Stock Option Plans

2004 Stock Option Plan

In November 2004, the Board of Directors of the Company adopted the 2004 Stock Option Plan (the “2004 Plan”). Under the 2004 Plan, incentive and non-qualified stock options could be granted to eligible employees, directors and consultants. Vesting and exercise provisions were determined by the Board of Directors at the time of grant. Options granted generally vest annually on a straight-line basis over a two- to five-year period from the date of grant. Vested options can be exercised at any time and generally expire ten years after the grant date. In the event that an option holder’s continuous service terminates, the option holder generally has three months from the date of termination in which to exercise vested options.

In February 2012, the Company’s compensation committee determined that no further awards would be granted under the 2004 Plan. As of March 31, 2014, eligible participants held options to purchase 551,181 shares of common stock under the 2004 Plan. If outstanding stock options expire or are canceled without having been fully exercised, the underlying shares will not become available for purposes of the 2004 Plan.

Annie’s, Inc. Omnibus Incentive Plan

In February 2012, the Board of Directors adopted and the Company’s shareholders approved the Omnibus Incentive Plan, which became effective upon the completion of the IPO. A total of 867,570 shares of common stock were reserved for future issuance under the Omnibus Incentive Plan. As of March 31, 2014, 3,857 shares have been issued and 2,468 shares have been withheld by the Company for tax withholding obligation under the Plan, 399,748 shares were reserved for issuance pursuant to outstanding awards, and 461,497 shares remained available for future awards. Any shares covered by an award that are forfeited, expired, canceled, settled in cash or otherwise terminated without delivery of shares to the grantee will be available for future grants under the Omnibus Incentive Plan. However, shares surrendered to or withheld by the Company in payment or satisfaction of the exercise price of an award or any tax withholding obligation with respect to an award will not be available for the grant of new awards. The Omnibus Incentive Plan provides for grants of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, other stock-based awards and cash-based incentive awards.

The Company has granted non-qualified stock options, restricted stock units and performance share units to its employees and restricted stock units to the members of its Board of Directors from the Omnibus Incentive Plan. As of March 31, 2014, eligible participants held options to purchase 275,886 shares of common stock, 33,092 restricted stock units and 60,510 performance share units (at target) under the Omnibus Incentive Plan. The options granted under the Omnibus Incentive Plan generally vest over a five-year period from the grant date. The restricted stock units granted to employees vest 50% on the second anniversary of the grant date, and the remaining 50% on the third anniversary of the grant date. The performance share units granted to employees vest based on achievement of required cumulative compounded adjusted diluted earnings per share growth during the three-year period applicable to the grant. The vesting of stock-based awards is subject to continuance of the employment with or service to the Company.

Non-plan Stock Option Awards

The Company granted performance based option awards for the right to purchase 176,615 shares of common stock to certain key management personnel prior to fiscal 2012, all of which were vested in full as of March 31, 2012. Vesting and exercise provisions were determined by the Board of Directors at the time of grant. Options granted vested according to the performance feature underlying the grant. Vested options can be exercised at any time and generally expire five to ten years after the grant date. In the event that an option holder’s continuous service terminates, the option holder generally has three months from the date of termination in which to exercise vested options. As of March 31, 2014, such key management personnel held options to purchase 86,758 shares of common stock under the non-plan stock option awards.

Activity of stock options under our 2004 Plan, non-plan option awards and Omnibus Incentive Plan is set forth below:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
						(in thousands)
Balance at March 31, 2013	1,203,990		$	13.26
Granted	66,690		41.80
Forfeited	(169,936	)	25.78
Exercised	(186,919	)	10.48
Balance at March 31, 2014	913,825		$	13.58
Vested and expected to vest—March 31, 2014	779,907		$	11.09	3.9	$	22,692
Exercisable—March 31, 2014	674,565		$	8.87	3.2	$	21,128

The following table summarizes information about stock options outstanding at March 31, 2014:



	Options Outstanding
		Weighted-Average
		Remaining
	Stock Options	Contractual Life	Options
Exercise Price	Outstanding	(Years)	Exercisable
$4.93—$6.62	376,963	1.8	376,963
$7.30—$8.88	192,809	3.5	192,809
$16.94—$19.00	244,406	7.8	96,793
$30.01—$35.00	40,000	8.8	8,000
$35.01—$40.00	22,867	9.1	—
$40.01—$45.00	36,780	9.3	—
	913,825	4.6	674,565

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The valuation model for stock compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term (weighted-average period of time that the options granted are expected to be outstanding); volatility of the Company’s common stock and an assumed-risk-free interest rate.



