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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ___________________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 175, Slate Hill, New York 10973
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 355-5300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.06-2/3 American Stock Exchange
- -------------------------------- ----------------------
Securities registered pursuant to Section 12(g) of the Act: None
---
(Title of Class)
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 1, 2001 was approximately $52,025,449.*
* For purposes of this calculation, shares of the registrant held by
directors and officers of the registrant and under the registrant's
401(k)/profit sharing plan have been excluded.
On March 1, 2001 there were 4,620,421 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the registrant's proxy statement for its 2001 annual
meeting of stockholders are incorporated by reference in this report.
2
Part I
Item 1. Business
General:
Balchem Corporation, incorporated in the State of Maryland in 1967,
is engaged in the development, manufacture and marketing of specialty
performance ingredients for the food, feed and medical sterilization industries.
The Company has a currently inactive Canadian subsidiary, Balchem, Ltd.
The Company operates in two business segments, the
micro-encapsulation of performance ingredients (the "encapsulated products"
segment) and the repackaging and marketing of high quality specialty gases (the
"specialty products" segment). The Company sells its products through its own
sales force, independent distributors and sales agents. Financial information
concerning the Company's business and business segments appears in the
Consolidated Financial Statements included under Item 8 herein, which
information is incorporated herein by reference.
Encapsulated Products
---------------------
The encapsulated products segment encapsulates performance
ingredients for use throughout the food and animal health industries to enhance
nutritional fortification, processing, mixing, packaging applications and
shelf-life improvement. Major product applications are baked goods, refrigerated
and frozen dough systems, processed meats, seasoning blends and confections.
Microencapsulated choline is marketed to the animal health industry offering key
nutrients to ruminant animals.
This segment also includes a line of endothermic blowing and
nucleating agents that are marketed to the foamed plastics industry exclusively
through a marketing partner.
Specialty Products
------------------
The specialty products segment consists of the following specialty
gases: ethylene oxide, blends of ethylene oxide, propylene oxide and methyl
chloride
Ethylene oxide is used as a chemical sterilant gas, primarily in the
health care industry. It is used to sterilize medical devices ranging from
syringes and catheters to scalpels, gauze, bandages and surgical kits, because
of its versatility in treating hard or soft surfaces, composites, metals, tubing
and different types of plastics without negatively impacting the performance or
appearance of the device being sterilized. As a fumigant, ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spice or other
seasoning materials. The Company's 100% ethylene oxide product is distributed by
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the Company in reusable double-walled shipping drums to assure compliance with
safety, quality and environmental standards as outlined by the U.S.
Environmental Protection Agency (the "EPA") and the U.S. Department of
Transportation. The Company's inventory of these specially-built drums, along
with the Company's two filling facilities, represent a significant capital
investment. Contract sterilizers, medical device manufacturers, medical gas
distributors and hospitals are the Company's principal customers for this
product.
Propylene oxide is used for bacteria reduction in spice treatment
and in the chemical synthesis market. It is also utilized in manufacturing
operations to make paints more durable, for manufacturing specialty starches and
textile coatings. Methyl chloride is used as a raw material in specialty
herbicides, fertilizers and pharmaceuticals, as well as in malt and wine
preservers. Propylene oxide and methyl chloride are sold principally to
customers seeking smaller (as opposed to bulk) quantities whose requirements
include timely delivery and safe handling.
In 1994, the Company purchased certain tangible and intangible
assets for its ethylene oxide business for $1,500,000 in cash and, as detailed
in the purchase agreement, the Company was required to pay additional contingent
amounts to compensate the seller for the purchase of the seller's customer list,
in accordance with a formula based on profits derived from sales of the
specialty-packaged ingredient. In 1998, the Company elected to exercise the
early payment option under the agreement resulting in the Company making a final
payment of $3,700,000 to the seller. The Company has no further purchase price
obligation under the agreement.
Due to consolidation of customer businesses in the contract
sterilizer industry, the Company has one customer, IBA, which accounted for
approximately 13% of the Company's net sales in 2000. The loss of such customer
could have a material adverse effect on the Company.
New product status:
- ------------------
In late 1999, the Company launched Reashure(TM), its encapsulated
choline for ruminant animals, having successfully completed university and field
trials. Commercial sales are currently targeted to the dairy industry where
Reashure(TM), delivers nutrient supplements through the rumen providing required
levels to dairy cows during certain weeks preceding and following calving,
commonly referred to as the "transition period" of the animal.
The Company has also introduced new products that are being sold
commercially for enhancement of shelf-life and fortification in segments of the
food industry and has several new products for the food market in test
production or test marketing status.
4
Raw materials:
- -------------
The raw materials utilized by the Company in the manufacture of its
products are generally available from a number of commercial sources. The
Company is not experiencing any current difficulties in procuring such materials
and does not anticipate any such problems however, the Company cannot assure
that will always be the case.
Patents/Licensing:
- -----------------
The Company currently holds a number of patents and uses certain
tradenames and trademarks. It also uses know-how, trade secrets, formulae and
manufacturing techniques that assist in maintaining the competitive positions of
certain of its products. Formulae and know-how are of particular importance in
the manufacture of a number of the Company's products. The Company believes that
certain of its patents, in the aggregate, are advantageous to its business.
However, it is believed that no single patent or related group of patents is
material to the Company as a whole and, accordingly, that the expiration or
termination thereof would not materially affect its business. The Company
believes that its sales and competitive position are dependent primarily upon
the quality of its products, its technical sales efforts and market conditions,
rather than on any patent protection.
As discussed below under "Environmental Matters" the Company's
ability to sell ethylene oxide is dependent upon maintaining registration with
the EPA as a medical device sterilant and spice fumigant.
Seasonality:
- -----------
In general, the business of the Company's segments is not seasonal
to any material extent.
Backlog:
- -------
At December 31, 2000, the Company had a total backlog of $597,000
(including $226,000 for the encapsulated products segment and $371,000 for the
specialty products segment) as compared to a total backlog of $798,000 at
December 31, 1999 (including $420,000 for the encapsulated products segment and
$378,000 for the specialty products segment). It has been the Company's policy
and practice to maintain an inventory of finished products or component
materials for its segments to enable it to ship products within a short time
after receipt of a product order.
5
Competition:
- -----------
The Company's competitors include many large and small companies,
some of which have greater financial, research and development, production and
other resources than the Company. Competition in the encapsulation markets
served by the Company is based primarily on performance, customer support,
quality, service and price. The development of new and improved products is
important to the Company's success. This competitive environment requires
substantial investments in product and manufacturing process research and
improvement. In addition, the winning and retention of customer acceptance of
the Company's encapsulated products involve substantial expenditures for
applications testing and sales efforts. The Company also engages various
universities to assist in research and provide independent third-party data. In
the specialty products business, the Company faces competition from alternative
sterilizing technologies and products.
Research & Development:
- ----------------------
During the years ended December 31, 2000, 1999 and 1998, the Company
incurred research and development expense of approximately $1.1 million, $1.3
million and $1.0 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the encapsulated products segment.
