FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
[ X ] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 13-2578432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 175
Slate Hill, New York 10973
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including
area code: 914-355-5300
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Indicate by a check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to filing requirements
for the past 90 days.
Yes [ X ] No [ ]
As of August 7, 1998, Registrant had 4,862,756 shares of its Common Stock, $.06
2/3 par value, outstanding.
Part I Financial Information
BALCHEM CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
----------------------
June 30, December 31,
Assets 1998 1997
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Current assets:
Cash and cash equivalents ................................ $ 58 $ 736
Trade accounts receivable, less allowance for doubtful
accounts ........................................... 3,184 3,061
Inventories .............................................. 3,011 2,507
Prepaid expenses ......................................... 309 513
Income taxes receivable .................................. 115
Deferred income taxes .................................... 322 305
Other current assets ..................................... 165
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Total current assets .................................. 6,999 7,287
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Property, plant and equipment, net of accumulated depreciation 7,660 7,345
Intangible assets, net of accumulated amortization ........... 6,680 2,925
Other assets ................................................. 21 36
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Total assets ..................................... $21,360 $17,593
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BALCHEM CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
------------------------
June 30, December 31,
Liabilities and Stockholders' Equity 1998 1997
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Current liabilities:
Accounts payable and accrued expenses .................... $ 2,057 $ 2,657
Dividends payable ........................................ (160)
Short term revolver ...................................... 125
Current portion of long-term debt ....................... 1,200 700
Current portion of other long-term obligations ........... 50 50
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Total current liabilities ............................. 3,432 3,567
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Long-term debt ................................................ 2,750 800
Deferred income taxes ......................................... 457 481
Deferred compensation ........................................ 132 143
Other long-term obligations ................................... 239 266
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3,578 1,690
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Total liabilities ................................. 7,010 5,257
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Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding
Common stock, $.06 2/3 par value. Authorized 10,000,000
shares; issued and outstanding 4,854,631 shares at
June 30, 1998 and 4,793,163 shares at December 31,1997 324 320
Additional paid-in capital ................................ 2,570 2,144
Retained earnings ......................................... 11,456 9,872
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Total stockholders' equity ............................. 14,350 12,336
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Commitments and contingencies
Total liabilities & stockholders' equity .......... $ 21,360 $ 17,593
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BALCHEM CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
Unaudited Unaudited
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Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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Net sales ........................................... $ 7,220 $ 7,308 $ 14,953 $ 14,143
Cost of sales ....................................... 4,313 4,126 8,832 7,969
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Gross margin ........................................ 2,907 3,182 6,121 6,174
Operating expenses:
Selling expenses ............................... 669 820 1,406 1,558
Research and development expenses .............. 240 287 524 541
General and administrative expenses ............ 799 808 1,681 1,615
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Total operating expenses ................... 1,708 1,915 3,611 3,714
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Income from operations .............................. 1,199 1,267 2,510 2,460
Other expenses - net:
Interest expense ............................... 17 44 38 84
Other (income) expense - net ................... (1) (29) 19 (5)
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Total other expenses - net ................. 16 15 57 79
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Earnings before income taxes ........................ 1,183 1,252 2,453 2,381
Income taxes ................................... 430 390 869 802
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Net earnings ........................................ $ 753 $ 862 $ 1,584 $ 1,579
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Basic net earnings per common share (notes 3 and 4) . $ 0.16 $ 0.18 $ 0.33 $ 0.33
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Diluted net earnings per common share (notes 3 and 4) $ 0.15 $ 0.18 $ 0.32 $ 0.33
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BALCHEM CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
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Six Months Ended
June 30,
1998 1997
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Cash flows from operating activities:
Net earnings ................................................................ $ 1,584 $ 1,579
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................................... 675 524
Non-employee stock option compensation ................................. 48 84
Employee stock option compensation ..................................... 91
Provision for deferred income taxes .................................... (41) (45)
Non-cash compensation .................................................. 99
