UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998 Commission File Number 000-28876
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CHEM INTERNATIONAL, INC.
(Exact name of small business registrant 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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (973) 926-0816
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.002 par value per share
Class A Redeemable Common Stock Purchase Warrants
(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes X No
Registrant's revenues for the fiscal year ended June 30, 1998 were $16,011,049.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the trading price of the Registrant's Common Stock on August
31, 1998 was $3,352,500.
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at August 31, 1998
Common Stock $.002 par value 5,178,300 Shares
Class A Redeemable Common Stock 1,265,000 Warrants
Purchase Warrants
Class C Redeemable Common Stock 150,000 Warrants
Purchase Warrants
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-KSB ANNUAL REPORT
INDEX
Page
Part I
Item 1. Description of Business 1
Item 2. Description of Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 6
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act 12
Item 10. Executive Compensation 12
Item 11. Security Ownership of Certain Beneficial
Owners and Management 12
Item 12. Certain Relationships and Related Transactions 12
Item 13. Exhibits and Reports on Form 8-K 12
Signatures
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PART I
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact, in this Form 10-KSB,
including without limitation, the statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Business" are, or may be deemed to be, forward looking statements. These
statements represent the Company's current judgment and are subject to risks and
uncertainties that could cause actual results to differ materially. Such risks
and uncertainties include, without limitation: (i) loss of a major customer,
(ii) competition, and/or (iii) government regulation.
Item 1. Description of Business
Chem International Inc. [the "Company"] a Delaware corporation, is the
survivor of a merger of Chem International, Inc. a Delaware Corporation, with
and into Frog Industries, Ltd. a New York corporation, which was effected on
December 27, 1994 with Frog Industries, Ltd. renamed Chem International Inc.
after the merger. The Company was reincorporated in Delaware on February 2,
1996. The Company is engaged primarily in manufacturing, marketing and sales of
vitamins, nutritional supplements and herbal products, including vitamins sold
as single entity supplements, in multi-vitamin combinations and in varying
potency levels and in different packaging sizes. The Company's subsidiary,
Manhattan Drug Company, Inc. ["Manhattan Drug"], manufacturers the vitamins and
nutritional supplements for sale to distributors, multilevel marketers and
specialized health-care providers. The Company also manufactures such products
for sale under its own private brand, "Vitamin Factory," at its retail store in
Hillside, New Jersey or through mail order.
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.
Manufacturing Agreement
On February 14, 1998, the Company signed a manufacturing agreement with Pilon
International, PLC., a company that supplies Zepter International, a world-wide
direct sales distributor of consumer products. The Company will manufacture and
develop dietary supplements through the year 2001.
Risk of Reduction of Significant Revenues from Major Customer
The Company derives a significant portion of its sales from one customer, Rexall
Sundown, Inc. ["Rexall"], for which it manufactures vitamins and nutritional
supplements. Sales to Rexall expressed as a percentage of the Company's total
sales, were approximately 44% and 48%, respectively, for the fiscal years ended
June 30, 1998 and 1997. The loss of this customer would have a material affect
on the Company's operations.
Dependence on Key Personnel
The Company is highly dependent on the experience of its management in the
continuing development of its manufacturing and retail operations. The loss of
the services of certain of these individuals, particularly E. Gerald Kay,
Chairman of the Board, President and director of the Company, would have a
material adverse effect on the Company's business. The Company has entered into
employment agreements with each of its five executive officers, which expire on
June 30, 1999. Such agreements may be terminated by the employees at any time
upon 30 days prior written notice without penalty, subject to a one year
non-compete clause. The Company has obtained key-man life insurance in the
amount of $ 1,000,000 on the life of Mr. Kay, with the Company as the named
beneficiary.
1
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Raw Materials
The principal raw materials used in the manufacturing process are natural and
synthetic vitamins, minerals, herbs, and related nutritional supplements,
gelatin capsules and coating materials and the necessary components for
packaging the finished products. The raw materials are available from numerous
sources within the United States. The gelatin capsules and coating materials and
packaging materials are similarly widely available. Raw materials are generally
purchased by the Company without long term commitments, on a purchase order
basis. The Company's principal suppliers are Roche Vitamins, Inc., Triarco Inc.,
M.W. International Inc. and BASF Corporation.
Employees
As of June 30, 1998, the Company had 96 full time employees, of whom 60 belonged
to a local unit of the Teamsters Union and are covered by a collective
bargaining agreement which expires August 30, 1999.
Seasonality
The Company's results of operations are not significantly affected by seasonal
factors.
Trademarks
The Company owns the registration in the United States Patent and Trademark
offices for "Oxitiva." Oxitiva is the Company's brand of chewable antioxidant
formula.
Government Regulations
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by a number of federal
agencies, including the Food and Drug Administration [the "FDA"], the Federal
Trade Commission [the "FTC"], the United States Postal Service, the Consumer
Product Safety Commission and the United States Department of Agriculture. The
FDA is primarily responsible for the regulation of the manufacturing, labeling
and sale of the Company's products. The Company's activities are also regulated
by various state and local agencies in which the Company's products are sold.
The operation of the Company's vitamin manufacturing facility is subject to
regulation by the FDA as a food manufacturing facility. In addition, the United
States Postal Service and the FTC regulate advertising claims with respect to
the Company's products sold by solicitation through the mail.
The Dietary Supplement Health and Education Act of 1994 [the "Dietary Supplement
Act"] was enacted on October 25, 1994. The Dietary Supplement Act amends the
Federal Food, Drug and Cosmetic Act by defining dietary supplements, which
include vitamins, minerals, nutritional supplements and herbs, and by providing
a regulatory framework to ensure safe, quality dietary supplements and the
dissemination of accurate information about such products. Dietary supplements
are regulated as foods under the Dietary Supplement Act and the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives, or as drugs unless product claims trigger drug status.
The Dietary Supplement Act provides for specific nutritional labeling
requirements for dietary supplements effective January 1, 1997. The Dietary
Supplement Act permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well being from consumption of a dietary ingredient or the role of a
nutrient or dietary ingredient in affecting or maintaining structure or function
of the body. In addition, the Dietary Supplement Act also authorizes the FDA to
promulgate Current Good Manufacturing Practices ["CGMPs"] specific to the
manufacture of dietary supplements, to be modeled after food CGMPS. The Company
currently manufactures its dietary supplement products pursuant to food CGMPS.
The Company believes that it is currently in compliance with all applicable
government regulations.
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The FDA will be proposing and promulgating regulations to implement the Dietary
Supplement Act. The Company cannot determine what effect such regulations, when
promulgated, will have on its business in the future or what cost it will add to
manufacturing the product. Such regulations could, among other things, require
expanded or different labeling, the recall, reformulation or discontinuance of
certain products, additional recordkeeping and expanded documentation of the
properties of certain products and scientific substantiation regarding
ingredients, product claims, safety or efficacy.
Competition
The business of manufacturing, distributing and marketing vitamins and
nutritional supplements is highly competitive. Many of the Company's competitors
are substantially larger and have greater financial resources with which to
manufacture and market their products. In particular, competition is fierce in
the retail segment. Many direct marketers not only focus on selling their own
branded products, but offer national brands at discounts as well. Many
competitors have established brand names recognizable to consumers. In addition,
major pharmaceutical companies offer nationally advertised multivitamin
products. The Company also competes with certain of its customers that also have
their own manufacturing capabilities.
Many of the Company's competitors in the retailing segment have the financial
resources to advertise freely to promote sales and to produce sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail purchasers and offer participation in frequent buyers programs. Some
retail competitors also manufacture their own products whereby they have the
ability and financial incentive to sell their own product.
Product Liability Insurance
The Company intends to compete by stressing the quality of its manufacturing
product, providing prompt service, competitive pricing of products in its direct
marketing segment and by focusing on niche products in the international retail
markets.
The Company, like other manufacturers, wholesalers and distributors of vitamin
and nutritional supplement products, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its products results
in injury. Accordingly, the Company currently maintains product liability
insurance policies which provides a total of $10 million of coverage per
occurrence and $10 million of coverage in the aggregate. Although the Company's
product liability insurance policies do not currently provide coverage for
claims with respect to products containing L-tryptophan manufactured after
September 1992, the Company discontinued manufacturing such products in 1989.
Based upon indemnification arrangements with its supplier of L-tryptophan, the
Company's product liability insurance and the product liability insurance of its
suppliers, the Company believes that its product liability insurance is adequate
to cover any product liability claims. There can be no assurance that the
Company's current level of product liability insurance will continue to be
available or, if available, will be adequate to cover potential liabilities.
3
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Item 2. Description of Properties
On January 10, 1997, the Company entered into a lease agreement for
approximately 84,000 square feet of factory, warehouse and office facilities in
Hillside, New Jersey. The facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company which is 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 has a term of five years and
expires on January 10, 2002. The lease provides for a base annual rental of
$346,000 plus increases in real estate taxes and building expenses. At its
option, the Company has the right to renew the lease for an additional five year
period. The space is utilized for the retail mail order business, warehousing
and packaging operations and also houses the Company's corporate offices.
The Company also leases 40,000 square feet of manufacturing facilities in
Hillside, New Jersey from Gerob Realty Partnership, of which E. Gerald Kay,
President of the Company, is a general partner. The lease which expires on
December 31, 1998 provides for a minimum annual rental of $60,000 plus payment
of all real estate taxes. The space is utilized for Manhattan Drug's tablet
manufacturing operations.
Item 3. Legal Proceedings
Numerous unrelated manufacturers, distributors, suppliers, importers and
retailers of manufactured L- tryptophan are or were defendants in an estimated
2,000 lawsuits brought in federal and state courts seeking compensation and
punitive damages for alleged personal injury from ingestion of products
containing manufactured L-tryptophan. A number of these suits have been settled
or discontinued. Additional suits may be filed. Prior to a request from the FDA
in November 1989 for a national, industry-wide recall, Manhattan Drug halted
sales and distribution and also ordered a recall of L- tryptophan products.
Subsequently, the FDA indicated that there is a strong epidemiological link
between the ingestion of the allegedly contaminated L-tryptophan and a blood
disorder known as eosinophilia myalgia syndrome ["EMS"]. Investigators at the
United States Centers for Disease Control suspect that a contaminant was
introduced during the manufacture of the product in Japan. While intensive
independent investigations are continuing, there has been no indication that EMS
was caused by any formulation or manufacturing fault of Manhattan Drug or any of
the other firms that manufactured tablets and/or capsules containing
L-tryptophan.
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 June
30, 1998 as to the amount, if any, of ultimate recovery.
Manhattan Drug and certain companies in the vitamin industry, including
distributors, wholesalers and retailers, have entered into an agreement [the
"Indemnification Agreement"] with Showa Denko America, Inc. ["SDA"], under which
SDA, a U.S. subsidiary of a Japanese corporation, Showa Denko K.K. ["SDK"],
which appears to have been the supplier of all of the alleged contaminated
L-tryptophan products, has assumed the defense of all claims against Manhattan
Drug arising out of the ingestion of L-tryptophan products and has agreed to pay
the legal fees and expenses in that defense, and SDK has agreed to guarantee
SDA's obligation therein. SDA has posted a revolving irrevocable letter of
credit, in the amount of $20,000,000, to be used for the benefit of the Company
and other indemnified parties if SDA is unable or unwilling to satisfy any
claims or judgments. SDA has agreed to indemnify Manhattan Drug against any
judgments and to fund settlements arising out of those actions and claims if it
is determined that a cause of the injuries sustained by the plaintiffs was a
constituent in the bulk material sold by SDA to Manhattan Drug or its suppliers,
except to the extent that Manhattan Drug is found to have any part of the
responsibility for those injuries and except for certain claims relating to
punitive damages. There is no assurance that SDA will have the financial ability
to perform under the Indemnification Agreement.
4
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Manhattan Drug has product liability insurance, which the Company believes
provides coverage for all of its L-tryptophan products subject to these claims,
including legal defense costs. Due to the multitude of defendants, the
probability that some or all of the total liability will be assessed against
other defendants and the fact that discovery in these actions is not complete,
it is impossible to predict the outcome of these actions or to assess the
ultimate financial exposure of the Company. Based upon the aforementioned
indemnification arrangements, the Company's product liability insurance and the
product liability insurance of its suppliers, the Company does not believe the
outcome of these actions will have a material adverse effect on Manhattan Drug,
and, accordingly, no provision has been made in the Company's Consolidated
Financial Statements for any loss that may be incurred by the Company as a
result of these actions.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended June 30, 1998.
5
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On October 30, 1996, the Company's units [Consisting of two shares of Common
Stock and two Class A Redeemable Warrants], Common Stock and Class A Redeemable
Warrants commenced trading on the National Association of Securities Dealers
Automated Quotation SmallCap Market System "NASDAQ" under the symbols CXILU,
CXIL and CXILW, respectively. In November 1996 the Company unbundled its public
unit. In November 1996, the Company authorized NASDAQ to delist the Unit [CXILU]
and cease trading it. Prior to the Company's initial public offering in October
1996 the Common Stock was traded sporadically in the over-the-counter market on
the NASD's Electronic Bulletin Board during the period commencing December 18,
1995 through May 5, 1996, at which time it was voluntarily withdrawn from
trading.
The following table sets forth the high and low prices for each of the Unit, the
Common Stock and the Class A Redeemable Warrant for the periods indicated as
reported by NASDAQ.
UNITS [CLIXU]
Time Period: HIGH LOW
October 30, 1996 through November 27, 1996 [Trading
ceased on November 29, 1996] 27 8
COMMON STOCK [CXIL]
Time Period:
October 30, 1996 through December 31, 1996 10 5 1/4
January 1, 1997 through March 31, 1997 10 1/4 6 1/4
April 1, 1997 through June 30, 1997 8 3/4 2 1/2
July 1, 1997 through September 30, 1997 3 7/8 1 7/8
October 1, 1997 through December 31, 1997 3 5/16 13/32
January 1, 1998 through March 31, 1998 2 1/4 1/2
April 1, 1998 through June 30, 1998 3 3/8 1 5/8
CLASS A REDEEMABLE WARRANTS [CXILW]
Time Period:
October 30, 1996 through December 31, 1996 5 2 1/4
January 1, 1997 through March 31, 1997 5 1/2 2 1/2
April 1, 1997 through June 30, 1997 4 3/4 3/8
July 1, 1997 through September 30, 1997 1 3/8
October 1, 1997 through December 31, 1997 1 1/16
January 1, 1998 through March 31, 1998 7/16 1/16
April 1, 1998 through June 30, 1998 3/4 5/16
As of June 30, 1998 there were approximately 167 holders of record of the
Company's Common Stock.
The Company has not declared or paid a dividend with respect to its Common Stock
nor does the Company anticipate paying dividends in the foreseeable future.
6
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Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto.
Results of Operations
Year ended June 30, 1998 Compared to the Year ended June 30, 1997
The Company's net [loss] for the year ended June 30, 1998 was $(97,438) as
compared to net loss of $(654,304) for the year ended June 30, 1997. This
decrease in net loss of approximately $557,000 is primarily the result of a
$865,000 decrease in operating loss and a decrease in the federal tax benefit of
approximately $200,000. The $865,000 decrease in operating loss is due to a
gross profit increase of approximately $1,500,000 and an increase in selling and
administrative expense of approximately $650,000.
Sales for the years ended June 30, 1998 and 1997 were $16,011,049 and
$11,126,860, respectively, an increase of approximately $5,000,000 or 44%. For
the year ended June 30, 1998, the Company had sales to one customer, who
accounted for 44% of net sales in 1998 and 48% of net sales in 1997. The loss of
this customer would have an adverse affect on the Company's operations.
Retail and mail order sales for the year ended June 30, 1998 totaled $1,090,854
as compared to $983,749 for the year ended June 30, 1997, an increase of
$107,105 or 11%.
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 year ended June 30, 1998 totaled $1,250,480.
Cost of sales increased to $12,841,937 in 1998 as compared to $9,475,624 for
1997. Cost of sales decreased as a percentage of sales to 80% as compared to 85%
for 1997. The decrease in cost of sales is due to greater operating efficiencies
because of the extensive renovation of the blending department and an increase
in sales to customers of bottled products.
Selling and administrative expenses for the year ended June 30, 1998 were
$3,197,047 versus $2,546,972 for the same period a year ago. The increase of
$650,075 was primarily attributable to an increase of advertising of
approximately $170,000, an increase in travel and entertainment of approximately
$85,000, a decrease in professional fees of approximately $55,000, a decrease in
consulting fees of approximately $124,000, an increase in pension and
profit-sharing plan expenses of approximately $400,000, and an increase in
office salaries of approximately $49,000.
Other income [expense] was $(105,789) for the year ended June 30, 1998 as
compared to $(4,588) for the same period a year ago. This increase in net
expense of $101,201 is attributable to a decrease in interest expense of
$12,128, a decrease in interest and investment income of $48,491, a decrease in
sales of fixed assets of $25,000, a loss resulting from the write off of a note
receivable of $33,058, and a decrease in partnership income of $6,780.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Results of Operations
Year ended June 30, 1997 Compared to the Year Ended June 30, 1996
The Company's net [loss] for the year ended June 30, 1997 was $(654,304) as
compared to net income of $42,198 for the year ended June 30, 1996. This
decrease in net income of approximately $700,000 is primarily the result of a
$1,200,000 decrease in operating income resulting from a decrease in gross
profit of approximately $650,000 and an increase in selling and administrative
expenses of approximately $550,000 for the year ended June 30, 1997 as compared
to the year ended June 30, 1996. The decrease in gross profit is due to a higher
percentage of sales to lower margin customers and an increase in raw material
costs.
Cost of sales increased to $9,475,624 in 1997 as compared to $8,343,179 for
1996. Cost of sales increased as a percentage of sales to 85% as compared to 78%
for 1996. The increase in cost of sales is due to an increase in material costs.
The Company has begun to develop new raw material suppliers whereby the Company
can achieve a lower cost of materials.
Selling and administrative expenses for the year ended June 30, 1997 were
$2,546,972 versus $1,990,997 for the same period a year ago. The increase of
$555,975 was primarily attributable to an increase in officers' compensation of
approximately $225,000, an increase in office salaries of approximately $25,000,
a decrease in professional fees of approximately $38,000, a decrease in travel
and entertainment of approximately $21,000, an increase in consulting fees of
approximately $207,000, a decrease in office rent of approximately $22,000, an
increase in advertising and catalog costs of approximately $117,000 and an
increase in payroll tax expense of approximately $9,000.
Other income [expense] was $(4,588) for the year ended June 30, 1997 as compared
to $(127,823) for the same period a year ago. This increase of $123,235 is
attributable to a decrease in sales of fixed assets of $39,000, an increase of
$38,778 from a 50% owned partnership, a decrease in interest expense of $85,600
and an increase in interest and investment income of $37,857.
The Company began in July of 1997 a renovation of its blending department.
Management expects the renovation to be completed by October 15, 1997 and
expects to achieve greater manufacturing efficiencies as a result.
Sales for the years ended June 30, 1997 and 1996 were $11,126,860 and
$10,637,797, respectively, an increase of approximately $490,000 or 5%. For the
year ended June 30, 1997, the Company had sales to one customer, who accounted
for 48% of net sales in 1997 and 40% of net sales in 1996. The loss of this
customer would have an adverse affect on the Company's operations.
Retail and mail order sales for the year ended June 30, 1997 totaled $983,749 as
compared to $756,711 for the year ended June 30, 1996, an increase of $227,038
or 30%.
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 additional terms of one year each. Sales
for the period from February 20, 1997 through June 30, 1997 under the agreement
totaled $308,259.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Results of Operations
Year ended June 30, 1997 Compared to the Year Ended June 30, 1996
In 1997, the Company signed an exclusive agreement with International Nutrition
Research Center, Inc. ["INRC"] to market and distribute the Master Amino Acid
Pattern ["MAP"]. MAP is a new patented unique food supplement in the sports
nutrition field and is specifically recommended for professional and weekend
athletes who need to maximize protein synthesis. MAP is being marketed
exclusively by "The Vitamin Factory, Inc." a subsidiary of the Company through
mail order. MAP represents the first proprietary product developed for sale by
the Company.
On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material used in the manufacturing of tablets sold containing
the recalled raw material. 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. In September, the Company instituted suit to recover
all damages.