During the year ended December 31, 2000, an average of 10 employees were devoted
full time to research and development activities. The Company has historically
funded its R&D programs with funds available from current operations with the
intent of recovering those costs from profits derived from future sales of
products resulting from, or enhanced by, the research and development effort.
The Company reviews its product development activities in an effort
to allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
Environmental Matters:
- ---------------------
The Federal Insecticide, Fungicide and Rodenticide Act, as amended,
a health and safety statute, requires that certain products within the Company's
specialty products segment must be registered with the EPA. In order to obtain a
registration, an applicant typically must demonstrate through extensive test
data that its product will not cause unreasonable adverse effects on the
environment. The Company holds an EPA registration to permit it to sell packaged
100% ethylene oxide as a medical device sterilant and spice fumigant. The
6
Company is in the process of re-registering this product use. The
re-registration requirement is a result of a congressional enactment during 1988
requiring the re-registration of this product and all products that are used as
pesticides. The Company, in conjunction with one other company, has conducted
the required testing under the direction of the EPA. Testing has concluded and
the EPA has stated that, due to, a backlog of projects, it cannot anticipate a
date for completing the re-registration process for this product at this time.
The Company hopes to recover the cost of re-registration in the selling price of
the sterilant.
The Company's management continues to believe it will be successful
in obtaining re-registration for this product as it has met the EPA's
requirements thus far. Additionally, the product is used as a sterilant with
certain qualities and no known, equally effective substitute. Management
believes absence of availability of this product could not be easily tolerated
by various medical device manufacturers and the health care industry due to the
resultant infection potential if the product were unavailable.
On February 27, 1988, California's Proposition 65 (Safe Drinking
Water and Toxic Enforcement Act of 1986) went into effect. 100% ethylene oxide,
a sterilant/fumigant distributed by the Company, is listed by the State of
California as a carcinogen and reproductive toxin. As a result, the Company is
required to provide a prescribed warning to any person in California who may be
exposed to this product; failure to do so would result in liability of up to
$2,500 per day per person exposed.
The California Birth Defect Law of 1984 requires the California
Department of Food and Agriculture ("CDFA") to identify chemicals in "widespread
use" for which significant data gaps exist, and requires registrants for those
products to submit the data or pay an assessment to the CDFA to fund independent
development of the data. The CDFA determined that data gaps existed for ethylene
oxide. After initially requesting an exemption, the Company, along with another
registrant, agreed to submit information to close the data gaps. The registrants
have provided requested data, and, to the Company's knowledge, fulfilled the
data submission obligations to the CDFA.
The Company believes it is in compliance in all material respects
with federal, state and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment. Such compliance includes the maintenance
of required permits under air pollution regulations and compliance with
requirements of the Occupational Safety and Health Administration. The cost of
such compliance has not had a material effect upon the results of operations or
financial condition of the Company. The proceeding referred to in Item 3 below
has been substantially completed.
Employees:
- ---------
As of March 1, 2001, the Company employed approximately 133 persons.
No employees are covered by any collective bargaining agreement.
7
Certain Factors Affecting Future Operating Results:
- ---------------------------------------------------
This Report contains "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The Company can give no assurances that the expectations
reflected in forward-looking statements will prove correct and various factors
could cause results to differ materially from the Company's expectations.
Certain factors that might cause such a difference include, without limitation;
(1) changes in the laws or regulations affecting the operations of the Company;
(2) changes in the business tactics or strategies of the Company; (3)
acquisition(s) of assets or of new or complementary operations, or divestiture
of any segment of the existing operations of the Company; (4) changing market
forces or contingencies that necessitate, in management's judgment, changes in
plans, strategy or tactics of the Company; and (5) fluctuations in the
investment markets or interest rates, which might materially affect the
operations or financial condition of the Company, as well as the following
matters, and all forward-looking statements are qualified in their entirety by
these cautionary statements:
Competition. The Company faces competition in its markets from a number of large
and small companies, some of which have greater financial, research and
development, production and other resources than the Company. Various of the
Company's products also face competition from products or technologies that may
be used as an alternative therefor. The Company's competitive position is based
principally on performance, quality, customer support, service, breadth of
product line, manufacturing technology and the selling prices of its products.
The Company's competitors can be expected to improve the design and performance
of their products and to introduce new products with competitive price and
performance characteristics. There can be no assurance that the Company will
have sufficient resources to maintain its current competitive position or market
share.
Environmental and Regulatory Matters. Pursuant to applicable environmental and
safety laws and regulations, the Company is required to obtain and maintain
certain governmental permits and approvals, including an EPA registration for
its ethylene oxide sterilant product. Permits and approvals may be subject to
revocation, modification or denial under certain circumstances. While the
Company believes it is in compliance in all material respects with environmental
laws, there can be no assurance that operations or activities of the Company
will not result in administrative or private actions, revocation of required
permits or licenses, or fines, penalties or damages, which could have an adverse
effect on the Company. In addition, the Company cannot predict the extent to
which any legislation or regulation may affect the market for the Company's
products or its cost of doing business.
Raw Materials. The principal raw materials used by the Company in
the manufacture of its products can be subject to price fluctuations. While the
8
selling prices of the Company's products tend to increase or decrease over time
with the cost of raw materials, such changes may not occur simultaneously or to
the same degree. There can be no assurance that the Company will be able to pass
increases in raw material costs through to its customers in the form of price
increases. Increases in the price of raw materials, if not offset by product
price increases, could have an adverse impact upon the profitability of the
Company. In addition, the Company is not experiencing any current difficulties
in procuring such materials and does not anticipate any such problems however,
the Company cannot assure that will always be the case.
Reliance on Continued Operation and Sufficiency of Facilities and on Unpatented
Trade Secrets. The Company's revenues are dependent on the continued operation
of its manufacturing, packaging and processing facilities. The operation of the
Company's facilities involves risks, including the breakdown, failure or
substandard performance of equipment, power outages, the improper installation
or operation of equipment, explosions, fires, natural disasters and the need to
comply with environmental and other directives of governmental agencies. The
occurrence of material operational problems, including but not limited to the
above events, may adversely affect the profitability of the Company during the
period of such operational difficulties. The Company's competitive position is
also dependent upon unpatented trade secrets. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information.
Risks Associated with Foreign Sales. For the year ended December 31, 2000,
approximately 9% of the Company's net sales consisted of sales outside the
United States, predominately to Europe. Changes in the relative values of
currencies take place from time to time and could in the future adversely affect
prices for the Company's products. In addition, international sales are subject
to other inherent risks, including possible labor unrest, political instability
and export duties and quotas. There can be no assurance that these factors will
not have a material adverse impact on the Company's ability to increase or
maintain its international sales.
Dependence on Key Personnel. The Company's operations are dependent on the
continued efforts of its senior executives. The loss of the services of a number
of senior executives could have a material adverse effect on the Company.
