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, 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 February 9, 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 December 31, 1997 [Unaudited] 1...2
Consolidated Statements of Operations for the three and six
months ended December 31, 1997 and 1996 [Unaudited]........... 3...
Consolidated Statement of Stockholders' Equity for the six
months ended December 31, 1997 [Unaudited].................... 4...
Consolidated Statements of Cash Flows for six months ended
December 31, 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.....15
Part II: Other Information........................................... 16
Signature............................................................ 17
. . . . . . . .
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
[UNAUDITED]
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Assets:
Current Assets:
Cash and Cash Equivalents $ 381,840
Accounts Receivable - Net 1,789,614
Inventories 3,295,266
Prepaid Expenses and Other Current Assets 296,193
Refundable Federal Income Taxes 410,000
-----------
Total Current Assets 6,172,913
-----------
Property and Equipment - Net 1,282,085
-----------
Other Assets:
Goodwill 287,878
Prepaid Pension Costs 340,291
Security Deposits and Other Assets 87,465
-----------
Total Other Assets 715,634
-----------
Total Assets $ 8,170,632
===========
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 DECEMBER 31, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 2,241,735
Notes Payable 51,166
Accrued Expenses and Other Current Liabilities 147,871
Accrued Expenses - Related Party 297,000
-----------
Total Current Liabilities 2,737,772
-----------
Non-Current Liabilities:
Notes Payable 206,410
Notes Payable - Related Party 276,444
-----------
Total Non-Current Liabilities 482,854
-----------
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 4,203,123
Retained Earnings 738,213
-----------
Total Stockholders' Equity 4,950,006
-----------
Total Liabilities and Stockholders' Equity $ 8,170,632
===========
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 Six months ended
December 31, December 31,
------------ ------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 2,618,510 $1,829,461 $4,970,100 $ 3,937,915
Cost of Sales 2,192,211 1,718,000 4,214,963 3,308,259
----------- ---------- ---------- -----------
Gross Profit 426,299 111,461 755,137 629,656
Selling and Administrative
Expenses 719,969 527,390 1,315,725 1,105,939
----------- ---------- ---------- -----------
Operating [Loss] (293,670) (415,929) (560,588) (476,283)
----------- ---------- ---------- -----------
Other Income [Expense]:
Interest Expense (16,784) (27,791) (27,981) (54,260)
Interest and Investment Income 2,819 10,656 19,435 11,438
Loss on Investment in Partnership (1,497) -- (5,000) --
------ ---------- ---------- -----------
Total Other [Expense] (15,462) (17,135) (13,546) (42,822)
----------- ---------- ---------- -----------
[Loss] Before Income Taxes (309,132) (433,064) (574,134) (519,105)
Federal and State Income
Tax [Benefit] (103,046) (138,760) (185,746) (160,915)
----------- ---------- ---------- -----------
Net [Loss] $ (206,086) $ (294,304) $ (388,388) $ (358,190)
=========== ========== ========== ===========
Net [Loss] Per Common Share
[Basic and Diluted] $ (.05) $ (.08) $ (.09) $ (.10)
=========== ========== ========== ===========
Average Common Shares
Outstanding 4,335,000 3,887,250 4,335,000 3,454,125
=========== ========== ========== ===========
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 SIX MONTHS
ENDED DECEMBER 31, 1997.
