UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended December 31, 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 (I.R.S. Employer
of organization) Identification No.)
201 Route 22
Hillside, New Jersey 07205
(Address of principal (Zip code)
executive offices)
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of February 8, 2000
- ---------------------------- ----------------------------------
Common Stock, Par Value 5,178,300
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Part I: Financial Information
<TABLE>
<CAPTION>
Item 1:Consolidated Financial Statements
<S> <C> <C>
Consolidated Balance Sheet as of December 31, 1999 [Unaudited] . . . 1 . . . 2
Consolidated Statements of Operations for the three and six months
ended December 31, 1999 and 1998 [Unaudited] . . . . . . . . . . . 3 . . .
Consolidated Statement of Stockholders' Equity for the six months
ended December 31, 1999 [Unaudited] . . . . . . . . . . . . . . . . 4 . . .
Consolidated Statements of Cash Flows for six months ended
December 31, 1999 and 1998 [Unaudited] . . . . . . . . . . . . . . . 5 . . . 6
Notes to Consolidated Financial Statements [Unaudited] . . . . . . . . 7 . . . 13
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 14 . . .16
Part II: Other Information . . . . . . . . . . . . . . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
. . . . . .
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 528,106
Accounts Receivable - Net 2,726,660
Deferred Income Taxes 231,000
Inventories 4,803,532
Prepaid Expenses and Other Current Assets 200,389
Refundable Federal Income Taxes 47,966
-----------
Total Current Assets 8,537,653
-----------
Property and Equipment - Net 1,440,263
-----------
Other Assets:
Security Deposits and Other Assets 107,787
-----------
Total Assets $10,085,703
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 3,781,252
Notes Payable 2,204,018
Accrued Expenses and Other Current Liabilities 380,952
Accrued Expenses - Related Party 100,000
Capital Lease Obligation 39,019
------------
Total Current Liabilities 6,505,241
------------
Non-Current Liabilities:
Notes Payable 25,331
Notes Payable - Related Party 722,538
Capital Lease Obligation 10,330
------------
Total Non-Current Liabilities 758,199
------------
Commitments and Contingencies [9] --
------------
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$ .002 Par Value, No Shares Issued --
Common Stock - Authorized 25,000,000 Shares,
$ .002 Par Value, 5,178,300 Shares Issued and Outstanding 10,357
Additional Paid-in Capital 4,847,405
[Deficit] (2,035,499)
------------
Total Stockholders' Equity 2,822,263
------------
Total Liabilities and Stockholders' Equity $ 10,085,703
============
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 Six months ended
-------------------- -------------------
December 31, December 31,
-------------------- -------------------
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 4,941,907 $ 2,839,762 $ 8,374,030 $ 5,063,494
Cost of Sales 4,164,588 2,777,609 7,181,056 4,910,204
----------- ----------- ----------- -----------
Gross Profit 777,319 62,153 1,192,974 153,290
Selling and Administrative
Expenses 766,798 1,001,359 1,507,564 1,684,299
----------- ----------- ----------- -----------
Operating Income[Loss] 10,521 (939,206) (314,590) (1,531,009)
----------- ----------- ----------- -----------
Other [Expense] Income:
Interest Expense- Related Party (18,807) (18,807) (37,614) (37,614)
Interest Expense (54,342) (15,862) (71,642) (28,405)
Interest and Investment Income 1,621 131 1,751 348
----------- ----------- ----------- -----------
Total Other [Expense] (71,528) (34,538) (107,505) (65,671)
----------- ----------- ----------- -----------
[Loss] Before Income Taxes (61,007) (973,744) (422,095) (1,596,680)
Federal and State Income
Tax Expense [Benefit] 34,580 (15,594) 14,134 (215,779)
----------- ----------- ----------- -----------
Net [Loss] $ (95,587) $ (958,150) $ (436,229) $(1,380,901)
=========== =========== =========== ===========
Net [Loss] Per Common Share
Basic and Diluted $ (.02) $ (.19) $ (.08) $ (.27)
=========== =========== =========== ===========
Average Common Shares Outstanding
5,178,300 5,178,300 5,178,300 5,178,300
=========== =========== =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
</TABLE>
3
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED DECEMBER 31, 1999
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Preferred Paid in Accumulated Stockholders'
Shares Par Value Stock Capital (Deficit) Equity
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,599,270) $ 3,258,492
Net [Loss] for the six
months ended December 31, 1999 -- -- -- -- (436,229) (436,229)
----------- ----------- ----------- ----------- ----------- -----------
Balance-December 31, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(2,035,499) $ 2,822,263
=========== =========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
4
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