Liquidity and Capital Resources
At June 30, 1998, the Company's working capital was $4,761,511 an increase of
$729,109 over working capital at June 30, 1997. Cash and cash equivalents were
$956,403 at June 30, 1998 a decrease of $53,853 from June 30, 1997. The Company
utilized $414,153 and $1,776,278 for operations for the years ended June 30,
1998 and 1997, respectively. The primary reasons for the decrease in cash
utilized for operations are (a) an increase in inventories of approximately
$1,400,000, (b) an increase in accounts receivable of approximately $1,000,000
resulting from an increase of approximately $2,000,000 in sales for the quarter
ended June 30, 1998, (c) an increase in accounts payable of approximately
$1,000,000, (d) a decrease in prepaid pension costs of approximately $340,000
due to the termination of the Company's defined benefit pension plan in May of
1997, and (e) a decrease in refundable federal income taxes of $240,000. The
Company utilized $740,216 and $660,004 in investing activities for the years
ended June 30, 1998 and 1997, respectively. The Company generated net cash of
$1,100,516 from debt financing activities for the year ended June 30, 1998 and
generated $2,681,473 from financing activities for the year ended June 30, 1997
through net proceeds from a public offering of $3,426,344 and proceeds from debt
financing of $412,744, with payments on debt of $1,157,615.
The Company had a $500,000 revolving line of credit with a bank which bears
interest at 1.5% above the bank's prime lending rate and expired on July 29,
1998. At June 30, 1998, the balance due under the line of credit loan was
$300,000. The Company has additionally secured a five year equipment loan with
interest at .75% above the bank's prime lending rate. At June 30, 1998, the
balance due under the equipment loan was $169,043.
On July 27, 1998, the Company signed a new financing agreement with a new bank
providing for a $500,000 revolving line of credit with interest at 1.00% above
the bank's prime lending rate and expiring on July 30, 1999, a $170,000 five
year equipment loan with interest at 1.5% above the bank's prime lending rate
expiring on June 30, 2003 and a five year $225,000 equipment term loan with
interest at 1.50% above the bank's prime lending rate.
On July 29, 1998, the Company borrowed $300,000 from the new bank to pay off the
existing line of credit balance and $170,000 to pay off the existing equipment
loan balance. Subsequently, the Company repaid the $300,000 on August 7, 1998.
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 June 30, 1999.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Liquidity and Capital Resources
In December 1997, the Underwriter of the public offering ceased operations and
market making activities. As part of the October 1996 underwriting agreement,
the Company had entered into an agreement retaining the Underwriter as 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 ended 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 Health 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 for the common stock at $1,000 and has recorded the royalties as a
non-current asset in the amount of $21,000.
On February 14, 1998, the Company signed a manufacturing agreement with Pilon
International, PLC., a company that supplies Zepter International, a world-wide
direct sales distributor of consumer products. The Company will manufacture and
develop dietary supplements through the year 2001.
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 light of the below market interest rate and
uncollateralized nature of the loan, the Company issued a Class C Warrant to
purchase 150,000 shares of common stock at the aggregate purchase price of $1.77
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 June 30, 1998, the balance due on the note was $101,529.
On April 9, 1998, the Company signed a development 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, 1998 for the next
five years of $1,364,124 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment, office
equipment and automobiles.
Based upon a preliminary study, the Company expects to spend approximately
$50,000 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 expanded over the next eighteen months to have a material effect
on its financial position or results of operations. The amount expended as of
June 30, 1998 was $2,248.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
New Authoritative Pronouncements
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.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15,1999. The Company will evaluate the new standard to
determine any required new disclosures or accounting.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
11
<PAGE>
Item 7. Financial Statements
For a list of financial statements filed as part of this report, see index to
financial statements at F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1998.
Item 10. Executive Compensation
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1998.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1998.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) A list of the financial statements filed as part of this report is set
forth in the index to financial statements at Page F-1 and is
incorporated herein by reference.
(2) Exhibits
Number Description
3.1 Restated Certificate of Incorporation of Registrant (1)
3.2 By-Laws of Registrant (1)
4.1 Form of Amended Warrant Agreement among the Registrant and
Continental Stock Transfer & Trust Company, as Warrant Agent(1)
4.2 Specimen Common Stock Certificate of Registrant (2)
4.3 Specimen Class A Warrant Certificate of Registrant (2)
10.1 Employment Agreement, effective January 1, 1996, between the
Registrant and Ronald G. Smalley (1)
10.2 Employment Agreement, effective July 1, 1996, between the
Registrant and E. Gerald Kay (1)
10.3 Employment Agreement, effective July 1, 1996, between the
Registrant and Eric Friedman (1)
12
<PAGE>
Number Description
10.4 Employment Agreement, effective July 1, 1996, between the
Registrant and Riva L. Kay (1)
10.5 Employment Agreement, effective July 1, 1996, between the
Registrant and Christina M. Kay (1)
10.6 Lease Agreement, dated January 1, 1996, between the Registrant
and Gerob Realty Partnership (1)
10.7 Stock Option Plan (2)
10.8 Amended Employment Agreement, effective September 20, 1996,
between the Registrant and E. Gerald Kay (3)
10.9 Lease Agreement, dated August 3, 1994, between the Registrant
and Hillside 22 Realty Associates, L.L.C. (2)
10.10 Exclusive License Agreement between the Registrant and
International Nutrition Research Center, Inc. and amendments,
dated April 29, 1997 and November 27, 1996 (4)
10.11 Lease Agreement between the Registrant and Vitamin Realty
Associates, dated January 10, 1997 (4)
10.12 Manufacturing agreement between Chem International, Inc. and
Herbalife International of America, Inc. dated April 9, 1998(5)
10.13 Manufacturing agreement between Chem International, Inc. and
Pilon International, PLC. dated February 14, 1998 (5).
10.14 Stock Sale Agreement between the Company and Gerob Realty
Partnership (5)
10.15 Promissory note between the Company and E. Gerald Kay dated
March 12, 1998 (5)
10.16 Class C warrant to purchase common stock dated March 12, 1998(5)
10.17 Consulting agreement with Buttonwood Advisory Group dated
March 20, 1998 (5)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(1) Incorporated herein by reference to the corresponding exhibit
number to the Registrants Registration Statement on Form SB-2,
Registration No. 333-5240-NY.
(2) Incorporated herein by reference to the corresponding exhibit
number to the Registrants Registration Statement Amendment No. 1
on Form SB-2, Registration
No. 333-5240-NY
(3) Incorporated herein by reference to the corresponding exhibit
number of the Registrants Registration Statement Amendment No. 2
on Form SB-2, Registration
No. 333-5240-NY
(4) Incorporated herein by reference to the corresponding exhibit
number to the Registrants Annual report on form 10-KSB for the
fiscal year ended June 30,1997, filed on September 29, 1997,
Commission File No. 000-28876.
(5) Filed herewith.
(b) No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this report.
13
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Item 7: Consolidated Financial Statements
Independent Auditor's Report.................................... F-2....
Consolidated Balance Sheet as of June 30, 1998.................. F-3.... F-4
Consolidated Statements of Operations for the years
ended June 30, 1998 and 1997.................................... F-5....
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1998 and 1997.................................... F-6....
Consolidated Statements of Cash Flows for years ended
June 30, 1998 and 1997 ......................................... F-7.... F-8
Notes to Consolidated Financial Statements...................... F-9.... F-22
. . . . . . . .
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Chem International, Inc.
We have audited the accompanying consolidated balance sheet of Chem
International, Inc. and its subsidiaries as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Chem International, Inc. and its subsidiaries as of June 30, 1998,
and the consolidated results of their operations and their cash flows for each
of the two fiscal years in the period then ended in conformity with generally
accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 14, 1998
F-2
<PAGE>
CHEM INTERNATIONAL, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998.
- ------------------------------------------------------------------------------
<TABLE>
Assets:
Current Assets:
<S> <C>
Cash and Cash Equivalents $ 956,403
Accounts Receivable - Net 3,460,937
Inventories 3,521,810
Prepaid Expenses and Other Current Assets 177,357
Deferred Income Taxes 63,000
-----------
Total Current Assets 8,179,507
Property and Equipment - Net 1,645,362
-----------
Other Assets:
Goodwill - Net 281,884
Deferred Income Taxes 37,000
Security Deposits and Other Assets 91,990
-----------
Total Other Assets 410,874
Total Assets $10,235,743
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
CHEM INTERNATIONAL, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998.
- ------------------------------------------------------------------------------
<TABLE>
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C>
Accounts Payable $ 2,837,042
Notes Payable 356,537
Accrued Expenses and Other Current Liabilities 165,439
Accrued Expenses - Related Party 25,000
Capital Lease Obligation 33,978
-----------
Total Current Liabilities 3,417,996
Non-Current Liabilities:
Notes Payable 174,824
Notes Payable - Related Party 688,447
Capital Lease Obligation 67,551
-----------
Total Non-Current Liabilities 930,822
Commitments and Contingencies [14] --
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 4,847,405
Retained Earnings 1,029,163
Total Stockholders' Equity 5,886,925
Total Liabilities and Stockholders' Equity $10,235,743
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
June 30,
1 9 9 8 1 9 9 7
<S> <C> <C>
Sales $ 16,011,049 $ 11,126,860
Cost of Sales 12,841,937 9,475,624
---------- -----------
Gross Profit 3,169,112 1,651,236
Selling and Administrative Expenses 3,197,047 2,546,972
---------- -----------
Operating [Loss] (27,935) (895,736)
---------- -----------
Other Income [Expense]:
Gain on Sale of Fixed Assets -- 25,000
Interest Expense (80,616) (85,696)
Interest Expense - Related Party (7,051) (14,099)
Interest and Investment Income 19,936 68,427
Income [Loss] on Investment in Partnership (5,000) 1,780
[Loss] on Note Receivable (33,058) --
---------- -----------
Other [Expense] - Net (105,789) (4,588)
---------- -----------
[Loss] Before Income Taxes (133,724) (900,324)
Federal and State Income Tax [Benefit] (36,286) (246,020)
---------- -----------
Net [Loss] $ (97,438) $ (654,304)
========== ===========
Net [Loss] Per Common Share
Basic and Diluted $ (.02) $ (.16)
========== ===========
Weighted Average Common Shares Outstanding 4,725,460 4,007,877
========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30,
1998 AND 1997.
- ------------------------------------------------------------------------------
<TABLE>
Additional Total
Common Stock Preferred Paid-in Retained Stockholders'
Shares Par Value Stock Capital Earnings Equity
Balance -
<S> <C> <C> <C> <C> <C> <C> <C>
July 1, 1996 3,370,000 $ 6,740 $ -- $1,883,132 $ 1,700,905 $ 3,590,777
Reversal of Issuance
of Bridge Units (300,000) (600) -- (1,199,400) 80,000 (1,120,000)
Imputed Interest on
Note Payable -
Related Party -- -- -- 14,099 -- 14,099
Issuance of Stock
Options -- -- -- 143,601 -- 143,601
Net Proceeds from
Public Offering1 1,265,000 2,530 -- 3,354,640 -- 3,357,170
Net [Loss] -- -- -- -- (654,304) (654,304)
--------- -------- -------- ---------- ----------- -----------
Balance -
June 30, 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
Issuance of Stock
Options -- -- -- 4,343 -- 4,343
Fair Value of Stock
Purchase Warrant
[7][12A] -- -- -- 68,182 -- 68,182
Net [Loss] -- -- -- -- (97,438) (97,438)
--------- -------- -------- ---------- ----------- -----------
Balance -
June 30, 1998 5,178,300 $ 10,357 $ -- $4,847,405 $ 1,029,163 $ 5,886,925
========= ======== ======== ========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
June 30,
1 9 9 8 1 9 9 7
Operating Activities:
<S> <C> <C>
Net [Loss] $ (97,438) $ (654,304)
---------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 413,060 310,395
Lease Termination Items -- (108,753)
Amortization of Discount on Note Payable 6,629 --
Deferred Income Taxes (83,000) 27,000
Imputed Interest on Note Payable - Related Party 7,051 14,099
[Gain] Loss on Investment in Partnership 5,000 (1,780)
Interest Income on Note Receivable (12,368) (14,623)
Write-off of Note Receivable 33,058 --
Bad Debt Expense 13,240 23,779
[Gain] on Sale of Property and Equipment -- (25,000)
Consulting Expense - Stock Options 4,343 143,601
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,031,469) (291,987)
Inventories (1,435,444) (653,134)
Prepaid Expenses and Other Current Assets 97,032 (241,332)
Prepaid Pension Costs 340,291 (45,957)
Security Deposits and Other Assets 11,868 (12,991)
Refundable Federal Income Taxes 240,000 --
Increase [Decrease] in:
Accounts Payable 1,075,080 (115,228)
Federal and State Income Taxes Payable (1,416) (127,549)
Accrued Expenses and Other Liabilities 330 (2,514)
---------- -----------
Total Adjustments (316,715) (1,121,974)
---------- -----------
Net Cash - Operating Activities - Forward (414,153) (1,776,278)
---------- -----------
Investing Activities:
Investment in Partnership -- (5,000)
Investment in Officers Life Insurance (20,375) --
Issuance of Note Receivable -- (223,750)
Repayment of Loan from Related Company -- 16,849
Repayment of Note Payable - Stock Retirement -- (156,473)
Purchase of Property and Equipment (974,385) (316,499)
Proceeds from Sale of Property and Equipment -- 25,000
Loans to Stockholders -- (92)
Repayment of Loans by Stockholders 2,044 --
Repayment of Note Receivable 250,000 3,183
[Loan to] Repayment of Loan to Related Company 2,500 (3,222)
---------- -----------
Net Cash - Investing Activities - Forward $ (740,216) $ (660,004)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
June 30,
1 9 9 8 1 9 9 7
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (414,153) $(1,776,278)
---------- -----------
Net Cash - Investing Activities - Forwarded (740,216) (660,004)
---------- -----------
Financing Activities:
Proceeds from Public Offering -- 3,426,344
Proceeds from Notes Payable 581,886 412,744
Proceeds from Notes Payable - Related Party 750,000 --
Repayment of Notes Payable (231,370) (1,157,615)
---------- -----------
Net Cash - Financing Activities 1,100,516 2,681,473
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents (53,853) 245,191
Cash and Cash Equivalents - Beginning of Years 1,010,256 765,065
---------- -----------
Cash and Cash Equivalents - End of Years $ 956,403 $ 1,010,256
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 55,000 $ 59,000
Income Taxes $ 75,000 $ 168,000
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 public offering as reflected
in the consolidated statements of stockholders' equity for the year ended June
30, 1997.
The Company issued 843,300 shares of its common stock to Gerob, a related
party in consideration of $297,000 of past due rent and satisfaction of a
promissory note in the amount of $276,444.
The promissory note from a related party is recorded net of a discount of
$68,182, which represents the fair value of the Class C Warrant issued as
consideration of the note.
The Company has received common stock and royalties receivable in exchange for
forgiveness of debt in the amount of $22,000 from a customer.
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-8
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[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 and Europe.
[2] Summary of Significant Accounting Policies
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.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - The inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $401,072 and $298,408 for the years ended June 30, 1998 and 1997,
respectively. Amortization of equipment under capital leases is included with
depreciation expense.
Goodwill - Goodwill, representing the excess of cost over the fair value of the
net assets acquired of the Company's principal operating business subsidiary at
its date of its acquisition in 1981, is being amortized over 40 years on the
straight-line method. The Company carries its goodwill net of accumulated
amortization of $197,596 and is subject to periodic review for impairment.
Amortization expense was $11,987 for each of the years ended June 30, 1998 and
1997.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," 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. 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. Potential common shares of 150,000 are not currently dilutive, but may
be in the future. Adoption of SFAS No. 128 is not material to the Company.
Revenue Recognition - The Company generally recognizes revenue upon shipment of
the product.
Impairment - Certain long-term assets of the Company including goodwill are
reviewed at least annually as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations [undiscounted and without interest charges]. If impairment is
deemed to exist, the assets will be written down to fair value which represents
the projected discounted cash flows from related operations. Management also
reevaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of June 30,
1998, management expects these assets to be fully recoverable.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $447,516 and $235,636 for the
years ended June 30, 1998 and 1997, respectively.
[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 June 30, 1998, 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 June 30,
1998. 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 June 30, 1998.
F-10
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[5] Inventories
Inventories consist of the following at June 30, 1998:
Raw Materials $ 2,122,343
Work-in-Process 419,663
Finished Goods 979,804
-----------
Total $ 3,521,810
----- ===========
[6] Property and Equipment
Property and equipment comprise the following at June 30, 1998:
Leasehold Improvements $1,252,399
Machinery and Equipment 2,288,210
Machinery and Equipment Under Capital Leases 109,545
Transportation Equipment 36,652
Total 3,686,806
Less: Accumulated Depreciation and Amortization 2,041,444
Total $1,645,362
[7] Notes Payable
Notes payable are summarized as follows at June 30, 1998:
Related Party
Notes Payable Note Payable Total
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 62,318 $ -- $ 62,318
President and Chief Executive Officer (b) -- 688,447 688,447
Summit Bank:
Revolving Line-of-Credit (c) 300,000 -- 300,000
Equipment Term Loan (d) 169,043 -- 169,043
---------- ----------- ----------
Totals 531,361 688,447 1,219,808
Less: Current Portion 356,537 -- 356,537
---------- ----------- ----------
Noncurrent Portion $ 174,824 $ 688,447 $ 863,271
------------------ ========== =========== ==========
(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.
F-11
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[7] Notes Payable [Continued]
(b)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 June 30, 1998 was $6,629 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].
(c)Under the terms of a revolving line of credit which expired on July 29, 1998,
the Company borrowed $300,000 under a $500,000 line of credit at 1 1/2 %
above the bank's prime rate. The loan was collateralized by accounts
receivable, inventory and machinery and equipment. The loan has been
guaranteed by the Company's president and principal stockholder. At June 30,
1998, the interest rate was 10.0% [See Note 20].
(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
June 30, 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 loan agreement with Summit Bank contained 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
Company was not in compliance with its debt coverage ratio on a consolidated
basis at June 30, 1998 [See Note 20].
The non-interest bearing note of approximately $276,000 due to Gerob Realty
Partnership ["Gerob"] on September 10, 2002 was exchanged in consideration of
shares of authorized but unissued common stock [See Note 17E].
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 $ 356,537 $ -- $ 356,537
2000 62,814 -- 62,814
2001 68,783 688,447 757,230
2002 43,227 -- 43,227
2003 -- -- --
---------- ----------- ----------
Totals $ 531,361 $ 688,447 $1,219,808
------ ========== =========== ==========
[8] Capital Lease
The Company acquired equipment under the provision of a long-term lease. The
lease expires in March 2001. The equipment under the capital lease as of June
30, 1998 had a cost of $109,545 accumulated depreciation of $15,654 with a net
book value of $93,891.
F-12
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[8] Capital Lease [Continued]
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at June 30, 1998 are as follows:
Total Minimum Lease Payments $ 115,390
Amount Representing Interest (13,861)
----------
Present Value of Net Minimum Lease Payments 101,529
Current Portion (33,978)
Long-Term Capital Lease Obligation $ 67,551
[9] Income Taxes
Provision for income taxes consists of the following:
Years Ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Currently Payable:
Federal $ 33,134 $ (277,276)
State 13,580 4,256
----------- -----------
46,714 (273,020)
Deferred:
Federal (60,275) 22,950
State (22,725) 4,050
----------- -----------
(83,000) 27,000
Totals $ (36,286)$ (246,020)
------ =========== ===========
Reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Years Ended
June 30,
1 9 9 8 1 9 9 7
------- -------
U.S. Statutory Rate (34)% (34)%
State Taxes on Income - Net of Federal Benefit (6) (6)
Nondeductible Items:
Travel and Entertainment 1 4
Amortization of Goodwill 9 2
Other - Net -- 1
Consulting Fees 3 6
------ -----
Effective Income Tax Rate (27)% (27)%
------------------------- ====== =======
Deferred income taxes arise from temporary differences resulting from income and
expense reported for financial accounting and tax purposes in different periods.
