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, 1998 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 May 11, 1998
- ---------------------------------- ------------------------------
Common Stock, Par Value 5,178,300
<PAGE>
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 March 31, 1998 [Unaudited] 1...2
Consolidated Statements of Operations for the three and nine months
ended March 31, 1998 and 1997 [Unaudited].................. 3...
Consolidated Statement of Stockholders' Equity for the nine months
ended March 31, 1998 [Unaudited]............................ 4...
Consolidated Statements of Cash Flows for nine months ended
March 31, 1998 and 1997 [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..16
Part II: Other Information.......................................... 17
Signature........................................................... 18
. . . . . . . .
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998.
[UNAUDITED]
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 660,482
Accounts Receivable - Net 3,077,200
Inventories 4,127,564
Prepaid Expenses and Other Current Assets 194,271
Refundable Federal Income Taxes 195,000
-----------
Total Current Assets 8,254,517
-----------
Property and Equipment - Net 1,517,498
-----------
Other Assets:
Goodwill 284,881
Prepaid Pension Costs 340,291
Security Deposits and Other Assets 94,967
-----------
Total Other Assets 720,139
-----------
Total Assets $10,492,154
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998.
[UNAUDITED]
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 3,237,556
Notes Payable 385,682
Accrued Expenses and Other Current Liabilities 111,110
Accrued Expenses - Related Party 15,000
-----------
Total Current Liabilities 3,749,348
-----------
Non-Current Liabilities:
Deferred Income Taxes 73,000
Notes Payable 268,468
Notes Payable - Related Party 682,765
-----------
Total Non-Current Liabilities 1,024,233
-----------
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, 5,178,300 Shares Issued and Outstanding 10,357
Additional Paid-in Capital 4,843,062
Retained Earnings 865,154
-----------
Total Stockholders' Equity 5,718,573
-----------
Total Liabilities and Stockholders' Equity $10,492,154
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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<TABLE>
Three months ended Nine months ended
March31, March 31,
-------- ---------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 4,978,839 $3,123,960 $9,948,939 $ 7,061,875
Cost of Sales 4,010,136 2,447,173 8,225,099 5,755,432
----------- ---------- ---------- -----------
Gross Profit 968,703 676,787 1,723,840 1,306,443
Selling and Administrative
Expenses 732,255 644,629 2,047,980 1,750,568
----------- ---------- ---------- -----------
Operating Income [Loss] 236,448 32,158 (324,140) (444,125)
----------- ---------- ---------- -----------
Other Income [Expense]:
Interest Expense (15,028) (9,683) (43,009) (63,943)
Interest and Investment Income 267 25,238 19,702 36,676
Income [Loss] on Investment in
Partnership -- 1,780 (5,000) 1,780
----------- ---------- ---------- -----------
Other [Expense] Income - Net (14,761) 17,335 (28,307) (25,487)
----------- ---------- ---------- -----------
Income [Loss] Before Income
Taxes 221,687 49,493 (352,447) (469,612)
Federal and State Income
Tax Expense [Benefit] 94,746 (19,817) (91,000) (180,732)
----------- ---------- ---------- -----------
Net Income [Loss] $ 126,941 $ 69,310 $ (261,447) $ (288,880)
=========== ========== ========== ===========
Net Income [Loss] Per
Common Share:
Basic $ .03 $ .02 $ (.06) $ (.08)
=========== ========== ========== ===========
Diluted $ .02 $ .02 $ (.06) $ (.08)
=========== ========== ========== ===========
Weighted Average Common
Shares Outstanding 5,065,685 4,286,000 4,575,068 3,727,369
Dilutive Potential Common Shares:
Warrants and Options 1,925,247 70,000 -- --
----------- ---------- ---------- -----------
Adjusted Weighted Average
Common Shares 6,990,932 4,356,000 -- --
=========== ========== ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
3
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED MARCH 31, 1998.
