UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 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 May 11, 1999
----- ------------------------------
Common Stock, Par Value 5,178,300
<PAGE>
CHEM INTERNATIONAL, INC.
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INDEX
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Part I: Financial Information
Item 1: Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 1999 [Unaudited] ............... 1 .... 2
Consolidated Statements of Operations for the three and nine months
ended March 31, 1999 and 1998 [Unaudited] ................................. 3 ....
Consolidated Statement of Stockholders' Equity for the nine months
ended March 31, 1999 [Unaudited] .......................................... 4 ....
Consolidated Statements of Cash Flows for nine months ended
March 31, 1999 and 1998 [Unaudited] ....................................... 5 .... 6
Notes to Consolidated Financial Statements [Unaudited] .................... 7 .... 14
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 15 ... 18
Part II: Other Information ........................................................ 19
Signature ......................................................................... 20
</TABLE>
. . . . . . . .
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 134,106
Accounts Receivable - Net 2,182,433
Deferred Income Taxes 97,000
Inventories 3,835,762
Prepaid Expenses and Other Current Assets 201,682
Refundable Federal Income Taxes 196,645
----------
Total Current Assets 6,647,628
----------
Property and Equipment - Net 1,573,455
----------
Other Assets:
Deferred Income Taxes 55,000
Security Deposits and Other Assets 122,456
----------
Total Other Assets 177,456
----------
Total Assets $8,398,539
==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 2,515,826
Notes Payable 551,214
Accrued Expenses and Other Current Liabilities 309,446
Accrued Expenses - Related Party 65,000
Capital Lease Obligation 36,412
-----------
Total Current Liabilities 3,477,898
-----------
Non-Current Liabilities:
Notes Payable 148,731
Notes Payable - Related Party 705,492
Capital Lease Obligation 39,296
-----------
Total Non-Current Liabilities 893,519
-----------
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
Accumulated [Deficit] (830,640)
-----------
Total Stockholders' Equity 4,027,122
-----------
Total Liabilities and Stockholders' Equity $ 8,398,539
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
March 31, March 31,
--------- ---------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 2,930,006 $ 4,978,839 $ 7,993,500 $ 9,948,939
Cost of Sales 2,772,837 4,010,136 7,683,041 8,225,099
----------- ----------- ----------- -----------
Gross Profit 157,169 968,703 310,459 1,723,840
Selling and Administrative
Expenses 615,287 732,255 2,299,586 2,047,980
----------- ----------- ----------- -----------
Operating Income [Loss] (458,118) 236,448 (1,989,127) (324,140)
----------- ----------- ----------- -----------
Other Income [Expense]
Interest Expense - Related Party (18,806) -- (56,420) --
Interest Expense (16,780) (15,028) (45,185) (43,009)
Interest and Investment Income 119 267 467 19,702
Income [Loss] on Investment in
Partnership -- -- -- (5,000)
----------- ----------- ----------- -----------
Other [Expense] Income - Net (35,467) (14,761) (101,138) (28,307)
----------- ----------- ----------- -----------
Income [Loss] Before Income
Taxes (493,585) 221,687 (2,090,265) (352,447)
Federal and State Income
Tax Expense [Benefit] (14,683) 94,746 (230,462) (91,000)
----------- ----------- ----------- -----------
Net Income [Loss] $ (478,902) $ 126,941 $(1,859,803) $ (261,447)
=========== =========== =========== ===========
Net Income [Loss] Per
Common Share:
Basic $ (.09) $ .03 $ (.36) $ (.06)
=========== =========== =========== ===========
Diluted $ (.09) $ .02 $ (.36) $ (.06)
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding 5,178,300 5,065,685 5,178,300 4,575,068
Dilutive Potential Common Shares: -- 1,925,247 -- --
Warrants and Options ----------- ----------- ----------- -----------
Adjusted Weighted Average
Common Shares 5,178,300 6,990,932 -- --
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED MARCH 31, 1999
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
---------- -----
Common Stock Preferred Paid-in Accumulated Stockholders'
-------------------------- --------- ------- ----------- -------------
Shares Par Value Stock Capital [Deficit] Equity
