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, 2005
2007
OR
o TRANSITION REPORT PURSUANT 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
Registrant’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 registrant 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. [ ]
þ
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, 2005December 31, 2006 was approximately $145$205.9 million.
On September 1, 20052007 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 Part III of this Form 10-K: certain portions of the definitive proxy statement for the fiscal year ended June 30, 20052007 that is expected to be filed with the U.S. Securities and Exchange Commission on or before October 28, 2005.
2007.
Farmer Bros. Co., including its consolidated subsidiaries unless the context otherwise requires, (the "Company", "we", "our"“Company,” “we,” “our” or "Farmer“Farmer Bros.?”) is a manufacturer, wholesaler 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. On April 27, 2007, we completed the acquisition of Coffee Bean Holding Co., Inc., a Delaware corporation (“CBH”), the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), a specialty coffee roaster and wholesaler headquartered in Portland, Oregon (the “CBI Acquisition”).
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 and food products, including restaurants, hotels and hospitals, as well as retailers such as convenience stores, coffee houses, general merchandisers and fast
food outlets.grocery stores. Our product line includes roasted coffee, coffee related products such as coffee filters, sugar and creamers, assorted teas, cocoa, spices, and soup and beverage bases. Our product line presently includes over 300400 items. AboutFor the past three fiscal years sales of roasted coffee products represented approximately 50% of our total sales are roasted coffee products. Noand no single product other than coffee accountsaccounted for more than 10% of our revenue. Coffee purchasing, roasting and packaging takes place at our Torrance, California and Portland, Oregon plants. Our Torrance plant which 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 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. Green 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 U.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.
Other raw materials used in the manufacture of theour non-coffee products (?(“allied products?products”) in our product line 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 fluctuations. Such fluctuations, however, historically have not had a material effect on our operating results.
We own 7291 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, we usually experience an increase in sales during the summer months from seasonal businesses located in vacation areas.
Distribution: Our selling divisions distribute our products
Most sales are made “off-truck” to our institutional food service customers at their places of business by our sales representatives.representatives 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 branch warehouse consisting of our complete product line and additional safety stocks to accommodate a modest interruption in supply. Customers: A portion of our products are distributed by third parties or are direct shipped via common carrier.
As one of the largest wholesale specialty coffee roasters in the nation, CBI markets their unique specialty coffee line primarily to coffee houses and private-label retailers and other national accounts utilizing a variety of distribution channels. In contrast, Farmer Bros. serves a variety of traditional coffee blends at different price points to restaurants, hotels, hospitals, etc. utilizing its own distribution network. We believe the combination of the two marketing approaches and the combined product line (adding over 100 SKU’s) allows the two companies to better serve their current and prospective customers’ needs without regard to the means of distribution.
No single customer represents a significant concentration of sales. As a result, the loss of one or more of our larger customer accounts is not likely to have a 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, are integral to our sales effort. Competition: As a result of the CBI Acquisition we added additional customer categories that include gourmet coffee houses, national foodservice, national mass market merchandisers and grocery stores.
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 U.S. Food Service, and regional institutional coffee roasters such as S & D Coffee Company and Boyd Coffee Company. Management believes we may have some competitive advantages due to our longevity and strong regional roots and our sales and
service force. We differentiate ourselves from our competitors byroots. Our focus on the quality of our products, our distribution network and our customer service. Someservice are the major factors that differentiate us from our competitors.
Competition is robust, and is primarily based on products and price, with distribution often a major factor. Most of our competitors do not do their owncustomers rely on us for distribution, however some of our customers do.use third party distribution or conduct their own distribution. Some of our customers are "price"“price” buyers, seeking the low cost provider with little concern about service;service, while 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 from foreign operations.
Other:
On June 30, 20052007 we employed 1,084 employees; 456 were1,233 employees, 441 of whom are subject to collective bargaining agreements. Compliance with government regulations relating to the discharge of materials into the environment has 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. 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 publicNo portion of our business may read and copy any materials filed with the SECbe subject to renegotiation of profits or termination of contracts or subcontracts at the SEC's Public Reading
Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operationelection of the Public Reference Room by calling the SEC at
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. The site address is http://www.sec.gov.
government.
