NOTE

— 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

2,188,509

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

June 30, 2017.

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

2017

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

June 3

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.

	February 21 ,
	2017

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

June 30, 2017,

the warrants had a remaining contractual life of

4.7

years.

Stock Options

As of

June 30, 2017,

a total of

3,119,688

options for common shares were outstanding from this plan as well as

one

previous stock option plan (both of which have been approved by shareholders), and of these, a total of

1,277,561

options for common shares were vested and exercisable. As of

June 30, 2017,

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

$3,065,300.

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

years.

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.

	2017			2016			2015

Dividend yield		1.9	%		1.3	%		1.1	%
Expected volatility		42	%		44	%		55	%
Risk-free interest rate		1.3	%		1.7	%		1.6	%
Expected life (in years)		6.0			6.0			6.0

June 30, 2017,

the

1,332,623

options granted during fiscal

2017

to employees had exercise prices ranging from

$9.15

$11.06

per share, fair values ranging from

$3.01

$3.83

per share, and remaining contractual lives of between

years and

years. The performance metric for the

425,000

performance based stock options granted in fiscal

2017

was

not

achieved; therefore these stock options were forfeited in fiscal

2017.

June 30, 2016,

the

1,026,800

options granted during fiscal

2016

to employees had exercise prices ranging from

$8.84

$11.87

per share, fair values ranging from

$3.28

$4.52

per share, and remaining contractual lives of between

years and

9.7

years.

June 30, 2015,

the

734,323

options granted to employees during fiscal

2015

had exercise prices ranging from

$5.96

$8.23

per share, fair values ranging from

$2.19

$3.89

per share, and remaining contractual lives of between

nine

years

five

months and

9.8

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

3.1%

forfeiture rate effective

April 1, 2017.

Previous estimated forfeiture rates were between

2.0%

and

3.3%

over the period

January 1, 2013

through

March 31, 2017.

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

$2,478,861,

$2,519,092

and

$1,238,897

of expense related to stock options in fiscal years

2017,

2016

and

2015,

respectively. As of

June 30, 2017,

the Company had

3,067,295

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

$9.11

per share, an aggregate intrinsic value of

$2,322,190

and weighted average remaining contractual terms of

7.1

years.

Information related to all stock options for the years ended

June 30, 2017,

2016

and

2015

is shown in the following tables:

	Twelve Months Ended June 30, 2017
						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		1,332,623		$	10.59
Forfeitures		(702,979	)	$	12.46
Exercised		(486,446	)	$	7.37

Outstanding at 6/30/17		3,119,688		$	9.12		7.4	$	2,332,324

Exercisable at 6/30/17		1,277,561		$	8.75		5.0	$	1,592,653

	Twelve Months Ended June 30, 2016
						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		1,026,800		$	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
	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		734,323		$	6.83
Forfeitures		(571,275	)	$	10.26
Exercised		(163,076	)	$	6.70

Outstanding at 6/30/15		2,677,436		$	8.8.5		6.1	$	4,914,601

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

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		1,332,623		$	3.67
Vested		(696,501	)	$	3.30
Forfeited		(457,500	)	$	3.81
Unvested at June 30, 2017		1,842,127		$	3.52

The weighted average grant date fair value of options granted was

$3.67,

$3.64

and

$3.27

per share in fiscal years

2017,

2016

and

2015,

respectively. The aggregate intrinsic value of options exercised during the years ended

June 30, 2017,

2016

and

2015

were

$1,189,414,

$1,695,213

and

$212,106,

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

2017,

2016

and

2015

was

$2,298,114,

$1,168,192

and

$822,827,

respectively. The Company received

$2,945,946,

$4,124,047

and

$1,092,002

of cash from employees who exercised options in fiscal years

2017,

2016

and

2015,

respectively. For the

twelve

months ended

June 30, 2017,

the

$2,945,986

cash received from stock options was partially offset by

$138,722

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

twelve

months ended

June 30, 2016,

the

$4,170,997

cash received from stock options was partially offset by

$141,394

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

2017

the Company recorded

$505,879

as a reduction of federal income taxes payable,

$261,694

as a decrease in common stock,

$138,722

as a reduction of income tax expense, and

$628,852

as a reduction of the deferred tax asset related to the issuance of RSUs 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 fiscal

2016

the Company recorded

$595,483

as a reduction of federal income taxes payable,

$102,010

as a decrease 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.

Restricted Stock Units

A total of

96,210

RSUs with a weighted average fair value of

$10.84

per share were awarded to employees during the

twelve

months ended

June 30, 2017.

A total of

72,000

RSUs with a 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 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

$30,067

and

$10,625

were accrued as of

June 30, 2017

and

2016,

respectively. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares. The following table presents information related to RSUs:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2016		62,500		$	9.39
Awarded		96,210		$	10.84
Shares Issued		(25,375	)	$	9.69
Unvested at June 30, 2017		133,335		$	10.38

As of

June 30, 2017,

the

133,335

outstanding RSUs had a remaining weighted average contractual life of

6.0

years. The Company recorded

$570,178

of expense related to RSUs during fiscal year

2017.

Of the

133,335

RSUs outstanding as of

June 30, 2017,

128,859

are vested or expected to vest in the future. 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

months. An estimated forfeiture rate of

3.4%

was used in the calculation of expense related to the RSUs.

As of

June 30, 2016,

the

62,500

outstanding RSUs had a remaining weighted average contractual life of

3.0

years. The Company recorded

$383,483

of expense related to RSUs during fiscal year

2016.

Of the

62,500

RSUs outstanding as of

June 30, 2016,

60,794

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 RSUs.

Director and Employee Stock Compensation Awards

The Company awarded a total of

40,092

common shares in fiscal

2017,

a total of

23,838

common shares in fiscal

2016,

and a total of

26,850

common shares in fiscal

2015

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

$409

,000,

$248,000

and

$191,000

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 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 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

June 30, 2017,

there were

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

257,898

common shares with a cost of

$2,456,875,

and

228,100

common shares with a cost of

$2,167,717

were held in the plan as of

June

30,

2017

and

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 nonqualified deferred compensation plan. The Company used approximately

$492,400

and

$363,400

to purchase

50,579

and

36,685

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

2017

and

2016,

respectively, for either employee salary deferrals or Company contributions into the nonqualified deferred compensation plan. For fiscal year

2018,

the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases, deposits of newly issues shares, and issuances in the range of

85,000

95,000

common shares of the Company. The Company does

not

currently repurchase its own common shares for any other purpose.