[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>
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
Net [Loss] for the six months
ended December 31, 1997 -- -- -- -- (388,388) (388,388)
------- -------- -------- --------- -------- --------
Balance - December 31, 1997 4,335,000 $ 8,670 $ -- $ 4,203,123 $ 738,213 $ 4,950,006
=========== ========== ======== =========== =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
4
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Six months ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
<S> <C> <C>
Net [Loss] $ (388,388) $ (358,190)
---------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 157,933 139,788
Non-Current Rent Charge -- (3,140)
Deferred Income Taxes (22,000) (24,000)
Imputed Interest on Note Payable - Related Party 7,051 7,049
Loss on Investment in Partnership 5,000 --
Interest Income on Note Receivable (11,627) --
Write-off of Note Receivable 33,058 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 675,094 860,375
Inventories (1,208,900) (872,960)
Prepaid Expenses and Other Current Assets 16,455 (201,843)
Security Deposits and Other Assets (23,938) (37,896)
Refundable Federal Income Taxes (170,000) --
Increase [Decrease] in:
Accounts Payable 479,773 (656,667)
Federal and State Income Taxes Payable (41,416) (48,398)
Accrued Expenses and Other Liabilities (2,238) 80,978
---------- -----------
Total Adjustments (105,755) (756,714)
---------- -----------
Net Cash - Operating Activities - Forward (494,143) (1,114,904)
---------- -----------
Investing Activities:
Payment for Property and Equipment (361,975) (150,773)
Loans to Stockholders' -- (1,519)
Repayment of Note Receivable 250,000 2,109
Loan to Related Company 2,500 (722)
---------- -----------
Net Cash - Investing Activities - Forward (109,475) (150,905)
---------- -----------
Financing Activities:
Proceeds from Initial Public Offering -- 3,645,790
Proceeds from Notes Payable -- 332,844
Repayment of Notes Payable (24,798) (1,134,117)
Deferred Offering Costs -- (219,446)
---------- -----------
Net Cash - Financing Activities - Forward $ (24,798) $ 2,625,071
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
5
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Six months ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (494,143) $(1,114,904)
Net Cash - Investing Activities - Forwarded (109,475) (150,905)
Net Cash - Financing Activities - Forwarded (24,798) 2,625,071
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents (628,416) 1,359,262
Cash and Cash Equivalents - Beginning of Periods 1,010,256 765,065
---------- -----------
Cash and Cash Equivalents - End of Periods $ 381,840 $ 2,124,327
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 20,825 $ 46,298
Income Taxes $ 66,045 $ 52,562
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.
</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 six months ended December 31, 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 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.
[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 December 31, 1997.
[5] Inventories
Inventories consist of the following at December 31, 1997:
Raw Materials $ 1,576,714
Work-in-Process 1,018,715
Finished Goods 699,837
-----------
Total $ 3,295,266
----- ===========
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 and was repaid on November 19, 1997. Advance interest of
$26,250 was payable out of the proceeds of the loan and is taken into income
over the period of the loan.
[7] Notes Payable
Notes payable are summarized as follows at December 31, 1997:
Related Party
Notes Payable Note Payable Total
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 69,186 $ -- $ 69,186
Gerob Realty Partnership (b) -- 276,444 276,444
Summit Bank:
Revolving Line-of-Credit (c) -- -- --
Equipment Term Loan (d) 188,390 -- 188,390
---------- ----------- ----------
Totals 257,576 276,444 534,020
Less: Current Portion 51,166 -- 51,166
---------- ----------- ----------
Noncurrent Portion $ 206,410 $ 276,444 $ 482,854
------------------ ========== =========== ==========
(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 [See Note 13].
(c)Under the terms of a revolving line of credit which expired 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 December 31, 1997, there were no
borrowings under the line of credit [See Note 13].
(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
December 31, 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
<PAGE>
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
December 31,
1998 $ 51,166 $ -- $ 51,166
1999 50,501 -- 50,501
2000 52,028 -- 52,028
2001 53,710 -- 53,710
2002 50,171 276,444 326,615
---------- ----------- ----------
Totals $ 257,576 $ 276,444 $ 534,020
------ ========== =========== ==========
[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 December 31, 1997, the
Company's uninsured cash balances totaled approximately $55,000. 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 December 31, 1997 is $15,750.
[9] Major Customer
For the six months ended December 31, 1997 and 1996, approximately 45% and 37%
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 six months
ended December 31, 1997 and 1996, an aggregate of approximately 15% and 42%,
respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the six months
ended December 31, 1997 and 1996. Accounts receivable from these customers
comprised approximately 57% and 62% of total accounts receivable at December 31,
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, 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 six months ended December 31, 1997 and 1996 on this
lease was approximately $58,000 and $87,000, respectively. Unpaid rent of
$297,000 due to Gerob at December 31, 1997 has been separately disclosed as
accrued expenses on the consolidated balance sheet [See Note 13].
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 six
months ended December 31, 1997 on this lease was approximately $202,000.
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 $ 28,398 $ 173,000 $ 201,398
1999 53,646 346,000 399,646
2000 43,568 346,000 389,568
2001 28,070 346,000 374,070
2002 23,515 182,609 206,124
Thereafter -- -- --
---------- --------- ----------
Total $ 177,197 $1,393,609 $1,570,806
----- ========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $260,000 and $255,000 for the six months ended December 31, 1997
and 1996, respectively. Rent expense is stated net of sublease income of
approximately $11,000 and $125,000 for the six months ended December 31, 1997
and 1996, respectively.
