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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, 2003
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
incorporation or organization) Identification Number)
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 $.06-2/3 per share American Stock Exchange
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 30, 2003 was approximately
$111,889,838. 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 4,945,273
as of March 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant's proxy statement for its 2004 Annual
Meeting of Stockholders (the "2004 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. The Company has three segments, specialty
products, encapsulated / nutritional products and the unencapsulated feed
supplements segment also referred to in this report as BCP Ingredients., 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.
REASHURE(TM) Choline, is an encapsulated choline product that dramatically
boosts health and milk production in transition and early lactation cows.
Commercial sales are currently derived from the dairy industry where
Reashure(TM), delivers nutrient supplements that survive the rumen and are
biologically available, providing required nutritional levels to dairy cows
during certain weeks preceding and following calving, commonly referred to as
the "transition period" of the animal.
1
In 2003, 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 a
Research and Development pipeline of several new products and product
applications for the food market in test production or test marketing status.
This segment also manufactures 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. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization.
Due to consolidation of customer businesses in the contract sterilizer
industry, the Company has one Specialty Products customer, Sterigenics, which
accounted for approximately 10% and 9% of the Company's net sales in 2003 and
2002, respectively. This customer accounted for 12% and 11% of the Company's
accounts receivable balance at December 31, 2003 and 2002, 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 various chemical synthesis
applications. It is also utilized in manufacturing operations to make paints
more durable, and for manufacturing specialty
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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.
BCP Ingredients
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.
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Seasonality:
In general, the business of the Company's segments is not seasonal to any
material extent.
Backlog:
At December 31, 2003, the Company had a total backlog of $1,881,000
(including $639,000 for the encapsulated / nutritional products segment,
$891,000 for the specialty products segment and $351,000 for BCP Ingredients),
as compared to a total backlog of $991,000 at December 31, 2002 (including
$527,000 for the encapsulated / nutritional products segment, $321,000 for the
specialty products segment and $143,000 for the BCP Ingredients 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 development. In
addition, the winning and retention of customer acceptance of the Company's
encapsulated products involve substantial expenditures for application testing
and sales efforts. The Company also engages various universities to assist in
research and provide independent third-party analysis. 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, 2003, 2002 and 2001, the Company
incurred research and development expense of approximately $2.1 million, $1.9
million and $1.6 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, 2003, 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.
4
The Company reviews its product development activities in an effort to
allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
Capital Projects:
Capital expenditures were approximately $2.3 million for 2003. During
2003, the Company constructed a 10,000 square foot, state-of-the-art canister
filling operation at its Green Pond, South Carolina plant site. This automated
facility has been designed and constructed to fill single use canisters with
ethylene oxide for use in medical device sterilization. Capital expenditures are
projected to be approximately $1.7 million for calendar year 2004.
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
5
to this product; failure to do so would result in liability of up to $2,500 per
day per person exposed.
The California Birth Defect Law of 1984 requires the California Department
of Food and Agriculture ("CDFA") to identify chemicals in "widespread use" for
which significant data gaps exist, and requires registrants for those products
to submit the data or pay an assessment to the CDFA to fund independent
development of the data. The CDFA determined that data gaps existed for ethylene
oxide. Upon notice from the CDFA, the Company and 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 implemented 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
6
results of operations or financial condition of the Company. The proceeding
referred to in Item 3 below has been substantially completed.
Employees:
As of March 1, 2004, the Company employed approximately 190 persons.
Approximately 48 employees at the Company's Verona, Missouri facility are
covered by a collective bargaining agreement which expires in 2004.
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
7
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 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, 2003,
approximately 8% of the Company's net sales consisted of sales outside the
United States, predominately to Europe, Japan and Mexico. 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 for an extended period of time could have a material
adverse effect on the Company.
8
Available Information:
The Company's Internet website address is www.balchem.com. The Company
makes available through its website, free 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 blending, drumming and terminal 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 10,000 square foot, state-of-the-art canister filling
facility, a maintenance building and an office building. The Company uses the
facility as a terminal, warehouse, drumming and canister filling station for the
products in its specialty products segment.
The Verona, Missouri facility site, which is located on approximately 100
acres, consists of manufacturing facilities relating to choline animal feed,
human choline nutrients 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 was 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
9
February 1994. Based on NYDEC requirements, the Company cleaned the area and
removed additional soil from the drum burial site. The cost for this clean-up
and the related reports was approximately $164,000. Clean-up was completed in
1996, but NYDEC required the Company to monitor the site through 1999. The
Company continues to be involved in discussions with NYDEC to evaluate test
results and determine what, if any, additional actions will be required on the
part of the Company to close out the remediation of this site. Additional
actions, if any, would likely require the Company to continue monitoring the
site. The cost of such monitoring has 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 2003.
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 2003 and 2002, for
each quarterly period during the past two years were as follows:
===================================================
Quarterly Period High Low
- ---------------------------------------------------
Ended March 31, 2003 $ 25.30 $ 16.95
Ended June 30, 2003 23.85 17.10
Ended September 30, 2003 25.60 20.35
Ended December 31, 2003 23.50 18.75
===================================================
===================================================
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
===================================================
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(b) Record Holders.
As of March 1, 2004, the approximate number of holders of record of the
Company's common stock was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.06-2/3 par value 214*
*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 1,900.
(c) Dividends.
The Company declared a cash dividend of $0.08 per share on the common
stock during its fiscal year ended December 31, 2003.