Item 2. Properties
The executive, sales, marketing, research & development offices and
manufacturing facilities of the Company's encapsulated products segment and a
drumming facility for the Company's ethylene oxide business, are presently
housed in four buildings located, together with a 14,900 square foot steel
warehouse, in Slate Hill, New York. The Company owns a total of approximately 16
acres of land on several parcels in this community.
9
The Company also owns a facility located on an approximately 24 acre
parcel of land in Green Pond, South Carolina. The Company sold the balance of
its formerly 81 acre site in Green Pond in 1997. The facility now consists of a
drumming facility, a maintenance building and an office building. The Company
uses the facility as a terminus, warehouse and drum filling station for its
products in its specialty products segment.
Item 3. Legal Proceedings
In 1982 the Company discovered and thereafter removed a number of
buried drums containing unidentified waste material from the Company's site in
Slate Hill, New York. The Company thereafter entered into a Consent Decree to
evaluate the drum site with the New York Department of Environmental
Conservation ("NYDEC") and performed a Remedial Investigation/Feasibility Study
that was approved by NYDEC in February 1994. Based on NYDEC requirements, the
Company cleaned the area and removed additional soil from the drum burial site.
The cost for this clean-up and the related reports was approximately $164,000.
Clean-up was completed in 1996, but NYDEC required the Company to monitor the
site through 1999. The Company continues to be involved in discussions with
NYDEC to evaluate test results and determine what, if any, additional actions
will be required on the part of the Company to close out the remediation of this
site. Additional actions, if any, would likely require the Company to continue
monitoring the site. The cost of such monitoring has historically been less than
$10,000 per year.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information.
The Company's common stock is traded on the American Stock Exchange
under the symbol BCP. The high and low closing prices for the common stock as
recorded in the American Stock Exchange Market Statistical Reports for 2000 and
1999, for each quarterly period during the past two years were as follows:
10
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Quarterly Period High Low
- -----------------------------------------------------------------------------
Ended March 31, 2000 $ 9.25 $ 7.50
Ended June 30, 2000 11.75 8.25
Ended September 30, 2000 12.38 11.00
Ended December 31, 2000 13.43 10.32
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Quarterly Period High Low
- -----------------------------------------------------------------------------
Ended March 31, 1999 $ 7.75 $ 5.06
Ended June 30, 1999 6.50 5.00
Ended September 30, 1999 7.25 5.69
Ended December 31, 1999 8.75 5.88
(b) Record Holders.
As of March 1, 2001, the approximate number of holders of record of
the Company's common stock was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.06-2/3 par value 261*
*An unknown number of stockholders hold stock in street name. The total number
of beneficial owners of the Company's common stock is estimated to be
approximately 1,342.
(c) Dividends.
The Company declared a dividend of $0.06 per share on the common
stock during its fiscal year ended December 31, 2000.
11
Item 6. Selected Financial Data
Earnings per share and dividend amounts have been adjusted for the May 1998
three-for-two stock split (effected by means of a stock dividend).
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------
Statement of Operations Data
Net sales $33,198 $29,682 $28,721 $28,619 $26,371
Earnings before income
tax expense 5,996 4,905 4,628 4,227 2,917
Income tax expense 2,267 1,811 1,673 1,456 990
Net earnings 3,729 3,094 2,955 2,771 1,927
Basic net earnings per
common share .80 .64 .61 .58 .41
Diluted net earnings per
common share .78 .63 .60 .57 .40
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------
At December 31, 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------
Balance Sheet Data
Total assets $23,222 $22,030 $22,648 $17,593 $15,140
Long-term debt -- 1,250 3,750 1,500 2,100
Other long-term
obligations 362 606 841 890 794
Total stockholders' equity 19,580 17,939 15,775 12,336 9,387
Dividends per share $ .06 $ .05 $ .033 $ .033 $ .030
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains forward-looking statements, within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The actions and performance of the Company could differ
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors that might cause differences from the forward-looking
statements include those referred to or identified in Item 1 above. Reference
should be made to such factors and all forward-looking statements are qualified
in their entirety by the above cautionary statements.
(All dollar amounts in thousands)
Results of Operations:
Fiscal Year 2000 compared to Fiscal Year 1999
Net sales for 2000 were $33,198 as compared to $29,682 for 1999, an
increase of $3,516 or 12%. Net sales for the specialty products segment were
$20,113 for 2000 as compared to $19,843 for 1999, an increase of $270 or 1%.
This increase was attributable primarily to increased volumes sold of ethylene
oxide related products. Net sales for the encapsulated products segment were
$13,085 for 2000 as compared to $9,839 for 1999, an increase of $3,246 or 33%.
This increase was due principally to greater sales to the animal nutrition,
specialty industrial and domestic food markets. The growth in sales to the food
market is the result of increased volumes sold of higher margin products which
can be attributed principally to new products and new applications, combined
with additional sales representation. In late 1999, the Company launched
Reashure(TM), its encapsulated choline for ruminant animals, after having
successfully completed university and field trials. Commercial sales are
currently targeted to the dairy industry where Reashure(TM) delivers nutrient
supplements through the rumen providing required levels to dairy cows during
certain weeks preceding and following calving, commonly referred to as the
"transition period" of the animal. Sales of Reashure(TM) continued to develop
through growth from existing customers and with the addition of new customers
primarily in the East and Midwest.
Gross profit as a percent of sales for 2000 was 42.3% as compared to
40.8% for 1999. Margins for the specialty products segment were favorably
affected primarily by increased volumes sold and improved production
efficiencies of blended ethylene oxide products which the Company now sells for
non-medical sterilization. Margins also improved in the encapsulated products
division, a result of efficiencies realized from increased production and the
mix of products sold during 2000.
13
Operating expenses for 2000 increased to $8,103 from $7,111 for
1999, an increase of $992 or 14%. The increase in operating expenses was
primarily the result of increased advertising expense and travel expenses and
increased payroll expense in the area of sales and marketing for the
encapsulated products segment. In particular, additional sales personnel have
been added to support the animal nutrition business. The Company expended $1,069
and $1,264 in 2000 and 1999, respectively, on Company-sponsored research and
development programs, substantially all of which pertained to the Company's
encapsulated products segment for both food and animal feed applications. The
decline in these research and development expenses is a result of the Company
having completed the gathering of data for Reashure(TM) from university studies,
commercial field trials and veterinarians in 1999.
As a result of the foregoing, earnings from operations for 2000 were
$5,938 as compared to $5,013 for 1999. Earnings from operations for the
specialty products segment for 2000 was $5,605 as compared to $5,613 for 1999.
Earnings from operations for the encapsulated products segment for 2000 was $333
as compared to a loss of $600 for 1999.
Net interest income for 2000 totaled $58 as compared to net interest
expense of $111 for 1999. Long-term debt was eliminated in 2000 from $1,250 in
1999 resulting in lower interest expense.
The Company's effective income tax rate was 38% for 2000 as compared
with 37% for 1999 due principally to the effects of the Company's utilization of
net operating loss carry-forwards for state income tax purposes in the second
quarter of 1999.
As a result of the foregoing, net earnings were $3,729 for 2000 as
compared to $3,094 for 1999.
