UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (date of earliest event reported): March 19, 2007
Balchem Corporation
(Exact name of registrant as specified in its charter)
Maryland 1-13648 13-257-8432
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
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
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
<page>
Item 2.01 Completion of Acquisition of Assets
Balchem Corporation (the "Company") previously filed a Current Report
on Form 8-K on March 21, 2007 to announce that the Company, through its
wholly-owned subsidiary BCP Ingredients, Inc. ("BCP"), entered into an asset
purchase agreement (the "Asset Purchase Agreement") with Chinook Global Limited
("Chinook"), a privately held Ontario corporation, pursuant to which BCP
acquired certain of Chinook's choline chloride business assets for a purchase
price of $29,000,000 plus the value of certain product inventories estimated at
approximately $1,840,000. The acquisition closed effective the same date. The
inventory purchase price is subject to adjustment based upon Chinook's actual
finished goods and raw materials inventory as of the closing date. The parties
have agreed to hold approximately $276,000 of the purchase price in a cash
escrow account for a brief period after the closing to secure such purchase
price adjustment. The Company indicated on the Form 8-K that it would file
financial information required under Item 9.01 below no later than 71 days after
the date on which the initial report on Form 8-K was required to be filed. This
Amendment No. 1 is filed to provide the required financial information.
Pursuant to Item 9.01 of Form 8-K, set forth below are the Financial
Statements and Pro Forma Financial Information relating to the acquisition. Such
information should be read in conjunction with the Company's Current Reports on
Form 8-K filed on March 21, 2007, relating to the acquisition.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
Independent Auditor's Report on Consolidated Balance Sheet, Statement
of Earnings, Stockholders' Equity and Cash Flows.
Consolidated Balance Sheet as of December 31, 2006 and Consolidated
Statements of Earnings, Stockholders' Equity, and Cash Flows for the
twelve month period ended December 31, 2006.
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Balance Sheet as of December 31, 2006, and
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 2006.
<page>
Item 9.01(a) Financial Statements of Businesses Acquired
CHINOOK GLOBAL LIMITED
Consolidated Financial Statements
December 31, 2006
(With Independent Auditors' Report Thereon)
<page>
CHINOOK GLOBAL LIMITED
Consolidated Financial Statements
December 31, 2006
Table of Contents
Page
Independent Auditors' Report 1
Consolidated Balance Sheet 2
Consolidated Statement of Earnings 3
Consolidated Statement of Stockholders' Equity and Comprehensive Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 24
<page>
Independent Auditors' Report
----------------------------
The Shareholders of Chinook Global Limited
We have audited the accompanying consolidated balance sheet of Chinook Global
Limited as of December 31, 2006, and the related consolidated statement of
earnings, stockholders' equity and comprehensive income, and cash flows for the
twelve month period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 Chinook Global
Limited as of December 31, 2006, and the results of their operations and their
cash flows for the twelve month period then ended in conformity with United
States generally accepted accounting principles.
Signed "KPMG LLP"
Chartered Accountants, Licensed Public Accountants
May 14, 2007
<page>
CHINOOK GLOBAL LIMITED
Consolidated Balance Sheet
Twelve month period ended December 31, 2006, (note 1(a))
(US $ in thousands)
Assets
Current assets:
Cash $ 1,121
Trade accounts receivable, less allowance for doubtful
accounts of nil 4,900
Inventories:
Finished goods 1,543
Raw materials 790
Supplies 120
--------
Total inventories 2,453
Unrealized gain, derivative instrument (note 3) 492
Other current assets 334
--------
Total current assets 9,300
Property, plant, and equipment (note 4) 613
--------
Total assets $ 9,913
========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,926
Accrued liabilities 3,171
Current portion of fines payable (note 6) 480
Railcar retirement obligation (note 5) 115
Unrealized loss, derivative instruments (note 3) 352
--------
Total current liabilities 6,044
Fines payable (note 6) 516
--------
Total liabilities 6,560
Stockholders' equity (note 8):
Unlimited Class A common shares with no par value;
issued and outstanding 80,000 shares 1
Unlimited Class E common shares with no par value;
issued and outstanding 20,000 shares 1
Additional paid in capital 237
Retained earnings 3,114
--------
Total stockholders' equity 3,353
Commitments and contingencies (notes 11 and 14)
Subsequent events (note 17)
--------
Total liabilities and stockholders' equity $ 9,913
========
See accompanying notes to consolidated financial statements.
2
<page>
<table>
<caption>
CHINOOK GLOBAL LIMITED
Consolidated Statement of Earnings
Twelve month period ended December 31, 2006, (note 1(a))
(US $, in thousands, except per share amounts)
- --------------------------------------------------------------------------------------
January 1 April 7
to April 6 to December 31
- --------------------------------------------------------------------------------------
(note 1(a)) (note 1(a))
<s> <c> <c>
Net sales $ 10,790 $ 32,347
Cost of goods sold (note 13) 8,899 25,916
------------ ------------
Gross profit 1,891 6,431
Selling, general, and administrative expenses 1,278 1,983
Amortization 89 39
Other income (expense):
Foreign exchange 1 (85)
Interest, net (1) 46
Interest, fines payable (note 6) -- (122)
Unrealized loss on derivative instruments (note 3) 98 (168)
------------ ------------
98 (329)
------------ ------------
Earnings before income taxes 622 4,080
Income taxes (note 7) -- --
------------ ------------
Earnings before extraordinary gain 622 4,080
Extraordinary gain - negative goodwill (note 2) -- 1,684
------------ ------------
Net earnings $ 622 $ 5,764
============ ============
Earnings before extraordinary gain $ 5.65 $ 40.80
Extraordinary gain - negative goodwill (note 2) -- 16.84
------------ ------------
Earnings per share $ 5.65 $ 57.64
============ ============
Weighted average number of shares outstanding 110 100
------------ ------------
See accompanying notes to consolidated financial statements.