Item 6. Selected Financial Data
(In thousands, except per share data)
=====================================================================================================
Year ended December 31, 2003(1) 2002(1) 2001(1) 2000 1999
- -----------------------------------------------------------------------------------------------------
Statement of Operations Data
Net sales $ 61,875 $ 60,197 $ 46,142 $ 33,198 $ 29,682
Earnings before income
tax expense 8,763 11,845 8,369 5,996 4,905
Income tax expense 3,125 4,429 3,259 2,267 1,811
Net earnings 5,638 7,416 5,110 3,729 3,094
Basic net earnings per
common share 1.17 1.56 1.10 .80 .64
Diluted net earnings per
common share 1.13 1.50 1.05 .78 .63
- -----------------------------------------------------------------------------------------------------
=====================================================================================================
At December 31, 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets $ 56,906 $ 53,298 $ 44,477 $ 23,222 $ 22,030
Long-term debt 7,839 9,581 11,323 -- 1,250
Other long-term
obligations 3,211 2,521 1,345 362 606
Total stockholders' equity 39,781 33,269 25,332 19,580 17,939
Dividends per common share $ .08 $ .08 $ .065 $ .06 $ .05
=====================================================================================================
(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.
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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.
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets specialty performance
ingredients and products for the food, feed and medical sterilization
industries. The Company's reportable segments are strategic businesses that
offer products and services to different markets. The Company presently has
three reportable segments, specialty products, encapsulated / nutritional
products and BCP Ingredients.
Specialty Products Segment
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 and is used to sterilize medical
devices. Contract sterilizers, medical device manufacturers, medical gas
distributors and hospitals are the Company's principal customers for this
product. Blends of ethylene oxide are sold as fumigants and are highly effective
in killing bacteria, fungi, and insects in spices and other seasoning materials.
In addition, the Company also sells single use canisters with 100% ethylene
oxide for use in medical device sterilization. Propylene oxide and methyl
chloride, are sold principally to customers seeking smaller (as opposed to bulk)
quantities.
Management believes that future success in this segment is highly
dependent on the Company's ability to maintain its strong reputation for
excellent quality, safety and customer service.
Encapsulated / Nutritional Products
The encapsulated / nutritional products segment predominantly encapsulates
performance ingredients for use throughout the food and animal health industries
to
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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.
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing launches of new products in the U.S. and International food
market by the Company's customers and prospects. Increased competition, economic
slowness and less than expected market acceptance of end-products in both the
Domestic and International food markets has during the past year resulted in
lower volumes sold and lower average selling prices which have had an impact on
profit margins. To counter this, the Company, through its innovative proprietary
technology and applications expertise, continues to develop new
microencapsulation products designed to solve and respond to customer problems
and needs. Sales of our Reashure(TM) product for the animal nutrition and health
industry are highly dependent on dairy industry economics as well as the ability
of the Company to leverage the results of existing successful university
research on the animal health benefits of this product.
BCP Ingredients
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent quality and customer service. In addition, the Company must continue
to increase production efficiencies in order to maintain its low-cost position
to effectively compete for market share in a highly competitive marketplace.
The Company sells products for all segments through its own sales force,
independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and
business segment earnings (loss) for the three years ended December 31, (in
thousands):
Business Segment Net Sales:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 26,163 $ 22,028 $ 21,130
Encapsulated/Nutritional Products 24,043 27,990 18,312
BCP Ingredients 11,669 10,179 6,700
- --------------------------------------------------------------------------------
Total $ 61,875 $ 60,197 $ 46,142
================================================================================
13
Business Segment Earnings (Loss):
======================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------------
Specialty Products $ 9,409 $ 7,240 $ 6,612
Encapsulated/Nutritional Products (962) 5,118 1,582
BCP Ingredients 568 (173) (39)
Interest expense and other income (expense) (252) (340) (214)
- --------------------------------------------------------------------------------------
Earnings before income taxes $ 8,763 $ 11,845 $ 8,369
======================================================================================
Fiscal Year 2003 compared to Fiscal Year 2002
Net Sales
Net sales for 2003 were $61,875 as compared with $60,197 for 2002, an
increase of $1,678 or 2.8%. Net sales for the specialty products segment were
$26,163 for 2003 as compared with $22,028 for 2002, an increase of $4,135 or
18.8%. This increase was due principally to greater sales volumes (11.8% over
the prior comparable period) of ethylene oxide for medical device sterilization
and single use ethylene oxide canisters (new business for 2003) for
sterilization use in medical facilities. Propylene oxide volume also increased
in 2003 by 20.3%. Net sales for the encapsulated / nutritional products segment
were $24,043 for 2003 as compared with $27,990 for 2002, a decrease of $3,947 or
14.1%. Of particular significance, the prior year comparable period included
substantial sales, approximately $2,200, to a single domestic food customer in
support of a new product launch. While this customer's end consumer product
continues to be in distribution, the Company did not realize any sales to this
customer in 2003 due to slower than expected market acceptance of the new
end-product. The remaining decrease was largely a result of unfavorable product
mix and a volume decline in sales to the domestic food market. The Company
continues to experience conservative customer purchasing patterns and delayed
new product launches by customers in the United States. Net sales of $11,669
were realized for 2003 in the BCP Ingredients (unencapsulated feed supplements)
segment, which markets choline additives for the poultry and swine industries as
well as industrial choline derivative products, as compared with $10,179 for
2002, an increase of $1,490 or 14.6%. The increase was primarily a result of
increased volumes sold (14.4% over the prior comparable period) in the choline
chloride and specialty derivative markets.
Gross Margin
Gross margin percentage for 2003 was 34.2% as compared to 38.7% for 2002.
Margins for the specialty products segment were favorably affected by increased
production volumes of the Company's products utilizing ethylene oxide. Margins
in the encapsulated / nutritional products segment were unfavorably affected by
the decline in sales volume as described above. These lower sales levels,
coupled with a designed reduction in inventory levels in this segment,
negatively impacted the Company's gross margins due to the resulting excess
plant manufacturing capacity. In addition, increased
14
competition in both the Domestic and International food markets during the
fourth quarter resulted in lower volumes sold and lower average selling prices
which contributed to the erosion in profit margins for this segment. Margins for
BCP Ingredients were favorably affected by increased production volumes of
choline chloride and specialty derivative products. The decision to reduce
inventory levels while maintaining prior levels of plant manufacturing capacity
in the encapsulated / nutritional products segment, generated unfavorable
manufacturing variances. However, such decision contributed greatly toward an
improved cash balance at December 31, 2003. Increases in employee medical claims
under our self-insurance program, as well as increases in the Company's general
business insurance premiums due to unfavorable insurance marketplace conditions,
had a negative impact on margins for all segments.
