-----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, Wej9nrNzIQRfXl9gvaz/D0F2WsDCEPxZqZSG2KB8ryfjgp6G2GbFZ24vRtN60p3l qc8YXH3s2DmBVVH9Rhiw4g== 0000913906-97-000041.txt : 19970505 0000913906-97-000041.hdr.sgml : 19970505 ACCESSION NUMBER: 0000913906-97-000041 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970502 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-28876 FILM NUMBER: 97594608 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 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 March 31, 1997 Commission File Number 000-28876 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES (Exact name of registrant as specified in its charter) Delaware 13-3035216 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 Route 22 Hillside, New Jersey 07205 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (201) 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 Shares as of May 2, 1997 - ---------------------------------- ------------------------------------ Common Stock, Par Value $.002 4,335,000 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ INDEX - ------------------------------------------------------------------------------ Part I: Financial Information Item 1: Financial Statements Consolidated Balance Sheet as of March 31, 1997 [Unaudited] 1.....2 Consolidated Statements of Operations for the three and nine months ended March 31, 1997 and 1996 [Unaudited]................... 3..... Consolidated Statement of Stockholders' Equity for the nine months ended March 31, 1997 [Unaudited]............................ 4..... Consolidated Statements of Cash Flows for nine months ended March 31, 1997 and 1996 [Unaudited]......................... 5.....6 Notes to Consolidated Financial Statements [Unaudited]...... 7.....9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations...................................10.....12 Part II:Other Information...........................................13 Signature...........................................................14 . . . . . . . . Part I: Financial Information Item 1: Financial Statements CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997. [UNAUDITED] - ------------------------------------------------------------------------------ Assets: Current Assets: Cash and Cash Equivalents $ 1,278,285 Accounts Receivable - Net 2,039,246 Note Receivable 250,000 Inventories 2,766,286 Deferred Income Taxes 44,000 Prepaid Expenses and Other Current Assets 416,163 ----------- Total Current Assets 6,793,980 Property, Plant and Equipment - Net 1,071,485 ----------- Other Assets: Goodwill 296,869 Prepaid Pension Costs 294,334 Security Deposits and Other Assets 107,690 ----------- Total Other Assets 698,893 Total Assets $ 8,564,358 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
1 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997. [UNAUDITED] - ------------------------------------------------------------------------------ Liabilities and Stockholders' Equity: Current Liabilities: Note Payable - Bank $ 37,926 Accounts Payable 2,081,107 Federal and State Income Taxes Payable 58,656 Accrued Expenses and Other Current Liabilities 373,177 ----------- Total Current Liabilities 2,550,866 Non-Current Liabilities: Note Payable - Bank 179,407 Notes Payable - Related Party 276,444 Deferred Income Taxes 8,000 ----------- Total Non-Current Liabilities 463,851 Commitments and Contingencies [6] -- 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, 4,335,000 Shares Issued and Outstanding 8,670 Additional Paid-in Capital 4,048,946 Retained Earnings 1,492,025 Total Stockholders' Equity 5,549,641 Total Liabilities and Stockholders' Equity $ 8,564,358 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 2
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] - ------------------------------------------------------------------------------ Three months ended Nine months ended March 31, March 31, --------- --------- 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 ------- ------- ------- ------- Sales $ 3,123,960 $2,577,650 $7,061,875 $ 7,669,856 Cost of Sales 2,447,173 2,066,005 5,755,432 6,088,840 ----------- ---------- ---------- ----------- Gross Profit 676,787 511,645 1,306,443 1,581,016 Selling and Administrative Expenses 644,629 447,333 1,750,568 1,545,188 ----------- ---------- ---------- ----------- Operating Income [Loss] 32,158 64,312 (444,125) 35,828 ----------- ---------- ---------- ----------- Other Income [Expense]: Gain on Sale of Fixed Assets -- 62,431 -- 62,431 Interest Expense (9,683) (21,025) (63,943) (72,688) Interest and Investment Income 25,238 2,979 36,676 26,546 Income [Loss] on Investment in Partnership 1,780 -- 1,780 (36,998) Commission Income -- -- -- 15,804 ----------- ---------- ---------- ----------- Other Income [Expense] - Net 17,335 44,385 (25,487) (4,905) ----------- ---------- ---------- ----------- Income [Loss] Before Income Taxes 49,493 108,697 (469,612) 30,923 Federal and State Income Tax Expense [Benefit] 19,817 60,148 (180,732) 42,122 ----------- ---------- ---------- ----------- Net Income [Loss] $ 69,310 $ 48,549 $ (288,880) $ (11,199) =========== ========== ========== =========== Net Income [Loss] Per Share $ .02 $ .02 $ (.08) $ (.01) =========== ========== ========== =========== Average Common Shares Outstanding 4,286,000 3,021,000 3,727,369 3,021,000 =========== ========== ========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 1997. [UNAUDITED] - ------------------------------------------------------------------------------ Additional Total Common Stock Paid-in RetainedStockholders' Shares Par Value Capital Earnings Equity Balance - July 1, 1996 3,370,000 $ 6,740 $1,883,132 $1,700,905 $3,590,777 Reversal of Issuance of Bridge Units (300,000) (600)(1,199,400) 80,000 (1,120,000) Imputed Interest on Note Payable - Related Party -- -- 10,574 -- 10,574 Net Proceeds from Initial Public Offering 1,265,000 2,530 3,354,640 -- 3,357,170 Net [Loss] -- -- -- (288,880) (288,880) -------- -------- --------- -------- -------- Balance - March 31, 1997 4,335,000 $ 8,670 $4,048,946$1,492,025 $5,549,641 ========= ======== ==================== ========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - ------------------------------------------------------------------------------ Nine months ended March 31, 1 9 9 7 1 9 9 6 ------- ------- Operating Activities: Net [Loss] $ (288,880) $ (11,199) ---------- ----------- Adjustments to Reconcile Net Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 228,398 176,170 Lease Termination Items (108,753) 31,146 Deferred Income Taxes 8,000 (41,955) Imputed Interest on Note Payable - Related Party 10,574 10,574 [Gain] Loss on Investment in Partnership (1,780) 36,998 Interest Income on Note Receivable (5,150) -- Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 157,254 (568,695) Inventories (1,333,054) (349,292) Prepaid Expenses and Other Current Assets (143,106) (129,716) Security Deposits and Other Assets (23,410) -- Increase [Decrease] in: Accounts Payable 203,917 206,354 Federal and State Income Taxes Payable (110,309) (57,538) Accrued Expenses and Other Liabilities (97,546) 46,976 ---------- ----------- Total Adjustments (1,214,965) (638,978) ---------- ----------- Net Cash - Operating Activities - Forward (1,503,845) (650,177) ---------- ----------- Investing Activities: Issuance of Note Receivable (223,750) -- Repayment of Loan to Related Company 16,849 -- Repayment of Note Payable - Stock Retirement (156,473) -- Purchase of Property and Equipment (236,935) (256,765) Loans to Stockholders' (1,519) (16,487) Repayment of Note Receivable 3,183 -- Repayment of Loan Receivable -- (100,000) Loan to Related Company (722) -- ---------- ----------- Net Cash - Investing Activities - Forward (599,367) (373,252) ---------- ----------- Financing Activities: Contribution to Paid-in Capital -- 2,977 Net Proceeds from Initial Public Offering 3,426,344 -- Proceeds from Notes Payable 332,844 294,156 Repayment of Notes Payable (1,142,756) (895,344) ---------- ----------- Net Cash - Financing Activities - Forward $2,616,432 $ (598,211) The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - ------------------------------------------------------------------------------ Nine months ended March 31, 1 9 9 7 1 9 9 6 ------- ------- Net Cash - Operating Activities - Forwarded $(1,503,845) $ (650,177) Net Cash - Investing Activities - Forwarded (599,367) (373,252) Net Cash - Financing Activities - Forwarded 2,616,432 (598,211) ---------- ----------- Net Increase [Decrease] in Cash and Cash Equivalents 513,220 (1,621,640) Cash and Cash Equivalents - Beginning of Periods 765,065 1,870,747 ---------- ----------- Cash and Cash Equivalents - End of Periods $1,278,285 $ 249,107 ========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $ 54,198 $ 58,942 Income Taxes $ 80,688 $ 141,589 Supplemental Disclosure of Non-Cash Investing and Financing Activities: The Company incurred offering costs of $69,174 as of June 30, 1996. These costs were offset against the net proceeds of the initial public offering