SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-13648
BALCHEM CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 13-2578432
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 175, Slate Hill, New York 10973
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (914) 355-5300
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class 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
(Title of Class)
<PAGE>
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State Registrant's revenues for its most recent fiscal year. $26,370,995.
State the aggregate market value of the voting stock held by
non-affiliates of Registrant computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days.
$24,710,865 is the aggregate market value of the voting stock held by
non-affiliates of Registrant as of March 1, 1997.
State the number of shares outstanding of each of Registrant's classes
of common equity as of the latest practicable date.
3,153,030 shares of common stock, par value $.06-2/3 per share ("Common
stock"), were outstanding as of March 1, 1997.
The proxy statement for the Annual Meeting to be held June 27, 1997, is
incorporated by reference in Part III.
Check whether 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 past
12 months (or for such shorter period that Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
<PAGE>
PART I
Item 1. Business
(a) Registrant, incorporated in the State of Maryland in 1967,
is principally engaged in the packaged specialty performance ingredients
business. As of December 31, 1996, Registrant has one inactive subsidiary,
formed in July 1991, Balchem, Ltd., a New Brunswick (Canada) corporation which
was organized in order for Registrant to comply with Canadian regulations so
that it would continue selling Registrant's medical device sterilant in Canada.
(b) (i) Registrant has one major business segment-packaged
specialty performance ingredients. Please refer to the financial statements
attached hereto. As of December 31, 1996, Registrant's specialty performance
ingredients were being used in the following industries: food, agricultural and
aquacultural feeds, sterilization, fumigation, and synthesis, among many others.
Prior to December 31, 1995, registrant also utilized its existing capabilities
to provide custom synthesis on a toll basis of certain organic chemicals.
Export sales for the last three fiscal years aggregated
approximately $8,448,290 and were made to the European Common Market, Canada,
Central and South America, Mexico and Southeast Asia. Export sales were
approximately $2,989,726 for the fiscal year ended December 31, 1996,
approximately $3,092,579 for the fiscal year ended December 31, 1995, and
approximately $2,365,985 for fiscal year ended December 31, 1994.
(b) (ii) Registrant sells packaged specialty performance
ingredients through its own sales force and through independent distributors and
contractors.
In 1994 Registrant obtained from AlliedSignal its sales
contracts and the right to use its customer list in respect of AlliedSignal's
100% ethylene oxide packaged medical device sterilant product. Compensation
involves a complex formula based upon revenue. Payment to AlliedSignal in 1995
and 1996 included $1,427,126 which was capitalized plus a $400,000 consulting
fee. Payments of similar magnitude are projected for 1997. In accordance with
I.R.S. regulation, the capital payments are all amortized on a schedule to be
completed by July 2004. Payments will continue until the agreed upon discounted
price is met, but in no event will go beyond June 2004.
(b) (iii) Registrant has six major competitors, who are
substantially larger in size and resources than Registrant.
(b) (iv) The raw materials utilized by Registrant in the
manufacture of its products are available from a number of commercial sources.
Registrant is not experiencing any current difficulties in procuring such
materials and does not anticipate any such problems.
(b) (v) Due to consolidation of customer businesses,
Registrant has one customer that accounted for approximately 11% of Registrant's
revenues in 1996. The aggregate revenues from its two largest customers was less
than 18%. The loss of any such customer would not have a material effect on
Registrant's operating results. Registrant is the sole source of supply for
certain products used by its customers.
<PAGE>
(b) (vi) Registrant currently holds six patents relating to
its business. Registrant believes that these and any other patents obtained are
advantageous to its business. However, Registrant believes that its sales and
position are dependent primarily upon the quality of its products, its sales
efforts and market conditions, rather than on any patent protection. Registrant
obtained a license in mid-1986 under United States Patent 4,511,584 from the SCM
Corporation to manufacture and market a specialty chemical food ingredient. That
license permitted Registrant to utilize its technology in certain applications
that have supplementary business potential.
(b) (vii) On February 27, 1988, California's Proposition 65
(Safe Drinking Water and Toxic Enforcement Act of 1986) went into effect. A
sterilant/fumigant, ethylene oxide, distributed by Registrant is listed by the
State of California as a carcinogen and reproductive toxin. As a result,
Registrant is required to and does provide a clear and reasonable warning to any
person in California who may be exposed to this product; failure to do so would
result in liability of up to $2,500 per day per person exposed.
(b) (viii) Since the passage of the California Birth Defect
Law of 1984, Registrant has requested an exemption for its sterilant and
fumigant gas as it is used in confined chambers to sterilize and fumigate and is
highly regulated as to its usage by the Environmental Protection Agency (EPA)
and Occupational Safety and Health Administration ("OSHA"), as compared to
agricultural pesticides which are used in open fields. Such gas is broadly
categorized as a pesticide because it kills bacteria and insects. In addition,
the State of California has set forth certain tests for each pesticide and if
the manufacturer is not willing to run such tests, the State will do so and then
assess the cost to the manufacturer. Registrant has once again requested an
exemption on the basis of the confined usage, as well as Registrant's belief
that sufficient tests have been run on the sterilant gas, and that such tests
comply with State guidelines. The State has turned down Registrant's request on
the basis that Registrant's former competitor in this field has agreed to
conduct such tests. Since such tests will now be required by the EPA as a result
of a congressional edict to register all pesticides under the Federal
Insecticide, Fungicide and Rodenticide Act, Registrant has joined with its
former competitor in agreeing to run such tests at a shared cost. Such costs
will be passed along to users of the sterilant who are relying upon Registrant
as their primary Registrant (there are five such users involved). In addition,
the EPA will require broader testing for re-registration, and Registrant and its
former competitor will conduct such tests and share costs; it is estimated that
the cost to each will be $100,000 per year, over a three year period. Registrant
intends similarly to pass along most of such testing costs. Also see (b)(vii)
above and (b)(x) below.
(b) (ix) During the years ended December 31, 1996 and December
31, 1995, Registrant spent approximately $831,523 and $744,718, respectively, on
company-sponsored research and development of new and existing products. During
the year ended December 31, 1996 an average of 10 employees devoted their full
time to research and development activities.
(b) (x) Registrant holds an EPA Registration number, which
permits it to sell its medical device sterilant and spice fumigant. As a result
of a congressional enactment during 1990 of a requirement to re-register all
pesticides, the Registrant and its former competitor have been conducting animal
testing under the direction of the EPA. Such testing has cost the Registrant
approximately $100,000 a year, for the past four years, and will continue on
that order of magnitude for at least the next three years. The cost of
re-registration is intended to be recouped in the selling price of the
sterilant.
<PAGE>
There are a vast number of items sterilized with ethylene
oxide, for which there is no substitute. Absence of availability would cause
chaos in the medical industry because of the resultant infection potential.
Re-registration is a negotiated process between the EPA and the primary EO
Registrants of which the Registrant is one of two. A series of additional
testing is being conducted at mutually-approved laboratories to fill data gaps
resulting from the negotiations. As animal tests require time, the process is
slow. This more recent re-registration commenced during 1990 and is expected to
continue through 1997.
Other than as set forth in the foregoing paragraphs, to the
best of Registrant's knowledge, it is in compliance with all federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. Such compliance has not had a material effect upon the capital
expenditures, earnings and competitive position of Registrant. Compliance with
the environmental provisions cost approximately $25,270 in 1996, and $196,939 in
1995.
(b) (xi) As of March 1, 1997, Registrant employed
approximately 116 persons.
Item 2. Properties
The executive offices, and certain manufacturing facilities of
Registrant, are presently housed in three buildings located, together with an
14,900 square foot steel warehouse, on a four acre parcel of land in Slate Hill,
New York. Registrant purchased a 1,500 square foot building on a contiguous
parcel (1 acre) to its facility to house one of its marketing groups. Registrant
also owns a nearby vacant 8-1/2 acre parcel, which it uses under permit for
industrial waste disposal, and an additional two acres of land giving it direct
access to the disposal field.
The buildings at Slate Hill, New York, used by Registrant have
an aggregate area of approximately 58,000 square feet. The largest building,
covering approximately 33,000 usable square feet, contains a steam generating
plant.
