-----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, N0JRuA+O+LC+Is7khjRXPjpsYFWE51nc4eZ9Bmv0BvavuU+p2No4KPXx+IaaWCZu 0+ABVoZFLK1gRuc4FRGLVQ== 0000914317-99-000182.txt : 19990330 0000914317-99-000182.hdr.sgml : 19990330 ACCESSION NUMBER: 0000914317-99-000182 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99576515 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 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, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to ___________________ Commission File Number 1-13648 BALCHEM CORPORATION (Exact name of registrant as specified in its charter) Maryland 13-2578432 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 175, Slate Hill, New York 10973 ---------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (914)355-5300 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, 1999 was approximately $26,933,056 million.* * For purposes of this calculation, shares of the registrant held by directors and officers of the registrant and under the registrant's 401(k) plan have been excluded. On March 1, 1999 there were 4,879,840 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the registrant's proxy statement for its 1999 annual meeting of stockholders are incorporated by reference in this report. 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 feed industries to enhance processing, mixing, packaging applications, fortification and shelf-life improvement. Major product applications are baked goods, refrigerated and frozen dough systems, processed meats, seasoning blends and confections. Vitamin C is also microencapsulated and sold globally primarily in the aquaculture industry. This product provides a stable and economic source of vitamin C in pelleted feeds used to formulate diets principally for shrimp and farmed fish, as well as for other species, including guinea pigs, horses and primates. Microencapsulated choline chloride is marketed to the animal feed industry offering encapsulated 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 three specialty gases: 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. The Company's 100% ethylene oxide product is distributed by the Company in reusable double-walled shipping drums to assure compliance with safety, quality and environmental standards. 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 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 paint more durable, for specialty starches and in 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. During 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, Griffith Microsciences, Inc., which accounted for approximately 14.8% of the Company's net sales in 1998. The loss of such customer could have a material adverse effect on the Company. New product status: The Company's microencapsulation staff continues to gather test data on its encapsulated choline chloride for animal feed from university studies, commercial field trials and customers, for the purpose of accelerating the marketing effort of this product. Such testing is geared principally to analyzing the ability of rumen stable ingredients to resist degradation by rumen bacteria. This ability allows the nutrient to pass through to the animal's stomach and be released in the small intestine so that it can provide the measured nutrient supplement in a cost-efficient manner. The Company has also introduced new products that are being tested for enhancement of shelf-life and fortification in segments of the food industry that the Company has not heretofore pursued. 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. Patents/Licensing: The Company currently holds numerous patents and uses certain tradenames and trademarks. It also uses know-how, trade secrets, formulae and manufacturing techniques which 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 United States Environmental Protection Agency 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, 1998, the Company had a total backlog of $718,000 (including $304,000 for the encapsulated products segment and $414,000 for the specialty products segment) as compared to a total backlog of $793,000 at December 31, 1997 (including $476,000 for the encapsulated products segment and $317,000 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. 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. In the specialty products business, the Company faces competition from alternative sterilizing technologies and products. Companies offering such competitive alternatives tend to be larger in size with greater financial resources than the Company. Research & Development: During the years ended December 31, 1998, 1997 and 1996, the Company spent approximately $1.0 million, $1.1 million and $0.9 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, 1998, an average of 10 employees devoted full time to research and development activities. The Company funds 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 continually 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 ("FIFRA"), a health and safety statute, requires that certain products within the Company's specialty products segment must be registered with the U.S. Environmental Protection Agency (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 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 been conducting the required testing under the direction of the EPA. Testing has concluded and the EPA has indicated that it anticipates completing its review of the re-registration process for this product in year 2000. The Company hopes to recover the cost of re-registration in the selling price of the sterilant. The Company's management believes 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 clear and reasonable 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 with requirements of the Occupational Safety and Health Administration ("OSHA"). 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 February 11, 1999, the Company employed approximately 107 persons. No employees are covered by any collective bargaining agreement. 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 which 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 which 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 Material Price Volatility. The principal raw materials used by the Company in the manufacture of its products can be subject to price fluctuations. While the selling prices of the Company's products tend to increase or decrease over time with the cost of raw materials, such changes may not occur simultaneously or to the same degree. There can be no assurance that the Company will be able to pass increases in raw material costs through to its customers in the form of price increases. Increases in the price of raw materials, if not offset by product price increases, could have an adverse impact upon the profitability of the Company. 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, 1998, approximately 10% of the Company's net sales consisted of sales outside the United States, predominately to the Far East and 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 any of them could have a material adverse effect on the Company. Year 2000 Compliance. The failure to correct or to adequately address Year 2000 issues (as described in more detail under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of this Report under the heading "Year 2000 Issues") could result in an interruption in, or failure of, certain normal business activities or operations. The inability of the Company to correct a Year 2000 problem could arise due to actions or inaction of third parties not controlled by the Company. In addition, the Year 2000 issue could have a material adverse impact on the operations of the Company due to the unavailability of qualified personnel and other information technology resources, the inability to identify and remediate all date-sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment and the inability of third parties to effect Year 2000 compliance on a timely basis. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of the Company's suppliers, other third-party providers and/or customers, the Company is unable to determine at this time whether the consequences of any Year 2000 problems will have a material impact on the Company's results of operations, liquidity or financial condition. 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 15-1/2 acres of land on several parcels in such community. 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. It is estimated that the total cost of such monitoring will be $50,000. 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 1998. 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 1998 and 1997, for each quarterly period during the past two years, adjusted for the May 1998 three-for-two stock split (effected by means of a stock dividend) were as follows:
Quarterly Period High Low - ---------------- ---- --- Ended March 31, 1998 $ 11.67 $ 9.25 Ended June 30, 1998 15.88 11.25 Ended September 30, 1998 13.38 8.88 Ended December 31, 1998 8.63 4.94 Quarterly Period High Low - ---------------- ---- --- Ended March 31, 1997 $ 6.25 $ 5.33 Ended June 30, 1997 7.50 5.50 Ended September 30, 1997 11.25 7.08 Ended December 31, 1997 13.50 10.25
(b) Record Holders. As of March 1, 1999, 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 309* *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 1,480. (c) Dividends. The Company declared a dividend of $0.033 per share on the common stock during its fiscal year ended December 31, 1998. The Company's agreement with its lending bank places restrictions on the payment of dividends. 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, 1998 1997 1996 1995 1994 - ----------------------- ----------- ----------- ----------- ------------- ----------- Statement of Operations Net sales $ 28,721 $ 28,619 $ 26,371 $ 24,733 $ 18,667 Earnings before income taxes 4,628 4,227 2,917 2,428 1,276 Income taxes 1,673 1,456 990 843 430 Net earnings 2,955 2,771 1,927 1,585 846 Basic earnings per common share .61 .58 .41 .34 .18 Diluted earnings per common share .60 .57 .40 .33 .18 December 31, 1998 1997 1996 1995 1994 - ------------ ----------- ----------- ----------- ------------- ----------- Balance Sheet Data Total assets $ 22,648 $ 17,593 $ 15,140 $ 14,332 $ 12,342 Long-term-debt 3,750 1,500 2,100 3,082 2,717 Other-long-term obligations 841 890 794 835 715 Total stockholders equity 15,775 12,336 9,387 7,447 5,920 Dividends per share $ .033 $ .033 $ .030 $ .023 $ .018
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 which might cause differences from the forward-looking statements include those referred to or identified in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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 1998 compared to 1997 Net sales for 1998 were $28,721 as compared to $28,619 for 1997, an increase of $102. Net sales for the specialty products segment were $19,434 in 1998 as compared to $19,650 in 1997, a decrease of 1% or $216. This decline was attributable primarily to a decrease in volumes sold of the Company's propylene oxide product due primarily to a customer having converted to purchasing the product in a bulk format not offered by the Company. Net sales for the encapsulated products segment increased 4% or $318. This increase was primarily the result of increased volumes sold of products in the domestic and international food markets and increased volumes sold in the animal nutrition markets. These increases were partially offset by declines in sales to the aquaculture industry due to Asian economic issues. Cost of sales increased 2 percentage points as a percent of sales for 1998 as compared to 1997. The increase was primarily attributable to higher costs related to the mix of products sold during 1998 in the encapsulated products segment and additional amortization expense associated with the early buy-out election relating to the specialty products business as more fully described in Liquidity and Capital Resources below. Operating expenses for 1998 decreased to $6,616 from $7,564 for 1997, a decrease of $948 or 13%. The decrease in operating expenses was primarily the result of the encapsulated products segment having established a reserve in 1997 of approximately $187 for an Asian receivable, which was collected in full in 1998. In addition, the Company incurred other charges in 1997 associated with a corporate reorganization totaling $302. Operating expenses without these unusual items would have been $6,803 and $7,075 in 1998 and 1997, respectively, a decrease in 1998 of $272 or 4%. This decrease is predominantly the result of a decrease in consulting fees in the specialty products segment and salary reduction, a result of the 1997 internal reorganization. These decreases were partially offset by an increase in costs associated with the Company's medical plan and increases in recruiting and relocation expenses for both of the Company's business segments. Pre-tax profit for the specialty products segment for 1998 was $4,631 as compared to $4,234 for 1997. The increase in pre-tax profit was the direct result of the ongoing cost containment efforts in the selling and general and administrative areas implemented by management in 1997. Pre-tax profit for the encapsulated products segment for 1998 was $176 as compared to $116 for 1997. During the years ended December 31, 1998 and 1997, the Company spent $1,017 and $1,065, respectively, on Company-sponsored research and development programs substantially all of which pertained to the Company's encapsulated products segment. In particular, the Company continues to incur considerable development expenses in the gathering of data for its encapsulated choline chloride product for animal feed from university studies, commercial field trials and customers, with the intent of accelerating the marketing effort of this product. Income from operations for 1998 was $4,807 as compared to $4,350 for 1997, an increase of 11% or $457. Net earnings were $2,955 for 1998 as compared to $2,771 for 1997. Net interest expense for 1998 totaled $164 as compared to $136 for 1997. The increase in interest expense was the result of a higher average debt balance for 1998 due to the exercise of the early purchase price buy-out option under the agreement pertaining to the 1994 acquisition by the specialty products segment. Fiscal Year 1997 compared to 1996 Net sales for 1997 were $28,619 as compared to $26,371 in 1996, an increase of 9% or $ 2,248. The increase in revenue for 1997 was attributable primarily to increased volumes for the specialty products business and the food product encapsulation business in domestic markets. Additional revenues were also realized due to improved product mix in the encapsulated products segment. Cost of sales decreased 2 percentage points as a percent of sales for 1997 as compared to 1996. The decrease in cost of sales as a percentage of sales was primarily the result of volume efficiencies and a change in the mix of products sold during the period. These favorable factors were partially offset by the reclassification of certain employees as well as employee benefit costs previously classified as general and administrative to various production departments and additional amortization expense associated with the purchase of a customer list for the Company's specialty products business of $147. Operating expenses increased in 1997 to $7,564 from $7,470 in 1996. The increase in operating expenses was primarily the result of the establishment of a reserve of approximately $187 in 1997 for an Asian receivable in the Company's encapsulated products segment. The Company also incurred other charges associated with an internal reorganization totaling $302 in 1997. An increase in revenues also contributed to the increase in operating expenses. These increases were partially offset by a decrease in recruiting and relocation expenses and a decrease in office and computer expenses associated with the 1996 development of a local area network. Pre-tax profit for the specialty products segment for 1997 was $4,234 as compared to $4,098 for 1996. The increase in pre-tax profit was primarily the result of the cost containment efforts in the selling and general and administrative areas implemented by management. Pre-tax profit for the encapsulated products segment for 1997 was $116 as compared to a loss of $978 for 1996. During 1996, the segment realized a substantial loss on the sale of fixed assets used in its custom manufacturing process. In addition, the segment incurred charges associated with the converting of Company's pension plan to the accrual basis. During the years ended December 31, 1997 and 1996, the Company spent $1,065 and $929, respectively, on Company-sponsored research and development programs substantially all of which pertained to the Company's encapsulated products segment. In particular, the Company incurred considerable development expenses in 1997 in the gathering of data for its encapsulated choline chloride product for animal feed from university studies, commercial field trials and customers, with the intent of accelerating the marketing effort of this product. Income from operations for 1997 was $4,350 as compared to $3,120 for 1996, an increase of 39% or $1,230. Net earnings were $2,771 in 1997 compared to $1,927 in 1996, an increase of 44%, or $844. Net interest expense for 1997 totaled $136 as compared to $255 in 1996. The decrease in interest expense is the result of reduced debt and renegotiated loan terms during 1997. Liquidity and Capital Resources Cash flow from operating activities provided approximately $3,893 for 1998 as compared to $2,994 for 1997. Over the last three years, operating cash flow has totaled approximately $10,499. Improvements in cash flow over this period of time have provided the Company with the ability to meet its current operating and investment budgets. Capital expenditures were $1,637 for 1998. The Company had undertaken a plant expansion for its encapsulation product line in 1998 and the increased capacity is presently on-line. Capital expenditures are projected to be approximately $700 for 1999. On June 16, 1994, the Company purchased certain tangible and intangible assets for one of its packaged specialty ingredients for $1,500 in cash. Under the agreement, the Company was also required to pay contingent amounts to compensate the seller for the purchase of the seller's customer list in accordance with a formula based on profits derived from sales of the specialty packaged ingredient. On June 25, 1998, the Company elected to exercise the early payment option under the agreement resulting in a final Company payment of $3,700 to the seller. The Company has no further purchase price obligation under the agreement. The Company has capitalized approximately $3,982 for 1998 in connection with this acquisition. In connection with the exercise of the early payment option described above, the Company borrowed an additional $3,000 during 1998. Long-term debt, including the current portion, totaled $3,750 at December 31, 1998. The Company knows of no current or pending demands on or commitments for its liquid assets that will materially affect its liquidity. The Company currently has approval for a $2,000 line of credit from its principal bank. Year 2000 Issue The Company has conducted a comprehensive review of its operations to identify those systems that could be affected by the "Year 2000" issue. The review covered information systems, mainframe and personal computers, the Company's product research and development facilities and its manufacturing operations. The Year 2000 issue is the general term used to describe various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery, as a result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or any hardware that has date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, production difficulties, or an inability to process transactions, send invoices, or engage in similar normal business activities. Management presently believes that the Company has substantially completed its Year 2000 planning for its internal systems and facilities utilizing both internal and external resources. The Company has implemented a new computer network throughout the organization and is currently implementing a Year 2000 compliant version of its core business software. It is anticipated that Year 2000 compliance efforts will be completed by mid-1999, allowing time for testing. The Company's information systems include sales, production, administrative and financial applications. In the event one of these systems were to fail, the Company's ability to capture, schedule and fulfill customer demands might be impaired. The cost of the Company's Year 2000 project is expected to range between $75 and $140. Approximately $60 of this amount was incurred through 1998. The remainder of the estimated cost of the project is expected to be incurred throughout 1999. All costs of the Year 2000 project have been recognized as incurred. Management also plans to review its external relationships to address potential Year 2000 issues arising from relationships with significant suppliers, service providers and customers and will determine whether it is appropriate, in light of particular relationships and their size and sophistication, to contact significant customers. Contingency plans are being considered and to the extent practicable will be put in place, as required, during 1999 in the event that the Company determines that it is at significant risk in regard to suppliers, customers or its own internal hardware and software. Contingency plans may include, but will not be limited to, consideration of alternative sources of supply, customer communication plans, manually performing certain functions and plant and business response plans. In general, the Company's plans are intended to provide a means of managing risk, but cannot eliminate the potential for disruption due to third party failure. The Company believes that due to the widespread nature of the potential Year 2000 issues, its contingency planning is an ongoing process which will require further consideration as the Company obtains additional information . The Company has not yet developed specific contingency plans in the event of a Year 2000 failure caused by a supplier or third-party, but intends to do so if a specific problem is identified through the program described above. In some cases, particularly with respect to its utility vendors, alternative suppliers may not be available. The failure to correct a material Year 2000 problem could, of course, result in an interruption in, or failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of the Company's suppliers, other third-party providers and customers, the Company is unable to determine at this time whether the consequences of any Year 2000 failures will have a material impact on the Company. The Company believes that, with the implementation of new business systems and completion of the Company's Year 2000 modifications, the possibility of significant interruptions of normal operations should be mitigated. Impact of Recent Accounting Standards In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Adoption of this SOP is not expected to have a material effect on the Company's financial position or results of operations. Also in April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities." This SOP requires companies to expense certain costs such as pre-operating expenses and organizational costs associated with the Company's start-up activities, and is effective for fiscal years beginning after December 15, 1998. Adoption of this SOP is not expected to have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations in the year of adoption. Item 7A. Quantitative and Qualitative Disclosures About Market Risk (All dollar amounts in thousands) 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 resulting from an adverse movement in interest rates. As of December 31, 1998, the Company's only borrowings were under a bank term loan which bears interest at LIBOR plus 1%. A 100 basis point increase in interest rates, applied to the Company's borrowings at December 31, 1998, would result in an increase in interest expense and a corresponding reduction in cash-flow of approximately $38. The Company's short term working capital borrowings have historically borne interest based on the prime rate. The Company believes that its exposure to market risk relating to interest rate risk is not material. The Company has no derivative financial instruments or derivative commodity instruments, nor does the Company generally have any financial instruments entered into for trading or hedging purposes. All foreign sales are 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' Reports 20 Consolidated Balance Sheets as of December 31, 1998 and 1997 22 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 26 Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 27 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP ------------ KPMG LLP Short Hills, New Jersey February 5, 1999 Report of Independent Accountants To the Stockholders and Board of Directors Balchem Corporation We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Balchem Corporation and subsidiaries for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly the results of operations and cash flows of Balchem Corporation and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Judelson, Giordano, Siegel, CPA, PC -------------------------------------- Judelson, Giordano, Siegel, CPA, PC Middletown, New York February 7, 1997 BALCHEM CORPORATION Consolidated Balance Sheets December 31, 1998 and 1997 (In thousands, except share and per share data)