3
</table>
<page>
<table>
<caption>
CHINOOK GLOBAL LIMITED
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Twelve month period ended December 31, 2006, (note 1(a))
(US $, in thousands, except per share amounts)
Accumulated
Total Additional other Total
Common stock (note 8) paid in Retained comprehensive stockholders'
Number $ capital earnings loss equity
---------- ---------- ---------- ---------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balances at January 1, 2006 110,365 411 $ -- $ 7,039 $ (2,455) $ 4,995
Net earnings -- -- -- 622 -- 622
Revision of share structure (note 8) (10,365) 1,318 -- -- -- 1,318
Share reorganization (note 8) -- (1,727) 1,727 -- -- --
Dividends paid (note 8(c)):
Common stock - Class A -- -- -- (1,644) -- (1,644)
Common stock - Class E -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at April 6, 2007 100,000 2 $ 1,727 $ 6,017 $ (2,455) $ 5,291
Impact of acquisition (note 2) -- -- (1,727) (6,017) 2,455 (5,289)
Net earnings -- -- -- 5,764 -- 5,764
Redemption of notes payable (note 9) -- -- 237 -- -- 237
Dividends paid (note 8(c)):
Common stock - Class A -- -- -- (2,139) -- (2,139)
Common stock - Class E -- -- -- (511) -- (511)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 2006 100,000 2 $ 237 $ 3,114 $ -- $ 3,353
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
</table>
<page>
<table>
<caption>
CHINOOK GLOBAL LIMITED
Consolidated Statement of Cash Flows
Twelve month period ended
December 31, 2006, (note 1(a))
(US $ in thousands)
January 1 April 7
Cash provided by (used in): to April 6 to December 31
<s> <c> <c>
Operating activities:
Net earnings $ 622 $ 5,764
Items not involving cash:
Extraordinary gain - negative goodwill (note 2) -- (1,684)
Amortization, plant and equipment 89 39
Unrealized gain on derivative instruments (note 3) (98) 168
Accretion of railcar retirement obligation (note 5) 1 4
Interest, fines payable (note 6) -- 123
Changes in non-cash operating working capital (note 12) 786 51
------------ ------------
1,400 4,465
Financing activities:
Repayment of note from a company under common control
(note 10) (500) --
Reduction of fines payable (note 6) (120) (360)
Proceeds from issuance of notes payable (note 9) 1,644 --
Repayment of notes payable (note 9) -- (1,407)
Dividends paid (note 8) (1,644) (2,650)
------------ ------------
(620) (4,417)
Investing activities:
Acquisition (note 2) -- (1)
Additions to plant and equipment (24) (524)
Proceeds on sale of property, plant and equipment 445 --
------------ ------------
421 (525)
------------ ------------
Increase (decrease) in cash 1,201 (477)
Cash, beginning of period 397 --
Cash and cash equivalents acquired on acquisition (note 2) -- 1,598
------------ ------------
Cash and cash equivalents, end of period $ 1,598 $ 1,121
============ ============
See accompanying notes to consolidated financial statements.
5
</table>
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(1) Summary of significant accounting policies:
(a) Basis of presentation
Chinook Group Limited, amalgamated with Chinook Canada Limited on
February 1, 2005 to form Chinook Global Limited ("CGL").
While the Company's fiscal period ends on March 31st, these financial
statements have been prepared as at and for the twelve months ended
December 31, 2006.
On April 6, 2006, new investors, being members of management ("new
investors") acquired 95.6% of the Company not previously held by
management representing all the issued and outstanding Class A common
stock of the Company.
The acquisition was accounted for using the purchase method under
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". Under the purchase method of accounting, the assets acquired
and liabilities assumed were recorded at estimated fair value at the
date of the acquisition and these values were "pushed down" to the
Company's financial statements in accordance with push down accounting
rules.
As a result of the acquisition, both the operating results of the
Company prior to April 7, 2006 and the operating results post April 6,
2006 are presented in these financial statements.
(b) Description of business
Chinook Global Limited is engaged in the business of producing and
selling choline chloride and specialty choline derivatives throughout
the world. Choline chloride is a vitamin B4 feed supplement that is
broadly used primarily in the swine, poultry and pet food industry.
(c) Principles of consolidation
The consolidated financial statements include the financial statements
of Chinook Global Limited and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. In addition, the Company evaluates its
relationships with other entities to identify whether they are
variable interest entities as defined by FASB Interpretation No. 46
(R), Consolidation of Variable Interest Entities ("FIN 46R") and to
assess whether it is the primary beneficiary of such entities. If the
determination is made that the Company is the primary beneficiary,
then that entity is included in the consolidated financial statements
in accordance with FIN 46(R). The Company has no relationships with
variable interest entities.
6
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(1) Summary of significant accounting policies (continued):
(d) Trade accounts receivable
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses for
doubtful accounts in the Company's existing accounts receivable. The
Company determines the allowance based on an individual account by
account review of all accounts outstanding at the balance sheet date.
Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet
credit exposure related to its customers.
(e) Inventories
Inventories are valued at the lower of cost or market determined using
the weighted average method and net realizable value.
(f) Property, plant, and equipment
Land is stated at cost. Buildings and equipment are stated at
amortized cost. Amortization is provided on a straight-line basis over
the estimated useful life of the asset as follows:
Asset Rate
----- ----
Buildings, roads and sidings 25 years
Production equipment 15-20 years
Pollution control equipment 10 years
Furniture and fixtures 5 years
(g) 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 carry
forwards. 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.
7
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(1) Summary of significant accounting policies (continued):
(h) Revenue recognition
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence that an
arrangement exists and the sales price is fixed or determinable.
Volume discounts earned by customers are applied to invoices at the
time of invoicing and are accounted for as a reduction of revenues.