Operating Expenses
Operating expenses for 2003 increased to $12,137 from $11,125 for 2002, an
increase of $1,012 or 9.1%. Total operating expenses as a percentage of sales
were 19.6% for 2003 as compared to 18.5% for 2002. Increases in general
insurance, medical costs as described above, and advertising costs for the
encapsulated / nutritional products segment, were largely responsible for the
increase in operating expenses. In addition, operating expenses for 2003 include
a charge of approximately $400, resulting from the Company making organizational
changes in the encapsulated/nutritional products segment. These personnel
changes were effected late in the fourth quarter of 2003 in an effort to refocus
our commercial efforts, reduce operating expenses and improve the overall
financial performance of the encapsulated / nutritional products segment. During
2003 and 2002, the Company spent $2,083 and $1,907, 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.
Earnings From Operations
As a result of the foregoing, earnings from operations for 2003 were
$9,015 as compared to $12,185 for 2002. Earnings from operations for the
specialty products segment for 2003 were $9,409 as compared to $7,240 for 2002.
Loss from operations for the encapsulated / nutritional products segment for
2003 was $962 as compared to earnings of $5,118 for 2002. Earnings from the
unencapsulated feed supplements segment for 2003 were $568 compared to a loss of
$173 for 2002.
Other expenses (income)
Interest expense for 2003 totaled $272 as compared to $389 for 2002, a
decrease of $117. This decrease is the result of lower average outstanding
borrowings during the period combined with lower average interest rates.
15
Income Tax Expense
The Company's effective tax rate for 2003 was 35.7% compared to 37.4% in
2002 primarily due to a favorable shift in the mix of taxable income to lower
state tax rate jurisdictions.
Net earnings
As a result of the foregoing, net earnings were $5,638 for 2003 as
compared with $7,416 for 2002.
Fiscal Year 2002 compared to Fiscal Year 2001
Net Sales
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 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
Gross margin percentage was 38.7% and 38.8% for 2002 and 2001,
respectively. Margins were slightly unfavorably affected principally by
increased sales of the lower margin feed products to the poultry and swine
markets in the unencapsulated feed supplements segment as a percentage of our
total business. 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 volumes
of the Company's products utilizing ethylene oxide. The Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of
16
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
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.
Earnings From Operations
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. 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.
Other expenses (income)
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.
17
Income Tax Expense
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.
Net earnings
As a result of the foregoing, net earnings were $7,416 for 2002 as
compared with $5,110 for 2001.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
The Company's contractual obligations and commitments principally include
obligations associated with its outstanding indebtedness under its Loan
Agreement and future minimum noncancelable operating lease obligations
(including the office space lease entered into in 2002 as described above).
These aggregate commitments are as follows:
===================================================================
Loan Operating Total
Agreement Leases Commitment
- -------------------------------------------------------------------
2004 1,742 469 2,211
2005 1,742 449 2,191
2006 1,742 392 2,134
2007 1,742 351 2,093
2008 1,742 324 2,066
Thereafter 871 473 1,344
===================================================================
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 could 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.
18
Cash
Cash and cash equivalents increased to $9,239 at December 31, 2003 from
$1,731 at December 31, 2002. The $7,508 increase resulted primarily from an
increase in net cash provided by operating activities of $11,153 offset
partially by net cash used in investing activities of $2,314 and cash used in
financing activities of $1,331. Working capital amounted to $17,555 at December
31, 2003 as compared to $10,884 at December 31, 2002, an increase of $6,671.
Operating Activities
Cash flows from operating activities provided $11,153 for 2003 as compared
with $10,114 for 2002. The increase in cash flows from operating activities was
due primarily to decreases in inventory and prepaid expenses and increases in
depreciation. Lower sales levels in the encapsulated / nutritional products
segment resulted in a designed reduction in inventory levels in this segment.
Reduction in prepaid expense is the result of a temporary change in the timing
of payments related to the Company's insurance program. Increased depreciation
expense is the result of 2002 capital expenditures discussed below. The
foregoing was partially offset by a decrease in net earnings and accounts
payable and accrued expenses.
Investing Activities
Capital expenditures were $2,270 for 2003. In 2003, the Company completed
construction of a 10,000 square foot, state-of-the-art canister filling
operation at its Green Pond, South Carolina plant site. In 2002, the Company
expanded the manufacturing, processing and distribution facilities at its
Verona, Missouri facility to enable it to handle operations for its specialty
products and encapsulated choline products businesses. In addition, the Company
entered into a ten (10) year lease for approximately 20,000 square feet of
office space, which serves as the Company's general offices and as a laboratory
facility. The costs of certain leasehold improvements to the Company's office
space, up to $630, were funded by the landlord. The overall effect of the
foregoing was that cash flows used in investing activities were $2,314 in 2003
and $9,951 in 2002.
Financing Activities
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 2003, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2004. As of December 31, 2003, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 300,156 shares
have been issued by the Company under employee benefit plans and for the
exercise of stock options. The Company intends to acquire shares from time to
time at prevailing market prices if and to the extent it deems
19
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, as described in Note
4 to the consolidated financial statements. The Term Loan is payable in equal
monthly installments of principal beginning October 1, 2002 of approximately
$145, together with accrued interest, and has a maturity date of May 31, 2009.
Repayments under the term loan totaled $1,742 in 2003 and 2002, respectively.
Borrowings under the Term Loan bear interest at LIBOR plus 1.25% (2.42% and
2.63% at December 31, 2003 and 2002, 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, 2003, 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% (2.17%
and 2.32% at December 31, 2003 and 2002, respectively). No amounts have been
drawn on the Revolving Facility as of the date hereof. The Revolving Facility
expires on May 30, 2004. 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.
