-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JFTRAC/Vmc/Crk7h8XmF5XpYHQDA0gDJGP2To7SROZ2w8saEY3Kn9P+6IGeHIGHW /RJNUJymBQ04EpTzfe2djA== 0001188112-05-000226.txt : 20050209 0001188112-05-000226.hdr.sgml : 20050209 20050209151853 ACCESSION NUMBER: 0001188112-05-000226 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050209 DATE AS OF CHANGE: 20050209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACETO CORP CENTRAL INDEX KEY: 0000002034 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 111720520 STATE OF INCORPORATION: NY FISCAL YEAR END: 0205 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04217 FILM NUMBER: 05588472 BUSINESS ADDRESS: STREET 1: ONE HOLLOW LANE CITY: LAKE SUCCESS STATE: NY ZIP: 11042 BUSINESS PHONE: 5166276000 MAIL ADDRESS: STREET 1: ONE HOLLOW LANE CITY: LAKE SUCCESS STATE: NY ZIP: 11042 FORMER COMPANY: FORMER CONFORMED NAME: ACETO CHEMICAL CO INC DATE OF NAME CHANGE: 19851203 10-Q 1 t10q-4864.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 2004 Commission file number 000-04217 ACETO CORPORATION (Exact name of registrant as specified in its charter) New York 11-1720520 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) One Hollow Lane, Lake Success, NY 11042 --------------------------------------- (Address of principal executive offices (516) 627-6000 (Registrant's telephone number, including area code) www.aceto.com ------------- (Registrant's website address) Name of each exchange on which registered: The Nasdaq National Market. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __X__ No _____ The Registrant has 24,225,003 shares of common stock outstanding as of February 7, 2005. ACETO CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 2004 (unaudited) and June 30, 2004 Consolidated Statements of Income - Six Months Ended December 31, 2004 and 2003 (unaudited) Consolidated Statements of Income - Three Months Ended December 31, 2004 and 2003 (unaudited) Consolidated Statements of Cash Flows - Six Months Ended December 31, 2004 and 2003 (unaudited) Notes to Unaudited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits Signatures Exhibits
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ACETO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per-share amounts) December 31, June 30, 2004 2004 ---- ---- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 27,139 $ 32,330 Short-term investments 4,311 888 Receivables: Trade, less allowance for doubtful accounts (December, $1,079; June, $1,033) 47,826 53,084 Other 2,073 1,504 ------------ ----------- 49,899 54,588 Inventory 50,148 41,784 Prepaid expenses and other current assets 1,257 1,165 Assets held for sale 2,656 - Income taxes receivable - 606 Deferred income tax benefit, net 1,841 1,613 ------------ ----------- Total current assets 137,251 132,974 Long-term notes receivable 696 747 Property and equipment 8,817 7,044 Less accumulated depreciation and amortization 3,739 4,390 ------------ ----------- 5,078 2,654 Goodwill 2,347 3,179 Intangible assets, net 3,852 3,701 Deferred income tax benefit, net 3,443 4,579 Other assets 2,517 1,863 ------------ ----------- Total assets $ 155,184 $ 149,697 ============ =========== See accompanying notes to consolidated financial statements and accountants' review report.
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ACETO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per-share amounts) December 31, June 30, 2004 2004 ---- ---- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Drafts and acceptances payable $ 3,486 $ 4,610 Accounts payable 26,604 31,292 Note payable - related party 500 1,000 Accrued compensation 2,728 2,836 Accrued environmental remediation 1,246 1,326 Other accrued expenses 10,587 6,070 Liabilities relating to assets held for sale 434 - ------------ ----------- Total current liabilities 45,585 47,134 Long-term liabilities 2,714 2,140 Minority interest 131 157 ------------ ----------- Total liabilities 48,430 49,431 Commitments and contingencies (Note 14) Shareholders' equity: Common stock, $.01 par value (Note 7): (40,000 shares authorized; 25,644 shares issued; 24,220 and 24,118 shares outstanding at December 31, 2004 and June 30, 2004, respectively) 256 256 Capital in excess of par value 57,245 57,111 Retained earnings 59,998 56,490 Treasury stock, at cost: (1,424 and 1,526 shares at December 31, 2004 and June 30, 2004, respectively) (14,118) (15,135) Accumulated other comprehensive income 3,373 1,544 ------------ ----------- Total shareholders' equity 106,754 100,266 ------------ ----------- Total liabilities and shareholders' equity $ 155,184 $ 149,697 ============ =========== See accompanying notes to consolidated financial statements and accountants' review report.
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ACETO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per-share amounts) Six Months Ended December 31, 2004 2003 ---- ---- Net sales $ 155,167 $ 138,890 Cost of sales 128,996 114,986 ------------ ----------- Gross profit 26,171 23,904 Selling, general and administrative expenses 18,380 15,672 ------------ ----------- Operating income 7,791 8,232 Other income (expense): Interest expense (40) (68) Interest and other income, net 855 888 ------------ ----------- 815 820 ------------ ----------- Income from continuing operations before income taxes 8,606 9,052 Provision for income taxes 2,467 2,717 ------------ ----------- Income from continuing operations 6,139 6,335 Loss from discontinued operations, net of income taxes (Note 3) (811) (253) ------------ ----------- Net income $ 5,328 $ 6,082 ============ =========== Basic income per common share (a): Income from continuing operations $ 0.25 $ 0.27 Loss from discontinued operations $ (0.03) $ (0.01) Net income $ 0.22 $ 0.26 Diluted income per common share (a): Income from continuing operations $ 0.25 $ 0.26 Loss from discontinued operations $ (0.03) $ (0.01) Net income $ 0.22 $ 0.25 Weighted average shares outstanding (a): Basic 24,145 23,732 Diluted 24,690 24,353 (a) The number of shares outstanding and the per-share information have been adjusted for a 3-for-2 stock split effected in the form of a dividend, paid January 10, 2005. See accompanying notes to consolidated financial statements and accountants' review report.
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ACETO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per-share amounts) Three Months Ended December 31, 2004 2003 ---- ---- Net sales $ 75,808 $ 67,954 Cost of sales 62,810 55,632 ------------ ----------- Gross profit 12,998 12,322 Selling, general and administrative expenses 9,565 8,380 ------------ ----------- Operating income 3,433 3,942 Other income (expense): Interest expense (20) (48) Interest and other income, net 306 511 ------------ ----------- 286 463 ------------ ----------- Income from continuing operations before income taxes 3,719 4,405 Provision for income taxes 1,218 1,245 ------------ ----------- Income from continuing operations 2,501 3,160 Loss from discontinued operations, net of income taxes (Note 3) (548) (197) ------------ ----------- Net income $ 1,953 $ 2,963 ============ =========== Basic income per common share (a): Income from continuing operations $ 0.10 $ 0.13 Loss from discontinued operations $ (0.02) $ (0.01) Net income $ 0.08 $ 0.12 Diluted income per common share (a): Income from continuing operations $ 0.10 $ 0.13 Loss from discontinued operations $ (0.02) $ (0.01) Net income $ 0.08 $ 0.12 Weighted average shares outstanding (a): Basic 24,163 23,783 Diluted 24,722 24,314 (a) The number of shares outstanding and the per-share information have been adjusted for a 3-for-2 stock split, effected in the form of a dividend, paid January 10, 2005. See accompanying notes to consolidated financial statements and accountants' review report.
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ACETO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Six Months Ended December 31, 2004 2003 ---- ---- Operating activities: Net income $ 5,328 $ 6,082 Loss from discontinued operations 811 - ------------ ----------- Net income from continuing operations 6,139 6,082 Adjustments to reconcile net income to net cash provided by continuing operations: Depreciation and amortization 647 490 Provision for doubtful accounts 230 112 Non-cash stock compensation 90 126 Deferred income taxes 908 - Income tax benefit on exercise of stock options 215 948 Changes in assets and liabilities: Investments - trading securities (53) (117) Trade accounts receivable 5,970 (1,641) Other receivables (495) (198) Inventory (8,210) 2,995 Prepaid expenses and other current assets (131) (331) Other assets (739) 105 Drafts and acceptances payable (1,235) 302 Accounts payable (5,004) 4,855 Accrued compensation (7) (224) Accrued environmental remediation (80) - Income taxes receivable 606 1,885 Other accrued expenses and long-term liabilities 1,894 (1,042) ------------ ----------- Net cash provided by operating activities 745 14,347 ------------ ----------- Investing activities: Purchases of investments (3,718) (2,708) Sales of investments 348 - Payments received on notes receivable 42 228 Purchases of property and equipment (3,347) (330) ------------ ----------- Net cash used in investing activities (6,675) (2,810) ------------ ----------- Financing activities: Proceeds from exercise of stock options 856 1,945 Payment of note payable - related party (500) - Payments of short-term bank loans - (2,284) ------------ ----------- Net cash provided by (used in) financing activities 356 (339) ------------ ----------- Net cash used in discontinued operations (146) - ------------ ----------- Effect of exchange rate changes on cash 529 466 ------------ ----------- Net (decrease) increase in cash (5,191) 11,664 Cash at beginning of period 32,330 20,263 ------------ ----------- Cash at end of period $ 27,139 $ 31,927 ============ =========== See accompanying notes to consolidated financial statements and accountants' review report.
