UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1999 Commission File Number 000-28876
CHEM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3035216
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Route 22
Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 926-0816
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 8, 1999
----- ----------------------------------
Common Stock, Par Value 5,178,300
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CHEM INTERNATIONAL, INC.
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INDEX
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<TABLE>
<CAPTION>
<S> <C>
Part I: Financial Information
Item 1: Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1999 [Unaudited] ...... 1 ... 2
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 [Unaudited] ........................ 3
Consolidated Statement of Stockholders' Equity for the
three months ended September 30, 1999 [Unaudited] .................... 4
Consolidated Statements of Cash Flows for three months ended
September 30, 1999 and 1998 [Unaudited] .............................. 5 ... 6
Notes to Consolidated Financial Statements [Unaudited] ............... 7 ... 12
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 13 ... 14
Part II: Other Information .................................................... 15
Signature ..................................................................... 16
</TABLE>
......
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999.
[UNAUDITED]
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Assets:
Current Assets:
Cash and Cash Equivalents $ 255,302
Accounts Receivable - Net 1,292,061
Deferred Income Taxes 262,000
Inventories 3,212,740
Prepaid Expenses and Other Current Assets 157,941
Refundable Federal Income Taxes 47,966
----------
Total Current Assets 5,228,010
----------
Property and Equipment - Net 1,468,565
----------
Other Assets:
Security Deposits and Other Assets 111,531
----------
Total Assets $6,808,106
==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,957,948
Notes Payable 550,357
Accrued Expenses and Other Current Liabilities 389,052
Accrued Expenses - Related Party 90,000
Capital Lease Obligation 38,130
-----------
Total Current Liabilities 3,025,487
-----------
Non-Current Liabilities:
Notes Payable 127,488
Notes Payable - Related Party 716,856
Capital Lease Obligation 20,425
-----------
Total Non-Current Liabilities 864,769
-----------
Commitments and Contingencies [9] --
-----------
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
[Deficit] (1,939,912)
-----------
Total Stockholders' Equity 2,917,850
-----------
Total Liabilities and Stockholders' Equity $ 6,808,106
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- --------------------------------------------------------------------------------
Three months ended
September 30,
--------------------------
1999 1998
----------- -----------
Sales $ 3,432,123 $ 2,223,732
Cost of Sales 3,016,468 2,132,595
----------- -----------
Gross Profit 415,655 91,137
Selling and Administrative Expenses 740,766 682,940
----------- -----------
Operating [Loss] (325,111) (591,803)
----------- -----------
Other [Expense] Income:
Interest Expense- Related Party (18,807) (18,807)
Interest Expense (17,300) (12,543)
Interest and Investment Income 130 217
----------- -----------
Total Other [Expense] (35,977) (31,133)
----------- -----------
[Loss] Before Income Taxes (361,088) (622,936)
Federal and State Income Tax Expense [Benefit] (20,446) (200,185)
----------- -----------
Net [Loss] $ (340,642) $ (422,751)
=========== ===========
Net [Loss] Per Common Share
Basic and Diluted $ (.07) $ (.08)
=========== ===========
Average Common Shares Outstanding 5,178,300 5,178,300
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
[UNAUDITED]
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<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Preferred Paid in Earnings/ Stockholders'
Shares Par Value Stock Capital (Deficit) Equity
----------- ----------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,599,270) $ 3,258,492
Net [Loss] for the three months
ended September 30, 1999
-- -- -- -- (340,642) (340,642)
----------- ----------- ------ ----------- ----------- -----------
Balance - September 30, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,939,912) $ 2,917,850
=========== =========== ====== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
4
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
September 30,
--------------------------
1999 1998
----------- -----------
Operating Activities:
Net [Loss] $ (340,642) $ (422,751)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 78,995 96,451
Amortization of Discount on Note Payable 5,682 5,682
Deferred Income Taxes (18,000) (18,000)
Bad Debt Expense 6,000 2,500
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 705,159 1,709,557
Inventories 265,887 (225,710)
Refundable Federal Income Taxes (6,321) (200,000)
Prepaid Expenses and Other Current Assets (63,153) 24,784
Security Deposits and Other Assets (5,648) (2,060)
[Decrease] Increase in:
Accounts Payable (696,863) (1,587,938)
Federal and State Income Taxes Payable -- (40,000)
Accrued Expenses and Other Liabilities 57,362 68,698
----------- -----------
Total Adjustments 329,100 (166,036)
----------- -----------
Net Cash - Operating Activities (11,542) (588,787)
----------- -----------
Investing Activities:
Purchase of Property and Equipment (9,292) (82,280)
Loans to Stockholders' (2,827) (14,101)
----------- -----------
Net Cash-Investing Activities (12,119) (96,381)
----------- -----------
Financing Activities:
Proceeds from Notes Payable -- 520,000
Repayment of Notes Payable (20,067) (486,477)
----------- -----------
Net Cash-Financing Activities (20,067) 33,523
----------- -----------
Net [Decrease] in Cash and Cash Equivalents (43,728) (651,645)
Cash and Cash Equivalents - Beginning of Periods 299,030 956,403
----------- -----------
Cash and Cash Equivalents - End of Periods $ 255,302 $ 304,758
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
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CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
Three months ended
September 30,
1999 1998
---- ----
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $17,300 $25,593
Income Taxes $ 3,080 $50,425
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
6
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Business
Chem International, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products. Its customers are located primarily throughout the United
States 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.
Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1999. The results of operations for
the three months ended September 30, 1999 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2000.
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 $78,995 and $93,453 for the three months ended September 30, 1999
and 1998, respectively. Amortization of equipment under capital leases is
included with the depreciation expense.
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 or revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition - The Company generally recognizes revenue upon shipment of
the product.
Impairment - Certain long-term assets of the Company's principal operating
business subsidiary 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 re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of September 30, 1999, management expects these assets to be
fully recoverable.
7
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[2] Summary of Significant Accounting Policies (Continued)
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $37,376 and $89,334 for the
three months ended September 30, 1999 and 1998 respectively.
[3] Inventories
Inventories consist of the following at September 30, 1999:
Raw Materials $1,906,138
Work-in-Process 523,888
Finished Goods 782,714
----------
Total $3,212,740
==========
[4] Property and Equipment
Property and equipment comprise the following at September 30, 1999:
Leasehold Improvements $1,157,960
Machinery and Equipment 2,464,357
Machinery and Equipment Under Capital Leases 109,545
Transportation Equipment 32,152
----------
Total 3,764,014
Less: Accumulated Depreciation and Amortization 2,295,449
----------
Total $1,468,565
==========
[5] Notes Payable
Notes payable are summarized as follows at September 30, 1999:
Related Party
Notes Payable Notes Payable Total
------------- ------------- -----
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 47,512 $ -- $ 47,512
Chairman of the Board (b) -- 716,856 716,856
First Union National Bank:
Revolving Line-of-Credit (c) 500,000 -- 500,000
Equipment Term Loan (d) 130,333 -- 130,333
---------- ---------- ----------
Totals 677,845 716,856 1,394,701
Less: Current Portion 550,357 -- 550,357
---------- ---------- ----------
Noncurrent Portion $ 127,488 $ 716,856 $ 844,344
========== ========== ==========
(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.
8
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[5] Notes Payable (Continued)
(b) Three year non-collateralized 7% promissory note for $750,000 with related
party providing for quarterly payments of $13,125 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 an 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 September 30, 1999 was $5,682 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.
(c) Under the terms of a revolving line of credit which expires on July 31,
2000, the Company may borrow up to 500,000 at 1% above the bank's prime lending
rate. The loan is collateralized by the assets of Manhattan Drug Company, Inc.
The loan has been guaranteed by the Company's principal stockholder. As
additional collateral the Chairman of the Board of the Company has granted the
bank a security interest in his security account maintained by First Union
Brokerage Services. At September 30, 1999 the interest rate was 9.25%.
(d) Under the terms of a five year equipment term loan, which expires on June
30, 2003, the Company borrowed $138,833 at 1.5% above the bank's prime interest
rate. The term loan provides for monthly payments of $2,834 for principal and
monthly payments for interest. The loan is collateralized by the assets of
Manhattan Drug Company, Inc. The loan has been guaranteed by the Company's
principal stockholder. At September 30, 1999, the interest rate was 9.75%.
The loan agreement with First Union National Bank contains certain financial
covenants relating to the maintenance of specified liquidity, debt to equity and
debt coverage ratios and requires that the Company's president and principal
stockholder maintain a minimum stock ownership percentage of the Company. The
Company was not in compliance with its debt coverage ratio on a consolidated
basis at September 30, 1999.
The following are maturities of long-term debt for each of the next five years:
Related Party
September 30, Notes Payable Notes Payable Total
- ------------- ------------- ------------- -----
2000 $ 550,397 $ -- $ 550,397
2001 52,069 716,856 768,925
2002 47,086 -- 47,086
2003 28,333 -- 28,333
---------- ---------- ----------
Totals $ 677,885 $ 716,856 $1,394,701
========== ========== ==========
[6] 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
September 30, 1999 had a cost of $109,545 accumulated depreciation of $47,512
with a net book value of $62,033.
