UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
2006
OR
o TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-1375
FARMER BROS. CO.
(exact name
(Exact Name of registrantRegistrant as specifiedSpecified in its charter)
Delaware 95-0725980
(State of Incorporation) (I.R.S. Employer Identification No.)
Its Charter)
Delaware | 95-0725980 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
20333 South Normandie Avenue, Torrance, California, 90502
(address
(Address of principal executive offices) (ZipPrincipal Executive Offices; Zip Code)
Registrant's
Registrants’s telephone number, including area code: (310)787-5200
code 310-787-5200
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common stock, $1.00 par value | NASDAQ |
Indicate by check mark if the Act:
Titleregistrant is a well-known seasoned issuer, as defined in Rule 405 of each class Namethe Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of each exchange on which
registered
Common stock, $1.00 par value NASDAQ
the Act. YES o NO þ
Indicate by check mark whether the Registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]þ NO [ ]
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [X]o NO [ ]
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price at which the Farmer Bros. Co. common stock was sold on June 30, 20042006 was approximately $181$146 million.
On September 13, 2004 Registrant1, 2006 the registrant had 16,075,080 shares outstanding of its common stock, par value $1.00 per share, which is the registrant'sregistrant’s only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: the definitive proxy statement for the fiscal year ended June 30, 2006 that is expected to be filed with the U.S. Securities and Exchange Commission on or before October 28, 2006.
Farmer Bros. Co. (the "Company", "we", "our"“Company,” “we,” “our” or "FBC"“Farmer Bros.”) is a manufacturer and distributor of coffee and spices to the institutional food service segment. The Company was incorporated in California in 1923, and reincorporated in Delaware in 2004.
Our product line is specifically focused on the needs of our market segment: restaurants and other institutional food service establishments that prepare and market meals, including hotels, hospitals, convenience stores and fast food outlets. TheOur product line includes roasted coffee, coffee related products such as coffee filters, sugar and creamers, assorted teas, cocoa, spices, and soup and beverage bases. TheOur product line presently includes over 300 items. RoastedFor the past three fiscal years sales of roasted coffee products make up aboutrepresented approximately 50% of our total sales. Nosales and no single product other than coffee accountsaccounted for more than 10% or more of our revenue. Coffee purchasing, roasting and packaging takes place at our Torrance, California plant, which is also serves as the distribution hub for our branches.
Sales are made "off-truck" to our institutional food service customers at
their places of business by our own sales representatives who are responsible
for soliciting, selling, collecting from and otherwise maintaining our
customer accounts.
Raw Materials and Supplies: Supplies
Our primary raw material is green coffee, an agricultural commodity. CoffeeGreen coffee is mainly grown outside the United States and can be subject to volatile price fluctuations. Weather, real or perceived shortages, political events,unrest, labor actions and armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the USU.S. and coffee producing nations, can affect the price of green coffee.
Green coffee prices can also be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation (CCF), the Association of Coffee Producing Countries (ACPC) and the International Coffee Organization (ICO). These organizations seek to increase green coffee prices largely by attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. In
recent years the green coffee market has been influenced by additional
production from a variety of producers, notably Vietnam and Brazil. These
additional supplies have had the tendency to hold prices down.
Other raw materials used in the manufacture of our non-coffee products (“allied productsproducts”) include a wide variety of spices, includingsuch as pepper, chilies, oregano &and thyme, as well as cocoa, dehydrated milk products, salt and sugar. These raw materials are agricultural products and can be subject to wide cost fluctuation. Costfluctuations. Such fluctuations, of these other
productshowever, historically have not had a material effect on our operating results.
We own approximately 3862 registered U.S. trademarks, which are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification.
Seasonality:
We experience some seasonal influences. The winter months are generally the best sales months. However, our product line and geographic diversity provide some sales stability during the warmer months when coffee consumption ordinarily decreases. Additionally, the summer monthswe usually experience an increase in sales toduring the summer months from seasonal businesses located in vacation areas.
Distribution: Our selling divisions distribute our products
Sales are made “off-truck” to our institutional food service customers at their places of business by our sales representatives. Theserepresentatives who are responsible for soliciting, selling and collecting from and otherwise
maintaining our customer accounts. Our distribution trucks are replenished from warehouses located in most largea number of cities in the western United States. We operate our own long haul trucking fleet in an effort to more effectively control the supply of products to these warehouses. Inventory levels are maintained at each location
sufficient to provide each branch warehouse with aconsisting of our complete product line and sufficientadditional safety stocks to accommodate a modest interruption in supply.
Customers:
No single customer represents a significant concentration of sales. TheAs a result, the loss of one or more of our larger customer accounts wouldis not likely to have noa material adverse effect on our results of operations. We serve a wide variety of customers, from small restaurants and donut shops to large institutional buyers like restaurant chains, hospitals, hotels, contract food services and convalescent hospitals. Customer contact, our distribution network and our service quality, which are integral to our sales effort, are often secondary to
product pricing for customers with their own distribution systems. Such
customers can be very price sensitive.
Competition: effort.
We face competition from many sources, including the institutional food service divisions of multi-national manufacturers of retail products such as Procter & Gamble (Folgers Coffee), Kraft Foods (Maxwell House Coffee) and Sara Lee Foods (Superior Coffee), wholesale grocery distributors such as Sysco and USU.S. Food Service and regional institutional coffee roasters such as Boyd Coffee Company and Lingle Bros. Coffee. WeCompany. Management believes we may have some competitive advantages due to our longevity, strong regional roots and our sales and service force. We differentiate ourselves from our competitors by the quality of our products, our distribution network and our customer service. Some of our competitors outsource their product distribution, while others conduct their own distribution. Some of our customers are “price” buyers, seeking the low cost provider with little concern about service; others find great value in the service programs we provide. We compete well when service and distribution are valued by our customers, and are less effective when only price matters. Our customer base is price sensitive and we are often faced with price competition.
We finance our operations internally, and we believe that working capital from internal sources will be adequate for the coming fiscal year.
Foreign Operations: Operations
We have no material revenues that result from foreign operations.
Other:
On June 30, 2004,2006 we employed 1,104 employees; 4611,091 employees, 441 of whom are subject to collective bargaining agreements. The effects of complianceCompliance with government provisions regulatingregulations relating to the discharge of materials into the environment havehas not had a material effect on our financial condition or results of operations. The nature of our business does not provide for maintenance of or reliance upon a sales backlog. No portion of our business may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
We file reports electronically with the U.S. Securities and Exchange Commission (“SEC”), including Forms 10-K, 10-Q, 8-K and amendments thereto. The public may read and copy any materials filed with the SEC at the SEC'sSEC’s Public Reading Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-
0330.1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC; theSEC. The site address is http://www.sec.gov.
Registrant's
Our Internet website address wasis http://www.farmerbroscousa.com. The
site has been closed for upgrading. Whenwww.farmerbroscousa.com (the website address is not intended to function as a hyperlink, and the site reopens, Registrant's Forms
3,4 and 5 as well as its Annual Reportinformation contained in our website is not intended to Stockholders, Formsbe part of this filing), where we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and 8-
Kcurrent reports andon Form 8-K including amendments thereto will be available on the website. Until that
time, SEC reports are availableas soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the public on a real time basis on the
Commission's EDGAR website described above. For those unable to access the
Commission's website, the Company will make paper copiesSEC. The Company’s Code of Ethics for its form 10-K, 10-
Qprincipal executive and 8-K filings and amendments thereto available without charge upon written
request addressed to Mr. John E. Simmons, Chief Financial Officer, Farmer
Bros. Co., 20333 S. Normandie Avenue, Torrance, CA 90502.
Item 2. Properties
Our largest and most significant facilityprincipal financial officers is the roasting plant, warehouses
and administrative offices in Torrance, California. This facility is our
primary manufacturing facility and the distribution hub for our fleet.
We stage products in 100 small branch warehouses throughout our service area.
These warehouses, taken together, represent a vital part of our business, but
no individual warehouse is material to the group as a whole; most warehouses
vary in size from 2,500-12,000 sq. feet. We believe the existing plant and the
distribution warehouses will continue to provide adequate capacity for the
foreseeable future.
A complete list of facilities is found in Exhibit (99).
Item 3. Legal Proceedings
We are both defendant and plaintiff in various legal proceedings incidental
to our business which are ordinary and routine. It is our opinion that the
resolution of these lawsuits will not have a material impactalso posted on our financial
condition or results of operations.
Internet website.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Executive Officers of Registrant
Name Age Position Last Five Years
Roy E. Farmer 52 Chairman since June 16, 2004, President, Chief
Executive since 2003, Chief Operating Officer
previously.
Guenter W. Berger 67 Vice President - Production
Michael J. King 59 Vice President - Sales since August 2004,
National Sales Manager previously
John E. Simmons 53 Treasurer, Chief Financial Officer
John M. Anglin (1) 57 Secretary since 2003, and Partner in Law Firm of
Anglin, Flewelling, Rasmussen, Campbell &
Trytten, LLP, Pasadena, California since 2002;
partner in Law Firm of Walker, Wright, Tyler
and Ward, LLP, Los Angeles, California,
previously.
(1) Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP provides legal
services to the Company.
All officers are elected annually by the Board of Directors and serve at the
pleasure of the Board.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
We have one class of common stock which is traded on the NASDAQ national
market under the symbol "FARM". On March 4, 2004, a ten-for-one stock split in
the form of a one-time stock dividend was declared. Each stockholder of record
on April 23, 2004 received nine additional shares for every share of Farmer
Bros. common stock held. The new shares were registered on the books of the
Corporation at the close of business on May 10, 2004. Share and per share
amounts have been restated to reflect the split. The following table sets
forth the high and low sales prices of the shares of Common Stock of the
Company. Prices are as reported on the NASDAQ National Market and represent
prices between dealers, without including retail mark up, mark down or
commission, and do not necessarily represent actual trades.
2004 2003
High Low Dividend High Low Dividend
1st Quarter $35.478 $31.750 $0.095 $35.600 $30.400 $0.090
2nd Quarter $33.349 $30.520 $0.095 $33.500 $30.101 $0.090
3rd Quarter $36.200 $30.100 $0.095 $31.999 $30.350 $0.090
4th Quarter $39.394 $25.110 $0.095 $36.599 $30.324 $0.090
There were 3,017 holders of record on September 10, 2004. Holders of record is
based upon the number of record holders and individual participants in security
position listings.
Item 6. Selected Financial Data
(In thousands, except per share data)
2004 2003 2002 2001 2000
Net sales $193,589 $201,558 $205,857 $215,431 $218,688
Income from operations $ 3,763 $23,888 $38,210 $42,115 $48,965
Net Income $12,687 $23,629 $30,569 $36,178 $37,576
Net income per share (b) $0.81 $1.30 $1.65 $1.96 $2.02
Proforma net income (a) $36,488 $35,445
Proforma net income per share (b) $1.98 $1.91
Total assets $317,871 $416,415 $417,524 $390,395 $353,467
Dividends per share (b) $0.38 $0.36 $0.34 $0.32 $0.30
(a) Upon adoption of Statements of Financial Accounting Standards ("SFAS") No.
133 on July 1, 2000, the Company reclassified its investments held as
"available for sale" to the "trading" category which resulted in an entry to
recognize the accumulated unrealized loss of $3,894,000. The "proforma"
amounts above summarize the effect on earnings and earnings per share on prior
years' results as if the change had been in effect for those periods presented.
(b) All share and per share disclosures have been split-adjusted.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis discusses the results of operations as
reflected in the Company's consolidated financial statements. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors.
The results of operations for the years ended June 30, 2004, 2003 and 2002 are
not necessarily indicative of the results that may be expected for any future
period. The following discussion should be read in combination with the
consolidated financial statements and the notes thereto included in Item 8 of
this report and with the "Risk Factors" described below.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to inventory valuation, including LIFO reserves, the
allowance for doubtful accounts, deferred tax assets, liabilities related to
retirement benefits, liabilities resulting from self-insurance of our worker's
compensation liabilities, and litigation. We base our estimates on historical
experience and other relevant factors that are believed to be reasonable under
the circumstances.
While we believe that the historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated financial statements, actual results may
differ from these estimates, which could require the Company to make
adjustments to these estimates in future periods.
Investments: Our investments consist of investment grade marketable debt
instruments issued by the US Government and major US and foreign corporations,
equity securities, primarily preferred stock, and various derivative
instruments, primarily exchange traded treasury futures and options, green
coffee forward contracts and commodity purchase agreements. All derivatives
not designated as accounting hedges are marked to market and changes are
recognized in current earnings. The fair value of derivative instruments is
based upon broker quotes where possible.
Allowance for Doubtful Accounts: We maintain an allowance for estimated
losses resulting from the inability of our customers to meet their
obligations. Our ability to maintain a relatively small reserve is directly
related to our ability to collect from our customers when our sales people
regularly interact with our customers in person. This method of operation has
provided us with a historically low bad debt experience.
Inventories: Inventories are valued at the lower of cost or market and the
costs of coffee and allied products are determined on the last in, first out
(LIFO) basis. Costs of coffee brewing equipment manufactured are accounted
for on the first in, first out (FIFO) basis. We regularly evaluate these
inventories to determine that market conditions are correctly reflected in the
recorded carrying value.
Self-Insurance Retention: We are self-insured for California workers'
compensation insurance and use historical analysis to determine and record
the estimates of expected future expenses resulting from worker's compensation
claims. Additionally, we accrue for estimated losses not covered by insurance
for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans: We have two defined benefit plans that provide retirement
benefits for the majority of our employees (the balance of our employees are
covered by union defined benefit plans). We obtain actuarial valuations for
both plans and at present we discount the pension obligations using 5.60%
discount rate and we estimate an 8% return on plan assets. Our retiree
medical plan is not funded and shares the same discount rate as the defined
benefit plans. We also project an initial medical trend rate of 10%
ultimately reducing to 5.5% in 6 years.
The performance of the stock market and other investments as well as the
overall health of the economy can have a material effect on pension investment
returns and these assumptions. A change in these assumptions could have an
effect on operating results.
Income Taxes: Deferred income taxes are determined based on the temporary
differences between the financial reporting and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse. We do not presently have a valuation
allowance for our deferred tax assets as we currently believe it is more
likely than not that we will realize our deferred tax assets.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and
believe that our short and long term cash requirements for the coming
year will be provided by internal sources.
As reported in the Form 10-Q/A dated February 18, 2004, on December 24, 2003,
the Company purchased 443,845 shares (pre-split) of its common stock held by
the Crowe Family and related trusts for approximately $111 million, or
approximately $250 per share (pre-split). Concurrently with this purchase, the
Company offered its Employee Stock Ownership Plan (ESOP) the opportunity to
acquire 124,939 shares (pre-split) at the same price. This portion of the
transaction was completed on January 11, 2004 when the Company issued said
shares to the ESOP. This fulfilled a previously announced commitment to fund
the ESOP with 300,000 shares (pre-split) by completing the purchase at a
significant discount to market price. The closing price for Farmer Bros. Co.
common stock on December 24, 2003 was $316 per share (pre-split). Please
review Note 11 to the accompanying financial statements for additional
information.
The transaction can be summarized as follows:
Cost of shares purchased $ 111,161,000
Cost of shares retired 79,926,000
Cost of shares transferred to ESOP 31,235,000
The ESOP, established in 2000 for all Farmer Bros. Co. employees, is a
leveraged ESOP. This compensation plan allocates shares to employees as the
Company makes its annual benefit contribution to the plan. The shares are held
for employees by a third party trustee. When employees retire or leave the
Company, they can receive the stock or cash. Cash amounts are based on the
market price of the stock. The Company must make a market in the stock for
the ESOP participants. At this time, based on allocated shares, the Company
has a re-funding liability of approximately $10,000,000.
Our working capital is composed of the following:
(In thousands)
2004 2003 2002
Current assets $252,720 $346,617 $348,434
Current liabilities $21,189 $16,659 $16,259
Working capital $231,531 $329,958 $332,175
Capital expenditures $ 7,683 $9,089 $5,039
We have no major commitments for capital expenditures at this time. The
following projects will require a commitment of funds:
1. We have started construction of a warehouse in Chico, California and
expect to begin construction shortly of another building in Bakersfield,
California to replace existing facilities in those locations. We expect to
complete construction in time to occupy both new warehouses before the end of
fiscal 2005. The combined cost of improvements for the two warehouses is not
expected to exceed $4,000,000.
2. We have completed the second year of a multi-year upgrading of our
internal management information system. To date we have expended $13.9
million for hardware, software, infrastructure, training, consulting and on-
going support. Our financial systems (general ledger, accounts receivable,
accounts payable, fixed assets and payroll) were converted to the new system
on July 1, 2003. On September 1, 2004, we converted our manufacturing systems
and expect to convert our sales systems before the end of fiscal 2005. Costs
to complete this project, including software, hardware and consulting &
configuration of software in 2005, may exceed $7,000,000, not including the
added fixed costs to maintain the new system.
Results of Operations
Years ended June 30, 2004 and 2003
Net sales in fiscal 2004 decreased $7,969,000, or 4%, to $193,589,000 from
$201,558,000 in fiscal 2003. This includes a decrease in coffee brewing
equipment sales during fiscal 2004 of $3.9 million.
Our sales force has persisted in its efforts throughout this recession. We
expect better results as the economy begins to improve. Some improvement has
been noted. Comparing fourth quarter 2004 to fourth quarter 2003, two of our
ten selling divisions had sales declines of less than 1% and one, in the
Mississippi Valley, had a 2.6% sales increase. Some trade reports as well as
published operating results from some restaurant operators seem to indicate
that restaurant sales have improved. The National Restaurant Association has
forecasted that industry sales will increase 4.4% for calendar 2004. A trade
publication, The Restaurant News, reports that restaurant sales in the first
four months of calendar 2004 were 3.4 percent higher than during the same
period of calendar 2003. We have not kept pace with this trend but we note
that regional results often do not reflect national averages. Our California
operations, representing our largest marketing area, continue to show limited
improvement.
Consumer sentiment and spending patterns are not enhanced by rising commodity
prices (leading to higher grocery store and menu prices), record high gasoline
prices (which can have an emotional effect on discretionary spending), and
uncertainty about job stability, terrorism and the Iraq war (which can lead to
just staying home).
Cost of goods sold in fiscal 2004 increased 1% to $71,405,000, or 37% of
sales, as compared to $70,662,000, or 35% of sales, in 2003. The average cost
of green coffee throughout fiscal 2004 has exceeded that of fiscal 2003 by
15%. Through price adjustments we were, on average, able to maintain margins
for the current year, although shrinking gross profit margins were experienced
during the last half of the fiscal year. Selling and General & Administrative
Expenses in 2004 increased 11% to $118,421,000 from $107,008,000 in fiscal
2003.
This increase is primarily attributed to costs associated with employee
benefits, including actuarially derived pension and retiree medical costs, the
cost of the ESOP, legal expenses, including those related to a stockholder
lawsuit during 2004 and reincorporation in Delaware, and our multiyear program
to update our information systems as well as the direct costs of our
Sarbanes-Oxley Act of 2002 ("SOX") compliance work related to Section 404.
