2 0 0 7 A N N U A L R E P O R T
P H A R M A C E U T I C A L • B I O P H A R M A C E U T I C A L • S P E C I A LT Y C H E M I C A L S • A G R I C U LT U R A L
Global Leader in Sourcing,
Regulatory Support,
Marketing & Distribution
60th
Company Profile
A ceto Corporation, incorporated in 1947, is a global leader in the
sourcing, regulatory support, marketing and distribution of chemically
derived pharmaceuticals, biopharmaceuticals, specialty chemicals and
agrochemicals. With a physical presence in 10 countries, we distribute over
1,000 chemicals and pharmaceuticals used principally as raw materials in
the pharmaceutical, agricultural, color, surface coating/ink and general
chemical consuming industries. Our global operations, including a staff of
26 in Shanghai and 10 in India, are unique in our industry and enable our
worldwide sourcing and regulatory capabilities. We source approximately
two thirds of our products from Asia, buying from approximately 500
companies in China and approximately 200 companies in India.
Aceto’s business is organized along product lines into three segments—
Health Sciences (55% of fiscal 2007 sales), Chemicals & Colorants (39%
of fiscal 2007 sales) and Crop Protection (6% of fiscal 2007 sales).
Importantly, beyond “traditional distribution,” we add value for our customers
and suppliers in terms of product development, providing access to new
markets, plant audits, regulatory support, financial planning and logistics.
Our revenue base is diverse, with no customer or product accounting for
more than10% of our overall business.
Facilitating global sourcing, regulatory support,
marketing and distribution of chemicals used
principally as raw materials in the pharmaceutical,
agricultural, color, surface coating/ink and general
chemical industries.
2007 Annual Report
Financial Highlights
Fiscal Years Ended June 30,
In thousands, except per share data
Net Sales
Net Income (2)
At Year-End
Cash and Short-Term Investments
Working Capital
Long-Term Bank Debt
Shareholders’ Equity
Per Common Share (3)
Net Income (diluted) (2)
Shareholders’ Equity
Cash Dividends
$313,473
10,212
$ 35,356
112,930
—
2007
2006
2005
2004(1)
2003
$297,328
$313,431
$296,646
$270,116
9,237
10,015
13,067
7,595
$ 37,041
104,707
—
$ 25,018
$ 33,218
94,249
—
107,655
86,420
—
100,266
124,827
115,053
$ 0.41
$ 5.13
$0.175
$0.38
$4.74
$0.15
$0.41
$4.43
$0.15
$0.53
$4.16
$0.11
$ 21,140
72,208
—
84,569
$0.32
$3.58
$0.10
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003.
(2) Fiscal 2003 net income includes a $1,873 ($0.08 per diluted share) charge for a cumulative effect of an accounting change resulting from an impairment of goodwill.
(3) Adjusted for stock splits, effected in the form of dividends, as appropriate.
A C E T O C O R P O R A T I O N 1
Dear Fellow Shareholders:
A Strong Foundation for Future Growth
• Finished Dosage Form Generic Drugs
• Vaccines for Companion Animals
• Entering the Japanese Pharmaceutical Market
In fiscal 2007, as we celebrated our 60th
anniversary as a company, all of our core
business segments, Health Sciences,
Chemicals & Colorants, and Crop Protection,
performed extremely well in the face of
challenging conditions in the chemical and
pharmaceutical industries. In fact, in fiscal
2007 we reported all-time record levels of
sales and gross profit for Aceto. I am pleased
to share with you our 2007 fiscal year results
and then highlight some of the strategic
initiatives we believe will be the drivers for
Aceto’s future growth.
Fiscal 2007 Financial Results
For the fiscal year ended June 30, 2007, net
sales grew 5.4% to a record level of $313.5
million compared to $297.3 million in fiscal
2006. Our gross profit increased 6.9% to
$54.5 million, a record level for the Company,
compared to $51.0 million in fiscal 2006 and
our gross profit margin increased to 17.4%
from 17.1% in the last fiscal year. Operating
income increased 21.2% to
$15.1 million in fiscal 2007 from
$12.4 million in fiscal 2006. We
are particularly gratified by our
ability to maintain tight control on
selling, general & administrative
expenses which increased only
2.3% in fiscal 2007, in spite of continuing ex-
penditures on our strategic initiatives and the
continuing development of our infrastructure
in China, India and now, Japan. Pre-tax in-
come from continued operations increased
16.3% to $15.4 million in fiscal 2007 from
$13.3 million in fiscal 2006. Net income was
$10.2 million or $0.41 per diluted share in fis-
cal 2007, compared to $9.2 million or $0.38
per diluted share in fiscal 2006.
Strategic Initiatives
Several years ago, we began to see the ef-
fect that intense competition was having on
our core active pharmaceutical ingredients
(API) business and came to the conclusion
that the competition would only continue to
intensify. A perfect example of the effect of
this competition is illustrated as follows. In
fiscal 2005, we had two API’s which gener-
ated sales of $19.8 million; however, in fiscal
2006, as a result of intense competition they
generated only $3.8 million in sales. In this
highly competitive market, in order for the
Company to achieve sustainable growth, we
decided it would be necessary for us to look
for ways to grow our core business as well
as parallel businesses that could be built
utilizing expertise that had been developed
in our core businesses. We decided to look
at the following areas:
• Globalizing our Chemicals & Colorants
business
• Expanding organic (color) pigments business
• Enhancing our Crop Protection business
by acquiring additional new products
for distribution by the acquisition or
development of intellectual property
• Moving into Eastern Europe
We called these our “Strategic Initiatives”
and spent considerable time and resources
in the past several years to make these ef-
forts successful. For example in fiscal 2004,
96% of our Chemicals & Colorants business
was domestic; however, in fiscal 2007 that
percentage had dropped to only 86% which
was accomplished by developing business in
Europe and south Asia. We opened an office
in Poland and, as a result, have expanded our
Leonard S. Schwartz
Chairman,
Chief Executive Officer and President
60th
2 A C E T O C O R P O R A T I O N
business in Eastern Europe. Sales in our or-
ganic pigments business have grown to ap-
proximately $9 million in fiscal 2007 and are
expected to grow even more in 2008 and
beyond. Our Crop Protection business has
expanded with the successful launch of
Asulam and several smaller products, and
we now have a robust pipeline of products.
As a result of our efforts, we no longer look at
these as “Strategic Initiatives,” we now see
them as valuable pieces of our ongoing core
business. Although to date, we have not recog-
nized any revenues from our current Strategic
Initiatives, namely companion animal vaccines,
finished dosage form generic drugs and enter-
ing the Japanese pharmaceutical market, we
are confident that our efforts in each of these
areas will be equally successful as our previous
“Strategic Initiatives” have proven to be.
Fiscal 2007 Developments
Finished Dosage Form Generic Drugs
A focus for Aceto as we entered fiscal 2007
was our initiative to sell generic drugs in fin-
ished dosage forms under the Aceto brand.
In February 2007, we announced that this
strategic initiative had become a reality.
Aceto Pharma Corp., a wholly owned sub-
sidiary of Aceto Corporation, established for
the express purpose of distributing Aceto
branded human and veterinary generic phar-
maceuticals in the United States, had made
a successful entrance into the market by
launching and taking orders for its first prod-
uct, isoflurane, an inhalable anesthetic for
human and veterinary use with a current U.S.
market of more than $75 million.
During the year, we have enhanced our in-
ternal capabilities and are focusing our ef-
forts on establishing relationships with other
suppliers of Abbreviated New Drug Applica-
tion (ANDA) approved products which we
hope to distribute under the Aceto brand in
the United States. We believe that there are
no other distribution companies attempting
to do what we are doing, attesting to Aceto’s
biggest competitive strength, the unique
marriage of our global sourcing and regulatory
capabilities. Our business model provides
access to the U.S. generic pharmaceutical
market for mid-size foreign companies.
With respect to regulatory compliance, we
are confident that we have achieved the
capability to satisfy all of our regulatory
requirements while maintaining our status
as a distributor.
Vaccines for Companion Animals
In fiscal 2007, we suffered a setback in our
efforts to have a 4-way vaccine for use in the
canine market approved by the USDA. As a
result of a misunderstanding with the USDA
regarding the testing protocol they had previ-
ously approved as the basis for our vaccines
label claims, it will be necessary for the animal
testing to be redone under a revised testing
protocol. There will also be a requisite field
safety test that needs to be completed.
On a much more positive note, the USDA did
acknowledge that notwithstanding the proto-
col approval error, the animal testing results
which had already been completed under the
original testing protocol indicated that the
vaccine was, as we expected it would be,
“efficacious.” While we continue to do
everything we can to expedite the approval
process, there can be no assurance given as
to when the approval process will be 100%
completed. Our application represents the
first time the USDA has been asked to approve
a foreign produced vaccine for companion
animals for use in the United States. The
USDA has therefore been, among other
things, extremely cautious throughout the
process. Once we receive the USDA approval,
we plan to enter the market promptly with
Aceto branded product.
Entering the Japanese
Pharmaceutical Market
The Company, intending to further advance
the globalization of its business, and recogniz-
ing the substantial Japanese pharmaceutical
market estimated at $66 billion, second
largest in the world, authorized the taking of
all necessary actions to establish a subsidiary,
2007 Annual Report
Aceto Japan, to transact business in Japan.
As of the writing of this letter, we are in the
final stages of forming this company.
We are encouraged by the early interest that
Japanese pharmaceutical companies have
shown in our business model. To date, we
have commenced development activities for
a number of products for multiple customers
and are working hard to further expand both
the product and customer lists. A key compo-
nent of our Japanese strategy is the fact that
we will be employing Japanese nationals, as
well as utilizing traditional Japanese business
practices and culture, at Aceto Japan.
A Look Ahead
We closed the books for fiscal 2007 in a
strong financial position, with working capital
of $112.9 million, no long-term debt and
shareholders’ equity of $124.8 million. We
believe this level of working capital provides
us with the financial strength to move our
Strategic Initiatives forward.
We remain excited and optimistic about the
Company’s future. Our core businesses and
global network of supply sources provide us
with a strong foundation that will allow us to
grow and we are building a Company that
we believe is well positioned to sustain
growth for the long term.
We would like to thank our employees,
shareholders, customers and other stake-
holders for supporting our past efforts and
for their continued support as we move for-
ward together, towards a promising future.
We look forward to updating you on Aceto’s
business initiatives and results in the future.
Sincerely,
Leonard S. Schwartz
Chairman, Chief Executive Officer and
President
A C E T O C O R P O R A T I O N 3
The Business of Aceto
Our Strengths
• Unparalleled global sourcing and regulatory capabilities to meet all chemically derived pharmaceuticals,
biopharmaceuticals, specialty chemicals and agrochemicals requirements
• Strategically located warehousing and distribution facilities to assure that customers receive the chemicals
they need, when they need them
• Talented, experienced people that know the markets we serve inside and out
2007 Sales by Segment
Health Sciences 55%
Chemicals & Colorants 39%
Crop Protection 6%
Many of the world’s leading companies
rely on Aceto to supply the chemicals
they use as raw materials and active ingredi-
ents in their products. Celebrating our 60th
anniversary, our experience is unmatched. In
recent years, acquisitions have made Aceto a
truly global company and one of the largest
independent distributors of chemicals for the
pharmaceutical, biopharmaceutical, specialty
chemicals and agrochemical industries.
Aceto’s unparalleled global resources in-
clude strategic relationships with hundreds
of manufacturers of specialty, pharmaceuti-
cal and agricultural chemicals, both domestic
and international. As a result, customers in
a wide range of industries rely on Aceto to
bring the world closer to them, providing the
vital chemicals necessary for diverse and
complex product applications. In addition
to our comprehensive global network of
sources, Aceto also has superior distribution
facilities located strategically throughout
North America, Europe, Asia and South
America, enabling us to respond quickly
to customer needs.
Among Aceto’s greatest strengths are our
experienced worldwide staff and their ability
to meet individual customer needs. Our mar-
keting, sales and technical professionals are
experts in the industries they serve, and
have an intimate knowledge of worldwide
sources of supply, product applications and
technical requirements. Many Aceto profes-
sionals are respected leaders in our industry,
bringing 25 or more years of experience at
Aceto to customer applications. It’s this
longevity with our Company that has fostered
loyalty among our customers.
Aceto personnel work as partners with
customers during the product development
process, creating new applications for ex-
isting products as well as entirely new
product lines. We also offer solutions to
production challenges, generate marketing
programs and assist with government ap-
provals and compliance. All of these value-
added services allow Aceto’s customers to
be more responsive to their customers,
and ultimately, more competitive in the
global marketplace.
4 A C E T O C O R P O R A T I O N
2007 Annual Report
Health Sciences
term can be volatile due to customer delays,
project cancellations or delays in receiving
regulatory approval. Additionally, during the
typical life cycle of an API, we benefit from
higher gross margins earned when the API
first enters the market. As more competitors
enter the market these margins generally
decline, therefore it is important to have a
sufficient pipeline of new APIs to achieve
sustainable long-term growth.
Aceto Pharma Corp., a wholly owned sub-
sidiary of Aceto Corporation, established for
the express purpose of distributing Aceto
branded human and veterinary generic phar-
maceuticals in the United States, had made
a successful entrance into the market by
launching and taking orders for its first prod-
uct, isoflurane, an inhalable anesthetic for
human and veterinary use with a current U.S.
market of more than $75 million.
Over the coming years as patents expire on
branded drugs, we have a pipeline of APIs
poised to reach commercial levels, both in the
United States and Europe. Additionally, with our
office in Poland that we opened in 2004, we are
well-positioned to take advantage of opportuni-
ties that develop as Eastern European countries
join the European Union, and thus become sub-
ject to the same regulatory standards as their
Western European counterparts.
We continue to develop new opportunities to
provide a second-source option for existing
generic drugs. By leveraging our worldwide
sourcing and regulatory capabilities, we believe
we can be an alternative low-cost provider of
existing APIs to generic drug companies.
During the year, we have enhanced our internal
capabilities and are focusing our efforts on
establishing relationships with other suppliers
of ANDA approved products to distribute
under the Aceto brand in the United States.
We believe there are no other distribution
companies attempting to do what we are
doing, attesting to Aceto’s biggest competitive
strength, the unique marriage of our global
sourcing and regulatory capabilities. Our
business model provides access to the U.S.
generic pharmaceutical market for mid-size
foreign companies. With respect to regulatory
compliance, we are confident that we have
achieved the capability to satisfy all of our
regulatory requirements while maintaining
our status as a distributor.
A focus for Aceto as we entered fiscal 2007
was our initiative to sell generic drugs in fin-
ished dosage forms under the Aceto brand.
In February 2007, we announced that this
strategic initiative had become a reality.
Pharmaceutical Intermediates
Aceto is a key supplier of complex chemical
building blocks used as pharmaceutical inter-
mediates. These are critical components of all
drugs whether they are already on the market
or currently undergoing clinical trials. Faced
with significant economic pressures as well
as ever-increasing regulatory barriers, the in-
novative drug companies count on Aceto to
supply these intermediates economically
while maintaining the highest levels of quality.
Aceto added a new business model for our
pharmaceutical intermediates in late 2002. In
addition to the traditional way of working
A C E T O C O R P O R A T I O N 5
Active Pharmaceutical Ingredients (APIs)
In recent years, the use of generic drugs has
expanded tremendously. Aceto’s presence
in this area has likewise grown dramatically,
both domestically and internationally. We sup-
ply APIs to all the major generic drug compa-
nies, who view Aceto as a crucial partner in
their mission to market generic drugs once
patents have expired. We supply APIs used to
treat high cholesterol, diabetes, depression,
glaucoma, asthma and many other conditions.