----------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Operating Activities:
Net [Loss] $ (436,229) $(1,380,901)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 161,682 200,961
Amortization of Discount on Note Payable 11,364 11,364
Deferred Income Taxes 13,000 (34,000)
Bad Debt Expense 25,184 5,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (748,624) 1,443,055
Inventories (1,324,905) (377,210)
Refundable Federal Income Taxes (6,321) (196,645)
Prepaid Expenses and Other Current Assets (105,601) (43,953)
Security Deposits and Other Assets (850) (2,060)
[Decrease] Increase in:
Accounts Payable 2,626,441 (553,619)
Federal and State Income Taxes Payable -- (40,000)
Accrued Expenses and Other Liabilities 59,262 139,490
----------- -----------
Total Adjustments 710,632 828,274
----------- -----------
Net Cash Operating Activities 274,403 (552,627)
----------- -----------
Investing Activities:
Purchase of Property and Equipment (63,677) (165,367)
Loans to Stockholders' (3,881) (13,017)
----------- -----------
Net CashInvesting Activities (67,558) (178,384)
----------- -----------
Financing Activities:
Proceeds from Notes Payable 853,766 670,000
Repayment of Notes Payable (831,545) (507,026)
----------- -----------
Net CashFinancing Activities 22,231 162,974
----------- -----------
Net Increase/[Decrease] in Cash and Cash Equivalents 229,076 (568,037)
Cash and Cash Equivalents Beginning of Periods 299,030 956,403
----------- -----------
Cash and Cash Equivalents End of Periods $ 528,106 $ 388,366
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
<PAGE>
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
-----------------------
December 31,
-----------------------
1 9 9 9 1 9 9 8
---------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 93,012 $ 38,913
Income Taxes $ 5,160 $ 51,047
Supplemental Schedule of Investing and Financial Activities:
Note payable issued in payment of accounts payable, trade $1,500,000
</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. Its customers are located primarily throughout the United
States and Europe.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.
Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1999. The results of operations for
the six months ended December 31, 1999 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2000.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - The inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $161,682 and $194,967 for the six months ended December 31, 1999 and
1998, respectively. Amortization of equipment under capital leases is included
with the depreciation expense.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts or revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition - The Company generally recognizes revenue upon shipment of
the product.
Impairment - Certain long-term assets of the Company's principal operating
business subsidiary are reviewed at least annually as to whether their carrying
value has become impaired, pursuant to guidance established in Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Management
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations [undiscounted and without interest
charges]. If impairment is deemed to exist, the assets will be written down to
fair value which represents the projected discounted cash flows from related
operations. Management also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 1999, management expects these assets to be
fully recoverable.
7
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies (Continued)
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $52,278 and $173,280 for the six
months ended December 31, 1999 and 1998 respectively.
[3] Inventories
Inventories consist of the following at December 31, 1999:
Raw Materials $ 2,686,758
Work-in-Process 1,312,519
Finished Goods 804,255
-------------
Total $ 4,803,532
- ----- =============
[4] Property and Equipment
Property and equipment comprise the following at December 31, 1999:
Leasehold Improvements $1,157,960
Machinery and Equipment 2,490,325
Machinery and Equipment Under Capital Leases 109,545
Transportation Equipment 60,569
----------
Total 3,818,399
Less: Accumulated Depreciation and Amortization 2,378,136
----------
Total $1,440,263
----- ==========
[5] Notes Payable
Notes payable are summarized as follows at December 31, 1999:
<TABLE>
<CAPTION>
Related Party
-------------
Notes Payable Notes Payable Total
------------- ------------- -----
<S> <C> <C> <C>
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 42,240 $ -- $ 42,240
Chairman of the Board (b) -- 722,538 722,538
Medallion Business Credit, LLC (c) 853,776 -- 853,776
Trade Creditor (d) 1,333,333 -- 1,333,333
---------- ------------- ----------
Totals 2,229,349 722,538 2,951,887
Less: Current Portion 2,204,018 -- 2,204,018
---------- ---------- ----------
Noncurrent Portion $ 25,331 $ 722,538 $ 747,869
========== ============= ==========
</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.