2004 2003
Employee benefits $14,104 $11,578
ESOP 6,298 4,637
Legal expenses 2,267 650
IT project expenses 3,400 698
SOX compliance 360 0
total $26,429 $17,563
As a result of these factors, operating income in 2004 decreased 83% to
$3,763,000 from $23,888,000 in the prior fiscal year.
Other income decreased 11% to $12,219,000 in fiscal 2004 as compared to
$13,683,000 in fiscal 2003. Low interest rates have limited investment
returns, and the expenditure of more than $100 million to purchase stock
reduced the amount available for investment. Additionally, the Company's
Chairman, Roy F. Farmer, who guided the Company for more than 50 years, died
on March 16, 2004 (as more fully described in a Form 8-K filed March 16,
2004). The Company received payment of a key man life insurance policy on Mr.
Farmer that is not taxable and paid the deferred compensation due Mr. Farmer.
The Company prevailed in a lawsuit against the California Franchise Tax Board
regarding taxability of dividends. As a result we received a tax refund of
$811,000 and interest income of $629,000. The Company received another court
award, as a plaintiff in a class-action lawsuit regarding price-fixing by
sellers of monosodium glutamate. The non-recurring items in other income
include the following.
Key man life insurance $4,088,000
Court award 1,061,000
Interest on state tax refunds 629,000
Total $5,778,000
Net income for fiscal 2004 decreased 46% to $12,687,000 as compared to
$23,629,000 in fiscal 2003. Income per share decreased 38% in fiscal 2004 to
$0.81 per share as compared to $1.30 per share in fiscal 2003.
Years ended June 30, 2003 and 2002
Net sales in fiscal 2003 decreased 2.1% to $201,558,000 as compared to
$205,857,000 in fiscal 2002. During this period the Company continued to
experience a decline in coffee sales. There are a number of trends that we
believe affect this result.
Fiscal 2003 was the third year of an economic downturn that has been especially
hard on our core service area of California. Our entire 28 state service area
has felt the combination of lay-offs, job uncertainty and the high cost of
living that can restrict consumer spending. Our primary market is the
independently owned and operated restaurant and restaurant chains. A weaker
economy is especially hard on these entrepreneurs who do not have the
geographic or "thematic" diversity of the large restaurant chains. The
success of coffee shops selling specialty coffees has spawned many imitators.
Although we compete favorably with our own line of specialty coffees, our
customers feel the effect of fewer sales dollars (in part because of the
recession) being divided among more direct competitors.
Green coffee costs for fiscal 2003 increased approximately 25% over those of
fiscal 2002. As a result gross profit decreased 5.2% to $130,896,000, or 65%
of sales, in fiscal 2003 as compared to $138,093,000, or 67% of sales, in
fiscal 2002.
Selling expenses for the 2003 fiscal year increased 3.1% to $88,658,000 as
compared to $86,025,000 in fiscal 2002. General and administrative expenses
increased 32.4% in fiscal 2003 to $18,350,000 as compared to $13,858,000 in
fiscal 2002. Operating expenses, composed of selling and general and
administrative expenses, increased $7,125,000, or 7.1%, to $107,008,000 during
fiscal 2003, or 53% of sales, as compared to $99,883,000, or 49% of sales, in
fiscal 2002. This increase primarily reflects additional costs in the
following order: ESOP $1,886,000; computer consulting and training $1,309,000;
insurance (including workers compensation) $1,300,000; life insurance
$1,045,000; defined benefit and post retirement benefit plan costs $997,000;
and the cost of coffee brewing equipment $897,000. These were partially offset
by decreases in legal expenses $941,000 and payroll $815,000.
Other income in fiscal 2003 increased $2,533,000 or 22.7% to $13,683,000 as
compared to $11,150,000 in fiscal 2002. This is primarily the result of the
volatility of the capital markets introduced by an accounting change in 2001
that required unrealized gains and losses on investments to be realized as
incurred. Prior to that time our hedging efforts reduced much of this
volatility. Interest rates declined throughout fiscal 2003. The major
components of this change from 2002 included an increase in unrealized gains of
$5,607,000, offset by decreases in interest income of $3,287,000 and realized
losses $1,897,000 and realized gains $1,864,000.
Pretax income in fiscal 2003 decreased 23.9% to $37,571,000, or 18.6% of
sales, as compared to $49,360,000, or 24% of sales, in fiscal 2002. Net
income in fiscal 2003 decreased 22.7% to $23,629,000, or 11.7% of sales, as
compared to $30,569,000, or 14.9% of sales in fiscal 2002. Earnings per share
in fiscal 2003 decreased 21.3% to $13.02 as compared to $16.54 in fiscal 2002.1A. Risk Factors
Certain statements contained in this Annual Report on Form 10-K regarding the risks, circumstances and financial trends that may affect our future operating results, financial position and cash flows may be forward-looking statements within the meaning of federal securities laws. These statements are based on management'smanagement’s current expectations, assumptions, estimates and observations about our business and are subject to risks and uncertainties. As a result, actual results could materially differ from the forward lookingforward-looking statements contained herein. These forward-looking statements can be identified by the use of words like "expects," "plans," "believes," "intends," "will," "assumes"“expects,” “plans,” “believes,” “intends,” “will,” “assumes” and other words of similar meanings.meaning. These and other similar words can be identified by the fact that they do not relate solely to historical or current facts. While we believe our assumptions are reasonable, we caution that it is impossible to predict the impact of such factors which could cause actual results to differ materially from predicted results. We intend these forward-
lookingforward-looking statements to speak only at the time of this report and do not undertake to update or revise these projectionsstatements as more information becomes available. For these statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
Factors
The Company’s business, its future performance and forward-looking statements are affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic and political conditions (including the global economy), competition, interest rate and currency exchange rate fluctuations, and other events. The following items are representative of the risks, uncertainties and other conditions that could cause ourmay impact the Company’s business, future performance and the forward-looking statements that it makes in this Annual Report on Form 10-K or that it may make in the future. Our actual results could differ materially from anticipated results due to materially differsome or all of the factors discussed below.
OUR EFFORTS TO SECURE AN ADEQUATE SUPPLY OF QUALITY COFFEES MAY BE UNSUCCESSFUL AND EXPOSE US TO COMMODITY PRICE RISK.
Maintaining a steady supply of green coffee is essential to keep inventory levels low and secure sufficient stock to meet customer needs. To help ensure future supplies, we may purchase our coffee on forward contracts for delivery as long as six months in the future. In the event of non-performance by the suppliers, the Company could be exposed to credit and supply risk. Entering into such future commitments also leaves the Company subject to purchase price risk. Various techniques are used to hedge these purchases against untoward price movement. Competitive factors make it difficult for the Company to “pass through” such price fluctuation to its customers. Therefore, unpredictable price changes can have an immediate effect on operating results that cannot be corrected in the short run. To reduce its exposure to the volatile fluctuation of green coffee costs, Farmer Bros. has, from those
expressed or implied by any forward-looking statementstime to time, entered into futures contracts to hedge coffee purchase commitments. Open contracts associated with these hedging activities are described herein
include:in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”
INCREASES IN THE COST OF GREEN COFFEE COULD REDUCE OUR GROSS MARGIN AND PROFIT.
Our primary raw material is green coffee, an agricultural commodity. Green coffee price volatility.
Our results of operations can vary dramatically with the volatility of the
green coffee market. Coffee is mainly grown outside the United StatesU.S. and can be subject to volatile price fluctuations. Weather, real or perceived shortages, labor actions, and political unrest and armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the USU.S. and coffee producing nations, can affect the price of green coffee. Price
volatilityGreen coffee prices can also be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation (CCF), the International Coffee Organization (ICO) and the Association of Coffee Producing Countries (ACPC). These organizations seek to increase coffee prices largely be attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. As a result these organizations or others may succeed in dramatic costraising green coffee prices.
In the past, we generally have been able to pass increases in green coffee costs to our customers. However, there can be no assurance that cannot, because of
competition and market conditions,we will be immediately passedsuccessful in passing such fluctuations on to our customers.
Competition.
Competition comescustomers without losses in many forms. sales volume or gross margin in the future. Similarly, rapid sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE EFFECTIVELY.
We primarily compete with other coffee companies, includeincluding multi-national firms with vastsubstantially greater financial, resources.marketing and operating resources than the Company. We face competition from many sources including the food service divisions of multi-national manufacturers of retail products such as Proctor and Gamble (Folgers Coffee), Kraft Foods (Maxwell House Coffee) and Sara Lee Foods (Superior Coffee), wholesale grocery distributors such as Sysco and U.S. Food Service, and regional coffee roasters such as Boyd Coffee Company. Some of our competitors outsource their product distribution, while others conduct their own distribution. Large roasters
like Folgers (Proctor & Gamble) and Maxwell House (Kraft) have volumes far in excess of ours, with a business model and information and distribution
technologies that areis substantially different from ours. We compete with those firms and others for a wide variety of customers, from small restaurants and donut shops, to large institutional buyers like restaurant chains, hospitals, hotels, contract food services and convalescent hospitals. If we do not succeed in differentiating ourselves from our competitors or our competitors adopt our strategies, then our competitive position may be weakened. At Farmer Bros. we differentiate ourselves from our competitors by the quality of our products, our distribution network and our customer service. Some of our customers are "price"“price” buyers, seeking the low cost provider with little concern about service; others find great value in the service programs we provide. We compete well when service isand distribution are valued by our customers, and are less effective when only price matters. Some of our competitors do not do their own distribution,Our customer base is price sensitive and some customers do.
We also competewe are often faced with other beverages. There are many beverages, hot and cold,
competing forprice competition.
CHANGES IN CONSUMER PREFERENCES COULD ADVERSELY AFFECT OUR BUSINESS.
Our continued success depends, in part, upon the same restaurant dollar. Our restaurant customers report that
competition from such beverages continues to dilute demand for coffee. Consumers who choose soft drinks, bottled water, and flavored coffees and teas
are all reducing the restaurant dollar formerly spent onShifts in consumer preferences away from a "standard"“standard” cup of coffee. Some restaurants that only sell coffee and flavored coffee products
may have expanded the beverage market somewhat, but these coffee shops have
also taken market share from existing Farmer Bros. customers. Although we
have a line of products that compares favorably with products sold in such
"specialty coffee" stores, most ofcould adversely affect our customers are restaurants that do not
specialize in coffee drinks.
Sales and Distribution Network.
We believe our sales and distribution network is one of the best in the
industry. This network is costly to maintain. Costs include the fluctuating
cost of gasoline, diesel and oil, the costs associated with managing,
purchasing, maintaining and insuring a fleet of delivery vehicles, the costs of
maintaining distribution warehouses throughout the country, the costs of
hiring, training and managing our route sales professionals. Many of these
costs are beyond our control, and others are more in the nature of fixed than
variable costs. Some competitors use alternate methods of distribution that
eliminate some of the costs associated with our method of distribution.
General economic and market conditions.profitability. Our primary market is restaurants and other food service establishments. We also provide coffee and related products to offices. We believe the success of our market segment is dependent upon personal and business expenditures in restaurants and other food service businesses. There are many beverages, hot and cold, competing for the same restaurant dollar. Our restaurant customers report that competition from such beverages continues to dilute the demand for coffee. Consumers who choose soft drinks, bottled water, and flavored coffees and teas are all reducing the restaurant dollar formerly spent on a “standard” cup of coffee. While restaurants and coffee houses that sell “specialty” coffee and flavored coffee products may have increased
the demand for coffee beverages, many of these establishments have taken market share from existing Farmer Bros. customers. We have a line of products that compares favorably with products sold in such “specialty coffee” stores, but most of our restaurant customers do not specialize in coffee drinks. As a result, a further shift toward “specialty” coffee houses may adversely impact the demand for the Company’s products.
REDUCTIONS IN DISCRETIONARY SPENDING COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant extent on a number of factors that affect discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. In a slow economy, businesses and individuals scale back their discretionary spending on travel and entertainment, including "dining“dining out."” Economic conditions may also cause businesses to reduce travel and entertainment expenses, and even cause office coffee benefits to be eliminated. Self insurance.
These factors could reduce demand for our products or impose practical limits on pricing, either of which could adversely affect our business, financial condition, operating results and cash flows.
OUR SALES AND DISTRIBUTION NETWORK IS COSTLY TO MAINTAIN.
Our sales and distribution network requires a large investment to maintain and operate. Costs include the fluctuating cost of gasoline, diesel and oil, the costs associated with managing, purchasing, maintaining and insuring a fleet of delivery vehicles, the costs of maintaining distribution warehouses throughout the country, and the costs of hiring, training and managing our route sales professionals. Many of these costs are beyond our control, and others are fixed rather than variable. Some competitors use alternate methods of distribution that eliminate some of the costs associated with our method of distribution.
WE ARE SELF-INSURED. OUR RESERVES MAY NOT BE SUFFICIENT TO COVER FUTURE CLAIMS.
We are self-insured for many risks up to significant deductible amounts. The premiums associated with our insurance have recently increased substantially. General liability, fire, workers'workers’ compensation, directors and officers liability, life, employee medical, dental and vision and automobile risks present a large potential liability. While we accrue for this liability based on historical experience, future lossesclaims may exceed lossesclaims we have incurred in the past. Risks from possible acquisitions and new business ventures.
The Company regularly evaluates opportunities that may enhance stockholder
value. There is no assurance that any such venture, should we decideShould a different amount of claims occur compared to enter
into one, will accruewhat was estimated or the projected returns. It is possible that such
ventures could result in losses or returns that would have a negative impact
on operating income.
ESOP.
The Farmer Bros. Co. Employee Stock Ownership Plan was designed to help us
attract and retain employees and to better align the efforts of our employees
with the interests of our stockholders. To that end, the Company has
purchased 300,000 shares (pre-split) of stock for the ESOP to allocate to
employees over the next 14 years. It is possible that additional shares could
be acquired that might deplete the Company's cash. We expect that the future
re-funding liabilitycost of the existing sharesclaims increase or decrease beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in the ESOP will increase and
require additional investment as the ESOP matures and individual holdings grow.
When employees vested in the ESOP leave the Company, they have the right to
"put" their shares to the Company for cash. This requires the Company to
repurchase the shares at the current market value. When shares are fully
distributed, the Company's refunding liability is approximately $75,000,000 at
current share prices.
Natural disasters.
Over half of our business is conducted in California, Oregon and Washington.
This area is prone to seismic activity and a major earthquake could have a
significant negative effect on our operations. Our major manufacturing
facility and distribution hub is in Los Angeles, and a serious interruption to
highway arteries, gas mains or electrical service could restrict our ability
to supply our branches with product.
Labor actions.
future periods.
EMPLOYEE STRIKES AND OTHER LABOR-RELATED DISRUPTIONS MAY ADVERSELY AFFECT OUR OPERATIONS.
We have union contracts relating to the majority of our employees serving ourworkforce in California, Oregon, Washington and Nevada markets.Nevada. Although we believe union relations have been amicable in the past, there is no assurance that this will continue in the future. There are potential adverse effects of labor disputes with our own employees or by others who provide transportation (shipping lines, truck drivers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. These actions could restrict our ability to obtain, process and/or distribute our products.
Pension Plan Viability.
WE MAY ENTER INTO NEW BUSINESS VENTURES THAT COULD HAVE A NEGATIVE IMPACT ON OPERATING RESULTS.
From time to time, we evaluate potential business ventures and acquisitions. Entering into any such transaction entails many risks, any of which could materially harm our business. There is no assurance that any such venture, should we decide to enter into one, will accrue the projected returns. It is possible that such ventures could result in losses or returns that would have a negative impact on operating results.
5
OUR ROASTING AND BLENDING METHODS ARE NOT PROPRIETARY, SO COMPETITORS MAY BE ABLE TO DUPLICATE THEM, WHICH COULD HARM OUR COMPETITIVE POSITION.
We consider our roasting and blending methods essential to the flavor and richness of our coffee and, therefore, essential to our brand. Because the Company’s roasting methods cannot be patented, we would be unable to prevent competitors from copying these methods if such methods became known. If our competitors copy our roasts or blends, the value of our brand may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
BECAUSE A SUBSTANTIAL PORTION OF OUR BUSINESS IS BASED IN CALIFORNIA, TEXAS, COLORADO, ARIZONA AND WASHINGTON, AN INTERRUPTION IN OPERATIONS IN ANY OF THESE MARKETS WOULD ADVERSELY IMPACT OUR BUSINESS.
Over half of our business is conducted in California, Texas, Colorado, Arizona and Washington. We expect that these operations will continue to generate a substantial portion of our revenue. A significant interruption in operations at our facilities in these markets, whether as a result of an earthquake, natural disaster, terrorism or other causes, could significantly impair our ability to operate our business. Our major manufacturing facility and distribution hub is in Los Angeles County. The majority of our green coffee comes through the Port of Los Angeles or the Port of Long Beach. Any interruption to port operations, highway arteries, gas mains or electrical service in this area could restrict our ability to supply our branches with product and would adversely impact our business.
OUR OPERATING RESULTS MAY HAVE SIGNIFICANT FLUCTUATIONS FROM QUARTER TO QUARTER WHICH COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE.
From time to time, our operating results likely will fall below investor expectations. These results are influenced by a number of factors, including fluctuations in the price of green coffee, competition from existing or new competitors in our industry and changes in consumer preferences.
Quarterly fluctuations in our operating results as the result of these factors or for any other reason, could cause our stock price to decline. Accordingly, we believe that period-to-period comparisons of our historical or future operating results are not necessarily meaningful, and such comparisons should not be relied upon as indicators of future performance.
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.
For the fiscal year ended June 30, 2006, we had an operating loss of ($2,965,000). For the fiscal year ended June 30, 2005, we had an operating loss of ($6,583,000) and a net loss of ($5,427,000). We could suffer additional losses in future years and as a result our stock price could decline.
FUTURE FUNDING DEMANDS UNDER PENSION PLANS FOR CERTAIN UNION EMPLOYEES ARE UNKNOWN.
We participate in two multi-employer defined benefit plans for certain union employees. The management, and funding status and future viability of these plans is not known at this time. The nature of the contract with these plans allows for future funding demands that are outside our control or ability to estimate.
ERP
WE RELY ON A SINGLE THIRD PARTY SUPPLIER TO MANAGE OUR INTEGRATED ORACLE SYSTEM THAT IS INTEGRAL TO THE SUCCESS AND OPERATION OF OUR BUSINESS.
We rely on WTS, a company affiliated with Oracle, and its employees, in connection with the hosting of our integrated Management Information System. This System Conversion.
Duringis essential to our operations and currently includes all accounting and production software applications. By the end of fiscal 20032007, WTS is also expected to host our Route Sales application software. If WTS were to experience financial, operational, or quality assurance difficulties, or if there were any other disruption in our relationship with WTS, we might be unable to produce financial statements, fill replenishment orders for our branch warehouses, issue payroll checks, process payments to our vendors or bill customers. Any of these items could have a material adverse effect on the Company began a multiyear programCompany.