The introduction of new APIs from our
pipeline to market is a process that spans a
number of years and begins by partnering
with a generic pharmaceutical company and
selecting the API. Next, we identify the ap-
propriate supplier and ensure they meet the
highest standards of quality to comply with
both U.S. and European regulations. The
generic pharmaceutical company will submit
the ANDA (Abbreviated New Drug Applica-
tion) for FDA or European equivalent ap-
proval while we control test-manufacturing
of the API. The introduction of the API to
market occurs once the ANDA or European
equivalent is granted and the API patent ex-
pires. As a result, our revenues in the short
Growth Drivers
• Drug patent expirations
• Introduce new APIs from pipeline
• Introduce Aceto branded finished dosage form
generic drugs directly into distribution channels
• Expansion of second source API business
• Expansion of pharma intermediate business
• Introduce vaccines for companion animals to the
U.S. market (subject to regulatory approvals)
• Enter the Japanese pharmaceutical market
• Explore strategic acquisitions
Health Sciences (continued)
as western pharmaceutical markets and we
believe our business model is well suited to
be successful there.
testing to be redone under a revised testing
protocol. There will also be a requisite field
safety test that needs to be completed.
with drug discovery companies, helping them
develop and source new chemical entities
that they will use to make the drugs of to-
morrow, we are working with the same com-
panies to assist them in bringing down the
costs of their mature pharmaceuticals by
sourcing many of their existing raw materials
from parts of the world where the economics
are more attractive. This business model has
started to gain acceptance from some of the
large, global pharmaceutical companies and
Aceto is currently working with several of
these companies supplying raw materials for
them. This dual approach gives our pharma-
ceutical customers an additional reason to
work with Aceto, covering both their existing
and developmental drugs.
Another business where Aceto has seen
nice growth is in providing chemicals for
the diagnostic kits used by health care
providers. In fiscal 2007, this business almost
doubled in size and we see this as a business
with more growth potential in the future as
we bring to light the advantages of sourcing
raw materials from other parts of the world
to the diagnostic companies. This, in many
ways, parallels what we are doing with
pharmaceutical intermediates.
We are currently in the final stages of forming
Aceto Japan, Inc. which will serve as our op-
erating company in Japan. A key component
of our Japanese strategy is the fact that we
will be employing Japanese nationals as well
as utilizing traditional Japanese business
practices and culture at Aceto Japan. We are
encouraged by the early interest that Japan-
ese pharmaceutical companies have shown
in our business model. To date, we have
commenced development activities for a
number of products for multiple customers
and are working hard to further expand the
product and customer list. While we initially
are looking to enter this market with our phar-
maceutical intermediates business, we ex-
pect that at some point in the future we will
introduce both our API business as well as
our finished dosage form business as well.
Biopharmaceuticals
Aceto entered into the biopharmaceutical mar-
ket in December 2003 with its acquisition of
Pharma Waldhof. We plan to leverage the ac-
quisition by supplying biopharma APIs to the
generic, innovator, animal health and discovery
industries in regulated markets (U.S./EU).
We are particularly focused on the biophar-
maceuticals used in the veterinary business
for companion animals, such as vaccines and
other therapies, where regulatory pathways
currently exist.
In fiscal 2007, as we continued to look at op-
portunities for Aceto to grow globally, we
made a decision to explore entering the
Japanese pharmaceutical market, the sec-
ond largest pharmaceutical market in the
world. Although the barriers to entry are
quite high, this market is not as competitive
In fiscal 2007, we suffered a setback in our
efforts to have a 4-way vaccine for use in the
canine market approved by the USDA. As a
result of a misunderstanding with the USDA
regarding the testing protocol they had previ-
ously approved as the basis for our vaccines
label claims, it will be necessary for the animal
On a much more positive note, the USDA did
acknowledge that notwithstanding the proto-
col approval error, the animal testing results
which had already been completed under the
original testing protocol indicated that the
vaccine was, as we expected it would be,
“efficacious.” While we continue to do
everything we can to expedite the approval
process, there can be no assurance given as
to when the approval process will be 100%
completed. Our application represents the
first time the USDA has been asked to ap-
prove a foreign produced vaccine for com-
panion animals for use in the United States.
The USDA has therefore been, among other
things, extremely cautious throughout the
process. Once we receive the USDA approval,
we plan to enter the market promptly with
Aceto branded product.
Aceto has been active in the area of generic
human biopharmaceuticals for the past several
years and we have a partnership with Three
Rivers Pharmaceuticals to bring three products
to market if and when regulatory pathways are
approved. The commercialization of human
generic biopharmaceuticals is subject to the
FDA providing guidance, and putting into place
regulatory pathways for these products to
come to market in the United States.
Nutraceuticals
We also supply raw materials used in the
production of nutritional supplements, includ-
ing: vitamins, amino acids, iron compounds,
and biochemicals used in pharmaceutical and
nutritional preparations. This is a business
that has shown nice growth in the past several
years and one that we believe has the potential
for more growth, particularly globally, over
the next several years.
6 A C E T O C O R P O R A T I O N
Aceto is a major supplier to the many
different industries that require out-
standing performance from chemical raw
materials and additives. We provide chemi-
cals used to make plastics, surface coatings,
textiles, fuels and lubricants. These products
include antioxidants, photoinitiators, cata-
lysts, cross linkers (curatives), brighteners
and adhesion promoters.
Aceto is at the forefront as a supplier of
chemicals to ecofriendly technologies. For
example, we supply UV photointiators that
allow inks and coatings to be cured by ultra-
violet light instead of solvents. We also sup-
ply curing agents and optical brighteners for
powder (non solvent) coatings. These grow-
ing technologies are critical in protecting the
world’s ecology.
We also provide specialty chemicals for the
food, beverage and flavor and fragrance in-
dustries. Many of Aceto’s raw materials also
find their way into high tech products like
high end electronic parts (circuit boards and
computer chips) and binders for specialized
rocket fuels. In addition, we introduced a
new additive for wines, distilled spirits and
sauces that adds an “oak” aging flavor.
2007 Annual Report
Chemicals & Colorants
Organic Intermediates and Colorants
The color producing industry manufactures a
wide assortment of products and Aceto is,
and has been, the supplier of choice to these
producers of “color.” From textiles and plas-
tics to inks and paints, our specialty colorant
intermediates allow manufacturers to develop
an endless rainbow of colorful possibilities
for fabrics, decorative effects, automobiles,
and countless other objects the world uses
every day.
Applications for Aceto’s organic intermedi-
ates include:
Aceto is currently responding to the
changing needs of our customers in the
color producing industry by taking our re-
sources and knowledge of color intermedi-
ates downstream as a supplier of select
organic pigments.
Aceto’s organic intermediates are also crucial
building blocks in the production of many
high quality agrochemicals utilized by farm-
ers throughout the world. Agricultural appli-
cations for our organic intermediates include
herbicides, insecticides, fungicides and other
functional pesticides.
• Color pigments for vibrant printing inks
used in color newspapers
• Inks for computer ink jet printing
• Automotive, industrial and residential
coatings
• Dyes for colorful textiles for both natural
and synthetic fibers
• Color photography and papers
• Colors for fuels like gasoline
• FDA-approved colorants for foods and
pharmaceuticals.
Growth
Drivers
• Globalizing our Chemicals
and Colorants Business
• Rapid pace of new product
development
• Leveraging our position in
chemical consuming industries
by broadening our product line
• Expanding organic (color)
pigments business
A C E T O C O R P O R A T I O N 7
Crop Protection
received approval to sell our sprout inhibitor in
Europe and in 2005, we expanded sales of
this product into Russia.
In fiscal 2007, we very successfully launched
generic Asulam, a herbicide used on sugar
cane. Under a multi-year contract with a major
agricultural chemical distributor, we began
supplying the product in the United States.
This approval marked an important first in our
history, as it was the first generic registration
that Aceto has received. We continue to de-
velop a pipeline of additional products for the
coming years.
As a result of our successful launch of this
product, we are attempting to increase our
market development activities in this business
segment. In this regard, we have expanded our
in-house resources and created a new position
in our Crop Protection business of Regulatory
Manager. In addition, we are enhancing our crop
protection sourcing and regulatory capabilities
in China. We believe that the combination of
our global sourcing and regulatory capabilities
makes Aceto an attractive partner and has
provided us with several new opportunities
which we are currently working on.
Growth
Drivers
• Successful launch of generic Asulam
• Partner with distribution companies
to secure entry into the marketplace
• Enhancing our Crop Protection
business by acquiring additional
new products for distribution by
the acquisition or development of
intellectual property leading to an
EPA label (official license to sell)
• Geographic expansion of existing
products
The world is dependent on agriculture for
all kinds of products—and Aceto has
become a valued partner to the global agri-
cultural industry by providing superior quality
chemicals. Aceto’s most widely used crop
protection product is a sprout inhibitor that
extends the storage life of potatoes. Farmers
also rely on Aceto agrochemicals to protect
crops that become many other types of food,
as well as clothing and shelter for consumers
throughout the world. The chemicals we supply
include herbicides, fungicides, and insecticides
that control weed growth and the spread of
insects and microorganisms that can severely
damage plant growth.
Aceto continues to expand its distribution of
products into new markets. During 2004, we
Regulatory Affairs
Aceto is proud of its industry-leading
commitment to regulatory concerns.
Proof of our dedication to this vital area is
our extensive corporate department that
handles health, safety, environmental and
many other varied regulatory affairs. More
than just reactive in our commitment, Aceto
is proactive in assuring that all the products
we supply conform to all applicable current,
and anticipated future, regulations. To fur-
ther assure compliance, we also assist our
suppliers and customers enabling them to
meet stringent regulatory guidelines that
govern the chemically derived pharmaceuti-
cal, biopharmaceuticals, specialty chemical
and agrochemicals industry.
8 A C E T O C O R P O R A T I O N
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, 2007
Commission file number 000-04217
ACETO CORPORATION
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
11-1720520
(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
(Title of Class)
The NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer ___
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting stock of the Company held by non-affiliates of the Company as of December 31,
2006 was approximately $207,307,261.
The Registrant has 24,333,503 shares of common stock outstanding as of September 4, 2007.
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 6, 2007.
2
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
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, an inability to continue to license technology
needed to sell certain of our crop protection products, the availability and pricing of key raw materials, dependence on key
members of management, risks of entering into new European markets, and economic and political conditions in the United
States and abroad.
In this Annual Report, all dollar amounts are expressed in thousands, except share prices and per-share amounts.
NOTE REGARDING DOLLAR 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, 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 profits. Products that fall within this
segment include active pharmaceutical ingredients (API’s), pharmaceutical intermediates, nutritionals and
biopharmaceuticals. In fiscal 2007, we entered the market for finished dosage form generic drugs when we received orders
for our first Aceto branded product, Isoflurane.
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 API’s 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 (ANDA’s). The
opportunities that we are looking for are to supply the API’s 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 and regulatory capabilities, we believe we can be an alternative lower cost, second-
source provider of existing API’s to generic drug companies.
Looking at worldwide pharmaceutical sales, and using that as a proxy for our Health Sciences business segment, in calendar
2006, the industry experienced total market growth of $42 billion, or a 7% increase. About one half of this growth originated
from the US market where the growth rate of 8.3% reflected the impact of the first year of the Medicare Part D benefit.
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.
4
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. Aceto is 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.
According to the American Chemistry Council, the global chemical industry still appears to be in an expansionary mode
although leading indicators of global industrial production suggest that the current growth cycle may have peaked. Overall,
on a year-over-year basis, global chemical industry production increased by 4.4%.
The Crop Protection segment sells herbicides, pesticides, and other agricultural chemicals to customers, primarily located in
the United States and Western Europe. Our joint venture with Nufarm, which markets Butoxone(R), increased our market
share of the peanut, soybean and alfalfa herbicide markets. 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 Aceto has received. Our plan is to develop over time a pipeline of additional products in a similar manner. The Crop
Protection segment was formerly reported as the Agrochemical segment with the name change effected on December 31,
2006.
According to the US Department of Agriculture, total acreage planted in 2007 increased by 1.3% to slightly more than 320
million acres. The number of peanut acres planted in 2007 was down 4.5% from 2006 levels, sugarcane acreage was down
0.7% from 2006 and potato acres planted in 2007 were down 3.6% from 2006 levels.
Our main business strengths are sourcing, regulatory support, quality control, marketing and distribution. With a physical
presence in ten countries, we distribute over 1000 chemicals and pharmaceuticals 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, 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 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 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, 2007 and 2006, approximately 65% and 67%, respectively, of our purchases were
from Asia and approximately 21% 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 2007 and 2006, sales made to customers in the United States totaled $153,147 and $157,527,
5
respectively. Sales made to customers outside the United States during fiscal years 2007 and 2006 totaled $160,326 and
$139,801, respectively, of which, approximately 58% and 53%, respectively, were to customers located in Europe.
The chemical industry is highly competitive. We compete by offering high-quality products produced around the world by
both large and small manufacturers at attractive prices. Because of our long 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 2007, 2006 or 2005. No single
supplier accounted for as much as 10% of purchases in fiscal 2007 and 2006. Two suppliers accounted for approximately
13% and 12% of purchases in fiscal year 2005.
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 $250 - $500 per
year. We may be required to make such additional payments in the future.
Employees
At June 30, 2007, we had 224 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.
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.
6
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 May 2007, February 2007 and September 2006, 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 one of Aceto's subsidiaries
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 its subsidiary 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's subsidiary 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's subsidiary 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's subsidiary sent to the
site, most of which were non-hazardous substances and as such, believes that its subsidiary is a very minor 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, also related to its former manufacturing facility in Carlstadt, New Jersey, Arsynco received notice from the
EPA of its status as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) for a site described as the Berry’s Creek Study Area. Arsynco is one of over 150
PRP’s which have potential liability for the required investigation and remediation of the site. The estimate of the potential
liability is not quantifiable for a number of reasons, including the difficulty in determining the extent of contamination and
the length of time remediation may require. In addition, any estimate of liability must also consider the number of other
potentially responsible parties and their financial strength. Since an amount of the liability can not be reasonably estimated at
this time, no accrual is recorded for these potential future costs. The impact of the resolution of this matter on the Company’s
results of operations in a particular reporting period is not known. However, management believes that the ultimate outcome
of this matter will not have a material adverse effect on the Company’s financial condition or liquidity.
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.
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.
7
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.
If we are unable to continue to use licensed technology that we rely on to conduct our crop protection business, our
profitability and financial condition will be adversely affected.
We cannot assure you that we will be able to continue to license the technology that we currently rely on in order to sell
certain of our crop protection products. An inability to license this technology could prevent us from continuing to sell the
products and, in turn, materially adversely affect our profitability and financial condition. We may also incur substantial costs
in seeking enforcement of our rights related to our licensed technologies.
One of the Company’s crop protection products is subject to certain licensed technology, which expired in August 2007. The
Company has commenced a lawsuit against the owner of the patent license bringing claims based on antitrust and breach of
contract and related claims. The Company intends to pursue these claims vigorously in order to continue to license the
technology and sell the particular crop protection product.
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 is difficult to predict.
Our revenue stream is difficult to predict because it is primarily generated as customers place orders and customers can
change their requirements or cancel orders. Many of our sales orders are short-term and may be cancelled at any time. As a
result, much of our revenue is not recurring from period to period, which contributes to the variability of our results from
period to period. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our
future performance.
Our operating results may fluctuate in future quarters, which may adversely affect the trading price of our common stock.
Our operating results will fluctuate on a quarterly basis as a result of a number of factors, including the timing of contracts,
the delay or cancellation of a contract, and changes in government regulations. Any one of these factors could have a
significant impact on our quarterly results. In some quarters, our revenue and operating results may fall below the
expectations of securities analysts and investors, which would likely cause the trading price of our common stock to decline.
Failure to obtain products from outside manufacturers could adversely affect our ability to fulfill sales orders to our
customers.
We rely on outside manufacturers to supply products for resale to our customers. Manufacturing problems may occur with
these and other outside sources. If such problems occur, we cannot ensure that we will be able to deliver our products to our
customers profitably or on time.
8
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 2007 and 2006, approximately 53% and 47%, 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
2007, approximately 65% and 21% 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.
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
9
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:
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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.
Available information
We file annual, quarterly, and current reports, proxy statements, and other information with the U.S. Securities and Exchange
Commission. You may read and copy any document we file at the SEC’s public reference room at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for information on the public reference
10
room. The SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other
information that issuers (including Aceto) file electronically with the SEC. The SEC’s website is www.sec.gov.
Our website is www.aceto.com. We make available free of charge through our Internet site, via a link to the SEC’s website
at www.sec.gov, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4
and 5 filed on behalf of our directors and executive officers; and any amendments to those reports and forms. We make these
filings available as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The
information on our website is not incorporated by reference into this Annual Report.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our general headquarters and main sales office occupy approximately 26,000 gross square feet of leased space in an office
building in Lake Success, New York. The lease expires in April 2011.
Arsynco’s former manufacturing facility is located on a 12-acre parcel in Carlstadt, New Jersey, that it owns. This parcel
contains one building with approximately 5,000 gross square feet of office space.