8
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- --------------------------------------------------------------------------------
[5] Notes Payable (Continued)
(b) Three year non-collateralized 7% promissory note for $750,000 with related
party providing for quarterly payments of $13,125 representing interest only.
The note matures on March 12, 2001. As additional consideration for the loan and
in the light of the below market interest rate and uncollateralized nature of
the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares of
common stock at an aggregate purchase price of $1.75 per share. The note is
recorded net of $68,182, which represents the fair value of the Class C Warrant.
The amortization at December 31, 1999 was $11,364 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. In order to complete the Company's new financing with
Medallion Business credit, the maturity date of the promissory note was extended
to December 31, 2001 and payment has been subordinated to Medallion Business
Credit, LLC.
(c) 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 December 31, 1999 the interest rate was
11.5%.
(d) Secured promissory note dated November 17, 1999, providing for monthly
payments of $83,333 for principal and interest on the unpaid balance. Interest
is computed at the prime interest rate. The note matures on December 15, 2000
and the then unpaid principal of $416,667 becomes due. The note is
collateralized by the accounts receivable, inventory and equipment of Manhattan
Drug Company, Inc. and by the principal stockholder of the Company. At December
31, 1999 the interest rate was 8.5%. On January 20, 2000 the note was repaid.
The loan agreement with Medallion Business Credit, LLC contains certain
financial covenants relating to the maintenance of specified liquidity, and
tangible net worth. The Company was not in compliance with its working capital
covenant.
The following are maturities of long-term debt for each of the next five years:
Related Party
Notes Payable Notes Payable Total
------------- ------------- -----
December 31,
2000 $2,204,018 $ -- $2,204,018
2001 18,680 722,538 741,218
2002 6,651 -- 6,651
---------- ---------- ----------
Totals $2,229,349 $ 722,538 $2,951,887
========== ========== ==========
[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
December 31, 1999 had a cost of $109,545 accumulated depreciation of $52,302
with a net book value of $57,243.
9
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
- --------------------------------------------------------------------------------
[6] Capital Lease (Continued)
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at December 31, 1999 are as follows:
Total Minimum Lease Payments $ 104,900
Amount Representing Interest (55,551)
---------
Present Value of Net Minimum Lease Payment 49,349
Current Portion (39,019)
---------
Long-Term Capital Lease Obligation $ 10,330
=========
[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 December 31, 1999 the
Company's uninsured cash balances totaled approximately $675,000. The Company
does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts at December 31, 1999 is $362,750.
[8] Major Customer
For the six months ended December 31, 1999 and 1998, approximately 57% and 40%
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 six months
ended December 31, 1999 and 1998, an aggregate of approximately 16% and 18%,
respectively, of revenues were derived from two other customers; no other
customers accounted for more than 10% of consolidated sales for the six months
ended December 31, 1999 and 1998. Accounts receivable from these customers
comprised approximately 81% and 64% of total accounts receivable at December 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 June 30, 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 six months ended December 31, 1999 and 1998 on this
lease was approximately $51,000 and $41,000, respectively. Unpaid rent of
$100,000 due to Gerob at December 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
Chairman of the Board and principal stockholder and certain family members and
10% owned by the Company's Chief Financial Officer. The lease was effective on
January 10, 1997 and provides for a minimum annual rental of $346,000 through
January 10, 2002 plus increases in real estate taxes and building operating
expenses. At its option, the Company has the right to renew the lease for an
additional five year period. Rent expense for the six months ended December 31,
1999 and 1998 on this lease was approximately $227,000 and $230,000,
respectively.
