Share-Based Compensation

6 Months Ended

Dec. 31, 2011

Share-Based Compensation

Note 7. Share-Based Compensation

The Company measures and recognizes compensation expense for all share-based payment awards made under the Farmer Bros. Co. 2007 Omnibus Plan (the “Omnibus Plan”) based on estimated fair values.

Stock Options

On December 8, 2011, the Company granted 96,834 shares issuable upon the exercise of non-qualified stock options with an exercise price of $7.32 per share to eligible employees and officers under the Omnibus Plan. Shares issuable under the options ratably vest over a three-year period. Following are the weighted average assumptions used in the Black-Scholes Merton valuation model for the grants issued during the six months ended December 31, 2011 and 2010:

	Six Months Ended December 31,
	2011			2010
Weighted average fair value of options	$	3.64		$	8.17
Pre-vest forfeiture rate		6.50	%		6.50	%
Risk-free interest rate		1.09	%		2.80	%
Dividend yield		0	%		2.00	%
Average expected life		6.00 years			6.00 years
Expected stock price volatility		52.5	%		54.9	%

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 statement of operations. The Company estimates forfeitures based on its historical pre-vest forfeiture rate and will revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company’s assumption regarding expected stock price volatility is based on the historical volatility of its 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 following table summarizes stock option activity for the six months ended December 31, 2011:

		497,810			497,810		497,810		497,810		497,810
(Unaudited)	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, 2011		497,810		$	17.19	$	6.44		5.7	$	61
Granted		96,834		$	7.32	$	3.64		7.0	$	—
Cancelled/forfeited		(98,974	)	$	21.03	$	6.37		—	$	—
Outstanding at December 31, 2011		495,670		$	14.50	$	5.90		5.7	$	27
Vested and exercisable, December 31, 2011		163,481		$	19.88	$	6.74		4.6	$	—
Vested and expected to vest, December 31, 2011		471,436		$	14.64	$	5.93		5.7	$	—

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $7.64 at December 30, 2011, representing the last trading day of the quarter, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. As of December 31, 2011, there was approximately $1.4 million of unrecognized compensation cost related to stock options and 73,852 shares vested during the six months ended December 31, 2011. Compensation expense recognized in general and administrative expenses in each of the three month periods ended December 31, 2011 and 2010 was $ 0.3 million and $0.2 million, respectively. Compensation expense recognized in general and administrative expenses in each of the six month periods ended December 31, 2011 and 2010 was $ 0.6 million and $0.4 million, respectively.

Restricted Stock

On December 8, 2011, the Company granted 78,756 shares of restricted stock with a grant date fair value of $7.32 per share to eligible employees, officers and directors under the Plan. Shares of restricted stock generally vest at the end of three years from the grant date for eligible employees and officers who are employees, with the exception of 10,384 shares of restricted stock granted in May 2011 to Patrick G. Criteser, the Company’s Interim Co-Chief Executive Officer, which shares vest one year from the date of grant. Shares of restricted stock vest ratably over a period of three years for directors and officers who are not employees. Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock that is ultimately expected to vest. Restricted stock based compensation expense recognized in general and administrative expenses in each of the three months ended December 31, 2011 and 2010 was $0.2 million. Restricted stock based compensation expense recognized in general and administrative expenses in each of the six months ended December 31, 2011 and 2010 was $0.3 million. As of December 31, 2011, there was approximately $1.3 million of unrecognized compensation cost related to restricted stock. During the six months ended December 31, 2011, 16,843 shares of restricted stock vested.

The following table summarizes restricted stock activity for the six months ended December 31, 2011:

		117,288			117,288		117,288		117,288
(Unaudited)	Shares Awarded			Weighted Average Grant  Date Fair Value		Weighted Average Remaining Life (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding at June 30, 2011		80,687		$	17.31		2.6	$	818
Granted		78,756		$	7.32		2.9	$	602
Vested		(16,843	)	$	19.61		—	$	127
Cancelled/Forfeited		(3,405	)	$	18.19		—	$	0
Outstanding at December 31, 2011		139,195		$	11.36		2.3	$	1,063
Expected to vest, December 31, 2011		117,288		$	11.36		2.3	$	896