UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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, 2000 Commission File Number 000-28876
CHEM INTERNATIONAL, INC.
(Exact name of small business registrant in its charter)
Delaware 22-2407475
(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: (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, 2000 were $17,974,885.
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, 2000 was $ 3,771,782.
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, 2000
Common Stock $.002 par value 5,152,500 Shares
Class A Redeemable Common Stock 1,265,000 Warrants
Purchase Warrants
Class C Redeemable Common Stock
Purchase Warrants 150,000 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
Part I Page
Item 1. Description of Business 1
Item 2. Description of Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 4
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 5
Item 6. Management's Discussion and Analysis of Financial
Condition And Results of Operations 6
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act 9
Item 10. Executive Compensation 9
Item 11. Security Ownership of Certain Beneficial
Owners and Management 9
Item 12. Certain Relationships and Related Transactions 9
Item 13. Exhibits and Reports on Form 8-K 9
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 judgement 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"], manufactures 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
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 51% and 55%, respectively, for the fiscal years ended
June 30, 2000 and 1999. 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 these certain individuals, particularly E. Gerald Kay, Chairman
of the Board, 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 four executive officers, which expire on June 30, 2002. 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.
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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 Pharmachem Laboratories, Inc.
Employees
As of June 30, 2000, the Company had 88 full time employees, of whom 54 belonged
to a local unit of the Teamsters Union and are covered by a collective
bargaining agreement, which expires August 31, 2002.
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 Untied 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 ["cGMP"] specific to the
manufacture of dietary supplements, to be modeled after food cGMP. The Company
currently manufactures its dietary supplement products pursuant to food cGMP.
The Company believes that it is currently in compliance with all applicable
government regulations. 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 record keeping
and expanded documentation of the properties of certain products and scientific
substantiation regarding ingredients, product claims and safety of efficacy.
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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 who 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
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 result
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.
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 Chairman of
the Board, 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. On
April 28, 2000 the lease was amended reducing the square footage to
approximately 75,000 square feet and extending the lease to May 31, 2015.
The Company also leases 40,000 square feet of manufacturing facilities in
Hillside, New Jersey from Morristown Holding Company, Inc. (formerly Gerob
Realty Partnership), of which E. Gerald Kay, Chairman of the Board of the
Company, is a majority shareholder. The lease which expires on December 31,2000
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 lawsuits 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
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
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firms that manufactured tablets and/or capsules containing L-tryptophan.
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 judgements. SDA has agreed to indemnify Manhattan Drug against any
judgements 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.
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 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, 2000.
4
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Set forth below are the high and low closing prices of the Common Stock and the
Class A Redeemable Warrant as reported on the Nasdaq National Market for the
periods indicated:
HIGH LOW
COMMON STOCK [CXIL]
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter 3 3/8 1 3/8
Second Quarter 1 7/8 3/4
Third Quarter 1 1/4 5/8
Fourth Quarter 2 5/8 11/16
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter 1 3/4 1/2
Second Quarter 1 7/16 7/16
Third Quarter 2 15/16 9/16
Fourth Quarter 1 23/32 25/32
CLASS A REDEEMABLE WARRANTS [CXILW]
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter 3/4 3/8
Second Quarter 7/16 3/16
Third Quarter 1/4 1/16
Fourth Quarter 11/16 1/16
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter 11/16 1/8
Second Quarter 6/16 1/8
Third Quarter 23/32 3/32
Fourth Quarter 9/16 1/4
As of June 30, there were approximately 125 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.
5
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Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2000 Compared to the Year ended June 30, 1999.
The Company's net income for the year ended June 30, 2000 was $3,143,695 as
compared to the net loss of $(2,628,433) for the year ended June 30, 1999. This
increase in net income of approximately $5,800,000 is primarily the result of a
$670,000 increase in operating income resulting from a corresponding increase in
gross profit of $670,000, an increase in other income of approximately
$6,200,000 due to the settlement of a Class Action Lawsuit and an increase in
Federal and State income taxes of approximately $1,100,000.
Sales for the years ended June 30, 2000 and 1999 were $17,974,885 and
$12,274,448, respectively, an increase of $5,700,437 or 46%. For the year ending
June 30, 2000 the Company had sales to one customer who accounted for 51% of net
sales in 2000 and 55% of net sales in 1999. 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, 2000 totaled $679,612 as
compared to $713,962 for the year ended June 30, 1999, as a decrease of 5%. The
Company has been experiencing a decline in mail order sales due to increased
competition and a decrease in advertising expenses.