Registrant owns a facility located on an approximately 81 acre
parcel of land in Green Pond, South Carolina. The facility consists of an office
building, a maintenance building, a utilities building, two manufacturing
buildings, chemical drumming facilities and warehouse. The equipment located at
such manufacturing facility consists of high pressure steam boilers and several
reaction vessels. Registrant uses the facility as a terminus and warehouse, as a
drum filling station for three of its specialty ingredients, and until December
29, 1995 manufactured specialty chemicals on a toll basis for other
manufacturers. The Registrant is attempting to sell off the portion of the plant
and facility that was associated with this last activity. The Registrant
constructed its second state-of-the-art drumming facility at Green Pond during
1994, and it became operative in January 1995, as a result of the purchase from
AlliedSignal of its EO-drums, inventory in drums and use of its customer list. A
railroad spur from the mainline was part of the construction to permit the
acceptance of tankcars of raw materials at the new Green Pond drumming station.
The Registrant will continue to own and operate this facility, occupying
approximately 25 acres of the total parcel noted above.
<PAGE>
Item 3. Legal Proceedings.
In the course of construction work carried out in early 1982
at Registrant's headquarters in Slate Hill, New York, a number of drums
containing unidentified waste material were discovered buried in the ground. The
presence of these drums was unknown to the present management of Registrant,
which took immediate steps to unearth all drums and repackage those that had
become corroded. Registrant notified the Department of Environmental
Conservation of the State of New York (NYDEC) and requested its assistance in
determining what further steps Registrant should take.
Four years after the discovery and removal of the drums,
Registrant and NYDEC entered into a Consent Decree to evaluate the drum site as
it relates to both soil and groundwater to determine if the remedial action of
1982 was sufficient to delist the site as a potential hazardous site.
Over the ensuing years, reports were written and soil
contaminants were removed. During a widening of the excavation site, additional
drums were uncovered and disposed of, as well as accumulated water from the
site. Registrant agreed to perform a focused Remedial Investigation/Feasibility
Study (RI/FS).
After negotiations with NYDEC, a new RI/FS submitted on
January 27, 1994 was approved by NYDEC in February. As required by New York
State law, a Citizen's Participation meeting was held by NYDEC officials on
February 2, 1994 to explain the history of the site and the expanded work plan
detailed in the new RI/FS.
The new remedial program involved surveying the site by means
of monitoring wells and piezometers to assess potential pathways by which water
from the former drum burial site could travel to the surface areas directly
outside the site. Surface water was collected and analyzed. Other monitoring
wells and piezometers were installed on Registrant's property, but further from
the burial site, in order to determine if site activities have impacted on the
surface water system of the surrounding area. Air monitoring was conducted
during all phases of the work.
Work began on the new remedial plan in the spring of 1994 and
was completed on schedule. A draft of the feasibility study was submitted to
NYDEC on October 31, 1994. The final study report was completed in April 1995
and was reviewed by the State. On October 2, 1995, a public meeting was held by
the NYDEC officials to discuss the status of the site and the final feasibility
study report. Based on the State requirements and comments made by the public at
this meeting, Registrant had to clean the area by the railroad and remove
additional soil from the drum burial site. The cost for this clean-up and the
related reports is estimated to be approximately $150,000. Clean-up was
completed in 1996, but NYDEC has requested that the site be monitored for three
years. It is estimated that the total cost of monitoring will be $50,000.
Several years ago, at the Green Pond, South Carolina facility,
Registrant closed four above-ground process tanks that were no longer needed.
These tanks were believed to be empty. During November 1994, these tanks were
opened and inspected to determine if they could be sold or used by Registrant
for new product lines. Residues were discovered in each of the tanks.
<PAGE>
Registrant arranged for sampling and analysis of the residues.
While residues from two of the tanks were found to be non-hazardous, residues
from the other two tanks were found to contain lead and, therefore, are
considered hazardous waste. Registrant promptly notified SCDHEC and was advised
to arrange for cleaning of the tanks and proper disposal of the hazardous waste.
Preliminary estimates of the costs involved in clean-up and waste disposal range
from $50,000 to $60,000, which monies had been accrued. Registrant contracted
with an environmental disposal firm who removed the hazardous waste from the
tanks and arranged for its disposal in accordance with environmental standards.
Cost of the waste clean-up and disposal to date is $24,184. One more truckload
of sludge remains to be disposed of. Otherwise the work is completed.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information.
Commencing March 3, 1995, the common stock was listed on the
American Stock Exchange. The high and low sales for the common stock as recorded
in the American Stock Exchange Market Statistical Reports for 1996, for each
quarterly period during the past two years were as follows (adjusted for 3 for 2
stock split in September 1994):
<TABLE>
<CAPTION>
Quarterly Period High Sales Low Sales
<S> <C> <C>
Ending March 31, 1995 6.13 5.25
Ending June 30, 1995 8.25 5.50
Ending September 30, 1995 11.00 7.75
Ending December 31, 1995 10.63 8.56
Quarterly Period High Sales Low Sales
<S> <C> <C>
Ending March 31, 1996 9.25 8.38
Ending June 30, 1996 10.88 8.13
Ending September 30, 1996 9.38 8.00
Ending December 31, 1996 8.88 7.75
</TABLE>
It should be noted that such market quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions and have been adjusted for stock
dividends or splits.
<PAGE>
(b) Holders.
As of March 1, 1997, the approximate number of holders of
record of the equity securities of Registrant (excluding nontransferable
options) was as follows:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock, $.06--2/3 par value 348*
</TABLE>
*An unknown number of shareholders have stock in street names. The total number
of shareholders is estimated to be 1,031.
(c) Dividends.
Registrant declared a dividend of $0.045 per share on the
common stock during its fiscal year ended December 31, 1996. Registrant declared
a dividend of $0.035 per share on the common stock during its fiscal year ended
December 31, 1995.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
1996 Compared to 1995
Total revenues for 1996 were $26,370,995 compared to
$24,732,652 in 1995, an increase of 6.6% or $1,638,343. Excluding the $1,244,000
in 1995 revenues associated with the custom manufacturing portion, which was
discontinued at the end of 1995, the increase in revenue is 12.3%. The increased
revenues in 1996 are attributed to increased volumes from existing customer base
for specialty ingredients and additional revenues generated by the food
encapsulation business in domestic and international markets.
Pre-tax earnings for 1996 were $2,917,138 as compared to
$2,427,885 for 1995, an increase of 20.2%, or $489,253, a direct correlation to
the business conditions as described above.
Net earnings after (current and deferred) taxes were
$1,926,803 during 1996 compared to $1,585,304 during 1995, an increase of 21.5%,
or $341,499. The increase in net earnings relates to increased revenues in
addition to interest expense savings due to reduced debt and renegotiated loan
terms during 1996.
Total corporate debt at December 31, 1996, net of deferred
taxes, was $5,218,534 compared to $6,200,189 at December 31, 1995. The decrease
in debt was a result of reducing the long-term and short-term debt by
$1,347,242, offset by a long-term covenant not to compete of $200,000.
Capital expenditures for 1996 were $975,242 compared to
$1,115,197 for 1995, a decrease of $139,955. The expenditures were for
additional production equipment and for extending the life of existing
equipment.
<PAGE>
Environmental clean-up expenses for 1996 were $25,270 compared
to $196,939 during 1995 a decrease of $171,669. This reduction was due to the
$164,000 accrual recorded in 1995 for the completion of the Slate Hill soil
remediation project.
Significant fluctuations (i.e. +/- 10%) in other significant
items in the statement of operations of Registrant were as follows:
(1) Shipping and Receiving salaries and related payroll taxes
decreased 43%, or $43,834, as a result of the discontinuance of the custom
manufacturing operation in Green Pond, South Carolina.
(2) Quality control salaries and related payroll taxes
decreased 34%, or $80,363, as a result of the discontinuance of the custom
manufacturing operation in Green Pond, South Carolina.