WE ARE DEPENDENT ON ENTERPRISE RESOURCE MANAGEMENT (“ERP”) SOFTWARE TO OPERATE OUR BUSINESS. SHOULD WE FAIL TO OPERATE EFFECTIVELY OR IF WE ENCOUNTER DIFFICULTIES INTEGRATING SYSTEMS OR SUFFER ILL-TIMED POWER OR COMMUNICATIONS FAILURES, THE RESULT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
We rely on complex software and hardware to update its
management informationinvoice our customers, produce customer statements, account for our inventory and manufacturing costs, fill branch inventory replenishment orders, pay our bills, pay our employees and produce our financial statements. We have in the past encountered, and in the future may encounter, software and hardware errors, system design errors and errors in the operation of our systems. This has provenresulted in and may in the future result in a number of adverse consequences, including: users being disconnected from systems and being unable to be a challenging
conversion.perform their job functions, delays in producing financial statements and other key management system information.
Reliance on such software also leaves us exposed to harmful software programs such as viruses that could disrupt our business and damage our network. It is possible that continuing conversion costs, potential
complications resulting from the conversion itself and system problems related
to oura security breach or inappropriate use of our network could expose us to the new softwarepossibility of system failure or other disruption. A security breach could have a material impactjeopardize security of confidential information and thereby expose the Company to potential legal liability.
THE COMPANY DEPENDS ON THE EXPERTISE OF KEY PERSONNEL. THE UNEXPECTED LOSS OF ONE OR MORE OF THESE KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR COMPETITIVE POSITION.
Our continued success largely depends on the efforts and abilities of our future
operating results.
Depth of management.executive officers and other key personnel. There is limited management depth in certain key positions throughout the Company, and theCompany. The unexpected loss of one or more of these key employees could have a material adverse effect on our operations and competitive position.
Purchasing activities.
The most important aspect
Our former Chairman and Chief Executive Officer and sole coffee buyer, Roy E. Farmer, died unexpectedly in January 2005. Guenter W. Berger, a long time member of our operationBoard of Directors and Vice President, Production was appointed interim CEO and in August 2005 assumed the title of Chairman, CEO and President. A new coffee buyer was hired in June 2005. In July 2006 we hired Roger M. Laverty III as President and COO. We continue to evaluate and recruit key personnel to enhance the depth of our management.
WE ARE SUBJECT TO RE-FUNDING OBLIGATIONS AND MAY ACQUIRE ADDITIONAL SHARES UNDER THE ESOP.
The Farmer Bros. Co. Employee Stock Ownership Plan was designed to help us attract and retain employees and to better align the efforts of our employees with the interests of our stockholders. To that
end, the Company has purchased 3,000,500 shares of Company stock for the ESOP to allocate to employees over the next 12 years. It is possible that additional shares could be acquired that might deplete the Company’s cash. We expect that the future re-funding liability of the existing shares in the ESOP will increase and require additional investment as the ESOP matures and individual holdings grow. When employees vested in the ESOP leave the Company, they have the right to secure“put” their shares to the Company for cash. This requires the Company to repurchase those shares at the current market value. Assuming all shares currently owned by the ESOP are fully distributed, the Company’s re-funding liability is approximately $64,700,000 based on the June 30, 2006 closing share price.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND MAY RESULT IN A LOWER TRADING PRICE FOR OUR STOCK THAN IF OWNERSHIP OF OUR STOCK WAS LESS CONCENTRATED.
As of September 1, 2006, members of the Farmer family or entities controlled by the Farmer family (such as trusts or business entities) as a consistent supplygroup beneficially owned approximately 40% of coffee. Maintainingour outstanding common stock. As a steady supplyresult, these stockholders, acting together, may be able to influence the outcome of green coffee is essential to keep
inventory levels lowstockholder votes, including votes concerning the election and sufficientremoval of directors and approval of significant corporate transactions. This level of concentrated ownership, along with the factors described in “Risk Factors—ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US,” may have the effect of delaying or preventing a change in the management or voting control of the Company. In addition, this significant concentration of share ownership may adversely affect the trading price for our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership.
ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
We have adopted a stockholder rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of our common stock to meet customer needs. To help
ensure future supplies, westockholders of record as of March 28, 2005. Each Right, when exercisable, will entitle the registered holder to purchase muchfrom the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $1.00 par value per share, at a purchase price of $112.50, subject to adjustment. The Rights expire on March 28, 2015, unless they are earlier redeemed, exchanged or terminated as provided in the Rights Plan. Because the Rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our coffee on forward contractsBoard of Directors, our Rights Plan could make it more difficult for deliverya third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition.
In addition, our Board of Directors has the authority to issue up to 500,000 shares of Preferred Stock (of which 200,000 shares have been designated as long as six monthsSeries A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. InThe issuance of preferred stock may have the eventeffect of non-
performancedelaying, deterring or preventing a change of control of Farmer Bros. without further action by the counter parties,stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including a classified board of directors, provisions eliminating the ability of stockholders to take action by written consent, and provisions limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Farmer Bros., which could
have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control or management.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), the SEC adopted rules requiring us, as a public company, to include a report of management on our internal controls over financial reporting in our annual report on Form 10-K and quarterly reports on Form 10-Q that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Compliance with SOX Section 404 has been a challenge for many companies. Our ability to continue to comply is uncertain as we expect that our internal controls will continue to evolve as our business activities change. If, during any year, our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with SOX Section 404. Failure to maintain an effective internal control environment could have a material adverse effect on our stock price. In addition, there can be no assurance that we will be able to remediate material weaknesses, if any, that may be identified in future periods.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX, new SEC and Public Accounting Oversight Board regulations and NASDAQ National Market rules, are creating uncertainty for public companies. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time related to compliance activities. Substantial costs have been incurred in fiscal 2006, and will continue to be incurred to comply with various of these mandates, including the engagement of separate public accounting firms to perform work that is now prohibited to be performed by our regular independent accounting firm, internal costs associated with documenting the adequacy of our internal controls over financial reporting and similar compliance activities, and increased costs of audit by our independent accounting firm. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our reputation may be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock. While Farmer Bros. believes that it has been at all times in material compliance with laws and regulations pertaining to the proper recording and reporting of our financial results, there can be no assurance that future regulations, implementing SOX and otherwise, will not have a material adverse impact on our reported results as compared with prior reporting periods.
Item 1.B. Unresolved Staff Comments
None.
Our largest and most significant facility consists of our roasting plant, warehouses and administrative offices in Torrance, California. This facility is our primary manufacturing facility and the distribution hub for our long haul trucking fleet. We stage our products in 101 small branch warehouses throughout our service area. These warehouses, taken together, represent a vital part of our business, but no individual warehouse is material to the group as a whole. Our warehouses vary in size from approximately 2,500 to 20,000 square feet. Approximately 40% of these warehouses are leased with a variety of expiration dates through 2011. We believe our existing plant and branch warehouses will continue to provide adequate capacity for the foreseeable future.
A complete list of properties and facilities operated by Farmer Bros. is attached hereto, and incorporated herein by reference, as Exhibit 99.1.
We are both defendant and plaintiff in various legal proceedings incidental to our business which are ordinary and routine. It is our opinion that the resolution of these lawsuits will not have a material impact on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal 2006 no matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise.
10
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We have one class of common stock which is traded on the NASDAQ National Market under the symbol “FARM.” The following table sets forth the high and low sales prices of the shares of Common Stock of the Company. Prices are as reported on the NASDAQ National Market and represent prices between dealers, without including retail mark-up, mark-down or commission, and do not necessarily represent actual trades.
|
| 2006 |
| 2005 |
| ||||||||||||||||||
|
| High |
| Low |
| Dividend |
| High |
| Low |
| Dividend |
| ||||||||||
1st Quarter |
| $ | 24.98 |
| $ | 19.50 |
|
| $ | 0.105 |
|
| $ | 27.55 |
| $ | 24.50 |
|
| $ | 0.100 |
|
|
2nd Quarter |
| $ | 22.87 |
| $ | 19.11 |
|
| $ | 0.105 |
|
| $ | 28.40 |
| $ | 24.03 |
|
| $ | 0.100 |
|
|
3rd Quarter |
| $ | 22.61 |
| $ | 19.31 |
|
| $ | 0.105 |
|
| $ | 29.65 |
| $ | 22.05 |
|
| $ | 0.100 |
|
|
4th Quarter |
| $ | 23.18 |
| $ | 19.72 |
|
| $ | 0.105 |
|
| $ | 24.49 |
| $ | 20.78 |
|
| $ | 0.100 |
|
|
There were approximately 3,937 holders of record on September 1, 2006. Holders of record is based upon the number of record holders and individual participants in security position listings.
Effective as of March 17, 2005, our Board of Directors approved a stockholder rights plan (the “Rights Plan”), pursuant to which the Company could be exposed to creditentered into a Rights Agreement dated March 17, 2005 (the “Rights Agreement”) with Wells Fargo Bank, N.A., as Rights Agent, and supply risk. The Company monitors the financial viabilityBoard declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of the counter
parties in an attemptCompany’s Common Stock to minimize this risk.
Entering into such future commitments leavesstockholders of record at the close of business on March 28, 2005. Each Right, when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $1.00 par value per share, at a purchase price of $112.50, subject to purchase
price risk. Various techniquesadjustment. The description and terms of the Rights are usedset forth in the Rights Plan. Initially, ownership of the Rights is evidenced by the certificates representing our Common Stock then outstanding, and no separate Rights Certificates, as defined in the Rights Plan, have been distributed. The Rights are not exercisable until the distribution date, as described in the Rights Agreement, and will expire on March 28, 2015, unless they are earlier redeemed, exchanged or terminated as provided in the Rights Plan. No rights have been exercised at this time.
Item 6. Selected Financial Data
|
| For the fiscal years ended June 30, |
| |||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||
|
| (In thousands, except per share data) |
| |||||||||||||
Net sales |
| $ | 207,453 |
| $ | 198,420 |
| $ | 193,589 |
| $ | 201,558 |
| $ | 205,857 |
|
(Loss) income from operations |
| $ | (2,965 | ) | $ | (6,583 | ) | $ | 3,763 |
| $ | 23,888 |
| $ | 38,210 |
|
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
| $ | 23,629 |
| $ | 30,569 |
|
Net income (loss) per common share(a) |
| $ | 0.34 |
| $ | (0.40 | ) | $ | 0.81 |
| $ | 1.30 |
| $ | 1.65 |
|
Total assets |
| $ | 317,237 |
| $ | 314,923 |
| $ | 317,871 |
| $ | 416,415 |
| $ | 417,524 |
|
Dividends per common share(a) |
| $ | 0.42 |
| $ | 0.40 |
| $ | 0.38 |
| $ | 0.36 |
| $ | 0.34 |
|
(a) All per share disclosures have been adjusted to hedgereflect the stock split that became effective on May 10, 2004.
11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis discusses the results of operations as reflected in the Company’s consolidated financial statements. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these purchases against
untoward price movement. Competitiveforward-looking statements as a result of many factors. The results of operations for the fiscal years ended June 30, 2006, 2005 and 2004 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in combination with the consolidated financial statements and the notes thereto included in Item 8 of this report and with the “Risk Factors” described in Item 1 of this report.
Overview
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventory valuation, including LIFO reserves, the allowance for doubtful accounts, deferred tax assets, liabilities relating to retirement benefits, liabilities resulting from self-insurance of our workers’ compensation liabilities, and litigation. We base our estimates on historical experience and other relevant factors make it difficultthat are believed to be reasonable under the circumstances.
While we believe that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, actual results may differ from these estimates, which could require the Company to "pass through" such price fluctuationmake adjustments to its customers. Therefore,
unpredictable price changes can have an immediate effect on operating results
that cannot be correctedthese estimates in future periods.
Investments
Our investments consist of investment grade marketable debt instruments issued by the short run.
FuturesU.S. Government and major U.S. and foreign corporations, equity securities, primarily preferred stock, and various derivative instruments, primarily exchange traded treasury futures and options, green coffee forward contracts and commodity purchase agreements. All derivatives not designated as hedges, and terminations of contracts
designated asaccounting hedges are marked to market and changes are recognized in current earnings. Open contractsThe fair value of derivative instruments is based upon broker quotes where possible.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to meet their obligations. Our ability to maintain a relatively small reserve is directly related to our ability to collect from our customers when our salespeople regularly interact with our customers in person. This method of operation has provided us with a historically low bad debt experience. There can be no assurance this will be the case in the future.
Inventories
Inventories are valued at the lower of cost or market and the costs of coffee and allied products are determined on the last in, first out (LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for on the first in, first out (FIFO) basis. We regularly evaluate these inventories to determine whether market conditions are correctly reflected in the recorded carrying value.
Self-Insurance Retention
We are self-insured for California workers’ compensation insurance and use historical analysis to determine and record the estimates of expected future expenses resulting from workers’ compensation claims. Additionally, we accrue for estimated losses not covered by insurance for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans
We have two defined benefit plans that provide retirement benefits for the majority of our employees (the balance of our employees are covered by union defined benefit plans). We obtain actuarial valuations for both plans and at present we discount the pension obligations using a 6.25% discount rate and we estimate an 8% return on plan assets. The performance of the stock market and other investments as well as the overall health of the economy can have a material effect on pension investment returns and these assumptions. A change in these assumptions could affect our operating results. Our retiree medical plan is not funded and shares the same discount rate as the defined benefit plans. We project an initial medical trend rate of 9% ultimately reducing to 5.5% in 6 years.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We make certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to our tax provision in future periods. Each fiscal quarter we reevaluate our tax provision and reconsider our estimates and our assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and believe that our short and long term cash requirements will be provided by internal sources. We do not expect to rely on banks or other third parties for our working capital needs.
Our working capital is composed of the following:
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Current assets |
| $ | 246,808 |
| $ | 245,219 |
| $ | 252,720 |
|
Current liabilities |
| $ | 16,578 |
| $ | 20,693 |
| $ | 21,189 |
|
Working capital |
| $ | 230,230 |
| $ | 224,526 |
| $ | 231,531 |
|
Capital expenditures |
| $ | 12,840 |
| $ | 8,832 |
| $ | 7,683 |
|
At June 30, 20042006 we had no major commitments for new capital expenditures.
Fiscal Years Ended June 30, 2006 and 2005
Overview
Management has a number of short and long term initiatives underway designed to strengthen the Company’s sales and distribution network and improve sales. Our efforts are addressedfocused primarily on enhancing our brand identification, expanding our product line and customer base and improving our sales and distribution efficiency. Our initiatives include:
· Promotion of our BRAND.
· We have designed and ordered new packaging for our entire product line. The updated designs employ the use of bright colors to better appeal to modern tastes. The roll-out for the new packaging is expected to begin in October 2006.
· We have designed, and are in the process of producing and distributing new point of sale marketing materials to help our customers increase sales of our products. Many of these materials were distributed to customers during fiscal 2006 and others will be distributed in connection with the new packaging roll-out.
· We are promoting our brand and product line in an expanded trade show schedule throughout our marketing area to highlight the “new spirit” our packaging represents.
· Introduction of New Products.
· During fiscal 2006 we developed a variety of new products designed to appeal to both new and existing customers, including horchata (a sweet rice drink flavored with cinnamon and almond), fruit smoothies (iced beverages), an expanded line of teas, liquid coffee and some seasonal products (pumpkin pie cappuccino). We believe these new products afford us with an opportunity to engage our customers and cross-sell other products and share ideas for future new products.
· Expansion of Customer Base.
· In an effort to expand our customer base we have created a National Accounts organization to solicit larger customers and national accounts. This group is currently comprised of 15 professionals who are working from our existing branch facilities to reach potential customers throughout the country.
· Improved Sales and Distribution Efficiency.
· In an effort to cut costs and improve our sales and distribution efficiency we have evaluated our branches, routes and sales staff responsibilities. In connection with these efforts we have reduced staffing and consolidated routes in certain areas, while increasing staffing in areas where we are experiencing growth.
· During fiscal 2007 we expect to implement new Route Sales application software to further enhance our ability to evaluate customer, product and route profitability.
Management continues to concentrate on improving our gross profit margins and controlling our selling and general and administrative expenses. Although we were able to maintain gross profit margins in fiscal 2006, as compared to fiscal 2005, inflationary pressures on the cost of our raw materials and packaging supplies remains a threat to our ability to maintain these margins in the future. Despite efforts to reduce operating costs during fiscal 2006, certain expenses are beyond our control, such as gasoline and diesel prices which directly impact our distribution costs. Moreover, during fiscal 2006 we also experienced
an increase of approximately $1,000,000 in compensation expenses associated with the cost of the National Accounts organization. We continue to evaluate all departments in an effort to eliminate unnecessary procedures and staff and align needed staff skills to match business requirements through re-training or new hires.
Comparative Information
Net sales in fiscal 2006 increased $9,033,000 or 5% to $207,453,000 from $198,420,000 in fiscal 2005, primarily because of higher sales prices. Programs to enhance sales began during fiscal 2005 and continue to be deployed as discussed above.
Cost of goods sold in fiscal 2006 increased to $84,910,000, or 41% of sales, as compared to $82,964,000, or 42% of sales, in fiscal 2005. Although we stabilized our margins in fiscal 2006 compared to fiscal 2005, the volatility of green coffee prices, higher prices on a variety of raw materials and product packaging and strong competition have restricted our ability to return to previous gross profit margins. We continue to seek alternative and competitive sources of raw materials, packaging supplies and other key cost components in an effort to improve our profit margins. There can be no assurance that such efforts will be successful.
The average closing price of green coffee nearby contract for each of the last three fiscal years, as compiled by the New York Board of Trade, is presented in the following Item 7A.
table.
Comparison of Average Periodic Green Coffee Prices
|
| Twelve months ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Average coffee price per pound |
| $ | 1.03 |
| $ | 0.97 |
| $ | 0.68 |
|
Change from prior year |
| 6 | % | 43 | % | 14 | % | |||
Selling, General and Administrative Expenses in fiscal 2006 increased $3,469,000 or 3% to $125,508,000 from $122,039,000 in fiscal 2005. This increase is primarily attributed to higher coffee brewing equipment costs largely associated with new products, higher gasoline and diesel costs and increased California workers’ compensation expense, offset by declines in self-insured employee medical costs, IT project consulting costs and SOX compliance consulting and auditing costs. Continuing development costs of our multi-year information systems project are currently capitalized. The new sales system implementation has been delayed and development costs associated with that project will begin depreciating in fiscal 2007.