In November 2004, we purchased approximately 1,300 gross square meters of office space located in Shanghai, China for our
sales offices and investment purposes.
We also lease office space in Hamburg, Germany; Düsseldorf, Germany; Heemskerk, the Netherlands; Paris, France; Lyon,
France; Singapore; Warsaw, Poland and Mumbai, India. These offices are used for sales and administrative purposes.
We believe that our properties are generally well maintained, in good condition and adequate for our present needs.
Item 3. Legal Proceedings.
We are subject to various claims that have arisen in the normal course of business. We do not know what impact the final
resolution of these matters will have on our results of operations in a particular reporting period. We believe, however, that
the ultimate outcome of such matters will not have a material adverse effect on our financial condition or liquidity.
In May 2007, February 2007 and September 2006, 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 one of Aceto's subsidiaries
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 its subsidiary 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's subsidiary 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's subsidiary 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's subsidiary sent to the
site, most of which were non-hazardous substances and as such, believes that its subsidiary is a very minor 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.
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 PRP’s which have potential liability for the required investigation and remediation of the site. The estimate of
the potential liability is not quantifiable for a number of reasons, including the difficulty in determining the extent of
contamination and the length of time remediation may require. In addition, any estimate of liability must also consider the
number of other potentially responsible parties and their financial strength. Since an amount of the liability can not be
reasonably estimated at this time, no accrual is recorded for these potential future costs. The impact of the resolution of this
11
matter on the Company’s results of operations in a particular reporting period is not known. However, management currently
believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s financial condition
or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year covered by this Annual
Report.
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 2007 and 2006 high and low sales prices of our common stock as reported by the NASDAQ Global Market for
the periods indicated.
HIGH
LOW
FISCAL YEAR 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 7.63
9.25
9.98
9.48
$ 8.20
6.96
7.70
8.36
$ 6.54
6.82
7.22
7.60
$ 5.49
5.64
6.44
6.33
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 years 2006 and
2005. Our revolving credit facility restricts the payment of cash dividends to $4,500 per year.
As of September 4, 2007, there were 520 holders of record of our common stock.
22,172 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, 2007:
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
2,700
-
2,700
$7.58
-
$7.58
161
-
161
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
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, 2002. The stock price performance included in this graph is not necessarily indicative of future stock
price performance.
13
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG ACETO CORPORATION, THE S&P 500 INDEX
And The Dow Jones US Chemicals Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
6/02
6/03
6/04
6/05
6/06
6/07
Aceto Corporation
S&P 500
Dow Jones US Chemicals
ASSUMES $100 INVESTED ON JUNE 30, 2002
ASSUMES DIVIDEND REINVESTMENT
FISCAL YEAR ENDING JUNE 30, 2007
Aceto Corporation
S&P 500 Index
Dow Jones U.S.
Chemicals
June 30, 2002
June 30, 2003
June 30, 2004
June 30, 2005
June 30, 2006
June 30, 2007
100
264
380
246
232
317
100
100
119
127
138
166
100
91
115
126
134
177
14
Item 6. Selected Financial Data
(In thousands, except per-share amounts)
Fiscal years ended June 30,
2007
2006
2005
2004(1)
2003
Net sales (2)
Operating income (2)
Income from continuing operations
Net income(3)
$313,473
15,064
10,212
10,212
$297,328
12,429
9,264
9,237
$313,431
11,590
10,625
10,015
$296,646
16,405
13,111
13,067
$270,116
13,182
9,522
7,595
At year end
Working capital
Total assets
Long-term liabilities
Shareholders’ equity
Per diluted common share(4)
$112,930
188,478
15,548
124,827
$104,707
166,592
15,140
115,053
$ 94,249
149,028
3,982
107,655
$ 86,420
149,697
2,877
100,266
$ 72,208
123,519
1,043
84,569
Income from continuing operations
Net income
Cash dividends
$0.41
$0.41
$0.175
$0.38
$0.38
$0.15
$0.43
$0.41
$0.15
$0.53
$0.53
$0.11
$0.40
$0.32
$0.10
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003.
(2) Certain reclassifications have been made to fiscal 2006 and prior year amounts included in the previously filed Form
10-K to conform to the current year presentation.
(3) Fiscal 2003 net income includes a $1,873 charge ($0.08 per diluted common share) for a cumulative effect of an
accounting change resulting from an impairment of goodwill.
(4) Adjusted for stock splits, effected in the form of dividends, as appropriate.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
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 $2,635 increase in operating profit to $15,064 for the year ended June 30, 2007 as compared to $12,429
for the prior year. This increase in operating profit was achieved, despite a highly competitive environment, primarily
through maintaining our profit margin and our successful management of selling, general and administrative costs. Net sales
for fiscal 2007 were $313,473, an increase of $16,145 from fiscal 2006. This increase in net sales also impacted our gross
profit, which increased $3,535 to $54,493 for fiscal 2007. Our net income increased to $10,212, or $0.41 per diluted share,
an increase of $975 or 10.6% compared to fiscal year 2006.
Our financial position as of June 30, 2007, remains strong, as we had cash and short-term investments of $35,356, working
capital of $112,930, no long-term debt and shareholders’ equity of $124,827.
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 API’s, pharmaceutical intermediates, nutritionals and biopharmaceuticals. In fiscal 2007, we entered the
market for finished dosage form generic drugs when we received orders for our first Aceto branded product, Isoflurane.
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 API’s 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
15
provide a second-source option for existing generic drugs with approved ANDA’s. The opportunities that we are looking for
are to supply the API’s 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 and regulatory capabilities, we believe we can be an alternative lower cost, second-
source provider of existing API’s to generic drug companies.
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. Aceto is 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, pesticides, and other agricultural chemicals to customers, primarily located in
the United States and Western Europe. Our joint venture with Nufarm, which markets Butoxone(R), increased our market
share of the peanut, soybean and alfalfa herbicide markets. 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 Aceto has received. Our plan is to develop over time a pipeline of additional products in a similar manner. The Crop
Protection segment was formerly reported as the Agrochemical segment with the name change effected on December 31,
2006.
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, regulatory support, quality control, marketing and distribution. With a physical
presence in ten countries, we distribute over 1,000 chemicals and pharmaceuticals 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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, 2007. 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
16
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following critical accounting policies affected our more significant judgments and estimates used in preparing
these consolidated financial statements.
Revenue Recognition
We recognize revenue from sales of any product when it is shipped and title and risk of loss pass to the customer. We have
no acceptance or other post-shipment obligations and we do not offer product warranties or services to our customers.
Sales are recorded net of returns of damaged goods from customers, which historically have been immaterial, and
sales incentives offered to customers. Sales incentives consist primarily of volume incentive rebates. We record
volume incentive rebates as the underlying revenue transactions that result in progress by the customer in earning the
rebate are recorded, in accordance with Emerging Issues Task Force (“EITF”) 01-09, “Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products).”
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts relating to estimated losses resulting from customers being unable to make
required payments. Allowances for doubtful accounts are based on historical experience and known factors regarding
specific customers and the industries in which those customers operate. If the financial condition of our customers were to
deteriorate, resulting in their ability to make payments being impaired, additional allowances would be required.
Inventories
Inventories, which consist principally of finished goods, are stated at the lower of cost (first-in first-out method) or market.
We write down our inventories for estimated excess and obsolete goods by an amount equal to the difference between the
carrying cost of the inventory and the estimated market value based upon assumptions about future demand and market
conditions. A significant sudden increase in demand for our products could result in a short-term increase in the cost of
inventory purchases, while a significant decrease in demand could result in an increase in the excess inventory quantities on-
hand. Additionally, we may overestimate or underestimate the demand for our products which would result in our
understating or overstating, respectively, the write-down required for excess and obsolete inventory. Although we make
every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in
demand could have a significant impact on the value of our inventory and reported operating results.
Goodwill and Other 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, customer lists, 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
17
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.
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, 2007, we had current net deferred tax assets of $1,656 and non-current net deferred tax assets of $3,212.
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.
Tax reform has taken place in Germany whereby an income tax law was passed in July 2007, awaiting approval into the
Federal Gazette. The enacted tax rate in Germany will potentially change from 40% to 30%. As a result, the deferred tax
balance could decrease by $1,600 in 2008.
Stock-based Compensation
With the adoption of SFAS No. 123(R) on July 1, 2005, we are required to record the fair value of stock-based compensation
awards as an expense. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes
option-pricing model, including an estimate of forfeitures. Inherent in this model are assumptions related to expected stock-
price volatility, option term, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are
less subjective assumptions that are based on factual data derived from public sources, the expected stock-price volatility and
option term assumptions require a greater level of judgment which makes them critical accounting estimates.
We use an expected stock-price volatility assumption that is based on the historical daily price changes of the underlying
stock which are obtained from public data sources. For stock option grants issued during fiscal 2007, we used an expected
stock-price volatility of 57% based upon the historical volatility at the time of issuance. With regard to the weighted-average
option term assumption, for stock option grants issued during fiscal 2007, we used an expected option term assumption of 5.5
years as determined under the “simplified” method prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107.
18
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,
Segment
2007
2006
Net sales
% of
total
Net sales
% of
total
Comparison 2007
Over/(Under) 2006
%
change
$
change
Health Sciences
Chemicals & Colorants
Crop Protection
$170,691
123,299
19,483
54.5%
39.3
6.2
$166,725
110,869
19,734
56.1%
37.3
6.6
$ 3,966
12,430
(251)
2.4 %
11.2
(1.3)
Net sales
$313,473 100.0%
$297,328
100.0%
$16,145
5.4%
Gross Profit by Segment
Year ended June 30,
Segment
2007
Gross % of
sales
profit
2006
Gross
Profit
% of
sales
Comparison 2007
Over/(Under) 2006
%
change
$
change
Health Sciences
Chemicals & Colorants
Crop Protection
$33,007
16,556
4,930
19.3%
13.4
25.3
$32,313
17,144
4,760
19.4%
15.5
24.1
$ 694
(588)
170
2.1%
(3.4)
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.
19
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.
20
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.
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
Selling, general and administrative expenses (“SG&A”) increased $900, or 2.3%, to $39,429 for the year ended June 30,
2007 compared to $38,529 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
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.
21
Results of Operations
Fiscal Year Ended June 30, 2006 Compared to Fiscal Year Ended June 30, 2005
Net Sales by Segment
Year ended June 30,
Segment
2006
2005
Net sales
% of
total
Net sales
% of
total
Comparison 2006
Over/(Under) 2005
%
change
$
change
Health Sciences
Chemicals & Colorants
Crop Protection
Institutional Sanitary Supplies
$166,725
110,869
19,734
-
56.1%
37.3
6.6
-
$184,577
104,777
20,031
4,046
58.9% $(17,852)
6,092
33.4
(297)
6.4
(4,046)
1.3
( 9.7)
5.8
(1.5)
(100.0)
Net sales
$297,328 100.0%
$313,431 100.0% $(16,103)
(5.1%)
Gross Profit by Segment
Year ended June 30,
Segment
2006
Gross % of
sales
Profit
2005
Gross
Profit
% of
sales
Comparison 2006
Over/(Under) 2005
%
change
$
change
Health Sciences
Chemicals & Colorants
Crop Protection
Institutional Sanitary Supplies
$32,313
17,144
4,760
-
19.4%
15.5
24.1
-
$32,886
17,257
6,719
696
17.8%
16.5
33.5
17.2
$ (573)
(113)
(1,959)
(696)
(1.7)%
(0.6)
(29.2)
(100.0)
Segment gross profit
54,217
18.2
57,558
18.4
(3,341)
(5.8)
Freight and storage costs (1)
(3,259)
(1.1)
(4,407)
(1.4)
1,148
26.0
Gross profit
$50,958
17.1%
$53,151
17.0%
$(2,193)
(4.1)%
(1) Represents certain freight and storage costs that are not allocated to a segment.
22
Net Sales
Net sales decreased $16,103, or 5.1%, to $297,328 for the year ended June 30, 2006, compared with $313,431 for the prior
year. We reported sales decreases in our Health Sciences and Crop Protection segments, which were partially offset by a
sales increase in our Chemicals & Colorants segment.
Health Sciences
Net sales for the Health Sciences segment decreased by $17,852 for the year ended June 30, 2006, to $166,725, which
represents a 9.7% decrease over net sales of $184,577 for the prior year. The sales decrease from the prior period is directly
attributable to the loss of foreign business of $16,716 from two previously launched APIs due to increased competition. The
fiscal 2006 results, net of the two lost APIs, include a sales reduction of $2,243 from our foreign operations which was
partially offset by a sales increase of $1,162 from our domestic operations over the prior fiscal year.
Chemicals & Colorants
Net sales for the Chemicals & Colorants segment were $110,869 for the year ended June 30, 2006, compared to $104,777 for
the prior year. This increase of $6,092, or 5.8%, over the prior period is primarily attributable to an increase in the
agricultural intermediate, food, beverage and cosmetics and coatings product groups of $7,650 as compared to fiscal 2005.
Our chemical business is diverse in terms of products, customers and consuming markets. One customer within our color-
pigment and pigment-intermediate business purchased $3,515 less product during fiscal 2006 as their contract had expired.
This reduction was more than offset by an increase over the prior period in domestic sales of our diverse chemical and
colorants offerings. In addition, net sales include a $1,783 increase relating to our former CDC business, primarily from
sales of the Anti-Clog product we retained.
Crop Protection
Net sales for the Crop Protection segment decreased to $19,734 for the year ended June 30, 2006, a decrease of $297, or
1.5%, over net sales of $20,031 for the prior year. This decline over the prior year was primarily due to dry weather
conditions shortening the agricultural selling season, for our second largest product.
Gross Profit
Gross profit by segment before unallocated cost of sales (primarily storage and certain freight costs) decreased $3,341 to
$54,217 (18.2% of net sales) for the year ended June 30, 2006, as compared to $57,558 (18.4% of net sales) for the prior
year.
Health Sciences
Health Sciences’ gross profit of $32,313 for the year ended June 30, 2006, was $573 or 1.7% lower than the prior year. This
decrease in gross profit was directly attributable to the loss of business on two larger previously-launched APIs in Asia of
$2,373 due to significant competitive pressures as well as a decrease in our foreign business, net of the two APIs, of $499.
This lost gross profit was partially offset by an increase in gross profit from sales increases from our domestic business of
$1,087 over the prior fiscal year. The gross margin increased to 19.4% in fiscal 2006 compared to a gross margin of 17.8%
for the prior fiscal year due primarily to a shift in the product mix of net sales to higher margin products during the 2006
fiscal year.
Chemicals & Colorants
Gross profit for the year ended June 30, 2006, decreased by $113, or 0.6%, over the prior year. Gross margin decreased from
16.5% in fiscal 2005 to 15.5% in fiscal 2006. Decreases in categories such as organic chemicals and chemical intermediates
in terms of both volume and margins were the primary reasons for these decreases. In addition, the decrease in gross margin
percentage was partly attributable to an increased allocation of certain freight and storage costs.
Crop Protection
Gross profit for the Crop Protection segment decreased to $4,760 for the year ended June 30, 2006, versus $6,719 for the
prior year, a decrease of $1,959 or 29.2%. Gross margin decreased from 33.5% in fiscal 2005 to 24.1% in fiscal 2006. The
23
primary cause of the decrease was lower royalty payments from our foreign customers of $652 and lower gross margins on
our second highest volume product compared to the prior fiscal year of $416. The gross profits and margins were also
negatively affected by higher costs associated with maintaining our EPA registered products and increased rebate expenses of
$339.
Unallocated freight and storage costs
Unallocated cost of sales decreased $1,148, to $3,259 in fiscal 2006, compared to $4,407 in the prior year, representing a
26.0% decrease. The lower costs were mainly a result of decreased sales and shipments to customers. In addition, certain
system improvements allow previously unallocated costs to be identifiable and included in a particular segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) decreased $3,032, or 7.3%, to $38,529 for the year ended June 30,
2006 compared to $41,561 for the prior year. As a percentage of sales, SG&A remained stable at 13.0% for fiscal 2006
versus 13.3% for fiscal 2005. The decrease in SG&A was primarily due to a $1,405 decrease in expenses for our former
CDC business, reduced legal fees of $878, a reduction in audit and Sarbanes-Oxley compliance costs of $428 and reduced
sales and marketing related expenses of $638. These expense reductions were partially offset by a $537 charge for a
settlement of legal claims against one of our subsidiaries.
