UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 1997 Commission File Number 000-28876
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
Delaware 13-3035216
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Route 22
Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 926-0816
------------------------
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 and 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding Shares as of May 2, 1997
- ---------------------------------- ------------------------------------
Common Stock, Par Value $.002 4,335,000
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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INDEX
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Part I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheet as of March 31, 1997 [Unaudited] 1.....2
Consolidated Statements of Operations for the three and nine months
ended March 31, 1997 and 1996 [Unaudited]................... 3.....
Consolidated Statement of Stockholders' Equity for the nine months
ended March 31, 1997 [Unaudited]............................ 4.....
Consolidated Statements of Cash Flows for nine months ended
March 31, 1997 and 1996 [Unaudited]......................... 5.....6
Notes to Consolidated Financial Statements [Unaudited]...... 7.....9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................10.....12
Part II:Other Information...........................................13
Signature...........................................................14
. . . . . . . .
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Part I: Financial Information
Item 1: Financial Statements
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,278,285
Accounts Receivable - Net 2,039,246
Note Receivable 250,000
Inventories 2,766,286
Deferred Income Taxes 44,000
Prepaid Expenses and Other Current Assets 416,163
-----------
Total Current Assets 6,793,980
Property, Plant and Equipment - Net 1,071,485
-----------
Other Assets:
Goodwill 296,869
Prepaid Pension Costs 294,334
Security Deposits and Other Assets 107,690
-----------
Total Other Assets 698,893
Total Assets $ 8,564,358
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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1
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable - Bank $ 37,926
Accounts Payable 2,081,107
Federal and State Income Taxes Payable 58,656
Accrued Expenses and Other Current Liabilities 373,177
-----------
Total Current Liabilities 2,550,866
Non-Current Liabilities:
Note Payable - Bank 179,407
Notes Payable - Related Party 276,444
Deferred Income Taxes 8,000
-----------
Total Non-Current Liabilities 463,851
Commitments and Contingencies [6] --
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued --
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 4,335,000 Shares Issued and Outstanding 8,670
Additional Paid-in Capital 4,048,946
Retained Earnings 1,492,025
Total Stockholders' Equity 5,549,641
Total Liabilities and Stockholders' Equity $ 8,564,358
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
2
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 3,123,960 $2,577,650 $7,061,875 $ 7,669,856
Cost of Sales 2,447,173 2,066,005 5,755,432 6,088,840
----------- ---------- ---------- -----------
Gross Profit 676,787 511,645 1,306,443 1,581,016
Selling and Administrative
Expenses 644,629 447,333 1,750,568 1,545,188
----------- ---------- ---------- -----------
Operating Income [Loss] 32,158 64,312 (444,125) 35,828
----------- ---------- ---------- -----------
Other Income [Expense]:
Gain on Sale of Fixed Assets -- 62,431 -- 62,431
Interest Expense (9,683) (21,025) (63,943) (72,688)
Interest and Investment Income 25,238 2,979 36,676 26,546
Income [Loss] on Investment in
Partnership 1,780 -- 1,780 (36,998)
Commission Income -- -- -- 15,804
----------- ---------- ---------- -----------
Other Income [Expense] - Net 17,335 44,385 (25,487) (4,905)
----------- ---------- ---------- -----------
Income [Loss] Before Income
Taxes 49,493 108,697 (469,612) 30,923
Federal and State Income
Tax Expense [Benefit] 19,817 60,148 (180,732) 42,122
----------- ---------- ---------- -----------
Net Income [Loss] $ 69,310 $ 48,549 $ (288,880) $ (11,199)
=========== ========== ========== ===========
Net Income [Loss] Per Share $ .02 $ .02 $ (.08) $ (.01)
=========== ========== ========== ===========
Average Common Shares
Outstanding 4,286,000 3,021,000 3,727,369 3,021,000
=========== ========== ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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3
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
MARCH 31, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in RetainedStockholders'
Shares Par Value Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance - July 1, 1996 3,370,000 $ 6,740 $1,883,132 $1,700,905 $3,590,777
Reversal of Issuance of
Bridge Units (300,000) (600)(1,199,400) 80,000 (1,120,000)
Imputed Interest on Note
Payable - Related Party -- -- 10,574 -- 10,574
Net Proceeds from Initial Public
Offering 1,265,000 2,530 3,354,640 -- 3,357,170
Net [Loss] -- -- -- (288,880) (288,880)
-------- -------- --------- -------- --------
