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 September 30, 1997 Commission File Number 000-28876
CHEM INTERNATIONAL, INC.
(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: (973) 926-0816
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 as of November 13, 1997
- ---------------------------------- -----------------------------------
Common Stock, Par Value 4,335,000
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CHEM INTERNATIONAL, INC.
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INDEX
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Part I: Financial Information
Item 1: Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1997 [Unaudited] 1..2
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996 [Unaudited]..................... 3.....
Consolidated Statement of Stockholders' Equity for the three months
ended September 30, 1997 [Unaudited]........................ 4.....
Consolidated Statements of Cash Flows for three months ended
September 30, 1997 and 1996 [Unaudited]..................... 5.....6
Notes to Consolidated Financial Statements [Unaudited]...... 7.....12
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................13.....14
Part II: Other Information..........................................15
Signature...........................................................16
. . . . . . . .
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 514,531
Accounts Receivable - Net 1,340,689
Note Receivable 247,720
Inventories 2,879,249
Prepaid Expenses and Other Current Assets 192,825
Refundable Federal Income Taxes 320,000
-----------
Total Current Assets 5,495,014
Property and Equipment - Net 1,021,332
-----------
Other Assets:
Goodwill 290,875
Prepaid Pension Costs 340,291
Security Deposits and Other Assets 219,318
-----------
Total Other Assets 850,484
Total Assets $ 7,366,830
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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1
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,299,574
Notes Payable 49,814
Accrued Expenses and Other Current Liabilities 80,229
Accrued Expenses - Related Party 287,000
Federal and State Income Taxes Payable 886
-----------
Total Current Liabilities 1,717,503
Non-Current Liabilities:
Notes Payable 220,316
Notes Payable - Related Party 276,444
-----------
Total Non-Current Liabilities 496,760
Commitments and Contingencies [10] --
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 4,199,598
Retained Earnings 944,299
Total Stockholders' Equity 5,152,567
Total Liabilities and Stockholders' Equity $ 7,366,830
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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2
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
September 30,
<S> <C> <C>
1 9 9 7 1 9 9 6
------- -------
Sales $2,351,590 $ 2,108,454
Cost of Sales 2,022,752 1,590,259
---------- -----------
Gross Profit 328,838 518,195
Selling and Administrative Expenses 595,756 578,549
---------- -----------
Operating [Loss] (266,918) (60,354)
---------- -----------
Other Income [Expense]:
Partnership Loss (3,503) --
Interest Expense (11,197) (26,469)
Interest and Income Investment Income 16,616 782
---------- -----------
Other Income [Expense] - Net 1,916 (25,687)
---------- -----------
[Loss] Before Income Taxes (265,002) (86,041)
Federal and State Income Tax [Benefit] (82,700) (22,155)
---------- -----------
Net [Loss] $ (182,302) $ (63,886)
========== ===========
Net [Loss] Per Share $ (.04) $ (.02)
========== ===========
Average Common Shares Outstanding 4,335,000 3,021,000
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Paid-in Retained Stockholders'
Shares Par Value Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1997 4,335,000 $ 8,670 $ -- $4,196,072 $1,126,601 $5,331,343
Imputed Interest on Note
Payable - Related Party -- -- -- 3,526 -- 3,526
Net [Loss] for the three
months
ended September 30, 1997 -- -- -- -- (182,302) (182,302)
------ -------- -------- --------- -------- ------- --------
Balance - September 30, 1997 4,335,000 8,670 $ -- $4,199,598 $944,299 $5,152,567
========= ====== ======== =========== ======= ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
4
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net [Loss] $ (182,302) $ (63,886)
---------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 76,114 62,183
Non-Current Rent Charge -- (1,570)
Deferred Income Taxes (10,000) (12,000)
Imputed Interest on Note Payable - Related Party 3,526 3,524
Loss on Investment in Partnership 3,503 --
Interest Income on Note Receivable (9,347) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,124,019 753,322
Inventories (792,883) (316,642)
Refundable Federal Income Taxes (80,000) --
Prepaid Expenses and Other Current Assets 108,564 39,742
Security Deposits and Other Assets (121,977) --
Increase [Decrease] in:
Accounts Payable (462,388) (764,254)
Federal and State Income Taxes Payable (40,530) 3,140
Accrued Expenses and Other Liabilities (79,880) 159,591
---------- -----------
Total Adjustments (281,279) (72,964)
---------- -----------
Net Cash - Operating Activities (463,581) (136,850)
---------- -----------
Investing Activities:
Purchase of Property and Equipment (22,400) (21,776)
Loans to Stockholders' -- (1,427)
Repayment to Note Receivable -- 1,048
Loan to Related Company 2,500 (722)
---------- -----------
Net Cash - Investing Activities (19,900) (22,877)
---------- -----------
Financing Activities:
Proceeds from Notes Payable -- 200,000
Repayment of Notes Payable (12,244) (248,448)
Deferred Offering Costs -- (219,446)
---------- -----------
Net Cash - Financing Activities (12,244) (267,894)
---------- -----------
Net [Decrease] in Cash and Cash Equivalents (495,725) (427,621)
Cash and Cash Equivalents - Beginning of Periods 1,010,256 765,065
---------- -----------
Cash and Cash Equivalents - End of Periods $ 514,531 $ 337,444
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 11,604 $ 14,586
Income Taxes $ 62,411 $ 457
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
</TABLE>
6
<PAGE>
CHEM INTERNATIONAL, INC.