10
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- --------------------------------------------------------------------------------
[9] Commitments and Contingencies (Continued)
Other Lease Commitments - The Company leases warehouse equipment for a five year
period providing for an annual rental of $15,847 and office equipment for a five
year period providing for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2002.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
-------
Lease Party Lease
----- -----------
December 31, Commitment Commitment Total
---------- ---------- -----
2000 $ 44,800 $346,000 $390,800
2001 31,915 346,000 377,915
2002 23,678 9,609 33,287
2003 -- -- --
2004 -- -- --
Thereafter -- -- --
-------- -------- --------
Total $100,393 $701,609 $802,002
======== ======== ========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $250,000 and $270,000 for the six months ended December 31, 1999
and 1998, respectively. Rent expense is stated net of sublease income of
approximately $2,900 and $13,000 for the six months ended December 31, 1999 and
1998, respectively.
[B] Employment Agreements - Effective July 1, 1999, the Company entered into
three year employment agreements with its four executive officers which provide
for aggregate annual salaries of $485,000 for the year ending June 30, 2000 and
$495,000 for the years ending June 30, 2001 and 2002, respectively. These
agreements are subject to annual increases equal to at least the increase in the
consumer price index for the Northeastern area.
[C] Investment in and Royalties Receivable from Martin Health Care products,
Inc. - On February 10, 1998, the Company signed an exclusive manufacturer
agreement with Martin Health Care Products, Inc. to provide to Martin Health
Care certain products for a ten year period. In connection with the agreement,
the Company also agreed to forgive from Martin Health Care outstanding invoices
totaling $22,000. In return for the forgiveness, Martin agreed to pay to the
Company a royalty on sales of certain products and to issue to the Company
15,000 shares of common stock in Martin health Care Products, Inc. The Company
has recorded the cost for the common stock at $1,000 and has recorded the
royalties as a non-current asset in the amount of $21,000. No royalties have
been paid as of December 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.
The Company is a participant in a Class Action Lawsuit against several major
bulk vitamin material suppliers. The suit seeks to recover damages resulting
from price fixing charges filled against the suppliers by the United States
Government. There are approximately 1,000 corporate buyers that are involved.
The Company is unable to predict the ultimate financial recovery.
[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.
11
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- --------------------------------------------------------------------------------
[9] Commitments and Contingencies (Continued)
[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.
[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 six moths ended December 31, 1999 and 1998, by the Company was
$6,600 and $6,600, respectively.
[11] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued expenses, it was estimated that the carrying amount approximated fair
value because of the short maturities of these instruments. Short-term debt and
long-term debt including long-term debt to a related party is based on current
rates at which the Company could borrow funds with similar remaining maturities
and approximates fair value.
[12] New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities and measure them at fair value. Under certain circumstances, the
gains or losses from derivatives may be offset against those from the items the
derivatives hedge against. The Company will adopt SFAS No. 133 in the fiscal
year ending June 30, 2001. SFAS No. 133 is not expected to have a material
impact on the financial statements.
[13] Equity Transactions
[A] Incentive Stock Options- On December 1, 1999, the Company granted 720,000
incentive stock options for a term of ten years commencing on December 1, 1999
to its officers and employees at the exercise price of $.50 per share and
167,000 stock options at $.55 per share for a term of five years commencing on
December 1, 1999.
[B] Non-Statutory Stock Options- On December 1, 1999, the Company granted
120,000 non-statutory stock options to officers, directors and members of its
Scientific Advisory Board at the exercise price of $.50 for a term of ten years
commencing on December 1, 1999 and 583,000 non-statutory stock options at $.55
for a term of five years commencing on December 1, 1999.
12
<PAGE>
CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- --------------------------------------------------------------------------------
[14] Subsequent Events
Litigation- On January 20, 2000, the Company entered into a settlement Agreement
with a major supplier in connection with a multidistrict consolidated class
action brought on behalf of direct purchasers of vitamin products, in which the
plaintiffs have alleged violations of Section 1 of the Sherman Antitrust Act and
other wrongful anti-competitive conduct in violation of various federal and
state laws.