Our Internet website address is http://www.farmerbroscousa.com (the website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be part of this filing). We, where we make available, on our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K including amendments thereto as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The Company?s Code of
Ethics for its Principal Executive and Principal Financial officers is also
posted on our Internet website.
RISK FACTORS
Certain statements contained in this Annual Reportannual 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 beare not based on historical fact and are forward-looking statements within the meaning of federal securities laws.laws and regulations. These statements are based on management'smanagement’s current expectations, assumptions, estimates and observations about our businessof future events and are subjectinclude any statements that do not directly relate to risks and uncertainties. As a result,
actual results could materially differ from the forward-looking statements
contained herein.any historical or current fact. These forward-looking statements can be identified by the use of words like "expects," "plans," "believes," "intends," "will," "assumes"“anticipates,” “feels,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “assumes” and other words of similar meaning. These and other similar words can be
identified byOwing to 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 causeuncertainties inherent in forward-looking statements, actual results tocould differ materially from predicted results.those set forth in forward-looking statements. 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 claimavailable except as required under federal securities laws and the protectionrules and regulations of the safe harbor
forSEC. Factors that could cause actual results to differ materially from those in forward-looking statements provided byinclude, but are not limited to, fluctuations in availability and cost of green coffee, competition, organizational changes, our ability to successfully integrate the Private Securities Litigation
Reform ActCBI Acquisition, the impact of 1995.
The Company?sa weaker economy, business its future performance and forward-looking statements
are affected by generalconditions in the coffee industry and market conditionsfood industry in general, the Company’s continued success in attracting new customers, variances from budgeted sales mix and growth rates, general U.S. and non-U.S. economicweather and political conditions (including the
global economy), competition, interest rate and currency exchange rate
fluctuations,special or unusual events, as well as other risks described in this report and other events. factors described from time to time in the Company’s filings with the SEC.
The following items are representative of the risks, uncertainties and other conditions that may impact the Company?sCompany’s business, future performance and the forward-looking statements that it makes in this Annual Reportannual report on Form 10-K or that it may make in the future. Our actual results could differ materially from projectedanticipated results due toas a result of some or all of the factors discussed below.
these items or from other factors.
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"“pass through” such price fluctuationfluctuations 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 time to time, entered into futures contracts to hedge price-to-be-established coffee purchase commitments. Open contracts associated with these hedging activities are described in Item 7A "Quantitative7A. “Quantitative and Qualitative Disclosures aboutAbout Market Risk."
”
INCREASES IN THE COST OF GREEN COFFEE COULD REDUCE OUR GROSS MARGIN AND PROFIT.
Coffee
Our primary raw material is green coffee, an agricultural commodity. Green coffee is mainly grown outside the U.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 U.S. and coffee producing nations, can affect the price of green coffee. Green specialty coffees sell at a premium to other green coffees due to the inability of producers to increase supply in the short run to meet rising demand. As a result, the price spread between specialty coffee and non-specialty coffee is likely to widen as demand continues to increase.
Green coffee prices have been affected in
the past, and maycan also be affected in the future, by the actions of certain
organizations and associations, such asproducer organizations. The most prominent of these are the Colombian Coffee Federation (CCF), the International Coffee Organization or(ICO) and the Association of Coffee Producing Countries.Countries (ACPC). These organizations have
historically attemptedseek to establish commodity price controlsincrease coffee prices largely be attempting to restrict supplies, thereby limiting the availability of green coffee through agreements that establish export quotas or by restrictingto coffee supplies worldwide. Theseconsuming nations. As a result these organizations or others may succeed in raising green coffee prices.
