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 amendments 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

1,669,003

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

March

31,

2017.

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, stock warrants and other stock awards. Service based and performance based stock options were granted and restricted stock units (“RSU’s”) were awarded during the

nine

months ended

March

31,

2017.

As of

March

31,

2017,

a total of

3,631,155

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

1,423,528

options for common shares were vested and exercisable. As of

March

31,

2017,

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

$3,508,348.

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

months. Additionally, as of

March

31,

2017,

a total of

135,585

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

$752,231.

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

months.

Stock Warrants

The Company issued

200,000

fully vested stock warrants in the

third

quarter of fiscal

2017

in conjunction with the acquisition of Atlas Lighting Products, Inc., with the fair value of the warrants being included in the purchase price of that company rather than being expensed. See further discussion in Note

16.

These

200,000

stock warrants were outstanding as of

March

31,

2017.

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

	Three Months Ended
	March 31
	2017

Dividend yield		2.01	%
Expected volatility		39	%
Risk-free interest rate		1.80	%
Expected life (in yrs.)		4.5

The stock warrants issued during the quarter ended

March

31,

2017

had an exercise price of

$9.95,

and a fair value of

$2.87.

As of

March

31,

2017,

the warrants had a remaining contractual life of

4.9

years.

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						Nine Months Ended
	March 31						March 31
	2017			2016			2017			2016

Dividend yield		1.93	%		1.72	%		1.85	%		1.29	%
Expected volatility		41	%		43	%		42	%		44	%
Risk-free interest rate		1.92	%		1.46	%		1.31	%		1.66	%
Expected life (in yrs.)		6.2			6.0			6.1			6.0

March

31,

2017,

the

1,256,623

options granted during the

first

nine

months of fiscal

2017

to employees had exercise prices ranging from

$9.48

$11.06

per share, fair values ranging from of

$3.22

$3.83

per share, and remaining contractual lives of between

9.3

and

years.

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

$11.87

per share, fair values ranging from of

$3.28

$4.52

per share, and remaining contractual lives of between

9.3

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

3.3%

forfeiture rate effective

January

2017.

Previous estimated forfeiture rates were between

2.0%

and

3.5%

between the periods

January

2013

through

December

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

$510,851

and

$360,952

of expense related to stock options in the

three

months ended

March

31,

2017

and

2016,

respectively, and recorded

$1,806,860

and

$2,191,659

of expense related to stock options in the

nine

months ended

March

31,

2017

and

2016,

respectively. The lower stock option expense in fiscal

2017

was the result of expectations that the performance criteria related to performance based options will not be met. As of

March

31,

2017,

the Company had

3,148,352

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

$9.20

per share, an aggregate intrinsic value of

$4,515,257

and weighted average remaining contractual terms of

7.2

years.

Information related to all stock options for the

nine

months ended

March

31,

2017

and

2016

is shown in the following tables:

	Nine Months Ended March 31, 2017
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

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

Granted		1,256,623		$	10.67
Forfeitures		(161,812	)	$	16.17
Exercised		(440,146	)	$	7.39

Outstanding at 3/31/17		3,631,155		$	9.43		7.4	$	4,546,991

Exercisable at 3/31/17		1,423,528		$	8.99		5.3	$	2,912,714

	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

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		1,256,623		$	3.71
Vested		(685,751	)	$	3.30
Forfeited		(26,750	)	$	3.50
Unvested at March 31, 2017		2,207,627		$	3.60

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

nine

month periods ended

March

31,

2017

and

2016

was

$3.71

and

$3.64,

respectively. The aggregate intrinsic value of options exercised during the

nine

months ended

March

31,

2017

and

2016

was

$1,094,696

and

$1,474,444,

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

nine

months ended

March

31,

2017

and

2016

was

$2,260,014

and

$1,149,022,

respectively. The Company received

$2,612,578

and

$3,737,233

of cash from employees who exercised options in the

nine

month periods ended

March

31,

2017

and

2016,

respectively.

For the

nine

months ended

March

31,

2017,

the

$2,612,578

cash received from stock options was partially offset by

$138,793

related to the tax effect of disqualifying dispositions of stock options along with

$72,399

related to the net tax effect of other stock option exercises. For the

nine

months ended

March

31,

2016,

the

$3,737,233

cash received from stock options was partially offset by

$133,172

related to the tax effect of disqualifying dispositions of stock options.

In the

first

nine

months of fiscal

2017

the Company recorded

$465,521as

a reduction of federal income taxes payable,

$138,793

as a decrease in common stock,

$109,140

as a reduction of income tax expense, and

$495,175

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

nine

months of fiscal

2016

the Company recorded

$518,515

as a reduction of federal income taxes payable,

$133,172

as a decrease 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.

Restricted Stock Units

A total of

96,210

RSU’s with a weighted average fair value of

$10.84

per share were awarded to employees during the

nine

months ended

March

31,

2017.

A total of

72,000

RSU’s with a 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 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

$24,120

and

$7,860

were accrued as of

March

31,

2017

and

2016,

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		96,210		$	10.84
Shares Issued		(23,125	)	$	9.71
Unvested at March 31, 2017		135,585		$	10.36

As of

March

31,

2017,

the

135,585

RSU’s had a remaining weighted average contractual life of

6.2

years. Of the

135,585

RSU’s outstanding as of

March

31,

2017,

130,316

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

$93,905

and

$486,102

of expense related to RSU’s in the

three

and

nine

month periods ended

March

31,

2017,

respectively.

As of

March

31,

2016,

the

65,500

outstanding RSU’s had a remaining weighted average contractual life of

9.25

years. Of the

65,500

RSU’s outstanding as of

March

31,

2016,

63,369

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

3.3%

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

$30,387

and

$350,369

of expense related to RSU’s in the

three

and

nine

month periods ended

March

31,

2016,

respectively.

Director and Employee Stock Compensation Awards

The Company awarded a total of

31,782

and

17,240

common shares in the

nine

months ended

March

31,

2017

and

2016,

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

$331,000

and

$168,000

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,

2017,

there were

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

255,119

common shares with a cost of

$2,437,880,

and

228,103

common shares with a cost of

$2,167,717

were held in the plan as of

March

31,

2017

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

$446,251

and

$316,900

to purchase

45,335

and

32,696

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

nine

months ended

March

31,

2017

and

2016,

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

48,000

53,000

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