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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 13-257-8432
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 326-5600
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 American Stock Exchange
$.06-2/3 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes |X| No |_|
The aggregate market value of the Common Stock issued and outstanding and held
by nonaffiliates of the Registrant, based upon the closing price for the Common
Stock on the American Stock Exchange on June 28, 2002 was approximately
$109,268,258. 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.
The number of shares outstanding of the Registrant's common stock was 4,903,240
as of March 1, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant's proxy statement for its 2003 Annual
Meeting of Stockholders (the "2003 Proxy Statement") are incorporated by
reference in Part III of this Report.
Part I
Item 1. Business
General:
Balchem Corporation ("Balchem", or the "Company"), incorporated in the
State of Maryland in 1967, is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food, feed
and medical sterilization industries. Presently, the Company has three segments,
specialty products, encapsulated / nutritional products and the unencapsulated
feed supplements segment, the latter being a result of the June 1, 2001
acquisition by BCP Ingredients, Inc. ("BCP"), a wholly owned subsidiary of
Balchem, of certain assets of DCV, Inc. and its affiliate, DuCoa L.P. Products
relating to choline animal feed for non-ruminant animals are primarily reported
in the unencapsulated feed supplements segment. Human choline nutrient products
and encapsulated products are reported in the encapsulated / nutritional
products segment.
Balchem has a currently inactive Canadian subsidiary, Balchem, Ltd.
References in this Report to the Company mean Balchem and/or its
subsidiary BCP as the context requires.
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 / Nutritional Products
The encapsulated / nutritional products segment predominantly
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 end product
applications are baked goods, refrigerated and frozen dough systems, processed
meats, seasoning blends and confections. Human grade choline nutrient products
are also marketed through this industry segment. Choline is recognized to play a
key role in the structural integrity of cell membranes, processing dietary fat,
reproductive development and neural functions, such as memory and muscle
function.
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.
In 2002, this segment introduced several new products and product
applications that are being sold commercially for enhancement of shelf-life and
fortification in certain markets of the food industry. The Company also has
several new products and product applications for the food market in test
production or test marketing status.
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 repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use 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 and effectiveness 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. The Company's 100% ethylene oxide product is distributed by the
Company in reusable double-walled stainless steel 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 three 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. As a fumigant, ethylene oxide blends are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning materials.
Due to consolidation of customer businesses in the contract sterilizer
industry, the Company has one Specialty Products customer, Sterigenics, which
accounted for approximately 9% and 11% of the Company's net sales in 2002 and
2001, respectively. This customer accounted for 11% of the Company's accounts
receivable balance at December 31, 2002 and 2001, respectively. The loss of such
customer could have a material adverse effect on the Company.
Two other products, 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. 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, and
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.
2
Unencapsulated feed supplements
The unencapsulated feed supplements segment is in the business of
manufacturing and supplying choline chloride, an essential nutrient for animal
health, predominantly to the poultry and swine industries. Choline, a vitamin
B-complex, plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in chicks, and fatty liver, kidney necrosis
and general poor health condition in baby pigs. In addition, certain derivatives
of choline chloride are also manufactured and sold into industrial applications.
Choline chloride is manufactured and sold in both an aqueous and dry form
and is sold through the Company's own sales force, independent distributors and
sales agents.
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 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
currently 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. In addition, certain of the
Company's encapsulated and choline products must meet state licensing
requirements prior to sales in such states.
Seasonality:
In general, the business of the Company's segments is not seasonal to any
material extent.
3
Backlog:
At December 31, 2002, the Company had a total backlog of $991,000
(including $527,000 for the encapsulated / nutritional products segment,
$321,000 for the specialty products segment and $143,000 for the unencapsulated
feed supplements segment), as compared to a total backlog of $936,000 at
December 31, 2001 (including $484,000 for the encapsulated / nutritional
products segment and $272,000 for the specialty products segment and $180,000
for the unencapsulated feed supplements segment). It has generally 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.
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. Competition in the animal feed markets served by the
Company is based primarily on service and price.
Research & Development:
During the years ended December 31, 2002, 2001 and 2000, the Company
incurred research and development expense of approximately $1.9 million, $1.6
million and $1.1 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the encapsulated / nutritional products
segment. During the year ended December 31, 2002, an average of 12 employees
were devoted full time to research and development activities. The Company has
historically funded its research and development 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
4
feasibility, expected and known product attributes, and estimated costs to bring
the product to market.
Capital Projects:
Capital expenditures were approximately $10.0 million for 2002. The
Company expanded the manufacturing, processing and distribution facilities at
its recently acquired Verona, Missouri facility to enable it to handle
operations for its specialty products and encapsulated choline products
businesses. The Company has also initiated capital projects at its South
Carolina facility and entered into a lease for a new headquarters office and
laboratory facility and effected capital improvements to the new premises.
Capital expenditures are projected to be approximately $2.4 million for calendar
year 2003.
Environmental / Regulatory 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
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 intends 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.
Under California's Proposition 65 (Safe Drinking Water and Toxic
Enforcement Act of 1986), 100% ethylene oxide, when used as a sterilant or
fumigant, 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.
5
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's Verona facility, while held by a prior owner, was
designated by the EPA as a Superfund site and placed on the National Priorities
List in 1983, because of dioxin contamination on portions of the site.
Remediation conducted by the prior owner under the oversight of the EPA and the
Missouri Department of Natural Resources ("MDNR") included removal of dioxin
contaminated soil and equipment, capping of areas of residual contamination in
four relatively small areas of the site separate from the manufacturing
facilities, and the installation of wells to monitor groundwater and surface
water contamination by organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of the two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona
facility for potential liabilities associated with the Superfund site and one of
the sellers, in turn, has the benefit of certain contractual indemnification by
the prior owner that is implementing the above-described Superfund remedy.
In connection with normal operations at its plant facilities, the Company
is required to maintain environmental and other permits including those relating
to ethylene oxide operations.
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.
6
Employees:
As of March 1, 2003, the Company employed approximately 217 persons.
Approximately 52 employees at the Company's Verona, Missouri facility are
covered by a collective bargaining agreement.
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 (including the status of compliance by the prior owner of the Verona
facility under Superfund remediation) will not result in administrative or
private actions, revocation of required permits or licenses, or fines, penalties
or damages, which
7
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
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 this 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,
2002, approximately 9% of the Company's net sales consisted of sales outside the
United States, predominately to Europe. Such sales are generally denominated in
U.S. Dollars at a specific price per unit. 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.
Available Information:
The Company's Internet website address is www.balchem.com. Commencing
with this Annual Report, the Company makes available through its website, free
8
of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and amendments to such reports, as soon as
reasonably practicable after they have been electronically filed with the
Securities and Exchange Commission. Such reports are available via a link from
the Investor Information page on the Company's website to a list of the
Company's reports on the Securities and Exchange Commission's Edgar website.
Item 2. Properties
In February, 2002, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space in New Hampton, New York. The
office space is serving as the Company's general offices and as laboratory
facilities for the Company's encapsulated / nutritional products business.
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.
The Company also owns a facility located on an approximately 24 acre
parcel of land in Green Pond, South Carolina. The facility 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.
The Verona facility site, which is approximately 100 acres in size,
consists of manufacturing facilities relating to the choline animal feed and
human choline nutrient product lines, and a drumming facility for the Company's
ethylene oxide business, together with buildings utilized for warehousing such
products. The facility, while under prior ownership, was designated by the EPA
as a Superfund site and placed on the National Priorities List in 1983, as a
result of dioxin contamination discovered on portions of the site and has been
the subject of remediation efforts by the prior owner. See discussion under Item
1 "Environmental/Regulatory Matters".
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
9
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 recently been less than $5,000 per year.
The Company is also involved in other legal proceedings through the
normal course of business. Management believes that any unfavorable outcome
related to these other proceedings will not have a material effect on the
Company's financial position, results of operations or liquidity.
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 2002.
