NOTE

—

EQUITY COMPENSATION

Stock Options

The Company’s equity compensation plan, the

2012

Stock Incentive Plan (“the

2012

Plan”), was approved by shareholders in

November 2012.

The

2012

Plan covers all of its full-time employees, outside directors and certain advisors and replaced all previous equity compensation plans. In

November 2016,

the Company’s shareholders approved an amendment to the

2012

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

2012

Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and other stock-based awards. Stock option grants or stock awards made pursuant to the

2012

Plan are granted at fair market value at the date of option grant or stock award.

Stock option grants

may

be service-based or performance-based. Service-based options granted during fiscal

2017

and prior fiscal years generally have a

four

year ratable vesting period beginning

one

year after the date of grant. Service-based options granted during fiscal

2018

have a

three

year ratable vesting period beginning

one

year after the date of grant. Performance-based options have a

three

year ratable vesting period beginning

one

year after the date of grant. The maximum exercise period of stock options granted under the

2012

Plan 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 under the

2012

Plan is

1,436,303

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

June 30, 2018.

Service-based and performance-based stock options were granted and restricted stock units (“RSUs”) were awarded during fiscal

2018.

As of

June 30, 2018,

a total of

3,298,677

stock options were outstanding under the

2012

Plan (as well as

one

previous stock option plan which was also approved by shareholders), of which, a total of

1,824,552

stock options were vested and exercisable. As of

June 30, 2018,

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

$1,052,342.

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

months. Additionally, as of

June 30, 2018,

a total of

169,397

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

$246,301.

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

months.

Stock Warrants

The Company has

200,000

stock warrants fully vested and outstanding as of

June 30, 2018.

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. The stock warrants issued during fiscal year

2017

have an exercise price of

$9.95,

and a fair value of

$2.87.

As of

June 30, 2018,

the warrants had a remaining contractual life of

3.7

years.

	February 21,
	2017

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

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.

	2018			2017			2016

Dividend yield		3.3	%		1.9	%		1.3	%
Expected volatility		41	%		42	%		44	%
Risk-free interest rate		1.8	%		1.3	%		1.7	%
Expected life (in years)		6.0			6.0			6.0

June 30, 2018,

the

794,537

options granted during fiscal

2018

to employees had exercise prices ranging from

$5.92

$6.54

per share, fair values ranging from

$1.71

$1.96

per share, and remaining contractual lives of between

years and

years. The performance metric for the

345,560

performance based stock options granted in fiscal

2018

was

not

achieved; therefore these stock options were forfeited in fiscal

2018.

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.

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

Plan, with an estimated

8.70%

forfeiture rate effective

April 1, 2018.

Previous estimated forfeiture rates were between

2.00%

and

8.79%

between the periods

January 1, 2013

through

March 31, 2018.

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

$2,147,423,

$2,478,861

and

$2,519,092

of expense related to stock options in fiscal years

2018,

2017

and

2016,

respectively. Included in the

$2,147,423

of expense related to stock options for fiscal

2018,

the Company recorded stock-based compensation expense related to the acceleration of service-based stock options and RSUs in conjunction with the Company’s transition agreement with the former CEO of

$954,000.

As of

June 30, 2018,

the Company had

2,918,382

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

$8.33

per share, an aggregate intrinsic value of

$8,037

and weighted average remaining contractual terms of

6.7

years.

Information related to all stock options for the years ended

June 30, 2018,

2017

and

2016

is shown in the following tables:

	Twelve Months Ended June 30, 2018
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual Term		Intrinsic
	Shares			Price		(in years)		Value

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

Granted		794,537		$	5.98
Exercised		(42,939	)	$	6.66
Forfeited		(467,609	)	$	9.11
Expired		(105,000	)	$	19.62

Outstanding at 6/30/18		3,298,677		$	8.06		7.0	$	8,037

Exercisable at 6/30/18		1,824,552		$	8.22		5.8	$	39,011

	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
Exercised		(486,446	)	$	7.37
Forfeited		(702,979	)	$	12.46

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
Exercised		(561,946	)	$	7.34
Forfeited		(165,800	)	$	15.15

