-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ku3WcTstoIs9DNIXnZ0EXOzUI1T1SkHiLP1/Fj9KTrTh32y9p5+tUh5PM4Q0AWQ8 mEI7ds4zscWQkdX0EVnvSg== 0000891554-00-001258.txt : 20000510 0000891554-00-001258.hdr.sgml : 20000510 ACCESSION NUMBER: 0000891554-00-001258 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEM INTERNATIONAL INC CENTRAL INDEX KEY: 0001016504 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133035216 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28876 FILM NUMBER: 622966 BUSINESS ADDRESS: STREET 1: 201 ROUTE 22 CITY: HILLSIDE STATE: NJ ZIP: 07205 BUSINESS PHONE: 2019260816 MAIL ADDRESS: STREET 1: 201 ROUTE 223 CITY: HILLSIDE STATE: NJ ZIP: 07205 10QSB 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D. C. 20549 ---------- FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 31, 2000 Commission File Number 000-28876 CHEM INTERNATIONAL, INC. (Exact name of registrant as specified 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, 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 May 8, 2000 ----------------- ----------------------------- Common Stock, Par Value 5,152,500 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Part I: Financial Information Item 1: Consolidated Financial Statements Independent Accountants' Review Report ........................... 1 Consolidated Balance Sheet as of March 31, 2000 [Unaudited] ...... 2......3 Consolidated Statements of Operations for the three and nine months ended March 31, 2000 and 1999 [Unaudited] ............ 4...... Consolidated Statement of Stockholders' Equity for the nine months ended March 31, 2000 [Unaudited] ..................... 5...... Consolidated Statements of Cash Flows for nine months ended March 31, 2000 and 1999 [Unaudited] .............................. 6......7 Notes to Consolidated Financial Statements [Unaudited] ........... 8.....13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 14....16 Part II: Other Information ............................................ 17 Signature ............................................................. 18 . . . . . . . . Independent Accountants' Review Report We have reviewed the accompanying condensed balance sheets of Chem International, Inc. and Subsidiaries as of March 31, 2000, and the related condensed statements of operations for the three months and nine months ended March 31, 2000, and condensed statements of cash flows for the three months and nine months ended March 31, 2000. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet as of June 30, 1999, and the related statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 31, 1999, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of March 31, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. AMPER, POLITZINER & MATTIA P.A. May 8, 2000 Edison, New Jersey CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000. [UNAUDITED] - -------------------------------------------------------------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 2,209,992 Accounts Receivable - Net 1,677,266 Deferred Income Taxes 182,000 Inventories 4,638,519 Prepaid Expenses and Other Current Assets 176,220 Refundable Federal Income Taxes 6,352 ----------- Total Current Assets 8,890,349 ----------- Property and Equipment - Net 1,408,767 ----------- Other Assets: Security Deposits and Other Assets 101,094 ----------- Total Assets $10,400,210 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 2 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000. [UNAUDITED] - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 2,526,927 Notes Payable 532,560 Accrued Expenses and Other Current Liabilities 261,382 Accrued Expenses - Related Party 115,000 Capital Lease Obligations 44,281 ----------- Total Current Liabilities 3,480,150 ----------- Non-Current Liabilities: Notes Payable 20,834 Capital Lease Obligations 20,165 ----------- Total Non-Current Liabilities 40,999 ----------- 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 Retained Earnings 2 ,021,299 ----------- Total Stockholders' Equity 6,879,061 ----------- Total Liabilities and Stockholders' Equity $10,400,210 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 3 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] - --------------------------------------------------------------------------------