[B] Employment Agreements - Effective July 1, 1996, the Company entered into
three year employment agreements with its president and four other officers
which provide for aggregate annual salaries of $580,000 for the year ending June
30, 1997, $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
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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 December 31, 1997 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. 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
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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. At December 31, 1997, none have
been exercised.
[13] Subsequent Events
[A] Related Party Notes Payable - On January 12, 1998, the Company signed a
Stock Sale Agreement with Gerob Realty Partnership ["Gerob"]. Under the terms of
the agreement, the Company sold from its authorized but unissued common stock a
total of 843,300 shares to Gerob. The issuance of the stock was in consideration
of $297,000 of past due rent separately disclosed as accrued expenses on the
consolidated balance sheet and the satisfaction of a promissory note of $276,444
separately disclosed as a non-current note payable on the consolidated balance
sheet of December 31, 1997.
[B] Line of Credit - On January 26, 1998, the Company signed a Loan Modification
Agreement with its bank, extending the term of the $500,000 revolving line of
credit to April 30, 1998.
. . . . . . . . . . . . . . . .
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.
Six months ended December 31, 1997 Compared to the Six Months ended December 31,
1996
Results of Operations
The Company's net losses for the six months ended December 31, 1997 and 1996
were $(388,388) and $(358,190), respectively. This increase in net loss of
approximately $30,000 is primarily the result of an $84,000 increase in
operating loss, a decrease of interest expense of approximately $26,000 and an
increase in the federal tax benefit of approximately $25,000. The $84,000
increase in operating loss is due to an increase in selling and administrative
expenses of approximately $210,000, and a gross profit increase of approximately
$126,000.
Sales for the six months ended December 31, 1997 and 1996 were $4,970,100 and
$3,937,915, respectively, an increase of approximately $1,032,000 or 26%. For
the six months ended December 31, 1997, the Company had sales to one customer,
who accounted for 45% of net sales in 1997 and 37% in 1996.
Retail and mail order sales for the six months ended December 31, 1997 totaled
$549,679 as compared to $416,604 for the six months ended December 31, 1996, an
increase of $133,075 or 32% 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 six months ended under the agreement totaled $537,272.
Cost of sales increased to $4,214,963 for the six months ended December 31, 1997
as compared to $3,308,259 for the six months ended December 31, 1996. Cost of
sales increased as a percentage of sales to 85% for the six months ended
December 31, 1997 from 84% for the six months ended December 31, 1996.
Selling and administrative expenses for the six months ended December 31, 1997
were $1,315,725 as compared to $1,105,939 for the six months ended December 31,
1996. The increase of approximately $210,000 was primarily attributable to an
increase in bad debt expense of approximately $33,000, an increase in
advertising of approximately $63,000, an increase in consulting fees of
approximately $34,000, an increase in office salaries of approximately $35,000,
a decrease in professional fees of approximately $35,000, an increase in freight
out of approximately $42,000 and an increase in entertainment expenses of
approximately $41,000.
Other income [expense] was $(13,546) for the six months ended December 31, 1997
as compared to $(42,822) for the six months ended December 31, 1996. This
decrease in net expense of $29,276 is attributable to a decrease in interest
expense of $ 26,279, an increase in interest and investment income of $7,997 and
a $5,000 loss from a 50% owned partnership.
13
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended December 31, 1997 Compared to the Six months ended December 31,
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
December 31, 1997 as to the amount, if any, of ultimate recovery.
Three months ended December 31, 1997 Compared to the Three months ended December
31, 1996
The Company's net losses for the three months ended December 31, 1997 and 1996
were $(309,132) and $(433,064) respectively. This decrease in net loss of
approximately $122,000 is primarily the result of an increase in gross profit of
approximately $314,000 and an increase in selling and administrative expenses of
approximately $192,000.
Sales for the three months ended December 31, 1997 and 1996 were $2,618,510 and
$1,829,461, respectively, an increase of $789,049 or 43%. For the three months
ended December 31, 1997, the Company had sales to one customer, who accounted
for 50% of net sales in 1997 and 44% in 1996.
