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.

On February 13, 2012, pursuant to agreements with each of Jeffrey A. Wahba, Treasurer and Chief Financial Officer and then Interim Co-Chief Executive Officer; Patrick G. Criteser, then Interim-Co-Chief Executive Officer; and Mark A. Harding, Senior Vice President of Operations, the Company granted 65,000 shares, 85,000 shares and 20,000 shares, respectively, issuable upon the exercise of non-qualified stock options with an exercise price of $10.82 per share. Shares issuable under these options vest on the first anniversary of the grant date, subject to accelerated vesting in the case of death, permanent incapacity and certain events relating to termination of employment as provided in the applicable employment agreement or arrangement and the award agreement.

Following are the weighted average assumptions used in the Black-Scholes Merton valuation model for the grants issued during the nine months ended March 31, 2012 and 2011:



	Nine Months Ended March 31,
	2012			2011
Weighted average fair value of options	$	4.74		$	8.17
Pre-vest forfeiture rate	6.5		%	6.5		%
Risk-free interest rate	1.1		%	2.8		%
Dividend yield	—		%	2.0		%
Average expected life	6 years			6 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 nine months ended March 31, 2012:



(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	266,834		$	9.55	$	4.74	6.8	$	358
Cancelled/forfeited	(101,834	)	$	20.84	$	6.35	—	$	—
Outstanding at March 31, 2012	662,810		$	13.55	$	5.77	5.8	$	506
Vested and exercisable, March 31, 2012	162,702		$	19.89	$	6.74	4.3	$	—
Vested and expected to vest, March 31, 2012	635,476		$	13.64	$	5.79	5.8	$	467

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $10.89 at March 30, 2012, 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 March 31, 2012, there was approximately $1.9 million of unrecognized compensation cost related to stock options and 73,852 shares vested during the nine months ended March 31, 2012. Compensation expense recognized in general and administrative expenses in each of the three months ended March 31, 2012 and 2011 was $0.4 million and $0.3 million, respectively. Compensation expense recognized in general and administrative expenses in each of the nine months ended March 31, 2012 and 2011 was $1.0 million and $0.6 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 Omnibus 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, then Interim Co-Chief Executive Officer, and 20,000 shares of restricted stock granted in February 2012 to Jeffrey A. Wahba, Treasurer and Chief Financial Officer and then Interim Co-Chief Executive Officer, which shares vest on the first anniversary of the grant date. 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 March 31, 2012 and 2011 was $0.2 million. Restricted stock based compensation expense recognized in general and administrative expenses in each of the nine months ended March 31, 2012 and 2011 was $0.4 million. As of March 31, 2012, there was approximately $1.3 million of unrecognized compensation cost related to restricted stock. During the nine months ended March 31, 2012, 16,843 shares of restricted stock vested.

The following table summarizes restricted stock activity for the nine months ended March 31, 2012:



(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	98,756		$	8.03	2.3	$	793
Vested	(16,843	)	$	19.61	—	$	127
Cancelled/Forfeited	(4,093	)	$	17.21	—	$	—
Outstanding at March 31, 2012	158,507		$	11.29	1.9	$	1,726
Expected to vest, March 31, 2012	129,564		$	11.29	1.9	$	1,411