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

On December 7, 2012, the Company granted 158,006 shares issuable upon the exercise of non-qualified stock options with an exercise price of $11.81 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 six months ended December 31, 2012 and 2011:



	Six Months Ended December 31,
	2012			2011
Weighted average fair value of options	$	5.54		$	3.64
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 six months ended December 31, 2012 and 2011 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 the 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 six months ended December 31, 2012 (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	158,006		11.81	5.54	6.9	414
Cancelled/forfeited	(125,924	)	12.79	4.16	—	—
Outstanding at December 31, 2012	699,317		12.62	5.06	5.4	2,281

Vested and exercisable, December 31, 2012	329,499		15.00	5.18	4.7	—
Vested and expected to vest, December 31, 2012	664,388		15.00	5.07	5.5	2,135

The aggregate intrinsic values in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $14.43 at December 31, 2012, representing the last trading day of the fiscal quarter ended December 31, 2012, 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 six months ended December 31, 2012 was $0.4 million.

As of December 31, 2012 and 2011, there was approximately $1.6 million and $1.4 million, respectively, of unrecognized compensation cost related to stock options. Compensation expense recognized in general and administrative expenses was $0.3 million in each of the three months ended December 31, 2012 and 2011. Compensation expense recognized in general and administrative expenses was $0.5 million and $0.6 million for the six months ended December 31, 2012 and 2011, respectively.

Restricted Stock

On December 7, 2012, the Company granted a total of 37,544 shares of restricted stock, with a grant date fair value of $11.81 per share. In the prior fiscal year, 78,756 shares of restricted stock were granted during the three months ended December 31, 2011, with a grant date fair value of $7.32 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 $0.3 million and $0.2 million, for the three months ended December 31, 2012 and 2011, respectively. Compensation expense recognized in general and administrative expenses was $0.5 million and $0.3 million, for the six months ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, there was approximately $1.2 million and $1.3 million, respectively, of unrecognized compensation cost related to restricted stock.

The following table summarizes restricted stock activity for the six months ended December 31, 2012 (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	44,374		11.39	—	505
Vested	(43,513	)	12.58	—	—
Cancelled/forfeited	(18,143	)	10.35	—	—
Outstanding at December 31, 2012	158,665		9.82	2.1	1,192

Expected to vest, December 31, 2012	134,218		9.78	2.1	1,053