10QSB 1 d24707_10qsb.txt FORM 10QSB 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, 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 (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 January 26, 2001 ----------------------- ---------------------------------- Common Stock, Par Value 6,228,720 CHEM INTERNATIONAL, INC. -------------------------------------------------------------------------------- INDEX -------------------------------------------------------------------------------- Part I: Financial Information Item 1: Consolidated Financial Statements Independent Auditor's Review Report ............................... 1 Consolidated Balance Sheet as of December 31, 2000 [Unaudited] ........................................................2... 3 Consolidated Statements of Operations for the three and six months ended December 31, 2000 and 1999 [Unaudited] ............4 Consolidated Statement of Stockholders' Equity for the six months ended December 31, 2000 [Unaudited] .....................5 Consolidated Statements of Cash Flows for six months ended December 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 consolidated balance sheet of Chem International, Inc. and Subsidiaries as of December 31, 2000, and the related condensed consolidated statements of operations and cash flows for the six months ended December 31, 2000. These condensed consolidated 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 accepted accounting principles. /s/ Amper, Politziner & Mattia P.A. February 9, 2001 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 [UNAUDITED] -------------------------------------------------------------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 420,901 Accounts Receivable - Net 1,655,828 Deferred Income Taxes 275,000 Inventories 4,311,539 Prepaid Expenses and Other Current Assets 210,632 Refundable Federal Income Taxes 632,352 ----------- Total Current Assets 7,506,252 ----------- Property and Equipment - Net 2,501,511 ----------- Other Assets: Security Deposits and Other Assets 126,762 ----------- Total Assets $10,134,525 =========== See accompanying notes to consolidated financial statements. 2 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 [UNAUDITED] -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 2,054,150 Notes Payable 892,077 Accrued Expenses and Other Current Liabilities 312,584 Accrued Expenses - Related Party 135,000 Capital Lease Obligation 24,553 ------------ Total Current Liabilities 3,418,364 ------------ Non-Current Liabilities: Notes Payable 9,895 Capital Lease Obligation 30,392 ------------ Total Non-Current Liabilities 40,287 ------------ Commitments and Contingencies [10] -- ------------ 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, 6,228,720 Shares Issued and Outstanding 12,457 Additional Paid-in Capital 6,095,305 Retained Earnings 596,943 ------------ 6,704,705 Less Treasury Stock at cost, 25,800 shares (28,831) ------------ Total Stockholders' Equity 6,675,874 ------------ Total Liabilities and Stockholders' Equity $ 10,134,525 ============ See accompanying notes to consolidated financial statements. 3 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] --------------------------------------------------------------------------------
Three months ended Six months ended ------------------ ---------------- December 31, December 31, ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- Sales $ 3,063,629 $ 4,941,907 $ 5,492,089 $ 8,374,030 Cost of Sales 2,906,997 4,164,588 5,132,648 7,181,056 ----------- ----------- ----------- ----------- Gross Profit 156,632 777,319 359,441 1,192,974 Selling and Administrative Expenses 1,010,216 766,798 1,732,836 1,507,564 ----------- ----------- ----------- ----------- Operating Income/[Loss] (853,584) 10,521 (1,373,395) (314,590) ----------- ----------- ----------- ----------- Other Income [Expense]: Administrative Fee Income 50,000 -- 50,000 -- Interest Expense-Related Party -- (18,807) -- (37,614) Interest Expense (28,055) (54,342) (48,247) (71,642) Interest and Investment Income 2,208 1,621 18,445 1,751 ----------- ----------- ----------- ----------- Total Other Income[Expense] 24,153 (71,528) 20,198 (107,505) ----------- ----------- ----------- ----------- [Loss] Before Income Taxes (829,431) (61,007) (1,353,197) (422,095) Federal and State Income Tax Expense [Benefit] (208,835) 34,580 (405,715) 14,134 ----------- ----------- ----------- ----------- Net [Loss] $ (620,596) $ (95,587) $ (947,482) $ (436,229) =========== =========== =========== =========== Net [Loss] Per Common Share Basic and Diluted $ (.11) $ (.02) $ (.17) $ (.08) =========== =========== =========== =========== Average Common Shares Outstanding 6,228,720 5,178,300 5,703,510 5,178,300 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 [UNAUDITED] --------------------------------------------------------------------------------
Additional Total ---------- ----- Common Stock Preferred Paid-in Retained Treasury Stock Stockholders' ------------ --------- ------- -------- -------------- ------------- Shares Par Value Stock Capital Earnings Shares Cost Equity ------ --------- ----- ------- -------- ------ ---- ------ Balance- July 1, 2000 5,178,300 $ 10,357 $ -- $ 4,847,405 $ 1,544,425 25,800 $(28,831) $ 6,373,356 Common Stock Issued for Purchase of Land and Building 1,050,420 2,100 -- 1,247,900 -- -- -- 1,250,000 Net [Loss] for the six months ended December 31 ,2000 -- -- -- -- (947,482) -- -- (947,482) ----------- -------- ---- ----------- ----------- ------- -------- ----------- Balance- December 31, 2000 6,228,720 $ 12,457 $ -- $ 6,095,305 $ 596,943 25,800 $(28,831) $ 6,675,874 =========== ======== ==== =========== =========== ======= ======== ===========