Three months ended Nine months ended March 31, 2000 March 31, 2000 1999 2000 1999 2000 ------------ ------------ ------------ ------------ Sales $ 2,930,006 $ 6,676,871 $ 7,993,500 $ 15,050,901 Cost of Sales 2,772,837 5,669,622 7,683,041 12,850,678 ------------ ------------ ------------ ------------ Gross Profit 157,169 1,007,249 310,459 2,200,223 Selling and Administrative Expenses 615,287 842,419 2,299,586 2,349,983 ------------ ------------ ------------ ------------ Operating Income [Loss] (458,118) 164,830 (1,989,127) (149,760) ------------ ------------ ------------ ------------ Other Income [Expense]: Gain on Sale of Fixed Assets -- 6,344 -- 6,344 Interest Expense- Related Party (18,806) (36,212) (56,420) (73,826) Interest Expense (16,780) (30,050) (45,185) (101,692) Gain on Settlement of Lawsuit -- 5,352,271 -- 5,352,271 Interest and Investment Income 119 15,842 467 17,593 ------------ ------------ ------------ ------------ Total Other [Expense] Income-Net (35,467) 5,308,195 (101,138) 5,200,690 ------------ ------------ ------------ ------------ Income [Loss] Before Income Taxes (493,585) 5,473,025 (2,090,265) 5,050,930 Federal and State Income Tax Expense [Benefit] (14,683) 1,416,227 (230,462) 1,430,361 ------------ ------------ ------------ ------------ Net Income [Loss] $ (478,902) $ 4,056,798 $ (1,859,803) $ 3,620,569 ============ ============ ============ ============ Net Income [Loss] Per Common Share: Basic $ (.09) $ .78 $ (.36) $ .70 ============ ============ ============ ============ Diluted $ (.09) $ .66 $ (.36) $ .66 ============ ============ ============ ============ Weighted Average Common Shares Outstanding 5,178,300 5,178,300 5,178,300 5,178,300 ------------ ------------ ------------ ------------ Dilutive Potential Common Shares: Warrants and Options -- 3,985,175 -- 3,985,175 ------------ ------------ ------------ ------------ Adjusted Weigthted Average Common Shares 5,178,300 9,163,475 5,178,300 9,163,475 ============ ============ ============ ============ The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2000. [UNAUDITED] - --------------------------------------------------------------------------------
Common Stock Additional Retained Total --------------------------- Preferred Paid in Earnings/ Stockholders' Shares Par Value Stock Capital (Deficit) Equity ---------- ----------- ------------- ----------- ----------- ------------ Balance - July 1, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,599,270) $ 3,258,492 Net Income for the nine months ended March 31, 2000 -- -- -- -- 3,620,569 3,620,569 ---------- ----------- ------------- ----------- ----------- ----------- Balance -March 31, 2000 5,178,300 $ 10,357 $ -- $ 4,847,405 $ 2,021,299 $ 6,879,061 ========== =========== ============= =========== =========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - --------------------------------------------------------------------------------
Nine months ended March 31, ------------------------------- 2 0 0 0 1 9 9 9 ----------- ----------- Operating Activities: Net Income [Loss] $ 3,620,569 $(1,859,803) ----------- ----------- Adjustments to Reconcile Net Income [Loss] to Net Cash Provided by [Used for] Operating Activities: Depreciation and Amortization 250,173 302,084 Amortization of Discount on Note Payable 38,826 17,045 Deferred Income Taxes 62,000 (52,000) Writeoff of Goodwill -- 275,891 Bad Debt Expense 31,184 7,500 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 294,770 1,271,004 Inventories (1,159,892) (313,952) Refundable Federal Income Taxes 35,293 (196,645) Prepaid Expenses and Other Current Assets (81,432) (24,325) Security Deposits and Other Assets (2,749) (3,433) [Decrease] Increase in: Accounts Payable 1,372,116 (321,216) Federal and State Income Taxes Payable 162,257 (40,000) Accrued Expenses and Other Liabilities (207,565) 224,007 ----------- ----------- Total Adjustments 794,981 1,145,960 ----------- ----------- Net Cash - Operating Activities 4,415,550 (713,843) ----------- ----------- Investing Activities: Purchase of Property and Equipment (120,672) (224,184) Loans to Stockholders' 4,711 (27,033) ----------- ----------- Net Cash-Investing Activities (115,961) (251,217) ----------- ----------- Financing Activities: Proceeds from Notes Payable 901,972 670,000 Repayment of Notes Payable (3,290,599) (527,237) ----------- ----------- Net Cash-Financing Activities (2,388,627) 142,763 ----------- ----------- Net Increase/[Decrease] in Cash and Cash Equivalents 1,910,962 (822,297) Cash and Cash Equivalents - Beginning of Periods 299,030 956,403 ----------- ----------- Cash and Cash Equivalents - End of Periods $ 2,209,992 $ 134,106 =========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6 CHEM INTERNATIONAL, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - --------------------------------------------------------------------------------
Nine months ended March 31, 2 0 0 0 1 9 9 9 ---------- ---------- Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $ 157,693 $ 71,435 Income Taxes $1,205,160 $ 51,067 Supplemental Schedule of Investing and Financial 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