(3) Repairs and maintenance - buildings and grounds, increased
17%, or $15,350, as a result of needed maintenance to plant and office buildings
and the general upkeep of grounds at both facilities.
(4) Repairs and maintenance - equipment, increased 39.9%, or
$48,422, as a result of maintenance programs and the increase in the
capitalization threshold for 1996 to $5,000 per item.
(5) Insurance expense increased 17.2%, or $115,901, as a
result of adjusted medical insurance premiums. The Registrant has since
restructured the medical insurance program to reduce these expenses.
(6) Real estate taxes increased 54.9%, or $36,018, as a result
of adjustment to taxable rate at the South Carolina facility due to the new
filling station operation constructed in 1994-1995.
(7) Depreciation-buildings and equipment increased 68.3%, or
$473,095, as a result of depreciation expense for the new drumming station and
equipment at the Green Pond facility and to accelerate the depreciation
associated with the anticipated sale of the custom manufacturing operation in
Green Pond, discussed in Note 14 of the attached financial statements.
(8) Outside selling services decreased 13.1%, or $2,191, as a
result of a reduction in commissions payable to outside representatives for sale
of products.
(9) Travel and promotion increased 30.4%, or $181,311, as a
result of increased travel to international markets by additional personnel,
travel by senior management to conduct an increased number of stock awareness
seminars, and additional travel to accounts as a result of more accounts.
(10) Research salaries and related payroll taxes increased
19.0%, or $104,866, as a result of additional professional hiring.
(11) Outside research expenses decreased 18.4%, or $27,911, as
a result of more inside lab tests being conducted in various fields of activity
by new hires noted in (10).
(12) Research and development supplies increased 23.2%, or
$9,850, in direct correlation with increased staff and requirements of same.
<PAGE>
(13) Management and office salaries and related payroll taxes
increased 10.2%, or $207,127, as a result of reclassification of certain
personnel to management salaries, increased adjustments for senior management
personnel, hiring of professional and support personnel and merit raises for
office personnel.
(14) Retirement plans contributions increased 80.9%, or
$163,484, as a result of a one time charge the Registrant took in 1996 to
convert the accounting for the pension plan to the accrual basis, referenced in
Note 8 of the attached financial statements.
(15) Supplemental insurance program decreased 23.2%, or
$7,375, as a result of a reduction in number of employees covered due to
retirements and/or death.
(16) Professional fees and litigation settlement costs
decreased 16.4%, or $24,128, as the environmental clean-up matter at Slate Hill
comes to completion as noted in Item 3 of this document.
(17) Office expenses increased 63.7%, or $171,782, as a result
of the increased cost associated with computer equipment required to develop a
LAN system and normal purchases required to equip new personnel. The increased
capitalization level ($5,000) also contributed to this increased expense.
(18) Consulting services increased 60.4%, or $76,314, as a
result of contractual agreements with consultants in various disciplines to
analyze existing computer systems and assist in the development of a
bar-coding/tracking system.
(19) Employee recruiting and moving expenses decreased
23.0%,or $63,360, as a result of reduced recruitment and reduced relocation
expenses associated with hiring of local professionals.
(20) Miscellaneous expenses increased 55.7%, or $197,045, as a
result of the Registrant's decision to adopt FAS No. 123 for options granted to
non-employees ($105,000), as referenced in Note 7 of the attached financial
statements, an increase in director fees and the overall rise in expenses due to
higher number of employees.
(21) Depreciation and amortization increased 86.9%, or
$106,304, as a result of the increased amortization associated with the
AlliedSignal acquisition, as described in Note 11 of the attached financial
statements.
1995 Compared to 1994
Total revenues for 1995 were $24,732,652 compared to
$18,666,979 during 1994, an increase of 32.5% or $6,065,673. The increase in
1995 resulted from the purchase from AlliedSignal of certain assets and the use
of AlliedSignal's customer list for a specialty chemical, in the sale of which
Registrant was already involved, and from revenues resulting from the growth in
core accounts and conversions of prospects. Certain prior year items recognized
as revenue have been reclassed to cost of products sold to conform with 1996
presentation.
Pre-tax earnings for 1995 were $2,427,885 compared to
$1,275,692 for 1994, an increase of 90.3%, or $1,152,193. The increased earnings
are attributed to business conditions as described above.
<PAGE>
Net earnings after (current and deferred) taxes were
$1,585,304 during 1995 compared to $845,502 during 1994, an increase of 87.5%,
or $739,802. The increased net earnings are in direct correlation with increased
revenues, tax savings realized on export sales and research and development
credits.
Total corporate debt at December 31, 1995, net of deferred
taxes, was $6,200,189 compared to $5,847,705 at December 31, 1994. The increase
in debt was a result of borrowing for the purchase of assets from AlliedSignal
and the construction of additional drumming station.
Capital expenditures for 1995 were $1,115,197 compared to
$2,819,487, a decrease of $1,704,290. The decreased expenditures for 1995
reflect that the new drumming station in Green Pond had been basically completed
in 1994.
Environmental clean-up expenses for 1995 were $196,939
compared to $258,581 during 1994 a decrease of $61,642. The decreased expenses
represent declining remediation clean-up costs required by the State at the
Slate Hill facility initiated in 1992. The Registrant accrued $164,000 of the
$196,936 in 1996, which should be sufficient to complete the project.
Significant fluctuations (i.e. +/- 10%) in other significant
items in the statement of operations of Registrant were as follows:
(1) Production salaries and related payroll taxes increased
33.4%, or $299,801, as a result of full year expense for production shifts added
during the second half of 1995 at the Slate Hill and Green Pond facilities and
additional personnel hired for increased production at the Slate Hill facility.
(2) Quality control salaries and related payroll taxes
increased >100%, or $135,334, as a result of replacement of consultant with
corporate employee at the Green Pond facility and the addition of professional
at the Slate Hill facility.
(3) Repairs and maintenance-buildings and grounds increased
34%, or $22,800, as a result of needed maintenance to plant and office buildings
and the general upkeep of grounds at both facilities.
(4) Repairs and maintenance - equipment increased 52.4%, or
$41,686, as a result of maintenance program and the increase in the
capitalization threshold.
(5) Plant and quality control supplies increased 44.6%, or
$96,755, in direct correlation with increased production and staff additions in
the quality control department.
(6) Maintenance salaries and related payroll taxes increased
17.8%, or $37,248, as a result of personnel additions to maintenance department
with minimum capitalization for labor on in-house capital projects.
(7) Real estate taxes decreased 12.4%, or $9,260, as a result
of adjustment to taxable rate at the South Carolina facility and refund of taxes
from prior year.
(8) Depreciation-buildings and equipment increased 17.9%, or
$104,984, as a result of depreciation expense for the new drumming station and
equipment at the Green Pond facility.
<PAGE>
(9) Delivery salaries and related payroll taxes increased
24.0%, or $73,127, as a result of hiring of professional drivers required for
the increase in the corporate fleet at the South Carolina facility.
(10) Outside selling services increased >100%, or $16,634, as
a result of commissions payable to outside representatives for sale of products.
(11) Sales consulting increased 74.8%, or $143,197, as a
result of full year of expense of consulting payments to AlliedSignal (vs. six
months in 1994) and the addition of European representative with related
expenses.
(12) Travel and promotion increased 49.6%, or $197,637, as a
result of increased travel to international markets by additional personnel,
travel by senior management to conduct stock awareness seminars, and additional
travel to accounts as a result of more accounts plus the former AlliedSignal
customers (versus 6 months 1994).
(13) Advertising expense increased 35.1%, or $31,011 as a
result of additional paid space advertising and expansion of sample program
during 1995.
(14) Freight out expenses increased 40.6%, or $399,978, as a
result of the change from FOB pricing policy to delivered status initiated in
1994 and addition of three trucks at South Carolina facility.
(15) Depreciation-vehicles decreased 13.2%, or $2,954, as a
percentage of delivery vehicles became fully depreciated.
(16) Research salaries and related payroll taxes increased
15.6%, or $74,187, as a result of professional hiring.
(17) Outside research expenses increased 60.9%, or $57,371, as
a result of outside lab tests conducted in various fields of activity.