Principal Changes in Selling, General and Administrative Expenses
|
| For year ended June 30, |
| ||||||
|
| 2006 |
| 2005 |
| ||||
|
| (In thousands) |
| ||||||
Coffee brewing equipment |
| $ | 11,376 |
|
| $ | 9,106 |
|
|
Self-insured employee medical costs |
| 6,883 |
|
| 6,334 |
|
| ||
Fuel costs |
| 6,943 |
|
| 5,638 |
|
| ||
Workers’ compensation costs |
| 3,028 |
|
| 1,495 |
|
| ||
IT project depreciation |
| 3,915 |
|
| 3,228 |
|
| ||
IT project consulting |
| 682 |
|
| 2,272 |
|
| ||
SOX compliance consulting/auditing costs |
| 430 |
|
| 1,100 |
|
| ||
Total other income (expense) in fiscal 2006 was $6,970,000 as compared to ($4,746,000) in fiscal 2005. This increase is primarily the result of (1) higher interest rates during fiscal 2006 and (2) the reduction of
losses associated with higher green coffee prices during the second quarter of fiscal 2005 which resulted in a decrease in the value of green coffee futures and options used by the Company to hedge against a decline in commodity prices. Other, net (expense) during fiscal 2005 consisted of net realized and unrealized coffee trading losses of ($12,992,000), offset by net gains on other investments.
As a result of the forgoing factors, net income for fiscal 2006 was $4,756,000 as compared to a net loss of ($5,427,000) in fiscal 2005. Net income per common share was $0.34 in fiscal 2006 as compared to a net loss per common share of ($0.40) in fiscal 2005.
Fiscal Years Ended June 30, 2005 and 2004
Net sales in fiscal 2005 increased $4,831,000 or 2% to $198,420,000 from $193,589,000 in fiscal 2004, primarily because of higher sales prices of roast coffee. During fiscal 2005 we initiated a number of programs intended to improve sales. In an effort to advance our image more clearly and aggressively with current and potential customers we redesigned our merchandising and point of sale materials and set an aggressive trade show schedule with a newly designed booth. We assembled a team of sales professionals drawn from the ranks of our route sales organization to solicit new large customer accounts. We developed some new products that we believe will appeal to both new and existing customers.
Cost of goods sold in fiscal 2005 increased 16% to $82,964,000 or 42% of sales, as compared to $71,405,000, or 37% of sales, in fiscal 2004. A volatile, sustained increase in green coffee prices in the second and third quarters of fiscal 2005 resulted in a decrease in profit margins on roast coffee during those periods. We attempt to pass on this cost increase to our customers through higher roast coffee prices, but sales price increases lag increases in green coffee costs, and our sales price increases did not take effect until June 2005. Additionally, volatile price increases cannot, because of competition and market conditions, always be passed on to our customers.
Selling, General and Administrative Expenses in fiscal 2005 increased 3% to $122,039,000 from $118,421,000 in fiscal 2004. This increase is primarily attributed to costs associated with the employee medical program, the cost of the ESOP, the project-related costs of our multi-year information systems project and consulting costs related to compliance with SOX Section 404 as summarized in the following table.
Principal Changes in Selling, General and Administrative Expenses
|
| June 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Employee medical costs |
| $ | 6,945 |
| $ | 6,091 |
|
ESOP |
| 7,163 |
| 6,298 |
| ||
IT project expenses |
| 3,035 |
| 3,400 |
| ||
IT project depreciation |
| 3,228 |
| 1,467 |
| ||
SOX compliance |
| 1,100 |
| 360 |
| ||
Another result of the dramatic increase in green coffee costs during fiscal 2005 was a realized loss on green coffee futures and options used by the Company to hedge against a decline in commodity prices. Total other (expense) was ($4,746,000) in fiscal 2005 as compared to Total other income of $12,219,000 in fiscal 2004. Other, net (expense) was ($10,887,000) for fiscal 2005 as compared to Other, net income of $6,305,000 for fiscal 2004.
Higher green coffee prices during fiscal 2005 resulted in a decrease in the value of green coffee futures and options used by the Company to hedge against a decline in commodity prices. Other, net
(expense) income during fiscal 2005 included realized coffee trading gains of $3,655,000 offset by realized coffee trading losses of ($16,764,000).
Rising interest rates resulted in increased interest income in fiscal 2005, but the January 2004 purchase of $111 million of Company stock from the Crowe family reduced the amount available for investment in fiscal 2005, as compared to fiscal 2004. In addition, Other, net income in fiscal 2004 included $5,778,000 of non-recurring income.
As a result of the forgoing factors the net loss for fiscal 2005 was ($5,427,000) as compared to net income $12,687,000 for fiscal 2004. Net loss per common share was ($0.40) in fiscal 2005 as compared to net income per common share of $0.81 in fiscal 2004.
Contractual obligations.
Obligations
The following table contains supplemental information regarding total contractual obligations as of June 30, 2004.
(In thousands) Less Than More Than
Total One Year 2-3 Years 4-5 Years 5 years
Operating lease obligations $1,711 $631 $828 $252 $ -
2006.
|
| Total |
| Less Than |
| 2-3 Years |
| 4-5 Years |
| More Than |
| ||||||||||||
|
| (In thousands) |
| ||||||||||||||||||||
Operating lease obligations |
| $ | 1,551 |
|
| $ | 739 |
|
|
| $ | 685 |
|
|
| $ | 127 |
|
|
| — |
|
|
Off-Balance Sheet Arrangements.
Arrangements
The Company has no so-called off-balance sheet arrangements.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market value risk arising from changes in interest rates on our securities portfolio. Our portfolio of investment grade money market instruments can include at any given time discount commercial paper, medium term notes, federal agency issues and treasury securities. As of June 30, 20042006, over 90% of these funds were invested in treasuryU.S. Treasury securities and more than 50%approximately 43% of these issues have maturities shorter than 11390 days. This portfolio'sportfolio’s interest rate risk is not hedged and its average maturity is approximately 9080 days. A 100 basis point move in the general level of interest rates would result in a change in the market value of the portfolio of approximately $1,200,000.
$1,150,000.
Our portfolio of preferred securities includes investments in derivatives that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and (a) enter into "short
positions"“short positions” in futures contracts on U.S. Treasury securities or (b) hold put options on such futures contracts in order to reduce the impact of certain interest rate changes on such preferred stocks. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes.
The following table demonstrates the impact of varying interest rate changes based on the preferred stock holdings, futures and options positions, and market yield and price relationships at June 30, 2004.2006. This table is predicated on an instantaneous change in the general level of interest rates and assumes predictable relationships between the prices of preferred securities holdings, the yields on U.S. Treasury securities and related futures and options.
The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred securitystock held, the slope of the Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options.
Interest Rate Changes
(In thousands) Market Value at June 30, 2004 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -150 basis points $63,010 $0 $63,010 $5,558
- -100 basis points 61,140 15 $61,155 3,702
Unchanged 56,020 1,432 $57,453 0
+100 basis points 50,787 6,417 $57,204 (249)
+150 basis points 48,269 8,802 $57,070 (382)
|
| Market Value at June 30, 2006 |
| Change in Market |
| ||||||||||||||||
|
| Preferred |
| Futures and |
| Total |
| Value of Total |
| ||||||||||||
Interest Rate Changes |
|
|
| Securities |
| Options |
| Portfolio |
| Portfolio |
| ||||||||||
|
| (In thousands) |
| ||||||||||||||||||
-150 basis points |
|
| $ | 68,248 |
|
|
| $ | 0 |
|
| $ | 68,248 |
|
| $ | 5,440 |
|
| ||
-100 basis points |
|
| $ | 66,355 |
|
|
| $ | 2 |
|
| $ | 66,357 |
|
| $ | 3,549 |
|
| ||
Unchanged |
|
| $ | 61,716 |
|
|
| $ | 1,092 |
|
| $ | 62,808 |
|
| $ | 0 |
|
| ||
+100 basis points |
|
| $ | 56,475 |
|
|
| $ | 5,880 |
|
| $ | 62,355 |
|
| $ | (453 | ) |
| ||
+150 basis points |
|
| $ | 53,907 |
|
|
| $ | 8,804 |
|
| $ | 62,711 |
|
| $ | (97 | ) |
| ||
We are exposed to commodity price risk arising from changes in the market price of green coffee. We price our inventory on the LIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers and we purchase exchange tradedsuppliers. We are subject to price risk resulting from the volatility of green coffee contracts. The
following table demonstratesprices. Volatile price increases cannot, because of competition and market conditions, always be passed on to our customers. From time to time the impactCompany will hold a mix of futures contracts and options to help hedge against volatile green coffee price decreases. Gains and losses on these derivative instruments are realized immediately in Other, net (expense) income.
On June 30, 2006 we had no open hedge derivative contracts, and our entire exposure to commodity risk was in the potential change of our inventory value resulting from changes in the market price of green coffee on inventory and green coffee contracts at June 30, 2004. It
assumes an immediate change in the price of green coffee, and the valuations
of coffee futures and relevant commodity purchase agreements at June 30, 2004.
Commodity Risk Disclosure
(In thousands)
Market Value
Coffee Futures & Change in Market Value
Coffee Cost Change Inventory Options Total Derivatives Inventory
-20% $11,020 $798 $11,818 $798 ($2,750)
unchanged 13,770 ($314) 13,456 0 0
20% 16,520 ($1,112) 15,408 ($798) $2,750
At June 30, 2004 the derivatives consisted mainly of commodity futures with
maturities shorter than three months.
coffee.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
18
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and Subsidiary (the 'Company') as of June 30, 20042006 and 2003,2005, and the related consolidated statements of income, stockholders'operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2004.2006. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmer Bros. Co. and Subsidiary at June 30, 20042006 and 2003,2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2004,2006, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Los Angeles, California
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Farmer Bros. Co. and Subsidiary’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 1, 2004
7, 2006 expressed an unqualified opinion thereon.
| |
Los Angeles, California | |
September 7, 2006 |
19
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars
(Dollars in thousands, except share and per share data)
June 30, 2004 June 30, 2003
ASSETS
Current assets:
Cash and cash equivalents $21,807 $18,986
Short term investments 176,903 274,444
Accounts and notes receivable, net 14,565 13,756
Inventories 35,579 34,702
Income tax receivable 408 2,878
Deferred income taxes 775 -
Prepaid expenses 2,683 1,851
Total current assets $252,720 $346,617
Property, plant and equipment, net 42,300 41,753
Notes receivable 143 193
Other assets 21,609 26,390
Deferred income taxes 1,099 1,462
Total assets $317,871 $416,415
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,589 $3,321
Accrued payroll expenses 6,999 7,362
Deferred income taxes - 976
Other 4,601 5,000
Total current liabilities $21,189 $16,659
Accrued postretirement benefits $26,984 $25,041
Other long term liabilities - 5,570
Total Liabilities $48,173 $47,270
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value;
authorized 25,000,000 shares and
16,075,080 issued and outstanding
at June 30, 2004; authorized
3,000,000 shares and 1,926,414
issued and outstanding at
June 30, 2003 $16,075 $1,926
Additional paid-in capital 32,248 18,798
Retained earnings 283,654 382,831
Unearned ESOP shares (61,542) (33,364)
Less accumulated comprehensive loss ( 737) (1,046)
Total stockholders' equity $269,698 $369,145
Total liabilities and
stockholders' equity $317,871 $416,415
|
| June 30, 2006 |
| June 30, 2005 |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| $ | 5,333 |
|
|
| $ | 9,814 |
|
|
Short term investments |
|
| 176,336 |
|
|
| 171,055 |
|
| ||
Accounts and notes receivable, net |
|
| 13,250 |
|
|
| 15,485 |
|
| ||
Inventories |
|
| 45,008 |
|
|
| 41,086 |
|
| ||
Income tax receivable |
|
| — |
|
|
| 4,064 |
|
| ||
Deferred income taxes |
|
| 3,300 |
|
|
| — |
|
| ||
Prepaid expenses |
|
| 3,581 |
|
|
| 3,715 |
|
| ||
Total current assets |
|
| $ | 246, 808 |
|
|
| $ | 245,219 |
|
|
Property, plant and equipment, net |
|
| 46,385 |
|
|
| 42,671 |
|
| ||
Other assets |
|
| 17,427 |
|
|
| 21,268 |
|
| ||
Deferred income taxes |
|
| 6,617 |
|
|
| 5,765 |
|
| ||
Total assets |
|
| $ | 317,237 |
|
|
| $ | 314,923 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||
Accounts payable |
|
| $ | 4,197 |
|
|
| $ | 7,852 |
|
|
Accrued payroll expenses |
|
| 6,235 |
|
|
| 7,590 |
|
| ||
Deferred income taxes |
|
| — |
|
|
| 321 |
|
| ||
Other |
|
| 6,146 |
|
|
| 4,930 |
|
| ||
Total current liabilities |
|
| $ | 16,578 |
|
|
| $ | 20,693 |
|
|
Accrued postretirement benefits |
|
| $ | 31,436 |
|
|
| $ | 29,344 |
|
|
Total liabilities |
|
| $ | 48,014 |
|
|
| $ | 50,037 |
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
| ||
Common stock, $1.00 par value, authorized 25,000,000 shares; 16,075,080 issued and outstanding |
|
| $ | 16,075 |
|
|
| $ | 16,075 |
|
|
Additional paid-in capital |
|
| 31,518 |
|
|
| 32,292 |
|
| ||
Retained earnings |
|
| 271,733 |
|
|
| 272,791 |
|
| ||
Unearned ESOP shares |
|
| (50,103 | ) |
|
| (55,415 | ) |
| ||
Less accumulated comprehensive loss |
|
| — |
|
|
| (857 | ) |
| ||
Total stockholders’ equity |
|
| $ | 269,223 |
|
|
| $ | 264,886 |
|
|
Total liabilities and stockholders’ equity |
|
| $ | 317,237 |
|
|
| $ | 314,923 |
|
|
The accompanying notes are an integral part of these financial statements.
20
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(DollarsOPERATIONS
(Dollars in thousands, except share and per share data)
2004 2003 2002
Net sales $193,589 $201,558 $205,857
Cost of goods sold 71,405 70,662 67,764
Gross profit 122,184 130,896 138,093
Selling expense 92,029 88,658 86,025
General and administrative expenses 26,392 18,350 13,858
Operating expenses 118,421 107,008 99,883
Income from operations 3,763 23,888 38,210
Other income:
Dividend income 3,396 3,246 3,198
Interest income 2,518 3,974 7,261
Other, net 6,305 6,463 691
Total other income 12,219 13,683 11,150
Income before taxes 15,982 37,571 49,360
Income taxes 3,295 13,942 18,791
Net income $12,687 $23,629 $30,569
Net income per common share $0.81 $1.30 $1.65
Weighted average shares outstanding 15,576,450 18,145,910 18,483,950
|
| Years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Net sales |
| $ | 207,453 |
| $ | 198,420 |
| $ | 193,589 |
|
Cost of goods sold |
| 84,910 |
| 82,964 |
| 71,405 |
| |||
Gross profit |
| $ | 122,543 |
| $ | 115,456 |
| $ | 122,184 |
|
Selling expense |
| 100,354 |
| 92,112 |
| 92,029 |
| |||
General and administrative expenses |
| 25,154 |
| 29,927 |
| 26,392 |
| |||
Operating expenses |
| $ | 125,508 |
| $ | 122,039 |
| $ | 118,421 |
|
(Loss) income from operations |
| $ | (2,965 | ) | $ | (6,583 | ) | $ | 3,763 |
|
Other income (expense): |
|
|
|
|
|
|
| |||
Dividend income |
| 3,597 |
| 3,420 |
| 3,396 |
| |||
Interest income |
| 4,445 |
| 2,721 |
| 2,518 |
| |||
Other, net (expense) income |
| (1,072 | ) | (10,887 | ) | 6,305 |
| |||
Total other income (expense) |
| $ | 6,970 |
| $ | (4,746 | ) | $ | 12,219 |
|
Income (loss) before taxes |
| 4,005 |
| (11,329 | ) | 15,982 |
| |||
Income tax (benefit) expense |
| (751 | ) | (5,902 | ) | 3,295 |
| |||
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
|
Net income (loss) per common share |
| $ | 0.34 |
| $ | (0.40 | ) | $ | 0.81 |
|
Weighted average shares outstanding |
| 13,890,609 |
| 13,653,420 |
| 15,576,450 |
| |||
The accompanying notes are an integral part of these financial statements.
21
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
(Dollars in thousands)
Years ended June 30,
2004 2003 2002
Cash flows from operating activities:
Net income $12,687 $23,629 $30,569
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 7,098 5,776 5,493
Deferred income taxes (1,536) 3,989 495
Gain on sales of assets (94) (498) (239)
ESOP compensation expense 5,516 4,269 2,529
Net gain on investments (706) (5,625) (51)
Change in assets and liabilities:
Short term investments (12,914) 16,721 (51,310)
Accounts and notes receivable (801) 224 1,220
Inventories (877) 2,659 (1,581)
Income tax receivable 2,470 (325) 438
Prepaid expenses and other assets 4,064 (1,128) (1,421)
Accounts payable 6,268 (1,506) (326)
Accrued payroll expenses
other liabilities (762) 930 (1,070)
Accrued postretirement benefits 2,285 1,904 1,926
Other long term liabilities (5,570) 84 594
Total adjustments 4,441 27,474 (43,303)
Net cash provided by (used in)
operating activities $17,128 $51,103 ($12,734)
Cash flows from investing activities:
Purchases of property, plant and equipment (7,683) (9,089) (5,039)
Proceeds from sales of property,
plant and equipment 132 630 307
Notes issued - - (35)
Notes repaid 42 55 2,640
Net cash used in investing activities ($7,509) ($8,404) ($2,127)
Cash flows from financing activities:
Dividends paid (5,621) (6,523) (6,278)
ESOP contributions (32,412) (24,237) (815)
Proceeds from sale of short
term investments 111,161
Purchase of capital stock (111,161)
Sale of capital stock 31,235
Net cash used in financing activities ($ 6,798) ($30,760) ($7,093)
Net increase (decrease) in cash
and cash equivalents $2,821 $11,939 ($21,954)
Cash and cash equivalents at beginning of year 18,986 7,047 29,001
Cash and cash equivalents at end of year $21,807 $18,986 $7,047
|
| Years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation |
| 8,963 |
| 8,396 |
| 7,098 |
| |||
Deferred income taxes |
| (5,001 | ) | (3,510 | ) | (1,536 | ) | |||
Gain on sales of assets |
| (396 | ) | (100 | ) | (94 | ) | |||
ESOP compensation expense |
| 4,538 |
| 6,171 |
| 5,516 |
| |||
Net loss (gain) on investments |
| 2,301 |
| 11,571 |
| (706 | ) | |||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Short term investments |
| (7,582 | ) | (5,723 | ) | (12,914 | ) | |||
Accounts and notes receivable |
| 2,235 |
| (777 | ) | (759 | ) | |||
Inventories |
| (3,922 | ) | (5,507 | ) | (877 | ) | |||
Income tax receivable |
| 4,064 |
| (3,656 | ) | 2,470 |
| |||
Prepaid expenses and other assets |
| 5,056 |
| (637 | ) | 4,064 |
| |||
Accounts payable |
| (3,655 | ) | (1,737 | ) | 6,268 |
| |||
Accrued payroll, expenses and other liabilities |
| (139 | ) | 920 |
| (762 | ) | |||
Accrued postretirement benefits |
| 2,396 |
| 2,126 |
| 2,285 |
| |||
Other long term liabilities |
| — |
| — |
| (5,570 | ) | |||
Total adjustments |
| $ | 8,858 |
| $ | 7,537 |
| $ | 4,483 |
|
Net cash provided by operating activities |
| $ | 13,614 |
| $ | 2,110 |
| $ | 17,170 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
| (12,840 | ) | (8,832 | ) | (7,683 | ) | |||
Proceeds from sales of property, plant and equipment |
| 559 |
| 165 |
| 132 |
| |||
Net cash used in investing activities |
| $ | (12,281 | ) | $ | (8,667 | ) | $ | (7,551 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Dividends paid |
| (5,814 | ) | (5,436 | ) | (5,621 | ) | |||
ESOP contributions |
| — |
| — |
| (32,412 | ) | |||
Proceeds from sale of short term investments |
| — |
| — |
| 111,161 |
| |||
Purchase of capital stock |
| — |
| — |
| (111,161 | ) | |||
Sale of capital stock |
| — |
| — |
| 31,235 |
| |||
Net cash used in financing activities |
| $ | (5,814 | ) | $ | (5,436 | ) | $ | (6,798 | ) |
Net (decrease) increase in cash and cash equivalents |
| $ | (4,481 | ) | $ | (11,993 | ) | $ | 2,821 |
|
Cash and cash equivalents at beginning of year |
| 9,814 |
| 21,807 |
| 18,986 |
| |||
Cash and cash equivalents at end of year |
| $ | 5,333 |
| $ | 9,814 |
| $ | 21,807 |
|
The accompanying notes are an integral part of these financial statements.