Assets 1998 1997 ------ -------- -------- Current assets: Cash and cash equivalents $ 1,348 $ 736 Trade accounts receivable, less allowance for doubtful accounts of $0 in 1998 and $187 in 1997 (note 5) 3,283 3,061 Inventories (notes 2 and 5) 2,875 2,507 Prepaid expenses 476 513 Deferred income taxes (note 6) 219 305 Other current assets 198 165 -------- -------- Total current assets 8,399 7,287 -------- -------- Property, plant and equipment, net of accumulated depreciation (notes 3 and 5) 8,103 7,345 Intangible assets, net of accumulated amortization (note 4) 6,139 2,925 0ther assets 7 36 -------- -------- Total assets $ 22,648 $ 17,593 ======== ========
BALCHEM CORPORATION Consolidated Balance Sheets December 31, 1998 and 1997 (In thousands, except share and per share data)
Liabilities and Stockholders' Equity 1998 1997 ------------------------------------ -------- -------- Current Liabilities: Accounts Payable $ 1,058 $ 1,006 Accrued Compensation And Other Benefits 601 542 Other Accrued Expenses 420 1,109 Dividends Payable 160 160 Current Portion Of Longterm Debt (Note 5) 1,200 700 Current Portion Of Other Longterm Obligations (Note 4) 43 50 -------- -------- Total Current Liabilities 3,482 3,567 -------- -------- Longterm Debt (Note 5) 2,550 800 Deferred Income Taxes (Note 6) 525 481 Deferred Compensation 135 143 Other Longterm Obligations (Note 4) 181 266 -------- -------- 3,391 1,690 -------- -------- -------- -------- Total Liabilities 6,873 5,257 -------- -------- Stockholders' Equity (Note 7): Preferred Stock, $25 Par Value. Authorized 2,000,000 Shares; None Issued And Outstanding Common Stock, $.06 2/3 Par Value. Authorized 10,000,000 Shares; Issued And Outstanding 4,875,914 Shares At December 31, 1998 And 4,793,163 Shares At December 31,1997 325 319 Additional Paid-in Capital 2,783 2,145 Retained Earnings 12,667 9,872 -------- -------- Total Stockholders' Equity 15,775 12,336 -------- -------- -------- -------- Total Liabilities & Stockholders' Equity $ 22,648 $ 17,593 ======== ========
BALCHEM CORPORATION Consolidated Statements of Operations Years Ended December 31, 1998, 1997 and 1996 (In thousands, except per share data)
1998 1997 1996 ------- ------- ------- Net sales $28,721 $28,619 $26,371 Cost of sales 17,298 16,705 15,781 ------- ------- ------- Gross margin 11,423 11,914 10,590 Operating expenses: Selling expenses 2,584 2,969 2,916 Research and development expenses 1,017 1,065 929 General and administrative expenses 3,015 3,530 3,625 ------- ------- ------- Total operating expenses 6,616 7,564 7,470 ------- ------- ------- Income from operations 4,807 4,350 3,120 Other expenses (income): Interest expense 164 136 255 Other (income) expense net 15 (13) (52) ------- ------- ------- Total other expenses net 179 123 203 ------- ------- ------- Earnings before income taxes 4,628 4,227 2,917 Income taxes (note 6) 1,673 1,456 990 ------- ------- ------- Net earnings $ 2,955 $ 2,771 $ 1,927 ======= ======= ======= Basic net earnings per common share (note 8) $ 0.61 $ 0.58 $ 0.41 ======= ======= ======= Diluted net earnings per common share (note 8) $ 0.60 $ 0.57 $ 0.40 ======= ======= =======
BALCHEM CORPORATION Consolidated Statements of Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996 (In thousands, except share and per share data)
Additional Total Common Stock Paidin Retained Stockholders' Shares Amount Capital Earnings Equity ------------ ------ ----------- -------- ------------- Balance January 1, 1996 4,713,264 314 1,657 5,476 7,447 Net earnings 1,927 1,927 Dividends ($.030 per share) (142) (142) Nonemployee stock options 106 106 Stock options exercised 16,281 1 48 49 --------- --------- --------- --------- --------- Balance December 31, 1996 4,729,545 315 1,811 7,261 9,387 Net earnings 2,771 2,771 Dividends ($.033 per share) (160) (160) Nonemployee stock options 110 110 Stock options exercised 63,618 4 224 228 --------- --------- --------- --------- --------- Balance December 31, 1997 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 Nonemployee stock options 52 52 Stock options exercised 65,607 5 323 328 --------- --------- --------- --------- --------- Balance December 31, 1998 4,875,914 325 2,783 12,667 15,775 ========= ========= ========= ========= =========
BALCHEM CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, 1998,1997 and 1996 (In thousands, except per share data)
1998 1997 1996 ------- ------- ------- Cash flows from operating activities: Net earnings $ 2,955 $ 2,771 $ 1,927 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,654 1,126 1,414 Nonemployee stock compensation 52 110 106 Employee stock option compensation 264 Provision for deferred income taxes 92 (207) (173) Provision for doubtful accounts (187) 187 Loss on sale of equipment 19 4 (9) Changes in assets and liabilities: Accounts receivable (35) (278) 176 Inventories (368) (645) 11 Prepaid expenses and other 5 (159) 27 Accounts payable and accrued expenses (550) 146 12 Income taxes payable (110) 102 Deferred compensation payable (8) 49 19 ------- ------- ------- Net cash flows provided by operating activities 3,893 2,994 3,612 ------- ------- ------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 15 538 10 Capital expenditures (1,637) (1,115) (975) Investments in other assets (4,063) (1,243) (1,300) ------- ------- ------- Net cash flows used in investing activities (5,685) (1,820) (2,265) ------- ------- ------- Cash flows from financing activities: Decrease in short-term borrowings (354) Proceeds from long-term debt 3,000 Principal payments on long-term debt (750) (600) (982) Stock options and warrants exercised 328 228 48 Dividends paid (160) (142) (110) Other financing activities (14) (13) (11) ------- ------- ------- Net cash flows provided by (used in) financing activities 2,404 (527) (1,409) ------- ------- ------- Increase(decrease) in cash and cash equivalents 612 647 (62) Cash and cash equivalents beginning of year 736 89 151 ------- ------- ------- Cash and cash equivalents end of year $ 1,348 $ 736 $ 89
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 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. 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. 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 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, 1998 and 1997 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying 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 and the Far East. Stock-based Compensation Stock-based compensation for employees is recognized using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. For non-employees, stock-based compensation is recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No.123 "Accounting for Stock-Based Compensation." For disclosure purposes, pro forma net earnings data included in note 7 are provided in accordance with SFAS No.123 as if the fair value based method applied. Impairment of Long-lived Assets Long-lived 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. Recent Accounting Pronouncements Effective January 1, 1998 the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. This Statement had no impact on the Company's consolidated financial position or results of operations. As required by SFAS No. 131, disclosures have been reflected in the Company's 1998 consolidated financial statements. Prior periods have been restated to comply with the provisions of the statement. 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). Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. NOTE 2-INVENTORIES Inventories at December 31, 1998 and 1997 consist of the following:
1998 1997 --------- --------- Raw materials $ 1,025 $ 836 Finished goods 1,850 1,671 $ 2,875 $ 2,507
NOTE 3- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1998 and 1997 are summarized as follows:
1998 1997 --------- ---------- Land $ 60 $ 60 Building 4,321 3,947 Equipment 9,758 8,553 14,139 12,560 Less: Accumulated depreciation 6,036 5,215 $ 8,103 $ 7,345
During 1997, the Company sold the fixed assets formerly used in a custom manufacturing process for approximately $538. In 1996, the Company had reduced the carrying values of these fixed assets from approximately $970 to their expected net realizable value of $540. The resulting loss of approximately $430 was included in depreciation expense for the year ended December 31, 1996. NOTE 4- INTANGIBLE ASSETS Intangible assets at December 31, 1998 and 1997 consist of the following:
1998 1997 ---------- ---------- Customer lists $ 6,760 $ 2,778 Re-registration costs 356 356 Covenants not to compete 295 295 Other 167 126 7,578 3,555 Less: Accumulated amortization 1,439 630 $ 6,139 $ 2,925
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. During 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 it anticipates completing re-registration for this product in 2000. 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 The Company has borrowings under a term loan agreement with a bank of $750 and $1,500 at December 31, 1998 and 1997, respectively. Borrowings under the term loan, which matures on December 31, 2000, bear interest at LIBOR plus 1% (7.06% at December 31, 1998) and are secured by accounts receivable, inventories, equipment and all personal property of the Company. Certain provisions of the term loan limit the payment of dividends, require maintenance of certain financial ratios, limit future borrowings and impose certain other conditions as contained in the agreement. In addition, the Company has additional borrowings under a short-term agreement with a bank of $3,000. Borrowings under the short-term agreement also bear interest at LIBOR plus 1%. On January 15, 1999, the Company and bank entered into an amended and restated term loan agreement whereby the bank agreed to make an additional term loan to the Company in the amount of $3,000, replacing the short-term agreement in place at December 31, 1998. Borrowings under the amended and restated term loan, which matures on January 15, 2004, bear interest at LIBOR plus 1% and are secured by accounts receivable, inventories, equipment and all personal property of the Company. Certain provisions of the term loan limit the payment of dividends, require maintenance of certain financial ratios, limit future borrowings and impose certain other conditions as contained in the agreement. As of December 31, 1998, long-term debt matures as follows: 1999 $ 1,200 2000 750 2001 600 2002 600 2003 600 Total $ 3,750
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, 1998 or 1997. The approval expires on June 30, 1999. The Company intends to seek renewal of such approval in 1999. NOTE 6 - INCOME TAXES Income tax expense (benefit) attributable to earnings before income taxes consists of the following:
1998 1997 1996 --------- --------- --------- Current: Federal $ 1,402 $ 1,476 $ 1,076 State 179 187 87 Deferred: Federal 85 (186) (186) State 7 (21) 13 Total income tax provision $ 1,673 $ 1,456 $ 990
The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 34% to income before income taxes for the following reasons:
1998 1997 1996 --------- --------- ---------- Income tax at Federal Statutory rate $ 1,574 $ 1,437 $ 992 State income taxes, net of Federal income tax benefit 123 109 66 Other (24) (90) (68) Total income tax provision $ 1,673 $ 1,456 $ 990
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 -------- -------- Deferred tax assets: Amortization $ 172 $ 62 Inventory valuation - uniform capitalization 177 177 Deferred compensation 70 136 Non-employee stock options 76 80 Self insurance 24 - Allowance for doubtful accounts - 71 Other 38 38 Total deferred tax assets 557 564 Deferred tax liabilities: Depreciation 863 740 Total deferred tax liabilities 863 740 Net deferred tax liability $ 306 $ 176
There is no valuation allowance for deferred tax assets at December 31, 1998 and 1997. 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. The amounts of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. NOTE 7 - STOCKHOLDERS' EQUITY On May 2, 1998, the Board of Directors of the Company approved a three-for-two split of the Company's common stock to be distributed in the form of a stock dividend to shareholders of record on May 15, 1998. Such distribution was made on June 3, 1998. Accordingly, the stock split was recognized by reclassifying $105, the par value of the additional shares resulting from the split, from additional paid-in capital to common stock. All references to number of common shares and per share amounts except shares authorized in the accompanying consolidated financial statements were retroactively adjusted to reflect the effect of the stock split. The Company has an incentive stock option plan (the "ISO Plan") under which officers and certain key employees may be granted options to purchase shares of common stock exercisable at prices equal to the fair market value at the date of grant. Options generally become exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from the date of grant. During 1996, the Company extended the expiration period of future option grants from five years to ten years from the date of grant. At December 31, 1998, 581,250 shares of common stock were reserved for issuances under the plan. A summary of incentive stock option plan transactions for 1998, 1997 and 1996 under this plan is as follows:
# of Weighted Average 1998 Shares Exercise Price ---- ------ -------------- Outstanding at beginning of year 188,753 $ 8.28 Granted 100,121 $ 9.48 Exercised (27,304) $ 3.40 Terminated or expired (15,765) $ 8.20 Outstanding at end of year 245,805 $ 9.31 Exercisable at end of year 70,580 $ 8.15
# of Weighted Average 1997 Shares Exercise Price ---- ------ -------------- Outstanding at beginning of year 147,731 $ 4.33 Granted 109,425 $ 10.77 Exercised (63,618) $ 3.59 Terminated or expired (4,785) $ 5.72 Outstanding at end of year 188,753 $ 8.28 Exercisable at end of year 79,502 $ 6.71
1996 ---- Outstanding at beginning of year 149,693 $ 3.82 Granted 36,000 $ 5.69 Exercised (16,281) $ 2.97 Terminated or expired (21,681) $ 4.09 Outstanding at end of year 147,731 $ 4.33 Exercisable at end of year 69,656 $ 3.35
Information related to stock options outstanding under the ISO Plan at December 31, 1998 is as follows:
Options Outstanding Options Exercisable ---------------------------------- ----------------------------- Weighted Average Weighted Weighted Remainin Average Average Range of Exercise Shares Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ----------------- ------------- ----------- --------- ------------- ------------- $ 4.00 - $ 5.92 29,330 5.9 years $ 5.21 20,570 $ 5.00 $ 6.25 - $ 9.00 69,550 8.1 years 7.44 14,625 6.25 $ 10.75 - $ 11.75 146,925 8.9 years 11.02 35,385 10.76 245,805 8.3 years $ 9.31 70,580 $ 8.15
The Company applies APB Opinion No. 25 in accounting for its ISO Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant dates for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 -------- -------- -------- Net Earnings As Reported $ 2,955 $ 2,771 $ 1,927 Pro forma $ 2,805 $ 2,611 $ 1,916 Earnings per share As Reported - Basic $ .61 $ 0.58 $ 0.41 Pro forma - Basic $ .58 $ 0.55 $ 0.41 As Reported - Diluted $ .60 $ 0.57 $ 0.40 Pro forma - Diluted $ .57 $ 0.54 $ 0.40
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 1998 ,1997 and 1996, respectively: dividend yield of .40%, .44%, and .37%; expected volatility of 46% , 32% and 14%; risk-free interest rates of 4.8%, 6.5% and 6.0% and expected life of six years for all years. The weighted average fair values of options granted during the years 1998, 1997 and 1996 were $1.81, $5.19 and $1.71, respectively. Pro forma net earnings reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for 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 period of three years and compensation cost for options granted prior to January 1, 1995 has not been considered. The Company has a non-statutory stock option plan (the "Plan") under which directors, directors emeritus, employees and consultants of the Company may be granted options to purchase shares of common stock exercisable at prices equal to the fair market value at the date of grant. The Company has reserved 678,000 shares of common stock for issuance under this Plan. During 1996, the Company extended the expiration period for all future grants from five years to ten years after the date of grant. A summary of these stock options for 1998, 1997 and 1996 is as follows:
# of Weighted Average 1998 Shares Exercise Price ---- -------- ---------------- Outstanding at beginning of year 136,964 $ 5.44 Granted 19,506 $ 5.38 Exercised (38,303) $ 5.07 Terminated or expired - - Outstanding at end of year 118,167 $ 5.55 Exercisable at end of year 110,667 $ 5.47
# of Weighted Average 1997 Shares Exercise Price ---- -------- ---------------- Outstanding at beginning of year 102,869 $ 3.90 Granted 34,095 $10.10 Terminated or expired - - Outstanding at end of year 136,964 $ 5.44 Exercisable at end of year 125,714 $ 5.32
1996 ---- Outstanding at beginning of year 87,161 $ 3.58 Granted 15,708 $ 5.67 Terminated or expired - - Outstanding at end of year 102,869 $ 3.90 Exercisable at end of year 99,119 $ 3.89
Information related to stock options outstanding under the Plan at December 31, 1998 is as follows:
Options Outstanding Options Exercisable ---------------------------------- ----------------------------- Weighted Average Weighted Weighted Remainin Average Average Range of Exercise Shares Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ----------------- ------------- ----------- --------- ------------- ------------- $ 2.45 - $ 3.17 27,081 4.3 years $ 2.76 27,081 $ 2.76 $ 4.00 - $ 6.75 75,091 7.9 years 5.24 67,591 5.07 $11.77 15,995 9.0 years 11.77 15,995 11.77 118,167 7.3 years $ 5.55 110,667 $ 5.47
The Plan was amended in 1998 to cover option grants to consultants. The information contained in the foregoing tables relating to the Plan includes information as to options to purchase an aggregate of 45,000 shares of common stock granted to a consultant pursuant to certain agreements with such consultant. In accordance with SFAS No.123 a charge to income and corresponding increase to paid-in capital of approximately $52, $110 and $106 was recorded for options granted in 1998, 1997 and 1996, 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 1998, 1997 and 1996, respectively: dividend yield of .40%, .44% and .37%; expected volatility of 46%, 32% and 14%; risk-free interest rates of 4.6%, 6.5% and 6.0%; and expected life of six years. The weighted average fair values of options granted during the years 1998, 1997 and 1996 were $2.65, $4.82 and $6.74, respectively. 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:
Number of Income Shares Per Share 1998 (Numerator) (Denominator) 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
Number of Income Shares Per Share 1997 (Numerator) (Denominator) Amount ---- ----------- ------------- --------- Basic EPS - Net earnings and weighted average common hares outstanding $ 2,771 4,742,754 $.58 Effect of dilutive securities - stock options 95,401 ------ Diluted EPS: - Net earnings and weighted average common shares outstanding and effect of stock options $ 2,771 4,838,155 $.57
Number of Income Shares Per Share 1996 (Numerator) (Denominator) Amount ---- ----------- ------------- --------- Basic EPS - Net earnings and weighted average common shares outstanding $ 1,927 4,716,500 $.41 Effect of dilutive securities - stock options 71,606 ------ Diluted EPS: - Net earnings and weighted average common shares outstanding and effect of stock options $ 1,927 4,788,106 $.40
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. 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 $178 and $172 in 1998, respectively. Prior to 1998, the Company had a defined contribution pension plan that covered substantially all employees. Pension plan contributions for 1997 and 1996 were $149 and $283, respectively. In 1996, the Company took a one-time charge to earnings of $165 in order to convert the accounting for the pension plan to the accrual basis. Prior to 1998, the Company also had a 40l(k) savings plan that covered substantially all employees. 401(k) savings plan contributions for 1997 and 1996 were $95 and $83, respectively. NOTE 10 - BUSINESS CONCENTRATIONS A customer accounted for 15%, 13% and 11% of the Company's net sales for 1998, 1997 and 1996, respectively. This customer accounted for 13% and 14% of the Company's accounts receivable balance at December 31, 1998 and 1997, 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 1998, 1997 and 1996 aggregated approximately $345, $334 and $221, respectively. Aggregate future minimum rental payments required under noncancelable operating leases at December 31, 1998 are as follows:
Year ---- 1999 $ 242 2000 217 2001 122 2002 57 2003 27 Total minimum lease payments $ 665
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 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 industry for processing, mixing, packaging applications, 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 Revenues: 1998 1997 1996 ---------- ---------- ---------- Specialty Products $ 19,434 $ 19,650 $ 18,264 Encapsulated Products 9,287 8,969 8,107 Total $ 28,721 $ 28,619 $ 26,371
Business Segment Profit (Loss): 1998 1997 1996 ---------- ---------- ---------- Specialty Products $ 4,631 $ 4,234 $ 4,098 Encapsulated Products 176 116 (978) Interest expense and other income (expense) (179) (123) (203) Earnings before income taxes $ 4,628 $ 4,227 $ 2,917
Depreciation/Amortization: 1998 1997 1996 ---------- ---------- ---------- Specialty Products $ 1,412 $ 924 $ 698 Encapsulated Products 242 202 716 Total $ 1,654 $ 1,126 $ 1,414
Business Segment Assets: 1998 1997 1996 ---------- ---------- ---------- Specialty Products $ 13,651 $ 10,254 $ 6,755 Encapsulated Products 6,524 5,314 7,343 Other Unallocated 2,473 2,025 1,042 Total $ 22,648 $ 17,593 $ 15,140
During 1997, the Company sold the fixed assets formerly used in a custom manufacturing process for approximately $538. In 1996, the Company had reduced the carrying values of these fixed assets from approximately $970 to their expected net realizable value of $540. The resulting loss of approximately $430 is included in depreciation expense for the year ended December 31, 1996. Such fixed assets were included in the encapsulated products segment for 1996. 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.
Expenditures for Segment Assets: 1998 1997 1996 ---------- ---------- ---------- Specialty Products $ 4,477 $ 1,826 $ 1,858 Encapsulated Products 1,183 532 417 Total $ 5,660 $ 2,358 $ 2,275
Geographic Revenue Information: 1998 1997 1996 ---------- ---------- ---------- United States $ 25,833 $ 25,825 $ 23,381 Foreign Countries 2,888 2,794 2,990 Total $ 28,721 $ 28,619 $ 26,371
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. Note 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for: 1998 1997 1996 ---------- --------- --------- Income taxes $ 1,578 $ 1,868 $ 1,034 Interest $ 197 $ 164 $ 266
Supplementary Financial Information (unaudited): Earnings per share been adjusted for the May 1998 three-for-two stock split (effected by means of a stock dividend).