Balance - March 31, 1997 4,335,000 $ 8,670 $4,048,946$1,492,025 $5,549,641
========= ======== ==================== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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4
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Nine months ended
March 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net [Loss] $ (288,880) $ (11,199)
---------- -----------
Adjustments to Reconcile Net Income to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 228,398 176,170
Lease Termination Items (108,753) 31,146
Deferred Income Taxes 8,000 (41,955)
Imputed Interest on Note Payable - Related Party 10,574 10,574
[Gain] Loss on Investment in Partnership (1,780) 36,998
Interest Income on Note Receivable (5,150) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 157,254 (568,695)
Inventories (1,333,054) (349,292)
Prepaid Expenses and Other Current Assets (143,106) (129,716)
Security Deposits and Other Assets (23,410) --
Increase [Decrease] in:
Accounts Payable 203,917 206,354
Federal and State Income Taxes Payable (110,309) (57,538)
Accrued Expenses and Other Liabilities (97,546) 46,976
---------- -----------
Total Adjustments (1,214,965) (638,978)
---------- -----------
Net Cash - Operating Activities - Forward (1,503,845) (650,177)
---------- -----------
Investing Activities:
Issuance of Note Receivable (223,750) --
Repayment of Loan to Related Company 16,849 --
Repayment of Note Payable - Stock Retirement (156,473) --
Purchase of Property and Equipment (236,935) (256,765)
Loans to Stockholders' (1,519) (16,487)
Repayment of Note Receivable 3,183 --
Repayment of Loan Receivable -- (100,000)
Loan to Related Company (722) --
---------- -----------
Net Cash - Investing Activities - Forward (599,367) (373,252)
---------- -----------
Financing Activities:
Contribution to Paid-in Capital -- 2,977
Net Proceeds from Initial Public Offering 3,426,344 --
Proceeds from Notes Payable 332,844 294,156
Repayment of Notes Payable (1,142,756) (895,344)
---------- -----------
Net Cash - Financing Activities - Forward $2,616,432 $ (598,211)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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5
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Nine months ended
March 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,503,845) $ (650,177)
Net Cash - Investing Activities - Forwarded (599,367) (373,252)
Net Cash - Financing Activities - Forwarded 2,616,432 (598,211)
---------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents 513,220 (1,621,640)
Cash and Cash Equivalents - Beginning of Periods 765,065 1,870,747
---------- -----------
Cash and Cash Equivalents - End of Periods $1,278,285 $ 249,107
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 54,198 $ 58,942
Income Taxes $ 80,688 $ 141,589
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
The Company incurred offering costs of $69,174 as of June 30, 1996. These
costs were offset against the net proceeds of the initial public offering as
reflected in the stockholders' equity for the nine months ended March 31, 1997.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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6
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Business
Chem International, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products. Its customers are located primarily throughout
the United States.
[2] Summary of Significant Accounting Policies
[A] Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries all of which
are wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.
[B] Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b)of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes for the year ended June 30, 1996 included in the Chem International, Inc.
Form SB-2 which was declared effective October 29, 1996.
[C] Earnings Per Share - Earnings per common share are computed based upon the
weighted average number of common and "common share equivalent" shares
outstanding during the periods presented after giving retroactive effect to the
1-for-4 reverse stock split in July 1996. Common stock equivalents are included
when dilutive.
[3] Investment in and Advances to Partnership
The Company was a 50% general partner in Swedish Herbal Institute - Chem
Associates [the "Partnership"]. In addition to its $1,000 capital investment,
the Company had advanced approximately $70,000 in exchange for a series of
promissory notes. As of June 30, 1996, the Partnership is insolvent and the
Company has recorded a loss on its investment and a charge for approximately 50%
of its note receivable for the year then ended. At March 31, 1997, the balance
of this note is $32,317.
[4] Inventories
Inventories consist of the following at March 31, 1997:
Raw Materials $ 1,545,474
Work-in-Process 407,277
Finished Goods 813,535
-----------
Total $ 2,766,286
----- ===========
[5] Note Receivable
On February 3, 1997, the Company received a secured promissory note in the
amount of $250,000 with interest at 14% per annum. The note is due and payable
on November 3, 1997. Advance interest of $26,250 was payable out of the proceeds
of the loan and is taken into income over the period of the loan.