Proceeds from stock options and warrants exercised totaled $807 and $515
in 2003 and 2002, respectively. Dividend payments were $382 and $305 in 2003 and
2002, respectively.
The overall effect of the foregoing was that cash flows used in financing
activities were $1,331 in 2003 and $1,552 in 2002.
Other Matters Impacting Liquidity
As previously reported in June, 2001, pursuant to a certain Asset Purchase
Agreement, dated as of May 21, 2001, BCP Ingredients, Inc. ("Buyer"), a wholly
owned subsidiary of Balchem Corporation, acquired certain assets of DCV, Inc.
and its affiliate, DuCoa L.P. The agreement provided for the payment of up to an
additional $2,750 of contingent purchase price based upon the sales of specified
product lines achieving certain gross margin levels (in excess of specified
thresholds) over the three year period ending June 2004, with no more than
$1,000 payable for any particular yearly period. Additionally, pursuant to the
agreement, a reimbursement of a part of the purchase price could be due the
Company for the first year of such calculation. Based upon the results of the
calculation for the first one year period ended June 2002, a reimbursement of
$30 was
20
received by the Company in 2003. Such reimbursement was recorded as a reduction
of the cost of the acquired product lines. No contingent consideration has been
earned or paid for the second one year period ended June 2003. Any future
contingent consideration would be recorded as an additional cost of the acquired
product lines.
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, 2003 for this obligation is $900. The
postretirement plan is not funded. Historical cash payments made under such plan
approximated $50 per year.
The Company has elected to defer accounting for the economic effects of
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act). In accordance with FSP FAS 106-1, any measures of the accumulated
postretirement plan benefit obligation or net periodic postretirement plan
benefit cost in the consolidated financial statements or accompanying notes do
not reflect the effects of the Act on the plan. Specific authoritative guidance
on the accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported information.
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.
21
Revenue Recognition
Revenue is recognized upon product shipment, and 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.
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. Inventory reserves are generally recorded when the
inventory for a product exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months.
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
We market our products to a diverse customer base, principally throughout
the United States, Europe, Mexico and Japan. We grant credit terms in the normal
course of business to our customers. We perform on-going credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined through review of their
current credit information. We continuously monitor collections and payments
from customers and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Estimated losses are based on historical experience and any specific customer
collection issues identified. If the financial condition of our customers were
to deteriorate resulting in an impairment of their ability to make payments,
additional allowances and related bad debt expense may be required.
22
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.
The Company has elected to defer accounting for the economic effects of
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act). In accordance with FSP FAS 106-1, any measures of the accumulated
postretirement plan benefit obligation or net periodic postretirement plan
benefit cost in the consolidated financial statements or accompanying notes do
not reflect the effects of the Act on the plan. Specific authoritative guidance
on the accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported information.
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 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:
During 2003, the Company was not engaged in related party transactions.
All transactions of the Company have been at arms length.
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.
23
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 was required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 did not have a material effect on the consolidated financial
statements.
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 Company was
required to adopt FIN 45 on December 31, 2002. The adoption of FIN 45 did not
have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure "SFAS No. 148." SFAS No. 148
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
24
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 adopted the disclosure provisions of SFAS
No. 148 during the first quarter of 2003.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 did not have an impact on the Company's
consolidated financial statements.
On December 24, 2003, FASB issued Financial Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities (FIN 46R), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. The Interpretation replaces
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46),
which was issued on January 17, 2003. The effective date of FIN 46R depends on
whether the reporting enterprise is a public or nonpublic company and on the
nature of the entity in which the reporting entity has a variable interest. The
initial adoption of this accounting pronouncement will not have a material
effect on the Company's consolidated financial statements.
25
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, 2003, 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, 2003, would result in an increase in annual
interest expense and a corresponding reduction in cash flow of approximately
$96. 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.
26
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Independent Auditors' Report 28
Consolidated Balance Sheets as of
December 31, 2003 and 2002 29
Consolidated Statements of Earnings for the
years ended December 31, 2003, 2002 and 2001 31
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001 32
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001 33
Notes to Consolidated Financial Statements 34
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2003, 2002 and 2001 56
27
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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, 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" effective January 1, 2002.
KPMG LLP
Short Hills, New Jersey
February 6, 2004
28
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in thousands, except share and per share data)
Assets 2003 2002
-------- --------
Current assets:
Cash and cash equivalents $ 9,239 $ 1,731
Accounts receivable, net of allowance for doubtful accounts of $86 and $90 at
December 31, 2003 and 2002, respectively 7,233 7,159
Inventories 5,961 7,238
Prepaid income taxes -- 975
Prepaid expenses 723 1,305
Deferred income taxes 474 403
-------- --------
Total current assets 23,630 18,811
-------- --------
Property, plant and equipment, net 25,636 25,852
Excess of cost over net assets acquired less accumulated
amortization 6,368 6,398
Intangibles assets, net 1,272 2,237
-------- --------
Total assets $ 56,906 $ 53,298
======== ========
(continued)
29
BALCHEM CORPORATION
Consolidated Balance Sheets, continued
December 31, 2003 and 2002
(Dollars in thousands, except share and per share data)
Liabilities and Stockholders' Equity 2003 2002
-------- --------
Current liabilities:
Trade accounts payable $ 1,254 $ 2,778
Accrued expenses 1,508 1,271
Accrued compensation and other benefits 1,182 1,754
Dividends payable 389 382
Current portion of long-term debt 1,742 1,742
-------- --------
Total current liabilities 6,075 7,927
-------- --------
Long-term debt 7,839 9,581
Deferred income taxes 2,226 1,557
Other long-term obligations 985 964
-------- --------
Total liabilities 17,125 20,029
-------- --------
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 4,860,078 shares outstanding at December 31, 2003 and
4,903,238 shares issued and 4,775,684 shares outstanding at December 31, 2002 327 327
Additional paid-in capital 3,902 3,546
Retained earnings 36,056 30,807
Treasury stock, at cost: 43,160 and 127,554 shares at December 31, 2003
and 2002, respectively (504) (1,411)
-------- --------
Total stockholders' equity 39,781 33,269
-------- --------
-------- --------
Total liabilities and stockholders' equity $ 56,906 $ 53,298
======== ========
See accompanying notes to consolidated financial statements.