F-13
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[9] Income Taxes [Continued]
The significant components of deferred tax assets and [liabilities] relate to
the following at June 30, 1998:
Inventory Cost $ 31,000
Other 10,000
Nondeductible Expense 22,000
Depreciation Expense 37,000
----------
Subtotal 100,000
Valuation Allowance --
Net Deferred Tax Assets $ 100,000
----------------------- ==========
The Company believes that net deferred tax assets, which are included in other
current assets, are more likely than not to be realized because all deductible
temporary differences will be utilized as charges against reversals of future
taxable temporary differences. Accordingly, the Company has not recorded a
valuation allowance for the year ended June 30, 1998. This is unchanged from
prior year.
The Company and its subsidiaries file a consolidated federal income tax return.
[10] Pension Plans
In May 1998, with the approval of the Internal Revenue Service, the Company
terminated the defined benefit pension plan. At June 30, 1997, the Company had
included in the balance sheet in other assets a prepaid pension cost of $340,291
and a corresponding deferred tax liability of $136,000. At June 30, 1998, the
Company wrote off the balance of the prepaid pension cost of $340,291 to pension
plan expense and reduced the deferred tax liability accordingly. The $340,291 is
included in selling and administrative expense at June 30, 1998.
The Company sponsored a noncontributory defined benefit pension plan covering
all nonunion employees meeting age and service requirements. Contributions to
the plan, which are made solely by the Company, are determined by an outside
actuarial firm. The Company made no contributions and incurred no expense for
1998 or 1997, respectively.
The defined benefit pension plan called for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the Company
and the average monthly compensation. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. Plan assets consisted primarily of marketable securities.
Pension expense includes the following components:
Years Ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Service Cost of the Current Period $ -- $ 27,920
Interest Cost on the Projected Benefit
Obligation -- 36,541
Actual Gain on Assets Held in the Plan -- (81,318)
Net Amortization of Transition Liability
and Net Gain -- (29,100)
----------- -----------
Pension Expense [Credit] $ -- $ (45,957)
------------------------ =========== ===========
F-14
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[10] Pension Plans [Continued]
The following sets forth the funded status of the plan and the amounts shown in
the accompanying balance sheet:
1 9 9 8 1 9 9 7
------- -------
Actuarial Present Value of Benefit Obligations:
Vested Benefits $ -- $ (567,601)
Nonvested Benefits -- --
---------- ----------
Accumulated Benefit Obligation -- (567,601)
Effect of Anticipated Future Compensation Levels
and Other Events -- (31,187)
Projected Benefit Obligation -- (598,788)
Fair Value of Assets Held in the Plan -- 1,138,348
---------- ----------
Excess of Plan Assets Over Projected Benefit Obligation -- 539,560
Unrecognized Transition Obligation -- 80,500
Unrecognized Net Gain from Past Experience Different
than Assumed -- (279,769)
Prepaid Pension Cost Included in the Balance Sheet $ -- $ 340,291
-------------------------------------------------- ========= ===========
The weighted average discount rate used to measure the projected benefit
obligation is 7% for 1997, the rate of increase in future compensation levels
was 2% for 1997, and the expected long-term rate of return on assets was 7% for
1997. The Company used the straight-line method of amortization of unrecognized
gains and losses.
Additionally, the Company participates in a union sponsored multi-employer
defined contribution plan covering all union employees. Information relating to
accumulated benefits obligations and plan assets is not available. Under ERISA,
an employer, upon withdrawal from a multi-employer plan, is required to fund its
proportionate share of the plan's unfunded vested benefits at the point of
withdrawal. The Company has no intention of withdrawing from the plan. The
Company is required to fund the plan on the first of each month for the
preceding month's obligation. Total contributions charged to operations were
$59,977 and $48,960 for the years ended June 30, 1998 and 1997, respectively.
[11] Profit-Sharing Plan
The Company maintains a profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code, covering all nonunion employees meeting age and
service requirements. Contributions are determined by matching a percentage of
employee contributions. The total expense for the years ended June 30, 1998 and
1997 was $43,257 and $32,596, respectively.
[12] 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 June 30, 1998, the
Company's uninsured cash balances totaled approximately $644,000.
The Company does not require collateral in relation to cash credit risk.
F-15
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[12] Significant Risks and Uncertainties [Continued]
[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 June 30, 1998 is $25,750.
[13] Major Customer
For the years ended June 30, 1998 and 1997, approximately 44% or $7,000,000 and
48% or $5,400,000, respectively, 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 years ended June 30, 1998 and 1997, an aggregate of
approximately 19% and 19%, respectively, of revenues were derived from two other
customers; no other customers accounted for more than 10% of consolidated sales
for the years ended June 30, 1998 and 1997. Accounts receivable from these
customers comprised approximately 48% and 51% of total accounts receivable at
June 30, 1998 and 1997, respectively.
[14] 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 years ended June 30, 1998 and 1997 on this lease was
approximately $116,000 and $143,000, respectively. Unpaid rent of $25,000 due to
Gerob at June 30, 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 14E].
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 years ended June 30, 1998 on this lease was
approximately $450,000.
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.
F-16
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
Other Lease Commitments [Continued] - The minimum rental commitment for
long-term non-cancelable leases is as follows:
Related
Year Ending Lease Party Lease
June 30, Commitment Commitment Total
1999 $ 53,646 $ 346,000 $ 399,646
2000 48,240 346,000 394,240
2001 24,717 346,000 370,717
2002 16,912 182,609 199,521
2003 -- -- --
Thereafter -- -- --
---------- --------- ----------
Total $ 143,515 $1,220,609 $1,364,124
----- ========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $568,000 and $411,000 for the years ended June 30, 1998 and 1997,
respectively. Rent expense is stated net of sublease income of approximately
$16,000 and $160,000 for the years ended June 30, 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, and $680,000 for the years ending June 30, 1998 and 1999,
respectively. These agreements are subject to annual increases equal to at least
the increase in the consumer price index for the Northeastern area.
[C] Investment in and Royalties Receivable from Martin Health Care Products,
Inc. - 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 Health 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 for the common stock at $1,000 and has recorded the
royalties as a non-current asset in the amount of $21,000.
[D] 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.
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. The case is currently in the
discovery stage. The Company expects that the case will proceed to non-binding
arbitration in January 1999. No estimate can be made at June 30, 1998 as to the
amount, if any, of ultimate recovery.
F-17
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
[E] Consulting Agreements - On October 29, 1996, the Company entered into a two
year consulting agreement for $88,550 with the underwriter of the Company's
public offering, which is being taken into expense over the term of the
agreement. In December 1997, the underwriter of the public offering ceased
operations and market making activities. At December 31, 1997, the balance of
prepaid consulting fees of $36,896 was written off as consulting expense.
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 17C].
[F] 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.
[G] Manufacturing Agreement - On February 14, 1998, the Company signed a
manufacturing agreement with Pilon International, PLC., a company that supplies
Zepter International, a world-wide direct sales distributor of consumer
products. The Company will manufacture and develop dietary supplements through
the year 2001.
[15] Related Party Transactions
During the year ended June 30, 1997, the Company entered into a consulting
agreement with the brother of the Company's president on a month to month basis
for $1,000 per month. The total consulting expense recorded per this verbal
agreement for the years ended June 30, 1998 and 1997, by the Company was $12,000
and $11,000, respectively.
[16] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued expenses, it was estimated that the carrying amount approximated fair
value because of the short maturities of these instruments. Short-term debt and
long-term debt including long-term debt to a related party is based on current
rates at which the Company could borrow funds with similar remaining maturities
and approximates fair value.
F-18
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[17] Equity Transactions
[A] Capital Stock - In February 1996, the Company [a New York corporation] was
merged into its wholly-owned subsidiary, Chem International, Inc. [a Delaware
corporation], pursuant to Section 253 of the Delaware Corporation Law for the
sole purpose of changing its domicile. As a result thereof and after giving
effect to restatements to the Company's certificate of incorporation subsequent
to the conversions and retirement of the previously outstanding Class A and
Class B preferred stock, the authorized capitalization of the Company is as
follows:
Preferred Stock: Authorized 1,000,000 shares $.002 par value
Common Stock: Authorized 25,000,000 shares $.002 par value
The Board of Directors of the Company has the right to determine the
designations, rights, preferences and privileges of the holders of one or more
series of preferred stock which might be issued.
In May 1996, the Company sold, in a private placement, 70,000 shares of common
stock for $175,000. In June 1996, the Company also issued the equivalent of
300,000 Bridge Units [each consisting of one share of common stock and one
warrant to purchase a share of common stock at $5.50 a share for four years
following the offering] in connection with the sale of $300,000 of 7% promissory
notes to four investors. The Bridge Units were valued at $4 each, a total of
$1,200,000, which was being charged to operations over the term of the Bridge
Notes. On October 16, 1996, the Bridge Lenders waived their rights to the bridge
units and agreed to the cancellation of the underlying securities. Accordingly,
the Company has eliminated the amount previously recorded for the bridge units
and the related bridge loan finance costs of $80,000.
In July 1996, the Company affected a 1 for 4 reverse common stock split. The
financial statements give retroactive effect to the reverse stock split.
On October 29, 1996, the Company received net proceeds of approximately
$3,400,000 from the sale of 632,500 units at $7.00 per unit in a public
offering. Each unit consisted of two shares of Common Stock and two Class A
Redeemable Common Stock Purchase Warrants.
[B] Additional Paid-in Capital - For financial accounting purposes, interest of
8.5% a year was being imputed on a related party non-interest bearing note [See
Note 7(b)].
[C] 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 option 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. The
weighted average grant date fair value of the above options was $3.50.
F-19
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
[C] Stock Option Plan [Continued] - Information pertaining to options as of June
30, 1998 and for the year then ended is as follows:
Remaining
Contractual
Weighted Average Life
Common Exercise Price of Options
Shares Per Share Outstanding
Options Outstanding - June 30, 1996 -- -- --
Granted:
Exercise Price Equals Market Price 573,597 3.50 4.3 Years
Exercise Price is Greater Than Market Price 25,974 3.85 8.7 Years
Options Exercised -- -- --
Options Canceled -- -- --
-------- ---------- ------------
Options Outstanding - June 30, 1997 599,571 $ 3.52 4.5 Years
Granted:
Exercise Price is Greater Than Market Price 45,000 2.54 4.8
Options Exercised -- -- --
Options Canceled -- -- --
-------- ---------- ------------
Options Outstanding - June 30, 1998 644,571 3.45 3.6
----------------------------------- ======== ========== ============
Options Exercisable - June 30, 1998 644,571 $ 3.45 3.6
----------------------------------- ======== ========== ============
The Company applies APB Opinion 25 in accounting for its stock issued to
employees. Accordingly, no compensation cost has been recognized for employee
stock options for the years ended June 30, 1998 and 1997, respectively.
Net income [loss] and net income [loss] per share as reported, and on a pro
forma basis as if compensation cost had been determined on the basis of fair
value pursuant to SFAS No. 123 is as follows:
Year Ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Net [Loss] - As Reported $ (97,438)$ (654,304)
=========== ===========
Pro Forma $ (97,438)$(1,589,680)
=========== ===========
[Loss] Per Share - As Reported $ (.02)$ (.16)
=========== ===========
Pro Forma $ (.02)$ (.40)
=========== ===========
F-20
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
[C] Stock Option Plan [Continued] - During the years ended June 30, 1998 and
1997, the Company issued 45,000 and 75,000 stock options, respectively, to
consultants at an exercise price equal to the market price [$1.06 and $3.50,
respectively] on the dates of grants. The cost of issuing these stock options to
consultants during the years ended June 30, 1998 and 1997, is approximately
$4,300 and $144,000 The weighted average fair value of the stock options granted
to consultants for the years ended June 30, 1998 and 1997 is estimated at $2.54
and $2.08, respectively, using the Black-Scholes option pricing model and using
a risk-free interest rate of 5.3% and 6.1%, an expected volatility ranging from
43% to 52% for 1998 and 64% for 1997, and an expected life of 5 years. No
dividends are expected to be paid during the expected life of the options.
[D] 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 17C]. 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.
[E] Related Party Debt Conversion - 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 14A].
[F] 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 $6,629 was recorded for the warrants at June 30, 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].
[18] New Authoritative Pronouncements
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.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15,1999. The Company will evaluate the new standard to
determine any required new disclosures or accounting.
F-21
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[20] Subsequent Events
On July 27, 1998, the Company signed a new financing agreement with First Union
Bank providing for a $500,000 revolving line of credit with interest at 1% above
the bank's prime lending rate and expiring on July 30, 1999, a $170,000 five
year equipment loan with interest at1.5% above the bank's prime lending rate
expiring on June 30, 2003, and a five year $225,000 equipment term loan with
interest at 1.50% above the bank's prime lending rate. The above financing is
personally guaranteed by the Company's President, and is collateralized by a
security interest in all the assets of Manhattan Drug Company. The financing
with First Union Bank contains certain financial covenants relating to the
maintenance of specified liquidity, debt to equity and debt coverage ratios.
On July 29, 1998, the Company borrowed $300,000 of the $500,000 revolving line
of credit from the new bank to pay off the existing line of credit balance at
June 30, 1998 and used the $170,000 equipment loan to pay off the existing
equipment loan balance at June 30, 1998. Subsequently, the Company repaid the
$300,000 on August 7, 1998.
. . . . . . . . . . . . . . . .
F-22
<PAGE>
Exhibit 10.12
DEVELOPMENT AND SUPPLY AGREEMENT
THIS DEVELOPMENT AND SUPPLY AGREEMENT ("Agreement") is entered into as of
March 13, 1998, by and between Manhattan Drug Company, Inc a company organized
and existing under the laws of New York ("Supplier"), and Herbalife
International of America, Inc., a company organized and existing under the laws
of California ("Herbalife"), with reference to the following facts:
RECITALS
A. Herbalife is in the business of selling nutritional and other products
manufactured in accordance with formulas. Supplier has demonstrated Supplier's
capability to develop formulas and to manufacture and supply nutritional
products derived from those formulas.
B. Herbalife desires to have Supplier develop formulas, which are to be
owned by Herbalife, and to have Supplier manufacture and supply nutritional
products made in .accordance with those and/or other Herbalife formulas, and
Supplier desires to so develop, manufacture and supply nutritional products for
and to Herbalife in accordance with the terms and conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained in this Agreement, and for other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Definitions. Capitalized terms not otherwise defined herein shall
bear the respective meanings given to them below:
"Current Products" means the nutritional products listed on Exhibit A-1
hereto made in accordance with the Product Rights for the Current Products,
including any modification, derivatives alteration, improvement, enhancement or
successor of the nutritional products listed on Exhibit A-1 hereto.
"Product Rights" means all documentation, materials and rights with
respect to Supplied Products (whether or not each respective document, material
or right is complete or reduced to tangible form), that have been or are at any
time generated or derived, whether before, on or after the date of this
Agreement, in connection with the development, manufacture and supply of
Supplied Products, including without limitation formulas, formulations,
processes, specifications, standards and procedures for Supplied Products,
whether developed by or on behalf of Herbalife or Supplier (whether pursuant to
Section 3(a) or otherwise), an ' d any and all (a) modifications, derivatives,
alterations, improvements, enhancements or successors thereof, whether developed
by or on behalf of Herbalife or Supplier (whether pursuant to Section 3(a) or
otherwise , and (b) patents, copyrights, trademarks, service marks, trade dress,
know-how, proprietary or confidential information or other intellectual or
industrial property rights (whether or not reduced to tangible form) included
in, pertaining to or associated with the foregoing.
"New Products" means (i) any and all new nutritional products made in
accordance with Product Rights, the chemical composition of which Product Rights
are materially different from any Product Rights for a Current Product, and (ii)
any and all substitute nutritional products made in accordance with Product
Rights, the chemical composition of which Product Rights are materially
different from any Product Rights for a Current Product (and which Product
Rights are substitutes for a Current Product), and, in the case of both of the
foregoing clauses (i) and (ii), which Product Rights were developed from time to
time by or on behalf of Herbalife or Supplier (whether pursuant to Section 3(a)
or otherwise), and which new or substitute nutritional products were designated
by Herbalife to be manufactured and supplied by Supplier pursuant to Section
4(b).
"Product Prices" means the prices at which Supplied Products shall be sold
by Supplier to Herbalife or its designees hereunder. The Product Price for each
Current Product is listed on Exhibit A-1 hereto in reference to the respective
Current Product.
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"Supplied Products" means any and all Current Products, and any and all
New Products made subject to the terms and conditions of this Agreement pursuant
to Section 4(b) below.
2. Term. The term of this Agreement shall commence as of the date set
forth above and shall continue through December 31, 2000, unless earlier
terminated pursuant to the provisions hereof (the "Term").
3. Development.
(a)Appointment as a Developer. Herbalife hereby appoints Supplier, and
Supplier hereby accepts such appointment, to develop, derive, create, alter,
modify, improve and enhance Product Rights according to the requirements and
specifications established or agreed to from time to time, by Herbalife.
Supplier shall diligently proceed with the development and creation of the
Product Rights, and shall commit and utilize sufficient resources to complete
the development and creation of the Product Rights in a timely manner.
Supplier's appointment hereunder is on a non-exclusive basis, and Herbalife may
appoint any other person or entity to carry on the same or similar services to
those to be carried out hereunder by Supplier.
(b)Personnel. The services described in Section 3(a) above shall be
performed only by Supplier's employees, all of whom are aware of the obligations
of Supplier set forth in Section 9 of this Agreement and are bound to abide by
all of such obligations of Supplier.
(c)No Additional Compensation For Development. No compensation
whatsoever, whether in the form of royalties, license fees, expense
reimbursement claims or otherwise, shall be payable or paid by Herbalife to
Supplier, or any third party in any way connected to Supplier, for Supplier's
development and creation of the Current Products above, or (except as
specifically set forth herein) for the development, manufacture, use or sale by
or for Herbalife (or its designees) of any product made in accordance with or
otherwise based upon, developed or derived, directly or indirectly, in any way
from the Product Rights for the Supplied Products.
4. Manufacture and Supply Terms.
(a)Appointment as a Manufacturer and Supplier. Herbalife hereby
appoints Supplier, and Supplier hereby accepts such appointment, as a
manufacturer and supplier to Herbalife of Supplied Products, subject to the
terms and conditions of this Agreement (including without limitation those
special additional terms and conditions set forth on Exhibit A hereto). Supplier
shall manufacture and supply the Supplied Products exclusively for and to
Herbalife and its designee(s). Supplier shall not develop, formulate,
manufacture, supply, distribute or otherwise sell at @ny time any of the
Supplied Products, or any product made with or using any or all of the Product
Rights, for or to any person or entity (including without limitation for or to
any person or entity, or for or to any person or entity that manufactures or
supplies for or to any person or entity, that directly or indirectly engages in
multilevel marketing) other than Herbalife or its designee(s). Herbalife
acknowledges that Supplier currently develops, manufactures and supplies
nutritional products (other than Supplied Products) to other persons or entities
(including without limitation for or to entities that engage in multi-level
marketing) and will continue such activities during the Term of this Agreement;
provided, however, that such activities by Supplier shall be subject to Supplier
complying with the terms and provisions set forth i ' n this Agreement
(including the prior sentence). Notwithstanding the foregoing, Herbalife, or its
designee(s), shall have the right itself, to: (i) manufacture, supply and sell,
(ii) have manufactured, supplied and sold on its behalf and (iii) otherwise
order and procure from any third party, any and all products made in accordance
with or otherwise based upon, developed or derived from the Product Rights
(whether or not such products are similar or identical to the Supplied
Products).
