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 December 31, 1996 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 February 10, 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 December 31, 1996 [Unaudited] 1...2
Consolidated Statements of Operations for the three and six months
ended December 31, 1996 and 1995 [Unaudited]................ 3.....
Consolidated Statement of Stockholders' Equity for the six months
ended December 31, 1996 [Unaudited]......................... 4.....
Consolidated Statements of Cash Flows for six months ended
December 31, 1996 and 1995 [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 DECEMBER 31, 1996.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,124,327
Accounts Receivable - Net 1,336,125
Inventories 2,306,192
Deferred Income Taxes 87,000
Prepaid Expenses and Other Current Assets 474,900
-----------
Total Current Assets 6,328,544
Property, Plant and Equipment - Net 1,070,937
-----------
Other Assets:
Goodwill 299,865
Prepaid Pension Costs 294,334
Security Deposits and Other Assets 138,319
-----------
Total Other Assets 732,518
Total Assets $ 8,131,999
===========
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 DECEMBER 31, 1996.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable - Bank $ 37,926
Note Payable - Stock Retirement 156,473
Accounts Payable 1,220,523
Federal and State Income Taxes Payable 120,567
Accrued Expenses and Other Current Liabilities 530,601
-----------
Total Current Liabilities 2,066,090
Non-Current Liabilities:
Note Payable - Bank 188,046
Notes Payable - Related Party 276,444
Non-Current Rent Payable 105,613
Deferred Income Taxes 19,000
-----------
Total Non-Current Liabilities 589,103
Commitments and Contingencies [4] --
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 8,670
Additional Paid-in Capital 4,045,421
Retained Earnings 1,422,715
Total Stockholders' Equity 5,476,806
Total Liabilities and Stockholders' Equity $ 8,131,999
===========
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]
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Three months ended Six months ended
December 31, December 31,
------------ ------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 1,829,461 $3,110,867 $3,937,915 $ 5,092,206
Cost of Sales 1,718,000 2,575,959 3,308,259 4,022,835
----------- ---------- ---------- -----------
Gross Profit 111,461 534,908 629,656 1,069,371
Selling and Administrative
Expenses 527,390 524,690 1,105,939 1,097,855
----------- ---------- ---------- -----------
Operating [Loss] Income (415,929) 10,218 (476,283) (28,484)
----------- ---------- ---------- -----------
Other Income [Expense]:
Interest Expense (27,791) (37,807) (54,260) (51,663)
Interest and Investment Income 10,656 20,874 11,438 23,567
Loss on Investment in Partnership -- (36,998) -- (36,998)
Commission Income -- 15,804 -- 15,804
----------- ---------- ---------- -----------
Total Other [Expense] (17,135) (38,127) (42,822) (49,290)
----------- ---------- ---------- -----------
[Loss] Before Income Taxes (433,064) (27,909) (519,105) (77,774)
Federal and State Income
Taxes [Benefit] (138,760) (2,426) (160,915) (18,026)
----------- ---------- ---------- -----------
Net [Loss] $ (294,304) $ (25,483) $ (358,190) $ (59,748)
=========== ========== ========== ===========
Net [Loss] Per Share $ (.08) $ (.01) $ (.10) $ (.02)
=========== ========== ========== ===========
Average Common Shares
Outstanding 3,887,250 3,021,000 3,454,125 3,021,000
=========== ========== ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996.