--------- ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1998 5,178,300 $ 10,357 $ -- $ 4,847,405 $ 1,029,163 $ 5,886,925
Net [Loss] for the nine
months ended
March 31, 1999 -- -- -- -- (1,859,803) (1,859,803)
--------- ----------- --------- ----------- ----------- -----------
Balance - March 31, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $ (830,640) $ 4,027,122
========= =========== ========= =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
4
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
Nine months ended
-----------------
March 31,
---------
1 9 9 9 1 9 9 8
----------- -----------
Operating Activities:
Net [Loss] $(1,859,803) $ (261,447)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 302,084 274,111
Amortization of Discount on Note Payable 17,045 947
Deferred Income Taxes (52,000) 90,000
Imputed Interest on Note Payable-Related Party -- 7,051
Loss on Investment in Partnership -- 5,000
Interest Income on Note Payable -- (11,627)
Bad Debt Expense 7,500 5,000
Writeoff of Note Receivable -- 33,058
Writeoff of Goodwill 275,891 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,271,004 (639,492)
Inventories (313,952) (2,041,198)
Refundable Federal Income Taxes (196,645) 45,000
Prepaid Expenses and Other Current Assets (24,325) 79,377
Security Deposits and Other Assets (3,433) (4,767)
Increase [Decrease] in:
Accounts Payable (321,216) 1,475,594
Federal and State Income Taxes Payable (40,000) (41,416)
Accrued Expenses and Other Liabilities 224,007 (23,999)
----------- -----------
Total Adjustments 1,145,960 (747,361)
----------- -----------
Net Cash - Operating Activities - Forward (713,843) (1,008,808)
----------- -----------
Investing Activities:
Repayment of Note Receivable -- 250,000
Purchase of Property and Equipment 250,000 (601,024)
Loans to Stockholders' (27,033) (4,673)
Loan to Related Company -- 2,500
----------- -----------
Net Cash-Investing Activities - Forward (251,217) (353,197)
----------- -----------
Financing Activities:
Proceeds from Notes Payable 670,000 1,050,000
Repayment of Notes Payable (527,237) (37,769)
----------- -----------
Net Cash-Financing Activities - Forward 142,763 1,012,231
----------- -----------
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
<PAGE>
CHEM INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
-----------------
March 31,
---------
1 9 9 9 1 9 9 8
----------- -----------
<S> <C> <C>
Net Cash-Operating Activities-Forwarded $ (713,843) $(1,008,808)
Net Cash-Investing Activities-Forwarded (251,217) (353,197)
Net Cash-Financing Activities-Forwarded 142,763 1,012,231
----------- -----------
Net [Decrease] in Cash and Cash Equivalents (822,297) (349,774)
Cash and Cash Equivalents-Beginning of Periods 956,403 1,010,256
----------- -----------
Cash and Cash Equivalents-End of Periods $ 134,106 $ 660,482
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 71,435 $ 37,125
Income Taxes $ 51,067 $ 70,863
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
6
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- --------------------------------------------------------------------------------
[1] Business
Chem International, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products. It's 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, 1998. The results of operations for
the nine months ended March 31, 1999 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 1999.
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 $ 296,091 and $ 265,120 for the nine months ended March 31, 1999 and
1998, respectively. Amortization of equipment under capital leases is included
with the depreciation expense.
Goodwill - At December 31, 1998, goodwill with a carrying value of $ 275,891,
which arose in connection with the acquisition of the Company's principal
operating business subsidiary, was written down to zero due to impairment. The
writeoff of goodwill is included in the March 31, 1999 income statement as part
of selling and administrative expenses.
Amortization expense was $ 5,993 for the nine months ended March 31, 1999, and
$8,991 for the nine months ended March 31, 1998.
7
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
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.
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'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 March 31, 1999, management expects these assets to be
fully recoverable.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $232,917 and $294,299 for the
nine months ended March 31, 1999 and 1998 respectively.