[UNAUDITED]
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<TABLE>
Additional Total
Common Stock Preferred Paid-in Retained Stockholders'
Shares Par Value Stock Capital Earnings Equity
--------- --------- ---------- ----------- ---------- ------------
<S> <C> <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 -- -- -- 7,051 -- 7,051
Common Stock Issued in Payment
of Debt 843,300 1,687 -- 571,757 -- 573,444
Fair Value of Stock Purchase
Warrant [7][12A] -- -- -- 68,182 -- 68,182
Net [Loss] for the nine months
ended March 31, 1998 -- -- -- -- (261,447) (261,447)
-------- -------- -------- --------- ---------- ----------
Balance - March 31, 1998 5,178,300 $ 10,357 $ -- $4,843,062 $865,154 $5,718,573
========= ======== ========= ========== ========== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
4
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Nine months ended
March 31,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
<S> <C> <C>
Net [Loss] $ (261,447) $ (288,880)
---------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 274,111 228,398
Lease Termination Items -- (108,753)
Deferred Income Taxes 90,000 8,000
Imputed Interest on Note Payable - Related Party 7,051 10,574
[Gain] Loss on Investment in Partnership 5,000 (1,780)
Interest Income on Note Receivable (11,627) (5,150)
Write-off of Note Receivable 33,058 --
Bad Debt Expense 5,000 --
Amortization of Discount on Note Payable 947 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (639,492) 157,254
Inventories (2,041,198) (1,333,054)
Prepaid Expenses and Other Current Assets 79,377 (143,106)
Security Deposits and Other Assets (4,767) (23,410)
Refundable Federal Income Taxes 45,000 --
Increase [Decrease] in:
Accounts Payable 1,475,594 203,917
Federal and State Income Taxes Payable (41,416) (110,309)
Accrued Expenses and Other Liabilities (23,999) (97,546)
---------- -----------
Total Adjustments (747,361) (1,214,965)
---------- -----------
Net Cash - Operating Activities - Forward (1,008,808) (1,503,845)
---------- -----------
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 (601,024) (236,935)
Loans to Stockholders' (4,673) (1,519)
Repayment of Note Receivable 250,000 3,183
Loan to Related Company 2,500 (722)
---------- -----------
Net Cash - Investing Activities - Forward (353,197) (599,367)
---------- -----------
Financing Activities:
Net Proceeds from Initial Public Offering -- 3,426,344
Proceeds from Notes Payable 1,050,000 332,844
Repayment of Notes Payable (37,769) (1,142,756)
---------- -----------
Net Cash - Financing Activities - Forward $1,012,231 $ 2,616,432
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
5
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Nine months ended
March 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,008,808) $(1,503,845)
Net Cash - Investing Activities - Forwarded (353,197) (599,367)
Net Cash - Financing Activities - Forwarded 1,012,231 2,616,432
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents (349,774) 513,220
Cash and Cash Equivalents - Beginning of Periods 1,010,256 765,065
---------- -----------
Cash and Cash Equivalents - End of Periods $ 660,482 $ 1,278,285
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 37,125 $ 54,198
Income Taxes $ 70,863 $ 80,688
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 Company sold 843,300 shares of its common stock to Gerob, a related party.
The issuance of the stock was in consideration of $297,000 of past due rent and
the satisfaction of a promissory note of $276,444.
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 nine months ended March 31, 1998 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 1998.
[C] Income [Loss] Per Share - Income [Loss] per common share is computed based
upon the weighted average number of common shares outstanding during the periods
presented after giving retroactive effect to the 1-for-4 reverse stock split in
July 1996. Potential common shares are included when dilutive. Potential common
shares of 150,000 are not currently dilutive, but may be in the future.
[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 December 31, 1997, the
balance of this note of $33,058 including accrued interest was written off as
uncollectible.
[4] Investment in Manhattan Health Products, L.L.C.
The Company is a 50% partner in Manhattan Health Products, L.L.C. at December
31, 1997. The Company's capital investment was written down to $-0-, which
reflects a capital cost of $5,000 and a net loss of $5,000 at March 31, 1998.
[5] Inventories
Inventories consist of the following at March 31, 1998:
Raw Materials $ 2,217,189
Work-in-Process 1,253,669
Finished Goods 656,706
-----------
Total $ 4,127,564
----- ===========
7
<PAGE>
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 and was repaid on November 19, 1997. Advance interest of
$26,250 was payable out of the proceeds of the loan and was taken into income
over the period of the loan.
