| ACETO CORP Item 1A Risk Factors ITEM 1A RISK FACTORS You should carefully consider the following risk factors and other information included in this Annual Report |
| The risks and uncertainties described below are not the only ones we face |
| Additionally, risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations |
| If any of the following risk factors occur, our business, financial condition, operating results and cash flows could be materially adversely affected |
| IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, MANY OF WHICH HAVE GREATER MARKET PRESENCE AND RESOURCES THAN US, OUR PROFITABILITY AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED Our financial condition and operating results are directly related to our ability to compete in the intensely competitive worldwide chemical market |
| We face intense competition from global and regional distributors of chemical products, many of which are large chemical manufacturers as well as distributors |
| Many of these companies have substantially greater 6 resources than us, including greater financial, marketing and distribution resources |
| We cannot assure you that we will be able to compete successfully with any of these companies |
| In addition, increased competition could result in price reductions, reduced margins and loss of market share for our services, all of which would adversely affect our business, results of operations and financial condition |
| WE MAY INCUR SIGNIFICANT UNINSURED ENVIRONMENTAL AND OTHER LIABILITIES INHERENT IN THE CHEMICAL DISTRIBUTION INDUSTRY THAT WOULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION The business of distributing chemicals is subject to regulation by numerous federal, state, local, and foreign governmental authorities |
| These regulations impose liability for loss of life, damage to property and equipment, pollution and other environmental damage that may occur in our business |
| Many of these regulations provide for substantial fines and remediation costs in the event of chemical spills, explosions and pollution |
| While we believe that we are in substantial compliance with all current laws and regulations, we can give no assurance that we will not incur material liabilities that exceed our insurance coverage or that such insurance will remain available on terms and at rates acceptable to us |
| Additionally, if existing environmental and other regulations are changed, or additional laws or regulations are passed, the cost of complying with those laws may be substantial, thereby adversely affecting our financial performance |
| Our subsidiary, Arsynco, has environmental remediation obligations in connection with its former manufacturing facility in Carlstadt, New Jersey |
| Estimates of how much it would cost to remediate environmental contamination at this site have increased since the facility was closed in 1993 |
| If the actual costs are significantly greater than estimated, it could have a material adverse effect on our financial condition, operating results and cash flows |
| In March 2006, also related to its former manufacturing facility in Carlstadt, New Jersey, Arsynco received notice from the Environmental Protection Agency (EPA) of its status as a potentially responsible party ( "e PRP "e ) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for a site described as the Berryapstas Creek Study Area |
| Arsynco is one of over 150 PRPapstas 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 Companyapstas 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 Companyapstas financial condition or liquidity |
| ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN THE AMOUNTS WE HAVE PROVIDED FOR IN OUR CONSOLIDATED FINANCIAL STATEMENTS We are regularly audited by federal, state, and foreign tax authorities |
| From time to time, these audits may result in proposed assessments |
| While we believe that we have adequately provided for any such assessments, future settlements may be materially different than we have provided for and thereby adversely affect our earnings and cash flows |
| We operate in various tax jurisdictions, and although we believe that we have provided for income and other taxes in accordance with the relevant regulations, if the applicable regulations were ultimately interpreted differently by a taxing authority, we may be exposed to additional tax liabilities |
| OUR ACQUISITION STRATEGY IS SUBJECT TO A NUMBER OF INHERENT RISKS, INCLUDING THE RISK THAT OUR ACQUISITIONS MAY NOT BE SUCCESSFUL We continually seek to expand our business through acquisitions of other companies that complement our own and through joint ventures, licensing agreements and other arrangements |
| Any decision regarding strategic alternatives would be subject to inherent risks, and we cannot guarantee that we will be able to identify the appropriate opportunities, successfully negotiate economically beneficial terms, successfully integrate any acquired business, retain key employees, or achieve the anticipated synergies or benefits of the strategic alternative selected |
| Acquisitions can require significant capital resources and divert our managementapstas attention from our existing business |
| Additionally, we may issue additional shares in connection with a strategic transaction, thereby diluting the holdings of our existing common shareholders, incur debt or assume liabilities, become subject to litigation, or consume cash, thereby reducing the amount of cash available for other purposes |
| 7 ANY ACQUISITION THAT WE MAKE COULD RESULT IN A SUBSTANTIAL CHARGE TO OUR EARNINGS We have previously incurred charges to our earnings in connection with acquisitions, and may continue to experience charges to our earnings for any acquisitions that we make, including large and immediate write-offs of acquired assets, or impairment charges |
| These costs may also include substantial severance and other closure costs associated with eliminating duplicate or discontinued products, employees, operations and facilities |
| These charges could have a material adverse effect on our results of operations for particular quarterly periods and they could possibly have an adverse impact on the market price of our common stock |
| OUR REVENUE STREAM IS DIFFICULT TO PREDICT Our revenue stream is difficult to predict because it is primarily generated as customers place orders and customers can change their requirements or cancel orders |
| As a result, much of our revenue is not recurring from period to period, which contributes to the variability of our results from period to period |
| We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance |
| OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE QUARTERS, WHICH MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK Our operating results will fluctuate on a quarterly basis as a result of a number of factors, including the timing of contracts, the delay or cancellation of a contract, and changes in government regulations |