7 ACETO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per-share amounts) (1) BASIS OF PRESENTATION The consolidated financial statements of Aceto Corporation and subsidiaries (the "Company") included herein have been prepared by the Company and reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented. Interim results are not necessarily indicative of results that may be achieved for the full year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. The Company's most critical accounting policies relate to revenue recognition; allowance for doubtful accounts; inventory; goodwill and other intangible assets; pension benefits; income taxes; and environmental matters and other contingencies. These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended June 30, 2004. Certain reclassifications have been made to the prior consolidated financial statements to conform to the current presentation. (2) STOCK-BASED COMPENSATION The Company applies the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations for stock options and other stock-based awards while disclosing pro forma net income and 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 is recognized if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant. Since the Company has issued all stock option grants with exercise prices equal to, or greater than, the market value of the common stock on the date of grant, no compensation cost has been recognized. SFAS No. 123 requires that the Company provide pro forma information regarding net income and net income per common share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. The following table illustrates the effect on net income and net income per common share as if the Company had measured the compensation cost for the Company's stock option programs under the fair value method in each period presented: 8
Six months ended Three months ended December 31, December 31, 2004 2003 2004 2003 ---- ---- ---- ---- Net income - as reported $5,328 $6,082 $1,953 $2,963 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (4,279) (534) (402) (278) ------- ----- ----- ----- Net income - pro forma $ 1,049 $5,548 $1,551 $2,685 Net income per share: Basic - as reported $ 0.22 $ 0.26 $ 0.08 $ 0.12 Basic - pro forma $ 0.04 $ 0.23 $ 0.06 $ 0.11 Diluted - as reported $ 0.22 $ 0.25 $ 0.08 $ 0.12 Diluted - pro forma $ 0.04 $ 0.23 $ 0.06 $ 0.11
Stock-based employee compensation expense under the fair value method for the six months ended December 31, 2004 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. (3) ASSETS HELD FOR SALE On December 31, 2004, the Company committed to a plan to divest its non-core Institutional Sanitary Supplies ("ISS") segment. The Company decided to sell its ISS segment to focus on its core segments and its new patent-pending landfill odor-control product. The Company anticipates that a sale of the ISS segment will be completed within a year. Assets held for sale of the disposal group included in the accompanying consolidated balance sheet as of December 31, 2004 consist of current assets (primarily accounts receivable and inventory) of $1,752, property and equipment of $682, and goodwill of $222. Liabilities related to the assets held for sale consist of accounts payable and accrued expenses of $434 in the accompanying consolidated balance sheet as of December 31, 2004. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations of the ISS segment have been recorded as discontinued operations in the accompanying consolidated statements of income. Revenues from discontinued operations were $2,745 and $2,648 for the six months ended December 31, 2004 and 2003, respectively, and $1,285 and $1,248 for the three months ended December 31, 2004 and 2003, respectively. The loss from operations of the discontinued business was $363 (net of income taxes of $222) and $253 (net of income taxes of $169) for the six months ended December 31, 2004 and 2003, respectively, and $100 (net of income taxes of $61) and $197 (net of income taxes of $132) for the three months ended December 31, 2004 and 2003, respectively. In addition, the loss from discontinued operations includes a non-cash write-down to goodwill of $448 (net of income taxes of $275) in December 2004. The presentation in the consolidated statements of income for the three and six months ended December 31, 2003 have been reclassified to reflect the discontinued operations. The consolidated balance sheet as of June 30, 2004 and the statement of cash flows for the six months ended December 31, 2003 have not been reclassified to reflect the discontinued operations. (4) BUSINESS ACQUISITIONS On December 31, 2003, the Company, through its wholly owned subsidiary Aceto Holding GmbH ("Aceto Holding"), acquired from Corange Deutschland Holding GmbH ("Corange"), all of the capital stock of Pharma 9 Waldhof Beteiligungs GmbH ("Pharma Waldhof"), and all of the partnership interest of Pharma Waldhof GmbH & Co. KG. Pharma Waldhof is the general partner of Pharma Waldhof GmbH & Co. KG. The following unaudited pro forma financial information presents a summary of the Company's consolidated results of continuing operations for the six and three months ended December 31, 2003, assuming the Pharma Waldhof acquisition had taken place as of July 1, 2003: Six months ended Three months ended December 31, December 31, 2003 2003 ---- ---- Net sales $143,444 $ 70,147 Net income $ 7,359 $ 3,553 Net income per common share: Basic $ 0.31 $ 0.15 Diluted $ 0.30 $ 0.15 The unaudited pro forma financial information has been prepared for comparative purposes only and reflects the addition of the historical unaudited results of Pharma Waldhof. The pro forma financial information includes adjustments to the Company's historical results to reflect reduced interest income generated from cash that was used for the acquisition, depreciation and amortization expenses and related income tax adjustments. The pro forma information does not purport to be indicative of operating results that would have been achieved had the acquisition taken place on the dates indicated or the results that may be obtained in the future. (5) SHORT-TERM INVESTMENTS Short-term investments at December 31, 2004 consist of governmental agency securities of $2,506, corporate bonds of $1,212 and corporate equity securities of $593. The governmental agency securities and corporate bonds are classified as available for sale. The corporate equity securities are classified as trading securities. The difference between the fair value of the available for sale investments and cost at December 31, 2004 was insignificant. (6) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill of $2,347 and $2,234 as of December 31, 2004 and June 30, 2004 relates to the Health Sciences segment. Goodwill at June 30, 2004 also includes $945 related to the discontinued ISS segment, which was written down to its fair value of $222 in December 2004 and is included in assets held for sale at December 31, 2004. Intangible assets subject to amortization as of December 31, 2004 and June 30, 2004 were as follows: Gross Carrying Accumulated Net Book Value Amortization Value ----- ------------ ----- DECEMBER 31, 2004 Customer relationships $2,995 $ 428 $2,567 Customer lists 600 450 150 Non-compete agreements 670 470 200 ------ ------ ------ $4,265 $1,348 $2,917 ====== ====== ====== JUNE 30, 2004 Customer relationships $2,644 $ 189 $2,455 Customer lists 600 390 210 Non-compete agreements 643 442 201 ------ ------ ------ $3,887 $1,021 $2,866 ====== ====== ====== 10 Amortization expense for intangible assets subject to amortization amounted to $327 and $111 for the six months ended December 31, 2004 and 2003, respectively. The estimated aggregate amortization expense for intangible assets subject to amortization for each of the succeeding years ended December 31 are as follows: 2005: $598; 2006: $508; 2007: $478; 2008: $478; 2009: $428; 2010: $427. As of December 31, 2004 and June 30, 2004, the Company also had $935 and $835, respectively, of intangible assets pertaining to trademarks which are not subject to amortization. The changes in the Health Sciences segment's goodwill and the gross carrying value of intangible assets is attributable to foreign currency exchange rates used to translate the financial statements of foreign subsidiaries. (7) STOCKHOLDERS' EQUITY On December 2, 2004, the Company's board of directors declared a 3-for-2 stock split effected in the form of a dividend and a cash dividend of $0.15 per share, to be paid semi-annually. The stock split and semi-annual cash dividend of $0.075 were paid January 10, 2005, to shareholders of record on December 24, 2004. The amount paid for the cash dividend of $1,820 was included in other accrued expenses at December 31, 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 for the stock split. All references to the number of common shares and the per common share amounts have been restated to give retroactive effect to the above stock split for all periods presented. (8) NET INCOME PER COMMON SHARE A reconciliation of the numerators and denominators of the basic and diluted income per common share follows:
Six months ended Three months ended December 31, December 31, 2004 2003 2004 2003 ---- ---- ---- ---- Income from continuing operations $ 6,139 $ 6,335 $ 2,501 $ 3,160 Loss from discontinued operations (811) (253) (548) (197) -------- -------- -------- -------- Net income $ 5,328 $ 6,082 $ 1,953 $ 2,963 ======== ======== ======== ======== Weighted average common shares outstanding 24,145 23,732 24,163 23,783 (basic) (a) Effect of dilutive securities: Stock options (a) 545 621 559 531 -------- -------- -------- -------- Weighted average common and potential common shares outstanding (diluted) (a) 24,690 24,353 24,722 24,314 ======== ======== ======== ======== Basic income per common share (a): Income from continuing operations $ 0.25 $ 0.27 $ 0.10 $ 0.13 Loss from discontinued operations $ (0.03) $ (0.01) $ (0.02) $ (0.01) -------- -------- -------- -------- Net income $ 0.22 $ 0.26 $ 0.08 $ 0.12 ======== ======== ======== ======== Diluted income per common share (a): Income from continuing operations $ 0.25 $ 0.26 $ 0.10 $ 0.13 Loss from discontinued operations $ (0.03) $ (0.01) $ (0.02) $ (0.01) -------- -------- -------- -------- Net income $ 0.22 $ 0.25 $ 0.08 $ 0.12 ======== ======== ======== ========
(a) Share and per share information have been adjusted for a 3-for-2 stock split effected in the form of a dividend, paid January 10, 2005. There were no employee stock options outstanding at December 31, 2004 that were not included in the diluted income per common share calculation because their effect would have been anti-dilutive. 11 (9) COMPREHENSIVE INCOME Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles, are excluded from net income. The components of comprehensive income were as follows:
Six months ended Three months ended December 31, December 31, 2004 2003 2004 2003 ---- ---- ---- ---- Comprehensive income: Net income $5,328 $6,082 $1,953 $2,963 Foreign currency translation adjustment 3,028 922 2,569 765 Unrealized loss on forward currency contracts (87) - (207) - Change in fair value of cross currency interest rate swaps (1,112) (30) (944) 58 ------ ------ ------ ------ Total $7,157 $6,974 $3,371 $3,786 ====== ====== ====== ======
The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency. New exchange gains or losses resulting from the translation of financial statements of foreign operations are accumulated in other comprehensive income. The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-US subsidiaries. (10) DEFERRED INCOME TAXES The decrease in the deferred income tax assets of $908 during the six months ended December 31, 2004 related to the reduction of taxes payable by $1,183 due to the utilization of foreign net operating loss carryforwards, partially offset by a $275 deferred tax asset established for the write-down of goodwill. (11) SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes for the six months ended December 31, 2004 and 2003 were as follows: 2004 2003 ---- ---- Interest $ 31 $ 70 Income taxes 929 1,327 The semi-annual cash dividend of $0.075 paid January 10, 2005, to shareholders of record on December 24, 2004 of $1,820 was included in other accrued expenses at December 31, 2004. (12) BENEFIT PLANS To comply with the requirements of the recently enacted American Jobs Creation Act of 2004, as of December 31, 2004, the Company has frozen its non-qualified Supplemental Executive Retirement Plan and will not permit further deferrals and contributions to this plan for compensation earned after December 31, 2004. All of the earned benefits of the participants in this plan as of December 31, 2004 will be preserved under the existing plan provisions. The Company intends to establish a similar plan in compliance with the American Jobs Creation Act. (13) RELATED PARTY TRANSACTIONS Certain directors of the Company are affiliated with law firms that serve as counsel to the Company on various corporate matters. During the six months ended December 31, 2004 and 2003, the Company incurred legal fees of 12 $57 and $97, respectively, for services rendered to the Company by these law firms. The fees charged by such firms were at rates comparable to rates obtainable from other firms for similar services. (14) COMMITMENTS AND CONTINGENCIES AND SHORT-TERM BORROWINGS As of December 31, 2004, the Company had outstanding purchase obligations totaling $16,315 with suppliers to the Company's Germany, Netherlands and Singapore operations to acquire certain products for resale to third party customers. During November 2004, the Company purchased ten separate units, comprising an entire floor of office space, aggregating approximately 1,300 gross square meters (whole number, not in thousands) located in Shanghai, China. The aggregate purchase price was approximately $2,900, of which $2,616 has been paid at December 31, 2004. The Company and its subsidiaries are subject to various claims that have arisen in the normal course of business. The impact of the final resolution of these matters on the Company's results of operations or liquidity in a particular reporting period is not known. Management is of the opinion, however, that the ultimate outcome of these matters will not have a material adverse effect upon the Company's financial condition or liquidity. Commercial letters of credit are issued by the Company during the ordinary course of business through major domestic banks as requested by certain suppliers. The Company had open letters of credit of approximately $2,590 and $1,161 as of December 31, 2004 and June 30, 2004, respectively. The terms of these letters of credit are all less than one year. No material loss is anticipated due to non-performance by the counterparties to these agreements. (15) RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment," that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires that such transactions be accounted for using a fair value based method. This statement is effective for interim or annual periods beginning after June 15, 2005 (the Company's 2006 fiscal year), as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair value based method of accounting. The Company has not yet determined the transition method it expects to select in adopting the provisions of FASB Statement No. 123R. See Note 2 "Stock-Based Compensation" for pro-forma information if the Company had elected to adopt the requirements of the previously issued SFAS 123. On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004. This law creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends-received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, although the FASB recently issued two Staff Positions to provide guidance on how companies should account for the effects of the American Jobs Creation Act, uncertainty remains and further U.S. Treasury guidance is anticipated. The Company is evaluating the repatriation provision of this law to determine whether, and to what extent, it might repatriate extraordinary dividends, as defined in this law. Accordingly, it can not reasonably estimate the amounts, if any, of undistributed earnings that may be repatriated. The Company expects to complete its evaluation within a reasonable amount of time after additional U.S. Treasury guidance is published. (16) SEGMENT INFORMATION The Company's four reportable segments, organized by product, are as follows: o Health Sciences - includes the active ingredients for generic pharmaceuticals, vitamins, and nutritional supplements, as well as products used in preparing pharmaceuticals, primarily by major innovative drug companies, and biopharmaceuticals. 13 o Chemicals & Colorants - products include a variety of specialty chemicals used in plastics, resins, adhesives, coatings, food, flavor additives, fragrances, cosmetics, metal finishing, electronics and many other areas; dye and pigment intermediates used in the color-producing industries like textiles, inks, paper, and coatings; intermediates used in the production of agrochemicals. o Agrochemicals - products include herbicides, fungicides and insecticides, as well as a sprout inhibitor for potatoes. o Institutional Sanitary Supplies & Other - products include cleaning solutions, fragrances, and deodorants for commercial and industrial customers. On December 31, 2004, management committed to a plan to sell this segment. Accordingly, the results of this segment are included in discontinued operations in the accompanying consolidated statements of income. The Company does not allocate assets by segment. The Company's chief operating decision maker evaluates performance of the segments based on net sales and gross profit. The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments' performance, as the assets are managed on an entity-wide basis. Six months ended December 31, 2004 and 2003 for continuing operations:
