-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PflXlSK3naU/glxZHIxTrSRx8Y4ET/8QNEB9lXhA4GWTjwmOH1UcpE6/Bda6sXEH BzALg7kI5kmR6v/xyI5yzQ== 0000914317-01-000233.txt : 20010329 0000914317-01-000233.hdr.sgml : 20010329 ACCESSION NUMBER: 0000914317-01-000233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALCHEM CORP CENTRAL INDEX KEY: 0000009326 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 132578432 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13648 FILM NUMBER: 1582581 BUSINESS ADDRESS: STREET 1: P O BOX 175 CITY: SLATE HILL STATE: NY ZIP: 10973 BUSINESS PHONE: 9143555345 MAIL ADDRESS: STREET 1: P O BOX 175 CITY: SLATE HILL STATE: NY ZIP: 10973 10-K 1 0001.txt 10-K FOR BALCHEM CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to ___________________ Commission File Number 1-13648 BALCHEM CORPORATION (Exact name of registrant as specified in its charter) Maryland 13-2578432 -------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 175, Slate Hill, New York 10973 - ---------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (845) 355-5300 -------------- 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 American Stock Exchange - -------------------------------- ---------------------- Securities registered pursuant to Section 12(g) of the Act: None --- (Title of Class) 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 for 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 1, 2001 was approximately $52,025,449.* * 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. On March 1, 2001 there were 4,620,421 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the registrant's proxy statement for its 2001 annual meeting of stockholders are incorporated by reference in this report. 2 Part I Item 1. Business General: Balchem Corporation, 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. The Company has a currently inactive Canadian subsidiary, Balchem, Ltd. The Company operates in two business segments, the micro-encapsulation of performance ingredients (the "encapsulated products" segment) and the repackaging and marketing of high quality specialty gases (the "specialty products" segment). 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 Products --------------------- The encapsulated products segment encapsulates performance ingredients for use throughout the food and animal health industries to enhance nutritional fortification, processing, mixing, packaging applications and shelf-life improvement. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends and confections. Microencapsulated choline is marketed to the animal health industry offering key nutrients to ruminant animals. This segment also includes a line of endothermic blowing and nucleating agents that are marketed to the foamed plastics industry exclusively through a marketing partner. Specialty Products ------------------ The specialty products segment consists of the following specialty gases: ethylene oxide, blends of ethylene oxide, propylene oxide and methyl chloride Ethylene oxide is used as a chemical sterilant gas, primarily in the health care industry. It is used to sterilize medical devices ranging from syringes and catheters to scalpels, gauze, bandages and surgical kits, because of its versatility 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. As a fumigant, ethylene oxide blends are highly effective in killing bacteria, fungi, and insects in spice or other seasoning materials. The Company's 100% ethylene oxide product is distributed by 3 the Company in reusable double-walled shipping 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 two filling facilities, represent a significant capital investment. Contract sterilizers, medical device manufacturers, medical gas distributors and hospitals are the Company's principal customers for this product. Propylene oxide is used for bacteria reduction in spice treatment and in the chemical synthesis market. It is also utilized in manufacturing operations to make paints more durable, 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. 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. In 1994, the Company purchased certain tangible and intangible assets for its ethylene oxide business for $1,500,000 in cash and, as detailed in the purchase agreement, the Company was required to pay additional contingent amounts to compensate the seller for the purchase of the seller's customer list, in accordance with a formula based on profits derived from sales of the specialty-packaged ingredient. In 1998, the Company elected to exercise the early payment option under the agreement resulting in the Company making a final payment of $3,700,000 to the seller. The Company has no further purchase price obligation under the agreement. Due to consolidation of customer businesses in the contract sterilizer industry, the Company has one customer, IBA, which accounted for approximately 13% of the Company's net sales in 2000. The loss of such customer could have a material adverse effect on the Company. New product status: - ------------------ In late 1999, the Company launched Reashure(TM), its encapsulated choline for ruminant animals, having successfully completed university and field trials. Commercial sales are currently targeted to the dairy industry where Reashure(TM), delivers nutrient supplements through the rumen providing required levels to dairy cows during certain weeks preceding and following calving, commonly referred to as the "transition period" of the animal. The Company has also introduced new products that are being sold commercially for enhancement of shelf-life and fortification in segments of the food industry and has several new products for the food market in test production or test marketing status. 4 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 tradenames and trademarks. It also uses know-how, trade secrets, formulae and manufacturing techniques that assist in maintaining the 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 material to the Company as a whole and, accordingly, that the expiration or 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. Seasonality: - ----------- In general, the business of the Company's segments is not seasonal to any material extent. Backlog: - ------- At December 31, 2000, the Company had a total backlog of $597,000 (including $226,000 for the encapsulated products segment and $371,000 for the specialty products segment) as compared to a total backlog of $798,000 at December 31, 1999 (including $420,000 for the encapsulated products segment and $378,000 for the specialty products segment). It has 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. 5 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 improvement. In addition, the winning and retention of customer acceptance of the Company's encapsulated products involve substantial expenditures for applications testing and sales efforts. The Company also engages various universities to assist in research and provide independent third-party data. In the specialty products business, the Company faces competition from alternative sterilizing technologies and products. Research & Development: - ---------------------- During the years ended December 31, 2000, 1999 and 1998, the Company incurred research and development expense of approximately $1.1 million, $1.3 million and $1.0 million, respectively, on Company-sponsored research and development for new products and improvements to existing products and manufacturing processes, principally in the encapsulated products segment. During the year ended December 31, 2000, an average of 10 employees were devoted full time to research and development activities. The Company has historically funded its R&D 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 reviews 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. Environmental Matters: - --------------------- The Federal Insecticide, Fungicide and Rodenticide Act, as amended, a health and safety statute, requires that certain products within the Company's specialty products segment must be registered with the EPA. 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 packaged 100% ethylene oxide as a medical device sterilant and spice fumigant. The 6 Company is in the process of re-registering this product use. The re-registration requirement is a result of a congressional enactment during 1988 requiring the re-registration 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 hopes to recover the cost of re-registration in the selling price of the sterilant. 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. On February 27, 1988, California's Proposition 65 (Safe Drinking Water and Toxic Enforcement Act of 1986) went into effect. 100% ethylene oxide, a sterilant/fumigant distributed by the Company, 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 California Birth Defect Law of 1984 requires the California Department of Food and Agriculture ("CDFA") to identify chemicals in "widespread use" for which significant data gaps exist, and requires registrants for those products to submit the data or pay an assessment to the CDFA to fund independent development of the data. The CDFA determined that data gaps existed for ethylene oxide. After initially requesting an exemption, the Company, along with another registrant, agreed to submit information to close the data gaps. The registrants have provided requested data, and, to the Company's knowledge, fulfilled the data submission obligations to the CDFA. 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 proceeding referred to in Item 3 below has been substantially completed. Employees: - --------- As of March 1, 2001, the Company employed approximately 133 persons. No employees are covered by any collective bargaining agreement. 7 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. Various of the Company's products also face competition from products or technologies that may be used as an alternative therefor. The Company's competitive position is based principally on performance, quality, customer support, service, breadth of product line, manufacturing technology and the selling prices of its products. 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 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. Raw Materials. The principal raw materials used by the Company in the manufacture of its products can be subject to price fluctuations. While the 8 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 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, 2000, approximately 9% of the Company's net sales consisted of sales outside the United States, predominately to Europe. 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 a number of senior executives could have a material adverse effect on the Company. Item 2. Properties The executive, sales, marketing, research & development offices and manufacturing facilities of the Company's encapsulated products segment and a drumming facility for the Company's ethylene oxide business, are presently housed in four buildings located, together with a 14,900 square foot steel warehouse, in Slate Hill, New York. The Company owns a total of approximately 16 acres of land on several parcels in this community. 9 The Company also owns a facility located on an approximately 24 acre parcel of land in Green Pond, South Carolina. The Company sold the balance of its formerly 81 acre site in Green Pond in 1997. The facility now consists of a drumming facility, a maintenance building and an office building. The Company uses the facility as a terminus, warehouse and drum filling station for its products in its specialty products segment. 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 historically been less than $10,000 per year. 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 2000. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (a) Market Information. 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 2000 and 1999, for each quarterly period during the past two years were as follows: 10
- ----------------------------------------------------------------------------- Quarterly Period High Low - ----------------------------------------------------------------------------- Ended March 31, 2000 $ 9.25 $ 7.50 Ended June 30, 2000 11.75 8.25 Ended September 30, 2000 12.38 11.00 Ended December 31, 2000 13.43 10.32 - ----------------------------------------------------------------------------- Quarterly Period High Low - ----------------------------------------------------------------------------- Ended March 31, 1999 $ 7.75 $ 5.06 Ended June 30, 1999 6.50 5.00 Ended September 30, 1999 7.25 5.69 Ended December 31, 1999 8.75 5.88
(b) Record Holders. As of March 1, 2001, 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 261* *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 1,342. (c) Dividends. The Company declared a dividend of $0.06 per share on the common stock during its fiscal year ended December 31, 2000. 11 Item 6. Selected Financial Data Earnings per share and dividend amounts have been adjusted for the May 1998 three-for-two stock split (effected by means of a stock dividend).