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(b)New Products. Herbalife agrees that if at any time during the Term
Supplier completes the development or creation of any proposed New Product in
accordance with the requirements and specifications established or agreed
pursuant to Section 3(a) above, Supplier shall have thirty (30) days from the
date of such completion to make a proposal to Herbalife in writing, including
the pricing thereof, and Herbalife and Supplier shall then negotiate on an
exclusive basis with each other in good faith for up to a further sixty (60)
days for an order to be made by Herbalife subject to the terms and conditions
hereof with respect to such proposed New Product, but in the event that no
agreement shall be reached either party shall be entitled in accordance with the
terms and conditions hereof to supply or purchase such proposed New Product to
or from any person or entity, if either party so desires. Subject to Herbalife
complying with its obligations under the preceding sentence of this Section
4(b), if applicable, Herbalife shall have the right, but not the obligation, to
designate Supplier as a manufacturer and supplier of any proposed New Product,
provided that the panics agree upon the price and other terms for such
manufacture and supply by Supplier. In connection therewith, Supplier shall
provide to Herbalife, upon Herbalife's request, production samples of any such
proposed New Product in sufficient quantities for testing and evaluation by
Herbalife. In the event the parties reach agreement on the price and other terms
for such proposed New Product (after good faith negotiations between the
parties, taking into account, among other things, Supplier's actual cost of raw
materials and other manufacturing costs and a reasonable overhead charge and
gross margin with respect to the price), each such proposed New Product shall be
added to the list of New Products set forth on Exhibit A-2 hereto, including
without limitation the price therefor, and shall be deemed a New Product subject
to the terms and conditions hereof; provided, however, that if Herbalife or any
designee places any firm purchase order with Supplier for any such New Product,
then such New Product shall be deemed to have been listed on Exhibit A-2 hereto
and shall be subject to the terms and conditions hereof (including without
limitation those special additional terms and conditions set forth on Exhibit
A-2 hereto).
(c)Orders. Herbalife shall have the right to order and procure from
Supplier, and Supplier shall be obligated to manufacture, package, label, supply
and deliver to Herbalife, Supplied Products in any quantity ordered at any time
by Herbalife, at Herbalife's sole discretion, for use at any time, whether such
use shall occur during the Term or after expiration of the Term, subject to the
terms and conditions hereof Herbalife shall have the right to appoint one or
more designees to order and procure Supplied Products from Supplier, and
Supplier shall be obligated to manufacture and supply Supplied Products to any
such designee; provided, however, that any such designee shall be subject to the
due observance and performance of any and all terms.. applicable to Herbalife
affecting the procurement and sale of Supplied Products hereunder. Supplier
shall maintain sufficient inventory and packaging components to minimize
Supplier's lead times and to fulfill Herbalife's purchase order requirements on
a timely basis. Supplier shall acquire all inventory, packaging components,
ingredients, inputs, and other materials necessary for manufacture of Supplied
Products solely from manufacturers and suppliers that meet industry standards of
acceptability and comply fully with all Laws (as hereinafter defined). Supplier
shall advise Herbalife of the start date of product packaging at least five (5)
business days prior to any such start date so Herbalife can make appropriate
delivery of labels therefor when requested. Herbalife shall provide Supplier
with the necessary product labels at its own expense. Supplier shall label
Supplied Products with the appropriate labels supplied by Herbalife.
(i)Open Blanket Purchase Order. Within thirty (30) days after the
execution of this Agreement, for the remainder of this calendar year, and
thereafter at the commencement of each calendar year during the Term, Herbalife
shall initiate orders hereunder by placing a preliminary, non-binding estimated
order as to the Supplied Products (the "Open Blanket Purchase Order") listing
the types and quantities of the Supplied Products estimated to be purchased by
Herbalife from Supplier for delivery in the respective year.
(iiShipping Schedules and Firm Binding Purchase Orders. For each
delivery of Supplied Products requested hereunder, Herbalife shall, not later
than eight (8) weeks prior to the anticipated shipping date of Supplied
Products, provide Supplier with a shipping schedule specifying the Supplied
Products and quantities estimated to be purchased. Supplied Products on the
shipping schedule may be modified by Herbalife through, and shall not become
firm binding purchase orders until, a date five (5) weeks prior to the scheduled
B modification.
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5. Quality Standards; Compliance with Laws.
(a)Manufacturing Practices and Standards. Supplier shall manufacture,
package, label, supply and deliver all Supplied Products in a professional
manner in accordance with the requirements and specifications (including without
limitation formulas) established or agreed to from time to time by Herbalife and
the other terms and conditions hereof. Supplier shall apply the trademarks
designated by Herbalife on the packaging and related product materials, subject
to the licenses and conditions set forth in Section g(b) of this Agreement.
Supplier shall manufacture and supply all Supplied Products hereunder in a
clean, safe, sanitary manner and using standards and operating procedures that
are at least as good as those prevailing in the industry. Supplier shall also
manufacture and supply in accordance with good manufacturing practices and
standard operating procedures.
(b)No Adulteration, Misbranding or Defects. All Supplied Products shall
be free from adulteration or misbranding and merchantable and fit for the
intended use by Herbalife and purchasers of the Supplied Products from
Herbalife. All Supplied Products shall be free of contamination or defect, and
all reasonable care and skill shall be used in manufacturing and supplying the
Supplied Products.
(c)Compliance with Laws. Supplier shall comply, and shall insure that
all manufacturers of Supplied Products comply, fully with any and all laws,
regulations, rules and orders (including without limitation those of the Federal
Food and Drug Administration) in any and all jurisdictions applicable to or
affecting Supplier's obligations hereunder (collectively, "Laws"), and shall
make, and shall insure that all manufacturers of Supplied Products make, such
adjustments as may be necessary to effect and maintain such compliance
throughout the Term. Without limiting the generality of the foregoing, (i)
Supplier's facilities shall comply with all applicable pro-duct safety,
sanitation and environmental Laws, and (ii) all Supplied Products shall be
clearly and accurately labeled and packaged in the manner requested by Herbalife
and otherwise as required by all Laws.
(d)Approvals. Supplier shall obtain, at its cost, all governmental,
administrative and other approvals, licenses, permits and other authorizations
and registrations necessary for the operation and conduct of its business,
including without limitation the development and/or manufacture and/or supply of
nutritional products generally, Supplier shall obtain all inventory, equipment,
employees, facilities and any other item necessary in order to assure that
Supplier has, and will have, the ability to perform its obligations hereunder in
accordance with the terms and conditions hereof Upon request by Herbalife,
Supplier shall furnish Herbalife with a copy of any and all documentation of any
kind demonstrating that Supplier is in compliance with, and has Complied with,
all Laws. Supplier expressly acknowledges the exclusive rights held by Herbalife
in and to all governmental, administrative and other approvals, licenses,
permits and other authorizations and registrations (collectively, "Approval")
necessary for the marketing, distribution and sale to the public of Supplied
Products by or on behalf of Herbalife or its affiliates, which Approvals shall
be obtained by Herbalife at Herbalife's cost. Supplier agrees that it shall not
have any right, title or interest in or to the Approvals and that it shall not
register or commence any procedures related to registration of the Supplied
Products with any governmental or other entity or authority without the prior,
written consent of Herbalife. In the event Herbalife consents to Suppliers
registering of any of the Supplied Products with a governmental or other entity
or authority, Supplier hereby (i) assigns and transfers to Herbalife all rights,
title and interests in and to or arising out of such registrations or other
Approvals and undertakes to fully cooperate with Herbalife to effect such
assignment and transfer (including without limitation executing and delivering
any documentation required in connection therewith), whenever requested by
Herbalife (and/or immediately following termination of this Agreement,
irrespective of the reason for such termination); and (ii) undertakes to request
cancellation of any Supplied Product registration or other Approval that has
been effected by Supplier with the applicable health authorities whenever
requested by Herbalife (and/of immediately following termination of this
Agreement, irrespective of the reason for such termination). Without limiting
the generality of the foregoing, Supplier hereby expressly, irrevocably and
unconditionally grants Herbalife all necessary powers required for Herbalife to
implement on behalf of Supplier the assignment, transfer, cancellation,
revalidation or rectification of the Supplied Product registrations. and other
Approvals.
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6. Rejection of Nonconforming Supplied Products; Ser-vice Level.
(a)Defective Products. Upon inspection of any Supplied Product by
Herbalife, if Herbalife reasonably determines that any Supplied Product or an
entire lot of Supplied Products delivered by Supplier fails to meet the
requirements and specifications established or agreed to from time to time by
Herbalife and the other terms and conditions hereof (other than to the extent
caused by and attributable to the acts or omissions of Herbalife) (the
"Defective Products"), Herbalife shall notify Supplier thereof after discovery
of the defect. Herbalife, or Herbalife's designated agents, may submit any
Supplied Product to any and all forms of chemical analysis, testing and review.
Herbalife shall provide Supplier with copies of, or summaries of, or relevant
extracts from (at Herbalife's discretion) the results of such chemical analysis,
testing and review within five (5) business days after Herbalife receives the
results thereof. All Defective Products, other than any Defective Products (or
any portions thereof) retained by Herbalife for testing, evaluating or sampling,
shall be, at Herbalife's option, destroyed or returned to Supplier, in either
case, at Supplier's expense. Supplier shall promptly destroy all Defective
Products returned to Supplier or in Supplier's possession and confirm in writing
to Herbalife such action. Herbalife shall confirm to Supplier in writing any
destruction by Herbalife of Defective Products. If Supplier receives any written
notice of Defective Products, Supplier shall, at Supplier's expense, ship
replacement Supplied Products to the destination designated by Herbalife as soon
as commercially possible after receipt of such notice, provided that Supplier
shall use its best efforts to make any such shipment within five (5) business
days after receiving notification of such Defective Products. Notwithstanding
the foregoing, Herbalife's failure to discover Defective Products as set forth
herein shall not relieve Supplier of its obligations under Section 12 or any
other provision hereunder or limit any rights or remedies Herbalife may have
under applicable Law.
(b)Shortfall. Upon inspection of any Supplied Product by Herbalife, if
Herbalife reasonably determines that there is a shortfall in any Supplied
Product delivered by Supplier hereunder (the "Shortfall"), Herbalife shall
notify Supplier thereof, and Supplier shall, at Supplier's expense, ship a
sufficient quantity of Supplied Products to the destination designated by
Herbalife to fulfill the entire obligation to be performed by Supplier as soon
as commercially possible, provided that Supplier shall use its best efforts to
make any such shipment within five (5) business days after receiving
notification of such Shortfall.
(c)Service Level. Supplier agrees that Supplier shall, for each
Supplied Product, meet a ninety-seven percent (97%) service level, which shall
be calculated in reference to the ratio of (i) the number of cases of the
Supplied Product delivered to Herbalife or its designee(s) in any month that
meet the requirements and specifications established or agreed to from time to
time by Herbalife and the other terms and conditions hereof, to (ii) the total
number of cases of that Supplied Product ordered by Herbalife or its designee(s)
that month (the "Service Level").
7. Price, Delivery and Payment Terms.
(a)Prices, Delivery and Title. Herbalife shall pay Supplier for the
Supplied Products at the Product Prices. Supplier shall meet the delivery and
frequency schedules (by day and time of day) set by Herbalife, in accordance
with the terms and conditions hereof, as such schedules shall be modified in
writing from time to time during the Term by mutual agreement of the parties.
The Supplied Products shall be delivered F.O.B. to the location set forth on
Exhibit B hereto (the "Local Delivery Point"), (unless, at Herbalife's request,
drop-shipped, at Herbalife's expense, to any other destination determined by
Herbalife and designated in writing). In the case of delivery to the Local
Delivery Point, the risk of loss and title shall pass to Herbalife upon delivery
to the Local Delivery Point, and transport, insurance, and other costs, charges,
and duties for transport beyond the Local Delivery Point shall be borne by
Herbalife. For deliveries made to a location other than a Local Delivery Point,
risk of loss and title shall pass to Herbalife at Supplier's shipping point, and
transport, insurance and other costs, charges and duties for transport beyond
Supplier's shipping point shall be borne by Herbalife. Notwithstanding any of
the above, title and risk of loss shall not pass to Herbalife for any Defective
Products rejected by Herbalife or its designees pursuant to Section 6(a) above,
and any transport, insurance and other costs, charges and duties Defective
Products shall be borne by Supplier pursuant to Section 6(a) above. Supplier
shall deliver all Supplied Products free from all liens and encumbrances, and
upon delivery by Supplier to Herbalife, or Herbalife's designee(s), of Supplied
Products, subject to and in accordance with the terms and conditions of this
Agreement, Herbalife, or Herbalife's designers), as the case may be, shall
acquire good title free from all liens and encumbrances.
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(b)Payment Terms. Herbalife shall cause payment for the Supplied
Products purchased from Supplier under the terms of this Agreement to be made no
later than thirty (30) days from the later of (i) the date of delivery of such
Supplied Products to Herbalife or its designers) and (ii) the date of receipt by
Herbalife or its designers) of an invoice for Supplied Products 'meeting the
requirements and specifications established or agreed to from time to time by
Herbalife. Payment made on any invoice within ten (10) days from the later of
(i) such date of delivery of and (ii) such receipt of an invoice for, as the
case may be, Supplied Products meeting the requirements and specifications
established or agreed to from time to time by Herbalife shall be entitled to a
two percent (2%) discount. In addition to any other remedies Herbalife may have
under this Agreement, at law or in equity, Herbalife shall be entitled, at its
option, to (i) a refund of the amount paid for any Defective Product or
Shortfall or (ii) a credit against future purchases of Supplied Products.
8. Intellectual Property.
(a)Ownership of Product Rights.
(i)Intention That Herbalife Own; Transfer of Product Rights. It is
the express intention, understanding and agreement of the parties that Herbalife
(or its designee) be the owner of all rights and interests of any kind
whatsoever in the Product Rights. Effective as of the date hereof, and effective
at any time hereafter as and where Supplier develops or creates any Product
Rights, Supplier hereby conveys, transfers, assigns and delivers to Herbalife
(or its designee) all rights, title and interests, in and to any and all Product
Rights throughout the world, free from any liens or encumbrances, to the extent
that Herbalife (or its designee) is not already the owner of all rights and
interests of any kind whatsoever in such Product Rights. Supplier agrees to
execute any and all documents to effectuate such conveyance, transfer,
assignment, and delivery to Herbalife (or its designee) and to provide Herbalife
(or its designee, as the case may be) with all other information necessary to
enable Herbalife (or its designee) to exercise the rights granted to Herbalife
(or its designee) hereunder. Supplier agrees to give Herbalife (or its designee,
as the case may be) all reasonable cooperation to register, obtain, or otherwise
establish or defend the proprietary rights of Herbalife (or its designee, as the
case may be) in and in connection with any and all Product Rights. Supplier
acknowledges and agrees that Supplier shall have no, and shall not assert or
claim any, legal, equitable or other right or interest, in whole or in part, in
or to any of the Product Rights, Herbalife Trademarks (as defined in Section
8(b) below) or other intellectual or industrial property of Herbalife
whatsoever, except for the rights expressly granted to Supplier by Herbalife
pursuant to Section 8(a)(ii) and Section 8(b) below.
(iiLimited Grant-back License to Supplier for the Term. Herbalife
hereby grants to Supplier a limited, non-exclusive, non-transferable,
royalty-free, right and license to use the Product Rights for the Supplied
Products solely to manufacture (or have manufactured) the Supplied Products for
Herbalife for the remainder of the Term only and not thereafter, and at all
times subject to the terms of this Agreement. Supplier acknowledges and agrees
that Herbalife reserves and retains any and all rights not expressly granted
hereunder to Supplier, and Supplier shall not claim any rights that are not
expressly granted or set forth hereunder to Supplier.
(b)Trademarks. Herbalife hereby grants to Supplier a limited,
nonexclusive, nontransferable royalty-free license solely to use the trademarks,
servicemarks, tradenames, and logos owned by or licensed to Herbalife (the
"Herbalife Trademarks') in packaging the Supplied Products for Herbalife, using
only the labels provided by Herbalife, for the remainder of the Term only and
not thereafter, and at all times subject to the terms and conditions of this
Agreement. Supplier hereby agrees that the Herbalife Trademarks shall only be
affixed to the Supplied Products. Supplier shall have no rights to use the
Herbalife Trademarks other than for purposes of packaging Supplied Products
pursuant to this Agreement which packaging shall be in form and substance
satisfactory to Herbalife. Supplier agrees to submit copies of the proposed
manner, use and layout of the Herbalife Trademarks for approval by Herbalife, in
Herbalife's sole and absolute discretion, prior to Supplier using the Herbalife
Trademarks as set forth herein. Supplier shall not use the Hcrbalife Trademarks
in advertising or promotional campaigns or otherwise, or use any confusingly
similar names., marks or logos, in any manner that, in Herbalife's sole and
absolute discretion, may be inconsistent with Herbalife's public image or be
misleading or harmful to Herbalife. In the event of termination, expiration, or
non-renewal of this Agreement, Supplier shall not have any right to sell any
Supplied Products remaining in any of Supplier's
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inventory, Supplier acknowledges and agrees that Herbalife reserves and retains
any and all rights not expressly granted hereunder to Supplier and Supplier
shall not assert or claim any rights that are not expressly granted or set forth
hereunder to Supplier.
Supplier hereby grants Herbalife (or its designee) a limited,
non-exclusive, nontransferable, royalty-free license solely to use the
trademarks, servicemarks, tradenames, and logos owned by or licensed to Supplier
(the "Supplier Trademark") in labeling and packaging the Supplied Products to
identify the source and contents thereof, and in related marketing, sales,
distribution and promotional activities. For products manufactured by or for
Herbalife (or its designee) other than by Supplier as permitted by Section 4(a)
of this Agreement, Supplier grants to Herbalife (or its designee) a limited,
non- cxclusive, perpetual, non-transferable, royalty-free license solely to use
Supplier Trademarks in labeling and packaging such products, and in related
marketing, sales, distribution and promotional activities, to identify the
source and contents of such products, to the extent that such contents include
the Product Rights. Supplier agrees to keep Herbalife informed concerning any
third party whose consent or license is required, and provide Herbalife with
reasonable assistance in obtaining any required consent or license from any
third party, with respect to the trademarks, servicemarks, tradenames, and logos
of that third party, which are not included in Supplier's license to Herbalife
herein, but which are necessary to meet the requirements for identifying the
source and contents of the products manufactured by or for Supplier, Herbalife
or its designee (the "Third Party Trademarks").
Supplier represents, warrants and covenants that all use of Supplier
Trademarks (that are owned by any third party) and Third Party Trademarks in
connection with Supplied Products has been and shall be authorized, that no
royalty or other compensation whatsoever is or shall be owed to any third party
with respect to such use, and that the content of any Supplied Products that use
Supplier Trademarks (that arc owned by any dill party) and/or Third Party
Trademarks include a component or ingredient which is manufactured, sold,
marketed, or otherwise distributed by such third party.
(c)Infringement. Supplier shall promptly notify Herbalife of any actual
or apparent infringement of Herbalife's rights in or to any of the Product
Rights or Herbalife Trademarks. Herbalife may, at its sole option and expense,
prosecute any suit it deems necessary or appropriate to protect any of
Herbalife's rights to the Product Rights or Herbalife Trademarks from and
against infringement by third parties anywhere in the world and Supplier shall
cooperate fully with Herbalife in connection with arty such action.
9. Confidential Information.
(a)Confidential Information. For purposes of this Agreement,
"Confidential Information" means any non-public information or material, whether
written, oral, or in any other form, received or obtained at any time, whether
before, on or after the date hereof, that is described as (or provided under
circumstances indicating it is) confidential or proprietary. Confidential
Information includes, but is not limited to, know-how, product prices, marketing
surveys and plans, flow charts, technical documentation, formulas, ingredients,
weight control concepts, and information concerning the design, specifications
and methods for the development, manufacture, packaging, supply, marketing,
distribution and sale of products, in addition to the terms and conditions of
this Agreement. Moreover, Confidential Information includes not only the
information itself, but any document, sketch, design, video tape, reproduction,
chart, graph, written application, or other writing or other form of
communication or documentation (whether visual, audio, or otherwise) of that
information. Confidential Information does not include information that a party
can demonstrate with competent written proof is: (i) already lawfully known by
that party at the time of first receipt from the other party and is not subject
to any other nondisclosure agreement between the parties; (ii) now, or which
later becomes, generally known to the industry through no fault of that party,
or which is later published or generally disclosed to the public by the other
party; (iii) otherwise lawfully and independently developed by that party (other
than the Product Rights in the case of development by Supplier), or lawfully
acquired from a third party without any obligation of confidentiality; or (iv)
required by any governmental authority having jurisdiction over that party
asserting a right to obtain such information,. including without limitation
where disclosure is required to be made for the purpose of Herbalife obtaining
Approvals in any jurisdiction; provided however, that prior to any such
disclosure pursuant to this clause (iv) (except where such disclosure is
required to be made to a governmental authority in order for Herbalife to obtain
Approvals in any jurisdiction) the party concerned
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shall promptly advise the other party in the event of any request by a
Governmental authority for the Confidential Information and shall cooperate with
the other party to assert any right of objection to such request or to seek a
protective order or to take other appropriate action to protect the Confidential
Information. Without limiting the generality of the foregoing, Supplier
acknowledges and agrees that any and all of the Product Rights (including
without limitation for proposed New Products), Herbalife's intellectual property
and trade secrets, and information relating to any and all aspects of
developing, manufacturing, distributing or multi-level marketing of Herbalife's
products are the Confidential Information of Herbalife.
