FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
- --------------------------------------------------------------------------------
(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
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 November 9, 1998, Registrant had 4,874,810 shares of its Common Stock,
$.06 2/3 par value, outstanding.
<PAGE>
Part I Financial Information
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
---------------------------------------
Assets September 30, 1998 December 31, 1997
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Current assets:
Cash and cash equivalents ................................ $ 937 $ 736
Trade accounts receivable, less allowance for doubtful
accounts ........................................... 3,206 3,061
Inventories .............................................. 2,854 2,507
Prepaid expenses ......................................... 134 513
Income taxes receivable .................................. 214
Deferred income taxes .................................... 291 305
Other current assets ..................................... 165
------- -------
Total current assets .................................. 7,636 7,287
------- -------
Property, plant and equipment, net of accumulated depreciation 8,007 7,345
Intangible assets, net of accumulated amortization ........... 6,409 2,925
Other assets ................................................. 14 36
------- -------
Total assets .................................... $22,066 $17,593
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
----------------------------
Liabilities and Stockholders' Equity September 30, December 31,
1998 1997
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<S> <C> <C>
Current liabilities: ...................................................
Accounts payable and accrued expenses ............................. $ 2,261 $ 2,657
Dividends payable ................................................. 160
Current portion of long-term debt ................................ 1,200 700
Current portion of other long-term obligations .................... 47 50
Total current liabilities ...................................... 3,508 3,567
Long-term debt ......................................................... 2,750 800
Deferred income taxes .................................................. 417 481
Deferred compensation ................................................. 140 143
Other long-term obligations ............................................ 229 266
3,536 1,690
Total liabilities .......................................... 7,044 5,257
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 4,868,831 shares at
September 30, 1998 and 4,793,163 shares at December 31,1997 .. 325 320
Additional paid-in capital ......................................... 2,646 2,144
Retained earnings .................................................. 12,051 9,872
Total stockholders' equity ...................................... 15,022 12,336
Commitments and contingencies
Total liabilities & stockholders' equity ................... $22,066 $17,593
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
Unaudited Unaudited
---------------------- ---------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ........................................... $ 6,583 $ 7,170 $ 21,536 $ 21,313
Cost of sales ....................................... 4,236 4,137 13,068 12,106
-------- -------- -------- --------
Gross margin ........................................ 2,347 3,033 8,468 9,207
Operating expenses:
Selling expenses ............................... 536 726 1,942 2,284
Research and development expenses .............. 199 259 723 800
General and administrative expenses ............ 645 824 2,326 2,439
-------- -------- -------- --------
Total operating expenses ................... 1,380 1,809 4,991 5,523
-------- -------- -------- --------
Income from operations .............................. 967 1,224 3,477 3,684
Other expenses - net:
Interest expense ............................... 66 31 104 115
Other (income) expense - net ................... (4) (1) 15 (6)
-------- -------- -------- --------
Total other expenses - net ................. 62 30 119 109
-------- -------- -------- --------
Earnings before income taxes ........................ 905 1,194 3,358 3,575
Income taxes ................................... 310 426 1,179 1,228
-------- -------- -------- --------
Net earnings ........................................ $ 595 $ 768 $ 2,179 $ 2,347
======== ======== ======== ========
Basic net earnings per common share (notes 3 and 4) . $ 0.12 $ 0.16 $ 0.45 $ 0.50
======== ======== ======== ========
Diluted net earnings per common share (notes 3 and 4) $ 0.12 $ 0.16 $ 0.44 $ 0.49
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
--------------------
Nine Months Ended
September 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................... $ 2,179 $ 2,347
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ..................................... 1,163 806
Non-employee stock option compensation ............................ 41 99
Employee stock compensation ....................................... 138
Provision for deferred income taxes ............................... (50) (56)
Non-cash compensation ............................................. 91
Loss on sale of equipment ......................................... 19 4
Changes in assets and liabilities:
Accounts receivable .......................................... (145) (58)
Inventories .................................................. (347) (426)
Prepaid expenses and other ................................... 544 331
Accounts payable and accrued expenses ........................ (415) 82
Income taxes receivable / payable ............................ (214) (132)
Deferred compensation payable ................................ (2) 62
Other long-term obligations .................................. (30) (30)
------- -------
Net cash flows provided by operating activities ......... 2,972 3,029
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment .................... 15 538
Capital expenditures ................................................... (1,328) (932)
Investments in other assets ........................................... (4,016) (945)
------- -------
Net cash flows used in investing activities ............. (5,329) (1,339)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt ........................................... 3,000
Principal payments on long-term debt ................................... (550) (600)
Stock options and warrants exercised ................................... 278 24
Dividends paid ......................................................... (160) (142)
Other financing activities ............................................. (10) (9)
------- -------
Net cash flows provided by (used in) financing activities 2,558 (727)
------- -------
Change in cash and cash equivalents ......................................... 201 963
Cash and cash equivalents beginning of year ................................. 736 89
------- -------
Cash and cash equivalents end of period ..................................... $ 937 $ 1,052
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 nine months ended September 30, 1998 are not
necessarily indicative of the operating results expected for the full year.