See accompanying notes to consolidated financial statements. 5 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] -------------------------------------------------------------------------------- Six months ended ---------------- December 31, ------------ 2000 1999 ---- ---- Operating Activities: Net [Loss] $ (947,482) $ (436,229) ----------- ----------- Adjustments to Reconcile Net [Loss] to Net Cash [Used for] Operating Activities: Depreciation and Amortization 169,503 161,682 Amortization of Discount on Note Payable -- 11,364 Deferred Income Taxes 5,000 13,000 Bad Debt Expense 18,000 25,184 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable (251,700) (748,624) Inventories (1,074,861) (1,324,905) Refundable Federal Income Taxes (416,000) (6,321) Prepaid Expenses and Other Current Assets (100,492) (105,601) Security Deposits and Other Assets (2,567) (4,731) [Decrease] Increase in: Accounts Payable 697,516 2,626,441 Federal and State Income Taxes Payable -- -- Accrued Expenses and Other Liabilities 226,133 59,262 ----------- ----------- Total Adjustments (729,468) 706,751 ----------- ----------- Net Cash - Operating Activities (1,676,950) 270,522 ----------- ----------- Investing Activities: Purchase of Property and Equipment (53,967) (63,677) ----------- ----------- Net Cash-Investing Activities (53,967) (63,677) ----------- ----------- Financing Activities: Proceeds from Notes Payable 494,932 853,776 Repayment of Notes Payable (166,123) (831,545) ----------- ----------- Net Cash-Financing Activities 328,809 22,231 ----------- ----------- Net Increase/[Decrease] in Cash and Cash Equivalents (1,402,108) 229,076 Cash and Cash Equivalents - Beginning of Periods 1,823,009 299,030 ----------- ----------- Cash and Cash Equivalents - End of Periods $ 420,901 $ 528,106 =========== =========== See accompanying notes to consolidated financial statements. 6 CHEM INTERNATIONAL, INC. ------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] -------------------------------------------------------------------------------- Six months ended ---------------- December 31, ------------ 2000 1999 ---- ---- Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $48,247 $93,012 Income Taxes $ 4,800 $ 5,160 See accompanying notes to consolidated financial statements. 7 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED] -------------------------------------------------------------------------------- [1] Business Effective January 5, 2001 the Company amended its corporate charter and changed its name to "Integrated Health Technologies, Inc. and began trading using the NASDAQ symbol IHTC for its common stock and the symbol IHTCW for its Class A redeemable warrants. Chem International, Inc. [the "Company"] is engaged primarily in the manufacturing, marketing and sales of vitamins, nutritional supplements and herbal products. Its manufacturing customers are located primarily throughout the United States and Europe. [2] Liquidity The Company anticipates operating losses during the 2001 fiscal year. The Company currently has purchases orders of approximately $2 million dollars on hand for shipment in the third quarter of fiscal 2001. The Company believes that anticipated sales coupled with the purchase orders and the remaining balances available under the revolving lines of credit will meet cash needs for operations. [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. Inter-company 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, 2000. The results of operations for the six months ended December 31, 2000 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2001. 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: Buildings and 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 $169,503 and $161,682 for the six months ended December 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. 8 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [UNAUDITED] -------------------------------------------------------------------------------- [3] Summary of Significant Accounting Policies (Continued) Revenue Recognition - The Company recognizes manufacturing revenue upon shipment of the product and service revenue when services are rendered. Advertising - Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $65,999 and $52,278 for the six months ended December 31, 2000 and 1999 respectively. [4] Inventories Inventories consist of the following at December 31, 2000: Raw Materials $2,481,019 Work-in-Process 1,189,030 Finished Goods 641,490 ---------- Total $4,311,539 ========== [5] Property and Equipment Property and equipment comprise the following at December 31, 2000: Land and Building $1,250,000 Leasehold Improvements 1,157,960 Machinery and Equipment 2,602,189 Machinery and Equipment Under Capital Leases 156,561 Transportation Equipment 60,569 ---------- Total 5,227,279 Less: Accumulated Depreciation and Amortization 2,725,768 ---------- Total $2,501,511 ========== [6] Notes Payable Notes Payable: Bio Merieux Vitek, Inc. (a) $ 28,267 Medallion Business Credit, LLC (b) 598,610 Summit Business Capital Corp. (c) 