Sales under the Roche Vitamins, Inc. distribution agreement were $2,689,575 as
compared to $1,607,092 for the year ended June 30, 1999, an increase of
$1,082,483 or 67%.
Cost of sales increased to $16,687,844 in 2000 as compared to $11,655,173 for
1999. Cost of sales decreased as a percentage of sales to 93% as compared to 95%
for 1999. The decrease in cost of sales is due to the greater manufacturing
efficiencies.
Selling and administrative expenses for the year ending June 30, 2000 were
$3,276,435 versus $3,275.723 for the same period a year ago. The increase of
$712 was primarily attributable to a decrease in advertising of approximately
$50,000, an increase in freight out of approximately $46,000 a decrease in bad
debt expenses of approximately $166,000, a decrease in officers salaries of
approximately $80,000, an increase in office salaries of approximately $47,000,
a decrease in the write-off of the balance of goodwill of approximately
$276,000, an increase in consulting fees of approximately $295,000, an increase
in professional fees of approximately $63,000 and an increase in entertainment
and lodging of approximately $57,000.
Other income (expense) was $6,047,145 for the year ended June 30, 2000 as
compared to $(136,159) for the same period a year ago. This increase in net
income of approximately $6,200,000 is primarily the result of the proceeds
received of $6,143,849 from the settlement of a Class Action Lawsuit against
three bulk vitamin suppliers.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year ended June 30, 1999 Compared to the Year ended June 30, 1998.
The Company's net [loss] for the year ended June 30, 1999 was $(2,628,433) as
compared to the net loss of $(97,438) for the year ended June 30, 1998. This
increase in net loss of approximately $2,500,000 is primarily the result of a
$2,600,000 increase in operating loss and an increase in the federal tax benefit
of approximately $130,000. The $2,600,000 decrease in operating loss is due to a
gross profit decrease of approximately $2,500,000 and an increase in selling and
administrative expense of approximately $100,000. 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 year ended June 30,
1999 in anticipation of increased orders. Product launches expected during the
year in eastern Europe have been delayed because of uncertainties in the
European markets. The Company cannot anticipate when these product launches will
eventually occur.
Sales for the years ended June 30, 1999 and 1998 were $12,274,448 and
$16,011,049, respectively, a decrease of $3,736,601 or 23%. For the year ended
June 30, 1999, the Company had sales to one customer, who accounted for 55% of
net sales in 1999 and 44% of net sales in 1998. 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, 1999 totaled $713,962 as
compared to $1,090,854 for the year ended June 30, 1998, a decrease of $376,892
or 35% 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 coming year.
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 had an initial term
of two years and shall be renewable for an additional term of one year. Sales
for the year ended June 30, 1999 totaled $1,607,092 as compared to $1,250,480
for the year ended June 30, 1998, an increase of $356,612 or 29%.
Cost of sales decreased to $11,655,173 in 1999 as compared to $12,841,937 for
1998. Cost of sales increased as a percentage of sales to 95% as compared to 80%
for 1998. The increase in cost of sales is due to an increase in manufacturing
costs and fixed overhead costs.
Selling and administrative expenses for the year ended June 30, 1999 were
$3,275,723 versus $3,197,047 for the same period a year ago. The increase of
$78,676 was primarily attributable to a decrease of advertising of approximately
$110,000, a decrease in travel and entertainment of approximately $93,000, a
decrease in pension and profit sharing plan expenses of approximately $330,000,
the writeoff of the balance of goodwill of approximately $276,000 and an
increase in the allowance for doubtful accounts of $315,000.
Other income (expense) was $(136,159) for the year ended June 30, 1999 as
compared to $(105,789) for the same period a year ago. This increase in net
expense of $30,370 is attributable to an increase in interest expense of $50,578
due to an increase in borrowings, a decrease in interest and investment income
of $19,350, a decrease in partnership loss of $5,000, a decrease in a loss
resulting from the writeoff of a note receivable of $33,058 and an increase in
gains on the sale of equipment.
Liquidity and Capital Resources
At June 30, 2000 the Company's working capital was $5,459,783 an increase of
$2,962,322 over working capital at June 30, 1999. Cash and cash equivalents were
$1,823,009 at June 30, 2000 an increase of $1,523,979 from June 30, 1999. The
Company generated $4,098,629 and utilized $483,206 for operations for the years
ended June 30, 2000 and 1999, respectively. The primary reason for the cash
generated from operations was net income of approximately 3,100,000. The Company
believes that the anticipated sales for next year will meet cash needs for
operations.