(18) Research and development supplies increased 28.7%, or
$9,451, in direct correlation with increased staff and requirements of same.
(19) Management and office salaries and related payroll taxes
increased 36.6%, or $544,476, as a result of reclassification of certain
personnel to management salaries, increased adjustments for senior management
personnel, hiring of professional and support personnel and merit raises for
office personnel.
(20) Retirement plans contributions increased 25.5%, or
$41,065, as a result of additional personnel eligible for the pension plan and
increased enrollment for the 401K.
(21) Office expenses increased 73.7%, or $114,422, as a result
of the increased cost associated with computer equipment and normal purchases
required to equip new personnel.
(22) Consulting services increased >100%, or $93,416, as a
result of contractual agreements with consultants in various disciplines to
analyze systems and assist in other areas as required.
<PAGE>
(23) Capital stock expenses increased 84.2%, or $40,263, as a
result of the move to American Stock Exchange (one time fee) and initiation of
stock awareness program with related expenses (mailings, printing of materials,
etc.)
(24) Employee recruiting and moving expenses increased >100%,
or $222,400, as a result of recruitment and relocation expenses associated with
hiring of professionals.
(25) Miscellaneous expenses increased 43.4%, or $107,174, as a
result of increased participation by employees in training seminars, increase in
director fees and overall rise in expenses due to higher number of employees.
(26) Depreciation and amortization increased 35.7%, or
$32,160, as a result of AlliedSignal customer list and consulting fees and
depreciation of purchases not expensed.
(27) Telephone expenses increased 39%, or $47,503, as a result
of increased customer base in domestic and international markets, upgrade to
systems at Slate Hill and Green Pond facilities and increase in total employees.
(28) Health insurance increased 27.1%, or $69,615, as a result
of increase in total employees and cost for coverage of same.
(29) Supplemental insurance decreased 17%, or $6,537, as
a result of retirement of key employee reducing annual expense.
(30) Professional fees and litigation costs decreased 19.7%,
or $36,076, as a result of reduction in outside legal services with no expense
incurred for lawsuit litigation in 1995.
Factors Causing Increased Revenues (1996):
Revenues increased 6.6% for the year 1996 which is attributed
to increased business from Registrant's packaged specialty ingredient business
and food encapsulation business in domestic and international markets. This
revenue increase recognizes the loss of $1,244,000 in 1995 revenue associated
with the custom manufacturing business, which was discontinued at the end of
1995. Excluding this business from 1995 shows a revenue increase of 12.3% in the
core businesses.
Liquidation and Capital Resources:
(1) Liquidity - Registrant knows of no demands, commitments,
events or uncertainties for its liquid assets, other than those programmed that
will materially affect its liquidity. Registrant currently has $2,000,000 in
committed, but unutilized credit available to it by its principal bank (which
funds are being reserved for future working capital needs and undefined business
opportunities).
(2) Capital Resources - Most of the committed capital
resources are for expanded production capacity (warehousing and equipment), for
the Slate Hill and Green Pond facilities. 100% of such commitment was paid out
of operational cash flow in 1996.
<PAGE>
Item 7. Financial Statements and Supplementary Data
Listed below are all financial statements and supplementary
financial information filed as part of this report:
(a) Financial Statements
Reference is made to the Year End Financial Statements and
Schedules contained in the Year End Financial Statements of Registrant attached
hereto.
(b) Supplementary Financial Information
Reference is made to the Year End Financial Statements and
Schedules contained in the Year End Financial Statements of Registrant attached
hereto.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Registrant has not changed accountants during Registrant's two
most recent fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons of Registrant; Compliance with Section 16(a) of
the Exchange Act
(a) Directors of the Company.
The required information is set forth in Registrant's Proxy Statement
for the Annual Meeting of Shareholders to be held on June 27, 1997 ("Proxy
Statement") under the caption "Directors and Executive Officers", which
information is hereby incorporated herein by reference.
(b) Executive Officers of the Company.
The required information is set forth in the Proxy Statement under the
caption "Directors and Executive Officers", which information is hereby
incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act.
The required information is set forth in the Proxy statement under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934",
which information is hereby incorporated herein by reference.
Item 10. Executive Compensation
The information required by this Item is set forth in the Proxy
Statement under the caption "Directors and Executive Officers", which
information is hereby incorporated herein by reference.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item is set forth in the Proxy
Statement under the caption "Directors and Executive Officers:, which
information is hereby incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is set forth in the Proxy
Statement under the caption "Directors and Executive Officers", which
information is hereby incorporated herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Listed below are all financial statements and
exhibits filed as a part of this report:
Financial Statements. Reference is made to the Financial
Statements contained in the financial statements attached hereto.
(b) No reports on Form 8-K were filed during the last quarter
of the year ended December 31, 1996.
In accordance with Section 13 or 15(d) of the Exchange Act,
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BALCHEM CORPORATION
By:/s/ Raymond A. Reber
-----------------------
Raymond A. Reber, President,
Chief Executive Officer
Date: March , 1997
By:/s/ Dino A. Rossi
--------------------
Dino A. Rossi, Vice President,
Chief Financial Officer
Date: March , 1997
<PAGE>
In accordance with the Exchange Act, this report has been
signed by the following persons on behalf of Registrant and in the capacities
and on the dates indicated.
By:/s/Raymond A. Reber
-------------------
Raymond A. Reber, President,
Chief Executive Officer and
Director
Date: March , 1997
By:/s/Donald E. Alguire
--------------------
Donald E. Alguire, Director
Date: March , 1997
By:/s/John E. Beebe
----------------
John E. Beebe, Director
Date: March , 1997
By:/s/Francis X. McDermott
-----------------------
Francis X. McDermott, Director
Date: March , 1997
By:/s/Kenneth P. Mitchell
----------------------
Kenneth P. Mitchell, Director
Date: March , 1997
By:/s/Paul F. Mosher
-----------------
Paul F. Mosher, Director
Date: March , 1997
By:/s/Carl R. Pacifico
-------------------
Carl R. Pacifico, Director
Date: March , 1997
By:/s/Israel Sheinberg
-------------------
Israel Sheinberg, Director
Date: March , 1997
By:/s/Leonard J. Zweifler
----------------------
Leonard J. Zweifler, Director
Date: March , 1997
<PAGE>
BALCHEM CORPORATION
FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 & 1994
<PAGE>
BALCHEM CORPORATION
TABLE OF CONTENTS
Report of Independent Accountants
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Schedules Referred to in Statement of Operations
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC -- COMPANY LOGO]
Judelson, Giordano and Siegel, P.C.
Certified Public Accountants
633 Route 211 East, P.O. Box 819
Middletown, New York 10940
Tel: 914-692-9500
Fax: 914-692-7522
Report of Independent Accountants
To the Stockholders and Board of Directors
Balchem Corporation
We have audited the accompanying balance sheets of Balchem Corporation
as of December 31, 1996 and 1995 and the related statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present
fairly the financial position of Balchem Corporation at December 31, 1996 and
1995, and the results of its operations, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules on pages 18 and 19 are
presented for purposes of additional analysis and are not required parts of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/Judelson, Giordano & Siegel, P.C.
------------------------------------
Judelson, Giordano & Siegel, P.C.
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS
1996 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash ................................ 88,706 150,679
Accounts Receivable (Note 2)....... 2,969,869 3,145,492
Inventories (Notes 1 & 3) ......... 1,862,100 1,872,838
Prepaid Expenses .................... 518,716 545,592
Deferred Income Taxes (Note 6) 152,075 127,838
---------- ----------
Total Current Assets ........... 5,591,466 5,842,439
PROPERTY, PLANT & EQUIPMENT:(Note 1).