(In thousands, except per share data) 1998 1997 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Net sales $ 7,733 $ 7,220 $ 6,583 $ 7,185 $ 6,835 $ 7,308 $ 7,170 $ 7,306 Gross margin 3,214 2,907 2,347 2,955 3,070 3,182 3,033 2,629 Earnings before Income taxes 1,270 1,183 905 1,270 1,129 1,252 1,194 652 Net earnings 831 753 595 776 717 862 768 424 Basic earnings per Common share $ .17 $ .16 $ .12 $ .16 $ .15 $ .18 $ .16 $ .09 Diluted earnings per Common share $ .17 $ .15 $ .12 $ .16 $ .15 $ .18 $ .16 $ .08
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On December 30, 1996, the Company advised the accounting firm of Judelson, Giordano, Siegel, CPA, PC, the principal accountant previously engaged to audit the Company's financial statements, that it was dismissing such principal accountant for audits of years after December 31, 1996. For the year ended 1996, the report issued by the former accountants on the Company's financial statements did not contain an adverse opinion or a disclaimer of opinion, nor was any such opinion qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to change accountants was recommended by the Audit Committee and approved by the Board of Directors. There were no disagreements with the former accountant on any matter of accounting principles or practices, financial statements disclosures or auditing scope or procedures. The Company has engaged KPMG LLP as its independent accountants for periods after December 31, 1996. The selection was the result of a competitive search process initiated by the Company. The above noted information was disclosed in the Company's Report on Form 8-K dated January 9, 1997. 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 1999 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: 3.1 Composite Articles of Incorporation of the Company. 3.2 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 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.* 10.4 Employment Agreement, dated as of October 1, 1997, between the Company and Dino A. Rossi.* 10.5 Agreements dated as of April 1, 1993, January 1, 1995 and April 25, 1997, as amended, between the Company and Dr. Charles McClelland.* 10.6 Amended and Restated Term Loan Agreement, dated as of January 15, 1999, and related Security Agreement, between the Company and The Chase Manhattan Bank. 16. Letter on change in certifying accountant (incorporated by reference to Exhibit 16 to Form 10-KSB/A (Amendment No. 1) of the Company, dated October 23, 1998). 21. Subsidiaries of Registrant. 23.1 Consent of KPMG LLP, Independent Auditors 23.2 Consent of Judelson, Giordano, Siegel, P.C. 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, 1998. - ---------------------- * Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. 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 17, 1999 BALCHEM CORPORATION By:/s/ Dino A. Rossi ------------------------- Dino A. Rossi, President, Chief Executive Officer 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 17, 1999 By:/s/ Francis J. Fitzpatrick ---------------------------------- Francis J. Fitzpatrick, Controller Date: March 17, 1999 By:/s/ Donald E. Alguire ---------------------------------- Donald E. Alguire, Director Date: March 13, 1999 By:/s/ John E. Beebe ---------------------------------- John E. Beebe, Director Date: March 15, 1999 By:/s/ Francis X. McDermott ---------------------------------- Francis X. McDermott, Director Date: March 17, 1999 By:/s/ Kenneth P. Mitchell ---------------------------------- Kenneth P. Mitchell, Director Date: March 17, 1999 By:/s/ Carl R. Pacifico ---------------------------------- Carl R. Pacifico, Director Date: March 15, 1999 By:/s/ Israel Sheinberg ---------------------------------- Israel Sheinberg, Director Date: March 17, 1999 By:/s/ Leonard J. Zweifler ---------------------------------- Leonard J. Zweifler, Director Date: March 13, 1999 EXHIBIT INDEX 3.1 Composite Articles of Incorporation of the Company. 3.2 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 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.* 10.4 Employment Agreement, dated as of October 1, 1997, between the Company and Dino A. Rossi.* 10.5 Agreements dated as of April 1, 1993, January 1, 1995 and April 25, 1997, as amended, between the Company and Dr. Charles McClelland.* 10.6 Amended and Restated Term Loan Agreement, dated as of January 15, 1999, and related Security Agreement, between the Company and The Chase Manhattan Bank. 16. Letter on change in certifying accountant (incorporated by reference to Exhibit 16 to Form 10-KSB/A (Amendment No. 1) of the Company, dated October 23, 1998). 21. Subsidiaries of Registrant. 23.1 Consent of KPMG LLP, Independent Auditors 23.2 Consent of Judelson, Giordano, Siegel, P.C. 27. Financial Data Schedule. EX-3.1 2 THIS COMPOSITE ARTICLES OF INCORPORATION OF BALCHEM CORPORATION (THE "CORPORATION") REFLECTS THE PROVISIONS OF THE CORPORATION'S ARTICLES OF INCORPORATION AS RESTATED ON OCTOBER 22, 1987, AND ALL AMENDMENTS THERETO FILED WITH THE MARYLAND SECRETARY OF STATE THEREAFTER PRIOR TO MARCH 25, 1999, BUT IS NOT AN AMENDMENT AND/OR RESTATEMENT THEREOF. COMPOSITE ARTICLES OF INCORPORATION OF BALCHEM CORPORATION * * * Pursuant to the provisions of Section 2-608 of the Maryland General Corporation Law, Balchem Corporation (the "Corporation"), a Maryland corporation having its principal office in Baltimore City, hereby certifies that: FIRST: The Corporation desires to restate its charter as currently in effect. SECOND: The provisions hereinafter set forth in the Articles of Restatement are all the provisions of the charter of the Corporation as currently in effect. THIRD: The restatement of the charter of the Corporation has been approved by a majority of the entire Board of Directors of the Corporation. FOURTH: The charter of the Corporation is not amended by these Articles of Restatement. FIFTH: The current address of the principal office of the Corporation in the State of Maryland is 20th Floor, 10 Light Street, Baltimore, Maryland 21202. SIXTH: The name and the address of the current resident agent of the Corporation in the State of Maryland is Herbert J. Hubbard, 10 Light Street, Baltimore, Maryland 21202. SEVENTH: The number of directors of the Corporation is eight, and the names of the directors of the Corporation currently in office are: Herbert D. Weiss John Germano Carl Pacifico Leslie L. Balassa John Beebe Leonard Zweifler Louis Greenberg Wallace J. Borker * * * -1- FIRST: The name of the corporation (which is hereinafter called the "Corporation") is BALCHEM CORPORATION. SECOND: The purposes for which the Corporation is formed and the business and objects to be carried on and promoted by it are as follows: (a) To discover, conceive, invent, and improve, implement and develop such discoveries, conceptions and inventions on its own behalf and on behalf of others in the field of microencapsulation and microdispersion of liquids, gasses and solids and related packaging and production equipment. (b) To promote and merchandise products, render services and engage in research in the field of microencapsulation and microdispersion of liquids, gasses and solids. (c) To apply for, obtain, register, purchase, lease or otherwise acquire, and to hold, use, own, operate and introduce, and to sell, assign, or otherwise dispose of, any trademarks, trade names, copyrights, patents, inventions, improvements and processes used in connection with or secured under Letters Patent of the United States, or elsewhere or otherwise, and to use, exercise, develop, grant licenses in respect of, or otherwise to turn to account any such trademarks, patents, copyrights, licenses, processes and the like, or any such property or rights; and to manufacture, buy, sell or deal in any article produced as the result or through the use of, any such inventories, processes, or the like or under any such patent, or any article of any description used, or suitable to be used in connection therewith. (d) To acquire by purchase, lease or otherwise, and to own, hold, develop, improve, mortgage, sell, exchange, let, use, operate, or in any manner and to any extent, encumber or dispose of any other property, real or personal, necessary or advisable to accomplish any of the purposes, or to carry on and promote the business or objects referred to in these Articles of Incorporation. (e) To purchase, lease or otherwise acquire, all or any part of the property, trademarks, trade names, rights, businesses, contracts, good will, franchises, patents, patents applied for, use of patents and patents applied for and assets of every kind, of any corporation, co-partnership or individual (including the estate of a decedent) carrying on, or having carried on, in whole or in part, the business or businesses which the Corporation is authorized to carry on; and to undertake, guarantee, assume and pay the indebtedness and liabilities thereof; and to pay for such property, trademarks, trade names, rights, businesses, contracts, good will, franchises, patents, patents applied for, use of patents and patents applied for, or assets by the issue in accordance with the laws of the State of Maryland, of stocks, bonds or other securities of the Corporation or otherwise. -2- (f) To guarantee the payment of dividends upon any shares of stock of, or the performance of any contract by, any other corporation or association in which the Corporation has an interest, and to endorse or otherwise guarantee the payment of the principal and interest, or either, of any bonds, debentures, notes, securities or other evidences of indebtedness created or issued by any such other corporation or association. (g) To purchase or otherwise acquire, hold and reissue shares of its capital stock of any class; and to purchase, hold, sell, assign, transfer, exchange, lease, mortgage, pledge, or otherwise dispose of, any shares of stock of, or voting trust certificates for any shares of stock of, or any bonds or other securities or evidence of indebtedness issued or created by, any other corporation or association, organized under the laws of the State of Maryland or of any other state, territory, district, colony or dependency of the United States of America, or of any foreign country, and while the owner or holder of any such shares of stock, voting trust certificates, bonds or other obligations, to possess and exercise in respect thereof any and all of the rights, powers and privileges of ownership, including the right to vote on any shares of stock so held or owned; and upon a distribution of the assets or a division of the profits of this Corporation, to distribute any such shares of stock, voting trust certificates, bonds or other obligations, or the proceeds thereof, among the stockholders of this Corporation. (h) To advance money with or without security, and without limit as to amount; and to borrow or raise money for any of the purposes of the Corporation, and to issue bonds, debentures, notes or other obligations of any nature, and in any manner permitted by law, for money so borrowed or in payment for property purchased, or for any other lawful consideration and to secure the payment thereof and of the interest thereon, by mortgage upon, or pledge or conveyance or assignment in trust of, the whole or any part of the property of the Corporation, real or personal, including contract rights, whether at the time owned or thereafter acquired; and to sell, pledge, discount or otherwise dispose of such bonds, notes or other obligations of the Corporation for its corporate purposes. (i) To carry on any of the businesses hereinbefore enumerated for itself, or for the account of others, or through others for its own account, and to carry on any other business which may be deemed by it to be calculated, directly or indirectly, to effectuate or facilitate the transaction of the aforesaid objects or businesses, or any of them, or any part thereof, or to enhance the value of its property, business or rights. The foregoing enumeration of the purposes, objects and business of the Corporation is made in furtherance, and not in limitation, of the powers conferred upon the Corporation by law, and is not intended, by the mention of any particular purpose, object or business, in any manner to limit or restrict the generality of any other purposes, object or business mentioned, or to limit or restrict any of the powers of the Corporation. The Corporation is formed upon the articles, conditions and provisions herein expressed, and subject in all particulars to the limitations relative to corporations which are contained in the general laws of this State. -3- THIRD: The post-office address of the principal office of this Corporation is 20th Floor, 19 Light Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in this State is Harbor City Research, Inc., the post-office address of which is 201 East Baltimore Street, Suite 630, Baltimore, Maryland 20202. The said resident agent so designated is a corporation of this State. FOURTH: The total number of shares of stock which the Corporation has authority to issue is twelve million (12,000,000) shares consisting of ten million (10,000,000) shares of common stock, $.06 2/3 par value per share, and two million (2,000,000) shares of preferred stock, $25.00 par value per share. The aggregate par value of all authorized shares of all classes having a par value is fifty million six hundred sixty-seven thousand dollars ($50,667,000). Subject to the provisions of Section 2-105 of the Maryland General Corporation Law, the board of directors of the Corporation is authorized to issue the preferred stock of the Corporation, from time to time, in one or more series, each series to be with such preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as the board of directors shall determine. Each share of any series of preferred stock shall be identical with all other shares of that series. Except as otherwise provided by law, or as authorized by the board of directors of the Corporation, all right to vote and all voting power incident to the Corporation's stock shall be vested exclusively in the holders of the common stock, which shares shall also have all of the rights not specifically granted to the preferred stock. The holders of the preferred stock shall not be entitled to notice of any meeting of stockholders except as authorized by the board of directors or as may be specifically required by law. FIFTH: No holders of stock of the Corporation shall have any preferential right of subscription to any shares of stock or securities convertible into shares of stock of the Corporation. SIXTH: The following provisions are hereby adopted for the purposes of defining, limiting and regulating the powers of the Corporation and of the directors and stockholders: The Board of Directors of the Corporation is hereby empowered to authorize the issuance from time to time of shares of its stock, whether now or hereafter authorized, or securities convertible in to shares of its stock, whether now or hereafter authorized. Any director individually, or any firm of which any director may be a member, or any corporation or association of which any director may be an officer or director or in which any director may be interested as the holder of any amount of its capital stock or otherwise, may be a -4- party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, and in the absence of fraud, no contract or other transaction shall be thereby affected or invalidated; provided that in case a director, or a firm of which a director is a member, is so interested, such fact shall be disclosed or shall have been known to the Board of Directors or a majority thereof. Any director of the Corporation who is also a director or officer of or interested in such other corporation or association, or who, or the firm of which he is a member, is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize any such contract or transaction, and may vote thereat to authorize any such contract or transaction, with like force and effect as if he were not such director or officer of such other corporation or association or not so interested or a member of a firm so interested. Any contract, transaction or act of the Corporation, or of the directors, which shall be ratified by a majority of a quorum of the stockholders having voting powers at any annual meeting, or any special meeting called for such purpose, shall, so far as permitted by law, be as valid and as binding as though ratified by every stockholder of the Corporation. SEVENTH: The duration of the Corporation shall be perpetual. EIGHTH: To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the charter of the Corporation or repeal of any of its provisions shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission that occurred prior to such amendment or repeal. * * * -5- EX-3.2 3 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 1 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 2 business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 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 CLASSIFICATIONS TENURE AND QUALIFICATIONS. The number of directors of the Corporation shall be eight (8), effective as of the 1998 Annual Meeting. The Board of Directors are divided into thee classes, Class 1, Class 2 and Class 3, who have staggered three year terms. Class 1, effective as of the 1998 Annual Meeting, shall consist of two directors and Classes 2 and 3 shall continue to consist of three directors each. The term of office of each class of directors shall expire at the third succeeding annual meeting following their election. 4 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. 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 5 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. 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 6 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. 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 7 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 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, 8 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. 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. 9 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 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. 10 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. 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 11 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 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. 12 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. 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 13 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-10.4 4 EMPLOYMENT AGREEMENT Agreement dated as of October 1, 1997, between BALCHEM 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 General Manager and Chief Executive Officer for a term (the "Term") commencing as of the date hereof and terminating September 30, 2000. 2. Throughout the Term, Employee shall be elected as a President and as a director of Company. 3. During the Term, Employee shall devote all of his 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 $150,000 per annum, which salary may be increased, at a minimum annually, but not decreased during the Term at the instance of the Board of Directors of Company. 5. In addition to his salary aforesaid, Employee shall be entitled to all of the fringe benefits afforded by Company to its executives, including a company car, and to annual discretionary bonuses based on a target figure of 50% of his annual salary for the respective bonus year. Employee shall be entitled to three weeks paid vacation per calendar year or such greater amount as may be provided under the 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. In addition, simultaneously herewith, Employee has been granted options to purchase 50,000 shares of Company's common stock under conditions set forth in a Board of Directors resolution dated October 17, 1997. 6. During the Term, and for one year thereafter, Employee, shall not (i) directly or indirectly own, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or make any financial investments in, or become employed by, or be connected in any manner with, or 1 render (whether or not for compensation) any consulting, advisory or other services to or for the benefit of, any person, firm or corporation, or otherwise engage in any business activity which directly or indirectly competes with any business conducted by the Company; 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 in such entity; (ii) directly or indirectly, solicit, in competition with the Company, any person who is a customer of any business conducted by the Company; or (iii) directly or indirectly, induce or attempt to induce any employee of the Company to terminate his or her employment for any purpose, including without limitation, in order to enter into employment with any entity which competes with any business conducted by the Company. 7. Employee acknowledges that in the course of his employment with the Company, he will have acquired information concerning the Company which is not publicly available, including non-public financial information and trade secrets ("Proprietary Information"). Employee will keep such Proprietary Information confidential at all times after his employment terminates, and will not make use of such Proprietary Information on his own behalf, or on behalf of any third party without the prior written consent from the Company (which may be withheld for any reasons), unless such information shall have become public knowledge other than by being divulged or made accessible by him in breach of this provision, or unless such information is required to be disclosed pursuant to governmental or judicial process or procedure. 8. Employee acknowledges that as CEO and President of the Company he has been placed in a position of confidence and trust with the clients and employees of the Company, and that in connection with such services to the company, he has access to confidential information vital to the Company's business. Employee 2 further acknowledges that in view of the nature of the business in which the Company is engaged, the foregoing restrictive covenants in this Section 6 and 7 hereof are reasonable and necessary in order to protect the legitimate interests of the Company and that violation of Sections 6-8 hereof would result in irreparable injury to the Company. Accordingly, Employee consents and agrees that this Section 8 is reasonable and necessary in order to protect the legitimate interests of the Company and that violation of Sections 6-8 hereof would result in irreparable injury to the Company. Accordingly, he consents and agrees that if he violates or threatens to violate any of the provisions of such sections the Company would sustain irreparable harm and, therefore, the Company shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, to 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 the Company may be entitled. 9. The Company may terminate the employment of Employee under this Agreement for cause at any time during the terms of this Agreement. "For Cause" as used herein shall mean the following: (a) Habitual absence or lateness; (b) Insubordination; (c) Gross failure to perform duties assigned in a competent and workmanlike manner; (d) Failure to observe the provisions of paragraph 3 of this Agreement concerning the devotion of full time to the Company's business; (e) Failure to protect Confidential Information; (f) Any action which constitutes a violation of applicable criminal statutes; or (g) Any act which frustrates or violates the undivided duty of loyalty owed by Employee to the Company and/or which violates the essence of this Agreement. 10. If, at the end of the Term, Company is unwilling to continue to employ Employee at a salary at least equal to the 3 salary being paid Employee at the end of the Term hereof for at least one year further, and Employee thus leaves the employ of Company, Employee shall receive as severance a sum equal to the previous year's annual salary and he shall be immediately vested in the right to exercise employee stock options theretofore granted to him and not yet vested. If, however, Employee leaves for any other reason, or is terminated for cause he is not to be entitled to a severance payment or the immediate vesting of such stock options. 11. 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 or entity acquiring all or substantially all of the Company's assets (by merger or otherwise) so long as such person, entity or affiliate assumes the Company's obligations hereunder. 12. 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 the Company or the termination thereof. This Agreement may not be modified except by a writing, signed by you and by a duly authorized officer of the Company. This Agreement shall be binding upon Employee's heirs and personal representatives, and the successors and assigns of the Company. Executed as of the day and year first above written. BALCHEM CORPORATION By: /S/ WALLACE BORKER ------------------ Secretary /s/ DINO A. ROSSI ------------------ Dino A. Rossi 4 EX-10.5.1 5 AGREEMENT dated as of April 1, 1993 by and between Dr. Charles McClelland ("McCLELLAND"), with an office at 3810 May Court, Palo Alto, CA 94303, and Balchem Corporation ('BALCHEM") with executive offices at Slate Hill, New York 10973. McCLELLAND is a recognized consultant in the field of conditional forecasting (the "Field"). BALCHEM desires to continue to avail itself of McCLELLAND's consulting services in the Field, in McCLELLAND's capacity as an independent contractor, and McCLELLAND is willing to undertake such services, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. McCLELLAND shall afford BALCHEM five consultation periods of approximately 2 to 3 days each in respect of the Field at BALCHEM's Slate Hill offices, commencing April 1, 1993 and ending approximately December 31, 1994, the particular dates of the periods to be as specified by BALCHEM, subject to the reasonable convenience of McCLELLAND. 2. BALCHEM shall reimburse McCLELLAND for his reasonable travel and hotel expenses in attending at each consultation period upon submission of documentation from McCLELLAND in support thereof. 3. BALCHEM may terminate this Agreement at any time on written notice to McCLELLAND if it is dissatisfied with, or McCLELLAND is unable to continue to furnish, the services of McCLELLAND in the Field. 4. In consideration of McCLELLAND's entering into this Agreement, and providing the services called for herein, BALCHEM hereby grants to McCLELLAND the option (the "Option") to acquire for investment for his own account, and not for, or with a view to the distribution thereof, for a period of five years ending March 31, 1998 up to 10,000 shares of common stock, $.06 2/3 per value of BALCHEM, at an exercise price per share of $5.50, as follows: (a) Up to 3,333 shares at any time prior to the termination of the Option. (b) Up to another 3,333 shares at any time after the furnishing by McCLELLAND of three periods of consulting 1 services satisfactory to BALCHEM and prior to the termination of the Option. (c) Up to another 3,334 shares at any time after the furnishing by McCLELLAND of five periods of consulting services to BALCHEM and prior to the termination of the Option. At McCLELLAND's written election at any time of exercise of the Option, the shares, or a portion of them, to be issued upon such exercise shall be issued to McCLELLAND and his wife as joint tenants with the right of survivorship. 5. Upon the death of McCLELLAND prior to March 31, 1998, the Option shall terminate, provided, however, that McCLELLAND's legal representative(s) may exercise the Option on behalf of the estate of McCLELLAND, to the extent McCLELLAND could have done so on the date of his death, for a period of ninety (90) days following his death. 6. The Option may be exercised, subject to the conditions contained herein, by giving BALCHEM written notice of the extent of exercise at its executive offices, together with payment of the exercise price of the shares of stock being acquired. 7. Each exercise of the Option shall be conditioned upon the receipt from McCLELLAND (or, in the event of his death, from his legal representative(s)) of a representation that, at the time of such exercise, it is the intent of such person(s) to acquire the shares of investment and not with a view to distribution. The certificates for the unregistered shares issued for investment shall be restricted by BALCHEM as to transfer and legended to such effect pursuant to the requirements of the Securities and Exchange Commission. 8. In the event that each of the outstanding shares of Common Stock of BALCHEM (other shares held by dissenting shareholders) should be changed into, or exchanged for, a different number of kind of shares of stock or other securities of Balchem, or, if further changes or exchanges of any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, shall be made (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividends, reclassification, split up, combination of shares, or otherwise), then, for each share of Common Stock of BALCHEM subject to the Option there shall be substituted and exchanged therefor the number and kind of shares of stock or other securities into which each outstanding share of 2 Common Stock of BALCHEM (other than shares held by dissenting shareholders) shall be so changed or exchanged. In the event of any such changes or exchanges, then, if BALCHEM in its sole discretion, should determine that in order to prevent dilution or enlargement of rights under the Option, an adjustment should be made in the number, kind, or option exercise price of the shares of stock or other securities then subject or potentially subject to the Option, such adjustment shall be made and shall be effective and binding for all purposes of the Option. 