The Company utilized $167,460 and $297,744 in investing activities for the years
ended June 30, 2000 and 1999, respectively. The Company utilized net cash of
$2,407,190 and generated $123,577 from debt financing activities for
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the year ended June 30, 2000 and 1999, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources [Continued]
The Company's total annual commitments at June 30, 2000 for long term
non-cancelable leases of $4,908,297 consists of obligations under operating
leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
The Company has a $1,000,000 revolving line of credit agreement which bears
interest at 3.0% above the prime interest rate and expires on November 5, 2001.
At June 30, 2000 the balance due under the revolving line of credit was
$540,757.
On January 20, 2000 the Company entered into a Settlement Agreement with a major
supplier in connection with a multidistrict consolidated class action. In
exchange for the Company's release and agreement to opt out of any settlement or
litigation pertaining to the pending class action lawsuit, the Company agreed to
a settlement of 4.9 million dollars. The settlement proceeds were offset by
$1,333,333, the amount due under a promissory note dated November 17, 1999.
On March 20, 2000 the Company entered into its second Settlement Agreement and
received a payment of $437,000 in settlement of the second portion of the
multidistrict consolidated class action suit.
On April 13, 2000 the Company settled the last major portion of its Class Action
Lawsuit for approximately $792,000.
On April 13, 2000, the Company announced a stock repurchase program whereby the
Company may purchase up to 500,000 shares of its outstanding common stock. At
June 30, 2000 the Company has repurchased 25,800 shares of its common stock
under the program at an average price of $1.12.
New Accounting Pronouncement
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.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
Item 7. Financial Statements
For a list of financial statements filed as part of this report, see index to
financial statement at F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
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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, 2000.
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, 2000.
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, 2000.
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, 2000.
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)
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)
9
<PAGE>
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)
10.18 Employment Agreement, effective July 1, 1999, between the
Registrant and Eric Friedman (6)
10.18 Employment Agreement, effective July 1, 1999, between the
Registrant and Riva Sheppard (6)
10.18 Employment Agreement, effective July 1, 1999, between the
Registrant and Christina Kay (6)
10.18 Employment Agreement, effective February 16, 1999, between the
Registrant and Abdulhameed Mirza (6)
16.1 Letter on changes in certifying accountants (6)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
--------------------------------------
(1) Incorporated herein by reference to the corresponding exhibit
number to the Registrants Registration Statement of 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 to 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) 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, 1998, filed on September 23, 1998,
Commission File No. 000-28876.
(6) Incorporated herein by reference to the corresponding exhibit
number to the Registrants Annual Report of From 10-KSB for the
fiscal year ended June 30, 1999, filed on September 30, 1999,
Commission File No. 000-28876.
(b) No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
10
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Item 7: Consolidated Financial Statements
Independent Auditors' Report......................................F-2...
Consolidated Balance Sheet as of June 30, 2000....................F-3... F-4
Consolidated Statements of Operations for the years
ended June 30, 2000 and 1999......................................F-5...
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2000 and 1999......................................F-6...
Consolidated Statements of Cash Flows for the years ended
June 30, 2000 and 1999............................................F-7... F-8
Notes to Consolidated Financial Statements........................F-9... F-17
. . . . . . . .
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, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended June 30, 2000 and 1999. 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
audits.
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, 2000, and the
consolidated results of their operations and their cash flows for the years
ended June 30, 2000 and 1999 in conformity with generally accepted accounting
principles.
/s/ Amper, Politziner & Mattia, P.A.