Loss on sale of equipment .............................................. 19 4
Changes in assets and liabilities:
Accounts receivable ............................................... (123) (305)
Inventories ....................................................... (504) (453)
Prepaid expenses and other ........................................ 369 134
Accounts payable and accrued expenses ............................. (633) (103)
Income taxes receivable / payable ................................. (115) (46)
Deferred compensation payable ..................................... (11) 78
Other long-term obligations ....................................... (20) (26)
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Net cash flows provided by operating activities .............. 1,438 1,425
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Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ......................... 15 538
Capital expenditures ........................................................ (771) (774)
Investments in other assets ................................................ (4,008) (577)
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Net cash flows used in investing activities .................. (4,764) (813)
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Cash flows from financing activities:
Net borrowings under short-term revolver .................................... 125 155
Proceeds from long-term debt ................................................ 3,000
Principal payments on long-term debt ........................................ (550) (400)
Stock options and warrants exercised ........................................ 240 8
Dividends paid .............................................................. (160) (142)
Other financing activities .................................................. (7) (6)
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Net cash flows provided by (used in) financing activities .... 2,648 (385)
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Change in cash and cash equivalents .............................................. (678) 227
Cash and cash equivalents beginning of year ...................................... 736 89
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Cash and cash equivalents end of year ............................................ $ 58 $ 316
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements presented herein have been prepared by the
Company in accordance with the accounting policies described in its December 31,
1997 Annual Report on Form 10-KSB and should be read in conjunction with the
notes to consolidated financial statements which appear in that report.
In the opinion of management, the unaudited Consolidated Financial Statements
furnished in this Form 10-Q include all adjustments necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. All such adjustments are of a normal recurring
nature. The Consolidated Financial Statements have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include some information
and notes necessary to conform with annual reporting requirements. The results
of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of the operating results expected for the full year.
NOTE 2 - INVENTORIES
Inventories at June 30, 1998 and December 31, 1997 consist of the following:
June 30, December 31,
1998 1997
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Raw Materials ......................... $ 972 $ 836
Finished Goods ......................... 2,039 1,671
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$3,011 $2,507
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NOTE 3 - NET EARNINGS PER SHARE
Net earnings per share are calculated in accordance with SFAS No.128 "Earnings
Per Share." The following presents a reconciliation of the numerator and
denominator used in calculating basic and diluted net earnings per share:
Number of
Income Shares Per Share
Three months ended June 30, 1998 (Numerator) (Denominator) Amount
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Basic EPS - Net earnings and weighted
average common shares outstanding ........... $ 753 4,826,696 $ .16
Effect of dilutive securities - stock options 114,762
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Diluted EPS - Net earnings and
weighted average common shares
outstanding and effect of stock options..... $ 753 4,941,458 $ .15
Number of
Income Shares Per Share
Three months ended June 30, 1997 (Numerator) (Denominator) Amount
- -------------------------------- ----------- ------------- ------
Basic EPS - Net earnings and weighted
average common shares outstanding ........... $ 862 4,731,386 $ .18
Effect of dilutive securities - stock options 51,601
---------
Diluted EPS - Net earnings and
weighted average common shares
outstanding and effect of stock options...... $ 862 4,782,986 $ .18
Number of
Income Shares Per Share
Six months ended June 30, 1998 (Numerator) (Denominator) Amount
- -------------------------------- ----------- ------------- ------
Basic EPS - Net earnings and weighted
average common shares outstanding ........... $ 1,584 4,812,438 $ .33
Effect of dilutive securities - stock options 98,635
---------
Diluted EPS - Net earnings and
weighted average common shares
outstanding and effect of stock options ..... $ 1,584 4,911,073 $ .32
Number of
Income Shares Per Share
Six months ended June 30, 1997 (Numerator) (Denominator) Amount
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Basic EPS - Net earnings and weighted
average common shares outstanding ........... $ 1,579 4,730,546 $ .33
Effect of dilutive securities - stock options 45,542
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Diluted EPS - Net earnings and
weighted average common shares
outstanding and effect of stock options .... $ 1,579 4,776,088 $ .33
NOTE 4 - STOCK SPLIT
On May 2, 1998, the Board of Directors of the Company approved a three-for-two
split of the Company's common stock to be distributed in the form of a stock
dividend to shareholders of record on May 15, 1998. Such distribution was made
on June 3, 1998. Accordingly, the stock split was recognized by reclassifying
$106, the par value of the additional shares resulting from the split, from
additional paid-in capital to common stock. All references to number of common
shares and per share amounts except shares authorized in the accompanying
consolidated financial statements were retroactively adjusted to reflect the
effect of the stock split.