Health Chemicals & Consolidated Sciences Colorants Agrochemicals Totals -------- --------- ------------- ------ 2004 - ---- Net sales $97,622 $48,548 $8,997 $155,167 Gross profit 17,643 7,653 2,791 28,087 Unallocated cost of sales (1) (1,916) -------- Net gross profit $ 26,171 2003 - ---- Net sales $87,076 $44,188 $7,626 $138,890 Gross profit 16,053 7,176 2,582 25,811 Unallocated cost of sales (1) (1,907) -------- Net gross profit $ 23,904
Three months ended December 31, 2004 and 2003 for continuing operations:
Health Chemicals & Consolidated Sciences Colorants Agrochemicals Totals -------- --------- ------------- ------ 2004 - ---- Net sales $45,384 $24,542 $5,882 $ 75,808 Gross profit 8,118 3,892 1,973 13,983 Unallocated cost of sales (1) (985) --------- Net gross profit $ 12,998 2003 - ---- Net sales $42,070 $21,047 $4,837 $ 67,954 Gross profit 7,459 3,723 1,902 13,084 Unallocated cost of sales (1) (762) -------- Net gross profit $ 12,322
(1) Certain freight and storage costs are not allocated to the segments as such costs are managed on an entity-wide basis, and the information to reasonably allocate such costs is not readily available. 14 Net sales and gross profit by location for the six months ended December 31, 2004 and 2003 and long-lived assets by location as of December 31, 2004 and June 30, 2004 for continuing operations were as follows:
Net Sales Gross Profit Long-lived Assets --------- ------------ ----------------- Six months ended Six months ended As of December 31, December 31, December 31, June 30, 2004 2003 2004 2003 2004 2004 ---- ---- ---- ---- ---- ---- United States $ 85,512 $ 82,335 $ 13,077 $ 14,529 $ 1,197 $ 1,748 Germany 31,658 20,342 7,685 3,619 665 585 Netherlands 4,010 4,678 935 846 398 129 France 5,414 4,659 718 744 113 119 Asia-Pacific 28,573 26,876 3,756 4,166 2,705 73 -------- -------- -------- -------- -------- -------- Total $155,167 $138,890 $ 26,171 $ 23,904 $ 5,078 $ 2,654 ======== ======== ======== ======== ======== ========
15 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Aceto Corporation: We have reviewed the accompanying consolidated balance sheet of Aceto Corporation and subsidiaries as of December 31, 2004, the related consolidated statements of income for the three-month and six-month periods ended December 31, 2004 and 2003, and the related consolidated statements of cash flows for the six-month periods ended December 31, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Aceto Corporation and subsidiaries as of June 30, 2004, and the related consolidated statements of income, shareholders' equity and comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated September 9, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2004, is fairly stated, in all material aspects, in relation to the consolidated balance sheet from which it has been derived. As discussed in note 2 to the June 30, 2004 consolidated financial statements, Aceto Corporation and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets" as of July 1, 2002. /s/ KPMG LLP Melville, New York February 8, 2005 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q 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 set forth 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, uncertain military actions in the world, the mix of products sold and their profit margins, order cancellation or a reduction in orders from customers, the nature and pricing of competing products, the availability and pricing of key raw materials, dependence on key members of management, risks of entering into new European markets, continued successful integration of acquisitions, and economic and political conditions in the United States and abroad. NOTE REGARDING DOLLAR AMOUNTS In this quarterly report, all dollar amounts are expressed in thousands, except for share prices and per-share amounts. EXECUTIVE SUMMARY We are a global distributor of chemically-derived pharmaceuticals, biopharmaceuticals, specialty chemicals, and agrochemicals. Our offices in China, Germany, France, the Netherlands, Singapore, India, Poland, Hong Kong, the United Kingdom and the United States, along with warehouses worldwide, enable us to respond quickly to global customer demands, assuring that a consistent, high-quality supply of pharmaceutical, biopharmaceutical, specialty chemicals and agrochemicals is never far away. We are able to offer our customers very competitive pricing, continuity of supply, and quality control. Our 57 years of experience, our reputation for reliability and stability, and our long-term relationships with our suppliers have fostered loyalty among our customers. We remain confident about our short- and long-term business prospects. In the short-term, we anticipate continued organic growth, including growth resulting from our launching new active pharmaceutical ingredients (APIs), entering the developing biopharmaceutical market, globalization of our Chemicals & Colorants business, expansion of our Agrochemicals segment by acquisition of product lines, continued enhancement of our sourcing operations in China and India, and steady improvement of our regulatory capabilities. We believe that new product launches and product introductions demonstrate that Aceto has come to be recognized by the worldwide generic pharmaceutical industry as a reliable supplier. Our long-term plans involve seeking strategic acquisitions that enhance our earnings, forming alliances with partners that add to our capabilities, and establishing significant business operations in Eastern Europe. We believe Eastern Europe has great potential in the API business, given that entry of Eastern European countries into the European Union will result in them being subject to the same strict pharmaceutical regulations as their Western European counterparts. We are reporting net sales of $155,167 for the six months ended December 31, 2004, which represents an 11.7% increase over the $138,890 reported in the same period in fiscal 2004. Our income from continuing operations of $6,139, or $0.25 per diluted share was slightly lower than the same period in fiscal 2004. Our financial position as of December 31, 2004 remains strong, as we had cash of $27,139, working capital of $91,666, no long-term debt, and shareholders' equity of $106,754. 17 Our business is separated into four principal segments: Health Sciences, Chemicals & Colorants, Agrochemicals, and Institutional Sanitary Supplies & Other. The Health Sciences segment is our largest and fastest growing segment in terms of both sales and gross profits. This segment is comprised of APIs, pharmaceutical intermediates, diagnostic chemicals and nutritional supplements. APIs comprise about 70% of this segment's revenues. We typically partner with both customers and suppliers years in advance of a drug coming off patent to provide the generic equivalent. We have an extensive pipeline of new generic products poised to reach commercial levels over the coming years as the patents on existing drugs expire, both in the United States and Europe. In addition, as new members join the European Union, primarily from Eastern Europe, they become subject to the same regulatory standards as their Western Europe counterparts. With the opening of our office in Poland in January 2004, we are well positioned to take advantage of that opportunity. The Chemicals & Colorants segment supplies chemicals used in the color-producing industries such as textiles, ink, paper and coatings, as well as chemicals used in plastic, resins, adhesives, coatings, food, flavor additives, and the production of agrochemicals. Our sales of these products are predominantly in the United States and purchases are primarily from China and Western Europe. The Agrochemicals segment, while relatively small in terms of sales, provides the highest gross margin percentages. Our revenues are derived from sales of herbicides, pesticides, and other Agrochemicals, primarily in the United States and Western Europe. Our joint venture with Nufarm, which markets Butoxone(R) is expected to increase our market share of the peanut, soybean and alfalfa herbicide markets. We believe this will have a marginally positive effect on the gross margins contribution in this segment. On December 31, 2004, we committed to a plan to divest our non-core Institutional Sanitary Supplies Segment. A sale will enable us to focus on our core segments as well as our new patent-pending landfill odor-control product, Landfill Odorend, which will be integrated into the Chemicals & Colorants segment. Aceto's main strengths are sourcing, regulatory support and quality control. We are currently the largest buyer of pharmaceutical and specialty chemicals for export from China, purchasing from over 400 different factories. Among our greatest strengths are our people and their ability to meet the individual needs of customers. Eighty-five of our approximately 260 employees have technical degrees and we have eighteen employees whose exclusive responsibility is regulatory compliance. This enables us to dispatch highly skilled professionals whenever they might be needed. In this section, we explain our general financial condition and results of operations, including the following: o factors that affect our business o our earnings and costs in the periods presented o changes in earnings and costs between periods o sources of earnings o the impact of these factors on our overall financial condition As you read this section, refer to the accompanying consolidated statements of income, which present the results of our operations for the six-month and three-month periods ended December 31, 2004 and 2003. We analyze and explain the differences between periods in the specific line items of the consolidated statements of income. CRITICAL ACCOUNTING POLICIES The 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 accounting principles generally accepted in the United States. 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 evaluate our estimates on a regular basis, including those related to bad debts, inventories, goodwill 18 and intangible assets, environmental and other contingencies, pension benefits and income taxes. We base our estimates on various factors, including historical experience, consultation and advice from third-party subject-matter experts, and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and circumstances. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of these consolidated financial statements. REVENUE RECOGNITION We recognize revenue from product sales at the time of shipment and passage of title and risk of loss 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 such volume incentive rebates as the underlying revenue transactions that result in progress by the customer in earning the rebate are recorded, in accordance with Emerging Issues Task Force 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 for estimated losses resulting from the inability of our customers to make required payments. Allowances for doubtful accounts are based on historical experience and known factors regarding specific customers and industries in which the customers operate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, 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 the 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 amount of excess inventory quantities on-hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the write-down required for excess and obsolete inventory. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and reported operating results. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. Other intangible assets principally consist of customer relationships, trademarks, purchased customer lists, and covenants not to compete. Goodwill and other intangible assets that have an indefinite life are not amortized. As required by Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," we test goodwill and other intangible assets for impairment on at least an annual basis. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. In making these assumptions and estimates, we use industry-accepted valuation models and set criteria that are reviewed and approved by various levels of management. Additionally, we use, as necessary, a 19 third-party valuation firm to help us evaluate recorded goodwill. If our estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. ENVIRONMENTAL AND OTHER CONTINGENCIES We establish accrued liabilities for environmental matters and other contingencies when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. 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 such determination was made. PENSION BENEFITS In addition to our defined contribution plans in the United States, we sponsor pension plans outside the United States covering fourteen employees who meet eligibility requirements. Several statistical and other factors that attempt to estimate the probability and magnitude of future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, within certain guidelines. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these variables. The actuarial assumptions that we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants, among other things. Differences from these assumptions may significantly affect the amount of pension expense and liability that we record. 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 for financial accounting and reporting of income taxes. 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 a deferred tax asset will not be realizable, 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 if and when we expect to 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, foreign tax credit carryforwards would be available to reduce a portion of such U.S. tax liability. 20 RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2003
NET SALES BY SEGMENT Six months ended December 31, Comparison 2004 2004 2003 Over/(Under) 2003 ---- ---- ----------------- % of % of $ % Segment Net sales total Net sales total change change - ------- --------- ----- --------- ----- ------ ------ Health Sciences $ 97,622 62.9% $ 87,076 62.7% $ 10,546 12.1% Chemicals & Colorants 48,548 31.3 44,188 31.8 4,360 9.9 Agrochemicals 8,997 5.8 7,626 5.5 1,371 18.0 --------- ----- --------- ----- --------- --------- Net sales $ 155,167 100.0% $ 138,890 100.0% $ 16,277 11.7% ========= ===== ========= ===== ========= ========= GROSS PROFIT BY SEGMENT Six months ended December 31, Comparison 2004 2004 2003 OVER/(UNDER) 2003 ---- ---- ----------------- Gross % of Gross % of $ % Segment Profit Sales Profit Sales Change Change - ------- ------ ----- ------ ----- ------ ------ Health Sciences $17,643 18.1% $16,053 18.4% $ 1,590 9.9% Chemicals & Colorants 7,653 15.8 7,176 16.2 477 6.6 Agrochemicals 2,791 31.0 2,582 33.9 209 8.1 ------- ------- ------- ------- ------- ------- Segment gross profit 28,087 18.1 25,811 18.6 2,276 8.8 Freight and storage costs (1) (1,916) (1.2) (1,907) (1.4) (9) (0.5) ------- ------- ------- ------- ------- ------- Gross profit $26,171 16.9% $23,904 17.2% $ 2,267 9.5% ======= ======= ======= ======= ======= =======