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 7 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 nine months ended March 31, 2000 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 $250,173 and $296,091 for the nine months ended March 31, 2000 and 1999, 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. 8 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 $149,680 and $232,917 for the nine months ended March 31, 2000 and 1999 respectively. [3] Inventories Inventories consist of the following at March 31, 2000: Raw Materials $2,628,849 Work-in-Process 1,178,412 Finished Goods 831,258 ---------- Total $4,638,519 ========== [4] Property and Equipment Property and equipment comprise the following at March 31, 2000: Leasehold Improvements $1,157,960 Machinery and Equipment 2,522,804 Machinery and Equipment Under Capital Leases 134,061 Transportation Equipment 60,569 ---------- Total 3,875,394 Less: Accumulated Depreciation and Amortization 2,466,627 ---------- Total $1,408,767 ========== [5] Notes Payable Notes payable are summarized as follows at March 31, 2000: Notes Payable: Bio Merieux Vitek, Inc. (a) $ 38,169 Medallion Business Credit, LLC (b) 515,225 ---------- Totals 553,394 Less: Current Portion 532,560 ---------- Noncurrent Portion $ 20,834 ========== (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. 9 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] - -------------------------------------------------------------------------------- [5] Notes Payable (Continued) (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 March 31, 2000 the interest rate was 12%. 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 in compliance with all of its financial covenants. The following are maturities of long-term debt for each of the next five years: March 31, - --------- 2001 $532,560 2002 19,150 2003 1,684 2004 -- 2005 -- -------- Totals $553,394 ======== [6] 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 March 31, 2000 had a cost of $134,061 accumulated depreciation of $59,480 with a net book value of $74,581. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at March 31, 2000 are as follows: Total Minimum Lease Payments $ 129,416 Amount Representing Interest (64,970) --------- Present Value of Net Minimum Lease Payment 64,446 Current Portion (44,281) --------- Long-Term Capital Lease Obligation $ 20,165 ========= [7] Significant Risks and Uncertainties [A] Concentrations of Credit Risk - Cash - The Company maintains balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At March 31, 2000 the Company's uninsured cash balances totaled approximately $2,780,000. 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 March 31, 2000 is $368,750. 10 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [UNAUDITED] - -------------------------------------------------------------------------------- [8] Major Customer For the nine months ended March 31, 2000 and 1999, approximately 50% and 45% of revenues were derived from one customer. The loss of this customer would have an adverse effect on the Company's operations. In addition, for the nine months ended March 31, 2000 and 1999, an aggregate of approximately 27% and 14%, respectively, of revenues were derived from two other customers; no other customers accounted for more than 10% of consolidated sales for the nine months ended March 31, 2000 and 1999. Accounts receivable from these customers comprised approximately 67% and 59% of total accounts receivable at March 31, 2000 and 1999, 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 nine months ended March 31, 2000 and 1999 on this lease was approximately $79,000 and $56,000, respectively. Unpaid rent of $115,000 due to Gerob at March 31, 2000 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 nine months ended March 31, 2000 and 1999 on this lease was approximately $341,000 and $345,000, respectively. Other Lease Commitments - The Company leases warehouse equipment for a five year period providing for an annual rental of $15,847 and office equipment for a five year period providing for an annual rental of $8,365. The Company leases automobiles under non-cancelable operating lease agreements which expire through 2002. The minimum rental commitment for long-term non-cancelable leases is as follows: Related Lease Party Lease March 31, Commitment Commitment Total - --------- ---------- ----------- -------- 2001 $ 47,077 $346,000 $393,077 2002 38,703 269,110 307,813 2003 12,267 -- 12,267 2004 -- -- -- 2005 -- -- -- Thereafter -- -- -- -------- -------- -------- Total $ 98,047 $615,110 $713,157 ======== ======== ======== Total rent expense, including real estate taxes and maintenance charges, was approximately $426,000 and $401,000 for the nine months ended March 31, 2000 and 1999, respectively. Rent expense is stated net of sublease income of approximately $8,450 and $17,000 for the nine months ended March 31, 2000 and 1999, respectively. 