Given the nature of the products sold, the Company does not allow
customers product returns or allowances unless the product does not
meet pre-established product specification. Early payment discounts
are given to select customers only.
(i) Derivative instruments
The Company accounts for derivatives and hedging activities in
accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Certain Hedging activities, as amended, which requires
that all derivative instruments be recorded on the balance sheet at
their respective fair values. Accordingly, each derivative contract is
adjusted to fair value at the balance sheet date with changes in fair
value being recognized in earnings in the current period. The Company
does not enter into financial instruments for trading or speculative
purposes.
The Company determines the fair value of its financial instruments
based on quoted market values or cash flow analyses. The recorded
amounts of financial instruments in these consolidated financial
statements approximate their fair values.
(j) Impairment of long-lived assets
In accordance with FASB Statement No. 144, Accounting for Impairment
on Disposal of Long-Lived Assets, 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.
Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability sections
of the balance sheet.
8
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(1) Summary of significant accounting policies (continued):
(k) Asset retirement obligation
In accordance with FASB Statement No. 143, Accounting for Asset
Retirement Obligations, ("Statement 143") the Company recognizes the
fair value of a future 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 or leased assets that results
from the acquisition, construction, development, and/or normal use of
the assets. The Company concurrently recognizes a corresponding
increase in the carrying amount of the related long-lived asset that
is amortized over the life of the asset. The fair value of the asset
retirement obligation is estimated using the expected cash flow
approach that reflects a range of possible outcomes discounted at a
credit-adjusted risk-free interest rate. Subsequent to the initial
measurement, the asset retirement obligation is adjusted at the end of
each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. Changes in the
obligation due to the passage of time are recognized in interest, net
expense using the interest method. Changes in the obligation due to
changes in estimated cash flows are recognized as an adjustment of the
carrying amount or value of the related long-lived asset that is
amortized over the remaining life of the asset.
(l) Commitments and contingencies
Liabilities for loss contingencies, including environmental
remediation costs not within the scope of Statement 143, arising from
claims, assessments, litigation, fines, and penalties and other
sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can be
reasonably estimated. Legal costs incurred in connection with loss
contingencies are expensed as incurred. Recoveries of environmental
remediation costs from third parties, which are probable of
realization, are separately recorded as assets, and are not offset
against the related environmental liability, in accordance with FASB
Interpretation No. 39, Offsetting of Amounts Related to Certain
Contracts.
The Company accrues for losses associated with environmental
remediation obligations not within the scope of Statement 143 when
such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally
are recognized no later than completion of the remedial feasibility
study. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environment
remediation obligations are not discounted to their present value.
9
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(1) Summary of significant accounting policies (continued):
(m) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated at the prevailing rates of exchange at the balance sheet
date. Revenue and expenses are translated at the exchange rates
prevailing on the transaction date. Realized and unrealized exchange
gains and losses are included in earnings.
(n) Accounting for foreign currencies
The functional currency of the Company is the United States dollar.
All transactions denominated in a foreign currency are translated
using an estimated rate on the day the transaction occurs.
The Company's functional currency changed to the United States dollar
effective April 1, 2003. At this time the financial statements were
remeasured into United States dollars using the historical exchange
rate for property, plant and equipment, equity and certain other
non-monetary assets and liabilities and related amortization on these
assets and liabilities. The Company used the exchange rate at the
balance sheet date for the remaining monetary assets and liabilities.
A weighted average exchange rate was used for each prior year revenues
and expenses. Translation adjustments, which were based upon the
exchange rate at the balance sheet date for assets and liabilities and
historical exchange rates for non-monetary assets and liabilities and
the weighted average rate for prior year income statements, are
recorded as cumulative translation adjustment in accumulated other
comprehensive loss in Stockholders' equity.
(o) Use of estimates
The preparation of the consolidated financial statements requires
management of the Company to make a number of estimates and
assumptions relating to the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject to
such estimates and assumptions include the carrying value of property,
plant and equipment, the railcar retirement obligation, valuation
allowances for receivables, inventories and deferred income tax
assets, environmental liabilities and valuation of derivative
instruments. Actual results could differ from those estimates.
10
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(2) Acquisition:
On April 6, 2006 new investors being members of management ("new
investors"), acquired the 95.6% of the Company representing all of the
issued and outstanding Class A common stock of the Company for total
consideration of $1.00, from the prior stockholders.
The acquisition by Management has been accounted for by the purchase
method, whereby the identifiable assets acquired and liabilities assumed
are recorded at fair value. The allocation of the purchase price to the net
assets acquired and liabilities assumed at their assigned values is as
follows:
Cash and cash equivalents $ 1,598
Accounts receivable 4,918
Inventories 2,832
Property, plant and equipment, available for sale 128
Unrealized gain on derivative contract 308
Other current assets 500
---------------------------------------------------------------------------
Total assets acquired 10,284
Trade accounts payable 3,973
Accrued liabilities 1,638
Fines payable 1,234
Railcar retirement obligation 111
Notes payable 1,644
---------------------------------------------------------------------------
Total liabilities assumed 8,600
---------------------------------------------------------------------------
Net assets acquired 1,684
Cash consideration 1.00
---------------------------------------------------------------------------
Extraordinary gain $ 1,684
---------------------------------------------------------------------------
The fair value of tangible and intangible assets acquired was $29,298. The
fair value of liabilities assumed was $8,600 resulting in negative goodwill
of $20,698. Negative goodwill was allocated to the acquired assets on a
pro-rata basis in accordance with SFAS 141, "Business Combinations". As a
result of the allocation, all property, plant and equipment acquired, other
than that held for sale and intangible assets were reduced to nil.
Following the allocation, $1,684 of negative goodwill remained and was
recorded as an extraordinary gain.
11
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(3) Derivative instruments:
The Company uses commodity derivatives to manage its exposure to commodity
price fluctuations.
