UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-K
-------------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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 13-257-8432
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 600, New Hampton, NY 10958
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 326-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange 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
Indicate by 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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes |X| No |_|
The aggregate market value of the Common Stock issued and outstanding and held
by nonaffiliates of the Registrant, based upon the closing price for the Common
Stock on the American Stock Exchange on June 30, 2004 was approximately
$136,803,425. For purposes of this calculation, shares of the Registrant held by
directors and officers of the Registrant and under the Registrant's
401(k)/profit sharing plan have been excluded.
The number of shares outstanding of the Registrant's common stock was 7,649,955
as of March 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's proxy statement for its 2005 Annual
Meeting of Stockholders (the "2005 Proxy Statement") are incorporated by
reference in Part III of this Report.
Part I
Item 1. Business
General:
Balchem Corporation (including, unless the context otherwise requires, BCP
Ingredients, "Balchem", or the "Company"), incorporated in the State of Maryland
in 1967, is engaged in the development, manufacture and marketing of specialty
performance ingredients and products for the food, feed and medical
sterilization industries. The Company has three segments, specialty products,
encapsulated / nutritional products and the unencapsulated feed supplements
segment also referred to in this report as BCP Ingredients ("BCP" or "BCP
Ingredients"). Products relating to choline animal feed for non-ruminant animals
are primarily reported in the unencapsulated feed supplements segment. Human
choline nutrient products and encapsulated products are reported in the
encapsulated / nutritional products segment.
References in this Report to the Company mean Balchem and/or its
subsidiary as the context requires.
The Company sells its products through its own sales force, independent
distributors and sales agents. Financial information concerning the Company's
business and business segments appears in the Consolidated Financial Statements
included under Item 8 herein, which information is incorporated herein by
reference.
Encapsulated / Nutritional Products
- -----------------------------------
The encapsulated / nutritional products segment predominantly encapsulates
performance ingredients for use throughout the food and animal health industries
to enhance nutritional fortification, processing, prepared foods and shelf-life
improvement. Major end product applications are baked goods, refrigerated and
frozen dough systems, processed meats, seasoning blends and confections. Human
grade choline nutrient products are also marketed through this industry segment
for wellness applications. Choline is recognized to play a key role in the
structural integrity of cell membranes, processing dietary fat, reproductive
development and neural functions, such as memory and muscle function.
In the animal health industries, Balchem markets REASHURE(TM) Choline, an
encapsulated choline product that boosts health and milk production in
transition and early lactation cows. Commercial sales are currently derived from
the dairy industry where REASHURE(TM) delivers nutrient supplements that survive
the rumen and are biologically available, providing required nutritional levels
to dairy cows during certain weeks preceding and following calving, commonly
referred to as the "transition period" of the animal. Also marketed in animal
health is NITROSHURE(TM), an encapsulated urea supplement for lactating dairy
cows. It is designed to create a slow-release nitrogen source for the rumen,
allowing for greater flexibility in feed rations for dairy nutritionists and
producers.
In 2004, this segment introduced several new products and product
applications that are being sold commercially for enhancement of nutritional
value, shelf-life and fortification in certain food and animal health markets.
The Company also has a research and development pipeline of several new products
and product applications for these markets in test production or test marketing
status.
Specialty Products
- ------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
1
Ethylene oxide, at the 100% level, is sold as a sterilant gas, primarily
for use in the health care industry. It is used to sterilize a wide range of
medical devices because of its versatility and effectiveness in treating hard or
soft surfaces, composites, metals, tubing and different types of plastics
without negatively impacting the performance or appearance of the device being
sterilized. The Company's 100% ethylene oxide product is distributed by the
Company in, uniquely designed, recyclable double-walled stainless steel drums to
assure compliance with safety, quality and environmental standards as outlined
by the U.S. Environmental Protection Agency (the "EPA") and the U.S. Department
of Transportation. The Company's inventory of these specially built drums, along
with the Company's three filling facilities, represent a significant capital
investment. Contract sterilizers, medical device manufacturers, and medical gas
distributors are the Company's principal customers for this product. As a
fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi,
and insects in spices and other seasoning materials. In addition, the Company
also sells single use canisters with 100% ethylene oxide for use in medical
device sterilization.
Due to consolidation of customer businesses in the contract sterilizer
industry, the Company has one Specialty Products customer, Sterigenics, which
accounted for approximately 11% and 10% of the Company's net sales in 2004 and
2003, respectively. This customer accounted for 10% and 12% of the Company's
accounts receivable, net balance at December 31, 2004 and 2003, respectively.
The loss of such customer could have a material adverse effect on the Company.
Two other products, propylene oxide and methyl chloride, are sold
principally to customers seeking smaller (as opposed to bulk) quantities whose
requirements include timely delivery and safe handling. Propylene oxide is used
for fumigation in spice treatment and in various chemical synthesis
applications. It is also utilized in manufacturing operations to make paints
more durable, and for manufacturing specialty starches and textile coatings.
Methyl chloride is used as a raw material in specialty herbicides, fertilizers
and pharmaceuticals, as well as in malt and wine preservers.
BCP Ingredients
- ---------------
The unencapsulated feed supplements segment is in the business of
manufacturing and supplying choline chloride, an essential nutrient for animal
health, predominantly to the poultry and swine industries. Choline, a vitamin
B-complex, plays a vital role in the metabolism of fat and the building and
maintaining of cell structures. Choline deficiency can result in, among other
symptoms, reduced growth and perosis in poultry, and fatty liver, kidney
necrosis and general poor health condition in swine. In addition, certain
derivatives of choline chloride are also manufactured and sold into industrial
applications. Choline chloride is manufactured and sold in both an aqueous and
dry form and is sold through the Company's own sales force, independent
distributors and sales agents.
Raw materials:
- --------------
The raw materials utilized by the Company in the manufacture of its
products are generally available from a number of commercial sources. The
Company is not experiencing any current difficulties in procuring such materials
and does not anticipate any such problems; however, the Company cannot assure
that will always be the case.
Patents/Licensing:
- ------------------
The Company currently holds a number of patents and uses certain
trade-names and trademarks. It also uses know-how, trade secrets, formulae, and
manufacturing techniques that assist in maintaining competitive positions of
certain of its products. Formulae and know-how are of particular importance in
the manufacture of a number of the Company's products. The Company believes that
certain of its patents, in the aggregate, are advantageous to its business.
However, it is believed that no single patent or related group of patents is
currently material to the Company as a whole and, accordingly, that the
expiration or
2
termination thereof would not materially affect its business. The Company
believes that its sales and competitive position are dependent primarily upon
the quality of its products, its technical sales efforts and market conditions,
rather than on any patent protection.
As discussed below under "Environmental Matters" the Company's ability to
sell ethylene oxide is dependent upon maintaining registration with the EPA as a
medical device sterilant and spice fumigant. In addition, certain of the
Company's encapsulated and choline products must meet state licensing
requirements prior to sales in certain states and foreign countries.
Seasonality:
- ------------
In general, the business of the Company's segments is not seasonal to any
material extent.
