. STOCK

-BASED COMPENSATION

In fiscal

2011,

the Company adopted the Twin Disc, Incorporated

2010

Stock Incentive Plan for Non-Employee Directors (the

“2010

Directors’ Plan”), a plan to grant non-employee directors equity-based awards up to

250,000

shares of common stock, and the Twin Disc, Incorporated

2010

Long-Term Incentive Compensation Plan (the

“2010

Employee Incentive Plan”), a plan under which officers and key employees

may

be granted equity-based awards up to

650,000

shares of common stock. Equity-based awards granted under these plans include performance shares and restricted stock.

Shares available for future awards as of

June 30

were as follows:

	2018		2017
2010 Employee Incentive Plan		-		97,609
2010 Directors' Plan		80,938		100,426

Performance Stock Awards (“PSA”)

In fiscal

2018,

2017

and

2016,

the Company granted a target number of

54,854,

109,598

and

60,466

PSAs, respectively, to various employees of the Company, including executive officers.

The PSAs granted in fiscal

2018

will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual Earnings Per Share (“EPS”) (as defined in the PSA Grant Agreement), in the cumulative

three

fiscal year period ending

June 30, 2020.

These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is

69,180.

Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.

The PSAs granted in fiscal

2017

will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual EPS (as defined in the PSA Grant Agreement), in the cumulative

three

fiscal year period ending

June 30, 2019.

149,397.

Based upon favorable actual results to date, the Company is currently accruing compensation expense for the portion of the PSAs relating to the average annual net sales and EPS measures. The Company is currently

not

accruing compensation expense for the portion of the PSAs relating to the average return on invested capital measure.

The portion of the PSAs granted in fiscal

2016

relating to the Total Shareholder Return (“TSR”) measure vested on

June 30, 2018.

The Company recorded compensation expense on the TSR portion of these PSAs in fiscal

2018,

2017,

and

2016.

compensation expense was recognized on the portion of these PSAs relating to the average annual net sales and economic profit measures because the target performance levels were

not

met; these shares expired on

June 30, 2018.

There were

145,718;

170,064

and

72,217

unvested PSAs outstanding at

June 30, 2018,

2017

and

2016,

respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. The compensation expense for the year ended

June 30, 2018,

2017

and

2016,

related PSAs, approximated

$574,

$59

and

$54,

respectively. The tax benefit from compensation expense for the year ended

June 30, 2018,

2017

and

2016,

related PSAs, approximated

$172,

$22

and

$20,

respectively. The weighted average grant date fair value of the unvested awards at

June 30, 2018

was

$12.29.

June 30, 2018,

the Company had

$1,276

of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal

2018

and

2017

awards. The total fair value of performance stock awards vested in fiscal

2018

was

$272.

The total fair value of performance stock awards vested in fiscal

2017

and

2016

was

$0.

Restricted Stock Awards (“RS”)

The Company has unvested RS outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation over the vesting period, which is generally

years. During fiscal

2018,

2017

and

2016,

the Company granted

85,327;

181,828

and

95,738

service based restricted shares, respectively, to employees and non-employee directors in each year. A total of

32,734;

and

1,750

shares of restricted stock were forfeited during fiscal

2018,

2017

and

2016,

respectively. There were

237,657;

269,584

and

142,971

unvested shares outstanding at

June 30, 2018,

2017

and

2016,

respectively. Compensation expense of

$1,488,

$1,555

and

$1,241

was recognized during the year ended

June 30, 2018,

2017

and

2016,

respectively, related to these service-based awards. The tax benefit from compensation expense for the year ended

June 30, 2018,

2017

and

2016,

related to these service-based awards, approximated

$446,

$567

and

$457,

respectively. The total fair value of restricted stock grants vested in fiscal

2018,

2017

and

2015

was

$1,809,

$587

and

$681,

respectively. As of

June 30, 2018,

the Company had

$1,137

of unrecognized compensation expense related to restricted stock which will be recognized over the next

three

years.

Stock Options

The

2010

Directors’ Plan

may

grant options to purchase shares of common stock, at the discretion of the Board of Directors, to non-employee directors who are elected or reelected to the board, or who continue to serve on the board. Such options carry an exercise price equal to the fair market value of the Company’s common stock as of the date of grant, vest immediately, and expire

ten

years after the date of grant. Options granted under the

2010

Employee Incentive Plan are determined to be non-qualified or incentive stock options as of the date of grant, and

may

carry a vesting schedule. For options under the

2010

Employee Incentive Plan that are intended to qualify as incentive stock options, if the optionee owns more than

10%

of the total combined voting power of the Company’s stock, the price will

not

be less than

110%

of the grant date fair market value and the options expire

five

years after the date of grant. There were

incentive options granted to a greater than

10%

shareholder during the years presented. There were

options outstanding under the

2010

Directors’ Plan and the

2010

Employee Incentive Plan as of

June 30, 2018

and

2017.

2004

Plans

The Company has

7,200

non-qualified stock options outstanding as of

June 30, 2018

under the

2004

Twin Disc, Incorporated Plan for Non-Employee Directors and

2004

Twin Disc, Incorporated Stock Incentive Plan. The

2004

plans were terminated during

2011,

except options then outstanding will remain so until exercised or until they expire.

Stock option transactions under the

2004

plans during

2018

were as follows:

						Weighted Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	2018			Price		Life (years)		Value

Non-qualified stock options:
Options outstanding at beginning of year		13,200		$	16.47
Granted		-			-
Canceled/expired		(3,600	)		27.55
Exercised		(2,400	)		12.31
Options outstanding at June 30		7,200		$	12.31		1.50	$	90.2

Options price range (

$10.01

$14.61

)

The Company historically computes its windfall tax pool using the shortcut method. ASC

718,

“Compensation – Stock Compensation”, requires the Company to expense the cost of employee services received in exchange for an award of equity instruments using the fair-value-based method. All options were

100%

vested at the adoption of this statement.

During fiscal

2018,

2017

and

2016

the Company granted

non-qualified stock options and all non-qualified stock options from prior periods have fully vested. As a result,

compensation cost has been recognized in the Consolidated Statements of Operations and Comprehensive Income for fiscal

2018,

2017

and

2016,

respectively.

The total intrinsic value of options exercised during the years ended

June 30, 2018,

2017

and

2016

was approximately

$38,

and

$4,

respectively.