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 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

1,366,738

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

September 30, 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, and other stock awards. Service based and performance based stock options were granted and restricted stock units (“RSUs”) were awarded during the

three

months ended

September 30, 2017.

As of

September 30, 2017,

a total of

3,593,365

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

1,536,124

options for common shares were vested and exercisable. As of

September 30, 2017,

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

$3,029,686.

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

months. Additionally, as of

September 30, 2017

a total of

194,150

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

$913,907.

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 wer

e used for grants in the period indicated.

	Three Months Ended
	September 30
	201 7

Dividend yield		3.4	%
Expected volatility		40.9	%
Risk-free interest rate		1.8	%
Expected life (years)		6.0

September 30,

201

the

724,037

options granted during the

first

three

months of fiscal

2018

to employees had exercise prices of

$5.92

per share, fair values

$1.71

per share, and remaining contractual lives of

nine

years,

ten

months.

September 30, 2016,

the

832,500

options granted during the

first

three

months of fiscal

2017

to employees had exercise prices ranging from

$10.08

$11.06

per share, fair values ranging from of

$3.39

$3.83

per share, and remaining contractual lives of between

nine

years,

nine

months and

nine

years,

eleven

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

8.3%

forfeiture rate effective

July 1, 2017.

Previous estimated forfeiture rates were between

2.0%

and

3.5%

between the periods

January 1, 2014

through

June 30, 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 $

757,808

and

$1,438,443

of expense related to stock options in the

three

months ended

September 30, 2017

and

2016,

respectively. As of

September 30, 2017,

the Company had

3,479,522

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

$8.21

per share, an aggregate intrinsic value of

$594,220

and weighted average remaining contractual terms of

7.6

years.

Information related to all stock options for the

three

months ended

September 30,

201

and

2016

is shown in the following tables:

	Three Months Ended September 30, 201 7
				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Term (years)		Value

Outstanding at 6/30/1 7		3,119,688		$	9.12		7.4	$	2,332,224

Granted		724,037		$	5.92
Forfeitures		(232,171	)	$	13.92
Exercised		(18,189	)	$	6.31

Outstanding at 9/30/1 7		3,593,365		$	8.18		7.6	$	646,326

Exercisable at 9/30/1 7		1,536,124		$	8.26		5.9	$	111,768

	Three Months Ended September 30, 2016
				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Term (years)		Value

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

Granted		832,500		$	11.06
Forfeitures		(140,250	)	$	15.95
Exercised		(20,813	)	$	8.32

Outstanding at 9/30/16		3,647,927		$	9.18		7.3	$	8,783,980

Exercisable at 9/30/16		1,586,188		$	8.91		5.1	$	4.982,876

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		724,037		$	1.71
Vested		(384,602	)	$	3.58
Forfeited		(124,321	)	$	3.49
Unvested at September 30, 2017		2,057,241		$	2.87

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

three

months ended

September 30,

201

and

2016

was

$1.71

and

$3.83,

respectively. The aggregate intrinsic value of options exercised during the

three

months ended

September 30, 2017

and

2016

was

$20,156

and

$50,160,

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

three

months ended

September 30, 2017

and

2016

was

$1,377,325

and

$1,334,248,

respectively. The Company received

$114,770

and

$173,185

of cash from employees who exercised options in the

three

month periods ended

September 30, 2017

and

2016,

respectively. In the

first

three

months of fiscal

2018

the Company recorded

$104,969

as a reduction of federal income taxes payable,

$81,010

as an increase in expense,

$5,973

as a reduction of income tax expense, and

$180,006

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 the

first

three

months of fiscal

2017

the Company recorded

$78,040

as a reduction of federal income taxes payable,

$165,856

as an increase in common stock,

$8,880

as a reduction of income tax expense, and

$183,665

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.

Restricted Stock Units

A total of

91,490

restricted stock units with a fair value of

$5.92

per share were awarded to employees during the

three

months ended

September 30, 2017.

A total of

71,700

restricted stock units with a fair value of

$11.06

per share were awarded to employees during the

three

months ended

September 30, 2016.

The Company determined the fair value of the awards based on the closing price of the Company stock on the date the restricted stock units were awarded. The RSUs have a

four

year ratable vesting period. The restricted stock units 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

$29,106

and

$13,898

were accrued as of

September 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 restricted stock units:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2017		133,335		$	10.38
Awarded		91,490		$	5.92
Shares Issued		(30,675	)	$	10.30
Unvested at September 30, 2017		194,150		$	8.29

As of

September 30,

201

the

194,150

restricted stock units had a remaining contractual life of between

years

months and

years

months. Of the

194,150

RSUs outstanding,

180,984

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

8.3%

was used in the calculation of expense related to the restricted stock units. The Company recorded

$255,415

of expense related to restricted stock units in the

three

months ended

September 30, 2017.

As of

September 30,

201

the

118,575

outstanding restricted stock units had a remaining contractual life of

years

months and

years

months. Of the

118,575

RSUs outstanding,

113,868

are expected to vest as of

September 30, 2016.

An estimated forfeiture rate of

3.4%

was used in the calculation of expense related to the restricted stock units. The Company recorded

$302,301

of expense related to restricted stock units in the

three

months ended

September 30, 2016.

Director and Employee Stock Compensation Awards

The Company awarded a total of

8,550

and

9,470

common shares in the

three

months ended

September 30, 2017

and

2016,

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

$77,976

and

$103,100

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 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

September 30,

201

there were

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

241,095

common shares with a cost of

$2,180,397,

and

257,898

common shares with a cost of

$2,456,875

were held in the plan as of

September 30, 2017

and

June

30,

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 and for distributions to terminated employees. The Company issued

31,922

new common shares for purposes of the non-qualified deferred compensation plan. The Company used approximately

$106,537

and

$343,700

to purchase

15,225

and

34,587

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

three

months ended

September 30, 2017

and

2016,

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

For fiscal year

201

the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases of

15,225

common shares of the Company. The Company does

not

currently repurchase its own common shares for any other purpose.