Operating Income
Fiscal 2006 operating income was $12,429 compared to $11,590 in the prior year, an increase of $839 or 7.2%. This increase
was due to the $3,032 decrease in SG&A expenses, which was partially offset by the overall decrease in gross profit of
$2,193.
Interest and Other Income
Interest and other income was $956 for fiscal 2006, which represents a 24.8% decrease from $1,271 in fiscal 2005. The
decrease is primarily attributable to a net loss on foreign currency of $537 offset in part by an increase of $208 in interest
income.
Provision for Income Taxes
The effective tax rate for fiscal 2006 increased to 30.1% from 16.9% for fiscal 2005. The effective tax rate for fiscal 2005
included the recognition of certain deferred tax assets for foreign net operating loss carryforwards, which previously were
fully offset by a valuation allowance in the amount of $1,263. Excluding the recognition of the deferred tax assets, the
effective tax rate for fiscal 2005 would have been 26.8%. The increase in the effective tax rate relates primarily to increased
earnings in foreign tax jurisdictions with higher tax rates, primarily Germany.
Discontinued Operations
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the results of
operations for one of the subsidiaries forming part of the Institutional Sanitary Supplies segment have been recorded as
discontinued operations in the accompanying consolidated statements of income. The net loss from discontinued operations
was $27 and $610 the fiscal years ended 2006 and 2005, respectively. The net loss from discontinued operations for the
fiscal year ended 2005 includes a non-cash write-down of goodwill, net of an income tax benefit, of $570.
Liquidity and Capital Resources
Cash Flows
At June 30, 2007, we had $32,320 in cash, $3,026 in short-term investments and only $25 in short-term bank loans.
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
24
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. Our cash position at June 30, 2005,
decreased $3,380 from the amount at June 30, 2004. Operating activities used cash of $771, primarily due to inventories
having been increased by $10,188 in order to take advantage of current prices in an environment of rising prices and the
anticipated revaluation of the Chinese currency which may increase future product costs. This was partially offset by net
income of $10,015.
Investing activities 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. We expect capital expenditures will be between
$1,000 and $1,500 during fiscal 2008, including approximately $600 for the opening of a facility in India. 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. Investing activities for the year end
June 30, 2005 provided cash of $486, primarily as a result of net proceeds from investments of $4,537. This was partially
offset by $4,195 of expenditures for property and equipment, including the purchase of office space located in Shanghai,
China in the amount of $3,015.
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. Financing activities for the year end June 30, 2005
used cash of $3,069 primarily as a result of payments of cash dividends of $3,641 and payment of a related party note of
$500, which were partially offset by proceeds from the exercise of stock options of $946.
Credit Facilities
We have available credit facilities with certain foreign financial institutions. These facilities provide us with a line of credit
of $19,472, as of June 30, 2007. 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, 2007, we had utilized $702 in letters of credit, leaving $9,298 of this
facility unused. Under the credit agreement, we may obtain credit through direct borrowings and letters of credit. Our
obligations under the credit agreement are guaranteed by certain of our subsidiaries and are secured by 65% of the capital of
certain of our non-domestic subsidiaries. There is no borrowing base on the credit agreement. Interest under the credit
agreement is at LIBOR plus 1.50%. The credit agreement contains several covenants requiring, among other things,
minimum levels of debt service and tangible net worth. We are also subject to certain restrictive debt covenants, including
covenants governing liens, limitations on indebtedness, limitations on cash dividends, guarantees, sale of assets, sales of
receivables, and loans and investments. We were in compliance with all covenants at June 30, 2007.
Working Capital Outlook
Working capital was $112,930 at June 30, 2007, versus $104,707 at June 30, 2006. 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. The Company is
considering forming a joint venture in connection with their crop protection business. The joint venture will require us to
acquire product registration costs and related data filed with the United States Environmental Protection Agency, which
could approximate $2,000 in fiscal 2008. 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, 2007, we had no significant obligations for capital expenditures. At
June 30, 2007, 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
$ 5,074
$ 1,543
$ 2,544
$ 913
$ 74
Commercial letters of
credit
702
702
Standby letters of credit
225
225
-
-
Unconditional purchase
obligations
71,891
67,611
4,280
-
-
-
-
-
-
Total
$ 77,892
$ 70,081
$ 6,824
$ 913
$ 74
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
$250 - $500 per year. We may be required to make additional payments in the future.
2. We, together with our subsidiaries, are subject to pending and threatened legal proceedings that have arisen in the
normal course of business. We do not know how the final resolution of these matters will affect our results of
operations in a particular reporting period. Our management is of the opinion, however, that the ultimate outcome of
such matters will not have a material adverse effect upon our financial condition or liquidity.
3.
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 PRP’s which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not quantifiable for a number of reasons, including
the difficulty in determining the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other potentially responsible parties and their
financial strength. Since an amount of the liability can not be reasonably estimated at this time, no accrual is
recorded for these potential future costs. The impact of the resolution of this matter on the Company’s results of
operations in a particular reporting period is not known. However, management currently believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company’s financial condition or liquidity.
26
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 2007, 2006 and 2005, we incurred legal fees of $329, $315 and $215, respectively, for services rendered to the
Company by those law firms. We believe that the fees charged by those firms were at rates comparable to rates obtainable
from other firms for similar services.
Impact of New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board’s (“FASB”) EITF issued EITF 06-3, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation).” The Task Force determined that the presentation of certain taxes on either a gross basis (included in
revenues and expenses) or a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. An
entity is not required to re-evaluate its existing policies related to taxes assessed by a governmental authority. However, an
entity is required to disclose the amounts of such taxes reported on a gross basis. The Company has adopted EITF 06-3 and
reports these taxes on a net basis.
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement 109”. FIN 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 48 is effective for
fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48 on the consolidated
financial position and results of operations.
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. Management is currently assessing the impact of SFAS No. 157 on the
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires that employers recognize on a prospective basis the funded
status of their defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a
component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic benefit cost. SFAS No. 158 also requires additional
disclosures in the notes to financial statements. The Company adopted the recognition and disclosure provisions of this
statement for the year ended June 30, 2007. The adoption of this statement did not have a material impact on the Company’s
consolidated financial position.
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. Management is currently evaluating the impact
of SFAS No. 159 on the consolidated financial position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Sensitive Instruments
The market risk inherent in our market-risk-sensitive instruments and positions is the potential loss arising from adverse
changes in investment market prices, foreign currency exchange-rates and interest rates.
Investment Market Price Risk
We had short-term investments of $3,036 at June 30, 2007. Those short-term investments consisted of government and
agency securities, corporate bonds and corporate equity securities, and they were recorded at fair value and had exposure to
price risk. If this risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in
prices quoted by stock exchanges, the effect of that risk would be $304 as of June 30, 2007. Actual results may differ.
27
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, 2007, we had foreign currency contracts
outstanding that had a notional amount of $13,793. 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, 2007, was not material.
In addition, we enter into cross currency interest rate swaps to reduce foreign currency exposure on inter-company
transactions. In June 2004 we entered into a one-year cross currency interest rate swap transaction, which expired in June
2005 when the underlying inter-company loan was repaid, and in May 2003 we entered into a five-year cross currency
interest rate swap transaction, both for the purpose of hedging fixed-interest-rate, foreign-currency-denominated cash flows
under inter-company loans. Under the terms of these derivative financial instruments, U.S. dollar fixed principal and interest
payments to be received under inter-company loans will be swapped for Euro denominated fixed principal and interest
payments. The change in fair value of the swaps from date of purchase to June 30, 2007, was $(75). The gains or losses on
the inter-company loans due to changes in foreign currency rates will be offset by the gains or losses on the swap in the
accompanying consolidated statements of income. Since our interest rate swaps qualify as hedging activities, the change in
their fair value, amounting to $161 and $42 in fiscal 2007 and 2006, respectively, is recorded in accumulated other
comprehensive income included in the accompanying consolidated balance sheets.
We are subject to risk from changes in foreign exchange rates for our subsidiaries that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result in cumulative translation adjustments, which
are included in accumulated other comprehensive income (loss). On June 30, 2007, we had translation exposure to various
foreign currencies, with the most significant being the Euro and the Chinese Renminbi. The potential loss as of June 30,
2007, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $5,791.
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.
As previously reported on Form 8-K dated November 29, 2005, the Company decided to change accountants. There were no
disagreements with predecessor accountants.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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
28
from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of
June 30, 2007 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, 2007 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, 2007, 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, 2007, was effective.
Our internal control over financial reporting as of June 30, 2007, 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:
(cid:120)
(cid:120)
(cid:120)
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.
29
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, 2007, 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, 2007, 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, 2007 and 2006, and the related consolidated statements
of income and comprehensive income, stockholders' equity, and cash flows for each of the years then ended and our report
dated September 5, 2007, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Melville, New York
September 5, 2007
30
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 6, 2007.
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 6, 2007.
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 6, 2007.
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 6, 2007.
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 6, 2007.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Report:
PART IV
(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
3.2
3.3
10.1
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)).
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).
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).
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).
31
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
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).
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).
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).
Aceto Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 4(i) to Registration Statement No.
333-110653 on Form S-8).
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).
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).
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).
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).
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).
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).
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).
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).
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).
Amendment and Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan Chase
Bank dated June 29, 2004 (incorporated by reference to Exhibit 10.15 to the Company’s annual report on Form 10-
K for the year ended June 30, 2004).
10.16 Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan Chase Bank dated August
31, 2004 (incorporated by reference to Exhibit 10.16 to the Company’s annual report on Form 10-K for the year
ended June 30, 2004).
32
10.17
10.18
10.19
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).
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).
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.
21.1*
Subsidiaries of the Company.
23.1*
Consent of BDO Seidman, LLP.
23.2*
Consent of KPMG LLP.
31.1*
31.2*
32.1*
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
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
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
33
ACETO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2007 and 2006
Consolidated statements of income for the years ended June 30, 2007, 2006 and 2005
Consolidated statements of cash flows for the years ended June 30, 2007, 2006 and 2005
Consolidated statements of shareholders’ equity and comprehensive income for the years ended June 30, 2007, 2006
and 2005
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.
34
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, 2007
and 2006 and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows
for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index for the years ended June 30, 2007 and 2006. These
consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and financial statement schedule, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements and the financial statement 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, 2007 and 2006, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein
for the years ended June 30, 2007 and 2006.
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, 2007, 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 5, 2007 expressed an unqualified opinion.
/s/ BDO Seidman, LLP
Melville, New York
September 5, 2007
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aceto Corporation:
We have audited the accompanying consolidated statements of income, shareholders’ equity and comprehensive income, and
cash flows of Aceto Corporation and subsidiaries for the year ended June 30, 2005. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index
for the year ended June 30, 2005. These consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of
operations and the cash flows of Aceto Corporation and subsidiaries for the year ended June 30, 2005, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Melville, New York
September 8, 2005
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2007 AND 2006
(in thousands, except per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Investments
Trade receivables: less allowance for doubtful accounts (2007, $491;
2006, $416)
Other receivables
Inventory
Prepaid expenses and other current assets
Deferred income tax asset, net
Total current assets
Long-term notes receivable
Property and equipment, net
Property held for sale
Goodwill
Intangible assets, net
Deferred income tax asset, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Short term bank loans
Note payable – related party
Accrued expenses
Deferred income tax liability
Total current liabilities
Long-term liabilities
Environmental remediation liability
Deferred income tax liability
Minority interest
Total liabilities
Commitments and contingencies (Note 16)
Shareholders’ equity:
Common stock, $.01 par value, 40,000 shares authorized; 25,644 shares issued;
24,330 and 24,278 shares outstanding at June 30, 2007 and 2006, respectively
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 1,314 and 1,366 shares at June 30, 2007 and 2006,
respectively
Accumulated other comprehensive income
Total shareholders’ equity
2007
2006
$ 32,320
3,036
58,206
3,123
60,679
1,128
2,541
161,033
449
4,406
5,268
1,820
5,817
5,958
3,727
$ 33,732
3,309
50,993
1,406
47,259
1,011
3,396
141,106
557
4,808
4,531
1,755
3,789
7,356
2,690
$ 188,478
$ 166,592
$ 32,539
25
500
14,154
885
48,103
6,684
5,816
2,746
302
63,651
256
56,854
74,419
(12,693)
5,991
124,827
$ 24,424
-
500
10,612
863
36,399
6,379
5,200
3,329
232
51,539
256
56,691
68,464
(13,198)
2,840
115,053
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$188,478
$166,592
See accompanying notes to consolidated financial statements.
37
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expense):
Interest expense
Interest and other income, net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of income taxes (Note 3)
Net income
Basic income per common share:
Income from continuing operations
Loss from discontinued operations
Net income
Diluted income per common share:
Income from continuing operations
Loss from discontinued operations
Net income
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
2007
2006
2005
$313,473
258,980
54,493
39,429
15,064
(173)
532
359
15,423
5,211
10,212
-
$10,212
$297,328
246,370
50,958
38,529
12,429
(127)
956
829
13,258
3,994
9,264
(27)
$ 9,237
$313,431
260,280
53,151
41,561
11,590
(73)
1,271
1,198
12,788
2,163
10,625
(610)
$10,015
$ 0.42
-
$ 0.42
$ 0.38
-
$ 0.38
$ 0.44
(0.03)
$ 0.41
$ 0.41
-
$ 0.41
$ 0.38
-
$ 0.38
$ 0.43
(0.02)
$ 0.41
24,305
24,711
24,267
24,590
24,198
24,670
38
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization
Goodwill impairment charge relating to discontinued operations
Asset impairment charge
Gain on sale of assets
Provision for doubtful accounts
Non-cash stock compensation
Unrealized gain on trading securities
Income tax benefit on exercise of stock options
Deferred income taxes
Changes in assets and liabilities:
Investments – trading securities
Trade accounts receivable
Other receivables
Income taxes receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Investing activities:
Purchases of investments
Proceeds from sale of investments
Maturities of investments
Payments received on notes receivable
Issuance of notes receivable
Purchase of intangible assets
Purchases of property and equipment, net
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from exercise of stock options
Excess income tax benefit on exercise of stock options
Payment of note payable – related party
Payment of cash dividends
Payments for purchases of treasury stock
Borrowings (repayments) of short-term bank loans
Net cash used in financing activities
2007
2006
2005
$10,212
$ 9,237
$10,015
1,791
-
-
-
132
443
(180)
-
1,692
-
(6,973)
(1,726)
-
(12,565)
(96)
(636)
7,884
4,185
4,163
(6,274)
-
6,779
151
(75)
(2,468)
(704)
(2,591)
217
24
-
(4,257)
-
25
(3,991)
1,558
-
-
(66)
38
278
(40)
-
1,134
-
(227)
129
-
4,909
(182)
(719)
(3,962)
3,941
16,028
-
1,799
-
73
-
-
(485)
1,387
250
85
-
(3,637)
(581)
(126)
(4,009)
1,291
920
619
(10)
352
329
(110)
142
650
341
3,110
80
232
(10,188)
401
(363)
(8,681)
99
(771)
(4,463)
9,000
-
144
-
-
(4,195)
486
946
-
(500)
(3,641)
-
126
(3,069)
Effect of foreign exchange rate changes on cash
1,007
376
(26)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(1,412)
33,732
$32,320
13,782
19,950
$33,732
(3,380)
23,330
$19,950
See accompanying notes to consolidated financial statements.