(1) Represents certain freight and storage costs that are not allocated to a segment. 21 NET SALES Net sales increased $16,277 or 11.7%, to $155,167 for the six months ended December 31, 2004 compared with $138,890 for the same period in the prior year. We reported sales increases in all three segments as explained below. HEALTH SCIENCES Net sales for the Health Sciences segment increased by $10,546 for the six months ended December 31, 2004 to $97,622, which represented a 12.1% increase over last year's net sales of $87,076. Several factors contributed to the increase in net sales in the Health Sciences segment. Virtually all of the increase resulted from improved sales in our European and Asian markets in addition to the newly acquired Pharma Waldhof business, all of which contributed to an increase in sales of $10,536. The European and Asian market increase was attributable to the introduction of several new products and strong follow-up sales of existing products. Included in the European and Asian net sales increases were follow-up shipments of several generic products launched outside the U.S. market prior to this fiscal year that showed an increase in net sales of $1,856 over the same period last year. Domestically, API and nutritional sales decreases of $1,818 and $740 respectively were substantially offset by an increase in pharmaceutical intermediates net sales of $2,463. CHEMICALS & COLORANTS Net sales for the Chemicals & Colorants segment was $48,548 for the six months ended December 31, 2004 compared to $44,188 for the same period in the prior year. This increase in net sales of $4,360 or 9.9% versus the same period in the prior year is partially attributable to the steady introduction of the products to our foreign subsidiaries product offerings. Our foreign subsidiaries' increased their sales of Chemicals & Colorants for the six months ended December 31, 2004 by $2,564. Our chemical business is diverse in terms of products, customers and consuming markets. One customer within our color pigment and pigment intermediate business purchased $1,975 less product in the first six months of fiscal 2005. This reduction was more than offset by increases in sales of our industrial chemical offerings of $3,987 over the same period last year. We expect a similar trend to continue in the short-term as the U.S. economy recovers. AGROCHEMICALS Net sales for the Agrochemical segment increased to $8,997 for the six months ended December 31, 2004, an 18.0% increase over the same period in the prior year of $7,626. The increase in net sales was attributable to higher sales of our highest volume product as well as sales generated from several new products. The Agrochemical segment sales trend for the six months should continue during the balance of fiscal 2005. GROSS PROFIT Gross profit by segment before unallocated cost of sales (primarily storage and certain freight costs) increased $2,276 to $28,087 (18.1% of net sales) for the six months ended December 31, 2004 as compared to $25,811 (18.6% of net sales) for the same period in the prior year. The Health Sciences segment made the largest contribution to this increase as it accounted for $1,590 or 69.9% of the overall increase. HEALTH SCIENCES The Health Sciences gross profit for the six months ended December 31, 2004 was $17,643, a 9.9% increase over last year's gross profit of $16,053 for the same period. The gross margin decreased slightly to 18.1% compared to last year's gross margin of 18.4%. Gross profit improvement in the Health Sciences segment was attributable to the various revenue factors as described above, namely an overall sales increase of $10,546 primarily from foreign subsidiaries, including Pharma Waldhof, which has higher margins. The domestic gross margin decrease can be primarily attributed to the lower than normal API gross margins realized on a re-launched anti-biotic of 10% and a product mix shift to pharmaceutical intermediates which contribute lower margins than API's. Additionally, two of 22 our larger previously launched API's in Europe and Asia have experienced normal pricing pressures for a more mature product. CHEMICALS & COLORANTS Gross profits increased by $477 or 6.6% over the same period last year. Last year's gross profit included a favorable adjustment of $450 due to a reversal of a reserve for the estimated loss of a purchase contract. Excluding this adjustment, the gross profit would have increased by $927 or 13.8%. The segment would have shown improved margins of 15.8% versus 15.2% for the same period last year excluding the adjustment. Contributions from categories such as food and beverages, miscellaneous intermediates, polymer additives and coatings in addition to improved sales volume and margins in the European markets were the primary reasons for the improvements. The increase in gross margin percentage was caused by a decrease in sales to one major customer whose sales had generated lower than usual margins, along with an improvement in margins across other categories due to changes in product mix and, in some cases, improved product pricing. AGROCHEMICALS Gross profit for the Agrochemicals segment increased to $2,791 for the six months ended December 31, 2004 versus $2,582 for the same period last year, an increase of 8.1%. The increased gross profit contributions resulted from a large increase in sales of one existing product, sales from several new products as well as a price increase in one product. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased $2,708 or 17.3% to $18,380 for the six months ended December 31, 2004 in comparison to $15,672 for the same period last year. As a percentage of sales, SG&A increased to 11.8% versus 11.3% for the comparable period in fiscal 2004. SG&A increased primarily due to the inclusion of Pharma Waldhof expenses of $1,247 which was acquired in December 2003, costs of $515 for new business development initiatives including personnel, fees associated with the planning and pre-implementation efforts of a new ERP system of $230 and increased compensation and related fringe benefit costs of $763. OPERATING INCOME For the six months ended December 31, 2004 operating income was $7,791 compared to $8,232 for the same period last year, a decrease of $441 or 5.4%. This decrease was due to higher SG&A expenses of $2,708, partially offset by the overall increase in gross profit of $2,267, with the main contribution of $1,590 coming from the Health Sciences segment. INTEREST AND OTHER INCOME, NET Interest and other income decreased to $855 for the six months ended December 31, 2004 as compared to $888 for the same period last year. The decrease of $33 was attributable to a reduced unrealized gain on foreign currency of $115 partially offset by higher interest income of $20 resulting from higher returns on short-term investment and an increase of $62 regarding a government subsidy paid annually for doing business in a free-trade zone in Shanghai, China. PROVISION FOR INCOME TAXES The effective tax rate decreased to 28.7% from 30.0% for the same period last year. This decrease in the effective tax rate is due to proportionately higher earnings in jurisdictions with lower tax rates, primarily China. 23 DISCONTINUED OPERATIONS In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations for 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 $811 and $253 for the six months ended December 31, 2004 and 2003, respectively. The net loss from discontinued operations for the six months ended December 31, 2004 includes a non-cash write-down of goodwill of $448. THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2003
NET SALES BY SEGMENT Three months ended December 31, Comparison 2004 2004 2003 Over/(Under) 2003 ---- ---- ----------------- % of % of $ % Segment Net sales total Net sales total change change - ------- --------- ----- --------- ----- ------ ------ Health Sciences $ 45,384 59.8% $ 42,070 61.9% $ 3,314 7.9% Chemicals & Colorants 24,542 32.4 21,047 31.0 3,495 16.6 Agrochemicals 5,882 7.8 4,837 7.1 1,045 21.6 --------- ----- --------- ----- --------- --------- Net sales $ 75,808 100.0% $ 67,954 100.0% $ 7,854 11.6% ========= ===== ========= ===== ========= ========= GROSS PROFIT BY SEGMENT Three months ended December 31, Comparison 2004 2004 2003 OVER/(UNDER) 2003 ---- ---- ----------------- Gross % of Gross % of $ % Segment Profit Sales Profit Sales Change Change - ------- ------ ----- ------ ----- ------ ------ Health Sciences $ 8,118 17.9% $ 7,459 17.7% $ 659 8.8% Chemicals & Colorants 3,892 15.9 3,723 17.7 169 4.5 Agrochemicals 1,973 33.5 1,902 39.3 71 3.7 --------- ----- --------- ----- --------- --------- Segment gross profit 13,983 18.4 13,084 19.2 899 6.9 Freight and storage costs (1) (985) (1.3) (762) (1.1) (223) 29.3 --------- ----- --------- ----- --------- --------- Gross profit $ 12,998 17.1% $ 12,322 18.1% $ 676 5.5% ========= ===== ========= ===== ========= =========
(1) Represents certain freight and storage costs that are not allocated to a segment. 24 NET SALES Net sales increased $7,854 or 11.6%, to $75,808 for the three months ended December 31, 2004 compared with $67,954 for the same period in the prior year. We reported sales increases for all three segments as compared to the same period last year. HEALTH SCIENCES Net sales for the Health Sciences segment increased to $45,384 for the three months ended December 31, 2004, which represented a 7.9% increase over last year's net sales of $42,070. Several factors contributed to the increase in net sales in the Health Sciences segment. A large portion of the increase resulted from improved sales in our European and Asian markets in addition to the newly acquired Pharma Waldhof business, all of which contributed to an increase in sales of $3,286. The European and Asian market increase was attributable to the introduction of several new products and follow-up sales of existing products. Domestically, sales of active pharmaceutical ingredients (APIs) and nutritionals decreased by a net $1,481 caused by a drop in demand for select products and price erosion of the largest volume product shipped in the previous year. The net overall decrease in domestic APIs sales includes an increase in sales for the re-launching of a broad based antibiotic amounting to $1,133. The pharmaceutical intermediates product line contributed to the segment's improvement with a $1,412 or 85.8% increase in sales over fiscal 2004. We believe sales of the pharmaceutical intermediates products will continue to outperform last year's pace for the remainder of fiscal 2005. CHEMICALS & COLORANTS Net sales for the Chemicals & Colorants segment was $24,542 for the three months ended December 31, 2004 compared to $21,047 for the same period in the prior year. This increase in net sales of $3,495 or 16.6% versus the same period in the prior year is partially attributable to the steady introduction of the Chemical and Colorants products to our foreign subsidiaries product offerings of $1,710. Our chemical business is diverse in terms of products, customers and consuming markets. This quarter was a further illustration of this diversity. One customer within our color pigment and pigment intermediate business purchased $1,015 less product in the second quarter of fiscal 2005. This reduction was more than offset by increases in sales of industrial chemicals of $1,944, agricultural intermediates of $559 and dye intermediates of $464. AGROCHEMICALS Net sales for the Agrochemicals segment increased to $5,882 for the three months ended December 31, 2004, a 21.6% increase over the same period in the prior year of $4,837. The increase in net sales in the Agrochemicals segment was attributable to higher sales of our highest volume product as well as sales generated from several new products in the current quarter. The Agrochemical segment sales trend should continue during the balance of fiscal 2005. GROSS PROFIT Gross profit by segment before unallocated cost of sales (primarily storage and certain freight costs) increased $899 to $13,983 (18.4% of net sales) for the three months ended December 31, 2004 as compared to $13,084 (19.2% of net sales) for the same period in the prior year. The Health Sciences segment made the largest contribution to this increase as it accounted for $659 or 73.3% of the overall increase. HEALTH SCIENCES The Health Sciences gross profit for the three months ended December 31, 2004 was $8,118, an 8.8% increase over last year's first quarter gross profit of $7,459. The gross margin increased to 17.9% in the second quarter of fiscal 2005 compared to last year's second quarter gross margin of 17.7%. Gross profit improvement in the Health Sciences segment was attributable to the various revenue factors as described above, namely an overall sales increase of $3,314. Gross margins for the European and Asia markets increased from 14.4% to 18.6%, much of which was due to the strong margins of our Pharma Waldhof business. Gross margins in the USA slipped from 22.1% to 15.5% due to pricing pressure and the product mix featuring increased sales in the pharmaceutical 25 intermediate products which contribute a lower margin than API's. We expect a similar trend on pricing pressure to continue in the short-term. CHEMICALS & COLORANTS Gross profit increased by $169 or 4.5% over the same period last year to $3,892. As mentioned previously, last year gross profits included a favorable adjustment of $450 due to a reversal of a reserve for the estimated loss of a purchase contract. If we were to reduce last year gross profit by the adjustment, the increase would have been $619 or a 18.9% increase. The segment would have shown improved margins of 15.9% versus 15.6% for the same period last year excluding the adjustment. Contributions from categories such as agriculture intermediates, food and beverages, miscellaneous intermediates and polymer additives in addition to improved sales volume and margins in the European markets were the primary reasons for the improvements. The increase in gross margin percentage was caused by a decrease in sales to one major customer whose sales had generated lower than usual margins, along with an improvement in margins across other categories due to changes in product mix and, in some cases, improved product pricing. The future trends are difficult to predict as they depend on product mix and the introduction of new products. AGROCHEMICALS Gross profit from the Agrochemicals segment was $1,973 this quarter versus $1,902 for the same period last year, an increase of 3.7%. There were gross profit contributions resulting from a large increase in sales of one existing product and sales from several new products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased $1,185 or 14.1% to $9,565 this quarter in comparison to $8,380 for the same period last year. As a percentage of sales, SG&A increased to 12.6% in the second quarter of fiscal 2005 versus 12.3% for the comparable period in fiscal 2004. SG&A increased primarily due to the inclusion of our Pharma Waldhof business of $574 which was acquired in December 2003, an increase in the provision for bad debt of $265, costs of new business development initiatives including personnel of $251 and increased compensation including fringe benefit costs of $334, partially offset by a decrease in consulting fees of $261. OPERATING INCOME For the quarter ended December 31, 2004 operating income was $3,433 compared to $3,942 for the same period last year, a decrease of $509 or 12.9%. This decrease was due to higher SG&A expenses of $1,185, partially offset by the overall increase in gross profit of $676, with the main contribution of $659 coming from the Health Sciences segment. INTEREST AND OTHER INCOME, NET Interest and other income decreased to $306 for the quarter ended December 31, 2004 as compared to $511 for the same period last year. The decrease of $205 was primarily attributable to a reduction of net gains on foreign currency of $151 compared to the same period last year. PROVISION FOR INCOME TAXES The effective tax rate increased to 32.8% from 28.3% for the same period last year. This increase in the effective tax rate is due to proportionately higher earnings in 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 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 $548 and $197 26 for the three months ended December 31, 2004 and 2003, respectively. The net loss from discontinued operations for the three months ended December 31, 2004 includes a non-cash write-down of goodwill of $448. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS At December 31, 2004, we had $27,139 in cash, $4,311 in short-term investments and no debt. Our cash position at December 31, 2004 decreased $5,191 from the June 30, 2004 level. Operating activities provided cash of $745, primarily from net income of $5,328, partially offset by a net decrease caused by changes in assets and liabilities. Investing activities for the six months ended December 31, 2004 used cash of $6,675 primarily related to purchases of short-term investments and property and equipment. Financing activities for the six months ended December 31, 2004 provided cash of $356 primarily as a result of proceeds from stock option exercises, partially offset by a payment of a related party note payable. CREDIT FACILITIES We have credit facilities with two European financial institutions. These facilities provide us with a line of credit of 14,500 Euros (approximately $19,784), as of December 31, 2004. We are not subject to any financial covenants under these arrangements. There were no outstanding balances under the credit facilities at December 31, 2004. In addition, we have a revolving credit facility with a financial institution which expires June 30, 2007 and provides for available credit of $10,000. At December 31, 2004, we had utilized $2,590 in letters of credit, leaving $7,410 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 December 31, 2004. WORKING CAPITAL OUTLOOK Working capital was $91,666 at December 31, 2004 versus $85,840 at June 30, 2004. The increase in working capital was attributable to various factors including net income during the period. We continually evaluate possible acquisitions of or investments in businesses that are complementary to our own, and such transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, borrowing capacity and access to the equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures and the anticipated continuation of semi-annual cash dividends. Further, we may obtain additional credit facilities to enhance our liquidity. 27 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 which will impact our short-term and long-term liquidity. At December 31, 2004, we had no significant obligations for capital expenditures, other than the purchase of office space in Shanghai, China discussed below. At December 31, 2004, contractual cash obligations and other commercial commitments were as follows:
Payments Due and/or Amount of Commitment Expiration Per Period --------------------- Less Than 1-3 4-5 After Total 1 Year Years Years 5 Years ----- ------ ----- ----- ------- Operating leases $ 10,096 $1,949 $3,630 $3,155 $1,362 Commercial letters of credit 2,590 2,590 - - - Standby letters of credit 109 109 - - - Unconditional purchase obligations (a) 16,315 16,315 - - - ------- ------- ------ ------ ------ Total $29,110 $20,963 $3,630 $3,155 $1,362 ======= ======= ====== ======= ======