Fiscal Year 1999 compared to Fiscal Year 1998
Net sales for 1999 were $29,682 as compared to $28,721 for 1998, an
increase of $961 or 3%. Net sales for the specialty products segment were
$19,843 for 1999 as compared to $19,434 for 1998, an increase of $409 or 2%.
This increase was attributable primarily to an increase in volumes sold of the
Company's ethylene oxide product partially offset by a decline in volumes sold
of the Company's methyl chloride product. Net sales for the encapsulated
products segment were $9,839 for 1999 as compared to $9,287 for 1998 an increase
of $552 or 6%. This increase was primarily the result of increased sales in the
domestic food markets partially offset by decreased sales in the international
food and animal nutrition markets. With successful university and field trials
conducted in 1999, targeted at the dairy industry and in particular the
transition period of the dairy cow, the Company launched Reashure(TM), its
encapsulated choline for animal feed in the fourth quarter of 1999.
14
Gross profit as a percent of sales for 1999 was 40.8% as compared to
39.8% in 1998. Margins for the specialty products segment were affected
favorably by increased volumes sold of ethylene oxide and improved production
efficiencies of blended ethylene oxide products, a result of the Company's
decision to blend internally rather than use third party blenders. These margin
improvements were partially offset by declines in volumes produced and sold of
the Company's methyl chloride product and additional amortization expense
associated with the early purchase price buy-out option under the agreement
pertaining to the 1994 acquisition by the specialty products segment. Margins in
the encapsulated products division declined two percentage points in 1999 as
compared to 1998, principally as a result of the mix of products sold into the
international food market.
Operating expenses for 1999 increased to $7,111 from $6,616 for
1998, an increase of $495 or 7%. The increase in operating expenses was
primarily the result of increased payroll expense in the area of selling and
applications research and development, increased advertising costs and increased
R&D consulting expenses in the encapsulated products segment. These increases
were partially offset by a decrease in consulting fees in the specialty products
segment and other payroll related expenses. During 1999 and 1998, the Company
spent $1,264 and $1,017, respectively, on research and development programs
substantially all of which pertained to the Company's encapsulated products
segment for both food and animal feed applications. The Company incurred
considerable development expenses in the gathering of data for Reashure(TM) from
university and veterinarian studies as well as field trials to accelerate the
marketing effort for this product.
As a result of the foregoing, earnings from operations for 1999 were
$5,013 as compared to $4,807 for 1998. Earnings from operations for the
specialty products segment for 1999 was $5,613 as compared to $4,631 for 1998.
Loss from operations for the encapsulated products segment for 1999 was $600, a
result of lower margins and increased research and development expenses as
described above, as compared to income of $176 for 1998.
15
Net interest expense for 1999 totaled $111 as compared to $164 for
1998. Long-term debt was reduced to $1,250 in 1999 from $3,750 in 1998, a
reduction of $2,500 resulting in lower interest expense.
The Company's effective income tax rate increased in 1999 as
compared to 1998 due principally to the effects of the Company's utilization of
net operating loss carry-forwards for state income tax purposes in 1998.
As a result of the foregoing, net earnings were $3,094 for 1999 as
compared to $2,955 for 1998.
Liquidity and Capital Resources
Cash flows provided by operating activities were $5,953 for 2000 as
compared with $4,682 for 1999. The increase in cash flows from operating
activities was due primarily to increased net earnings, reduced inventory levels
and increases in accounts payable, income taxes payable and other accrued
expense balances, a result of timing of payments made to vendors and other
service providers partially offset by an increase in accounts receivable.
Capital expenditures were $881 for 2000. Capital expenditures are
projected to be approximately $1,800 for 2001.
In June 1999, the board of directors authorized the repurchase of up
to 1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. As of December 31, 2000, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which, 56,248 shares
had been issued by the Company as of such date under employee benefit plans and
for the exercise of stock options. The Company intends to acquire shares from
time to time at prevailing market prices if and to the extent it deems it
advisable to do so based among other factors on its assessment of corporate cash
flow and market conditions.
During 2000, the Company paid off its remaining long-term debt of
$1,250. There was no long-term debt outstanding at December 31, 2000.
The Company knows of no current or pending demands on or commitments
for its liquid assets that will materially affect its liquidity. Management
believes current cash balances and expected operating cash flow will be
sufficient to fund operations in the next year. The Company currently has
approval for a $2,000 line of credit from its principal bank. There were no
outstanding borrowings under this line of credit on December 31, 2000.
16
Impact of Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, as amended, "Accounting for Derivative Instruments and
Hedging Activities." It 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. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Adoption of
this statement is not expected to have a material effect on the Company's
financial position or results of operations upon adoption effective January 1,
2000 because the Company does not currently have derivative financial
instruments or derivative commodity instruments, nor does the Company have any
financial instruments entered into for trading or hedging purposes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of operations, the Company is exposed to market
risks arising from adverse changes in interest rates. Market risk is defined for
these purposes as the potential change in the fair value of debt instruments
resulting from an adverse movement in interest rates. As of December 31, 2000,
the Company did not have any long term borrowings. The Company's short-term
working capital borrowings have historically borne interest based on the prime
rate. The Company believes that its exposure to market risk relating to interest
rate risk is not material, as it presently does not have any outstanding debt.
The Company has no derivative financial instruments or derivative
commodity instruments, nor does the Company have any financial instruments
entered into for trading or hedging purposes. Foreign sales are generally billed
in U.S. dollars. The Company believes that its business operations are not
exposed in any material respect to market risk relating to foreign currency
exchange risk or commodity price risk.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Independent Auditors' Report 18
Consolidated Balance Sheets as of
December 31, 2000 and 1999 19
Consolidated Statements of Earnings for the
years ended December 31, 2000, 1999 and 1998 21
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 22
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998 23
Notes to Consolidated Financial Statements
for the years ended December 31, 2000, 1999 and 1998 24
Financial Statement Schedule - Valuation and Qualifying
Accounts for the years ended December 31, 2000, 1999 and 1998 42
17
Independent Auditors' Report
The Board of Directors and Stockholders
Balchem Corporation:
We have audited the accompanying consolidated balance sheets of Balchem
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule on valuation and qualifying
accounts for the three year period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Balchem Corporation
and subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
- -----------
KPMG LLP
Short Hills, New Jersey
February 6, 2001
18
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2000 and 1999
(Dollars in thousands, except share and per share data)
Assets 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 3,068 $ 1,699
Accounts receivable, net of allowance for doubtful accounts of $48 and $0 at
December 31, 2000 and 1999, respectively 5,044 3,981
Inventories 2,554 2,748
Prepaid expenses 502 501
Deferred income taxes 200 188
------- -------
Total current assets 11,368 9,117
------- -------
Property, plant and equipment, net 7,765 7,786
Investments in intangibles assets, net 4,089 5,127
------- -------
Total assets $23,222 $22,030
======= =======
19
BALCHEM CORPORATION
Consolidated Balance Sheets, continued
December 31, 2000 and 1999
(Dollars in thousands, except share and per share data)
Liabilities and Stockholders' Equity 2000 1999
------------------------------------ ---- ----
Current liabilities:
Trade accounts payable $ 970 $ 565
Accrued compensation and other benefits 1,135 829
Other accrued expenses 654 429
Dividends payable 277 245
Income taxes payable 208 131
Current portion of long-term debt -- 600
Current portion of other long-term obligations 36 36
-------- --------
Total current liabilities 3,280 2,835
-------- --------
Long-term debt -- 650
Deferred income taxes 225 381
Deferred compensation 91 108
Other long-term obligations 46 117
-------- --------
Total liabilities 3,642 4,091
-------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding
Common stock, $.0667 par value. Authorized 10,000,000 shares; 4,903,238
shares issued and 4,616,170 shares outstanding at December 31, 2000 and
4,903,238 shares issued and 4,781,358 shares outstanding at December 31, 1999 327 327
Additional paid-in capital 3,082 2,994
Retained earnings 18,968 15,516
Treasury stock, at cost: 287,068 and 121,880 shares at December 31, 2000
and 1999, respectively (2,797) (898)
-------- --------
Total stockholders' equity 19,580 17,939
-------- --------
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $ 23,222 $ 22,030
======== ========
See accompanying notes to consolidated financial statements.