Land ................................ 89,709 84,710
Buildings ........................... 4,399,122 4,160,793
Equipment ........................... 10,240,077 9,697,876
---------- ----------
Total Property, Plant & Equipment.... 14,728,908 13,943,379
Less: Accumulated Depreciation ........... 7,199,800 6,128,586
---------- ----------
Net Property, Plant & Equipment 7,529,108 7,814,793
OTHER ASSETS: (Note 4)
Intangible Assets ........................ 1,956,095 623,507
Other .................................... 63,534 50,810
---------- ----------
Total Other Assets .................. 2,019,629 674,317
TOTAL ASSETS ............................. 15,140,203 14,331,549
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
1996 1995
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES :
Accounts Payable and Accrued Expenses (Note 11)....... 2,538,842 2,495,117
Dividends Payable ..................................... 141,887 109,976
Income Taxes Payable .................................. 110,044 7,673
Short-Term Borrowings (Note 5)........................ 0 353,768
Current Portion of Long-Term Debt (Note 5)............ 712,737 467,474
Current Portion of Other Long-Term Obligation (Note 4) 34,050 0
---------- ----------
Total Current Liabilities ........................ 3,537,560 3,434,008
LONG-TERM LIABILITIES:
Long-Term Debt (Note 5) .............................. 1,421,782 2,660,519
Deferred Income Taxes (Note 6) ....................... 534,721 683,467
Deferred Compensation (Note 8) ....................... 93,242 105,662
Other Long-Term Obligation (Note 4) ................... 165,950 0
---------- ----------
Long-Term Liabilities, Net of Current Portion .... 2,215,695 3,449,648
TOTAL LIABILITIES .......................................... 5,753,255 6,883,656
COMMITMENTS & CONTINGENCIES (Notes 10 & 11)
STOCKHOLDERS' EQUITY: (Notes 7 & 12)
Preferred Stock, $25 Par Value, authorized 2,000,000
shares, -0- shares issued & outstanding ......... 0 0
Common Stock, $.06 2/3 Par Value, authorized
10,000,000 shares, 3,153,030 shares issued and
outstanding in 1996, 3,142,176 shares in 1995. 210,202 209,478
Capital Contributed in Excess of Par Value ............ 1,915,712 1,762,296
Retained Earnings ..................................... 7,261,034 5,476,119
---------- ----------
Total Stockholders' Equity ....................... 9,386,948 7,447,893
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ................... 15,140,203 14,331,549
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES ............................ 26,370,995 24,732,652 18,666,979
Cost of Products Sold (Sch. 1)........ 15,071,041 14,993,085 11,967,995
----------- ----------- -----------
GROSS MARGIN ......................... 11,299,954 9,739,567 6,698,984
OPERATING EXPENSES:
Selling Expenses (Sch. 3)........ 2,355,214 2,092,738 1,694,731
Research & Development
Expenses (Sch. 4)............ 831,523 744,718 603,709
General & Administrative
Expenses (Sch. 5)............ 4,993,423 4,143,538 2,873,657
----------- ----------- -----------
Total Operating Expenses .. 8,180,160 6,980,994 5,172,097
INCOME FROM OPERATIONS ............... 3,119,794 2,758,573 1,526,887
OTHER EXPENSES (INCOME):
Miscellaneous Income ............ (51,794) (9,809) (6,629)
Interest Expense ................ 254,450 340,497 257,824
----------- ----------- -----------
Total Other Expenses - Net 202,656 330,688 251,195
EARNINGS BEFORE INCOME TAXES ......... 2,917,138 2,427,885 1,275,692
Income Taxes (Notes 1 & 6) ..... 990,335 842,581 430,190
----------- ----------- -----------
NET EARNINGS ......................... 1,926,803 1,585,304 845,502
========= ========= =======
NET EARNINGS PER COMMON
SHARE (Notes 1 & 12) ........... $0.61 $0.50 $0.27
===== ===== =====
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1996, 1995 & 1994
Capital
Contributed
Common Stock In Excess of Retained
Shares Amount Par Value Earnings
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE-January 1, 1994 .................. 2,058,567 137,238 1,730,369 3,241,091
Net Earnings - 1994 ................. 845,502
Dividends ($.0275 per share,
after 3-for-2 split) ............ (85,802)
Stock Options Exercised ............. 31,429 2,095 49,736
Three-For-Two Stock
Split ........................... 1,030,063 68,671 (69,253)
--------- ------- --------- ---------
BALANCE-December 31, 1994 ................ 3,120,059 208,004 1,710,852 4,000,791
Net Earnings - 1995 ................. 1,585,304
Dividends ($.035 per share) ......... (109,976)
Stock Options Exercised ............. 22,117 1,474 51,444
--------- ------- --------- ---------
BALANCE-December 31, 1995 ................ 3,142,176 209,478 1,762,296 5,476,119
Net Earnings - 1996 ................. 1,926,803
Dividends ($.045 per share) ......... (141,888)
Non-Employee Stock Options (Note 13) 105,885
Stock Options Exercised ............. 10,854 724 47,531
--------- ------- --------- ---------
BALANCE-December 31, 1996 ................ 3,153,030 210,202 1,915,712 7,261,034
========= ======= ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ................................................................ 1,926,803 1,585,304 845,502
Adjustments to Reconcile Net Earnings
to Net Cash Provided by Operating
Activities:
Depreciation & Amortization ...................................... 1,414,147 834,748 700,558
Non-Employee Stock Option Compensation ........................... 105,885 0 0
Provision for Deferred Income Taxes .............................. (172,983) 55,914 94,954
Gain on Sale of Equipment ........................................ (8,932) (3,845) (5,000)
Changes in Assets & Liabilities:
Accounts Receivable .............................................. 175,623 (557,215) (380,778)
Inventories 10,738 (570,964) (301,667)
Prepaid Expenses ................................................. 26,876 (105,666) (163,506)
Accounts Payable ................................................. 12,208 421,889 1,072,720
Income Taxes Payable ............................................. 102,371 (82,547) (8,917)
Deferred Compensation Payable .................................... 19,097 21,858 7,017
---------- ---------- ----------
Total Adjustments ............................................. 1,685,030 14,172 1,015,381
Net Cash Provided by Operating Activities ..................... 3,611,833 1,599,476 1,860,883
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Property,
Plant & Equipment ........................................................ 10,450 11,550 5,000
Capital Expenditures ........................................................ (975,242) (1,115,197) (2,819,487)
Investment in Other Assets .................................................. (1,300,051) (319,821) (142,168)
---------- ---------- ----------
Net Cash Used in Investing Activities ......................... (2,264,843) (1,423,468) (2,956,655)
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing Costs ............................................................. 0 0 (12,500)
Decrease in Short-Term Borrowings ........................................... (353,768) (387,887) (118,345)
Proceeds from Long-Term Borrowings .......................................... 0 812,500 1,700,000
Principal Payments on Long-Term Debt ........................................ (993,474) (457,503) (536,027)
Stock Options & Warrants Exercised .......................................... 48,255 52,918 51,831
Dividends Paid .............................................................. (109,976) (85,802) (68,929)
Cash in Lieu of Fractional Shares - Stock Split ............................. 0 0 (582)
---------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities............ (1,408,963) (65,774) 1,015,448
NET INCREASE (DECREASE) IN CASH ................................................. (61,973) 110,234 (80,324)
CASH - BEGINNING ................................................................ 150,679 40,445 120,769
---------- ---------- ----------
CASH - ENDING ................................................................... 88,706 150,679 40,445
========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
BALCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 & 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generally recognizes sales in accordance with the
shipping terms of the transaction.
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.
Property, Plant & Equipment and Depreciation
Property, plant and equipment are recorded at cost. The Company
uses the straight-line method in computing depreciation for financial statement
purposes and accelerated methods with respect to certain assets for income tax
purposes.
Expenditures for repairs and maintenance are charged to
expense, and renewals and replacements 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.
Estimated useful lives for fixed assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 15-25 Years
Equipment 3-12 Years
</TABLE>
Assets under capitalized leases were $61,106 at December 31,
1996 and 1995, with accumulated amortization of $30,590 and $18,354,
respectively. Amortization of assets under capitalized leases is shown as part
of depreciation expense.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~ (Cont'd)
Intangible Assets
Intangible assets are stated at cost and are amortized on a
straight-line basis over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Patent License (remaining 16 years
term)
Deferred Financing Costs 5-7 years
Goodwill 40 years
Customer Lists (Note 11) 10 years
Patent 17 years
Re-Registration Costs 10 years
</TABLE>
Income Taxes
Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities in accordance with Statement of Financial
Accounting Standards No. 109.