265,331 Merchant Financial Corporation (d) 9,764 ---------- Totals 901,972 Less: Current Portion 892,077 ---------- Non-current Portion $ 9,895 ========== (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, 9 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] -------------------------------------------------------------------------------- [6] Notes Payable (Continued) 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, 2000 the interest rate was 12.5%. (c) Non-Interest bearing Promissory Note dated August 30, 2000 providing for ten consecutive monthly installments for the purchase of inventory. (d) Under the terms of a revolving credit note which expires on December 21, 2002, the Company may borrow up to $1,000,000 at 4% above the prime lending rate. The loan is collateralized by the inventory, receivables and equipment of IHT Health Products, Inc. a subsidiary of Chem International, Inc. The note has been guaranteed by the Company's principal stockholder and by the Corporate Guarantee of Chem International, Inc. At December 31, 2000 the interest rate was 13.5%. The loan agreements with Medallion Business Credit, LLC and Merchant Financial Corporation contain certain financial covenants relating to the maintenance of specified liquidity, and tangible net worth. At December 31, 2000 the Company was in compliance with its tangible net worth and working capital covenants. The following are maturities of long-term debt for each of the next five years: December 31, ------------ 2001 $892,077 2002 9,895 2003 -- 2004 -- 2005 -- -------- Totals $901,972 ======== [7] Capital Lease The Company acquired capsule, warehouse, and office equipment under the provisions of three long-term leases. The leases expire in March 2001, March 2003, and July 2003, respectively. The equipment under the capital leases as of December 31, 2000 had a cost of $156,561 accumulated depreciation of $76,327 with a net book value of $80,234. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at December 31, 2000 are as follows: Total Minimum Lease Payments $ 151,916 Amount Representing Interest (96,971) --------- Present Value of Net Minimum Lease Payment 54,945 Current Portion (24,553) --------- Long-Term Capital Lease Obligation $ 30,392 ========= [8] 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, 2000 the Company's uninsured cash balances totaled approximately $360,000. The Company does not require collateral in relation to cash credit risk. 10 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [UNAUDITED] -------------------------------------------------------------------------------- [8] Significant Risks and Uncertainties (Continued) [B] Concentrations of Credit Risk - Receivables - The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company does not require collateral in relation to its trade accounts receivable credit risk. The amount of the allowance for uncollectible accounts at December 31, 2000 is $110,389. [9] Major Customer For the six months ended December 31, 2000 and 1999, approximately 69% and 57% 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, 2000 and 1999, an aggregate of approximately 13% and 16%, 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, 2000 and 1999. Accounts receivable from these customers comprised approximately 46% and 47% of total accounts receivable at December 31, 2000 and 1999, respectively. [10] Commitments and Contingencies [A] Leases Related Party Leases - Certain manufacturing and office facilities were leased from Morristown Holding, Inc. (formerly Gerob Realty Partnership) whose owners are stockholders of the Company. The lease, which expired on December 31, 2000, provided 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, 2000 and 1999 on this lease was approximately $20,000 and $41,000, respectively. Unpaid rent of $135,000 due to Morristown Holding Company, Inc. December 31, 2000 has been separately disclosed as accrued expenses on the consolidated balance sheet. On August 30, 2000 the Company acquired the manufacturing and office facility. The Company issued 1,050,420 shares of its common stock in exchange for the property. 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. On April 28, 2000 the lease was amended reducing the square footage and extending the lease to May 31, 2015. Rent expense for the six months ended December 31, 2000 and 1999 on this lease was approximately $221,000 and $227,000 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 2003. 11 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [UNAUDITED] -------------------------------------------------------------------------------- [10] Commitments and Contingencies (Continued) The minimum rental commitment for long-term non-cancelable leases is as follows: Related Lease Party Lease December 31 , Commitment Commitment Total ------------- ---------- ---------- ----- 2001 $ 66,022 $ 323,559 $ 389,581 2002 41,277 323,559 364,836 2003 12,289 323,559 335,848 2004 -- 323,559 323,559 2005 -- 323,559 323,559 Thereafter -- 3,019,886 3,019,886 -------- ---------- ---------- Total $119,588 $4,637,681 $4,757,269 ======== ========== ========== Total rent expense, including real estate taxes and maintenance charges, was approximately $245,000 and $250,000 for the six and three months ended December 31, 2000 and 1999, respectively. Rent expense is stated net of sublease income of approximately $2,200 and $2,900 for the six months ended December 31, 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] 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, 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. [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, 2001. [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] Consulting Agreements- The Company entered into 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 issued to the consultants options to purchase 75,000 shares of its common stock at an exercise price of $1.10 and 75,000 shares at an exercise price of $1.75. 