22
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(In
(In thousands, except share and per share data)
Other
Additional Unearned Comprehensive
Common Stock Paid-in Retained Esop Income
Stocks Amount Capital Earnings Stocks -Loss Total
Balance at June 30, 2001 1,926,414 $1,926 $16,629 $341,434 ($12,941) $0 $347,048
Comprehensive income
Net income 30,569 30,569
Total comprehensive income 30,569
Dividends ($3.40 per share) (6,278) (6,278)
ESOP contributions (815) (815)
ESOP compensation expense 998 1,531 2,529
Balance at June 30, 2002 1,926,414 $1,926 $17,627 $365,725 ($12,225) $0 $373,053
Comprehensive income
Net income 23,629 23,629
Minimum pension liability (1,046) (1,046)
Total comprehensive income 22,583
Dividends ($3.60 per share) (6,523) (6,523)
ESOP contributions (24,237) (24,237)
ESOP compensation expense 1,171 3,098 4,269
Balance at June 30, 2003 1,926,414 $1,926 $18,798 $382,831 ($33,364) ($1,046) $369,145
Comprehensive income
Net income 12,687 12,687
Minimum net pension liability 309 309
Total comprehensive income 12,996
Dividends ($3.60 per share) (5,621) (5,621)
ESOP contributions (32,412) (32,412)
ESOP compensation expense 1,282 4,234 5,516
Purchase capital stock (443,845) (444) (4,474) (106,243) (111,161)
Sale of capital stock 124,939 125 31,110 31,235
Stock split (ten-for-one) 14,467,572 14,468 (14,468) 0
Balance at June 30, 2004 16,075,080 $16,075 $32,248 $283,654 ($61,542) ($737) $269,698
|
| Common |
| Stock |
| Additional |
| Retained |
| Unearned |
| Other |
| Total |
| ||||||||||||||
Balance at June 30, 2003 |
| 1,926,414 |
|
| $ | 1,926 |
|
|
| $ | 18,798 |
|
| $ | 382,831 |
|
| $ | (33,364 | ) |
|
| $ | (1,046 | ) |
| $ | 369,145 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 12,687 |
|
|
|
|
|
|
|
|
| 12,687 |
| ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 309 |
|
| 309 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,996 |
| ||||||
Dividends ($3.80 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,621 | ) |
|
|
|
|
|
|
|
| (5,621 | ) | ||||||
ESOP contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (32,412 | ) |
|
|
|
|
| (32,412 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| 1,282 |
|
|
|
|
| 4,234 |
|
|
|
|
|
| 5,516 |
| ||||||
Purchase capital stock |
| (443,845 | ) |
| (444 | ) |
|
| (4,474 | ) |
| (106,243 | ) |
|
|
|
|
|
|
|
| (111,161 | ) | ||||||
Issue capital stock |
| 124,939 |
|
| 125 |
|
|
| 31,110 |
|
|
|
|
|
|
|
|
|
|
|
| 31,235 |
| ||||||
Stock dividend |
| 14,467,572 |
|
| 14,468 |
|
|
| (14,468 | ) |
|
|
|
|
|
|
|
|
|
|
| 0 |
| ||||||
Balance at June 30, 2004 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 32,248 |
|
| $ | 283,654 |
|
| $ | (61,542 | ) |
|
| $ | (737 | ) |
| $ | 269,698 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
| (5,427 | ) |
|
|
|
|
|
|
|
| (5,427 | ) | ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (120 | ) |
| (120 | ) | ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,547 |
| ||||||
Dividends ($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,436 | ) |
|
|
|
|
|
|
|
| (5,436 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| 44 |
|
|
|
|
| 6,127 |
|
|
|
|
|
| 6,171 |
| ||||||
Balance at June 30, 2005 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 32,292 |
|
| $ | 272,791 |
|
| $ | (55,415 | ) |
|
| $ | (857 | ) |
| $ | 264,886 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 4,756 |
|
|
|
|
|
|
|
|
| 4,756 |
| ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 857 |
|
| 857 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,613 |
| ||||||
Dividends ($0.42 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,814 | ) |
|
|
|
|
|
|
|
| (5,814 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| (774 | ) |
|
|
|
| 5,312 |
|
|
|
|
|
| 4,538 |
| ||||||
Balance at June 30, 2006 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 31,518 |
|
| $ | 271,733 |
|
| $ | (50,103 | ) |
|
| $ | 0 |
|
| $ | 269,223 |
|
The accompanying notes are an integral part of these financial statements.
23
Notes to Consolidated Financial Statements
Note 11. Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of roasting, packaging, and distributing coffee and allied products through direct sales to restaurants, hotels, hospitals, convenience stores and fast food outlets. The Company'sCompany’s products are distributed by its selling divisions from branch warehouses located in most large cities throughout the western United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary FBC Finance Company. All inter-company balances and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Investments
The Company'sCompany’s investments consist of marketable debt and equity securities, money market instruments and various derivative instruments, primarily exchange traded treasury futures and options, green coffee forward contracts and commodity purchase agreements. All such derivative instruments not designated as accounting hedges are marked to market and changes are recognized in current earnings. At June 30, 20042006 and 20032005 no derivative instruments were designated as accounting hedges. The fair value of derivative instruments is based upon broker quotes. The cost of investments sold is determined on the specific identification method. Dividend and interest income is accrued as earned.
Concentration of Credit Risk
At June 30, 2004,2006, the financial instruments which potentially expose the Company to concentrations of credit risk consist of cash in financial institutions (which exceeds federally insured limits), cash equivalents (principally commercial paper), short term investments, investments in the preferred stocks of other companies and trade receivables. Cash equivalents and short term investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 180 days. Other investments are in U.S. government securities. Investments in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer. Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company'sCompany’s customer base and their dispersion across many different geographic areas. The trade receivables are short term, and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or market. Costs of coffee and allied products are determined on the last in, first out (LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for on the first in, first out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation of buildings and facilities is computed using the straight-line method. All other assets are depreciated using the sum-of-the
years' digits and straight-line methods. The following useful lives are used:
Building and facilities 10 to 30 years
Machinery and equipment 3 to 5 years
Office furniture and equipment 5 years
Capitalized software 3 years
Building and facilities | 10 to 30 years | ||
Machinery and equipment | 3 to 5 years | ||
Office furniture and equipment | 5 years | ||
Capitalized software | 3 years |
When assets are sold or retired the asset and related depreciation allowance are eliminated from the records and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and betterments are capitalized.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. A valuation allowance is recorded, if necessary, to reduce deferred tax assets to an amount management believes is more likely than not to be realized.
Revenue Recognition
Products are sold and delivered to ourthe Company’s customers at their places of business by ourthe Company’s route sales employees. Revenue is recognized at the time ourthe Company’s sales representatives physically deliver products to customers and title passes.
Net Income (Loss) Per Share
Net income (loss) per share has been computed in accordance with SFAS Statement No. 128, "Earnings“Earnings per Share" (see Note 11),Share” excluding unallocated shares held by the Company'sCompany’s Employee Stock Ownership Plan (see Note 7). The Company has no dilutive shares for any of the three fiscal years in the period ended June 30, 2004.2006. Accordingly, the consolidated financial statements present only basic net income (loss) per share. A ten-for-one stock split in the form of a one-time stock dividend became effective May 10, 2004. All share and per share amounts used in calculating net income (loss) per share have been restated to reflect the split.
Employee Stock Ownership Plan ("ESOP"(“ESOP”)
The ESOP is accounted for in accordance with AICPA Statement of Position ("SOP"(“SOP”) 93-6. SOP 93-6 recognizes that the ESOP is a form of compensation. Compensation cost is based on the fair market value of shares released or deemed to be released for the period. Dividends on allocated shares retain the character of true dividends, but dividends on unallocated shares are considered compensation cost. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company'sCompany’s note receivable. The contra account will change as compensation is recognized. Repurchase liability is disclosed as the current value of allocated shares.
Long-lived
Long-Lived Assets
The
When there are indicators of impairment, the Company reviews the recoverability of its long-lived assets as required by Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 144, Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company has determined that no indicators of impairment of long-lived assets existed as of or during the fiscal year ended June 30, 2004.
2006.
Shipping and Handling Costs
The Company distributes its products directly to its customers and shipping and handling costs are recorded as Company selling expenses.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements. The duration of these agreements extend from 20052007 to 2006.
2010.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year presentation.
New pronouncements
Pronouncements
In January 2003,June 2006, the Financial Accounting Standards Board ("FASB"(“FASB”)issued Interpretation No. 46 ("48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109, Accounting for Income Taxes (“FIN 46"48”), Consolidation of Variable Interest Entities.to create a single model to address accounting for uncertainty in tax positions. FIN 4648 clarifies the application of Accounting Research Bulletin No. 51 and
applies immediatelyaccounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to any variable interest entities created after January 31,
2003 and to variable interest entities in which an interest is obtained after
that date. This interpretation was applicable to the Companymeet before being recognized in the quarter
ending September 30, 2003,financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for interests acquiredfiscal years beginning after December 15, 2006. The Company will adopt FIN 48 no later than July 1, 2007, as required. The cumulative effect of adopting FIN 48, if any, will be recorded in variable interest entitiesretained earnings and other accounts as applicable. The Company does not expect that the adoption of FIN 48 will have a significant impact on the Company’s financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to February 1, 2003. This interpretation required variable interest
entities to be consolidated ifdetermine either the equity investment at risk is not sufficient
to permit an entity to finance its activities without support from other
partiesperiod-specific effects or the equity investors lack specific characteristics. FIN 46 was
adopted bycumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company on September 30, 2003will adopt this Statement effective July 1, 2006, and diddoes not expect the adoption to have a material impact on the Company'sCompany’s financial position, or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, effective for
financial instruments entered intooperations or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS No. 150 was adopted by the Company on July 1, 2003
and did not have a material impact on the Company's financial position or
results of operations.
In December 2003 the FASB issued SFAS No. 132 (Revised), Employer's Disclosure
about Pensions and Other Postretirement Benefits. SFAS No. 132 (Revised)
retained disclosure requirements of the original SFAS No. 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. SFAS No. 132 (Revised) is effective for fiscal years
ending after December 15, 2003, except that certain disclosures are effective
for fiscal years ending after June 15, 2004. The adoption of the disclosure
provisions of SFAS No. 132 (Revised) did not have a material impact on the
Company's financial position or results of operations.
In May, 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which clarified and
superceded Staff Position No. 106-1 issued in January, 2004. Therefore, in
accordance with FASB Staff Position 106-2, the accumulated postretirement
benefit obligation and net postretirement health care costs included in the
consolidated financial statements do not reflect any amount associated with
the subsidy because the company is unable to conclude at this time whether the
benefits provided by the plan are actuarially equivalent to Medicare Part D
under the Act and accompanying notes do not reflect the effects of the Act on
the plan. In accordance with FSP No. 106-2, the Company will make these
evaluations and adopt the provisions during the year ending June 30, 2005.
flows.
Note 22. Investments and Derivative Instruments
The Company purchases various derivative instruments as investments or to create economic hedges of its interest rate risk and commodity price risk. At June 30, 20042006 and 2003,2005, derivative instruments are not designated as accounting hedges as defined by SFAS No. 133. The fair value of derivative instruments is based upon broker quotes. The Company records unrealized gains and losses on trading securities and changes in the market value of certain coffee contracts meeting the definition of derivatives in other income and expense.
Investments, consisting of marketable debt and equity securities and money market instruments, are held for trading purposes and are stated at fair value.
Investments at June 30, are as follows:
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Trading securities at fair value |
|
|
|
|
| ||
U.S. Treasury Obligations |
| $ | 113,502 |
| $ | 109,134 |
|
Preferred Stock |
| 61,716 |
| 61,660 |
| ||
Futures, options and other derivatives |
| 1,092 |
| 239 |
| ||
Other |
| 26 |
| 22 |
| ||
|
| $ | 176,336 |
| $ | 171,055 |
|
Gains and losses, both realized and unrealized, are included in other income and expense. InvestmentsGross realized gains/losses at June 30, are as follows:
(In thousands)
2004 2003
Trading securities at fair value
U.S. Treasury Obligations $119,528 $220,057
Preferred Stock 56,037 53,897
Futures, options and other derivatives 1,338 490
$176,903 $274,444
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Gains |
| $ | 5,071 |
| $ | 5,599 |
| $ | 12,259 |
|
Losses |
| $ | (1,660 | ) | $ | (21,112 | ) | $ | (6,955 | ) |
Note 33. Allowance for Doubtful Accounts
(In thousands)
2004 2003
Balance
Doubtful accounts at beginning of year $345 $345
Additions 181 356
Deductions (181) (356)
Balance at end of year $345 $345
Note 4 Inventories
(In thousands) June 30, 2004
Processed Unprocessed Total
Coffee $3,034 $10,736 $13,770
Allied products 11,800 3,665 15,465
Coffee brewing equipment 2,341 4,003 6,344
$17,175 $18,404 $35,579
June 30, 2003
Processed Unprocessed Total
Coffee $3,853 $9,155 $13,008
Allied products 11,776 4,213 15,989
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,702
are as follows:
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Balance at beginning of year |
| $ | 310 |
| $ | 345 |
|
Additions |
| 107 |
| 194 |
| ||
Deductions |
| (152 | ) | (229 | ) | ||
Balance at end of year |
| $ | 265 |
| $ | 310 |
|
June 30, 2006 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
|
| (In thousands) |
| |||||||||||||
Coffee |
|
| $ | 4,949 |
|
|
| $ | 12,735 |
|
| $ | 17,684 |
| ||
Allied products |
|
| 15,556 |
|
|
| 4,487 |
|
| 20,043 |
| |||||
Coffee brewing equipment |
|
| 1,528 |
|
|
| 5,753 |
|
| 7,281 |
| |||||
|
|
| $ | 22,033 |
|
|
| $ | 22,975 |
|
| $ | 45,008 |
| ||
June 30, 2005 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
Coffee |
|
| $ | 4,888 |
|
|
| $ | 12,568 |
|
| $ | 17,456 |
| ||
Allied products |
|
| 12,860 |
|
|
| 5,478 |
|
| 18,338 |
| |||||
Coffee brewing equipment |
|
| 2,081 |
|
|
| 3,211 |
|
| 5,292 |
| |||||
|
|
| $ | 19,829 |
|
|
| $ | 21,257 |
|
| $ | 41,086 |
| ||
Current cost of coffee and allied products inventories is greater than the LIFO cost by approximately $2,427,000$18,750,000 and $122,000$16,506,000 as of June 30, 20042006 and 2003,2005, respectively.
The change in the Company'sCompany’s green coffee and allied product inventories during fiscal 2004, 2003,2006, 2005, and 20022004 resulted in LIFO (increments)/decrements which had the effect of (decreasing)/increasing (loss)/income before taxes for those years by $(499,000)($971,000), $64,000,($1,747,000) and $207,000,($499,000), respectively.
Note 55. Property, Plant and Equipment
(In thousands)
2004 2003
Buildings and facilities $41,179 $40,907
Machinery and equipment 48,945 48,969
Capitalized software costs 9,016 3,934
Office furniture and equipment 5,912 5,845
$105,052 $99,655
Accumulated depreciation (68,899) (63,851)
Land 6,147 5,949
Total property plant and equipment $42,300 $41,753
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Buildings and facilities |
| $ | 47,561 |
| $ | 42,757 |
|
Machinery and equipment |
| 50,375 |
| 49,642 |
| ||
Capitalized software costs |
| 14,318 |
| 12,689 |
| ||
Office furniture and equipment |
| 6,824 |
| 6,301 |
| ||
|
| $ | 119,078 |
| $ | 111,389 |
|
Accumulated depreciation |
| (79,166 | ) | (74,865 | ) | ||
Land |
| 6,473 |
| 6,147 |
| ||
Total property plant and equipment |
| $ | 46,385 |
| $ | 42,671 |
|
Maintenance and repairs charged to expense for the years ended June 30, 2006, 2005 and 2004 2003,were $12,112,000, $10,719,000 and 2002 were $11,151,000, $11,022,000 and $11,202,000, respectively.
Note 66. Employee Benefit Plans
The Company provides pension plans for most full time employees. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. Retirees are also eligible for medical and life insurance benefits.
Union Pension Plans
The Company contributes to two multi-employer defined benefit plans for certain union employees. The contributions to these multi-employer pension plans were approximately $2,114,000, $2,104,000$2,400,000, $2,278,000 and $2,183,000$2,114,000 for the years ended June 30, 2006, 2005 and 2004, 2003 and 2002, respectively.
Company Pension Plans
The Company has a defined benefit plan for all employees not covered under a collective bargaining agreement (Farmer Bros. Co. Plan) and defined benefit pension plan (Brewmatic Co. Plan) for certain hourly employees covered under a collective bargaining agreement. All assets and benefit obligations were determined using a measurement date of June 30.30, 2006.