[3] Inventories
Inventories consist of the following at March 31, 1999:
Raw Materials $ 2,542,846
Work-in-Process 467,384
Finished Goods 825,532
-------------
Total $ 3,835,762
- ----- =============
8
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- --------------------------------------------------------------------------------
[4] Property and Equipment
Property and equipment comprise the following at March 31, 1999:
Leasehold Improvements $1,124,876
Machinery and Equipment 2,422,222
Machinery and Equipment Under Capital Leases 109,545
Transportation Equipment 32,152
----------
Total 3,688,795
Less: Accumulated Depreciation and Amortization 2,115,340
----------
Total $1,573,455
----- ==========
[5] Notes Payable
Notes payable are summarized as follows at March 31, 1999:
<TABLE>
<CAPTION>
Related Party
-------------
Notes Payable Notes Payable Total
------------- ------------- -----
<S> <C> <C> <C>
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 52,612 $ -- $ 52,612
President and Chief Executive Officer (b) -- 705,492 705,492
First Union National Bank:
Revolving Line-of-Credit (c) 500,000 -- 500,000
Equipment Term Loan (d) 147,333 -- 147,333
---------- ---------- ----------
Totals 699,945 705,492 1,405,437
Less: Current Portion 551,214 -- 551,214
---------- ---------- ----------
Noncurrent Portion $ 148,731 $ 705,492 $ 854,223
------------------ ========== ========== ==========
</TABLE>
(a) Five year 10% equipment note dated April 1, 1997 providing for monthly
payments of $1,698 for principal and interest. The note is collateralized by
laboratory equipment.
(b) 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 March 31, 1999 was $17,045 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 27,
1999, 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. At March
31, 1999 the interest rate was 8.75%.
9
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
- --------------------------------------------------------------------------------
[5] Notes Payable [Continued]
(d) Under the terms of a five year equipment term loan, dated July 27, 1998, the
Company may borrow up to $395,000 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 March 31, 1999, the interest rate was 9.25%.
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 March 31, 1999.
The following are maturities of long-term debt for each of the next five years:
Related Party
-------------
Notes Payable Notes Payable Total
------------- ------------- -----
March 31,
- ---------
2000 $ 549,823 $ -- $ 549,823
2001 51,479 705,492 756,971
2002 53,310 -- 53,310
2003 34,000 -- 34,000
2004 11,333 -- 11,333
---------- ---------- ----------
Totals $ 699,945 $ 705,492 $1,405,437
- ------ ========== ========== ==========
[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 March
31, 1999 had a cost of $109,545 accumulated depreciation of $36,148 with a net
book value of $73,397.
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at March 31, 1999 are as follows:
Total Minimum Lease Payments $ 104,900
Amount Representing Interest (29,192)
----------
Present Value of Net Minimum Lease Payments 75,708
Current Portion (36,412)
----------
Long-Term Capital Lease Obligation $ 39,296
---------------------------------- ==========
[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 March 31, 1999 the
Company's uninsured cash balances totaled approximately $124,000. The Company
does not require collateral in relation to cash credit risk.
10
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- --------------------------------------------------------------------------------
[7] 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 March 31, 1999 is $33,250.
[8] Major Customer
For the nine months ended March 31, 1999 and 1998, approximately 45% and 55% 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 nine months
ended March 31, 1999 and 1998, an aggregate of approximately 14% and 12%,
respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the nine months
ended March 31, 1999 and 1998. Accounts receivable from these customers
comprised approximately 59% and 73% of total accounts receivable at March 31,
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 nine months ended March 31, 1999 and 1998 on this
lease was approximately $56,000 and $87,000, respectively. Unpaid rent of
$65,000 due to Gerob at March 31, 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
president and principal stockholder and certain family members and 10% owned by
the Company's Chief Financial Officer. The lease was effective on January 10,
1997 and provides for minimum annual rental of $346,000 through January 10, 2002
plus increases in real estate taxes and building operating expenses. At its
option, the Company has the right to renew the lease for an additional five year
period. Rent expense for the nine months ended March 31, 1999 and 1998 on this
lease was approximately $345,000 and $338,000, respectively.