9. The Option shall not be transferable by McCLELLAND, either voluntarily or involuntarily, except by will or the laws of descent and distribution, and then only to the extent provided in paragraph 5 hereof. Any other attempt to do so shall void the Option. The Option shall be exercisable during McCLELLAND's lifetime only by McCLELLAND and, after McCLELLAND's death, only by McCLELLAND's legal representative(s). 10. McCLELLAND shall not have any rights as a shareholder with respect to any Common Stock covered by the Option until he shall have become the holder of record of such share, and no adjustments shall be made for cash dividends or other distributions or other rights as to which there is a record date preceding the date he becomes the holder of record of such shares. 11. The foregoing sets forth the agreement between the parties and the same may not be changed, except by a writing between the parties. Executed as of the day and year first above written. /s/ Charles McClelland ---------------------- CHARLES McCLELLAND BALCHEM CORPORATION By: /s/ Herbert D. Weiss -------------------- Herbert D. Weiss, President 3 EX-10.5.2 6 AGREEMENT dated as of January 1, 1995 by and between Dr. Charles McClelland ("McCLELLAND"), with an office at 3810 May Court, Palo Alto, CA 94303, and Balchem Corporation ("BALCHEM") with executive offices at Slate Hill, New York 10973. McCLELLAND is a recognized consultant in the field of conditional forecasting, planning and project management (the "Field"). BALCHEM desires to continue to avail itself of McCLELLAND's consulting services in the Field, in McCLELLAND's capacity as an independent contractor, and McCLELLAND is willing to undertake such services, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. McCLELLAND shall afford BALCHEM two consultation periods per year of approximately 2 to 3 days each in respect of the Field at BALCHEM's Slate Hill offices, for the years 1995, 1996 and 1997, the particular dates of the periods to be as specified by BALCHEM, subject to the reasonable convenience of McCLELLAND. In addition McCLELLAND will provide telephone consultation as required by the chief operating officer of BALCHEM. 2. BALCHEM shall reimburse McCLELLAND for his reasonable travel and hotel expenses in attending at each consultation period upon submission of documentation from McCLELLAND in support thereof. 3. BALCHEM may terminate this Agreement at any time on written notice to McCLELLAND if it is dissatisfied with, or McCLELLAND is unable to continue to furnish, the services of McCLELLAND in the Field. 4. In consideration of McCLELLAND's entering into this Agreement, and providing the services called for herein, BALCHEM hereby grants to McCLELLAND the option (the "Option") to acquire during a period of seven years ending December 31, 2001, for investment for his own account, and not for, or with a view to the distribution thereof, up to 7,500 shares of common stock, $.06 2/3 per value of BALCHEM, at an exercise price per share of $6.00, as follows: a. Up to 2,500 shares at any time prior to the termination of the Option. b. Up to another 2,500 shares at any time after December 31, 1995, and prior to the termination of the Option. c. Up to another 2,500 shares at any time after the furnishing by McCLELLAND of the six periods of consulting services to BALCHEM as provided herein, and prior to the termination of the Option. 1 At McCLELLAND's written election at any time of exercise of the Option, the shares, or a portion of them, to be issued upon such exercise shall be issued to McCLELLAND and his wife as joint tenants with the right of survivorship instead of to McCLELLAND alone. 5. Upon death of McCLELLAND prior to December 31, 2001, the Option shall terminate, to the extent then unexercised, provided, however, that McCLELLAND's legal representative(s) may exercise the Option on behalf of the estate of McCLELLAND, to the extent McCLELLAND could have done so on the date of his death, for a period of 365 days following his death. 6. The Option may be exercised, subject to the conditions contained herein, by giving BALCHEM written notice of the extent of exercise at its executive office, together with payment of the exercise price of the shares of stock being acquired. 7. Each exercise of the Option shall be conditioned upon the receipt from McCLELLAND (or, in the event of his death, from his legal representative(s)) of a representation that, at the time of such exercise, it is the intent of such person(s) to acquire the shares of investment and not with a view to distribution. The certificates for the unregistered shares issued, pursuant to the exercise of the Option, for investment shall be restricted by BALCHEM as to transfer and legended to such effect pursuant to the requirements of the Securities and Exchange Commission. 8. In the event that each of the outstanding shares of Common Stock of BALCHEM (other shares held by dissenting shareholders) should be changed into, or exchanged for, a different number or kind of shares of stock or other securities of Balchem, or, if further changes or exchanges of any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, shall be made (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividends, reclassification, split up, combination of shares, or otherwise), then, for each share of Common Stock of BALCHEM subject to the Option there shall be substituted and exchanged therefor the number and kind of shares of stock or other securities into which each outstanding share of Common Stock of BALCHEM (other than shares held by dissenting shareholders) shall be so changed or exchanged. In the event of any such changes or exchanges, then, if BALCHEM should determine that in order to prevent dilution or enlargement of rights under the Option, an adjustment should be made in the number, kind, or option exercise price of the shares of stock or other securities then subject or potentially subject to the Option, such adjustment shall be made and shall be effective and binding for all purposes of the Option. 9. The Option shall not be transferable by McCLELLAND, either voluntarily or involuntarily, except by will or the laws of descent and distribution, and then only to the extent provided in paragraph 5 hereof. Any other attempt to do so shall void the Option. The Option shall be exercisable during McCLELLAND's lifetime only by McCLELLAND and, after McCLELLAND's death, only by McCLELLAND's legal representative(s). 2 10. McCLELLAND shall not have any rights as a shareholder with respect to any Common Stock covered by the Option until he shall have become the holder of record of such share, and no adjustments shall be made for cash dividends or other distributions or other rights as to which there is a record date preceding the date he becomes the holder of record of such shares. 11. The foregoing sets forth the agreement between the parties and the same may not be changed, except by a writing between the parties. Executed as of the day and year first above written. /s/ Charles McClelland ---------------------- CHARLES McCLELLAND BALCHEM CORPORATION By: /s/ Herbert D. Weiss -------------------- Herbert D. Weiss, President 3 EX-10.5.3 7 Amendment and Extension dated as of April 25, 1997 of Agreement ("Consulting Agreement") dated January 1, 1995, as heretofore amended, between Dr. Charles McClelland ("McClelland") with an office at 3810 May Court, Palo Alto, California 94303 and Balchem Corporation ("Balchem") with executive offices at Slate Hill, New York 10973. WHEREAS, the services of McClelland under the Consulting Agreement will Cease at the end of 1997 in accordance with its terms; and WHEREAS, Balchem is desirous of continuing to obtain the consulting services of McClelland, as provided in the Agreement, for the additional three-year period 1998-2000; and WHEREAS, McClelland is willing to perform such services for the consideration set forth herein; NOW THEREFORE, the parties agree as follows: 1. McClelland shall continue to perform for Balchem the consulting services as described in paragraph 1 of the Consulting Agreement in the three-year period 1996-2000, unless the Consulting Agreement is sooner terminated as provided in paragraph 3. 2. In consideration of McClelland's entering into this amendment and performing such additional consulting services, Balchem hereby grants to McClelland the further option (the "Additional Option") to acquire during the ten-year period ending April 30, 2007, for investment for his own account, and not for, or with a view to the distribution thereof, up to 7,500 shares of common stock, $.06 2/3 par value of Balchem, at an exercise price of $10.125 per share as follows: a. Up to 2,500 shares, from and after completion of the furnishing by McClelland of all required consulting services during the year ending December 31, 1998, exercisable from such completion until April 30, 2007; b. Up to 2,500 additional shares from and after completion of the furnishing by McClelland of all required consulting services during the two years ending December 31, 1999, exercisable from such completion until April 30, 2007; and c. up to 2,500 additional shares from and after completion of the furnishing by McClelland of all required consulting services during the three-year period 1 ending December 31, 2000, exercisable from such completion until April 30, 2007. 3. The provisions relating to the Option in the Agreement shall apply to the Additional Option, including without limiting the generality thereof, McClelland's right to elect to hold any shares acquired by exercise of the Additional Option as joint tenants with his wife, the effect on the Additional Option of McClelland's death, the manner of exercising the Additional Option, the legending of share certificates to be issued upon exercise of the Additional Option, the adjustments in shares of splits, stock dividends, recapitalization, and the limitations on the Additional Option's transferability. 4. Balchem shall use its best efforts to cause a Registration Statement on Form S-8 to become effective with respect to all of the shares of Balchem common stock which may be issued pursuant to the options granted to McClelland under the Consulting Agreement as hereby amended. If such a Registration Statement becomes effective, and continues to be effective, the certificates evidencing such shares shall not bear any restrictive legend. 5. Except as herein set forth, the Consulting Agreement shall continue in full force and effect. Executed as of the day and year first above written /s/ Charles McClelland ---------------------- Charles McClelland BALCHEM CORPORATION By: /s/ Raymond Reber ----------------- President 2 EX-10.6 8 AMENDED AND RESTATED TERM LOAN AGREEMENT BETWEEN BALCHEM CORPORATION AND THE CHASE MANHATTAN BANK Dated as of January 15, 1999 Amended and Restated Loan Agreement dated as of January 15, 1999 between BALCHEM CORPORATION, a Maryland corporation with its chief place of business located at Route 6 and Route 284, P.O. Box 175, Slate Hill, New York 10973 (the "Borrower") and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), a New York banking corporation having an office at 400 Rella Boulevard, Suite 100, Suffern, New York, 10901 (the "Bank"). Preliminary Statement. The Borrower and the Bank entered into a loan agreement dated as of January 25, 1995 (as heretofore amended, the "Original Agreement") pursuant to which the Bank made a term loan to the Borrower in the original amount of $3,700,000 ("Term Loan A"). The Borrower has requested and the Bank has agreed, subject to the terms and conditions contained herein, to make an additional term loan to the Borrower in the amount of $3,000,000. To that end, the Borrower and the Bank hereby amend and restate the Original Agreement in its entirety as set forth herein. Accordingly, the Borrower, the Borrower and the Bank agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used herein the following terms shall have the following meanings: "Affiliate", as applied to any Person, means any other Person directly or indirectly through one or more intermediaries controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "Agreement" shall mean this Amended and Restated Loan Agreement, as the same from time to time may be amended, supplemented or modified. "Alternate Base Rate" shall mean a rate per annum equal to 1/2 of 1% plus the Federal Funds Effective Rate from time to time. "Base LIBOR Rate" applicable to a particular LIBOR Rate Interest Period shall mean a rate per annum equal to the product arrived at by multiplying the Fixed LIBOR Rate applicable to such Interest Period by a fraction (expressed as a decimal), the numerator of which shall be the number one and the denominator of which shall be the number one minus the aggregate reserve percentages (expressed as a decimal) from time to time established by the Board of Governors of the Federal Reserve System of the United States and any other banking authority to which the Bank is now or hereafter subject, including, but not limited to any reserve on Eurocurrency Liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System of the United States at the ratios provided in such Regulation from time to time, it being agreed that any portion of the Principal Balance bearing interest at a LIBOR Rate shall be deemed to constitute Eurocurrency Liabilities, as defined by such Regulation, and it being further agreed that such Eurocurrency Liabilities shall be deemed to be subject to such reserve requirements without benefit of or credit for prorations, exceptions or offsets that may be available to the Bank from time to time under such Regulation and irrespective of whether the Bank actually maintains all or any portion of such reserve. "Business Day" shall have the same meaning as "Working Day" set forth below. "Calculation Period" shall mean each period commencing on each anniversary of the date a Loan was made (calculated on the basis of a single annual payment), except for the initial Calculation Period following prepayment, which shall commence on the date of such prepayment and end of the next following anniversary date of the date the Fixed Rate was made. "Capital Expenditures" shall mean amounts paid or indebtedness incurred by the Borrower or any Subsidiary in connection with the purchase or lease of capital assets that would be required to be capitalized and shown on the balance sheet of the Borrower in accordance with GAAP. "Cash Flow" shall mean Operating Profit plus depreciation, amortization and non-cash compensation minus dividends minus Capital Expenditures. "Contractual Obligations" shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Controlled" and "Control" shall mean any partnership, corporation or other entity of which the Borrower, alone, or the Borrower and/or one or more of its Subsidiaries, either has the power to direct the management or the power to direct at least a majority of the voting interests. "Corporate Guarantor" shall mean any Subsidiary of the Borrower. "Default" shall mean any of the events specified in Section 8, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Discount Rate" shall mean, for the purposes of Paragraph 2.5(a) and the calculation pursuant to the formula attached hereto as Exhibit C, for each Calculation Period, the fixed per annum rate, as determined by the Bank in its sole discretion on the date of such prepayment, that would be bid by a fixed rate payor under an arm's-length interest rate swap transaction having (i) a term approximately equal to such Calculation Period, (ii) a notional amount equal to the amount of such prepayment, (iii) a floating rate of LIBOR for the notional amount and (iv) a counterparty of creditworthiness acceptable to the Bank. "Dollars" and "$" shall mean dollars in lawful currency of the United States of America. "Environmental Laws" shall mean any federal, state or local statute or regulation relating to hazardous or toxic wastes or substances or the removal thereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding one billion dollars in respect of "Eurocurrency Liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the LIBOR Rate is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of the Bank to United States residents). With respect to increases in the Eurodollar Reserve Percentage, the LIBOR Rate shall be adjusted automatically on and as of the effective date of any such increase. "Event of Default" shall mean any of the events specified in Section 8, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Federal Funds Effective Rate" shall mean and to the extent necessary determined by the Bank separately for each day during the term of this Agreement and shall for each such day be a rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for each such day (or if any such day is not a Business Day, for the next immediately preceding Business Day) by the Federal Reserve Bank of New York, or if the weighted average of such rates is not so published for any such day which is a Business Day, the average of the quotations for any such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by the Bank. "Fixed Rate" shall mean the fixed rate of interest from time to time offered by the Bank for periods not to exceed in any event the applicable Term Loan Maturity Date. The Fixed Rate is subject to availability by the Bank. "Fixed LIBOR Rate" applicable to a particular LIBOR Rate Interest Period shall mean a rate per annum equal to the rate for U.S. dollar deposits with maturities comparable to such LIBOR Rate Interest Period which appears on Telerate Page 3750 as of 11:00 a.m., London Time, three (3) Working Days prior to the commencement of such LIBOR Rate Interest Period, provided, however, that if such rate does not appear on Telerate Page 3750, the "Fixed LIBOR Rate" applicable to a particular LIBOR Rate Interest Period shall mean a rate per annum equal to the rate at which U.S. dollar deposits in an amount approximately equal to the Principal Balance (or the portion thereof which will bear interest at a LIBOR Rate during the LIBOR Rate Interest Period to which such Fixed LIBOR Rate is applicable in accordance with the provision of this Agreement), and with maturities comparable to the last day of the LIBOR Rate Interest Period with respect to which such Fixed LIBOR Rate is applicable, are offered in immediately available funds in the London Interbank Market to the London office of the Bank by leading banks in the Eurodollar market at 11:00 a.m., London time, three (3) Working Days prior to the commencement of the LIBOR Rate Interest Period to which such Fixed LIBOR Rate is applicable. "Floating Rate" shall mean a rate per annum equal to the greater on a daily basis of (a) the Prime Rate and (b) the Alternate Base Rate. If for any reason the Bank shall have determined (which determination shall be conclusive and binding on the Borrower) that the Bank is unable to ascertain the Federal Funds Effective Rate for any reason, including, without limitation, the inability or failure of the Bank to obtain sufficient bids for the purposes of determining the Federal Funds Effective Rate in accordance with the provisions of this Agreement, the Floating Rate shall be determined on the basis of the Prime Rate until the circumstances giving rise to such inability no longer exist. Notwithstanding anything to the contrary contained in this Agreement, the Bank shall have the right in its sole and absolute discretion to calculate interest on the portion of the Principal Balance from time to time bearing interest at the Floating Rate during any given period of time, or for any given day during the term of this Agreement, at a rate per annum based upon the Prime Rate notwithstanding the fact that a rate per annum based upon the Alternate Base Rate may, from time to time during such period of time or for any such given day, in fact be higher, it being agreed that no such election by the Bank shall in any event or under any circumstance constitute a waiver of the Bank's right at any time thereafter and without prior notice to the Borrower to charge interest on the portion of the Principal Balance bearing interest at the Floating Rate strictly in accordance with the provisions of this provision. Any change in the Floating Rate as a result of a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of any such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be. The Floating Rate and the components thereof shall be calculated for the actual number of days elapsed on the basis of a 360-day year. Each determination of the Floating Rate shall be made by the Bank and shall be conclusive and binding upon the Borrower absent manifest error. "Funded Debt" shall mean short term debt plus long term debt plus capital leases. "Funded Debt/Cash Flow Ratio" shall mean Funded Debt divided by Cash Flow. "GAAP" shall mean generally accepted accounting principles applied in a manner consistent with that employed in the preparation of the financial statements described in Section 3.1. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) any of the foregoing. "Guaranty" shall mean the guaranty in the form of Exhibit D hereto, which shall be executed and delivered to the Bank by the Corporate Guarantor. "Installment Payment Date" shall mean any date on which all or any portion of the Principal Balance of a Term Loan is due and payable. "Interest Period" shall mean any period during which a portion of a Loan bears interest at a fixed rate as elected by the Borrower in accordance with the terms of this Agreement. (a) If any Interest Period would otherwise end on a day which is not a day on which the Bank is open for business in New York City, that Interest Period shall be extended to the next succeeding day upon which the Bank is open for business. (b) No Interest Period shall extend beyond the applicable Term Loan Maturity Date. "LIBOR Margin" shall be the number set forth below based on the Borrower's Funded Debt/Cash Flow Ratio as evidenced by both (i) the Borrower's audited year-end financial statements delivered pursuant to Paragraph 5.2(a) and (ii) evidence from the Borrower of the calculation of its Funded Debt/Cash Flow Ratio on a rolling four quarter basis. As such time as:
- ----------------------------------------------------------------- ----------------------- Funded Debt/Cash Flow Ratio is: LIBOR Margin shall be: - ----------------------------------------------------------------- ----------------------- equal to or greater than 2.0 to 1.0 1.75 percent per annum - ----------------------------------------------------------------- ----------------------- greater than 1.0 to 1.0 but less than 2.0 to 1.0 1.50 percent per annum - ----------------------------------------------------------------- ----------------------- greater than .5 to 1.0 but less than 1.0 to 1.0 1.25 percent per annum - ----------------------------------------------------------------- ----------------------- equal to or less than .50 to 1.00 1.00 percent per annum - ----------------------------------------------------------------- -----------------------
Adjustments in the LIBOR Rate resulting from such calculations shall become effective as to LIBOR Rate Interest Periods that commence after the date that such calculations shall have been accepted by the Bank and shall be fixed for the entirety of such LIBOR Rate Interest Period. "LIBOR Rate" applicable to a particular LIBOR Rate Interest Period shall mean a rate per annum equal to the LIBOR Margin plus the Base LIBOR Rate applicable to such LIBOR Rate Interest Period. "LIBOR Rate Interest Period" shall mean the period of time during which a particular LIBOR Rate will be applicable to all or a particular portion of the Principal Balance of the Term Loan in accordance with the provisions of this Agreement, it being agreed that: (i) each LIBOR Rate Interest Period shall commence and shall terminate on a Re-Set Date, (ii) each LIBOR Rate Interest Period shall be of a duration of either one month, two months, three months, four months, five months, or six months, (iii) no LIBOR Rate Interest Period shall extend beyond the applicable Term Loan Maturity Date, and (iv) except as otherwise specifically provided to the contrary with respect to the last LIBOR Rate Interest Period during the term of the applicable Term Note, and with respect to the unavailability of a LIBOR Rate or Rates, and with respect to a prepayment of all or a portion of the Principal Balance, the entire portion of the Principal Balance with respect to which a LIBOR Rate or Rate is or are due to be reset on the first day of a particular LIBOR Rate Interest Period will bear interest at the LIBOR Rate pertaining to such LIBOR Rate Interest Period from and including the first day of such LIBOR Rate Interest Period to, but not including, the last day of such LIBOR Rate Interest Period. "LIBOR Rate Prepayment Premium" shall have the meaning given therefor in Paragraph 2.5(b) hereof. "Lien" shall mean any mortgage, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan or "Loans" shall mean Term Loan A and/or Term Loan B, as the context may require. "Loan Documents" shall mean Term Note A. Term Note B, this Agreement, the Security Agreement and any other document or instrument executed and delivered in connection herewith. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Bank hereunder or thereunder. "Maturity Date" shall mean the date that all or a portion of the outstanding Principal Balance of a Loan is due and payable pursuant to the terms hereof which shall include without limitation, each Installment Payment Date and the final Maturity Date of each Term Loan. "Note" shall mean Term Note A or Term Note B, as the context may require. "Operating Profit" shall mean earnings before interest and taxes. "Person" shall mean any individual, corporation, partnership, joint venture, trust, unincorporated organization or any other juridical entity, or a government or state or any agency or political subdivision thereof. "Plan" shall mean any plan of a type described in Section 4021(a) of ERISA in respect of which the Borrower is an "employer" as defined in Section 3(5) of ERISA. "Post Default Rate" shall mean at any time a rate of interest equal to 2% per annum in excess of the rate (or rates) of interest otherwise in effect with respect to the Principal Balance. "Prepayment Premium" shall mean, for the purposes of Paragraph 2.5(a) and the calculation pursuant to the formula attached hereto as Exhibit C, for any prepayment of the Principal Balance bearing interest at a Fixed Rate, a premium (as liquidated damages and not as penalty) equal to (a) in the case of any such prepayment made within one year period prior to the applicable Term Loan Maturity Date or the date upon which such Interest Period would otherwise end, all reasonable losses, expenses and liabilities (including, without limitation, any interest paid by the Bank to lenders of funds borrowed by it to make or carry the Fixed Rate and losses sustained by the Bank in connection with the re-employment of such funds) which the Bank may incur with respect to that portion of the Principal Balance bearing interest at the Fixed Rate, or (b) in the case of any such prepayment made earlier than one year prior to the applicable Term Loan Maturity Date or the date upon which such Interest Period would otherwise end, the sum of the present values, each determined at the appropriate Discount Rate, of the excess, if any, of (i) the amount of interest computed at the Fixed Rate on the Principal Balance (after giving effect to any scheduled amortization occurring prior to the first day of each Calculation Period) deemed to be due on the last day of each Calculation Period during the remaining term of the applicable Term Note, or until the Interest Period applicable to such Fixed Rate would otherwise end, over (ii) the amount of each corresponding interest payment computed according to the formula set forth on Exhibit C. "Principal Balance" shall mean the outstanding Principal Balance of the Term Note from time to time. "Prime Rate" shall mean the rate of interest established from time to time by the Bank as its "prime rate", as the same shall change from day to day. "Real Property" shall mean any real property owned or leased by the Borrower or any of its Subsidiaries. "Redeployment Rate" shall mean, for the purposes of Paragraph 2.5(a) and the calculation pursuant to the formula attached hereto as Exhibit C, at any time, the fixed per annum rate (calculated on the basis of a single annual interest payment), as determined by the Bank in its sole discretion on the date of such prepayment, that would be bid by a fixed rate payor under an arm's-length interest rate swap transaction having (i) a term approximately equal to the period commencing on the date of such prepayment and ending on the stated maturity of such Fixed Rate, (ii) a notional amount equal to the amount of such prepayment, (iii) a floating rate of LIBOR for the notional amount and (iv) a counterparty of creditworthiness acceptable to the Bank. "Reference Bank" means one or more of the banks appearing on the display designated as page "LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks); provided that if no such offered rate shall appear on such display, "Reference Bank" shall mean one or more major banks in the London interbank market as selected by the Bank. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder. "Re-Set Date" shall mean consecutive numerically corresponding dates during the term of this Agreement, the first of which Re-Set Dates shall occur on a Working Day to be designated by the Bank, which Working Day shall not be earlier than five (5) Working Days or later than fifteen (15) Working Days subsequent to the date upon which the Loan is advanced. Each subsequent Re-Set Date during the term of this Agreement shall be the date in each subsequent calendar month during the term of this Agreement which numerically corresponds to the first Re-Set Date during the term of this Agreement, provided, however, that if the numerically corresponding date in any such subsequent calendar month during the term of this Agreement shall not be a Working Day, the Re-Set Date for such calendar month shall be the next succeeding Working Day, unless the next such succeeding Working Day would fall in the next calendar month, in which event the Re-Set Date for such calendar month shall be the next preceding Working Day. For the purposes of this Agreement the period of time between any two consecutive Re-Set Dates during the term of this Agreement shall be deemed to be a period of one month. "Requirements of Law" shall mean as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Roll Over Date" applicable to a particular LIBOR Rate Interest Period shall mean the last day of such LIBOR Rate Interest Period. "Security Agreements" shall mean the Security Agreements referred to in Paragraph 9(b) hereof substantially in the form of Exhibit E hereto. "Specified Person" shall mean either the Borrower or any of its Subsidiaries. "Subsidiary or Subsidiaries" of any Person shall mean any corporation or corporations of which the Person alone, or the Person and/or one or more of its Subsidiaries, owns, directly or indirectly, at least a majority of the securities having ordinary voting power for the election of directors. "Telerate Page 3750" shall mean the display designated as "Page 3750" on the Associated Press-Dow Jones Telerate Service (or such other page as may replace Page 3750 on the Associated Press-Dow Jones Telerate Service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association interest settlement rates for U.S. Dollar deposits). Any Fixed LIBOR Rate determined on the basis of the rate displayed on Telerate Page 3750 in accordance with the provisions of this Agreement shall be subject to corrections, if any, made in such rate and displayed by the Associated Press-Dow Jones Telerate Service within one hour of the time when such rate is first displayed by such Service. "Term Loan(s)" shall mean Term Loan A and/or Term Loan B, as the context may require. "Term Loan A" shall mean the term loan made by the Bank to the Borrower pursuant to Section 2.1 hereof, in the original principal amount of $3,700,000 (the Principal Balance of which is, as of the Restatement Date, $750,000). "Term Loan B" shall mean the term loan made by the Bank to the Borrower on the restatement Date pursuant to Section 2.1 hereof, in the original principal amount of $3,000,000. "Term Loan A Maturity Date" shall mean April 1, 2000. "Term Loan B Maturity Date" shall mean January 15, 2004. "Term Loan Maturity Date" shall mean, with respect to Term Loan A, Term Loan A Maturity Date, and with respect to Term Loan B, Term Loan B Maturity Date. "Term Note(s)" shall mean Term Note A and/or Term Note B, as the context may require. "Term Note A" shall mean the note, substantially in the form of Exhibit A hereto, evidencing Term Loan A. "Term Note B" shall mean the note, substantially in the form of Exhibit B hereto, evidencing Term Loan B. "Working Day" shall mean any day on which the Bank is open for business in New York City and on which commercial banks in the City of London, England are open for dealings in U.S. dollar deposits in the London Interbank Market. 1.2 Accounting Terms. As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms not specifically defined herein shall have the respective meanings given to them under generally accepted accounting principles. SECTION 2. TERM LOANS 2.1 Term Loan Principal Repayment. (a) (i) Term Loan A. The Outstanding Principal Balance of Term Loan A as of the Restatement Date, in the amount of $750,000.00, shall be repayable in consecutive monthly installments of principal as follows: Subject to Paragraph (b)(i) below of Section 2.1, commencing on February 1, 1999 and on the first day of each succeeding month thereafter through and including Term Loan A Maturity Date, there shall be due and payable installments of principal each in the amount of $50,000.00. (ii) Term Loan B. The Outstanding Principal Balance of Term Loan B shall be repayable in consecutive monthly installments of principal as follows: Subject to paragraph (b)(ii) below of Section 2.1, commencing on February 1, 1999 and on the first day of each succeeding month thereafter through and including Term Loan B Maturity Date, there shall be due and payable installments of principal each in the amount of $50,000. (b) (i) Term Loan A. If in any month, it would be necessary for the Borrower to prepay a Loan which bears interest at a LIBOR Rate in order to make a regular monthly payment of principal due under Paragraph (a)(i) of Section 2.1, the Borrower may defer such regular monthly payment until the last day of the LIBOR Rate Interest Period applicable to such Loan, provided, however, that the aggregate of all principal payments for: (1) the period February 1, 1999 through December 31, 1999 shall be no less than $550,000; and (2) the period February 1, 1999 through Term Loan A Maturity Date shall be no less than $750,000. (ii) Term Loan B. If in any month, it would be necessary for the Borrower to prepay a Loan which bears interest at a LIBOR Rate in order to make a regular monthly payment of principal due under Paragraph (a)(ii) of Section 2.1, the Borrower may defer such regular monthly payment until the last day of the LIBOR Rate Interest Period applicable to such Loan, provided, however, that the aggregate of all principal payments for (1) the period February 1, 1999 through December 31, 1999 shall be no less than $550,000; (2) the period February 1, 1999 through December 31, 2000 shall be no less than $1,150,000; (3) the period February 1, 1999 through December 31, 2001 shall be no less than $1,750,000; (4) the period February 1, 1999 through December 31, 2002 shall be no less than $2,350,000; and (5) the period February 1, 1999 through Term Loan B Maturity Date shall be no less than $3,000,000. (c) In addition to and together with each installment of principal set forth above, the Borrower shall pay to the Bank interest on the unpaid Principal Balance of each Term Loan at the rate (or rates) hereinafter provided and at the times so designated for the particular interest option selected. The entire Principal Balance of each Term Loan remaining unpaid and any accrued and unpaid interest shall be due and payable on the Term Loan Maturity Date applicable to such Term Loan. 2.2 Term Loan Interest (a) Each Term Loan made by the Bank to the Borrower pursuant to Section 2.1 hereof shall be evidenced by, in the case of Term Loan A, a replacement promissory note of the Borrower substantially in the form of Exhibit A hereto, and in the case of Term Loan B, a promissory note of the Borrower substantially in the form of Exhibit B hereto, each payable to the order of the Bank and representing the obligation of the Borrower to pay the Principal Balance of such Term Loan with interest thereon as hereinafter prescribed. Each Term Note shall (i) be dated the date hereof, (ii) be stated to mature on, in the case of Term Loan A, Term Loan A Maturity Date, and, in the case of Term Loan B, Term Loan B Maturity Date, (iii) provide for principal repayment as set forth above and (iv) bear interest with respect to the unpaid Principal Balance thereof from time to time outstanding at a rate (or rates) per annum to be selected by the Borrower in accordance with the provisions set forth in Section 2.3 hereof, and in the case of the Fixed Rate or the LIBOR Rate for the Interest Period or the LIBOR Rate Interest Period therein specified, equal to either (1) the Base LIBOR Rate plus the LIBOR Margin, (2) the Fixed Rate, if available and at the rate determined by the Bank for the period so designated, or (3) the Floating Rate (which interest rate will change when and as the Prime Rate or the Federal Funds Effective Rate changes). In all cases interest shall be computed on the basis of a 360-day year for actual days elapsed and shall be payable as provided in Paragraph 2.2(b) hereof. After any stated or accelerated maturity, such Term Note shall bear interest at the rate set forth in Paragraph 2.2(d) hereof. (i) From and including the date on which the Loan is advanced to, but not including, the first Re-Set Date during the term of this Agreement, the entire Principal Balance shall bear interest at the Floating Rate. From and including the first Re-Set Date during the term of this Agreement to, but not including, the last Re-Set Date during the term of this Agreement to, but not including, the last Re-Set Date during the term of this Agreement, the entire Principal Balance shall, except as specifically provided to the contrary in this Agreement, bear interest at the above referenced Fixed Rate, Floating Rate or to the extent hereafter provided at one or more of the available LIBOR Rates. The available LIBOR Rates shall consist of a one-month LIBOR Rate, a two-month LIBOR Rate, a three-month LIBOR Rate, a four-month LIBOR Rate, a five-month LIBOR Rate, and a six-month LIBOR Rate determined in accordance with the provisions of this Agreement, it being agreed that: (A) the Borrower shall have the right to select from the available LIBOR Rate (or rates) from time to time applicable to the Principal Balance, and (B) each LIBOR Rate from time to time so selected by the Borrower shall take effect and shall end on a Re-Set Date. Except as hereinafter specifically provided to the contrary in this paragraph, the Borrower shall not have the right to select more than one LIBOR Rate to take effect on any given Re-Set Date. (ii) Notwithstanding anything to the contrary hereinabove set forth in Paragraph 2.2(a)(i), the Borrower shall have the option from time to time during the term of this Agreement to select up to, but not in excess of, two (2) LIBOR Rates to take effect on any given Re-Set Date with respect to each Term Loan. The Borrower shall make such election by written irrevocable notice given to the Bank at least five (5) Working Days prior to the applicable Re-Set Date, in which notice the Borrower shall specify the two (2) LIBOR Rates so selected by the Borrower and the respective portions of the Principal Balance to which such LIBOR Rates are to respectively pertain, it being agreed that: (A) the minimum portion of the Principal Balance to which any such LIBOR Rate may pertain shall be equal to at least $500,000, (B) each such LIBOR Rate so selected by the Borrower shall be applicable to the portion of the Principal Balance to which it pertains from and including the first day of the applicable LIBOR Rate Interest Period to, but not including, the Roll Over Date applicable to such LIBOR Rate Interest Period, and (C) the Borrower shall not have the right to exercise its option pursuant to this sentence as of any given Re-Set Date if the effect thereof would be to cause more than two (2) different LIBOR Rate Interest Periods to be in effect with respect to the Principal Balance of any individual Term Loan at any given time during the term of this Agreement. (b) Interest accrued on each Term Loan shall be payable, on: (i) the Maturity Date applicable to such Term Loan; (ii) with respect to any portion of the Principal Balance prepaid pursuant to this Agreement, the date of such prepayment; (iii) the first day of each month in each year during the term of such Term Loan to and including the Term Loan Maturity Date applicable to such Term Loan, commencing on the first day of the first month following the Restatement Date; (iv) with respect to any portion of the Principal Balance converted to a different rate on a day when interest would not otherwise have been payable, the date of such conversion. (c) All payments (including prepayments) to be made by the Borrower on account of principal or interest with respect to the Loans or on account of fees or any other obligations of the Borrower to the Bank hereunder shall be made to the Bank at the office of the Bank set forth in Section 10.1 hereof or at such other place as the Bank may from time to time designate in writing in lawful money of the United States of America in immediately available funds. The Borrower hereby authorizes and directs the Bank to charge any account of the Borrower maintained at any office of the Bank for any such payments. Subject to the other provisions hereof and the definitions of Interest Period and LIBOR Rate Interest Period set forth in Section 1.1 hereof, if any payment to be so made hereunder, or under a Term Note, becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, to the extent permitted by applicable law, interest thereon shall be payable at the then applicable rate during such extension. (d) If all or a portion of principal or interest shall not be paid when due (whether at the stated or any accelerated maturity of the Loans) or if any fee or other amount due hereunder shall not be paid when due, such Loan, interest, fee or amount due hereunder, to the extent permitted by applicable law, shall bear interest (payable on demand, and in any event on the last day of each month, and computed daily on the basis of a 360-day year for actual days elapsed) at the Post Default Rate. In no event, however, shall interest payable hereunder be in excess of the maximum rate of interest permitted under applicable law. The obligation to so pay interest upon any reimbursement obligation of the Borrower to the Bank shall not be construed so as to waive the requirement for reimbursement on the same date that payment is made by the Bank as set forth in this Agreement. (e) The Borrower hereby expressly authorizes the Bank to record the rate (or rates) of interest applicable to the Principal Balance (or portions thereof) and the Interest Period or LIBOR Rate Interest Periods applicable and all such recordations shall be presumed to be correct. (f) Notwithstanding anything to the contrary contained herein, the amount of the Principal Balance of a Loan which may bear interest at a LIBOR Rate (or rates) and the LIBOR Rate Interest Period (or periods) applicable thereto shall not be such as would result in a prepayment penalty in order to satisfy the amortization requirements set forth in Paragraph (a) of Section 2.1 except as permitted by Paragraph (b) of Section 2.1. 2.3 Procedure for Election of Interest Rates. (a) The Borrower may elect to have interest on all or portions of the Principal Balance accrue at any of the aforementioned interest rates by giving the Bank irrevocable notice of a request for an interest election hereunder (i) in the case of the LIBOR Rate, as set forth below and (ii) in the case of all other interest rate elections, not less than one nor more than five Business Days before a proposed election, continuation or conversion, setting forth (A) the amount of the Principal Balance which will bear interest at such rate, which shall be not less than $500,000, (B) whether the interest rate for such principal amount is to be LIBOR Rate, Fixed Rate or Floating rate or a combination thereof, (C) if a LIBOR or Fixed Rate is selected, the requested Interest Period or LIBOR Rate Interest Period commencement date, and (D) if entirely or partially a Fixed Rate or a LIBOR Rate, the length of the Interest Period or LIBOR Rate Interest Period therefor, which shall be (1) one month, two months, three months, four months, five months, or six months, in the case of the LIBOR Rate, and (2) for a period not to exceed the applicable Term Loan Maturity Date in the case of a Fixed Rate or a LIBOR Rate. As used in this Section 2.3, "conversion" shall mean the conversion from one interest rate to another interest rate as more fully described in Section 2.3 hereof. Such notice may be written (including, without limitation, via facsimile transmission) or oral and shall be sufficient if received by 1 p.m. on the date on which such notice is to be given. If any such request is oral it shall be confirmed in writing sent by the Borrower to the Bank within two Business Days thereafter. If no interest rate election is made, then the Principal Balance (or any portion thereof) will automatically then bear interest at the Floating Rate. (b) The Borrower shall have the right at any time on prior irrevocable written notice to the Bank as specified in Paragraph 2.3(a) to continue any interest rate election into a subsequent Interest Period or LIBOR Rate Interest Period, as the case may be, (ii) to convert any portion of the Principal Balance bearing interest at a Fixed Rate upon the expiration of the Interest Period or LIBOR Rate upon the Roll Over Date to bear interest at another type of Fixed Rate or LIBOR Rate or a Floating Rate (specifying, in the case of a Fixed Rate or LIBOR Rate, the Interest Period and LIBOR Rate Interest Period to be applicable thereto), and (iii) to convert interest on any portion of the Principal Balance bearing interest at the Floating Rate into a Fixed Rate or LIBOR Rate (specifying the Interest Period or the LIBOR Rate Interest Period to be applicable thereto), subject to the following: (i) in the case of a conversion of less than all of the outstanding Principal Balance of a Term Loan, the aggregate principal amount of such Term Loan converted shall not be less than $500,000.00; (ii) no portion of a Term Loan (other than that portion bearing interest at a Floating Rate) shall be converted at any time other than at the end of an Interest Period (or the LIBOR Rate Interest Period) applicable thereto; and (iii) no election for a Fixed Rate or a LIBOR Rate may be made by the Borrower within sixty (60) days of the applicable Term Loan Maturity Date. In the event that the Borrower shall not give notice to continue any Fixed Rate or LIBOR Rate into a subsequent Interest Period or convert any amount of the Principal Balance of a Term Loan bearing interest at such rate into another type, on the last day of the Interest Period or LIBOR Rate Interest Period thereof, such Principal Balance (unless prepaid) shall automatically bear interest at the Floating Rate. The Interest Period or LIBOR Rate Interest Period applicable to any portion of the Principal Balance which is to bear interest at the Fixed Rate or the LIBOR Rate resulting from a conversion or continuation shall be specified by the Borrower in the irrevocable notice delivered by the Borrower pursuant to this section; provided, however, that, if such notice does not specify either rate of interest or the Interest Period or the LIBOR Rate Interest Period to be applicable thereto, that portion of the Principal Balance shall automatically be converted into, or continued as, as the case may be, at the Floating Rate until such required information is furnished pursuant to the terms hereof. Notwithstanding anything to the contrary contained above, if an Event of Default shall have occurred and is continuing, no Fixed Rate may be continued into a subsequent Interest Period or LIBOR Rate may be continued into a subsequent LIBOR Rate Interest Period and no LIBOR Rate of interest may be converted to the Fixed Rate or Fixed Rate of Interest into the LIBOR Rate. 2.4 Prepayment. (a) The Borrower may prepay any portion of the Principal Balance bearing interest at the Floating Rate in whole or in part without premium or penalty upon not less than ten (10) business days prior written notice; provided, however, that each partial prepayment on account of any portion of the Principal Balance bearing interest at the Floating Rate shall be in an amount not less than $100,000. Except as provided in Section 2.5 below, the Borrower may not prepay any portion of a Term Loan bearing interest at the Fixed Rate or the LIBOR Rate prior to the last day of the Interest Period or LIBOR Rate Interest Period therefor. Any partial prepayment of a Term Loan shall be applied to the last maturing installments in inverse order or their respective maturities. Each prepayment shall be made together with payment of accrued interest on the amount prepaid to and including the date of prepayment. 2.5 Prepayment Premiums. (a) If any portion of the Principal Balance of a Term Loan is bearing interest at the Fixed Rate, then, subject to the following provisions of this paragraph, the Borrower shall have the right to prepay such portion of the Principal Balance in multiples of $100,000.00 (with a minimum of $100,000.00), upon not less than ten (10) business days' prior written irrevocable notice to the Bank specifying the intended date of prepayment, and the amount to be prepaid, and such prepayment is accompanied by payment of accrued interest to and including the date of prepayment and other sums then due and payable pursuant to the provisions of this Agreement or the other Loan Documents. The Borrower shall pay to the Bank contemporaneously with any such voluntary prepayment of the Principal Balance which bears interest at the Fixed Rate a Prepayment Premium (as hereinafter defined). Any payment of the then outstanding Principal Balance after the Bank shall have declared the Principal Balance immediately due and payable, or after the Bank shall have commenced an action or proceeding as a result of an Event of Default, shall be deemed a voluntary prepayment for the purposes of this paragraph and a Prepayment Premium calculated pursuant to the provisions of this paragraph shall be payable with respect thereto based upon the interest rate specified herein applicable to the then outstanding principal indebtedness immediately prior to such default, declaration or commencement. The portion of the Principal Balance specified in any such irrevocable notice of prepayment shall, notwithstanding anything to the contrary contained in this Agreement, be absolutely and unconditionally due and payable on the date specified in such notice. (b) If any portion of the Principal Balance of a Term Loan is bearing interest at a LIBOR Rate or rates, then subject to the following provisions of this paragraph, the Borrower shall have the right to prepay such Principal Balance (or any portion thereof) in whole, or in part, upon not less than ten (10) Business Days' prior written irrevocable notice to the Bank specifying the intended date of prepayment, which date of prepayment shall not be more than fifteen (15) Business Days days after the date of such notice, and the amount to be prepaid and upon payment of all interest and other sums then due and payable pursuant to the provisions of this Agreement and the Loan Documents. The portion of the Principal Balance specified in any such irrevocable notice of prepayment shall, notwithstanding anything to the contrary contained in this Agreement or the Loan Documents, be absolutely and unconditionally due and payable on the date specified in such notice. Any partial prepayment of the Principal Balance in accordance with the provisions of this Paragraph 2.5(b) shall be in a minimum amount of and in multiples of at least $100,000, and no partial prepayment of the Principal Balance shall be permitted in accordance with the provisions of this paragraph if such partial prepayment would reduce the Principal Balance below $100,000. The Bank shall not be obligated to accept any prepayment of the Principal Balance bearing interest at a LIBOR Rate or rates unless it is accompanied by the prepayment premium, if any, due in connection therewith as calculated pursuant to the provisions of this Paragraph 2.5(b), it being understood and agreed that no LIBOR Rate Prepayment Premium (as hereinafter defined) payable under this paragraph shall in any event or under any circumstance be deemed or construed to be a penalty. No LIBOR Rate Prepayment Premium shall be payable if the portion of the Principal Balance being prepaid hereunder occurs on the Roll Over Date pertaining to the portion of the Principal Balance of the Term Note being prepaid. If any particular portion of the Principal Balance being prepaid is bearing interest at a LIBOR Rate and such prepayment does not occur on the Roll Over Date pertaining to the portion of the Principal Balance of the Term Note being prepaid, the Borrower shall pay to the Bank contemporaneously with any such prepayment a prepayment premium (the "LIBOR Rate Prepayment Premium") equal to the portion of the Principal Balance being prepaid, multiplied by a per annum interest rate equal to the difference between the then applicable Base LIBOR Rate and the 360-day equivalent interest yield, as adjusted to reflect interest payments on a monthly basis (the "Reinvestment Rate"), on any U.S. Government Treasury obligations selected by the Bank, in its sole and absolute discretion, in an aggregate amount comparable to the portion of the Principal Balance being prepaid, and with maturities comparable to the next occurring Roll Over Date applicable to the portion of the Principal Balance being prepaid, calculated over a period of time from and including the date of prepayment to, but not including, such next occurring Roll Over Date. If the Base LIBOR Rate applicable to the portion of the Principal Balance being prepaid is equal to or less than the Reinvestment Rate, no LIBOR Rate Prepayment Premium, nor any rebate, shall be due. If a portion of the Principal Balance is bearing interest at a LIBOR Rate or Rates and a portion of the Principal Balance is bearing interest at the Floating Rate in accordance with the provisions of this Agreement on the date of a partial prepayment of the Principal Balance in accordance with the provisions of this Paragraph 2.5(b), such partial prepayment shall be applied to the respective portions of the Principal Balance bearing interest at a LIBOR Rate and the Floating Rate or Rates in such order and manner so as to minimize the LIBOR Rate Prepayment Premium due with respect thereto as calculated pursuant to the provisions of this paragraph. The Bank shall, at the request of the Borrower, deliver to the Borrower a statement setting forth the amount and basis of determination of the LIBOR Rate Prepayment Premium, if any, due in connection with a prepayment of any portion of the Principal Balance of a Term Note bearing interest at a LIBOR Rate or rates in accordance with the provisions of this paragraph, it being agreed that: (i) the calculation of such LIBOR Rate Prepayment Premium may be based on any U.S. Government Treasury obligations selected by the Bank, in its sole and absolute discretion, (ii) no Obligee shall be obligated or required to have actually reinvested the prepaid portion of the Principal Balance of the Term Note in any such U.S. Government Treasury obligations as a condition precedent to the Borrower being obligated to pay a LIBOR Rate Prepayment Premium calculated as aforesaid, and (iii) the Borrower shall not have the right to question the correctness of any such statement or the method of calculation set forth therein in the absence of manifest error. The Borrower shall, upon receipt of such statement and contemporaneously with any such prepayment of the Principal Balance of the Term Note bearing interest at such a LIBOR Rate, remit to the Bank the LIBOR Rate Prepayment Premium, if any, due in connection therewith, as calculated pursuant to the provisions of this paragraph. Any payment of the Principal Balance after the Bank shall have declared a Term Loan immediately due and payable in accordance with the provisions of this Agreement or the other Loan Documents, or after the Bank shall have commenced an action as a result of an Event of Default under this Agreement or the other Loan Documents, shall be deemed to be a voluntary prepayment for all purposes of this paragraph and a LIBOR Rate Prepayment Premium calculated pursuant to the provisions of this paragraph shall be payable with respect thereto based upon the Base LIBOR Rate or Rates applicable to the Principal Balance immediately prior to such default, declaration or commencement. Notwithstanding the foregoing, however, it is understood and agreed that the Bank shall not be obligated to accept a prepayment, in whole or in part bearing interest at a LIBOR Rate (or rates), of the Principal Balance in accordance with the provisions of this paragraph if any default shall have occurred and shall be continuing under any Term Note, this Agreement or the other Loan Documents unless the Bank shall otherwise agree to the contrary in its sole and absolute discretion. The provisions of this paragraph shall be applicable to any prepayment of the Principal Balance in whole or in part, by acceleration or otherwise, it being agreed that any payment of the Principal Balance shall be deemed to be a voluntary prepayment for the purposes of this paragraph and a LIBOR Rate Prepayment Premium calculated pursuant to the provisions of this paragraph shall be payable with respect thereto. 