-----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, K8cjNsOkshqhK8nOatWZS2tdFq6pxdqivOLWA4X+8+y9cPIcdjIrWg7yyuZb8sjq 3K+XBiJp9ZdsUKAJbZYhBQ== 0000913906-99-000012.txt : 19990211 0000913906-99-000012.hdr.sgml : 19990211 ACCESSION NUMBER: 0000913906-99-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990210 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: 99528662 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 December 31, 1998 Commission File Number 000-28876 CHEM INTERNATIONAL, INC. (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: (973) 926-0816 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of February 10, 1999 - ---------------------------------- ----------------------------------- Common Stock, Par Value 5,178,300 CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ INDEX - ------------------------------------------------------------------------------ Part I: Financial Information Item 1: Consolidated Financial Statements Consolidated Balance Sheet as of December 31, 1998 [Unaudited] 1...2 Consolidated Statements of Operations for the three and six months ended December 31, 1998 and 1997 [Unaudited].................. 3 Consolidated Statement of Stockholders' Equity for the six months ended December 31, 1998 [Unaudited]........................... 4 Consolidated Statements of Cash Flows for six months ended December 31, 1998 and 1997 [Unaudited]........................ 5.....6 Notes to Consolidated Financial Statements [Unaudited]........ 7.....14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 15.....18 Part II: Other Information........................................... 19 Signature............................................................ 20 . . . . . . . . CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998. [UNAUDITED] - ------------------------------------------------------------------------------ Assets: Current Assets: Cash and Cash Equivalents $ 388,366 Accounts Receivable - Net 2,012,882 Deferred Income Taxes 85,000 Inventories 3,899,020 Prepaid Expenses and Other Current Assets 221,309 Refundable Federal Income Taxes 196,645 ----------- Total Current Assets 6,803,222 Property and Equipment - Net 1,615,762 ----------- Other Assets: Deferred Income Taxes 49,000 Security Deposits and Other Assets 107,067 Total Other Assets 156,067 Total Assets $ 8,575,051 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
1 CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998. [UNAUDITED] - ------------------------------------------------------------------------------ Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 2,283,423 Notes Payable 549,562 Accrued Expenses and Other Current Liabilities 234,929 Accrued Expenses - Related Party 55,000 Capital Lease Obligation 35,582 ----------- Total Current Liabilities 3,158,496 Non-Current Liabilities: Notes Payable 161,370 Notes Payable - Related Party 699,811 Capital Lease Obligation 49,350 ----------- Total Non-Current Liabilities 910,531 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 Accumulated [Deficit] (351,738) Total Stockholders' Equity 4,506,024 Total Liabilities and Stockholders' Equity $ 8,575,051 =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
2 CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] - ------------------------------------------------------------------------------ Three months ended Six months ended December 31, December 31, ------------ ------------ 1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7 ------- ------- ------- ------- Sales $ 2,839,762 $2,618,510 $5,063,494 $ 4,970,100 Cost of Sales 2,777,609 2,192,211 4,910,204 4,214,963 ----------- ---------- ---------- ----------- Gross Profit 62,153 426,299 153,290 755,137 Selling and Administrative Expenses 1,001,359 719,969 1,684,299 1,315,725 ----------- ---------- ---------- ----------- Operating [Loss] (939,206) (293,670) (1,531,009) (560,588) ----------- ---------- ---------- ----------- Other Income [Expense]: Interest Expense - Related Party (18,807) -- (37,614) -- Interest Expense (15,862) (16,784) (28,405) (27,981) Interest and Investment Income 131 2,819 348 19,435 Loss on Investment in Partnership -- (1,497) -- (5,000) ---------- ---------- ---------- ----------- Total Other [Expense] (34,538) (15,462) (65,671) (13,546) ----------- ---------- ---------- ----------- [Loss] Before Income Taxes (973,744) (309,132) (1,596,680) (574,134) Federal and State Income Tax Expense [Benefit] (15,594) (103,046) (215,779) (185,746) ----------- ---------- ---------- ----------- Net [Loss] $ (958,150) $ (206,086) $(1,380,901) $ (388,388) =========== ========== =========== =========== Net [Loss] Per Common Share [Basic and Diluted] $ (.19) $ (.05) $ (.27) $ (.09) =========== ========== ========== =========== Average Common Shares Outstanding 5,178,300 4,335,000 5,178,300 4,335,000 =========== ========== ========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 3
CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 1998. [UNAUDITED] - ------------------------------------------------------------------------------ Additional Total Common Stock Preferred Paid-in Accumulated Stockholders' Shares Par Value Stock Capital [Deficit] Equity Balance - July 1, 1998 5,178,300 $ 10,357 $ -- $4,847,405 $1,029,163 $ 5,886,925 Net [Loss] for the six months ended December 31, 1998 -- -- -- -- (1,380,901) (1,380,901) --------- -------- -------- --------- ---------- ----------- Balance - December 31, 1998 5,178,300 $ 10,357 $ -- $4,847,405 $ (351,738) $ 4,506,024 ========= ======== ======== ========== =========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4 CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - ------------------------------------------------------------------------------ Six months ended December 31, 1 9 9 8 1 9 9 7 ------- ------- Operating Activities: Net [Loss] $(1,380,901) $ (388,388) ----------- ------------ Adjustments to Reconcile Net [Loss] to Net Cash [Used for] Operating Activities: Depreciation and Amortization 200,961 157,933 Amortization of Discount on Note Payable 11,364 -- Deferred Income Taxes (34,000) (22,000) Imputed Interest on Note Payable - Related Party -- 7,051 Loss on Investment in Partnership -- 5,000 Interest Income on Note Receivable -- (11,627) Bad Debt Expense 5,000 -- Writeoff of Note Receivable -- 33,058 Writeoff of Goodwill 275,891 -- Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 1,443,055 675,094 Inventories (377,210) (1,208,900) Refundable Federal Income Taxes (196,645) (170,000) Prepaid Expenses and Other Current Assets (43,953) 16,455 Security Deposits and Other Assets (2,060) (23,938) Increase [Decrease] in: Accounts Payable (553,619) 479,773 Federal and State Income Taxes Payable (40,000) (41,416) Accrued Expenses and Other Liabilities 139,490 (2,238) ---------- ----------- Total Adjustments 828,274 (105,755) ---------- ----------- Net Cash - Operating Activities (552,627) (494,143) ---------- ----------- Investing Activities: Repayment of Note Receivable -- 250,000 Purchase of Property and Equipment (165,367) (361,975) Loans to Stockholders' (13,017) -- Loan to Related Company -- 2,500 ---------- ----------- Net Cash - Investing Activities (178,384) (109,475) ---------- ----------- Financing Activities: Proceeds from Notes Payable 670,000 -- Repayment of Notes Payable (507,026) (24,798) ---------- ----------- Net Cash - Financing Activities 162,974 (24,798) ---------- ----------- Net [Decrease] in Cash and Cash Equivalents (568,037) (628,416) Cash and Cash Equivalents - Beginning of Periods 956,403 1,010,256 ---------- ----------- Cash and Cash Equivalents - End of Periods $ 388,366 $ 381,840 The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 5
CHEM INTERNATIONAL, INC. - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - ------------------------------------------------------------------------------ Six months ended December 31, 1 9 9 8 1 9 9 7 ------- ------- Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $ 38,913 $ 20,825 Income Taxes $ 51,047 $ 66,045 The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6 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, 1998. The results of operations for the six months ended December 31, 1998 are not necessarily indicative of the results for the entire fiscal year ending June 30, 1999. 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 $194,967 and $151,939 for the six months ended December 31, 1998 and 1997, respectively. Amortization of equipment under capital leases is included with depreciation expense. Goodwill - At December 31, 1998, goodwill with a carrying value of $275,891, which arose in connection with the acquisition of the Company's principal operating business subsidiary, was written down to zero due to impairment. The writeoff of goodwill is included in the December 31, 1998 income statement as part of selling and administrative expenses. Amortization expense was $5,994 for each of the six months ended December 31, 1998 and 1997. 7 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [UNAUDITED] - ------------------------------------------------------------------------------ [2] Summary of Significant Accounting Policies [Continued] Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," 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. The Company has adopted SFAS No. 128 in these financial statements. Basic EPS is based on average common shares outstanding and diluted EPS include the effects of potential common stock, such as, options and warrants, if dilutive. Potential common shares of 150,000 are not currently dilutive, but may be in the future. Adoption of SFAS No. 128 is not material to the Company. Revenue Recognition - The Company generally recognizes revenue upon shipment of the product. Impairment - Certain long-term assets of the Company's principal operating business subsidiary are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value which represents the projected discounted cash flows from related operations. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 1998, management expects these assets to be fully recoverable. Advertising - Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $173,280 and $129,708 for the six months ended December 31, 1998 and 1997, respectively. [3] Inventories Inventories consist of the following at December 31, 1998: Raw Materials $ 2,331,431 Work-in-Process 763,864 Finished Goods 803,725 ----------- Total $ 3,899,020 ----- =========== 8 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] - ------------------------------------------------------------------------------ [4] Property and Equipment Property and equipment comprise the following at December 31, 1998: Leasehold Improvements $1,083,816 Machinery and Equipment 2,406,865 Machinery and Equipment Under Capital Leases 109,545 Transportation Equipment 32,152 Total 3,632,378 Less: Accumulated Depreciation and Amortization 2,016,616 Total $1,615,762 [5] Notes Payable Notes payable are summarized as follows at December 31, 1998: Related Party Notes Payable Note Payable Total Notes Payable: Bio Merieux Vitek, Inc. (a) $ 55,099 $ -- $ 55,099 President and Chief Executive Officer (b) -- 699,811 699,811 First Union National Bank: Revolving Line-of-Credit (c) 500,000 -- 500,000 Equipment Term Loan (d) 155,833 -- 155,833 ---------- ----------- ---------- Totals 710,932 699,811 1,410,743 Less: Current Portion 549,562 -- 549,562 ---------- ----------- ---------- Noncurrent Portion $ 161,370 $ 699,811 $ 861,181 ------------------ ========== =========== ========== (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)Three year non-collaterized 7% promissory note for $750,000 with related party providing for quarterly payments of $13,125 representing interest only. The note matures on March 12, 2001. As additional consideration for the loan and in the light of the below market interest rate and uncollateralized nature of the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares of common stock at the aggregate purchase price of $1.75 per share. The note is recorded net of $68,182, which represents the fair value of the Class C warrant. The amortization at December 31, 1998 was $11,364 and is classified as interest expense in the Company's financial statements. The warrant is exercisable for a four year period commencing one year after the issuance of the note and expires on March 12, 2003. (c)Under the terms of a revolving line of credit which expires on July 27, 1999, the Company may borrow up to $500,000 at 1% above the bank's prime lending rate. The loan is collateralized by the assets of Manhattan Drug Company. The loan has been guaranteed by the Company's principal stockholder. At December 31, 1998, the interest rate was 8.75%. 9 CHEM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [UNAUDITED] - ------------------------------------------------------------------------------ [5] Notes Payable [Continued] (d)Under the terms of a five year equipment term loan, dated July 27, 1998, the Company may borrow up to $395,000 at 1.5% above the bank's prime interest rate. The term loan provides for monthly payments of $2,834 for principal and monthly payments for interest. The loan is collateralized by the assets of Manhattan Drug Company. The loan has been guaranteed by the Company's principal stockholder. At December 31, 1998, the interest rate was 9.25%. The loan agreement with First Union National Bank contains certain financial covenants relating to the maintenance of specified liquidity, debt to equity and debt coverage ratios and requires that the Company's president and principal stockholder maintain a minimum stock ownership percentage of the Company. The Company was not in compliance with its debt coverage ratio on a consolidated basis at December 31, 1998. The following are maturities of long-term debt for each of the next five years: Related Party Notes Payable Note Payable Total December 31, 1999 $ 549,562 $ -- $ 549,562 2000 51,192 -- 51,192 2001 52,992 699,811 752,803 2002 37,353 -- 37,353 2003 19,833 -- 19,833 ---------- ----------- ---------- Totals $ 710,932 $ 699,811 $1,410,743 ------ ========== =========== ========== [6] Capital Lease The Company acquired equipment under the provision of a long-term lease. The lease expires in March 2001. The equipment under the capital lease as of December 31, 1998 had a cost of $109,545 accumulated depreciation of $29,068 with a net book value of $80,477 The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at December 31, 1998 are as follows: Total Minimum Lease Payments $ 104,900 Amount Representing Interest (19,968) ---------- Present Value of Net Minimum Lease Payments 84,932 Current Portion (35,582) Long-Term Capital Lease Obligation $ 49,350 [7] Significant Risks and Uncertainties [A] Concentrations of Credit Risk - Cash - The Company maintains balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 1998, the Company's uninsured cash balances totaled approximately $112,000. The Company does not require collateral in relation to cash credit risk. 10 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [UNAUDITED] - ------------------------------------------------------------------------------ [7] 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, 1998 is $30,750. [8] Major Customer For the six months ended December 31, 1998 and 1997, approximately 40% and 45% of revenues were derived from one customer. The loss of this customer would have an adverse affect on the Company's operations. In addition, for