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, 2015, there were 20,000 stock options and 42,234 restricted stock units outstanding. In addition, there were 431,800 shares available for grant under the 2012 Stock Incentive Plan as of June 30, 2015.

For the stock option grant, the fair value of each grant was 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 (short-cut method).

There were no stock options granted during fiscal years 2015 or 2014. The fair value of stock options granted during fiscal year 2013 of $3.82 was estimated using the following weighted-average assumptions:

Risk-free interest rate	1.0	%
Expected life (years)	6.0
Expected stock volatility	52.3	%
Expected dividend yield	4.0	%

The weighted average contractual term for stock options outstanding as of June 30, 2015 was 7.5 years. The aggregate intrinsic value of stock options outstanding as of June 30, 2015 was $0.1 million. There were 13,167 options exercisable as of June 30, 2015. In recognizing stock compensation expense for the 2012 Stock Incentive Plan management has estimated that there will be no 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, 2015, the Company granted 39,500 RSU awards with fair values of $17

.49 per RSU award. There were no RSU awards during the year ended June 30, 2014. During the year ended June 30, 2013

, the Company granted 8,200 RSU awards with fair values of $10.08 per RSU award. There were no RSU awards prior to December 17, 2012.

There were 2,733 RSU awards settled in each of the fiscal years 2015 and 2014. The aggregate intrinsic value of RSU awards outstanding as of June 30, 2015 was $0.8 million. As of June 30, 2015 all vested RSU awards had been issued and settled.

Compensation expense related to the 2012 Stock Incentive Plan was $146,000

, $54,000 and $31,000 for fiscal 2015

, 2014 and 2013 respectively. As of June 30, 2015 there was $

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

Of this cost $0.4 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 2.1 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. No options were exercisable at fiscal year ends. The Board of Directors last approved an ESPP renewal in 2012. No 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, 2012		102,490					352,185
2007 Plan expired		-					(352,185	)
2012 Plan authorized		-					500,000
Options granted		61,382			8.77		(61,382	)
Options exercised		(34,128	)		8.28		-
Options canceled		(41,016	)				9,926
Balance, June 30, 2013		88,728					448,544
Options granted		43,643			10.91		(43,643	)
Options exercised		(26,225	)		9.83		-
Options canceled		(30,758	)				19,711
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

The following information relates to outstanding options as of June 30, 2015:

Weighted average remaining life (years)		1.3
Weighted average fair value on grant date of options granted in:
2013	$	2.73
2014		3.37
2015		4.68

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 volatility – 33.28% – 34.86%, interest – 0.54% – 0.58%, and expected lives - 2 years. Compensation expense of $139,006, $138,677 and $166,368 has been recorded for fiscal 2015, 2014 and 2013, respectively.

Employee Stock Ownership Plan

On 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) (7) 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.

On June 5, 2013 the Board of Directors approved a contribution to the 2013 ESOP for fiscal 2013 in the amount of two percent of each participant’s compensation (as defined in the Plan). The 2013 contribution was funded in July 2013 in the amount of $0.8 million.

There was no ESOP contribution in 2014 or 2015.

There was no compensation expense for the ESOP in 2014 or 2015. There was no ESOP Liability in 2014 or 2015. Shares of Class B common stock were contributed to the 2013 ESOP on July 30, 2013 in order to fund the 2013 liability.