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.
11
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- --------------------------------------------------------------------------------
[9] Commitments and Contingencies [Continued]
Other Lease Commitments [Continued] - The minimum rental commitment for
long-term non-cancelable leases is as follows:
Related
-------
Lease Party Lease
----- -----------
March 31, Commitment Commitment Total
- --------- ---------- ---------- -----
2000 $ 51,284 $ 346,000 $ 397,284
2001 31,247 346,000 377,247
2002 24,212 269,110 293,322
2003 1,395 -- 1,395
2004 -- -- --
Thereafter -- -- --
---------- ---------- ----------
Total $ 108,138 $ 961,110 $1,069,248
- ----- ========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $401,000 and $ 411,000 for the nine months ended March 31, 1999
and 1998, respectively. Rent expense is stated net of sublease income of
approximately $17,000 and $16,000 for the nine months ended March 31, 1999 and
1998, 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. No royalties have
been paid as of March 31, 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.
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 these 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. On February 10, 1999 the Company
settled the suit and filed a Stipulation of Dismissal.
12
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- --------------------------------------------------------------------------------
[9] Commitments and Contingencies [Continued]
[E] Consulting Agreements - 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 three options
for 45,000 shares of common stock. 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 March 20, 2003.
[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.
[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 March 31, 1999 and 1998, by the Company was
$9,900 and $9,000, 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 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.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS No. 130 as of July 1,
1998. SFAS No. 130 does not have a material impact on the Company.
13
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- --------------------------------------------------------------------------------
[12] New Authoritative Pronouncements [Continued]
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 was effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated. SFAS
No. 131 does not apply to interim financial statements in the initial year of
its application. SFAS No. 131 does not have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[13] Equity Transactions
[A] Incentive Stock Options - On October 7, 1998, the Company granted 219,998
incentive stock options for a term of ten years commencing on October 7, 1998 to
its officers at the exercise price of $1.50 per share and 60,606 shares at 110%
of the exercise price for a term of five years commencing on October 7, 1998. No
options have been exercised as of March 31, 1999.
[B] Non-Statutory Options - On October 7, 1998, the Company granted 40,000
non-statutory stock options to the members of its Scientific Advisory Board at
the exercise price of $1.50 per share for a term of ten years commencing October
7, 1998. No options have been exercised as of March 31, 1999.
. . . . . . . . . . . . . . . . .
14
<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.
Nine months ended March 31, 1999 Compared to the Nine months ended March 31,
1998
Results of Operations
The Company's net losses for the nine months ended March 31, 1999 and 1998 were
$(1,859,803) and $(261,447), respectively. This increase in net loss of
approximately $1,600,000 is primarily the result of a $1,650,000 increase in
operating loss resulting from a corresponding $1,400,000 decrease in gross
profit and a $250,000 increase in selling and administrative expenses. The
decrease in gross profit is due to an increase in manufacturing expenses as the
Company hired additional direct labor and increased its production capacity for
the nine months ended March 31, 1999 in anticipation of increased orders.
Product launches expected during the nine months ended March 31, 1999 in eastern
Europe have been delayed because of the uncertainties in the European markets.
The Company cannot anticipate when these product launches will eventually occur.
Sales for the nine months ended March 31, 1999 and 1998 were $7,993,500 and
$9,948,939, respectively, a decrease of $1,955,439 or 20%. For the nine months
ended March 31, 1999, the Company had sales to one customer, who accounted for
45% of net sales in 1999 and 55% in 1998. The loss of this customer would have
an adverse affect on the Company's operations.
Retail and mail order sales for the nine months ended March 31, 1999 totaled
$517,224 as compared to $846,216 for the nine months ended March 31, 1998, a
decrease of $328,992 or 39% due primarily to the closing of the retail store on
November 13, 1998 for approximately 9 weeks for renovations. The store reopened
on January 7, 1999. The Company anticipates retail and mail order sales
returning to their fiscal 1998 levels in the fourth quarter of the year. The
Company has been unable to date to recapture the lost sales while the store was
closed for renovations.
