STOCK-BASED COMPENSATION

Long-Term Incentive Plan

During the quarter ended

December 31, 2012,

the Company implemented The L.S. Starrett Company

2012

Long-Term Incentive Plan (the

“2012

Stock Incentive Plan”), which was adopted by the Board of Directors

September 5, 2012

and approved by shareholders

October 17, 2012.

The

2012

Stock Incentive Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The

2012

Stock Incentive Plan provides for the issuance of up to

500,000

shares of common stock.

Options granted vest in periods ranging from

one

year to

three

years and expire

ten

years after the grant date. Restricted stock units (“RSU”) granted generally vest from

one

year to

three

years. Vested restricted stock units will be settled in shares of common stock. As of

June 30, 2017,

there were

20,000

stock options and

105,634

restricted stock units outstanding. In addition, there were

346,600

shares available for grant under the

2012

Stock Incentive Plan as of

June 30, 2017.

For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (simplified method).

There were

stock options granted during fiscal years

2017,

2016

2015.

The weighted average contractual term for stock options outstanding as of

June 30, 2017

was

5.5

years. The aggregate intrinsic value of stock options outstanding as of

June 30, 2017

was less than

$0.1

million. There were

20,000

options exercisable as of

June 30, 2017.

In recognizing stock compensation expense for the

2012

Stock Incentive Plan management has estimated that there will be

forfeitures of options.

The Company accounts for RSU awards by recognizing the expense of the intrinsic value at award date ratably over vesting periods generally ranging from

one

year to

three

years. The related expense is included in selling, general and administrative expenses. During the year ended

June 30, 2017,

the Company granted

45,000

RSU awards with fair values of

$10.86

per RSU award. During the year ended

June 30, 2016,

the Company granted

40,200

RSU awards with fair values of

$15.11

per RSU award. During the year ended

June 30, 2015,

the Company granted

39,500

RSU awards with fair values of

$17.49

per RSU award.

There were

12,732

and

9,067

RSU awards settled in fiscal years

2017

and

2016

respectively. The aggregate intrinsic value of RSU awards outstanding as of

June 30, 2017

was

$0.9

million. The aggregate intrinsic value of RSU awards outstanding as of

June 30, 2016

was

$0.9

million. Compensation expense related to the

2012

Stock Incentive Plan was

$223,000,

$214,000

and

$146,000

for fiscal

2017,

2016

and

2015

respectively. As of

June 30, 2017,

there was

$1.3

million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements.

Of this cost

$1.1

million relates to performance based RSU grants that are

not

expected to be awarded. The remaining

$0.2

million is expected to be recognized over a weighted average period of

1.3

years.

Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plans (ESPP) give eligible employees an opportunity to participate in the success of the Company. The Board of Directors renews each Employee Stock Purchase Plan every

five

years. Under these plans the purchase price of the optioned stock is

85%

of the lower of the market price on the date the option is granted or the date it is exercised. Options become exercisable exactly

two

years from the date of grant and expire if

not

exercised on such date.

options were exercisable at fiscal year ends. The Board of Directors last approved an ESPP renewal in

2012.

additional options will be granted under the previous

2007

plan. A summary of option activity is as follows:

	Shares On Option			Weighted Average Exercise Price		Shares Available For Grant
Balance, June 30, 2014		75,388					424,612
Options granted		35,208			13.97		(35,208	)
Options exercised		(30,718	)		8.82		-
Options canceled		(25,571	)				25,571
Balance, June 30, 2015		54,307					414,975
Options granted		52,836			9.37		(52,836	)
Options exercised		(15,523	)		9.57		-
Options canceled		(27,705	)				27,705
Balance, June 30, 2016		63,915					389,844
Options granted		55,766			7.88		(55,766	)
Options exercised		(10,893	)		8.34		-
Options canceled		(31,503	)				31,503
Balance, June 30, 2017		77,285					365,581

The following information relates to outstanding options as of

June 30, 2017:

Weighted average remaining life (years)		1.3
Weighted average fair value on grant date of options granted in:
2015	$	4.68
2016		3.34
2017		2.76

The fair value of each option grant was estimated on the date of grant based on the Black-Scholes option pricing model with the following weighted average assumptions: expected stock volatility –

40.78%

–

43.00%,

risk free interest rate –

0.81%

–

1.27%,

expected dividend yield -

4.11%

4.42%

and expected lives -

years. Compensation expense of

$0.15

million,

$0.14

million and

$0.14

million has been recorded for fiscal

2017,

2016

and

2015,

respectively.

Employee Stock Ownership Plan

February 5, 2013,

the Board of Directors adopted The L.S. Starrett Company

2013

Employee Stock Ownership Plan (the

“2013

ESOP”).

The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section

4975

(e) (

) of the Internal Revenue Code of

1986,

as amended. U.S. employees who have completed a year of service as of

December 31, 2012

are eligible to participate.

There was

compensation expense for the ESOP in

2015,

2016

2017.