20
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
2000 1999 1998
-------- -------- --------
Net sales $ 33,198 $ 29,682 $ 28,721
Cost of sales 19,157 17,558 17,298
-------- -------- --------
Gross profit 14,041 12,124 11,423
Operating expenses:
Selling expenses 3,914 3,082 2,584
Research and development expenses 1,069 1,264 1,017
General and administrative expenses 3,120 2,765 3,015
-------- -------- --------
8,103 7,111 6,616
Earnings from operations 5,938 5,013 4,807
Other expenses (income):
Interest (income) expense - net (58) 111 164
Other (income) expense - net - (3) 15
-------- -------- --------
Total other (income) expenses (58) 108 179
-------- -------- --------
Earnings before income tax expense 5,996 4,905 4,628
Income tax expense 2,267 1,811 1,673
-------- -------- --------
Net earnings $ 3,729 $ 3,094 $ 2,955
======== ======== =======
Basic net earnings per common share $ 0.80 $ 0.64 $ 0.61
======== ======== =======
Diluted net earnings per common share $ 0.78 $ 0.63 $ 0.60
======== ======== =======
See accompanying notes to consolidated financial statements.
21
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except share and per share data)
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
------ ------ ------- -------- ------ ------ ------
Balance - January 1, 1998 4,793,163 $ 319 $ 2,145 $ 9,872 - $ - $ 12,336
Net earnings - - - 2,955 - - 2,955
Dividends ($.033 per share) - - - (160) - - (160)
Employee stock option compensation 17,144 1 263 - - - 264
Grants of non-employee stock options - - 52 - - - 52
Shares issued under employee stock
option plans 65,607 5 323 - - - 328
--------- ----- ------- -------- -------- -------- --------
Balance - December 31, 1998 4,875,914 325 2,783 12,667 - - 15,775
Net earnings - - - 3,094 - - 3,094
Dividends ($.05 per share) - - - (245) - - (245)
Treasury shares purchased - - - - (128,400) (943) (943)
Shares issued under employee benefit
plans 19,927 2 124 - 4,420 30 156
Grants of non-employee stock options - - 60 - - - 60
Shares issued under employee stock
option plans 7,397 - 27 - 2,100 15 42
--------- ----- ------- -------- -------- -------- --------
Balance - December 31, 1999 4,903,238 327 2,994 15,516 (121,880) (898) 17,939
Net earnings - - - 3,729 - - 3,729
Dividends ($.06 per share) - - - (277) - - (277)
Treasury shares purchased - - - - (214,916) (2,236) (2,236)
Shares issued under employee benefit
plans - - 58 - 17,095 116 174
Shares issued under stock option plans - - 30 - 32,633 221 251
--------- ----- ------- -------- -------- -------- --------
Balance - December 31, 2000 4,903,238 $ 327 $ 3,082 $ 18,968 (287,068) $ (2,797) $ 19,580
========= ===== ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
22
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net earnings $ 3,729 $ 3,094 $ 2,955
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,015 2,028 1,654
Non-employee stock compensation -- 60 52
Income tax benefit from stock options exercised 77 -- --
Shares issued under employee benefit plans 174 156 264
Deferred income tax (benefit) expense (168) (113) 92
Provision for doubtful accounts 48 -- (187)
Loss on sale of equipment -- -- 19
Changes in assets and liabilities:
Accounts receivable (1,111) (698) (35)
Inventories 194 127 (368)
Prepaid expenses (1) (25) 5
Accounts payable and accrued expenses 936 (249) (550)
Income taxes payable 77 329 --
Other long-term obligations (17) (27) (8)
------- ------- -------
Net cash provided by operating activities 5,953 4,682 3,893
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment -- -- 15
Capital expenditures (881) (602) (1,637)
Increase in intangibles assets (75) (97) (4,063)
------- ------- -------
Net cash used in investing activities (956) (699) (5,685)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 3,000
Principal payments on long-term debt (1,250) (2,500) (750)
Proceeds from stock options and warrants exercised 174 42 328
Dividends paid (245) (160) (160)
Purchase of treasury stock (2,236) (943) --
Other financing activities (71) (71) (14)
------- ------- -------
Net cash (used in) provided by financing activities (3,628) (3,632) 2,404
------- ------- -------
Increase in cash and cash equivalents 1,369 351 612
Cash and cash equivalents beginning of year 1,699 1,348 736
------- ------- -------
Cash and cash equivalents end of year $ 3,068 $ 1,699 $ 1,348
======= ======= =======
See accompanying notes to consolidated financial statements.
23
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
Note 1- Business Description and Summary of Significant Accounting Policies
Business Description
- --------------------
Balchem Corporation (the "Company") is engaged in the development, manufacture
and marketing of specialty performance ingredients and products for the food,
feed and medical sterilization industries.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenue is recognized upon product shipment, passage of title and when all
significant obligations of the Company have been satisfied. In December 1999,
the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 is not a rule
or interpretation of the SEC, however, it represents interpretations and
practices followed by the Division of Corporation Finance and the Office of the
Chief Accountant in administering the disclosure requirements of the Federal
securities laws. The Company believes its revenue recognition policies are in
compliance with the interpretations outlined in SAB 101.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost generally
determined on a first-in, first-out basis.
24
Property, Plant and Equipment and Depreciation
- ----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings 15-25 years
Equipment 3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and
major overhauls that extend the lives or increase the capacity of plant assets
are capitalized. When assets are retired or otherwise disposed of, the cost of
the assets and the related accumulated depreciation are removed from the
accounts and any resultant gain or loss is included in earnings.