In exchange for the Company's release and agreement to opt out of any settlement
or litigation pertaining to the pending class action lawsuit and to release the
supplier from any and all claims it may have concerning the pricing, selling,
discounting, marketing or distributing of vitamin products, the Company received
a $4.9 million cash payment.
In the event that the plaintiffs in the class action receive a percentage
distribution under the class settlement agreement in excess of the percentage
agreed to in the Settlement Agreement, the Company will be entitled to an
additional payment to increase the Company's net recovery to the same percentage
as that received by the other plaintiffs in the class action suit.
The Company intends to use the proceeds from the settlement to reduce its
outstanding debt and to use the excess for working capital.
13
<PAGE>
Item 2.
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the historical
information of the Company and notes thereto.
Six months ended December 31, 1999 Compared to December 31, 1998
Results of Operations
The Company's net losses for the six months ended December 31, 1999 and 1998
were $(436,229) and $(1,380,901). This decrease in net loss of approximately
$950,000 is primarily the result of a $1,200,000 decrease in operating loss
resulting from a corresponding increase in gross profit of approximately
$1,000,000. The increase in gross profit is due to increased sales.
Sales for the six months ended December 31, 1999 and 1998 were $8,374,030 and
$5,063,494, respectively, an increase of approximately $3,300,000 or 65%. For
the six months ended December 31, 1999 the Company had sales to one customer,
who accounted for 57% of net sales in 1999 and 40% in 1998. The loss of this
customer would have an adverse affect on the Company's operations.
Retail and mail order sales for the six months ended December 31, 1999 totaled
$331,611 as compared to $367,495 for the six months ended December 31, 1998, a
decrease of 10%. 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 $1,188,092 for
the six months ended December 31, 1999 as compared to $654,777 for the six
months ended December 31, 1998, an increase of $533,315 or 81%.
Cost of sales increased to $7,181,056 for the six months ended December 31, 1999
as compared to $4,910,204 for the six months ended December 31, 1998. Cost of
sales decreased as a percentage of sales to 86% for the six months ended
December 31, 1999 from 97% for the six months ended December 31, 1998. The
decrease in cost of sales is due to greater manufacturing efficiencies and
higher margin sales.
Selling and administrative expenses for the six months ended December 31, 1999
were $1,507,564 versus $1,684,299 for the same period a year ago. The decrease
of $176,735 was primarily attributable to a decrease in goodwill expense of
$275,891 due to the write off in 1998, a decrease in advertising of $121,002, an
increase in office salaries of $24,179, a decrease in officers salaries of
$54,960, an increase in consulting fees of $220,356 due to the hiring of an
independent sales and marketing firm to help launch a new private label line.
Other income [expense] was $(107,505) for the six months ended December 31, 1999
as compared to $(65,671) for the six months ended December 31, 1998. The
increase of $41,834 is primarily the result of an increase in interest expense
of $43,237 due to increased borrowings.
Three months ended December 31, 1999 Compared to the Three months ended December
31, 1998
The Company's net losses for the three months ended December 31, 1999 and 1998
were $(95,587) and $(958,150), respectively. This decrease in net loss of
approximately $(860,000) is primarily the result of an increase in operating
income of $950,000 due to an increase in gross profit of approximately $715,000.
Sales for the three months ended December 31, 1999 and 1998 were $4,941,907 and
$2,839,762, respectively, an increase of $2,102,145 or 74%. For the three months
ended December 31, 1999 the Company had sales to one customer who accounted for
54% of net sales in 1999 and 36% in 1998.
14
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations - Continued
Retail and mail order sales for the three months ended December 31, 1999 totaled
$155,200 as compared to $169,376 for the three months ended December 31, 1998, a
decrease of $14,176 or 8% due to increased competition.
Sales under the Roche Vitamins, Inc. distribution agreement totaled $600,581 for
the three months ended December 31, 1999 as compared to $344,756 for the three
months ended December 31, 1998, an increase of $255,825 or 74%.
Cost of sales increased to $4,164,588 for the three months ended December 31,
1999 as compared to $2,777,609 for the three months ended December 31, 1998.