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 2002 and
2001, for each quarterly period during the past two years were as follows:
Quarterly Period High Low
- ---------------- -------- --------
Ended March 31, 2002 $ 21.80 19.55
Ended June 30, 2002 23.50 20.85
Ended September 30, 2002 24.70 19.40
Ended December 31, 2002 24.30 21.53
Quarterly Period High Low
- ---------------- -------- --------
Ended March 31, 2001 $ 15.85 13.40
Ended June 30, 2001 19.00 13.90
Ended September 30, 2001 22.45 17.30
Ended December 31, 2001 22.10 19.55
(b) Record Holders.
As of March 1, 2003, the approximate number of holders of record of the
Company's common stock was as follows:
10
Title of Class Number of Record Holders
Common Stock, $.06-2/3 par value 234*
*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 1,400.
(c) Dividends.
The Company declared a cash dividend of $0.08 per share on the common
stock during its fiscal year ended December 31, 2002.
Item 6. Selected Financial Data
(In thousands, except per share data)
-----------------------------------------------------------------------------
Year ended December 31, 2002(1) 2001(1) 2000 1999 1998
- ----------------------- ---------- ---------- ---------- -------- ---------
Statement of Operations Data
Net sales $ 60,197 $ 46,142 $ 33,198 $ 29,682 $ 28,721
Earnings before income
Tax expense 11,845 8,369 5,996 4,905 4,628
Income tax expense 4,429 3,259 2,267 1,811 1,673
Net earnings 7,416 5,110 3,729 3,094 2,955
Basic net earnings per
Common share 1.56 1.10 .80 .64 .61
Diluted net earnings per
Common share 1.50 1.05 .78 .63 .60
At December 31, 2002 2001 2000 1999 1998
- ----------------------- ---------- ---------- ---------- --------- ----------
Balance Sheet Data
Total assets $ 53,298 $ 44,477 $ 23,222 $ 22,030 $ 22,648
Long-term debt 9,581 11,323 - 1,250 3,750
Other long-term
Obligations 2,521 1,345 362 606 841
Total stockholders' equity 33,269 25,332 19,580 17,939 15,775
Dividends per Common share $ .08 $ .065 $ .06 $ .05 $ .033
(1) The Selected Financial Data includes the operating results, cash
flows, assets and liabilities relating to the acquisition of certain assets and
product lines of DCV, Inc. and its affiliate DuCoa L.P. from the date of
acquisition (June 1, 2001) forward.
11
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.
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RESULTS OF OPERATIONS:
Fiscal Year 2002 compared to Fiscal Year 2001
Net sales for 2002 were $60,197 as compared with $46,142 for 2001, an
increase of $14,055 or 30.5%. Net sales for the specialty products segment were
$22,028 for 2002 as compared with $21,130 for 2001, an increase of $898 or 4.2%.
Net sales for the encapsulated / nutritional products segment were $27,990 for
2002 as compared with $18,312 for 2001, an increase of $9,678 or 52.9%. Sales of
the core encapsulates business (before giving effect to the June 1, 2001
acquisition of certain assets, excluding accounts receivable and inventories,
relating to the choline animal feed, human choline nutrient and encapsulated
product lines of DCV, Inc. and its affiliate, DuCoa L.P.), increased 45.6% based
on growth in the domestic food, animal nutrition and industrial application
markets. When combined with sales of human choline products (the latter product
line having been derived from the 2001 acquisition), growth of 52.9% for the
entire encapsulated / nutritional products segment was achieved. The growth in
sales to the domestic food market is principally the result of increased volumes
sold which can be attributed principally to new products and new applications to
both existing and new customers. Sales of Reashure(TM) strengthened through
growth from existing customers and from the addition of new customers and added
distribution channels globally. Net sales of $10,179 were realized in the
unencapsulated feed supplements segment for 2002, which markets choline
additives for the poultry and swine industries as well as industrial choline
derivative products as compared with $6,700 for 2001 which only reflected sales
after June 1, 2001.
Gross margin percentage was 38.7% and 38.8% for 2002 and 2001,
respectively. Margins were unfavorably affected principally by increased sales
of lower margin feed products to the poultry and swine markets in the
unencapsulated feed supplements segment. Margins in the encapsulated /
nutritional products segment were favorably affected by increased production and
the mix of products sold. Margins for the specialty products segment were
favorably affected by increased production volumes of the Company's products
utilizing ethylene oxide. The Company adopted the provisions of
12
SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002
whereby goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Accordingly, the Company did not recognize any
expense relating to goodwill amortization in 2002 as compared to a 2001 expense
of $170.
Operating expenses for 2002 increased to $11,125 from $9,771 for 2001,
an increase of $1,354 or 13.9%. However, total operating expenses as a
percentage of sales were 18.5% for 2002 as compared to 21.2% for 2001. This
increase in operating expenses was due to increased advertising expense and
increased personnel in the area of sales and marketing, for the encapsulated /
nutritional products segment. Total payroll expenses related to these and other
administrative areas increased approximately $558 for 2002 as compared to 2001.
In particular, additional sales personnel were added to support the animal
nutrition business, additional research and application personnel have been
added to support a more expansive research and development program for both
human and animal markets and additional selling expenses were incurred as a
result of the June 1, 2001 acquisition. During 2002 and 2001, the Company spent
$1,907 and $1,631, respectively, on Company-sponsored research and development
programs, substantially all of which pertained to the Company's encapsulated /
nutritional products segment for both food and animal feed applications.
As a result of the foregoing, earnings from operations for 2002 were
$12,185 as compared to $8,155 for 2001. Earnings from operations for the
specialty products segment for 2002 were $7,240 as compared to $6,612 for 2001.
Earnings from operations for the encapsulated / nutritional products segment for
2002 were $5,118 as compared to $1,582 for 2001. The unencapsulated feed
supplements segment incurred a loss from operations for 2002 of $173 as compared
to a loss of $39 for 2001. The 2001 earnings from operations for this segment
reflect results relating to the acquisition of certain assets and product lines
of DCV, Inc. and its affiliate DuCoa L.P. from the date of acquisition (June 1,
2001) forward.
Interest income for 2002 totaled $42 as compared to $110 for 2001.
Interest expense for 2002 totaled $389 as compared to $387 for 2001. This
increase is the result of the Company not having any borrowings outstanding
during the first five months of 2001, partially offset by lower average interest
rates for 2002.
The Company's effective tax rate for 2002 was 37.4% compared to 38.9%
in 2001 primarily due to favorable shift in the mix of taxable income to lower
state tax rate jurisdictions.
As a result of the foregoing, net earnings were $7,416 for 2002 as
compared with $5,110 for 2001.
13
Fiscal Year 2001 compared to Fiscal Year 2000
Net sales for 2001 were $46,142 as compared with $33,198 for 2000, an
increase of $12,944 or 39.0%. Net sales for the specialty products segment were
$21,130 for 2001 as compared with $20,113 for 2000, an increase of $1,017 or
5.1%. Such increase is the result of favorable product mix of ethylene oxide
related products and increased volumes sold of ethylene oxide related products
during 2001. Net sales for the encapsulated / nutritional products segment were
$18,312 for 2001 as compared with $13,085 for 2000, an increase of $5,227 or
39.9%. This increase was due principally to sales of human choline nutrients, a
product line acquired as part of the June 1, 2001 acquisition of certain assets
relating to the choline animal feed, human choline nutrient, and encapsulated
product lines of DCV, Inc. and its affiliate, DuCoa L.P. Increased volumes sold
into the domestic food and animal nutrition (Reashure(TM)) markets contributed
significantly as well. Sales of Reashure(TM) continued to strengthen through
growth from existing customers and from the addition of new customers and added
distribution channels globally. The increases noted above were partially offset
by a decline in sales to the specialty industrial market. The unencapsulated
feed supplements segment sales, realized as a result of the above noted
acquisition were $6,700 for 2001.
Gross margin percentage for 2001 was 38.8% as compared to 42.3% for
2000. Margins were affected by sales of lower margin feed products to the
poultry and swine markets in the unencapsulated feed supplements segment.
Margins for the specialty products segment were favorably affected by increased
volumes sold of ethylene oxide related products and a more favorable mix of
ethylene oxide and propylene oxide products sold. Margins improved in the
encapsulated / nutritional products segment, a result of efficiencies realized
from increased production and the mix of products sold during 2001. The Company
adopted the provisions of SFAS No.142, Goodwill and Other Intangible Assets, as
of January 1, 2002 whereby goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No.142.