Edison, New Jersey
August 15, 2000
F-2
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000
Assets:
Current Assets:
Cash and Cash Equivalents $1,823,009
Accounts Receivable-Net 1,422,128
Inventories 3,236,678
Prepaid Expenses and Other Current Assets 110,140
Deferred Income Taxes 280,000
Refundable Federal Income Taxes 216,352
----------
Total Current Assets 7,088,307
----------
Property and Equipment-Net 1,367,047
----------
Other Assets:
Security Deposits and Other Assets 124,195
----------
Total Assets $8,579,549
==========
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,356,634
Notes Payable 16,223
Accrued Expenses and Other Current Liabilities 91,451
Accrued Expenses-Related Party 130,000
Capital Lease Obligation 34,216
-----------
Total Current Liabilities 1,628,524
-----------
Non-Current Liabilities:
Notes Payable 558,529
Capital Lease Obligation 19,140
-----------
Total Non-Current Liabilities 577,669
-----------
Commitments and Contingencies [12]
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 1,544,425
-----------
6,402,187
Less Treasury Stock at cost, 25,800 common shares (28,831)
-----------
Total Stockholders' Equity 6,373,356
-----------
Total Liabilities and Stockholders' Equity $ 8,579,549
===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
June 30,
--------------------
2000 1999
---- ----
Sales $ 17,974,885 $ 12,274,448
Cost of Sales 16,687,844 11,655,173
------------ ------------
Gross Profit 1,287,041 619,275
Selling and Administrative Expenses 3,276,435 3,275,723
Operating [Loss] (1,989,394) (2,656,448)
------------ ------------
Other Income [Expense]:
Gain on Sale of Equipment 6,344 1,500
Interest Expense (119,380) (63,018)
Interest Expense-Related Party (76,271) (75,227)
Interest and Investment Income 42,603 586
Administrative Fee Income 50,000 --
Gain on Settlement of Lawsuit 6,143,849 --
------------ ------------
Other Income [Expense]-Net 6,047,145 (136,159)
------------ ------------
Income [Loss] Before Income Taxes 4,057,751 (2,792,607)
Federal and State Income Tax Expense [Benefit] 914,056 (164,174)
------------ ------------
Net Income [Loss] $ 3,143,695 $ (2,628,433)
============ ============
Net Income [Loss] Per
Common Share:
Basic $ .61 $ (.51)
============ ============
Diluted $ .60 $ (.51)
============ ============
Average Common Shares Outstanding 5,169,185 5,178,300
Dilutive Potential Common Shares:
Warrants and Options 86,738 --
------------ ------------
Average Common Shares
Outstanding-assuming dilution 5,255,923 5,178,300
============ ============
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30,
2000 AND 1999
<TABLE>
<CAPTION>
Additional Total
Common Stock Preferred Paid-in Retained Treasury Stock Stockholders'
Shares Par Value Stock Capital Earnings Shares Cost Equity
------ --------- ----- ------- -------- ------ ---- ------
<S> <C> <C> <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] -- -- -- -- (2,628,433) -- -- (2,628,433)
----------- ----------- ---- ----------- ----------- ----------- ----------- -----------
Balance-
June 30, 1999 5,178,300 10,357 -- 4,847,405 (1,599,270) -- -- 3,258,492
Purchase of
Treasury Stock -- -- -- -- -- 25,800 (28,831) (28,831)
Net Income -- -- -- -- 3,143,695 -- -- 3,143,695
----------- ----------- ---- ----------- ----------- ----------- ----------- -----------
Balance-
June 30, 2000 5,178,300 $ 10,357 $ -- $ 4,847,405 $ 1,544,425 25,800 $ (28,831) $ 6,373,356
=========== =========== ==== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
June 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Operating Activities:
Net Income [Loss] $ 3,143,695 $(2,628,433)
----------- -----------
Adjustments to Reconcile Net Income [Loss] to Net Cash
Provided By [Used for]
Operating Activities:
Depreciation and Amortization 339,811 403,198
Write-off of Goodwill -- 275,891
Amortization of Discount on Note Payable 38,826 22,727
Deferred Income Taxes (36,000) (144,000)
Bad Debt Expense 170,387 336,450
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 410,705 1,121,267
Inventories 241,949 43,183
Prepaid Expenses and Other Current Assets (15,352) 82,569
Security Deposits and Other Assets (22,269) (3,433)
Refundable Federal Income Taxes (161,707) (41,645)
Increase [Decrease] in:
Accounts Payable 201,823 (182,231)
Federal and State Income Taxes Payable -- (40,000)
Accrued Expenses and Other Liabilities (213,239) 271,251
----------- -----------
Total Adjustments 954,934 2,145,227
----------- -----------
Net Cash-Operating Activities 4,098,629 (483,206)
----------- -----------
Investing Activities:
Purchase of Property and Equipment (168,590) (290,111)
Loans to Stockholders 1,130 (7,633)
----------- -----------
Net Cash-Investing Activities (167,460) (297,744)
----------- -----------
Financing Activities:
Proceeds from Notes Payable 927,504 670,000
Repayment of Notes Payable (3,305,863) (546,243)
Purchase of Treasury Stock (28,831) --
----------- -----------
Net Cash-Financing Activities (2,407,190) 123,577
----------- -----------
Net Change in Cash and Cash Equivalents 1,523,979 (657,373)
Cash and Cash Equivalents-Beginning of Year 299,030 956,403
----------- -----------
Cash and Cash Equivalents-End of Year $ 1,823,009 $ 299,030
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
June 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 183,075 $ 89,000
Income Taxes 1,205,160 62,000
Supplement Schedule of Investing and Financing Activities:
Note payable issued in payment of accounts payable, trade $1,500,000
Proceeds from lawsuit used in payment of note payable 1,333,333
</TABLE>
See accompanying notes to 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] Liquidity
Although the Company anticipates operating losses during the 2000 fiscal year,
the Company believes that the available cash on hand and the operating plan for
the fiscal year ended June 30, 2001 will provide sufficient working capital to
meet its needs for the current year.