as reflected in the stockholders' equity for the nine months ended March 31, 1997. The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES 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. [2] Summary of Significant Accounting Policies [A] 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. [B] 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 for the year ended June 30, 1996 included in the Chem International, Inc. Form SB-2 which was declared effective October 29, 1996. [C] Earnings Per Share - Earnings per common share are computed based upon the weighted average number of common and "common share equivalent" shares outstanding during the periods presented after giving retroactive effect to the 1-for-4 reverse stock split in July 1996. Common stock equivalents are included when dilutive. [3] Investment in and Advances to Partnership The Company was a 50% general partner in Swedish Herbal Institute - Chem Associates [the "Partnership"]. In addition to its $1,000 capital investment, the Company had advanced approximately $70,000 in exchange for a series of promissory notes. As of June 30, 1996, the Partnership is insolvent and the Company has recorded a loss on its investment and a charge for approximately 50% of its note receivable for the year then ended. At March 31, 1997, the balance of this note is $32,317. [4] Inventories Inventories consist of the following at March 31, 1997: Raw Materials $ 1,545,474 Work-in-Process 407,277 Finished Goods 813,535 ----------- Total $ 2,766,286 ----- =========== [5] Note Receivable On February 3, 1997, the Company received a secured promissory note in the amount of $250,000 with interest at 14% per annum. The note is due and payable on November 3, 1997. Advance interest of $26,250 was payable out of the proceeds of the loan and is taken into income over the period of the loan. 7 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [UNAUDITED] - ------------------------------------------------------------------------------ [6] Commitments and Contingencies [A] Related Party Leases - Certain manufacturing and office facilities are leased from Gerob Realty Partnership whose partners are stockholders of the Company. The lease, which expires on December 31, 1997, 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, 1997 and 1996 on this lease was approximately $115,000 and $129,000, respectively. The Company's original lease agreement for other warehouse and office facilities was terminated on January 10, 1997 when the landlord sold the premises. At the time of sale the rentals under the lease were recorded for financial accounting purposes on a straight-line basis. At December 31, 1996, accrued future rentals of $105,613, which give effect to both future scheduled increases and certain concessions at the lease inception had been recorded as a non-current liability. Because of the termination of the lease the balance of accrued future rentals of $105,613 has been allocated to rent expense in the three month period ended March 31, 1997. The Company subleased a portion of its premises on a month-to-month basis through January 10, 1997 for approximately $25,000 a month. Other warehouse and office facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is 90% owned by the Company's president and principal stockholder and certain family members and 10% owned by the Company's Chief Financial Officer. The lease was effective on January 10, 1997 and provides for minimum annual rental of $346,000 through January 10, 2002 plus increases in real estate taxes and building operating expenses. At its option, the Company has the right to renew the lease for an additional five year period. The Company leases warehouse equipment for a five year period providing for an annual rental of $15,847. The minimum rental commitment for long-term non-cancelable leases is as follows: Year Ending June 30, 1997 $ 269,603 1998 391,847 1999 361,847 2000 361,847 2001 361,847 Thereafter 182,244 ----------- Total $ 1,929,235 ----- =========== Total rent expense, including real estate taxes and maintenance charges, was approximately $147,000 and $108,000 for the nine months ended March 31, 1997 and 1996, respectively. Rent expense is stated net of sublease income of approximately $166,000 and $131,000 for the nine months ended March 31, 1997 and 1996, respectively. [B] Employment Agreements - Effective July 1, 1996, the Company entered into three year employment agreements with its president and four other officers which provide for aggregate annual salaries of $580,000 for the year ending June 30, 1997 and $680,000 for the year ending June 30, 1998. These agreements are subject to annual increases equal to at least the increase in the consumer price index for the Northeastern area. An agreement with one of the officers also provides for a $100,000 signing bonus which is refundable on a pro rata basis during the period from July 1, 1996 to June 30, 1997, if the executive voluntarily terminates his employment. The amount is included in prepaid expenses and is amortized over the period July 1, 1996 to June 30, 1997. 