Intangible Assets
- -----------------
Intangible assets are stated at cost and are amortized on a straight-line basis
over the following estimated useful lives:
Customer lists 6-10 years
Re-registration costs 10 years
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
- ----------------
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at December 31, 2000 and 1999 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
25
accompanying consolidated balance sheets. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value,
and, accordingly, the estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
Research and Development
- ------------------------
Research and development costs are expensed as incurred.
Credit Risk
- -----------
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customers'
financial condition and credit histories. The majority of the Company's
customers are major national or international corporations. International sales
are mostly to companies in Europe.
Stock Option Plan
- -----------------
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations including FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation and
interpretation of APB Opinion No. 25" issued in March 2000, to account for its
fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
26
Impairment of Long-lived Assets
- -------------------------------
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
27
Net Earnings Per Share
- ----------------------
Basic net earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per share is calculated in a manner consistent with basic net
earnings per share except that the weighted average number of common shares
outstanding also includes the dilutive effect of stock options outstanding
(using the treasury stock method).
NOTE 2-INVENTORIES
- ------------------
Inventories at December 31, 2000 and 1999 consist of the following:
2000 1999
------ ------
Raw materials $1,147 $1,340
Finished goods 1,407 1,408
------ ------
Total inventories $2,554 $2,748
====== ======
NOTE 3- PROPERTY, PLANT AND EQUIPMENT
- -------------------------------------
Property, plant and equipment at December 31, 2000 and 1999 are summarized as
follows:
2000 1999
------ ------
Land $ 60 $ 60
Building 4,551 4,331
Equipment 11,011 10,350
15,622 14,741
------- -------
Less: Accumulated depreciation 7,857 6,955
------- -------
Net property, plant and equipment $ 7,765 $ 7,786
======= =======
NOTE 4- INTANGIBLE ASSETS
- -------------------------
Intangible assets at December 31, 2000 and 1999 consist of the following:
2000 1999
------ ------
Customer lists $6,760 $6,760
Re-registration costs 356 356
Covenants not to compete 295 295
Patents 215 116
Other 125 148
7,751 7,675
------ ------
Less: Accumulated amortization 3,662 2,548
------ ------
Net intangible assets $4,089 $5,127
====== ======
28
In 1994, the Company purchased certain tangible and intangible assets for one of
its packaged specialty products for $1,500 in cash and the Company was required
to pay additional contingent amounts to compensate the seller for the purchase
of the seller's customer list in accordance with a formula based on profits
derived from sales of the specialty packaged ingredient. In 1998, the Company
elected to exercise the early payment option under the agreement and made a
final payment of $3,700 to the seller in settlement of its remaining purchase
price obligation under the terms of the agreement. Amounts allocated to the
customer list are being amortized over its remaining estimated useful life on a
straight-line basis through 2004.
In 1997, the Company entered into non-compete agreements with two former
officers of the Company. The Company has recorded the present value of the
future monthly payments under these agreements as a deferred charge and is
amortizing such amount over the terms of the respective agreements, which end in
2002.
The Company is in the process of re-registering a product it sells for
sterilization of medical devices and other uses. The re-registration requirement
is a result of a congressional enactment during 1988 requiring the
re-registration of this product and all other products that are used as
pesticides. The Company, in conjunction with one other company, has been
conducting the required testing under the direction of the Environmental
Protection Agency ("EPA"). Testing has concluded and the EPA has stated that,
due to a backlog of projects, it cannot anticipate a date for completing the
re-registration process for this product at this time. The Company's management
believes it will be successful in obtaining re-registration for the product as
it has met the EPA's requirements thus far, although no assurance can be given.
Additionally, the product is used as a sterilant with no known substitute.
Management believes absence of availability of this product could not be easily
tolerated by medical device manufacturers and the health care industry due to
the resultant infection potential if the product were unavailable.
NOTE 5 - LONG-TERM DEBT & CREDIT AGREEMENTS
- -------------------------------------------
There was no long-term debt outstanding at December 31, 2000. Borrowings at
December 31, 1999 included $1,250 due under a term loan agreement with a bank
that was paid in full during 2000. Such borrowings had an interest rate of LIBOR
plus 1%.
The Company also has approval for a $2,000 short-term line of credit from a
bank. There were no outstanding borrowings under the line of credit on December
31, 2000 or 1999. The approval expires on June 30, 2001. The Company intends to
seek renewal of such approval in 2001.
29
NOTE 6 - INCOME TAXES
Income tax expense (benefit) attributable to earnings before income taxes
expense consists of the following:
2000 1999 1998
------- ------- -------
Current:
Federal $ 2,018 $ 1,598 $ 1,402
State 417 326 179
Deferred:
Federal (149) (102) 85
State (19) (11) 7
------- ------- -------
Total income tax provision $ 2,267 $ 1,811 $ 1,673
======= ======= =======
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 34% to earnings before income tax expense in 2000,
1999 and 1998 due to the following :
30
2000 1999 1998
------- ------- -------
Income tax at Federal
Statutory rate $ 2,039 $ 1,668 $ 1,574
State income taxes, net of
Federal income tax benefit 263 208 123
Other (35) (65) (24)
------- ------- -------
Total income tax provision $ 2,267 $ 1,811 $ 1,673
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are as follows:
2000 1999
---- ----
Deferred tax assets:
Amortization $504 $340
Inventories 121 158
Deferred compensation 41 48
Non-employee stock options 99 99
Other 92 84
---- ----
Total deferred tax assets 857 729
==== ====
Deferred tax liabilities:
Depreciation 882 922
---- ----
Total deferred tax liabilities 882 922
==== ====
Net deferred tax liability $ 25 $193
==== ====
There is no valuation allowance for deferred tax assets at December 31, 2000 and
1999. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences.
31
NOTE 7 - STOCKHOLDERS' EQUITY
- -----------------------------
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. Since inception of its repurchase authorization,
through December 31, 2000, the Company had repurchased 343,316 shares at an
average cost of $9.26 per share.
On May 2, 1998, the Board of Directors of the Company approved a three-for-two
split of the Company's common stock distributed in the form of a stock dividend
to shareholders of record on May 15, 1998. Such distribution was made on June 3,
1998. Accordingly, the stock split was recognized by reclassifying $105, the par
value of the additional shares resulting from the split, from additional paid-in
capital to common stock.
In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan (the
"1999 Stock Plan") for officers, directors, directors emeritus and employees of
and consultants to the Company and its subsidiaries. The 1999 Stock Plan is
administered by the Compensation Committee of the Board of Directors of the
Company. Under the plan, options and rights to purchase shares of the Company's
common stock are granted at prices established at the time of grant. Option
grants are either fully exercisable on the date of grant or become exercisable
thereafter in such installments as the Committee may specify. The 1999 Stock
Plan reserves an aggregate of 600,000 shares of common stock for issuance under
the Plan. The 1999 Stock Plan replaced the Company's incentive stock option plan
(the "ISO Plan") and its non-qualified stock option plan (the "Non-Qualified
Plan"), both of which expired on June 24, 1999. Unexercised options granted
under the ISO Plan and the Non-Qualified Plan prior to such termination remain
exercisable in accordance with their terms. Options granted under the ISO Plan
generally become exercisable 20% after 1 year, 60% after 2 years and 100% after
3 years from the date of grant, and expire ten years from the date of grant.