Retail and mail order sales for the three months ended December 31, 1997 totaled
$275,930 as compared to $233,200 for the three months ended December 31, 1996 an
increase of $42,730 or 18%.
Sales under the Roche Vitamins, Inc. distribution agreement totaled $262,140 for
the three months ended December 31, 1997.
Cost of sales increased to $2,192,211 for the three months ended December 31,
1997 as compared to $1,718,000 for the three months ended December 31, 1997.
Cost of sales decreased as a percentage of sales to 84% for the three months
ended December 31, 1997 as compared to 94% for the three months ended December
31, 1996. The decrease in cost of sales is due to a decrease in manufacturing
expenses.
The Company completed the renovation of its blending department in December
1997.
Selling and administrative expenses for the three months ended December 31, 1997
were $719,969 as compared to $527,390 for the three months ended December 31,
1996. The increase of $192,579 is primarily due to an increase in bad debt
expense of approximately $33,000, an increase in advertising of approximately
$63,000, an increase in freight out of approximately $23,000, an increase in
entertainment of approximately $24,000, an increase in consulting fees of
approximately $41,000 and an increase in professional fees of approximately
$11,000.
Other income [expense] was $15,462 for the three months ended December 31, 1997
as compared to $(17,135) for the three months ended December 31, 1996. This
increase of $1,673 is attributable to a decrease in interest expense of $11,007
a decrease of interest and investment income of $7,837 and a loss of $1,497 from
a 50% owned partnership.
14
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources
At December 31, 1997, the Company's working capital was $3,435,141 a decrease of
$597,261 over working capital at June 30, 1997. Cash and cash equivalents were
$381,840 at December 31, 1997 a decrease of $628,416 from June 30, 1997. The
Company utilized $494,143 and $1,114,904 for operations for the six months ended
December 31, 1997 and 1996, respectively. The primary reasons for the decrease
in cash utilized for operations are (a) an increase in inventories of
approximately $1,200,000 as more inventory is needed as more products are sold
through retail and mail order sales, increasing work-in-process inventory, (b) a
decrease in accounts receivable of approximately $675,000, (c) an increase in
accounts payable of approximately $480,000, and (d) an increase in refundable
federal income taxes due to the potential carryback of net operating losses. The
Company utilized $109,475 and $150,905 in investing activities for the six
months ended December 31, 1997 and 1996 respectively. The Company utilized
$24,798 from financing activates for the six months ended December 31, 1997 and
generated $2,625,071 from financing activities for the six months ended December
31, 1996.
The Company had a $500,000 revolving line of credit with a bank which bore
interest at .75% above the bank's prime lending rate and expired on November 30,
1997. On January 26, 1998, the Company renewed the revolving line of credit
until April 30, 1998. The Company has additionally secured a five year equipment
term loan with interest at 1.5% above the banks prime lending rate. At December
31, 1997, the balance due under the equipment loan was $188,390.
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 $ 630,000 for the fiscal year ending June 30, 1998 and $680,000 for
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 six months ending December 31, 1997.
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 six
months ended December 31, 1997 was immaterial.
15
<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
16
<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: February 9, 1998 By: /s/ E. Gerald Kay
-------------------------------------
E. Gerald Kay,
President and Chief Executive Officer
Date: February 9, 1998 By: /s/ Eric Friedman
-------------------------------------
Eric Friedman,
Chief Financial Officer
17
<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 reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Dec-31-1997
<CASH> 381,840
<SECURITIES> 0
<RECEIVABLES> 1,789,614
<ALLOWANCES> 0
<INVENTORY> 3,295,266
<CURRENT-ASSETS> 6,172,913
<PP&E> 1,282,085
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,170,632
<CURRENT-LIABILITIES> 2,737,772
<BONDS> 0
0
0
<COMMON> 8,670
<OTHER-SE> 4,941,336
<TOTAL-LIABILITY-AND-EQUITY> 8,170,632
<SALES> 2,618,510
<TOTAL-REVENUES> 2,618,510
<CGS> 2,192,211
<TOTAL-COSTS> 719,969
<OTHER-EXPENSES> (1,322)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,784
<INCOME-PRETAX> (309,132)
<INCOME-TAX> (103,046)
<INCOME-CONTINUING> (206,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (206,086)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