8 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] - ------------------------------------------------------------------------------ [6] Commitments and Contingencies [Continued] [C] Litigation - The Company is unable to predict its ultimate financial exposure with respect to its prior sale of certain products which may have contained allegedly contaminated Tryptophan which is the subject of numerous lawsuits against unrelated manufacturers, distributors, suppliers, importers and retailers of that product. However, management does not presently believe the outcome of these actions will have a material adverse effect on the Company. [7] New Authoritative Pronouncements The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. Earlier application is not allowed. The provisions of SFAS No. 125 must be applied prospectively; retroactive application is prohibited. Adoption on January 1, 1997 is not expected to have a material impact on the Company. The FASB deferred some provisions of SFAS No. 125, which are not expected to be relevant to the Company. The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital Structure" in February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations, by replacing the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. When adopted, SFAS No. 128 will require restatement of all prior-period EPS data presented; however, the Company has not sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will have on its historically reported EPS amounts. SFAS No. 129 does not change any previous disclosure requirements, but rather consolidates existing disclosure requirements for ease of retrieval. [8] Equity Transactions [A] Stock Option Plan - The Company has adopted a stock option plan for the granting of options to employees, officers, directors and consultants of the Company to purchase up to 1,000,000 shares of common stock, at the discretion of the Board of Directors. Stock options grants are limited to a total of 500,000 shares for "incentive stock options" and 500,000 shares for "non-statutory options" and, may not be priced less than the fair market value of the Company's common stock at the date of grant. Options granted are generally for ten year periods, except that options granted to a 10% stockholder [as defined] are limited to five year terms. On October 16, 1996, options to purchase 573,597 shares at the offering price [$3.50] and 25,974 shares at 110% of the offering price were granted. Such options become exercisable on October 16, 1997. [B] Bridge Units - On October 16, 1996, the bridge lenders waived their rights to the bridge units and agreed to the cancellation of the underlying securities. Accordingly, the Company has eliminated the amount previously recorded for the bridge units and the related bridge loan finance costs. [C] Initial Public Offering - On October 29, 1996, the Company received net proceeds of approximately $3,400,000 from the sale of 625,000 units at $7.00 per unit. Each unit consisted of two shares of Common Stock and two Class A Redeemable Common Stock Purchase Warrants. . . . . . . . . . . . . . . . . 9 Item 2. CHEM INTERNATIONAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ The following discussion should be read in conjunction with the historical financial statements of the Company and notes thereto. Nine months ended March 31, 1997 Compared to the Nine months ended March 31, 1996 Results of Operations The Company's net losses for the nine months ended March 31, 1997 and 1996 were $(288,880) and $(11,199), respectively. Sales for the nine months ended March 31, 1997 and 1996 were $7,061,875 and $7,669,856, respectively, a decrease of approximately $600,000 or 8%. Retail and mail order sales for the nine months ended March 31, 1997 totaled $682,109 as compared to $529,205 for the nine months ended March 31, 1996, an increase of $152,904 or 29%. On February 20, 1997, the Company signed a distribution