Options granted under the Non-Qualified Plan, generally vested on the date of
grant, and expire ten years from the date of grant.
The Company applies APB Opinion No. 25 in accounting for employee and director
stock options and, accordingly, when the exercise price of the options is equal
to or greater than the fair value of the stock on date of grant, no compensation
cost is recognized in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant dates for such
stock options under SFAS No. 123, the Company's net earnings would have been as
set forth below for the years ended December 31:
32
2000 1999 1998
-------- -------- ---------
Net Earnings
As Reported $ 3,729 $ 3,094 $ 2,955
Pro forma 3,465 2,971 2,805
Earnings per share
As Reported - Basic $ .80 $ .64 $ .61
Pro forma - Basic .74 .61 .58
As Reported - Diluted .78 .63 .60
Pro forma - Diluted .73 .61 .57
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of .52%, .46% and .40%; expected volatility of 54%, 48% and 46%; risk-free
interest rates of 4.9%, 6.3% and 4.8%; and expected life of five years for 2000
and six years for 1999 and 1998, respectively. The weighted average fair values
of options granted during the years 2000, 1999 and 1998 were $7.23, $4.66 and
$1.81, respectively. Pro forma net earnings reflects only options granted since
January 1, 1995. Therefore, the full impact of calculating compensation cost for
employee stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected over the
options' vesting periods and compensation cost for options granted prior to
January 1, 1995 has not been considered.
A charge to earnings and corresponding increase to additional paid-in capital of
approximately $60 and $52 was recorded for options granted in 1999 and 1998
respectively, to non-employees (including directors) in exchange for their
services. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: dividend yield of
.46% and .40%; expected volatility of 48% and 46%; risk-free interest rates of
6.3% and 4.6%; and expected lives of three years and six years. The weighted
average fair values of options granted during the years 1999 and 1998 were $2.92
and $2.65 respectively.
33
A summary of stock option plan activity for 2000, 1999 and 1998 for all plans is
as follows:
# of Weighted Average
2000 Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year 427,322 $ 7.92
Granted 103,711 11.42
Exercised (32,621) 5.32
Terminated or expired (56,615) 10.87
Outstanding at end of year 441,797 $ 8.55
Exercisable at end of year 314,627 $ 8.51
# of Weighted Average
1999 Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year 363,972 $ 8.09
Granted 89,100 6.79
Exercised (9,497) 4.42
Terminated or expired (16,253) 7.62
Outstanding at end of year 427,322 $ 7.92
Exercisable at end of year 272,252 $ 7.78
# of Weighted Average
1998 Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year 325,717 $ 7.09
Granted 119,627 8.81
Exercised (65,607) 4.37
Terminated or expired (15,765) 8.20
Outstanding at end of year 363,972 $ 8.09
Exercisable at end of year 181,247 $ 6.51
34
Information related to stock options outstanding under all plans at December 31,
2000 is as follows:
Options Outstanding Options Exercisable
--------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Number Exercise
----------- -------- ------ --------
Range of Exercise Prices Shares Outstanding Life Price Exercisable Price
$ 2.45 - $ 5.92 81,691 5.1 years $ 4.44 81,691 $ 4.44
6.00 - 9.50 168,685 8.2 years 7.40 83,515 7.37
10.75 - 13.25 191,421 8.1 years 11.33 149,421 11.38
441,797 7.6 years $ 8.55 314,627 $ 8.51
NOTE 8 - NET EARNINGS PER SHARE
The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per share:
Earnings Number of Shares
2000 (Numerator) (Denominator) Per Share Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $3,729 4,683,355 $.80
Effect of dilutive securities - stock options 89,423
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $3,729 4,772,778 $.78
Earnings Number of Shares
1999 (Numerator) (Denominator) Per Share Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $3,094 4,856,782 $.64
Effect of dilutive securities - stock options 30,049
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $3,094 4,886,831 $.63
Earnings Number of Shares
1998 (Numerator) (Denominator) Per Share Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $2,955 4,841,300 $.61
Effect of dilutive securities - stock options 69,038
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $2,955 4,910,338 $.60
36
NOTE 9 - EMPLOYEE BENEFIT PLANS
- -------------------------------
Effective January 1, 1998, the Company terminated its defined contribution
pension plan and amended its 401(k) savings plan. Assets of the terminated
defined contribution pension plan were merged into an enhanced 401(k)/ profit
sharing plan. The plan allows participants to make pretax contributions and the
Company matches certain percentages of those pretax contributions with shares of
the Company's common stock. The profit sharing portion of the plan is
discretionary and non-contributory. All amounts contributed to the plan are
deposited into a trust fund administered by independent trustees. The Company
provided for profit sharing contributions and matching 401(k) savings plan
contributions of $208 and $174 in 2000, $186 and $156 in 1999 and $178 and $172
in 1998, respectively.
NOTE 10 - BUSINESS CONCENTRATIONS
- ---------------------------------
A Specialty Products customer accounted for 13%, 16% and 15% of the Company's
consolidated net sales for 2000, 1999 and 1998, respectively. This customer
accounted for 10% and 16% of the Company's accounts receivable balance at
December 31, 2000 and 1999, respectively.
NOTE 11 - LEASES
- ----------------
The Company leases most of its vehicles and office equipment under noncancelable
operating leases, which expire at various times through 2003. Rent expense
charged to operations under such lease agreements for 2000, 1999 and 1998
aggregated approximately $326, $335 and $345, respectively. Aggregate future
minimum rental payments required under noncancelable operating leases at
December 31, 2000 are as follows:
Year
----
2001 $ 205
2002 125
2003 69
-----
Total minimum lease payments $ 399
=====
NOTE 12 - SEGMENT INFORMATION
- -----------------------------
The Company's reportable segments are strategic businesses that offer different
products and services. Presently, the Company has two reportable segments,
Specialty Products and Encapsulated Products. They are managed separately
38
because each business requires different technology and marketing strategies.
The Specialty Products segment consists of three specialties: ethylene oxide,
propylene oxide and methyl chloride. The Encapsulated Products segment is in the
business of encapsulating performance ingredients for use throughout the food
and animal health industries for processing, mixing, packaging applications and
nutritional fortification and for shelf-life improvement. The Company sells
products for both segments through its own sales force, independent distributors
and sales agents. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Business Segment Net Sales:
- ---------------------------
2000 1999 1998
-------- -------- --------
Specialty Products $ 20,113 $ 19,843 $ 19,434
Encapsulated Products 13,085 9,839 9,287
-------- -------- --------
Total $ 33,198 $ 29,682 $ 28,721
======== ======== ========
Business Segment Earnings (Loss):
- ---------------------------------
2000 1999 1998
-------- -------- --------
Specialty Products $ 5,605 $ 5,613 $ 4,631
Encapsulated Products 333 (600) 176
Interest expense and other income (expense) 58 (108) (179)
-------- -------- --------
Earnings before income taxes $ 5,996 $ 4,905 $ 4,628
======== ======== ========
Depreciation/Amortization:
- --------------------------
Specialty Products $ 1,666 $ 1,706 $ 1,412
Encapsulated Products 349 322 242
-------- -------- --------
Total $ 2,015 $ 2,028 $ 1,654
======== ======== ========
Business Segment Assets:
- ------------------------
2000 1999 1998
-------- -------- --------
Specialty Products $ 11,679 $ 12,680 $ 13,651
Encapsulated Products 7,442 6,527 6,524
Other Unallocated 4,101 2,823 2,473
-------- -------- --------
Total $ 23,222 $ 22,030 $ 22,648
======== ======== ========
Other unallocated assets consist of cash, prepaid expenses, deferred income
taxes and other deferred charges, which the Company does not allocate to its
individual business segments.