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 each. The
Company renewed the agreement for the coming year. Sales for the nine months
ended March 31, 1999 were $1,109,567 as compared to $912,214 for the nine months
ended March 31, 1998, an increase of $197,353 or 22%.
Cost of sales increased to $7,683,041 for the nine months ended March 31, 1999
as compared to $8,225,099 for the nine months ended March 31, 1998. Cost of
sales increased as a percentage of sales to 96% for the nine months ended March
31, 1999 from 83% for the nine months ended March 31, 1998. The increase in cost
of sales is due to an increase in manufacturing costs and fixed overhead costs.
Selling and administrative expenses for nine months ended March 31, 1999 were
$2,299,586 versus $2,047,980 for the same period a year ago. The increase of
$251,606 was primarily attributable to the write-off of the balance of goodwill
at December 31, 1998 of $275,891. Selling and administrative expenses have
stabilized at approximately $700,000 per quarter.
Other income (expense) was $(101,138) for the nine months ended March 31, 1999
as compared to $(28,307) for the nine months ended March 31, 1998. This increase
in net expense of $72,831 is attributable to an increase in interest expense of
$58,596 due to an increase in borrowings, a decrease in interest and investment
income of $19,235 and a decrease in a partnership loss of $5,000.
15
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine months ended March 31, 1999 Compared to the Nine months ended March 31,
1998
Results of Operations (Continued)
On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material which was used in manufacturing of tablets sold by
Manhattan Drug 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 material. The Company does not believe that there will be any
significant additional costs relating to this recall. On September 30, 1997 the
Company instituted suit to recover all damages. On February 10, 1999 the Company
settled the suit and filed a Stipulation of Dismissal.
Three months ended March 31, 1999 Compared to the Three months ended March 31,
1998
Results of Operations
The Company's net losses for the three months ended March 31, 1999 were
$(478,902) and the Company's net income for the same period a year ago was
$126,941. This increase in net loss of approximately $600,000 is primarily the
result of an increase in operating loss of $695,000 and a decrease in federal
and state income tax benefits of approximately $80,000. The increase in
operating loss results from a corresponding $800,000 decrease in gross profit
and an approximately $100,000 decrease in selling and administrative expenses.
Sales for the three months ended March 31, 1999 and 1998 were $2,930,006 and
$4,978,839, respectively, a decrease of $2,048,833 or 41%. For the three months
ended March 31, 1999 the Company had sales to one customer who accounted for 54%
of net sales in 1999 and 44% in 1998.
Retail and mail order sales for the three months ended March 31, 1999 totaled
$149,729 as compared to $296,537 for the three months ended March 31, 1998, a
decrease of $146,808 or 50% due to the store being closed for renovations for
approximately 2 weeks in the quarter. The Company has been unable to date to
recapture the lost sales while the store was closed for renovations, but
anticipates sales levels returning to their fiscal 1998 levels.
Sales under the Roche Vitamins, Inc. distribution agreement totaled $454,790 for
the three months ended March 31, 1999 as compared to $374,942 for the three
months ended March 31, 1998 an increase of $79,848 or 21%.
Cost of sales decreased to $2,772,837 for the three months ended March 31, 1999
as compared to $4,010,136 for the three months ended March 31, 1998. Cost of
sales increased as a percentage of sales to 95% as compared to 81% for the three
months ended March 31, 1998. The increase in cost of sales is due to an increase
in manufacturing expenses and fixed overhead costs.
Selling and administrative expenses for the three months ended March 31, 1999
were $615,287 as compared to $732,255 for the three months ended March 31, 1998.
This decrease of approximately $117,000 is primarily due to an increase in
office salaries of approximately $17,000; a decrease in travel and entertainment
of approximately $30,000; an increase in officers salaries of approximately
$20,000; a decrease in freight out of approximately $30,000 and a decrease in
advertising of approximately $100,000.