39
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
Common Stock
serahS
tnuomA
Capital in
Excess of
Par Value
Retained
Earnings
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income
Total
446,52
-
65$2
-
111,7$5
-
094,6$ 5
510,01
)625,1(
-
)531,51($
-
445,$ 1
-
662,00$ 1
510,01
4002 ,03 enuJ ta ecnalaB
emocni teN
:emocni evisneherpmoc rehtO
Change in fair value of cross currency
interest rate swaps
Foreign currency translation
adjustments
Unrealized loss on available for sale
investments
Additional minimum pension liability
:emocni evisneherpmoC
Stock issued pursuant to employee stock
incentive plans
Cash dividends ($0.11 per share)
snoitpo kcots fo esicrexE
Tax benefit from exercise of stock options
5002 ,03 enuJ ta ecnalaB
emocni teN
:emocni evisneherpmoc rehtO
Change in fair value of cross currency
interest rate swap
Foreign currency translation
adjustments
Unrealized loss on available for sale
investments
Additional minimum pension liability
:emocni evisneherpmoC
Stock issued pursuant to employee stock
incentive plans
Cash dividends ($0.15 per share)
noitasnepmoc desab-erahS
kcots yrusaert fo sesahcruP
snoitpo kcots fo esicrexE
Tax benefit from exercise of stock options
6002 ,03 enuJ ta ecnalaB
emocni teN
:emocni evisneherpmoc rehtO
Change in fair value of cross currency
interest rate swap
Foreign currency translation
adjustments
Unrealized gain on available for sale
investments
:emocni evisneherpmoC
Adjustment to adopt SFAS No. 158, net of
tax of $25
-
-
-
-
-
-
-
-
446,52
-
-
-
-
-
-
-
-
-
-
-
446,52
-
-
-
-
-
-
-
-
-
-
-
-
-
652
-
-
-
-
-
-
-
-
-
-
-
652
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(74)
-
)672(
142
309,65
-
-
(3,641)
-
-
468,26
732,9
41
-
321
-
)263,1(
-
408
-
222,1
-
)505,31(
-
-
-
-
-
(66)
-
881
-
)914(
85
196,65
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,637)
-
-
-
-
464,86
212,01
20
-
-
)69(
27
-
)663,1(
-
219
-
-
)185(
966
-
)891,31(
-
-
-
-
-
-
-
-
-
-
-
-
-
Stock issued pursuant to employee stock
incentive plans
Cash dividends ($0.175 per share)
noitasnepmoc desab-erahS
snoitpo kcots fo esicrexE
Tax benefit from exercise of stock options
7002 ,03 enuJ ta ecnalaB
-
-
-
-
-
446,52
See accompanying notes to consolidated financial statements.
-
-
-
-
-
652$
(44)
-
923
)641(
24
458,65$
-
(4,257)
-
-
-
914,47 $
15
-
-
73
-
)413,1(
142
-
-
363
-
)396,21$(
40
49
(383)
(52)
(21)
-
-
-
-
731,1
-
49
(383)
(52)
(21)
806,9
334
(3,641)
649
142
556,701
732,9
42
42
1,682
1,682
(42)
21
-
-
-
-
-
-
048,2
-
(42)
21
049,01
153
(3,637)
881
)185(
052
85
350,511
212,01
161
161
2,900
2,900
52
52
523,31
38
38
-
-
-
-
-
199,5 $
98
(4,257)
923
712
24
728,421$
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
(1) Description of Business
Aceto Corporation and subsidiaries (“Aceto” or the “Company”) is primarily engaged in the sourcing, regulatory support,
marketing and distribution of chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals and crop
protection products used principally as raw materials in the agricultural, color, pharmaceutical, surface coating/ink and
general chemical consuming industries. Most of the chemicals distributed by the Company are purchased from companies
located outside the United States. The Company’s customers are primarily located throughout the United States, Europe and
Asia.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. In
addition, the financial statements of S.R.F.A. LLC, a joint-venture entity which is 50% owned by the Company and
commenced operations in April 2004, are included in the consolidated financial statements in accordance with FASB
Interpretation 46R, “Consolidation of Variable Interest Entities” (FIN 46R). All significant inter-company balances and
transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements and the disclosure of contingent assets and liabilities at the date of the financial
statements. These judgments can be subjective and complex, and consequently actual results could differ from those
estimates and assumptions. The Company’s most critical accounting policies relate to revenue recognition; allowance for
doubtful accounts; inventory; goodwill and other indefinite-life intangible assets; long-lived assets; environmental matters
and other contingencies; income taxes; and stock-based compensation.
Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities at the time of purchase of three months or
less to be cash equivalents.
Investments
The Company classifies investments in marketable securities as trading, available-for-sale or held-to-maturity at the time of
purchase and periodically re-evaluates such classifications. Trading securities are carried at fair value, with unrealized
holding gains and losses included in earnings. Held-to-maturity securities are recorded at cost and are adjusted for the
amortization or accretion of premiums or discounts over the life of the related security. Unrealized holding gains and losses
on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income (loss) until realized. In determining realized gains and losses, the cost of securities sold is based on
the specific identification method. Interest and dividends on the investments are accrued at the balance sheet date.
Inventories
Inventories, which consist principally of finished goods, are stated at the lower of cost (first-in first-out method) or market.
The Company writes down its inventories for estimated excess and obsolete goods by an amount equal to the difference
between the carrying cost of the inventory and the estimated market value based upon assumptions about future demand and
market conditions.
Environmental and Other Contingencies
The Company establishes accrued liabilities for environmental matters and other contingencies when it is probable that a
liability has been incurred and the amount of the liability is reasonably estimable. If the contingency is resolved for an
amount greater or less than the accrual, or the Company’s share of the contingency increases or decreases, or other
41
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
assumptions relevant to the development of the estimate were to change, the Company would recognize an additional
expense or benefit in the consolidated statements of income in the period such determination was made.
Pension Benefits
In connection with certain historical acquisitions in Germany, the Company assumed defined benefit pension plans covering
certain employees who meet certain eligibility requirements. The net pension benefit obligations recorded and the related
periodic costs are based on, among other things, assumptions of the discount rate, estimated return on plan assets, salary
increases and the mortality of participants. The obligation for these claims and the related periodic costs are measured using
actuarial techniques and assumptions. Actuarial gains and losses are deferred and amortized over future periods. The
Company’s plans are funded in conformity with the funding requirements of applicable government regulations.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income as of June 30, 2007 and 2006 are as follows:
Fair value of cross currency interest rate swaps
Cumulative foreign currency translation adjustments
Unrealized loss on available for sale investments
Adjustment to adopt SFAS No. 158
Total
2007
$ (75)
6,070
(42)
38
$5,991
2006
$ (236)
3,170
(94)
-
$2,840
The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-US
subsidiaries.
Common Stock
On May 4, 2005, the Board of Directors of the Company authorized the extension of the Company’s stock repurchase
program for an additional three years, expiring in May 2008. Under the stock repurchase program, the Company is
authorized to purchase up to an additional 4,147 shares of common stock (4,051 shares available as of June 30, 2007), in
open market or private transactions, at prices not to exceed the market value of the common stock at the time of such
purchase.
On December 2, 2004, the Board of Directors of the Company declared a 3-for-2 stock split, effected in the form of a
dividend, that was paid January 10, 2005 to shareholders of record on December 24, 2004. The Company transferred $80 to
common stock from capital in excess of par value, representing the aggregate par value of the 8,073 shares issued.
Stock Options
Prior to July 1, 2005, the Company accounted for stock-based employee compensation under the intrinsic value method as
outlined in the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations while disclosing pro-forma net income and net income per share as if the fair value
method had been applied in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting
for Stock-Based Compensation.” Under the intrinsic value method, no compensation expense was recognized if the exercise
price of the Company’s employee stock options equaled or exceeded the market price of the underlying stock on the date of
grant. Since the Company had issued all stock option grants with exercise prices equal to, or greater than, the market value
of the common stock on the date of grant, through June 30, 2005 no compensation cost was recognized in the consolidated
statements of income.
Effective July 1, 2005, the Company adopted SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS
No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such costs be measured at the fair value of the award. This statement was
adopted using the modified prospective method, which requires the Company to recognize compensation expense on a
42
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
prospective basis. SFAS 123(R) also requires that excess tax benefits related to stock option exercises be reflected as
financing cash inflows. Prior to the adoption of SFAS 123(R), the Company presented all tax benefits related to stock-based
compensation as an operating cash inflow. The Company’s policy is to satisfy stock-based compensation awards with
treasury shares.
In order to determine the fair value of stock options on the date of grant, the Company uses the Black-Scholes option-pricing
model, including an estimate of forfeiture rates. Inherent in this model are assumptions related to expected stock-price
volatility, option term, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less
subjective assumptions that are based on factual data derived from public sources, the expected stock-price volatility and
option term assumptions require a greater level of judgment.
The Company uses an expected stock-price volatility assumption that is based on the historical daily price changes of the
underlying stock which are obtained from public data sources. For stock option grants issued during fiscal 2007 and 2006, an
expected stock-price volatility of 57% and 50%, respectively, was used based upon the historical volatility at the time of
issuance. With regard to the weighted-average option term assumption, for stock option grants issued during fiscal 2007 and
2006, an expected option term assumption of 5.5 years was used as determined under the “simplified” method prescribed in
SEC Staff Accounting Bulletin (“SAB”) No. 107.
The following table illustrates the effect on net income and net income per common share as if the Company had measured
the compensation cost for the Company’s stock option programs under the fair value method for the fiscal year ended June
30, 2005:
Net income – as reported
Add: Stock-based compensation
included in reported net income
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
Net income – pro forma
Net income per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
2005
$10,015
329
(4,643)
$ 5,701
$ 0.41
$ 0.24
$ 0.41
$ 0.23
Stock-based employee compensation expense under the fair value method for the fiscal year ended June 30, 2005, includes
$6,046, which represents the entire fair value of 1,322 options granted to employees and 61 options granted to directors in
September 2004, all of which had an exercise price equal to or greater than the market value of the common stock on the date
of grant, as those options were vested as of their date of grant.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment and passage of title and risk of loss to the
customer. The Company has no acceptance or other post-shipment obligations and does not offer product warranties or
services to its customers.
Sales are recorded net of returns of damaged goods from customers, which historically have been immaterial, and sales
incentives offered to customers. The Company’s sales incentives consist primarily of volume incentive rebates. The
Company records such volume incentive rebates as the underlying revenue transactions that result in progress by the
43
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
customer in earning the rebate are recorded, in accordance with Emerging Issues Task Force (EITF) 01-09, “Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products).”
Shipping and Handling Fees and Costs
All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and are
included in net sales. The costs incurred by the Company for shipping and handling are reported as a component of cost of
sales. Cost of sales also includes inbound freight, receiving, inspection, warehousing, distribution network, and customs and
duty costs.
Net Income Per Common Share
Basic income per common share is based on the weighted average number of common shares outstanding during the period.
Diluted income per common share includes the dilutive effect of potential common shares outstanding. The Company’s only
potential common shares outstanding are stock options, which resulted in a dilutive effect of 406, 323 and 472 shares for the
years ended June 30, 2007, 2006 and 2005, respectively. There were 1,443, 1,638 and 1,096 stock options outstanding that
were not included in the calculation of diluted income per common share for the years ended June 30, 2007, 2006 and 2005,
respectively because their effect would have been anti-dilutive.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight line method over the estimated useful lives of
the related asset. Expenditures for improvements that extend the useful life of an asset are capitalized. Ordinary repairs and
maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any related gains or losses are included in income.
The components of property and equipment were as follows:
Machinery and equipment
Leasehold improvements
Computer equipment and software
Furniture and fixtures
Automobiles
Building
Accumulated depreciation and amortization
June 30, 2007
$ 964
June 30, 2006
$ 741
330
3,763
1,100
497
3,015
$ 9,669
5,263
$ 4,406
322
3,523
952
423
3,015
$ 8,976
4,168
$ 4,808
Estimated useful
life (years)
10
Shorter of asset life
or lease term
3-5
10
3
20
Property held for sale represents land and land improvements of $5,268 and $4,531 at June 30, 2007 and 2006, respectively.
During fiscal 2007 the Company recorded an additional $737 to partially recognize the capitalized environmental costs up to
the fair value of the land and land improvements to the extent of additional environmental remediation cost estimates in
accordance with EITF 90-8 “Capitalization of Costs to Treat Environmental Contamination”.
44
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
Depreciation and amortization of property and equipment amounted to $1,067, $943, and $749 for the years ended June 30,
2007, 2006, and 2005, respectively.
Goodwill and Other Intangibles
Goodwill is calculated as the excess of the cost of purchased businesses over the fair value of their underlying net assets.
Other intangible assets principally consist of customer relationships, patent license, EPA registrations and related data,
trademarks, purchased customer lists and covenants not to compete. Goodwill and other intangible assets that have an
indefinite life are not amortized.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company tests goodwill and other intangible
assets for impairment on at least an annual basis. Goodwill impairment exists if the net book value of a reporting unit
exceeds its estimated fair value. The impairment testing is performed in two steps: (i) the Company determines impairment
by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is an impairment, the Company
measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that
goodwill. To determine the fair value of these intangible assets, the Company uses many assumptions and estimates that
directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted
valuation models and set criteria that are reviewed and approved by various levels of management.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets and
certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.
Recoverability of assets held for sale is measured by comparing the carrying amount of the assets to their estimated fair
value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Accounting for Derivatives and Hedging Activities
The Company accounts for derivatives and hedging activities under the provisions of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as amended, which establishes accounting and reporting guidelines for
derivative instruments and hedging activities. SFAS No. 133 requires the recognition of all derivative financial instruments
as either assets or liabilities in the statement of financial condition and measurement of those instruments at fair value.
Changes in the fair values of those derivatives are reported in earnings or other comprehensive income depending on the
designation of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of a derivative and the effect on the consolidated financial statements depends on its hedge
designation and whether the hedge is highly effective in achieving offsetting changes in the fair value or cash flows of the
asset or liability hedged. Under the provisions of SFAS No. 133, the method that is used for assessing the effectiveness of a
hedging derivative, as well as the measurement approach for determining the ineffective aspects of the hedge, is established
at the inception of the hedged instrument.
For derivatives designated as fair value hedges, changes in fair value are recognized in earnings. If the fair value hedge is
fully effective, the change in fair value of the hedged item attributable to the hedged risk is adjusted to fair value and is also
recognized in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as
a cash flow hedge are recorded in other comprehensive income to the extent that the derivative is effective as a hedge, until
earnings are affected by the variability in cash flows of the designated hedged item.
The Company enters into cross currency interest rate swaps to reduce foreign currency exposure on inter-company
transactions. The gains or losses on the inter-company loans due to changes in foreign currency rates will be offset by the
gains or losses on the swap in the statements of income. Since the Company’s interest rate swaps qualify as cash flow
hedging activities, the change in their fair value is recorded in accumulated other comprehensive income.
45
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
The Company operates internationally, therefore its earnings, cash flows and financial positions are exposed to foreign
currency risk from foreign-currency-denominated receivables and payables, which, in the U.S., have been denominated in
various foreign currencies, including Euros, British Pounds, Japanese Yen, Singapore Dollars and Chinese Renminbi and at
certain foreign subsidiaries in U.S. dollars and other non-local currencies.
Management believes it is prudent to minimize the risk caused by foreign currency fluctuation. Management minimizes the
currency risk on its foreign currency receivables and payables by purchasing future foreign currency contracts (futures) with
one of its financial institutions. Futures are traded on regulated U.S. and international exchanges and represent commitments
to purchase or sell a particular foreign currency at a future date and at a specific price. Since futures are purchased for the
amount of the foreign currency receivable or for the amount of foreign currency needed to pay for specific purchase orders,
and the futures mature on the due date of the related foreign currency vendor invoices or customer receivables, the Company
believes that it eliminates risks relating to foreign currency fluctuation. The Company takes delivery of all futures to pay
suppliers in the appropriate currency. The gains or losses for the changes in the fair value of the foreign currency contracts
are recorded in cost of sales (sales) and offset the gains or losses associated with the impact of changes in foreign exchange
rates on trade payables (receivables) denominated in foreign currencies. Senior management and members of the financial
department continually monitor foreign currency risks and the use of this derivative instrument.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the applicable local currency. The translation of the
applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts and cash flows using average rates of exchange prevailing
during the year. Adjustments resulting from the translation of foreign currency financial statements are accumulated in a
separate component of stockholders’ equity.
Reclassifications
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current year
presentation.
(3) Sale of Institutional Sanitary Supplies Segment
During June 2005, the Company entered into an agreement to sell the majority of the product lines formulated and marketed
by CDC Products Corp. (“CDC”), which is one of the two reporting units forming part of the former Institutional Sanitary
Supplies reportable segment. The sale of certain product lines of CDC was completed on August 24, 2005 for $75 and a note
receivable of $44 due in April 2006, which resulted in a pre-tax gain of $66, included in other income in the statement of
income for the year ended June 30, 2006. The Company recorded an asset impairment charge relating to CDC of $619
included in selling, general and administrative expenses in the consolidated statement of income for the year ended June 30,
2005. The asset impairment charge related to certain leasehold improvements which were deemed to have no future value
and thus the Company wrote-off those assets. Excluded from the sale of CDC’s product lines was Anti-Clog, an EPA-
registered biocide that has a unique delivery system and is used in commercial air-conditioning systems. Beginning in July
2005, the operating results of the Anti-Clog product, which are not material, are included in the Chemicals & Colorants
reportable segment.