the six months ended December 31, 1998 and 1997, an aggregate of approximately 18% and 15%, 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, 1998 and 1997. Accounts receivable from these customers comprised approximately 64% and 57% of total accounts receivable at December 31, 1998 and 1997, 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 December 31, 1999, provides for a minimum annual rental of $60,000 plus payment of all real estate taxes. Rent and real estate tax expense for the six months ended December 31, 1998 and 1997 on this lease was approximately $41,000 and $58,000, respectively. Unpaid rent of $55,000 due to Gerob at December 31, 1998 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 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. Rent expense for the six months ended December 31, 1998 and 1997 on this lease was approximately $230,000 and $202,000, 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 2001. 11 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [UNAUDITED] - ------------------------------------------------------------------------------ [9] Commitments and Contingencies [Continued] Other Lease Commitments [Continued] - The minimum rental commitment for long-term non-cancelable leases is as follows: Related Lease Party Lease December 31, Commitment Commitment Total 1999 $ 53,382 $ 346,000 $ 399,382 2000 35,935 346,000 381,935 2001 24,212 346,000 370,212 2002 7,594 9,609 17,203 2003 -- -- -- Thereafter -- -- -- ---------- --------- ---------- Total $ 121,123 $1,047,609 $1,168,732 ----- ========== ========== ========== Total rent expense, including real estate taxes and maintenance charges, was approximately $270,000 and $260,000 for the six months ended December 31, 1998 and 1997, respectively. Rent expense is stated net of sublease income of approximately $13,000 and $11,000 for the six months ended December 31, 1998 and 1997, 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 years ending June 30, 1998 and 1999, 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, 1998. [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 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. On July 7, 1997, the Company was informed by one of its suppliers of a recall of the supplier's raw material which was used in manufacturing of tablets sold by the Company. On July 17, 1997, the Company issued a voluntary recall to three customers affected by this and, accordingly, reduced its sales and accounts receivable at June 30, 1997 by $127,000. The Company believes they have recourse against the supplier for the full value of the tablets sold containing the recalled raw material. The Company does not believe there will be any significant additional costs relating to this recall. On September 30, 1997, the Company instituted suit to recover all damages. The case continues in settlement negotiations, whereby, no estimate can be made as to the amount, if any, of ultimate recovery. 12 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 [UNAUDITED] - ------------------------------------------------------------------------------ [9] Commitments and Contingencies [Continued] [E] Consulting Agreements - The Company entered into a consulting agreement with a financial advisory group ["Consultants"] commencing on March 20, 1998 until February 28, 1999. The Company is obligated to pay $2,500 for services rendered at the end of each month that services are provided during the terms of this agreement. In addition, the Company has issued to the Consultants three options for 45,000 shares of common stock. Each option is exercisable for 15,000 shares at exercise prices of $1.125, $2.50 and $4.00, respectively. These options are exercisable until March 20, 2003. [F] 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. [G] Manufacturing Agreement - On February 14, 1998, the Company signed a manufacturing agreement with Pilon International, PLC., a company that supplies Zepter International, a world-wide direct sales distributor of consumer products. The Company will manufacture and develop dietary supplements through the year 2001. [10] Related Party Transactions During the year ended June 30, 1997, the Company entered into a consulting agreement with the brother of the Company's president on a month to month basis for $1,100 per month. The total consulting expense recorded per this verbal agreement for the six months ended December 31, 1998 and 1997, by the Company was $6,600 and $6,000, respectively. [11] Fair Value of Financial Instruments Generally accepted accounting principles require disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. Short-term debt and long-term debt including long-term debt to a related party is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value. 