30
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
---------- ---------- ----------
Net sales $ 61,875 $ 60,197 $ 46,142
Cost of sales 40,723 36,887 28,216
---------- ---------- ----------
Gross profit 21,152 23,310 17,926
Operating expenses:
Selling expenses 5,718 5,426 4,380
Research and development expenses 2,083 1,907 1,631
General and administrative expenses 4,336 3,792 3,760
---------- ---------- ----------
12,137 11,125 9,771
---------- ---------- ----------
Earnings from operations 9,015 12,185 8,155
Other expenses (income):
Interest income (20) (42) (110)
Interest expense 272 389 387
Other, net -- (7) (491)
---------- ---------- ----------
Earnings before income tax expense 8,763 11,845 8,369
Income tax expense 3,125 4,429 3,259
---------- ---------- ----------
Net earnings $ 5,638 $ 7,416 $ 5,110
========== ========== ==========
Basic net earnings per common share $ 1.17 $ 1.56 $ 1.10
========== ========== ==========
Diluted net earnings per common share $ 1.13 $ 1.50 $ 1.05
========== ========== ==========
See accompanying notes to consolidated financial statements.
31
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2003 2002 and 2001
(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, 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
Net earnings -- -- -- 5,638 -- -- 5,638
Dividends ($.08 per share) -- -- -- (389) -- -- (389)
Shares issued under employee benefit
plans -- -- 138 -- 12,935 135 273
Shares issued under stock option plans and
an income tax benefit of $183 -- -- 218 -- 71,459 772 990
--------- --------- --------- --------- -------- --------- ---------
Balance - December 31, 2003 4,903,238 $ 327 $ 3,902 $ 36,056 (43,160) $ (504) $ 39,781
========= ========= ========= ========= ======== ========= =========
See accompanying notes to consolidated financial statements.
32
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 5,638 $ 7,416 $ 5,110
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,525 2,917 2,621
Shares issued under employee benefit plans 273 241 201
Deferred income tax (benefit) expense 598 1,017 112
Provision for doubtful accounts 36 70 65
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (110) (99) (2,149)
Inventories 1,277 (1,663) (3,021)
Prepaid expenses 582 (300) (452)
Accounts payable and accrued expenses (1,676) 1,520 872
Income taxes 975 (975) (208)
Other long-term obligations 35 (30) 71
-------- -------- --------
Net cash provided by operating activities 11,153 10,114 3,222
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (2,270) (10,020) (1,950)
Proceeds from sale of property, plant and equipment 41 239 --
Cash paid for product lines acquired -- -- (14,259)
Cash paid for intangibles assets acquired (85) (170) (137)
-------- -------- --------
Net cash used in investing activities (2,314) (9,951) (16,346)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 13,500
Principal payments on long-term debt (1,742) (1,742) (435)
Proceeds from stock options and warrants exercised 807 515 511
Dividends paid (382) (305) (277)
Other financing activities (14) (20) (123)
-------- -------- --------
Net cash (used in) provided by financing activities (1,331) (1,552) 13,176
-------- -------- --------
Increase (decrease) in cash and cash equivalents 7,508 (1,389) 52
Cash and cash equivalents beginning of year 1,731 3,120 3,068
-------- -------- --------
Cash and cash equivalents end of year $ 9,239 $ 1,731 $ 3,120
======== ======== ========
See accompanying notes to consolidated financial statements.
33
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
34
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 10%, 9% and 11% of the Company's
consolidated net sales for 2003, 2002 and 2001, respectively. This customer
accounted for 12% and 11% of the Company's accounts receivable balance at
December 31, 2003 and 2002, respectively. Approximately 8%, 9% and 8% of the
Company's net sales consisted of sales outside the United States, predominately
to Europe, Japan, and Mexico for 2003, 2002 and 2001, 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.
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, 2003 and 2002, the Company also performed an impairment test of its
goodwill balance. 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. Accordingly, the Company was not required to perform any
35
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 $6,368 and $6,398 at
December 31, 2003 and December 31, 2002, respectively, subject to the provisions
of SFAS Nos. 141 and 142. The decrease in goodwill was a result of a
reimbursement of $30 of the purchase price of the June 2001 acquisition of
certain assets of DCV, Inc. and its affiliate, DuCoa L.P., as described in Note
4.
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.
==================================================================
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.
36
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 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, 2003 and 2002 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, 2002 or
2003.
Research and Development
Research and development costs are expensed as incurred.
37
Stock Option Plan
At December 31, 2003, 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 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 Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement 123," which requires the Company to provide pro
forma net earnings and pro forma earnings per share disclosures for employee and
director stock option grants made 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
----------------------
2003 2002 2001
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 5,638 $ 7,416 $ 5,110
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method, net of related tax effects (731) (452) (296)
-----------------------------------------
Net earnings as adjusted $ 4,907 $ 6,964 $ 4,814
=========================================
Earnings per share:
Basic EPS as reported $ 1.17 $ 1.56 $ 1.10
Basic EPS as adjusted $ 1.02 $ 1.47 $ 1.03
Diluted EPS as reported $ 1.13 $ 1.50 $ 1.05
Diluted EPS as adjusted $ .98 $ 1.41 $ .99
==========================================================================================
38
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:
=========================================================================
2003 2002 2001
- -------------------------------------------------------------------------
Expected life (years) 5 5 5
Expected volatility 33% 32% 49%
Expected dividend yield .40% .40% .50%
Risk-free interest rate 3.0% 3.7% 4.4%
Weighted average fair value of options
granted during the year $8.08 $9.47 $10.94
=========================================================================
Impairment of Long-lived Assets
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 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 was required
to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not
have a material effect on the Company's consolidated financial statements.