[7] Notes Payable
Notes payable are summarized as follows at March 31, 1998:
Related Party
Notes Payable Note Payable Total
Notes Payable:
Siemens Credit Corp. (a) $ 109,545 $ -- $ 109,545
Bio Merieux Vitek, Inc. (b) 65,795 -- 65,795
President and Chief Executive Officer (c) -- 682,765 682,765
Summit Bank:
Revolving Line-of-Credit (d) 300,000 -- 300,000
Equipment Term Loan (e) 178,810 -- 178,810
---------- ----------- ----------
Totals 654,150 682,765 1,336,915
Less: Current Portion 385,682 -- 385,682
---------- ----------- ----------
Noncurrent Portion $ 268,468 $ 682,765 $ 951,233
------------------ ========== =========== ==========
(a)Three year 9.66% equipment note dated March 17, 1998 providing for monthly
payments of $3,497 for principal and interest. The note is collateralized by
machinery and equipment.
(b)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.
(c)Three year non-collaterized 7% promissory note for $750,000 with related
party providing for quarterly payments of $4,725 representing interest only.
The note matures on March 12, 2001. As additional consideration for the loan
and in the light of the below market interest rate and uncollateralized
nature of the loan, the Corporation issued a Class C Warrant to purchase
150,000 shares of common stock at the aggregate purchase price of $1.75 per
share. The note is recorded net of $68,182, which represents the fair value
of the Class C warrant. The amortization at March 31, 1998 was $947 and is
classified as interest expense in the Company's financial statements. The
warrant is exercisable for a four year period commencing one year after the
issuance of the note and expires on March 12, 2003 [See Note 12D].
(d)Under the terms of a revolving line of credit which expired on April 30,
1998, 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 March 31, 1998, the interest rate was
9.25% [See Note 13].
(e)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
March 31, 1998, 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 non-interest bearing note due to Gerob Realty Partnership ["Gerob"] on
September 10, 2002 was exchanged in consideration of shares of authorized but
unissued common stock [See Note 12B].
8
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[7] Notes Payable [Continued]
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.
The following are maturities of long-term debt for each of the next five years:
Related Party
Notes Payable Note Payable Total
March 31,
1999 $ 385,682 $ -- $ 385,682
2000 96,084 -- 96,084
2001 106,616 682,765 789,381
2002 65,768 -- 65,768
2003 -- -- --
---------- ----------- ----------
Totals $ 654,150 $ 682,765 $1,336,915
------ ========== =========== ==========
[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 March 31, 1998, the
Company's uninsured cash balances totaled approximately $980,000. 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 March 31, 1998 is $20,750.
[9] Major Customer
For the nine months ended March 31, 1998 and 1997, approximately 55% and 45% 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 nine months
ended March 31, 1998 and 1997, an aggregate of approximately 12% and 25%,
respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the nine months
ended March 31, 1998 and 1997. Accounts receivable from these customers
comprised approximately 73% and 68% of total accounts receivable at March 31,
1998 and 1997, 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, 1998, 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, 1998 and 1997 on this
lease was approximately $87,000 and $115,000, respectively. Unpaid rent of
$15,000 due to Gerob at March 31, 1998 has been separately disclosed as accrued
expenses on the consolidated balance sheet. Past due rent at December 31, 1997
of $297,000 was forgiven in consideration of issuance of shares of common stock
[See Note 12C].
9
<PAGE>
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 nine
months ended March 31, 1998 on this lease was approximately $338,000.
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 $ 13,411 $ 86,500 $ 99,911
1999 53,646 346,000 399,646
2000 43,568 346,000 389,568
2001 28,070 346,000 374,070
2002 23,515 182,606 206,121
Thereafter -- -- --
---------- --------- ----------
Total $ 162,210 $1,307,106 $1,469,316
----- ========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $411,000 and $313,000 for the nine months ended March 31, 1998 and
1997, respectively. Rent expense is stated net of sublease income of
approximately $16,000 and $166,000 for the nine months ended March 31, 1998 and
1997, 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, $630,000 for the year ending June 30, 1998, and $680,000 for the year
ending June 30, 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
<PAGE>
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 March 31, 1998 as to the amount, if any, of ultimate
recovery.