13 CHEM INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 [UNAUDITED] - ------------------------------------------------------------------------------ [12] New Authoritative Pronouncements The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company adopted SFAS No. 130 as of July 1, 1998. SFAS No. 130 does not have a material impact on the Company. The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes how operating segments are reported in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 was effective for periods beginning after December 15, 1997, and comparative information for earlier years is to be restated. SFAS No. 131 does not apply to interim financial statements in the initial year of its application. SFAS No. 131 does not have a material impact on the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and how it its designated, for example, gain or losses related to changes in the fair value of a derivative not designated as a hedging instrument is recognized in earnings in the period of the change, while certain types of hedges may be initially reported as a component of other comprehensive income [outside earnings] until the consummation of the underlying transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS No. 133 should be as of the beginning of a fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. The Company does not currently have any derivative instruments and is not currently engaged in any hedging activities. [13] Equity Transactions [A] Incentive Stock Options - On October 7, 1998, the Company granted 219,998 incentive stock options for a term of ten years commencing on October 7, 1998 to its officers at the exercise price of $1.50 per share and 60,606 shares at 110% of the exercise price for a term of five years commencing on October 7, 1998. No options have been exercised as of December 31, 1998. [B] Non-Statutory Options - On October 7, 1998, the Company granted 40,000 non-statutory stock options to the members of its Scientific Advisory Board at the exercise price of $1.50 per share for a term of ten years commencing on October 7, 1998. No options have been exercised as of December 31, 1998. . . . . . . . . . . . . . . . . . 14 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, 1998 Compared to December 31, 1997 Results of Operations The Company's net losses for the six months ended December 31, 1998 and 1997 were $(1,380,901) and $(388,388), respectively. This increase in net loss of approximately $990,000 is primarily the result of a $970,000 increase in operating loss resulting from a corresponding $600,000 decrease in gross profit and a $370,000 increase in selling and administrative expenses. The decrease in gross profit is due to an increase in manufacturing expenses as the Company hired additional direct labor and increased its production capacity in the fourth quarter of fiscal 1998 in anticipation of increased orders. Product launches expected during the six months ended December 31, 1998 in eastern Europe have been delayed because of the uncertainties in the European markets. The Company cannot anticipate when these product launches will eventually occur. Sales for the six months ended December 31, 1998 and 1997 were $5,063,494 and $4,970,100, respectively, an increase of $93,394 or 2%. For the six months ended December 31, 1998, the Company had sales to one customer, who accounted for 40% of net sales in the six month period ended December 31, 1998 and 45% in the six month period ended December 31, 1997. The loss of this customer would have an adverse affect on the Company's operations. The Company is continually trying to reduce its dependency on any one customer and diversifying its customer base with the development new product lines and increasing its contract sales. Retail and mail order sales for the six months ended December 31, 1998 totaled $367,495 as compared to $549,679 for the six months ended December 31, 1997, a decrease of $182,184 or 33% due primarily to the closing of the retail store on November 13, 1998 for approximately 9 weeks for renovations. The store reopened on January 7,1999. The Company anticipates retail and mail order sales returning to their fiscal 1998 levels, On February 17, 1997, the Company signed a distribution agreement with Roche Vitamins, Inc. to service and supply Roche products to a select segment of Roche's food, nutrition and cosmetic accounts. The agreement has initial term of two years and shall be renewable for an additional term of one year each. The Company expects to renew the agreement for the coming year. Sales for the six months ended December 31, 1998 were $654,777 as compared to $537,272, an increase of $117,505 or 22%. Cost of sales increased to $4,910,204 for the six months ended December 31, 1998 as compared to $4,214,693 for the six months ended December 31, 1997. Cost of sales increased as a percentage of sales to 97% for the six months ended December 31, 1998 from 85% for the six months ended December 31, 1997. The increase in cost of sales is due to an increase in manufacturing costs and fixed overhead costs. Selling and administrative expenses for the six months ended December 31, 1998 were $1,684,299 versus $1,315,725 for the same period a year ago. The increase of $368,574 was primarily attributable to the writeoff of the balance of goodwill at December 31, 1998 of $275,891, an increase in advertising of approximately $44,000 over the comparative period last year as the Company tries to generate new sales and customers, including hiring a consulting group and signing a professional services contract with Allan Houston of the New York Knicks to be the Company's spokesman for its Vitality Medicine line of products. There was also an increase in professional fees of approximately $33,000. Selling and administrative expenses have stabilized at approximately $700,000 per quarter. 