Backlog:
- --------
At December 31, 2004, the Company had a total backlog of $2,027,000
(including $807,000 for the encapsulated / nutritional products segment,
$812,000 for the specialty products segment and $408,000 for BCP Ingredients),
as compared to a total backlog of $1,881,000 at December 31, 2003 (including
$639,000 for the encapsulated / nutritional products segment, $891,000 for the
specialty products segment and $351,000 for the BCP Ingredients segment). It has
generally been the Company's policy and practice to maintain an inventory of
finished products or component materials for its segments to enable it to ship
products within a short time after receipt of a product order.
Competition:
- ------------
The Company's competitors include many large and small companies, some of
which have greater financial, research and development, production and other
resources than the Company. Competition in the encapsulation markets served by
the Company is based primarily on performance, customer support, quality,
service and price. The development of new and improved products is important to
the Company's success. This competitive environment requires substantial
investments in product and manufacturing process research and development. In
addition, the winning and retention of customer acceptance of the Company's
encapsulated products involve substantial expenditures for application testing
and sales efforts. The Company also engages various universities to assist in
research and provide independent third-party analysis. In the specialty products
business, the Company faces competition from alternative sterilizing
technologies and products. Competition in the animal feed markets served by the
Company is based primarily on service and price.
Research & Development:
- -----------------------
During the years ended December 31, 2004, 2003 and 2002, the Company
incurred research and development expense of approximately $1.8 million, $2.1
million and $1.9 million, respectively, on Company-sponsored research and
development for new products and improvements to existing products and
manufacturing processes, principally in the encapsulated / nutritional products
segment. During the year ended December 31, 2004, an average of 15 employees
were devoted full time to research and development activities. The Company has
historically funded its research and development programs with funds available
from current operations with the intent of recovering those costs from profits
derived from future sales of products resulting from, or enhanced by, the
research and development effort.
The Company prioritizes its product development activities in an effort to
allocate its resources to those product candidates that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and needs, status
of its proprietary rights, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market.
3
Capital Projects:
- -----------------
Capital expenditures were approximately $1.2 million for 2004. The capital
expenditures in 2003 of $2.3 million included construction costs associated with
the completion of a state-of-the-art canister filling operation at its Green
Pond, South Carolina plant site. This automated facility has been designed and
constructed to fill single use canisters with ethylene oxide for use in medical
device sterilization. Capital expenditures are projected to be approximately
$1.7 million for calendar year 2005.
Environmental / Regulatory Matters:
- -----------------------------------
The Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), as
amended, a health and safety statute, requires that certain products within the
Company's specialty products segment must be registered with the EPA because
they are considered pesticides. In order to obtain a registration, an applicant
typically must demonstrate through extensive test data that its product will not
cause unreasonable adverse effects on the environment. The Company holds an EPA
registration to permit it to sell ethylene oxide as a medical device sterilant
and spice fumigant. The Company is in the process of re-registering this product
use, complying with FIFRA re-registration requirements of this product and all
products that are used as pesticides. The Company, in conjunction with one other
company, has conducted the required testing under the direction of the EPA.
Testing has concluded and the EPA has stated that, due to a backlog of projects,
it cannot anticipate a date for completing the re-registration process for this
product at this time. The Company's management continues to believe it will be
successful in obtaining re-registration for this product as it has met the EPA's
requirements thus far. Additionally, the product is used as a sterilant with
certain qualities and no known, equally effective substitute. Management
believes absence of availability of this product could not be easily tolerated
by various medical device manufacturers and the health care industry due to the
resultant infection potential if the product were unavailable. The Company
intends to recover the cost of re-registration in the selling price of the
sterilant.
Under California's Proposition 65 (Safe Drinking Water and Toxic
Enforcement Act of 1986), 100% ethylene oxide, when used as a sterilant or
fumigant, is listed by the State of California as a carcinogen and reproductive
toxin. As a result, the Company is required to provide a prescribed 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.
The Company's Verona facility, while held by a prior owner, was designated
by the EPA as a Superfund site and placed on the National Priorities List in
1983, because of dioxin contamination on portions of the site. Remediation
conducted by the prior owner under the oversight of the EPA and the Missouri
Department of Natural Resources ("MDNR") included removal of dioxin contaminated
soil and equipment, capping of areas of residual contamination in four
relatively small areas of the site separate from the manufacturing facilities,
and the installation of wells to monitor groundwater and surface water
contamination for certain organic chemicals. No ground water or surface water
treatment was required. The Company believes that remediation of the site is
complete. In 1998, the EPA certified the work on the contaminated soils to be
complete. In February 2000, after the conclusion of two years of monitoring
groundwater and surface water, the former owner submitted a draft third party
risk assessment report to the EPA and MDNR recommending no further action. The
prior owner is awaiting the response of the EPA and MDNR to the draft risk
assessment.
While the Company must maintain the integrity of the capped areas in the
remediation areas on the site, the prior owner is responsible for completion of
any further Superfund remedy. The Company is indemnified by the sellers under
its May 2001 asset purchase agreement covering its acquisition of the Verona
facility for potential liabilities associated with the Superfund site and one of
the sellers, in turn, has the benefit of certain contractual indemnification by
the prior owner that implemented the above-described Superfund remedy.
4
In connection with normal operations at its plant facilities, the Company
is required to maintain environmental and other permits including those relating
to ethylene oxide operations.
The Company believes it is in compliance in all material respects with
federal, state, and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment. Such compliance includes the maintenance
of required permits under air pollution regulations and compliance with
requirements of the Occupational Safety and Health Administration. The cost of
such compliance has not had a material effect upon the results of operations or
financial condition of the Company. The New York State environmental regulatory
proceeding referred to in Item 3 below has been substantially completed.
Employees:
- ----------
As of March 1, 2005, the Company employed approximately 200 persons.
Approximately 50 employees at the Company's Verona, Missouri facility are
covered by a collective bargaining agreement which expires in 2007.
Certain Factors Affecting Future Operating Results:
- ---------------------------------------------------
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 Company can give no assurances that the expectations
reflected in forward-looking statements will prove correct and various factors
could cause results to differ materially from the Company's expectations.
Certain factors that might cause such a difference include, without limitation;
(1) changes in the laws or regulations affecting the operations of the Company;
(2) changes in the business tactics or strategies of the Company; (3)
acquisition(s) of assets or of new or complementary operations, or divestiture
of any segment of the existing operations of the Company; (4) changing market
forces or contingencies that necessitate, in management's judgment, changes in
plans, strategy or tactics of the Company; and (5) fluctuations in the
investment markets or interest rates, which might materially affect the
operations or financial condition of the Company, as well as the following
matters, and all forward-looking statements are qualified in their entirety by
these cautionary statements:
Competition. The Company faces competition in its markets from a number of
large and small companies, some of which have greater financial, research and
development, production and other resources than the Company. The Company's
competitive position is based principally on performance, quality, customer
support, service, breadth of product line, manufacturing or packaging technology
and the selling prices of its products. As in most industries, the Company's
competitors can be expected to improve the design and performance of their
products and to introduce new products with competitive price and performance
characteristics. There can be no assurance that the Company will have sufficient
resources to maintain its current competitive position or market share.
Environmental and Regulatory Matters. Pursuant to applicable environmental
and safety laws and regulations, the Company is required to obtain and maintain
certain governmental permits and approvals, including an EPA registration for
its ethylene oxide sterilant product. Permits and approvals may be subject to
revocation, modification or denial under certain circumstances. While the
Company believes it is in compliance in all material respects with environmental
laws, there can be no assurance that operations or activities of the Company
(including the status of compliance by the prior owner of the Verona facility
under Superfund remediation) will not result in administrative or private
actions, revocation of required permits or licenses, or fines, penalties or
damages, which could have an adverse effect on the Company. In addition, the
Company cannot predict the extent to which any legislation or regulation may
affect the market for the Company's products or its cost of doing business.