In the past, we generally have been able to pass on increases in green coffee costs to our customers. However, there can be no assurance that we will be successful in passing such fluctuations on to our customers without losses in 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, including multi-national firms with substantially greater financial, marketing and operating resources than the Company. LargeWe 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 like Folgers (Proctorsuch as S & Gamble)D Coffee Company and Maxwell
House (Kraft) have volumes far in excess of ours, with a business model that is
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.Boyd Coffee Company. 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, of our
distribution network and our customer service. Some of our competitors do not
do their own distribution, but some of our customers do. 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.
CHANGES IN CONSUMER PREFERENCES COULD ADVERSELY AFFECT OUR BUSINESS.
Our continued success depends, in part, upon the demand for coffee. Shifts in
consumer preferences away from a ?standard? cup of coffee could adversely
affect our 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 suchother beverages continues to dilute the demand for coffee. Consumers who choose soft drinks, juices, bottled water, teas and flavored coffees and teas areother beverages all reducing the
restaurant dollar formerly spentreduce spending on a "standard" cup of coffee. Some
restaurants that only sellConsumer trends away from 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 negatively impact our customers are restaurants that do not specialize in coffee
drinks.
business.
REDUCTIONS IN DESCRETIONARYDISCRETIONARY 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 out."“dining out,” as well as the purchase of high-end consumables like specialty coffee. Economic conditions may also cause businesses to reduce travel and entertainment expenses, and even cause office coffee benefits to be eliminated. 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 more
in the nature of fixed rather than variable costs.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 claims may exceed claims we have incurred in the past. Should a different amount of claims occur compared to what was estimated or coststhe cost of the claims increase or decrease beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods.
EMPLOYEE STRIKES AND OTHER LABOR-RELATED DISUPTIONSDISRUPTIONS MAY ADVERSELY AFFECT OUR OPERATIONS.
We have union contracts relating to the majority of our workforce in ourlocated on the West Coast, including 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.
THE FAILURE TO INTEGRATE SUCCESSFULLY OTHER BUSINESSES THAT WE MAY ENTER INTO NEW BUSINESS VENTURES THATACQUIRE COULD HAVE A NEGATIVE IMPACT ON
OPERATING RESULTS.
From timeADVERSELY AFFECT OUR BUSINESS.
In April 2007, we acquired CBI in a stock acquisition. While we have no current agreements or binding commitments regarding any potential acquisitions, as part of our growth strategy we may evaluate opportunities 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 toacquire other businesses or enter into one, will accrue the projected returns. It is
possible that suchjoint ventures could result in losses or returns that would complement our existing product line, expand our geographic reach or increase our customer base. Acquisitions entail numerous risks, including:
· the integration of new operations, products, services and personnel;
· the diversion of management and other resources from our existing businesses;
· the inability to generate revenues from new products sufficient to offset associated acquisition costs;
· the maintenance of uniform standards, controls, procedures and policies;
· accounting effects that may adversely affect our financial results, including the amortization of intangible assets;
· difficulties in retaining customers of the acquired companies;
· the impairment of employee and customer relations as a result of any integration of new management personnel or the loss of key employees of the acquired companies;
· dilution to existing stockholders from the issuance of equity securities; and
· liabilities or other problems associated with an acquired business.
Any problems we encounter in connection with our acquisitions could have a negative impactmaterial adverse effect on operating results.
our business.
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'sCompany’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 brandbrands 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, OREGON, 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, Oregon, 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. AnThe majority of our green coffee comes through the Ports of Los Angeles, Long Beach, San Franciso and Portland. Any interruption to port operations, highway arteries, gas mains or electrical service in this areathese areas 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:
a.including fluctuations in the price of green coffee;
b.coffee, competition from existing or new competitors in our industry;industry and
c. 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.
6
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.
For
We have incurred operating losses for each of the prior three fiscal year just ended, June 30, 2005, we hadyears and a net loss in one of ($5,427,000). Wethe prior three fiscal years. If our current strategies are unsuccessful or if we are unsuccessful in integrating the CBI Acquisition with our existing operations we may not achieve the levels of sales and earnings we expect. As a result, 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, funding status and future viability of these plans is not known at this time. The nature of the contractcontracts with these plans allows for future funding demands that are outside our control or ability to estimate.