12 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [UNAUDITED] -------------------------------------------------------------------------------- [11] 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 six months ended December 31, 2000 and 1999, by the Company was $6,600 and $6,600, respectively. [12] 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. [13] 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 has adopted SFAS No. 133 in the fiscal year ending June 30, 2001, and it does not have a material impact on the financial statements. [14] Equity Transactions [A] Purchase of Manufacturing Facility-On August 30, 2000 the Company issued to Morristown Holding Company 1,050,420 shares of its common stock in exchange for the manufacturing and office facility it had been renting [See Note 10A]. [B] Consultant Agreement/Stock Options-In connection with a consulting agreement dated July 18, 2000 the Company has issued 75,000 options on its common stock exercisable at $1.10 per share and 75,000 options exercisable at $1.75 per share [ See Note 9G]. Should the Company not choose 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. [C] Incentive Stock Options-On July 1, 2000 the Company granted 200,000 incentive stock options for a term of ten years to its employees at the exercise price of $1.00 per share. On December 19, 2000, the Company granted 497,333 incentive stock options for a term of ten years commencing on December 19, 2000 to its officers and employees at the exercise price of $.75 per share and 120,480 stock options at $.83 per share for a term of five years commencing on December 19, 2000. [D] Non-Statutory Stock Options-On December 19, 2000, the Company granted 171,667 non-statutory stock options to officers, directors, and members of its Scientific Advisory Board at the exercise price of $.75 for a term of ten years commencing on December 19, 2000 and 179,520 non-statutory stock options at $.83 for a term of five years commencing on December 19, 2000. 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. Six months ended December 31, 2000 Compared to the six months ended December 31, 1999 Results of Operations The Company's net losses for the six months ended December 31, 2000 and 1999 were $(947,482) and $(436,229). This increase in net loss of approximately $500,000 is primarily the result of a $1,000,000 increase in operating loss resulting from a corresponding decrease in gross profit of approximately $800,000 and an approximate $400,000 increase in federal income tax benefits. The decrease in gross profit is due to decreased sales. Sales for the six months ended December 31, 2000 and 1999 were $5,492,089 and $8,374,030, respectively, a decrease of approximately $3,000,000 or 34%. For the six months ended December 31, 2000 the Company had sales to one customer, who accounted for 69% of net sales in 2000 and 57% in 1999. 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, 2000 totaled $252,202 as compared to $331,611 for the six months ended December 31, 2000, a decrease of 24%. The Company has been experiencing a decline in mail order sales due to increased competition and has decided to close the retail store in the coming quarter. Sales under the Roche Vitamins, Inc. distribution agreement were $1,134,609 for the six months ended December 31, 2000 as compared to $1,188,092 for the six months ended December 31, 1999, a decrease of $53,483 or 5%. On July 1, 2000, the Company began offering solid dosage product development and technical services through its subsidiary, Integrated Health Ideas, Inc. Consulting revenues for the six months ended December 31, 2000 totaled $207,532. On August 31, 2000, the Company began the distribution and sale of fine chemicals through a new subsidiary, IHT Health Products, Inc. Sales for the four months ended December 31, 2000 totaled $1,148,185. Cost of sales decreased to $5,132,648 for the six months ended December 31, 2000 as compared to $7,181,056 for the six months ended December 31, 1999. Cost of sales increased as a percentage of sales to 93% for the six months ended December 31, 2000 from 86% for the six months ended December 31, 1999. The increase in cost of sales is due to manufacturing inefficiencies and lower margin sales. Selling and administrative expenses for the six months ended December 31, 2000 were $1,732,836 versus $1,507,564 for the same period a year ago. The increase of $225,272 was primarily attributable to an increase in officers salaries of $28,081, an increase in insurance expense of $24,335, an increase in employee benefits of $18,598, a decrease in consulting fees of $197,036, an increase in travel and entertainment of $106,318 and an increase in office salaries of $131,526 due to the commencement of the IHT Health Products, Inc. distribution business. Other income [expense] was $20,198 for the six months ended December 31, 2000 as compared to $(107,505) for the six months ended December 31, 1999. The decrease of $127,703 is the result of a decrease in interest expense of $61,009, an increase in interest and investment income of $16,694, and an increase in administrative fee income of $50,000. 