15 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Six months ended December 31, 1998 Compared to December 31, 1997 Results of Operations Other income [expense] was $(65,671) for the six months ended December 31, 1998 as compared to $(13,546) for the six months ended December 31, 1997. This increase in net expense of $52,125 is attributable to an increase in interest expense of $38,038 due to an increase in borrowings under the Company's line of credit, a decrease in interest and investment income of $19,087 and a decrease in a partnership loss of $5,000. On July 7, 1997, the Company was informed by one of its suppliers of a recall of the supplier's raw material which was used in manufacturing of tablets sold by the Company. On July 17, 1997, the Company issued a voluntary recall to three customers affected by this, and accordingly, reduced its sales and accounts receivable at June 30, 1997 by $ 127,000. The Company believes they have recourse against the supplier for the full value of the tablets sold containing the recalled material. The Company does not believe that there will be any significant additional costs relating to this recall. On September 30, 1997 the Company instituted suit to recover all damages. The case is currently in the discovery stage. The Company expects that the case will proceed to non-binding arbitration in February 1999. No estimate can be made at December 31, 1998 as to the amount, if any, of ultimate recovery. The case continues in settlement negotiations, whereby, no estimate can be made as to the amount, if any, of ultimate recovery. Three months ended December 31, 1998 Compared to the Three months ended December 31, 1997 The Company's net losses for the three months ended December 31, 1998 and 1997 were $(958,150) and $(206,086), respectively. This increase in net loss of approximately $750,000 is primarily the result of an increase in operating loss of $370,000 as sales were uneven from month to month and overhead costs were fixed, the writeoff of goodwill, and a decrease in Federal and state income tax benefits of approximately $ 90,000. The increase in operating loss results from a corresponding $364,000 decrease in gross profit. Sales for the three months ended December 31, 1998 and 1997 were $2,839,762 and $2,618,510, respectively an increase of $221,252 or 8%. For the three months ended December 31, 1998 the Company had sales to one customer who accounted for 36% of net sales in 1998 and 50% in 1997. Retail and mail order sales for the three months ended December 31, 1998 totaled $169,376 as compared to $275,930 for the three months ended December 31, 1997, a decrease of $106,554 or 39% due to the store being closed for renovations for approximately 7 weeks. Sales under the Roche Vitamins, Inc. distribution agreement totaled $344,756 for the three months ended December 31, 1998 as compared to $262,140 for the three months ended December 31, 1997 an increase of $82,616 or 32%. Cost of sales increased to $2,777,609 for the three months ended December 31, 1998 as compared to $2,192,211 for the three months ended December 31, 1997. Cost of sales increased as a percentage of sales to 98% as compared to 84% for the three months ended December 31, 1997. The increase in cost of sales is due to an increase in manufacturing expenses, including fixed overhead costs. Selling and administrative expenses for the three months ended December 31, 1998 were $1,001,359 as compared to $719,619 for the three months ended December 31, 1997, an increase of $281,740 due primarily to the writeoff of goodwill. Selling and administrative expenses have stabilized at approximately $700,000 per quarter. 16 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Three months ended December 31, 1998 Compared to the Three months ended December 31, 1997 Other income [expense] was $(34,538) for the three months ended December 31, 1998 as compared to $(15,462) for the three months ended December 31, 1997. This increase in net expense of $19,076 is attributable to an increase in interest expense of $17,885, a decrease of interest and investment income of $2,688 and a decrease in partnership loss of $1,497. Liquidity and Capital Resources At December 31, 1998 the Company's working capital was $3,644,726 a decrease of $1,116,785 over working capital at June 30, 1998. Cash and cash equivalents were $388,366 at December 31, 1998 a decrease of $568,037 from June 30, 1998. The Company utilized $552,627 and $494,143 for operations for the six months ended December 31, 1998. The primary reasons for the cash utilized for operations for the six months ended December 31, 1998 are (a) a decrease in accounts receivable of approximately $1,440,000, (b) an increase in inventories of approximately $377,000, (c) an increase in refundable income taxes of approximately $200,000 and (d) a