2.6 Use of Proceeds. The proceeds of Term Loan A were used to refinance the Borrower's existing floating rate term debt and to finance the purchase of ethylene oxide drums, construction of a drumming station and ancillary expenses. The proceeds of Term Loan B shall be used to replace short term refinancing of existing debt of Borrower. No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purpose, or (b) for any purpose which violates or is inconsistent with the provisions of the Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System. 2.7 Capital Requirements. If after the date of this Agreement the Bank shall have determined that: (a) the applicability of any law, rule, regulation or guideline adopted or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards," (b) the adoption, after the date of the Term Notes, of any other law, rule, regulation or guideline regarding capital adequacy, (c) any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any domestic or foreign governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or (d) the compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has, or would have, the effect of reducing the rate of return on the Bank's capital, as a consequence of having made the Loans or any portion thereof, or of having any interest therein, or under this Agreement or the other Loan Documents, to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then, from time to time, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. Any amount or amounts payable by the Borrower to the Bank in accordance with the provisions of this Section 2.7 shall be paid by the Borrower to the Bank within ten (10) days of receipt by the Borrower from the Bank of a statement setting forth the amount or amounts due and the basis for the determination from time to time of such amount or amounts, which statement shall be conclusive and binding upon the Borrower absent manifest error. 2.8 Indemnity. (a) Anything in this Agreement or the other Loan Documents to the contrary notwithstanding, the Borrower shall indemnify and hold the Bank harmless and defend the Bank at the Borrower's sole cost and expense against any loss or liability, cost or expense (including, without limitation, reasonable attorneys' fees and disbursements of the Bank's counsel, whether in-house staff, retained firms or otherwise), and all claims, actions, procedures and suits arising out of or in connection with: (i) any ongoing matters arising out of this Agreement, the other Loan Documents or the transaction contemplated hereby or thereby, including, but not limited to, all costs of appraisal or reappraisal of all or any portion of any collateral for the Loans; (ii) any amendment to, or restructuring of, the Loans, this Agreement or the other Loan Documents, (iii) any and all lawful action that may be taken by the Bank in connection with the enforcement of the provisions of this Agreement or any of the other Loan Documents, whether or not suit is filed in connection with the same, or in connection with the Borrower, any guarantor of all or any portion of the Loans and/or any partner, joint venturer or shareholder thereof becoming a subject of a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding, and (iv) any liability to brokers, finders or similar persons and/or under any applicable securities or blue sky laws. All sums expended by the Bank on account of any of the foregoing shall be reimbursable on demand, and until reimbursed by the Borrower pursuant hereto, shall be deemed additional principal evidenced hereby and shall bear interest at the Default Rate herein set forth. The obligations of the Borrower under this paragraph shall, notwithstanding any exculpatory or other provisions of any nature whatsoever which may be set forth herein, or the other Loan Documents, constitute the personal recourse undertakings, obligations and liabilities of the Borrower. (b) In addition, the other provisions herein contained, the Borrower shall indemnify the Bank against any loss or expense that the Bank may sustain or incur as a consequence of any failure by the Borrower to take down all or any portion of the Loans on the date the Borrower requested that the Loan be advanced or as a consequence of any default by the Borrower in the payment of any portion of the Principal Balance of the Term Note bearing interest at a LIBOR Rate or the Fixed Rate, or any part thereof or interest accrued thereon at a LIBOR Rate or the Fixed Rate, as and when due and payable, or the occurrence of any default or Event of Default under this Agreement or other Loan Documents, including, but not limited to, any loss or expense sustained or incurred by any such Obligee in liquidating or reemploying deposits from third parties acquired to effect or maintain a LIBOR Rate or a Fixed Rate with respect to all or any portion of the Principal Balance hereof. The Bank shall provide to the Borrower a statement explaining the amount of any such loss or expense, which statement shall be conclusive and binding upon the Borrower absent manifest error. 2.9 Increased Costs. The Borrower recognizes that the cost to the Bank of making or maintaining LIBOR Rates with respect to the Principal Balance, or any portion thereof, may fluctuate, and the Borrower agrees to pay the Bank within ten (10) days after demand by the Bank an additional amount or amounts as the Bank shall reasonably determine will compensate the Bank for additional costs incurred by each such Obligee in maintaining LIBOR Rates on the Principal Balance or any portion thereof as a result of: (i) the imposition after the date of this Agreement of, or changes after the date of this Agreement in, the reserve requirements promulgated by the Board of Governors of the Federal Reserve System of the United States including, but not limited to, any reserve on Eurocurrency Liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System of the United States at the ratios provided in such Regulation from time to time, it being agreed that any portion of the Principal Balance hereof bearing interest at LIBOR Rates from time to time in accordance with the provisions of this Agreement shall be deemed to constitute Eurocurrency Liabilities, as defined by such Regulation, and it being further agreed that such Eurocurrency Liabilities shall be deemed to be subject to such reserve requirements without benefit of, or credit for, prorations, exceptions or offsets that may be available to the Bank from time to time under such Regulations, and irrespective of whether the Bank actually maintains all or any portion of such reserve; or (ii) any change, after the date of this Agreement, in applicable law, rule or regulation, or in the interpretation or administration thereof, by any domestic or foreign governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) or by any domestic or foreign court, changing the basis of taxation of any payments to the Bank under this Agreement or the other Loan Documents (other than taxes imposed on all or any portion of the overall net income of the Bank by any state or country or by any political subdivision or taxing authority), or imposing, modifying or applying any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, credit extended by, or any other acquisition of funds for loans by the Bank or imposing on the Bank, or on the London Interbank Market, any other condition affecting the Term Note or the other Loan Documents or the portion of the Principal Balance of the Term Note bearing interest at LIBOR Rates so as to increase the cost to the Bank of making or maintaining a LIBOR Rate with respect to the Principal Balance hereof or any portion thereof or to reduce the amount of any sum received or receivable by the Bank under this Agreement or the other Loan Documents (whether of principal, interest or otherwise), by an amount deemed by the Bank in good faith to be material, but without duplication for payments required under subparagraph (i) above. Any amount or amounts payable by the Borrower to the Bank pursuant to subparagraphs (i) or (ii) of this Section 2.9 shall be paid by the Borrower to the Bank within ten (10) days of receipt by the Borrower from the Bank of a statement setting forth the amount or amounts due and the basis for the determination from time to time of such amount or amounts, which statement shall be conclusive and binding upon the Borrower absent manifest error. Failure on the part of the Bank to demand compensation for any increased costs in any Interest Period shall not constitute a waiver of the Bank's right to demand compensation for any increased costs incurred during any such LIBOR Rate Interest Period or in any other subsequent or prior LIBOR Rate Interest Period. 2.10 Fees. The Borrower acknowledges and confirms that the Bank may impose certain administrative processing and/or commitment fees in connection with any extension, renewal, modification, amendment, termination or the administration of its loans required due to changes in governmental policy (the occurrence of any of the above hereinafter called an "Event"). The Borrower hereby acknowledges and agrees to pay, immediately, with or without demand, all such fees (as the same may be increased or decreased from time to time), and any additional reasonable fees of a similar type or nature which may be imposed by the Bank from time to time, upon the occurrence of any Event. 2.11 Stub Date. If the last LIBOR Rate Interest Period during the term of a Term Loan which fully complies with the definitions and requirements set forth herein with respect to a particular portion of the Principal Balance shall end on a date prior to the applicable Term Loan Maturity Date (the "Stub Date"), then, if the period from and including the Stub Date to and including such Term Loan Maturity Date shall be equal to: (i) less than on month, the entire amount of such portion of the Principal Balance shall, for the remainder of the term, at the election of the Bank, either bear interest at the Floating Rate or at a one-month LIBOR Rate determined in accordance with the provisions of this Agreement, it being agreed that the one-month LIBOR Rate applicable to such period shall be determined as if it were for a LIBOR Rate Interest Period of one month, or (ii) more than one month, the outstanding Principal Balance shall bear interest at an available LIBOR Rate chosen by the Borrower in accordance with the provisions of this Agreement for a period extending from the Stub Date to the last Re-Set Date to occur prior to such Term Loan Maturity Date and thereafter shall bear interest in accordance with (i) above. The foregoing notwithstanding, in no event shall the Principal Balance bearing interest at any one LIBOR Rate be less than $500,000.00. Any sums less than $500,000.00 shall bear interest at the Floating Rate. 2.12 LIBOR Rate Unavailability. In the event, and on each occasion, that on the day two (2) Working Days prior to the commencement of a particular LIBOR Rate Interest Period, the Bank shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that U.S. dollar deposits, in an amount approximately equal to the portion of the Principal Balance which is to bear interest at a particular LIBOR Rate during such particular LIBOR Rate Interest Period in accordance with the provisions of this Agreement, are not generally available at such time in the London Interbank Market, or reasonable means do not exist for ascertaining a LIBOR Rate for such particular LIBOR Rate Interest Period, the Bank shall so notify the Borrower, and the interest rate applicable to the portion of the Principal Balance with respect to which such LIBOR Rate was to pertain shall automatically convert to the Floating Rate as of the impending Roll Over Date, it being agreed that the Floating Rate shall remain in effect thereafter with respect to such portion of the Principal Balance unless and until the Bank shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that the aforesaid circumstances no longer exist, whereupon the interest rate applicable to such portion of the Principal Balance shall be converted back to a LIBOR Rate determined in the manner hereinabove set forth in this Agreement effective as of the first Re-Set Date which commences ten (10) Working Days or more after such good faith determination by the Bank. 2.13 LIBOR Rate Determinations. Each determination of the LIBOR Rate, the Base LIBOR Rate and the Fixed LIBOR Rate applicable to a particular LIBOR Rate Interest Period shall be made by the Bank and shall be conclusive and binding upon the Borrower absent manifest error. Interest at the applicable LIBOR Rate from time to time shall be calculated for the actual number of days elapsed on the basis of a 360-day year. 2.14 LIBOR Rate Changes of Law. If any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for the Bank to make or maintain a LIBOR Rate with respect to the Principal Balance or any portion thereof or to fund the Principal Balance or any portion thereof at a LIBOR Rate in the London Interbank Market or to give effect to its obligations as contemplated by this Agreement, then, upon notice by the Bank to the Borrower in accordance with the notice provisions set forth herein, the interest rate applicable to such portion of the Principal Balance shall be automatically converted to the Floating Rate, it being agreed that any notice given by the Bank to the Borrower pursuant to this sentence shall, such change in law, regulation or interpretation permitting, be effective in so far as it pertains to any particular portion of the Principal Balance bearing interest at a particular LIBOR Rate on the impending Roll Over Date pertaining to such particular portion of the Principal Balance, or shall, such change not so permitting, be effective immediately upon being given by the Bank to the Borrower, and that the Floating Rate shall thereafter remain in effect with respect to such portion of the Principal Balance unless and until the Bank shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that the aforesaid circumstances no longer exist, whereupon the interest rate applicable to such portion of the Principal Balance shall be converted to a LIBOR Rate determined in the manner hereinabove set forth in this Agreement effective as of the first Re-Set Date which commences ten (10) Working Days or more after such good faith determination by the Bank. If the interest rate applicable to any portion of the Principal Balance is converted from a LIBOR Rate to the Floating Rate on a date other than a Roll Over Date in accordance with the provisions of the preceding sentence, the Borrower shall pay to the Bank on demand an amount equal to the LIBOR Rate Prepayment Premium, if any, which would have been due pursuant to the provisions of this Agreement hereinafter set forth if the portion of the Principal Balance bearing interest at such LIBOR Rate was prepaid in full on the date of such conversion. 2.15 Late Payments. If any installment of principal, interest, additional interest or other sum payable under any Note is not paid when due, the Borrower shall pay to the Bank upon demand, in addition to any other amounts which may be due or imposed hereunder, an amount equal to the Floating Rate plus 3% per annum multipled by (i) the amount of such payment overdue times (ii) the number of days such payment is past due. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and to make the financial accommodations herein provided for, the Borrower hereby covenants, represents and warrants to the Bank that: 3.1 Financial Condition. The consolidated balance sheet of the Borrower as of December 31, 1997, and the related consolidated statements of operations and retained earnings and cash flows for the fiscal year ended on such date, prepared by the Borrower, and audited by KPMG Peat, Marwick, L.L.P., such statements have heretofore been furnished to the Bank, are complete and correct and present fairly the financial condition of the Borrower as at such date, and the results of its operations and changes in financial position for the fiscal year then ended. Such certified financial statements, including schedules and notes thereto, have been prepared in accordance with generally accepted accounting principles. The Borrower has no material contingent obligations, contingent liabilities or liabilities for taxes, long-term leases or unusual forward or long-term commitments, which are not reflected in the foregoing certified statements or in the notes thereto. Since the date of the aforementioned financial statements, there has been no material adverse change in the business operations, assets or financial or other condition of the Borrower. 3.2 Corporate Existence: Compliance with Law. The Borrower, (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate power and authority and the legal right to own and operate its property, and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or operation of property or the conduct of its business require such qualification, and (d) is in compliance with all Requirements of Law; except to the extent that the failure to so qualify as a foreign corporation as required by clause (c) of this Section 3.2 or to comply with all Requirements of Law as required by clause (d) of this Section 3.2 could not, in the aggregate, have a material adverse effect on the business, operations, property or financial or other condition of any such Person, and could not materially adversely affect the ability of (i) the Borrower to perform its obligations under this Agreement, the Notes and its Security Agreement. 3.3 Obligations. The Borrower has the corporate power and authority and the legal right to make, execute, deliver and perform its obligations under this Agreement, its Security Agreement and the Notes, and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement, its Security Agreement and the Notes and to authorize the execution, delivery and performance of this Agreement, its Security Agreement and the Notes. No consent or authorization of, filing with, or other act by or in respect of any other Person (including stockholders and creditors of such Borrower) or any Governmental Authority, is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, its Security Agreement or any Note. This Agreement, its Security Agreement and the Notes will be duly executed and delivered on behalf of the Borrower and this Agreement, its Security Agreement and the Notes, when executed and delivered, will each constitute a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 3.4 No Legal Bar. The execution, delivery and performance of this Agreement, the Security Agreement and the Notes and the borrowings hereunder and the use of the proceeds thereof by the Borrower will not violate any Requirement of Law or any Contractual Obligation of the Borrower, and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any Requirement of Law or Contractual Obligation except those in favor of the Bank as provided herein. 3.5 No Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending by or against any Specified Person or against any of their properties or revenues (a) with respect to this Agreement, any Security Agreement, any Note or any of the transactions contemplated hereby or thereby, or (b) which if adversely determined, would have an adverse effect on the business, operations, property or financial or other condition of the Borrower. 3.6 No Default. No Specified Person is in default under or with respect to any Contractual Obligation in any respect which could be materially adverse to the business, operations, property or financial or other condition of the Borrower or which could materially and adversely affect the ability of the Borrower to perform its obligations under this Agreement, its Security Agreement or any Note. No Default or Event of Default has occurred and is continuing. 3.7 No Burdensome Restrictions. No Contractual Obligation of any Specified Person and no Requirement of Law materially adversely affects, or insofar as the Borrower may reasonably foresee may so affect, the business, operations, property or financial or other condition of any such Specified Person. 3.8 Taxes. The Borrower has filed or caused to be filed all tax returns which to the knowledge of the Borrower are required to be filed, and have paid all taxes shown to be due and payable on said returns or on any assessments made against them or any of their property. 3.9 Federal Regulations. The Borrower is not engaged nor will it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Loans hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. 3.10 Environmental Matters. Except as specifically set forth and as provided in Schedule 3.10 hereto: (a) none of the Real Property contains, or has previously contained, any hazardous or toxic waste or substances or underground storage tanks. (b) The Real Property is in compliance with all applicable federal, state and local environmental standards and requirements affecting such Real Property, and there are no environmental conditions which could interfere with the continued use of the Real Property. (c) The Borrower has not received any notices of violations or advisory action by regulatory agencies regarding environmental control matters or permit compliance. (d) Hazardous waste has not been transferred from any of the Real Property to any other locations which is not in compliance with all applicable environmental laws, regulations or permit requirements. (e) With respect to the Real Property, there are no proceedings, governmental administrative actions or judicial proceedings pending or, to the best knowledge of the Borrower, contemplated under any federal, state or local law regulating the discharge of hazardous or toxic materials or substances into the environment, to which the Borrower is named as a party. 3.11 Year 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (a) the Borrower's computer systems and (b) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed by June 1, 1999. The cost to the Borrower of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower to conduct its business without Material Adverse Effect. 3.12 Subsidiaries. The Borrower has no active Subsidiaries. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions of the Term Loans. The obligation of the Bank to make the Term Loans to the Borrower hereunder is subject satisfaction of the following conditions precedent: (a) Note. The Bank shall have received the Term Notes conforming to the requirements hereof and duly executed by the Borrower. (b) Security Agreements. The Bank shall have received a Security Agreement from the Borrower in form and substance satisfactory to the Bank, together with UCC-l financing statements executed by such entity in favor of the Bank. (c) Certificates and Resolutions. The Bank shall have received (i) copies of the resolutions of the board of directors of the Borrower authorizing the execution, delivery and performance of this Agreement, the Security Agreement referred to in Paragraph 9(b) and the Notes certified respectively by the Secretary or an Assistant Secretary of such corporation; and (ii) a certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of such corporation authorized to sign any and all documents to be delivered by such corporation or as required or contemplated hereunder. (d) Patents and Trademarks. The Bank shall have received a list of all patents and trademarks held by the Borrower and the same shall be free of any security interests. (e) Origination Fee. The Bank shall have received the sum of $10,000 as an origination fee, which fee shall be deemed earned whether or not Term Loan B is made hereunder. (f) Insurance Certificates. The Bank shall have received certificates of insurance naming the Bank as loss payee on all insurance policies required hereunder. (g) Additional Matters. All other documents and legal matters in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Bank and its counsel. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as any Term Note remains outstanding and unpaid, or any other amount is owing to the Bank hereunder, the Borrower will and with respect to the agreements set forth in Sections 5.1 through 5.5 hereof will cause each Specified Person as applicable to: 5.1 Corporate Existence and Qualification. Take the necessary steps to preserve its corporate existence and its right to conduct business in all states in which the nature of its business requires qualification to do business. In the event of dispute between the Borrower and the Bank as to when qualification is necessary, the decision of the Bank shall control. 5.2 Financial Information and Compliance Certificates. (a) Keep its books of account in accordance with good accounting practices and furnish to the Bank within 90 days after the last day of each of its fiscal years, the consolidated and consolidating financial statements and balance sheets of the Borrower and its Subsidiaries (and to the extent not furnished therewith, like consolidated and consolidating statements of each Corporate Guarantor and its Subsidiaries) as at such last day of the fiscal year and statements of income and retained earnings and cash flows for such fiscal year each prepared in accordance with generally accepted accounting principles consistently applied and certified by a firm of independent certified public accountants satisfactory to the Bank, together with such certified public accountant's management letter as and when issued; and within 45 days after the close of each of the first three quarters of each fiscal year consolidated and consolidating financial statements, balance sheets, statements of income and retained earnings and cash flows of such Borrower and its Subsidiaries (and to the extent not furnished therewith, like consolidated and consolidating statements of each Corporate Guarantor and its Subsidiaries) as of the last day of and for such quarter and for the period of the fiscal year ended as of the close of the particular quarter, all such quarterly statements to be unaudited and in reasonable detail, and certified by the chief financial or accounting officer of the Borrower as having been prepared in accordance with GAAP (subject to year-end adjustments) and in comparative form for the corresponding figures for the comparable period for the preceding fiscal year. The Borrower will also, with reasonable promptness, furnish such other data as may be reasonably requested by the Bank and will at all times and from time to time permit the Bank by or through any of its officers, agents, employees, attorneys or accountants to inspect and make extracts from such Borrower's books and records. (b) At the same time as it delivers the financial statements called for by Paragraph 5.2(a), deliver certificate of the president and the chief financial or accounting officer of the Borrower evidencing a computation of compliance with the provisions of Section 6 hereof for each quarter and a certificate of the auditor for each fiscal year end statement and stating that in each case except as disclosed in such certificate, the person making such certificate has no knowledge or any Default or Event of Default their delivery of annual certified financial statements. The Borrower's certified public accountants shall also deliver such a certificate, which shall be addressed to the Borrower and the Bank for the fiscal year end calculations. (c) Within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, Borrower shall furnish to the Bank a certificate of the chief financial or accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto. (d) As soon as practical, all reports submitted to governmental agencies and stockholders, except as prepared in the normal course of business and that would not result in an adverse action to be taken by any such agencies, and all such other information as the Bank shall reasonably request. (e) All reports and forms filed with respect to all pension or other employee benefit plans under ERISA, except as filed in the normal course of business and that would not result in an adverse action to be taken by ERISA, and details related to information of a reportable ERISA event; and (f) Such other information regarding the operations, business affairs and financial condition as the Bank may reasonably request. 5.3 Insurance. Maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and naming the Bank as loss payee. 5.4 Preservation of Properties: Compliance with Law. Maintain and preserve all of its properties which are used or which are useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted and comply with all Requirements of Law . 5.5 Taxes. Duly pay and discharge all taxes or other claims which might become a lien upon any of its property except to the extent that any thereof are being in good faith appropriately contested with adequate reserves provided therefor. 