By using derivative financial instruments to hedge economic exposures to
changes in commodity prices, the Company exposes itself to credit risk and
market risk. Credit risk is the failure of the counterparty to perform
under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and, therefore, it
does not possess credit risk. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high-quality
counterparties.
Market risk is the adverse effect on the value of a derivative instrument
that results from a change in commodity prices. The market risk associated
with commodity-price contracts is managed by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.
The Company maintains a commodity-price-risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by commodity-price volatility. The manufacturing of the
Company's products requires a significant volume of raw materials. Price
fluctuations of raw materials cause market values of raw material inventory
to differ from its cost and for the actual purchase price of raw materials
to differ from the contract price.
The Company has the following derivative instruments at December 31, 2006:
(a) On May 5, 2006, the Company entered into a natural gas swap agreement.
The swap expires on March 31, 2007 and requires the Company to pay (or
receive from) a counterparty on a monthly basis the difference between
prevailing market rates and the contract price. The prevailing market
price at December 31, 2006 was lower than the contract price.
(b) On December 15, 2006, the Company entered into a contract to purchase
a raw material and to fix the price of the material. The contract
expires in January 2007 and requires the Company to take delivery of
the contracted amount of the raw material. The prevailing market
forward price at December 31, 2006 is in excess of the contract price.
(c) At December 31, 2006, the Company had an obligation to deliver a raw
material input to a supplier based on the amount of processed
materials already received from the supplier. The fair value of the
obligation to deliver the raw material component has been determined
using the spot price of the raw material component at December 31,
2006, which exceeds the contract price.
12
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(3) Derivative instruments (continued):
The following table presents the carrying amounts and fair values of the
Company's derivative instruments at December 31, 2006 (asset/(liability)):
Carrying and
fair value
Natural gas swap agreement (a) $ (249)
Raw material purchase contract (b) 492
Process material purchase contract (c) (103)
(4) Property, plant and equipment:
Buildings, roads and sidings $ --
Production equipment 524
Pollution control equipment --
Furniture and fixtures --
Less accumulated amortization 39
---------
485
Assets held for sale 128
---------
$ 613
=========
The carrying value of all property, plant and equipment, other than
property held for sale, was reduced to nil as a result of the acquisition
(note 2).
(5) Railcar retirement obligation:
The Company has a railcar retirement obligation arising from requirements
to perform certain activities at the time that certain leased equipment is
returned to the lessor. The liability was initially measured at fair value
and subsequently is adjusted for accretion expense and changes in the
amount or timing of the estimated cash flows. The corresponding retirement
costs are capitalized and amortized over the term of the lease. The
following table presents the activity for the railcar retirement obligation
for the twelve month period ended December 31, 2006:
January 1, April 7,
to April 6 to December 31
Beginning balance $ 110 $ 111
Additional liabilities incurred -- --
Liabilities settled in current period -- --
Revisions to estimates -- --
Accretion expense 1 4
------------ ------------
Ending balance $ 111 $ 115
============ ============
13
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(6) Fines payable:
Fines payable at December 31, 2006 consists of the following (note 14(a)):
Unsecured non-interest bearing amounts, payable in equal
quarterly installments of $120, due June 2009 $ 1,180
Less amounts representing interest at 7% 184
------------
996
Less current installments 480
------------
Fines payable $ 516
============
(7) Income taxes:
Income tax expense attributable to income from continuing operations was
nil for the 96-day period ended April 6, 2006 and the 269-day period ended
December 31, 2006, and differed from the amounts computed by applying the
Canadian Federal income tax rate of 22.12% and Ontario Provincial tax rate
of 14% to pretax income from continuing operations as a result of the
following:
<table>
<caption>
January 1, April 7,
to April 6 to December 31
<s> <c> <c>
Computed "expected" tax expense $ 225 $ 2,082
Increase (reduction) in income taxes resulting from:
Non-deductible expenses 163 120
Non-taxable extraordinary gain (note 2) -- (605)
Manufacturing and processing deduction (22) (88)
Change in the beginning-of-the-period balance of the
valuation allowance for deferred tax assets allocated
to income tax expense (366) (1,509)
------------ ------------
Total income tax expense $ -- $ --
============ ============
</table>
The Company is not subject to income taxes in any foreign jurisdiction.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2006 are presented below.
Deferred tax assets:
Non-capital losses carried forward $ 4,201
Equipment and machinery 1,208
Other 175
-------
Total gross deferred tax assets 5,584
Less valuation allowance (5,584)
-------
Net deferred tax assets $ --
=======
14
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(7) Income taxes (continued):
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. In order to fully realize the deferred tax asset, the Company
will need to generate future taxable income of approximately $12,312 prior
to the expiration of the net operating loss carry forwards and investment
tax credit carry forwards as follows:
Investment Loss
tax credits carry forwards
----------- --------------
2010 $ 47 $ --
2011 13 1,191
2012 11 --
2013 16 --
2015 -- 7,820
2016 -- 3,301
------------ ------------
$ 87 $ 12,312
============ ============
Based upon the level of historical taxable income and projections for
future taxable income over periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will not realize the benefits of these deductible differences at December
31, 2006.
Subsequent to year end, the Company sold certain of its assets (note
17(b)). The future tax asset attributed to loss carry forwards previously
reduced to nil, through the recognition of a valuation allowance, will by
utilized by the Company as a result of the sale.