Operating expenses for 2001 increased to $9,771 from $8,103 for 2000,
an increase of $1,668 or 20.6%. Total operating expenses as a percentage of
sales were 21.2% for 2001 as compared to 24.4% for 2000. The increase in
operating expenses was primarily the result of increased personnel in the area
of sales, marketing, and research and development for the encapsulated /
nutritional products segment. Total payroll expenses related to these and other
administrative areas increased approximately $869 in 2001. In particular,
additional sales personnel were added to support the animal nutrition business,
additional research and application personnel have been added to support a more
expansive research and development program for both human and animal markets and
additional selling expenses were incurred as a result of the June 1, 2001
acquisition. During 2001 and 2000, the Company spent $1,631 and $1,069,
respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and
14
animal feed applications. General and administrative expenses increased
primarily due to an increase in costs associated with the Company's medical plan
of approximately $213 and recruiting and relocation expenses of approximately
$206, a result of the increases in personnel noted above.
As a result of the foregoing, earnings from operations for 2001 were
$8,155 as compared to $5,938 for 2000. Earnings from operations for the
specialty products segment for 2001 were $6,612 as compared to $5,605 for 2000.
Earnings from operations for the encapsulated / nutritional products segment for
2001 were $1,582 as compared to $333 for 2000. Earnings from operations of the
unencapsulated feed supplements segment for 2001 was a slight loss of $39.
Interest income for 2001 totaled $110 as compared to $106 for 2000.
Interest expense for 2001 totaled $387 as compared to $48 for 2000, an increase
of $339. Long-term debt, including the current portion, totaled $13,065 at
December 31, 2001 as compared to no long-term debt at December 31, 2000,
resulting in greater interest expense.
Other income of $491 for 2001 represents proceeds received from the
settlement of a class-action claim related to vitamin product antitrust
litigation.
The Company's effective tax rate increased from 37.8% to 38.9% in 2001
primarily due to additional state tax associated with the Verona Missouri based
acquisition of certain assets and product lines.
As a result of the foregoing, net earnings were $5,110 for 2001 as
compared with $3,729 for 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital amounted to $10,884 at December 31, 2002 as compared to
$10,547 at December 31, 2001, an increase of $337. Cash flows from operating
activities provided $10,114 for 2002 as compared with $3,222 for 2001. The
increase in cash flows from operating activities was due primarily to increases
in net earnings, accounts payable and accrued expenses, and a smaller increase
in inventory and account receivable than in 2001. The larger increases in
accounts receivable and inventory balances for 2001 were a result of the Company
having to invest working capital in its 2001 acquired business.
Capital expenditures were $10,020 for 2002 as compared to $1,950 in
2001. The Company has recently completed significant capital expenditures in the
process of expanding the manufacturing, processing and distribution facilities
at its Verona, Missouri facility to enable it to handle operations for its
encapsulated choline products business. In addition, the Company has completed
and placed into service a repackaging facility for its specialty products
business also at its Verona, Missouri location. The
15
Company has entered into a ten (10) year lease for approximately 20,000
square feet of office space in New Hampton, NY. The office space is now serving
as the Company's general offices and as a laboratory facility. The costs of
certain leasehold improvements to the Company's office space, totaling $630,
were funded by the landlord. During 2001, the Company paid $14,259 for the
aforementioned June 2001 acquisition of certain product lines. The overall
effect of the foregoing was that cash flows used in investing activities were
$9,951 in 2002 and $16,346 in 2001.
The Company used $1,552 of cash flows from financing activities in 2002
as compared to cash flows generated of $13,176 in 2001. The decline in cash
flows was primarily due to proceeds from long-term debt of $13,500 in 2001 (none
in 2002), and an increase in payments on long-term debt in 2002 to $1,742 from
$435 in 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 which was subsequently extended through June
2002. As of December 31, 2002, 343,316 shares had been repurchased under the
program at a total cost of $3,179 of which 215,762 shares have been issued by
the Company under employee benefit plans and for the exercise of stock options.
In June 2002, the board of directors authorized an extension to the stock
repurchase program for up to an additional 600,000 shares through September 30,
2003. 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.
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate DuCoa L.P. The Term Loan, which
is payable in equal monthly installments of principal beginning October 1, 2001
of approximately $145, together with accrued interest, had an outstanding
principal balance of $11,323 as of December 31, 2002, and has a maturity date of
May 31, 2009. Borrowings under the Term Loan bear interest at LIBOR plus 1.25%
(2.63% and 3.39% at December 31, 2002 and 2001, respectively). Certain
provisions of the Term Loan require maintenance of certain financial ratios,
limit future borrowings and impose certain other requirements as contained in
the agreement. At December, 2002, the Company was in compliance with all
restrictive covenants contained in the Loan Agreement. The Loan Agreement also
provides for a short-term revolving credit facility of $3,000 (the "Revolving
Facility"). Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00% (2.32% and 3.14% at December 31, 2002 and 2001, respectively). No amounts
have been drawn on the Revolving Facility as of the date hereof. The Revolving
Facility expires on May 30, 2003. Management believes that such facility will be
renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all
of the assets of the Company other than real properties.
16
As part of the June 1, 2001 acquisition of certain assets relating to
the choline animal feed, human choline nutrient, and encapsulated product lines
of DCV, Inc. and its affiliate, DuCoa L.P., the asset purchase agreement calls
for the payment of up to an additional $2,750 based upon the sales of specified
product lines achieving certain gross margin levels (in excess of specified
thresholds) over the three year period following the closing, with no more than
$1,000 payable for any particular yearly period. No such contingent
consideration has been earned or paid as of December 31, 2002.
The Company also currently provides postretirement benefits in the form
of a retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility. The amount recorded on the
Company's balance sheet as of December 31, 2002 for this obligation is $859. The
postretirement plan is not funded.
The Company's aggregate commitments under its Loan Agreement and
noncancelable operating lease agreements as of December 31, 2002 are as follows:
Loan Operating Total
Agreement Leases Commitment
--------- --------- ----------
2003 1,742 427 2,169
2004 1,742 355 2,097
2005 1,742 275 2,017
2006 1,742 245 1,987
2007 1,742 245 1,987
Thereafter 2,613 608 3,221
The Company knows of no current or pending demands on or commitments
for its liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient
cash flow to fund working capital requirements, necessary capital investments
and the current portion of debt obligations; however, the Company would seek
further bank loans or access to financial markets to fund operations, working
capital, necessary capital investments or other cash requirements should it deem
it necessary to do so.
Recently Issued Statements of Financial Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company also records a
corresponding asset which is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the obligation
17
will be adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. The
Company is required to adopt SFAS No. 143 on January 1, 2003. The Company does
not expect that the adoption of SFAS No. 143 will have a material effect on the
Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145") was issued. SFAS No. 145 rescinds SFAS Nos. 4 and 64, which required
gains and losses from extinguishment of debt to be classified as extraordinary
items. SFAS No. 145 also rescinds SFAS No. 44 since the provisions of the Motor
Carrier Act of 1980 are complete. SFAS No. 145 also amends SFAS No. 13
eliminating inconsistencies in certain sale-leaseback transactions. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented shall be reclassified. The Company
does not expect that the adoption of SFAS No. 145 will have a material effect on
the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 is different from EITF Issue No. 94-3 in that
Statement No. 146 requires that a liability be recognized for a cost associated
with an exit or disposal activity only when the liability is incurred, that is
when it meets the definition of a liability in the FASB's conceptual framework.