5.6 Indemnity (Environmental Matters). With respect to the Real Property, (a) indemnify the Bank against any liability, loss, cost, damage, or expense (including, without limitation, reasonable attorneys' fees) arising from (i) the imposition or recording of a lien by any local, state, or federal government or governmental agency or authority pursuant to any Environmental Laws; (ii) claims of any private parties regarding violations of Environmental Laws; and (iii) costs and expenses (including, without limitation, reasonable attorneys' fees and fees incidental to the securing of repayment of such costs and expenses) incurred by any Specified Person or the Bank in connection with compliance by any Specified Person or the Bank with any statute, regulation or order issued pursuant to any Environmental Laws by any local, state or federal government or governmental agency or authority, (b) at any time the Borrower has knowledge that it has violated, has incurred liability under or any of the Real Property has any lien or exposure of lien under any Environmental Law, the Borrower shall furnish to the Bank a certificate as to the action the Borrower is taking or proposes to take with respect thereto, which action shall be reasonably satisfactory to the Bank in all respects, and (c) at the request of the Bank, which request will not be made on more than one occasion during any twelve month period, the Borrower shall undertake, at its sole expense, any environmental investigation and examination of the Real Property which the Bank may require, including without limitation an environmental investigation and examination by a consultant satisfactory to the Bank. 5.7 Litigation. Promptly notify the Bank of any material adverse litigation, administrative proceedings, investigation, audit, business development or change in financial condition. 5.8 Inspection. Allow the Bank to inspect the Borrower's and Corporate Guarantors' properties and/or books of account. 5.9 Corporate Guarantors. Cause any newly formed or acquired Subsidiary of the Borrower to become a Corporate Guarantor, which subsidiary shall then execute and deliver to the Bank the Guaranty and shall be required to comply with all terms and conditions as herein required of the Borrower. 5.10 ERISA. Maintain compliance with ERISA. 5.11 Requirements of Law. Maintain compliance in all material respects with all Federal, State and local laws, rules and regulations, including environmental laws, rules and regulations. SECTION 6. FINANCIAL COVENANTS The Borrower hereby agrees that, so long as any Term Note remains outstanding and unpaid, or any other amount is owing to the Bank hereunder, the Borrower and its Subsidiaries on a consolidated basis will not: 6.1 Dividends. Declare cash dividends in excess of 5% of each fiscal year's net income before taxes; provided that no Event of Default exists at the time of the payment of such dividend or would be created by such payment. 6.2 Losses. Permit any fiscal year losses or losses for any two (2) consecutive fiscal quarters. 6.3 Consolidated Working Capital. Permit Consolidated Working Capital (excluding prepaid expenses) to be less than $1,000,000 at any time. 6.4 Debt to Worth Ratio. Permit the ratio of Consolidated Total Unsubordinated Liabilities to Consolidated Tangible Net Worth (including Approved Subordinated Debt) to be greater than 1.00 to 1.00 at any time. 6.5 Debt Service Coverage. Permit the Debt Service Coverage to be less than 1.25 to 1.00 at the end of any fiscal quarter. For the purposes of this covenant, the term "Debt Service Coverage" shall be defined as the sum of Net Income Before Taxes and Interest plus Depreciation and Amortization minus Unfunded Capital Expenditures divided by the sum of the Current Portion of Long Term Debt plus Interest and Dividends and shall be calculated at the end of any fiscal quarter for the four (4) quarters then ended. For the purposes of the above Financial Covenants, each shall be calculated using the Bank's standard formulas. Any capitalized terms set forth above not defined shall have the meaning ascribed thereto using generally accepted accounting principles. SECTION 7. NEGATIVE COVENANTS. The Borrower hereby agrees that, so long as any Term Note remains outstanding and unpaid, or any other amount is owing to the Bank hereunder it will not, nor will it permit any of its Subsidiaries to: 7.1 Indebtedness for Borrowed Money. Incur, or permit to exist, any indebtedness for borrowed money except (i) indebtedness incurred hereunder and under any other loans made by the Bank in its discretion to the Borrower or any Subsidiary or Corporate Guarantor, (ii) indebtedness existing on the date hereof and reflected in the financial statements referred to in Section 3.1 hereof; (iii) purchase money indebtedness incurred in the acquisition of equipment not to exceed 80% of the purchase price and $500,000 on an annual basis, (iv) indebtedness subordinated on terms and conditions satisfactory to and with prior written consent of the Bank, (v) trade payables, advances or progress payments under contracts as are customarily incurred in the normal course of business, (vi) indebtedness incurred for the financing of insurance premiums provided such indebtedness does not exceed $500,000 in the aggregate, and (vii) contingent liabilities arising from interest rate hedges. 7.2 Mergers, Acquisitions and Sales of Assets. Enter into any merger or consolidation in which the Borrower is not the surviving corporation or liquidate, windup or dissolve itself or sell, transfer or lease or otherwise dispose of all or any substantial part of its assets (other than sales of inventory and obsolescent equipment in the ordinary course of business) or acquire by purchase or otherwise the business or assets of, or stock of, another business entity for a consideration in excess of $250,000; except that any Subsidiary may merge into or consolidate with any other Subsidiary which is wholly-owned by the Borrower and any Subsidiary which is wholly-owned by the Borrower may merge with or consolidate into the Borrower. 7.3 Loans; Investments. Lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any firm, corporation, or other Person except investments in (i) United States Government obligations, certificates of deposit of any banking institution with combined capital and surplus of at least $1,000,000,000 which matures no later than one (1) year from the date of investment, (ii) investments in ready marketable securities, direct obligations of the United States of America or obligations guaranteed by the United States of America which mature no later than one (1) year from the date of investment, (iii) prime (A-1, P-1) rated commercial paper and (iv) credit advanced in the normal course of business. 7.4 Liens. Create, assume or permit to exist, any Lien on any of its property or assets now owned or hereafter acquired except (i) Liens in favor of the Bank; (ii) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially impair the use thereof in the operation of its business; (iii) Liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established in accordance with generally accepted accounting principles; (iv) purchase money Liens granted to secure the unpaid purchase price of any fixed assets purchased within the limitations of Section 7.1 above; (v) existing liens scheduled and not to be renewed, extended or increased; and (vi) statutory liens for deposits under Social Security and similar laws. 7.5 Contingent Liabilities. Assume, endorse, be or become liable for or guarantee the obligations of any Person excluding however, the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 7.6 Dividends. Declare or pay any dividends in contradiction to the permitted dividends set forth in the financial covenants hereof. 7.7 Sales of Receivables: Sale - Leasebacks. Sell, discount or otherwise dispose of notes, accounts receivable or other obligations owing to the Borrower, with or without recourse, except for the purpose of collection in the ordinary course of business; or sell any asset pursuant to an arrangement to thereafter lease such asset from the purchaser thereof. 7.8 Nature of Business. Materially alter the nature of its business. 7.9 Stock of Subsidiaries. Sell or otherwise dispose of any Subsidiary (except in connection with a merger or consolidation of a Subsidiary into the Borrower or another Subsidiary) or permit a Subsidiary to issue any additional shares of its capital stock except pro rata to its stockholders. 7.10 ERISA. (i) Terminate any Plan so as to result in any material liability to the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (the "PBGC"), (ii) engage in or permit any person to engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended) involving any Plan which would subject a Borrower to any material tax, penalty or other liability, (iii) incur or suffer to exist any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, involving any Plan, or (iv) allow or suffer to exist any event or condition, which presents a material risk incurring a material liability to the PBGC by reason of termination of any Plan. 7.11 Fiscal Year. Change or consent to a change in the fiscal year end of the Borrower or any Subsidiary. SECTION 8. EVENTS OF DEFAULT Upon the occurrence of any of the following events (each an "Event of Default"): (a) Borrower shall fail to pay any interest on or principal of any Term Note when due or shall fail to pay any other amount payable hereunder; or the Borrower or any Corporate Guarantor shall default under any other agreement, instrument or obligation made with or in favor of or owing to the Bank; or (b) Any representation or warranty made or deemed made by the Borrower herein or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been false in any material respect on or as of the date made or deemed made; or (c) Borrower shall default in the observance or performance of any covenant or agreement contained in Sections 5, 6 or 7. (d) Borrower shall default in the observance or performance of any other agreement contained in this Agreement and such default shall continue unremedied for a period of 10 days after written notice thereof is given to the Borrower by the Bank; or (e) Any Specified Person shall (i) default in any payment of any indebtedness for borrowed money (other than the Notes) or the obtaining of advances or credit beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto or any other event shall occur or condition exist, in each case the effect of which default or other event or condition is to cause or permit the holder or holders of such indebtedness (or a trustee or agent on behalf of such holder or holders) to cause such indebtedness to become due prior to its stated maturity; or (f) (i) Any Specified Person shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or any Specified Person shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Specified Person any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Specified Person any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall have not been vacated, discharged, or stayed or bonded pending appeal within 20 days from the entry thereof; or (iv) any Specified Person shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) of this Paragraph 8(f); or (v) any Specified Person shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) any Specified Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, (iv) any Plan shall terminate for purposes of Title IV of ERISA, and in each case in clauses (i) through (iv) above, such event or condition could subject the Borrower to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations or property of the Borrower; or (h) the rendition by any court of a final judgment against any Specified Person which shall not be satisfactorily stayed, discharged, vacated or set aside within 60 days after the making thereof; or the attachment of any property of any Specified Person which has not been released or provided for to the reasonable satisfaction of the Bank within 60 days after the making thereof; or (i) the Guarantees of any of the Corporate Guarantors shall cease to be in full force and effect other than because of a merger of a subsidiary into the Borrower; then, in any such event, the Bank may, at its option, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable and the same, and all interest accrued thereon, shall forthwith become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived, anything contained herein or in any instrument evidencing the Loans to the contrary notwithstanding. SECTION 9. COLLATERAL SECURITY (a) General Loan and Collateral Agreement. As collateral security for the payment of any and all sums owing under the Term Notes and all other obligations, direct or contingent, joint, several or independent, of the Borrower now or hereafter existing due or to become due to, or held or to be held by the Bank, whether created directly or acquired by assignment or otherwise including, without limitation, any arising under this Agreement (all of such obligations, including the Notes, being hereinafter called the "Obligations"), the Borrower hereby grants to the Bank a lien on and security interest in any and all deposits or other sums at any time credited by or due from the Bank to the Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other property of the Borrower, and the proceeds thereof, now or hereafter held or received by or in transit to the Bank from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any such deposits, sums, monies, securities and other property, may at any time after the occurrence of any Event of Default be set-off, appropriated and applied by the Bank against any of the Obligations whether or not such Obligations are then due or are secured by any collateral, or, if they are so secured, whether or not such collateral held by the Bank is considered to be adequate. (b) Additional Collateral Security. In addition to the collateral described in Paragraph 9(a) hereof, payment of the Obligations is also secured by a first priority security interest in all personal property of the Borrower and its Subsidiaries whether now owned or hereafter acquired, as provided in security agreements executed or to be executed and delivered by such parties to the Bank (collectively the "Security Agreements"). SECTION 10. MISCELLANEOUS 10.1 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing unless otherwise expressly provided herein and shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail addressed as follows, or to such address as may be hereafter notified in writing by the respective parties hereto and any future holders of any Note: The Borrower: Balchem Corporation Route 6 and Route 284 Slate Hill, New York 10973 Attention: Mr. Frank J. Fitzpatrick The Bank: The Chase Manhattan Bank 400 Rella Boulevard, Suite 100 Suffern, New York 10901 Attention: George C. Cardona, Vice President with a copy to: McCarthy Fingar Donovan Drazen & Smith 11 Martine Avenue White Plains, New York 10601 Attention: Nicholas J. Chivily, Esq. 10.2 No Waiver: Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right. 10.3 Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Note. 10.4 Payment of Expenses. The Borrower agrees to pay or reimburse the Bank for all its costs and expenses incurred in connection with (a) the enforcement or preservation of any rights under this Agreement or any Note or any other instrument or agreement entered into in connection herewith or therewith including, without limitation, the reasonable fees and disbursements of attorneys for the Bank if referred by the Bank to such attorneys for enforcement and collection, and (b) any claim or action threatened, made or brought against the Bank arising out of or relating to any extent to this Agreement, any Security Agreement, any Note or any instrument or agreement entered into a connection therewith or the transactions contemplated hereby or thereby if the Bank prevails in any such action or proceeding or Borrower makes payment to the Bank on account of any sums demanded by it prior to the disposition of any such action or proceeding or in settlement thereof. 10.5 Waiver of Jury Trial. Set-off and Counterclaim. The Borrower and the Bank in any litigation (whether or not arising out of or relating to this Agreement) in which they shall be adverse parties waive the right of trial by jury and the Borrower waives the right to interpose any set-off or counterclaim of any kind or description in any such litigation. 10.6 Modification and Waiver. No modification or waiver of, or with respect to any provision of this Agreement or any document or instrument delivered in connection therewith shall be effective unless it shall be in writing and signed by the Bank, and then such modification or waiver shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. 10.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Bank, all future holders of the Notes and its successors and assigns, except that the Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of the Bank. The term "Bank" as used herein shall be deemed to include the Bank and its successors, endorsees and assigns. 10.8 Governing Law: Consent to Jurisdiction. This Agreement, the Notes and any documents and instruments delivered in connection herewith and therewith and the rights and duties of the parties hereunder and thereunder shall be governed by, and construed and interpreted in accordance with, the law of the State of New York and the Borrower consents to the jurisdiction of the courts of the State of New York in any action brought to enforce any rights of the Bank under this Agreement and any document or instrument related hereto. 10.9 Entire Agreement. This Agreement and any other agreements, documents and instruments executed and delivered pursuant to or in connection with the Obligations contain the entire agreement between the parties relating to the subject matter hereof and thereof. The Borrower expressly acknowledges that the Bank has not made and the Borrower is not relying on any oral representations, agreements or commitments of the Bank or any officer, employee, agent or representative thereof. 10.10 Interest Adjustment. Notwithstanding anything to the contrary contained in this Agreement or the Notes, the rate of interest payable on the Notes shall never exceed the maximum rate of interest permitted under applicable law. If at any time the rate of interest otherwise prescribed herein shall exceed such maximum rate, and such prescribed rate is thereafter below such maximum rate, the prescribed rate shall be increased to the maximum rate for such period of time as is required so that the total amount of interest received by the Bank is that which would have been received by the Bank except for the operation of the first sentence of this Section 10.10. 10.11 Participation Interests. The Borrower acknowledges that the Bank may after the date of the Notes to sell and assign, participation interests in the Loans to such domestic or foreign banks, insurance companies, pension funds, trusts or other institutional lenders or other persons, parties or investors (including, but not limited to, grantor trusts, owner trusts, special purpose corporations, REMIC's, investment trusts or other similar or comparable investment vehicles) as may be selected by the Bank in its sole and absolute discretion and on terms and conditions satisfactory to the Bank in its sole and absolute discretion (any such bank, insurance company, pension fund, trust or other institutional lender or other person, party or investor to whom a participation interest in the Loans is so sold and assigned is herein referred to as a Participant). The Bank shall at all times during the term of the Loans act as lead lender and servicer for Participants in accordance with participation agreements in form and substance satisfactory in all respects to the Payee and its counsel. Subject to the applicable terms and provisions of the participation agreements, the Bank shall retain all rights with respect to the enforcement, collection and administration of the Loans and the security therefor and shall service the Loans throughout the term thereof. The Borrower shall cooperate, and shall cause each Corporate Guarantor, indemnitor and other Person or party associated or connected with the Loans or the collateral therefore to cooperate, in all respects with the Bank in connection with the sale of participation interests in the Loans in the manner contemplated by this paragraph, and shall, in connection therewith, execute and deliver such estoppels, certificates, instruments and documents as may be requested by the Bank. The Borrower grants to the Bank, and shall cause each Corporate Guarantor, indemnitor and other person or party associated or connected with the Loans or the collateral therefore to grant to the Bank, the right to distribute on a confidential basis financial and other information concerning the Borrower, each such Corporate Guarantor, indemnitor and other person or party and other pertinent information with respect to the Loans to any party who has purchased a participation interest in the Loans or who has expressed a serious interest in purchasing a participation interest in the Loans. The Borrower shall execute and deliver, and shall cause each Corporate Guarantor, indemnitor and other person or party associated or connected with the Loans or the collateral therefore to execute and deliver, such documents and instruments as may be necessary to split the Loans into two or more loans evidenced, secured and advanced by and pursuant to separate sets of notes, security agreements and other related Loan Documents to the full extent by the Bank to facilitate the sale of participation interests in the Loans in the manner contemplated by this paragraph, it being agreed that (i) any such splitting of the Loans will not adversely affect or diminish the rights of the Borrower as presently set forth in this Agreement, the Notes, or the other Loan Documents and will not increase the respective obligations and liabilities of the Borrower or any such Corporate Guarantor, indemnitor or other person or party above those presently set forth in this Agreement, the Notes or the other Loan Documents, (ii) the other documents securing the Loans as so split will have such priority of lien and security interest as may be specified by the Bank, and (iii) the retained interest of the Bank in the Loans as so split shall be allocated to or among one or more of such separate loans in a manner specified by the Bank in its sole and absolute discretion. The Borrower shall not incur or be responsible for any additional costs, fees or expenses of any nature whatsoever as a result of the Bank's sale of participation interests in all or any portion of the Loans in the manner contemplated by this paragraph, it being agreed, however, that nothing contained in this sentence shall be deemed to modify, qualify, limit or affect in any manner whatsoever any of the terms and provisions of the Notes. If the Borrower shall default in the performance of its obligation as set forth in this paragraph, and if such default shall not be remedied by the Borrower within ten (10) days after notice by the Bank, the Bank shall have the right in its discretion to declare the Loans immediately due and payable. 10.12 Legal Representation. The Borrower acknowledges that the Bank has advised it to be represented by legal counsel in the negotiation and execution of this Agreement and the other Loan Documents and Borrower has elected to forego such representation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in White Plains, New York by their proper and duly authorized officer as of the day and year first above written. BALCHEM CORPORATION By: /s/Dino A. Rossi ---------------- Dino A. Rossi President THE CHASE MANHATTAN BANK By: /s/George C. Cardona -------------------- George C. Cardona Vice President State of New York ) ) ss.: County of ) On the ___________ day of January in the year 1999, before me, the undersigned, a Notary Public in and for the State of New York, personally appeared Dino A. Rossi, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual(s) acted, executed the instrument. ------------------------------- NOTARY PUBLIC State of New York ) ) ss.: County of ) On the ___________ day of January in the year 1999, before me, the undersigned, a Notary Public in and for the State of New York, personally appeared George C. Cardona, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual(s) acted, executed the instrument. ------------------------------- NOTARY PUBLIC Schedule 3.10 Environmental Matters None Exhibit A TERM NOTE A $750,000.00 White Plains, New York Dated as of January 15, 1999 BALCHEM CORPORATION, a Maryland corporation (the "Borrower"), for value received, hereby promises to pay to the order of THE CHASE MANHATTAN BANK (the "Bank") at its office specified in Section 10.1 of the Amended and Restated Loan Agreement dated as of January 15, 1999 between the Borrower and the Bank, as amended from time to time (as so amended the "Agreement"; terms defined in the Agreement shall have their defined meanings when used in this Note) in lawful money of the United States and in immediately available funds, the principal sum of SEVEN HUNDRED FIFTY THOUSAND and no/100 DOLLARS ($750,000) payable in monthly principal installments as follows: Commencing on February 1, 1999 and on the first day of each succeeding month thereafter through and including Term Loan A Maturity Date, there shall be due and payable installments of principal each in the amount of $50,000.00; and On Term Loan A Maturity Date, the entire Principal Balance remaining unpaid and any accrued and unpaid interest shall be due and payable. In addition to the aforesaid payments of principal, the Borrower further promises to pay interest at said office in like money on the unpaid Principal Balance of this Note from time to time outstanding (computed on the basis of a 360-day year for actual days elapsed) at the times and at an annual rate (or rates) as selected by the Borrower pursuant to the terms of Section 2 of the Agreement. Interest shall be payable as provided in Section 2 of the Agreement. Whenever the entire unpaid principal amount of this Note becomes due and payable (whether at the stated maturity hereof, by acceleration or otherwise), interest hereon shall thereafter be payable on demand at a rate as set forth in Section 2 of the Agreement, but in no event in excess of the maximum rate of interest permitted under any applicable law. The foregoing notwithstanding, if in any month, it would be necessary for the Borrower to prepay a Loan which bears interest at a LIBOR Rate in order to make a regular monthly payment of principal due hereunder, the Borrower may defer such regular monthly payment until the last day of the LIBOR Rate Interest Period applicable to such Loan, provided, however, that the aggregate of all principal payments for: (1) the period February 1, 1999 through December 31, 1999 shall be no less than $550,000; and (2) the period February 1, 1999 through Term Loan A Maturity Date shall be no less than $750,000. This Note is the Term Note A referred to in the Agreement, and is entitled to the benefits thereof and may be prepaid in whole or in part (subject to the indemnity provided in the Agreement) as provided therein. This Note is secured by the collateral described in each Security Agreement. Upon the occurrence of any one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid under the Note may be declared immediately due and payable as provided in the Agreement. This Note is a restatement and replacement of, and not in addition to, the Note dated November 1, 1996 made by the Borrower for the benefit of the Bank, in the original principal amount of $2,100,000, which, itself, is a restatement and replacement of, and not in addition to, the Note dated January 25, 1995 made by the Borrower for the benefit of the Bank, in the original principal amount of $3,700,000.00. This Note shall be construed in accordance with and governed by the laws of the State of New York. BALCHEM CORPORATION By: _____________________ Name: Title: State of New York ) ) ss.: County of ) On the ___________ day of January in the year 1999, before me, the undersigned, a Notary Public in and for the State of New York, personally appeared_____________________________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------- NOTARY PUBLIC Exhibit B TERM NOTE B $3,000,000.00 White Plains, New York Dated as of January 15, 1999 BALCHEM CORPORATION, a Maryland corporation (the "Borrower"), for value received, hereby promises to pay to the order of THE CHASE MANHATTAN BANK (the "Bank") at its office specified in Section 10.1 of the Amended and Restated Loan Agreement dated as of January 15, 1999 between the Borrower and the Bank, as amended from time to time (as so amended the "Agreement"; terms defined in the Agreement shall have their defined meanings when used in this Note) in lawful money of the United States and in immediately available funds, the principal sum of THREE MILLION and no/100 DOLLARS ($3,000,000.00) payable in monthly principal installments as follows: Commencing on February 1, 1999 and on the first day of each succeeding month thereafter through and including Term Loan B Maturity Date, there shall be due and payable installments of principal each in the amount of $50,000.00; and On Term Loan B Maturity Date, the entire Principal Balance remaining unpaid and any accrued and unpaid interest shall be due and payable. In addition to the aforesaid payments of principal, the Borrower further promises to pay interest at said office in like money on the unpaid Principal Balance of this Note from time to time outstanding (computed on the basis of a 360-day year for actual days elapsed) at the times and at an annual rate (or rates) as selected by the Borrower pursuant to the terms of Section 2 of the Agreement. Interest shall be payable as provided in Section 2 