On September 6, 2005, the Company completed the sale of certain assets of Magnum Research Corp. for $81, the remaining
reporting unit of the former Institutional Sanitary Supplies reportable segment, the operating results of which are included in
discontinued operations in the consolidated statements of income. In December 2005, the Company exited the leased space
previously occupied by CDC and Magnum Research Corp. In June 2006, the Company negotiated a lease termination with
its landlord which resulted in a pre-tax charge of $378 included in selling, general and administrative expenses for the year
ended June 30, 2006.
46
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
Operating results of discontinued operations for the fiscal years ended June 30, 2006 and 2005 were as follows:
Net sales
Loss from operations of
discontinued business
Benefit for income taxes
2006
$ 154
2005
$ 1,314
(44)
17
(64)
24
Non-cash impairment charge
Benefit for income taxes
-
-
(920)
350
Loss from discontinued operations
$ (27)
$ (610)
The $920 non-cash impairment charge included in the table of operating results of discontinued operations for the fiscal year
ended June 30, 2005 relates to a write-down of goodwill, net of an income tax benefit, of $570 for Magnum Research Corp.,
the remaining reporting unit that was sold, which was part of the former Institutional Sanitary Supplies segment. The
goodwill amount that was written down had been previously allocated to this reportable segment.
(4) Investments
A summary of short-term investments was as follows:
Trading securities
Corporate equity securities
Available for sale securities
Corporate bonds
Government and agency securities
June 30, 2007
June 30, 2006
Fair Value
Cost Basis
Fair Value
Cost Basis
$ 877
$ 152
$ 697
$ 152
$ 1,187
$ 972
$ 3,036
$ 1,203
$ 1,000
$ 1,167
$ 1,445
$ 3,309
$ 1,210
$ 1,501
The Company has classified all investments with maturity dates of greater than three months as current since it has the ability
to redeem them within the year and is available for current operations.
Unrealized gains on trading securities were $180, $40 and $110 for fiscal 2007, 2006 and 2005, respectively.
(5) Notes Receivable
The Company has four notes receivable with outstanding balances aggregating $482 and $624 at June 30, 2007 and June 30,
2006, respectively, which have arisen from sales of property. The notes are either secured by a first mortgage on the real
property sold or collateralized by a security interest in the asset sold. The notes range in length from seven to ten years and
earn interest at a fixed rate. The range of fixed rates on the notes is 5.5% to 7.0%. Included in current assets are the current
portions of the notes receivable due within one year totaling $74 and $67 at June 30, 2007 and 2006, respectively.
47
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
(6) Goodwill and Other Intangible Assets
Goodwill of $1,820 and $1,755 as of June 30, 2007 and June 30, 2006, respectively, relates to the Health Sciences segment
and reporting unit.
Intangible assets subject to amortization as of June 30, 2007 and 2006 were as follows:
June 30, 2007
Customer relationships
Patent license
EPA registrations and related data
Non-compete agreements
June 30, 2006
Customer relationships
Customer lists
Patent license
EPA registrations and related data
Non-compete agreements
Gross Carrying
Value
Accumulated
Amortization
Net Book
Value
$ 2,958
838
2,733
247
$ 6,776
$ 1,479
133
98
173
$ 1,883
$ 1,479
705
2,635
74
$ 4,893
Gross Carrying
Value
Accumulated
Amortization
Net Book
Value
$ 2,755
600
838
265
230
$ 4,688
$ 984
600
57
3
115
$ 1,759
$ 1,771
-
781
262
115
$ 2,929
The estimated useful lives of customer relationships, patent license, EPA registrations and related data and non-compete
agreements are 7 years, 11 years, 10 years and 3-5 years, respectively.
As of June 30, 2007 and June 30, 2006, the Company also had $924 and $860, respectively, of intangible assets pertaining to
trademarks which have indefinite lives and are not subject to amortization.
In fiscal 2007 and 2006, changes in goodwill and trademarks are attributable to foreign currency exchange rates used to
translate the financial statements of foreign subsidiaries.
Amortization expense for intangible assets subject to amortization amounted to $724, $615 and $542 for the years ended June
30, 2007, 2006 and 2005, respectively. The estimated aggregate amortization expense for intangible assets subject to
amortization for each of the succeeding years ended June 30, 2008 through June 30, 2013 are as follows: 2008: $838; 2009:
$813; 2010: $788; 2011: $577; 2012: $366 and 2013 and thereafter: $1,511.
(7) Accrued Expenses
The components of accrued expenses as of June 30, 2007 and 2006 were as follows:
Accrued compensation
Accrued environmental remediation costs
Accrued income taxes payable
Other accrued expenses
2007
$ 3,749
321
1,504
8,580
$14,154
2006
$ 2,949
200
2,019
5,444
$10,612
48
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
(8) Environmental Remediation
In May 2007, February 2007 and September 2006, 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 one of Aceto's subsidiaries
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 its subsidiary 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's subsidiary 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's subsidiary 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's subsidiary sent to the
site, most of which were non-hazardous substances and as such, believes that its subsidiary is a very minor 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.
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 2007, 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 $6,136 and $7,611. As of June 30, 2007 and 2006 a liability of $6,136 and $5,400, 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.
In March 2006, Arsynco received notice from the EPA of its status as a potentially responsible party (“PRP”) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for a site described as the Berry’s
Creek Study Area. Arsynco is one of over 150 PRP’s which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not quantifiable for a number of reasons, including the
difficulty in determining the extent of contamination and the length of time remediation may require. In addition, any
estimate of liability must also consider the number of other PRP’s and their financial strength. Since an amount of the
liability can not be reasonably estimated at this time, no accrual is recorded for these potential future costs. The impact of the
resolution of this matter on the Company’s results of operations in a particular reporting period is not known. However,
management believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s
financial condition or liquidity.
(9) Financing Arrangements
The Company has a revolving credit agreement with a financial institution that expires June 30, 2010 and provides for
available credit of $10,000. Under the credit agreement, the Company may obtain credit through direct borrowings and
letters of credit. The obligations of the Company under the credit agreement are guaranteed by certain of the Company’s
subsidiaries and are secured by 65% of the capital of certain non-domestic subsidiaries which the Company owns. There is
no borrowing base on the credit agreement. Interest under the credit agreement is at LIBOR plus 1.50%, which was 6.82%,
7.19% and 4.93% at June 30, 2007, 2006 and 2005, respectively. The credit agreement contains several financial covenants
requiring, among other things, minimum levels of debt service and tangible net worth. The Company is also subject to
certain restrictive debt covenants including liens, limitations on indebtedness, limitations on cash dividends, guarantees, sale
of assets, sales of receivables, and loans and investments. The Company was in compliance with all covenants at June 30,
2007.
49
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
At June 30, 2007 and 2006, the Company had available lines of credit with foreign financial institutions totaling $19,472 and
$18,512, respectively. The Company has issued a cross corporate guarantee to the foreign banks. Short term loans under
these agreements bear interest at LIBOR plus 0.75%, which was 6.07%, 6.44% and 4.18% at June 30, 2007, 2006 and 2005,
respectively. The Company is not subject to any financial covenants under these arrangements.
Under the above financing arrangements, the Company had $25 in short-term bank loans outstanding and $702 in letters of
credit leaving an unused facility of $28,770 at June 30, 2007. At June 30, 2006 the Company had no short-term bank loans
outstanding and $1,349 in letters of credit leaving an unused facility of $27,163.
(10) Stock Based Compensation Plans
In September 2002, the Company adopted the Aceto Corporation 2002 Stock Option Plan (“2002 Plan”), which was ratified
by the Company’s shareholders in December 2002. Under the 2002 Plan, restricted stock or options to purchase up to 1,688
shares of the Company’s common stock may be granted by the Company to officers, directors, employees and agents of the
Company. The exercise price per share shall not be less than the market value of Aceto common stock on the date of grant
and each option may not become exercisable less than six months from the date it is granted. Restricted stock may be
granted to an eligible participant in lieu of a portion of any annual cash bonus earned by such participant. Such award may
include additional shares of restricted stock (premium shares) greater than the portion of bonus paid in restricted stock. The
restricted stock award is vested at issuance and the restrictions lapse ratably over a period of years as determined by the
Board of Directors, generally three years. The premium shares vest when all the restrictions lapse, provided that the
participant remains employed by the Company at that time.
During the year ended June 30, 2007, the Company granted 65 options to certain employees and directors at a weighted
average exercise price of $8.25 per share. The options vest on the first anniversary of the date of grant and expire ten years
from the date of grant.
In January 2006, the Company granted 131 options to certain employees and directors at an exercise price of 6.82 per share.
The options vest on the first anniversary of the date of grant and expire ten years from the date of grant.
All options granted were at exercise prices equal to the market value of the common stock on the date of grant. As of June
30, 2007, there were 94 shares of common stock available for grant as either options or restricted stock under the 2002 Plan.
In December 1998, the Company adopted the Aceto Corporation 1998 Omnibus Equity Award Plan (“1998 Plan”). In
accordance with the 1998 Plan the Company’s Board of Directors (“Board”) may grant up to 1,688 shares of common stock
in the form of stock options or restricted stock to eligible participants. The exercise price per share, determined by the Board,
for options granted cannot be less than the market value of the stock on the date of grant. The options vest as determined by
the Board and expire no later than ten years from the date of grant. Restricted stock may be granted to an eligible participant
in lieu of a portion of any annual cash bonus earned by such participant. Such restricted stock award may include premium
shares greater than the portion of bonus paid in restricted stock. The restricted stock award is vested at issuance and the
restrictions lapse ratably over a period of years as determined by the Board. The premium shares vest when the restrictions
lapse, provided that the participant remains employed by the Company at that time. Under the 1998 Plan, there were 67
shares of common stock available for grant as either options or restricted stock at June 30, 2007.
Under the terms of the Company’s 1980 Stock Option Plan, as amended (“1980 Plan”), options may be issued to officers and
key employees. The exercise price per share can be greater or less than the market value of the stock on the date of grant. The
options vest either immediately or over a period of years as determined by the Board of Directors and expire no later than
five or ten years from the original date they are fully vested. The 1980 Plan expired September 2005. Outstanding options
survive the expiration of the 1980 Plan.
In September 2004, the Company granted 1,317 options under the 1980 Plan to employees, 64 options under the 1998 Plan to
directors and employees and 2 options under the 2002 Plan to employees at an exercise price of $10.95 per share which was
equal to the market value of the common stock on the date of grant. These options were vested as of their date of grant and
will expire ten years from such date.
50
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
The following summarizes the shares of common stock under option for all plans at June 30, 2007, 2006 and 2005, and the
activity with respect to options for the respective years then ended:
Balance at June 30, 2004
Granted
Exercised
Forfeited
Balance at June 30, 2005
Granted
Exercised
Forfeited
Balance at June 30, 2006
Granted
Exercised
Forfeited
Balance at June 30, 2007
Options exercisable at June 30, 2007
Shares subject to
option
1,632
1,383
(171)
(80)
2,764
131
(72)
(80)
2,743
65
(38)
(70)
2,700
2,635
Weighted average
exercise price per
share
$ 4.72
10.95
5.18
9.62
7.65
6.82
3.88
10.65
7.62
8.25
6.02
10.26
$ 7.58
$ 7.57
Aggregate
Intrinsic
Value
$6,499
$6,434
The total intrinsic value of stock options exercised during the years ended June 30, 2007, 2006 and 2005 was approximately
$106, $234 and $1,045, respectively. At June 30, 2007, outstanding options had expiration dates ranging from December 10,
2008 to April 30, 2017.
Under the 2002 Plan and the 1998 Plan, compensation expense is recorded for the market value of the restricted stock awards
in the year the related bonus is earned and over the vesting period for the market value at the date of grant of the premium
shares granted. In fiscal 2007, 2006 and 2005, restricted stock awarded and premium shares vested of 15, 20 and 41 common
shares, respectively, were issued from treasury stock under employee incentive plans, which increased stockholders’ equity
by $98, $153 and $334, respectively. The related non-cash compensation expense related to the restricted stock granted and
the vesting of premium shares during the year, which are issuable only when fully vested, was $114, $90 and $329 in fiscal
2007, 2006 and 2005, respectively. Additionally, non-cash compensation expense of $329 and $188 was recorded in fiscal
2007 and 2006, respectively, relating to stock option grants, which is included in selling, general and administrative
expenses.
The following summarizes the non-vested stock options at June 30, 2007 and the activity with respect to non-vested options
for the year ended June 30, 2007:
Non-vested at June 30, 2006
Granted
Vested
Forfeited
Non-vested at June 30, 2007
Shares
subject to
option
130
65
(129)
(1)
65
Weighted
average grant
date fair value
$2.87
3.96
2.87
2.87
$3.96
51
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
Non-cash compensation expense for non-vested options at June 30, 2007 of $109 will be expensed during fiscal 2008. The
per-share weighted-average fair value of stock options granted during 2007, 2006 and 2005 was $3.96, $2.87 and $4.38,
respectively, on the date of the grant using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Date of Grant
Fiscal 2007:
July 2006
December 2006
March 2007
April 2007
Fiscal 2006:
January 2006
Fiscal 2005:
September 2004
Expected
Volatility (%)
Expected
Life (years)
Risk-free
interest rate Dividend yield (%)
57
57
58
57
50
40
5.5
5.5
5.5
5.5
5.5
6.0
4.36
4.40
4.50
5.02
2.22
1.80
1.90
2.50
4.36
2.22
3.76
1.04
(11) Interest and Other Income
Interest and other income during fiscal 2007, 2006 and 2005 was comprised of the following:
sdnediviD
tseretnI
Net gain on investments
Foreign government subsidies received
Minority interest
Foreign currency (losses) gains
suoenallecsiM
7002
46 $
540,1
174
152
(70)
(770)
)36(
235 $
2006
331 $
095
29
561
(61)
(354)
58
$ 956
2005
68 $
954
117
457
(14)
182
(16)
$ 1,271
(12) Income Taxes
The components of income from continuing operations before the provision for income taxes are as follows:
Domestic operations
Foreign operations
7002
$ 2,988
12,435
324,51 $
2006
$ 1,981
11,277
$ 13,258
2005
$ (332)
13,120
$12,788
52
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
The components of the provision for income taxes are as follows:
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
2007
2006
2005
$ 788
208
$ 105
335
$ 293
(692)
270
6
187
126
2,461
1,478
$ 5,211
2,568
673
$ 3,994
126
(184)
1,023
1,597
$ 2,163
Income taxes payable, which is included in accrued expenses, was $1,504 and $2,019 at June 30, 2007 and 2006,
respectively.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at June 30, 2007 and 2006 are
presented below:
Deferred tax assets:
Accrued environmental remediation liabilities not
currently deductible
Accrued deferred compensation
Additional inventoried costs for tax purposes
Allowance for doubtful accounts receivable
Depreciation and amortization
Other
Impairment charges
Domestic net operating loss carryforwards
Foreign net operating loss carryforwards
Total gross deferred tax assets
Valuation allowances
Deferred tax liabilities:
Foreign deferred tax liabilities
Unrealized gain on investments
Goodwill
Depreciation and amortization
Total gross deferred tax liabilities
2007
2006
$ 461
1,360
168
132
-
80
196
333
8,738
11,468
(2,502)
8,966
(3,631)
(313)
(143)
(11)
(4,098)
$ 461
1,159
124
116
223
53
585
376
10,695
13,792
(2,450)
11,342
(4,192)
(207)
(383)
-
(4,782)
Net deferred tax assets
$ 4,868
$ 6,560
53
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
The following table shows the current and non current deferred tax assets (liabilities) at June 30, 2007 and 2006:
Current deferred tax assets, net
Non-current deferred tax assets, net
Current deferred tax liabilities
Non current deferred tax liabilities
Net deferred tax assets
2007
$ 2,541
5,958
(885)
(2,746)
$ 4,868
2006
$ 3,396
7,356
(863)
(3,329)
$ 6,560
The net change in the total valuation allowance for the year ended June 30, 2007 was an increase of $52. This increase was
primarily attributable to an additional valuation allowance recorded for net operating loss carryforwards generated in certain
foreign jurisdictions. The net change in the total valuation allowance for the year ended June 30, 2006 was an increase of
$697, primarily attributable to an additional valuation allowance recorded for net operating loss carryforward generated in
certain foreign jurisdictions. A valuation allowance is provided when it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. The Company has established valuation allowances primarily for net operating
loss carryforwards in certain foreign countries. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets are not expected to be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which net operating loss carryforwards are utilizable and temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the net deferred tax assets recognized at June 30, 2007, the Company will need to
generate future taxable income of approximately $11,100.