15
<page>
<table>
<caption>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands, except share amounts)
(8) Capital stock (table expressed in dollars):
Class C Class D Class E
Common stock common stock common stock common stock
Number Number Number Number
outstanding Amount outstanding Amount outstanding Amount outstanding Amount
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balances at
January 1, 2006 92,717 $ 411,245 8,824 $ 6 4,412 $ 3 4,412 $ 3
Elimination on
Revision of
capital structure
(note 8 (b(i))) (92,717) (411,245) (8,824) (6) (4,412) (3) -- --
Increase
(reduction) in
the stated capital
(note 8 (b(i))) -- -- -- -- -- -- -- 1,046
- ------------------------------------------------------------------------------------------------------------------
Balances at
April 6, 2006 -- -- -- -- -- -- 4,412 1,049
Exchange of
Class A
common stock
for Class E
common stock
(note 8 (b(vi))) -- -- -- -- -- -- 15,588 --
- ------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2006 -- $ -- -- $ -- -- $ -- 20,000 $ 1,049
==================================================================================================================
<caption>
Class A Class B
Class A Total preferred stock preferred stock Total
common stock common stock (note 7 (a)(ii)) (note 7 (a) (iii)) preferred stock
Number Number Number Number Number
outstanding Amount outstanding Amount outstanding Amount outstanding Amount outstanding Amount
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balances at
January 1, 2006 -- $ -- 110,365 $ 411,257 1,000 $ -- 92,717 $ -- 93,717 $ --
Elimination on
Revision of
capital
structure
(note 8
(b(i))) 95,588 1,728,579 (10,365) 1,317,325 (1,000) -- (92,717) -- (93,717) --
Increase
(reduction)
in the stated
capital (note
8 (b(i))) -- (1,727,824) -- (1,726,778) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
April 6, 2006 95,588 755 100,000 1,804 -- -- -- -- -- --
Exchange of
Class A
common stock
for Class E
common stock
(note 8 (b(vi))) (15,588) -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2006 80,000 $ 755 100,000 $ 1,804 -- $ -- -- $ -- -- $ --
====================================================================================================================================
</table>
16
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(8) Capital stock (continued):
(a) Capital stock:
At January 1, 2006, the outstanding classes of stock had the
following features:
Authorized:
(i) Unlimited common stock; Class A, Class C, Class D and Class E
common stock with no par value.
(ii) Unlimited Class A voting preferred stock, retractable and
redeemable, at $1,317 per share, non-cumulative cash dividend
of 0.5% of redemption price, preference in winding up and
payment of dividends in priority to all other stock except to
Class B preferred stock which rank in priority. This preferred
stock has certain characteristics which require them to be
classified as a liability on the balance sheet. Accordingly,
any dividends authorized on this stock are recorded as
interest expense.
(iii) Unlimited Class B non-voting preferred stock, retractable and
redeemable at 0.001 per share, non-cumulative cash dividend of
3.0% of redemption price, preference on winding up and payment
of dividends in priority to all other stock. This preferred
stock has certain characteristics which require them to be
classified as a liability on the balance sheet. Accordingly,
any dividends authorized on this stock are recorded as
interest expense.
(b) Transactions:
(i) On March 30, 2006, the Company obtained stockholder approval
and filed articles of amendment to consolidate its Class A and
Class B preferred stock, its Class C and Class D voting common
stock and common stock to 95,588 Class A voting common stock.
Following the consolidation, the Class A and Class B preferred
stock, the common stock and the Class C and Class D voting
common stock were cancelled. In addition to the stock
consolidation, the Company reduced the stated capital of its
Class A voting common stock to less than $1, and increased the
stated capital of the Class E voting common stock to $1. The
net reduction in stated capital of $1,727 was reclassified to
additional paid in capital. The Class A and Class E voting
common stock rank equally in their rights with respect to
payment of dividends and amounts upon liquidation, dissolution
or winding up.
(ii) On April 6, 2006, the Directors of Chinook Global Limited
passed a resolution declaring a capital dividend in the amount
of $1,644 on the Class A common shares held by the selling
shareholders.
17
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(8) Capital stock (continued):
(b) Transactions:
(iii) Immediately following the declaration of the dividend, the
$1,644 dividend was paid.
(iv) Immediately following the payment of the capital dividend, the
Directors of Chinook Global Limited passed a resolution
approving the issuance of notes payable to the two Class A
stockholders of Chinook Global Limited in the amount of $924
and $720, respectively. Interest on the notes was calculated
at 3% per annum with blended interest and principal payments
monthly.
(v) Immediately following the foregoing transactions, the two
Class A stockholders sold all of their Class A common stock to
the new investors.
(vi) Following the change in control, one stockholder exchanged
15,588 Class A common shares for 15,588 Class E common shares.
(c) Dividends:
(i) Prior to April 7, 2006, the Company paid dividends as follows:
Class of stock Date
Class A common April 6 $ 1,644
=========
(ii) During the period April 7, to December 31, 2006, the Company
paid dividends as follows:
Class of stock Date
Class A common August 22 $ 119
October 16 100
December 1 1,920
--------
2,139
Class E common August 22 6
October 16 25
December 1 480
--------
511
--------
Total $ 2,650
========
18
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(9) Notes payable:
On April 6, 2006, the Company issued notes payable to the two Class A
stockholders of the Company in the amount of $1,644 maturing on March 31,
2011 (note 8(b)). Interest on the notes was calculated at 3% per annum
with blended principal and interest payments monthly. The terms of the
notes permitted the Company to redeem the notes in advance of their stated
maturity date at their face amount. On December 1, 2006, the Company
redeemed the notes for total consideration of $1,407. The $237 benefit
recognized by the Company, being the amount by which the redemption amount
was less than the stated principal outstanding has been recorded as
additional paid in capital.
(10) Related party transaction:
During the period ended April 6, 2006, the Company repaid a $500
obligation under a revolving credit facility bearing interest at bank
prime rate to a company under common control. Following the repayment of
the obligation, the revolving credit facility was extinguished.
(11) Lease commitments:
The Company has several noncancelable operating leases, primarily for
transportation equipment, that expire over the next three years. These
leases generally contain renewal options at fair value prices to be
determined in the future. The Company is required to pay all executory
costs such as maintenance and insurance. The Company is also obligated to
perform certain remediation activities at the end of the lease (note 5).
Rental payments include minimum rentals plus contingent rentals based on
mileage.
