NOTE 10

EQUITY COMPENSATION

Stock Based Compensation

The Company has an equity compensation plan that was approved by shareholders in November 2012 and that covers all of its full-time employees, outside directors and certain advisors. This 2012 Stock Incentive Plan replaced all previous equity compensation plans of the Company. The options granted and stock awards made pursuant to this Plan are granted at fair market value at the date of grant or award. Service-based options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from the date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. Performance-based options granted to employees become exercisable 33.3% per year (cumulative) beginning one year after the date of grant. The maximum contractual term of the Company’s stock options is ten years. If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting. The number of shares reserved for issuance is 1,603,993 shares, all of which were available for future grant or award as of March 31, 2016. This Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, and other stock awards. Service based and performance based stock options were granted and restricted stock units (“RSUs”) were awarded during the nine months ended March 31, 2016. As of March 31, 2016, a total of 3,043,565 options for common shares were outstanding from this Plan as well as one previous stock option plan (which has also been approved by shareholders), and of these, a total of 1,362,810 options for common shares were vested and exercisable. As of March 31, 2016, the approximate unvested stock option expense that will be recorded as expense in future periods is $2,797,019. The weighted average time over which this expense will be recorded is approximately 30 months. Additionally, as of March 31, 2016 a total of 65,500 RSUs were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSUs is $291,620. The weighted average time over which this expense will be recorded is approximately 33 months.

Stock Options

The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for grants in the periods indicated.

	Three Months Ended March 31						Nine Months Ended March 31
	2016			2015			2016			2015

Dividend yield		1.72	%		0.83	%		1.29	%		1.11	%
Expected volatility		43	%		53	%		44	%		56	%
Risk-free interest rate		1.46	%		1.57	%		1.66	%		1.63	%
Expected life (in years)	6.0			6.0			6.0			6.0

At March 31, 2016, the 1,026,800 options granted during the first nine months of fiscal 2016 to employees had exercise prices ranging from $8.84 to $11.87 per share, fair values ranging from $3.28 to $4.52 per share, and remaining contractual lives of between nine years, three months and nine years, eleven months.

At March 31, 2015, the 713,323 options granted during the first nine months of fiscal 2015 to employees had exercise prices ranging from $5.96 to $7.88 per share, fair values ranging from $2.19 to $3.49 per share, and remaining contractual lives of between nine years, six months and nine years, eleven months.

The Company calculates stock option expense using the Black-Scholes model. Stock option expense is recorded on a straight line basis, or sooner if the grantee is retirement eligible as defined in the 2012 Stock Incentive Plan, with an estimated 3.3% forfeiture rate effective January 1, 2016. Previous estimated forfeiture rates were between 2.0% and 3.3% for the period January 1, 2013 through December 31, 2015. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued. The Company recorded $360,952 and $271,669 of expense related to stock options in the three months ended March 31, 2016 and 2015, respectively, and $2,191,659 and $1,153,494 of expense related to stock options in the nine months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the Company had 2,998,087 stock options that were vested and that were expected to vest, with a weighted average exercise price of $8.95 per share, an aggregate intrinsic value of $10,304,852 and weighted average remaining contractual terms of 6.7 years.

Information related to all stock options for the nine months ended March 31, 2016 and 2015 is shown in the following tables:

	Nine Months Ended March 31, 2016
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Outstanding at 6/30/15		2,677,436		$	8.85		6.1	$	4,914,601

Granted		1,026,800		$	9.39
Forfeitures		(150,800	)	$	15.73
Exercised		(509,871	)	$	7.33

Outstanding at 3/31/16		3,043,565		$	8.95		6.8	$	10,448,456

Exercisable at 3/31/16		1,362,810		$	9.67		4.3	$	4,741,694

	Nine Months Ended March 31, 2015
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Outstanding at 6/30/14		2,677,464		$	9.57		5.4	$	1,674,010

Granted		713,323		$	6.76
Forfeitures		(559,525	)	$	10.23
Exercised		(103,875	)	$	6.01

Outstanding at 3/31/15		2,727,387		$	8.84		6.3	$	2,519,836

Exercisable at 3/31/15		1,650,439		$	10.15		4.5	$	1,099,822

The following table presents information related to unvested stock options:

	Shares			Weighted-Average Grant Date Fair Value

Non-vested at June 30, 2015		1,080,198		$	2.99
Granted		1,026,800		$	3.64
Vested		(390,443	)	$	2.94
Forfeited		(35,800	)	$	3.31
Non-vested at March 31, 2016		1,680,755		$	3.39

The weighted average grant date fair value of options granted during the nine month periods ended March 31, 2016 and 2015 was $3.64 and $3.26, respectively. The aggregate intrinsic value of options exercised during the nine month periods ended March 31, 2016 and 2015 was $1,474,444 and $126,203, respectively. The aggregate grant date fair value of options that vested during the nine month periods ended March 31, 2016 and 2015 was $1,149,022 and $777,436, respectively. The Company received $3,737,233 and $624,248 of cash from employees who exercised options in the nine month periods ended March 31, 2016 and 2015, respectively. In the first nine months of fiscal 2016 the Company recorded $518,515 as a reduction of federal income taxes payable, $133,172 as a reduction in common stock, $95,543 as a reduction of income tax expense, and $556,144 as a reduction of the deferred tax asset related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise. In the first nine months of fiscal 2015 the Company recorded $44,071 as a reduction of federal income taxes payable, $223,003 as a reduction in common stock, $18,473 as a reduction of income tax expense, and $248,601 as a reduction of the deferred tax asset related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise.

Restricted Stock Units

A total of 72,000 RSUs with a weighted average fair value of $9.39 per share were awarded to employees during the nine months ended March 31, 2016. The Company determined the fair value of the awards based on the closing price of the Company’s common stock on the date the RSUs were awarded. The RSUs have a four year ratable vesting period. The RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSUs in the amount of $7,965 were accrued as of March 31, 2016. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares. Of the 72,000 RSUs awarded, 5,000 were issued and 1,500 were forfeited during the first nine months of fiscal year 2016. As of March 31, 2016, the 65,500 restricted stock units outstanding had a remaining contractual life of 9 years, 3 months. Of the 65,500 RSUs outstanding as of March 31, 2016, 63,369 are expected to vest in the future. An estimated forfeiture rate of 3.3% was used in the calculation of expense related to the restricted stock units. The Company recorded $30,837 and $350,369 of expense related to RSUs in the three and nine month periods ended March 31, 2016. There were no RSUs awarded prior to July 1, 2015.

Director and Employee

Stock Compensation Awards

The Company awarded a total of 17,240 and 21,050 common shares in the nine months ended March 31, 2016 and 2015, respectively, as stock compensation awards. These common shares were valued at their approximate $168,000 and $144,000 fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.

Deferred Compensation Plan

The Company has a Non-qualified Deferred Compensation Plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of March 31, 2016 there were 28 participants, all with fully vested account balances. A total of 249,330 common shares with a cost of $2,372,257, and 321,838 common shares with a cost of $2,986,498 were held in the plan as of March 31, 2016 and June 30, 2015, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the plan and for distributions to terminated employees. The Company does not issue new common shares for purposes of the non-qualified deferred compensation plan. The Company accounts for assets held in the non-qualified deferred compensation plan according to accounting guidance. The Company used approximately $316,900 and $165,100 to purchase 32,696 and 23,519 common shares of the Company in the open stock market during the nine months ended March 31, 2016 and 2015, respectively, for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan. For fiscal year 2016, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 35,000 to 39,000 common shares of the Company. The Company does not currently repurchase its own common shares for any other purpose.