Share-based Compensation

On August 23, 2007, the Company’s Board of Directors approved the Farmer Bros. Co. 2007 Omnibus Plan (the “Omnibus Plan”), which was approved by stockholders on December 6, 2007. On December 6, 2012, the stockholders approved an amendment to increase the maximum number of shares of common stock available for issuance under the Omnibus Plan to 1,125,000 from 1,000,000, subject to adjustment as provided in the Omnibus Plan.

The Company measures and recognizes compensation expense for all share-based payment awards made under the Omnibus Plan based on estimated fair values.

Stock Options

During the nine months ended March 31, 2013, the Company granted a total of 163,446 shares issuable upon the exercise of non-qualified stock options with a weighted average exercise price of $11.85 per share to eligible employees and officers under the Omnibus Plan. Shares issuable under the options vest ratably over a three-year period. Following are the weighted average assumptions used in the Black-Scholes valuation model for the grants issued during the nine months ended March 31, 2013 and 2012:



	Nine Months Ended March 31,
	2013	2012
Weighted average fair value of options	$5.56	$4.74
Risk-free interest rate	0.8%	1.1%
Dividend yield	—	—
Average expected life	6 years	6 years
Expected stock price volatility	49.5%	52.5%

The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated statements of operations. Compensation expense recognized for all stock option awards is recognized using the straight-line method over the vesting period. The options generally vest ratably over a three-year period, however, fiscal 2012 grants included nonqualified stock option awards to executive officers with different vesting periods, in each case, subject to certain events of acceleration as provided in the applicable employment agreement or award agreement with the executive officer.

The share-based compensation expense recognized in the Company’s consolidated statements of operations for the three and nine months ended March 31, 2013 and 2012 is based on awards ultimately expected to vest. Currently, management estimates an annual forfeiture rate of 6.5% based on actual forfeiture experience from the inception of the Omnibus Plan. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company uses the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected life is based on the midpoint between the vesting date and the end of the contractual term of the award.

The following table summarizes stock option activity for the nine months ended March 31, 2013 (unaudited):



Outstanding Stock Options	Number of Stock Options		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2012	667,235		12.84	4.78	4.8	143
Granted	163,446		11.85	5.56	6.7	465
Exercised	(116,471	)	10.27	5.24	—	—
Cancelled/forfeited	(147,122	)	13.21	5.75	—	—
Outstanding at March 31, 2013	567,088		12.99	5.46	5.1	1,875

Vested and exercisable, March 31, 2013	244,851		16.66	6.26	3.5	356
Vested and expected to vest, March 31, 2013	537,471		13.13	5.49	5.0	1,745

The aggregate intrinsic values in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $14.70 at March 28, 2013, representing the last trading day of the fiscal quarter ended March 31, 2013, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. Total fair value of options vested during the nine months ended March 31, 2013 was $0.9 million. During the three and nine months ended March 31, 2013, the Company received $1.2 million in proceeds from exercises of vested options.

As of March 31, 2013 and 2012, there was approximately $1.3 million and $1.9 million, respectively, of unrecognized compensation cost related to stock options. Compensation expense recognized in general and administrative expenses in the three and nine months ended March 31, 2013 was $0.2 million and $0.7 million, respectively. Compensation expense recognized in general and administrative expenses for the three and nine months ended March 31, 2012 was $0.4 million and $1.0 million, respectively.

Restricted Stock

During the nine months ended March 31, 2013, the Company granted a total of 45,230 shares of restricted stock with a weighted average grant date fair value of $11.42 per share. Shares of restricted stock generally vest on the third anniversary of the date of grant for employees, including officers. Shares of restricted stock generally vest ratably over a three-year period for directors and officers who are not employees. Fiscal 2012 grants included certain awards to executive officers with different vesting periods, in each case, subject to accelerated vesting as provided in the applicable employment agreement or award agreement with the executive officer.

Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Compensation expense recognized in general and administrative expenses was $0.1 million and $0.2 million, for the three months ended March 31, 2013 and 2012, respectively. Compensation expense recognized in general and administrative expenses was $0.6 million and $0.4 million, for the nine months ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, there was approximately $1.0 million and $1.3 million, respectively, of unrecognized compensation cost related to restricted stock.

The following table summarizes restricted stock activity for the nine months ended March 31, 2013 (unaudited):



Outstanding and Nonvested Restricted Stock Awards	Shares Awarded		Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding June 30, 2012	175,947		10.16	1.9	1,401
Granted	45,230		11.42	2.6	516
Vested	(50,085	)	12.52	—	638
Cancelled/forfeited	(21,104	)	12.34	—	—
Outstanding at March 31, 2013	149,988		9.45	2.0	2,205

Expected to vest, March 31, 2013	127,128		9.41	1.9	1,869