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.management information system. This Systemsystem is essential to our operations and currently includes all accounting and production software applications. By the end of fiscal 2006,2008, WTS willis also expected to host our Route Salesroute 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.
WE ARE DEPENDENT ON ENTERPRISE RESOURCE MANAGEMENT (?ERP?PLANNING (“ERP”) SOFTWARE TO OPERATE OUTOUR BUSINESS. SHOULD WE FAIL TO OPERATEDOPERATE 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 invoice 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 resulted in and may in the future result in a number of adverse consequences, including: users being disconnected from systems and being unable to perform their job functions, and 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 a security breach or inappropriate use of our network could expose us to the possibility of system failure or other disruption. A security breach could jeopardize 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 executive officers and other key personnel. There is limited management depth in certain key positions throughout the Company. The unexpected loss of one or more of these key employees could have a material adverse effect on our operations and competitive position.
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 board 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, and we are currently
recruiting additional management personnel.
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 1312 years. It is possible that additional shares could be acquired that might deplete the Company'sCompany’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 "put"“put” their shares to the Company for cash. This requires the Company to repurchase thethose shares at the current market value. WhenAssuming all shares currently owned by the ESOP are fully distributed, the Company'sCompany’s re-funding liability is approximately $63,000,000 at current$67,700,000 based on the June 30, 2007 closing share prices.
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 AugustSeptember 1, 2005,2007, members of the Farmer family or entities controlled by the Farmer family (including trusts and a family partnership) as a group beneficially owned approximately 40% of our outstanding common stock. As a result, these stockholders, acting together, may be able to influence the outcome of stockholder votes, including votes concerning the election and removal 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,?“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 becauseif investors often perceive disadvantages in owning stock in companiesa 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?“Rights Plan”) and declared a dividend distribution of one preferred share purchase right (a ?Right?“Right”) for each outstanding share of our common stock to stockholders of record as of 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 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 boardBoard of directors,Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our boardBoard of directorsDirectors regarding such acquisition.
In addition, our boardBoard of directorsDirectors has the authority to issue up to 500,000 shares of Preferred Stock (of which 200,000 shares have been designated as Series 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. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change of control of Farmer Bros. without further action by the 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 boardBoard of directors.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"“business combination” with an "interested stockholder"“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 SOX SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
As directed by SOX 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?smanagement’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Compliance with the SOX Section 404 has been a challenge for many companies. Our ability to continue to comply is an uncertaintyuncertain 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?smanagement’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 COVERNANCEGOVERNANCE 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 NasdaqNASDAQ 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 2005,2007, 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 presently lease a manufacturing facility in Portland, Oregon that is the manufacturing and distribution point for our specialty coffee, grocery and mass market customers. 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 our facilities are leased with a variety of expiration dates through 2011.
We believe our existingTorrance plant and branch warehouses will continue to provide adequate capacity for the foreseeable future. We are currently seeking to expand our Portland plant to accommodate anticipated growth.
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.
None duringHolders
During the fourth quarter of fiscal 2005.
2007 no matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise.
10
Item 5. Market for Registrant'sRegistrant’s Common Equity, and 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."“FARM.” The following table sets forth, for the periods indicated, the dividends paid and the high and low sales prices of the shares of Common Stockcommon stock of the Company. Prices areCompany as reportedquoted 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.
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 Company at the close of business
on May 10, 2004. Share and per share amounts have been restated in the table
below to reflect the split.