9
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
[6] Capital Lease (Continued)
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at September 30, 1999 are as follows:
Total Minimum Lease Payments $ 104,900
Amount Representing Interest (46,345)
---------
Present Value of Net Minimum Lease Payment 58,555
Current Portion (38,130)
---------
Long-Term Capital Lease Obligation $ 20,425
=========
[7] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - The Company maintains balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 1999 the
Company's uninsured cash balances totaled approximately $315,000. The Company
does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts at September 30, 1999 is $356,750.
[8] Major Customer
For the three months ended September 30, 1999 and 1998, approximately 61% and
44% of revenues were derived from one customer. The loss of this customer would
have an adverse effect on the Company's operations. In addition, for the three
months ended September 30, 1999 and 1998, an aggregate of approximately 4% and
19%, respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the three months
ended September 30, 1999 and 1998. Accounts receivable from these customers
comprised approximately 47% and 67% of total accounts receivable at September
30, 1999 and 1998, respectively.
[9] 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, 1999, provides for a minimum
annual rental of $60,000 plus payment of all real estate taxes. Rent and real
estate tax expense for the three months ended September 30, 1999 and 1998 on
this lease was approximately $26,000 and $20,000, respectively. Unpaid rent of
$90,000 due to Gerob at September 30, 1999 has been separately disclosed as
accrued expenses on the consolidated balance sheet.
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
Chairman of the Board and principal stockholder and certain family members and
10% owned by the Company's Chief Financial Officer. The lease was effective on
January 10, 1997 and provides for minimum annual rental of $346,000 through
January 10, 2002 plus increases in real estate taxes and building operating
expenses. At its option, the Company has the right to renew the lease for an
additional five year period. Rent expense for the three months ended September
30, 1999 and 1998 on this lease was approximately $116,000 and $117,000,
respectively.
10
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[9] Commitments and Contingencies (Continued)
Other Lease Commitments - The Company leases warehouse equipment for a five year
period providing for an annual rental of $15,847 and office equipment for a five
year period providing for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2001.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Lease Party Lease
September 30, Commitment Commitment Total
- ------------- ---------- ---------- -----
2000 $ 35,505 $259,500 $295,005
2001 28,072 346,000 374,072
2002 19,553 182,609 202,162
2003 -- -- --
2004 -- -- --
Thereafter -- -- --
-------- -------- --------
Total $ 83,130 $788,109 $871,239
======== ======== ========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $141,000 and $137,000 for the three months ended September 30,
1999 and 1998, respectively. Rent expense is stated net of sublease income of
approximately $1,300 and $4,000 for the three months ended September 30, 1999
and 1998, respectively.
[B] Employment Agreements - Effective July 1, 1999, the Company entered into
three year employment agreements with its four executive officers which provide
for aggregate annual salaries of $485,000 for the year ending June 30, 2000 and
$495,000 for the years ending June 30, 2001 and 2002, 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. No royalties have
been paid as of September 30, 1999.
[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 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.
The Company is a participant in a Class Action Lawsuit against several major
bulk vitamin material suppliers. The suit seeks to recover damages resulting
from price fixing charges filled against the suppliers by the United States
Government. There are approximately 1,000 corporate buyers that are involved.
The Company is unable to predict the ultimate financial recovery.
[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.
11
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CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
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[9] Commitments and Contingencies (Continued)
[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.
[10] 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 $1,100 per month. The total consulting expense recorded per this verbal
agreement for the nine moths ended September 30, 1999 and 1998, by the Company
was $3,300 and $3,300, respectively.
[11] 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.
[12] New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities and measure them at fair value. Under certain circumstances, the
gains or losses from derivatives may be offset against those from the items the
derivatives hedge against. The Company will adopt SFAS No. 133 in the fiscal
year ending June 30, 2001. SFAS No. 133 is not expected to have a material
impact on the financial statements.
[13] Year 2000 Issue
The Company has spent approximately $55,000 through September 30, 1999 to modify
its computer information systems enabling proper processing of transactions
relating to the year 2000 ("Y2K") and beyond. The Company installed a new
network system in October of 1998 at a cost of approximately $20,000 whose
hardware and software is Y2K compliant. The Company has also spent approximately
$35,000 to provide the necessary upgrades and modifications to the Company's
existing manufacturing program to insure Y2K compliance. The new software
program is installed and running. The Company's suppliers and venders have been
contacted, and most have responded with there intent to be Y2K compliant by the
year 2000. At this time, the Company believes based on their responses, that
there will be no disruption of their business.
12
<PAGE>
Item 2.
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
information of the Company and notes thereto.
Three months ended September 30, 1999 Compared to the Three months ended
September 30, 1998
Results of Operations
The Company's net losses for the three months ended September 30, 1999 and 1998
were $(340,642) and $(422,751), respectively. This decrease in net loss of
approximately $80,000 is primarily the result of a $270,000 decrease in
operating loss resulting from a corresponding increase in gross profit of
approximately $325,000 and a decrease in the federal income tax benefit of
approximately $180,000. The increase in gross profit is due to increased sales
and better manufacturing efficiencies.