[D] Consulting Agreement - The Company entered into a consulting agreement with
a financial advisory group ["Consultants"] commencing on March 20, 1998 until
February 28, 1999. The Company is obligated to pay $2,500 for services rendered
at the end of each month that services are provided during the terms of this
agreement. In addition, the Company has issued to the Consultants options for
45,000 shares of common stock [See Note 12B].
[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. The Company has adopted SFAS No. 128 in
these financial statements. Basic EPS is based on average common shares
outstanding and diluted EPS include the effects of potential common stock, such
as, options and warrants, if dilutive. Adoption of SFAS No. 128 is not material
to the Company.
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. Management is in the process of evaluating
the disclosure requirements. SFAS No. 131 is not expected to have a material
impact on the Company.
11
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[12] 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 became exercisable on October 16, 1997. At
March 31, 1998, none have been exercised.
[B] Consultant Agreement/Stock Options - In connection with a consulting
agreement dated March 20, 1998, the Company has issued three options for 45,000
shares of common stock [See Note 10C]. Each option is exercisable for 15,000
shares at exercise prices of $1.125, $2.50 and $4.00, respectively. These
options are exercisable until five years following the date of this agreement.
[C] Related Party Notes Payable - On January 12, 1998, the Company signed a
Stock Sale Agreement with Gerob. Under the terms of the agreement, the Company
sold 843,300 shares of common stock to Gerob. The issuance of the stock was in
consideration of $297,000 of past due rent and the satisfaction of a promissory
note of $276,444 [See Note 7 and 10A].
[D] Related Party Promissory Note - On March 12, 1998, the Company negotiated a
three year promissory note for $750,000 with its Chairman and President. The
note bears interest at 7% and is due on March 12, 2001. The note provides for
interest only to be paid quarterly. As additional consideration for the loan and
in the light of the below market interest rate and uncollateralized nature of
the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares of
common stock at the aggregate purchase price of $1.75 per share. The note is
recorded net of $68,182, which represents the fair value of the Class C
Warrants. Amortization of $947 was recorded for the warrants at March 31, 1998.
The warrant is exercisable for a four year period commencing one year after the
issuance of the note and expires on March 12, 2003 [See Note 7].
[13] Subsequent Events
Development and Supply Agreement - On April 9, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
["Herbalife"] whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife through December 31, 2000.
Line of Credit - On April 30, 1998, the Company signed a Loan Modification
Agreement with its bank, extending the term of the $500,000 revolving line of
credit to July 31, 1998 [See Note 7].
. . . . . . . . . . . . . . . .
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 historical financial
statements of the Company and notes thereto.
Nine months ended March 31, 1998 Compared to the Nine Months ended March 31,
1997
Results of Operations
The Company's net losses for the nine months ended March 31, 1998 and 1997 were
$(261,447) and $(288,880), respectively. This decrease in net loss of
approximately $27,000 is primarily the result of a $117,000 decrease in
operating loss and a decrease in the federal tax benefit of approximately
$90,000 due to forgiveness of accrued rent which gave rise to deferred taxes.
The $117,000 decrease in operating loss is due to a gross profit increase of
approximately $417,000 and an increase in selling and administrative expenses of
approximately $300,000.
Sales for the nine months ended March 31, 1998 and 1997 were $9,948,939 and
$7,061,875, respectively, an increase of $2,887,064 or 41%. For the nine months
ended March 31, 1998, the Company had sales to one customer, who accounted for
55% of net sales in 1998 and 45% in 1997.
Retail and mail order sales for the nine months ended March 31, 1998 totaled
$846,216 as compared to $682,109 for the nine months ended March 31, 1997, an
increase of $164,107 or 24% 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 nine months ended March 31, 1998 under the agreement totaled
$912,214.
On April 9, 1998, the Company signed a development and supply agreement with
Herbalife International of America, Inc. Under the agreement, the Company's
subsidiary Manhattan Drug Company, Inc. will develop, manufacture and supply
nutritional products to Herbalife through December 31, 2000.
Cost of sales increased to $8,225,099 for the nine months ended March 31, 1998
as compared to $5,775,432 for the nine months ended March 31, 1997. Cost of
sales increased as a percentage of sales to 83% for the nine months ended March
31, 1998 from 82% for the nine months ended March 31, 1997.