[3] 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.
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. All debt is based on
current rates at which the Company could borrow funds with similar remaining
maturities and approximates fair value.
Cash and Cash Equivalents- Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories-Inventory is valued by the first-in, first-out method, at the lower
of cost or market.
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 $339,811 and $397,205 for the years ended June 30, 2000 and 1999,
respectively. Amortization of equipment under capital leases is included with
depreciation expense.
F-9
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[3] 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 of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition- The Company recognizes revenue upon shipment of the
product.
Advertising- Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $284,888 and $335,232 for the
years ended June 30, 2000 and 1999, respectively.
[4] Inventories
Raw materials $1,754,690
Work-in-Process 737,024
Finished Goods 744,964
----------
Total $3,236,678
==========
[5] Property and Equipment
Leasehold Improvements $1,157,960
Machinery and Equipment 2,570,722
Machinery and Equipment Under Capital Leases 134,061
Transportation Equipment 60,596
----------
Total
3,923,312
Less: Accumulated Depreciation and Amortization 2,556,265
----------
Total $1,367,047
==========
F-10
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[6] Notes Payable
Bio Merieux Vitek, Inc. (a) $ 33,995
Medallion Business Credit, LLC (b) 540,757
--------
Totals 574,752
Less: Current Portion 16,223
--------
Noncurrent Portion $558,529
========
(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) Under the terms of a revolving credit note which expires on November 5,
2001, the Company may borrow up to $1,000,000 at 3% above the prime-lending
rate. The loan is collateralized by the inventory, receivables and equipment of
Chem International, Inc., and Chem's two operating subsidiaries, Manhattan Drug
Company, Inc. and Vitamin Factory, Inc. The note has been guaranteed by the
Company's principal stockholder. At June 30, 2000 the interest rate was 12.5%.
The loan agreement with Medallion Business Credit, LLC contains certain
financial covenants relating to the maintenance of specified liquidity, the
tangible net worth. The Company was in compliance with all of its financial
covenants.
The following are maturities of long-term debt for each of the next five years:
June 30,
-------
2001 $558,529
2002 16,223
2003 --
2004 --
2005 --
--------
Totals $574,752
========
[7] Capital Lease
The Company acquired capsule equipment and warehouse equipment under the
provisions of two long-term leases. The leases expire in March 2001 and March
2003, respectively. The equipment under the capital leases as of June 30, 2000
has a cost of $134,061 and accumulated depreciation of $65,144, with a net book
value of $68,917.
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at June 30, 2000 are as follows:
Total Minimum Lease Payments $ 129,416
Amount Representing Interest (76,060)
---------
Present Value of Net Minimum Lease Payments 53,356
Current Portion (34,216)
---------
Long-Term Capital Lease Obligation $ 19,140
=========
F-11
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[8] Income Taxes
Deferred tax attributes resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at June 30, 2000 follow:
Current assets and liabilities
Allowance for doubtful account $ 116,000
Inventory overhead capitalization 36,000
Depreciation 76,000
Other accruals 52,000
---------
280,000
Valuation allowance (--)
---------
Net current deferred tax asset (liability) $ 280,000
=========
The provision for income taxes consists of the following:
June 30,
2000 1999
---- ----
Deferred tax (benefit) $ (36,000) $(467,000)
Current tax expense 950,056 (20,174)
Net change in valuation allowance -- 323,000
--------- ---------
$ 914,056 $ 164,174)
========= =========
A valuation reserve was established as of June 30, 1999 for those loss
carryforwards and deductible temporary differences, which were not presently
considered more likely than not to be fully realized.