(b)Non-Use and Non-Disclosure. Each party agrees to hold in confidence
and not to disclose or reveal to any person or entity any Confidential
Information of the other party disclosed hereunder without the clew and express
prior written consent of a duly authorized representative of the other party,
except to those persons and entities who (i) are required to have the
Confidential Information in order for the party receiving the information
hereunder to exercise its rights or perform its obligations under this Agreement
or for testing, evaluating or sampling proposed products for inclusion in this
Agreement, and (ii) are bound by an obligation of confidentiality no less
stringent am that set forth in this Agreement. Each party further agrees not to
use or disclose any Confidential Information of the other party for any purpose
at any time, other than for the limited purpose(s) referred to in this
Agreement. In the event that a party is directed to disclose any portion of any
Confidential information of the other party or any other materials proprietary
to the other party in conjunction with a judicial proceedings, or arbitration,
the disclosing party shall immediately notify the other party both orally and in
writing and shall provide the other party with reasonable cooperation and
assistance i obtaining a suitable protective order and in taking any other steps
to preserve confidentiality.
(c)Supplier Not To Use Confidential Information of Other Parties.
Supplier represents, warrants and covenants that it will not use in the course
of its performance under this Agreement, and will not disclose to Herbalife, any
confidential or proprietary information of any third party (including
competitors of Herbalife or Supplier) unless Supplier is expressly authorized in
writing by such third party to do so.
(d)Return of Materials Upon Termination. Upon termination, expiration
or non-renewal of this Agreement, each party shall use all reasonable commercial
efforts to return to the other party all material and documents containing
Confidential Information, including any copies or extracts thereof, and shall
erase any copies thereof contained in any electronic or other memory device.
Supplier immediately shall cease and desist from using any Confidential
Information of Herbalife, including without limitation Confidential Information
concerning the Product Rights, for any purpose whatsoever.
10. Inspection and Documents; Audits. Herbalife, or Herbalife's designated
agents, shall have the right from time to time, on reasonable notice and during
business hours, to inspect and/or carry out a general quality assurance review
of Supplier's facilities, manufacturing arrangements, inventory storage areas
and all other places relating to the performance of Supplier's duties hereunder.
Additionally, Herbalife, or Herbalife's designated agents, may submit any
Supplied Product to any and all forms of chemical analysis, testing and review.
Upon request by Herbalife, or Herbalife's designated agents, Supplier shall
furnish Herbalife with information and copies of documents necessary for
Herbalife to: (i) give Herbalife assurance that the Supplied Products were
manufactured and supplied in accordance with this Agreement and in compliance
with applicable Laws, (ii) enable Herbalife to assure that the Supplied Products
comply with the labeling claims made for the Supplied Products, (iii) secure all
governmental licenses; registrations or approvals for the Supplied Products as
required by applicable Laws, (iv) respond to all governmental inquiries or
requests, and (v) verify the true and actual cost of manufacturing, packaging,
labeling, insuring, shipping, supply and delivery by Supplier of Supplied
Products.
11. Termination.
(a)By Supplier. Supplier may terminate this Agreement (i) sixty (60)
days following written notice to Herbalife of a material breach of this
Agreement (or any other written agreement between the parties) by Herbalife, if
such breach has not been cured, or if Herbalife has not commenced diligently to
cure such breach, within such sixty-day (60-day) period; or (ii) immediately
upon the Insolvency of Herbalife.
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<PAGE>
(b)By Herbalife. Herbalife may terminate this Agreement (i) sixty (60)
days following written notice to Supplier of a material breach of this Agreement
(or any other written agreement between the parties ) by Supplier, if such
breach has not been cured, or if Supplier has not commenced diligently to cure
such breach, within such sixty-day (60-day) period; or (ii) immediately upon (x)
the Insolvency of Supplier, (y) notice to Supplier in the event of a failure by
Supplier, on three (3) or more occasions in any twelve-month (12-month) period,
to meet the Service Level requirements as set forth in Section 6(c) or (z) the
Change of Control of Supplier.
(c)Definition of Insolvency. "Insolvency" shah mean that, with respect
to an entity, such entity shall (i) make a general assignment for the benefit of
creditors or an agent authorized to liquidate its assets, (ii) become the
subject of bankruptcy or insolvency proceedings or other proceedings for relief
under any bankruptcy or other Law for the relief of debtors, where, with respect
to an involuntary petition in bankruptcy, the petition shall not have been
stayed within sixty (60) days, (iii) apply to a court for the appointment of a
receiver or custodian for substantially all of its assets or properties, with or
without consent, and such receiver is not discharged with sixty (60) days after
appointment or (iv) adopt a plan of complete liquidation of its assets.
(d)Definition of Change of Control. A "Change of Control" means (i) any
change, sale, merger, reorganization, transfer, pledge, granting of an option,
wan-ant hypothecation or any other event or action that results or could result
in a third party having an interest in or a lien or encumbrance upon (x) all or
a material part of the business or assets of Supplier or (y) any of the issued
and outstanding capital stock of Supplier (on a fully-diluted basis) such that
the present shareholders of Supplier no longer own more than fifty (50%) of such
capital stock or no longer have the authority and power to elect a majority of
the directors of Supplier or to direct and control the management and affairs of
Supplier or (ii) any assignment or delegation of, sale, transfer, pledge,
granting of an option, hypothecation or any other action that results or could
result in a third party having an interest in or a lien or encumbrance upon
Supplier's rights and obligations under this Agreement (or any part thereof),
without the prior written consent of Herbalife.
(e)Effect of Termination, Expiration or Non-Renewal. In the event of
any termination, expiration or non-renewal of this Agreement, Herbalife shall
remain the sole and exclusive owner of the Product Rights and shall be entitled
to sell and distribute all Supplied Products in its inventory. If Supplier
terminates this Agreement pursuant to Section 11(a) above, Herbalife shall
purchase Supplied Products remaining in Supplier's possession but not to exceed
the quantity on firm order for the preceding five (5) weeks at prices no higher
than those specified in this Agreement; provided, however, that if this
Agreement is terminated for any other reason or expires or is not renewed in
accordance with the terms and conditions hereof, Herbalife shall have the right,
but not the obligation, to (i) purchase Supplied Products remaining in
Supplier's possession and/or (ii) purchase and take delivery of any Supplied
Products ordered prior to the date of termination, expiration or non-renewal of
this Agreement, at prices no higher than those .specified in this Agreement.
Unless otherwise provided in this Agreement, Supplier shall promptly destroy all
Supplied Products in its possession upon termination of this Agreement and
provide written confirmation to Herbalife of such action.
(f)No Liability of Terminating Party for Termination Pursuant to
Agreement. Supplier and Herbalife have each considered the possibility that
either or both parties will incur expenses in preparing for performance of this
Agreement and that either or both parties will incur expense's and suffer losses
as a result of termination of this Agreement and the parties have nevertheless
agreed that neither party in exercising its right to terminate or not renew this
Agreement in accordance with the terms and conditions hereof (the "Terminating
Party") shall incur any liability whatsoever for any damage, loss or expense of
any kind suffered or incurred by the other (or for any compensation to the
other) arising from or incident to any such termination or nonrenewal, whether
or not the Terminating Party is aware of any such damage, loss or expense. Any
termination hereof shall not impair any rights nor discharge any obligations
which have accrued to the parties as of the effective date of such termination.
(g)Survival. Notwithstanding any other provision contained herein,
Sections 6(a) and (b), 7, 8(a)(i), 9, 10, 11(e), (f), and (g), 12, 15, 18, and
25 through 28 shall survive the termination, expiration or non-renewal of this
Agreement for any reason.
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12. Indemnification. Supplier shall indemnify, defend and hold Herbalife
and its designees, and their respective officers, directors, shareholders,
affiliates, employees and agents (each, an "Indemnified Party"), harmless from
and against any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including interest,
penalties, reasonable attorneys' fees, costs of investigation and any legal or
other expenses or costs incurred or suffered by any Indemnified Party arising
out of, in connection with or resulting from any claim or allegation as to: (a)
any product liability or defect (other than to the extent caused by and
attributable to the acts or omissions of any Indemnified Party), or (b) any
violation or infringement by Supplier (or any manufacturer of Supplied Products)
'upon any common law or statutory rights of any third party, including without
limitation rights relating to copyrights, Patents, trade marks, contractual
rights or trade secret rights (other than to the extent caused by and
attributable to the acts or omissions of Herbalife), or (c) any inaccuracy or
breach in or of or any failure to observe or perform any of Supplier's
covenants, representations, warranties or obligations under this Agreement.
Further, with respect to rights of Herbalife under (b) above in this Section 12:
(i) Supplier shall provide, at its own cost, non-infringing replacements to
Supplied Products of equivalent quality and effect, or obtain at its own cost
the necessary licenses from third parties to allow Herbalife to continue to
market, sell, distribute and promote the Supplied Products, and (ii) in addition
to other remedies, Herbalife shall be entitled to a full refund of all payments
made to or in connection with Supplier.
13. Insurance. Supplier shall maintain, and shall insure all manufacturers
of Supplied Products maintain, in full force and effect throughout the Term, at
their sole cost and expense, insurance with financially sound and established
reputable insurers of the type and quantity (and with such risk retention)
generally maintained by the companies of established repute in the nutritional
products line of business, such insurance to include, without limitation,
products liability insurance in an amount no less than five million U.S. dollars
(U.S. $5,000,000.00) per occurrence. Supplier shall upon request provide
Herbalife with a copy of any documentation relating to any such insurances.
Supplier shall, and shall insure that all manufacturers of Supplied Products, if
Herbalife so requests, have Herbalife named as an additional insured
beneficiary, with Herbalife able to claim thereunder as primary beneficiary and
without offset or deduction whatsoever as a result of any insurance obtained by
Herbalife.
14. Amendment or Waiver. This Agreement shall not be amended, nor shall
any of its terms be deemed to have been waived by either party, unless such
amendment or waiver is in writing in a document that specifically refers to this
Agreement and specifically states that it intends to amend this Agreement or
waive a term of this Agreement and such document is signed by Supplier and two
(2) duly authorized executive officers of Herbalife. Any delay or failure by a
non-defaulting party hereto to exercise its rights hereunder shall not
constitute a waiver thereof by that non-defaulting party, and no single or
partial exercise by a non-defaulting party hereto shall preclude other or
further exercise thereof by that non-defaulting party. General correspondence
between the parties, invoices, purchase orders or any other document exchanged
between the parties not meeting the requirements of this Section 14 shall not be
deemed to amend or waive any term of this Agreement.
15. Governing Law; Injunctive Relief
(a)Governing Law. This Agreement is to be construed in accordance with
and governed by the internal laws of the State of California (as permitted by
Section 1646.5 of the California Civil Code or any similar successor provision)
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of
California to the rights and duties of the parties. In the event of any legal
action, arbitration or other proceeding, the prevailing party shall be entitled
to reimbursement of its costs, including court and arbitration costs and expert
witnesses' and reasonable attorneys' fees and costs.
(b)Injunctive Relief. If Supplier breaches Section 8, 9, or 19, the
parties acknowledge that the damage or imminent damage to Herbalife's business
or its goodwill would be irreparable and difficult to estimate, making any
remedy at law or in damages inadequate. Accordingly, notwithstanding any other
provision in this Agreement Herbalife shall have the right to pursue a claim for
injunctive relief, damages and attorneys' fees in a court of competent
jurisdiction for Supplier's breach of any covenant, agreement or obligation
arising under Section 8, 9, or 19, in addition to any other relief available to
Herbalife under this Agreement or under Law.
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16. Counterparts. This Agreement may be executed in multiple counterparts,
which taken together shall constitute one instrument and each of which shall be
considered an original for all purposes.
17. Time is of the Essence. The parties agree that time is of the essence
under this Agreement.
18. Notices. All notices, requests, demands and other communications
hereunder shall be in writing, in English, and shall be deemed to have been duly
given (except as may otherwise be specifically provided herein to the contrary)
if delivered by hand, by a nationally recognized overnight delivery service, by
facsimile transmission followed by mail, or mailed by certified or registered
mail with postage prepaid.
(a)If to Supplier:
Manhattan Drug Company, Inc.
201 Route 22
Hillside, New Jersey 07205
Attention: Mr. E. Gerald Kay, President
Facsimile No.: (973) 926-1735
With copies to:
Shanley & Fisher P.C.
131 Madison Avenue
Morristown, New Jersey 07960
Attention: Kevin M. Kilcullen, Esq.
Facsimile No.: (973) 540-8819
(b)If to Herbalife:
Herbalife International of America, Inc.
1800 Century Park East, 14th Floor
Century City, California
Attention: Mr. Bernie O'Brien,
Senior Vice President
Facsimile No.: (310) 557-3928
With copies to:
Herbalife International, Inc.
1800 Century Park East, 14th Floor
Century City, California 90067
Attn: Robert A. Sandler, Esq.
General Counsel
Facsimile NO.: (310) 557-3906
Morrison & Foerster LLP
555 West 5th Street
Los Angeles, California 90013
Attn: Rena L. O'Malley, Esq.
Facsimile No.: (213) 892-5454
or such other address or facsimile number as any of the persons designated above
may have specified in a notice or communication duly given to the other
designated person as provided herein. Such notice or communication will be
deemed to have been given as of the date so delivered or telecopied, or if
mailed, two business days thereafter.
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19. Binding Effect; Non-Assignability. This Agreement shall inure to the
benefit of, and be binding on, the parties hereto, their respective successors
and assigns; provided, however, that neither this Agreement nor the rights and
obligations of Supplier hereunder shall be transferable, assignable or delegable
by Supplier nor shall there be any Change of Control of Supplier without the
consent of Herbalife. Any purported transfer, assignment or delegation in breach
of this Section 19 shall be null and void.
20. Relationship of the Parties. The parties expressly understand and
agree that Supplier is an independent contractor hereunder; no joint venture,
partnership or agency relationship is created or intended to be created by this
Agreement;. and Supplier shall not be deemed to be or become hereunder the
representative or agent of Herbalife.
21. Force Majeure. Neither party shall be liable to the other party for
failure or delay in the performance of any of the obligations under this
Agreement for the time and to the extent such failure or delay is caused by
reason of acts of God or other cause beyond its reasonable control, including
acts of government, riots, war, interruption of transportation, strikes or other
labor trouble, shortage of labor, fire, storm, flood, earthquake, inability to
obtain suitable raw materials, products, parts, components, fuel or power, or
extraordinary price increases (each a "Force Majeure Event"). The performance of
obligations hereunder shall be suspended during the existence of any ,Force
Majeure Event, and upon cessation of such Force Majeure Event, shall again be
required; provided, however, that the parties hereto shall use their reasonable
commercial efforts to minimize the consequences of such Force Majeure Event and
in the event either party is unable to perform as a result of such Force Majeure
Event for a period of sixty (60) consecutive days, the other party may
immediately terminate this Agreement upon notice to the non-performing party.
22. Exhibits and Schedules. Any exhibit or schedule attached hereto is
made a part hereof and is fully incorporated herein by reference.
23. Entire Agreement. This Agreement embodies the entire understanding of
the parties, and supersedes any other agreement between the parties, with
respect to the subject matter of this Agreement, including without limitation
any confidentiality agreement between Herbalife and Supplier. In the event of
any conflict between this Agreement and any other document., including any
purchase order, this Agreement shall prevail.
24. Agreement Negotiated. The parties are sophisticated and have been
represented by lawyers throughout this transaction who have carefully negotiated
the provisions hereof As a consequence, the parties do not believe the
presumption of California Civil Code Section 1654 and similar laws or rules
relating to the interpretation of contracts against the drafter of any
particular clause should be applied in this case and therefore waive its
effects.
25. Remedies Not Exclusive. No remedy conferred by any of the specific
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy will be cumulative and will be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute or otherwise. The election of any one or more remedies will not
constitute a waiver of the right to pursue other available remedies.
26. Partial Invalidity. In the event that any of the provisions of this
Agreement are held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions will
not be affected thereby.
27. Language; Interpretation. The language controlling the construction
and interpretation of this Agreement shall be English. Section headings are
included solely for convenience and shall not constitute a part hereof. Unless
the context otherwise requires, words importing the singular shall be deemed to
import the plural and vice versa.
28. Third Party Beneficiaries. No person or entity shall be a third party
beneficiary of this Agreement, except that any designee of Herbalife shall be
entitled to enforce against Supplier the rights conferred upon that designee
hereunder.
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29. Media Relations. Each of Herbalife and Supplier agree that during the
Term each will not, and will cause its affiliates not to, disparage each other
or release commercially sensitive information about each other in any oral,
written or electronic public statements (including without limitation in any
securities filing of Supplier or its affiliates with the U.S. Securities and
Exchange Commission) concerning any matters relating to or arising from this
Agreement. Supplier agrees, and will cause its affiliates not to, make any such
public statements prior to the launch by Herbalife of the Supplied Products as
products to be sold in commercial quantities by or on behalf of Herbalife to its
distributors (and in any event only after provision to Herbalife of a proposed
draft and then having obtained the approval in advance of Herbalife).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
HERBALIFE INTERNATIONAL OF
AMERICA, INC.
By________________________________
Name:_____________________________
Its_______________________________
By________________________________
Name:_____________________________
Its_______________________________
MANHATTAN DRUG COMPANY, INC.
By________________________________
Name:_____________________________
Its_______________________________
By________________________________
Name:_____________________________
Its_______________________________
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EXHIBIT A-1
SUPPLIED PRODUCTS
1. LIST OF CURRENT PRODUCTS AND PRODUCT PRICES THEREFOR
Product Product Price Per Unit
"Super Ginkgo" $2.12
30 Tablets per Bottle; 12 Bottles per Case
2. SPECIAL TERMS FOR CURRENT PRODUCTS
*This is not the final name
Note: "Ultimate Ginkgo" is final name
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EXHIBIT A-2
NEW PRODUCTS
1. LIST OF NEW PRODUCTS AND PRODUCT PRICES THEREFOR
Product Product Price Per Unit
[Detailed description of product?][flavors?][special packaging?]
[units per case?] [volume discount?]
2. SPECIAL TERMS FOR NEW PRODUCTS
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EXHIBIT B
LOCAL DELIVERY POINT
Herbalife's Los Angeles distribution center at 930 East 233rd Street, Carson,
CA 90745 or Herbalife's Memphis distribution center at 3580 East Raines Road,
Memphis, TN 38118 as designated by Herbalife.
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Exhibit 10.13
MANUFACTURING AGREEMENT
AGREEMENT (this "Agreement") made and entered into effective as of the
14th day of February, 1998, by and between PILON INTERNATIONAL, PLC, a company
incorporated under the laws of England and Whales, with its registered office at
Bell House, 175 Regent Street, London WlR 7FB, England (hereinafter referred to
as "PILON"), and MANHATTAN DRUG COMPANY, INC., a New York corporation with
offices at 225 Long Avenue, Building 15, P.O. Box 278, Hillside, New Jersey
07205 (hereinafter referred to as "MANHATTAN") .
W I T N E S S E T H:
WHEREAS, PILON is engaged in, among other things, the business of
distributing and selling various vitamins and nutritional supplements (the
"Business"); and
WHEREAS, MANHATTAN is engaged in, among other things, the business of
manufacturing and developing formulas for vitamins and nutritional supplements;
and
WHEREAS, PILON and MANHATTAN agree that it is in their mutual interest
that MANHATTAN develop formulas and products to be sold under a private label
(the "Private Label"') chosen by PILON; and
WHEREAS, PILON and MANHATTAN agree that it is in their mutual interest
that MANHATTAN manufacture and supply the products related to the Business to
PILON on the terms herein set forth.