Selling and administrative expenses for the nine months ended March 31, 1998
were $2,047,980 as compared to $1,750,568 for the nine months ended March 31,
1997. The increase of approximately $297,000 was primarily attributable to an
increase in bad debt expense of approximately $38,000, an increase in
advertising of approximately $151,000, an increase in consulting fees of
approximately $36,000, an increase in office salaries of approximately $40,000,
a decrease in professional fees of approximately $67,000, an increase in freight
out of approximately $52,000 and an increase in entertainment expenses of
approximately $59,000.
Other income [expense] was $(28,307) for the nine months ended March 31, 1998 as
compared to $(25,487) for the nine months ended March 31, 1997. This increase in
net expense of $2,820 is attributable to a decrease in interest expense of
$20,934, a decrease in interest and investment income of $16,974 and an increase
in partnership losses of $6,780.
13
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Nine months ended March 31, 1998 Compared to the Nine months ended March 31,
1997
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 March
31, 1998 as to the amount, if any, of ultimate recovery.
Three months ended March 31, 1998 Compared to the Three months ended March 31,
1997
Results of Operations
The Company's net income for the three months ended March 31, 1998 and 1997 were
$126,941 and $69,310, respectively. This increase in net income of approximately
$58,000 is primarily the result of an increase in gross profit of approximately
$292,000, an increase in selling and administrative expenses of approximately
$88,000 and an increase in federal and state income taxes of approximately
$115,000 due to forgiveness of accrued rent which gave rise to deferred taxes.
Sales for the three months ended March 31, 1998 and 1997 were $4,978,839 and
$3,123,960, respectively, an increase of $1,854,879 or 59%. For the three months
ended March 31, 1998, the Company had sales to one customer, who accounted for
65% of net sales in 1998 and 45% in 1997.
Retail and mail order sales for the three months ended March 31, 1998 totaled
$296,537 as compared to $265,505 for the three months ended March 31, 1997 an
increase of $31,032 or 12%.
Sales under the Roche Vitamins, Inc. distribution agreement totaled $374,942 for
the three months ended March 31, 1998.
Because of the increase of sales to one customer, whose cost of sales are
higher, the cost of sales increased to $4,010,136 for the three months ended
March 31, 1998 as compared to $2,447,173 for the three months ended March 31,
1997. Cost of sales increased as a percentage of sales to 81% for the three
months ended March 31, 1998 as compared to 78% for the three months ended March
31, 1997.
Selling and administrative expenses for the three months ended March 31, 1998
were $732,255 as compared to $644,629 for the three months ended March 31, 1997.
The increase of $87,626 is primarily due to an increase in bad debt expense of
approximately $5,000, an increase in advertising of approximately $96,000, an
increase in entertainment of approximately $20,000, a decrease in professional
fees of approximately $30,000, and a decrease in consulting fees of
approximately $18,000.
Other income [expense] was $(14,761) for the three months ended March 31, 1998
as compared to $17,335 for the three months ended March 31, 1997. This decrease
of $32,096 is attributable to an increase in interest expense of $5,345, a
decrease of interest and investment income of $24,971 due to a decrease in cash
available for investing and a decrease in partnership income of $1,780.
14
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources
At March 31, 1998, the Company's working capital was $4,505,169 an increase of
$472,767 over working capital at June 30, 1997. Cash and cash equivalents were
$660,482 at March 31, 1998, a decrease of $349,774 from June 30, 1997. The
Company utilized $1,008,808 and $1,503,845 for operations for the nine months
ended March 31, 1998 and 1997, respectively. The primary reasons for the
decrease in cash utilized for operations are (a) an increase in inventories of
approximately $2,000,000 as more inventory is needed as more products are sold
through retail and mail order and there is an increase in work-in-process
inventory, (b) an increase in accounts receivable of approximately $640,000, and
(c) an increase in accounts payable of approximately $1,475,000. The Company
utilized $353,197 and $599,367 in investing activities for the nine months ended
March 31, 1998 and 1997, respectively. The Company generated $1,012,231 and
$2,616,432 from financing activities for the nine months ended March 31, 1998
and 1997, respectively.
