FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15 (d) of
[ X ] The Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 175 Slate Hill, New York 10973
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(Address of principal executive offices) (Zip Code)
914-355-5300
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Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 10, 1999, the registrant had 4,827,205 shares of its Common
Stock, $.06 2/3 par value, outstanding.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
---------
Assets September 30, December 31,
1999 1998
------- -------
Current assets:
<S> <C> <C>
Cash and cash equivalents ..................................... $ 2,160 $ 1,348
Trade accounts receivable, less allowance for doubtful accounts 3,594 3,283
Inventories ................................................... 2,551 2,875
Prepaid expenses .............................................. 223 476
Income taxes receivable ....................................... 70 198
Deferred income taxes ......................................... 214 219
------- -------
Total current assets ...................................... 8,812 8,399
------- -------
Property, plant and equipment, net of accumulated depreciation 7,840 8,103
Intangible assets, net of accumulated amortization ............ 5,377 6,139
Other assets .................................................. 1 7
------- -------
Total assets ............................................ $22,030 $22,648
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
Unaudited
---------
Liabilities and Stockholders' Equity September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 1,220 $ 1,478
Accrued compensation and other benefits ..................................... 704 601
Dividends payable ........................................................... 160
Current portion of long-term debt .......................................... 600 1,200
Current portion of other long-term obligations .............................. 36 43
-------- --------
Total current liabilities ................................................ 2,560 3,482
-------- --------
Long-term debt ................................................................. 1,150 2,550
Deferred income taxes .......................................................... 413 525
Deferred compensation ......................................................... 112 135
Other long-term obligations .................................................... 135 181
-------- --------
1,810 3,391
-------- --------
-------- --------
Total liabilities ........................................................ 4,370 6,873
-------- --------
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; 4,897,596 shares issued and 4,837,296 shares outstanding at
September 30, 1999 and 4,875,914 shares issued and outstanding at
December 31, 1998 ........................................................... 326 325
Additional paid-in capital ..................................................... 2,910 2,783
Retained earnings .............................................................. 14,833 12,667
Treasury stock, at cost: 60,300 shares at September 30, 1999 ................... (409)
-------- --------
Total stockholders' equity ............................................... 17,660 15,775
-------- --------
Total liabilities & stockholders' equity ................................. $ 22,030 $ 22,648
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Unaudited Unaudited
--------- ---------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .................................... $ 7,229 $ 6,583 $ 21,545 $ 21,536
Cost of sales ................................ 4,235 4,236 12,771 13,068
-------- -------- -------- --------
Gross margin ................................. 2,994 2,347 8,774 8,468
Operating expenses:
Selling expenses .......................... 869 536 2,160 1,942
Research and development expenses ......... 343 199 992 723
General and administrative expenses ....... 698 645 2,130 2,326
-------- -------- -------- --------
Total operating expenses ..................... 1,910 1,380 5,282 4,991
Income from operations ....................... 1,084 967 3,492 3,477
Other expenses - net:
Interest expense - net .................... 21 66 94 104
Other (income)/expense - net .............. -- (4) (3) 15
-------- -------- -------- --------
Total other expenses - net ................... 21 62 91 119
Earnings before income taxes ................. 1,063 905 3,401 3,358
Income taxes ................................. 402 310 1,235 1,179
-------- -------- -------- --------
Net earnings ................................. $ 661 $ 595 $ 2,166 $ 2,179
======== ======== ======== ========
Basic net earnings per common share (note 3) . $ 0.14 $ 0.12 $ 0.44 $ 0.45
======== ======== ======== ========
Diluted net earnings per common share (note 3) $ 0.14 $ 0.12 $ 0.44 $ 0.44
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 2,166 $ 2,179
Adjustments to reconcile net incom
to net cash provided by operating activities:
Depreciation and amortization ............................ 1,524 1,163
Non-employee stock compensation .......................... 60 41
Employee non-cash compensation ........................... 122 229
Deferred income tax benefit .............................. (107) (50)
Loss on sale of equipment ................................ 19
Changes in assets and liabilities:
Accounts receivable .................................. (311) (145)
Inventories .......................................... 324 (347)
Prepaid expenses ..................................... 253 544
Accounts payable and accrued expenses ................ (208) (415)
Income taxes receivable .............................. 128 (214)
Deferred compensation payable ........................ (23) (2)
------- -------
Net cash flows provided by operating activities ... 3,928 3,002
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ....... 15
Capital expenditures ...................................... (429) (1,328)
Investments in intangibles and other assets ............... (71) (4,016)
------- -------
Net cash flows used in investing activities ....... (500) (5,329)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt .............................. 3,000
Principal payments on long-term debt ...................... (2,000) (550)
Stock options and warrants exercised ...................... 6 278
Dividends paid ............................................ (160) (160)
Treasury stock at cost .................................... (409)
Other financing activities ................................ (53) (40)
------- -------
Net cash flows (used for) provided by financing
activities ........................................ (2,616) 2,528
------- -------
Increase in cash and cash equivalents ........................ 812 201
Cash and cash equivalents beginning of year .................. 1,348 736
------- -------
Cash and cash equivalents end of period ...................... $ 2,160 $ 937
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 1998 Annual Report on Form 10-K 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 condensed 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 condensed 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, 1999 are not necessarily indicative of the operating results
expected for the full year.