Statement No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. In contrast,
under EITF Issue 94-3, a company recognized a liability for an exit cost when it
committed to an exit plan. Statement No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of Statement
No. 146 can be expected to impact the timing of liability recognition associated
with any future exit activities.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." This interpretation elaborates
on the disclosures to be made by a guarantor in interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of FIN45 are applicable to guarantees
issued or modified after December 31, 2002 and are not expected to have a
material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure "SFAS No. 148." SFAS No. 148
18
amends FASB Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosures about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion No. 28 ("Opinion No. 28"),
Interim Financial Reporting, to require disclosures about those effects in
interim financial information. The amendments to SFAS No. 123 include certain
disclosure provisions that are effective for financial statements for fiscal
years ending after December 15, 2002, and other disclosure provisions as well as
the amendment to Opinion No. 28 shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002. The Company currently accounts for its stock-based
compensation awards to employees and directors using the intrinsic value method
as prescribed by Accounting Principles Board Opinion No. 25, and provides the
disclosures required by SFAS No. 123. The Company believes that it will continue
to account for its stock-based compensation awards to employees and directors
under the accounting prescribed by Accounting Principles Board Opinion No. 25
and will adopt the disclosure provisions of SFAS No. 148 for the year ended
December 31, 2002, or during the first quarter of its fiscal year ended December
31, 2003, as appropriate.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") has issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
The Company's significant accounting policies are described in Note 1
of the Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, management considers the following policies to
be critical within the SEC definition.
19
Inventories
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess and
obsolete inventories. The estimate is based on management's review of
inventories on hand compared to estimated future usage and sales. Cost includes
material, labor and manufacturing overhead.
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, 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 estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is generally
based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount of an applicable reporting unit exceeds its fair value.
Accounts Receivable
The Company estimates an allowance for doubtful accounts after
considering the collectibility of balances due, the credit worthiness of the
customer and its current level of business with the customer. Actual results
could differ from these estimates.
Postemployment Benefits
The Company provides life insurance and health care benefits for
eligible retirees and health care benefits for retirees' eligible survivors. The
costs and obligations related to these benefits reflect the Company's
assumptions as to general economic conditions and health care cost trends. The
cost of providing plan benefits also depends on demographic assumptions
including retirements, mortality, turnover, and plan participation. If actual
experience differs from these assumptions, the cost of providing these benefits
could increase or decrease.
Intangible Assets
The useful life of an intangible asset is based on the Company's
assumptions regarding expected use of the asset; the relationship of the
intangible asset to another asset or group of assets; any legal, regulatory or
contractual provisions that may limit the useful life of the asset or that
enable renewal or extension of the asset's legal or
20
contractual life without substantial cost; the effects of obsolescence, demand,
competition and other economic factors; and the level of maintenance
expenditures required to obtain the expected future cash flows from the asset
and their related impact on the asset's useful life. If events or circumstances
indicate that the life of an intangible asset has changed, it could result in
higher future amortization charges or recognition of an impairment loss.
RELATED PARTY TRANSACTIONS:
The Company is not engaged and has not engaged in related party
transactions. All transactions of the Company have been at arms length.
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, 2002,
the Company's only borrowings were under a bank term loan, which bears interest
at LIBOR plus 1.25%. A 100 basis point increase in interest rates, applied to
the Company's borrowings at December 31, 2002, would result in an increase in
annual interest expense and a corresponding reduction in cash flow of
approximately $113. 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.
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.
21
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Independent Auditors' Report 23
Consolidated Balance Sheets as of
December 31, 2002 and 2001 24
Consolidated Statements of Earnings for the
years ended December 31, 2002, 2001 and 2000 26
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 27
Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000 28
Notes to Consolidated Financial Statements 29
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2002, 2001 and 2000 49
22
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 listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, 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.
As described in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" in 2002, which changes its
accounting for goodwill and intangible assets.
KPMG LLP
Short Hills, New Jersey
February 5, 2003
23
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands, except share and per share data)
Assets 2002 2001
------ ------- -------
Current assets:
Cash and cash equivalents $ 1,731 $ 3,120
Accounts receivable, net of allowance for doubtful accounts of $90 and $50 at
December 31, 2002 and 2001, respectively 7,159 7,130
Inventories 7,238 5,575
Prepaid Income Taxes 975 -
Prepaid expenses 1,305 985
Deferred income taxes 403 214
------- -------
Total current assets 18,811 17,024
------- -------
Property, plant and equipment, net 25,852 17,904
Excess of cost over net assets acquired less accumulated
amortization of $170 in 2001 6,398 6,398
Intangibles assets, net 2,237 3,151
------- -------
Total assets $53,298 $44,477
======= =======
24
BALCHEM CORPORATION
Consolidated Balance Sheets, continued
December 31, 2002 and 2001
(Dollars in thousands, except share and per share data)
Liabilities and Stockholders' Equity 2002 2001
------------------------------------ -------- --------
Current liabilities:
Trade accounts payable $ 2,778 $ 1,647
Accrued Expenses 1,271 1,241
Accrued compensation and other benefits 1,754 1,542
Dividends payable 382 305
Current portion of long-term debt 1,742 1,742
-------- --------
Total current liabilities 7,927 6,477
-------- --------
Long-term debt 9,581 11,323
Deferred income taxes 1,557 351
Other long-term obligations 964 994
-------- --------
Total liabilities 20,029 19,145
-------- --------
Commitments and contingencies (note 11)
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 4,775,684
shares outstanding at December 31, 2002
and 4,903,238 shares issued and 4,699,166
shares outstanding at December 31, 2001 327 327
Additional paid-in capital 3,546 3,387
Retained earnings 30,807 23,773
Treasury stock, at cost: 127,554 and 204,072 shares at December 31, 2002
and 2001, respectively (1,411) (2,155)
-------- --------
Total stockholders' equity 33,269 25,332
-------- --------
Total liabilities and stockholders' equity $ 53,298 $ 44,477
======== ========
See accompanying notes to consolidated financial statements
25
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
-------- -------- --------
Net sales $ 60,197 $ 46,142 $ 33,198
Cost of sales 36,887 28,216 19,157
-------- -------- --------
Gross profit 23,310 17,926 14,041
Operating expenses:
Selling expenses 5,426 4,380 3,914
Research and development expenses 1,907 1,631 1,069
General and administrative expenses 3,792 3,760 3,120
-------- -------- --------
11,125 9,771 8,103
-------- -------- --------
Earnings from operations 12,185 8,155 5,938
Other expenses (income):
Interest (income) (42) (110) (106)
Interest expense 389 387 48
Other (income) expense - net (7) (491) -
-------- -------- --------
Earnings before income tax expense 11,845 8,369 5,996
Income tax expense 4,429 3,259 2,267
-------- -------- --------
Net earnings $ 7,416 $ 5,110 $ 3,729
======== ======== ========
Basic net earnings per common share $ 1.56 $ 1.10 $ 0.80
======== ======== ========
Diluted net earnings per common share $ 1.50 $ 1.05 $ 0.78
======== ======== ========
See accompanying notes to consolidated financial statements.
26
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
(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 - 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 and
an income tax benefit of $77 - - 30 - 32,633 221 251
--------- --------- --------- --------- -------- --------- ---------
Balance - December 31, 2000 4,903,238 327 3,082 18,968 (287,068) (2,797) 19,580
Net earnings - - - 5,110 - - 5,110
Dividends ($.065 per share) - - - (305) - - (305)
Shares issued under employee benefit
plans - - 116 - 11,669 85 201
Shares issued under stock option plans and
an income tax benefit of $235 - - 189 - 71,327 557 746
--------- --------- --------- --------- -------- --------- ---------
Balance - December 31, 2001 4,903,238 327 3,387 23,773 (204,072) (2,155) 25,332
Net earnings - - - 7,416 - - 7,416
Dividends ($.08 per share) - - - (382) - - (382)
Shares issued under employee benefit
plans - - 136 - 10,866 105 241
Shares issued under stock option plans and
an income tax benefit of $147 - - 23 - 65,652 639 662
--------- --------- --------- --------- -------- --------- ---------
Balance - December 31, 2002 4,903,238 $ 327 $ 3,546 $ 30,807 (127,554) $ (1,411) $ 33,269
========= ========= ========= ========= ======== ========= =========
See accompanying notes to consolidated financial statements.