2005 2004
High Low Dividend High Low Dividend
1st Quarter $27.55 $24.50 $0.100 $35.48 $31.75 $0.095
2nd Quarter $28.40 $24.03 $0.100 $33.35 $30.52 $0.095
3rd Quarter $29.65 $22.05 $0.100 $36.20 $30.10 $0.095
4th Quarter $24.49 $20.78 $0.100 $39.39 $25.11 $0.095
Market.
|
| Fiscal year ended June 30, 2007 |
| Fiscal year ended June 30, 2006 |
| ||||||||||||||||||
|
| High |
| Low |
| Dividend |
| High |
| Low |
| Dividend |
| ||||||||||
1st Quarter |
| $ | 21.13 |
| $ | 20.70 |
|
| $ | 0.11 |
|
| $ | 24.98 |
| $ | 19.50 |
|
| $ | 0.105 |
|
|
2nd Quarter |
| $ | 21.48 |
| $ | 20.97 |
|
| $ | 0.11 |
|
| $ | 22.87 |
| $ | 19.11 |
|
| $ | 0.105 |
|
|
3rd Quarter |
| $ | 20.61 |
| $ | 20.23 |
|
| $ | 0.11 |
|
| $ | 22.61 |
| $ | 19.31 |
|
| $ | 0.105 |
|
|
4th Quarter |
| $ | 22.73 |
| $ | 22.12 |
|
| $ | 0.11 |
|
| $ | 23.18 |
| $ | 19.72 |
|
| $ | 0.105 |
|
|
There were approximately 4,0913,893 holders of record on September 12, 2005.1, 2007. Holders of record is based upon the number of record holders and individual participants in security position listings.
Effective
Performance Graph
The chart set forth below shows the value of an investment of $100 on June 30, 2002 in each of Farmer Bros. Co. common stock, the Russell 2000 Index and the Value Line Food Processing Index. All values assume reinvestment of the pre-tax value of dividends paid by companies included in these indices and are calculated as of March 17, 2005, our BoardJune 30 of Directors approved a stockholder
rights plan (the "Rights Plan"), pursuant to which the Company entered into a
Rights Agreement dated March 17, 2005 (the "Rights Agreement") with Wells Fargo
Bank, N.A., as Rights Agent, and the Board declared a dividend of one preferred
share purchase right (a "Right") for each outstanding shareyear. The historical stock price performance of the Company's
Common Stock to stockholdersCompany’s common stock shown in the performance graph below is not necessarily indicative of recordfuture stock price performance.
Comparison of Five-Year Cumulative Total Return*
Farmer Bros. Co., Russell 2000 Index And Value Line Food Processing Index
(Performance Results Through 6/30/07)
|
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| ||||||
Farmer Bros. Co. |
| $ | 100.00 |
| $ | 94.51 |
| $ | 75.56 |
| $ | 63.70 |
| $ | 63.24 |
| $ | 67.35 |
|
Russell 2000 Index |
| $ | 100.00 |
| $ | 96.91 |
| $ | 127.85 |
| $ | 138.26 |
| $ | 156.63 |
| $ | 180.20 |
|
Food Processing |
| $ | 100.00 |
| $ | 95.10 |
| $ | 119.42 |
| $ | 126.55 |
| $ | 130.05 |
| $ | 164.82 |
|
Assumes $100 invested at the close of business on March 28,
2005. Each Right, when exercisable, will entitletrading 6/30/02 in Farmer Bros. Co. common stock, Russell 2000 Index, and Value Line Food Processing Index.
*Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believed to be reliable, but 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 adjustment. The description and terms of the Rights are
set forth in the Rights Plan. Initially, ownership of the Rightspublisher 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, exchangedresponsible for any errors or terminated as provided in the Rights
Plan. No rights have been exercised at this time.
omissions contained herein.