Certain 1998 amounts have been reclassified to conform to the current period
presentation.
NOTE 2 - INVENTORIES
Inventories at September 30, 1999 and December 31, 1998 consist of the
following:
September 30, December 31,
1999 1998
----------- ------------
Raw Materials $ 1,000 $ 1,025
Finished Goods 1,551 $ 1,850
----------- ------------
$ 2,551 $ 2,875
=========== ============
NOTE 3 - NET EARNINGS PER SHARE
Net earnings per share are calculated in accordance with Statement of Financial
Accounting Standards 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:
<PAGE>
<TABLE>
<CAPTION>
Number of
Income Shares Per Share
Three months ended September 30, 1999 (Numerator) (Denominator) Amount
- ------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding ....................................... $ 661 4,845,164 $ .14
Effect of dilutive securities - stock options ............ 29,973
---------- --------- -------
Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options ........... $ 661 4,875,137 $ .14
========== ========= =======
<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
========== ========= =======
<CAPTION>
Number of
Income Shares
Nine months ended September 30, 1999 (Numerator) (Denominator) Per Share
- ------------------------------------ ----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS - Net earnings and weighted average common
shares outstanding $ 2,166 4,872,204 $ .44
Effect of dilutive securities - stock options 24,219
---------- --------- -------
Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options $ 2,166 4,896,423 $ .44
========== ========= =======
</TABLE>
<PAGE>
<TABLE>
<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
========== ========= =======
</TABLE>
NOTE 4 - SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer different
products and services. Presently, the Company has two reportable segments,
specialty products and encapsulated products.
Business Segment Net Revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Specialty Products $ 4,954 $ 4,676 $ 14,793 $ 14,757
Encapsulated Products 2,275 1,907 6,752 6,779
------------ ------------ ------------ ------------
Total $ 7,229 $ 6,583 $ 21,545 $ 21,536
============ ============ ============ ============
</TABLE>
Business Segment Profit (Loss):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Specialty Products $ 1,349 $ 1,203 $ 4,083 $ 3,661
Encapsulated Products (265) (236) (591) (184)
Interest expense and other
income (expense) (21) (62) (91) (119)
Earnings before income taxes
$ 1,063 $ 905 $ 3,401 $ 3,358
============ ============ ============ ============
</TABLE>
<PAGE>
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the nine months ended September 30, 1999 and 1998 for income
taxes and interest is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Income taxes $ 1,172 $ 1,298
Interest $ 134 $ 120
----------------- ------------------
</TABLE>
NOTE 6 - COMMON STOCK
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. Since inception of its repurchase authorization,
through September 30, 1999, the Company has repurchased 60,300 shares at an
average cost of $6.79 per share.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The actions and performance of the Company could differ
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors which might cause differences from the forward-looking
statements include those referred to or identified in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 and other
factors which may be identified elsewhere in this Report. Reference should be
made to such factors and all forward-looking statements are qualified in their
entirety by the above cautionary statements.
Balchem Corporation is engaged in the development, manufacture and
marketing of specialty performance ingredients and products for the food, feed
and medical sterilization industries. The Company operates in two business
segments, the micro-encapsulation of performance ingredients (the "encapsulated
products" segment) and the repackaging and marketing of high quality specialty
gases (the "specialty products" segment).