of the Agreement. Whenever the entire unpaid principal amount of this Note becomes due and payable (whether at the stated maturity hereof, by acceleration or otherwise), interest hereon shall thereafter be payable on demand at a rate as set forth in Section 2 of the Agreement, but in no event in excess of the maximum rate of interest permitted under any applicable law. The foregoing notwithstanding, if in any month, it would be necessary for the Borrower to prepay a Loan which bears interest at a LIBOR Rate in order to make a regular monthly payment of principal due hereunder, the Borrower may defer such regular monthly payment until the last day of the LIBOR Rate Interest Period applicable to such Loan, provided, however, that the aggregate of all principal payments for (1) the period February 1,1999 through December 31, 1999 shall be no less than $550,000; (2) the period February 1, 1999 through December 31, 2000 shall be no less than $1,150,000; (3) the period February 1, 1999 through December 31, 2001 shall be no less than $1,750,000; (4) the period February 1, 1999 through December 31, 2002 shall be no less than $2,350,000; and (5) the period February 1, 1999 through Term Loan B Maturity Date shall be no less than $3,000,000. This Note is the Term Note B referred to in the Agreement, and is entitled to the benefits thereof and may be prepaid in whole or in part (subject to the indemnity provided in the Agreement) as provided therein. This Note is secured by the collateral described in each Security Agreement. Upon the occurrence of any one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid under the Note may be declared immediately due and payable as provided in the Agreement. This Note shall be construed in accordance with and governed by the laws of the State of New York. BALCHEM CORPORATION By: ______________________________ Name: Title: State of New York ) ) ss.: County of ) On the ___________ day of January in the year 1999, before me, the undersigned, a Notary Public in and for the State of New York, personally appeared_____________________________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------- NOTARY PUBLIC Exhibit C Prepayment Formula n = x PV = [GRAPHIC-MATH SYMBOL] NETn n = 1 ( P x (L - R) ) x Daysn - Daysn-1 --------------- 360 NETn = ----------------------------------- (1 + Zn) Daysn - Daysn 360 X = Number, or fraction thereof, of Calculation Periods from date of prepayment to date of final fixed maturity P = Principal prepaid L = Fixed Rate R = Redeployment Rate Daysn - Daysn-1 = For each Calculation Period "n", the actual number of days elapsed during that Calculation Period. Daysn - Days0 = For each Calculation Period "n", the actual number of days elapsed from the date of prepayment to the last day of that Calculation Period. Z = For each Calculation Period "n", the Discount Rate for that Calculation Period. Exhibit D [GRAPHIC-CHASE LOGO] THE CHASE MANHATTAN BANK GUARANTY __________, New York, ___________, 199_ WHEREAS, __________________________ (hereinafter called the "Borrower"), desires to transact business with and to obtain credit or a continuation of credit or other financial accommodations from THE CHASE MANHATTAN BANK, a New York banking corporation (hereinafter called the "Bank"); and WHEREAS, the Bank is unwilling to extend or continue credit to or other financial accommodations to the Borrower, unless it receives the following guaranty of the undersigned; NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration and in order to induce the Bank from time to time, in its discretion, to extend or continue credit or other financial accommodations to the Borrower, the undersigned hereby guarantees, absolutely and unconditionally, to the Bank the payment of all liabilities of the Borrower to the Bank of whatever nature, whether now existing or hereafter incurred, whether created directly or acquired by the Bank by assignment or otherwise, whether matured or unmatured and whether absolute or contingent (all of which are hereinafter collectively referred to as the "Liabilities of the Borrower"). In order to further secure the payment of the Liabilities of the Borrower, the undersigned does hereby give the Bank a continuing lien and right of set-off for the amount of the Liabilities of the Borrower upon any and all monies, securities and any and all other property of the undersigned and the proceeds thereof, now or hereafter actually or constructively held or received by or in transit in any manner to or from the Bank, Chase Securities, Inc., or any other affiliate of the Bank from or for the undersigned, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into the possession of the Bank, Chase Securities, Inc., or any other affiliate of the Bank in any way, or place in any safe deposit box leased by the Bank, Chase Securities, Inc., or any other affiliate of the Bank to the undersigned. The Bank is also given a continuing lien and right of set-off for the amount of said Liabilities of the Borrower upon any and all deposits (general and special) and credits of, or for the benefit of the undersigned with, and any and all claims of the undersigned against, the Bank, Chase Securities, Inc., or any other affiliate of the Bank at any time existing. The Bank is hereby authorized at any time or times, without prior notice, to apply such deposits or credits, or any part thereof, to such Liabilities of the Borrower and, although said Liabilities of the Borrower may be contingent or unmatured, and whether the collateral security therefor is deemed adequate or not. The undersigned authorizes the Bank to deliver a copy of this guaranty to others as written notification of the undersigned's transfer of a security interest in the collateral described herein to the Bank. The undersigned agrees that, with or without notice or demand, the undersigned shall reimburse the Bank for all the Bank's expenses (including reasonable fees of counsel for the Bank who may be employees thereof) incurred in connection with any of the Liabilities of the Borrower or the collection thereof. This guaranty is a continuing guaranty and shall remain in full force and effect irrespective of any interruptions in the business relations of the Borrower with the Bank; provided, however, that the undersigned may, by notice in writing, delivered personally or received by certified mail, return receipt requested, addressed to the Bank's office at _____________________________________________________, terminate this guaranty with respect to all Liabilities of the Borrower incurred or contracted by the Borrower or acquired by the Bank after the date on which such notice is so delivered or received. All monies available to the Bank for application in payment or reduction of the Liabilities of the Borrower may be applied by the Bank in such manner and in such amounts and at such time or times as it may see fit to the payment or reduction of such of the Liabilities of the Borrower as the Bank may elect. The undersigned hereby waives: (a) notice of acceptance of this guaranty and of extensions of credit or other financial accommodations by the Bank to the Borrower; (b) presentment and demand for payment of any of the Liabilities of the Borrower; (c) protest and notice of dishonor or default to the undersigned or to any other party with respect to any of the Liabilities of the Borrower; (d) all other notices to which the undersigned may otherwise be entitled; and (e) any demand for payment hereunder. All liabilities of the undersigned to the Bank hereunder or otherwise, whether or not then due or absolute or contingent, shall without notice or demand become due and payable immediately upon the occurrence of any default or event of default with respect to any Liabilities of the Borrower (or the occurrence of any other event which results in acceleration of the maturity of any thereof) or the occurrence of any default hereunder. This is a guaranty of payment and not of collection and the undersigned further waives any right to require that any action be brought against the Borrower or any other person or to require that resort be had to any security or to any balance of any deposit account or credit on the books of the Bank in favor of the Borrower or any other person. The undersigned hereby consents that from time to time, before or after any default by the Borrower or any notice of termination hereof, with or without further notice to or assent from the undersigned, any security at any time held by or available to the Bank for any obligation of the Borrower, or any security at any time held by or available to the Bank for any obligation of any other person secondarily or otherwise liable for any of the Liabilities of the Borrower, may be exchanged, surrendered or released and any obligation of the Borrower, or of any such other person, may be changed, altered, renewed, extended, continued, surrendered, compromised, waived, discharged or released in whole or in part (including without limitation any such event resulting from any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or its assets) or any default with respect thereto waived, and the Bank may fail to set off and may release, in whole or in part, any balance of any deposit account or credit on the Bank's books in favor of the Borrower, or of any such other person, and may extend further credit in any manner whatsoever to the Borrower, and generally deal or take action or no action with regard to the Borrower or any such security or other person as the Bank may see fit; and the undersigned shall remain bound under this guaranty notwithstanding any such exchange, surrender, release, change, alteration, renewal, extension, continuance, compromise, waiver, discharge, inaction, extension of further credit or other dealing. The obligations of the undersigned are absolute and unconditional and are valid irrespective of any other agreement or circumstance which might otherwise constitute a defense to the obligations hereunder or to the obligations of others related thereto and the undersigned irrevocably waives the right to assert defenses, set-offs and counterclaims in any litigation relating to this guaranty and the Liabilities of the Borrower. This guaranty sets forth the entire understanding of the parties, and the undersigned acknowledges that no oral or other agreements, conditions, promises, understandings, representations or warranties exist in regard to the obligations hereunder, except those specifically set forth herein. The undersigned irrevocably waives and shall not seek to enforce or collect upon any rights which it now has or may acquire against the Borrower, either by way of subrogation, indemnity, reimbursement or contribution, or any other similar right, for any amount paid under this guaranty or by way of any other obligations whatsoever of the Borrower to the undersigned. In the event either a petition is filed under the Bankruptcy Code in regard to the Borrower or an action or proceeding is commenced for the benefit of the creditors of the Borrower, this agreement shall at all times thereafter remain effective in regard to any payments or other transfers of assets to the Bank received from or on behalf of the Borrower prior to notice of termination of this guaranty and which are or may be held voidable or otherwise subject to recission or return on the grounds of preference, fraudulent conveyance or otherwise, whether or not the Liabilities of the Borrower have been paid in full. Each reference herein to the Bank shall be deemed to include its successors and assigns, in whose favor the provisions of this guaranty shall also inure. Each reference herein to the undersigned shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of the undersigned, all of whom shall be bound by the provisions of this guaranty. The term "undersigned" as used herein shall, if this instrument is signed by more than one party, mean the "undersigned and each of them" and each undertaking herein contained shall be their joint and several undertaking, provided, however, that in the next succeeding paragraph hereof the term "undersigned" shall mean the "undersigned or any of them". If any party hereto shall be a partnership, the agreements and obligations on the part of the undersigned herein contained shall remain in force and applicable against the partnership and all of its partners (notwithstanding any changes in the individuals composing the partnership or any release of one or more partners) and the term "undersigned" shall include any altered or successive partnership but, the predecessor partnerships and their partners shall not thereby be released from any obligation or liability. No delay on the part of the Bank in exercising any rights hereunder or failure to exercise the same shall operate as a waiver of such rights; no notice to or demand on the undersigned shall be deemed to be a waiver of the obligation of the undersigned or of the right of the Bank to take further action without notice or demand as provided herein; nor in any event shall any modification or waiver of the provisions of this guaranty be effective unless in writing signed by an authorized officer of the Bank; nor shall any such waiver be applicable except in the specific instance for which given. This guaranty is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the State of New York and shall be in all respects governed, construed, applied and enforced in accordance with the laws of said State; and no defense given or allowed by the laws of any other State or Country shall be interposed in any action hereon unless such defense is also given or allowed by the laws of the State of New York. The undersigned hereby unconditionally WAIVES ANY RIGHT TO JURY TRIAL in connection with actions by or against the Bank arising out of or in connection with the Liabilities of the Borrower and this guaranty. Guarantor: ___________________________________ (AFFIX CORPORATE SEAL HERE) By: ______________________________ Name: Title: Address: ____________________________________ ____________________________________ Exhibit E SECURITY AGREEMENT (General Purpose) This agreement made this 15th day of January 1999 between The Chase Manhattan Bank (herein called "Bank") and BALCHEM CORPORATION (herein called "Borrower"). 1. DEFINITIONS OF TERMS USED HEREIN. (a) "Borrower" includes all individuals executing this agreement as parties hereto and all members of a partnership when Borrower is a partnership, each of whom shall be jointly and severally liable individually and as partners hereunder. (b) "Liability" or "liabilities" includes all liabilities (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that may be hereafter contracted or acquired, of Borrower (including Borrower and any other person) to Bank, including without limitation all liabilities arising under or from any note, loan or credit agreement, letter of credit, guaranty, draft, acceptance, interest rate or foreign exchange agreement or any other instrument or agreement of (or the responsibility of) the Borrower or any loan, advance or other extension of credit or financial accommodation to Borrower by Bank. (c) "Proceeds" means whatever is received when Collateral is sold, exchanged, leased, collected or otherwise disposed of and includes the account arising when the right to payment is earned under a contract. (d) "Security interest" means a lien or other interest in Collateral which secures payment of a liability or performance of an obligation. (e) "Collateral" means the property described in Section 2 hereof and the following described property of the Borrower. SEE RIDER A ATTACHED HERETO AND DEEMED INSERTED AT THIS POINT. All terms used herein which are also defined in the New York or any other applicable Uniform Commercial Code shall also have at least the meanings herein as therein defined. 2. SECURITY INTEREST. As security for the payment of all loans and other extensions of credit or other financial accommodations now or in the future made by Bank to Borrower and all other liabilities of Borrower to Bank, Borrower hereby grants to Bank a security interest in the above described Collateral and all and any Proceeds arising therefrom and all and any products of the Collateral. Borrower represents and warrants that it is the sole lawful owner of the Collateral, free and clear of any liens and encumbrances, and has the right and power to pledge, sell, assign and transfer absolute title thereto to Bank and that no financing statement covering the Collateral, other than the Bank's, is on file in any public office. To further secure the Liabilities, the Borrower hereby grants, pledges and assigns to the Bank a continuing lien security interest and right of set-off in and to all money, securities and all other property of the Borrower, and the proceeds thereof, now or hereafter actually or constructively held or received by or for the Bank, Chase Securities, Inc or any other affiliate of the Bank for any purpose, including safekeeping, custody, pledge, transmission and collection and in and to all of the Borrower's deposits (general and special) and credits with the Bank, Chase Securities, Inc. or any other affiliate of the Bank. Borrower authorizes Bank to deliver to others a copy of this agreement as written notification of the Borrower's transfer of a security interest in the foregoing property. The Bank is hereby authorized at any time and from time to time, without notice, to apply all or part of such money, securities, property, proceed deposits or credits to any of the Liabilities in such amounts as the Bank may elect in its sole and absolute discretion, although the Liabilities may then be contingent or unmatured and whether or not the collateral security may be deemed adequate. 3. USE OF COLLATERAL. Until default, Borrower may use the Collateral in any lawful manner. If the Collateral is or is about to become affixed to realty, Borrower will, at Bank's request, furnish to the Bank a writing executed by the mortgagee of the realty whereby the mortgagee subordinates its rights and priorities to the Bank's security interest in the Collateral. If the Collateral is or may become subject to a landlord's lien, the Borrower will, at Bank's request, furnish the Bank with a landlord's waiver satisfactory in form to the bank. 4. INSURANCE. Borrower will have and maintain insurance on the Collateral until this Agreement is terminated against all expected risks to which it is exposed, including fire, theft and collision, and those which the Bank may designate, such insurance to be payable to the Bank and Borrower as their interest may appear; all policies shall provide for thirty (30). days' written notice minimum cancellation notice to the Bank. Bank may act as attorney for Borrower in obtaining, adjusting, settling and canceling such insurance. 5. DEFAULT. Default shall exist hereunder (1) if the Borrower shall fail to pay any amount of the Liabilities when due or if the Borrower shall fail to keep, observe or perform any provision of this Agreement or of any note, or other instrument or agreement between Borrower and Bank relating to any Liabilities or if any default or Event of Default specified or defined in any such note, instrument or agreement shall occur, (2) if the Borrower shall or shall attempt to (a) remove or allow removal of the Collateral from the county where the Borrower now resides or change the location of its chief executive office or principal place of business, (b) sell, encumber or otherwise dispose of the Collateral or any interest therein or permit any lien or security interest (other than the Bank's) to exist thereon or therein, (c) conceal, hire out or let the Collateral, (d) misuse or abuse the Collateral, or (e) use or allow the use of the Collateral in connection with any undertaking prohibited by law; (3) if bankruptcy or insolvency proceedings shall be instituted by or against the Borrower, or (4) If the Collateral shall be attached, levied upon, seized in any legal proceedings, or held by virtue of any lien or distress, or (5) If the Borrower shall make any assignment for the benefit of creditors, or (6) If the Borrower shall fail to pay promptly all taxes and assessments upon the Collateral or the use thereof, or (7) If the Borrower shall die, or (8) if the Bank with reasonable cause determines that its interest in the Collateral is in jeopardy, or (9) If Borrower should fail to keep the Collateral suitably insured. In the event of default or the breach of any undertaking of or conditions to be performed by the Borrower (1) all liabilities shall become immediately due and payable, and (2) the Borrower agrees upon demand to deliver the Collateral to the Bank, or the Bank may, with or without legal process, and with or without previous notice or demand for performance, enter any premises wherein the Collateral may be, and take possession of the same, together with anything therein; and the Bank may make disposition of the Collateral subject to any and all applicable provisions of the law. If the Collateral is sold at public sale, Bank may purchase the Collateral at such sale. The Bank, provided it has sent the statutory notice of default, may retain from the proceeds of such sale all reasonable costs Incurred in the said taking and sale and also, all sums then owing by the Borrower, and any surplus of any such sale shall be paid to the Borrower. 6. GENERAL AGREEMENTS. (a) Borrower agrees to pay the costs of filing financing statements and of conducting searches in connection with this Agreement (b) Borrower agrees to allow the Bank through any of its officers or agents, at all reasonable times, to examine or inspect any of the Collateral and to examine, inspect and make extracts from the Borrower's books and records relating to the Collateral. (c) Borrower will promptly pay when due all taxes and assessments upon the Collateral or for its use of operation or upon the proceeds thereof or upon this Agreement or upon any note or other instrument or agreement evidencing any of the liabilities. (d) At its option, the Bank may discharge taxes, liens or security interests or other encumbrances at any time levied or placed on the Collateral, and may pay for the maintenance and preservation of the Collateral, and the Borrower agrees to reimburse the Bank on demand for any payment made or any expense incurred by the Bank pursuant to the foregoing authorization, Including outside or in-house counsel fees and disbursements incurred or expended by the Bank in connection with this Agreement (e) Borrower hereby authorizes the Bank to file financing statements and any amendments .thereto without the signature of Borrower. Such authorization is limited to the security Interest granted by this Agreement (f) Borrower agrees that the Bank has the right to notify (on invoices or otherwise) account debtors and other obligors or payors on any Collateral of its assignment to the Bank and that all payments thereon should be made directly to the Bank and that the Bank has full power and authority to collect, compromise, endorse, sell or otherwise deal with the Collateral on its own name or that of the Borrower at any time. (g) The Borrower agrees to pay or reimburse the Bank on demand for all costs and expenses incurred by it in connection with the administration and enforcement of this Agreement and the administration, preservation, protection, collection or realization of any Collateral (including outside or in-house attorneys' fees and expenses). (h) The Bank shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by the Borrower unless such waiver is in writing and signed by the Bank. No delay or omission on the part of the Bank in exercising any right shall operate as a waiver thereof or of any other right. A waiver upon any one occasion shall not be construed as a bar or a waiver of any right or remedy on any future occasion. All of the rights and remedies of the Bank, whether evidenced hereby or by any other Agreement, instrument or paper, shall be cumulative and may be exercised singly or concurrently. (i) This Agreement shall be governed by and construed In accordance with the laws of the State of New York. j) This Agreement, and the security interests, obligations, rights and remedies created hereby, shall inure to the benefit of the Bank and its successors and assigns and be binding upon the Borrower and its heirs, executors, administrators, legal representatives, successors and assigns. 7. EXECUTION BY BANK. This Agreement shall take effect immediately upon execution by the Borrower, and the execution hereof by the Bank shall not be required as a condition to the effectiveness of this Agreement. The provision for execution of this Agreement by the Bank is only for purposes of filing this Agreement as a Security Agreement under the Uniform Commercial Code, if execution hereof by the Bank is required for purposes of such filing. BALCHEM CORPORATION (Borrower) By: /S/Dino Rossi - ----------------- Dino Rossi Route 6 & Route 284 - ------------------- (Number and Street) Slate Hill, New York 10973 - -------------------------- (City, County, State) Places of business in counties other than above. - -------------------------------------- THE CHASE MANHATTAN BANK - ------------------------ (Bank Designation) By: /S/George C. Cardona, - ------------------------- George C. Cardona (Name and Title) Address: 400 Rella Boulevard, Suite 100, Suffern, New York 10901 ------------------------------------------------------- State of New York ) ) ss.: County of Orange ) On the 14th day of January in the year 1999, before me, the undersigned, a Notary Public in and for the State of New York, personally appeared Dino A. Rossi, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. /S/ Linda Wood -------------- NOTARY PUBLIC LINDA M. WOOD Notary Public, State of New York No 4957414 Qualified in Orange County Commission Expires October 16, 1999 RIDER A TO SECURITY AGREEMENT BETWEEN THE CHASE MANHATTAN BANK AND BALCHEM CORPORATION (a) All equipment in all of its forms, wherever located, now or hereafter existing (including, but not limited to, any specific items or types of equipment set forth in the Schedule hereto), and all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "Equipment"); (b) All inventory in all of its forms, wherever located, now or hereafter existing (including, but not limited to (i) any specific items or types of inventory set forth in the Schedule hereto and raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (ii) goods in which the Borrower has an interest in mass or a joint or other interest or right of any kind and (iii) goods which are returned to or repossessed by the Borrower, and all accessions thereto and products thereof (any and all such inventory, accessions and products being the "Inventory"); (c) All accounts, contract rights, chattel paper, instruments, general intangibles and other obligations of any kind now or hereafter existing arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights now or hereafter existing in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, general intangibles or obligations (any and all such accounts, contract rights, chattel paper, instruments, general intangibles and obligations being the "Receivables", and any and all such leases, security agreements and other contracts being the "Related Contracts") and all rights under any present or future interest rate protection agreements related to any financial accommodations made by the Bank for the benefit of the Borrower; and (d) All proceeds of any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not the Bank is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. EX-21 9 EXHIBIT 21 BALCHEM CORPORATION Schedule of Subsidiaries Jurisdiction of Name Incorporation - ---- ------------- Balchem, Ltd. Canada EX-23.1 10 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Balchem Corporation: We consent to the incorporation by reference in the Registration Statements (No. 333-44489, 33-35912 and 33-35910) on Form S-8 of Balchem Corporation of our report dated February 5, 1999, relating to the consolidated balance sheets of Balchem Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Balchem Corporation. /s/ KPMG LLP ------------ KPMG LLP Short Hills, New Jersey March 24, 1999 EX-23.2 11 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Balchem Corporation: We consent to the incorporation by reference in each of (i) the Registration Statement (No. 333-44489) on Form S-8 of Balchem Corporation (the "Company") relating to the Company's 401(k)/Profit Sharing Plan, (ii) the Registration Statement (No. 33-35912) on Form S-8 of the Company relating to the Company's Stock Option Plan for Directors and (iii) the Registration Statement on Form S-8 (No. 33-35910) of the Company relating to the Company's Incentive Stock Option Plan of our report dated February 7, 1997, relating to the consolidated statements of operations of Balchem Corporation and subsidiaries, stockholders' equity and cash flows for the year ended December 31, 1996, which report appears in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Judelson, Giordano, Siegal, CPA, PC --------------------------------------- Judelson, Giordano, Siegal, CPA, PC Middletown, New York March 25, 1999 EX-27 12
5 YEAR DEC-31-1998 DEC-31-1998 1,348 0 3,283 0 2,875 8,399 14,139 6,036 22,648 3,482 0 0 0 325 15,450 22,648 28,721 28,721 17,298 23,914 179 0 0 4,628 1,673 2,955 0 0 0 2,955 0.61 0.60
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