Item 6. Selected Financial Data
(In thousands, except per share data)
For the fiscal years ended June 30,
2005 2004 2003 2002 2001
Net sales $198,420 $193,589 $201,558 $205,857 $215,431
(Loss) income from operations($6,583) $3,763 $23,888 $38,210 $42,115
Net (loss) income ($5,427) $12,687 $23,629 $30,569 $36,178
Net (loss) income
per common share
|
| For the fiscal years ended June 30, |
| |||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| |||||
|
| (In thousands, except per share data) |
| |||||||||||||
Net sales |
| $ | 216,259 |
| $ | 207,453 |
| $ | 198,420 |
| $ | 193,589 |
| $ | 201,558 |
|
(Loss) income from operations |
| (4,076 | ) | $ | (2,965 | ) | $ | (6,583 | ) | $ | 3,763 |
| $ | 23,888 |
| |
Net income (loss) |
| $ | 6,815 |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
| $ | 23,629 |
|
Net income (loss) per common share(a) |
| $ | 0.48 |
| $ | 0.34 |
| $ | (0.40 | ) | $ | 0.81 |
| $ | 1.30 |
|
Total assets |
| $ | 337,609 |
| $ | 317,237 |
| $ | 314,923 |
| $ | 317,871 |
| $ | 416,415 |
|
Dividends per common share(a) |
| $ | 0.44 |
| $ | 0.42 |
| $ | 0.40 |
| $ | 0.38 |
| $ | 0.36 |
|
(a) ($0.40) $0.81 $1.30 $1.65 $1.96
Total assets $316,553 $317,871 $416,415 $417,524 $390,395
Dividends per common
share (a) $0.40 $0.38 $0.36 $0.34 $0.32
(a) All per share disclosures have been adjusted to reflect the stock split that became effective on May 10, 2004.
Item 7. Management's
In April 2007, Farmer Bros. acquired all of the outstanding shares of CBH for a purchase price of $23.6 million in cash, including transaction costs of approximately $1.4 million, net of the amount of all outstanding indebtedness of CBH and its subsidiaries. The results of operations of CBH have been included in our consolidated financial statements since April 27, 2007. The Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations Management'sincluded elsewhere in this annual report should be read in conjunction with the selected financial data in order to understand factors such as business combinations and unusual items which may affect the comparability of the information shown above.
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'sCompany’s consolidated financial statements. In April 2007, Farmer Bros. acquired all of the outstanding shares of CBH for a purchase price of $23.6 million in cash, including transaction costs of approximately $1.4 million, net of the amount of all outstanding indebtedness of CBH and its subsidiaries. The results of operations of CBH have been included in our consolidated financial statements since April 27, 2007. An amount of $3.3 million, representing the excess of the purchase price over the fair value of the identifiable net assets acquired, has been recorded as goodwill. We have completed our purchase price allocation at the acquisition date.
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 fiscal years ended June 30, 2005, 20042007, 2006 and 20032005 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"“Risk Factors” described in Item 1.
1A of this report.
Critical Accounting Policies
Management's
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 relatedrelating to retirement benefits, liabilities resulting from self-insurance of our workers?workers’ compensation liabilities, tax liabilities and litigation. We base our estimates on historical experience and other relevant factors that are believed to be reasonable under the circumstances.
13
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:
Investments
Our investments consist of investment grade marketable debt instruments issued by the U.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 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 salespeople
regularly interact with our customers in person. This method of operation has
provided us with a historically low bad debt experience.
Inventories:
Inventories
Inventories are valued at the lower of cost or market and the costs of coffee and allied products for the Company are determined on the last in, first out (LIFO) basis. Costs of coffee and allied products for CBI are determined on an average cost 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: Retention
We are self-insured for California workers'workers’ compensation insurance and use historical analysis to determine and record the estimates of expected future expenses resulting from workers?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: Plans
We have two defined benefit plans that provide retirement benefits for the majority of our employees (the balance of ournon-union employees. Other employees are covered by multiemployer union defined benefit plans).plans. We obtain actuarial valuations for both plans and at present we discount the pension obligations using a 5.30%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 10%9% ultimately reducing to 5.5% in 6 years.
Income Taxes: 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 presently have a valuation
allowancemake certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the portioneffect 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 deferred tax assets that we estimate is more
likely than not to be unrealizable based on available evidence at the time the
estimate is made. Determining the valuation allowance requires significant
management judgments and assumptions, and eachprovision in future periods. Each fiscal quarter we reevaluate our estimate related to the valuation allowancetax provision and reconsider our estimates and our assumptions related to the
specific tax assets.
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.