(All dollar amounts in thousands)
Results of Operations:
Three months ended September 30, 1999 as compared with three months ended
September 30, 1998
Net sales for the three months ended September 30, 1999 were $7,229 as
compared to $6,583 for the three months ended September 30, 1998, an increase of
$646 or 10%. Net sales for the specialty products segment were $4,954 for the
three months ended September 30, 1999 as compared to $4,676 for the three months
ended September 30, 1998, an increase of $278 or 6%. This increase was
attributable primarily to increased volumes sold of the Company's ethylene oxide
product. Net sales for the encapsulated products segment were $2,275 for the
three months ended September 30, 1999 as compared to $1,907 for the three months
ended September 30, 1998 an increase of $368 or 19%. This increase was
principally the result of increased volumes sold in the domestic and
international food markets.
Cost of sales as a percent of sales for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998
showed improvement of six percentage points. Margins improved in the
encapsulated products segment, a result of increased volumes of products
produced and sold during the three months ended September 30, 1999. Margins for
the specialty products segment were favorably affected by increased volumes sold
and improved production efficiencies of blended ethylene oxide products, a
result of the Company's decision to internally blend rather than use third party
blenders.
Operating expenses for the three months ended September 30, 1999
increased to $1,910 from $1,380 for the three months ended September 30, 1998,
an increase of $530 or 38%. The increase in operating expenses was primarily the
result of increased advertising expense and increased payroll expense in the
area of selling and applications research and development for the encapsulated
<PAGE>
products segment and increased selling and R&D consulting expenses for the
animal nutrition project. During the three months ended September 30, 1999 and
the three months ended September 30, 1998, the Company spent $343 and $199,
respectively, on Company-sponsored research and development programs
substantially all of which pertained to the Company's encapsulated products
segment. In particular, the Company continues to incur considerable development
expenses in the gathering of data for its encapsulated choline chloride product
for animal nutrition from university studies, commercial field trials and
veterinarians, to accelerate the marketing effort for this product.
Income from operations for the three months ended September 30, 1999
was $1,084 as compared to $967 for the three months ended September 30, 1998.
Income from operations for the specialty products segment for the three months
ended September 30, 1999 was $1,349 as compared to $1,203 for the three months
ended September 30, 1998. Income from operations for the encapsulated products
segment was a $265 loss for the three months ended September 30, 1999 as
compared to a $236 loss for the three months ended September 30, 1998.
Net interest expense for the three months ended September 30, 1999
totaled $21 as compared to $66 for the three months ended September 30, 1998.
The decrease in interest expense was the result of a lower average debt balance
for the three months ended September 30, 1999.
The Company's effective income tax rate for the three months ended
September 30, 1999 increased as compared to the three months ended September 30,
1998 due to higher state income tax expenses.
Net earnings were $661 for the three months ended September 30, 1999 as
compared to $595 for the three months ended September 30, 1998.
Nine months ended September 30, 1999 as compared with nine months ended
September 30, 1998
Net sales for the nine months ended September 30, 1999 were $21,545 as
compared to $21,536 for the nine months ended September 30, 1998, an increase of
$9. Net sales for the specialty products segment were $14,793 for the nine
months ended September 30, 1999 as compared to $14,757 for the nine months ended
September 30, 1998, an increase of $36. Net sales for the encapsulated products
segment were $6,752 for the nine months ended September 30, 1999 as compared to
$6,779 for the nine months ended September 30, 1998 a decrease of $27. This
decrease was primarily the result of decreased sales in the international food
market and was partially offset by increased sales in the domestic food markets.
Cost of sales as a percent of sales for the nine months ended September
30, 1999 as compared to the nine months ended September 30, 1998 decreased one
percentage point. Margins in the encapsulated products division increased
slightly for the nine months ended September 30, 1999 as compared to September
30, 1998, a result of lower costs and improved production efficiencies. Margins
for the specialty products segment were favorably affected by increased volumes
sold of ethylene oxide and improved production efficiencies of blended ethylene
oxide products, a result of the Company's decision to internally blend rather
than use third party blenders. These margin improvements were partially offset
by declines in volumes produced and sold of the Company's methyl chloride
product.