NOTE 5 - INTANGIBLE ASSETS
On June 16,1994, the Company purchased certain tangible and intangible assets
for one of its packaged specialty ingredients for $1,500 in cash. As detailed in
the agreement as amended, the Company was required to pay contingent amounts to
compensate the seller for the purchase of the seller's customer list. The amount
payable to the seller was based on the profits derived from the sale of the
specialty packaged ingredient. On June 25, 1998, the Company elected to exercise
the early payment option of the agreement resulting in the Company paying $3,700
to the seller. The Company has no further obligation to pay any other sum to the
seller under the terms of the agreement. Amounts allocated to the customer list
are being amortized on a straight-line basis over its remaining estimated useful
life through 2004.
Management's Discussion and Analysis
(All dollar amounts in thousands)
Results of Operations:
Three months ended June 30, 1998 as compared with three months ended June 30,
1997
Net sales for the three months ended June 30, 1998 were $7,220 as compared to
$7,308 for the three months ended June 30, 1997, a decrease of 1% or $88. The
slightly lower sales revenue was the result of a reduction in inventory levels
by some customers in the food industry. This decline was partially offset by
increased volumes in the specialty products and animal nutrition businesses in
domestic markets.
Cost of sales increased 3% points as a percentage of sales for the three months
ended June 30, 1998 as compared to the three months ended June 30, 1997. The
increase is primarily attributable to higher costs related to the increased
volumes of certain lower margin products sold during the three months ended June
30, 1998 and additional amortization expense associated with the purchase of a
customer list for the Company's ethylene oxide business.
Operating expenses for the three months ended June 30, 1998 decreased to $1,708
from $1,915 for the three months ended June 30, 1997. The decrease in operating
expenses is primarily the result of a decrease in salary expense and
professional fees. These decreases were partially offset by an increase in costs
associated with the Company's medical plan.
Income from operations for the three months ended June 30, 1998 was $1,199 as
compared to $1,267 for the three months ended June 30, 1997, a decrease of 5% or
$68.
Net earnings were $753 for the three months ended June 30, 1998 as compared to
$862 for the three months ended June 30, 1997, a decrease of 13%, or $109.
Interest expense for the three months ended June 30, 1998 totaled $17 as
compared to $44 for the three months ended June 30, 1997. The decrease in
interest expense is the result of a lower average debt balance for the three
months ended June 30, 1998.
Six months ended June 30, 1998 as compared with six months ended
June 30, 1997
Net sales for the six months ended June 30, 1998 were $14,953 as compared to
$14,143 for the six months ended June 30, 1997, an increase of 6% or $810. The
increase in revenue is primarily attributable to increased volumes for the
specialty products business, the food encapsulation business in international
markets and the animal nutrition business.
Cost of sales increased 3 % points as a percentage of sales for the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997. The
increase is primarily attributable to higher costs related to the increased
volumes of certain lower margin products sold during the six months ended June
30, 1998 and additional amortization expense associated with the purchase of a
customer list for the Company's ethylene oxide business.
Operating expenses for the six months ended June 30, 1998 decreased to $3,611
from $3,714 for the six months ended June 30, 1997. The decrease in operating
expenses is primarily the result of a decrease in salary expense and
professional fees. These decreases were partially offset by an increase in costs
associated with the Company's medical plan and increased recruiting and
relocation expense.
Income from operations for the six months ended June 30, 1998 was $2,510 as
compared to $2,460 for the six months ended June 30, 1997, an increase of 2% or
$50.
