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 - -------------------------------------------------------------------------------- (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.
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 ------------------ ----------------- <S> <C> <C> 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 ======= ======= </TABLE> See accompanying notes to consolidated financial statements.
<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 ------------- ------------ <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.
<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.
<TABLE> <CAPTION> BALCHEM CORPORATION Consolidated Statements of Cash Flows (In thousands) Unaudited -------------------- Nine Months Ended September 30, 1998 1997 ------- ------- <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.
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>
<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.
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.
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.
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
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
effect that SFAS 131 will have on segment reporting disclosures. These statements address presentation and disclosure matters and will have no impact on the Company's financial position or results of operations. As required by SFAS 131 and SFAS 132, compliance with the respective reporting disclosures will be reflected in the Company's 1998 Form 10-K. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Adoption of this SOP is not expected to have a material effect on the Company's financial position or results of operations. Also in April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities." This SOP requires companies to expense certain costs such as pre-operating expenses and organizational costs associated with the Company's start-up activities, and is effective for fiscal years beginning after December 15, 1998. Adoption of this SOP is not expected to have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations in the year of adoption.
Part II Other Information: Item 4. Submission of Matters to a Vote of Security Holders 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.
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