<PAGE>
Operating expenses for the nine months ended September 30, 1999
increased to $5,282 from $4,991 for the nine months ended September 30, 1998, an
increase of $291 or 6%. The increase in operating expenses was primarily the
result of increased payroll expense in the area of selling and applications
research and development and increased R&D consulting expenses in the
encapsulated products segment. These increases were partially offset by a
decrease in consulting fees in the specialty products segment and other payroll
related expenses. During the nine months ended September 30, 1999 and the nine
months ended September 30, 1998, the Company spent $992 and $723, respectively,
on Company-sponsored research and development programs substantially all of
which pertained to the Company's encapsulated products segment. In particular,
the Company continues to incur considerable development expenses in the
gathering of data for its encapsulated choline chloride product for animal
nutrition from university studies, commercial field trials and veterinarians, to
accelerate the marketing effort for this product.
Income from operations for the nine months ended September 30, 1999 was
$3,492 as compared to $3,477 for the nine months ended September 30, 1998.
Income from operations for the specialty products segment for the nine months
ended September 30, 1999 was $4,083 as compared to $3,661 for the nine months
ended September 30, 1998. Income from operations for the encapsulated products
segment for the nine months ended September 30, 1999 was a $591 loss as compared
to a loss of $184 for the nine months ended September 30, 1998.
Net interest expense for the nine months ended September 30, 1999
totaled $94 as compared to $104 for the nine months ended September 30, 1998.
The decrease in net interest expense was the result of a higher average cash
balance for the nine months ended September 30, 1999 resulting in higher
interest income.
The Company's effective income tax rate for the nine months ended
September 30, 1999 increased as compared to the nine months ended September 30,
1998 due to higher state income tax expenses.
Net earnings were $2,166 for the nine months ended September 30, 1999
as compared to $2,179 for the nine months ended September 30, 1998.
Liquidity and Capital Resources
Cash flow from operating activities provided approximately $3,928 for
the nine months ended September 30, 1999 as compared to $3,002 for the nine
months ended September 30, 1998. Improvements in cash flow for this period of
time were due primarily to increased earnings before depreciation and
amortization and reductions in inventory balances.
Capital expenditures were $429 for the nine months ended September 30,
1999. Capital expenditures are projected to be approximately $700 for all of
calendar year 1999.
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. As of September 30, 1999, 60,300 shares were
repurchased under the program at a total cost of $409. The Company intends to
acquire shares from time to time at prevailing market prices if and to the
extent it deems it advisable to do so based among other matters on its
assessment of corporate cash flow and market conditions.
<PAGE>
On June 16, 1994, the Company purchased certain tangible and intangible
assets for one of its packaged specialty products for $1,500 in cash. Under the
agreement, the Company was also required to pay contingent amounts to compensate
the seller for the purchase of the seller's customer list in accordance with a
formula based on profits derived from sales of the packaged specialty product.
On June 25, 1998, the Company elected to exercise the early payment option under
the agreement resulting in a final Company payment of $3,700 to the seller. The
Company has no further purchase price obligation under the agreement. In 1998,
the Company capitalized approximately $3,982 in connection with this
acquisition.
In connection with the exercise of the early payment option described
above, the Company borrowed an additional $3,000 during 1998. Long-term debt,
including the current portion, totaled $1,750 at September 30, 1999.
The Company knows of no current or pending demands on or commitments
for its liquid assets that will materially affect its liquidity. The Company
currently has approval for a $2,000 line of credit from its principal bank.
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. The
review covered information systems, mainframe and personal computers, the
Company's product research and development facilities and its manufacturing
operations. The Year 2000 issue is the general term used to describe various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery, as a result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or any hardware that has
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, or an inability to process transactions, send
invoices, or engage in similar normal business activities.
Management presently believes that the Company has completed its Year
2000 planning for its internal systems and facilities utilizing both internal
and external resources. The Company has implemented a new computer network
throughout the organization and has also implemented a Year 2000 compliant
version of its core business software. The Company has conducted Year 2000
testing on the majority of applications identified during its planning phase.
Testing of the remaining systems should be completed by the end of November,
1999. The Company's information systems include sales, production,
administrative and financial applications. In the event one of these systems was
to fail, the Company's ability to capture, schedule and fulfill customer demands
might be impaired.