decrease in accounts payable of approximately $550,000. The Company believes that the anticipated sales for the third and fourth quarters of fiscal 1999 including retail and mail order sales and new product lines with higher gross profit margins, will improve the cash needs for operations in the next six months. The Company has drawn down its entire line of credit and consequently will be looking for additional sources of financing to meet its liquidity needs. The Company utilized $178,384 and $109,475 in investing activities for the six months ended December 31, 1998 and 1997, respectively. The Company generated net cash of $162,974 from debt financing activities for the six months ended December 31, 1998 and utilized $24,798 in financing activities for the six months ended December 31, 1997. The Company has a $500,000 revolving line of credit agreement with a bank which bears interest at 1.0% above the bank's prime lending rate and expires on July 27, 1999. At December 31, 1998 the balance due under the revolving line of credit was $500,000. The Company has additionally secured a five year equipment term loan with interest at 1.5% above the bank's prime lending rate. At December 31, 1998 the balance due under the equipment loan was $155,833. The Company was not in compliance with its debt coverage ratio on a consolidated basis at December 31, 1998. The Company's total annual commitments at December 31, 1998 for the next five years of $1,168,732 consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment, office equipment and automobiles. Effective July 1, 1996, the Company entered into employment agreements with each of its five executive officers providing for aggregate compensation in the amount of $680,000 for the fiscal year ending June 30, 1999. 17 CHEM INTERNATIONAL, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ Liquidity and Capital Resources [Continued] The Company expects to spend approximately $55,000 through 1999 to modify it's computer information systems enabling proper processing of transactions relating to the year 2000 ["Y2K"] and beyond. The Company installed a new network system in October of 1998 at a cost of approximately $20,000 whose hardware and software is Y2K compliant. The Company has contracted with a computer consulting firm to provide the necessary upgrades and modifications to the Company's existing manufacturing program to insure Y2K compliance. The total cost of the upgrades is approximately $33,000 and should be completed by June 30, 1999. The Company's suppliers and vendors have been contacted, and most have responded with their intent to be Y2K compliant by the year 2000. At this time, the Company believes, based on their responses, that there will be no disruption of their business. The Company does not expect the amounts required to be expended over the next twelve months to have a material effect on its financial position or results of operations. The amount expended as of December 31, 1998 was $20,543. New Authoritative Pronouncements The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company adopted SFAS No. 130 as of July 1, 1998. SFAS No. 130 does not have a material impact on the Company. The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes how operating segments are reported in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 was effective for periods beginning after December 15, 1997, and comparative information for earlier years is to be restated. SFAS No. 131 does not apply to interim financial statements in the initial year of its application. SFAS No. 131 does not have a material impact on the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and how it its designated, for example, gain or losses related to changes in the fair value of a derivative not designated as a hedging instrument is recognized in earnings in the period of the change, while certain types of hedges may be initially reported as a component of other comprehensive income [outside earnings] until the consummation of the underlying transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS No. 133 should be as of the beginning of a fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. The Company does not currently have any derivative instruments and is not currently engaged in any hedging activities. Impact of Inflation The Company does not believe that inflation has significantly affected its results of operations. 18 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 19 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 10, 1999 By:/s/ E. Gerald Kay E. Gerald Kay, President and Chief Executive Officer Date: February 10, 1999 By:/s/ Eric Friedman Eric Friedman, Chief Financial Officer 20 EX-27 2 FDS --
5 This scheudle contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of operations and is qualified in its entirety by reference to such schedules. 6-Mos Jun-30-1999 Dec-31-1998 388,366 0 2,012,822 0 3,899,020 6,803,222 1,615,762 0 8,575,051 3,158,496 0 0 0 10,357 4,495,667 8,575,051 5,063,494 5,063,842 4,910,204 6,594,503 0 0 66,019 (1,596,680) 215,779 (1,380,901) 0 0 0 (1,380,901) (.27) (.27)
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