| Any one of these factors could have a significant impact on our quarterly results |
| In some quarters, our revenue and operating results may fall below the expectations of securities analysts and investors, which would likely cause the trading price of our common stock to decline |
| FAILURE TO OBTAIN PRODUCTS FROM OUTSIDE MANUFACTURERS COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL SALES ORDERS TO OUR CUSTOMERS We rely on outside manufacturers to supply products for resale to our customers |
| Manufacturing problems may occur with these and other outside sources |
| If such problems occur, we cannot ensure that we will be able to deliver our products to our customers profitably or on time |
| OUR POTENTIAL LIABILITY ARISING FROM OUR COMMITMENT TO INDEMNIFY OUR DIRECTORS, OFFICERS AND EMPLOYEES COULD ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION We have committed in our bylaws to indemnify our directors, officers and employees against the reasonable expenses incurred by these persons in connection with an action brought against him or her in such capacity, except in matters as to which he or she is adjudged to have breached a duty to us |
| The maximum potential amount of future payments we could be required to make under this provision is unlimited |
| While we have a "e director and officer "e insurance policy that covers a portion of this potential exposure, we may be adversely affected if we are required to pay damages or incur legal costs in connection with a claim above our insurance limits |
| OUR BUSINESS MAY BE ADVERSELY AFFECTED BY TERRORIST ACTIVITIES Our business depends on the free flow of products and services through the channels of commerce |
| Instability due to military, terrorist, political and economic actions in other countries could materially disrupt our overseas operations and export sales |
| In fiscal years 2006 and 2005, approximately 47prca and 49prca, respectively, of our revenues were attributable to operations conducted abroad and to export sales |
| In addition, in fiscal year 2006, approximately 67prca and 21prca of our purchases came from Europe and Asia, respectively |
| In addition, in certain countries where we currently operate or export, intend to operate or export, or intend to expand our operations, we could be subject to other political, military and economic uncertainties, including labor unrest, restrictions on transfers of funds and unexpected changes in regulatory environments |
| FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION A substantial portion of our revenue is denominated in currencies other than the US 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 US dollar |
| 8 WE RELY HEAVILY ON KEY EXECUTIVES FOR OUR FINANCIAL PERFORMANCE Our financial performance is highly dependent upon the efforts and abilities of our key executives |
| The loss of the services of any of our key executives could therefore have a material adverse effect upon our financial position and operating results |
| None of our key executives has an employment agreement with us and we do not maintain "e key-man "e 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 ( "e cGMP "e ) regulations as required by the FDA Our facilities are subject to scheduled periodic regulatory and customer inspections to ensure compliance with cGMP and other requirements applicable to such products |
| A finding that we had materially violated these requirements could result in one or more regulatory sanctions, loss of a customer contract, disqualification of data for client submissions to regulatory authorities and a mandated closing of our facilities, which in turn could have a material adverse effect on our business, financial condition and results of operations |
| LITIGATION MAY HARM OUR BUSINESS AND OUR MANAGEMENT AND FINANCIAL RESOURCES Substantial, complex or extended litigation could cause us to incur large expenditures and could distract our management |
| For example, lawsuits by employees, stockholders, collaborators, distributors, customers, or end-users of our products or services could be very costly and substantially disrupt our business |
| Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure you that we will always be able to resolve such disputes out of court or on favorable terms |
| THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE The market price of our common stock has been subject to volatility and may continue to be volatile in the future, due to a variety of factors, including: o quarterly fluctuations in our operating income and earnings per share results o technological innovations or new product introductions by us or our competitors o economic conditions o disputes concerning patents or proprietary rights o changes in earnings estimates and market growth rate projections by market research analysts o sales of common stock by existing security holders o loss of key personnel o securities class actions or other litigation The market price for our common stock may also be affected by our ability to meet analysts &apos 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 US 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 US generally accepted accounting principles ( "e GAAP "e ) |
| Preparing financial statements in accordance with GAAP involves 9 making estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and income |
| Estimates, judgments and assumptions are inherently subject to change, and any such changes could result in corresponding changes to the reported amounts |
| FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our annual report |
| Section 404 also requires our independent registered public accounting firm to attest to, and report on, managementapstas assessment of our internal controls over financial reporting |
| If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal controls over financial reporting |
| If we fail to maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ Any such action could adversely affect our financial results and the market price of our common stock and may also result in delayed filings with the Securities and Exchange Commission |
| AVAILABLE INFORMATION We file annual, quarterly, and current reports, proxy statements, and other information with the US Securities and Exchange Commission |
| You may read and copy any document we file at the SECapstas public reference room at Room 1024, 450 Fifth Street, NW, Washington, DC 20549 |
| You may call the SEC at 1-800-SEC-0330 for information on the public reference room |
| The SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other information that issuers (including Aceto) file electronically with the SEC The SECapstas website is WWWSECGOV Our website is WWWACETOCOM We make available free of charge through our Internet site, via a link to the SECapstas website at WWWSECGOV, 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 |