Investment and research tax credits are recorded under the
"flow-through" method, reducing income tax expense in the year the credits are
utilized.
Earnings Per Common Share
Earnings per common share are based on the weighted average
number of common shares outstanding during the period and the assumed exercise
of dilutive stock options less the number of treasury shares assumed to be
purchased from the proceeds. There is no material dilutive effect on earnings
per common share due to stock options and warrants.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
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, 1996 and 1995, does not differ
materially from the aggregate carrying values of its financial instruments
recorded in the accompanying 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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~ (Cont'd)
Adoption of Recently Issued Accounting Pronouncements
The Company has adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective for 1996. See Note 14 for its
impact on the financial statements.
The Company has adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation",
effective for 1996. In regard to employee stock options, the Company has chosen
to disclose the impact of stock-based compensation in its footnotes and will not
include such impact on its recorded earnings. See Note 7 for the impact of
adoption of SFAS 123.
Reclassifications
Certain prior year amounts from selling expenses have been
reclassified to cost of products sold in order to conform to the 1996
presentation.
NOTE 2 - NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK
The Company is principally engaged in the packaged specialty
ingredient business. The Company's specialty ingredients are used in the
following industries: Food, aquaculture and animal feeds, sterilization of
medical devices, fumigation and synthesis, among many others. Credit is granted
to the Company's customers, most of whom are major national or international
corporations. International sales are mostly to companies in Europe and the Far
East.
NOTE 3 - INVENTORIES
Inventories at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Raw Materials 670,020 681,656
Finished Goods 1,192,080 1,191,182
----------- ------------
1,862,100 1,872,838
=========== ============
</TABLE>
<PAGE>
NOTE 4 - OTHER ASSETS
Included in Other Assets at December 31, 1996 and 1995 are the
following :
A) Intangible Assets:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Patent License ............................. 30,000 30,000
Deferred Financing Costs ................... 22,500 32,500
Goodwill ................................... 12,000 12,000
Customer Lists ............................. 1,562,091 438,386
Patent ..................................... 61,748 61,748
Covenant Not to Compete .................... 200,000 0
Re-Registration Costs ...................... 329,279 165,658
--------- ---------
Total ................................ 2,217,618 740,292
Less: Accumulated Amortization ............. 261,523 116,785
--------- ---------
Net Balance .......................... 1,956,095 623,507
========= =========
</TABLE>
Amortization expense of these intangibles for 1996, 1995 and
1994 was $154,738, $57,641 and $31,721, respectively.
B) Other Assets:
Other assets consist primarily of the funded portion of the
non-qualified supplemental retirement agreement referred to in Note 8.
C) Covenant Not to Compete:
The Company, at December 31, 1996, entered into a covenant not
to compete with a retiring officer of the Company. The terms of the covenant are
monthly payments of $4,166 for a period of 60 months beginning January 1997. The
amount recorded for the covenant of $200,000 is the present value of the monthly
payments at a 9.5% discount factor. The five year maturity of the related
obligation is $34,050, $35,776, $39,326, $43,229, and $47,619 in 1997, 1998,
1999, 2000 and 2001, respectively.
<PAGE>
NOTE 5 - LONG-TERM DEBT & CREDIT AGREEMENTS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Bank term loan payable at an annual
rate of $700,000 in 1997 and
$600,000 per year thereafter plus
interest at the effective fixed
LIBOR Rate, maturity at April 1,
2000. The loan is secured by the
accounts receivable, inventory,
equipment and all personal property
of the Company. Certain provisions
of the agreement limit the payment
of dividends, require maintenance
of certain financial ratios, limit
future borrowings and impose
certain other conditions as
contained in the agreement.
2,100,000 3,082,000
Capitalized lease payable in
monthly installments of $1,313
including interest at 10.5%. The
lease terminates in June 1999 and
is secured by the equipment to
which it pertains.
34,519 45,993
--------- ---------
Total 2,134,519 3,127,993
========= =========
</TABLE>
As of December 31, 1996, long-term debt matures as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 712,737
1998 614,140
1999 607,642
2000 200,000
-----------
2,134,519
===========
</TABLE>
The Company has a $2,000,000 short-term bank line of credit at
prime, of which there was no outstanding balance on December 31, 1996 and 1995.
The line of credit expires on June 30, 1997 and is secured by a blanket lien on
the Company's assets. Additionally, at December 31, 1995, the Company financed
certain of its insurance premiums on a short-term basis at 6.92% interest. The
outstanding balances at December 31, 1996 and 1995 were $-0- and $353,768,
respectively.
<PAGE>
NOTE 6 - INCOME TAXES
The Company provides for income taxes based on earnings
reported for financial statement |purposes. The components of the provision for
income taxes for 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
Per
Per Tax Financial
Returns Deferred Statements
---------- ---------- ----------
<S> <C> <C> <C>
1996
Federal ..................... 1,098,705 (186,459) 912,246
Research Tax Credit ......... (22,511) 0 (22,511)
---------- ---------- ----------
1,076,194 (186,459) 889,735
State ....................... 122,427 13,476 135,903
Investment Tax Credit ....... (35,303) 0 (35,303)
---------- ---------- ----------
87,124 13,476 100,600
Total Income Taxes .......... 1,163,318 (172,983) 990,335
========== ========== ==========
<CAPTION>
Per
Per Tax Financial
Returns Deferred Statements
---------- ---------- ----------
<S> <C> <C> <C>
1995
Federal ..................... 760,381 41,608 801,989
Research Tax Credit ......... (17,240) 0 (17,240)
-------- -------- --------
743,141 41,608 784,749
State ....................... 83,949 38,639 122,588
Investment Tax Credit ....... (40,423) (24,333) (64,756)
-------- -------- --------
43,526 14,306 57,832
Total Income Taxes .......... 786,667 55,914 842,581
======== ======== ========
</TABLE>
<PAGE>
NOTE 6 - INCOME TAXES (Cont'd)
<TABLE>
<CAPTION>
Per
Per Tax Financial
Returns Deferred Statements
---------- ---------- ----------
<S> <C> <C> <C>
1994
Federal ..................... 331,633 101,436 433,069
Research Tax Credit ......... (34,572) 0 (34,572)
-------- -------- --------
297,061 101,436 398,497
State ....................... 49,600 (6,482) 43,118
Investment Tax Credit ....... (11,425) 0 (11,425)
-------- -------- --------
38,175 (6,482) 31,693
Total Income Taxes .......... 335,236 94,954 430,190
======== ======== ========
</TABLE>
The tax effects of temporary differences that gave rise to
deferred income tax assets and liabilities at December 31, 1996, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Depreciation ................... 646,134 720,062 601,810
Amortization ................... (21,192) (4,008) (527)
Inventory Valuation ............ (118,209) (121,416) (71,153)
Deferred Compensation .......... (57,606) (39,009) (30,415)
Self-Insurance ................. (8,204) 0 0
Post Retirement Benefits ....... (19,535) 0 0
Non-Employee Stock Options ..... (38,742) 0 0
-------- -------- --------
Net Deferred Income Taxes ...... 382,646 555,629 499,715
======== ======== ========
</TABLE>
<PAGE>
NOTE 6 - INCOME TAXES (Cont'd)
Deferred income tax provisions resulting from temporary
differences between accounting for financial statement purposes and accounting
for tax purposes were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Depreciation ................... (73,928) 118,252 94,720
Amortization ................... (17,184) (3,481) (527)
Inventory Valuation ............ 3,207 (50,263) (29,314)
Deferred Compensation .......... (18,597) (8,594) (2,169)
Alternative Minimum Tax
Credit ................... 0 0 32,244
Self-Insurance ................. (8,204) 0 0
Post Retirement Benefits ....... (19,535) 0 0
Non-Employee Stock Options ..... (38,742) 0 0
-------- -------- --------
Tax Effects of Temporary
Differences .............. (172,983) 55,914 94,954
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate and
the effective tax rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Rate ....................... 34.0% 34.0% 34.0%
State Income Taxes, net of
Federal Benefit ................ 2.3 1.6 1.7
Research Tax Credit .................. (0.8) (0.7) (2.7)
Foreign Sales Corporation
Tax Benefit .................... (0.8) (0.8) (1.3)
Life Insurance, net .................. 0.2 0.3 1.0
Meals & Entertainment
Disallowance ................... 0.5 0.4 1.0
Directors' Stock Options ............. (1.5) 0.0 0.0
Other ................................ 0.0 (0.1) 0.0
---- ---- ----
Effective Tax Rate ................... 33.9% 34.7% 33.7%
==== ==== ====
</TABLE>
<PAGE>
NOTE 7 - STOCK OPTIONS AND WARRANTS
In 1994 the Company updated its incentive stock option plans
which provide for the granting of incentive stock options, as defined under
current tax laws, to officers and key employees. The stock options are
exercisable at a price equal to the market value on the date of grant.