The statutory income tax rate differs from the effective tax rate used in the
financial statements as a result of the permanent differences, change in
statutory tax rate and current year net operating losses. A reconciliation of
the statutory tax rate to the effective tax rate for the year ended June 30 is
as follows:
2000 1999
---- ----
Computed (benefit) provision at the
statutory tax 34% (15)
State tax rate 6 (8)
Reversal of prior year tax accruals (5) 5
Change in valuation allowance (8) 12
Change in estimated tax rate (2) 0
--- ---
Effective income tax rate 25% (6)%
=== ===
F-12
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[9] 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, 2000
and 1999 was $53,214 and $56,930, respectively.
[10] 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, 2000, the
Company's uninsured cash balances totaled approximately $1,714,089.
[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, 2000 is $290,000.
[11] Major Customer
For the years ended June 30, 2000 and 1999, approximately 51% or $9,200,000 and
55% or $6,700,000 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, 2000 and 1999, an aggregate of approximately 24%
and 11%, 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, 2000 and 1999. Accounts receivable from these customers comprised
approximately 44% and 61% of total accounts receivable at June 30, 2000 and
1999, respectively.
[12] Commitments and Contingencies
[A] Leases
Related Party Leases- Certain manufacturing and office facilities are leased
from Morristown Holding, Inc., (formerly Gerob Realty Partnership) whose owners
are stockholders of the Company. The lease, which expires on December 31, 2000
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, 2000 and
1999 on this lease was approximately $105,000 and $68,000, respectively. Unpaid
rent of due to Morristown Holding Company, Inc. and Gerob at June 30, 2000 has
been separately disclosed as accrued expenses on the consolidated balance sheet.
The balance due was $130,000 as of June 30, 2000.
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 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. Rent
expense has been straight-lined over the life of the lease. At its option, the
Company has the right to renew the lease for an additional five year period. On
April 28, 2000 the lease was amended reducing the square footage and extending
the lease to May 31, 2015. Rent expense for the years ended June 30, 2000 and
1999 on this lease was approximately $456,000 and $460,000.
Other Lease Commitments- The Company leases warehouse equipment for a five year
period providing for an annual rental of $23,114 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 2003.
F-13
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[12] Commitments and Contingencies [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
-------- ---------- ---------- -----
2001 $ 50,569 $ 323,559 $ 374,128
2002 42,533 323,559 366,092
2003 15,736 323,559 339,295
2004 -- 323,559 323,559
2005 -- 323,559 323,559
Thereafter -- 3,181,664 3,181,664
---------- ---------- ----------
Total $ 108,838 $4,799,459 $4,908,297
========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $556,000 and $527,000 for the years ended June 30, 2000 and 1999,
respectively. Rent expense is stated net of sublease income of approximately
$12,000 and $18,000 for the years ended June 30, 2000 and 1999, 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 $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] 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.
[D] 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 paid $2,500 for services rendered at the end of
each month that services are provided during the term 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.
[E] 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.
[F] 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.
F-14
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[13] Related Party Transactions
During the year ended June 30, 1997, the Company entered into a consulting
agreement with the brother of the Company's Chairman of the Board on a month to
month basis for $1,100 per month. The total consulting expense recorded per this
verbal agreement for the years ended June 30, 2000 and 1999 was $13,200 for each
year.
[14] Equity Transactions
[A] Stock Option Plan - The Company has adopted a stock option plan for the
granting of options to employees, officers, directors and consultants of the
Company to purchase up to 3,000,000 shares of common stock, at the discretion of
the Board of Directors. Stock option grants are limited to a total of 1,500,000
shares for "incentive stock options" and 1,500,000 shares for "non-statutory
options" and may not be priced less than the fair market value of the Company's
common stock at the date of grant. Options granted are generally for ten year
periods, except that options granted to a 10% stockholder [as defined] are
limited to five year terms..