(In thousands, except per share data) - ---------------------------------------------------------------------------------------- Year ended December 31, 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- Statement of Operations Data Net sales $33,198 $29,682 $28,721 $28,619 $26,371 Earnings before income tax expense 5,996 4,905 4,628 4,227 2,917 Income tax expense 2,267 1,811 1,673 1,456 990 Net earnings 3,729 3,094 2,955 2,771 1,927 Basic net earnings per common share .80 .64 .61 .58 .41 Diluted net earnings per common share .78 .63 .60 .57 .40 (In thousands, except per share data) - ---------------------------------------------------------------------------------------- At December 31, 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- Balance Sheet Data Total assets $23,222 $22,030 $22,648 $17,593 $15,140 Long-term debt -- 1,250 3,750 1,500 2,100 Other long-term obligations 362 606 841 890 794 Total stockholders' equity 19,580 17,939 15,775 12,336 9,387 Dividends per share $ .06 $ .05 $ .033 $ .033 $ .030
12 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. (All dollar amounts in thousands) Results of Operations: Fiscal Year 2000 compared to Fiscal Year 1999 Net sales for 2000 were $33,198 as compared to $29,682 for 1999, an increase of $3,516 or 12%. Net sales for the specialty products segment were $20,113 for 2000 as compared to $19,843 for 1999, an increase of $270 or 1%. This increase was attributable primarily to increased volumes sold of ethylene oxide related products. Net sales for the encapsulated products segment were $13,085 for 2000 as compared to $9,839 for 1999, an increase of $3,246 or 33%. This increase was due principally to greater sales to the animal nutrition, specialty industrial and domestic food markets. The growth in sales to the food market is the result of increased volumes sold of higher margin products which can be attributed principally to new products and new applications, combined with additional sales representation. In late 1999, the Company launched Reashure(TM), its encapsulated choline for ruminant animals, after having successfully completed university and field trials. Commercial sales are currently targeted to the dairy industry where Reashure(TM) delivers nutrient supplements through the rumen providing required levels to dairy cows during certain weeks preceding and following calving, commonly referred to as the "transition period" of the animal. Sales of Reashure(TM) continued to develop through growth from existing customers and with the addition of new customers primarily in the East and Midwest. Gross profit as a percent of sales for 2000 was 42.3% as compared to 40.8% for 1999. Margins for the specialty products segment were favorably affected primarily by increased volumes sold and improved production efficiencies of blended ethylene oxide products which the Company now sells for non-medical sterilization. Margins also improved in the encapsulated products division, a result of efficiencies realized from increased production and the mix of products sold during 2000. 13 Operating expenses for 2000 increased to $8,103 from $7,111 for 1999, an increase of $992 or 14%. The increase in operating expenses was primarily the result of increased advertising expense and travel expenses and increased payroll expense in the area of sales and marketing for the encapsulated products segment. In particular, additional sales personnel have been added to support the animal nutrition business. The Company expended $1,069 and $1,264 in 2000 and 1999, respectively, on Company-sponsored research and development programs, substantially all of which pertained to the Company's encapsulated products segment for both food and animal feed applications. The decline in these research and development expenses is a result of the Company having completed the gathering of data for Reashure(TM) from university studies, commercial field trials and veterinarians in 1999. As a result of the foregoing, earnings from operations for 2000 were $5,938 as compared to $5,013 for 1999. Earnings from operations for the specialty products segment for 2000 was $5,605 as compared to $5,613 for 1999. Earnings from operations for the encapsulated products segment for 2000 was $333 as compared to a loss of $600 for 1999. Net interest income for 2000 totaled $58 as compared to net interest expense of $111 for 1999. Long-term debt was eliminated in 2000 from $1,250 in 1999 resulting in lower interest expense. The Company's effective income tax rate was 38% for 2000 as compared with 37% for 1999 due principally to the effects of the Company's utilization of net operating loss carry-forwards for state income tax purposes in the second quarter of 1999. As a result of the foregoing, net earnings were $3,729 for 2000 as compared to $3,094 for 1999. Fiscal Year 1999 compared to Fiscal Year 1998 Net sales for 1999 were $29,682 as compared to $28,721 for 1998, an increase of $961 or 3%. Net sales for the specialty products segment were $19,843 for 1999 as compared to $19,434 for 1998, an increase of $409 or 2%. This increase was attributable primarily to an increase in volumes sold of the Company's ethylene oxide product partially offset by a decline in volumes sold of the Company's methyl chloride product. Net sales for the encapsulated products segment were $9,839 for 1999 as compared to $9,287 for 1998 an increase of $552 or 6%. This increase was primarily the result of increased sales in the domestic food markets partially offset by decreased sales in the international food and animal nutrition markets. With successful university and field trials conducted in 1999, targeted at the dairy industry and in particular the transition period of the dairy cow, the Company launched Reashure(TM), its encapsulated choline for animal feed in the fourth quarter of 1999. 14 Gross profit as a percent of sales for 1999 was 40.8% as compared to 39.8% in 1998. Margins for the specialty products segment were affected favorably by increased volumes sold of ethylene oxide and improved production efficiencies of blended ethylene oxide products, a result of the Company's decision to blend internally rather than use third party blenders. These margin improvements were partially offset by declines in volumes produced and sold of the Company's methyl chloride product and additional amortization expense associated with the early purchase price buy-out option under the agreement pertaining to the 1994 acquisition by the specialty products segment. Margins in the encapsulated products division declined two percentage points in 1999 as compared to 1998, principally as a result of the mix of products sold into the international food market. Operating expenses for 1999 increased to $7,111 from $6,616 for 1998, an increase of $495 or 7%. The increase in operating expenses was primarily the result of increased payroll expense in the area of selling and applications research and development, increased advertising costs and increased R&D consulting expenses in the encapsulated products segment. These increases were partially offset by a decrease in consulting fees in the specialty products segment and other payroll related expenses. During 1999 and 1998, the Company spent $1,264 and $1,017, respectively, on research and development programs substantially all of which pertained to the Company's encapsulated products segment for both food and animal feed applications. The Company incurred considerable development expenses in the gathering of data for Reashure(TM) from university and veterinarian studies as well as field trials to accelerate the marketing effort for this product. As a result of the foregoing, earnings from operations for 1999 were $5,013 as compared to $4,807 for 1998. Earnings from operations for the specialty products segment for 1999 was $5,613 as compared to $4,631 for 1998. Loss from operations for the encapsulated products segment for 1999 was $600, a result of lower margins and increased research and development expenses as described above, as compared to income of $176 for 1998. 15 Net interest expense for 1999 totaled $111 as compared to $164 for 1998. Long-term debt was reduced to $1,250 in 1999 from $3,750 in 1998, a reduction of $2,500 resulting in lower interest expense. The Company's effective income tax rate increased in 1999 as compared to 1998 due principally to the effects of the Company's utilization of net operating loss carry-forwards for state income tax purposes in 1998. As a result of the foregoing, net earnings were $3,094 for 1999 as compared to $2,955 for 1998. Liquidity and Capital Resources Cash flows provided by operating activities were $5,953 for 2000 as compared with $4,682 for 1999. The increase in cash flows from operating activities was due primarily to increased net earnings, reduced inventory levels and increases in accounts payable, income taxes payable and other accrued expense balances, a result of timing of payments made to vendors and other service providers partially offset by an increase in accounts receivable. Capital expenditures were $881 for 2000. Capital expenditures are projected to be approximately $1,800 for 2001. In June 1999, the board of directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock over a two-year period commencing July 2, 1999. As of December 31, 2000, 343,316 shares had been repurchased under the program at a total cost of $3,179 of which, 56,248 shares had been issued by the Company as of such date 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. During 2000, the Company paid off its remaining long-term debt of $1,250. There was no long-term debt outstanding at December 31, 2000. The Company knows of no current or pending demands on or commitments for its liquid assets that will materially affect its liquidity. Management believes current cash balances and expected operating cash flow will be sufficient to fund operations in the next year. The Company currently has approval for a $2,000 line of credit from its principal bank. There were no outstanding borrowings under this line of credit on December 31, 2000. 16 Impact of Recent Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations upon adoption effective January 1, 2000 because the Company does not currently have derivative financial instruments or derivative commodity instruments, nor does the Company have any financial instruments entered into for trading or hedging purposes. Item 7A. Quantitative and Qualitative Disclosures About Market Risk In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates. Market risk is defined for these purposes as the potential change in the fair value of debt instruments resulting from an adverse movement in interest rates. As of December 31, 2000, the Company did not have any long term borrowings. The Company's short-term working capital borrowings have historically borne interest based on the prime rate. The Company believes that its exposure to market risk relating to interest rate risk is not material, as it presently does not have any outstanding debt. 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 Independent Auditors' Report 18 Consolidated Balance Sheets as of December 31, 2000 and 1999 19 Consolidated Statements of Earnings for the years ended December 31, 2000, 1999 and 1998 21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 22 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 23 Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999 and 1998 24 Financial Statement Schedule - Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999 and 1998 42 17 Independent Auditors' Report The Board of Directors and Stockholders Balchem Corporation: We have audited the accompanying consolidated balance sheets of Balchem Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule on valuation and qualifying accounts for the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG LLP - ----------- KPMG LLP Short Hills, New Jersey February 6, 2001 18
