UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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.
Explanatory Note
Balchem Corporation is filing this Amendment No. 1 on Form 10-K/A (the
"Form 10-K/A") to its Annual Report on Form 10-K for the period ended December
31, 2003, dated March 15, 2004(the "Form 10-K"), to reflect revisions to (i) the
Index to Financial Statements and Supplementary Financial Data, (ii) the Report
of Independent Registered Public Accounting Firm, (iii) the Exhibit List and
Exhibit Index and (iv) Consent of Independent Registered Public Accounting Firm.
In accordance with the rules of the Commission, the affected items of the
Form 10-K, Item 8 of Part II and Item 15 of Part IV, along with the exhibit
index are being amended and restated in their entirety. This Form 10-K/A does
not reflect information subsequent to, or events occuring after, the original
filing of the Form 10-K, other than the amendments discussed above and reflected
below.
..
26
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Report of Independent Registered Public Accounting Firm 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
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Balchem Corporation:
We have audited the accompanying consolidated financial statements 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 U.S. generally accepted accounting
principles . 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.
/s/ 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
Part III
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 add between Fleet
National Bank and Balchem Corporation (incorporated by reference to
exhibit 4.1.1 to the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 2002).
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, Registered Public Accounting Firm.
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 duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 2004 BALCHEM CORPORATION
By: /s/ Dino A. Rossi
--------------------------------
Dino A. Rossi, President,
Chief Executive Officer
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 (incorporated
by reference to exhibit 4.1.1 to the Company's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 2002).
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, Registered Public Accounting Firm
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