7
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[6] Commitments and Contingencies
[A] Related Party Leases - Certain manufacturing and office facilities are
leased from Gerob Realty Partnership whose partners are stockholders of the
Company. The lease, which expires on December 31, 1997, provides for a minimum
annual rental of $60,000 plus payment of all real estate taxes. Rent and real
estate tax expense for the nine months ended March 31, 1997 and 1996 on this
lease was approximately $115,000 and $129,000, respectively.
The Company's original lease agreement for other warehouse and office facilities
was terminated on January 10, 1997 when the landlord sold the premises. At the
time of sale the rentals under the lease were recorded for financial accounting
purposes on a straight-line basis. At December 31, 1996, accrued future rentals
of $105,613, which give effect to both future scheduled increases and certain
concessions at the lease inception had been recorded as a non-current liability.
Because of the termination of the lease the balance of accrued future rentals of
$105,613 has been allocated to rent expense in the three month period ended
March 31, 1997. The Company subleased a portion of its premises on a
month-to-month basis through January 10, 1997 for approximately $25,000 a month.
Other warehouse and office facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company, which is 90% owned by the Company's
president and principal stockholder and certain family members and 10% owned by
the Company's Chief Financial Officer. The lease was effective on January 10,
1997 and provides for minimum annual rental of $346,000 through January 10, 2002
plus increases in real estate taxes and building operating expenses. At its
option, the Company has the right to renew the lease for an additional five year
period.
The Company leases warehouse equipment for a five year period providing for an
annual rental of $15,847.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Year Ending
June 30,
1997 $ 269,603
1998 391,847
1999 361,847
2000 361,847
2001 361,847
Thereafter 182,244
-----------
Total $ 1,929,235
----- ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $147,000 and $108,000 for the nine months ended March 31, 1997 and
1996, respectively. Rent expense is stated net of sublease income of
approximately $166,000 and $131,000 for the nine months ended March 31, 1997 and
1996, respectively.
[B] Employment Agreements - Effective July 1, 1996, the Company entered into
three year employment agreements with its president and four other officers
which provide for aggregate annual salaries of $580,000 for the year ending June
30, 1997 and $680,000 for the year ending June 30, 1998. These agreements are
subject to annual increases equal to at least the increase in the consumer price
index for the Northeastern area. An agreement with one of the officers also
provides for a $100,000 signing bonus which is refundable on a pro rata basis
during the period from July 1, 1996 to June 30, 1997, if the executive
voluntarily terminates his employment. The amount is included in prepaid
expenses and is amortized over the period July 1, 1996 to June 30, 1997.
8
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- ------------------------------------------------------------------------------
[6] Commitments and Contingencies [Continued]
[C] Litigation - The Company is unable to predict its ultimate financial
exposure with respect to its prior sale of certain products which may have
contained allegedly contaminated Tryptophan which is the subject of numerous
lawsuits against unrelated manufacturers, distributors, suppliers, importers and
retailers of that product. However, management does not presently believe the
outcome of these actions will have a material adverse effect on the Company.
[7] New Authoritative Pronouncements
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.
The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. SFAS No. 128 simplifies the earnings per share
["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No.
15, and related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to the fully diluted EPS of APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, SFAS No. 128 will require
restatement of all prior-period EPS data presented; however, the Company has not
sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will
have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[8] Equity Transactions
[A] Stock Option Plan - The Company has adopted a stock option plan for the
granting of options to employees, officers, directors and consultants of the
Company to purchase up to 1,000,000 shares of common stock, at the discretion of
the Board of Directors. Stock options grants are limited to a total of 500,000
shares for "incentive stock options" and 500,000 shares for "non-statutory
options" and, may not be priced less than the fair market value of the Company's
common stock at the date of grant. Options granted are generally for ten year
periods, except that options granted to a 10% stockholder [as defined] are
limited to five year terms. On October 16, 1996, options to purchase 573,597
shares at the offering price [$3.50] and 25,974 shares at 110% of the offering
price were granted. Such options become exercisable on October 16, 1997.
[B] Bridge Units - On October 16, 1996, the bridge lenders waived their rights
to the bridge units and agreed to the cancellation of the underlying securities.
Accordingly, the Company has eliminated the amount previously recorded for the
bridge units and the related bridge loan finance costs.