(a) As of December 31, 2004, we had outstanding purchase obligations totaling $16,315 with suppliers to our Germany, Netherlands and Singapore operations to acquire certain products for resale to customers. Other significant commitments and contingencies included the following: (1) We had a liability of $2,105 as of December 31, 2004 for our non-qualified Supplemental Executive Retirement Plan. The related funds held by the grantor trust amounted to $1,809 as of December 31, 2004. (2) During November 2004, we purchased ten separate units, comprising an entire floor of office space, aggregating approximately 1,300 gross square meters (whole number, not in thousands) located in Shanghai, China. The aggregate purchase price was approximately $2,900 of which $2,616 has been paid at December 31, 2004. (3) We, together with our subsidiaries, are subject to pending and threatened legal proceedings that have arisen in the normal course of business. We do not know the impact the final resolution of these matters will have on our results of operations or liquidity in a particular reporting period. Our management is of the opinion, however, that the ultimate outcome of such matters will not have a material adverse effect upon our financial condition or liquidity. RELATED PARTY TRANSACTIONS Certain of our directors are affiliated with law firms which serve as our counsel on various corporate matters. During the three months ended December 31, 2004 and 2003, we incurred legal fees of $57 and $97, respectively, for services rendered to us by these law firms. The fees charged by such firms were at rates comparable to rates obtainable from other firms for similar services. 28 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment," that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires that such transactions be accounted for using a fair value based method. This statement is effective for interim or annual periods beginning after June 15, 2005 (the Company's 2006 fiscal year), as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair value based method of accounting. The Company has not yet determined the transition method it expects to select in adopting the provisions of FASB Statement No. 123R. See Note 2 "Stock-Based Compensation" for pro-forma information if the Company had elected to adopt the requirements of the previously issued SFAS 123. On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004. This law creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends-received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, although the FASB recently issued two Staff Positions to provide guidance on how companies should account for the effects of the American Jobs Creation Act, uncertainty remains and further U.S. Treasury guidance is anticipated. The Company is evaluating the repatriation provision of this law to determine whether, and to what extent, it might repatriate extraordinary dividends, as defined in this law. Accordingly, it can not reasonably estimate the amounts, if any, of undistributed earnings that may be repatriated. The Company expects to complete its evaluation within a reasonable amount of time after additional U.S. Treasury guidance is published. RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONALLY, RISKS AND UNCERTAINTIES NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISK FACTORS OCCUR, OUR BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE MATERIALLY ADVERSELY AFFECTED. IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, MANY OF WHICH HAVE GREATER MARKET PRESENCE AND RESOURCES THAN US, OUR PROFITABILITY AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED. Our financial condition and operating results are directly related to our ability to compete in the intensely competitive worldwide chemical market. We face intense competition from global and regional distributors of chemical products, many of which are large chemical manufacturers as well as distributors. Many of these companies have substantially greater resources than us, including greater financial, marketing and distribution resources. We cannot assure you that we will be able to compete successfully with any of these companies. In addition, increased competition could result in price reductions, reduced margins and loss of market share for our services, all of which would adversely affect our business, results of operations and financial condition. WE MAY INCUR SIGNIFICANT UNINSURED ENVIRONMENTAL AND OTHER LIABILITIES INHERENT IN THE CHEMICAL DISTRIBUTION INDUSTRY THAT WOULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION. The business of distributing chemicals is subject to regulation by numerous federal, state, local, and foreign governmental authorities. These regulations impose liability for loss of life, damage to property and equipment, pollution and other environmental damage that may occur in our business. Many of these regulations provide for substantial fines and remediation costs in the event of chemical spills, explosions and pollution. While we believe that we are in substantial compliance with all current laws and regulations, we can give no assurance that we will not incur material liabilities that exceed our insurance coverage or that such insurance will remain available on terms and at rates acceptable to us. Additionally, if existing environmental and other regulations are changed, or additional 29 laws or regulations are passed, the cost of complying with those laws may be substantial, thereby adversely affecting our financial performance. ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN WE HAVE PROVIDED FOR. 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. 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 acquired assets, and may continue to experience charges to our earnings for any acquisitions that we make, including large and immediate write-offs of acquired assets, or impairment charges. These costs may also include substantial severance and other closure costs associated with eliminating duplicate or discontinued products, employees, operations and facilities. These charges could have a material adverse effect on our results of operations for particular quarterly periods and they could possibly have an adverse impact on the market price of our common stock. OUR REVENUE IS DIFFICULT TO PREDICT. Our revenue is difficult to predict because it is primarily generated on a contract-by-contract or purchase order basis, and customers can change their requirements or cancel orders. Many of our contracts are short-term and may be cancelled at any time. As a result, much of our revenue is not recurring from period to period, which contributes to the variability of results from period to period. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE QUARTERS, WHICH MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK. Our operating results will fluctuate on a quarterly basis as a result of a number of factors, including the timing of contracts, the delay or cancellation of a contract, and changes in government regulations. Any one of these factors could have a significant impact on our quarterly results. In some quarters, our revenue and operating results may fall below the expectations of securities analysts and investors, which would likely cause the trading price of our common stock to decline. 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 by-laws to indemnify our directors, officers and employees against the reasonable expenses incurred by these persons in connection with an action brought against him or her in such capacity, except in matters as to which he or she is adjudged to have breached a duty to us. The maximum potential amount of future payments we could be required to make under this provision is unlimited. While we have a "director and officer" 30 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 year 2004, approximately 50% of our revenues were attributable to operations conducted abroad and to export sales. In addition, in fiscal 2004, approximately 29% and 59% of our purchases came from Europe and Asia, respectively. In addition, in certain countries where we currently operate, export, intend to operate, 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 United States 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 United States dollar. Moreover, we may incur significant costs in connection with conversions between currencies. WE RELY ON KEY EXECUTIVES IN LARGE PART 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. THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED IN PREPARING FINANCIAL STATEMENTS IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. 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 accounting principles generally accepted in the United States ("GAAP"). The preparation of 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. WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN PLACE, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM LEGISLATION REQUIRING COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002. We are evaluating our internal controls systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We are performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we are incurring additional expenses and a diversion of management's time. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, 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. 31 ITEM 3. 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 market price, foreign currency exchange rates and interest rates. MARKET PRICE RISK Short-term investments at December 31, 2004 of $4,311, which consists of corporate securities, governmental agency securities and corporate bonds are recorded at fair value and have exposure to price risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices quoted by stock exchanges and amounts to $431 as of December 31, 2004. Actual results may differ. FOREIGN CURRENCY EXCHANGE RISK In order to reduce the risk of foreign currency exchange rate fluctuations, we hedge some of our transactions denominated in a currency other than the functional currencies applicable to each of our various entities. The instruments used for hedging are short-term foreign currency contracts (futures). The changes in market value of such contracts have a high correlation to price changes in the currency of the related hedged transactions. At December 31, 2004, we had foreign currency contracts outstanding that had a notional amount of $2,756. 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 December 31, 2004 was $(87). In addition, we also 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 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 December 31, 2004 was $(1,621). 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. 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" in the accompanying consolidated balance sheets. On December 31, 2004, we had translation exposure to various foreign currencies, with the most significant being the Euro and the Singapore dollar. The potential loss as of December 31, 2004, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $3,902. 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. 32 ITEM 4. 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 Chief Executive Officer and Chief Financial Officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2004 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the second quarter of fiscal 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 33 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held an annual meeting of its shareholders on December 2, 2004. Two matters were voted on at the annual meeting, as follows: a. The election of nominees Leonard S. Schwartz, Samuel I. Hendler, Robert A. Wiesen, Stanley H. Fischer, Albert L. Eilender, Ira S. Kallem and Hans C. Noetzli as directors of the Company until the next annual meeting. The votes were cast for this matter as follows: FOR WITHHELD/ABSTAIN Leonard S. Schwartz 11,250,774 3,752,373 Samuel I. Hendler 10,288,718 4,714,429 Robert A. Wiesen 10,294,880 4,708,267 Stanley H. Fischer 10,561,284 4,441,863 Albert L. Eilender 13,789,941 1,213,206 Ira S. Kallem 13,780,482 1,222,665 Hans C. Noetzli 13,789,266 1,213,881 Each nominee was elected a director of the Company. b. Ratification of the selection of KPMG LLP as the Company's independent auditors for the current fiscal year. The votes were cast for this matter as follows: FOR AGAINST ABSTAIN 14,367,200 617,345 18,602 The selection of KPMG LLP as the Company's independent auditors was ratified. ITEM 6. EXHIBITS The exhibits filed as part of this report are listed below. 10.1 Form of purchase agreement between Shanghai Zhongjin Real Estate Development Company Limited and Aceto (Hong Kong) Limited dated November 10, 2004 15.1 Letter of independent registered public accounting firm re: unaudited interim financial information 31.1 Certification by Chairman, President and CEO Leonard S. Schwartz pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Chairman, President and CEO Leonard S. Schwartz pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by CFO Douglas Roth pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACETO CORPORATION DATE February 9, 2005 BY /s/ Douglas Roth ---------------------- ------------------------------------------- Douglas Roth, Chief Financial Officer DATE February 9, 2005 BY /s/ Leonard S. Schwartz ---------------------- ------------------------------------------- Leonard S. Schwartz, Chairman, President and Chief Executive Officer 35 EX-10.1 2 text10_1-4864.txt EX-10.1 SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Shanghai Municipality Contract for Presale of Commodity Houses Formulated by: Shanghai Administration for Housing and Land Resources Supervised by: Shanghai Administration for Industry and Commerce Printed in 2000 SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Special Advice 1. This is a model contract text drawn up in accordance with the <> and the printed clauses of the contract are suggestive clauses intended only for the adoption by parties to the contract. 2. Purchase of a house is a civil juristic act that involves a relatively greater object, better professional knowledge and a number of laws and regulations. When signing such a contract, the parties concerned should use caution and prudence and the contract signed should be as concrete, complete and precise as possible so as to safeguard their rights and interests. 3. Prior to the conclusion of the contract, the real estate developer should show the permit for presale of the commodity housing to the buyer. The buyer may check and verify the authenticity and legal validity of the permit and possible existence of such facts as repeated presales of the house, the seizure of the house by a judicial organization or any restrictions on the transfer of the house at the district or county property transaction center where the house is located. 4. In order to protect legitimate rights and interests of themselves, the contracting parties may stipulate the advertisement and letter of presale of the house as appendices to the contract. 