BALCHEM CORPORATION Consolidated Balance Sheets December 31, 2000 and 1999 (Dollars in thousands, except share and per share data) Assets 2000 1999 ------ ---- ---- Current assets: Cash and cash equivalents $ 3,068 $ 1,699 Accounts receivable, net of allowance for doubtful accounts of $48 and $0 at December 31, 2000 and 1999, respectively 5,044 3,981 Inventories 2,554 2,748 Prepaid expenses 502 501 Deferred income taxes 200 188 ------- ------- Total current assets 11,368 9,117 ------- ------- Property, plant and equipment, net 7,765 7,786 Investments in intangibles assets, net 4,089 5,127 ------- ------- Total assets $23,222 $22,030 ======= =======
19
BALCHEM CORPORATION Consolidated Balance Sheets, continued December 31, 2000 and 1999 (Dollars in thousands, except share and per share data) Liabilities and Stockholders' Equity 2000 1999 ------------------------------------ ---- ---- Current liabilities: Trade accounts payable $ 970 $ 565 Accrued compensation and other benefits 1,135 829 Other accrued expenses 654 429 Dividends payable 277 245 Income taxes payable 208 131 Current portion of long-term debt -- 600 Current portion of other long-term obligations 36 36 -------- -------- Total current liabilities 3,280 2,835 -------- -------- Long-term debt -- 650 Deferred income taxes 225 381 Deferred compensation 91 108 Other long-term obligations 46 117 -------- -------- Total liabilities 3,642 4,091 -------- -------- 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; 4,903,238 shares issued and 4,616,170 shares outstanding at December 31, 2000 and 4,903,238 shares issued and 4,781,358 shares outstanding at December 31, 1999 327 327 Additional paid-in capital 3,082 2,994 Retained earnings 18,968 15,516 Treasury stock, at cost: 287,068 and 121,880 shares at December 31, 2000 and 1999, respectively (2,797) (898) -------- -------- Total stockholders' equity 19,580 17,939 -------- -------- Commitments and contingencies (note 11) Total liabilities and stockholders' equity $ 23,222 $ 22,030 ======== ========
See accompanying notes to consolidated financial statements. 20
BALCHEM CORPORATION Consolidated Statements of Earnings Years Ended December 31, 2000, 1999 and 1998 (In thousands, except per share data) 2000 1999 1998 -------- -------- -------- Net sales $ 33,198 $ 29,682 $ 28,721 Cost of sales 19,157 17,558 17,298 -------- -------- -------- Gross profit 14,041 12,124 11,423 Operating expenses: Selling expenses 3,914 3,082 2,584 Research and development expenses 1,069 1,264 1,017 General and administrative expenses 3,120 2,765 3,015 -------- -------- -------- 8,103 7,111 6,616 Earnings from operations 5,938 5,013 4,807 Other expenses (income): Interest (income) expense - net (58) 111 164 Other (income) expense - net - (3) 15 -------- -------- -------- Total other (income) expenses (58) 108 179 -------- -------- -------- Earnings before income tax expense 5,996 4,905 4,628 Income tax expense 2,267 1,811 1,673 -------- -------- -------- Net earnings $ 3,729 $ 3,094 $ 2,955 ======== ======== ======= Basic net earnings per common share $ 0.80 $ 0.64 $ 0.61 ======== ======== ======= Diluted net earnings per common share $ 0.78 $ 0.63 $ 0.60 ======== ======== =======
See accompanying notes to consolidated financial statements. 21
BALCHEM CORPORATION Consolidated Statements of Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998 (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 - January 1, 1998 4,793,163 $ 319 $ 2,145 $ 9,872 - $ - $ 12,336 Net earnings - - - 2,955 - - 2,955 Dividends ($.033 per share) - - - (160) - - (160) Employee stock option compensation 17,144 1 263 - - - 264 Grants of non-employee stock options - - 52 - - - 52 Shares issued under employee stock option plans 65,607 5 323 - - - 328 --------- ----- ------- -------- -------- -------- -------- Balance - December 31, 1998 4,875,914 325 2,783 12,667 - - 15,775 Net earnings - - - 3,094 - - 3,094 Dividends ($.05 per share) - - - (245) - - (245) Treasury shares purchased - - - - (128,400) (943) (943) Shares issued under employee benefit plans 19,927 2 124 - 4,420 30 156 Grants of non-employee stock options - - 60 - - - 60 Shares issued under employee stock option plans 7,397 - 27 - 2,100 15 42 --------- ----- ------- -------- -------- -------- -------- Balance - December 31, 1999 4,903,238 327 2,994 15,516 (121,880) (898) 17,939 Net earnings - - - 3,729 - - 3,729 Dividends ($.06 per share) - - - (277) - - (277) Treasury shares purchased - - - - (214,916) (2,236) (2,236) Shares issued under employee benefit plans - - 58 - 17,095 116 174 Shares issued under stock option plans - - 30 - 32,633 221 251 --------- ----- ------- -------- -------- -------- -------- Balance - December 31, 2000 4,903,238 $ 327 $ 3,082 $ 18,968 (287,068) $ (2,797) $ 19,580 ========= ===== ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 22
BALCHEM CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 (In thousands, except per share data) 2000 1999 1998 ------- ------- ------- Cash flows from operating activities: Net earnings $ 3,729 $ 3,094 $ 2,955 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,015 2,028 1,654 Non-employee stock compensation -- 60 52 Income tax benefit from stock options exercised 77 -- -- Shares issued under employee benefit plans 174 156 264 Deferred income tax (benefit) expense (168) (113) 92 Provision for doubtful accounts 48 -- (187) Loss on sale of equipment -- -- 19 Changes in assets and liabilities: Accounts receivable (1,111) (698) (35) Inventories 194 127 (368) Prepaid expenses (1) (25) 5 Accounts payable and accrued expenses 936 (249) (550) Income taxes payable 77 329 -- Other long-term obligations (17) (27) (8) ------- ------- ------- Net cash provided by operating activities 5,953 4,682 3,893 ------- ------- ------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment -- -- 15 Capital expenditures (881) (602) (1,637) Increase in intangibles assets (75) (97) (4,063) ------- ------- ------- Net cash used in investing activities (956) (699) (5,685) ------- ------- ------- Cash flows from financing activities: Proceeds from long-term debt -- -- 3,000 Principal payments on long-term debt (1,250) (2,500) (750) Proceeds from stock options and warrants exercised 174 42 328 Dividends paid (245) (160) (160) Purchase of treasury stock (2,236) (943) -- Other financing activities (71) (71) (14) ------- ------- ------- Net cash (used in) provided by financing activities (3,628) (3,632) 2,404 ------- ------- ------- Increase in cash and cash equivalents 1,369 351 612 Cash and cash equivalents beginning of year 1,699 1,348 736 ------- ------- ------- Cash and cash equivalents end of year $ 3,068 $ 1,699 $ 1,348 ======= ======= =======
See accompanying notes to consolidated financial statements. 23 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 (the "Company") is engaged in the development, manufacture and marketing of specialty performance ingredients and products 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. Revenue Recognition - ------------------- Revenue is recognized upon product shipment, passage of title and when all significant obligations of the Company have been satisfied. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is not a rule or interpretation of the SEC, however, it represents interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws. The Company believes its revenue recognition policies are in compliance with the interpretations outlined in SAB 101. 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. 24 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 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. Intangible Assets - ----------------- Intangible assets are stated at cost and are amortized on a straight-line basis over the following estimated useful lives: Customer lists 6-10 years Re-registration costs 10 years 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. Use of Estimates - ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. 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, 2000 and 1999 does not differ materially from the aggregate carrying values of its financial instruments recorded in the 25 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. Research and Development - ------------------------ Research and development costs are expensed as incurred. Credit Risk - ----------- 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. International sales are mostly to companies in Europe. Stock Option Plan - ----------------- The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation and interpretation of APB Opinion No. 25" issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. 26 Impairment of Long-lived Assets - ------------------------------- Long-lived assets, including intangible assets, 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 future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 27 Net Earnings Per Share - ---------------------- Basic net earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is calculated in a manner consistent with basic net earnings per share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding (using the treasury stock method). NOTE 2-INVENTORIES - ------------------ Inventories at December 31, 2000 and 1999 consist of the following: 2000 1999 ------ ------ Raw materials $1,147 $1,340 Finished goods 1,407 1,408 ------ ------ Total inventories $2,554 $2,748 ====== ====== NOTE 3- PROPERTY, PLANT AND EQUIPMENT - ------------------------------------- Property, plant and equipment at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ------ ------ Land $ 60 $ 60 Building 4,551 4,331 Equipment 11,011 10,350 15,622 14,741 ------- ------- Less: Accumulated depreciation 7,857 6,955 ------- ------- Net property, plant and equipment $ 7,765 $ 7,786 ======= ======= NOTE 4- INTANGIBLE ASSETS - ------------------------- Intangible assets at December 31, 2000 and 1999 consist of the following: 2000 1999 ------ ------ Customer lists $6,760 $6,760 Re-registration costs 356 356 Covenants not to compete 295 295 Patents 215 116 Other 125 148 7,751 7,675 ------ ------ Less: Accumulated amortization 3,662 2,548 ------ ------ Net intangible assets $4,089 $5,127 ====== ====== 28 In 1994, the Company purchased certain tangible and intangible assets for one of its packaged specialty products for $1,500 in cash and the Company was required to pay additional contingent amounts to compensate the seller for the purchase of the seller's customer list in accordance with a formula based on profits derived from sales of the specialty packaged ingredient. In 1998, the Company elected to exercise the early payment option under the agreement and made a final payment of $3,700 to the seller in settlement of its remaining purchase price obligation under the terms of the agreement. Amounts allocated to the customer list are being amortized over its remaining estimated useful life on a straight-line basis through 2004. In 1997, the Company entered into non-compete agreements with two former officers of the Company. The Company has recorded the present value of the future monthly payments under these agreements as a deferred charge and is amortizing such amount over the terms of the respective agreements, which end in 2002. The Company is in the process of re-registering a product it sells for sterilization of medical devices and other uses. The re-registration requirement is a result of a congressional enactment during 1988 requiring the re-registration of this product and all other products that are used as pesticides. The Company, in conjunction with one other company, has been conducting the required testing under the direction of the Environmental Protection Agency ("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 believes it will be successful in obtaining re-registration for the product as it has met the EPA's requirements thus far, although no assurance can be given. Additionally, the product is used as a sterilant with no known substitute. Management believes absence of availability of this product could not be easily tolerated by medical device manufacturers and the health care industry due to the resultant infection potential if the product were unavailable. NOTE 5 - LONG-TERM DEBT & CREDIT AGREEMENTS - ------------------------------------------- There was no long-term debt outstanding at December 31, 2000. Borrowings at December 31, 1999 included $1,250 due under a term loan agreement with a bank that was paid in full during 2000. Such borrowings had an interest rate of LIBOR plus 1%. The Company also has approval for a $2,000 short-term line of credit from a bank. There were no outstanding borrowings under the line of credit on December 31, 2000 or 1999. The approval expires on June 30, 2001. The Company intends to seek renewal of such approval in 2001. 