NOW, THEREFORE, in consideration of the mutual. covenants herein
contained, the parties hereby agree as follows:
1. PRODUCTS. MANHATTAN shall manufacture, sell and deliver to PILON, and
PILON shall purchase and receive from MANHATTAN, such Products (defined at
clause 2 below) as may be required by PILON from time to time for the Business
upon the terms and conditions hereinafter, set forth. For the purposes of this
Agreement, the word "manufacture" shall include the manufacture of the Products,
and a bottling and labeling operation with respect to the Products.
2. PRODUCT DEVELOPHENT. (a) MANHATTAN shall develop formulas, vitamins, and
nutritional supplements for the product's set forth on Schedule A annexed hereto
(the "Products") for sale under the Private Label. All right, title and interest
in the formulas for the Products shall remain the sole property of MANHATTAN.
MANHATTAN shall license PILON with the right to sell the Products containing the
formulas for the sum of one ($1.00) dollar per year during such time as this
Agreement shall be in force.
<PAGE>
(b)PILON acknowledges and agrees that upon termination of this
Agreement, all of PILON's rights in and to the formulas for the Products shall
immediately cease, and terminate and PILON shall promptly return to MANHATTAN
all documentation and other tangible data and information, including all copies
or other reproductions thereof, relating to the formulas for the Products,
disclosed or delivered by MANHATTAN or otherwise made available to PILON
hereunder.
3. CONFIDENTIALITY AGREEMENT. Simultaneously with and as condition to the
execution and delivery of this Agreement by PILON, PILON and MANHATTAN are
entering into that certain Confidentiality Agreement (the "Confidentiality
Agreement"), the terms of which are an integral part of the terms of this
Agreement and are hereby incorporated by this reference.
4. TERM. This Agreement shall be effective for a three year period (the
"Initial Term") commencing on the lst day of March, 1998 (the "Effective Date"),
and for successive annual periods thereafter (each a "Renewal Term"), subject to
termination by either party upon written notice to ,the other party not less
than one (1) month prior, to the expiration of the Initial Term or any Renewal
Term thereafter, unless, sooner terminated in accordance with Section 15 below.
Each annual period under this Agreement is hereinafter sometimes referred to as
a "contract year".
5. DELIVERY FORECASTS.
The parties to this Agreement acknowledge that PILON is unable to forecast
its delivery requirements on a monthly basis with respect to such Products for
the first contract year. PILON shall use its best efforts to submit to MANHATTAN
delivery forecasts for succeeding contract years.
6. ALTERNATE MANUFACTURERS. MANHATTAN and PILON acknowledge and agree that
MANHATTAN shall be the exclusive manufacturer for PILON of such Products
described on Schedule A annexed hereto. PILON shall have the right to purchase
the Products from other manufacturers designated by MANHATTAN during the term of
this Agreement if MANHATTAN is unable to manufacture the Products.
7. PRICE. The initial per unit prices for the Products shall be MANHATTAN'
s current price (a list of' the current price is attached hereto as Schedule B)
and are composed of a labor component, an overhead component and a raw materials
component. The price per unit for the Products shall remain MANHATTAN' s current
prices during the Initial Term and for Renewal Terms, subject to change only in
MANHATTAN's costs of acquiring the raw materials component of the Products. For
the purpose of this Agreement, the term "raw materials" shall include bottling
and packaging materials.
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<PAGE>
8. INVOICES AND PAYMENTS. All Products shall be shipped free on board from
Manhattan's warehouse facility in. Hillside, New Jersey. All Products shipped
hereunder shall be shipped pursuant to a 30 day divisible, transferable letter
of credit issued by a bank reasonably acceptable to Manhattan.
9. CHANGES IN SPECIFICATIONS.
(a)PILON may at any time and from time to time make changes to the
Product specifications, previously given to MANHATTAN. All changes in the
Product specifications shall be it writing, signed by PILON and, as of the
effective date specified by PILON (which shall be at least thirty (30) days
after the same are delivered to MANHATTAN), shall be deemed to be a part of this
Agreement.
(b)If any change in the Product specifications shall result in a change
in MANHATTAN's actual costs of manufacture, MANHATTAN will promptly notify PILON
of such change in writing and the amount of any such increase or decrease shall
be borne by or inure to the benefit of PILON, as the case may be. MANHATTAN
shall provide to PILON upon request substantiation of any increase or decrease
in such costs.
10. DELIVERY; TITLE; RISK OF LOSS. MANHATTAN shall deliver, or cause to be
delivered, the Products ordered hereunder to PILON's facility in Italy having as
address at SAIMA AVANDERO S.P.A., Via Dante N. 132/134, 20090 Limito Di
Pioltello (MI) (or to such other locations as PILON may advise MANHATTAN in
writing) on the dates specified in PILON's purchase orders. Title and risk of
loss with respect to all Products sold hereunder shall pass to PILON upon
delivery to PILON. MANHATTAN shall be responsible for compliance with all
health, environmental and other laws relating to the safe handling and
transportation of the Products until delivered to PILON.
11. WARRANTIES; REMEDIES. MANHATTAN hereby warrants and agrees that:
(a)All Products delivered pursuant to this Agreement shall be free from
defects in materials and workmanship.
(b)MANHATTAN shall comply with all applicable Federal, State and local
laws and regulations in manufacturing, bottling, packaging and labeling the
Products hereunder, including, but not limited to, all requirements of the Fair
Labeling and Packaging Act, the Fair Labor Standards Act of 1938, as amended,
the Equal Employment Opportunities provisions of the Civil Rights Act of 1964,
as amended, and all regulations promulgated thereunder.
3
<PAGE>
(c)In addition to any other remedies that PILON may have hereunder or
under applicable law, PILON may return any unit of the Products which does not
satisfy any of the foregoing warranties at the time it is delivered to PILON
(each, "Rejected Product"), at any time within one (1) year after the date of
such delivery, to MANHATTAN at MANHATTAN's risk and cost, and MANHATTAN shall,
if so directed by PILON, at MANHATTAN's sole expense, promptly deliver a
replacement which conforms to all requirements set forth in this Agreement to
PILON's facility in Italy having as address at SAIMA AVANDERO S.P.A., Via Dante
N. 132/134, 20090 Limito Di Pioltello (MI) (or to such other locations as PILON
may advise MANHATTAN in writing). If a replacement is not requested, MANHATTAN
shall promptly return all payments which may have been made in respect of the
Rejected Product, and PILON need not pay for any units thereof for which payment
has not yet been made.
(d)The warranties set forth in Subsections (a) and (b) of this Section
11 shall survive PILON's acceptance of Products hereunder.
12. INSURANCE.
(a)MANHATTAN shall, throughout the term hereof, maintain (i) worker's
compensation insurance in statutory amounts covering all of its employees, (ii)
employer's liability insurance with a minimum per occurrence limit of
$1,000,000, and (iii) public liability insurance (including product liability
and "broad form" contractual liability) for injuries, including accidental
death, to any one person in an amount not less than $10,000,000 and on account
of any one accident in an amount not less than $10,000,000, and for property
damage in an amount not less than $500,000 (the employer's liability and public
liability insurance are herein referred to as the "Liability Insurance").
(b)All insurance policies required hereunder shall be issued by
companies reasonably acceptable to PILON. PILON (and such other companies as it
may nominate) shall be named as additional insured under MANHATTAN's Liability
Insurance. MANHATTAN shall furnish PILON with certificates of insurance which
provide that PILON (and such other companies as it may nominate) are named as an
additional insured under the Liability Insurance, that the Liability Insurance
is primary as to any other insurance, that the issuers of the Liability
Insurance waive subrogation against PILON (and its nominees), that the Liability
Insurance includes contractual liability and that all policies required
hereunder cannot be modified or cancelled without thirty (30) days advance
notice being given to PILON. The existence of any such insurance shall not be
construed as a limitation of MANHATTAN'S liability hereunder.
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<PAGE>
13. FORCE MAJEURE.
(a)Failure by MANHATTAN to make any delivery hereunder (or portions
thereof) when due shall not subject MANHATTAN to any liability to PILON if
MANHATTAN declares in writing to PILON that performance,, cannot be made due to
(i) act of God or the public enemy, fire, explosion, perils of the sea, flood,
drought, war, riot, sabotage, accident or embargo; (ii) without limiting the
foregoing circumstances, any circumstances of like or different character beyond
the reasonable control of MANHATTAN; interruption of or delay in transportation
beyond the reasonable control of MANHATTAN; (iv) inadequacy or shortage or
failure of normal sources of supply of materials, energy or equipment beyond the
reasonable control of MANHATTAN; (v) equipment breakdowns beyond the reasonable
control of MANHATTAN; (vi) labor trouble from whatever cause arising and whether
or not the demands of the employees involved are reasonable and within
MANHATTAN's power to concede; or (vii) compliance by MANHATTAN with any order,
action, direction or request of any governmental officer, department, agency,
authority or committee thereof (any occurrence or condition set forth in
subsections (i) through (vii) above are herein referred to as "Force Majeure").
(b)If MANHATTAN claims an excuse hereunder, MANHATTAN shall promptly
notify PILON in writing, specifying the reasons therefor and expected duration
thereof. MANHATTAN shall take reasonable steps to ensure resumption of full
performance hereunder as soon as reasonably possible.
14.INTANGIBLE PROPERTY; GRANT OF LICENSE; CONFIDENTIAL INFORMATION.
(a)The parties hereby acknowledge and agree that PILON is the owner of
all trademarks,
tradenames and information relating directly or indirectly to any aspect of the
Business or affairs of PILON, or-the pricing, employees, customers, financial
condition or prospects thereof.
(b)MANHATTAN covenants for the benefit of PILON its subsidiaries and
affiliates, to hold all information (the "Confidential Information") directly or
indirectly to any aspect of the Business or affairs of PILON, or the pricing,
employees, customers, financial condition or prospects thereof, in confidence in
perpetuity and to not disclose any Confidential Information to any third party
unless MANHATTAN can demonstrate by documentary evidence that such Confidential
Information (i) is made known to the public generally through no fault or act of
MANHATTAN, or its subsidiaries or affiliates, or (ii) is required to be
disclosed by governmental authority; provided, however, with respect to required
disclosures pursuant to subsection (iii) hereof MANHATTAN shall give PILON
immediate notice of the requested disclosure and shall cooperate with PILON in
the event PILON chooses to challenge such
5
<PAGE>
disclosure. MANHATTAN shall protect Confidential Information at least to the
extent it protects its own proprietary information and shall disclose
Confidential Information only to those employees of MANHATTAN with an absolute
need to know.
(c)MANHATTAN further acknowledges and agrees that it would be difficult
to assess the monetary damages PILON would sustain in the event of the breach of
the obligations contained in this Section 14, and expressly recognizes that an
irreparable injury would be caused to PILON by any such breach, and that
MANHATTAN's obligations set forth in this Section 14 can be enforced by
injunction. MANHATTAN will indemnify PILON for all, costs and expenses,
including reasonable attorneys' fees and disbursements, incurred by PILON in
enforcing MANHATTAN's .obligations or protecting PILON's rights under this
Section 14.
15. MANHATTAN'S INDEMNITY.
MANHATTAN shall indemnify and hold harmless PILON, its subsidiaries and
affiliates, and their respective officers, directors and employees
(collectively, "Indemnitees") from and against any and all claims, demands,
causes of action, suits, proceedings, judgments, decrees, liabilities, losses,
damages and costs, including attorneys' fees and disbursements (collectively
"Claims"), which may be asserted against any Indemnitee to the extent they arise
out of, are connected with or relate to, any and all units of the Product,
whether or not for damage to property or injury or death, including, but not
limited to (a) Claims involving (i) the operation of MANHATTAN's facility, or
(ii) the failure of any unit of any Product to comply with the specifications of
PILON's purchase orders, and (b) Claims involving any environmental, safety or
health law/ regulation or order of any governmental authority. In addition to
the foregoing, at PILON's written request, MANHATTAN will, at its own expense,
assume the defense of any Claim arising out of, connected with or related to any
Product using counsel reasonably acceptable to PILON; provided, however, that
MANHATTAN shall not be responsible for any Claim arising out of (i) misuse of
any Product, or (ii) any change or modification to any Product after delivery to
PILON.
16. TERMINATION.
(a)In addition to the right of either party to terminate this Agreement
at the end of the Initial Term or any Renewal Term thereafter as set forth in
Section 4 above, either party may terminate this Agreement by written notice to
the other party if the other party (i) suspends payment of its debts or enters
into or becomes subject to insolvency, liquidation, dissolution or bankruptcy
proceedings, (ii) makes an assignment for the benefit of its creditors, (iii)
has a receiver or trustee appointed for all or a substantial portion of its
assets, (iv) seeks relief under any law for debtors' relief, (v) attempts to
assign this Agreement or delegate its duties hereunder unless authorized under
this
6
<PAGE>
Agreement, (vi) fails to perform its obligations under this Agreement for a
period of thirty (30) days (either consecutively or in the aggregate) during any
contract year due to Force Majeure (as hereinafter defined), or (vii) fails to
comply with the terms and conditions of this Agreement in any material respect;
provided, however, that in such event, with respect to the events or
circumstances set forth in subsection (vii) above, the party failing to comply
with the terms and conditions of this Agreement in such material respect shall
be provided at least ten (10) days' prior written notice during which it may
cure the failure.
(b) Except as expressly set forth in this Agreement, termination
of this Agreement: (i) will not affect or impair the' rights,
liabilities and obligations of any party
under any purchase order issued prior to the effective date of termination,
including without limitation the right of PILON to sell all Products delivered
to PILON prior to termination hereof; and
(ii) will not relieve any party of any obligation or liability
incurred under this Agreement prior to the effective date of termination.
(c) In the event of termination hereunder for whatever reason (other
than nonpayment), MANHATTAN shall, at PILON's option, and upon PILON's request,
continue to perform its obligations hereunder for a period of up to one hundred
eighty (180) days beyond the date of termination.
17. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of New Jersey, including the New Jersey adopted version of the Uniform
Commercial Code.
18. ASSIGNABILITY. This Agreement may not be assigned by either party
without the consent of the other party, which consent shall not be unreasonably
withheld; provided, however, that either party may assign some or all of its
rights or obligations hereunder without the other party's consent to any person
or entity controlling, controlled by, or under common control with, the first
.party, or, pursuant to a stock or asset sale, a merger or any other
transaction, to any successor to all or substantially all of the assets of any
business unit of the first party receiving the benefits of this Agreement,
provided, however, that the successor is not in a business similar to or in
competition with PILON' s business (or that of its customers).
19. ARBITRATION. Any dispute, controversy or claim arising out of or
relating to this Agreement, which cannot be amicably settled, shall be finally
settled by arbitration to be held in New Jersey, in accordance with the rules of
the American Arbitration Association. Arbitration shall be before three
arbitrators, one to be selected by each of the parties and the third to be
chosen by the first two arbitrators. Each party shall be responsible for its own
expenses regarding any arbitration. The costs of
7
<PAGE>
the arbitration itself shall be shared equally by the parties unless otherwise
determined by the,-arbitrators. Judgment upon any award may be entered in any
court having jurisdiction and shall be final.
20. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given to the parties at their
respective addresses set forth below and shall be sent by (i) hand delivery;
(ii) certified mail, return receipt requested, postage prepaid; (iii) a
recognized "overnight" delivery service; or (iv) telecopy. Notices sent by hand
delivery shall be deemed received when delivered to the address and/or person
set forth below; notices sent by certified mail shall be deemed received when
accepted; notices sent by "overnight" delivery service shall be deemed received
when delivered; and notices sent by telecopy shall be deemed received upon
receipt of confirmation of dispatch:
If to PILON:PILON INTERNATIONAL, PLC
Bell House
175 Regent Street
London W1R 7FB
England
Attention:Mr. Gabriele Albora
Mr. Peter Colerigde
Telephone No. +(44) 171 2875322
With a copy to: P&P SERVICES SA
via Balestra 22/B
CH 6900 LUGANO
Switzerland
Attention: Mr. Fernando
Telephone No. +(41) 91 912 2670
Telephone No. +(41) 91 921 0470
If to MANHATTAN: MANHATTAN DRUG COMPANY, INC.
225 Long Avenue
Hillside, NJ 07205
Attention: Mr. E. Gerald Kay, President
Telephone No. (973) 926-0816
Telecopy No. (973) 926-1735
With copies to: Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962-1979
Attention: Kevin M. Kilcullen, Esq.
Telecopy No. (973) 285-1625
or to such other address or telecopy number as any party may designate by
written notice in the aforesaid manner.
21. INSPECTION. PILON shall have the right, during normal business hours
and upon not less than two (2) hours prior notice, to inspect the books and
records of MANHATTAN as to PILON transactions hereunder and plants and
facilities of MANHATTAN producing PILON Products in order to confirm compliance
with this Agreement or to review any information provided to PILON by MANHATTAN
hereunder.
8
<PAGE>
22. WAIVER. The right of either party at any time to require strict
performance by the other party hereto of any or all of the terms and conditions
of this Agreement shall in no way be affected or impaired by prior waiver,
forbearance, or course of dealing.
23. ENTIRETY. This Agreement constitutes the entire agreement between the
parties hereto with respect to the development, manufacture, and supply by
MANHATTAN and purchase by PILON of the Products, and merges and supersedes all
prior understandings and representations, whether oral or written, between the
parties pertaining thereto. No addition, modification or alteration of this
Agreement shall be of any force or effect whatsoever unless reduced to writing
and signed by the party to be charged thereby. Any provision appearing on any
purchase order, sales order, sales acknowledgment, purchase order release or
similar document which appears to modify, alter or add to the provisions of this
Agreement, shall be null and void and of no effect whatsoever unless
acknowledged and accepted, in writing, by both parties on said documents.
24. SURVIVAL. The obligations of the parties under Sections 10, 13, 14,
15, 18, and 19 hereof shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the date and year first
hereinabove written.
PILON INTERNATIONAL, PLC
By:__________________________
Name:________________________
Title:_______________________
MANHATTAN DRUG COMPANY, INC.