[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 -- -- 7,049 -- 7,049
Net Proceeds from Initial Public
Offering 1,265,000 2,530 3,354,640 -- 3,357,170
Net [Loss] -- -- -- (358,190) (358,190)
-------- -------- --------- -------- --------
Balance - December 31, 1996 4,335,000 $ 8,670 $4,045,421$1,422,715 $5,476,806
========= ======== ==================== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
December 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Operating Activities:
Net [Loss] $ (358,190) $ (59,748)
---------- -----------
Adjustments to Reconcile Net Income to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 139,788 121,944
Non-Current Rent Charge (3,140) 17,798
Deferred Income Taxes (24,000) (30,955)
Imputed Interest on Note Payable - Related Party 7,049 7,049
Loss on Investment in Partnership -- 36,998
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 860,375 (741,339)
Inventories (872,960) (219,203)
Prepaid Expenses and Other Current Assets (201,843) (39,990)
Security Deposits and Other Assets (37,896) --
Increase [Decrease] in:
Accounts Payable (656,667) 405,726
Federal and State Income Taxes Payable (48,398) (24,579)
Accrued Expenses and Other Liabilities 80,978 (41,889)
---------- -----------
Total Adjustments (756,714) (508,440)
---------- -----------
Net Cash - Operating Activities - Forward (1,114,904) (568,188)
---------- -----------
Investing Activities:
Investment in Split Dollar Life Insurance -- (9,663)
Payment for Property and Equipment (150,773) (85,484
Loans to Stockholders' (1,519) (10,193)
Repayment of Note Receivable 2,109 --
Repayment of Loan Receivable -- (100,000)
Loan to Related Company (722) (100)
Contribution to Paid-in Capital -- 2,977
---------- -----------
Net Cash - Investing Activities - Forward (150,905) (202,463)
---------- -----------
Financing Activities:
Proceeds from Initial Public Offering 3,645,790 --
Proceeds from Notes Payable 332,844 --
Repayment of Notes Payable (1,134,117) (646,896)
Deferred Offering Costs (219,446) --
---------- -----------
Net Cash - Financing Activities - Forward $2,625,071 $ (646,896)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
December 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,114,904) $ (568,188)
Net Cash - Investing Activities - Forwarded (150,905) (202,463)
Net Cash - Financing Activities - Forwarded 2,625,071 (646,896)
---------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents 1,359,262 (1,417,547)
Cash and Cash Equivalents - Beginning of Periods 765,065 1,870,747
---------- -----------
Cash and Cash Equivalents - End of Periods $2,124,327 $ 453,200
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 46,298 $ 47,284
Income Taxes $ 52,562 $ 144,973
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 six months ended December 31,
1996.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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.
[D] 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 December 31, 1996, the balance of this note is $31,611.
[3] Inventories
Inventories consist of the following at December 31, 1996:
Raw Materials $ 1,038,531
Work-in-Process 156,412
Finished Goods 1,111,249
-----------
Total $ 2,306,192
----- ===========
[4] Commitments and Contingencies
Certain manufacturing and office facilities are leased from Gerob Realty
Partnership whose partners are stockholders of the Company. The current 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 six months ended December 31, 1996 and 1995 on this lease was
approximately $87,000 and $85,000, respectively.
7
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[4] Commitments and Contingencies [Continued]
The Company's lease agreement for other warehouse and office facilities expires
on November 14, 2001 and provides for minimum annual rentals of $332,500 through
November 14, 1999 and $370,000 from November 15, 1999 through November 14, 2001
plus real estate taxes and building operating expenses. The rentals under these
leases are 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
have been reflected as a non-current liability in the attached balance sheet.
This liability will be reduced in future years to the extent that the minimum
rentals payable in those years exceeds the average net expense recorded on the
straight-line basis. At its option, the Company has the right to renew this
lease for an additional five year period. On January 10, 1997, 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, purchased these premises.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Year Ending
June 30,
1997 $ 495,681
1998 435,681
1999 435,681
2000 459,119
2001 473,181
Thereafter 177,443
-----------
Total $ 2,476,786
----- ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $255,000 and $89,000 for the six months ended December 31, 1996
and 1995, respectively. The Company subleases a portion of its premises on a
month-to-month basis. Rent expense is stated net of sublease income of
approximately $125,000 and $90,000 for the six months ended December 31, 1996
and 1995, respectively.
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 customer 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 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.
8
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[5] New Authoritative Pronouncement
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
SFAS No. 121 could have a material impact on the Company's financial statements.
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on July 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
[6] 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.
[7] Subsequent Events
Commitments and Contingencies - On January 10, 1997, the Company entered into a
lease agreement with 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 for warehouse and office facilities expiring January 9, 2007 [See Note
4].
. . . . . . . . . . . . . . . .
9
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Item 2.
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto.
Six months ended December 31, 1996 Compared to the Six month ended December 31,
1995
Results of Operations
The Company's net losses for the six months ended December 31, 1996 and 1995
were $(358,190) and $(59,748), respectively.
Sales for the six months ended December 31, 1996 and 1995 were $3,937,915 and
$5,092,206, respectively, a decrease of approximately $1,154,000 or 23%. Retail
and mail order sales for the six months ended December 31, 1996 totaled $416,604
as compared to $369,569 for the six months ended December 31, 1995, an increase
of $47,035 or 13%.
For the six months ended December 31, 1996, the Company had sales to one
customer, who accounted for 37% of net sales in 1996 and 33% of net sales in
1995.
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 $3,308,259 1996 as compared to $4,022,835 for 1995.
Cost of sales increased as a percentage of sales to 84% as compared to 79% for
1995. The increase in cost of sales is due to an increase in manufacturing
expenses.
