NOTE

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EQUITY COMPENSATION

Stock Options

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. 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% every 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 1,612,095 shares, all of which were available for future grant or award as of June 30, 2016

. This plan allows for the grant of incentive stock options, nonqualified 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 in fiscal 2016. As of June 30, 2016, a total of 2,976,490 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 1,312,985 options for common shares were vested and exercisable. As of June 30, 2016, the approximate unvested stock option expense that will be recorded as expense in future periods is $2,458,925

. The weighted average time over which this expense will be recorded is approximately 27 months. Additionally, as of June 30, 2016 a total of 62,500 RSUs were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSUs is $234,320. The weighted average time over which this expense will be recorded is approximately 32 months.

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.

	2016			2015			2014

Dividend yield		1.3	%		1.1	%		3.3	%
Expected volatility		44	%		55	%		53	%
Risk-free interest rate		1.7	%		1.6	%		1.7	%
Expected life (in years)		6.0			6.0			5.5

At June 30, 2016, the 1,026,800 options granted during fiscal 2016 to both employees and non-employee directors 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 and nine years, eight months.

At June 30, 2015, the 734,323 options granted to employees during fiscal 2015 had exercise prices ranging from $5.96 to $8.23 per share, fair values ranging from $2.19 to $3.89 per share, and remaining contractual lives of between nine years five months and nine years nine months.

At June 30, 2014, the 436,000 options granted to employees during fiscal 2014 had exercise prices ranging from of $7.20 to $8.44 per share, fair values ranging from $2.64 to $3.64 per share, and remaining contractual lives of between nine years two months and nine years six 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 April 1, 2016. Previous estimated forfeiture rates were between 2.0% and 3.3% over the period January 1, 2013 through March 31, 2016. 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 $2,519,092, $1,238,897 and $1,004,676 of expense related to stock options in fiscal years 2016, 2015 and 2014, respectively. As of June 30, 2016, the Company had 2,939,224 stock options that were vested and that were expected to vest, with a weighted average exercise price of $8.98 per share, an aggregate intrinsic value of $8,246,362 and weighted average remaining contractual terms of 6.5 years.

Information related to all stock options for the years ended June 30, 2016, 2015 and 2014 is shown in the following tables:

	Twelve Months Ended June 30, 2016
				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Term (in years)		Value

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

Granted		1,026,800		$	9.39
Forfeitures		(165,800	)	$	15.15
Exercised		(561,946	)	$	7.34

Outstanding at 6/30/16		2,976,490		$	8.97		6.6	$	8,338,974

Exercisable at 6/30/16		1,312,985		$	9.75		4.0	$	3,819,127

	Twelve Months Ended June 30, 2015
				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Term (in years)		Value

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

Granted		734,323		$	6.83
Forfeitures		(571,275	)	$	10.26
Exercised		(163,076	)	$	6.70

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

Exercisable at 6/30/15		1,597,238		$	10.18		4.3	$	2,250,093

	Twelve Months Ended June 30, 2014
				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Term (in years)		Value

Outstanding at 6/30/13		2,341,150		$	9.95		5.6	$	1,544,896

Granted		436,000		$	7.24
Forfeitures		(39,050	)	$	11.59
Exercised		(60,636	)	$	6.22

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

Exercisable at 6/30/14		1,874,326		$	10.74		4.0	$	750,925

The following table presents information related to unvested stock options:

	Shares			Weighted-Average Grant Date Fair Value

Unvested at June 30, 2015		1,080,198		$	2.99
Granted		1,026,800		$	3.64
Vested		(395,693	)	$	2.95
Forfeited		(47,800	)	$	3.30
Unvested at June 30, 2016		1,663,505		$	3.39

The weighted average grant date fair value of options granted was $3.64, $3.27 and $2.67 per share in fiscal years 2016, 2015 and 2014, respectively. The aggregate intrinsic value of options exercised during the years ended June 30, 2016, 2015 and 2014 were $1,695,213, $212,106 and $142,715, respectively. The aggregate grant date fair value of options that vested during 2016, 2015 and 2014 was $1,168,192, $822,827 and $777,825, respectively. The Company received $4,124,047, $1,092,002 and $377,401 of cash from employees and former employees or beneficiaries who exercised options in fiscal years 2016, 2015 and 2014, respectively. Additionally, in fiscal 2016 the Company recorded $595,483 as a reduction of federal income taxes payable, $102,010 as a reduction in common stock, $141,349 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 fiscal 2015 the Company recorded $71,643 as a reduction of federal income taxes payable, $242,385 as a reduction in common stock, $30,149 as a reduction of income tax expense, and $283,888 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 twelve months ended June 30, 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 $10,625 were accrued as of June 30, 2016. Accrued dividends are paid to the award recipient upon vesting of the RSUs and issuance of the common shares. Of the 72,000 RSUs awarded, 5,000 common shares were issued and 4,500 RSUs were forfeited during fiscal year 2016. As of June 30, 2016, the 62,500 restricted stock units outstanding had a remaining contractual life of three years. Of the 62,500 RSUs outstanding as of June 30, 2016, 60,794 are expected to vest in the future. An estimated forfeiture date of 3.3% was used in the calculation of expense related to the restricted stock units. The Company recorded $383,483 of expense related to RSUs during fiscal year 2016. The Company awarded no RSUs prior to July 1, 2015.

Director and Employee

Stock Compensation Awards

The Company awarded a total of 23,838 common shares in fiscal 2016, a total of 26,850 common shares in fiscal 2015, and a total of 23,205 common shares in fiscal 2014 as stock compensation awards. These common shares were valued at their approximate $248,000, $191,000 and $192,100 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 receive a nominal recognition award in the form of common stock. Stock compensation awards are made in the form of newly issued common shares of the Company.

Deferred Compensation Plan

The Company has a nonqualified 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 June 30, 2016 there were 28 participants, all with fully vested account balances. A total of 228,1

00 common shares with a cost of $2,167,700, and 226,600 common shares with a cost of $2,145,100 were held in the plan as of June 30, 2016 and 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 nonqualified deferred compensation plan. The Company used approximately $363,400 and $205,600 to purchase 36,685 and 27,902 common shares of the Company in the open stock market during fiscal years 2016 and 2015, respectively, for either employee salary deferrals or Company contributions into the nonqualified deferred compensation plan. For fiscal year 2017, 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.