Minimum rent payments under operating leases are recognized on a
straight-line basis over the term of the lease including any periods of
free rent. Rental expense for operating leases for the ninety-six day
period ended April 6, 2006, and the 269 day period ended December 31, 2006
were $28 and $83 respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
2006 are:
Twelve months ending December 31:
2007 $ 111
2008 111
2009 50
-------
Total minimum lease payments $ 272
=======
19
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(12) Change in non-cash operating working capital:
January 1 to April 7, to
April 6 December 31
Trade accounts receivable $ 120 $ 18
Inventories (266) 379
Other current assets (258) 166
Trade accounts payable 1,743 (2,046)
Accrued liabilities (553) 1,534
------------ ------------
$ 786 $ 51
============ ============
(13) Cost of goods sold:
January 1 to April 7, to
April 6 December 31
Cost of goods sold consists of:
Raw materials $ 6,577 $ 19,233
Production costs 1,251 3,533
Freight 1,071 3,150
------------ ------------
$ 8,899 $ 25,916
============ ============
20
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(14) Commitments and contingencies:
(a) A predecessor company of CGL pleaded guilty on January 24, 2000, to
felony price fixing in the United States. This matter was resolved
with the United States Department of Justice ("DOJ") with the
imposition of a non-interest bearing fine of $5,000, initially
payable in escalating annual instalments over a five year period. On
January 15, 2004, the U.S. District Court for the Northern District
of Texas restructured the fine payment schedule to require payments
in quarterly instalments of $120 with the final instalment due in
June 2009 (note 5). In addition, all of the predecessor companies
(collectively referred to as the "Chinook defendants") were named as
co-defendants in numerous class action and non-class civil action
suits as a result of the charges brought by the DOJ. As of December
31, 2006, virtually all class action and non-class civil action
suits which had been filed against one or more of the Chinook
defendants, except as noted below, have been settled and no further
amounts are owed by CGL in respect of these actions.
CGL reached an agreement in principle on March 1, 2005, subject to
review and execution of the necessary legal documentation, to settle
the Straus and Boies Actions. The agreement in principle
contemplated a payment by CGL of approximately $200, and
accordingly, this amount has been recorded as a liability at
December 31, 2006. However, as at December 31, 2006, the Straus &
Boies Actions, an amalgamation of numerous state indirect purchases
class action suits, remains unsettled and management is not in a
position at this time to suggest a date when the above noted matter
will be fully resolved.
Legal fees to represent the Company in these matters are expensed as
incurred.
(b) The Company entered into a Participation Agreement with a former
shareholder pursuant to which the Company agreed to pay 50% of the
net proceeds realized from the sale of certain property, plant and
equipment assets of the Company, if any, less one third of the
aggregate amount of fines and surcharges in excess of $50 that may
be required to be paid by the Company in relation to claims brought
against the Company by the Ministry for the Environment for the
Province of Ontario ("MOE") for violations alleged to have occurred
in 2004 and 2005 (see Note 17(b)). "Net proceeds" is defined in the
Participation Agreement to be sale proceeds less out-of-pocket
expenses incurred by the Company in respect of the sale of the
assets, including commissions, legal fees and decommissioning costs
of buildings and/or equipment required to facilitate sale. The
former shareholder is not obligated to make any payments under the
Participation Agreement. At this time, the Company has not actively
pursued the sale of the assets which are subject to the
Participation Agreement.
21
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(15) Business and credit concentrations:
i) Credit risk:
Credit risk arises from the potential default of a customer in
meeting its financial obligation to the Company. The Company has
credit evaluation, approval and monitoring processes to mitigate
potential credit risk.
The Company evaluated the collectability of accounts receivable and
no allowance for doubtful accounts was considered necessary.
ii) Business concentration:
The Company supplies products to a broad range of customers who
operate in a number of industry segments. No single customer,
identifiable group of customers or business segment comprises a
substantial portion of the Company's sales. As such, the Company is
not subjected to undue business concentration risk.
(16) Segmented information:
The following schedules provide required segmented information disclosure
for the period ended:
January 1, 2006 to April 6, 2006:
United
Canada States International Total
-------------------------------------------------
Net sales $ 1,356 $ 7,386 $ 2,048 $ 10,790
Property, plant and
equipment 3,733 -- -- 3,733
April 7, 2006 to December 31, 2006:
United
Canada States International Total
-------------------------------------------------
Net sales $ 5,610 $ 20,934 $ 5,803 $ 32,347
Property, plant and
equipment 613 -- -- 613
Geographic segmentation of revenue is determined based on the location of
the customer.
22
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(17) Subsequent events:
(a) Indirect California Actions:
A predecessor company of CGL pleaded guilty on January 24, 2000, to
felony price fixing in the United States. This matter was resolved
with the United States Department of Justice ("DOJ") with the
imposition of a non-interest bearing fine of $5,000, initially
payable in escalating annual instalments over a five year period. On
January 15, 2004, the U.S. District Court for the Northern District
of Texas restructured the fine payment schedule to require payments
in quarterly instalments of $120 with the final instalment due in
June 2009 (note 5). In addition, all of the predecessor companies
(collectively referred to as the "Chinook defendants") were named as
co-defendants in numerous class action and non-class civil action
suits as a result of the charges brought by the DOJ. As of December
31, 2006, virtually all class action and non-class civil action
suits which had been filed against one or more of the Chinook
defendants, except as noted below, have been settled and no further
amounts are owed by CGL in respect of these actions.
On February 28, 2007, the Company signed a Memorandum Agreement to
settle the Indirect California Actions for $275. As the financial
statements as at and for the twelve months ended December 31, 2005
had not been issued at the time of the settlement, they were
adjusted for the resolution of this matter and therefore the
settlement had no effect on the results of operations for the twelve
months ended December 31, 2006. Accordingly, a liability of $275 has
been recorded in these financial statements.