By:__________________________
Name:________________________
Title:_______________________
9
<PAGE>
Schedule A
6th ELEMENT
IMUNO GRANIT
DEFINITY
CAPRICE
FRUITONATURAL
VEGENATURAL
MARE
VULCAN
GINGSTAR
<PAGE>
SCHEDULE B
Item Product Original CostRevised Cost
Number Description Per Bottle Per Bottle
2148/30's 6th Element $ 2.52 $ 2.580
2149/30's Imuno Granit $ 2.30 $ 2.360
2150/60's Gingstar $ 2.45 $ 2.533
2151/30's Definity $ 2.95 $ 3,010
2152/30's Caprice $ 1.40 $ 1,460
2153/60's Mare $ 1.90 $ 1,983
2154/30's Vulcan $ 2.03 $ 2,090
2155/60's Vege Natural $ 2.28 $ 2,363
2156/60's Fruito Natural $ 2.43 $ 2,513
Raw Material Cost Includes the Following:
1. All active ingredients
2. All inactive ingredients
3. Coating Costs
4. Cost of blue bottle, cotton and cap (with 4 color artwork), Label 5. Cost of
standard non-printed corrugated box (approximately 100 per box)
Manufacturing and Bottling Charge Includes the Following:
1. Manufacturing and bottling labor and necessary supplies
2. Some but not all testing of products. To be discussed in further detail.
Not included
Tooling and Plate charges for labels
<PAGE>
6TH ELEMENT
Raw Material Cost Unit
Pycnogenol $2,210.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcrystalline Cellulose $ 3,000 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10,000 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.110 bottle
White Ribbed Cap with 4 Color Artwork $ 0.040 each
Label $ 0.040 each
<PAGE>
IMUNO GRANIT
Raw Material Cost Unit
Cat's Claw $ 62.000 kg
Echinacea $ 170.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcystalline Cellulose $ 3.000 kg
Calcium Carbonate $ 1.350 kg
Hydrogenated Vegetable Oil $ 3.770 kg
Croscarmellose Sodium $ 10.000 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.110 bottle
White Ribbed Cap with 4
Color Artwork $ 0.040 each
Label $ 0.040 each
<PAGE>
GINSTAR
Raw Material Cost Unit
Ginseng $ 28.000 kg
Rhodiola $ 150.000 kg
Schizandra $ 90.000 kg
Dextrose $ 0.860 kg
Microcrystalline Cellulose $ 3.000 kg
Calcium Carbonate $ 1.350 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10.000 kg
Silica $ 2.600 kg
Magnesium Stearate $ 2.500 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.120 bottle
White Ribbed Cap with 4
Color Artwork $ 0.043 each
Label $ 0.060 each
<PAGE>
DEFINITY
Raw Material Cost Unit
Kava Root $ 265.000 kg
Passiflora $ 38.000 kg
St. John's Wort $ 80.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcrystalline Cellulose $ 3.000 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10.000 kg
Soy Polysaccharides $ 9.740 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.110 bottle
White Ribbed Cap with 4
Color Artwork $ 0.040 each
Label $ 0.040 each
<PAGE>
CAPRICE
Raw Material Cost Unit
Zhi Shi $ 72.000 kg
Chromium Chelavite $ 26.000 kg
St. John's Wort $ 80.000 kg
Microcrystalline Cellulose $ 3.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10.000 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.110 bottle
White Ribbed Cap with 4
Color Artwork $ 0.040 each
Label $ 0.040 each
<PAGE>
MARE
Raw Material Cost Unit
Chlorella 45.000 kg
Oyster Shell 2.160 kg
Spirulina Algae 18.000 kg
Calcium Phosphate Dibasic 1.510 kg
Microcrystalline Cellulose 3.000 kg
Croscarmellose Sodium 10.000 kg
Stearic Acid 1.760 kg
Sodium Starch Glycolate 8.720 kg
Silica 2.600 kg
Magnesium Stearate 2.500 kg
Coating 0.500 1000
Blue PET Bottle, Wadding & Box 0.120 bottle
White Ribbed Cap with 4
Color Artwork 0.043 1000
Label 0.060 1000
<PAGE>
VULCAN
Raw Material Cost Unit
L-Arginine $ 33.500 kg
Marapuama $ 80.000 kg
Catuaba $ 42.000 kg
Ginkgo Biloba $ 320.000 kg
Niacin $ 9.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcrystalline Cellulose $ 3.000 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10.000 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.110 bottle
White Ribbed Cap with 4
Color Artwork $ 0.040 each
Label $ 0.040 each
<PAGE>
VEGE NATURAL
Raw Material Cost Unit
Ascorbic Acid $ 10.250 kg
Broccoli $ 48.000 kg
Carrot $ 25.000 kg
Beta Carotene $ 195.000 kg
Folic Acid $ 12.000 kg
Garlic $ 28.000 kg
Niacinamide $ 8.500 kg
MSM $ 24.000 kg
Pyridoxine $ 26.000 kg
Riboflavin $ 69.000 kg
Spinach $ 43.000 kg
Thiamine Mono $ 23.000 kg
Tomato $ 26.500 kg
B-12 $ 95.000 kg
E 50% $ 25.250 kg
Calcium Pantothenate $ 25.250 kg
Phytonadione $ 45.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcrystalline Cellulose $ 3.000 kg
Stearic Acid $ 1.760 kg
Croscarmellose Sodium $ 10.000 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.120 bottle
White Ribbed Cap with 4
Color Artwork $ 0.043 each
Label $ 0.060 each
<PAGE>
FRUITO NATURAL
Raw Material Cost Unit
Asorbic Acid $ 10.250 kg
Apple Fruit $ 21.000 kg
Acerola Cherry $ 34.500 kg
Beta Carotene $ 195.000 kg
Co Q-10 $1,850.000 kg
Capuaco Fruit $ 42.500 kg
Cashew $ 22.770 kg
Guava $ 31.500 kg
Lime $ 28.500 kg
Melon $ 28.500 kg
Niacinamide $ 8.500 kg
Papaya $ 28.000 kg
Pineapple $ 24.750 kg
Pyridoxine $ 26.000 kg
Passion Fruit $ 26.000 kg
Riboflavin $ 69.000 kg
Thiamine Mono $ 23.000 kg
B-12 $ 95.000 kg
D 1000mu/gm $ 126.000 kg
Calcium Phosphate Dibasic $ 1.510 kg
Microcrystalline Cellulose $ 3.000 kg
Croscarmellose Sodium $ 10.000 kg
Stearic Acid $ 1.760 kg
Magnesium Stearate $ 2.500 kg
Silica $ 2.600 kg
Coating $ 0.500 1000
Blue PET Bottle, Wadding & Box $ 0.120 bottle
White Ribbed Cap with 4
Color Artwork $ 0.043 each
Label $ 0.060 each
<PAGE>
Exhibit 10.14
Stock Sale Agreement
This Stock Sale Agreement is made as of the 12th day of January, 1998 by
and between Chem International, Inc. a Delaware corporation (the "Company"), and
Gerob Realty Partnership, a New Jersey general partnership (the "Purchaser").
W I T N E S S E T H
WHEREAS, the Company desires to sell to Purchaser, and Purchaser desires
to purchase from Company, 843,300 shares (the "Shares") of the common stock,
$.002 par value (the "Common Stock") of the Company, all on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and material
representations, warranties and covenants contained herein, the parties agree as
follows:
1. Sale of Shares. As of the Closing Date (the date hereof) and subject to
all other terms and conditions of the Agreement, the Company shall issue and
sell the Shares to Purchaser.
2. Payment of Purchase Price. The Company's performance of this Agreement
is in consideration of the following: (i) satisfaction of the aggregate amount
of $297,000 owed by the Company to Purchaser representing rent past due and
payable by the Company to the Purchaser for the period December 1, 1994 to
December 31, 1997 for the Company's rental of the premises at 201 Route 22,
Hillside, New Jersey under the Lease dated December 31, 1994, as renewed
annually, by and between the Company, as lessee, and Purchaser, as lessor, and
(ii) satisfaction in full of the amount of $276,443.92 payable under the
Promissory Note dated August 15, 1997 (the "Note") made by the Company in favor
of Purchaser.
3. Purchase Price per Share. The purchase price per share of Common Stock
is sixty-eight cents ($.68), which is an agreed upon value being $.03 higher
than the average of the closing price for a share of Common Stock as quoted on
the Nasdaq SmallCap Market for the five business days immediately preceding the
Closing Date.
4. Closing Documentation. As of the Closing Date, the Company shall
forward a letter of instruction to Continental Stock Transfer & Trust Company,
its transfer agent, to issue a stock certificate representing the Shares in the
name of and to the Purchaser.
5. Purchaser's Closing Documentation. As of the Closing Date, Purchaser
shall deliver the Note marked "paid in full" to the Company.
6. Representations and Warranties of the Company. The Company hereby
represents and warrants as follows:
(a) The Company has the legal capacity to execute and deliver this
Agreement and perform the transactions contemplated hereby.
(b) This Agreement has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
<PAGE>
(c) The Shares, when issued for the consideration set forth herein, will be
duly authorized, validly issued and nonassessable.
(d) The Shares are not subject to any lien, restriction, stockholder's
agreement, standstill agreement or similar agreement or restrictions,
except for restrictions on resale which may be imposed on Purchaser
under the Securities Act of 1933, as amended (the "Securities Act").
(e) There has not been any material adverse change in the business,
operations, assets or financial condition of the Company from that set
forth in the Company's Annual Report on Form 10- KSB for the fiscal
year ended June 30, 1997 and the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1997.
7. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants:
(a) Purchaser has the legal capacity to execute and deliver this Agreement
and to consummate the transactions described herein. This Agreement
constitutes the legal, valid and binding obligation of Purchaser,
enforceable in accordance with its terms.
(b) No consent of any person is required for the execution, delivery and
performance of this Agreement by Purchaser.
(c) Purchaser is acquiring the Shares solely for its own account for
investment and not with a view to resale or distribution thereof, in
whole or part.
(d) Purchaser understands that the Shares have not been registered under
the Securities Act or any state securities law, and that the offering
and sale of the Shares by the Company to such Purchaser is intended to
be exempt from registration under Section 4(2) of the Securities Act
and the provisions of Rule 506 of Regulation D promulgated thereunder,
based in part upon the representations and warranties of Purchaser
hereunder.
(e) Purchaser understands that the Shares may not be sold, hypothecated or
otherwise disposed of unless subsequently registered under the
Securities Act and applicable state securities laws or pursuant to an
exemption from such registration.
(f) Purchaser did not become aware of the offer of the Shares through or as a
result of any form of general solicitation or general advertising,
including, without limitation, any article, notice, advertisement or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio.
(g) The managing general partner of Purchaser has such knowledge and
experience in business and financial matters that he is capable of
evaluating the merits and risk of the purchase of the Shares and make
an informed investment decision with respect thereto.
(h) The Purchaser acknowledges that all documents, filings, records and
books pertaining to the Company have been made available for inspection
by it.
(i) Neither the Securities and Exchange Commission or any state securities
commission has approved or recommended the Shares.
2
<PAGE>
(j) Purchaser is an accredited investor (as such term is defined in Rule
501 of Regulation D under the Securities Act).
8. Conditions to the Obligations of Each Party under this Agreement. The
respective obligations of each party under this Agreement shall be subject to
the satisfaction at the Closing Date that no orders, decrees or rulings issued
by any court of competent jurisdiction, nor any rule, regulation or order
entered, promulgated or enacted by any governmental, regulatory or
administrative agency nor any suit, action or other proceeding would prevent the
consummation of the transactions as contemplated hereby.
9. Fees and Expenses. Each of the parties hereto shall be responsible for
their own expenses incurred in connection with the transactions contemplated
hereby. Each party hereby represents that no person or entity is entitled to
receive any brokerage or finder's fee or other fees in connection with this
Agreement or the transactions contemplated hereby. Each party shall indemnify
the other and hold the other party harmless from and against any claims for such
fees as a result of any agreement or understanding between such indemnifying
party and any third party.
10. Survival of Certain Representations and Warranties. The
representations and warranties of the parties in this Agreement and in any
instrument delivered pursuant hereto shall survive the Closing.
11. Entire Agreement. This Agreement and the agreements and documents
executed and/or delivered at the Closing in connection herewith constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings, oral and written,
among the parties hereto with respect to the subject matter hereof. No
representation, warranty, inducement or statement of intention has been made by
any party that is not embodied in this Agreement or such other documents, and
none of the parties shall be bound by, or be liable for, any alleged
representation, warranty, inducement or statement of intention not embodied
herein or therein.
12. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without regard to
principles of conflict of interest.
13. Binding Effect, Benefits. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective permitted successors
and assigns. Notwith-standing anything contained in this Agreement to the
contrary, nothing in this Agreement, express or implied, is intended to confer
on any person other than the parties hereto or their respective permitted
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
14. Assignability. Neither this Agreement nor any of the parties' rights
hereunder shall be assignable by any party hereto without the prior written
consent of the other parties hereto.
15. Amendments. This Agreement may be modified, amended or supplemented at
any time by mutual agreement of the parties. Without limiting the generality of
the foregoing, this Agreement may only be amended, varied or supplemented by an
instrument in writing, signed by the parties hereto.
16. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to
be duly executed and delivered as of the date hereinabove set forth.
COMPANY:
Chem International, Inc.
By:/s/ Eric Friedman_______________
Eric Friedman, Vice President
PURCHASER:
Gerob Realty Partnership
By:/s/ E. Gerald Kay_______________
E. Gerald Kay, General Partner
4
<PAGE>
Exhibit 10.15
PROMISSORY NOTE
Amount: $750,000
Dated: March 12, 1998
FOR VALUE RECEIVED, Chem International, Inc., a Delaware corporation (the
"Borrower"), promises to pay E. Gerald Kay, (the "Lender"), at such place as the
Lender may direct, SEVEN HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($750,000),
together with interest, as follows:
1. LOAN: This Note evidences a loan in the amount of $750,000 (the "Loan"),
made by the Lender to the Borrower.
2. INTEREST RATE: The Loan shall bear interest at a fixed rate per annum equal
to seven percent (7.00%). Interest shall be calculated for the actual number of
days elapsed on the basis of a 360 day year and shall be paid in arrears.
3. TERM: The Loan shall mature on March 12, 2001 (the "Maturity Date").
4. PAYMENTS: The Borrower shall pay to the Lender accrued interest only, on a
quarterly basis, payable on the last day of each calendar quarter commencing on
March 31, 1998 and continuing thereafter until the Maturity Date, when all
outstanding principal, interest, fees and other charges owing under the Loan
shall be due and payable to the Lender.
5. PREPAYMENTS: Prepayment will be permitted in whole or in part at any time,
without fee or penalty. In addition to any prepaid amount, the Borrower shall
also pay to the Lender any accrued and unpaid interest and all other sums due
under the terms of this Note at the time of such prepayment.
6. LATE FEE: If the Lender does not receive the entire amount of any payment
required under this Note within 30 days of its due date, the Borrower shall pay
a late fee of 5% of that entire amount.
7. DEFAULT: The Borrower shall be in default under this Note upon the
occurrence of any of the following events (an "Event of Default"):
(a) Failure to make any payment required under this Note on the Maturity Date
or on the due date thereof;
(b) The institution of proceedings by or against the Borrower under any
bankruptcy or insolvency law, or any law for the benefit of creditors or the
relief of debtors, or a custodianship, trusteeship, receivership or assignment
for the benefit of creditors shall be imposed upon the Borrower or sought by the
Borrower or by any other person or a petition for debtor's relief under any
state or federal bankruptcy, reorganization or insolvency law, shall be filed
against or by the Borrower;
(c) The dissolution by the Borrower of its existence as a corporation or the
cessation of doing business by the Borrower or the institution of any actions to
accomplish the foregoing; or
(d) If there shall occur a seizure or foreclosure of any of the material
assets or property of Borrower.
<PAGE>
Upon the happening of any Event of Default, or on the Maturity Date, the
entire amount of interest, principal, and any and all other sums due under this
Note shall become due and payable immediately and interest shall accrue
thereafter at a rate of interest equal to 2% per annum in excess of the rate of
interest which would have been payable on this Note if default had not occurred.
The Lender does not give up its rights upon a default as a result of any delay
in declaring or failure to declare a default.
8. WAIVERS: Borrower hereby waives presentment for payment, demand, notice of
dishonor, protest, notice of protest and all other demands and notice in
connection with the delivery, performance and enforcement of this Note.
9. CHANGES: This Note can only be changed by an agreement in writing signed by
the Borrower and the Lender.
10. NOTE BINDING ON BORROWER AND SUCCESSORS: All obligations under this Note
are unconditional obligations of Borrower and all who succeed to its rights and
interests.
11. GOVERNING LAW; JURISDICTION: This Note shall be construed according to the
laws of the State of New Jersey and the Borrower consents to the jurisdiction of
the courts of the State of New Jersey to determine any questions of fact or law
arising under this Note.
12. ACTIONS INVOLVING THIS NOTE: If this Note is referred to an attorney for
collection, the Borrower agrees to pay all costs of collection, including court
costs and reasonable attorney's fees.
THE BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY
IN ANY ACTION ARISING OUT OF THE LOAN EVIDENCED BY THIS NOTE AND THE
TRANSACTIONS CONTEMPLATED HEREUNDER.
13. NO USURY: The Lender and Borrower intend to comply at all times with
applicable usury laws. If at any time such laws would ever render usurious any
amounts called for under this Note, then it is the Borrower's and the Lender's
express intention that such excess amount shall be immediately credited on the
principal balance of this Note (or, if this Note has been fully paid, refunded
by the Lender to Borrower), and the provisions hereof shall be immediately
reformed and the amounts thereafter collectible under this Note reduced, without
the necessity of the execution of any further documents, so as to comply with
the then applicable law, but so as to permit the recovery of the fullest amount
otherwise called for under this Note. Any such crediting or refund shall not
cure or waive any Event of Default by Borrower under this Note. If at any time
following any reduction in the interest rate payable by Borrower, there remains
unpaid any principal amount under this Note and the maximum interest rate not
prohibited by applicable law is increased or eliminated, then the interest rate
payable under this Note shall be readjusted, to the extent not prohibited by
law, so that the dollar amount of interest payable hereunder shall be equal to
the dollar amount of interest which would have been paid by Borrower without
giving effect to the reduction in interest resulting from compliance with
applicable usury laws. Borrower agrees that in determining whether or not any
interest payable under this Note exceeds the highest rate not prohibited by law,
any non-principal payment (except payments specifically stated in this Note to
be "interest"), including, without limitation, prepayment fees and late charges,
shall, to the maximum extent not prohibited by law, be an expense, fee, premium
or penalty rather than interest.
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<PAGE>
14. RIGHTS CUMULATIVE: The rights and remedies of the Lender under this Note
shall be cumulative and concurrent and at the sole discretion of the Lender may
be pursued singly, successively, or together and exercised as often as the
Lender shall desire. Time is of the essence under this Note. The failure of the
Lender to exercise any such right or remedy shall in no event be construed as a
waiver or release thereof. Nothing herein contained shall be construed as
limiting the Lender to the remedies mentioned above.
IN WITNESS WHEREOF, the Borrower has executed this Note as of the day and year
first set forth above.
Attest: BORROWER:
CHEM INTERNATIONAL, INC.
By:
Name: Name: Eric Friedman
Title: Title: Vice President
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Exhibit 10.16
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING SUCH TRANSACTION AND
COMPLIANCE WITH REGISTRATION REQUIREMENTS UNDER APPLICABLE STATE SECURITIES LAWS
OR (II) AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT SUCH REGISTRATION IS
NOT REQUIRED BECAUSE OF EXEMPTIONS AVAILABLE THEREUNDER.
Warrant to Purchase
Warrant No. 1 150,000 shares
VOID AFTER MARCH 12, 2003
CLASS C WARRANT TO PURCHASE
COMMON STOCK
OF
CHEM INTERNATIONAL, INC.
Incorporated Under the Laws of the State of Delaware
THIS IS TO CERTIFY that E. GERALD KAY (the "Warrantholder") , or its
proper assigns, is entitled, upon the due exercise hereof and subject to the
terms and conditions hereof, as to the total number of shares thereafter, until
5:00 p.m. New Jersey time on March 12, 2003, to purchase from Chem
International, Inc., a Delaware corporation (the "Company") , all or any part of
One Hundred Fifty Thousand (150,000) fully paid and nonassessable shares of
common stock, par value $.002 per share of the Company (the "Common Stock") ,
but not for fractional shares of Common Stock, upon surrender hereof with the
Election to Purchase attached hereto as Appendix "A", duly completed, at the
principal office of the Company, and simultaneous payment therefor in cash or by
certified or bank check payable to the order of the Company, at the aggregate
purchase price of $1.75 for one (1) share of Common Stock (the "Warrant Exercise
Price").
1. Term. This Warrant is exercisable, in whole or in part, at the option
of the Warrantholder, for a four (4) year period, commencing one (1) year after
the date hereof and may not be exercised after 5:00 p.m., New Jersey time, March
12, 2003 (the "Expiration Date"), at which time this Warrant will become wholly
void and all rights evidenced hereby will terminate.
2. Warrant Exchange. If this Warrant is exercised for less than all the
shares purchasable upon the exercise hereof, the holder shall be entitled to
receive a new Warrant of like tenor of or the purchase in the aggregate of the
number of shares in respect of which this Warrant shall not have been exercised.
3. Issuance of Common Stock Certificates. Upon the exercise of this
Warrant, the Company will issue to the Warrantholder stock certificates
representing the number of shares of Common Stock exercised therefor, in the
name of the Warrantholder or in such names as may be directed by the holder.
<PAGE>
4. Adjustment of Warrant Exercise Price and Number of Shares of Common
Stock.
(a)Subject to the exceptions referred to in Paragraph 4(e) below, in
the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price of the Common Stock on the date of the sale or issue any shares
of Common Stock as a stock dividend to the holders of Common Stock, or subdivide
or combine the outstanding shares of Common Stock into a greater or lesser
number of shares (any such sale, issuance, subdivision, or combination being
herein called a "Change of Shares"), then, and thereafter upon each further
Change of Shares, the Warrant Exercise Price in effect immediately prior to such
Change of Shares shall be changed to a price (including any applicable fraction
of a cent) determined by multiplying the Warrant Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
subparagraph 4(d) below) for the issuance of such additional shares would
purchase at such Market Price per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such adjustment shall
be made successively whenever such an issuance is made. For purposes of this
Paragraph 4, the term Market Price shall mean the average of the closing bid
price for a share of Common Stock for any twenty (20) consecutive trading days
within a period of thirty (30) consecutive trading days ending on the date of
the Change of Shares.