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
39
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 Company was
required to adopt FIN 45 on December 31, 2002. The adoption of FIN 45 did not
have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure "SFAS No. 148." SFAS No. 148 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 adopted the disclosure
provisions of SFAS No. 148 during the first quarter of 2003.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS 150 did not have an impact on the Company's
consolidated financial statements.
40
On December 24, 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the
entity. The Interpretation replaces Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was issued on January 17, 2003. The
effective date of FIN 46R depends on whether the reporting enterprise is a
public or nonpublic company and on the nature of the entity in which the
reporting entity has a variable interest. The initial adoption of this
accounting pronouncement will not have a material effect on the Company's
consolidated financial statements.
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, 2003 and 2002 consist of the following:
===========================================================
2003 2002
- -----------------------------------------------------------
Raw materials $ 1,914 $ 2,042
Finished goods 4,047 5,196
- -----------------------------------------------------------
Total inventories $ 5,961 $ 7,238
===========================================================
NOTE 3- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2003 and 2002 are summarized as
follows:
================================================================================
2003 2002
- --------------------------------------------------------------------------------
Land $ 290 $ 290
Building 10,264 9,271
Equipment 27,781 24,582
Construction in Progress 123 2,728
- --------------------------------------------------------------------------------
38,458 36,871
Less: Accumulated depreciation 12,822 11,019
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 25,636 $ 25,852
================================================================================
41
Depreciation expense was $2,445, $1,833 and $1,329 for the years ended December
31, 2003, 2002 and 2001, 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. Additionally, pursuant to the agreement, a
reimbursement of a part of the purchase price could be due the Company for the
first year of such calculation. Based upon the results of the calculation for
the first one year period ended June 2002, a reimbursement of $30 was received
by the Company in 2003. Such reimbursement was recorded as a reduction of the
cost of the acquired product lines. No contingent consideration has been earned
or paid for the second one year period ended June 2003. Any future contingent
consideration would be recorded as an additional cost of the acquired product
lines. Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142 and the amortization of such goodwill ceased.
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
==============================================================
42
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
- -------------------------------------------
Net sales $ 54,866
Net earnings $ 4,482
Basic EPS $ .96
Diluted EPS $ .92
===========================================
NOTE 5- INTANGIBLE ASSETS
As of December 31, 2003 and 2002 the Company had identifiable intangible assets
as follows:
===================================================================================================================
2003 2002
Amortization Gross 2003 Gross 2002
period Carrying Accumulated Carrying Accumulated
(in years) Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------------------------------------
Customer lists 10 $ 6,760 $ 6,124 $ 6,760 $ 5,127
Re-registration costs 10 356 347 356 304
Patents 17 487 81 386 58
Trademarks 17 205 25 191 14
Other 5 54 13 53 6
- -------------------------------------------------------------------------------------------------------------------
$ 7,862 $ 6,590 $ 7,746 $ 5,509
===================================================================================================================
43
Amortization of identifiable intangible assets was approximately $1,080 for
2003. Assuming no change in the gross carrying value of identifiable intangible
assets, the estimated amortization expense for 2004 is approximately $690,
approximately $41 in the second succeeding year, and approximately $41 in the
third and fourth succeeding years. At December 31, 2003, 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 in 2003.
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 August, 2004 and are included in cost of sales.
Amortization expense included in cost of sales related to this customer list was
$997 in 2003, 2002 and 2001, respectively.
The Company is in the process of re-registering a product it sells for
sterilization of medical devices and other uses. The re-registration requirement
is a result of a congressional enactment during 1988 requiring the
re-registration of this product and all other products that are used as
pesticides. The Company, in conjunction with one other company, has been
conducting the required testing under the direction of the Environmental
Protection Agency ("EPA"). Testing has concluded and the EPA has stated that,
due to a backlog of projects, it cannot anticipate a date for completing the
re-registration process for this product at this time. The Company's management
believes it will be successful in obtaining re-registration for the product as
it has met the EPA's requirements thus far, although no assurance can be given.
Additionally, the product is used as a sterilant with no known substitute.
Management believes absence of availability of this product could not be easily
tolerated by medical device manufacturers and the health care industry due to
the resultant infection potential if the product were unavailable.
NOTE 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%
(2.42% and 2.63% at December 31, 2003 and 2002,
44
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, 2003, 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% (2.17% and 2.32% at December 31, 2003 and 2002,
respectively). No amounts have been drawn on the Revolving Facility as of the
date hereof. The Revolving Facility expires on May 30, 2004. 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, 2003, long-term debt matures as follows:
===========================
2004 1,742
2005 1,742
2006 1,742
2007 1,742
2008 1,742
2009 871
- ---------------------------
Total $ 9,581
===========================
NOTE 7 - INCOME TAXES
Income tax expense consists of the following:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Current:
Federal $ 2,111 $ 2,874 $ 2,515
State 416 538 632
Deferred:
Federal 557 895 99
State 41 122 13
- --------------------------------------------------------------------------------
Total income tax provision $ 3,125 $ 4,429 $ 3,259
================================================================================
The provision for income taxes differs from the amount computed by applying the
Federal statutory rate of 35% to earnings before income tax expense due to the
following:
45
================================================================================
2003 2002 2001
- -------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 3,067 $ 4,027 $ 2,846
State income taxes, net of
Federal income tax benefit 297 435 426
Other (239) (33) (13)
- -------------------------------------------------------------------------------
Total income tax provision $ 3,125 $ 4,429 $ 3,259
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are as follows:
======================================================================
2003 2002
- ----------------------------------------------------------------------
Deferred tax assets:
Customer list amortization $ 720 $ 705
Inventories 292 343
Deferred compensation 93 25
Non-employee stock options 100 102
Other 178 125
- ----------------------------------------------------------------------
Total deferred tax assets 1,383 1,300
- ----------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 3,135 2,454
- ----------------------------------------------------------------------
Total deferred tax liabilities 3,135 2,454
- ----------------------------------------------------------------------
Net deferred tax liability $ 1,752 $ 1,154
======================================================================
There is no valuation allowance for deferred tax assets at December 31, 2003 and
2002. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. 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, which was subsequently extended. Through
December 31, 2003, the Company has
46
repurchased 343,316 shares at an average cost of $9.26 per share of which 43,360
remain in treasury at December 31, 2003. In June 2003, the board of directors
authorized an extension to the stock repurchase program for up to an additional
600,000 shares that is, over and above those repurchased to date under the
program, through June 30, 2004.