(b) Sale of assets:
On March 16, 2007, the Company sold its inventory and customer list
to a publicly listed company in the United States.
(c) Ministry of the Environment for the Province of Ontario:
On September 28, 2006 CGL was charged with two counts of failing to
comply, in October of 2004, with an amended Certificate of Approval
for Air contrary to Section 186(3) of the Environmental Protection
Act for the Province of Ontario and on September 29, 2006 CGL was
charged with one count of failing to comply, in October of 2004,
with the daily loading limit for a regulated element contrary to
Section 186(1) of the Environmental Protection Act.
The MOE has identified that there are a number of charges beyond the
above noted charges which could be laid and which pertain to failing
to comply with the daily loading limit for various dates in July
2005 and for failing to report same on one occasion contrary to the
Environmental Protection Act. The MOE has indicated that there will
be a financial penalty assessed.
23
<page>
CHINOOK GLOBAL LIMITED
Notes to Consolidated Financial Statements
December 31, 2006
(US $ in thousands)
(17) Subsequent events (continued):
(c) Ministry of the Environment for the Province of Ontario (continued):
On May 4, 2007, the Company reached an agreement to settle the
outstanding charges laid by the MOE in September, 2006. The Company
agreed to a settlement amount of $815. As the Company had previously
recorded a liability for this amount, no adjustment to the financial
statements was made as a result of the settlement.
24
<page>
Item 9.01(b) Pro Forma Financial Information
1. Description of Transaction and Basis of Presentation
On March 16, 2007, the Company, through its wholly-owned subsidiary BCP
Ingredients, Inc. ("BCP"), entered into an asset purchase agreement (the "Asset
Purchase Agreement") with Chinook Global Limited ("Chinook"), a privately held
Ontario corporation, pursuant to which BCP acquired certain of Chinook's choline
chloride business assets (the "Chinook Acquisition") for a purchase price of
$29,000,000 plus the value of certain product inventories estimated at
approximately $1,840,000. The acquisition closed effective the same date. On
March 16, 2007, the Company and its principal bank entered into a new Loan
Agreement (the "New Loan Agreement") providing for an unsecured term loan of
$29,000,000 (the "New Term Loan"), the proceeds of which were used to fund the
acquisition. The New Term Loan is payable in equal monthly installments of
principal, each equal to 1/60th of the principal of the New Term Loan, together
with accrued interest, with remaining principal and interest payable at
maturity. The New Term Loan has a maturity date of March 16, 2010 and is subject
to a monthly interest rate equal to LIBOR plus 1%. At March 31, 2007, this
interest rate was 6.32%.
Because these unaudited pro forma condensed combined financial statements have
been prepared based on preliminary estimates of fair values attributable to the
acquisition, the actual amounts recorded for the acquisition may differ from the
information presented in these unaudited pro forma condensed combined financial
statements. The Chinook 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 at the date of
acquisition.
The pro forma information presented is for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the acquisition had occurred at the beginning of each
period, nor is it indicative of future operating results or financial position.
The unaudited pro forma condensed combined financial statements do not reflect
any operating efficiencies and cost savings that we may achieve with respect to
the acquisition. The pro forma information should be read in conjunction with
the accompanying notes thereto, and in conjunction with the historical
consolidated financial statements and accompanying notes of Balchem
Corporation's annual reports on Form 10-K. The pro forma adjustments are based
upon available information and certain assumptions that we believe are
reasonable.
<page>
2. Purchase Price
Preliminary Purchase Price Allocation
The preliminary allocation of the total purchase price, including acquisition
costs, was based on the estimated fair values as of March 16, 2007. Adjustments
to these estimates will be included in the allocation of the purchase price of
the Chinook Acquisition upon settlement of any working capital or other
adjustments. The preliminary purchase price has been allocated as follows (in
thousands):
- ----------------------------------------------------
Fair Value Recorded
in Purchase
Accounting
- ----------------------------------------------------
Customer list $ 29,201
Inventory 1,840
Short-term receivable 1,850
Short-term obligation (870)
Other 73
- ----------------------------------------------------
Total $ 32,094
====================================================
<page>
<table>
<caption>
BALCHEM CORPORATION
Unaudited Pro Forma Combined Balance Sheet
December 31, 2006
(In thousands)
Historical
---------------------------
(audited) (audited)
Pro forma Pro Forma
Assets (1) Balchem (2) Chinook Adjustments Combined
------ ------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Current assets:
Cash and cash equivalents $ 5,189 $ 1,121 $ (4,215) (3)(7) $ 2,096
Accounts receivable 11,578 4,900 (4,900) (7) 11,578
Inventories 9,918 2,453 (613) (4)(7) 11,758
Prepaid expenses and other 1,754 826 1,024 (4)(7) 3,604
Deferred income taxes 416 -- -- 416
------------ ------------ ------------ ------------
Total current assets 28,855 9,300 (8,704) 29,452
------------ ------------ ------------ ------------
Property, plant and equipment, net 31,313 613 (498) (7) 31,428
Goodwill 25,253 -- -- 25,253
Intangibles and other assets, net 6,912 -- 29,274 (4)(5) 36,186
Deferred financing costs -- -- -- --
------------ ------------ ------------ ------------
Total assets $ 92,333 $ 9,913 $ 20,072 $ 122,318
============ ============ ============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable 3,010 1,926 (1,926) (7) $ 3,010
Accrued expenses 1,827 3,171 (3,171) (7) 1,827
Accrued compensation and other benefits 1,869 -- -- 1,869
Customer deposits and other deferred revenue 1,072 -- -- 1,072
Dividends payable 1,596 -- -- 1,596
Income tax payable 186 -- -- 186
Current portion of long-term debt -- -- 5,800 (6) 5,800
Other current liabilities -- 947 (77) (4)(7) 870
------------ ------------ ------------ ------------