NOTE 2 - INVENTORIES
Inventories at September 30, 1998 and December 31, 1997 consist of the
following:
September 30, December 31,
1998 1997
------ ------
Raw Materials ........... $1,136 $ 836
Finished Goods .......... 1,718 1,671
$2,854 $2,507
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:
<TABLE>
<CAPTION>
Number of
Income Shares Per Share
Three months ended September 30, 1998 (Numerator) (Denominator) Amount
- ------------------------------------- ----------- ------------- ------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding ......................................... $ 595 4,866,077 $ .12
Effect of dilutive securities - stock options .............. 55,083
---------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options ........... $ 595 4,921,160 $ .12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of
Income Shares Per Share
Three months ended September 30, 1997 (Numerator) (Denominator) Amount
- ------------------------------------- ----------- ------------- ------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding ............................................ $ 768 4,735,641 $ .16
Effect of dilutive securities - stock options ................. 78,851
---------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options ................ $ 768 4,814,492 $ .16
<CAPTION>
Number of
Income Shares Per Share
Nine months ended September 30, 1998 (Numerator) (Denominator) Amount
- ------------------------------------ ----------- ------------- ------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding ............................................. $ 2,179 4,830,318 $ .45
Effect of dilutive securities - stock options .................. 84,078
---------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options ................ $ 2,179 4,914,396 $ .44
<CAPTION>
Number of
Income Shares Per Share
Nine months ended September 30, 1997 (Numerator) (Denominator) Amount
- ------------------------------------ ----------- ------------- ------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding .......................................... $ 2,347 4,732,244 $ .50
Effect of dilutive securities - stock options ............... 56,645
---------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options ............ $ 2,347 4,788,889 $ .49
</TABLE>
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.
<PAGE>
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 through 2004.
<PAGE>
Management's Discussion and Analysis
(All dollar amounts in thousands)
Results of Operations:
Three months ended September 30, 1998 as compared with three months ended
September 30, 1997
Net sales for the three months ended September 30, 1998 were $6,583 as compared
to $7,170 for the three months ended September 30, 1997, a decrease of 8% or
$587. The decrease in sales revenue was primarily the result of no sales to the
Aquaculture industry due to the Thailand economic issues and continued softness
in the food encapsulation business from the second quarter.
Cost of sales increased 7 percentage points as a percent of sales for the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997. The increase is primarily attributable to the mix of products sold
during the three months ended September 30, 1998, unfavorable production
variances, due to the lower sales volume described above and additional
amortization expense associated with the early buy-out of the specialty
ingredients business as more fully described in Liquidity and Capital Resources
below.
Operating expenses for the three months ended September 30, 1998 decreased to
$1,380 from $1,809 for the three months ended September 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 September 30, 1998 was $967 as
compared to $1,224 for the three months ended September 30, 1997, a decrease of
21% or $257.
Net earnings were $595 for the three months ended September 30, 1998 as compared
to $768 for the three months ended September 30, 1997, a decrease of 23%, or
$173. Interest expense for the three months ended September 30, 1998 totaled $66
as compared to $31 for the three months ended September 30, 1997. The increase
in interest expense is the result of a higher average debt balance for the three
months ended September 30, 1998.
Nine months ended September 30, 1998 as compared with nine months ended
September 30, 1997
Net sales for the nine months ended September 30, 1998 were $21,536 as compared
to $21,313 for the nine months ended September 30, 1997, an increase of 1% or
$223. 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 4 percentage points as a percent of sales for the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997. The increase is primarily attributable to higher costs related to the
mix of products sold during the nine months ended September 30, 1998 and
additional amortization expense associated with the early buy-out of the
specialty ingredients business as more fully described in Liquidity and Capital
Resources below.
<PAGE>
Operating expenses for the nine months ended September 30, 1998 decreased to
$4,991 from $5,523 for the nine months ended September 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 nine months ended September 30, 1998 was $3,477
as compared to $3,684 for the nine months ended September 30, 1997, a decrease
of 6% or $207.