14 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended December 31, 2000 Compared to the three months ended December 31, 1999 Results of Operations The Company's net losses for the three months ended December 31, 2000 and 1999 were $(620,596) and $(95,587), respectively. This increase in net loss of approximately $(525,000) is primarily the result of a decrease in operating income of $850,000 due to a decrease in gross profit of approximately $600,000, an approximate $250,000 increase in selling and administrative expenses, and an approximate $250,000 increase in federal income tax benefits. Sales for the three months ended December 31, 2000 and 1999 were $3,063,629 and $4,941,907 respectively, a decrease of $1,878,278 or 38%. For the three months ended December 31, 2000 the Company had sales to one customer who accounted for 43% of net sales in 2000 and 54% in 1999. Retail and mail order sales for the three months ended December 31, 2000 totaled $115,334 as compared to $155,200 for the three months ended December 31, 1999, a decrease of $39,866 or 26% due to increased competition. Sales under the Roche Vitamins, Inc. distribution agreement totaled $601,984 for the three months ended December 31, 2000 as compared to $600,581 for the three months ended December 31, 1999, an increase of $1,403. Sales through its IHT Health Products, Inc. subsidiary totaled $690,787 for the three months ended December 31, 2000, and sales through its Integrated Health Ideas, Inc. subsidiary totaled $96,596. Cost of sales decreased to $2,906,997 for the three months ended December 31, 2000 as compared to $4,164,588 for the three months ended December 31, 1999. Cost of sales increased as a percentage of sales to 95% as compared to 84% for the three months ended December 31, 1999. The increase in cost of sales is due to manufacturing inefficiencies. Selling and administrative expenses for the three months ended December 31, 2000 were $1,010,216 as compared to $766,798 for the three months ended December 31, 1999. The increase of $243,418 was primarily attributable to an increase in advertising of $11,920, an increase in officer salaries of $56,110, an increase in travel and entertainment of $51,331, an increase in insurance expense of $24,335, a decrease in consulting fees of $95,249 and an increase in office salaries of $97,374 due to the commencement of the IHT Health Products, Inc. distribution business. Other income [expense] was $24,153 for the three months ended December 31, 2000 as compared to $(71,528) for the three months ended December 31, 1999. The decrease of $95,681 is the result of a decrease in interest expense of $45,094, an increase in investment income of $587 and an increase in administrative fee income of $50,000. Liquidity and Capital Resources At December 31, 2000 the Company's working capital was $4,087,888, a decrease of $1,371,895 over working capital at June 30, 2000. Cash and cash equivalents were $420,901 at December 31, 2000, a decrease of $1,402,108 from June 30, 2000. The Company utilized $1,676,950 and provided $270,522 for operations for the six months ended December 31, 2000 and 1999, respectively. The primary reasons for the increase in cash utilized for operations for the six months ended December 31, 2000 are an increase in inventories of approximately $1,075,000 and an increase in accounts payable of approximately $700,000. The Company currently has purchase orders of approximately $2 million dollars on hand for shipment in the third quarter of fiscal 2001. The Company believes that anticipated sales coupled with the purchase orders and the remaining balances available under the two revolving lines of credit will meet the cash needs for operations. 15 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Liquidity and Capital Resources-Continued The Company utilized $53,967 and $63,677 in investing activities for the six months ended December 31, 2000 and 1999, respectively. The Company generated net cash of $328,809 and $22,231 from debt financing activities for the six months ended December 31, 2000 and 1999, respectively. The Company has two revolving lines of credit. One of the lines provides for 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, 2000 the balance due under the revolving line of credit was $598,610. The second line of credit also provided for a $1,000,000 revolving line of credit agreement which bears interest at 4% above the prime interest rate and expires on December 21, 2002. At December 31, 2000 the balance due under the second line was $9,764. The Company's total annual commitment at December 31, 2000 for the next five years of $1,737,383 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 $495,000 for the years ending June 30, 2001 and 2002. 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: February 9, 2001 By:/s/ Seymour Flug ------------------------------------- Seymour Flug, President and Chief Executive Officer Date: February 9, 2001 By:/s/ Eric Friedman ------------------------------------- Eric Friedman, Chief Financial Officer 18