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. In
April 2003, the Board of Directors of the Company adopted and stockholders
subsequently approved, the Amended and Restated 1999 Stock Plan which amended
the 1999 Stock Plan by: (i) increasing the number of shares of Common Stock
reserved for issuance under the 1999 Stock Plan by 600,000 shares, to a total of
1,200,000 shares of Common Stock; and (ii) confirming the right of the Company
to grant awards of Common Stock ("Awards") in addition to the other Stock Rights
available under the 1999 Stock Plan, and providing certain language changes
relating thereto. 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.
A summary of stock option plan activity for 2003, 2002, and 2001 for all plans
is as follows:
================================================================================
# of Weighted Average
2003 Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year 584,670 $ 14.62
Granted 124,960 21.77
Exercised (71,459) 11.30
Terminated or expired (37,560) 22.26
- --------------------------------------------------------------------------------
Outstanding at end of year 600,611 $ 16.03
- --------------------------------------------------------------------------------
Exercisable at end of year 399,831 $ 13.15
================================================================================
47
================================================================================
# 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
================================================================================
Information related to stock options outstanding under all plans at December 31,
2003 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
- ------------------------------------------------------------------------------------------------------------
$ 5.38 - $10.75 196,326 4.6 years $ 8.93 196,326 $ 8.93
11.13 - 18.91 149,209 7.4 years 14.64 123,169 14.36
20.05 - 24.91 255,076 8.6 years 22.30 80,336 21.60
- ------------------------------------------------------------------------------------------------------------
600,611 7.1 years $16.03 399,831 $13.15
============================================================================================================
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:
48
=================================================================================================================
Number of
Earnings Shares Per Share
2003 (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted
average common shares outstanding $5,638 4,815,884 $1.17
Effect of dilutive securities - stock options 181,935
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $5,638 4,997,819 $1.13
=================================================================================================================
=================================================================================================================
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
2002 (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
=================================================================================================================
The Company had 166,150, 94,950 and 103,562 stock options outstanding at
December 31, 2003, 2002 and 2001, respectively 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.
49
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 $307 and
$273 in 2003, $241 and $320 in 2002 and $263 and $201 in 2001, respectively.
The Company also currently provides postretirement benefits in the form of an
unfunded 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:
================================================================================
2003 2002
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 976 $ 910
Service Cost with Interest to End of Year 32 26
Interest Cost 62 61
Participant contributions 23 19
Acquisitions/divestitures -- --
Benefits Paid (77) (68)
Actuarial (gain) or loss 66 28
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 1,082 $ 976
================================================================================
Change in plan assets:
================================================================================
2003 2002
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 54 49
Participant contributions 23 19
Acquisitions/divestitures -- --
Benefits Paid (77) (68)
Exchange Rate Changes -- --
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ -- $ --
================================================================================
50
Amounts recognized in consolidated balance sheet:
=================================================================================================================
2003 2002
- -----------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation $(1,082) $ (976)
Fair Value of Plan Assets -- --
Funded Status (1,082) (976)
Unrecognized Transition Obligation -- --
Unrecognized Prior Service Cost -- --
Unrecognized Net (Gain)/Loss 182 117
- -----------------------------------------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost (included in other long-term obligations) $ 900 $ 859
=================================================================================================================
Components of net periodic benefit cost:
===============================================================================
2003 2002
- -------------------------------------------------------------------------------
Service Cost 32 26
Interest Cost 62 61
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of prior service cost -- --
Amortization of (gain) or loss 1 --
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 95 $ 87
===============================================================================
Assumed health care cost trend rates have been used in the valuation of
postretirement health insurance benefits. The trend rate is 11 percent in 2003
declining to 5.5 percent in 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, 2003 by $205 and the net
periodic postretirement benefit cost for 2003 by $18. 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, 2003 by $188
and the net periodic postretirement benefit cost for 2003 by $17. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 6.25% in 2003 and 6.625% in 2002.
The Company has elected to defer accounting for the economic effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
In accordance with FSP FAS 106-1, any measures of the accumulated postretirement
plan benefit obligation or net periodic postretirement plan benefit cost in the
consolidated financial statements or accompanying notes do not reflect the
effects of the Act on the plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information.
51
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 2011. Rent
expense charged to operations under such lease agreements for 2003, 2002 and
2001 aggregated approximately $564, $382 and $310, respectively. Aggregate
future minimum rental payments required under noncancelable operating leases at
December 31, 2003 are as follows:
===============================================
Year
- -----------------------------------------------
2004 $ 469
2005 449
2006 392
2007 351
2008 324
Thereafter 473
- -----------------------------------------------
Total minimum lease payments $ 2,458
===============================================
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.
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
52
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 (also referred to as
BCP Ingredients). 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 specialty chemicals: 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 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 unencapsulated feed supplements 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.