[C] Initial Public Offering - On October 29, 1996, the Company received net
proceeds of approximately $3,400,000 from the sale of 625,000 units at $7.00 per
unit. Each unit consisted of two shares of Common Stock and two Class A
Redeemable Common Stock Purchase Warrants.
. . . . . . . . . . . . . . . .
9
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Item 2.
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto.
Nine months ended March 31, 1997 Compared to the Nine months ended March 31,
1996
Results of Operations
The Company's net losses for the nine months ended March 31, 1997 and 1996 were
$(288,880) and $(11,199), respectively.
Sales for the nine months ended March 31, 1997 and 1996 were $7,061,875 and
$7,669,856, respectively, a decrease of approximately $600,000 or 8%. Retail and
mail order sales for the nine months ended March 31, 1997 totaled $682,109 as
compared to $529,205 for the nine months ended March 31, 1996, an increase of
$152,904 or 29%.
On February 20, 1997, the Company signed a distribution agreement with Roche
Vitamins, Inc. to service and supply Roche products to a select segment of
Roche's food, nutrition and cosmetic accounts. Sales for the period from
February 20, 1997 through March 31, 1997 under the agreement totaled $68,816.
For the nine months ended March 31, 1997, the Company had sales to one customer,
who accounted for 45% of net sales in 1997 and 33% of net sales in 1996.
On January 23, 1997, the Company signed an exclusive agreement with
International Nutrition Research Center, Inc. ["INRC"] to market and distribute
the Master Amino Acid Pattern ["MAP"]. MAP is recommended for athletes who need
to maximize protein synthesis.
Cost of sales decreased to $5,755,432 in 1997 as compared to $6,088,840 for
1996. Cost of sales increased as a percentage of sales to 82% as compared to 79%
for 1996. The increase in cost of sales is due to an increase in manufacturing
expenses.
Selling and administrative expenses for the nine months ended March 31, 1997
were $1,750,568 versus $1,545,188 for the same period a year ago. The increase
of $205,380 was primarily attributable to an increase in officers' compensation
of approximately $137,000, an increase in office salaries of approximately
$9,000, an increase in depreciation expense of approximately $22,000, a decrease
in travel and entertainment of approximately $39,000, an increase in consulting
fees of approximately $42,000, a decrease in freight out of approximately
$53,000, an increase in office rent of approximately $22,000 and an increase in
advertising and catalog costs of approximately $53,000.
Other income [expense] was $(25,487) for the nine months ended March 31, 1997 as
compared to $(4,905) for the same period a year ago. This increase of $20,582 is
attributable to a decrease in sales of fixed assets of $62,431, a decrease in
commission income of $15,804, an increase of $38,778 from a 50% owned
partnership, a decrease in interest expense of $8,745 and an increase in
interest and investment income of $10,130.
10
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Results of Operations [Continued]
Three months ended March 31, 1997 Compared to the Three months ended March 31,
1996
The Company's net income for the three months ended March 31, 1997 and 1996 were
$69,310 and $48,549, respectively.
Sales for the three months ended March 31, 1997 and 1996 were $3,123,690 and
$2,577,650, respectively, an increase of approximately $546,000 or 21%. Retail
and mail order sales for the three months ended March 31, 1997 totaled $265,505
as compared to $159,636 for the three months ended March 31, 1996, an increase
of $105,869 or 66%.
For the three months ended March 31, 1997, the Company had sales to one
customer, who accounted for 58% of net sales in 1997 and 33% of net sales in
1996.
Cost of sales increased to $2,447,173 in 1997 as compared to $2,066,005 for
1996. Cost of sales decreased as a percentage of sales to 78% as compared to 80%
for 1996. The decrease in cost of sales is due to an decrease in rent expense
for the quarter.
Selling and administrative expenses for the three months ended March 31, 1997
were $644,629 versus $447,333 for the same period a year ago. The increase of
$197,296 was primarily attributable to an increase in officers' salaries of
approximately $36,000, a decrease in freight out of approximately $11,000, a
decrease in officer's life insurance of approximately $19,000, an increase in
advertising and catalog costs of approximately $31,000, an increase in office
expenses of approximately $11,000, an increase in professional fees of
approximately $57,000, an increase in office salaries of approximately $16,000,
an increase in regulatory expenses of approximately $20,000, and an increase in
depreciation expense of approximately $24,000.