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 thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1997. The results of operations for
the three months ended September 30, 1997 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 1998.
[C] [Loss] Per Share - [Loss] per common share is 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 was insolvent and the
Company recorded a loss on its investment and a charge for approximately 50% of
its note receivable for the year ended June 30, 1997. At September 30, 1997, the
balance of this note is $32,317.
[4] Investment in Manhattan Health Products, L.L.C.
The Company is a 50% partner in Manhattan Health Products, L.L.C. at September
30, 1997. The Company's capital investment was recorded at $1,497, which
reflects a capital cost of $5,000 and a net loss of $3,503 at September 30,
1997. The investment is included in other assets.
[5] Inventories
Inventories consist of the following at September 30, 1997:
Raw Materials $ 1,586,883
Work-in-Process 697,100
Finished Goods 595,266
-----------
Total $ 2,879,249
----- ===========
7
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[6] 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 was 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 [See Note 13].
[7] Notes Payable
Notes payable are summarized as follows at September 30, 1997:
Related Party
Notes Payable Note Payable Total
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 72,495 $ -- $ 72,495
Gerob Realty Partnership (b) -- 276,444 276,444
Summit Bank:
Revolving Line-of-Credit (c) -- -- --
Equipment Term Loan (d) 197,635 -- 197,635
---------- ----------- ----------
Totals 270,130 276,444 546,574
Less: Current Portion 49,814 -- 49,814
---------- ----------- ----------
Noncurrent Portion $ 220,316 $ 276,444 $ 596,388
------------------ ========== =========== ==========
(a)Five year 10% equipment note dated April 1, 1997 providing for monthly
payments of $1,698 for principal and interest. The note is collateralized by
laboratory equipment.
(b)Noninterest bearing note due September 10, 2002. For financial reporting
purposes, interest has been imputed at 8.5% a year with the net of tax effect
being credited to additional paid-in capital.
(c)Under the terms of a revolving line of credit which expires on November 30,
1997, the Company may borrow up to $500,000 at 3/4% above the bank's prime
rate. The loan is collateralized by accounts receivable, inventory and
machinery and equipment. The loan has been guaranteed by the Company's
president and principal stockholder. At September 30, 1997, there were no
borrowings under the line of credit.
(d)Under the terms of an equipment term loan, due November 30, 2001, the Company
may borrow up to $350,000 at 1-1/2% above the bank's prime rate. The term
loan provides for monthly payments of $4,698 for principal and interest. At
September 30, 1997, the interest rate was 9.75%. The loan is collateralized
by machinery and equipment. The loan has been guaranteed by the Company's
president and principal stockholder.
The loan agreement with Summit Bank contains certain financial covenants
relating to the maintenance of specified liquidity, debt to equity and debt
coverage ratios and requires that the Company's president and principal
stockholder maintain a minimum stock ownership percentage of the Company. At
June 30, 1997, the Company was in compliance with all bank covenants.
8
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[7] Notes Payable [Continued]
The following are maturities of long-term debt for each of the next five years:
Related Party
Notes Payable Note Payable Total
September 30,
1998 $ 49,814 $ -- $ 49,814
1999 50,501 -- 50,501
2000 52,028 -- 52,028
2001 53,710 -- 53,710
2002 52,166 276,444 328,610
Thereafter 11,911 -- 11,911
---------- ----------- ----------
Totals $ 270,130 $ 276,444 $ 546,574
------ ========== =========== ==========
[8] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - The Company maintains balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 1997, the
Company's uninsured cash balances totaled approximately $92,000. The Company
does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts at September 30, 1997 is $15,750.
[9] Major Customer
For the three months ended September 30, 1997 and 1996, approximately 39% and
48% of revenues were derived from one customer. The loss of this customer would
have an adverse affect on the Company's operations. In addition, for the three
months ended September 30, 1997 and 1996, an aggregate of approximately 23% and
32%, respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the three months
ended September 30, 1997 and 1996. Accounts receivable from these customers
comprised approximately 64% and 50% of total accounts receivable at September
30, 1997 and 1996, respectively.