5. The commodity houses sold in advance are houses under construction (or houses completed but have not yet performed initial registration). Uncertainties may lie hidden in such houses with respect to areas, date of delivery, quality of the house, etc. The buyer as well as the seller should have a thorough understanding of the following issues particularly before inking the contract: (1) The floor space of a commodity house sold in advance is measured tentatively. However, when it is delivered, the actual floor space measured by a surveying organization duly authorized by Shanghai Administration for Housing and Land Resources shall be taken as criterion. The contract for the presale shall clearly state the floor space of the house, the floor space in the flat and the apportioned floor space shared with others in use (the "common area". The difference between the floor spaces measures tentatively and actually shall be dealt with according to Clause 44 of the <> (the Measure"). (Clause 44 <> reads as follows: If the floor space of a commodity house sold in advance is found increased or decreased compared to that SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com stipulated in the contract on delivery, it should be tackled according to the provisions set below: (i) The total transfer price agreed in the contract shall remain unchanged if the increase or decrease is due to the floor space apportioned for the common area pursuant to clause 27, Section 2 of the Measure, or due to the error made by the qualified surveying organization in measuring. [Clause 27, Section 2 reads as follows: On transfer, the common area and equipment shall be transferred simultaneously. The floor space for common use shall be apportioned by the property owners in compliance with the relevant national and municipal rules and regulations]. (ii) The increase or decrease in floor space due to the alteration of architectural design of the commodity housing shall be handled according to Clause 39 of the Measure [which reads as follows: The developer must not unilaterally alter any architectural design of the commodity house already sold in advance. In the event that the alteration is indispensable, it shall first have the consent of the buyer and apply to the planning and management authorities concerned for examination and approval, and then sign an alteration agreement of the contract for presale of the commodity houses with the buyer. If the developer alters the architectural design of the commodity house sold in advance without the consent of the buyer, the buyer shall have the right to cancel the contract and the developer shall bear liability for breach of contract]. (iii) Excepting the matters specified in the above subsections (i) and (ii), if the floor space is greater than that stipulated in the contract, the transferee shall not pay the price for the increased area; if the floor space is less than that stipulated in the contract, the developer shall refund the price for the decreased area to the transferee. However, if it is otherwise agreed in the contract, the agreement shall be followed. (2) After completion and acceptance inspection of a newly-built commodity house and before it is delivered to the buyer, the developer shall perform the initial registration of it by evidence of the documents listed in Clause 20 of the <> and the documents for approval of the commodity housing construction project. The developer shall have received the Real Estate title Certificate of the Newly-built Commodity Housing (the "major real estate title certificate") after completion and before the delivery of the house. (3) The quality-guaranteed period for commodity houses given by the construction enterprise specified in the < SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com (4) Construction Projects>> promulgated by the State Council is: "(i) The reasonable service life of the project set forth in design documents shall be the quality-guaranteed period for the infrastructures, foundations and main structures of the building; (ii) Five years for the waterproof roofing, toilets, rooms and permeability-proof exterior walls; (iii) two heat or cold supply periods for heating and cooling systems; (iv) two years for electric conduit lines, water supply and drainage piping, installation of fixtures and furnishings, and decoration works". The period of guaranteed maintenance service shall start from the date of completion and acceptance of the house. The developer shall assume the responsibility for repairing the commodity house purchased by the buyer from the handing-over of the house and the period of guaranteed maintenance service shall not be less than two years, starting from the date of transfer of the real estate rights. (5) After delivery of the commodity house, if the quality of its main structure is not up to the required standard, it shall be dealt with according to Clause 32 of the <> issued by the State Council, which reads "After delivery of the commodity house, if the buyer considers the quality of the main structure of the house not up to the required standard, it may apply to a project quality supervising organization for reexamination. If the reexamination proves the non-conformity of the quality of the main structure to the required standard, the buyer is entitled to return the house and the developer shall bear the liability for compensation for loss (if any) to the buyer according to law". 6. If any dispute arises from the implementation of the contract, either party may bring an action at a people's court at the district where the house is located, or apply to Shanghai Arbitration Commission or commissions in other cities for arbitration. In Shanghai, there exist Shanghai Arbitration Commission and Shanghai Sub-commission with china International Economic and Trade Arbitration Commission, (for foreign-related arbitration). 7. After conclusion of the contract for presale of the commodity house, registration for advance notice on the commodity house shall be performed with the real estate registration institution in good time so as to protect the rights and interests of the contracting parties. After the said registration, the parties to the contract attain the land use right, property right of the house, or other priority in claims in connection with real estates. According to regulations, the registration shall be applied by both parties. However, if one of the parties does not propose the application for registration for advance notice, the other party may unilaterally apply for it. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com 8. Matters discussed and decided by the developer and the buyer are filled in the blanks of the contract by the developer through a computer, and then the text is generated and printed. It is suggested that the buyer carefully read the printed contents of the contract prior to the formal signing of it. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Shanghai Municipal Contract for Presale of Commodity Houses Party A (The Seller): Shanghai Zhongjing Real Estate Development co., Ltd. Domicile: Room 2603, 2 Huashan Road, Jing'an District, Shanghai Post code: 200040 Business License No.: 3101061012888 Qualification Certificate No.: HFDZ (Jing'an) 0121 Legal representative: Teng Guowei Phone: 64336472 Entrusted agent: Party B (The Buyer): ACETO (HONGKONG) LIMITED Nationality:_____________Sex:____________Date of Birth:________________ Domicile (address): 5/F., Harilela House, 79 Wyndham Street Central/HONGKONG Post code: 000000 Certificate: Business Registration Certificate, No.: 10282626 Phone: 28691188 (HK) Entrusted/Legal Representative: GARY J. MO Domicile (address): Room 403, 258 Tongren Road, Shanghai, Phone: 13801945289 Party B (The Buyer):__________________________________ Nationality:_____________Sex:____________Date of Birth:____________ Domicile (address):______________________Post Code:________________ Certificate:__________________No.:______________Phone:_____________ Entrusted/legal Representative:____________________________________ Domicile (address):_____________________________Phone:_____________ Party B (The Buyer):__________________________________ Nationality:_____________Sex:____________Date of Birth:_____________ Domicile (address):______________________Post Code:_________________ Certificate:__________________No.:______________Phone:______________ Entrusted/legal Representative:_____________________________________ Domicile (address):_____________________________Phone:______________ Party B (The Buyer):__________________________________ Nationality:_____________Sex:____________Date of Birth:_____________ Domicile (address):______________________Post Code:_________________ Certificate:__________________No.:______________Phone:______________ Entrusted/legal Representative:_____________________________________ Domicile (address):_____________________________Phone:______________ SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com On the basis of equality, willingness and consensus, Party A and Party B hereby enter into this Contract for the purchase of the ((Jing'an Zhonghua Building)) Commodity House sold in advance by Party A to Party B. Clause 1 Party A has, by way of transfer of the land use right, obtained the right to use the No. 0600400160030002 Land Lot situated in Jing'an District, carried out the registration for the land use right according to law and received the real estate title certificate numbered J2003009962. The Lot covers an area of 3,657m(2) and its purpose is for business office. After approval, Party A invested and built on the Lot the Commodity Housing ((Jing'an Zhonghua Building)) (provisional/present name). The main building is of reinforced concrete structure, consisting of 30 storeys above the ground and 2 storeys below the ground. Having satisfied the presale conditions set forth in the <>, the said building has been authorized for advance sale by Jing'an District Administration for Housing and Land [Presale permit No. JF (2004)Y009]. Clause 2 The house bought by Party B from Party A is Flat No. 901 on the 9th floor of the ((Jing'an Zhonghua Building>> standing in 1701 Beijing Road (W) (hereinafter referred to as the House), its planned purpose approved by the government is for business office. The floor space of the House measured tentatively by Party A is 126.6m(2), of which the floor space within the flat is 87.16m(2) and the apportioned floor space used in common with others (the "common area") is 39.44m(2). The height between the floor and ceiling of the House is 3.4m. The architectural design and plan view of the House can be seen in Appendix 2 of the Contract. The structure and standard for furnishings and fixtures are listed in Appendix 3. Information related to the House (mortgage, leasehold relationships) is tabled in Appendix 4. The adjacent relations and the Plot Planning are depicted in Appendix 6. The <>, ((Pledge on the Use of the House>> and relevant ((Letter of Undertaking)) can be found in Appendix 5. Clause 3 The unit price of the House purchased by Party B is RMB18,678/m(2) (Say: RMB eighteen thousand six hundred and seventy-eight per square meter of floor space only). Calculated on the basis of the tentative floor space measure by Party A, the provisional total purchase price of the House shall be RMB2,364,736 (Say: RMB two million three hundred sixty-four thousand and seven hundred thirty-six only). Clause 4 The total purchase price of the House bought by Party B (including the price of fixtures and furnishings listed in Appendix 3) shall mean the total purchase price of the House and the relevant proportional land use right. The total purchase price of the House specified in the Contract shall remain unchanged unless by reasons of differences between the floor spaces of the House measured tentatively and actually. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Clause 5 On delivery, the actual floor space of the House measured by a surveying organization duly authorized by the Shanghai Administration for Housing and Land Resources shall be taken as standard. Unless otherwise stipulated by laws, decrees of regulations, the difference (if any) between the tentative floor space measured by Party A and the actual floor space measured by the aforesaid surveying organization shall be disposed of as follows: 1. To refund any overpayment or to demand a supplemental payment for any difference in the floor space calculated at the unit price/m(2). 2. Party A hereby agrees that if the difference between the tentatively measured floor space and actually measured floor space exceed +3% (including 3%), it shall not demand from Party B any supplemental payment for the surplus floor space. Also, Party A hereby agrees that if the difference between the tentative floor space and actual floor space exceed -3% (including -3%), Party B shall have the right to cancel the Contract unilaterally. However, Party B shall put forward the exercise of the right of unilateral cancellation on or before the date of signing the "Letter of Handing-over of the House", otherwise it shall be regarded as a waiver of the right. Clause 6 On the signing of the Contract, the construction work shall have been proceeded to the completion of the main part of the Building. Party B shall pay the purchase price of the House into Party A's special bank account for advance sale incomes at the time and in the sum as prescribed in the Contract (the designated monetary supervisory organization: Luwan Subbranch, Shanghai Branch of Bank of China; Account: Shanghai Zhongjing Real Estate Development Co., Ltd.; Account No.: 044049-8200-11982908093001). The incomes from the advance sales shall be used under supervision according to the governmental regulations. The method and time for the payment to be made by Party B have been clearly defined in Appendix 1. Clause 7 In the event that Party B fails to pay at the time defined, it shall pay to Party A a penalty computed at a daily rate of 0.02% of the outstanding amount, starting from the second day after it became payable until the date of actual pay-off. If the payment is delayed for more than 30 days, Party A shall have the first option hereunder to claim against Party B: 1. Party A shall have the right to cancel the Contract unilaterally and Party B shall be liable for compensation. The compensation shall be 3% of the total purchase price of the House. Party A shall be entitled to deduct the said compensation from the purchase price of the House already paid by Party B and refund the remaining sum, if any, to Party B. If the purchase price of the House paid by Party B is not enough for the compensation, Party A shall have the right to demand further payment from Party B. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com If Party A uses the right of unilateral cancellation of the Contract, it shall notify Party B in writing. 2. _____________________________ Clause 8 After conclusion of the Contract, Party A must not unilaterally change the architectural design of the House (Appendix 2). If the change is absolutely needed, it shall first have the written consent of Party B and meantime shall be subject to the scrutiny and approval of the planning and management authorities concerned. Party A shall enter into an agreement on amending the Contract with Party B within 30 days after the date of approval. If Party A changes the architectural design of the House without the consent of Party B, Party B shall have the right to dissolve the Contract unilaterally. Clause 9 Party A shall not unilaterally alter the Plot Planning agreed with Party B (Appendix 6). If the alteration is inevitable, Party A shall have a written consent from Party B. In the event that Party A alters the Plot Planning without the consent of Party B, Party B shall have the right to demand Party A to reinstate it. If the reinstatement becomes impossible, Party A shall pay to Party B a penalty of 3% of the total purchase price of the House. Clause 10 The delivery of the House shall meet the conditions specified in the first option set below: 1. The initial registration for the real estate has been performed and the Real Estate Title Certificate of the Newly-built Commodity Housing (the "major real estate title certificate") received. Party A has already discharged the mortgage against the Building and has duly paid its maintenance fund. 2. Party A has received the "Permit for the Delivery of the Residential House for Use", discharged the mortgage against the House and duly paid the maintenance fund of the House. Party A has promised to do the initial registration of the real estate and acquire the Real Estate Title Certificate of the Newly-built Commodity Housing (the "major real estate title certificate") before _____________. If Party A fails to attain the Real Estate Title Certificate of the Newly-built Commodity Housing (the "major real estate title certificate") at the designated time, Party B shall have the right to dissolve the Contract unilaterally. 3. _____________________________ Clause 11 Party A shall hand over the House to Party B on March 31, 2005 save for any event of FORCE MAJEURE. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Clause 12 In the event that Party A fails to hand over the House to Party B before the deadline defined in Clause 11 of the Contract, it shall pay to Party B a penalty calculated at a daily rate of 0.02% of the purchased price of the House already paid by Party B from the second day after the said deadline to the date of actual pay-off. If the delay of delivery exceeds over 30 days, Party B shall have the first option hereunder to claim against Party A: 1. Party B shall have the right to dissolve the Contract unilaterally. 2. ____________________________ Clause 13 Having satisfied the conditions of delivery of the House specified in Clause 10 of the Contract, Party A shall notify Party B in writing of performing the procedures for handing over the House 3 days prior to the hand-over date. Party B shall inspect and accept the House together with Party A within 7 days after receipt of the notice. The signing of the <> marks the completion of the handing-over. During the acceptance and handing-over of the House, Party A shall product evidentiary documents to prove that the conditions set out in Clause 10 for delivery of the House have been met. Because the House is intended for business office purpose, Party A shall provide Party B with "Letter of Warranty of quality for ______________" and "User's Manual of _______________". Meanwhile, Party A shall provide Party B with information and data related to the actually measured area of the House upon request. If Party A does not produce and provide the aforesaid information or documents, Party B shall be entitled to refuse the acceptance of the House and Party A shall bear all the liability for the delay of delivery of the House. Clause 14 Within 7 days after completion of the initial property registration of the Newly-built Commodity Housing and obtainment of the "major real estate title certificate", the parties shall sign the ((Letter of Handing-over of the House)) stipulated in the Contract, which is an essential document for the performance of the procedures for transferring the ownership of the House. Within 30 days after the signing of the ((Letter of Handing-over of the House)), the two parties shall go through formalities for declaration of the purchase price of the House and apply for the transfer of the ownership and the Real Estate Title Certificate of the House (the "minor real estate title certificate") at Shanghai Real Estate Transaction Centre. Clause 15 The risk responsibility for the House shall be shifted from Party A to Party B on the date of handing over the House. If Party B does not implement procedures for inspection and taking-over the House on the date prescribed, Party A may give Party B a written reminder. If Party B does not do the aforesaid procedures on the date designated in the written reminder, the risk responsibility for the House shall be shifted from Party A to Party B the second day after the date designated in the written reminder. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Clause 16 Party A pledges that it has neither created any mortgage right against the House delivered by it, nor there is any dispute over the right of the House and other financial issues. If anything inconsistent with the pledge emerges after the delivery of the House, Party A shall assume all the liability thereof. Clause 17 The House delivered by Party A is the House that has passed the inspection for acceptance. If the fixtures and furnishings of the House are not up to the standard set forth in Appendix 3 of the Contract, Party B shall have the right to ask Party A to compensate with an amount equal to 100% of the price differentials between the fixtures and furnishings actually supplied and those specified in Appendix 3, Party B shall have the right to dissolve the Contract unilaterally. It is agreed that when the dispute arises between the parties over the determination of the standard for the fixtures and furnishings, a qualified organization specialized in the assessment of quality of construction projects in Shanghai shall be appointed to make an examination of it. The written evaluation conclusion made by the said organization shall be taken as the basis for the settlement of the dispute. Clause 18 After delivery of the House, if Party B considers the main structure of the House not up to the standard, it may appoint a qualified organization specialized in the assessment of quality of construction projects in Shanghai to make an examination of it. Party B shall be entitled to dissolve the Contract unilaterally if the examination confirms the nonconformity of the main structure to the standard. Clause 19 When exercising the right of unilateral dissolution of the Contract, Party B shall notify Party A of it in writing. Party A shall refund in full the purchase price of the House paid by Party B (including the interest computed at the saving interest rate for the corresponding period announced by the People's Bank of China) to Party B within 30 days after receipt of the written notice. Furthermore, Party A shall assume the liability for violation of the Contract and pay to Party B a compensation equal to 3% of the total purchase price of the House. The payment for compensation shall be made together with the refund of the purchase price of the House. The paid purchase price of the House mentioned in this Clause and other Clauses of the Contract shall include the purchase price of the House paid directly by Party B and by way of loans. Clause 20 If either party dissolves the Contract unilaterally according to the provisions of the Contract, and if the other party had paid the penalty as stipulated before the unilateral dissolution of the Contract, then the sum paid for the penalty shall be deducted from the compensation specified in the Contract. Clause 21 If one of the parties objects to the unilateral dissolution of the Contract by the other party, it shall request an organization for settlement of dispute selected according to Clause SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com 33 of the Contract to confirm the legal validity of the unilateral dissolution of the Contract within 3 days after receipt of the written notice of the other party. Clause 22 In the period of guaranteed maintenance service, if the House delivered by Party A is found with other quality problems, Party B shall have the right to claim against Party A a compensation equal to 50% of the restoration costs in addition to the free restoration made by Party A. The parties agree that if any dispute over other quality problems of the House arises, a qualified organization specialized in the assessment of quality of construction projects in Shanghai shall be appointed to make an examination of it. The written assessment conclusion of the said organization shall be taken as the basis for the settlement of the dispute. Clause 23 Party A shall be responsible for the repairs of the House starting from the date of delivery. The scope and length of the guaranteed maintenance service have been specified in Appendix 5 on the basis of the ((Regulations for the Quality Management of Construction Projects)) promulgated by the State Council and the ((Procedures for the Transfer of Real Estates in Shanghai)) issued by the Shanghai Municipal Government. Clause 24 Party A has selected and engaged Shanghai Zhongqi Real Estate Management Co., Ltd. for the initial management of the House and has entered into the ((Service Contract for the Initial Management of the Real Estates)) with it (See Appendix 5). Because the House is planned for the purpose of business office, Party A and Party B have signed the <> (See Appendix 5). Clause 25 The House purchased by Party B is inseparable from the use right of the land the House occupies correspondingly. The rights, obligations and responsibilities stipulated in the <> concluded between Party A and Shanghai Jing'an District Administration for Land shall be shifted to Party B from the date of transfer of the property right of the House. Clause 26 Party B may legitimately transfer or mortgage the rights and interests of the House (option of the House) it enjoys under the Contract. Party A shall assist Party B when Party B exercises the said rights according to law. Clause 27 Any documents, replies and correspondences given by one party to the other shall be in written form and sent by registered mail or by person directly to the address of the other party stated in the Contract or to the address changed by the other party according to the method described in this Clause. If it is sent by registered post, the 7th day after posting (by evidence of postmark) shall be deemed the date of receipt by the other party. If the mail is sent directly by person, it shall be regarded that the mail has been received at the time when the recipient signed the receipt. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Clause 28 Party A and Party B shall respectively bear taxes and expenses incurred in the course of transaction of the House according to relevant rules. Clause 29 All the Appendices, supplementary Clauses and Agreements of the Contract form an integral part of it. The supplementary Clauses and Agreements shall prevail in case of any divergences between these supplements and clauses of the Contract. Matters unmentioned in the Contract or matters requiring modification in the implementation of the Contract shall be stipulated through agreement on modification. Clause 30 On signing the Contract, both Party A and Party B have a clear knowledge and understanding of their respective rights and obligations and are willing to perform them strictly as agreed hereunder. If one of the parties breaks the Contract, the other party shall have the right to claim for damages according to the Contract. Clause 31 The Contract shall come into effect on the date of signing/on the date of notarization by _______________________ Notary Office. It is agreed that Party A shall be responsible for the performance of procedures for registration of the Contract with the real estate registration authorities within 30 days starting from the effective date of the Contract. If the responsible party fails to carry out the registration of the Contract within the above time limit, it shall compensate any losses suffered by the other party as a result of its default. Clause 32 After registration, if the Contract is terminated through consultations, the two parties shall go to Shanghai Municipal Real Estate Registration Institution to go through formalities for canceling the registration of the Contract by evidence of written documents related to the termination within 30 days starting from the date of termination. If Party A or Party B terminates the Contract unilaterally according to the terms of the Contract, then Party A or Party B shall perform formalities for canceling registration of the Contract with Shanghai Municipal Real Estate Registration Institution by evidence of the service of written notice on the unilateral termination of the Contract. Clause 33 Any dispute between the parties arising from the execution of the Contract shall be settled through consultation. If consultation reaches no settlement of it, the second method set below shall be chosen for settlement: 1. Apply to _______________Arbitration Commission for settlement; 2. File a suit at a people's court according to law. Clause 34 The Contract is drawn up in quintuplicate, each being equally authentic: one for each party, one for ____________, ____________, ____________ each. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 1 METHOD AND TIME FOR PAYMENT Party B has chosen the first method for payment as follows: I PAYMENT BY INSTALLMENTS: 1. Party B shall pay to Party A the purchase price of the House in full according to the time set below: (1) Pay 60% of the purchase price of the House with an amount of RMB1,434,736 before Nov. 10, 2004; (2) Pay 30% of the purchase price of the House with an amount of 700,000 before Dec. 20, 2004; (3) Pay 10% of the purchase price of the House with an amount Of RMB230,000 before March 31, 2005. 2. If Party B fails to make the payment on schedule, Party A may correspondingly postpone the delivery of the House land bear no liability for delay until Party B pays off the total purchase price of the House and possible penalty for default. II PAYMENT BY MORTGAGE LOAN 1. Party B shall pay to Party A the purchase price of the House in the following modes: (1) Pay 50% of the total purchase price of the House with an amount of RMB _______________ within _______ days after conclusion of the Contract; (2) Pay 50% of the total purchase price of the House with an amount of RMB ________________ in the mode of mortgage loan within _____ days after conclusion of the Contract. (3) If the bank does not grant the loan as scheduled in above sub-clause (2) not due to Party A's reasons, or the loan applied by Party B or granted by the SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com bank is insufficient, Party B shall pay to Party A the purchase price of the House in the first mode described above. Otherwise, it shall be deemed late payment and Party B shall shoulder the liability for default as stipulated in Clause 5 of the Contract; (4) In the event that Party B fails to make the payment in good time, Party A may correspondingly postpone the delivery of the House until the total purchase price of the House and the possibility penalty are paid off. 2. Party B shall perform the procedures for mortgage specified below: (1) Party B shall have carefully read the instructions provided by the bank with respect to the conditions required for the loan applicant and have sufficiently known all the evidential documents to be furnished for the application of mortgage loan; (2) Party B shall supply Party A with all evidential documents (Party A will pass them on to the loan bank) needed for the mortgage loan and go to the bank to go through the formalities for the loan within 7 days after signing the Contract. Otherwise Party B shall pay to Party A 5% of the total purchase price of the House as a penalty. If Party B fails to fulfill the said formalities hereunder or pay off the purchase price of the House in other mode, Party A shall have the right to cancel the Contract in addition to receiving the aforesaid 5% penalty. 3. The obligations of Party A as a guarantor for the mortgage loan of Party B: (1) Both parties have agreed that the guaranty period of Party A as a guarantor for the security of Party B's mortgage loan shall be ended on the day when the <> under Party B's name (the "minor real estate title certificate") and ((Certificate for Other Real Estate Rights)) of Party B are received. If the said period does not coincide with the guaranty period written in the mortgage loan contract, Party B agrees and approves the alteration of the said period made by Party A and the loan bank for the sake of coincidence of the two periods. (2) After satisfaction of the conditions for delivery of the House, if the retardation of Party B in the performance of procedures for taking over the House or for the minor real estate title certificate leads to the extension of the guaranty period of Party A, and if Party B refuses to go through the formalities for the minor real estate title certificate after two times of written reminders sent to Party B by Party A, Party A shall have the right to unilaterally cancel the Contract in addition to the collection of a penalty of 5% of the total purchase price of the House. Party B shall shoulder all the losses resulted therefrom. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com (3) In the guaranty period of Party A for security (i) If Party B breaks the mortgage loan contract inked with the bank or does not pay off the expenses incurred to Party A as a guarantor before delivery of the House, Party A shall be entitled to put off the delivery and bear no liability for delay of delivery of the House until Party B pays off the sums and the interest that shall be paid to the loan bank and Party A. (ii) If the bank calls in all the loans to Party B in advance due to Party B's violation of contract, Party B shall pay all the purchase price fo the House (including all the expenses paid to the bank by Party A on behalf of Party B) to Party A within 10 days after the withdrawal of the loans by the bank. Otherwise Party A shall have the right to unilaterally dissolve the Contract. In such a case, Party B shall pay to Party A 5% of the total purchase price of the House as a penalty in addition to all the expenses paid to the bank by Party A on behalf of Party B. (4) In addition to the money (including penalties) paid by Party A as a guarantor on behalf of Party B, Party B shall pay to Party A the interest of the said money calculated at a lending rate for the corresponding period from the date of payment made by Party A up to the date when Party B actual pays it off. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 2 THE ARCHITECTURAL DESIGN AND PLAN VIEW OF THE HOUSE - -------------------------------------------------------------------------------- ----------------------------------------------------------------- PICTURE ----------------------------------------------------------------- SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 3 STRUCTURE AND STANDARDS FOR FIXTURES AND FURNISHING Structure: frame shear walls External wall: aluminum plate and glass certain walls Entrance hall: Flooring paved with marble stone, walls decorated with stone and metal network Passageway: Carpeted flooring, back-coated glass and fireproof wall surfaces Elevator: Five group-control original Mitsubishi passenger elevators and a fire elevator (used as well as a freight elevator) made by a Sino-Mitsubishi joint venture Central air conditioning: The main engine of the heat pump used is of the American Dunhanbush Brand; air-conditioning processors, fan coils and fresh air processors used are manufactured by Shinkho Air-conditioning Co., Ltd., a Shanghai-Singapore Joint venture. Office unit: - Coated with "Shenniuli" high-grade paint; - Equipped with "Phillip" grid lamps; - "Armstrong" mineral wool suspended ceiling; - "Qisheng" electric sockets; - Carpeting. Intelligent system: - Data Communication system accessed through China Telecom wideband; - The wires and cables used are of US AVAYA brand; - Honiwell brand products are used for the automatic system of equipment and facilities of the Building; - Fire alarm system uses UK TREND brand products; - TV monitoring system made by US PELCO company (matched with Japanese National video camera); - Japanese JVC background sound system/emergency broadcast system; - Induced card read and car parking lot management system; - Communications: data information point SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 4 INFORMATION RELATED TO THE HOUSE (PROPERTY RIGHT, MORTGAGE AND LEASEHOLD RELATIONSHIPS)