Participants are eligible to exercise 20% after 1 year, 60% after 2 years and
100% after 3 years subsequent to the date of grant. For the purpose of the
plans, 187,500 shares of common stock were reserved for future grant. During
1996, the Company extended the expiration period from five years to ten years
subsequent to the date of grant.
A summary of incentive stock option plan transactions for
1996, 1995 and 1994 under this plan is as follows:
<TABLE>
<CAPTION>
# of Weighted Average
1996 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 99,795 5.73
Granted ....................................... 24,000 8.53
Exercised ..................................... (10,854) 4.45
Terminated or Expired ......................... (14,454) 5.55
Outstanding at End of Year .................... 98,487 5.26
Exercisable at End of Year .................... 46,437 5.02
<CAPTION>
# of Weighted Average
1995 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 99,126 4.66
Granted ....................................... 22,125 9.38
Exercised ..................................... (17,345) 2.47
Terminated or Expired ......................... (4,111) 4.68
Outstanding at End of Year .................... 99,795 5.73
Exercisable at End of Year .................... 43,435 4.41
<CAPTION>
# of Weighted Average
1994 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 81,444 3.25
Granted ....................................... 42,304 5.30
Exercised ..................................... (21,158) 3.10
Terminated or Expired ......................... (3,464) 4.29
Outstanding at End of Year .................... 99,126 4.66
Exercisable at End of Year .................... 42,208 2.76
</TABLE>
<PAGE>
NOTE 7 - STOCK OPTIONS AND WARRANTS (Cont'd)
At December 31, 1996, the Company applies APB Opinion 25 and
related interpetations in accounting for its employee stock option plan.
Accordingly, no compensation cost has been recognized for its employee stock
option plan. Had compensation cost for the Company's employee stock option plan
been determined based on the fair value at the date of grant under this plan
consistent with the method of FASB Statement No. 123, the Company's net income
and earnings per share would not have been materially affected.
The value of each option grant is estimated on the date of
grant using the Binomial option-pricing model with the following weighted
average assumptions : dividend yield of .37% (.0037), expected volatility of 14
percent, risk free interest rate of 6 percent, and expected plan life of 10
years.
During the initial phase-in period, the effects of applying
FASB Statement No. 123 are not likely to be representative of the effects on pro
forma disclosures of net income and earnings per share, for example, because
options vest over several years and additional awards are generally made each
year.
In 1994, the Company updated its non-statutory stock option
plan for its directors. The Company has reserved 52,500 shares of common stock
for issuance under this plan. During 1996, the Company extended the expiration
period from five years to ten years after the date of grant. Additionally, the
Company has entered into an agreement with a consultant to receive stock options
in lieu of payment for services rendered to the Company. A total of 22,500
shares of stock have been reserved under this plan. A summary of these stock
options for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
# of Weighted Average
1996 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 58,107 4.85
Granted ....................................... 10,472 8.50
Terminated or Exercised ....................... 0 0.00
Outstanding at End of Year .................... 68,579 5.85
Exercisable at End of Year .................... 66,079 5.84
<CAPTION>
# of Weighted Average
1995 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 47,457 4.34
Granted ....................................... 15,422 7.54
Terminated or Exercised ....................... (4,772) 2.13
Outstanding at End of Year .................... 58,107 5.37
Exercisable at End of Year .................... 53,107 5.31
</TABLE>
<PAGE>
NOTE 7 - STOCK OPTIONS AND WARRANTS (Cont'd)
<TABLE>
<CAPTION>
# of Weighted Average
1994 Shares Price Per Share
- ---- ------ ---------------
<S> <C> <C>
Outstanding at Beginning of Year .............. 46,321 3.19
Granted ....................................... 12,253 6.00
Terminated or Exercised ....................... (11,117) 1.50
Outstanding at End of Year .................... 47,457 4.34
Exercisable at End of Year .................... 47,457 4.34
</TABLE>
The adoption of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" has resulted in a charge to
1996 income and corresponding increase to paid-in capital of approximately
$105,000 for options granted in 1996 to non-employees in exchange for their
services.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution pension plan which
covers substantially all employees. Pension plan contributions for 1996, 1995
and 1994 were $282,657, $137,556 and $111,741, respectively. In 1996, the
Company took a one-time charge to earnings of $164,764 in order to convert the
accounting for the pension plan to the accrual basis.
The Company also has a 401(k) savings plan which covers
substantially all employees. 401(k) savings plan contributions for 1996, 1995
and 1994 were $82,899, $64,515 and $49,265, respectively.
The Company has a non-qualified supplemental insurance program
for key employees. The Company has purchased life insurance on the lives of the
participants and is the sole owner and beneficiary of the policies. The plan
provides for deferred compensation payments to key employees over 10 years for
the cash value of the policy at the time of retirement or payments over 10 years
of the face value of the policy in case of death. Premiums of $24,456, $31,831
and $38,368 were paid in 1996, 1995 and 1994, respectively. Cash values were
$196,982, $205,362 and $199,234 at December 31, 1996, 1995 and 1994,
respectively. Amounts due participants at December 31, 1996, 1995 and 1994 under
this plan are $68,441, $59,695 and $45,842, respectively.
The Company has a non-qualified supplemental retirement
agreement ("Top Hat" plan) which permits the President of the Company to defer a
portion of his compensation. The cumulative deferred compensation and interest
distributable after retirement or termination at December 31, 1996, 1995 and
1994 was $63,034, $50,398 and $37,962, respectively. The expense attributable to
this agreement for the years ended December 31, 1996, 1995, and 1994 was
$12,724, $12,436 and $11,114, respectively.
NOTE 9 - EXPORT SALES
Export sales for 1996, 1995 and 1994 were $2,989,726,
$3,092,579 and $2,365,985, respectively.
<PAGE>
NOTE 10 - LEASES
The Company leases most of its vehicles and office equipment
under non-cancellable operating leases which expire at various times through
2003.
Future minimum rental commitments at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 272,210
1998 211,486
1999 193,438
2000 144,051
2001 87,354
Thereafter 48,254
---------
956,793
=========
</TABLE>
Rental expense for operating leases was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Minimum rentals ................ 179,596 166,614 190,870
Contingent rentals ............. 41,359 36,412 28,564
------- ------- -------
Total .................... 220,955 203,026 219,434
======= ======= =======
</TABLE>
Contingent rentals on trucking equipment are generally
calculated at a standard rate per mile. Base and contingent rentals on trucking
equipment may be adjusted annually for fluctuations in the consumer price index.
Generally, management expects that leases will be replaced upon expiration by
other leases in the normal course of business.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is involved in remedial and voluntary clean up
expenditures associated with environmental matters. The Company believes it has
provided for all of the foreseeable expected clean up costs at December 31,
1996. Although it is very difficult to estimate the ultimate aggregate cost to
the Company of environmental clean up, management believes the potential impact
of compliance with environmental protection laws will not have a material
adverse effect on its future financial condition or results of operations.