Based upon the level of historical taxable income and projections for taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the Company will realize the benefits of these
deductible differences. There can be no assurance, however, that the Company will generate any earnings or any specific
level of continuing earnings in the future. The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Deferred taxes have not been provided on undistributed earnings of foreign subsidiaries amounting to approximately $61,400
at June 30, 2007 since substantially all of these earnings are expected to be permanently reinvested in foreign operations. A
deferred tax liability will be recognized when the Company expects that it will recover these undistributed earnings in a
taxable manner, such as through the receipt of dividends or sale of the investments. Determination of the amount of
unrecognized deferred U.S. income tax liabilities is not practical to calculate because of the complexity of this hypothetical
calculation. In addition, unrecognized foreign tax credit carryforwards would be available to reduce a portion of such U.S.
tax liability.
We operate in various tax jurisdictions, and although we believe that we have provided for income and other taxes in
accordance with the relevant regulations, if the applicable regulations were ultimately interpreted differently by a taxing
authority, we may be exposed to additional tax liabilities.
Tax reform has taken place in Germany whereby an income tax law was passed in July 2007, awaiting approval into the
Federal Gazette. The enacted tax rate in Germany will potentially change from 40% to 30%. As a result, the deferred tax
balance could decrease by $1,600 in 2008.
54
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
A reconciliation of the statutory federal income tax rate and the effective tax rate for continuing operations for the fiscal years
ended June 30, 2007, 2006 and 2005 follows:
Federal statutory tax rate
State and local taxes, net of federal income tax
benefit
Increase (reduction) in valuation allowance
Foreign tax rate differential
Other
Effective tax rate
2007
34.0%
1.1
0.4
(2.1)
0.4
33.8%
2006
34.0%
1.0
5.3
(9.1)
(1.1)
30.1%
2005
34.0%
(0.5)
(9.9)
(5.6)
(1.1)
16.9%
At June 30, 2007, the Company had foreign net operating loss carryforwards of approximately $16,600 which are available to
offset future foreign taxable income and which have no expiration date.
(13) Supplemental Cash Flow Information
Cash paid for interest and income taxes during fiscal 2007, 2006 and 2005 was as follows:
Interest
Income taxes, net of refunds
2007
$ 167
$3,822
2006
$ 129
$ 797
2005
$ 151
$ 195
(14) Retirement Plans
Defined Contribution Plans
The Company has defined contribution retirement plans in which certain employees are eligible to participate, including
deferred compensation plans (see below). The Company's annual contribution per employee, which is at management's
discretion, is based on a percentage of the employee’s compensation. The Company's provisions for contributions amounted
to $1,281, $1,148 and $1,161 in fiscal 2007, 2006 and 2005, respectively.
Defined Benefit Plans
The Company sponsors certain defined benefit pension plans covering certain employees of its German subsidiaries who
meet the plan’s eligibility requirements. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires that employers
recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their
consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost.
SFAS No. 158 also requires additional disclosures in the notes to financial statements. The Company adopted the recognition
and disclosure provisions of this statement for the year ended June 30, 2007. The incremental effect of applying SFAS No.
158 on individual line items in the consolidated balance sheet at June 30, 2007 is as follows:
55
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
ytilibail noisnep deurccA
ytilibail xat emocni derrefeD
seitilibail latoT
Accumulated other comprehensive income
ytiuqe ’sredloherahs latoT
Prior to SFAS
No. 158
adoption
SFAS No. 158
adoption
adjustments
After SFAS
No. 158
adoption
478
127,2
986,36
5,953
987,421
)36(
52
)83(
38
83
811
647,2
156,36
5,991
124,827
The accrued pension liability as of June 30, 2007 was $811. The accrued pension liability recorded as of June 30, 2006
amounted to $755. Net periodic pension costs, which consists principally of interest cost and service cost was $73 in fiscal
2007, $87 in fiscal 2006 and $84 in fiscal 2005. The Company’s plans are funded in conformity with the funding
requirements of the applicable government regulations. An assumed weighted average discount rate of 5.1%, 4.2% and 4.6%
and a compensation increase rate of 3.2%, 3.3% and 3.0% were used in determining the actuarial present value of benefit
obligations as of June 30, 2007, 2006 and 2005, respectively.
Deferred Compensation Plans
To comply with the requirements of the American Jobs Creation Act of 2004, as of December 2004, the Company froze its
non-qualified Supplemental Executive Retirement Plan (the “Frozen Plan”) and has not allowed any further deferrals or
contributions to the Frozen Plan after December 31, 2004. All of the earned benefits of the participants in the Frozen Plan as
of December 31, 2004, will be preserved under the existing plan provisions.
On March 14, 2005, the Company’s Board of Directors adopted the Aceto Corporation Supplemental Executive Deferred
Compensation Plan (the “Plan”). The Plan is a non-qualified deferred compensation plan intended to provide certain
qualified executives with supplemental benefits beyond the Company’s 401(k) plan, as well as to permit additional deferrals
of a portion of their compensation. The Plan is intended to comply with the provisions of section 409A of the Internal
Revenue Code of 1986, as amended, and is designed to provide comparable benefits to those under the Frozen Plan.
Substantially all compensation deferred under the Plan, as well as Company contributions, is held by the Company in a
grantor trust, which is considered an asset of the Company. The assets held by the grantor trust are in life insurance policies.
As of June 30, 2007 and 2006, the Company recorded a liability under the Plans of $3,523 and $2,937, respectively,
(included in long-term liabilities) and an asset (included in other assets) of $3,008 and $2,556, respectively, primarily
representing the cash surrender value of policies owned by the Company.
(15) Financial Instruments
Derivative Financial Instruments
At June 30, 2007 and 2006 the Company had future foreign currency contracts that have a notional amount of $13,793 and
$12,389, respectively. Unrealized (losses) gains on hedging activities at the end of fiscal 2007 and 2006 amounted to ($20)
and $171, respectively and are included in the consolidated statements of income. The contracts have varying maturities of
less than one year.
The Company is exposed to credit losses in the event of non-performance by the financial institutions, who are the counter
parties, on its future foreign currency contracts. The Company anticipates, however, that the financial institutions will be
able to fully satisfy their obligations under the contracts. The Company does not obtain collateral to support financial
instruments, but monitors the credit standing of the financial institutions.
56
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
In addition, the Company enters into cross currency interest rate swaps to reduce foreign currency exposure on inter-company
transactions. In June 2004, a foreign subsidiary of the Company entered into a one-year cross currency interest rate swap
transaction, which expired in June 2005 when the underlying inter-company loan was repaid, and in May 2003 the foreign
subsidiary entered into a five-year cross currency interest rate swap transaction, both for the purpose of hedging fixed-
interest-rate, foreign-currency-denominated cash flows under inter-company loans. Under the terms of these derivative
financial instruments, U.S. dollar fixed principal and interest payments to be received under inter-company loans will be
swapped for EURO denominated fixed principal and interest payments. The change in fair value of the swaps from the date
of purchase to June 30, 2007, was $(75). The gains or losses on the inter-company loans due to changes in foreign currency
rates will be offset by the gains or losses on the swap in the statements of income. Since the Company’s interest rate swaps
qualify as hedging activities, the change in their fair value, amounting to $161, $42 and $49 in 2007, 2006 and 2005,
respectively, is recorded in accumulated other comprehensive income.
Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during the ordinary course of business through major banks as
requested by certain suppliers. The Company had open letters of credit of approximately $702 and $1,349 as of June 30,
2007 and 2006, respectively. The terms of these letters of credit are all less than one year. No material loss is anticipated due
to non-performance by the counter parties to these agreements.
Fair Value of Financial Instruments
The carrying values of all financial instruments classified as a current asset or current liability are deemed to approximate fair
value because of the short maturity of these instruments. The difference between the fair value of long-term notes receivable
and their carrying value at both June 30, 2007 and 2006 was not material. The fair value of the Company’s notes receivable
was based upon current rates offered for similar financial instruments to the Company.
Business and Credit Concentration
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade
receivables. The Company’s customers are dispersed across many industries and are located throughout the United States as
well as in Mexico, Brazil, Malaysia, France, Canada, Germany, Australia, the United Kingdom, the Netherlands and other
countries. The Company estimates an allowance for doubtful accounts based upon the credit worthiness of its customers as
well as general economic conditions. Consequently, an adverse change in those factors could affect the Company’s estimate
of this allowance. The Company as a policy does not require collateral from its customers. At June 30, 2007 and 2006, no
single customer accounted for as much as 10% of net trade accounts receivable.
No single product or customer accounted for as much as 10% of net sales in fiscal 2007, 2006 or 2005. Two suppliers
accounted for 13% and 12% of purchases in fiscal 2005.
During the fiscal years ended June 30, 2007, 2006 and 2005, approximately 65%, 67% and 68%, respectively, of the
Company’s purchases came from Asia and approximately 21%, 21% and 22%, respectively, came from Europe.
The Company maintains operations located outside of the United States. Net assets located in Europe and Asia approximated
$31,559 and $32,560, respectively at June 30, 2007. Net assets located in Europe and Asia approximated $23,444 and
$28,165, respectively at June 30, 2006.
One of the Company’s crop protection products is subject to certain licensed technology, which expired in August 2007. The
Company has commenced a lawsuit against the owner of the patent license bringing claims based on antitrust and breach of
contract and related claims. The Company intends to pursue these claims vigorously in order to continue to license the
technology and sell the particular crop protection product. For the year end June 30, 2007, 2006 and 2005, net sales from this
crop protection product were $3,244, $4,832 and $5,939, respectively.
(16) Commitments and Contingencies
As of June 30, 2007, the Company has outstanding purchase obligations totaling $71,891 with suppliers to the Company’s
domestic and foreign operations to acquire certain products for resale to third party customers.
57
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
The Company and its subsidiaries are subject to various claims which have arisen in the normal course of business. The
impact of the final resolution of these matters on the Company’s results of operations in a particular reporting period is not
known. Management is of the opinion, however, that the ultimate outcome of such matters will not have a material adverse
effect upon the Company's financial condition or liquidity.
In May 2007, February 2007 and September 2006, 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 one of Aceto's subsidiaries
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 its subsidiary 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's subsidiary 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's subsidiary 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's subsidiary sent to the
site, most of which were non-hazardous substances and as such, believes that its subsidiary is a very minor 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.
The Company has environmental remediation obligations in connection with Arsynco’s former manufacturing facility located
in Carlstadt, New Jersey, which was closed in 1993 and is currently held for sale. During fiscal 2007, 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 $6,136 and $7,611. As of June 30,
2007 a liability of $6,136 is included in the accompanying consolidated balance sheet. However, these matters, if resolved
in a manner different from those assumed in current estimates, could have a material adverse effect on the Company’s
financial condition, operating results and cash flows when resolved in a future reporting period.
In connection with the environmental remediation obligation for Arsynco, the Company has filed a claim against BASF
Corporation (BASF), the former owners of the Arsynco property. The Company alleges that BASF is liable for a portion of
the cost to remediate, however, since collection is uncertain at this time, no asset has been recorded.
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 PRP’s which have potential liability for the required investigation and remediation of the site. The estimate of
the potential liability is not quantifiable for a number of reasons, including the difficulty in determining the extent of
contamination and the length of time remediation may require. In addition, any estimate of liability must also consider the
number of other PRP’s and their financial strength. Since an amount of the liability can not be reasonably estimated at this
time, no accrual is recorded for these potential future costs. The impact of the resolution of this matter on the Company’s
results of operations in a particular reporting period is not known. However, management believes that the ultimate outcome
of this matter will not have a material adverse effect on the Company’s financial condition or liquidity.
One of the Company’s subsidiaries was a defendant in a legal action alleging patent infringement. The patent in question
covered a particular method of applying one of the products in the Company’s Crop Protection segment. In September 2005,
shortly before a trial was expected to begin, the parties agreed to a settlement. Under the terms of the settlement agreement,
the Company was obligated to pay $1,375, of which $625 was paid in December 2005 and the remaining $750 will be paid in
equal installments over the next five years. As of June 30, 2007, the balance is $450. As a result of the settlement, the
company recorded an intangible asset of $838 for the patent license, which will be amortized over its remaining life of 11
years, and a charge of $537, included in SG&A expense, for the fiscal year ended June 30, 2006.
A subsidiary of the Company markets certain agricultural chemicals which are subject to the Federal Insecticide, Fungicide
and Rodenticide Act (FIFRA). FIFRA requires that test data be provided to the Environmental Protection Agency (EPA) to
register, obtain and maintain approved labels for pesticide products. The EPA requires that follow-on registrants of these
58
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
products compensate the initial registrant for the cost of producing the necessary test data on a basis prescribed in the FIFRA
regulations. Follow-on registrants do not themselves generate or contract for the data. However, when FIFRA requirements
mandate that new test data be generated to enable all registrants to continue marketing a pesticide product, often both the
initial and follow-on registrants establish a task force to jointly undertake the testing effort. The Company is presently a
member of three such task force groups and historically, our payments have been in the range of $250 - $500 per year. The
Company may be required to make additional payments in the future.
The Company leases office facilities in the United States, the Netherlands, Germany, France, China and Singapore expiring
at various dates between December 2007 and April 2011. In addition, a domestic subsidiary leases a manufacturing facility
under an operating lease expiring December 2009.
At June 30, 2007, the future minimum lease payments for each of the five succeeding years and in the aggregate are as
follows:
Fiscal year
2008
2009
2010
2011
2012
Thereafter
Amount
$1,543
1,389
1,155
835
78
74
$5,074
Total rental expense amounted to $1,672, $1,651 and $1,760 for fiscal 2007, 2006 and 2005, respectively.
In June 2006, the Company negotiated a lease termination with its landlord for the facility previously occupied by CDC and
Magnum. In connection with the lease termination, the landlord and a third party entered into a long-term lease for which the
Company guaranteed the rental payments by the third party through September 30, 2009. The aggregate future rental
payments of the third party that are guaranteed by the Company are $925 and the fair value of this guarantee is deemed to be
insignificant.
(17) Related Party Transactions
Certain directors of the Company are affiliated with law firms that serve as legal counsel to the Company on various
corporate matters. During fiscal 2007, 2006 and 2005, the Company incurred legal fees of $329, $315 and $215,
respectively, for services rendered to the Company by those law firms.
In November 2003, the Company formed a joint venture with Nufarm Americas, Inc. (Nufarm), a subsidiary of Australia-
based Nufarm Limited. Each company owns 50% of the joint venture, named S.R.F.A., LLC. In June 2004, Nufarm and the
Company each loaned $1,000 to S.R.F.A., with those loans being evidenced by demand notes that bear interest at 3.0% per
annum. During fiscal 2005, S.R.F.A. repaid $500 of principal to each of Nufarm and the Company. The amounts due
Nufarm at June 30, 2007 and 2006 are included as a note payable in the accompanying consolidated balance sheets.
(18) Other Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board’s (“FASB”) EITF issued EITF 06-3, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation).” The Task Force determined that the presentation of certain taxes on either a gross basis (included in
revenues and expenses) or a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. An
entity is not required to re-evaluate its existing policies related to taxes assessed by a governmental authority. However, an
entity is required to disclose the amounts of such taxes reported on a gross basis. The Company has adopted EITF 06-3 and
reports these taxes on a net basis.
59
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement 109”. FIN 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 48 is effective for
fiscal years beginning after December 15, 2006. Management is currently assessing the impact of FIN 48 on the consolidated
financial position and results of operations.
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. Management is currently assessing the impact of SFAS No. 157 on the
consolidated financial position and results of operations.
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. Management is currently evaluating the impact
of SFAS No. 159 on the consolidated financial position and results of operations.
(19) Segment Information
The Company's business is organized along product lines into three principal segments: Health Sciences, Chemicals &
Colorants and Crop Protection.