------------------------------------------------------------------------------------------------------------- House & Land Condition --------------- -------------------- -------------- --------------------- ----------------- ----------------- 30/2Qiu in 16#Jie From Sept. 28, 2002 Fang Jiang'ansi Term of usage to Sept. 27, 2052 Lot No. Neighbour, Jing'an Purpose approved Business office District --------------- -------------------- -------------- --------------------- ----------------- ----------------- Total area 3,657.0m2 Common area 3,657.0m2 Source of use Transfer right --------------- -------------------- -------------- --------------------- ----------------- ----------------- ------------------------------------------------------------------------------------------------------------- Information on Property Rights -------------------------- ---------------------------- -------------------- -------------------------------- Shanghai Zhongjing Real Property right Owner Estate Development Co., document or J2003009962 Ltd., certificate No. -------------------------- ---------------------------- -------------------- -------------------------------- Joint owners and Joint ownership status -------------------------- ---------------------------------------------------------------------------------- Location of the House Located on the Lot lying in 1703 Beijing Road (W) -------------------------- ---------------------------- ------------------------- --------------------------- Date of acceptance Dec. 23, 2003 Date of approval Dec. 28, 2003 -------------------------- ---------------------------- ------------------------- --------------------------- Remarks Transfer of the land initial registration -------------------------- ---------------------------------------------------------------------------------- Printed: 2004-11-06 11:18:58
SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 5 ((SERVICE CONTRACT FOR THE INITIAL MANAGEMENT OF THE REAL ESTATE)), ((PLEDGE ON THE USE OF THE HOUSE)) OR ((LETTER OF UNDERTAKING)) - -------------------------------------------------------------------------------- Letter of Undertaking I/we/the Company is/are the buyer(s) of the unit(s) of the "Jing'an Zhonghua Building". In order to safeguard the rights and interests of the owners of the units and promote the management of the Building, I/we/the Company agree(s) and state(s) as follows: 1. I/we/the Company have/has carefully read the ((Service Contract for the Initial Management of the Real Estate)) and ((Pledge of the Owners of the Units of Jing'an Zhonghua Building)) (hereinafter referred to as "Owners' Pledge". Its scope encompasses documents and clauses related to alteration, addition, substitution, and supplementary agreement to be made at any future time) placed in the Sales Site before signing the Contract. 2. I/we/the Company fully understand(s) and agree(s) to execute and adhere to and cause(s) other concerned parties to execute and adhere to the "Owners' Pledge" and all the obligations and responsibilities of the owners of the units set forth in the "Owners' Pledge". 3. I/we/the Company agree(s) that the House can be transferred to a third party or a third party is allowed to use the House only at the prerequisite that the third party signs this Letter of Understanding. This Letter of Understanding remains effective until Party A or the real estate management company receives the Letter of Understanding signed by the third party. 4. I/we/the Company agree(s) that essential legal documents must be signed with the real estate management company, including ((Management Pledge)) of the Building and (Users' Manual) when performing formal procedure for occupation. 5. ((This Letter of Understanding)) comes into effect on the signing date of the Contract. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com APPENDIX 6 ADJACENT RELATIONS AND THE PLOT PLANNING ----------------------------------------------------- PICTURE ----------------------------------------------------- SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com SUPPLEMENTARY CLAUSES 1. The total purchase price of the House stipulated in the Contract excludes the account opening fees and service charges of public utilities and facilities of the House (including but not limited to water, electricity, telephone and wideband network, etc.) and expenses arising from Party B's acceptance of a third party service or extra service provided by Party A. Party B shall bear the aforesaid expenses, if any. 2. "The architectural design of the House" mentioned in Clause 8 of the Contract shall mean the architectural design in the Flat of the House shown in the "Architectural Design and Plan View of the House" (See Appendix 2), excluding any alteration resulting from FORCE MAJEURE or any other events beyond the control of Party A. In the event that the architectural design of the House or the Plot Planning is changed by reasons of the government and the change is sanctioned by the Planning Management Department of the government, Party A does not need to notify Party B of the change and Party B may not raise any objections or claims. 3. Any quality problems (excepting the non-conformity of the main structure) found in the course of handing over the House, or any failure of fixtures and furnishings in reaching the standards stipulated in Appendix 3 shall not affect the performance of the procedure for handing over the House. Party B may not put off or refuse to go through the said procedure on these grounds. However, Party A shall assume responsibilities for restoration and compensation to Party B according to relevant provisions of the Contract after handing over the House. 4. The length of guaranteed maintenance service of the House given by Party A shall last two years, starting from the date of delivery of the House. If Party B does not perform the procedure for handing over the House according to Clause 13 of the Contract, the guaranteed maintenance service period given by Party A shall start from the date of delivery and acceptance designated in the written reminder mentioned in Clause 15 of the Contract. The following events are not included in the scope of guaranteed maintenance service: (1) Any loss or damage resulting from FORCE MAJEURE; (2) Any loss or damage caused by Party B's decoration or modification work, improper use or other reasons that have nothing to do with Party A. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com 5. If Party B does not implement the procedure for acceptance and handing-over at the time designated in the written reminder mention in Claude 15 of the Contract, it shall be regarded that the House has been handed over to Party B on the second day of the date designated in the said written reminder. Party B shall take the risk responsibility of the House shifted to it on the second ay of the date designated in the aforesaid written reminder and meantime pay to Party A a penalty of 0.02% of the total purchase price of the House per day. Furthermore, Party B shall shoulder the real estate management fees and other costs for the use of equipment and facilities from the second day of the date designated in the written reminder. 6. On the delivery of the House, Party B shall pay in full the purchase price of the House and pay the maintenance fund and real estate management fee to the real estate management company. Otherwise Party A shall be entitled to postpone the delivery of the House without any liability for breach of contract and meanwhile to deal with the matter according to Caluse 5 of this Supplement if conditions exists. 7. Both parties confirm that the aggregate amount of compensation specified in Clause 19 of the Contract is determined by them in compliance with the extent of the foreseeable loss and either party shall assume no liability for compensating the loss exceeding the aggregate amount determined. 8. If Party B has carried out formalities for the mortgage loan, it shall have no claim on Party A for returning the House until it has discharged the mortgage against the House from the bank by itself. 9. In the Contract, at the prerequisite of faultlessness of Party A, FORCE MAEJURE shall mean war, terrorist activities, natural disaster, extraordinary difficulties or crucial technological problems met with in construction that are hard to be immediately solved, and human factors unavoidable or irresistible by Party A, including shut down of the construction work thanks to the governmental important activities in the construction period, or changes in municipal planning, infrastructures or supporting measure. In the above circumstances, Party A shall have the right to appropriately postpone the delivery of the House pursuant to the actual situation and bear no liability for late delivery of the House. 10. If dispute over the quality of the House arises, the parties shall jointly appoint an authoritative appraisal organization for determination, and the conclusions of SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com expert evaluations shall be taken as criteria for settlement of the dispute. Conclusions made by any organization appointed by one party cannot be used as the basis for tackling the dispute. 11. Party B has known the present state of the Building wherein the House locates, its surroundings, ventilation, nature lighting, roads, traffic, public utilities and facilities, etc. and has no objection to them. 12. Party B does not object to the right of Party A to use the external walls and roofing of the Building and the ownership of Party A over the rights and interests of the advertisements projected or stretched therefrom. Nevertheless, the advertisement plans shall be subject to the sanction of the competent advertisement release and management authorities such as administrations for industry and commerce, or for city planning and city appearance. Besides, any advertisement shall not affect the ventilation, natural lighting and line of vision of the adjacent owners, shall avoid generation of optical pollution and noise and shall be in harmony with the style of the entire Building. Party A owns the property right of the underground parking space and Party B shall buy or rent separately the parking space from Party A if needed. 13. In the light of the governmental requirements for the Building in regard to national security, Party B shall observe the following stipulations in the use of the House: A. Party B must not lease or sell the House to any foreign consulate or news organs stationed in Shanghai to be used as official residence or office. B. Rooms 03-06 above the 10th Floor facing northeast and due north and Rooms 01 and 05 on the 17th Floor must not be leased or sold to foreigners for office or residence. C. If Party B leases or sells the House to others, it shall write the said stipulations down to the contract and request the lessee or the transferee to stick to these stipulations when subletting or selling the House to a third party. SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com Party A: Shanghai Zhongjing Real Party B: ACETO Estate Development Co., Ltd. (HONG KONG) LIMITED Legal representative:___________________ _________________________________ (signature) (signature) Entrusted agent of the legal Entrusted agent of _____________/ representative:________________________ legal agent:_____________________ (signature) (signature) Official seal of Party A: Official seal of Party B: (official seal) (official seal) Date of signing:_______________________ Date of signing:_________________ Place of signing:______________________ Place of signing:________________ Party A's Person to sign the Contract: Chen Jianfend ID No.: 310225801118223 Person confirmed by Party A: Zhou Xu ID No.: 310107680129041 SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com NOTRIAL CERTIFICATE SHANGHAI JING'AN DISTRICT NOTARY OFFICE SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com NOTRIAL CERTIFICATE (2004) HJZJ-12001 The Seller (Party A): Shanghai Zhongjing Real Estate Development Co., Ltd. Legal representative: Teng Guowei The Buyer (Party B): ACETO (HONG KONG) LIMITED Deputy: GARY J. MO Matters notarized: "Contract for Presale of Commodity House in Shanghai" (hereinafter referred to as the Contract) Both the Seller and the Buyer applied to this office for the notarization of the Contract a few days ago. Investigation has proved that the two parties signed the Contract on the basis of unanimity achieved through consultations. Both Party A and Party B have the capacity for civil rights as well as the capacity for civil conduct at the time of concluding the Contract. The house sold in advance by Party A is Room 901 on the 9th Floor, 1701 Beijing Road (W) with a tentatively measured floor space of 126.60m2. Party A holds a "Permit for the Presale of Commodity Housing in Shanghai" numbered JF (2004) Y009. The investigation found no such records as mortgage, seizure and other restrictions on the rights related to the House up to November 15, 2004 at Shanghai Jing'an District Real Estate Registration Office. This house may be sold in advance according to the stipulations of the ((Law of the People's Republic of China on the Management of Urban Real Estates)). The intention expressed in the Contract is genuine. It is agreed in the Contract that Party A transfers the House to Party B at a price of RMB2,364,736 (say: RMB two million three hundred sixty-four thousand and seven hundred thirty-six only). The method for payment, the date of delivery of the House and liability for breach of contract are all concretely and explicitly defined in the terms of the Contract. In view of the above facts, it is hereby certified that Teng Guowei, the legal representative e of the Seller Shanghai Zhongjing Real Estate Development Co., Ltd. and GARY J. MO, the deputy of the Buyer ACETO (HONG KONG) LIMITED SHANGHAI INTERPRETERS' ASSOCIATION (T): 63233608 (F): 63233988 63239181 Room 702-4, 66 Nanjing Rd.(E) Shanghai 200002 E-mail: fanyixiehui@vip.citiz.net http://www.shwsfy.com signed the Contract on November 10, 2004. The act of signing the Contract of the two parties conforms to Clause 55 of the <>; the contents of the Contract conform to the stipulations of the ((Law of the People's Republic of China on Contracts)). The signs and seals of the two parties put and affixed on the Contract are entitled to full faith and credit. The Contract came into effect on the date of signing by both parties. Shanghai Jing'an District Notary Office (Official seal) Notary public: Lin Ling (signing) Date: November 16, 2004 EX-15.1 3 tex15_1-4864.txt EX-15.1 Exhibit 15.1 February 8, 2005 Aceto Corporation Lake Success, New York RE: Registration Statements (No. 33-38679, No. 333-90929 and No. 333-110653) on Form S-8 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated February 8, 2005 related to our review of interim financial information for the three-month and six-month periods ended December 31, 2004. Pursuant to Rule 436 under the Securities Act of 1933 (the "Act"), such report is not considered part of a registration statement prepared or certified by an accountant, or report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. Melville, New York /s/ KPMG LLP EX-31.1 4 tex31_1-4864.txt EX-31.1 Exhibit 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Leonard S. Schwartz, Chairman, President and Chief Executive Officer of Aceto Corporation, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Aceto Corporation (the "Registrant"); 2. Based on my knowledge, this Quarterly 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 Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly 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 Quarterly 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)) 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 Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Quarterly 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 c) disclosed in this Quarterly Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's first fiscal quarter 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: February 9, 2005 /s/ Leonard S. Schwartz Chairman, President and Chief Executive Officer (Principal Executive Officer) - -------------------------------------------------------------------------------- EX-31.2 5 tex31_2-4864.txt EX-31.2 Exhibit 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION I, Douglas Roth, Chief Financial Officer of Aceto Corporation, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Aceto Corporation (the "Registrant"); 2. Based on my knowledge, this Quarterly 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 Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly 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 Quarterly 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)) 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 Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Quarterly 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 c) disclosed in this Quarterly Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's first fiscal quarter 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: February 9, 2005 /s/ Douglas Roth - --------------------------------- Chief Financial Officer (Principal Financial Officer) - -------------------------------------------------------------------------------- EX-32.1 6 tex32_1-4864.txt EX-32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Aceto Corporation, a New York corporation (the "Company"), on Form 10-Q for the period ended December 31, 2004 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) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) 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 - -------------------------- Leonard S. Schwartz Chairman, President and Chief Executive Officer February 9, 2005 EX-32.2 7 tex32_2-4864.txt EX-32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Aceto Corporation, a New York corporation (the "Company"), on Form 10-Q for the period ended December 31, 2004 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) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) 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 - ------------------------ Douglas Roth Chief Financial Officer February 9, 2005 -----END PRIVACY-ENHANCED MESSAGE-----