5
Raw Materials. The principal raw materials used by the Company in the
manufacture of its products can be subject to price fluctuations. While the
selling prices of the Company's products tend to increase or decrease over time
with the cost of raw materials, such changes may not occur simultaneously or to
the same degree. There can be no assurance that the Company will be able to pass
increases in raw material costs through to its customers in the form of price
increases. Increases in the price of raw materials, if not offset by product
price increases, could have an adverse impact upon the profitability of the
Company. In addition, the Company is not experiencing any current difficulties
in procuring such materials and does not anticipate any such problems. However,
the Company cannot assure that this will always be the case.
Reliance on Continued Operation and Sufficiency of Facilities and on
Unpatented Trade Secrets. The Company's revenues are dependent on the continued
operation of its manufacturing, packaging, and processing facilities. The
operation of the Company's facilities involves risks, including the breakdown,
failure, or substandard performance of equipment, power outages, the improper
installation, or operation of equipment, explosions, fires, natural disasters
and the need to comply with environmental and other directives of governmental
agencies. The occurrence of material operational problems, including but not
limited to the above events, may adversely affect the profitability of the
Company during the period of such operational difficulties. The Company's
competitive position is also dependent upon unpatented trade secrets. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information.
Risks Associated with Foreign Sales. For the year ended December 31, 2004,
approximately 8% of the Company's net sales consisted of sales outside the
United States, predominately to Europe, Japan and Mexico. Such sales are
generally denominated in U.S. Dollars at a specific price per unit. Changes in
the relative values of currencies take place from time to time and could in the
future adversely affect prices for the Company's products. In addition,
international sales are subject to other inherent risks, including possible
labor unrest, political instability and export duties, and quotas. There can be
no assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales.
Dependence on Key Personnel. The Company's operations are dependent on the
continued efforts of its senior executives. The loss of the services of certain
executives for an extended period of time could have a material adverse effect
on the Company.
Available Information:
- ----------------------
The Company's Internet website address is www.balchem.com. The Company
makes available through its website, free of charge, its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to such reports, as soon as reasonably practicable after they have
been electronically filed with the Securities and Exchange Commission. Such
reports are available via a link from the Investor Information page on the
Company's website to a list of the Company's reports on the Securities and
Exchange Commission's Edgar website.
Item 2. Properties
In February 2002, the Company entered into a ten (10) year lease for
approximately 20,000 square feet of office space in New Hampton, New York. The
office space is serving as the Company's general offices and as laboratory
facilities for the Company's encapsulated / nutritional products business.
Manufacturing facilities owned by the Company for its encapsulated
products segment and a blending, drumming and terminal facility for the
Company's ethylene oxide business, are presently housed in buildings located in
Slate Hill, New York. The Company owns a total of approximately 16 acres of land
on two parcels in this community.
6
The Company also owns a facility located on an approximately 24 acre
parcel of land in Green Pond, South Carolina. The site consists of a drumming
facility, a canister filling facility, a maintenance building and an office
building. The Company uses this site for processing products in its specialty
products segment.
The Verona, Missouri site, which is located on approximately 100 acres,
consists of manufacturing facilities relating to choline animal feed, human
choline nutrients, and a drumming facility for the Company's ethylene oxide
business, together with buildings utilized for warehousing such products. The
facility, while under prior ownership, was designated by the EPA as a Superfund
site as noted in the previous discussion under Item 1 "Environmental/Regulatory
Matters."
Item 3. Legal Proceedings
In 1982 the Company discovered and thereafter removed a number of buried
drums containing unidentified waste material from the Company's site in Slate
Hill, New York. The Company thereafter entered into a Consent Decree to evaluate
the drum site with the New York Department of Environmental Conservation
("NYDEC") and performed a Remedial Investigation/Feasibility Study that was
approved by NYDEC in February 1994. Based on NYDEC requirements, the Company
cleaned the area and removed additional soil from the drum burial site. The cost
for this clean-up and the related reports was approximately $164,000. Clean-up
was completed in 1996, but NYDEC required the Company to monitor the site
through 1999. The Company continues to be involved in discussions with NYDEC to
evaluate test results and determine what, if any, additional actions will be
required on the part of the Company to close out the remediation of this site.
Additional actions, if any, would likely require the Company to continue
monitoring the site. The cost of such monitoring has recently been less than
$5,000 per year.
Casey Liesse, et al., v. AGA AB, et al., Circuit Court of Cook County,
Illinois, Case No. 02 L 000498, was commenced in 2002 against over 80
defendants, among which is the Company. The action alleges that nineteen
individual plaintiffs were exposed to ethylene oxide and other chemicals used
for sterilizing or cleaning medical instruments during their employment at a
hospital in Harvey, Illinois. As a result of the alleged exposure, the
plaintiffs claim they have suffered various physical and psychological injuries.
During the time period plaintiffs suffered their alleged injuries, the Company
was in the business of repackaging and distributing ethylene oxide, among other
products. The Company never sold any product to the hospital but has been joined
due to the fact that it distributed ethylene oxide for medical device
sterilization to other companies that blend ethylene oxide for sales to the
hospital noted. The litigation is currently in the early stages of discovery and
various insurance companies have been notified of the claim. As a result, the
Company is unable to predict the outcome of this litigation.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these proceedings will not have a material effect on the Company's financial
position, results of operations or liquidity.
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 2004.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information.
On December 16, 2004, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock to be effected in the form of
a stock dividend to shareholders of record on December 30, 2004. Such stock
dividend was made on January 20, 2005. Accordingly, the stock split was
7
recognized by reclassifying 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.
The Company's common stock is traded on the American Stock Exchange under
the symbol BCP. The high and low closing prices for the common stock as recorded
in the American Stock Exchange Market Statistical Reports for 2004 and 2003, for
each quarterly period during the past two years, adjusted for the December 2004
three-for-two stock split (effected by means of a stock dividend) were as
follows:
================================================================================
Quarterly Period High Low
- --------------------------------------------------------------------------------
Ended March 31, 2004 $ 17.91 $ 15.00
Ended June 30, 2004 18.67 16.17
Ended September 30, 2004 20.00 17.94
Ended December 31, 2004 23.27 19.53
================================================================================
================================================================================
Quarterly Period High Low
- --------------------------------------------------------------------------------
Ended March 31, 2003 $ 16.87 $ 11.30
Ended June 30, 2003 15.90 11.40
Ended September 30, 2003 17.07 13.57
Ended December 31, 2003 15.67 12.50
================================================================================
(b) Record Holders.
As of March 1, 2005, the approximate number of holders of record of the
Company's common stock was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.06-2/3 par value 201*
*An unknown number of stockholders hold stock in street name. The total
number of beneficial owners of the Company's common stock is estimated to be
approximately 2,335.
(c) Dividends.
The Company declared cash dividends of $0.09 and $0.053 per share on its
common stock during its fiscal years ended December 31, 2004 and 2003,
respectively (after giving effect to the December 2004 three-for-two stock
split).