Health Sciences - includes the active ingredients for generic pharmaceuticals, vitamins, and nutritional supplements, as well
as products used in preparing pharmaceuticals, primarily by major innovative drug companies, and biopharmaceuticals.
Health Sciences also includes Aceto branded vaccines for companion animals and finished dosage form generic drugs.
Chemicals & Colorants - includes a variety of specialty chemicals used in plastics, resins, adhesives, coatings, food, flavor
additives, fragrances, cosmetics, metal finishing, electronics, air-conditioning systems and many other areas. Dye and
pigment intermediates are used in the color-producing industries such as textiles, inks, paper, and coatings. Organic
intermediates are used in the production of agrochemicals.
Crop Protection - includes herbicides, fungicides and insecticides that control weed growth as well as control the spread of
insects and other microorganisms that can severely damage plant growth. Also includes a sprout inhibitor for potatoes and an
herbicide for sugar cane. The Company changed the name of this segment from Agrochemicals to Crop Protection in 2007 to
more accurately portray the markets in which we do business.
The former Institutional Sanitary Supplies segment reported in prior years, which included cleaning solutions, fragrances and
deodorants for commercial and industrial customers, was successfully divested from the Company's ongoing business.
During June 2005, the Company entered into an agreement to sell the majority of the product lines formulated and marketed
by CDC, which was one of the two reporting units forming the Institutional Sanitary Supplies reportable segment. The sale of
certain product lines of CDC was completed on August 24, 2005. Excluded from the sale of CDC's product lines was Anti-
Clog, an EPA-registered biocide that has a unique delivery system and is used in commercial air-conditioning systems, the
results of which are included in the Chemicals & Colorants segment. On September 6, 2005, the Company completed the sale
of certain assets of Magnum Research Corp., the remaining reporting unit forming part of the former Institutional Sanitary
Supplies reportable segment, the operating results of which are included in discontinued operations in the consolidated
statements of income.
The Company's chief operating decision maker evaluates performance of the segments based on net sales and gross profit.
The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by
segment to assess the segments' performance, as the assets are managed on an entity-wide basis.
60
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
2007
Net sales
Net gross profit
2006
Net sales
Gross profit
Unallocated cost of sales (1)
Net gross profit
2005
Net sales
Gross profit
Unallocated cost of sales (1)
Net gross profit
Health
Sciences
Chemicals &
Colorants
Crop
Protection
Institutional
Sanitary Supplies
Consolidated
Totals
$170,691
33,007
$123,299
16,556
$ 19,483
4,930
-
-
$313,473
54,493
$166,725
32,313
$110,869
17,144
$ 19,734
4,760
-
-
$184,577
32,886
$104,777
17,257
$ 20,031
6,719
$ 4,046
696
$297,328
54,217
(3,259)
$ 50,958
$313,431
57,558
(4,407)
$ 53,151
(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.
Net sales by source country for the years ended June 30, 2007, 2006 and 2005 and long-lived assets by location as of June 30,
2007 and 2006 were as follows:
United States
Germany
Netherlands
France
Asia-Pacific
Total
2007
$ 184,391
68,484
8,579
16,812
35,207
$ 313,473
Net Sales
2006
$ 184,395
56,464
10,095
15,543
30,831
$ 297,328
2005
$183,447
63,518
8,018
12,609
45,839
$313,431
2007
$ 29,779
17,371
1,594
1,973
3,776
$ 54,493
Gross Profit
2006
$ 30,348
14,311
1,791
1,808
2,700
$ 50,958
2005
$ 29,179
13,041
1,686
1,561
7,684
$ 53,151
Long-lived assets
2006
2007
$ 3,033
$ 5,229
4,061
3,826
179
73
80
68
2,999
2,847
$10,352
$12,043
Sales generated from the United States to foreign countries amounted to $35,540, $29,152 and $26,111 for the fiscal years
ended June 30, 2007, 2006 and 2005, respectively.
61
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
(20)
Unaudited Quarterly Financial Data
The following is a summary of the unaudited quarterly results of operations for the years ended June 30, 2007 and 2006.
Fiscal year ended June 30, 2007
Net sales
Gross profit
Net income
September 30,
2006
$74,725
12,561
2,462
For the quarter ended
December 31,
2006
$75,686
12,562
1,744
March 31,
2007
$75,879
12,876
1,800
June 30,
2007
$87,183
16,494
4,206
Net income per diluted share
$ 0.10
$ 0.07
$ 0.07
$ 0.17
Fiscal year ended June 30, 2006
Net sales
Gross profit
Net income
For the quarter ended
September 30,
2005
$75,046
12,556
1,974
December 31,
2005
$69,498
11,500
1,547
March 31,
2006
$80,915
13,513
2,751
June 30,
2006
$71,869
13,389
2,965
Net income per diluted share
$ 0.08
$ 0.06
$ 0.11
$ 0.12
The net income per common share calculation for each of the quarters is based on the weighted average number of shares
outstanding in each period. Therefore, the sum of the quarters in a year does not necessarily equal the year’s net income per
common share.
62
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the years ended June 30, 2007, 2006 and 2005
(dollars in thousands)
Description
Year ended June 30, 2007
Allowance for doubtful accounts
Year ended June 30, 2006
Allowance for doubtful accounts
Year ended June 30, 2005
Allowance for doubtful accounts
Balance at
beginning of
year
Charged to
costs and
expenses
Charged to
other
accounts
Deductions
Balance at
end of year
$ 416
$ 132
$ 427
$ 38
$ 1,033
$ 343
-
-
-
$ 57(a)
$ 491
$ 49(a)
$ 416
$ 949(a)
$ 427
(a) Specific accounts written off as uncollectible.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACETO CORPORATION
By /s/Leonard S. Schwartz
Leonard S. Schwartz
Chairman, President and
Chief Executive Officer
Date: September 6, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Company and in the capacities and on the dates indicated.
Signatures
Title
/s/Leonard S. Schwartz
Leonard S. Schwartz
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/Douglas Roth
Douglas Roth
Secretary/Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/Stanley Fischer
Stanley Fischer
/s/Robert Wiesen
Robert Wiesen
Director
Director
/s/Ira S. Kallem
Ira S. Kallem
Director
/s/Albert L. Eilender
Albert L. Eilender
Director
/s/Hans C. Noetzli
Hans C. Noetzli
/s/William Britton
William Britton
Director
Director
Date
09-06-07
09-06-07
09-06-07
09-06-07
09-06-07
09-06-07
09-06-07
09-06-07
64
Exhibit Number Description
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 4(a)(iii) to Registration
Statement No. 2-70623 on Form S-8 (S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3(ii) to the Company's annual report on Form 10-K for the fiscal year ended June 30,
1986).
3.3 Amended and restated by-laws of Aceto Corporation, effective as of February 2, 2005 (incorporated by
reference to Exhibit 3.1 to the Company’s current report on Form 8-K dated February 2, 2005).
10.1 Aceto Corporation 401(k) Retirement Plan, effective August 1, 1997, as amended and restated as of July 1,
2002 (incorporated by reference to Exhibit 10.1 to the Company’s annual report on Form 10-K for the fiscal
year ended June 30, 2004).
10.2 Supplemental Executive Retirement Plan, as amended and restated, effective June 30, 2004 and frozen as of
December 31, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s annual report on Form
10-K for the fiscal year ended June 30, 2004).
10.3 Aceto Corporation Stock Option Plan (as Amended and Restated effective as of September 19, 1990) (and
as further Amended effective June 9, 1992) (incorporated by reference to Exhibit 10(v)(b) to the Company's
annual report on Form 10-K for the fiscal year ended June 30, 1992).
10.4 1998 Aceto Corporation Omnibus Equity Award Plan (incorporated by reference to Exhibit 10(v) to the
Company’s annual report on Form 10-K for the fiscal year ended June 30, 1999).
10.5 Aceto Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 4(i) to Registration
Statement No. 333-110653 on Form S-8).
10.6 Lease between Aceto Corporation and M. Parisi & Son Construction Co., Inc. for office space at One
Hollow Lane, Lake Success, NY dated April 28, 2000 (incorporated by reference to Exhibit 10(vi) to the
Company’s annual report on Form 10-K for the fiscal year ended June 30, 2000).
10.7 Lease between Aceto Corporation and M. Parisi & Son Construction Co., Inc. for office space at One
Hollow Lane, Lake Success, NY dated April 28, 2000 (incorporated by reference to Exhibit 10(vi)(b) to the
Company’s annual report on Form 10-K for the year ended June 30, 2000).
10.8 Lease between CDC Products Corp. and Seaboard Estates for manufacturing and office space at 1801
Falmouth Avenue, New Hyde Park, NY dated October 31, 1999 (incorporated by reference to Exhibit
10(vi)(c) to the Company’s annual report on Form 10-K for the year ended June 30, 2000).
10.9 Stock Purchase Agreement among Windham Family Limited Partnership, Peter H. Kliegman, CDC
Products Corp. and Aceto Corporation (incorporated by reference to Exhibit 10(vii) to the Company’s
annual report on Form 10-K for the year ended June 30, 1999).
10.10 Asset Purchase Agreement among Magnum Research Corporation, CDC Products Corp., Roy Gross and
Aceto Corporation (incorporated by reference to Exhibit 10 (viii) to the Company’s annual report on Form
10-K for the year ended June 30, 2000).
10.11 Asset Purchase Agreement between Schweizerhall, Inc. and Aceto Corporation (incorporated by reference
to Exhibit 10(ix) to the Company’s annual report on Form 10-K for the year ended June 30, 2000).
10.12 Purchase and Sale Agreement among Schweizerhall Holding AG, Chemische Fabrik Schweizerhall,
Schweizerhall, Inc., Aceto Corporation and Aceto Holding B.V., I.O. (incorporated by reference to Exhibit
2.1 to the Company’s current report on Form 8-K dated April 4, 2001).
65
10.13 Loan Guarantee between Aceto Corporation and subsidiaries and Deutsche Bank AG dated March 22, 2001
(incorporated by reference to Exhibit 10.13 to the Company’s annual report on Form 10-K for the year
ended June 30, 2001).
10.14 Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan Chase Bank dated May 10,
2002 (incorporated by reference to Exhibit 10.13 to the Company’s annual report on Form 10-K for the year
ended June 30, 2002).
10.15 Amendment and Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan
Chase Bank dated June 29, 2004 (incorporated by reference to Exhibit 10.15 to the Company’s annual report
on Form 10-K for the year ended June 30, 2004).
10.16 Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan Chase Bank dated
August 31, 2004 (incorporated by reference to Exhibit 10.16 to the Company’s annual report on Form 10-K
for the year ended June 30, 2004).
10.17 Share Purchase Agreement dated as of December 12, 2003 between Aceto Holding GmbH and Corange
Deutschland Holding GmbH (incorporated by reference to Exhibit 2.1 to the Company’s current report on
Form 8-K dated December 31, 2003).
10.18 Aceto Corporation Supplemental Executive Deferred Compensation Plan, effective March 14, 2005
(incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated March 14,
2005).
10.19 Form of purchase agreement between Shanghai Zhongjin Real Estate Development Company Limited and
Aceto (Hong Kong) Limited dated November 10, 2004 (incorporated by reference to Exhibit 10.1 to the
Company’s quarterly report on Form 10-Q for the quarter ended December 31, 2004).
10.20* Amendment and Waiver to Credit Agreement between Aceto Corporation and subsidiaries and JPMorgan
Chase Bank dated June 26, 2007.
21.1* Subsidiaries of the Company.
23.1* Consent of BDO Seidman, LLP.
23.2* Consent of KPMG 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
66
I, Leonard S. Schwartz, certify that:
CERTIFICATION
Exhibit 31.1
1. I have reviewed this annual report on Form 10-K of Aceto Corporation (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles; and
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over
financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or
persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in
the Registrant’s internal control over financial reporting.
Dated: September 6, 2007
/s/ Leonard S. Schwartz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
I, Douglas Roth, certify that:
CERTIFICATION
Exhibit 31.2
1. I have reviewed this annual report on Form 10-K of Aceto Corporation (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles; and
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over
financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or
persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in
the Registrant’s internal control over financial reporting.
Dated: September 6, 2007
/s/ Douglas Roth
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION
Exhibit 32.1
In connection with the Annual Report of Aceto Corporation, a New York corporation (the “Company”), on
Form 10-K for the period ended June 30, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Leonard S. Schwartz, Chairman, President and Chief Executive Officer of
the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) and 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Leonard S. Schwartz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
September 6, 2007
Exhibit
32.2
CERTIFICATION
In connection with the Annual Report of Aceto Corporation, a New York corporation (the “Company”), on
Form 10-K for the period ended June 30, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Douglas Roth, Chief Financial Officer of the Company, certify, pursuant
to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) and 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Douglas Roth
Chief Financial Officer
(Principal Financial and Accounting Officer)
September 6, 2007
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This page left blank intentionally.
Corporate Information
Directors
Officers and Executives
ALBERT L. EILENDER
Owner
WaterWays Advisory Services
STANLEY H. FISCHER
Attorney
Fischer and Burstein, P.C.
IRA S. KALLEM
Certified Public Accountant
HANS C. NOETZLI
Industrial Advisor
LEONARD S. SCHWARTZ
Chairman, President and
Chief Executive Officer
Aceto Corporation
ROBERT A. WIESEN
Attorney and Partner
Clifton, Budd & DeMaria
WILLIAM N. BRITTON
Owner
TD AIM, LLC
THEODORE AYVAS
Director of Corporate
Communications and
Investor Relations
RAYMOND BARTONE
Vice President
ULF BENDER
Managing Director
Pharma Waldhof GmbH*
DAVID BERCHER
Assistant Vice President
FRANK DEBENEDITTIS
Senior Vice President
MICHAEL FEINMAN
President
Aceto Agricultural
Chemicals Corp.*
MARLENE FELIX
Assistant Vice President
ROY GOODMAN
Group Vice President
SEAN ISACSSON
Assistant Vice President
EDWARD KELLY
Assistant Vice President and
Controller
TERRY KIPPLEY
Assistant Vice President
Aceto Agricultural
Chemicals Corp.*
JOHN LAROCCA
Vice President
LEONARD LAWTON
Group Vice President
JAMES SAMMER
Assistant Vice President
JASON LEVI
Assistant Vice President
VINCENT MIATA
Senior Vice President
SIMONE MILLER
Corporate Director
Environmental and
Regulatory Affairs
ALBERT MISEJE
Vice President
GARY MO
Managing Director
Aceto (Shanghai) Ltd.*
ANDREAS MUENDS
Managing Director
Aceto Holding GmbH
(Germany)*
PHILIPPE POTELLE
Managing Director
Aceto France S.A.S.*
DAVID RIMMLER
Vice President
AMY ROGERS
Assistant Vice President and
Director of Transportation
DOUGLAS ROTH
Vice President and
Chief Financial Officer
FRANCES SCALLY
Director of Financial
Reporting and Compliance
LEONARD S. SCHWARTZ
Chairman, President and
Chief Executive Officer
BRIAN SHAPIRO
Vice President
TERRY STEINBERG
Vice President
PRADEEP THAKUR
General Manager
Aceto Pharma India PVT. LTD.
PETER TOMASINO
Assistant Vice President
JAN VAN EIS
Managing Director
Aceto Holding B.V.
(The Netherlands)*
ROGER WEAVING, JR.
Vice President
KEITH WILKINSON
Vice President
JASON YU
Managing Director
Aceto Pte Ltd. (Singapore)*
* A wholly owned subsidiary
Shareholder Information
Corporate Headquarters
Investor Relations
Transfer Agent & Registrar
Aceto Corporation
One Hollow Lane
Lake Success, NY 11042
(516) 627-6000
www.aceto.com
Theodore Ayvas
Director of Corporate
Communications and
Investor Relations
Aceto Corporation
One Hollow Lane
Lake Success, NY 11042
(516) 627-6000
(516) 627-6093 (fax)
The Bank of New York
Shareholder Relations Dept.
PO Box 11258
Church Street Station
New York, NY 10286
(800) 524-4458
shareowner-svcs@bankofny.com
Common Stock
Auditors
NASDAQ Symbol: ACET
BDO Seidman, LLP
401 Broadhollow Road
Melville, NY 11747
Aceto Corporate Office
One Hollow Lane
Lake Success, New York 11042
(516) 627-6000
www.aceto.com