27
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 7,416 $ 5,110 $ 3,729
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,917 2,621 2,015
Income tax benefit from stock options exercised 147 235 77
Shares issued under employee benefit plans 241 201 174
Deferred income tax (benefit) expense 1,017 112 (168)
Provision for doubtful accounts 70 65 48
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (99) (2,149) (1,111)
Inventories (1,663) (3,021) 194
Prepaid expenses (300) (452) (1)
Accounts payable and accrued expenses 1,373 637 936
Income taxes receivable (975) (208) 77
Other long-term obligations (30) 71 (17)
-------- -------- --------
Net cash provided by operating activities 10,114 3,222 5,953
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (10,020) (1,950) (881)
Proceeds from sale of property, plant and equipment 239 - -
Cash paid for product lines acquired - (14,259) -
Cash paid for intangibles assets acquired (170) (137) (75)
-------- -------- --------
Net cash used in investing activities (9,951) (16,346) (956)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt - 13,500 -
Principal payments on long-term debt (1,742) (435) (1,250)
Proceeds from stock options and warrants exercised 515 511 174
Dividends paid (305) (277) (245)
Purchase of treasury stock - - (2,236)
Other financing activities (20) (123) (71)
-------- -------- --------
Net cash (used in) provided by financing activities (1,552) 13,176 (3,628)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (1,389) 52 1,369
Cash and cash equivalents beginning of year 3,120 3,068 1,699
-------- -------- --------
Cash and cash equivalents end of year $ 1,731 $ 3,120 $ 3,068
======== ======== ========
See accompanying notes to consolidated financial statements
28
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 ("Balchem", or the "Company"), 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.
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 risk of loss.
The Company reports amounts billed to customers related to shipping and handling
as revenue and includes costs incurred for shipping and handling in cost of
sales.
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, and have been reduced by an allowance
for excess or obsolete inventories. Cost elements include material, labor and
manufacturing overhead.
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
29
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.
Business Concentrations
A Specialty Products customer accounted for 9%, 11% and 13% of the Company's
consolidated net sales for 2002, 2001 and 2000, respectively. This customer
accounted for 11% of the Company's accounts receivable balance at December 31,
2002 and 2001. Approximately 9%, 8% and 9% of the Company's net sales consisted
of sales outside the United States, predominately to Europe, for 2002, 2001 and
2000, respectively.
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.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
business combination and define an intangible asset. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. All of the Company's goodwill arose
from the June 2001 acquisition described in Note 4.
As required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2002, the Company also performed an impairment test of its goodwill
balances. As of such date the Company's reporting units' fair value exceeded
their carrying amounts, and therefore there was no indication that goodwill was
impaired.
30
Accordingly, the Company was not required to perform any further
impairment tests. The Company plans to perform its impairment test each December
31 in the future.
The Company had unamortized goodwill in the amount of $6,398 at December 31,
2001, subject to the provisions of SFAS Nos. 141 and 142.
The following table sets forth the reconciliation of previously reported net
earnings to net earnings as if SFAS No. 142 was adopted as of January 1, 2001.
The Company had no goodwill amortization for the year ended December 31, 2000.
- --------------------------------------------------------------------
2001
- --------------------------------------------------------------------
Net Earnings
Net earnings as reported $5,110
Add Back: Goodwill Amortization, net of tax 105
------------
Net earnings as adjusted $5,215
============
Earnings per share
Basic EPS as reported $ 1.10
Basic EPS as adjusted $ 1.12
Diluted EPS as reported $ 1.05
Diluted EPS as adjusted $ 1.08
- ------------------------------------------------------ ------------
The following 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
Management of the Company is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of
31
contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. 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, 2002 and 2001 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
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. The Company's
financial instruments, principally cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments. As amounts
outstanding under the Company's credit agreements bear interest approximating
current market rates, their carrying amounts approximate fair value.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, ("SFAS 133") which
requires that all derivative financial instruments be reported on the balance
sheet at fair value and establishes criteria for designation and effectiveness
of transactions entered into for hedging purposes.
The implementation of this standard did not have a material effect on the
Company's consolidated financial statements because the Company did not have any
derivative financial instruments at January 1, 2001 or during 2001 and 2002.
Research and Development
Research and development costs are expensed as incurred.
Stock Option Plan
At December 31, 2002, the Company has stock based employee compensation plans
which are described more fully in Note 8. The Company accounts for its stock
option plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. No stock based employee
32
compensation cost is reflected in net earnings, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company has adopted the disclosure
standards of Statement of Financial Accounts Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", which requires the Company to provide
pro forma net earnings and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value based
method of accounting for stock options as defined in SFAS No. 123 has been
applied. The following table illustrates the effect on net earnings and per
share amounts if the Company had applied the fair value recognition provisions
of SFAS No. 123 to stock based employee compensation:
================================================================================
Year Ended December 31
-----------------------------------
2002 2001 2000
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 7,416 $ 5,110 $ 3,729
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related
tax effects (452) (296) (36)
---------------------------------
Net earnings as adjusted $ 6,964 $ 4,814 $ 3,465
=================================
Earnings per share:
Basic EPS as reported $ 1.56 $ 1.10 $ .80
Basic EPS as adjusted $ 1.47 $ 1.03 $ .74
Diluted EPS as reported $ 1.50 $ 1.05 $ .78
Diluted EPS as adjusted $ 1.41 $ .99 $ .73
================================================================================
The fair value of each stock option granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
==============================================================================
2002 2001 2000
- ------------------------------------------------------ ----------- ----------
Expected life (years) 5 5 5
Expected volatility 32% 49% 54%
Expected dividend yield .40% .50% .52%
Risk-free interest rate 3.7% 4.4% 4.9%
Weighted average fair value of options
granted during the year $9.47 $10.94 $7.23
- ------------------------------------------------------ ----------- ----------
Impairment of Long-lived Assets
33
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, 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 estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncement
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement requires that long-lived assets be 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 the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 on January 1, 2002 and such adoption had
no effect on the Company's consolidated financial statements for 2002.
Net Earnings Per Common Share
Basic net earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per common share is calculated in a manner consistent with basic
net earnings per common 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, 2002 and 2001 consist of the following:
- -----------------------------------------------------------
2002 2001
- -----------------------------------------------------------
Raw materials $ 2,042 $ 2,152
Finished goods 5,196 3,423
- -----------------------------------------------------------
Total inventories $ 7,238 $ 5,575
- -----------------------------------------------------------
34
NOTE 3-PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001 are summarized as
follows:
================================================================================
2002 2001
- --------------------------------------------------------------------------------
Land $ 290 $ 290
Building 9,271 7,094
Equipment 24,582 18,804
Construction in Progress 2,728 902
- --------------------------------------------------------------------------------
36,871 27,090
Less: Accumulated depreciation 11,019 9,186
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 25,852 $ 17,904
================================================================================
Depreciation expense was $1,833, $1,329 and $902 for the years ended December
31, 2002, 2001 and 2000, respectively.
NOTE 4-PRIOR YEAR ACQUISITION
Effective as of June 1, 2001, pursuant to a certain Asset Purchase Agreement,
dated as of May 21, 2001 (the "Asset Purchase Agreement"), BCP Ingredients, Inc.
("Buyer"), a wholly owned subsidiary of Balchem Corporation, acquired certain
assets, excluding accounts receivable and inventories, relating to the choline
animal feed, human choline nutrient and encapsulated product lines of DCV, Inc.
and its affiliate, DuCoa L.P., including DuCoa's manufacturing facility in
Verona, Missouri.
The purchase price, including acquisition costs, was approximately $15,290, of
which approximately $14,259 was paid in cash, with the balance reflecting the
assumption by the Buyer of certain liabilities. The Buyer also assumed certain
obligations of DuCoa for retiree medical benefits under the collective
bargaining agreement covering various employees at the Verona facility. The
acquisition was financed with a $13,500 term loan and approximately $759 in
existing cash. The Asset Purchase Agreement also called for the payment of up to
an additional $2,750 based upon the sales of specified product lines achieving
certain gross margin levels (in excess of specified thresholds) over the three
year period following the closing, with no more than $1,000 payable for any
particular yearly period. Such contingent consideration will be recorded as an
additional cost of the acquired product lines. No such contingent consideration
has been earned or paid as of December 31, 2002. Cost in excess of net assets
acquired (goodwill) of approximately $6,562 was being amortized over 20 years.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142
and the amortization of such goodwill ceased.