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

The following table presents information related to unvested stock options:

				Weighted-Average
				Grant Date
	Shares			Fair Value
Unvested at June 30, 2017		1,842,127		$	3.52
Granted		794,537		$	1.73
Vested		(942,905	)	$	3.39
Forfeited		(219,634	)	$	3.43
Unvested at June 30, 2018		1,474,125		$	2.65

The weighted average grant date fair value of options granted during fiscal years

2018,

2017,

and

2016,

was

$1.73,

$3.67

and

$3.64

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

June 30, 2018,

2017

and

2016

were

$39,011,

$1,189,414

and

$1,695,213,

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

2018,

2017

and

2016

was

$3,192,672,

$2,298,114

and

$1,168,192,

respectively.

The Company received

$285,875,

$2,945,986,

and

$4,124,047,

of cash from employees who exercised options in fiscal years

2018,

2017

and

2016,

respectively.

For year ended

June 30, 2018,

exercised options resulted in an income tax benefit of

$116,602.

Pursuant to the implementation of ASU

2016

09,

the Company recognized a discrete tax expense of

$292,000

to reduce deferred tax assets for cancelled awards and for detriments compared to the current year tax deduction. A discrete tax benefit of

$10,767

was recognized for disqualifying dispositions of incentive stock options.

For the year ended

June 30,

3017,

exercised options resulted in an income tax benefit of

$505,879.

The Company reduced common stock by

$261,694

to reduce deferred tax assets for cancelled awards and for detriments compared to the current year tax deduction. A discrete tax benefit of

$138,722

was recognized for disqualifying dispositions of incentive stock options.

For the year ended

June 30, 2016,

exercised options resulted in an income tax benefit of

$595,483.

The company reduced common stock by

$102,010

to reduce deferred tax assets for cancelled awards and for detriments compared to the current year tax deduction. A discrete tax benefit of

$141,349

was recognized for disqualifying dispositions of incentive stock options.

Restricted Stock Units

A total of

91,490

RSUs with a weighted average fair value of

$5.92

per share were awarded to employees during fiscal,

2018.

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.

The service-based RSUs awarded during fiscal

2017

and in prior fiscal years have a

four

year ratable vesting period beginning

one

year after the date of award. 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 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

$50,621

and

$30,067

were accrued as of

June 30, 2018

and

2017,

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, 2017		133,335		$	10.38
Awarded		91,490		$	5.92
Vested		(43,803	)	$	10.32
Forfeited		(11,625	)	$	9.82
Unvested at June 30, 2018		169,397		$	8.03

The Company recorded

$879,613

of expense related to RSUs during fiscal year

2018.

As of

June 30, 2018,

the

169,397

RSUs outstanding have a weighted average remaining contractual life of

4.5

years. Of the

169,397

RSUs outstanding as of

June 30, 2018,

165,680

RSUs 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 RSU’s is

$246,302.

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

months. An estimated forfeiture rate of

8.3%

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

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. An estimated forfeiture rate of

3.4%

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

Director and Employee Stock Compensation Awards

The Company awarded a total of

41,388,

40,092,

and

23,838

common shares in fiscal years

2018,

2017,

and

2016,

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

$312,000,

$409,000

and

$248,000

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

June 30, 2018,

there were

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

241,996

common shares with a cost of

$2,110,248,

and

257,898

common shares with a cost of

$2,456,875

were held in the plan as of

June

30,

2018

and

2017,

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; shares newly issued for compensation deferred into the plan, and for distributions to terminated employees. The Company issued

67,138

new common shares for purposes of the non-qualified deferred compensation plan during fiscal

2018

and the company did

not

issue new common shares for the plan in fiscal years

2017

and

2016.

The Company used approximately

$106,537

and

$492,400

to purchase

15,225

and

50,579

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

2018

and

2017,

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

The Company’s non-qualified deferred compensation is

longer funded by purchases in the open market of LSI stock as of

September 30, 2017.

This plan is now solely funded by newly issued shares that are authorized from the Company’s

2012

Stock Incentive Plan.