For information concerning prior stockholder approval of and other matters
relating to our equity incentive plans, see Item 12 in this annual report on
Form 10-K.
8
Item 6. Selected Financial Data
All dollar amounts are in thousands (other than per share amounts). Earnings per
share and dividend amounts have been adjusted for the December 2004
three-for-two stock split (effected by means of a stock dividend).
(In thousands, except per share data)
============================================================================================================
Year ended December 31, 2004(1) 2003(1) 2002(1) 2001(1) 2000
- ------------------------------------------------------------------------------------------------------------
Statement of Operations Data
- ----------------------------
Net sales $ 67,406 $ 61,875 $ 60,197 $ 46,142 $ 33,198
Earnings before income
tax expense 12,715 8,763 11,845 8,369 5,996
Income tax expense 4,689 3,125 4,429 3,259 2,267
Net earnings 8,026 5,638 7,416 5,110 3,729
Basic net earnings per
common share 1.07 .78 1.04 .73 .53
Diluted net earnings per
common share 1.03 .75 1.00 .70 .52
- ------------------------------------------------------------------------------------------------------------
============================================================================================================
At December 31, 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Balance Sheet Data
- ------------------
Total assets $ 60,405 $ 56,906 $ 53,298 $ 44,477 $ 23,222
Long-term debt -- 7,839 9,581 11,323 --
Other long-term
obligations 1,003 985 964 994 137
Total stockholders' equity 50,234 39,781 33,269 25,332 19,580
Dividends per common share $ .09 $ .053 $ .053 $ .043 $ .04
============================================================================================================
(1) The Data includes the operating results, cash flows, assets and
liabilities relating to the acquisition of certain assets and
product lines of DCV, Inc. and its affiliate DuCoa L.P. from
the date of acquisition (June 1, 2001) forward.
9
Item 7. 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 that might cause differences from the forward-looking
statements include those referred to or identified in Item 1 above. Reference
should be made to such factors and all forward-looking statements are qualified
in their entirety by the above cautionary statements.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company develops, manufactures, distributes and markets specialty
performance ingredients and products for the food, feed and medical
sterilization industries. The Company's reportable segments are strategic
businesses that offer products and services to different markets. The Company
presently has three reportable segments, specialty products, encapsulated /
nutritional products and BCP Ingredients.
Specialty Products Segment
--------------------------
The specialty products segment repackages and distributes the following
specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and
methyl chloride.
Ethylene oxide, at the 100% level, is sold as a chemical sterilant gas,
primarily for use in the health care industry and is used to sterilize medical
devices. Contract sterilizers, medical device manufacturers and medical gas
distributors are the Company's principal customers for this product. Blends of
ethylene oxide are sold as fumigants and are highly effective in killing
bacteria, fungi, and insects in spices and other seasoning type materials. In
addition, the Company also sells single use canisters with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride are
sold principally to customers seeking smaller (as opposed to bulk) quantities.
Management believes that future success in this segment is highly
dependent on the Company's ability to maintain its strong reputation for
excellent quality, safety and customer service.
Encapsulated / Nutritional Products
-----------------------------------
The encapsulated / nutritional products segment predominantly encapsulates
performance ingredients for use throughout the food and animal health industries
to enhance nutritional fortification, prepared food processing, packaging
applications and shelf-life improvement. Major end product applications are
baked goods, refrigerated and frozen dough systems, processed meats, seasoning
blends and confections.
Management believes this segment's key strengths are its proprietary
technology and end-product application capabilities. The success of the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing launches of new products in the U.S. and international food
market by the Company's customers and prospects. The Company, through its
innovative proprietary technology and applications expertise, continues to
develop new microencapsulation products designed to solve and respond to
customer problems and needs. Sales of our REASHURE(TM) and NITROSHURE(TM)
products for the animal nutrition and health industry are highly dependent on
dairy industry economics as well as the ability of the Company to leverage the
results of existing successful university research on the animal health benefits
of this product.
10
BCP Ingredients
---------------
BCP Ingredients manufactures and supplies choline chloride, an essential
nutrient for animal health, to the poultry and swine industries. In addition,
certain derivatives of choline chloride are also marketed into industrial
applications.
Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's ability to maintain its strong reputation for
excellent product quality and customer service. In addition, the Company must
continue to increase production efficiencies in order to maintain its low-cost
position to effectively compete for market share in a highly competitive
marketplace.
The Company sells products for all three segments through its own sales
force, independent distributors, and sales agents.
The following tables summarize consolidated net sales by segment and
business segment earnings (loss) for the three years ended December 31 (in
thousands):
Business Segment Net Sales:
==========================================================================================
2004 2003 2002
- ------------------------------------------------------------------------------------------
Specialty Products $ 28,767 $ 26,163 $ 22,028
Encapsulated/Nutritional Products 24,759 24,043 27,990
BCP Ingredients 13,880 11,669 10,179
- ------------------------------------------------------------------------------------------
Total $ 67,406 $ 61,875 $ 60,197
==========================================================================================
Business Segment Earnings (Loss):
==========================================================================================
2004 2003 2002
- ------------------------------------------------------------------------------------------
Specialty Products $ 10,693 $ 9,409 $ 7,240
Encapsulated/Nutritional Products 992 (962) 5,118
BCP Ingredients 1,112 568 (173)
Interest expense and other income (expense) (82) (252) (340)
- ------------------------------------------------------------------------------------------
Earnings before income taxes $ 12,715 $ 8,763 $ 11,845
==========================================================================================
Fiscal Year 2004 compared to Fiscal Year 2003
11
Net Sales
---------
Net sales for 2004 were $67,406 compared with $61,875 for 2003, an
increase of $5,531 or 8.9%. Net sales for the specialty products segment were
$28,767 for 2004 compared with $26,163 for 2003, an increase of $2,604 or 10%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device contractor sterilization and single use ethylene oxide canisters
for use in sterilization equipment. Net sales for the encapsulated / nutritional
products segment were $24,759 for 2004 compared with $24,043 for 2003, an
increase of $716 or 3%, led by volume improvements in the domestic food market
as well as increasing dairy industry acceptance of NITROSHURE (TM), which we
launched in the first quarter of 2004. Sales in this segment were negatively
affected by competitive pressures in the human food and nutrition markets which
resulted in lower average selling prices as compared to the prior year. Net
sales of $13,880 were realized for 2004 in the BCP Ingredients segment compared
with $11,669 for 2003, an increase of $2,211 or 18.9%. This increase was due
principally to increased volumes sold in the aqueous and dry choline product
lines, along with some very modest price increases in both product lines.
Gross Margin
------------
Gross margin for 2004 increased to $23,806 compared to $21,152 for 2003.
Gross margin as a percentage of net sales for 2004 was 35.3% compared to 34.2%
for 2003. Although sales volumes and gross margin have increased in 2004
compared to the comparable prior year period, our margins, in all three
segments, were unfavorably impacted by rising raw material and energy costs.
Gross margin percentage for the specialty products segment was 50.9% for 2004
compared to 50.1% for 2003. Margins for the specialty products segment improved
due principally to increased sales volume of packaged ethylene oxide and sales
of single use ethylene oxide canisters for use in medical device sterilization
and lower amortization expense. Gross margin percentage in the encapsulated /
nutritional products segment was 31.0% for 2004 compared to 29.6% for 2003.