35
The allocation of the purchase price of the acquisition has been assigned to the
net assets acquired as follows:
- -------------------------------------------------------------------------
Fair Value Recorded
in Purchase Accounting
- -------------------------------------------------------------------------
Property, plant and equipment $ 9,518
Retiree Medical Obligation (821)
Other Receivable 31
Goodwill 6,562
- -------------------------------------------------------------------------
Total Purchase Price $ 15,290
Current Liabilities Assumed (1,031)
- -------------------------------------------------------------------------
Total Cash Paid $ 14,259
- -------------------------------------------------------------------------
The above acquisition has been accounted for using the purchase method of
accounting and, the purchase price of the acquisition has been assigned to the
net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The consolidated financial statements include the
results of operations of the acquired product lines from the date of purchase.
Pro Forma Summary of Operations:
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2000 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to interest on
borrowings to finance the acquisition and changes in depreciation and
amortization of tangible and intangible assets resulting from the acquisition.
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned
acquisition, and related financing transactions had occurred at the beginning of
the periods presented and is not intended to be a projection of future results.
- ---------------------------------------------------------------------------
Pro-Forma
Twelve Months Ended
December 31,
2001 2000
- ---------------------------------------------------------------------------
Net sales $ 54,866 $ 52,431
Net earnings 4,482 3,253
Basic EPS .96 .69
Diluted EPS .92 .68
- ---------------------------------------------------------------------------
36
NOTE 5-INTANGIBLE ASSETS
As of December 31, 2002 and 2001 the Company had identifiable intangible assets
as follows:
- --------------------------------------------------------------------------------------------------------------
2002 2001
Amortization Gross 2002 Gross 2001
period Carrying Accumulated Carrying Accumulated
(in years) Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 5,127 $ 6,760 $ 4,129
Re-registration costs 10 356 304 356 261
Patents 17 386 58 293 72
Trademarks 17 191 14 148 5
Covenants not to compete 5 - - 295 288
Other 5 58 11 77 23
- -----------------------------------------------------------------------------------------------------------
$ 7,751 $ 5,514 $ 7,929 $ 4,778
- -----------------------------------------------------------------------------------------------------------
Amortization of identifiable intangible assets was approximately $1,084 for
2002. Assuming no change in the gross carrying value of identifiable intangible
assets, the estimated amortization expense for 2003 is approximately $1,100,
approximately $690 in the second succeeding year, and approximately $45 in the
third and fourth succeeding years. At December 31, 2002, there were no
identifiable intangible assets with indefinite useful lives as defined by SFAS
No. 142. Identifiable intangible assets are reflected in Intangible assets in
the Company's consolidated balance sheets. There were no changes to the useful
lives of intangible assets subject to amortization 2002.
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 and are included in cost of sales.
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
37
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 6-LONG-TERM DEBT & CREDIT AGREEMENTS
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate DuCoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowings under the Term Loan bear interest at LIBOR plus 1.25%
(2.63% and 3.39% at December 31, 2002 and 2001, respectively). Certain
provisions of the Term Loan require maintenance of certain financial ratios,
limit future borrowings and impose certain other requirements as contained in
the agreement. At December, 2002, the Company was in compliance with all
restrictive covenants contained in the Loan Agreement. The Loan Agreement also
provides for a short-term revolving credit facility of $3,000 (the "Revolving
Facility"). Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00% (2.32% and 3.14% at December 31, 2002 and 2001, respectively). No amounts
have been drawn on the Revolving Facility as of the date hereof. The Revolving
Facility expires on May 30, 2003. Management believes that such facility will be
renewed in the normal course of business.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
As of December 31, 2002, long-term debt matures as follows:
- ----------------------------
2003 1,742
2004 1,742
2005 1,742
2006 1,742
2007 1,742
2008 1,742
2009 871
- ----------------------------
Total $11,323
- ----------------------------
38
NOTE 7-INCOME TAXES
Income tax expense consists of the following:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Current:
Federal $ 2,874 $ 2,515 $ 2,018
State 538 632 417
Deferred:
Federal 895 99 (149)
State 122 13 (19)
- --------------------------------------------------------------------------------
Total income tax provision $ 4,429 $ 3,259 $ 2,267
- --------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 34% to earnings before income tax expense due to the
following:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Income tax at Federal
Statutory rate $ 4,027 $ 2,846 $ 2,039
State income taxes, net of
Federal income tax benefit 435 426 263
Other (33) (13) (35)
- --------------------------------------------------------------------------------
Total income tax provision $ 4,429 $ 3,259 $ 2,267
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001 are as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Customer List Amortization $ 705 $ 667
Inventories 343 122
Deferred compensation 25 35
Non-employee stock options 102 99
Other 125 99
- --------------------------------------------------------------------------------
Total deferred tax assets 1,300 1,022
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 2,454 1,159
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,454 1,159
- --------------------------------------------------------------------------------
Net deferred tax liability $ 1,154 $ 137
- --------------------------------------------------------------------------------
There is no valuation allowance for deferred tax assets at December 31, 2002 and
2001. 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.
39
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. The amount of
deferred tax asset realizable, however, could change if management's estimate of
future taxable income should change.
NOTE 8-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. In June 2002, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2003 . Since inception of its repurchase authorization,
through December 31, 2002, the Company had repurchased 343,316 shares at an
average cost of $9.26 per share for a total value of $3,179.
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 generally become exercisable 20% after 1 year, 60% after 2 years and 100%
after 3 years from the date of grant for employees and are fully exercisable on
the date of grant for directors. Other 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.
40
A summary of stock option plan activity for 2002, 2001 and 2000 for all plans is
as follows:
- -------------------------------------------------------------------------------
# of Weighted Average
2002 Shares Exercise Price
- -------------------------------------------------------------------------------
Outstanding at beginning of year 544,372 $ 12.17
Granted 108,150 22.86
Exercised (65,652) 7.84
Terminated or expired (2,200) 14.82
- --------------------------------------------------------------------------------
Outstanding at end of year 584,670 $ 14.62
- --------------------------------------------------------------------------------
Exercisable at end of year 347,760 $ 10.84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
# of Weighted Average
2001 Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year 441,797 $ 8.55
Granted 179,662 18.96
Exercised (71,327) 7.15
Terminated or expired (5,760) 8.49
- --------------------------------------------------------------------------------
Outstanding at end of year 544,372 $ 12.17
- --------------------------------------------------------------------------------
Exercisable at end of year 326,972 $ 9.68
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
# 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
- --------------------------------------------------------------------------------
Information related to stock options outstanding under all plans at December 31,
2002 is as follows:
- ------------------------------------------------------------------------- ------------------------------
Options Outstanding Options Exercisable
--------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Shares Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------- ---------------------------- ----------------
$ 4.00 - $ 9.50 147,656 5.8 years $ 7.17 147,576 $ 7.17
10.75 - 18.25 227,514 6.8 years 12.63 164,674 11.89
20.05 - 23.05 209,500 9.3 years 22.05 35,510 21.24
- ---------------------------------------------------------- ---------------------------- ----------------
584,670 7.8 years $ 14.62 347,760 $ 10.84
- ---------------------------------------------------------- ---------------------------- ----------------
41
NOTE 9-NET EARNINGS PER COMMON SHARE
The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per common share:
- --------------------------------------------------------------------------------
Number of
Earnings Shares Per Share
2002 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $7,416 4,750,784 $1.56
Effect of dilutive securities - stock options 204,297
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $7,416 4,955,081 $1.50
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Number of
Earnings Shares Per Share
2001 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,110 4,660,922 $1.10
Effect of dilutive securities - stock options 186,555
----------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $5,110 4,847,477 $1.05
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Number of
Earnings Shares Per Share
2000 (Numerator) (Denominator) 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
- --------------------------------------------------------------------------------
42
At December 31, 2002, the Company had 94,950 stock options outstanding that
could potentially dilute basic earnings per share in future periods that were
not included in diluted earnings per share because their effect on the period
presented was anti-dilutive.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for eligible employees. 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 $241 and
$320 in 2002, $263 and $201 in 2001 and $208 and $174 in 2000, respectively.
The Company also currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility.