28
Disclosure for the Company Pension Plans
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Change in benefit obligation |
|
|
|
|
| ||
Benefit obligation at the beginning of the year |
| $ | 86,841 |
| $ | 69,516 |
|
Service cost |
| 2,815 |
| 2,117 |
| ||
Interest cost |
| 4,510 |
| 4,284 |
| ||
Plan participants contributions |
| 235 |
| 189 |
| ||
Amendments |
| 0 |
| 0 |
| ||
Actuarial (gain)/loss |
| (9,653 | ) | 14,358 |
| ||
Benefits paid |
| (3,397 | ) | (3,623 | ) | ||
Benefit obligation at the end of the year |
| $ | 81,351 |
| $ | 86,841 |
|
Change in plan assets |
|
|
|
|
| ||
Fair value in plan assets at the beginning of the year |
| $ | 84,457 |
| $ | 79,387 |
|
Actual return on plan assets |
| 7,337 |
| 8,484 |
| ||
Employer contributions |
| 24 |
| 20 |
| ||
Plan participants contributions |
| 235 |
| 189 |
| ||
Benefits paid |
| (3,397 | ) | (3,623 | ) | ||
Fair value in plan assets at the end of the year |
| $ | 88,656 |
| $ | 84,457 |
|
Funded status |
| $ | 7,305 |
| $ | (2,385 | ) |
Unrecognized net asset |
| 0 |
| 0 |
| ||
Unrecognized actuarial loss |
| 9,321 |
| 20,692 |
| ||
Unrecognized prior service cost |
| 302 |
| 366 |
| ||
Net amount recognized |
| $ | 16,928 |
| $ | 18,673 |
|
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Amounts recognized in the consolidated balance sheet |
|
|
|
|
| ||
Prepaid benefit cost |
| $ | 16,928 |
| $ | 17,291 |
|
Accrued benefit liability |
| — |
| (304 | ) | ||
Intangible asset |
| — |
| 301 |
| ||
Accumulated other comprehensive income |
| — |
| 1,385 |
| ||
Net amount recognized |
| $ | 16,928 |
| $ | 18,673 |
|
The accumulated benefit obligation for the Farmer Bros. Co. Plan Assumptionswas $71,896,000 and $74,826,000 as of June 30, 2006 and June 30, 2005, respectively. The following weighted averageaccumulated benefit obligation for the Brewmatic Co. Plan was $3,457,000 and $3,888,000 as of June 30, 2006 and June 30, 2005, respectively.
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated benefit obligation |
| $ | 75,144 |
| $ | 78,714 |
|
Components of net periodic benefit cost |
|
|
|
|
| ||
Service cost |
| $ | 2,814 |
| $ | 2,117 |
|
Interest cost |
| $ | 4,510 |
| $ | 4,284 |
|
Expected return on plan assets |
| $ | (6,624 | ) | $ | (6,238 | ) |
Amortization of prior service cost |
| $ | 63 |
| $ | 184 |
|
Amortization of net (gain)/loss |
| $ | 1,006 |
| $ | 70 |
|
Net periodic benefit cost |
| $ | 1,769 |
| $ | 418 |
|
Estimated future benefit payments for years ended June 30,
|
| (In thousands) |
| |||
2007 |
|
| $ | 3,750 |
|
|
2008 |
|
| $ | 3,940 |
|
|
2009 |
|
| $ | 4,120 |
|
|
2010 |
|
| $ | 4,320 |
|
|
2011 |
|
| $ | 4,630 |
|
|
years 2012 - 2016 |
|
| $ | 28,420 |
|
|
These amounts are based on current data and assumptions were usedand reflect expected future service, as appropriate.
The Company expects to determinemake no contributions to the benefit
obligations andFarmer Bros. Co. Plan in fiscal 2007, but expects to contribute approximately $25,000 to the net periodic benefit cost.
Brewmatic Co. Plan in fiscal 2007.
Assumptions: |
|
|
|
|
|
Weighted average assumptions used to determine benefit obligations at June 30 |
|
|
|
|
|
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
| 3.50 | % | 3.50 | % |
Weighted average assumptions used to determine net periodic benefit cost for years ended June 30 |
|
|
|
|
|
|
| 2006 |
| 2005 |
|
Discount rate |
| 5.30 | % | 6.30 | % |
Rate of return on assets |
| 8.00 | % | 8.00 | % |
Rate of compensation increase |
| 3.50 | % | 3.50 | % |
Assumptions:
Weighted average assumptions used to determine benefit obligationobligations at June 30
2004 2003
Discount rate 6.30% 5.60%
Rate of compensation increase 3.50% 3.50%
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
| N/A |
| N/A |
|
Weighted average assumptions used to determine net periodic benefit cost for the years ended June 30
2004 2003
Discount rate 5.60% 7.20%
Rate
|
| 2006 |
| 2005 |
|
Discount rate |
| 5.30 | % | 6.30 | % |
Rate of return on assets |
| 8.00 | % | 8.00 | % |
Rate of compensation increase |
| N/A |
| N/A |
|
Information for pension plans with an accumulated benefit obligation in excess of return onplan assets 8.00% 8.00%
Rate of compensation increase 3.50% 3.50%
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Projected benefit obligation |
| $ | 3,457 |
| $ | 3,888 |
|
Accumulated benefit obligation |
| $ | 3,457 |
| $ | 3,888 |
|
Fair value of plan assets |
| $ | 3,697 |
| $ | 3,583 |
|
(Decrease) increase in minimum liability included in other comprehensive income |
| $ | (1,385 | ) | $ | 181 |
|
To develop the expected long term rate of return on asset assumption the Company considers the current level of returns on long term bonds and equities, the level of risk associated with each asset class and the expectations for future returns of each asset class. The long-term return on asset assumption for our plans is 8% for the years ended June 30, 20042006 and 2003.
Change in Benefit Obligation
(In thousands)
2004 2003
Benefit obligation at
the beginning of the year $71,853 $55,116
Service cost 2,375 1,708
Interest cost 3,954 3,886
Plan participants contributions 191 180
Actuarial (gain) loss ( 5,961) 13,797
Benefits paid ( 2,896) ( 2,834)
Benefit obligation at
the end of the year $69,516 $71,853
Change in 2005.
Plan Assets
(In thousands)
2004 2003
Fair value in plan assets at
the beginning of the year $69,247 $75,552
Actual return on plan assets 12,825 ( 3,674)
Company contributions 20 23
Plan participants contributions 191 180
Benefit paid ( 2,896) ( 2,834)
Fair value in plan assets at
the end of the year $79,387 $69,247
Funded Status - Unrecognized Components
2004 2003
Funding surplus (shortage) $9,871 ($2,606)
Unrecognized actuarial (gain)/loss 8,650 23,330
Unrecognized prior service cost 550 800
Net amount recognized $19,071 $21,524
Funded Status - Amounts Recognized on Balance Sheet
(In thousands)
2004 2003
Prepaid pension cost $17,576 $19,854
Accrued benefit liability ( 69) ( 411)
Intangible asset 360 420
Accumulated other comprehensive income 1,204 1,661
Net amount recognized $19,071 $21,524
Components of Net Periodic Benefit Cost
(In thousands)
Pension Benefits
2004 2003 2002
Service cost $2,375 $1,708 $1,527
Interest cost $3,954 $3,886 $3,684
Expected return on Plan assets ($5,448) ($5,965) ($6,267)
Amortization of the unrecognized
transition asset $0 ($657) ($657)
Amortization of net (gain) loss $1,343 $18 ($269)
Amortization of prior service cost $250 $262 $239
Net periodic benefit cost $2,474 ($748) ($1,743)
Additional Information 6/30/2004 6/30/2003
Increase (decrease) in minimum liability
included in other comprehensive income (457) 1,661
Cash Flows
(In thousands)
Contributions expected to be made to the
plans during 2005 $20
Estimated Future Benefit Payments
(In thousands)
2005 $3,022
2006 $3,153
2007 $3,463
2008 $3,770
2009 $3,982
years 2010-2014 $22,978
Information for pension plans with an accumulated benefit obligation in excess
of plan assets is as follows.
(In thousands)
2004 2003
Projected benefit obligation $3,503 $3,689
Accumulated benefit obligation $3,503 $3,608
Fair value of plan assets $3,434 $3,197
The accumulated benefit obligation for all defined pension plans was $63.5
million and $65.1 million at June 30, 2004 and 2003 respectively.
Plan Assets
Assets are allocated between equity securities and debt securities. The
Company seeks to produce a stable return on well diversified investments over
the long term in line with reasonable investment risk. Allocations
historically have been 60-80 percent equities, 20-40 percent debt; the plans
are not invested in real estate and other investments are not significant.
The tables below detail assets by category for the Company'sCompany’s pension plans.
Percent of Plan Assets
Farmer Bros.
|
| Farmer Bros. Plan |
| Brewmatic Plan |
| ||||||||||||||
Asset Categories |
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Equity securities |
|
| 69 | % |
|
| 86 | % |
|
| 69 | % |
|
| 90 | % |
| ||
Debt securities |
|
| 22 | % |
|
| 14 | % |
|
| 22 | % |
|
| 10 | % |
| ||
Real estate |
|
| 9 | % |
|
| 0 | % |
|
| 9 | % |
|
| 0 | % |
| ||
|
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
| ||
Description of Investment Policy
Our investment strategy for employee benefit plans is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the
specific needs of each plan. The core asset allocation utilizes multiple investment managers in order to maximize the plan’s return while minimizing risk.
2006 | |||
Equity securities | 67.5 | % | |
Debt securities | 24.0 | % | |
Real estate | 8.5 | % | |
Total | 100.0 | % |
The Company also has defined contribution plans for all eligible employees. No Company contributions have been made nor are any required to be made to these defined contribution plans.
The Company sponsors defined benefit postretirement medical and dental plans that cover non-union employees and retirees, and certain union locals. The plan is contributory and retiree contributions are fixed at a current level. The plan is not funded.
The following weighted average assumptions were used to determine the benefit obligations and the net periodic benefit cost.
Weighted average assumptions used to determine benefit obligation at June 30,
2004 2003
Discount rate 6.30% 5.60%
Initial medical rate trend 10.00% 10.00%
Ultimate medical trend rate 5.50% 5.50%
Number of years from initial
to ultimate trend rate 6 6
Initial dental/vision trend rate 7.00% 7.00%
Ultimate dental/vision trend rate 5.50% 5.50%
Number of years from initial
to ultimate trend rate 6 6
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
|
|
|
|
|
Initial medical rate trend |
| 9.00 | % | 10.00 | % |
Ultimate medical trend rate |
| 5.50 | % | 5.50 | % |
Number of years from initial to ultimate trend rate |
| 6 |
| 6 |
|
Initial dental/vision trend rate |
| 6.50 | % | 7.00 | % |
Ultimate dental/vision trend rate |
| 5.50 | % | 5.50 | % |
Reconciliation of funded status.
2004 2003
Accumulated post retirement
benefit obligation
Actives not eligible to retire $9,320 $8,857
Actives eligible to retire 8,275 8,403
Retirees 11,995 13,462
Total
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated post retirement benefit obligation (“APBO”) |
|
|
|
|
| ||
Actives not eligible to rehire |
| $ | (10,625 | ) | $ | (12,887 | ) |
Actives eligible to rehire |
| (7,269 | ) | (9,230 | ) | ||
Retirees |
| (11,955 | ) | (11,539 | ) | ||
Total APBO* |
| $ | (29,849 | ) | $ | (33,656 | ) |
Fair market value of assets |
| $ | 0 |
| $ | 0 |
|
Funded status |
| $ | (29,849 | ) | $ | (33,656 | ) |
Unrecognized transition obligation |
| 0 |
| 0 |
| ||
Unrecognized prior service cost |
| 7,380 |
| 1,046 |
| ||
Unrecognized cumulative net loss |
| (8,967 | ) | 3,570 |
| ||
Accrued post retirement benefit cost as of June 30 |
| $ | (31,436 | ) | $ | (29,041 | ) |
Retiree medical claims paid |
| $ | 1,214 |
| $ | 1,012 |
|
* The APBO $29,590 $30,722
Fair market valuereflects the recognition of assets $0 $0
Funded status ($29,590) ($30,722)
Unrecognized transition obligation
Unrecognized prior service cost 1,228 1,410
Unrecognized cumulative
net (gain) or loss 1,446 4,682
(Accrued)/prepaid post retirement
benefit costan estimate of the subsidy available under Medicare Part D in accordance with FASB Staff Position No. FAS 106-2 (“FSP FAS 106-2”). This change decreased the APBO by $2,132,000 as of June 30, ($26,915) ($24,630)
Retiree medical claims paid $916 $755
The2005.
SFAS No. 106, as amended by SFAS No. 132, also requires the disclosure of the effects of a 1% increase orand decrease in the health care inflation trend assumption on the accumulated postretirement benefit obligation and net periodic service and interest costcost. These results are shown below.
|
| Plan Year |
| Effect of 1% |
| |||||||||
|
| Results |
| Increase |
| Decrease |
| |||||||
|
| (In thousands) |
| |||||||||||
Accumulated postretirement benefit obligation as of June 30, 2006 |
|
| $ | 29,849 |
|
|
| $ | 2,510 |
|
| $ | (2,105 | ) |
Service cost for plan year ended June 30, 2006 |
|
| $ | 1,269 |
|
|
| $ | 177 |
|
| $ | (137 | ) |
Interest for plan year ended June 30, 2006 |
|
| $ | 1,650 |
|
|
| $ | 145 |
|
| $ | (120 | ) |
Presented below is shown below.
Change in Inflation Trend
Plan Year Effect of 1%
Results Increase Decrease
Accumulated postretirement benefit
obligation as of June 30, 2004 $29,590 $3,172 ($2,535)
Service Cost for plan year $1,231 $309 ($234)
Interest for plan year $1,681 $251 ($199)
Thethe change in the accumulated postretirement benefit obligation from the prior year is as follows.
2004 2003
Accumulated postretirement benefit
obligation beginning of year $30,722 $24,335
Service cost 1,231 765
Interest cost 1,681 1,712
Plan participants' contributions 150 0
Actuarial (gain) or loss ( 3,128) 4,665
Benefits paid ( 1,066) (755)
Accumulated postretirement benefit
obligation as of end of year $29,590 $30,722
year.
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated postretirement benefit obligation beginning of year |
| $ | 33,656 |
| $ | 29,590 |
|
Service cost |
| 1,269 |
| 1,140 |
| ||
Interest cost |
| 1,651 |
| 1,815 |
| ||
Actuarial loss or (gain) |
| (12,688 | ) | 4,255 |
| ||
Benefits paid |
| (1,214 | ) | (1,012 | ) | ||
Plan change |
| 7,175 |
| — |
| ||
Change due to Medicare Part D subsidy* |
| — |
| (2,132 | ) | ||
Accumulated postretirement benefit obligation as of end of year |
| $ | 29,849 |
| $ | 33,656 |
|
* Recognized in accordance with FSP FAS 106-2.
Presented below is the change in the fair value of assets from the prior year.
2004 2003
Fair value
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Fair value of plan assets at the beginning of the year |
| $ | 0 |
| $ | 0 |
|
Actual return on plan assets |
| 0 |
| 0 |
| ||
Company contributions |
| 1,214 |
| 1,012 |
| ||
Plan participants contributions |
| 253 |
| 216 |
| ||
Benefit paid |
| (1,467 | ) | (1,228 | ) | ||
Fair value of plan assets at the end of the year |
| $ | 0 |
| $ | 0 |
|
Presented below is a table of projected benefit payments from the plan, assets at
the beginningnet of the year $0 $0
Actual return on plan assets 0 0
Company contributions 916 755
Plan participants' contributions 150 132
Benefits paid ( 1,066) ( 887)
Fair valueexpected retiree contributions.
Years ended June 30, |
|
|
| With Medicare |
| Without Medicare |
| Medicare |
| |||||||||
|
| (In thousands) |
| |||||||||||||||
2007 |
|
| $ | 1,592 |
|
|
| $ | 1,689 |
|
|
| $ | 97 |
|
| ||
2008 |
|
| $ | 1,774 |
|
|
| $ | 1,884 |
|
|
| $ | 110 |
|
| ||
2009 |
|
| $ | 1,918 |
|
|
| $ | 2,042 |
|
|
| $ | 124 |
|
| ||
2010 |
|
| $ | 2,125 |
|
|
| $ | 2,259 |
|
|
| $ | 133 |
|
| ||
2011 |
|
| $ | 2,205 |
|
|
| $ | 2,350 |
|
|
| $ | 145 |
|
| ||
2012-2016 |
|
| $ | 12,808 |
|
|
| $ | 13,633 |
|
|
| $ | 825 |
|
| ||
Expected 2007 benefit payments (net of plan assets at
the end of the year $0 $0
Components of net periodic benefit costs
2004 2003 2002
Service cost $1,231 $765 $670
Interest cost 1,681 1,712 1,721
Expected return on Plan assets - - -
Actuarial (gain)/loss - - -
Amortization of the unrecognized
transition asset 107 - -
Recognized actuarial loss - - -
Amortization of prior service cost 182 182 286
Net periodic benefit cost $3,201 $2,659 $2,677
Cash Flows
(In thousands)
Contributions expected to be made to the
plans during 2005 $1,561
Estimated Future Benefit Payments
(In thousands)
2005 $1,561
2006 $1,770
2007 $1,976
2008 $2,164
2009 $2,319
years 2010-2014 $11,558
Defined Contribution Plans
The Company also has defined contribution plans for all eligible employees.
No Company contributions have been made nor are required to be made to these
defined contribution plans.
retiree contributions): $1,458,000.
Note 7. Employee Stock Ownership Plan
The Farmer Bros. Co. Employee Stock Ownership Plan (ESOP) was established in 2000 to provide benefits to all employees. The plan is a leveraged ESOP in which Company is the lender. The loan will be repaid from the Company'sCompany’s discretionary plan contributions over a fifteen year term with a variable rate of interest, 2.52%6.85% at June 30, 2004.
at the years ended June 30,
2004 2003 2002
Loan amount (in thousands) $64,567 $24,237 $815
Shares purchased 1,286,430 778,500 38,000
2006.
|
| As of and for the years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Loan amount (in thousands) |
| $ | 54,441 |
| $ | 59,242 |
| $ | 64,567 |
|
Shares purchased |
| — |
| — |
| 1,286,430 |
| |||
Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
The Company reports compensation expense equal to the fair market price of shares committed to be released to employees in the period in which they are committed. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-
equitycontra-equity account "Unearned“Unearned ESOP Shares"Shares” and are excluded from earnings per share calculations.
During the fiscal years ended June 30, 2004, 20032006, 2005 and 20022004 the Company charged $4,234,000, $3,098,000$5,312,000, $6,127,000 and $1,531,000,$4,234,000 to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares, which was $1,282,000, $1,171,000($774,000) , $44,000 and $998,000$1,282,000 for the years ended June 30, 2004, 20032006, 2005 and 2002,2004, respectively, is recorded as additional paid inpaid-in capital.