11 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [UNAUDITED] - -------------------------------------------------------------------------------- [9] Commitments and Contingencies (Continued) [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 March 31, 2000. [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. As of March 31, 2000 the company had settled with two of its suppliers and has recorded $5,352,271 as other income it its consolidated income statement. On April 13, 2000 the company received $792,000 in settlement with a third supplier. The company believes that this settlement concludes the majority of the settlement proceeds. [See Note 13.] [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. [G] Joint Venture-On March 24, 2000, the Company formed a joint venture with NuCyclye Therapy, Inc. to be called Bioscience, LLC. Bioscience will develop and market high performance nutritional formulations based on plant derived minerals through NuCycle's patented hyperaccumulation technology. The Joint Venture will use the equity method of accounting. [10] Related Party Transactions During the year ended June 30, 1997, the Company entered into a consulting agreement with the brother of the Company's president on a month to month basis for $1,100 per month. The total consulting expense recorded per this verbal agreement for the nine months ended March 31, 2000 and 1999, by the Company was $9,900 and $9,900, respectively. 12 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [UNAUDITED] - -------------------------------------------------------------------------------- [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] Subsequent Events Litigation- On April 13, 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 $792,000 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. [See Note 9D.] 13 Item 2. CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following discussion should be read in conjunction with the historical information of the Company and notes thereto. Nine months ended March 31, 2000 Compared to the Nine months ended March 31, 1999 Results of Operations The Company's net income for the nine months ended March 31, 2000 was $3,620,569 as compared to a net loss for the nine months ended March 31, 1999 of $(1,859,803). This increase in net income of approximately $5,500,000 is primarily the result of a $1,839,000 increase in operating income resulting from a corresponding increase in gross profit of approximately $1,900,000, an increase in other income of approximately $5,300,000 due to the settlement of a Class Action Lawsuit and an increase in Federal and State income taxes of approximately $1,600,000. Sales for the nine months ended March 31, 2000 and 1999 were $15,050,901 and $7,993,500, respectively, an increase of approximately $7,000,000 or 88%. For the nine months ended March 31, 2000 the Company had sales to one customer, who accounted for 50% of net sales in 2000 and 45% in 1999. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the nine months ended March 31, 2000 totaled $499,117 as compared to $517,224 for the nine months ended March 31, 2000, a decrease of 4%. 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 $1,957,175 for the nine months ended March 31, 2000 as compared to $1,109,567 for the nine months ended March 31, 1999, an increase of $847,608 or 76%. Cost of sales increased to $12,850,678 for the nine months ended March 31, 2000 as compared to $7,683,041 for the nine months ended March 31, 2000. Cost of sales decreased as a percentage of sales to 85% for the nine months ended March 31, 2000 from 96% for the nine months ended March 31, 1999. The decrease in cost of sales is due to greater manufacturing efficiencies and higher margin sales. Selling and administrative expenses for the nine months ended March 31, 2000 were $2,349,983 versus $2,299,586 for the same period a year ago. The increase of $50,397 was primarily attributable to a decrease in goodwill expense of $275,891 due to the write off in 1998, a decrease in advertising of $83,237, an increase in office salaries of $41,676, a decrease in officers salaries of $68,374, an increase in freight out of $61,515 and an increase in consulting fees of $266,353 due to the hiring of an independent sales and marketing firm to help launch a new private label line. Other income (expense) was $5,200,690 for the nine months ended March 31, 2000 as compared to $(101,138) for the nine months ended March 31, 1999. The increase of $5,301,828 is primarily the result of the proceeds received of $5,352,271 from the settlement of a Class Action Lawsuit against two bulk vitamin material suppliers. Three months ended March 31, 2000 Compared to the Three months ended March 31, 