During the year ended June 30, 2000 the Company issued to its employees 840,000
stock options at an exercise price equal to the market price ($.50) on the date
of grant and 750,000 stock options at an exercise price equal to 110% of the
market price ($.55). No dividends are expected to be paid during the life of the
options.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee's stock options
under the fair-value method. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for June 30:
2000 1999
---- ----
Risk-free interest rate 6.6% 6.0%
Expected volatility 104.1% 167.0%
Dividend yield -- --
Expected life 7.6 years 7.0 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's life. The Company's pro forma
information follows:
2000 1999
---- ----
Pro forma net income, (loss) $ 2,545,855 $ (2,993,088)
================== =============
Pro forma net income, (loss) per share
Basic $ 0.49 $ (0.58)
================== =============
Diluted $ 0.48 $ (0.58)
================== =============
F-15
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[14] Equity Transactions [Continued]
There was no compensation expense recorded from stock options for the years
ended June 30, 2000 and 1999. A summary of the Company's stock option activity,
and related information for the years ended June 30, follows:
Weighted Average Weighted Average
Exercise Number of Exercise
Options Price Exercisable Price
------- ----- ----------- -----
Outstanding
June 30, 1998 644,571 $3.45 644,571 $3.45
Granted 320,604 1.53
Exercised -- --
Terminated (25,000) 3.50
-----
Outstanding 940,175 2.82 940,175 2.82
June 30, 1999
Granted 1,590,000 0.52
Exercised -- --
Terminated (15,000) 3.50
-------
Outstanding
June 30, 2000 2,515,175 1.36 925,175 2.82
=========
Weighted-average fair
value of options granted
during the year 2000 1999
---- ----
Where exercise price 0.50 1.50
equals stock price
Where exercise price 0.55 1.65
exceeds stock price
Where stock price -- --
exceeds exercise price
Following is a summary of the status of stock options outstanding at June 30,
2000:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Range Number Contractual Life Exercise Price Number Exercise Price
------------- ------ ---------------- -------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$ .50 - .55 1,590,000 8.9 0.52 0 0
$ 1.50 - 1.65 320,604 7.2 1.53 320,604 1.53
$ 3.50 - 3.85 604,571 6.2 3.52 604,571 3.52
------ ---- ------- --- ---- ------- ----
$ 0.50 - 3.85 2,515,175 7.6 1.36 925,175 2.82
</TABLE>
There were no warrants exercised for the fiscal years ended June 30, 2000 and
1999.
F-16
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[B] Consultant Agreement/Stock Options- In connection with a consulting
agreement dated March 20, 1998, the Company has issued three options for 45,000
shares of common stock [See Note 12E]. Each option is exercisable for 15,000
shares at exercise price of $1.125, $2.50 and $4.00, respectively. These options
are exercisable until five years following the date of this agreement.
[C] Related Party Promissory Note- On March 12, 1998, the Company negotiated a
three year promissory note for $750,000 with its Chairman and then President.
The note was repaid in January 2000. As consideration for the loan, the
Corporation issued a Class C Warrant to purchase 150,000 shares of common stock
at the aggregate purchase price of $1.75 per share. The warrant is exercisable
for a four year period commencing one year after the issuance of the note and
expires on March 12, 2003.
[15] New Accounting Pronouncement
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.
[16] Subsequent Events
On July 1, 2000 the Company changed the name of its inactive subsidiary
Manhattan International, Inc. to Integrated Health Ideas, Inc. and acquired the
business of I.D.E.A.S, Inc., a leading value-added solid dosage product
development and technical services organization. As consideration of the
acquisition the Company has agreed to issue 200,000 options on its common stock
exercisable at $1.00 per share to the owners of I.D.E.A.S
On July 18, 2000 the Company signed a consulting agreement with a financial
public relations firm to provide financial communications and investor
relations. The agreement is for a 12-month period and provides for a yearly
retainer of $54,000. In addition the Company has agreed to issue 75,000 options
on its common stock exercisable at $1.10 per share and 75,000 options
exercisable at $1.75 per share. Should the Company choose not to renew the
consulting agreement the consultants have agreed to give back 50,000 of the
$1.75 options. The options are exercisable for five years from the date the
agreement was signed.
On August 30, 2000 the Company acquired the manufacturing facility that it had
been leasing from Morristown Holding, Inc. The company issued 1,050,420 shares
of its common stock in exchange for the property.
F-17
<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 22, 2000 By:/s/ Seymour Flug
-------------------------------
Seymour Flug,
President and Chief Executive Officer
Date: September 22, 2000 By:/s/ Eric Friedman
--------------------------------
Eric Friedman,
Chief Financial Officer