[10] Commitments and Contingencies
[A] Leases
Related Party Leases - Certain manufacturing and office facilities are leased
from Gerob Realty Partnership ["Gerob"] 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 three months ended September 30, 1997 and 1996 on
this lease was approximately $29,000 and $43,000, respectively. Unpaid rent of
$287,000 due to Gerob at September 30, 1997 has been separately disclosed as
accrued expenses on the consolidated balance sheet.
9
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[A] Leases [Continued
Related Party Leases [Continued] - 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. Rent expense for the three
months ended September 30, 1997 on this lease was approximately $102,000.
Other Lease Commitments - The Company leases warehouse equipment for a five year
period providing for an annual rental of $15,847 and office equipment for a five
year period providing for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2001.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Year Ending Lease Party Lease
June 30, Commitment Commitment Total
1998 $ 29,159 $ 259,500 $ 288,659
1999 38,449 346,000 384,449
2000 37,768 346,000 383,768
2001 24,717 346,000 370,717
2002 23,515 182,609 206,124
Thereafter -- -- --
---------- --------- ----------
Total $ 153,608 $1,480,109 $1,633,717
----- ========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $122,000 and $137,000 for the three months ended September 30,
1997 and 1996, respectively. Rent expense is stated net of sublease income of
approximately $8,000 and $62,000 for the three months ended September 30, 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 years ending June 30, 1998 and 1999. These
agreements are subject to annual increases equal to at least the increase in the
consumer price index for the Northeastern area.
[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.
10
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[10] Commitments and Contingencies [Continued]
[C] Litigation [Continued] - On July 7, 1997, the Company was informed by one of
its suppliers of a recall of the supplier's raw material which was used in
manufacturing of tablets sold by the Company. On July 17, 1997, the Company
issued a voluntary recall to three customers affected by this and, accordingly,
reduced its sales and accounts receivable at June 30, 1997 by $ 127,000. The
Company believes they have recourse against the supplier for the full value of
the tablets sold containing the recalled raw material. The Company does not
believe there will be any significant additional costs relating to this recall.
On September 30, 1997, the Company instituted suit to recover all damages. No
estimate can be made at this time as to the amount, if any, of ultimate
recovery.
[11] 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.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required.
SFAS No. 130 is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements
in the initial year of its application. SFAS No. 131 is not expected to have
a material impact on the Company.
11
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
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[12] Equity Transactions
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 became exercisable on October 16, 1997.
[13] Subsequent Event
Note Receivable - The balance due on the secured promissory note receivable in
the amount of $250,000 was in default at November 3, 1997. The Company is in the
process of enforcing collection on this note.
. . . . . . . . . . . . . . . .
12
<PAGE>
Item 2.
CHEM INTERNATIONAL, INC.
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.
Three months ended September 30, 1997 Compared to September 30, 1996
Results of Operations
The Company's net losses for the three months ended September 30, 1997 and 1996
were $(182,302) and $(63,886), respectively. This increase in net loss of
approximately $120,000 is primarily the result of a $200,000 increase in
operating loss resulting from a correspondingly $200,000 decrease in gross
profit. The decrease in gross profit is due to an increase in manufacturing
expenses and an increase in raw material costs.
Sales for the three months ended September 30, 1997 and 1996 were $2,351,590 and
$2,108,454, respectively, an increase of approximately $240,000 or 11.5 %. For
the three months ended September 30, 1997, the Company had sales to one
customer, who accounted for 39% of net sales in 1997 and 48% in 1996.
Retail and mail order sales for the first quarter of 1997 totaled $273,749 as
compared to $183,404 for the first quarter of 1996, an increase of $90,345 or
49% due to increased volume in mail order sales and store sales.
On February 17, 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. The agreement has an initial term
of two years and shall be renewable for an additional term of one year each.
Sales for the quarter ended September 30, 1997 under the agreement totaled
$275,132.
Cost of sales increased to $2,022,752 for the first quarter of 1997 as compared
to $1,590,259 for the first quarter of 1996. Cost of sales increased as a
percentage of sales to 86% for the first quarter of 1997 from 75% for the first
quarter of 1996. The increase in cost of sales is due to an increase in material
costs and an increase in manufacturing expenses.
The Company began in July of 1997 a renovation of its blending department.
Management expects the renovation to be completed by the end of November 1997 at
an approximate cost of $200,000. The Company expects to achieve greater
manufacturing efficiencies as a result.