29 NOTE 6 - INCOME TAXES Income tax expense (benefit) attributable to earnings before income taxes expense consists of the following: 2000 1999 1998 ------- ------- ------- Current: Federal $ 2,018 $ 1,598 $ 1,402 State 417 326 179 Deferred: Federal (149) (102) 85 State (19) (11) 7 ------- ------- ------- Total income tax provision $ 2,267 $ 1,811 $ 1,673 ======= ======= ======= The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 34% to earnings before income tax expense in 2000, 1999 and 1998 due to the following : 30 2000 1999 1998 ------- ------- ------- Income tax at Federal Statutory rate $ 2,039 $ 1,668 $ 1,574 State income taxes, net of Federal income tax benefit 263 208 123 Other (35) (65) (24) ------- ------- ------- Total income tax provision $ 2,267 $ 1,811 $ 1,673 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are as follows: 2000 1999 ---- ---- Deferred tax assets: Amortization $504 $340 Inventories 121 158 Deferred compensation 41 48 Non-employee stock options 99 99 Other 92 84 ---- ---- Total deferred tax assets 857 729 ==== ==== Deferred tax liabilities: Depreciation 882 922 ---- ---- Total deferred tax liabilities 882 922 ==== ==== Net deferred tax liability $ 25 $193 ==== ==== There is no valuation allowance for deferred tax assets at December 31, 2000 and 1999. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. 31 NOTE 7 - STOCKHOLDERS' EQUITY - ----------------------------- In June 1999, the board of directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock over a two-year period commencing July 2, 1999. Since inception of its repurchase authorization, through December 31, 2000, the Company had repurchased 343,316 shares at an average cost of $9.26 per share. On May 2, 1998, the Board of Directors of the Company approved a three-for-two split of the Company's common stock distributed in the form of a stock dividend to shareholders of record on May 15, 1998. Such distribution was made on June 3, 1998. Accordingly, the stock split was recognized by reclassifying $105, the par value of the additional shares resulting from the split, from additional paid-in capital to common stock. In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan (the "1999 Stock Plan") for officers, directors, directors emeritus and employees of and consultants to the Company and its subsidiaries. The 1999 Stock Plan is administered by the Compensation Committee of the Board of Directors of the Company. Under the plan, options and rights to purchase shares of the Company's common stock are granted at prices established at the time of grant. Option grants are either fully exercisable on the date of grant or become exercisable thereafter in such installments as the Committee may specify. The 1999 Stock Plan reserves an aggregate of 600,000 shares of common stock for issuance under the Plan. The 1999 Stock Plan replaced the Company's incentive stock option plan (the "ISO Plan") and its non-qualified stock option plan (the "Non-Qualified Plan"), both of which expired on June 24, 1999. Unexercised options granted under the ISO Plan and the Non-Qualified Plan prior to such termination remain exercisable in accordance with their terms. Options granted under the ISO Plan generally become exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from the date of grant, and expire ten years from the date of grant. Options granted under the Non-Qualified Plan, generally vested on the date of grant, and expire ten years from the date of grant. The Company applies APB Opinion No. 25 in accounting for employee and director stock options and, accordingly, when the exercise price of the options is equal to or greater than the fair value of the stock on date of grant, no compensation cost is recognized in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant dates for such stock options under SFAS No. 123, the Company's net earnings would have been as set forth below for the years ended December 31: 32 2000 1999 1998 -------- -------- --------- Net Earnings As Reported $ 3,729 $ 3,094 $ 2,955 Pro forma 3,465 2,971 2,805 Earnings per share As Reported - Basic $ .80 $ .64 $ .61 Pro forma - Basic .74 .61 .58 As Reported - Diluted .78 .63 .60 Pro forma - Diluted .73 .61 .57 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield of .52%, .46% and .40%; expected volatility of 54%, 48% and 46%; risk-free interest rates of 4.9%, 6.3% and 4.8%; and expected life of five years for 2000 and six years for 1999 and 1998, respectively. The weighted average fair values of options granted during the years 2000, 1999 and 1998 were $7.23, $4.66 and $1.81, respectively. Pro forma net earnings reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for employee stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 has not been considered. A charge to earnings and corresponding increase to additional paid-in capital of approximately $60 and $52 was recorded for options granted in 1999 and 1998 respectively, to non-employees (including directors) in exchange for their services. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999 and 1998, respectively: dividend yield of .46% and .40%; expected volatility of 48% and 46%; risk-free interest rates of 6.3% and 4.6%; and expected lives of three years and six years. The weighted average fair values of options granted during the years 1999 and 1998 were $2.92 and $2.65 respectively. 33 A summary of stock option plan activity for 2000, 1999 and 1998 for all plans is as follows: # of Weighted Average 2000 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding at beginning of year 427,322 $ 7.92 Granted 103,711 11.42 Exercised (32,621) 5.32 Terminated or expired (56,615) 10.87 Outstanding at end of year 441,797 $ 8.55 Exercisable at end of year 314,627 $ 8.51 # of Weighted Average 1999 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding at beginning of year 363,972 $ 8.09 Granted 89,100 6.79 Exercised (9,497) 4.42 Terminated or expired (16,253) 7.62 Outstanding at end of year 427,322 $ 7.92 Exercisable at end of year 272,252 $ 7.78 # of Weighted Average 1998 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding at beginning of year 325,717 $ 7.09 Granted 119,627 8.81 Exercised (65,607) 4.37 Terminated or expired (15,765) 8.20 Outstanding at end of year 363,972 $ 8.09 Exercisable at end of year 181,247 $ 6.51 34 Information related to stock options outstanding under all plans at December 31, 2000 is as follows:
Options Outstanding Options Exercisable --------------------------- ------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Number Exercise ----------- -------- ------ -------- Range of Exercise Prices Shares Outstanding Life Price Exercisable Price $ 2.45 - $ 5.92 81,691 5.1 years $ 4.44 81,691 $ 4.44 6.00 - 9.50 168,685 8.2 years 7.40 83,515 7.37 10.75 - 13.25 191,421 8.1 years 11.33 149,421 11.38 441,797 7.6 years $ 8.55 314,627 $ 8.51
NOTE 8 - NET EARNINGS PER SHARE The following presents a reconciliation of the numerator and denominator used in calculating basic and diluted net earnings per share:
Earnings Number of Shares 2000 (Numerator) (Denominator) Per Share Amount - -------------------------------------------------------------------------------------------------------------------------- Basic EPS - Net earnings and weighted average common shares outstanding $3,729 4,683,355 $.80 Effect of dilutive securities - stock options 89,423 --------- Diluted EPS - Net earnings and weighted average common shares outstanding and effect of stock options $3,729 4,772,778 $.78 Earnings Number of Shares 1999 (Numerator) (Denominator) Per Share Amount - -------------------------------------------------------------------------------------------------------------------------- Basic EPS - Net earnings and weighted average common shares outstanding $3,094 4,856,782 $.64 Effect of dilutive securities - stock options 30,049 --------- Diluted EPS - Net earnings and weighted average common shares outstanding and effect of stock options $3,094 4,886,831 $.63 Earnings Number of Shares 1998 (Numerator) (Denominator) Per Share Amount - -------------------------------------------------------------------------------------------------------------------------- Basic EPS - Net earnings and weighted average common shares outstanding $2,955 4,841,300 $.61 Effect of dilutive securities - stock options 69,038 --------- Diluted EPS - Net earnings and weighted average common shares outstanding and effect of stock options $2,955 4,910,338 $.60
36 NOTE 9 - EMPLOYEE BENEFIT PLANS - ------------------------------- Effective January 1, 1998, the Company terminated its defined contribution pension plan and amended its 401(k) savings plan. Assets of the terminated defined contribution pension plan were merged into an enhanced 401(k)/ profit sharing plan. The plan allows participants to make pretax contributions and the Company matches certain percentages of those pretax contributions with shares of the Company's common stock. The profit sharing portion of the plan is discretionary and non-contributory. All amounts contributed to the plan are deposited into a trust fund administered by independent trustees. The Company provided for profit sharing contributions and matching 401(k) savings plan contributions of $208 and $174 in 2000, $186 and $156 in 1999 and $178 and $172 in 1998, respectively. NOTE 10 - BUSINESS CONCENTRATIONS - --------------------------------- A Specialty Products customer accounted for 13%, 16% and 15% of the Company's consolidated net sales for 2000, 1999 and 1998, respectively. This customer accounted for 10% and 16% of the Company's accounts receivable balance at December 31, 2000 and 1999, respectively. NOTE 11 - LEASES - ---------------- The Company leases most of its vehicles and office equipment under noncancelable operating leases, which expire at various times through 2003. Rent expense charged to operations under such lease agreements for 2000, 1999 and 1998 aggregated approximately $326, $335 and $345, respectively. Aggregate future minimum rental payments required under noncancelable operating leases at December 31, 2000 are as follows: Year ---- 2001 $ 205 2002 125 2003 69 ----- Total minimum lease payments $ 399 ===== NOTE 12 - SEGMENT INFORMATION - ----------------------------- The Company's reportable segments are strategic businesses that offer different products and services. Presently, the Company has two reportable segments, Specialty Products and Encapsulated Products. They are managed separately 38 because each business requires different technology and marketing strategies. The Specialty Products segment consists of three specialties: ethylene oxide, propylene oxide and methyl chloride. The Encapsulated Products segment is in the business of encapsulating performance ingredients for use throughout the food and animal health industries for processing, mixing, packaging applications and nutritional fortification and for shelf-life improvement. The Company sells products for both segments through its own sales force, independent distributors and sales agents. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Business Segment Net Sales: - --------------------------- 2000 1999 1998 -------- -------- -------- Specialty Products $ 20,113 $ 19,843 $ 19,434 Encapsulated Products 13,085 9,839 9,287 -------- -------- -------- Total $ 33,198 $ 29,682 $ 28,721 ======== ======== ======== Business Segment Earnings (Loss): - --------------------------------- 2000 1999 1998 -------- -------- -------- Specialty Products $ 5,605 $ 5,613 $ 4,631 Encapsulated Products 333 (600) 176 Interest expense and other income (expense) 58 (108) (179) -------- -------- -------- Earnings before income taxes $ 5,996 $ 4,905 $ 4,628 ======== ======== ======== Depreciation/Amortization: - -------------------------- Specialty Products $ 1,666 $ 1,706 $ 1,412 Encapsulated Products 349 322 242 -------- -------- -------- Total $ 2,015 $ 2,028 $ 1,654 ======== ======== ======== Business Segment Assets: - ------------------------ 2000 1999 1998 -------- -------- -------- Specialty Products $ 11,679 $ 12,680 $ 13,651 Encapsulated Products 7,442 6,527 6,524 Other Unallocated 4,101 2,823 2,473 -------- -------- -------- Total $ 23,222 $ 22,030 $ 22,648 ======== ======== ========