Margins were favorably impacted by increased sales volume to the domestic food
market. Margins in the encapsulated / nutritional products segment in 2003 were
unfavorably affected by a designed reduction in inventory levels which
negatively impacted the Company's gross margins due to the resulting excess
plant manufacturing capacity. As noted above, during 2004, increased competition
in both the human food and nutrition markets resulted in lower average selling
prices which partially offset improvements in profit margins for this segment
during 2004. Margins for BCP Ingredients were favorably affected by increased
production volumes of choline chloride and choline derivative products in
addition to the modest price increases noted above.
Operating Expenses
------------------
Operating expenses for 2004 declined to $11,009 from $12,137 for 2003, a
decrease of $1,128 or 9.3%. Total operating expenses as a percentage of sales
were 16.3% for 2004 compared to 19.6% for 2003. This decrease was principally a
result of a decrease in selling, marketing and research expenses, a result of
the Company having made several organizational and business changes affecting
the encapsulated / nutritional products segment. Many of these changes were
effected late in the fourth quarter of 2003 in an effort to refocus our
commercial efforts, reduce operating expenses and improve the overall financial
performance of this segment. These decreases were partially offset by increased
charges for search fees associated with new hires and higher professional fees
including those required to comply with the Sarbanes-Oxley Act of 2002. During
2004 and 2003, the Company spent $1,752 and $2,083, respectively, on
Company-sponsored research and development programs, substantially all of which
pertained to the Company's encapsulated / nutritional products segment for both
food and animal health applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2004 were
$12,797 compared to $9,015 for 2003, reflecting a 42.0% increase year over year.
Other expenses (income)
-----------------------
12
Interest expense for 2004 totaled $219 compared to $272 for 2003, a
decrease of $53. This decrease is the result of lower average outstanding
borrowings during the period. Interest income for 2004 totaled $125 compared to
$20 for 2003. This increase is the result of higher average cash balances during
the period.
Income Tax Expense
------------------
The Company's effective tax rate in 2004 was 36.9% compared to a 35.7%
rate for 2003.
Net earnings
------------
As a result of the foregoing, net earnings were $8,026 for 2004 compared
with $5,638 for 2003, reflecting a 42.4% increase year over year..
Fiscal Year 2003 compared to Fiscal Year 2002
Net Sales
---------
Net sales for 2003 were $61,875 compared with $60,197 for 2002, an
increase of $1,678 or 2.8%. Net sales for the specialty products segment were
$26,163 for 2003 compared with $22,028 for 2002, an increase of $4,135 or 18.8%.
This increase was due principally to greater sales volumes (11.8% over the prior
comparable period) of ethylene oxide for medical device sterilization and single
use ethylene oxide canisters (new business for 2003) for sterilization use in
medical facilities. Propylene oxide volume also increased in 2003 by 20.3%. Net
sales for the encapsulated / nutritional products segment were $24,043 for 2003
compared with $27,990 for 2002, a decrease of $3,947 or 14.1%. Of particular
significance, the prior year comparable period included substantial sales,
approximately $2,200, to a single domestic food customer in support of a new
product launch. While this customer's end consumer product continues to be in
distribution, the Company did not realize any sales to this customer in 2003 due
to slower than expected market acceptance of the new end-product. The remaining
decrease was largely a result of unfavorable product mix and a volume decline in
sales to the domestic food market. The Company experienced conservative customer
purchasing patterns and delayed new product launches by customers in the United
States. Net sales of $11,669 were realized for 2003 in the BCP Ingredients
(unencapsulated feed supplements) segment, which markets choline additives for
the poultry and swine industries as well as industrial choline derivative
products, compared with $10,179 for 2002, an increase of $1,490 or 14.6%. The
increase was primarily a result of increased volumes sold (14.4% over the prior
comparable period) in the choline chloride and specialty derivative markets.
Gross Margin
------------
Gross margin percentage for 2003 was 34.2% compared to 38.7% for 2002.
Margins for the specialty products segment were favorably affected by increased
production volumes of the Company's products utilizing ethylene oxide. Margins
in the encapsulated / nutritional products segment were unfavorably affected by
the decline in sales volume as described above. These lower sales levels,
coupled with a designed reduction in inventory levels in this segment,
negatively impacted the Company's gross margins due to the resulting excess
plant manufacturing capacity. In addition, increased competition in both the
Domestic and International food markets during the fourth quarter resulted in
lower volumes sold and lower average selling prices which contributed to the
erosion in profit margins for this segment. Margins for BCP Ingredients were
favorably affected by increased production volumes of choline chloride and
specialty derivative products. The decision to reduce inventory levels while
maintaining prior levels of plant manufacturing capacity in the encapsulated /
nutritional products segment, generated unfavorable manufacturing variances.
However, such decision contributed greatly toward an improved cash balance at
December 31, 2003. Increases in employee medical claims under our self-insurance
program, as well as
13
increases in the Company's plant and other insurance premiums due to unfavorable
insurance marketplace conditions, had a negative impact on margins for all
segments.
Operating Expenses
------------------
Operating expenses for 2003 increased to $12,137 from $11,125 for 2002, an
increase of $1,012 or 9.1%. Total operating expenses as a percentage of sales
were 19.6% for 2003 compared to 18.5% for 2002. Increases in general insurance
and medical costs as described above, and advertising costs for the encapsulated
/ nutritional products segment, were largely responsible for the increase in
operating expenses. In addition, operating expenses for 2003 include a charge of
approximately $400, resulting from the Company making organizational changes in
the encapsulated/nutritional products segment. These personnel changes were
effected late in the fourth quarter of 2003 in an effort to refocus our
commercial efforts, reduce operating expenses and improve the overall financial
performance of the encapsulated / nutritional products segment. During 2003 and
2002, the Company spent $2,083 and $1,907, respectively, on Company-sponsored
research and development programs, substantially all of which pertained to the
Company's encapsulated / nutritional products segment for both food and animal
feed applications.
Earnings From Operations
------------------------
As a result of the foregoing, earnings from operations for 2003 were
$9,015 compared to $12,185 for 2002. Earnings from operations for the specialty
products segment for 2003 were $9,409 compared to $7,240 for 2002. Loss from
operations for the encapsulated / nutritional products segment for 2003 was $962
compared to earnings of $5,118 for 2002. Earnings from the unencapsulated feed
supplements segment for 2003 were $568 compared to a loss of $173 for 2002.
Other expenses (income)
-----------------------
Interest expense for 2003 totaled $272 compared to $389 for 2002, a
decrease of $117. This decrease is the result of lower average outstanding
borrowings during the period combined with lower average interest rates.
Income Tax Expense
------------------
The Company's effective tax rate for 2003 was 35.7% compared to 37.4% in
2002 primarily due to a favorable shift in the mix of taxable income to lower
state tax rate jurisdictions.
Net earnings
------------
As a result of the foregoing, net earnings were $5,638 for 2003 compared
with $7,416 for 2002.
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Contractual Obligations
-----------------------
The Company's contractual obligations and commitments principally include
obligations associated with future minimum noncancelable operating lease
obligations (including the headquarters office space entered into in 2002).
These aggregate commitments are as follows:
==============================================
Year
- ----------------------------------------------
2005 492
2006 425
2007 372
2008 324
2009 422
Thereafter 51
- ----------------------------------------------
Total minimum lease
payments $ 2,086
==============================================
14
The Company knows of no current or pending demands on or commitments for
its liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements and necessary capital investments. The
Company is actively pursuing acquisition candidates. While at the present time
it has no agreements or understandings to enter into any such transactions, the
Company could seek bank loans or access to financial markets to fund such
acquisitions, its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.