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES (con't)
On June 16, 1994, the Company purchased certain tangible
assets for one of its packaged specialty ingredients. The terms of the agreement
were $1,500,000 at closing for the purchase of these assets. As detailed in the
agreement as amended, the Company will also pay contingent amounts to compensate
the seller for the right to use the seller's customer list and for other
services to be provided from the seller. The amount payable to the seller is
based on the profits derived from the sale of the specialty packaged ingredient.
Any amounts allocated to the customer list will be amortized on a straight-line
basis over the remaining life of the customer list. The agreement terminates in
June 2004.
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 1990 requiring the
re-registration of this product and all other products which are used as
pesticides. The Company, in conjunction with one other company, has been
conducting testing under the direction of the Environmental Protection Agency
(EPA). Re-registration is a negotiated process between the two companies seeking
re-registration and the EPA. A series of additional tests are being conducted at
mutually approved laboratories to fill data gaps resulting from the
negotiations. The test results and EPA's review thereof are expected during
1997. The Company's management believes it will be successful in obtaining
re-registration for the product as it has met EPA's requirements thus far.
Additionally, the product is used as a sterilant with no known substitute.
Management believes absence of availability of this product could not be
tolerated by the medical industry due to the resultant infection potential if
the product were unavailable.
NOTE 12 - STOCKHOLDERS' EQUITY
The Company issued a 3 for 2 stock split, effected in the form
of a stock dividend, to shareholders of record on September 9, 1994. Balances at
December 31, 1994 reflect the split with an increase to common stock and
decrease to paid-in capital of $68,671. Cash payments in lieu of fractional
shares of $582 were also charged to paid-in capital. Stock option and per share
data have been retroactively adjusted to reflect the stock split.
The rights of preferred shares are not yet specified and will
be authorized by the Board of Directors prior to issuance.
NOTE 13- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income Taxes 1,034,088 896,073 344,153
Interest 266,011 342,135 240,558
</TABLE>
<PAGE>
Non-cash investing and financing activities:
During 1996, the Company recorded the acquisition of a
Covenant Not to Compete in exchange for its obligation to pay an individual
$200,000. Also, the Company charged earnings and correspondingly increased its
paid-in capital for the services of non-employees in exchange for stock options
valued at the date of grant at $105,885.
The Company acquired certain computer equipment in 1994 by
assuming a capitalized lease of $61,106.
NOTE 14 - OTHER MATTERS
In December 1995, the Company formalized plans to end its
relationship with a customer whose products were custom manufactured at its
Green Pond, South Carolina facility. The plans, implemented in early 1996,
called for reductions in the workforce, return of the customer's raw materials
and equipment, and preparation for the sale of certain fixed assets used in the
custom manufacturing process. The amount charged to operations in 1995 for the
costs associated with this transaction were $159,000.
During 1996, the Company has negotiated with prospective
buyers for the fixed assets formerly used in the custom manufacturing process.
Based upon the offers received, management has reduced the carrying values of
these fixed assets from approximately $970,000 to their expected net realizable
value of $540,000. The resulting loss of approximately $430,000 is included in
depreciation expense for the year ended December 31,1996.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
SUPPLEMENTAL SCHEDULES
FOR YEARS ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SCHEDULE 1 - COST OF PRODUCTS SOLD:
Inventory-Beginning (Notes 1 & 3) ........... 1,872,838 1,301,874 1,000,207
Purchases-Materials ......................... 8,770,990 9,643,469 7,513,658
Production Salaries & Related
Payroll Taxes .......................... 1,197,542 1,197,115 897,314
Plant Overhead (Schedule 2) ................. 5,091,771 4,723,465 3,858,690
---------- ---------- ----------
Total .................................. 16,933,141 16,865,923 13,269,869
Inventory-Ending ............................ 1,862,100 1,872,838 1,301,874
---------- ---------- ----------
Total Cost of Products Sold ............ 15,071,041 14,993,085 11,967,995
========== ========== ==========
SCHEDULE 2 - PLANT OVERHEAD:
Shipping & Receiving Salaries &
Related Payroll Taxes .................. 58,234 102,068 106,925
Quality Control Salaries & Related
Payroll Taxes .......................... 158,068 238,431 103,097
Delivery Salaries & Related Payroll Taxes ... 403,237 378,422 305,295
Utilities ................................... 186,077 200,054 190,878
Repairs & Maintenance-Buildings &
Grounds ................................ 105,264 89,914 67,114
Repairs & Maintenance-Equipment ............. 169,632 121,210 79,524
Maintenance Salaries & Related
Payroll Taxes .......................... 259,443 246,202 208,954
Plant & Quality Control Supplies ............ 338,404 313,756 217,001
Environmental Expenses ...................... 25,270 196,939 258,581
Insurance ................................... 790,032 674,131 651,731
Freight Out ................................. 1,310,969 1,384,310 984,332
Real Estate Taxes ........................... 101,617 65,599 74,859
Depreciation - Delivery Vehicles ............ 19,393 19,393 22,347
Depreciation-Buildings & Equipment (Note 14) 1,166,131 693,036 588,052
---------- ---------- ----------
Total Plant Overhead ................... 5,091,771 4,723,465 3,858,690
========== ========== ==========
SCHEDULE 3 - SELLING EXPENSES:
Selling Salaries & Related Payroll Taxes .... 904,818 849,627 852,032
Outside Selling Services .................... 14,502 16,693 59
Sales Consulting ............................ 365,579 334,744 191,547
Royalties ................................... 21,000 21,000 21,460
Advertising ................................. 114,513 119,237 88,226
Travel & Promotion .......................... 777,766 596,455 398,818
Auto Expenses ............................... 157,036 154,982 142,589
---------- ---------- ----------
Total Selling Expenses ................. 2,355,214 2,092,738 1,694,731
========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SCHEDULE 4 - RESEARCH & DEVELOPMENT EXPENSES:
Research Salaries & Related
Payroll Taxes .......................... 655,640 550,774 476,587
Outside Research Expenses ................... 123,661 151,572 94,201
Supplies .................................... 52,222 42,372 32,921
---------- ---------- ----------
Total Research & Development
Expenses ........................... 831,523 744,718 603,709
========== ========== ==========
SCHEDULE 5 - GENERAL & ADMINISTRATIVE EXPENSES:
Management & Office Salaries &
Related Payroll Taxes .................. 2,238,053 2,030,926 1,486,450
Telephone ................................... 184,539 169,196 121,693
Health Insurance ............................ 339,726 326,367 256,752
Retirement Plan Contribution (Note 8) ...... 365,555 202,071 161,006
Supplemental Insurance Program
(Note 8)................................ 24,456 31,831 38,368
Professional Fees and Litigation
Settlement Costs (Note 11) ............ 123,383 147,511 183,587
Office Expenses ............................. 441,357 269,575 155,153
Consulting Services ......................... 202,697 126,383 32,967
Capital Stock Expenses ...................... 82,053 88,063 47,800
Employee Recruiting & Moving Expenses ....... 211,918 275,278 52,878
Miscellaneous Expenses ...................... 551,063 354,018 246,844
Depreciation & Amortization ................. 228,623 122,319 90,159
---------- ---------- ----------
Total General & Administrative
Expenses ........................... 4,993,423 4,143,538 2,873,657
========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 88,706
<SECURITIES> 0
<RECEIVABLES> 2,969,869
<ALLOWANCES> 0
<INVENTORY> 1,862,100
<CURRENT-ASSETS> 5,591,466
<PP&E> 14,728,908
<DEPRECIATION> 7,199,800
<TOTAL-ASSETS> 15,140,203
<CURRENT-LIABILITIES> 3,537,560
<BONDS> 0
0
0
<COMMON> 210,202
<OTHER-SE> 9,176,746
<TOTAL-LIABILITY-AND-EQUITY> 15,140,203
<SALES> 26,370,995
<TOTAL-REVENUES> 26,370,995
<CGS> 15,071,041
<TOTAL-COSTS> 15,071,041
<OTHER-EXPENSES> 8,128,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,450
<INCOME-PRETAX> 2,917,138
<INCOME-TAX> 990,335
<INCOME-CONTINUING> 1,926,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,926,803
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
