NOTE

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. The Company’s shareholders approved an amendment to the

2012

Stock Incentive Plan that added

1,600,000

shares to the plan and implemented the use of a fungible share ratio that consumes

2.5

available shares for every

full value share awarded by the Company as stock compensation. The options granted or 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

2,364,601

shares, all of which were available for future grant or award as of

December

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 (“RSU’s”) were awarded during the

six

months ended

December

31,

2016.

As of

December

31,

2016,

a total of

3,625,372

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

1,700,025

options for common shares were vested and exercisable. As of

December

31,

2016,

the approximate unvested stock option expense that will be recorded as expense in future periods is

$2,622,788.

The weighted average time over which this expense will be recorded is approximately

months. Additionally, as of

December

31,

2016,

a total of

118,575

RSU’s were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSU’s is

$608,468.

The weighted average time over which this expense will be recorded is approximately

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						Six Months Ended
	December 31						December 31
	2016			2015			2016			2015

Dividend yield		2.07	%		1.33	%		1.81	%		1.28	%
Expected volatility		41	%		43	%		43	%		44	%
Risk-free interest rate		2.06	%		1.38	%		1.00	%		1.67	%
Expected life (in years)		6.0			6.0			6.0			6.0

December

31,

2016,

the

834,320

options granted during the

first

six

months of fiscal

2017

to employees had exercise prices ranging from

$9.65

$11.06

per share, fair values ranging from of

$3.29

$3.83

per share, and remaining contractual lives of between

9.5

and

years.

December

31,

2015,

the

1,016,800

options granted during the

first

six

months of fiscal

2016

to employees had exercise prices ranging from

$8.84

$11.82

per share, fair values ranging from of

$3.28

$4.48

per share, and remaining contractual lives of between

9.5

and

9.9

years.

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

3.51%

forfeiture rate effective

October

2016.

Previous estimated forfeiture rates were between

2.0%

and

3.4%

between the periods

January

2013

through

September

30,

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 a reduction of expense of

$142,434

in the

three

months ended

December

31,

2016

and recorded

$342,134

of expense in the

three

months ended

December

31,

2015,

related to stock options. The reduction of stock option expense in the

three

months ended

December

31,

2016

was the result of expectations that the performance criteria related to incentive based options will not be met. The Company recorded

$1,296,009

and

$1,830,707

of expense related to stock options in the

six

months ended

December

31,

2016

and

2015,

respectively. As of

December

31,

2016,

the Company had

3,159,692

stock options that were vested and that were expected to vest, with a weighted average exercise price of

$8.92

per share, an aggregate intrinsic value of

$4,620,655

and weighted average remaining contractual terms of

6.7

years.

Information related to all stock options for the

six

months ended

December

31,

2016

and

2015

is shown in the following tables:

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

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

Granted		834,320		$	11.05
Forfeitures		(147,375	)	$	16.03
Exercised		(38,063	)	$	7.75

Outstanding at 12/31/16		3,625,372		$	9.18		7.1	$	4,648,729

Exercisable at 12/31/16		1,700,025		$	8.73		5.1	$	3,216,899

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

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

Granted		1,016,800		$	9.38
Forfeitures		(55,050	)	$	11.65
Exercised		(298,724	)	$	7.20

Outstanding at 12/31/15		3,340,462		$	9.11		6.8	$	12,661,470

Exercisable at 12/31/15		1,628,976		$	9.95		4.5	$	6,032,985

The following table presents information related to unvested stock options:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2016		1,663,505		$	3.39
Granted		834,320		$	3.83
Vested		(546,978	)	$	3.25
Forfeited		(25,500	)	$	3.50
Unvested at December 31, 2016		1,925,347		$	3.62

The weighted average grant date fair value of options granted during the

six

month periods ended

December

31,

2016

and

2015

was

$3.83

and

$3.63,

respectively. The aggregate intrinsic value of options exercised during the

six

months ended

December

31,

2016

and

2015

was

$99,883

and

$852,596,

respectively. The aggregate grant date fair value of options that vested during the

six

months ended

December

31,

2016

and

2015

was

$1,779,490

and

$1,035,041,

respectively. The Company received

$295,030

and

$2,149,606

of cash from employees who exercised options in the

six

month periods ended

December

31,

2016

and

2015,

respectively. In the

first

six

months of fiscal

2017

the Company recorded

$95,443

as a reduction of federal income taxes payable,

$124,056

as a decrease in common stock,

$22,073

as a reduction of income tax expense, and

$197,427

as a reduction of the deferred tax asset related to the issuance of RSU’s and 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

six

months of fiscal

2016

the Company recorded

$300,868

as a reduction of federal income taxes payable,

$46,066

as an increase in common stock,

$84,781

as a reduction of income tax expense, and

$170,021

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

71,700

restricted stock units with a fair value of

$11.06

per share were awarded to employees during the

six

months ended

December

31,

2016.

A total of

72,000

RSU’s with a fair value of

$9.39

per share were awarded to employees during the

six

months ended

December

31,

2015.

The Company determined the fair value of the awards based on the closing price of the Company stock on the date the RSU’s were awarded. The RSU’s have a

four

year ratable vesting period. The RSU’s 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 RSU’s in the amount of

$19,826

and

$4,690

were accrued as of

December

31,

2016

and

2015,

respectively. Accrued dividends are paid to the holder upon vesting of the RSU’s and issuance of shares.

The following table presents information related to RSU’s:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2016		62,500		$	9.39
Awarded		71,700		$	11.06
Shares Issued		(15,625	)	$	9.39
Unvested at December 31, 2016		118,575		$	10.40

As of

December

31,

2016,

the

118,575

RSU’s had a remaining contractual life of between

2.5

and

3.5

years. Of the

118,575

RSU’s outstanding as of

December

31,

2016,

114,531

are vested or expected to vest in the future. An estimated forfeiture rate of

3.4%

was used in the calculation of expense related to the RSU’s. The Company recorded

$89,896

and

$392,197

of expense related to RSU’s in the

three

and

six

month periods ended

December

31,

2016,

respectively.

As of

December

31,

2015,

the

67,000

outstanding RSU's had a remaining contractual life of

3.5

years. Of the

67,000

RSU’s outstanding as of

December

31,

2015,

64,434

were expected to vest. An estimated forfeiture rate of

3.3%

was used in the calculation of expense related to the RSU’s. The Company recorded

$33,276

and

$319,533

of expense related to RSU’s in the

three

and

six

month periods ended

December

31,

2015,

respectively.

Director and Employee Stock Compensation Awards

The Company awarded a total of

21,199

and

12,590

common shares in the

six

months ended

December

31,

2016

and

2015,

respectively, as stock compensation awards. These common shares were valued at their approximate

$228,000

and

$113,400

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

December

31,

2016,

there were

participants, all with fully vested account balances. A total of

263,506

common shares with a cost of

$2,514,106,

and

228,103

common shares with a cost of

$2,167,717

were held in the plan as of

December

31,

2016

and

June

30,

2016,

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 used approximately

$390,288

and

$276,800

to purchase

39,487

and

29,021

common shares of the Company in the open stock market during the

six

months ended

December

31,

2016

and

2015,

respectively, for either employee salary deferrals or Company contributions into the non-qualified 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

45,000

50,000

common shares of the Company. The Company does not currently repurchase its own common shares for any other purpose.