June 30,
2004 2003
Allocated shares 400,110 255,950
Committed to be released shares 106,140 71,700
Unallocated shares 2,494,250 1,387,180
Total ESOP shares 3,000,500 1,174,830
Fair value of ESOP shares (In thousands) $75,013 $58,181
Re-funding liability of ESOP shares is approximately $10 million.
|
| June 30, |
| ||
|
| 2006 |
| 2005 |
|
Allocated shares |
| 846,737 |
| 636,572 |
|
Committed to be released shares |
| 119,440 |
| 119,434 |
|
Unallocated shares |
| 2,019,839 |
| 2,242,671 |
|
Total ESOP shares |
| 2,986,016 |
| 2,998,677 |
|
|
| (In thousands) |
| ||||
Fair value of ESOP shares |
| $ | 64,737 |
| $ | 66,751 |
|
The current and deferred components of the provision for income taxes consist of the following:
June 30,
(In thousands) 2004 2003 2002
Current: Federal $4,753 $8,030 $15,367
State 78 1,923 2,929
$4,831 $9,953 $18,296
Deferred: Federal ($1,402) $3,775 $434
State ( 134) 214 61
( 1,536) 3,989 495
$ 3,295 $13,942 $18,791
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Current federal |
| $ | 3,124 |
| $ | (1,703 | ) | $ | 4,753 |
|
Current state |
| 1,126 |
| (689 | ) | 78 |
| |||
Total current provision |
| $ | 4,250 |
| $ | (2,392 | ) | $ | 4,831 |
|
Deferred federal |
| $ | (4,338 | ) | $ | (1,165 | ) | $ | (1,402 | ) |
Deferred state |
| (663 | ) | (2,345 | ) | (134 | ) | |||
Total deferred provision |
| $ | (5,001 | ) | $ | (3,510 | ) | $ | (1,536 | ) |
Total tax provision |
| $ | (751 | ) | $ | (5,902 | ) | $ | 3,295 |
|
A reconciliation of the provision for income taxes to the statutory federal income tax expense is as follow.
(In thousands) June 30,
2004 2003 2002
Statutory tax rate 35% 35% 35%
Income tax expense at statutory rate $ 5,594 $13,150 $17,276
State income tax (net federal tax benefit) (65) 1,389 1,943
Officer life insurance proceeds (1,476) - -
Dividend income exclusion (821) (808) (767)
Other (net) 63 211 339
$ 3,295 $13,942 $18,791
State income taxes include a benefit from a refund as a result of a favorable
court settlement in the fiscal year.
Income taxes paid $ 3,443 $10,429 $17,881
follows:
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Federal statutory tax rate |
| 34 | % | 34 | % | 35 | % | |||
Income tax expense (benefit) at statutory rate |
| $ | 1,362 |
| $ | (3,852 | ) | $ | 5,594 |
|
State income tax (net federal tax benefit) |
| 206 |
| (696 | ) | 831 |
| |||
Life insurance proceeds |
| 0 |
| 0 |
| (1,476 | ) | |||
Dividend income exclusion |
| (849 | ) | (819 | ) | (821 | ) | |||
Valuation allowance |
| (1,379 | ) | 1,379 |
| 0 |
| |||
Change in contingency reserve |
| 406 |
| (2,492 | ) | (896 | ) | |||
Other (net) |
| (497 | ) | 578 |
| 63 |
| |||
|
| $ | (751 | ) | $ | (5,902 | ) | $ | 3,295 |
|
Income taxes paid |
| $ | 2,301 |
| $ | 2,356 |
| $ | 3,443 |
|
35
The primary components of temporary differences which give rise to the Company'sCompany’s net deferred tax assets are as follows:
In thousands)
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Deferred tax assets: |
|
|
|
|
| ||
Postretirement benefits |
| $ | 12,187 |
| $ | 11,664 |
|
Accrued liabilities |
| 3,266 |
| 3,121 |
| ||
Capital loss carry forwards |
| 2,807 |
| 4,427 |
| ||
Other |
| 1,808 |
| 780 |
| ||
Total deferred tax assets |
| $ | 20,068 |
| $ | 19,992 |
|
Deferred tax liabilities: |
|
|
|
|
| ||
Pension assets |
| $ | (6,563 | ) | $ | (7,040 | ) |
Unrealized gain on investments |
| (449 | ) | (2,759 | ) | ||
Other |
| (3,139 | ) | (3,370 | ) | ||
Total deferred tax liabilities |
| $ | (10,151 | ) | $ | (13,169 | ) |
Valuation allowance |
| 0 |
| (1,379 | ) | ||
Net deferred tax assets |
| $ | 9,917 |
| $ | 5,444 |
|
The Company has approximately $6.8 million and $12.0 million of federal and state capital loss carry forwards, respectively, that will expire on June 30, 2004 2003
Deferred tax assets:
Postretirement benefits $10,572 $10,384
Accrued liabilities 2,893 4,859
State taxes 65 -
$13,530 $15,243
Deferred tax liabilities:
Pension assets ($6,566) ($8,205)
Other ( 5,090) ( 6,552)
($11,656)($14,757)
Net deferred tax assets $1,874 $486
2010, unless previously utilized. During the year ended June 30, 2006, the valuation allowance related to the capital loss carry forwards has been released as management believes realization is more likely than not based upon projected generation of capital gains prior to the expiration of the carry forward period, based on facts and circumstances at this time.
Note 99. Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
2004 2003
Accrued workers' compensation liabilities $2,758 $2,898
Dividends payable 1,527 1,734
Other (including net taxes payable) 316 368
$4,601 $5,000
|
| June 30, |
| ||||||
|
| 2006 |
| 2005 |
| ||||
|
| (In thousands) |
| ||||||
Accrued workers’ compensation liabilities |
|
| $ | 4,052 |
|
| $ | 2,725 |
|
Dividends payable |
|
| 1,688 |
|
| 1,608 |
| ||
Other (including net taxes payable) |
|
| 406 |
|
| 597 |
| ||
|
|
| $ | 6,146 |
|
| $ | 4,930 |
|
Note 1010. Commitments and Contingencies
The Company incurred rent expense of approximately $753,000, $736,000$907,000, $779,000 and $698,000$753,000 for the fiscal years ended June 30, 2004, 20032006, 2005 and 2002,2004, respectively, and is obligated under leases for branch warehouses. A few of
theSome leases have renewal options that allow the Company, as lessee, to extend the lease at the Company'sCompany’s option for one or two years at a pre-agreed rental rate. The Company also has operating leases for computer hardware with terms that do not exceed three years.
Future minimum lease payments for future fiscal years are as follows:
(In thousands)
2005 $631
2006 496
2007 332
2008 156
2009 96
Total $1,711
|
| (In thousands) |
| |||
2007 |
|
| $ | 739 |
|
|
2008 |
|
| 448 |
|
| |
2009 |
|
| 237 |
|
| |
2010 |
|
| 106 |
|
| |
2011 |
|
| 21 |
|
| |
Total |
|
| $ | 1,551 |
|
|
The Company is a party to various pending legal and administrative proceedings. It is management'smanagement’s opinion that the outcome of such proceedings will not have a material impact on the Company'sCompany’s financial position, results of operations, or cash flows.
Note 11 Equity
On December 24, 2003, the Company purchased the 443,845 shares (4,438,450
shares post-split) of its common stock held by the Crowe Family and related
trusts for approximately $111 million, or approximately $250.00 per share
($25.00 per share post-split). Concurrently with this purchase, the Company
offered its Employee Stock Ownership Plan (ESOP) the opportunity to acquire
124,939 shares (1,249,390 shares post-split) at the same price. This portion
of the transaction was completed on January 11, 2004 when the Company issued
said shares to the ESOP.
On February 17, 2004, the Company was reincorporated as a Delaware corporation
by merger into a wholly-owned Delaware corporation. The total number of
shares of capital stock authorized is 25,500,000, consisting of 25,000,000
shares of common stock, par value $1.00 per share and 500,000 shares of
preferred stock par value $1.00 per share.
On March 04, 2004, the Board of Directors declared a ten-for-one stock
split in the form of a one-time stock dividend. The Board acted after the
Company completed its Delaware reincorporation, which authorized enough shares
to enable the stock split. Each stockholder of record received nine
additional shares for every share of Farmer Bros. stock held at the close of
business on the record date of April 23, 2004.
These transactions are summarized as follows.
Number of Shares
Split
Pre-Split Adjusted
Beginning shares outstanding
at June 30, 2003 1,926,414 19,264,140
Purchase of capital stock (443,845) (4,438,450)
Issue capital stock 124,939 1,249,390
Stock split 14,467,572
Ending shares outstanding
At June 30, 2004 16,075,080 16,075,080
Following the effective date of the stock split, the par value of the common
stock remained $1 per share. As a result the common stock in the accompanying
consolidated balance sheet increased as of the effective date
by $14,468,000 with a corresponding decrease to additional paid-in-capital.
These transactions are reflected in the accompanying consolidated statement of
stockholders' equity for the year ended June 30, 2004.
Per share amounts included in the accompanying consolidated statements of
income and in the notes to the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect the ten-for-one
stock split, unless otherwise noted.
No shares of the Company's preferred stock have been issued.
Note 1211. Quarterly Financial Data (Unaudited) (In thousands except per share data; all per share disclosures have been split
adjusted.)
September 30 December 31 March 31 June 30
2003 2003 2004 2004
Net sales $45,665 $51,511 $49,069 $47,344
Gross profit $29,632 $32,573 $30,581 $29,398
Income (loss) from operations $1,057 $3,124 $743 ($1,161)
Net income $2,511 $2,565 $5,603 $2,008
Net income per common share $0.14 $0.15 $0.42 $0.11
Net income (loss) in the quarter ended June 30, 2004 decreased to $2,008 from
$5,783 in the quarter ended June 30, 2003. This decrease is primarily the
result of the lower level of sales that occurs in the June quarter, combined
with a decrease to 62% gross profit margin in the 2004 quarter as compared to a
67% gross profit in the 2003 quarter. In addition, the Company had higher
operating expenses in the quarter, the largest of which are related to
increases in actuarially derived pension and retiree insurance costs and the
cost of the ESOP as listed below.
4th Quarter
2004 2003
FAS 87 & 105 $928 $132
ESOP 1,978 1,535
Gas, oil & grease 1,620 1,364
IT project costs 415 70
Legal expenses 412 244
Total $5,353 $3,345
September 30 December 31 March 31 June 30
2002 2002 2003 2003
Net sales $50,389 $54,118 $49,267 $47,784
Gross profit $31,532 $35,154 $32,038 $32,172
Income from operations $7,354 $8,319 $4,985 $3,230
Net income $5,608 $5,899 $6,339 $5,783
Net income per common share $0.30 $0.32 $0.35 $0.32
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||||||||
|
| (In thousands except share data) |
| ||||||||||||||||
Net sales |
|
| $ | 48,424 |
|
|
| $ | 54,950 |
|
|
| $ | 53,561 |
|
| $ | 50,518 |
|
Gross profit |
|
| $ | 28,885 |
|
|
| $ | 33,154 |
|
|
| $ | 32,039 |
|
| $ | 28,465 |
|
(Loss) income from operations |
|
| $ | (1,124 | ) |
|
| $ | 3,149 |
|
|
| $ | 67 |
|
| $ | (5,057 | ) |
Net (loss) income |
|
| $ | (1,079 | ) |
|
| $ | 4,164 |
|
|
| $ | 2,463 |
|
| $ | (792 | ) |
Net (loss) income per common |
|
| $ | (0.08 | ) |
|
| $ | 0.30 |
|
|
| $ | 0.18 |
|
| $ | (0.06 | ) |
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||||||||
Net sales |
|
| $ | 46,708 |
|
|
| $ | 51,220 |
|
|
| $ | 50,271 |
|
| $ | 50,221 |
|
Gross profit |
|
| $ | 29,239 |
|
|
| $ | 30,298 |
|
|
| $ | 29,343 |
|
| $ | 26,576 |
|
Income (loss) from operations |
|
| $ | 1,002 |
|
|
| $ | 699 |
|
|
| $ | (2,167 | ) |
| $ | (6,117 | ) |
Net income (loss) |
|
| $ | 1,497 |
|
|
| $ | (4,068 | ) |
|
| $ | 856 |
|
| $ | (3,712 | ) |
Net income (loss) per common |
|
| $ | 0.11 |
|
|
| $ | (0.30 | ) |
|
| $ | 0.06 |
|
| $ | (0.27 | ) |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures. The Company'sProcedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures.
As of June 30, 2006 our management, with the participation of our Chief Executive Officer and Chief Financial Officer, havecarried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2004 there is
reasonable assurance that the Company's2006, our disclosure controls and procedures will meet their objectiveswere (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our Chief Executive Officer and Chief Financial Officer, in a timely manner, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the disclosureobjectives of the controls system are met, and procedures are
effective atno evaluation of controls can provide absolute assurance that all control deficiencies and instances of fraud, if any, within a company have been detected.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the "reasonable assurance" level. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the dateparticipation of evaluation by the Chief Executive Officer and Chief Financial Officer.
Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of June 30, 2006.
Ernst & Young LLP, an independent registered public accounting firm, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2006, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
We have audited management’s assessment, included in the accompanying “Management Report on Internal Control over Financial Reporting,” that Farmer Bros. Co. and Subsidiary maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Farmer Bros. Co. and Subsidiary’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Farmer Bros. Co. and Subsidiary maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Farmer Bros. Co. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2006 of Farmer Bros. Co. and Subsidiary and our report dated September 7, 2006 expressed an unqualified opinion thereon.
| |
Los Angeles, California |
39
None.
Item 10. Directors and Executive Officers of the Registrant
Directors
Served as a
Director
Continuously Principal Occupation
Name Age Since for the Last Five Years/Term
Roy E. Farmer 52 1993 Chairman since June 16, 2004, President, Chief
Executive since 2003, Chief Operating Officer
Previously; term expires at the fiscal 2006
Annual Meeting.
Guenter W. Berger 67 1980 Vice President - Production; term expires at
the fiscal 2005 Annual Meeting.
Lewis A. Coffman 85 1983 Retired (formerly Vice President - Sales); term
expires at the fiscal 2004 Annual Meeting.
John H. Merrell 60 2001 Partner in Accounting Firm of Hutchinson
The information required by this item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and Bloodgood LLP, Glendale, California; term
expires at the fiscal 2006 Annual Meeting.
John Samore, Jr. 58 2003 Independent Consultant and CPA in Los
Angeles, California since 2002, formerly
Tax Partnerfiled with the Accounting Firm
Arthur Andersen LLP, Los Angeles,
California; term expires atSEC on or before October 28, 2006.
To the fiscal 2004
Annual Meeting.
Thomas A. Maloof 52 2003 Chief Financial Officer of Hospitality
Marketing Concepts, Irvine, California
since 2001, previously President of
Perinatal Practice Management-Alfigen
The Genetices Institute, Pasadena,
California(1); term expires at the fiscal 2005
Annual Meeting.
Kenneth R. Carson 64 2004 Retired (formerly Vice President - Sales);
term expires at the fiscal 2004 Annual Meeting.
(1) Mr. Maloof is also a director of eCOST.COM, Inc. and PC Mall, Inc. publicly
traded companies listed on the NASDAQ National Market. None of the other
directors is a director of any other publicly-held company.
The Company has a standing Audit Committee established in accordance with
applicable provisions of the Securities Exchange Act of 1934, as amended.
Messrs. Maloof, Merrell and Samore comprise the Audit Committee. All Audit
Committee members are independent as defined by applicable NASDAQ rules.
The Company's board of directors has determined that at least one member of
the Company's Audit Committee is an "audit committee financial expert" as
defined in item 401(h)(2) of Regulation S-K under the Securities Exchange Act
of 1934, as amended. That person is John H. Merrell, the Company's Audit
Committee Chairman. Mr. Merrell is "independent" as that term is used in item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
The Company has made no changes in the procedures by which stockholders may
recommend nominees to the Board of Directors since the filing of its most
recent proxy statement.
Information regarding the Company's executive officers appears in Part I
pursuant to instruction 3 of Item 401(b) of Regulation S-K.
The Company has adopted a "code of ethics" within the meaning of Item 406(b)
of Regulation S-K under the Securities Exchange Act of 1934, as amended. The
code of ethics is applicable to the Company's Chief Executive Officer and to
the Company's Chief Financial Officer who is also the Company's principal
accounting officer. The Company has no controller or other person performing
that function. A copy of the Company's code of ethics can be obtained without
charge upon written request addressed to Mr. John E. Simmons, Chief Financial
Officer, Farmer Bros. Co., 20333 S. Normandie Avenue, Torrance, CA 90502.
Section 16(a) Beneficial Ownership Reporting Compliance. BasedCompany’s knowledge, based solely on a review of filings received by it or representations from Company officers and directors,
the Company believes that all filing requirements applicable to Company
officers and directors were met for fiscal 2004, except: the ESOP and Mr.
Samore each had one purchase transaction for which the filing was late; and
Franklin Resources has reported 12 purchase transactions, for which allcopies of the
filings were late.
Item 11. Executive Compensation
Compensation Committee Report
The Compensation Committee is a standing committee of the Board and is
comprised of Lewis A. Coffman, John H. Merrell, Thomas A. Maloof and John
Samore, Jr. All members of the Compensation Committee are independent as
defined by applicable NASDAQ rules. The Compensation Committee met once in
fiscal 2004. The Compensation Committee makes all determinations with respect
to executive compensation and administers the Company's Incentive Compensation
Plan. The Compensation Committee report follows:
Compensation Committee Report - Philosophy and Objectives
The Compensation Committee believes that once base salaries of executive
officers are established at competitive levels, increases should generally
reflect cost of living changes and that individual performance should be
rewarded by bonuses or other incentive compensation awards. The Compensation
Committee believes that most of the executive officers will be incentivized to
a greater degree by such a program.
Executive Officer Compensation
In 2003 the Compensation Committee obtained a compensation study
prepared by Valuemetrics Advisors, Inc. relating to officer and director
compensation. The report concluded that the current executive officers
employed by the Company were underpaid when compared to their counterparts at
size-adjusted peer group companies. Consistent with the Compensation
Committee's expressed compensation policy of paying a competitive base salary,
the Compensation Committee has increased base salaries to Messrs. Berger and
Simmons by three percent (3%) for fiscal 2005. In recognition of Mr. Farmer's
increased responsibilities, the Compensation Committee raised his salary for
fiscal 2005 to $595,000.
Incentive Compensation Plan
The Company made awards under its Incentive Compensation Plan (the "Plan") for
fiscal 2004 to all employee executive officers. The Compensation Committee
felt that awards were justified in light of the Company's performance in fiscal
2004, although financial results were below those achieved in the prior two
years. Total awards for fiscal 2004 were $675,000 as compared to $700,000 for
fiscal 2003 and $1,000,000 for fiscal 2002.
Under the provisions of the Plan, a percentage of the Company's annual pre-tax
income is made available for cash or deferred awards. The percentage varies
from three percent of pre-tax income over $14 million to six percent of pre-
tax income of $24 million or more. Amounts available for awards but not
awarded are carried forward. The pool available for awards for fiscal 2004
under the Incentive Compensation Plan was in excess of $14,000,000. Of the
available pool, the Compensation Committee awarded a total of $675,000 of
which $400,000 was awarded to Roy E. Farmer, the Company's Chairman, President
and Chief Executive Officer, and a total of $275,000 was awarded to the other
executive officers.
Lewis A. Coffman John H. Merrell
Thomas A. Maloof John Samore, Jr.
Compensation Committee Interlocks and Insider Participation.
For fiscal 2004 persons serving on the Company's Compensation Committee were
John H. Merrell, an outside director, Lewis A. Coffman, an outside director
and retired executive officer of the Company, Thomas A. Maloof, an outside
director and John Samore, Jr., an outside director.