Cash
----
Cash and cash equivalents increased to $12,734 at December 31, 2004 from
$9,239 at December 31, 2003. The $3,495 increase resulted primarily from an
increase in net cash provided by operating activities of $12,145 offset
partially by net cash used in investing activities of $1,229 and cash used in
financing activities of $7,421. Working capital amounted to $23,505 at December
31, 2004 as compared to $17,555 at December 31, 2003, an increase of $5,950.
Operating Activities
--------------------
Cash flows from operating activities provided $12,145 for 2004 as compared
with $11,153 for 2003. The increase in cash flows from operating activities was
due primarily to increases in net income, customer deposits, accounts payable,
accrued expenses, and deferred income taxes. The foregoing was partially offset
by an increase in accounts receivable, inventory, and prepaid expense and a
decrease in amortization expense. The increase in prepaid expense is primarily
the result of the timing of payments related to the Company's insurance program.
Investing Activities
--------------------
Capital expenditures were approximately $1,200 for 2004. The capital
expenditures in 2003 of $2,270 included construction costs associated with the
completion of the canister filling operation at its Green Pond, South Carolina
plant site. This automated facility has been designed and constructed to fill
single use canisters with ethylene oxide for use in medical device
sterilization. Capital expenditures are projected to be approximately $1,700 for
calendar year 2005. The overall effect of the foregoing was that cash flows used
in investing activities were $1,229 in 2004 and $2,314 in 2003.
Financing Activities
--------------------
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. In June 2004, the board of directors authorized
an extension to the stock repurchase program for up to an additional 600,000
shares through June 30, 2005. As of December 31, 2004, 514,974 shares had been
repurchased
15
under the program at a total cost of $3,179 of which all shares have been issued
by the Company under employee benefit plans and for the exercise of stock
options. 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 factors on its assessment of corporate cash flow and market conditions.
There was no debt outstanding at December 31, 2004. On June 1, 2001, the
Company and its principal bank entered into a Loan Agreement (the "Loan
Agreement") providing for a term loan of $13,500 (the "Term Loan"), the proceeds
of which were used to fund the acquisition of certain assets of DCV, Inc. and
its affiliate Ducoa L.P, as described in Note 4 to the consolidated financial
statements. During the quarter ended December 31, 2004, the Company pre-paid
$7,839, the remaining balance of its term loan. Borrowings at December 31, 2003
included borrowings under the term loan bearing interest at LIBOR plus 1.25%
(2.42% at December 31, 2003). Certain provisions of the Term Loan require
maintenance of certain financial ratios, limit future borrowings, and impose
certain other requirements as contained in the agreement. At December, 2004 and
2003, the Company was in compliance with all restrictive covenants contained in
the Loan Agreement. The Loan Agreement also provides for a short-term revolving
credit facility of $3,000 (the "Revolving Facility"). Borrowings under the
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the Revolving Facility as of the date hereof. The Revolving Facility expires
on May 30, 2005. Management believes that such facility will be renewed in the
normal course of business.
Proceeds from stock options and warrants exercised totaled $2,563 and $807
in 2004 and 2003, respectively. Dividend payments were $389 and $382 in 2004 and
2003, respectively.
The overall effect of the foregoing was that cash flows used in financing
activities were $7,421 in 2004 and $1,331 in 2003.
16
Other Matters Impacting Liquidity
---------------------------------
The Company currently provides postretirement benefits in the form of a
retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility. The amount recorded on the
Company's balance sheet as of December 31, 2004 for this obligation is $934. The
postretirement plan is not funded. Historical cash payments made under such plan
approximated $50 per year.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
plan sponsor subsidy based on a percentage of a beneficiary's annual
prescription drug benefits, within defined limits, and the opportunity for a
retiree to obtain prescription drug benefits under Medicare. There was no impact
of the subsidy on the postretirement benefit obligation and net periodic cost in
2004 as Medicare eligible retirees are not covered under the Company's plan.
Critical Accounting Policies
----------------------------
The Securities and Exchange Commission ("SEC") has issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, management considers the following policies to
be critical within the SEC definition.
Revenue Recognition
-------------------
Revenue is recognized upon product shipment, passage of title and risk of
loss and when collection is reasonably assured. The Company reports amounts
billed to customers related to shipping and handling as revenue and includes
costs incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities.
17
Inventories
-----------
Inventories are valued at the lower of cost (first in, first out or
average) or market value and have been reduced by an allowance for excess and
obsolete inventories. Inventory reserves are generally recorded when the
inventory for a product exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months.
Long-Lived Assets
-----------------
Long-lived assets, such as property, plant, and equipment and intangible
assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
Goodwill, which is not subject to amortization, is tested annually for
impairment, and more frequently if events and circumstances indicate that the
asset might be impaired. If an indicator of impairment exists, the Company
determines the amount of impairment based on a comparison of the implied fair
values of its goodwill to its carrying value.
Accounts Receivable
-------------------
We market our products to a diverse customer base, principally throughout
the United States, Europe, Mexico and Japan. We grant credit terms in the normal
course of business to our customers. We perform on-going credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined through review of their
current credit information. We continuously monitor collections and payments
from customers and maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Estimated losses are based on historical experience and any specific customer
collection issues identified. If the financial condition of our customers were
to deteriorate resulting in an impairment of their ability to make payments,
additional allowances and related bad debt expense may be required.
Postemployment Benefits
-----------------------
The Company provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees' eligible survivors. The costs
and obligations related to these benefits reflect the Company's assumptions as
to general economic conditions and health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and plan participation. If actual experience
differs from these assumptions, the cost of providing these benefits could
increase or decrease.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
plan sponsor subsidy based on a percentage of a beneficiary's annual
prescription drug benefits, within defined limits, and the opportunity for a
retiree to obtain prescription drug benefits under Medicare. There was no impact
of the subsidy on the postretirement benefit obligation and net periodic cost in
2004 as Medicare eligible retirees are not covered under the Company's plan.
Intangible Assets with Finite Lives
-----------------------------------
The useful life of an intangible asset is based on the Company's
assumptions regarding expected use of the asset; the relationship of the
intangible asset to another asset or group of assets; any legal,
18
regulatory or contractual provisions that may limit the useful life of the asset
or that enable renewal or extension of the asset's legal or contractual life
without substantial cost; the effects of obsolescence, demand, competition and
other economic factors; and the level of maintenance expenditures required to
obtain the expected future cash flows from the asset and their related impact on
the asset's useful life. If events or circumstances indicate that the life of an
intangible asset has changed, it could result in higher future amortization
charges or recognition of an impairment loss.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
The Company regularly reviews its deferred tax assets for recoverability
and would establish a valuation allowance if it believed that such assets may
not be recovered, taking into consideration historical operating results,
expectations of future earnings, changes in its operations and the expected
timing of the reversals of existing temporary differences.
Related Party Transactions:
During 2004, the Company was not engaged in related party transactions and
all transactions of the Company were at arms length.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment". SFAS
No. 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. This statement is effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently evaluating the impact from this
standard on its results of operations and financial position.