During fiscal 2004,
The Company expects to make additional investment in CBI to increase the Company purchased 443,845 shares (pre-split)capacity of its common stock held byPortland plant to accommodate anticipated growth. We estimate the Crowe Family and related trusts for approximately $111
million, or approximately $250 per share (pre-split). Concurrentlycosts associated with this purchase, theexpansion will be approximately $8-15 million. The Company offered its Employee Stock Ownership Plan (ESOP) the
opportunityexpects 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. 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
Additional information onfund this matter can be found in Note 11 to the
accompanying financial statements.
additional investment from internal sources.
Our working capital is composed of the following:
(In thousands) June 30,
2005 2004 2003
Current assets $245,219 $252,720 $346,617
Current liabilities $20,693 $21,189 $16,659
Working capital $224,526 $231,531 $329,958
Capital expenditures $8,832 $7,683 $9,089
|
| June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (In thousands) |
| |||||||
Current assets |
| $ | 239,362 |
| $ | 246,808 |
| $ | 245,219 |
|
Current liabilities |
| 27,096 |
| 16,578 |
| 20,693 |
| |||
Working capital |
| $ | 212,266 |
| $ | 230,230 |
| $ | 224,526 |
|
Capital expenditures |
| $ | 35,652 |
| $ | 12,840 |
| $ | 8,832 |
|
At June 30, 20052007 we had no major commitments for new capital expenditures. The
following ongoing projects
Fiscal Years Ended June 30, 2007 and 2006
Overview
During fiscal 2007 our primary focus was to continue our initiatives to strengthen sales. We continue to provide resources and support to our national sales organization. We believe securing national accounts requires an extended effort over time and while we are expected tohopeful that we will be successful in securing additional business as a result of these efforts in the future, there can be no assurance that such accounts will be obtained. We believe that the additional resources resulting from the CBI Acquisition will assist this effort.
We completed the roll-out of our new product packaging in fiscal 2006:
1. Construction2007, which we believe has been well received by our customers.
In fiscal 2007 we completed a significant upgrade to our ERP system, converted our Custom Coffee Plan Division to our ERP system in May 2007, and we began testing the sales system. We expect branch operations will begin live testing of warehousesour route sales system in both Bakersfield and Chico, California is
expected to finish this fall. The combined total cost of improvements for the two warehouses is expected to be approximately $4 million. During the fourthsecond quarter of fiscal 20052008. We also expect to convert CBI to our ERP system during the third quarter of fiscal 2008.
New branches in Shreveport, Louisiana and Nashville, Tennessee were opened in August 2007. Additionally, as a result of the CBI Acquistition, we closed escrow on the purchase ofacquired a warehousecoffee plant in Oakland, California,Portland, Oregon.
In addition to meet the needsour efforts to improve sales through organic growth of our growing Northern California
service area. The total cost for this facility, after improvements, is not
expectedcustomer base and product line, we are seeking to exceed $3 million.
2. We are entering the final year of a multi-year upgrading ofimprove operating results through better sourcing, managing distribution and other costs, and making strategic acquisitions to complement our management information system. At June 30, 2005, we have expended
approximately $14 million since the beginning of the project for hardware,
software, infrastructure, training, consulting and ongoing support. Our
financial systems (general ledger, accounts receivable, accounts payable, fixed
assets and payroll) were converted on July 1, 2003. On September 1, 2004, we
converted our manufacturing system. The final conversion is our sales system
which is scheduled to occur during fiscal 2006. Costs to complete this project
are estimated to be approximately $4 million in fiscal 2006.
Results of Operations
Fiscal years ended June 30, 2005 and 2004
existing core business.
Comparative Information
Net sales in fiscal 20052007 increased $4,831,000$8,806,000 or 2%4% to $198,420,000$216,259,000 from $193,589,000$207,453,000 in fiscal 2004,2006, primarily because of increased sales of allied products and an additional $5,500,000 in sales associated with CBI from the date of its acquisition.