Summary Compensation Table
The following table sets forth all remuneration paid to the Chief Executive
Officer and the four other most highly compensated officers whose total
compensation during the last fiscal year exceeded $100,000, for services in
all capacitiesreports furnished to the Company and written representations that no other reports were required during the fiscal year ended June 30, 2006, its subsidiaries.
Nameofficers, directors and Principal Fiscal Annual Compensation All Other
Position Year Salary Bonus (1) Other Compensation (2)
ROY F. FARMER 2004 $300,000 $ - $59,002(3) $0
Deceased - Formerly 2003 $850,000 $ - $ - $164,683(4)
Chairmanten percent shareholders complied with all applicable Section 16(a) filing requirements, with the exception of the Board 2002 $1,000,000 $450,000 $ - $138,815(4)
ROY E. FARMER 2004 $498,411 $400,000 $ - $282
Chairman and CEO 2003 $335,585 $400,000 $ - $465
2002 $325,730 $300,000 $ - $425
GUENTER W. BERGER 2004 $250,788 $100,000 $ - $644
Vice President, 2003 $244,477 $100,000 $ - $700
Production 2002 $238,113 $100,000 $ - $630
KENNETH R. CARSON 2004 $250,788 $ 75,000 $ - $494
Retired - Formerly 2003 $214,889 $100,000 $ - $414
Vice President, Sales 2002 $208,544 $100,000 $ - $384
MICHAEL KING 2004 $168,967 $ - $ - $226
Vice President, 2003 $162,919 $ - $ - $0
Sales 2002 $156,781 $ - $ - $0
JOHN E. SIMMONS 2004 $228,555 $100,000 $ - $202
Treasurer and CFO 2003 $203,472 $100,000 $ - $216
2002 $188,584 $75,000 $ - $148
(1) Awarded under the Company's Incentive Compensation Plan. The awards for
fiscal 2004 were based primarily upon the Company's earnings achieved that
year. (See "Compensation Committee Report," supra.).
(2) Except as stated in footnote (3) the amount shown represents the dollar
value of the benefit to the executive officer for the years shown under the
Company's executive life insurance plan.
(3) Legal fees paid for tax and estate planning.
(4) The amount shown for Roy F. Farmer represents P.S. 58 costs of the two
split-dollar life insurance policies purchased pursuant to the prior
employment agreement with Mr. Farmer which expired in 1998 plus the dollar
value of the benefit to him under the Company's executive life insurance plan.
No premiums were paid by the Company in fiscal 2002-2004 on the split-dollar
policies.
Pension Plan Table
The following table shows estimated annual benefits payable for the
2004 plan year under the Company's retirement plan upon retirement at age 62 to
persons at various average compensation levels and years of credited
service based on a straight life annuity. The retirement plan is a
contributory defined benefit plan covering all non-union Company employees.
The following figures assume that employee contributions (2% of annual gross
earnings) are made throughout the employees' first five years of service and
are not withdrawn. After five years of participationthose filings listed in the plan, employees
make no further contributions. Benefits under a predecessor plan are
included in the following figures. Maximum annual combined benefits under
both plans generally cannot exceed the lesser of $205,000 or the average of
the employee's highest three years of compensation.
Annualized Pension Compensation
for Highest 60 Consecutive Months Credited Years of Service
in Last Ten Years of Employment 20 25 30 35
$100,000 $30,000 $37,500 $45,000 $52,500
$125,000 $37,500 $46,875 $56,250 $65,625
$150,000 $45,000 $56,250 $67,500 $78,750
$170,000 $52,500 $65,625 $78,750 $91,875
$200,000 $60,000 $75,000 $90,000 $105,000
$250,000 $61,500 $76,875 $92,250 $107,625
The earnings of executive officers by which benefits in part are
measured consist of the amounts reportable under "Annual Compensation" in the
Summary Compensation Table less certain allowance items (none in 2003).
Credited years of service through December 31, 2003 were as follows:
Guenter W. Berger - 39 years; Roy E. Farmer - 27 years; Kenneth R. Carson -
38 years; John E. Simmons - 22 years.
The above straight life annuity amounts are not subject to deductions
for Social Security or other offsets. Other payment options, one of which is
integrated with Social Security benefits, are available.
Compensation of Directors
For fiscal 2004, each director who was not a Company employee (an "outside
director")was paid an annual retainer fee of $20,000 and the additional sum of
$1,500 for each board meeting and committee meeting (if not held in
conjunction with a board meeting). For fiscal 2005, outside directors will
receive an annual retainer fee of $25,000 and $1,500 for each board meeting
and committee meeting (if not held in conjunction with a board meeting)
attended, and the Audit Committee Chairman will receive an additional annual
retainer fee of $2,500. A director also receives reimbursement of travel
expenses from outside the greater Los Angeles area to attend a meeting.
Performance Graph
1999 2000 2001 2002 2003 2004
Farmer Brothers Co. 100.00 87.92 115.04 181.41 171.45 137.07
Russell 2000 Index 100.00 113.01 110.55 99.77 96.69 127.56
Food Processing 100.00 103.82 126.43 155.48 147.87 185.68
Assumes $100 invested at the close of trading 6/30/98 in Farmer Brothers
Co. common stock, Russell 2000 Index and Food Processing Index (Cumulative
total return assumes reinvestment of dividends).
Source: Value Line, Inc. Factual material is obtained from sources believedRegistrant’s Proxy Statement expected to be reliable, butdated and filed with the publisher is not responsible for any errorsSEC on or omissions contained herein.
before October 28, 2006.
Item 11. Executive Compensation
The information required by this item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the SEC on or before October 28, 2006.
Item 12. Security Ownership of Certain Beneficial Owners and Management (a) and Related Stockholder Matters
The following are all persons known to management who beneficially own
more than 5% of the Company's common stock:
Amount and Nature Percent
Name and Address of of Beneficial of
Beneficial Owner Ownership (1) Class
Roy E. Farmer 6,311,282 shares (2) 39.3%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
Farmer Bros. Co. Employee
Stock Ownership Plan 3,000,500 shares (3) 18.7%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
Franklin Mutual Advisers, LLC 2,065,917 shares (4) 12.9%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Attn: Bradley Takahashi
Royce & Associates, LLC 946,250 shares (5) 5.9%
1414 Avenue of the Americas
New York, NY 10019
Attn: Daniel A. O'Byrne
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Includes 6,269,580 shares heldinformation required by various trusts of which Mr. Farmer is
sole trustee for the benefit of family members (including himself), 40,000
shares owned outright by Mr. Farmer and 1,702 shares beneficially owned by Mr.
Farmer through the Company's Employee Stock Ownership Plan ("ESOP"), rounded to
the nearest whole share.
(3) There are 400,110 allocated shares and 2,600,390 shares as yet
unallocated to plan participants. Under terms of the ESOP, unallocated shares
and allocated shares which ESOP participants have failed to votethis item will be voted
proportionatelysubsequently incorporated herein by reference to the vote of allocated shares by ESOP participants.
(4) Accordingour Proxy Statement expected to a Form 4be dated and filed with the Securities and Exchange
Commission dated September 10, 2004 by Franklin Mutual Advisers, LLC
("Franklin"), FranklinSEC on that date beneficially owned 2,065,917 shares
(12.9%). Franklin is reported to have sole voting and investment power over
these shares pursuant to certain Investment Advisory contracts with one or more record stockholders, which advisory clients are the record owners of the
2,065,917 shares.
(5) According to a Schedule 13-G/A filed with the Securities and Exchange
Commission dated April 8, 2004 by Royce & Associates, LLC, ("Royce"), Royce on
that date beneficially owned 946,250 shares (5.9%). Royce is reported to have
sole voting and investment power over these shares.
(b) The following sets forth the beneficial ownership of the common stock
of the Company by each director and nominee, each executive officer named in
the Summary Compensation Table, and all directors and executive officers as a
group:
Number of Shares and Nature
Name of Beneficial Ownership (1) Percent of Class
Guenter W. Berger 6,762(2) *
Kenneth R. Carson 4,202(3) *
Lewis A. Coffman 150(4) *
Roy E. Farmer 6,311,282(5) 39.3%
Michael J. King 1,431(6) *
Thomas A. Maloof - -
John H. Merrell 500(7) -
John Samore, Jr. 500(8) -
John E. Simmons 5,350(9) *
All directors and exec
officers as a group (9 persons) 6,330,177 39.4%
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Held in trust with voting and investment power shared by Mr. Berger and
his wife. Includes 1,702 shares beneficially owned by Mr. Berger through the
Company's ESOP, rounded to the nearest whole share.
(3) Includes 1,702 shares beneficially owned by Mr. Carson through the
Company's ESOP, rounded to the nearest whole share and 1,000 shares voted as
custodian for minor children
(4) Voting and investment power shared with spouse.
(5) Includes 40,000 shares owned outright by Mr. Farmer, 6,269,580 shares
held by trusts of which Mr. Farmer is sole trustee for the benefit of himself
and other family members, and 1,702 shares beneficially owned by Mr. Farmer
through the Company's ESOP, rounded to the nearest whole share.
(6) Beneficially owned by Mr. King through the Company's ESOP, rounded to the
nearest whole dollar.
(7) Held in a revocable living trust with voting and investment power shared
by Mr. Merrell and his wife.
(8) Held in a revocable living trust with voting and investment power shared
by Mr. Samore and his wife.
(9) Voting and investment power shared with spouse. Includes 1,702 shares
beneficially owned by Mr. Simmons through the Company's ESOP, rounded to the
nearest whole share.
* Less than 1%.
before October 28, 2006.
Item 13. Certain Relationships and Related Transactions
None.
The information required by this item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the SEC on or before October 28, 2006.
Item 14. Principal Accountant Fees and Services.
Audit Fees
Services
The aggregate fees billedinformation required by Ernst & Young, LLP forthis item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the audit of the Company's
annual financial statements and review of financial statements included in the
Company's quarterly reportsSEC on Form 10-Q were $154,000 for the fiscal year
ended June 30, 2003 ("fiscal 2003") and $244,000 for the fiscal year ended June
30, 2004 ("fiscal 2004"), which includes $28,500 to examine Company
documentation related to SOX 404.
Audit-Related Fees
The aggregate fees billed by Ernst & Young, LLP for assurance and related
services reasonably related to the performance of the audit of the Company's
financial statements and not reported under Audit Fees, above, were $-0- for
fiscal 2003 and $-0- for fiscal 2004.
Tax Fees.
The aggregate fees billed by Ernst & Young, LLP for tax compliance, tax advice
and tax planning services were $126,000 for fiscal 2003 and $210,000 for
fiscal 2004. These tax services consisted of state tax representation and
miscellaneous consulting on taxation matters.
All Other Fees.
For fiscal 2003 and 2004, Ernst & Young, LLP provided no services other than
audit, audit-related and tax services.
The Audit Committee has considered the effect of Ernst & Young, LLP's
providing tax services and other non-audit services on the firm's
independence. All engagements for services by Ernst & Young LLP or other
independent accountants are subject to prior approval by the Audit Committee.
Prior approval was given for all services provided by Ernst & Young LLP in
fiscal 2004
before October 28, 2006.
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K.
(a) List of Financial Statements and Financial Statement Schedules:
1. Financial Statements included in Item 8:
Consolidated Balance Sheets as of June 30, 20042006 and 2003.
2005.
Consolidated Statements of IncomeOperations for the Years Ended
June 30, 2004, 20032006, 2005 and 2002.
2004.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004, 20032006, 2005 and 2002.
2004.
Consolidated Statements of Stockholders'Stockholders’ Equity For the Years
Ended June 30, 2004, 2003,2006, 2005 and 2002.
2004.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, ofor the required information is given in the consolidated financial statements ofand notes thereto.
(b) Reports
3. The exhibits to this Annual Report on Form 8-K.
A form 8-K dated July 23, 2003 and filed with the Commission on July 24, 2003
announced approval by the Board of Directors of a loan by the Company to the
ESOP to purchase up to 129,575 shares of Farmer Bros. Co. common stock.
A form 8-K dated December 24, 2003 and filed with the Commission on December
24, 2003 announced the purchase of all Crowe family shares at a cost of
approximately $110.96 million, and the rejection of a request for injunction
on behalf of a stockholder by U.S. District Judge Margaret M. Morrow.
A Form 8-K dated January 12, 2004 and filed with the Commission on January 12,
2004, reporting the purchase of 124,939 shares of stock by the ESOP,
completing the Company's goal of acquiring 300,000 shares of Company stock.
A Form 8-K dated February 23, 2004 and filed with the Commission on February
23, 2004, reporting that the Company had filed to reincorporate in Delaware
following stockholder approval at the stockholder's meeting held February 23,
2004. The Form 8-K also reported the results of proxy voting, and a report
from management10-K are listed on the stateaccompanying index to exhibits and are incorporated herein by reference or are filed as part of the company.
AAnnual Report on Form 8-K dated March 4, 2004 and10-K.
Each management contract or compensation plan required to be filed with the Commission on March 4, 2004
noting that the Board of Directors declared a ten for one stock split in the
form of a one time stock dividend. The stock dividend will entitle each pre-
split stockholder to receive nine shares of stock for each share owned at the
opening of business on May 10, 2004.
A Form 8-K dated March 16, 2004 and filed with the Commission on March 16,
2004 to announce the death of Chairman, Roy F. Farmer.
A Form 8-K dated June 18, 2004 and filed with the Commission on June 18, 2004,
to announce that the Board of Directors has elected Roy E. Farmer, Chief
Executive Officer and President, to the additional position as Chairman of the
Board.
A Form 8-K dated August 3, 2004 and filed with the Commission on August 4,
2004, to announce the retirement of Kenneth R. Carson, Vice President of
Sales, and the appointment of Michael J. King as his replacement.
A Form 8-K dated August 17, 2004 and filed with the Commission on August 18,
2004, to announce the appointment of Kenneth R. Carson, retired Vice President
of Sales, to the Board of Directors.
(c) Exhibitsan exhibit is identified by an asterisk (*).
(b) Exhibits: See Exhibit Index
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FARMER BROS. CO.
/s/Roy E. Farmer
Roy E. Farmer, Chief Executive Officer
Date: September 9, 2004
FARMER BROS. CO. | |||
By: | /s/ GUENTER W. BERGER | ||
Guenter W. Berger, | |||
Chairman and Chief Executive Officer | |||
Date: September 11, 2006 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/Roy E. Farmer
Roy E. Farmer, President and Chief Executive Officer and Director
(principal executive officer)
Date: September 9, 2004
/s/John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: September 9, 2004
/s/Guenter W. Berger
Guenter W. Berger, Vice President and Director
Date: September 9, 2004
/s/Lewis A. Coffman
Lewis A. Coffman
Director
Date: September 9, 2004
/s/Thomas A. Maloof
Thomas A. Maloof
Director
Date: September 9, 2004
/s/John H. Merrell
John H. Merrell
Director
Date: September 9, 2004
/s/John Samore, Jr.
John Samore, Jr.
Director
Date: September 9, 2004
/s/Kenneth R. Carson
Kenneth R. Carson
Director
Date: September 9, 2004
Name | Title | Date | ||||||||
/s/ GUENTER W. BERGER | Chairman and Chief Executive | September 11, 2006 | ||||||||
Guenter W. Berger | Officer (principal executive officer) | |||||||||
/s/ JOHN E. SIMMONS | Treasurer and Chief Financial | |||||||||
John E. Simmons | Officer (principal financial and | September 11, 2006 | ||||||||
accounting officer) | ||||||||||
/s/ LEWIS A. COFFMAN | Director | September 11, 2006 | ||||||||
Lewis A. Coffman | ||||||||||
/s/ JOHN H. MERRELL | Director | September 11, 2006 | ||||||||
John H. Merrell | ||||||||||
/s/ THOMAS A. MALOOF | Director | September 11, 2006 | ||||||||
Thomas A. Maloof | ||||||||||
/s/ JOHN SAMORE, JR. | Director | September 11, 2006 | ||||||||
John Samore, Jr. | ||||||||||
/s/ CAROL FARMER WAITE | Director | September 11, 2006 | ||||||||
Carol Farmer Waite | ||||||||||
/s/ KENNETH R. CARSON | Director | September 11, 2006 | ||||||||
Kenneth R. Carson | ||||||||||
42
EXHIBIT INDEX
3 (i) Certificate of Incorporation (1)
3(ii) By-laws (2)
14 Code of ethics (CEO and CFO) (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
31.1 Certification of Chief Executive Officer (Section 302 of Sarbanes-Oxley
Act of 2002) (filed herewith)
31.2 Certificate of Chief Financial Officer (Section 302 of Sarbanes-Oxley
Act of 2002) (filed herewith)
32.1 Certificate of Chief Executive Officer (Section 906 of Sarbanes-Oxley
Act of 2002) (furnished herewith)
32.2 Certification of Chief Financial Officer (Section 906 of Sarbanes-Oxley
Act of 2002) (furnished herewith)
99 Additional Exhibits
1. List of properties (filed herewith)
(1) Incorporated by reference from Company's report on Form 10-Q
filed May 13, 2004.
(2) Incorporated by reference from Company's report on Form 10-Q
filed May 13, 2004.
3.1 | Certificate of Incorporation (filed as an exhibit to the Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference). | |
3.2 | Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference). | |
4.1 | Certificate of Designations of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 17, 2005 and incorporated herein by reference). | |
4.2 | Rights Agreement dated March 17, 2005 by and between Farmer Bros. Co. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 17, 2005 and incorporated herein by reference). | |
10.1 | The Farmer Bros. Co. Pension Plan for Salaried Employees (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.2 | The Farmer Bros. Co. Incentive Compensation Plan (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.3 | Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 12, 2005 and incorporated herein by reference).* | |
10.4 | Form of Notification Letter Under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 12, 2005 and incorporated herein by reference).* | |
10.5 | Form of Award Letter (Fiscal 2006) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2006 and incorporated herein by reference).* | |
10.6 | The Farmer Bros. Co. Employee Stock Ownership Plan (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.7 | Farmer Bros. Co. Employee Stock Ownership Plan Amendment 2 (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference).* | |
10.8 | Farmer Bros. Co. Employee Stock Ownership Plan Amendment 3 (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference).* | |
10.9 | Loan Agreement dated July 21, 2003 between the Company and Wells Fargo Bank, Trustee of the Farmer Bros Co. Employee Stock Ownership Plan (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference). | |
10.10 | Form of Change in Control Severance Agreements entered into with each of the following officers: Guenter Berger, Michael J. King and John E. Simmons (filed as an exhibit to the Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).* | |
10.11 | Change in Control Severance Agreement (Laverty), dated as of June 2, 2006, by and between Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference).* |
10.12 | Employment Agreement, dated as of June 2, 2006, by and between Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference).* | |
10.13 | Form of Indemnification Agreement for Directors and Officers of the Company (filed as Exhibit 10.01 to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2006 and incorporated herein by reference).* | |
21.1 | Subsidiaries of the registrant. (filed as an exhibit to the Form 10-K for the year ended June 30, 2005 and incorporated herein by reference.) | |
31.1 | Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) | |
31.2 | Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) | |
32.1 | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) | |
32.2 | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) | |
99.1 | List of properties. (filed herewith) |
44