agreement with Roche Vitamins, Inc. to service and supply Roche products to a select segment of Roche's food, nutrition and cosmetic accounts. Sales for the period from February 20, 1997 through March 31, 1997 under the agreement totaled $68,816. For the nine months ended March 31, 1997, the Company had sales to one customer, who accounted for 45% of net sales in 1997 and 33% of net sales in 1996. On January 23, 1997, the Company signed an exclusive agreement with International Nutrition Research Center, Inc. ["INRC"] to market and distribute the Master Amino Acid Pattern ["MAP"]. MAP is recommended for athletes who need to maximize protein synthesis. Cost of sales decreased to $5,755,432 in 1997 as compared to $6,088,840 for 1996. Cost of sales increased as a percentage of sales to 82% as compared to 79% for 1996. The increase in cost of sales is due to an increase in manufacturing expenses. Selling and administrative expenses for the nine months ended March 31, 1997 were $1,750,568 versus $1,545,188 for the same period a year ago. The increase of $205,380 was primarily attributable to an increase in officers' compensation of approximately $137,000, an increase in office salaries of approximately $9,000, an increase in depreciation expense of approximately $22,000, a decrease in travel and entertainment of approximately $39,000, an increase in consulting fees of approximately $42,000, a decrease in freight out of approximately $53,000, an increase in office rent of approximately $22,000 and an increase in advertising and catalog costs of approximately $53,000. Other income [expense] was $(25,487) for the nine months ended March 31, 1997 as compared to $(4,905) for the same period a year ago. This increase of $20,582 is attributable to a decrease in sales of fixed assets of $62,431, a decrease in commission income of $15,804, an increase of $38,778 from a 50% owned partnership, a decrease in interest expense of $8,745 and an increase in interest and investment income of $10,130. 10 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Results of Operations [Continued] Three months ended March 31, 1997 Compared to the Three months ended March 31, 1996 The Company's net income for the three months ended March 31, 1997 and 1996 were $69,310 and $48,549, respectively. Sales for the three months ended March 31, 1997 and 1996 were $3,123,690 and $2,577,650, respectively, an increase of approximately $546,000 or 21%. Retail and mail order sales for the three months ended March 31, 1997 totaled $265,505 as compared to $159,636 for the three months ended March 31, 1996, an increase of $105,869 or 66%. For the three months ended March 31, 1997, the Company had sales to one customer, who accounted for 58% of net sales in 1997 and 33% of net sales in 1996. Cost of sales increased to $2,447,173 in 1997 as compared to $2,066,005 for 1996. Cost of sales decreased as a percentage of sales to 78% as compared to 80% for 1996. The decrease in cost of sales is due to an decrease in rent expense for the quarter. Selling and administrative expenses for the three months ended March 31, 1997 were $644,629 versus $447,333 for the same period a year ago. The increase of $197,296 was primarily attributable to an increase in officers' salaries of approximately $36,000, a decrease in freight out of approximately $11,000, a decrease in officer's life insurance of approximately $19,000, an increase in advertising and catalog costs of approximately $31,000, an increase in office expenses of approximately $11,000, an increase in professional fees of approximately $57,000, an increase in office salaries of approximately $16,000, an increase in regulatory expenses of approximately $20,000, and an increase in depreciation expense of approximately $24,000. Other income was $17,335 for the three months ended March 31, 1997 as compared to $44,385 for the same period a year ago. This decrease of $27,050 is attributable to a decrease in gains on sales of fixed assets of $62,431, an increase in interest and investment income of $22,259, a decrease in interest expense of $11,342 and a gain of $1,780 from a 50% owned partnership. Liquidity and Capital Resources At March 31, 1997, the Company had working capital of $4,243,114 and cash and cash equivalents of $1,278,285. The Company utilized $1,503,845 and $650,177 for operations for the nine months ended March 31, 1997 and 1996, respectively. The Company utilized $599,367 and $373,252 in investing activities for the nine months ended March 31, 1997 and 