Other unallocated assets consist of cash, prepaid expenses, deferred income taxes and other deferred charges, which the Company does not allocate to its individual business segments. 39
Expenditures for Segment Assets: - -------------------------------- 2000 1999 1998 ------- ------- ------- Specialty Products $ 516 $ 256 $ 4,477 Encapsulated Products 365 443 1,183 ------- ------- ------- Total $ 881 $ 699 $ 5,660 ======= ======= ======= Geographic Revenue Information: - ------------------------------ 2000 1999 1998 ------- ------- ------- United States $30,187 $26,970 $25,833 Foreign Countries 3,011 2,712 2,888 ------- ------- ------- Total $33,198 $29,682 $28,721 ======= ======= =======
The Company has no foreign operations. Therefore, all long-lived assets are in the United States and revenue from foreign countries is based on customer ship-to address. 40 Note 13 - SUPPLEMENTAL CASH FLOW INFORMATION - -------------------------------------------- Cash paid during the year for: - ------------------------------ 2000 1999 1998 ------ ------ ------ Income taxes $2,281 $1,607 $1,578 Interest $ 47 $ 174 $ 197 ------ ------ ------ Non-cash financing activities: - ------------------------------ 2000 1999 1998 ------ ------ ------ Dividends declared $ 277 $ 245 $ 160 ------ ------ ------ Supplementary Financial Information (unaudited): (In thousands, except per share data)
2000 1999 --------------------------------------- ---------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Net sales $7,751 $7,849 $8,450 $9,148 $7,047 $7,270 $7,229 $8,136 Gross profit 3,113 3,257 3,574 4,097 2,840 2,940 2,994 3,350 Earnings before income taxes 1,296 1,376 1,517 1,807 1,163 1,175 1,063 1,612 Net earnings 809 847 984 1,089 750 755 661 928 Basic net earnings per common share $ .17 $ .18 $ .21 $ .24 $ .15 $ .15 $ .14 $ .20 Diluted net earning per common share $ .17 $ .18 $ .21 $ .23 $ .15 $ .15 $ .14 $ .19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 41
SCHEDULE II BALCHEM CORPORATION Valuation and Qualifying Accounts Years Ended December 31, 2000, 1999 and 1998 (In thousands) Additions -------------------------- Balance at Charges to Charges to Beginning of Costs and Other Balance at Description Year Expenses Accounts Deductions End of Year - ------------- ------------ --------- -------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 2000 $ -- $ 48 $-- $ -- $ 48 Year ended December 31, 1999 -- -- -- -- -- Year ended December 31, 1998 187 -- -- (187) --
42 PART III Item 10. Directors and Executive Officers of the Registrant. (a) Directors of the Company. The required information is to be set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders ("Proxy Statement") under the caption "Directors and Executive Officers," which information is hereby incorporated herein by reference. (b) Executive Officers of the Company. The required information is to be set forth in the Proxy Statement under the caption "Directors and Executive Officers," which information is hereby incorporated herein by reference. (c) Section 16(a) Beneficial Ownership Reporting Compliance. The required information is to be set forth in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," which information is hereby incorporated herein by reference. Item 11. Executive Compensation. The information required by this Item is to be set forth in the Proxy Statement under the caption "Directors and Executive Officers," which information is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is to be set forth in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and of Management," which information is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by this Item is set forth in the Proxy Statement under the caption "Directors and Executive Officers," which information is hereby incorporated herein by reference. Item 14. Exhibits and Reports on Form 8-K. (a) Exhibits: 43 3.1 Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")). 3.2 Composite By-laws of the Company. 10.1 Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement")).* 10.2 Stock Option Plan for Directors of the Company, as amended (incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-35912, dated October 25, 1996, and to the 1998 Proxy Statement).* 10.3 Balchem Corporation 1999 Stock Plan (incorporated by reference to Exhibit A to Proxy Statement dated April 23, 1999 for the Company's 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement")). * 10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No. 333-4448, dated December 12, 1997).* 10.5 Employment Agreement, dated as of January 1, 2001, between the Company and Dino A. Rossi. * 10.6 Agreements dated as of April 1, 1993, January 1, 1995 and April 25, 1997, as amended, between the Company and Dr. Charles McClelland (incorporated by reference to Exhibit 10.5 to the 1999 10-K).* 44 - ---------------------- * Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. 21. Subsidiaries of Registrant. 23.1 Consent of KPMG LLP, Independent Auditors 27. Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the year ended December 31, 2000. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 2001 BALCHEM CORPORATION By:/s/ Dino A. Rossi -------------------- Dino A. Rossi, President, Chief Executive Officer 46 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By:/s/ Dino A. Rossi -------------------- Dino A. Rossi, President, Chief Executive Officer, Principal Financial Officer and Director Date: March 28, 2001 By:/s/ Francis J. Fitzpatrick ------------------------------ Francis J. Fitzpatrick, Controller Date: March 28, 2001 By:/s/ John E. Beebe --------------------- John E. Beebe, Director Date: March 28, 2001 By:/s/ Francis X. McDermott --------------------------- Francis X. McDermott, Director Date: March 28, 2001 By:/s/ Kenneth P. Mitchell -------------------------- Kenneth P. Mitchell, Director Date: March 28, 2001 By:/s/ Carl R. Pacifico ----------------------- Carl R. Pacifico, Director Date: March 28, 2001 By:/s/ Israel Sheinberg ----------------------- Israel Sheinberg, Director Date: March 28, 2001 By:/s/ Leonard J. Zweifler -------------------------- Leonard J. Zweifler, Director Date: March 28, 2001 47 EXHIBIT INDEX 3.1 Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")). 3.2 Composite By-laws of the Company. 10.1 Incentive Stock Option Plan of the Company, as amended, (incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement")).* 10.2 Stock Option Plan for Directors of the Company, as amended (incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-35912, dated October 25, 1996, and to the 1998 Proxy Statement).* 10.3 Balchem Corporation 1999 Stock Plan (incorporated by reference to Exhibit A to Proxy Statement dated April 23, 1999 for the Company's 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement")). * 10.4 Balchem Corporation 401(k)/Profit Sharing Plan, dated January 1, 1998 (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No. 333-4448, dated December 12, 1997).* 10.5 Employment Agreement, dated as of January 1, 2001, between the Company and Dino A. Rossi. * 10.6 Agreements dated as of April 1, 1993, January 1, 1995 and April 25, 1997, as amended, between the Company and Dr. Charles McClelland (incorporated by reference to Exhibit 10.5 to the 1999 10-K).* - ---------------------- * Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. 22. Subsidiaries of Registrant. 23.2 Consent of KPMG LLP, Independent Auditors 28. Financial Data Schedule. 48 EX-3.2 2 0002.txt BALCHEM CORPORATION BY-LAWS ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office of the corporation in the State of Maryland shall be located at the 20th Floor, 10 Light Street, Baltimore, Maryland 21202. Section 2. OTHER OFFICES. The corporation may have offices at such other places within or without the State of Maryland as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE. All meetings of shareholders shall Be held at the principal office of the corporation, or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. The annual meeting of the shareholders shall be held on such day in June in each year as the Board of Directors may fix for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held at the same time on the next succeeding business day. Section 3. SPECIAL MEETING. The president or Board of Directors may call special meetings of the shareholders during the interval between annual meetings. Special meetings of shareholders shall also be called by the secretary upon the written request of the holders of shares entitled to cast not less than 25% of all of the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. The secretary shall inform the shareholders making such request of the reasonably estimated cost of preparing and mailing such notice of the meeting, and upon payment to the corporation of such costs by the shareholders, the secretary shall give notice stating the purpose or purposes of the meeting to all shareholders entitled to vote at such meeting. No special meeting need be called upon the request of the holders of shares entitled to cast less than a majority of all votes entitled to be cast at such meeting, to consider any matter which is, in the opinion of the Board of Directors or of the Executive Committee, if there is one in being, substantially the same as a matter voted upon at any special meeting of the shareholders held during the preceding twelve months. Section 4. NOTICE. Not less than ten (10) nor more than ninety (90) days before the date of every shareholders meeting, the secretary shall give to each shareholder who may be entitled to vote at such meeting, and to each shareholder not entitled to vote who is entitled by statute to notice, written or printed notice stating the time and place of the meeting, and, in the case of a special meeting, or as otherwise may be required by statute, the purpose or purposes for which the meeting is called either by mail or by presenting it to him personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the shareholder at his post office address as it appears on the records of the corporation, with postage thereon prepaid. Section 5. SCOPE OF NOTICE. No business shall be transacted at any special meeting of shareholders except that specifically designated in the notice. Any business of the corporation may be transacted at the annual meeting without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. Section 6. QUORUM. At any meeting of shareholders the presence in person or by proxy of shareholders entitled to cast a majority of the votes