The actuarial recorded liabilities for such unfunded postretirement benefit is
as follows:
Change in benefit obligation:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 910 $ -
Service Cost with Interest to End of Year 26 17
Interest Cost 61 43
Participant contributions 19 9
Acquisitions/divestitures - 861
Benefits Paid (68) (48)
Actuarial (gain) or loss 28 68
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 976 $ 950
- --------------------------------------------------------------------------------
Amounts recognized in consolidated balance sheet:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation $ (976) $ (950)
Fair Value of Plan Assets - -
Funded Status (976) (950)
Unrecognized Transition Obligation - -
Unrecognized Prior Service Cost - -
Unrecognized Net (Gain)/Loss 117 89
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost (included in
other long-term obligations) $ 859 $ 861
- --------------------------------------------------------------------------------
Assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. The trend rate is 12 percent in 2002
declining to 5.5 percent in
43
2009 and thereafter. A one percentage point increase in health care cost trend
rates in each year would increase the accumulated postretirement benefit
obligation as of December 31, 2002 by $153 and the net periodic postretirement
benefit cost for 2002 by $15. A one percentage point decrease in health care
cost trend rates in each year would decrease the accumulated postretirement
benefit obligation as of December 31, 2002 by $146 and the net periodic
postretirement benefit cost for 2002 by $14. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 6.625%
in 2002 and 7.25% for 2001.
NOTE 11-COMMITMENTS AND CONTINGENCIES
In February 2002, the Company entered into a ten (10) year lease which is
cancelable in 2009 for approximately 20,000 square feet of office space. The
office space is now serving as the Company's general offices and as a laboratory
facility. The Company leases most of its vehicles and office equipment under
noncancelable operating leases, which expire at various times through 2006. Rent
expense charged to operations under such lease agreements for 2002, 2001 and
2000 aggregated approximately $382, $310 and $326, respectively. Aggregate
future minimum rental payments required under noncancelable operating leases at
December 31, 2002 are as follows:
- ----------------------------------------------------
Year
- ----------------------------------------------------
2003 $ 427
2004 355
2005 275
2006 245
2007 245
Thereafter 608
- ----------------------------------------------------
Total minimum lease
payments $ 2,155
- ----------------------------------------------------
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. 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 recently been less than $5 per year.
44
The Company's Verona facility, while held by a prior owner, was designated by
the EPA as a Superfund site and placed on the National Priorities List in 1983,
because of dioxin contamination on portions of the site. Remediation conducted
by the prior owner under the oversight of the EPA and the Missouri Department of
Natural Resources ("MDNR") included removal of dioxin contaminated soil and
equipment, capping of areas of residual contamination in four relatively small
areas of the site separate from the manufacturing facilities, and the
installation of wells to monitor groundwater and surface water contamination by
organic chemicals. No ground water or surface water treatment was required. The
Company believes that remediation of the site is complete. In 1998, the EPA
certified the work on the contaminated soils to be complete. In February 2000,
after the conclusion of the two years of monitoring groundwater and surface
water, the former owner submitted a draft third party risk assessment report to
the EPA and MDNR recommending no further action. The prior owner is awaiting the
response of the EPA and MDNR to the draft risk assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona
facility for potential liabilities associated with the Superfund site and one of
the sellers, in turn, has the benefit of certain contractual indemnification by
the prior owner that is implementing the above-described Superfund remedy.
From time to time, the Company is a party to various litigation, claims and
assessments, management believes that the alternate outcome of such matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
NOTE 12-SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer products
and services to different markets. As a result of the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate, DuCoa L.P., the Company
presently has three segments, specialty products, encapsulated / nutritional
products and, the unencapsulated feed supplements segment. Products relating to
choline animal feed for non-ruminant animals are primarily reported in the
unencapsulated feed supplements segment. Human choline nutrient products and
encapsulated products are reported in the encapsulated / nutritional products
segment. They are managed separately 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 / nutritional products segment is principally 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 unencapsulated feed
supplements segment is in the business of manufacturing and supplying choline
chloride, an essential nutrient for animal health, to
45
the poultry and swine industries. In addition, certain derivatives of choline
chloride are also manufactured and sold into industrial applications and are
included in the encapsulated feed supplement segment. The Company sells products
for all 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:
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Specialty Products $ 22,028 $ 21,130 $ 20,113
Encapsulated/Nutritional Products 27,990 18,312 13,085
Unencapsulated Feed Supplements 10,179 6,700 -
- ------------------------------------------------------------------------------
Total $ 60,197 $ 46,142 $ 33,198
- ------------------------------------------------------------------------------
Business Segment Earnings (Loss):
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Specialty Products $ 7,240 $ 6,612 $ 5,605
Encapsulated/Nutritional Products 5,118 1,582 333
Unencapsulated Feed Supplements (173) (39) -
Interest expense and other income
(expense) 340 214 58
- ------------------------------------------------------------------------------
Earnings before income taxes $ 11,845 $ 8,369 $ 5,996
- ------------------------------------------------------------------------------
Depreciation/Amortization:
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Specialty Products $ 1,583 $ 1,587 $ 1,666
Encapsulated/Nutritional Products 484 373 349
Unencapsulated Feed Supplements 850 661 -
- ------------------------------------------------------------------------------
Total $ 2,917 $ 2,621 $ 2,015
- ------------------------------------------------------------------------------
Business Segment Assets:
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Specialty Products $ 13,993 $ 11,074 $ 11,679
Encapsulated/Nutritional Products 16,730 10,798 7,442
Unencapsulated Feed Supplements 17,954 18,181 -
Other Unallocated 4,621 4,424 4,101
- ------------------------------------------------------------------------------
Total $ 53,298 $ 44,477 $ 23,222
- ------------------------------------------------------------------------------
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.
46
Expenditures for Segment Assets:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Specialty Products $ 5,273 $ 414 $ 516
Encapsulated/Nutritional Products 4,705 1,175 365
Unencapsulated Feed Supplements 42 361 -
- --------------------------------------------------------------------------------
Total $ 10,020 $ 1,950 $ 881
- --------------------------------------------------------------------------------
Geographic Revenue Information:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
United States $ 54,663 $ 42,606 $ 30,187
Foreign Countries 5,534 3,536 3,011
- --------------------------------------------------------------------------------
Total $ 60,197 $ 46,142 $ 33,198
- --------------------------------------------------------------------------------
The Company has no foreign based operations. Therefore, all long-lived assets
are in the United States and revenue from foreign countries is based on customer
ship-to address.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
- ----------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------
Income taxes $ 4,386 $ 3,220 $ 2,281
Interest $ 389 $ 387 $ 47
- ----------------------------------------------------------------------
Non-cash financing activities:
- ----------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------
Dividends declared $ 382 $ 305 $ 277
- ----------------------------------------------------------------------------
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $14,389 $15,668 $15,784 $14,356 $ 8,024 10,189 $ 13,849 $ 14,080
Gross profit 5,294 6,564 5,998 5,454 3,542 4,165 4,932 5,287
Earnings before
income taxes 2,340 3,571 3,313 2,621 1,780 1,809 2,179 2,601
Net earnings 1,438 2,205 2,154 1,619 1,113 1,148 1,308 1,541
Basic net earnings
per common share $ .31 $ .46 $ .45 $ .34 $ .24 $ .25 $ .28 $ .33
Diluted net earnings
per common share $ .29 $ .45 $ .43 $ .33 $ .23 $ .24 $ .27 $ .31
- -----------------------------------------------------------------------------------------------------------------------------
47
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 on January 1, 2003. The Company does not expect that the
adoption of SFAS No. 143 will have a material effect on the Company's financial
position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 is different from EITF Issue No. 94-3 in that
Statement No. 146 requires that a liability be recognized for a cost associated
with an exit or disposal activity only when the liability is incurred, that is
when it meets the definition of a liability in the FASB's conceptual framework.
Statement No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. In contrast,
under EITF Issue 94-3, a company recognized a liability for an exit cost when it
committed to an exit plan. Statement No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of Statement
No. 146 can be expected to impact the timing of liability recognition associated
with any future exit activities.