Selling and administrative expenses for the three months ended September 30,
1997 were $595,756 versus $578,549 for the same period a year ago. The increase
of $17,207 was primarily attributable to an increase in office salaries of
approximately $21,000, a decrease in professional fees of approximately $46,000,
an increase in freight out of approximately $20,000, an increase in consulting
fees of approximately $12,000, a decrease in advertising expense of
approximately $16,000, an increase in office rent of approximately $10,000, and
an increase in travel and entertainment expenses of approximately $15,000.
Other income (expense) was $1,916 for the first quarter of 1997 as compared to
$(25,687) for the first quarter of 1996. This increase of $27,603 is
attributable to a decrease in interest expense of $15,272, an increase in
interest and investment income of $15,834 and a $3,503 loss from a 50% owned
partnership.
13
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended September 30, 1997 Compared to September 30, 1996
Results of Operations [Continued]
On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material which was used in manufacturing of tablets sold by
the Company. On July 17, 1997, the Company issued a voluntary recall to three
customers affected by this and, accordingly, reduced its sales and accounts
receivable at June 30, 1997 by $ 127,000. The Company believes they have
recourse against the supplier for the full value of the tablets sold containing
the recalled raw material. The Company does not believe there will be any
significant additional costs relating to this recall. On September 30, 1997, the
Company instituted suit to recover all damages. No estimate can be made at this
time as to the amount, if any, of ultimate recovery.
Liquidity and Capital Resources
At September 30, 1997, the Company's working capital was $3,777,511 a decrease
of $254,891 over working capital at June 30,1997. Cash and cash equivalents were
$514,531 at September 30, 1997 a decrease of $495,725 from June 30, 1997. The
Company utilized $463,581 and $136,850 for operations for the three months ended
September 30, 1997 and 1996, respectively. The primary reasons for the increase
in cash utilized for operations are (a) an increase in inventories of
approximately $800,000, as more inventory is needed to cover more products being
sold through retail and mail order sales, and an increase in raw material costs,
(b) a decrease in accounts receivable of approximately $1,000,000 resulting
partially from a decrease in sales from a major customer, (c) a decrease in
accounts payable of approximately $460,000 as more cash was used to pay accounts
payable, and (d) an increase in security deposits and advances in relation to
the renovation of the blending department. The Company utilized $19,900 and
$22,877 in investing activities for the three months ended September 30, 1997
and 1996, respectively. The Company utilized $12,244 and $267,894 from financing
activities for the three months ending September 30, 1997 and 1996,
respectively.
The Company has a $500,000 revolving line of credit agreement with a bank which
bears interest at .75% above the banks prime lending rate and expires on
November 30, 1997. At September 30, 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 1.5% above the banks prime lending rate. At
September 30, 1997, the balance due under the equipment loan was $197,635.
The Company's total annual principal commitments at June 30, 1997 for the next
five years of $1,633,717 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment, office
equipment and automobiles.
Effective July 1, 1996, the Company entered into employment agreements with each
of its five executive officers providing for aggregate compensation in the
amount of $680,000 for the fiscal years ending June 30, 1998 and 1999.
Management expects to renew the $500,000 line of credit which expires on
November 30, 1997. In the event that the Company requires additional working
capital, the Company would have to either increase its line of credit or engage
in sales of its equity securities. There can be no assurance that any line of
credit increases or sales of equity securities can be accomplished on conditions
favorable to the Company.
14
<PAGE>
Part II: Other Information
CHEM INTERNATIONAL, INC.
- ------------------------------------------------------------------------------
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 8K
None
15
<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.
Date: November 13, 1997 By:/s/ E. Gerald Kay
E. Gerald Kay,
President and Chief Executive Officer
Date: November 13, 1997 By:/s/ Eric Friedman
Eric Friedman,
Chief Financial Officer
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by refernece to such fuinancial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> sep-30-1997
<CASH> 514,531
<SECURITIES> 0
<RECEIVABLES> 1,340,689
<ALLOWANCES> 0
<INVENTORY> 2,879,249
<CURRENT-ASSETS> 5,495,014
<PP&E> 1,021,332
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,366,830
<CURRENT-LIABILITIES> 1,717,503
<BONDS> 0
0
0
<COMMON> 8,670
<OTHER-SE> 5,143,897
<TOTAL-LIABILITY-AND-EQUITY> 7,366,830
<SALES> 2,351,590
<TOTAL-REVENUES> 2,351,590
<CGS> 2,022,752
<TOTAL-COSTS> 595,756
<OTHER-EXPENSES> 14,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16,616)
<INCOME-PRETAX> (265,002)
<INCOME-TAX> (82,700)
<INCOME-CONTINUING> (182,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,302)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