thereat shall constitute a quorum; but this section shall not affect any statutory or charter requirement for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any such meeting of shareholders, the shareholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until such quorum shall be present. At such adjourned meeting at which a quorum shall been present, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2 Section 7. VOTING. A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present, shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, unless another method or number of votes is required by statute or by the charter of the corporation. Unless otherwise provided in these By-Laws or in the charter of the corporation, each outstanding voting share shall be entitled to one vote upon each matter submitted to vote at a meeting of shareholders. Section 8. PROXIES. At all meetings of shareholders a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation, domestic or foreign, when entitled to be voted, may be voted by the president or vice president or by proxy appointed by the president or a vice president of such other corporation, unless some other person who has been appointed to vote such shares pursuant to a by-law or a resolution of the Board of Directors of such other corporation presents a certified copy of such by-law or resolution, in which case such person may vote such shares. Any fiduciary may vote shares standing in his name as such fiduciary, either in person or by proxy. Shares of its own stock belonging to this corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares at any given time, but shares of its own stock held by it in a fiduciary capacity may be voted by a committee consisting of all the directors of the corporation who shall vote all the shares in proportion to the vote of the directors, except in an election of directors, when all such shares shall be divided into an equal number of parts, which number of parts shall correspond to the number of directors being elected, and a part shall be voted for each director proposed by immediate past management, and shall be counted in determining the total number of outstanding shares at any given time. 3 Section 10. INSPECTORS. At any meeting of shareholders the chairman of the meeting may, or upon request of any shareholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon their determination of the validity and effect of proxies, count all votes and report the results and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there be more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 11. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing setting forth the action to be taken shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Section 12. VOTING BY BALLOT. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. ARTICLE III DIRECTORS Section 1. GENERAL POWERS. The business and affairs of the corporation shall be managed by its Board of Directors. Section 2. NUMBER, CLASSIFICATION, TENURE AND QUALIFICATIONS. The number of directors of the Corporation shall be six (6), effective immediately prior to election of directors at the Year 2001 annual meeting of shareholders, and prior thereto shall be seven (7). The Board of Directors is divided into three classes, Class 1, Class 2 and Class 3, who have staggered three year terms. Class 1, effective immediately prior to election of directors at said Year 2001 annual meeting of shareholders, shall consist of one director, and prior thereto shall consist of two (2) directors, Class 2 shall 4 consist of two directors, and Class 3 shall consist of three directors. The term of office of each class of directors shall expire at the third succeeding annual meeting of shareholders following their election. Section 3. ANNUAL AND REGULAR MEETINGS. The annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this by-law being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. Section 5. NOTICE. Notice of any special meeting shall be given by written notice delivered personally, telegraphed or mailed to each director at his business or residence address. Personally delivered or telegram notices shall be given at least two (2) days prior to the meeting. Notice by mail shall be given at least five (5) days prior the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail properly addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be specified in the notice, unless specifically required by statute. Section 6. QUORUM. A majority of directors then in office shall constitute a quorum for transaction of business at any meeting of the Board of Directors, but in no event should less than one-third of the entire authorized Board of Directors or less than two directors be considered a quorum. Section 7. VOTING. The act of a majority of the directors present at a duly constituted meeting shall be the act of the Board of Directors. 5 Section 8. VACANCIES. Any vacancy occurring in the Board of Directors by reason of the death, disability or resignation of any director may be filled by a majority of the remaining members of the Board of Directors although such majority is less than a quorum, as provided in the charter. A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next Annual Meeting of Stockholders or until his successor is elected and qualifies. Section 9. INFORMAL ACTION BY DIRECTORS. Any action required to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Section 10. COMPENSATION. By resolution of the Board of Directors a fixed annual stipend may be paid to each director, or in lieu thereof a fixed annual sum may be allowed to directors for the attendance at such annual, regular and special meetings of the Board of Directors or any executive committee meeting thereof, and in addition expenses, if any, shall be allowed to directors for attendance at such annual, regular and special meetings of the Board of Directors, or of any executive committee thereof; but nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 11. REMOVAL OF DIRECTORS. A director or directors may be removed from office with or without cause by an affirmative vote of a majority of all of the votes of shareholders entitled to be cast for the election of directors and any resulting vacancy for the unexpired term of the removed director shall be filled by action of the shareholders. Section 12. DIRECTOR EMERITUS. The Board of Directors may, with the consent of the person designated, designate a person who has theretofore served as a director for at least ten years, as a director emeritus, to hold such title at the pleasure of the Board of Directors. A director emeritus shall have the right, while holding such designation, to be present at meetings of the Board of Directors, but without any right of vote or consent, and shall be paid expenses of attendance and an attendance fee equal to that which is paid to a director. 6 ARTICLE IV COMMITTEES NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of three or more directors; such committee or committees to serve at the pleasure of the Board of Directors. ARTICLE V OFFICERS Section 1. POWERS AND DUTIES. The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer or agent shall not of itself create contract rights between the corporation and such officer or agent. Section 2. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interest of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 3. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, creation of a new office or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. Section 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be selected from among the directors and shall preside at all meetings of the Board of Directors. 7 Section 4 A. PRESIDENT. The president shall be the principal executive officer of the corporation and shall in general supervise and control all of the business and affairs of the corporation to the extent actually authorized by resolution of the Board of Directors. He shall preside at all meetings of the shareholders. The president shall be selected from among the directors. He may sign, with the secretary or any other proper officer of the corporation thereunto authorized by the Board of Directors pursuant to these By-Laws, any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these By-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. The president shall be ex officio a member of all committees that may, from time to time, be constituted by the Board of Directors. Section 5. VICE PRESIDENTS. In the absence of the president or in the event of his death, inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 6. SECRETARY. The secretary shall:(a)keep the minutes of the shareholders and Board of Directors meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these By-Laws; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) have general charge of the stock transfer books of the corporation;(f) in general perform all duties as from time to time may be assigned to him by the Board of Directors. Section 7. TREASURER. The treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of 8 the corporation in such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 8. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The assistant treasurers and assistant secretaries, in general, shall perform such duties as shall be assigned to them by the treasurer or secretary, respectively, or by the president or the Board of Directors. Section 9. ANNUAL REPORT. The president or other executive officer of the corporation shall prepare or cause to be prepared annually a full and correct statement of the affairs of the corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be submitted at the annual meeting of shareholders and filed within twenty (20) days thereafter at the principal office of the corporation in the State of Maryland. Section 10. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. Section 11. GIVING OF BOND. If required by the Board of Directors, any officer or other party shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of his duties and for the restoration to the corporation, in case of his death, resignation, retirement or removal from his office or other position, all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. 9 ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 2. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. Section 3. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select. ARTICLE VII SHARES OF STOCK Section 1. CERTIFICATES OF STOCK. Each shareholder shall be entitled to a certificate or certificates which shall represent and certify the number and kind and class of shares owed by him in the corporation. Each certificate shall be signed by the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and shall be sealed with the corporate seal. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the corporation shall, from time to time, issue several classes of stock, each class may have its own number series. In case any officer who has signed any certificate ceases to be an officer of the corporation before the certificate is issued, the certificate may nevertheless be issued by the corporation with the same effect as if the officer had not ceased to be such officer as to the date of its issue. All certificates representing stock which is restricted or limited as to its transferability or voting powers or which is preferred or limited as to its dividends, or as to its share of the assets upon liquidation, or is redeemable at the option of the corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. Section 2. TRANSFERS OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate of stock 10 duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. Section 3. LOST CERTIFICATE. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation alleged to have been stolen, lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be stolen, lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion, and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give bond, with sufficient surety, to the corporation to indemnify it against any loss or claim which may arise by reason of the issuance of a new certificate. Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may fix, in advance, a date as the record date for the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders, or shareholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make a determination of shareholders for any other proper purpose. Such date, in any case, shall be not more than ninety (90) days, and in case of a meeting of shareholders not less than ten (10) days prior to the date on which the meeting or particular action requiring such determination of shareholders is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. 11 If no record date is fixed and the stock transfer books are not closed for the determination of shareholders: (a) the record date for the determination of shareholders entitled to notice of, or to vote at, a meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed, or the thirtieth (30th) day before the meeting, whichever is the closer date to the meeting; (b) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any rights shall be at the closed of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. ARTICLE VIII FISCAL YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the corporation by a duly adopted resolution. ARTICLE IX DIVIDENDS Section 1. DECLARATION. Dividends upon the capital stock of the corporation, subject to the provisions, if any, of the charter of the corporation, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the corporation, subject to the provisions of law and of the charter. Section 2. CONTINGENCIES. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any 12 property of the corporation, or for such other purpose as the Board shall determine to be in the best interest of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X SEAL The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words, Incorporated Maryland. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. ARTICLE XI INDEMNITY OF OFFICERS AND DIRECTORS The corporation shall indemnify and hold harmless each of its directors and officers against any and all expenses actually and necessarily incurred in connection with the defense of any action, suit or proceeding to which such director or officer is made a party by reason of his being, or having been, a director or officer of the corporation, except in relation to matters as to which he shall be adjudged in such action, suit or proceeding to be liable for gross negligence or misconduct in the performance of his duties as such director or officer. In the event of settlement of such action, suit or proceeding in the absence of such adjudication, indemnification shall include reimbursement of amounts paid in settlement and expenses actually and necessarily incurred by such director or officer in connection therewith, but such indemnification shall be provided only if this corporation is advised by its counsel that in his opinion such settlement is for the best interests of this corporation and the director or officer to be indemnified has not been guilty of gross negligence or misconduct in respect of any matter covered by such settlement. Such right of indemnification shall not be deemed exclusive of any other right, or rights, to which such director or officer may be entitled under any agreement, vote of shareholders or otherwise. 13 ARTICLE XIII WAIVER OF NOTICE Whenever any notice is required to be given under the provisions of these By-Laws or under the provisions of the charter of the corporation or under the provisions of the Maryland corporation law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or convened. ARTICLE XIV AMENDMENT OF BY-LAWS Section 1. BY DIRECTORS. The Board of Directors shall have the power, at any annual or regular meeting, or at any special meeting, if notice thereof be included in the notice of such special meeting, to alter or repeal any By-Laws of the corporation and to make new By-Laws, except that the Board of Directors shall not alter or repeal this section or any By-Laws made by the shareholders. Section 2. BY SHAREHOLDERS. The shareholders entitled to vote shall have the power, at any annual meeting, or at any special meeting, if notice thereof be included in the notice of such special meeting, to alter or repeal any By-Laws of the corporation and to make new By-Laws. 14 EX-10.5 3 0003.txt EMPLOYMENT AGREEMENT Agreement, dated as of January 1, 2001, between BALCHEM CORPORATION, a Maryland corporation ("Company") and DINO A. ROSSI ("Employee"). In consideration of the agreements contained below, the parties agree as follows: 1. Company shall employ Employee as its President and Chief Executive Officer for a term (the "Term") commencing as of the date hereof and terminating December 31, 2001, provided that the Term shall be deemed automatically extended for successive one (1) year periods (each an "Extension Period") ending on each successive anniversary of December 31, 2001, unless either party hereto gives written notice to the other not less than sixty (60) days prior to the end of such initial term or the then current Extension Period that the Term is to terminate effective as of the end of such initial term or of such then current Extension Period, as the case may be, in all events subject to earlier termination in accordance with the provisions of this Agreement. 2. Throughout the Term, the Board of Directors of Company (the "Board") shall, consistent with its fiduciary duty, cause Employee to be nominated (and recommended by the Board) for election as a director of Company. 3. During the Term, Employee shall devote all of his working time, attention and effort to the performance of his duties for Company. 4. During the Term, Employee shall receive a salary at the rate of $194,700 per annum, which salary may be increased, at a minimum annually, but not decreased during the Term, at the instance of the Board. 5. In addition to his annual salary as aforesaid, Employee shall be entitled to annual discretionary bonuses based on a target figure of up to 100% (as determined by the Board or an authorized committee thereof) of his annual salary, and consistent with operating and/or other financial targets established by the Board or an authorized committee thereof, for each respective fiscal year of Company during the Term. 6. Employee shall be entitled to four weeks paid vacation per calendar year or such greater amount as may be provided under Company's then prevailing vacation policy as in effect from time to time. All vacation shall be scheduled so as not to interfere with Company's operations. 7. Employee shall be entitled during the Term to all of the fringe benefits from time to time afforded by Company generally to its executives, as well as: (1) Use of a leased company car (generally consistent with that provided to comparable executive officers in Company's industry regarding model, year and reimbursement for related expenses). (2) The sum of $2,500 per annum, to be applied by Employee to the premium cost of term life insurance and disability insurance (in addition to such group life insurance and disability insurance as may be made available generally to Company's executives) for the benefit of such person(s) as Employee may designate from time to time. 8. In the event Employee's employment with Company shall terminate for any reason, then, in addition to any entitlements under Section 9 or Section 10 hereof, if then applicable thereto, Employee shall be entitled to receive any accrued but unpaid salary to the date of such termination and any unpaid annual bonus which Employee shall have earned in respect of any theretofore completed fiscal year of Company. 9. In the event (x) Company shall terminate the employment of Employee under this Agreement for any reason other than (i) "Cause" (as herein defined), (ii) Employee's death, or (iii) by reason of notice from Employee that Employee intends to terminate his employment with Company, whether such termination by Company is pursuant to a notice given under Section 1 above, or whether such termination shall otherwise occur upon the expiration of, or at any time during, the Term, or (y) Executive shall terminate his employment with Company within twelve (12) months after Executive shall have been demoted by Company from his position as President and Chief Executive Officer of Company or shall otherwise have suffered by reason of Company's intentional actions regarding the terms and nature of his employment such a fundamental change in his employment with Company as to effectively amount to a "constructive termination" of his employment with Company (but shall not in fact have been discharged from such employment): (1) Company shall pay to Employee, and Employee shall be entitled to receive as his sole and exclusive remedy and compensation by reason of or arising out of such termination, in addition to the amounts specified in Section 8 hereof, an amount (the "Severance Amount") equal to 150% of Employee's then current annual salary at the time of such termination. The Severance Amount shall be due and payable to Employee in twelve (12) equal monthly installments commencing the tenth day of the month immediately after the month of such termination. (2) As of the effective date of such termination, all options to purchase shares of common stock of the Company theretofore granted to Employee but not yet vested shall be deemed vested and accordingly immediately exercisable in full (to the extent not theretofore exercised) and shall thereupon be exercisable in accordance with and so long as is provided under the respective terms and conditions of such options. 10. (a) In the event a Change of Control Event (as herein defined) shall occur during the Term, then, if Company (or any other successor thereto for which Employee shall thereupon become employed) shall terminate Employee's employment with Company (or such successor) for any reason, other than (i) for Cause, (ii) Employee's death, or (iii) by reason of notice from Employee of Employee's intention to terminate his employment with Company (or such successor), in each case prior to the second anniversary of such Change of Control Event, then Company shall pay to Employee, in lieu of the Severance Amount provided for in Section 9(a) hereof, but in addition to the amounts specified in Section 8 hereof (and in any event subject to Section 10(d) hereof), an amount (the "Involuntary Change of Control Amount"), equal to 200% of the sum of (x) Employee's then current annual salary plus (y) the annual bonus earned by Employee in respect of the fiscal year of Company immediately prior to the fiscal year in which such Change of Control Event occurs. Such Involuntary Change of Control Amount shall be due and payable to Employee in one lump sum within ninety (90) days after such termination. (b) In the event a Change of Control Event shall occur, then, if Employee elects to terminate his employment with Company (or the successor thereto for which Employee shall thereupon become employed) prior to the second anniversary of such Change of Control Event, then Company shall pay to Employee (and in any event subject to Section 10(d) hereof), an amount (the "Voluntary Change of Control Amount") equal to 100% of Employee's then current annual salary. Such Voluntary Change of Control Amount shall be due and payable to Employee in 12 equal monthly installments commencing on the tenth day of the month immediately after the month in which the Change of Control Event occurs. (c) For purposes of this Agreement: (1) "Change of Control Event" means the occurrence of any of the following events