Net earnings were $1,584 for the six months ended June 30, 1998 as compared to
$1,579 for the six months ended June 30, 1997. Interest expense for the six
months ended June 30, 1998 totaled $38 as compared to $84 for the six months
ended June 30, 1997. The decrease in interest expense is the result of a lower
average debt balance for the six months ended June 30, 1998.
Liquidity and Capital Resources
Cash flow from operating activities provided approximately $1,438 for the six
months ended June 30, 1998 as compared to $1,425 for the six months ended June
30, 1997. Over the last three years, operating cash flow has totaled
approximately $8,853. Improvements in cash flow over this period of time have
provided the Company with the ability to meet both its operating and investment
objectives.
Capital expenditures were $771 for the six months ended June 30, 1998. The
Company has undertaken a plant expansion for its encapsulation product line. The
increased capacity should be on-line in the third quarter. Capital expenditures
are projected to be approximately $1,300 for 1998.
On June 16, 1994, the Company purchased certain tangible and intangible assets
for one of its packaged specialty ingredients for $1,500 in cash. The amount
contingently payable to the seller involved a complex formula based on the
profits derived from the sale of the specialty packaged ingredient. On June 25,
1998, the Company elected to exercise the early payment option of the agreement
resulting in the Company paying $3,700 to the seller. The Company has no further
obligation to pay any other sum to the seller under the terms of the agreement.
The Company has capitalized approximately $3,982 for the six months ended June
30, 1998 and $1,216 in 1997 in connection with the agreement.
In connection with the exercise of the early payment option described above, the
Company borrowed an additional $3,000 during the quarter ended June 30, 1998.
Long-term debt, including the current portion, totaled $3,950 at June 30, 1998.
The Company knows of no demands, commitments, events or uncertainties for its
liquid assets that will materially affect its liquidity. The Company currently
has $2,000 in committed credit available to it by its principal bank of which
$1,875 was unutilized at June 30, 1998 (which funds are being reserved for
future working capital needs and undefined business opportunities).
Impact of Recent Accounting Standards
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.131, "Disclosures About Segments of an Enterprise and
Related Information" and SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The Company is currently evaluating the
effect that SFAS 131 will have on segment reporting disclosures. These
statements address presentation and disclosure matters and will have no impact
on the Company's financial position or results of operations. As required by
SFAS 131 and SFAS 132, compliance with the respective reporting disclosures will
be reflected in the Company's 1998 Form 10-K.
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Adoption of this SOP is not expected to have a material effect on the Company's
financial position or results of operations.
Also in April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of
Start-up Activities ." This SOP requires companies to expense certain costs such
as pre-operating expenses and organizational costs associated with the Company's
start-up activities, and is effective for fiscal years beginning after December
15, 1998. Adoption of this SOP is not expected to have a material effect on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities." It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Adoption of this statement is not expected to have a
material effect on the Company's financial position or results of operations in
the year of adoption.
Part II Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
(a) The date of the annual meeting of stockholders was June 19, 1998.
(b) The following, other than election of directors, were approved by the
stockholders (there were 942,235 non-votes).
ITEM FOR AGAINST ABSTAIN
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Amendment to Incentive Stock Option Plan (for 1,694,303 303,051 32,968
employees) increased by 200,000 number of shares as
to which options could be granted and changed the
limitations on grants
Amendment to Stock Option Plan for Directors 1,606,311 364,714 59,287
increased by 400,000 number of shares as to which
options could be granted and expanded classes of
eligible participants
Ratification of Amended 401(k) Plan providing among 2,770,884 152,454 49,219
other things, that matching contributions of
Registrant be in its common stock at market
Ratification of Appointment of KPMG Peat Marwick 2,946,037 23,834 2,686
LLP as independent auditors for 1998
Item 6. Exhibits and Reports on Form 8-K
(a) There were no exhibits.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1998.
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 thereunto duly authorized.
BALCHEM CORPORATION
By:/s/ Dino A. Rossi
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Dino A. Rossi, President,
Chief Executive Officer
Date: August 11, 1998