48
Schedule II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
(In thousands)
Additions
---------
Balance at Charges to Charges to
Beginning of Costs and Other Balance at
Description Year Expenses Accounts Deductions End of Year
----------- ------------ ---------- ---------- ---------- -----------
Year ended December 31, 2002
Allowance for doubtful accounts $ 50 $ 70 - $(30) (a) $ 90
Inventory obsolescence reserve 82 152 - (42) (a) 192
Year ended December 31, 2001
Allowance for doubtful accounts 48 65 - (63) (a) 50
Inventory obsolescence reserve 81 63 - (62) (a) 82
Year ended December 31, 2000
Allowance for doubtful accounts - 48 - - 48
Inventory obsolescence reserve 88 41 (48) (a) 81
(a) represents write-offs
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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 2002 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. Controls and Procedures.
(a) Based upon an evaluation by the Company's Chief Executive Officer and
Principal Financial Officer and its Corporate Controller within 90 days prior to
the filing date of this Annual Report on Form 10-K, they have concluded that the
Company's disclosure controls and procedures as
50
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended,
are effective for gathering, analyzing and disclosing information the Company is
required to disclose in its periodic reports filed under such Act.
(b) Since the date of the most recent evaluation of the Company's internal
controls, there have been no significant changes in such internal controls or in
other factors that could significantly affect these controls nor were there any
corrective actions with regard to significant deficiencies and material
weaknesses.
Item 15. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and
certain related agreements (forms of which constitute Exhibits to
the Asset Purchase Agreement) as executed. (The Disclosure Schedule
identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP
Ingredients, Inc.) and the Power of Attorney and Security Agreement
(referred to in Section 2.6 of the Asset Purchase Agreement) and
Post-Closing Escrow Agreement (referred to in Sections 3.2.2 and
3.3.3 of the Asset Purchase Agreement), have been omitted. The
Company agrees to furnish a copy of these documents on a
supplemental basis to the Securities and Exchange Commission upon
request.) (incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated June, 2001(the "2001 8-K".))
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.
4.1 Loan Agreement dated June 1, 2001 by and between Fleet National Bank
and Balchem Corporation, Note dated June 1, 2001 from Balchem
Corporation to Fleet National Bank, and Promissory Note (Revolving
Line of Credit) dated June 1, 2001 from Balchem Corporation to Fleet
National Bank (incorporated by reference to exhibit 4.1 to the 2001
8-K).
4.1.1 Amendment to Agreements No. 3, dated as of May 23, 2002, with
respect to Loan Agreement dated June 1, 2001 by and between
Fleet National Bank and Balchem Corporation and Amendment,
dated December 27, 2002, to Loan Agreement dated June 1, 2001
by and between Fleet National Bank and Balchem Corporation.
4.2 Guaranty dated June 1, 2001 from BCP Ingredients, Inc. to Fleet
National Bank (incorporated by reference to exhibit 4.2 to the 2001
8-K).
51
4.3 Security Agreement dated June 1, 2001 from Balchem Corporation to
Fleet National Bank (incorporated by reference to exhibit 4.3 to the
2001 8-K).
4.4 Security Agreement dated June 1, 2001 from BCP Ingredients, Inc. to
Fleet National Bank (incorporated by reference to exhibit 4.4 to the
2001 8-K).
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 ((incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 10-K")). *
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).*
10.7 Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc.
and Balchem Corporation (incorporated by reference to Exhibit 10.7
to the 2001 10-K).
21. Subsidiaries of Registrant (incorporated by reference to Exhibit 21
to the 2001 10-K).
23.1 Consent of KPMG LLP, Independent Auditors
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
year ended December 31, 2002.
52
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 31, 2003 BALCHEM CORPORATION
By:/s/ Dino A. Rossi
----------------------------------
Dino A. Rossi, President,
Chief Executive Officer
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.
/s/ Dino A. Rossi
------------------------------------
Dino A. Rossi, President,
Chief Executive Officer, Principal
Financial Officer and Director
Date: March 31, 2003
/s/ Francis J. Fitzpatrick
------------------------------------
Francis J. Fitzpatrick, Controller
Date: March 31, 2003
/s/ Francis X. McDermott
------------------------------------
Francis X. McDermott, Director
Date: March 31, 2003
/s/ Kenneth P. Mitchell
------------------------------------
Kenneth P. Mitchell, Director
Date: March 31, 2003
/s/ Israel Sheinberg
------------------------------------
Israel Sheinberg, Director
Date: March 31, 2003
/s/ Hoyt Ammidon, Jr.
------------------------------------
Hoyt Ammidon, Jr., Director
Date: March 31, 2003
------------------------------------
Edward McMillan, Director
Date:
53
CERTIFICATIONS
I, Dino A. Rossi, President, Chief Executive Officer and Principal
Financial Officer of Balchem Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Balchem
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Dino A. Rossi
-----------------
Dino A. Rossi,
President, Chief Executive Officer
and Principal Financial Officer
54
I, Francis J. Fitzpatrick, Corporate Controller of Balchem Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Balchem
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Francis J. Fitzpatrick
--------------------------------
Francis J Fitzpatrick Corporate Controller
55
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Balchem Corporation (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dino A.
Rossi, President, Chief Executive Officer and Principal Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and (2) The information contained in the Report
fairly presents, in all material respects, the financial condition and result of
operations of the Company.
/s/ Dino A. Rossi
-----------------
Dino A. Rossi President,
Chief Executive Officer and Principal Financial Officer
March 31, 2003
This certification accompanies the above-described Report on Form 10-K
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except
to the extent required by such Act, be deemed filed by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
56
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Balchem Corporation (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Francis
J. Fitzpatrick, Corporate Controller of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge: (1) The Report fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Francis J. Fitzpatrick
--------------------------
Francis J. Fitzpatrick
Corporate Controller
March 31, 2003
This certification accompanies the above-described Report on Form 10-K
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except
to the extent required by such Act, be deemed filed by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
57
Exhibit
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Asset Purchase Agreement, dated as of May 21, 2001, among BCP
Ingredients, Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc. and
certain related agreements (forms of which constitute Exhibits to
the Asset Purchase Agreement) as executed. (The Disclosure Schedule
identified throughout Asset Purchase Agreement, Schedule A to the
Obligations Undertaking (list of contracts assumed by BCP
Ingredients, Inc.) and the Power of Attorney and Security Agreement
(referred to in Section 2.6 of the Asset Purchase Agreement) and
Post-Closing Escrow Agreement (referred to in Sections 3.2.2 and
3.3.3 of the Asset Purchase Agreement), have been omitted. The
Company agrees to furnish a copy of these documents on a
supplemental basis to the Securities and Exchange Commission upon
request.) (incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated June, 2001(the "2001 8-K".))
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.
4.1 Loan Agreement dated June 1, 2001 by and between Fleet National Bank
and Balchem Corporation, Note dated June 1, 2001 from Balchem
Corporation to Fleet National Bank, and Promissory Note (Revolving
Line of Credit) dated June 1, 2001 from Balchem Corporation to Fleet
National Bank (incorporated by reference to exhibit 4.1 to the 2001
8-K).
4.1.1 Amendment to Agreements No. 3, dated as of May 23, 2002, with
respect to Loan Agreement dated June 1, 2001 by and between
Fleet National Bank and Balchem Corporation and Amendment,
dated December 27, 2002, to Loan Agreement dated June 1, 2001
by and between Fleet National Bank and Balchem Corporation.
4.2 Guaranty dated June 1, 2001 from BCP Ingredients, Inc. to Fleet
National Bank (incorporated by reference to exhibit 4.2 to the 2001
8-K).
4.3 Security Agreement dated June 1, 2001 from Balchem Corporation to
Fleet National Bank (incorporated by reference to exhibit 4.3 to the
2001 8-K).
4.4 Security Agreement dated June 1, 2001 from BCP Ingredients, Inc. to
Fleet National Bank (incorporated by reference to exhibit 4.4 to the
2001 8-K).
58
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 ((incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 10-K")). *
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).*
10.7 Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc.
and Balchem Corporation (incorporated by reference to Exhibit 10.7
to the 2001 10-K).
21. Subsidiaries of Registrant (incorporated by reference to Exhibit 21
to the 2001 10-K).
23.1 Consent of KPMG LLP, Independent Auditors
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
59