16
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three months ended March 31, 1999 Compared to the Three months ended March 31,
1998
Results of Operations [Continued]
Other income (expense) was $(35,467) for the three months ended March 31, 1999
as compared to $(14,761) for the three months ended March 31, 1998. This
increase in net expense of $20,706 is attributable to an increase in interest
expense of $20,558 and a decrease of interest and investment income of $148.
Liquidity and Capital Resources
At March 31, 1999 the Company's working capital was $3,169,730 a decrease of
$1,591,781 over working capital at June 30, 1998. Cash and cash equivalents were
$134,106 at March 31, 1999 a decrease of $822,297 from June 30, 1998. The
Company utilized $713,843 and $1,008,808 for operations for the nine months
ended March 31, 1999 and 1998, respectively. The primary reasons for the
increase in cash utilized for operations are (a) a decrease in accounts
receivable of approximately $1,300,000, (b) an increase in inventories of
approximately $300,000, (c) an increase in refundable income taxes of
approximately $200,000 and (d) a decrease in accounts payable of approximately
$320,000. The Company believes that the anticipated sales for the fourth quarter
of fiscal 1999 will meet the cash needs for operations in the next six months.
The Company has drawn down its entire line of credit and consequently will be
looking for additional sources of financing to meet its liquidity needs.
The Company utilized $251,217 and $353,197 in investing activities for the nine
months ended March 31, 1999 and 1998, respectively. The Company generated net
cash of $142,763 from debt financing activities for the nine months ended March
31, 1999 and $1,012,231 for the nine months ended March 31, 1998.
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
27, 1999. At March 31, 1999 the balance due under the revolving line of credit
was $500,000. The Company has additionally secured a five year equipment term
loan with interest at 1.5% above the bank's prime lending rate. At March 31,
1999 the balance due under the equipment loan was $147,333. The Company was not
in compliance with its debt coverage on a consolidated basis at March 31, 1999.
The Company's total annual commitments at March 31, 1999 for the next five years
of $1,069,248 consists of obligations under operating leases for facilities and
lease agreements for the rental of warehouse equipment, office equipment and
automobiles.
Effective July 1, 1996, the Company entered into employment agreements with each
of its five executive officers providing for aggregate compensation in the
amount of $680,000 for the fiscal year ending June 30, 1999.
The Company expects to spend approximately $55,000 through 1999 to modify it's
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 $30,439 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 is
currently being tested. The Company intends to be fully Y2K compliant by June
30, 1999. The Company's suppliers and vendors have been contacted, and most have
responded with their 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. The Company does not expect the amounts required to be
expended over the next twelve months to have a material effect on its financial
position or results of operations. The amount expended as of March 31, 1999 was
$50,982.
17
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS 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.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS No. 130 as of July 1,
1998. SFAS No. 130 does not 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 was effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated. SFAS
No. 131 does not apply to interim financial statements in the initial year of
application. SFAS No. 131 does not have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting changes in a fair value of a derivative depends on
the intended use of the derivative and how it is designated, for example, gain
or losses related to changes in the fair value of a derivative not designated as
a hedging instrument is recognized in earnings in the period of the change,
while certain types of hedges may be initially reported as a component of other
comprehensive income (outside earnings) until the consummation of the underlying
transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years after June 15,
1999. Initial application of SFAS No. 133 should be as of the beginning of a
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as
of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company does not
currently have any derivative instruments and is not currently engaged in any
hedging activities.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
18
<PAGE>
Part II: Other Information
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
Item 1: Legal Proceeding
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
Form 8-K filed May 10, 1999, reported change in accounting firm
on May 5, 1999.
19
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEM INTERNATIONAL, INC.
Date: May 11, 1999 By: /s/ E. Gerald Kay
-------------------------------------
E. Gerald Kay,
President and Chief Executive Officer
Date: May 11, 1999 By: /s/ Eric Friedman
-------------------------------------
Eric Friedman,
Chief Financial Officer
20