Net earnings were $2,179 for the nine months ended September 30, 1998 as
compared to $2,347 for the nine months ended September 30, 1997. Interest
expense for the nine months ended September 30, 1998 totaled $104 as compared to
$115 for the nine months ended September 30, 1997. The decrease in interest
expense is the result of a lower average debt balance for the nine months ended
September 30, 1998.
Liquidity and Capital Resources
Cash flow from operating activities provided approximately $2,972 for the nine
months ended September 30, 1998 as compared to $3,029 for the nine months ended
September 30, 1997. Over the last three years, operating cash flow has totaled
approximately $10,134. 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 $1,328 for the nine months ended September 30, 1998.
The Company has undertaken a plant expansion for its encapsulation product line.
The increased capacity should be on-line early 1999. Capital expenditures are
projected to be approximately $1,400 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 nine months ended
September 30, 1998 in connection with this 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 September 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 but unutilized credit available to it by its principal
bank at September 30, 1998 (which funds are being reserved for future working
capital needs and undefined business opportunities).
Year 2000 Issue
The Company has conducted a comprehensive review of its operations to identify
those systems that could be affected by the "Year 2000" issue. Our review
included information systems, mainframe and personal computers, and the
Company's products and product research and development facilities. The Year
2000 issue is the result of computer programs being written using two digits
<PAGE>
rather than four to define the applicable year. Any of the Company's computer
programs or any hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, production difficulties, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Management presently believes that the Company has substantially completed its
Year 2000 planning utilizing both internal and external resources. The Company
has implemented a new computer network throughout the organization and is
currently implementing a Year 2000 compliant version of its business software.
It is anticipated that all Year 2000 compliance efforts will be completed by May
31, 1999, allowing adequate time for testing. Management also plans to review
its external relationships to address potential year 2000 issues arising from
relationships with significant customers, suppliers and service providers.
Contingency plans are being considered and will be in place, as required, by the
third quarter of 1999 in the event that the corporation is at risk in regard to
suppliers, customers or its own internal hardware and software. Contingency
plans will include, but will not be limited to, consideration of alternative
sources of supply, customer communication plans, and plant and business response
plans.
The cost of the Company's Year 2000 project is expected to range between $75 and
$125 thousand dollars. Approximately $50 thousand of this amount was incurred as
of September 30, 1998. The remainder of the estimated cost of the project is
expected to be incurred in the fourth quarter of 1998 and throughout 1999. All
costs of the Year 2000 project have been expensed as incurred.
Private Securities Reform Act of 1995 - Forward Looking Statements Disclosure
This Report may contain forward-looking statements. For purposes of this Report,
a "Forward Looking Statement", within the meaning of the Securities Reform Act
of 1995, is any statement concerning the remainder of the year 1998 and beyond.
The actions and performance of the Company and its subsidiaries could deviate
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors which might cause deviations from the forward looking
statements include, without limitations, the following: 1) changes in the laws
or regulations affecting the operations of the Company or any of its
subsidiaries; 2) changes in the business tactics or strategies of the Company or
any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary
operations, or divestiture of any segment of the existing operations of the
Company or any of its subsidiaries; 4) changing market forces or litigation
which necessitate, in Management's judgment, changes in plans, strategy or
tactics of the Company or its subsidiaries and 5) adverse weather conditions,
fluctuations in the investment markets, changes in the retail marketplace or
fluctuations in interest rates, any one of which might materially affect the
operations of the Company and/or its subsidiaries.
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
<PAGE>
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.
<PAGE>
Part II Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
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 September 30,
1998.
<PAGE>
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
---------------------
Dino A. Rossi, President,
Chief Executive Officer
Date: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 937
<SECURITIES> 0
<RECEIVABLES> 3,206
<ALLOWANCES> 0
<INVENTORY> 2,854
<CURRENT-ASSETS> 7,636
<PP&E> 13,831
<DEPRECIATION> 5,824
<TOTAL-ASSETS> 22,066
<CURRENT-LIABILITIES> 3,508
<BONDS> 0
0
0
<COMMON> 325
<OTHER-SE> 14,697
<TOTAL-LIABILITY-AND-EQUITY> 15,022
<SALES> 21,536
<TOTAL-REVENUES> 21,536
<CGS> 13,068
<TOTAL-COSTS> 18,059
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 3,358
<INCOME-TAX> 1,179
<INCOME-CONTINUING> 2,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,179
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.44
</TABLE>