1999 The Company's net income for the three months ended March 31, 2000 was $4,056,798 as compared to a net loss of $(478,902) for the three months ended March 31, 1999. This increase in net income of approximately $4,535,000 is primarily the result of an increase in operating income of $622,948, an increase in other income of $5,343,662 due to a settlement of a Class Action Lawsuit and an increase in Federal and State income taxes of $1,430,910. Sales for the three months ended March 31, 2000 and 1999 were $6,676,871 and $2,930,006, respectively, an increase of $3,746,865 or 128%. For the three months ended March 31, 2000 the Company had sales to one customer who accounted for 14 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Results of Operations - Continued 41% of net sales in 2000 and 54% in 1999. Retail and mail order sales for the three months ended March 31, 2000 totaled $167,506 as compared to $149,729 for the three months ended March 31, 2000, an increase of $17,777 or 12%. Sales under the Roche Vitamins, Inc. distribution agreement totaled $769,083 for the three months ended March 31, 2000 as compared to $454,790 for the three months ended March 31, 1999, an increase of $314,293 or 69%. Cost of sales increased to $5,669,622 for the three months ended March 31, 2000 as compared to $2,772,837 for the three months ended March 31, 1999. Cost of sales decreased as a percentage of sales to 85% as compared to 95% for the three months ended March 31, 1999. 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 March 31, 2000 were $842,419 as compared to $615,287 for the three months ended March 31, 1999. The increase of $227,132 was primarily attributable to an increase in freight out of $31,674, an increase in advertising of $98,755, a decrease in officer salaries of $13,414, an increase in consulting fees of $45,997, an increase in office salaries of $17,497 and an increase in entertainment and lodging of $35,533 Other income [expense] was $5,308,195 for the three months ended March 31, 2000 as compared to $(35,467) for the three months ended March 31, 1999. The increase of $5,343,662 is primarily the result of the settlement of a Class Action Lawsuit in the amount of $5,352,271. Liquidity and Capital Resources At March 31, 2000 the Company's working capital was $5,410,199, an increase of $2,912,738 over working capital at June 30, 1999. Cash and cash equivalents were $2,209,992 at March 31, 2000, an increase of $1,910,962 from June 30, 1999. The Company generated $4,415,550 and utilized $713,843 for operations for the nine months ended March 31, 2000 and 1999, respectively. The primary reasons for the cash generated from operations for the nine months ended March 31, 2000 are an increase in net income of approximately $3,600,000 an increase in inventories of approximately $1,000,000 and an increase in accounts payable of approximately $1,300,000 The Company believes that the anticipated sales for the fourth quarter of fiscal 2000 and the litigation settlement of an additional $792,000 will meet the cash needs for operations. The Company utilized $115,961 and $251,217 in investing activities for the nine months ended March 31, 2000 and 1999, respectively. The Company utilized net cash of $2,388,627 and generated $142,763 from debt financing activities for the nine months ended March 31, 2000 and 1999, 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 March 31, 2000 the balance due under the revolving line of credit was $515,225. 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. On March 20, 2000 the Company entered into its second Settlement Agreement and received a payment of $475,000 in settlement of the second portion of the multidistrict consolidated class action suit. 15 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 March 31, 2000 for the next five years of $713,157 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 April 13, 2000 the Company settled the last major portion of its Class Action Lawsuit for approximately $792,000 bringing the total amount of settlement to approximately $6.2 million. On April 13, 2000, the Company announced a stock repurchase program whereby the Company may repurchase up to 500,000 shares of its outstanding common stock. As of May 8, 2000 the company has repurchased 25,800 shares of its common stock under the program at an average price of $1.12. 16 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 SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHEM INTERNATIONAL, INC. Date: May 8, 2000 By: /s/ Seymour Flug ------------------------------------- Seymour Flug, President and Chief Executive Officer Date: May 8, 2000 By: /s/ Eric Friedman ------------------------------------ Eric Friedman, Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----