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 151, "Inventory Costs". The new
Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement requires
that those items be recognized as current-period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. We do not expect adoption of
this statement to have a material impact on our financial condition or results
of operations.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents are invested primarily in money market accounts.
Accordingly, we believe we have limited exposure to market risk for changes in
interest rates. The Company has no derivative financial instruments or
derivative commodity instruments, nor does the Company 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.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data: Page
Reports of Independent Registered Public Accounting Firms 21
Consolidated Balance Sheets as of
December 31, 2004 and 2003 24
Consolidated Statements of Earnings for the
years ended December 31, 2004, 2003 and 2002 25
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2004, 2003 and 2002 26
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2003 and 2002 27
Notes to Consolidated Financial Statements 28
Report of Independent Registered Public Accounting Firm 43
Schedule II - Valuation and Qualifying
Accounts for the years ended December 31, 2004, 2003 and 2002 44
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Balchem Corporation
New Hampton, New York
We have audited the consolidated balance sheet of Balchem Corporation and
subsidiaries as of December 31, 2004, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Balchem Corporation
and subsidiaries as of December 31, 2004, and the results of their operations
and their cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Balchem
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2004, based on "criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)" and our report dated March 14,
2005 expressed an unqualified opinion on management's assessment of the
effectiveness of Balchem Corporation's internal control over financial reporting
and an unqualified opinion on the effectiveness of Balchem Corporation's
internal control over financial reporting.
/s/McGladrey & Pullen, LLP
New York, New York
March 14, 2005
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Balchem Corporation
New Hampton, New York
We have audited management's assessment, included in the accompanying
"Management's Report On Internal Control Over Financial Reporting", that Balchem
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on "criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)." Balchem Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Balchem Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on "criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO)." Also in our
opinion, Balchem Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on "
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)."
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Balchem Corporation and subsidiaries as of December 31, 2004 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the year then ended and our report dated March 14, 2005 expressed an
unqualified opinion.
/s/McGladrey & Pullen, LLP
New York, New York
March 14, 2005
22
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Balchem Corporation:
We have audited the accompanying consolidated balance sheet of Balchem
Corporation and subsidiaries as of December 31, 2003, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 2003. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule, "Schedule II-Valuation and
Qualifying Accounts," for each of the years in the two-year period ended
December 31, 2003. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Balchem
Corporation and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule for
each of the years in the two year period ended December 31, 2003, when
considered in relation to the basic consolidated financial statements for such
years taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As described in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002.
/s/ KPMG LLP
Short Hills, New Jersey
February 6, 2004
23
BALCHEM CORPORATION
Consolidated Balance Sheets
December 31, 2004 and 2003
(Dollars in thousands, except share and per share data)
Assets 2004 2003
------ ---------- ----------
Current assets:
Cash and cash equivalents $ 12,734 $ 9,239
Accounts receivable, net of allowance for doubtful accounts of $82 and $86 at
December 31, 2004 and 2003, respectively 7,996 7,233
Inventories 6,319 5,961
Prepaid income taxes 315 --
Prepaid expenses 1,527 723
Deferred income taxes 321 474
---------- ----------
Total current assets 29,212 23,630
Property, plant and equipment, net 24,188 25,636
Goodwill 6,368 6,368
Intangible assets with finite lives, net 637 1,272
---------- ----------
Total assets $ 60,405 $ 56,906
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 1,466 $ 1,254
Accrued expenses 1,212 1,508
Accrued compensation and other benefits 1,492 1,182
Customer deposits 852 --
Dividends payable 685 389
Current portion of long-term debt -- 1,742
---------- ----------
Total current liabilities 5,707 6,075
Long-term debt -- 7,839
Deferred income taxes 3,461 2,226
Other long-term obligations 1,003 985
---------- ----------
Total liabilities 10,171 17,125
---------- ----------
Commitments and contingencies (note 11)
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.0667 par value. Authorized 10,000,000 shares; 7,621,158
shares issued and outstanding at December 31, 2004 and
7,354,857 shares issued and 7,290,117 shares outstanding at December 31, 2003 508 491
Additional paid-in capital 6,329 3,738
Retained earnings 43,397 36,056
Treasury stock, at cost: 0 and 64,740 shares at December 31, 2004
and 2003, respectively -- (504)
---------- ----------
Total stockholders' equity 50,234 39,781
---------- ----------
---------- ----------
Total liabilities and stockholders' equity $ 60,405 $ 56,906
========== ==========
24
See accompanying notes to consolidated financial statements.
BALCHEM CORPORATION
Consolidated Statements of Earnings
Years Ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
----------- ----------- -----------
Net sales $ 67,406 $ 61,875 $ 60,197
Cost of sales 43,600 40,723 36,887
----------- ----------- -----------
Gross margin 23,806 21,152 23,310
Operating expenses:
Selling expenses 4,815 5,718 5,426
Research and development expenses 1,752 2,083 1,907
General and administrative expenses 4,442 4,336 3,792
----------- ----------- -----------
11,009 12,137 11,125
----------- ----------- -----------
Earnings from operations 12,797 9,015 12,185
Other expenses (income):
Interest income (125) (20) (42)
Interest expense 219 272 389
Other, net (12) -- (7)
----------- ----------- -----------
Earnings before income tax expense 12,715 8,763 11,845
Income tax expense 4,689 3,125 4,429
----------- ----------- -----------
Net earnings $ 8,026 $ 5,638 $ 7,416
=========== =========== ===========
Basic net earnings per common share $ 1.07 $ 0.78 $ 1.04
=========== =========== ===========
Diluted net earnings per common share $ 1.03 $ 0.75 $ 1.00
=========== =========== ===========
See accompanying notes to consolidated financial statements.
25
BALCHEM CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share and per share data)
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
--------- ------- ---------- -------- -------- ------- -------------
Balance - December 31, 2001 7,354,857 $ 491 $ 3,223 $ 23,773 $(306,108) $ (2,155) $ 25,332
Net earnings -- -- -- 7,416 -- -- 7,416
Dividends ($.053 per share) -- -- -- (382) -- -- (382)
Shares issued under employee benefit
plans -- -- 136 -- 16,299 105 241
Shares issued under stock option plans and
an income tax benefit of $147 -- -- 23 -- 98,478 639 662
--------- ------- --------- -------- -------- ------- ---------
Balance - December 31, 2002 7,354,857 491 3,382 30,807 (191,331) (1,411) 33,269
Net earnings -- -- -- 5,638 -- -- 5,638
Dividends ($.053 per share) -- -- -- (389) -- -- (389)
Shares issued under employee benefit
plans -- -- 138 -- 19,403 135 273
Shares issued under stock option plans and
an income tax benefit of $183 -- -- 218 -- 107,188 772 990
--------- ------- --------- -------- -------- ------- ---------
Balance - December 31, 2003 7,354,857 491 3,738 36,056 (64,740) (504) 39,781
Net earnings -- -- -- 8,026 -- -- 8,026
Dividends ($.09 per share) -- -- (685) -- -- (685)
Shares issued under employee benefit plans and other 14,060 1 255 -- -- -- 256
Shares issued under stock option plans and
an income tax benefit of $293 252,241 16 2,336 -- 64,740 504 2,856
--------- ------- --------- -------- -------- ------- ---------
Balance - December 31, 2004 7,621,158 $ 508 $ 6,329 $ 43,397 $ -- $ -- $ 50,234
========= ======= ========= ======== ======== ======= =========
See accompanying notes to consolidated financial statements.