39
Expenditures for Segment Assets:
- --------------------------------
2000 1999 1998
------- ------- -------
Specialty Products $ 516 $ 256 $ 4,477
Encapsulated Products 365 443 1,183
------- ------- -------
Total $ 881 $ 699 $ 5,660
======= ======= =======
Geographic Revenue Information:
- ------------------------------
2000 1999 1998
------- ------- -------
United States $30,187 $26,970 $25,833
Foreign Countries 3,011 2,712 2,888
------- ------- -------
Total $33,198 $29,682 $28,721
======= ======= =======
The Company has no foreign operations. Therefore, all long-lived assets are in
the United States and revenue from foreign countries is based on customer
ship-to address.
40
Note 13 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid during the year for:
- ------------------------------
2000 1999 1998
------ ------ ------
Income taxes $2,281 $1,607 $1,578
Interest $ 47 $ 174 $ 197
------ ------ ------
Non-cash financing activities:
- ------------------------------
2000 1999 1998
------ ------ ------
Dividends declared $ 277 $ 245 $ 160
------ ------ ------
Supplementary Financial Information (unaudited):
(In thousands, except per share data)
2000 1999
--------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net sales $7,751 $7,849 $8,450 $9,148 $7,047 $7,270 $7,229 $8,136
Gross profit 3,113 3,257 3,574 4,097 2,840 2,940 2,994 3,350
Earnings before
income taxes 1,296 1,376 1,517 1,807 1,163 1,175 1,063 1,612
Net earnings 809 847 984 1,089 750 755 661 928
Basic net earnings per
common share $ .17 $ .18 $ .21 $ .24 $ .15 $ .15 $ .14 $ .20
Diluted net earning
per common share $ .17 $ .18 $ .21 $ .23 $ .15 $ .15 $ .14 $ .19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
41
SCHEDULE II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2000, 1999 and 1998
(In thousands)
Additions
--------------------------
Balance at Charges to Charges to
Beginning of Costs and Other Balance at
Description Year Expenses Accounts Deductions End of Year
- ------------- ------------ --------- -------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2000 $ -- $ 48 $-- $ -- $ 48
Year ended December 31, 1999 -- -- -- -- --
Year ended December 31, 1998 187 -- -- (187) --
42
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
The required information is to be set forth in the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders ("Proxy Statement") under
the caption "Directors and Executive Officers," which information is hereby
incorporated herein by reference.
(b) Executive Officers of the Company.
The required information is to be set forth in the Proxy Statement
under the caption "Directors and Executive Officers," which information is
hereby incorporated herein by reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
The required information is to be set forth in the Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is hereby incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the
Proxy Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is to be set forth in the
Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and of Management," which information is hereby incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is set forth in the Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 14. Exhibits and Reports on Form 8-K.
(a) Exhibits:
43
3.1 Composite Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (the "1999 10-K")).
3.2 Composite By-laws of the Company.
10.1 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy
Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement")).*
10.2 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35912, dated October 25, 1996, and to the
1998 Proxy Statement).*
10.3 Balchem Corporation 1999 Stock Plan (incorporated by reference to
Exhibit A to Proxy Statement dated April 23, 1999 for the Company's
1999 Annual Meeting of Stockholders (the "1999 Proxy Statement")). *
10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-4448, dated
December 12, 1997).*
10.5 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi. *
10.6 Agreements dated as of April 1, 1993, January 1, 1995 and April 25,
1997, as amended, between the Company and Dr. Charles McClelland
(incorporated by reference to Exhibit 10.5 to the 1999 10-K).*
44
- ----------------------
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
21. Subsidiaries of Registrant.
23.1 Consent of KPMG LLP, Independent Auditors
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
year ended December 31, 2000.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2001 BALCHEM CORPORATION
By:/s/ Dino A. Rossi
--------------------
Dino A. Rossi, President,
Chief Executive Officer
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By:/s/ Dino A. Rossi
--------------------
Dino A. Rossi, President,
Chief Executive Officer, Principal
Financial Officer and
Director
Date: March 28, 2001
By:/s/ Francis J. Fitzpatrick
------------------------------
Francis J. Fitzpatrick, Controller
Date: March 28, 2001
By:/s/ John E. Beebe
---------------------
John E. Beebe, Director
Date: March 28, 2001
By:/s/ Francis X. McDermott
---------------------------
Francis X. McDermott, Director
Date: March 28, 2001
By:/s/ Kenneth P. Mitchell
--------------------------
Kenneth P. Mitchell, Director
Date: March 28, 2001
By:/s/ Carl R. Pacifico
-----------------------
Carl R. Pacifico, Director
Date: March 28, 2001
By:/s/ Israel Sheinberg
-----------------------
Israel Sheinberg, Director
Date: March 28, 2001
By:/s/ Leonard J. Zweifler
--------------------------
Leonard J. Zweifler, Director
Date: March 28, 2001
47
EXHIBIT INDEX
3.1 Composite Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (the "1999 10-K")).
3.2 Composite By-laws of the Company.
10.1 Incentive Stock Option Plan of the Company, as amended,
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy
Statement, dated April 22, 1998, for the Company's 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement")).*
10.2 Stock Option Plan for Directors of the Company, as amended
(incorporated by reference to the Company's Registration Statement
on Form S-8, File No. 33-35912, dated October 25, 1996, and to the
1998 Proxy Statement).*
10.3 Balchem Corporation 1999 Stock Plan (incorporated by reference to
Exhibit A to Proxy Statement dated April 23, 1999 for the Company's
1999 Annual Meeting of Stockholders (the "1999 Proxy Statement")). *
10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1,
1998 (incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-4448, dated
December 12, 1997).*
10.5 Employment Agreement, dated as of January 1, 2001, between the
Company and Dino A. Rossi. *
10.6 Agreements dated as of April 1, 1993, January 1, 1995 and April 25,
1997, as amended, between the Company and Dr. Charles McClelland
(incorporated by reference to Exhibit 10.5 to the 1999 10-K).*
- ----------------------
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
22. Subsidiaries of Registrant.
23.2 Consent of KPMG LLP, Independent Auditors
28. Financial Data Schedule.
48