The Company has a revolving line of credit with a bank which bears interest at
3/4% above the bank's prime lending rate which expired on April 30, 1998. On
April 30, 1998, the Company signed a Loan Modification Agreement with its bank,
extending the term of the $500,000 revolving line of credit to May 31, 1998. At
March 31, 1998, the balance due under the line of credit loan was $300,000. The
Company had additionally secured a five year equipment loan with interest at
1.5% above the bank's prime lending rate. At March 31, 1998, the balance due
under the equipment loan was $178,810.
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 $ 630,000 for the fiscal years ending June 30, 1998 and $680,000 for
fiscal year ending June 30, 1999.
In December 1997, the Underwriter of the public offering ceased operations and
market making activities. As part of the December 1996 underwriting arrangement,
the Company had entered into an agreement retaining the Underwriter as a
financial consultant to the Company for a two-year period commencing on the date
of the completion of the offering at a fee of $88,550. Accordingly at December
31, 1997, the balance of prepaid consulting fees of $36,896 was written off as
consulting expense for the nine months ending December 31, 1997.
On February 10, 1998, the Company signed an exclusive manufacturer agreement
with Martin Health Care Products, Inc. to provide to Martin Health Care certain
products for a ten year period. In connection with the agreement, the Company
also agreed to forgive from Martin Heath Care outstanding invoices totaling
$22,000. In return for the forgiveness, Martin agreed to pay to the Company a
royalty on sales of certain products and to issue to the Company 15,000 shares
of common stock in Martin Health Care Products, Inc. The Company has recorded
the cost of the common stock at $1,000 and has recorded the royalties as a
non-current asset in the amount of $21,000.
On March 12, 1998, the Company negotiated a three year promissory note with its
Chairman and President. The note bears interest at 7% and is due on March 12,
2001. The note provides for interest only to be paid quarterly. As additional
consideration for the loan and in the light of the below market interest rate
and uncollateralized nature of the loan, the Corporation issued a Class C
Warrant to purchase 150,000 shares of common stock at the aggregate purchase
price of $1.75 per share. The warrant is exercisable for a four year period
commencing one year after the issuance of the note and expires on March 12,
2003.
On March 17, 1998, the Company secured a three year equipment loan with interest
at 9.66%. At March 31, 1998, the balance due on the note was $109,545.
15
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended March 31, 1998 Compared to the Three months ended March 31,
1997
Liquidity and Capital Resources [Continued]
On April 9, 1998, the Company signed a development and supply agreement with
Herbalife International of America, Inc. ["Herbalife"] whereby the Company will
develop, manufacture and supply certain nutritional products to Herbalife
through December 31, 2000.
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.
Management expects to renew the $500,000 line of credit which expires on July
31, 1998. In the event 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.
Based on a preliminary study, the Company expects to spend approximately $10,000
through 1999 to modify its computer information systems enabling proper
processing of transactions relating to the year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. Accordingly, the Company does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations. The amount expensed in the nine
months ended March 31, 1998 was immaterial.
16
<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
17
<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: May 12, 1998 By:/s/ E. Gerald Kay
-----------------------------------------
E. Gerald Kay,
President and Chief Executive Officer
Date: May 12, 1998 By:/s/ Eric Friedman
-----------------------------------------
Eric Friedman,
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Mar-31-1998
<CASH> 660,482
<SECURITIES> 0
<RECEIVABLES> 3,077,200
<ALLOWANCES> 0
<INVENTORY> 4,127,564
<CURRENT-ASSETS> 8,254,517
<PP&E> 1,517,498
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,492,154
<CURRENT-LIABILITIES> 3,749,348
<BONDS> 0
0
0
<COMMON> 10,357
<OTHER-SE> 5,708,216
<TOTAL-LIABILITY-AND-EQUITY> 10,492,154
<SALES> 9,948,939
<TOTAL-REVENUES> 9,948,939
<CGS> 8,225,099
<TOTAL-COSTS> 2,047,980
<OTHER-EXPENSES> (14,702)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,009
<INCOME-PRETAX> (352,447)
<INCOME-TAX> (91,000)
<INCOME-CONTINUING> (261,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (261,447)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