26
BALCHEM CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 8,026 $ 5,638 $ 7,416
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,271 3,525 2,917
Shares issued under employee benefit plans 256 273 241
Deferred income tax expense 1,388 598 1,017
(Recovery of) provision for doubtful accounts (4) 36 70
Income tax benefit from stock options exercised 293 183 147
Disposition of intangible assets 53 --
Gain on sale of assets (12) -- --
Changes in assets and liabilities
Accounts receivable (759) (110) (99)
Inventories (358) 1,277 (1,663)
Prepaid expenses (804) 582 (300)
Accounts payable and accrued expenses 226 (1,859) 1,373
Income taxes (315) 975 (975)
Customer deposits 852 -- --
Other long-term obligations 32 35 (30)
---------- ---------- ----------
Net cash provided by operating activities 12,145 11,153 10,114
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (1,215) (2,270) (10,020)
Proceeds from sale of property, plant and equipment 91 41 239
Cash paid for intangibles assets acquired (105) (85) (170)
---------- ---------- ----------
Net cash used in investing activities (1,229) (2,314) (9,951)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (9,581) (1,742) (1,742)
Proceeds from stock options and warrants exercised 2,563 807 515
Dividends paid (389) (382) (305)
Other financing activities (14) (14) (20)
---------- ---------- ----------
Net cash used in financing activities (7,421) (1,331) (1,552)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 3,495 7,508 (1,389)
Cash and cash equivalents beginning of year 9,239 1,731 3,120
---------- ---------- ----------
Cash and cash equivalents end of year $ 12,734 $ 9,239 $ 1,731
========== ========== ==========
See accompanying notes to consolidated financial statements.
27
BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)
NOTE 1- BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------------------
Business Description
- --------------------
Balchem Corporation (including, unless the context otherwise requires, BCP
Ingredients, Inc., "Balchem", or the "Company"), incorporated in the State of
Maryland in 1967, is engaged in the development, manufacture and marketing of
specialty performance ingredients for the food, feed and medical sterilization
industries.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior period balances to conform with the presentation for the
current period.
Revenue Recognition
- -------------------
Revenue is recognized upon product shipment, passage of title and risk of loss
and when collection is reasonably assured. The Company reports amounts billed to
customers related to shipping and handling as revenue and includes costs
incurred for shipping and handling in cost of sales. Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities. In addition, the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, " Revenue Recognition," which sets
forth guidelines on the timing of revenue recognition based upon factors such as
passage of title, installation, payments and customer acceptance.
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, and have been reduced by an allowance
for excess or obsolete inventories. Cost elements include material, labor and
manufacturing overhead.
Property, Plant and Equipment and Depreciation
- ----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings 15-25 years
Equipment 3-12 years
Expenditures for repairs and maintenance are charged to expense. Alterations and
major overhauls that extend the lives or increase the capacity of plant assets
are capitalized. When assets are retired or
28
otherwise disposed of, the cost of the assets and the related accumulated
depreciation are removed from the accounts and any resultant gain or loss is
included in earnings.
Business Concentrations
- -----------------------
A Specialty Products customer accounted for 11%, 10% and 9% of the Company's
consolidated net sales for 2004, 2003 and 2002, respectively. This customer
accounted for 10% and 12% of the Company's accounts receivable balance at
December 31, 2004 and 2003, respectively. Approximately 8%, 8% and 9% of the
Company's net sales for 2004, 2003 and 2002, respectively, consisted of sales
outside the United States, predominately to Europe, Japan, and Mexico.
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customers'
financial condition and credit histories. The majority of the Company's
customers are major national or international corporations.
Goodwill and Acquired Intangible Assets
- ---------------------------------------
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. These standards require the use of the purchase method of
business combination and define an intangible asset. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. All of the Company's goodwill arose
from the June 2001 acquisition described in Note 4.
As required by SFAS No. 142, the Company performed an assessment of whether
there was an indication that goodwill was impaired at the date of adoption. In
connection therewith, the Company determined that its operations consisted of
three reporting units and determined each reporting units' fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting unit exceeded its carrying amount, there was no indication of
impairment and no further transitional impairment testing was required. As of
December 31, 2004 and 2003, the Company also performed an impairment test of its
goodwill balance. As of such dates the Company's reporting units' fair value
exceeded their carrying amounts, and therefore there was no indication that
goodwill was impaired. Accordingly, the Company was not required to perform any
further impairment tests. The Company plans to perform its impairment test each
December 31.
The Company had unamortized goodwill in the amount of $6,368 at both December
31, 2004 and December 31, 2003 subject to the provisions of SFAS Nos. 141 and
142. Unamortized goodwill is allocated to the Company's reportable segments as
follows:
==============================================================
2004 2003
- --------------------------------------------------------------
Specialty Products $ 5,089 $ 5,089
Encapsulated/Nutritional Products 1,279 1,279
BCP Ingredients -- --
- --------------------------------------------------------------
Total $ 6,368 $ 6,368
==============================================================
The following intangible assets are stated at cost and are amortized on a
straight-line basis over the following estimated useful lives:
29
=================================================
Amortization
period
(in years)
Customer lists 10
Re-registration costs 10
Patents 17
Trademarks 17
=================================================
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company regularly reviews its deferred tax assets for recoverability and
would establish a valuation allowance if it believed that such assets may not be
recovered, taking into consideration historical operating results, expectations
of future earnings, changes in its operations and the expected timing of the
reversals of existing temporary differences.
Use of Estimates
- ----------------
Management of the Company is required to make certain estimates and assumptions
during the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those 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, 2004 and 2003 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying consolidated 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. The Company's
financial instruments, principally cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments. As amounts
outstanding under the Company's credit agreements bear interest approximating
current market rates, their carrying amounts approximate fair value.
Research and Development
- ------------------------
Research and development costs are expensed as incurred.
Stock Option Plan
- -----------------
The Company has stock based employee compensation plans, which are described
more fully in Note 8. The Company accounts for its stock option plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related
30
interpretations. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. No stock based employee compensation cost is reflected in net earnings,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
has adopted the disclosure standards of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement 123," which require the Company to provide pro forma
net earnings and pro forma earnings per share disclosures for employee and
director stock option grants made as if the fair-value based method of
accounting for stock options as defined in SFAS No. 123 has been applied. The
following table illustrates the effect on net earnings and per share amounts if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock based employee compensation:
====================================================================================================
Year Ended December 31
----------------------
2004 2003 2002
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------
Net Earnings
Net earnings, as reported $ 8,026 $ 5,638 $ 7,416
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax
effects (722) (731) (452)
-------------------------------------------
Net earnings (pro-forma) $ 7,304 $ 4,907 $ 6,964
===========================================
Earnings per share:
Basic EPS as reported $ 1.07 $ .78 $ 1.04
Basic EPS (pro-forma) $ .97 $ .68 $ .98
Diluted EPS as reported $ 1.03 $ .75 $ 1.00
Diluted EPS (pro-forma) $ .94 $ .65 $ .94
====================================================================================================
Impairment of Long-lived Assets
- -------------------------------
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.
New Accounting Pronouncements
- -----------------------------
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment". SFAS No.
123