53
Business Segment Net Sales:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 26,163 $ 22,028 $ 21,130
Encapsulated/Nutritional Products 24,043 27,990 18,312
BCP Ingredients 11,669 10,179 6,700
- --------------------------------------------------------------------------------
Total $ 61,875 $ 60,197 $ 46,142
================================================================================
Business Segment Earnings (Loss):
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 9,409 $ 7,240 $ 6,612
Encapsulated/Nutritional Products (962) 5,118 1,582
BCP Ingredients 568 (173) (39)
Interest expense and other income (expense) (252) (340) (214)
- --------------------------------------------------------------------------------
Earnings before income taxes $ 8,763 $ 11,845 $ 8,369
================================================================================
Depreciation/Amortization:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 1,991 $ 1,689 $ 1,585
Encapsulated/Nutritional Products 1,102 800 506
BCP Ingredients 431 428 530
- --------------------------------------------------------------------------------
Total $ 3,525 $ 2,917 $ 2,621
================================================================================
Business Segment Assets:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 14,287 $ 13,993 $ 11,074
Encapsulated/Nutritional Products 15,043 16,730 10,798
BCP Ingredients 17,099 17,954 18,181
Other Unallocated 10,477 4,621 4,424
- --------------------------------------------------------------------------------
Total $ 56,906 $ 53,298 $ 44,477
================================================================================
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.
Capital Expenditures:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
Specialty Products $ 1,090 $ 5,273 $ 414
Encapsulated/Nutritional Products 661 4,705 1,175
BCP Ingredients 519 42 361
- --------------------------------------------------------------------------------
Total $ 2,270 $ 10,020 $ 1,950
================================================================================
54
Geographic Revenue Information:
================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------
United States $56,727 $54,663 $42,606
Foreign Countries 5,148 5,534 3,536
- --------------------------------------------------------------------------------
Total $61,875 $60,197 $46,142
================================================================================
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:
=========================================================================
2003 2002 2001
- -------------------------------------------------------------------------
Income taxes $2,110 $4,386 $3,220
Interest $ 272 $ 389 $ 387
=========================================================================
Non-cash financing activities:
=========================================================================
2003 2002 2001
- -------------------------------------------------------------------------
Dividends declared $ 389 $ 382 $ 305
=========================================================================
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)
========================================================================================================================
2003 2002
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Net sales $14,816 $14,860 $15,791 $16,408 $14,389 $15,668 $15,784 $14,356
Gross profit 5,651 5,488 4,657 5,356 5,294 6,564 5,998 5,454
Earnings before
income taxes 2,684 2,692 1,335 2,052 2,340 3,571 3,313 2,621
Net earnings 1,683 1,691 867 1,397 1,438 2,205 2,154 1,619
Basic net earnings
per common share $ .35 $ .35 $ .18 $ .29 $ .31 $ .46 $ .45 $ .34
Diluted net earnings
per common share $ .34 $ .34 $ .17 $ .28 $ .29 $ .45 $ .43 $ .33
========================================================================================================================
55
Schedule II
BALCHEM CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2003, 2002 and 2001
(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, 2003
Allowance for doubtful accounts: $ 90 $ 36 -- $ (40)(a) $ 86
Inventory obsolescence reserve 192 -- -- (116)(a) 76
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
(a) represents write-offs.
56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Based upon an evaluation, under the supervision and with the participation
of the Company's Principal Executive Officer and Principal Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K, they have concluded that the Company's disclosure controls
and procedures as defined in Rule 13a-15(e) 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) During the most recent fiscal quarter, there have been no significant
changes in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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 2004 Annual Meeting of Stockholders (the "2004 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 2004 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 2004 Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is hereby incorporated herein by reference.
(d) Code of Ethics.
The Company has adopted a Code of Ethics for Senior Financial Officers
that applies to its Chief Executive Officer (principal executive officer), Chief
Financial Officer (principal financial officer and principal accounting officer)
and its Treasurer. The Company's Code of Ethics for Senior Financial Officers is
filed as Exhibit 14 to this Annual Report on Form 10-K.
57
Item 11. Executive Compensation.
The information required by this Item is to be set forth in the 2004 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 2004 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 2004 Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is set forth in the 2004 Proxy
Statement under the caption "Independent Auditor Fees," which information is
hereby incorporated herein by reference.
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.
58
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).
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 Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 30, 2003).*
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).*
59
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).
14 Code of Ethics for Senior Financial Officers.
21. Subsidiaries of Registrant (incorporated by reference to Exhibit 21
to the 2001 10-K).
23.1 Consent of KPMG LLP, Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
* Each of the Exhibits noted by an asterisk is a management
compensatory plan or arrangement.
(b) Reports on Form 8-K.
On October 28, 2003, the Company furnished a report on Form 8-K
announcing financial results for the quarter ended September 30,
2003.
On February 12, 2004, the Company furnished a report on Form 8-K
announcing financial results for the quarter ended December 31,
2003.
60
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 15, 2004 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, and Director
(Principal Executive Officer)
Date: March 15, 2004
/s/ Francis J. Fitzpatrick
---------------------------------------
Francis J. Fitzpatrick, Chief Financial
Officer
(Principal Financial and Principal
Accounting Officer)
Date: March 15, 2004
/s/ Hoyt Ammidon, Jr.
---------------------------------------
Hoyt Ammidon, Jr., Director
Date: March 15, 2004
/s/ Francis X. McDermott
---------------------------------------
Francis X. McDermott, Director
Date: March 15, 2004
/s/ Edward McMillan
---------------------------------------
Edward McMillan, Director
Date: March 15, 2004
/s/ Kenneth P. Mitchell
---------------------------------------
Kenneth P. Mitchell, Director
Date: March 15, 2004
/s/ Dr. Elaine Wedral
---------------------------------------
Dr. Elaine Wedral, Director
Date: March 15, 2004
s
61
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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).
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,
62
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's Amended and Restated 1999 Stock Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 30,
2003).*
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).
14 Code of Ethics for Senior Financial Officers.
21. Subsidiaries of Registrant (incorporated by reference to Exhibit
21 to the 2001 10-K).
23.1 Consent of KPMG LLP, Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
*Each of the Exhibits noted by an asterisk is a management compensatory plan or
arrangement.
63