Cost of sales decreased as a percentage of sales to 84% as compared to 98% for
the three months ended December 31, 1998. The decrease in cost of sales is due
to greater manufacturing efficiencies and higher margin sales.
Selling and administrative expenses for the three months ended December 31, 1999
were $766,798 as compared to $1,001,359 for the three months ended December 31,
1998. The decrease of $234,561 was primarily attributable to a decrease in
goodwill expense of $275,891 due to the write off in 1998, a decrease in
advertising of $69,044, a decrease in officer salaries of $72,661, an increase
in consulting fees of $125,402.
Other income [expense] was $(71,528) for the three months ended December 31,
1999 as compared to $(34,538) for the three months ended December 31, 1998. The
increase of $36,990 is primarily the result of an increase in interest expense
of $38,480 due to increased borrowings.
Liquidity and Capital Resources
At December 31, 1999 the Company's working capital was $1,965,412, a decrease of
$532,049 over working capital at June 30, 1999. Cash and cash equivalents were
$528,106 at December 31, 1999, an increase of $229,076 from June 30, 1999. The
Company generated $274,403 and utilized $552,627 for operations for the six
months ended December 31, 1999 and 1998, respectively.
The primary reasons for the cash generated from operations for the six months
ended December 31, 1999 are an increase in inventories of approximately
$1,300,000 and an increase in accounts payable of approximately $2,600,000. The
Company believes that the anticipated sales for the third and fourth quarters of
fiscal 2000 and the litigation settlement of $4.9 million will meet the cash
needs for operations.
The Company utilized $67,558 and $178,384 in investing activities for the six
months ended December 31, 1999 and 1998, respectively. The Company generated net
cash of $22,231 and $162,974 from debt financing activities and the six months
ended December 31, 1999 and 1998, respectively.
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 December 31, 1999 the balance due under the revolving line of credit was
$853,776.
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 secured promissory note dated November 17,
1999. [See Note 5D].
15
<PAGE>
CHEM INTERNATIONAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Liquidity and Capital Resources - Continued
The Company's total annual commitment at December 31, 1999 for the next five
years of $1,394,701 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment and
automobiles.
Effective July 1, 1999, the Company entered into three year employment
agreements with four executive officers which provide for aggregate annual
salaries of $485,000 for the year ending June 30, 2000 and $495,000 for the
years ending June 30, 2001 and 2002.
Recent Developments
On September 23, 1999 the Company was notified by the Nasdaq SmallCap Market
that its shares of common stock had failed to maintain a minimum bid price of
greater than or equal to $1.00 per share over the last thirty consecutive
trading days, as required under Marketplace Rule 4310(c)(4).
The Company had ninety (90) calendar days, or until December 23, 1999 to regain
compliance with this Rule. On December 21, 1999 the Company requested an oral
hearing to determine its continued listing on the Nasdaq Small Cap Market
because it failed to maintain a minimum bid price of greater than or equal to
$1.00 per share. The Company was advised on December 28, 1999 that in
anticipation of an oral hearing to be held on February 3, 2000 the delisting
action referred to the September 23, 1999 letter was stayed.
On January 18, 2000, the bid price of the Company's common stock closed above
the $1.00 minimum and has subsequently maintained the $1.00 minimum since that
date.
On January 27, 2000, Nasdaq informed the Company that it was not in compliance
with the independent directors and audit committee requirements. The Company
responded informing Nasdaq of the appointment of an additional independent
director on December 1, 1999 and that it was in compliance with the
requirements.
The Company attended the hearing on February 3, 2000 and presented its oral
arguments for its continued listing on the Nasdaq SmallCap Market. The hearing
committee advised the Company that the committee's decision would take
approximately two weeks.
16
<PAGE>
Part II: Other Information
CHEM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
Item 1: Legal Proceeding
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
None
17
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEM INTERNATIONAL, INC.
Date: February 8, 2000 By:/s/ Seymour Flug
-------------------------------------
Seymour Flug,
President and Chief Executive Officer
Date: February 8, 2000 By:/s/ Eric Friedman
-------------------------------------
Eric Friedman,
Chief Financial Officer
18