1996, respectively. The Company generated $2,616,432 from financing activities for the nine months ended March 31, 1997 and utilized $598,211 from financing activities for the nine months ended March 31, 1996. On February 3, 1997, the Company received a secured promissory note in the amount of $250,000 with interest at 14% per annum. The note is due and payable on November 3, 1997. Advance interest of $26,250 was payable out of the proceeds of the loan and is taken into income over the period of the loan. On October 29, 1996, the Company successfully completed an initial public offering whereby the Company sold 625,000 units at $7.00 per unit, each unit consisting of two shares of Common Stock and two Class A Redeemable Common Stock Purchase Warrants. The net proceeds to the Company after deducting underwriting discounts and commission of $575,575 and other expenses of the offering of $442,310 were $3,357,170. 11 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Liquidity and Capital Resources [Continued] The Company has a $500,000 revolving line of credit agreement with a bank which bears interest at .75% above the bank's prime lending rate and expires on November 30, 1997. At March 31, 1997, there was no balance due under the line of credit agreement. The Company has additionally secured a five year equipment term loan with interest at 1.50% over the bank's prime lending rate. At March 31, 1997, the balance due under the equipment loan was $215,508. The Company's principal commitments at March 31, 1997 consisted of obligations under operating leases for facilities and a lease agreement for the rental of warehouse equipment. Effective July 1, 1996, the Company entered into employment agreements with each of its executive officers providing for aggregate compensation in the amount of $530,000 for the fiscal year ending June 30, 1997. Such compensation amounts to an approximate increase of $200,000 as compared to fiscal 1996. On October 16, 1996, the bridge lenders waived their rights to the bridge units and agreed to the cancellation of the underlying securities. Accordingly, the Company eliminated the amount previously recorded for the bridge units and the related bridge costs. Stockholders' equity has been reduced by $1,120,000. Management believes that the net proceeds from the initial public offering, borrowing available under the anticipated line of credit and anticipated cash flows from operations will be sufficient to meet the Company's working capital needs for the foreseeable future. New Authoritative Pronouncements The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. Earlier application is not allowed. The provisions of SFAS No. 125 must be applied prospectively; retroactive application is prohibited. Adoption on January 1, 1997 is not expected to have a material impact on the Company. The FASB deferred some provisions of SFAS No. 125, which are not expected to be relevant to the Company. The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital Structure" in February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations, by replacing the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. When adopted, SFAS No. 128 will require restatement of all prior-period EPS data presented; however, the Company has not sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will have on its historically reported EPS amounts. SFAS No. 129 does not change any previous disclosure requirements, but rather consolidates existing disclosure requirements for ease of retrieval. Impact of Inflation The Company does not believe that inflation has significantly affected its results of operations. 12 Part II: Other Information CHEM INTERNATIONAL, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ 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 8-K Form 8-K/A filed January 6, 1997, amended the disclosure of original Form 8-K filed December 6, 1996, reporting change in accounting firm on December 4, 1996. 13 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. AND SUBSIDIARIES Date: May 2, 1997 By:/s/ E. Gerald Kay E. Gerald Kay, President and Chief Executive Officer Date: May 2, 1997 By:/s/ Eric Friedman Eric Friedman, Chief Financial Officer 14 EX-27 2 FDS EX27
5 3-mos jun-30-1997 mar-31-1997 1,278,285 0 2,039,246 0 2,766,286 6,793,980 1,071,485 0 8,564,358 2,550,866 0 0 0 8,670 8,555,688 8,564,358 3,123,960 3,123,960 2,447,173 644,629 (27,018) 0 9,683 49,493 (19,817) 69,310 0 0 0 69,310 .02 .02
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