during the Term: (1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes (including by merger, consolidation or otherwise) the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 promulgated under the Exchange Act, directly or indirectly, of 50% or more of the voting power of the total outstanding Voting Stock of Company; (2) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (together with any new directors whose election to the Board, or whose nomination for election by the stockholders of the Company, was approved by a vote of 75% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease to constitute a majority of the Board then in office; or (3) the sale or other disposition (other than by way of merger or consolidation) of all or substantially all of the capital stock or assets of Company to any Person or group (as defined in Rule 13d-5 promulgated under the Exchange Act) as an entirety or substantially as an entirety in one transaction or a series of related transactions, unless the ultimate "beneficial owners" of the Voting Stock of such Person immediately after giving effect to such transaction own, directly or indirectly, more than 80% of the total voting power of the total outstanding Voting Stock of Company immediately prior to such transaction. (i) "Person" means any individual, corporation, partnership, joint venture, limited liability company, trust, or other entity. (2) "Voting Stock" of a person means capital stock of or equity interests in such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers, general partner(s) or trustees of such Person (irrespective of whether or not at the time stock or equity interests of any other class or classes shall have or might have voting power by reason of the happening of any contingency). (d) Notwithstanding anything in this Agreement to the contrary, in no event will any amount which otherwise would be payable under or pursuant to this Agreement be payable to Employee to the extent such amount, together with all other amounts payable and benefits provided to Employee under or pursuant to this Agreement and/or under any other plan(s), agreements and/or arrangement(s) arising out of Employee's employment relationship with Company and/or any direct or indirect subsidiary of Company (including without limitation any such amounts payable by any affiliate of Company or any acquirer of any of the stock or assets of Company or any affiliate of such acquirer), if paid to Employee, would result in Employee receiving an "excess parachute payment" for purposes of Section 280G of the Internal Revenue Code of 1986, as amended. The determination of whether a payment under or pursuant to this Agreement would result in Employee receiving an excess parachute payment (but for the provisions of this Section 10(d)) shall be made by counsel for Company reasonably selected by Company, after consultation with Company's independent auditor. 11. (a) It is expressly understood that, solely for purposes of this Section 11, in the event Employee's employment with Company is terminated for Cause, or by reason of notice from Employee of his intention to terminate his employment with Company, or if Employee terminates his employment with Company prior to the then scheduled last day of the Term (before giving effect to such termination), then the Term shall be deemed to end on its then scheduled last day (before giving effect to any such termination or any possible subsequent Extension Period). If, on the other hand, Employee's employment is terminated by Company for any reason other than (i) for Cause, or (ii) by reason of notice from Employee of his intention to terminate his employment with Company, then, for purposes of this Section 11, the Term shall be deemed to end on the effective date of such termination. (b) During the Term (as determined pursuant to Section 11(a) above), and for one year thereafter, Employee, shall not: (1) directly or indirectly own, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or make any financial investment in, or become employed by, or be connected in any manner with, or render (whether or not for compensation) any consulting, advisory or other services to or for the benefit of, any Person, or otherwise engage in any business or activity, which directly or indirectly competes with any business conducted by Company and or any of its subsidiaries; provided, however, that it shall not be a violation of this Agreement for Employee to have beneficial ownership of less than 1% of the outstanding amount of any class of securities listed on a national securities exchange or quoted on an inter-dealer quotation system; (2) directly or indirectly solicit, in competition with Company and/or any of its subsidiaries, any Person who is a client or customer of any business conducted by Company and/or any of its subsidiaries; or (3) directly or indirectly induce or attempt to induce any employee of Company and/or any of its subsidiaries to terminate his or her employment for any purpose, including, without limitation, in order to enter into employment with any Person which competes with any business conducted by Company and/or any of its subsidiaries. Notwithstanding the foregoing, it is understood and agreed that in the event any entity shall acquire control of Company or shall become a successor to Company, the provisions of this Section 11(b) shall not apply to any business or activity conducted by such entity or any of its subsidiaries which is not substantially similar to any of the business(es) or activities conducted by any of Company and its subsidiaries. 12. Employee acknowledges that in the course of his employment with Company, he will have acquired information concerning Company and/or its subsidiaries which is not publicly available, including non-public financial information and trade secrets ("Proprietary Information"). At all times during his employment and after his employment terminates, Employee will keep such Proprietary Information confidential and will not make use of such Proprietary Information on his own behalf, or on behalf of any Person, without the express prior written consent from Company (which may be withheld for any reason), unless such information shall have become public knowledge other than by being divulged or made accessible by him in breach of this provision or any obligation or fiduciary duty to Company or any of its subsidiaries; provided that such confidentially obligation shall not prohibit disclosure of information required pursuant to governmental or judicial process or procedure. 13. Employee acknowledges that as CEO and President of Company he has been placed in a position of confidence and trust with the clients and employees of Company, and that, in connection with such services to Company, he has had and will have access to confidential information vital to the business of Company and/or one or more of its subsidiaries. Employee further acknowledges that, in view of the nature of the business in which Company and/or its subsidiaries is engaged, the covenants in Sections 11 and 12 hereof are reasonable and necessary in order to protect the legitimate interests of Company and that violation of any thereof would result in irreparable injury to Company. Accordingly, Employee consents and agrees that, if he violates or threatens to violate any of such provisions, Company shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief, as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies in law or equity to which Company may be entitled. 14. Employee acknowledges that: (i) the enforcement of any of the provisions of any of Sections 11, 12 and 13 hereof (the "Restrictive Covenants") against Employee would not impose any undue burden upon Employee; and (ii) none of the Restrictive Covenants is unreasonable as to duration or scope. If, notwithstanding the foregoing, any provision hereof would be held to be invalid, prohibited or unenforceable in any jurisdiction for any reason (including, without limitation, any provision which may be held unenforceable because of the scope, duration or area of its applicability), unless narrowed by construction, such provision shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable (and the court making any such determination as to any provision shall have the power to modify such scope, duration or area or all of them, and such provision shall then be applicable in such modified form in such jurisdiction only). If, notwithstanding the foregoing, any provision hereof would be held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability, without invalidating the remaining provisions of this Agreement, or affecting the validity or enforceability of such provision in any other jurisdiction. 15. (a) Company shall be entitled to terminate the employment of Employee under this Agreement for Cause at any time during the Term. "Cause" as used herein shall mean the following: (1) Habitual absence or lateness; (2) Gross insubordination; (3) Failure to observe the provisions of Section 3 of this Agreement concerning the devotion of full time to Company's business; (4) Failure to comply with any of the provisions of Section 11 or 12 hereof; (5) Any action which constitutes a violation of any applicable criminal statute; or (6) Any act which frustrates or violates the undivided duty of loyalty owed by Employee to Company. (b) Company shall also be entitled to terminate the employment of Employee under this Agreement for any reason other than for Cause, in which case the provisions of Section 8, and of Section 9 or Section 10, hereof shall, to the extent provided therein, be applicable. (c) In the event of a Change of Control Event, Employee shall be entitled to terminate his employment with Company prior to the second anniversary of such Change of Control Event and in such event the provisions of Section 8 and of Section 10 hereof shall, to the extent provided therein, apply. (d) Upon any termination pursuant to this Section 15 of Employee's employment with Company, the Term shall be deemed to end concurrently with the effectiveness of such termination, except as otherwise provided in Section 11(a) hereof. 16. Employee may not assign or transfer this Agreement or any of his rights, duties or obligations hereunder. Company may assign this Agreement to any Person acquiring all or substantially all of Company's assets (by merger, sale of assets or otherwise) so long as such Person assumes Company's obligations hereunder. 17. This Agreement sets forth the entire understanding of the parties, and supersedes any and all prior agreements, oral or written, relating to Employee's employment by Company or the termination thereof. This Agreement may not be modified except by a writing, signed by Employee and by a duly authorized officer or director of Company. This Agreement shall be binding upon and shall inure to the benefit of Employee's heirs and personal representatives, and the successors and assigns of Company. 18. This Agreement may be executed in more than one counterpart which, when taken together, shall constitute one complete, executed Agreement. Executed as of the day and year first above written. BALCHEM CORPORATION By: /s/ Kenneth Mitchell -------------------- Kenneth Mitchell /s/ Dino A. Rossi ------------------ Dino A. Rossi EX-23.1 4 0004.txt Exhibit 23.1 Independent Auditors' Consent The Board of Directors and Stockholders Balchem Corporation: We consent to the incorporation by reference in the registration statements (No. 333-78355, 333-44489, 33-35912 and 33-35910) on Form S-8 of Balchem Corporation of our report dated February 6, 2001, relating to the consolidated balance sheets of Balchem Corporation and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Balchem Corporation. /s/ KPMG LLP - ------------ KPMG LLP Short Hills, New Jersey March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----