Upon each adjustment of the Warrant Exercise Price pursuant to
this Paragraph 4, the total number of shares of Common Stock purchasable upon
the exercise of this Warrant shall be such number of shares (calculated to the
nearest tenth) purchasable at the Warrant Exercise Price in effect immediately
prior to such adjustment multiplied by a fraction, the numerator of which shall
be the Warrant Exercise Price in effect immediately prior to such adjustment and
the denominator of which shall be the Warrant Exercise Price in effect
immediately after such adjustment.
(b)In case of any reclassification, capital reorganization, or other
change of outstanding shares of Common Stock, or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization, or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of all or substantially all of the property of
the Company (other than a sale/leaseback, mortgage, or other financing
transaction), the Company shall cause effective provision to be made so that the
Warrantholder shall have the right thereafter, by exercising such Warrant, to
purchase the kind and number of shares of stock or other securities or property
(including cash) receivable upon such reclassification, capital reorganization,
or other change, consolidation, merger, sale, or conveyance by a holder of the
number of shares of Common Stock that might have been purchased upon exercise of
such Warrant immediately prior to such reclassification, capital reorganization,
or other change, consolidation, merger, sale, or conveyance. Any such provision
shall include provision for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Paragraph 4. The
Company shall not effect any such consolidation, merger, or sale unless prior to
or simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume by
written instrument the obligation to deliver to the holder of this Warrant such
shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holders may be entitled to purchase and the other obligations
under this Agreement. The foregoing provisions shall similarly apply
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<PAGE>
to successive reclassification, capital reorganizations, and other changes of
outstanding shares of Common Stock and to successive consolidations, mergers,
sales, or conveyances.
(c)After each adjustment of the Warrant Exercise Price pursuant to
this Paragraph 4, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Warrant Exercise Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of the Warrant after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly forward by first class mail such certificate to the Warrantholder.
(d)For purposes of Paragraphs 4(a) and 4(b) hereof, the following
provisions (i) to (vii) shall also be applicable:
(i)The number of shares of Common Stock outstanding at any given
time shall include shares of Common Stock owned or held by or for the account of
the Company and the sale or issuance of such treasury shares or the distribution
of any such treasury shares shall not be considered a Change of Shares.
(iiNo adjustment of the Warrant Exercise Price shall be made
unless such adjustment would require an increase or decrease of at least $.10 in
such price; provided that any adjustments which by reason of this subparagraph
(ii) are not required to be made shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment which, together
with any adjustment(s) so carried forward, shall require an increase or decrease
of at least $.10 in the Warrant Exercise Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash of any
rights or warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or any securities convertible into or exchangeable for Common
Stock without the payment of any further consideration other than cash, if any
(such convertible or exchangeable securities being herein called "Convertible
Securities"), or (2) the issuance by the Company, without the receipt by the
Company of any consideration therefor, of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, in each case, if (and only if) the consideration payable to the
Company upon the exercise of such rights, warrants, or options shall consist of
cash, whether or not such rights, warrants, or options, or the right to convert
or exchange such Convertible Securities, are immediately exercisable, and the
price per share for which Common Stock is issuable upon the exercise of such
rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants,
or options, plus the consideration received by the Company for the issuance or
sale of such rights, warrants, or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants, or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of such
rights, warrants, or options) is less than the fair market value of the Common
Stock on the date of the issuance or sale of such rights, warrants, or options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such rights, warrants, or options or upon the conversion or exchange
of such Convertible Securities (as of the date of the issuance or sale of such
rights, warrants, or options) shall be deemed to
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<PAGE>
be outstanding shares of Common Stock for purposes of Paragraphs 4(a) and 4(b)
hereof and shall be deemed to have been sold for cash in an amount equal to such
price per share.
(iv) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company or the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market value or
the Common Stock on the date of the sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Paragraphs 4(a) and 4(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(v)In case the Company shall modify the rights of conversion,
exchange, or exercise of any of the securities referred to in subparagraph (iii)
above or any other securities of the Company convertible, exchangeable, or
exercisable for shares of Common Stock, for any reason other than an event that
would require adjustment to prevent dilution, so that the consideration per
share received by the Company after such modification is less than the market
price on the date prior to such modification, the Warrant Exercise Price to be
in effect after such modification shall be determined by multiplying the Warrant
Exercise Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
multiplied by the market price on the date prior to the modification plus the
number of shares of Common Stock which the aggregate consideration receivable by
the Company for the securities affected by the modification would purchase at
the market price and of which the denominator shall be the number of shares of
Common Stock outstanding on such date plus the number of shares of Common Stock
to be issued upon conversion, exchange, or exercise of the modified securities
at the modified rate. Such adjustment shall become effective as of the date upon
which such modification shall take effect.
(vi) On the expiration of any such right, warrant, or option or
the termination of any such right to convert or exchange any such Convertible
Securities, the Warrant Exercise Price then in effect hereunder shall forthwith
be readjusted to such Warrant Exercise Price as would have obtained (a) had the
adjustments made upon the issuance or sale of such rights, warrants, options, or
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights, warrants, or
options or upon the conversion or exchange of such Convertible Securities and
(b) had adjustments been made on the basis of the Warrant Exercise Price as
adjusted under clause (a) for all transactions (which would have affected such
adjusted Warrant Exercise Price) made after the issuance or sale of such rights,
warrants, options, or Convertible Securities.
(vii) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or purchase,
or any options for the purchase of, Common Stock or Convertible Securities, the
consideration received by the Company therefore shall be deemed to be the gross
sales price therefor without deducting therefrom any expense paid or incurred by
the Company or any underwriting discounts or commissions or concessions paid or
allowed by the Company in connection therewith.
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<PAGE>
(e)No adjustment to the Warrant Exercise Price or to the number of
shares of Common Stock purchasable upon the exercise of this Warrant will be
made, however,
(i)Upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants, or options were outstanding on
the date hereof or were thereafter issued or sold other than issuances of
preferred stock in connection with acquisitions by the Company; or
(iiUpon the issuance or sale of Common Stock upon conversion
or exchange of any Convertible Securities, whether or not any adjustment in the
Warrant Exercise Price was made or required to be made upon the issuance or sale
of such Convertible securities and whether or not such Convertible Securities
were outstanding on the date hereof or were thereafter issued or sold; or
(iii) Upon the issuance or sale of Common Stock or Convertible
Securities in a private placement unless the issuance or sale price is less than
85% of the fair market value of the Common Stock on the date of issuance, in
which case the adjustment shall only be for the difference between 85% of the
fair market value and the issue or sale price; or
(iv) Upon the issuance or sale of Common Stock or Convertible
Securities to shareholders of any corporation which merges into the Company or
from which the Company acquires assets and some or all of the consideration
consists of equity securities of the Company, in proportion to their stock
holdings of such corporation immediately prior to the acquisition, but only if
no adjustment is required pursuant to any other provision of this Paragraph 4.
(f)Any determination as to whether an adjustment in the Warrant
Exercise Price in effect hereunder is required pursuant to Paragraph 4, or as to
the amount of any such adjustment, if required, shall be binding upon the
Warrantholder and the Company if made in good faith by the Board of Directors of
the Company.
(g)If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant, or option to purchase Common
Stock, the Company shall concurrently therewith grant to the Warrantholder as of
the record date for such transaction the rights, warrants, or options to which
the Warrantholder would have been entitled if, on the record date used to
determine the stockholders entitled to the rights, warrants, or options being
granted by the Company, the Warrantholder were the holder of record of the
number of whole shares of Common Stock then issuable upon exercise (assuming,
for purposes of this Paragraph 4(g), that exercise of warrants is permissible)
of this Warrant. Such grant by the Company to the Warrantholder shall be in lieu
of any adjustment which otherwise might be called for pursuant to this Paragraph
4.
5. No Stockholder Rights. The Warrantholder shall not have the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders or as having any rights whatsoever as a stockholder of
the Company. The holder of this Warrant shall not be entitled to any rights of a
stockholder of the Company in respect of any shares purchasable upon the
exercise hereof until such shares have been paid for in full and issued to such
holder.
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<PAGE>
6. Restrictions on Transfer. This Warrant and the shares of Common Stock
issuable upon the exercise hereof (collectively, the "Warrant Securities") are
not registered upon the Securities Act of 1933, as amended (the "Securities
Act") or any state securities laws. The Warrant Securities are subject to
restrictions on transferability and resale and may not be transferred or resold
except as permitted under the Securities Act and applicable state securities
laws. Each certificate representing shares of Common Stock issuable upon the
exercise of this Warrant shall bear the following legend:
The shares of common stock represented by this certificate have not
been registered under the Securities Act of 1933,1 as amended (the
"Securities Act") , or under any state securities laws, and said shares
may not be sold, transferred or otherwise disposed of in the absence of
(i) an effective registration statement under the Securities Act
covering such transaction and compliance with registration requirements
under applicable state securities laws or (ii) an opinion of counsel
acceptable to the issuer that such registration is not required because
of exemptions available thereunder.
7. Reservation of Stock Issuable Upon Exercise. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the issuance of the Shares
upon exercise of the Warrant, such number of its shares of Common Stock as shall
from time to time be sufficient to provide for the exercise of this Warrant, and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to provide for the exercise of this Warrant, the Company
will, subject to the requirements of applicable state law, take such corporate
action as may, in the option of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares of
Common Stock as shall be sufficient for such purposes.
8. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction to the nearest
whole number of shares of Common Stock or other securities, properties or
rights.
9. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company and the Warrantholder and
their respective successors. and assigns hereunder.
10. Governing Law: Submission to Jurisdiction. This Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New Jersey and for all purposes shall be construed in accordance with the laws
of said State without giving effect to the rules of said State governing the
conflicts of laws.
The Company and the Warrantholder, by accepting this Warrant hereby agree
that any action, proceeding or claim against it or them arising out of, or
relating in any way to, this Warrant shall be brought and enforced in the courts
of the State of New Jersey or United States federal court sitting in New Jersey
and irrevocably submit to such jurisdiction, which jurisdiction shall be
exclusive. The Company and the Warrantholder hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any process or
summons to be served upon any of the Company and the Warrantholder (at the
option of the party bringing such action, proceeding or claim)may be served by
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<PAGE>
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage paid, addressed to the Company at its principal office and to
the Warrantholder at its address appearing in the records of the Company. Such
mailing shall be deemed personal service and shall be legal and binding upon the
party so served in any action, proceeding or claim. The Company and the
Warrantholder agree that the prevailing party(ies) all of its/their reasonable
legal costs and expenses relating to such action or proceeding and/or incurred
in connection with the preparation therefor.
11. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered by registered or certified mail, return receipt requested or by
overnight mail.
(a) If to the registered Holder of the Warrant, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to its principal offices at 201 Route 22,
Hillside, New Jersey 07205 or to such other address as the Company may designate
by notice to the Holder.
12. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
CHEM INTERNATIONAL, INC.
By:____________________________
Eric Friedman, Vice President
Dated: March 12, 1998
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Appendix A
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase _____ shares of Common Stock.
In accordance with the terms of the Class C Warrant dated as of March 12,
1998 issued by Chem International, Inc. in favor of E. Gerald Kay, the
undersigned requests that a certificate for such securities be registered in the
name of _________________ whose address is __________________________ and that
such Certificate be delivered to ______________________ whose address is
- ----------------------------------------------.
Dated:______________,
Signature________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant.)
------------------------------------------
(Insert Social security or Other Identifying Number of Holder)
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Exhibit 10.17
CONSULTING AGREEMENT
This Consulting Agreement dated as of _March 20, 1998, is entered into by and
between Chem International, Inc. (the "Company") with offices located at 201
Route 22 West Hillside, NJ 07205 and the BUTTONWOOD ADVISORY GROUP, INC. (the
"Consultant") with offices located at 15705 Framingham Lane, Huntersville, NC
28078.
RECITALS
WHEREAS, the Consultant has experience in the investment banking and
financial services business; and
WHEREAS, the Consultant desires to provide the financial advisory services (the
"Services") set forth in Section 3 hereof to the Company and the Company desires
to retain the Consultant to provide the Services to the Company.
NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreement hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Retention. The Company hereby retains the Consultant, and the Consultant
agrees to be retained by the Company, to perform the Services as a Consultant
to the Company on the terms and conditions set forth herein. The parties
agree that the Consultant shall be retained by the Company as an independent
contractor on a consulting basis and not as an employee of the Company.
2. Term. The term of this Agreement shall commence on the date hereof and shall
end on February 28,1999, unless terminated earlier pursuant to Section 8
hereof.
3. Duties of Consultant. During the term of this Agreement, Consultant shall
provide the Company with such regular and customary advice as is reasonably
requested by the Company, within the scope of the services enumerated below.
It is understood and acknowledged by the parties that the value of
Consultant's advice is not readily quantifiable, and that Consultant shall be
obligated to render advice upon the request of the Company, in good faith,
but not be obligated to spend any specific amount of time so doing.
Consultant's duties shall include, but will not necessarily be limited to
providing recommendations concerning one or more of the following financial
and related matters upon the request of the Board of Directors of the Company
and/or its President:
a. Assisting in the introduction of the Company to registered
representatives at various registered broker/dealers;
b. Arranging, on behalf of the Company, meetings with securities analysts of
nationally recognized and regional investment banking firms;
c. Arranging, on behalf of the Company, meetings with "small cap" money
managers who manage funds in both North America and Internationally;
<PAGE>
d. Rendering advice with regard to any of the following corporate finance
matters:
1. Changes in capitalization of the Company.
2. Changes in the Company's corporate structure.
3. Budgets and business plans.
4. The Company's financial requirements.
e. Furnish advice to the Company in connection with prospective acquisitions
and/or merger candidates.
f. Participating as an observer or advisor at meetings of the Company's
Board of Directors or any committee thereof;
g. Using its best efforts to cause research reports concerning the Company
to be written and disseminated by investment banking firms;
h. Using its best efforts to provide the Company with market-makers in its
Common Stock, which market-makers have not previously made a market in the
Company's securities;
i. Promptly upon request by the Company, preparing press releases for the
Company and promptly distributing them to the appropriate news and wire
services.
j. Handling investor relations activities such as incoming investor inquiries
and faxing news releases.
4. Compensation. In consideration for the services rendered by Consultant to the
Company pursuant to this Agreement, the Company shall pay to the Consultant
$2,500 for services rendered during the month of _March and $2,500 within
fifteen days of the end of each succeeding month for services provided during
that month during the term of this Agreement.
5. The Company will promptly reimburse Consultant for all reasonable and
required out-of-pocket expenses properly incurred by the Consultant in his
performance of this Agreement provided that the Company has approved such
expenses in advance and provided further that a written accounting,
reasonable and acceptable to the Company, is made by the Consultant.
6. Confidentiality. Consultant acknowledges that as a consequence of his
relationship with the Company, he has been and will continue to be given
access to ideas, trade secrets, methods, customer information, business plans
and other confidential and proprietary information of the Company
(collectively, "Confidential Information"). Consultant agrees that he shall
maintain in confidence, and shall not disclose directly or indirectly, to any
third parties or use for any purposes (other than the performance hereof),
any Confidential Information for the term of this Agreement and a period of
seven years thereafter, unless previously approved by the Company in writing.
The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Section 6 are not performed by the
Consultant in accordance with the specific terms or are otherwise breached by
the Consultant. It is accordingly agreed that the Company shall be entitiled
to an injunction or injunctions to prevent breaches of this Section 6 and to
enforce specifically the terms and provisions hereof in any court of the
United States or any State having jurisdiction in addition to any other
remedy to which they are entitled at law or in equity. Upon terminationof the
Agreement, the Consultant shall immediatley return all confidential
information to the Company.
2
<PAGE>
7. The company has issued to the Consultant as a portion of his compensation
hereunder options (the "Options") exercisable for a total of 45,000 shares of
Common Stock of the Company as set forth below subject to the Company's Board
approval:
(i)One option exercisable for 15,000 shares of Common Stock
of the Company at an exercise price of $1.125 per share;
(ii)One option exercisable for 15,000 shares of Common
Stock of the Company at an exercise price of $ 2.50 per share;
(iii) One option exercisable for 15,000 shares of Common
Stock of the Company at an exercise price of $ 4.00_ per share.
The Consultant will be granted "piggyback " registration rights at any time
following the signing of this document or at such time as permissible under
applicable laws and regulations. The options will be exercisable one year
from the date of the signed Agreement and until five years following the date
of Consultant's engagement hereunder.
8. Termination. This agreement will terminate upon either:
(i)Expiration of the term of this Agreement; or
(ii45 days written notice by either party.
9. Compliance with Law. The Consultant agrees that in performing this Agreement
the Consultant shall comply with the applicable provisions of the Securities
Act of 1933 and the Securities Exchange Act of 1934, as amended, the
applicable rules and regulations of the Securities and Exchange Commission
thereunder, the statutes of any state security commissions and departments,
the applicable rules and regulations of the National Association of
Securities Dealers, Inc. and any other applicable federal, state or foreign
laws, rules and regulations.
10.Indemnity. The Consultant shall indemnify the Company, its directors,
officers, stockholders, representatives, agents and affiliates (collectively,
the "Affiliated Parties") from and against any and all claims, losses,
damages, fines, fees, penalties, deficiencies, expenses, inlcuding expenses
of investigations, court costs and fees and expenses of attorneys
(collectively "Claims") which the Company or its Affiliated Parties may
sustain at any time resulting from, arising out of or relating to the breach
or failure to comply with any of the covenants or agreements of the
Consultant or its Affiliated Parties contained in this Agreement.
11.Notices. Notices, other communications or deliveries required or permitted
under this Agreement shall be in writing delivered by hand against receipt,
certified mail return receipt requested, or reputable overnight courier to
the addresses set forth below or to such address as a party may designate in
accordance with this paragraph and shall be effective upon the earlier of:
3
<PAGE>
(i) Actual receipt;
(ii)Three (3) calendar days if sent by certifed mail; or one
(1) day if sent by overnight courier.
To the Company at:
PO BOX 278
Hillsdale, NJ 07205 attn: Mr. E. Gerald Kay
To the Consultant at:
15705 Framingham Lane
Huntersville, NC 28078
12.Applicable Law. This Agreement shall be governed by the internal laws of the
Sate of _New Jersey without regard to its conflict of law provisions.
If the foregoing sets forth your understanding of our Agreement, kindly
indicate your compliance on the space provided below.
BUTTONWOOD ADVISORY GROUP, INC.
_______________________ 3-20-98
John Aneralla, President Date
AGREED AND ACCEPTED BY:
Chem International Inc.
__________________________ 3-20-98
E. Gerald Kay, CEO Date
4
<PAGE>
Exhibit 21
SUBSIDIARIES OF CHEM INTERNATIONAL, INC.
Name State of Incorporation
Manhattan Drug Company, Inc. New York
Vitamin Factory, Inc. New York
Bexpol International, Inc. New Jersey
Media Consultants, Inc. Delaware
Manhattan International, Inc. New Jersey
Connaught Press, Inc. New Jersey
Bioscience Technologies, I nc. New Jersey
Gero Industries, Inc. New Jersey
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
Date: September 23, 1998 By: /s/ E. Gerald Kay
E. Gerald Kay,
President and Chief Executive Officer
Date: September 23, 1998 By:/s/ Eric Friedman
Eric Friedman,
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary finanical information extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by reference to such schedules.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Jun-30-1998
<CASH> 956,403
<SECURITIES> 0
<RECEIVABLES> 3,460,937
<ALLOWANCES> 0
<INVENTORY> 3,521,810
<CURRENT-ASSETS> 8,179,507
<PP&E> 3,686,806
<DEPRECIATION> 2,041,444
<TOTAL-ASSETS> 10,235,743
<CURRENT-LIABILITIES> 3,417,996
<BONDS> 0
0
0
<COMMON> 4,857,762
<OTHER-SE> 1,029,163
<TOTAL-LIABILITY-AND-EQUITY> 10,235,743
<SALES> 16,011,049
<TOTAL-REVENUES> 16,011,049
<CGS> 12,841,937
<TOTAL-COSTS> 3,197,047
<OTHER-EXPENSES> 18,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,667
<INCOME-PRETAX> (133,724)
<INCOME-TAX> (36,286)
<INCOME-CONTINUING> (97,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,438)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