Other income was $17,335 for the three months ended March 31, 1997 as compared
to $44,385 for the same period a year ago. This decrease of $27,050 is
attributable to a decrease in gains on sales of fixed assets of $62,431, an
increase in interest and investment income of $22,259, a decrease in interest
expense of $11,342 and a gain of $1,780 from a 50% owned partnership.
Liquidity and Capital Resources
At March 31, 1997, the Company had working capital of $4,243,114 and cash and
cash equivalents of $1,278,285. The Company utilized $1,503,845 and $650,177 for
operations for the nine months ended March 31, 1997 and 1996, respectively. The
Company utilized $599,367 and $373,252 in investing activities for the nine
months ended March 31, 1997 and 1996, respectively. The Company generated
$2,616,432 from financing activities for the nine months ended March 31, 1997
and utilized $598,211 from financing activities for the nine months ended March
31, 1996.
On February 3, 1997, the Company received a secured promissory note in the
amount of $250,000 with interest at 14% per annum. The note is due and payable
on November 3, 1997. Advance interest of $26,250 was payable out of the proceeds
of the loan and is taken into income over the period of the loan.
On October 29, 1996, the Company successfully completed an initial public
offering whereby the Company sold 625,000 units at $7.00 per unit, each unit
consisting of two shares of Common Stock and two Class A Redeemable Common Stock
Purchase Warrants. The net proceeds to the Company after deducting underwriting
discounts and commission of $575,575 and other expenses of the offering of
$442,310 were $3,357,170.
11
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources [Continued]
The Company has a $500,000 revolving line of credit agreement with a bank which
bears interest at .75% above the bank's prime lending rate and expires on
November 30, 1997. At March 31, 1997, there was no balance due under the line of
credit agreement. The Company has additionally secured a five year equipment
term loan with interest at 1.50% over the bank's prime lending rate. At March
31, 1997, the balance due under the equipment loan was $215,508.
The Company's principal commitments at March 31, 1997 consisted of obligations
under operating leases for facilities and a lease agreement for the rental of
warehouse equipment.
Effective July 1, 1996, the Company entered into employment agreements with each
of its executive officers providing for aggregate compensation in the amount of
$530,000 for the fiscal year ending June 30, 1997. Such compensation amounts to
an approximate increase of $200,000 as compared to fiscal 1996.
On October 16, 1996, the bridge lenders waived their rights to the bridge units
and agreed to the cancellation of the underlying securities. Accordingly, the
Company eliminated the amount previously recorded for the bridge units and the
related bridge costs. Stockholders' equity has been reduced by $1,120,000.
Management believes that the net proceeds from the initial public offering,
borrowing available under the anticipated line of credit and anticipated cash
flows from operations will be sufficient to meet the Company's working capital
needs for the foreseeable future.
New Authoritative Pronouncements
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.
The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. SFAS No. 128 simplifies the earnings per share
["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No.
15, and related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to the fully diluted EPS of APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, SFAS No. 128 will require
restatement of all prior-period EPS data presented; however, the Company has not
sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will
have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
12
<PAGE>
Part II: Other Information
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Item 1: Legal Proceeding
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
Form 8-K/A filed January 6, 1997, amended the disclosure of original
Form 8-K filed December 6, 1996, reporting change in accounting firm on
December 4, 1996.
13
<PAGE>
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.
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
Date: May 2, 1997 By:/s/ E. Gerald Kay
E. Gerald Kay,
President and Chief Executive Officer
Date: May 2, 1997 By:/s/ Eric Friedman
Eric Friedman,
Chief Financial Officer
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> mar-31-1997
<CASH> 1,278,285
<SECURITIES> 0
<RECEIVABLES> 2,039,246
<ALLOWANCES> 0
<INVENTORY> 2,766,286
<CURRENT-ASSETS> 6,793,980
<PP&E> 1,071,485
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,564,358
<CURRENT-LIABILITIES> 2,550,866
<BONDS> 0
0
0
<COMMON> 8,670
<OTHER-SE> 8,555,688
<TOTAL-LIABILITY-AND-EQUITY> 8,564,358
<SALES> 3,123,960
<TOTAL-REVENUES> 3,123,960
<CGS> 2,447,173
<TOTAL-COSTS> 644,629
<OTHER-EXPENSES> (27,018)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,683
<INCOME-PRETAX> 49,493
<INCOME-TAX> (19,817)
<INCOME-CONTINUING> 69,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,310
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