Sales for the three months ended September 30, 1999 and 1998 were $3,432,123 and
$2,223,732, respectively, an increase of approximately $1,200,000 or 54%. For
the three months ended September 30, 1999, the Company had sales to one
customer, who accounted for 61% of net sales in 1999 and 44% in 1998. The loss
of this customer would have an adverse affect on the Company's operations.
Retail and mail order sales for the first quarter of 1999 totaled $176,411 as
compared to $198,119 for the first quarter of 1998, a decrease of 11%. The
Company has been experiencing a decline in mail order sales due to increased
competition.
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 initial term of
two years and shall be renewable for an additional term of one year. Sales for
the quarter ended September 30, 1999 were $587,511 as compared to $310,021 for
the quarter ended September 29, 1998, an increase of of 90%.
Cost of sales increased to $3,016,468 for the first quarter of 1999 as compared
to $2,132,595 for the first quarter of 1998. Cost of sales decreased as a
percentage of sales to 88% for the first quarter of 1999 from 96% for the first
quarter of 1998. The decrease in cost of sales is due to greater manufacturing
efficiencies and higher margin sales.
Selling and administrative expenses for three months ended September 30, 1999
were $740,766 versus $682,940 for the same period a year ago. The increase of
$57,826 was primarily attributable to a decrease in advertising of $51,958, an
increase in office salaries of $16,193 and an increase in consulting fees of
$99,898 due to the hiring of an independent sales and marketing firm to help
launch a new private label line.
Other income [expense] was $(35,977) for the first quarter of 1999 as compared
to $(31,133) for the first quarter of 1998. This increase in expense of $4,844
is primarily the result of an increase in interest expense of $4,757.
Liquidity and Capital Resources
At September 30, 1999,the Company's working capital was $2,202,523 a decrease of
$294,938 over working capital at June 30, 1999. Cash and cash equivalents were
$255,302 at September 30, 1999 a decrease of $43,728 from June 30, 1999. The
company utilized $11,542 and $588,787 for operations for the three months ended
September 30, 1999 and 1998, respectively. The primary reasons for the decrease
in cash utilized for operations are (a) a decrease in accounts receivable of
approximately $700,000, (b) a decrease in inventories of approximately $265,000
and (c) a decrease in accounts payable of approximately $700,000. The Company
believes that the anticipated sales for the second quarter of fiscal 2000 will
meet the cash needs for operation in the next nine months. The Company has drawn
down its entire line of credit and consequently will be looking for additional
sources of financing to meet liquidity needs.
13
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CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
The Company utilized $12,119 and $96,381 in investing activities for the three
months ended September 30, 1999 and 1998, respectively. The Company utilized
$20,067 and generated net cash of $33,523 from financing activities for the
three months ended September 30, 1999 and 1998, respectively.
The Company has a $500,000 revolving line of credit agreement with a bank which
bears interest at 1.0% above the bank's prime lending rate and expires on July
31, 2000. At September 30, 1999 the balance due under the revolving line of
credit was $500,000. The Company has additionally secured an equipment term loan
with interest at 1.5% above the bank's prime lending rate. At the September 30,
1999 the balance due under the equipment loan was $130,333.
The Company's total annual commitment at September 30, 1999 for the next five
years of $1,394,701 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment and
automobiles.
Effective July 1, 1999, the Company entered into three year employment
agreements with four executive officers which provide for aggregate annual
salaries of $485,000 for the year ending June 30, 2000 and $495,000 for the
years ending June 30, 2001 and 2002.
Recent Developments
On September 23, 1999 the Company was notified by the Nasdaq SmallCap Market
that its shares of common stock have failed to maintain a minimum bid price of
greater than or equal to $1.00 per share over the last thirty consecutive
trading days, as required under Marketplace Rule 4310(c)(4).
The Company has ninety (90) calendar days, or until December 23, 1999 to regain
compliance with this Rule. If at anytime before December 23, 1999, the bid price
of a share of the Company's Common Stock is equal to or greater than $1.00 for a
minimum of ten consecutive trading days, Nasdaq will determine if compliance
with the bid price deficiency has been achieved. If the Company is unable to
demonstrate compliance with this requirement before December 23, 1999, its
securities will be delisted at the opening of business on December 27, 1999.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
14
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Part II: Other Information
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
Item1: Legal Proceeding
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
None
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEM INTERNATIONAL, INC.
Date: November 8, 1999 By: /s/ Seymour Flug
----------------------------
Seymour Flug,
President and Chief Executive Officer
Date: November 8, 1999 By: /s/ Eric Friedman
----------------------------
Eric Friedman,
Chief Financial Officer
