NOTE 3 - STOCKHOLDERS’ EQUITY

STOCK-BASED COMPENSATION

All share-based payments, including grants of stock options, are recognized in the income statement as an operating expense, based on their fair values.

The Company has made an estimate of expected forfeitures, based on its historical experience, and is recognizing compensation cost only for those stock-based compensation awards expected to vest.

Additionally, excess tax benefits related to stock compensation are presented as a cash inflow from financing activities. The change had the effect of decreasing cash flows from operating activities and increasing cash flows from financing activities by $2,546, $7,009, and $7,220 for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company’s results for the years ended December 31, 2016, 2015 and 2014 reflected the following compensation cost and such compensation cost had the following effects on net earnings:

	Increase/(Decrease) for the Years Ended December 31,
	2016			2015			2014
Cost of sales	$	1,040		$	854		$	593
Operating expenses		5,984			5,975			3,964
Net earnings		(4,473	)		(4,395	)		(2,926	)

On December 31, 2016, the Company had one share-based compensation plan, which is described below (the “1999 Stock Plan”).

In June 1999, the Company adopted the Balchem Corporation 1999 Stock Plan for officers, directors, directors emeritus and employees of and consultants to the Company and its subsidiaries. The 1999 Stock Plan is administered by the Compensation Committee of the Board of Directors of the Company. Under the plan, options and rights to purchase shares of the Company’s Common Stock are granted at prices established at the time of grant. Option grants generally become exercisable 20% after 1 year, 60% after 2 years and 100% after 3 years from the date of grant for employees and are fully exercisable on the date of grant for directors. Other option grants are either fully exercisable on the date of grant or become exercisable thereafter in such installments as the Committee may specify. Options granted under the 1999 Stock Plan expire ten years from the date of grant. The 1999 Stock Plan initially reserved an aggregate of 600,000 shares (unadjusted for the stock splits) of Common Stock for issuance under the Plan. In April 2003, the Board of Directors of the Company adopted and stockholders subsequently approved, the Amended and Restated 1999 Stock Plan (the “Amended Plan”) which amended the 1999 Stock Plan by: (i) increasing the number of shares of Common Stock reserved for issuance under the 1999 Stock Plan by 600,000 shares (unadjusted for the stock splits), to a total of 1,200,000 shares (unadjusted for the stock splits) of Common Stock; and (ii) confirming the right of the Company to grant awards of Common Stock (“Awards”) in addition to the other Stock Rights available under the 1999 Stock Plan, and providing certain language changes relating thereto. The Amended Plan was scheduled to expire in April 2009. In April 2008, the Board of Directors of the Company adopted and stockholders subsequently approved, the adoption of an amendment and restatement of the Amended Plan (collectively to be referred to as the “Second Amended Plan”), which provides as follows: (i) for a termination date of April 9, 2018; (ii) to authorize 6,000,000 shares reserved for future grants under the Second Amended Plan; (iii) for the making of grants of stock appreciation rights, restricted stock and performance awards; (iv) for immediate acceleration of vesting of awards issued under the plan in the event of a change in control of the Company; and (v) for compliance with the requirements of Sections 409A and 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code” or the “Code”). The 1999 Stock Plan replaced the Company's incentive stock option plan (the “ISO Plan”) and its non-qualified stock option plan (the “Non-Qualified Plan”), both of which expired on June 24, 1999. Unexercised options granted under the ISO Plan and the Non-Qualified Plan prior to such termination remained exercisable in accordance with their terms and expired ten years from the date of grant.

The shares to be issued upon exercise of the outstanding options have been approved, reserved and are adequate to cover all exercises. As of December 31, 2016, the plans had 3,476,571 shares available for future awards.

The Company has Restricted Stock Purchase Agreements (the “RSP Agreements”) with its non-employee directors and certain employees of the Company to purchase the Company’s Common Stock pursuant to the Company’s 1999 Stock Plan. Under the RSP Agreements, certain shares have been purchased, ranging from 1,000 shares to 20,250 shares, of the Company’s Common Stock at purchase prices ranging from approximately $.02 per share to $.07 per share. The purchased stock is subject to a repurchase option in favor of the Company and to restrictions on transfer until it vests in accordance with the provisions of the RSP Agreements. In 2011, the Company discontinued the use of RSP Agreements and replaced them with Restricted Stock Grant Agreements for the Company’s non-employee directors and certain employees. Under the Restricted Stock Grant Agreements, certain shares of the Company’s Common Stock have been granted, ranging from 500 shares to 54,000 shares, to its non-employee directors and certain employees, subject to time-based vesting requirements.

The Company also has performance share (“PS”) awards, which provide the recipients the right to receive a certain number of shares of the Company’s common stock in the future, subject to an (1) EBITDA performance hurdle, where vesting is dependent upon the Company achieving a certain EBITDA percentage growth over the performance period, and (2) relative total shareholder return (“TSR”) where vesting is dependent upon the Company’s TSR performance over the performance period relative to a comparator group consisting of the Russell 2000 index constituents.

The fair value of each option award issued under the 1999 Stock Plan is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical experience of employees’ exercise behavior. Dividend yields are based on the Company’s historical dividend yields. Risk-free interest rates are based on the implied yields currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.

Weighted Average Assumptions:	2016			Years Ended December 31, 2015			2014
Expected Volatility		34.4	%		33.2	%		33.7	%
Expected Term (in years)		5.0			5.5			5.6
Risk-Free Interest Rate		1.2	%		1.7	%		1.8	%
Dividend Yield		0.5	%		0.6	%		0.5	%

The value of the restricted shares is based on the fair value of the award at the date of grant.