The cost of the Company's Year 2000 project is expected to be less than
$100. Approximately $80 of this amount was incurred through September 30, 1999.
Any remaining costs are expected to be incurred during the fourth quarter of
1999. The foregoing costs do not include Company internal costs, which are
principally the payroll costs for those employees working on Year 2000 related
matters. Such employees are otherwise full-time employees of the Company who
have not been hired specifically for Year 2000 related matters and, accordingly,
such costs have not been tracked. Costs of the Year 2000 project have been
expensed as incurred.
<PAGE>
The Company is currently reviewing its external relationships to
address potential Year 2000 issues arising from relationships with significant
suppliers, service providers and customers. The Company has mailed Year 2000
questionnaires to significant suppliers and service providers and is reviewing
responses to these questionnaires. Based on the responses received to date from
the suppliers and service providers, the Company does not anticipate any
material disruption to its operations as a result of Year 2000 compliance
failure. The Company has also contacted several significant customers regarding
such customers' readiness. Based on their responses, the Company does not
anticipate any material disruptions in its relationships with such customers as
a result of their Year 2000 compliance issues.
To the extent practicable, contingency plans have, or will be put in
place during 1999 in the event that the Company determines that it is at
significant risk in regard to suppliers, customers or its own internal hardware
and software. Contingency plans may include, but will not be limited to,
stockpiling raw materials, increasing finished goods inventory levels,
consideration of alternative sources of supply, customer communication plans,
manually performing certain functions and plant and business response plans.
In general, the Company's plans are intended to provide a means of
managing risk, but cannot eliminate the potential for disruption due to third
party failure. The Company believes that due to the widespread nature of the
potential Year 2000 issues, its contingency planning is an ongoing process,
which will require further consideration, as the Company obtains additional
information. Although not currently anticipated, the Company believes that the
most reasonably likely worst case scenario resulting from Year 2000 problems
would be a slowdown or temporary cessation of manufacturing operations at one or
both of the Company's facilities due to one or more of the Company's specialty
product vendors' inability to supply material to the Company in a timely manner
and/or the unavailability of regularly used transportation sources for both
incoming and outgoing shipments of the Company's raw materials and finished
products. Manufacturing and shipping operations could also be adversely impacted
by a disruption in utility services. The Company has specific plans to have
increased quantities of raw material inventories for its specialty products
segment on hand at year-end. The Company has not yet developed any other
specific contingency plans in the event of a Year 2000 failure caused by a
supplier or third party, but would attempt to do so if a specific problem is
identified through the program described above. In some cases, particularly with
respect to its utility vendors, alternative suppliers may not be available and
effective contingency plans may not be feasible.
The failure to correct a material Year 2000 problem could, of course,
result in an interruption in, or failure of, certain normal business activities
or operations. Such failures could, and in the scenario described in the
preceding paragraph would, materially and adversely affect the Company. Due to
the general uncertainty inherent in the Year 2000 problem, resulting largely
from the uncertainty of the Year 2000 readiness of the Company's suppliers,
other third-party providers and customers, the Company is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
adverse impact on the Company.
Impact of Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, as amended, "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 now effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. 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>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, the Company is exposed to market
risks arising from adverse changes in interest rates. Market risk is defined for
these purposes as the potential change in the fair value of debt instruments
resulting from an adverse movement in interest rates. As of September 30, 1999,
the Company's only borrowings were under a bank term loan, which bears interest
at LIBOR plus 1%. A 100 basis point increase in interest rates, applied to the
Company's borrowings at September 30, 1999, would result in an increase in
annual interest expense and a corresponding reduction in cash flow of
approximately $18. The Company's short-term working capital borrowings have
historically borne interest based on the prime rate. The Company believes that
its exposure to market risk relating to interest rate risk is not material.
The Company has no derivative financial instruments or derivative
commodity instruments, nor does the Company generally have any financial
instruments entered into for trading or hedging purposes. Foreign sales are
generally billed in U.S. dollars. The Company believes that its business
operations are not exposed in any material respect to market risk relating to
foreign currency exchange risk or commodity price risk.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1999.
<PAGE>
SIGNATURES
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 and
Principal Financial Officer
Date: November 12, 1999
-----------------------
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