Total current liabilities 9,560 6,044 626 16,230
------------ ------------ ------------ ------------
Deferred income taxes 6,627 -- -- 6,627
Long-term debt -- -- 23,200 (6) 23,200
Other long-term obligations 784 516 (401) (7) 899
------------ ------------ ------------ ------------
Total liabilities 16,971 6,560 23,425 46,956
------------ ------------ ------------ ------------
Stockholders' equity:
Common stock 788 2 (2) (7) 788
Additional paid-in capital 10,393 237 (237) (7) 10,393
Retained earnings 63,988 3,114 (3,114) (7) 63,988
Accumulated other comprehensive income 193 -- -- 193
Treasury stock -- -- -- --
------------ ------------ ------------ ------------
Total stockholders' equity 75,362 3,353 (3,353) 75,362
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 92,333 $ 9,913 $ 20,072 $ 122,318
============ ============ ============ ============
See accompanying notes to unaudited pro forma combined financial statements
</table>
<page>
<table>
<caption>
BALCHEM CORPORATION
Pro Forma Combined Statement of Operations
Year ended December 31, 2006
(In thousands, except earnings per share data)
Historical
----------------------------
(audited) (audited)
Pro Forma Pro Forma
(8) Balchem (9) Chinook Adjustments Combined
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Net sales $ 100,905 $ 43,137 -- $ 144,042
Cost of sales 66,899 34,943 (128) (10) 101,714
------------ ------------ ------------ ------------
Gross profit 34,006 8,194 128 42,328
Operating expenses:
Selling, general and administrative expenses 14,844 3,261 (113) (11) 17,992
------------ ------------ ------------ ------------
Earnings from operations 19,162 4,933 241 24,336
Other income (expense):
Interest income (expense) - net (61) 45 (1,650) (12) (1,666)
Other income (expense) - net -- (276) 276 (13) --
------------ ------------ ------------ ------------
Earnings before income tax expense 19,101 4,702 (1,133) 22,670
Income tax expense 6,823 -- 1,275 (14) 8,098
------------ ------------ ------------ ------------
Earnings before extraordinary gain 12,278 4,702 (2,408) 14,572
Extraordinary gain - negative goodwill -- 1,684 (1,684) --
------------ ------------ ------------ ------------
Net earnings $ 12,278 $ 6,386 $ (4,092) $ 14,572
============ ============ ============ ============
Net earnings per common share - basic $ 0.70 $ 0.84
============ ============
Net earnings per common share - diluted $ 0.67 $ 0.80
============ ============
Weighted average shares outstanding - basic 17,427,857 17,427,857
============ ============
Weighted average shares outstanding - diluted 18,247,241 18,247,241
============ ============
See accompanying notes to unaudited pro forma combined financial statements
</table>
<page>
Balchem Corporation
Notes to Unaudited Pro Forma Combined Financial Statements
(in thousands)
Balance Sheet:
1) Represents the Company's historical consolidated balance sheet as of
December 31, 2006.
2) Represents Chinook's historical consolidated balance sheet as of December
31, 2006.
The pro forma combined financial statements have been adjusted for the items set
forth below:
3) To record cash paid as if the acquisition took place on December 31, 2006
of $29,274 which includes $201 and $73 for acquisition costs and deferred
financing costs respectively, incurred in connection with borrowings
pursuant to the $29,000 term loan used to finance the acquisition.
4) The following reflects the preliminary allocation of the purchase price.
These allocations may change based on actual working capital and other
adjustments.
----------------------------------------------------
Fair Value Recorded
in Purchase
Accounting
----------------------------------------------------
Customer list $ 29,201
Inventory 1,840
Short-term receivable 1,850
Short-term obligation (870)
Other 73
----------------------------------------------------
Total $ 32,094
====================================================
5) Reflects the deferred financing charges incurred in connection with
borrowings pursuant to the $29,000 term loan used to finance the
acquisition. Such costs will be amortized over 3 years, the term of the
related debt.
6) To record borrowings pursuant to the term loan of $29,000 to fund the
acquisition of the Chinook Acquisition. The Term Loan is payable in equal
monthly installments of principal totaling approximately $483, together
with accrued interest, and has a maturity date of March 16, 2010.
Borrowing under the term loan bears interest at LIBOR plus 1%.
7) To eliminate the historical assets, liabilities, and equity of Chinook.
<page>
Balchem Corporation
Notes to Unaudited Pro Forma Combined Financial Statements
(in thousands)
Statement of Operations:
8) Represents the Company's historical consolidated statement of operations
for the year ended December 31, 2006.
9) Represents Chinook's historical consolidated statement of earnings for the
twelve month period ended December 31, 2006.
10) Adjustment to decrease depreciation expense included in cost of sales by
$128 to reflect the preliminary allocation of the purchase price which did
not include acquired property, plant and equipment.
11) Adjustment of $2,920 to reflect amortization expense of the customer list
acquired for the year ended December 31, 2006. The Company amortizes its
customer lists over 10 years. Also reflects the elimination of selling,
general and administrative expenses that were not 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.
12) Adjustment to reflect the Company's pro forma interest expense associated
with additional borrowings for the acquisitions. Interest is calculated on
the $29,000 Term Loan (variable rate assumed at 6.32%) resulting in
interest expense of approximately $1,650 for the year ended December 31,
2006.
The effects of a 1/8% increase or decrease in interest rates would change
annual interest expense by approximately $19.
13) Elimination of fines, currency losses and derivative gains and losses.
14) Adjustment to apply the Company's effective tax rate of 35.7% to the
pretax earnings/(loss) of the pro forma adjustments and to the
earnings/(loss) of Chinook. The effective tax rate used by the Company is
higher than applicable statutory rates due to the inclusion of state
income taxes.
<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BALCHEM CORPORATION
By:/s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President &
Chief Executive Officer
Dated: May 31, 2007