PS expense is measured based on the fair value at the date of grant utilizing a Black-Scholes methodology to produce a Monte-Carlo simulation model which allows for the incorporation of the performance hurdles that must be met before the PS vests. The assumptions used in the fair value determination were risk free interest rates of 0.88% and 1.00%; dividend yields of 0.6% and 0.5%; volatilities of 32% and 34%; and initial TSR’s of -6.6% and -6.9%, in each case for the years ended December 31, 2016 and 2015, respectively. Expense is based on the estimated number of shares expected to vest, assuming the requisite service period is rendered and the probable outcome of the performance condition is achieved. The estimate is revised if subsequent information indicates that the actual number of shares likely to vest differs from previous estimates. Expense is ultimately adjusted based on the actual achievement of service and performance targets. The PS will cliff vest 100% at the end of the third year following the grant in accordance with the performance metrics set forth.

Compensation expense for stock options and stock awards is recognized on a straight-line basis over the vesting period, generally three years for stock options, four years for employee restricted stock awards, three years for employee performance share awards, and four years for non-employee director restricted stock awards.

A summary of stock option plan activity for 2016, 2015, and 2014 for all plans is as follows:

2016	# of Shares (000s)			Weighted Average Exercise Price
Outstanding at beginning of year		1,017		$	37.29
Granted		341			60.92
Exercised		(236	)		30.44
Forfeited		(56	)		58.23
Outstanding at end of year		1,066		$	45.32
Exercisable at end of year		604		$	34.77

2015	# of Shares (000s)			Weighted Average Exercise Price
Outstanding at beginning of year		1,470		$	27.35
Granted		209			58.34
Exercised		(627	)		20.16
Forfeited		(35	)		52.97
Outstanding at end of year		1,017		$	37.29
Exercisable at end of year		667		$	29.19

2014	# of Shares (000s)			Weighted Average Exercise Price
Outstanding at beginning of year		1,893		$	20.94
Granted		313			53.38
Exercised		(610	)		14.92
Forfeited		(126	)		56.03
Outstanding at end of year		1,470		$	27.35
Exercisable at end of year		1,066		$	21.52

The aggregate intrinsic value for outstanding stock options was $41,161, $23,927 and $57,742 at December 31, 2016, 2015 and 2014, respectively, with a weighted average remaining contractual term of 6.2 years at December 31, 2016. Exercisable stock options at December 31, 2016 had an aggregate intrinsic value of $29,680 with a weighted average remaining contractual term of 4.6 years.

Other information pertaining to option activity during the years ended December 31, 2016, 2015 and 2014 was as follows:

	Years Ended December 31,
	2016			2015			2014
Weighted-average fair value of options granted		$	18.48		$	18.35		$	17.36
Total intrinsic value of stock options exercised ($000s)		$	8,609		$	24,047		$	25,224

Additional information related to stock options outstanding under all plans at December 31, 2016 is as follows:

				Options Outstanding			Options Exercisable
Range of Exercise Prices		Shares Outstanding (000s)		Weighted Average Remaining Contractual Term	Weighted Average Exercise Price		Number Exercisable (000s)		Weighted Average Exercise Price
$	13.61 - $34.81		356	3.5 years	$	25.40		356	$	25.40
	38.10 - 59.95		406	6.6 years		51.03		224		46.89
	60.01 - 80.26		304	9.0 years		61.00		24		60.84
			1,066	6.2 years	$	45.32		604	$	34.77

Non-vested restricted stock activity for the years ended December 31, 2016, 2015 and 2014 is summarized below:

	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2015		150		$	47.46
Granted		19			61.22
Vested		(66	)		40.96
Forfeited		(1	)		56.77
Non-vested balance as of December 31, 2016		102		$	54.18

	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2014		134		$	38.13
Granted		77			55.77
Vested		(61	)		37.35
Forfeited		-			-
Non-vested balance as of December 31, 2015		150		$	47.46

	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2013		172		$	33.69
Granted		33			54.86
Vested		(65	)		34.19
Forfeited		(6	)		45.32
Non-vested balance as of December 31, 2014		134		$	38.13

Non-vested performance share activity for the years ended December 31, 2016, 2015 and 2014 is summarized below:

	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2015		20		$	58.77
Granted		22			63.15
Vested		-			-
Forfeited		(8	)		60.88
Non-vested balance as of December 31, 2016		34		$	61.06

	Shares (000s)			Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2014		-		$	-
Granted		29			58.77
Vested		-			-
Forfeited		(9	)		58.77
Non-vested balance as of December 31, 2015		20		$	58.77

	Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested balance as of December 31, 2013		-	$	-
Granted		-		-
Vested		-		-
Forfeited		-		-
Non-vested balance as of December 31, 2014		-	$	-

As of December 31, 2016, 2015 and 2014, there was $8,260, $7,705 and $5,981, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. As of December 31, 2016, the unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.4 years. We estimate that share-based compensation expense for the year ended December 31, 2017 will be approximately $6,900.

REPURCHASE OF COMMON STOCK

The Company has an approved stock repurchase program. The total authorization under this program is 3,763,038 shares. Since the inception of the program in June 1999, a total of 2,150,835 shares have been purchased, of which -0- and 1,089 remained in treasury at December 31, 2016 and 2015, respectively. During 2016, a total of 24,912 shares have been purchased at an average cost of $63.76 per share. The Company intends to acquire shares from time to time at prevailing market prices if and to the extent it deems it advisable to do so based on its assessment of corporate cash flow, market conditions and other factors.