Selling and administrative expenses for the six months ended December 31, 1996
were $1,105,939 versus $1,097,855 for the same period a year ago. The increase
of $8,084 was primarily attributable to an increase in officers' compensation of
approximately $103,000, a decrease in travel and entertainment expenses of
approximately $45,000, a decrease in freight out of approximately $43,000, and a
decrease in consulting fees of approximately $11,000.
Other income [expense] was $(42,822) for the six months ended December 31, 1996
as compared to $(49,290) for the same period a year ago. This decrease of $6,468
is primarily attributable to a loss of $36,998 from a 50% owned partnership in
1995, a decrease in interest and investment income of $12,129, and to a decrease
in commission income of $15,804.
Three months ended December 31, 1996 Compared to the Three months ended December
31, 1995
The Company's net losses for the three months ended December 31, 1996 and 1995
were $(294,304) and $(25,483), respectively.
Sales for the three months ended December 31, 1996 and 1995 were $1,829,461 and
$3,110,867, respectively, a decrease of approximately $1,280,000 or 41%. Retail
and mail order sales for the three months ended December 31, 1996 totaled
$233,200 as compared to $180,595 for the three months ended December 31, 1996,
an increase of $52,605 or 29%.
For the three months ended December 31, 1996, the Company had sales to one
customer, who accounted for 31% of net sales in 1996 and 25% of net sales in
1995.
10
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
Three months ended December 31, 1996 Compared to the Three months ended December
31, 1995
Cost of sales decreased to $1,718,000 in 1996 as compared to $2,575,959 for
1995. Cost of sales increased as a percentage of sales to 94% as compared to 83%
for 1995. The increase in cost of sales is due to an increase in manufacturing
expenses.
Selling and administrative expenses for the three months ended December 31, 1996
were $527,390 versus $524,690 for the same period a year ago. The increase of
$2,700 was primarily attributable to and increase in officers' salaries of
approximately $66,000, a decrease in travel and entertainment of approximately
$12,000, a decrease in freight out of approximately $20,000, a decrease in
professional fees of $57,000 and an increase in advertising of $25,000.
Other income [expense] was $(17,135) for the three months ended December 31,
1996 as compared to $(38,127) for the same period a year ago. This decrease of
$20,992 is primarily attributable to a loss of $36,998 from a 50% owned
partnership in 1995, a decrease in interest and investment income of $10,218, a
decrease in commission income of $15,804, and a decrease in interest expense of
$10,016.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of $4,262,454 and cash and
cash equivalents of $2,124,327. The Company utilized $1,114,904 and $568,188 for
operations for the six months ended December 31, 1996 and 1995, respectively.
The Company utilized $150,905 and $202,463 in investing activities for the six
months ended December 31, 1996 and 1995, respectively. The Company generated
$2,625,071 from financing activities for the six months ended December 31, 1996
and utilized $646,896 from financing activities for the six months ended
December 31,1995.
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.
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 December 31, 1996, 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 December
31, 1996, the balance due under the equipment loan was $225,972.
The Company's principal commitments at December 31, 1996 consisted of
obligations under operating leases for facilities.
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 loan finance costs. Stockholders' equity has been reduced by
$1,120,000.
11
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources [Continued]
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 Pronouncement
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
SFAS No. 121 could have a material impact on the Company's financial statements.
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on July 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
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 filed December 6, 1996, reported change in accounting firm on
December 4, 1996.
Form 8-K/A filed December 13, 1996, amended the Form 8-K filed December
6, 1996 by attaching letter from predecessor accountant.
Form 8-K/A filed January 6, 1997, amended the disclosure of original
Form 8-K filed December 6, 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: February 10, 1997 By:/s/ E. Gerald Kay
E. Gerald Kay,
President and Chief Executive Officer
Date: February 10, 1997 By:/s/ Eric Friedman
Eric Friedman,
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> dec-31-1996
<CASH> 2,124,327
<SECURITIES> 0
<RECEIVABLES> 1,336,125
<ALLOWANCES> 0
<INVENTORY> 2,306,192
<CURRENT-ASSETS> 6,328,544
<PP&E> 1,070,937
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,131,999
<CURRENT-LIABILITIES> 2,066,090
<BONDS> 0
0
0
<COMMON> 8,670
<OTHER-SE> 5,468,136
<TOTAL-LIABILITY-AND-EQUITY> 8,131,999
<SALES> 1,829,469
<TOTAL-REVENUES> 1,829,469
<CGS> 1,718,000
<TOTAL-COSTS> 527,390
<OTHER-EXPENSES> (10,656)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,791
<INCOME-PRETAX> (433,064)
<INCOME-TAX> (138,760)
<INCOME-CONTINUING> (294,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (294,304)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