	Fiscal Year Ended March 31,
	2014	2013	2012
Expected term (in years)	5.2 - 6.0	5.2	5.2 - 6.9
Expected volatility	38.2% - 39.7%	39.8% - 40.8%	41.0% - 42.0%
Risk-free interest rate	0.7% - 2.1%	0.8% - 1.1%	1.1% - 3.1%
Expected dividend rate	0%	0%	0%

Fair Value of Common Stock. Under our Omnibus Incentive Plan, the fair value of the shares of common stock underlying the stock options is defined as the closing price of the Company’s common stock on the date of the grant. Prior to the IPO, the fair value of the shares of common stock underlying the stock options had historically been determined by the Board of Directors. Because there had been no public market for the Company’s common stock prior to March 28, 2012, the Board of Directors determined the fair value of the common stock at the time of grant of the option by considering a number of objective and subjective factors including valuation of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance and general and industry-specific economic outlook.

Weighted-Average Expected Term. The Company derived the expected term using several factors including the ratio of market value to the strike price, volatility, proximity to recent vesting and the remaining option term. In addition, the Company considered behavioral factors including portfolio diversification, liquidity considerations, risk aversion and tax planning in its model to determine the expected term. Additionally, the Company considered historical experience and expected term used by peer group companies for stock option grants having similar vesting terms in determining the expected term.

Volatility. The Company did not have historical data regarding the volatility of its common stock prior to the IPO and since the IPO, it has a limited company-specific historical volatility. Therefore, the Company used the expected volatility based upon the volatility of a group of similar entities, referred to as “guideline” companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.

Risk-Free Interest Rate. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.

Dividend Yield. Although the Company in the past while it was a privately held company declared dividends, no future dividends are expected to be available to benefit option holders, and, accordingly, the Company used an expected dividend yield of zero in the valuation model.

Forfeitures. The Company used estimated forfeiture rates calculated based on analysis of actual forfeitures, employee turnover and other related factors. The Company used historical data to estimate pre-vesting forfeitures and recorded stock-based compensation expense only for those awards that were expected to vest. To the extent actual forfeitures differed from the estimates, the difference in stock-based compensation expense was recorded as a cumulative adjustment in the period in which the estimates were revised.

The total intrinsic value of stock options exercised was $5.9 million, $21.4 million and $0.6 million during the years ended March 31, 2014, 2013 and 2012, respectively. The intrinsic value was calculated based on the difference between the exercise price and the fair value of the common stock at time of exercise.

The weighted-average grant date fair value of the employee stock options granted was $15.79, $13.93 and $7.62 per share during the years ended March 31, 2014, 2013 and 2012, respectively.

Stock-based compensation expense included in selling, general and administrative expenses was $0.5 million, $1.1 million and $0.8 million for the years ended March 31, 2014, 2013 and 2012, respectively. The related tax benefit for stock-based compensation was $0.2 million, $0.4 million and $0.3 million for the years ended March 31, 2014, 2013 and 2012, respectively.

The following table summarizes the activity of unvested restricted stock units and performance share units:



Shares-Based Awards	Shares		Weighted-Average Grant Date Fair Value
Unvested at March 31, 2013	71,165		$	21.73
Granted	65,352		41.36
Vested	(11,017	)	30.19
Forfeited	(36,590	)	29.67
Unvested at March 31, 2014	88,910		$	31.84

As of March 31, 2014, there were 60,510 unvested performance share units (at target) outstanding, net of actual forfeitures. As of March 31, 2014, there were no shares estimated to be issued at the end of the performance period(s). The maximum number of total shares that could be issued at the end of performance period(s) is 90,770 shares.

As of March 31, 2014, total unrecognized compensation cost was $2.0 million related to unvested share-based compensation arrangements which is expected to be recognized over a weighted-average period of 3.1 years.