Cost of goods sold in fiscal 2007 increased to $89,492,000, or 42% of sales, as compared to $84,910,000, or 41% of sales, in fiscal 2006. Although margins have been stable in fiscal 2007 and 2006, the volatility of green coffee prices, higher prices on a variety of raw materials and product packaging, strong competition and the integration of CBI with our existing operations will continue to impact future results. As a result of these factors, gross profit increased 3%, or $4,224,000, to $126,767,000 in fiscal 2007 as compared to $122,543,000 in fiscal 2006.
Selling expenses in fiscal 2007 increased 2% to $102,622,000 from $100,354,000 in fiscal 2006. This increase was primarily the result of higher coffee brewing equipment costs associated with our sales pricesprograms. General and administrative expenses in fiscal 2007 increased 12%, or $3,067,000, to $28,221,000 from $25,154,000 in fiscal 2006. This was primarily the result of roast
coffee. Duringhigher consulting costs associated with software upgrade and development of the new sales system.
Total other income (expense) in fiscal 2007 was $10,924,000 as compared to $6,970,000 in fiscal 2006. This increase is primarily the result of higher interest rates during fiscal 2007.
As a result of the forgoing factors, net income for fiscal 2007 was $6,815,000 as compared to $4,756,000 in fiscal 2006. Net income per common share was $0.48 in fiscal 2007 as compared to a $0.34 in fiscal 2006.
Fiscal Years Ended June 30, 2006 and 2005
Overview
In fiscal 2005, we initiated additional programs intendedmanagement developed a number of short and long term initiatives to strengthen the Company’s sales and distribution network and improve sales. We revisedOur efforts were focused primarily on enhancing our brand identification, expanding our product line and customer base and improving our sales incentive program to more clearly focusand distribution efficiency. Our initiatives included:
· Promotion of our sales people. In an effort to advance our image more clearlybrand with new packaging throughout the product line, design and aggressively with current and potential customers, we redesigned our
merchandising anddistribution of new point of sale marketing materials used byfor our customers, and we have
set an aggressiveexpanding our trade show schedule with a new booth. Most importantly, we
have assembled a teamthroughout our marketing area.
· Introduction of sales professionals drawn from the ranks of our route
sales organization. This group will work with and separately from our existing
sales organization to solicit new large customer accounts and maintain existing
relationships with our large customers. In addition, we have developed some new products that we believe will appeal to both new and existing customers,
including cultural drinks like horchata (a sweet rice drink with almond and
cinnamon),which included fruit smoothies, (an iced beverage), an expanded line of teas, liquid coffee and some new seasonal products like Pumpkin Pie Cappuccino.
products.
· Expansion of our customer base through a national accounts organization to solicit large customers and national accounts.
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 in fiscal 2006.
Cost of goods sold in fiscal 20052006 increased 16%to $84,910,000, or 41% of sales, as compared to $82,964,000, or 42% of sales, asin fiscal 2005. Although we stabilized our margins in fiscal 2006 compared to $71,405,000, or 37% of sales, in fiscal 2004. The average cost2005, 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 fiscal 2005 exceededan effort to improve our profit margins. There can be no assurance that of fiscal 2004 by 74%. A
volatile, sustained increase in green coffee prices in the secondsuch efforts will be successful.
Selling, General and third
quarters of fiscal 2005 resulted in a decrease in profit margins on roast
coffee during those periods. As previously reported in our filings with the
SEC, we expect to pass on this cost increase through higher roast coffee
prices, but such price increases lag increases in green coffee costs, and price
increases did not take effect until June 2005.
Selling and General & Administrative Expenses in fiscal 20052006 increased $3,469,000 or 3% to $122,039,000$125,508,000 from $118,421,000$122,039,000 in fiscal 2004.2005. This increase is primarily attributed to higher coffee
brewing equipment costs largely associated with thenew products, higher gasoline and diesel costs and increased California workers’ compensation expense, offset by declines in self-insured employee medical program, the cost of
the ESOP, the project-relatedcosts, 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 consultingdevelopment costs related to complianceassociated with Section 404 of the
Sarbanes-Oxley Act of 2002 (?SOX?) as summarized in the following table.
Principal increases in Selling and General and Administrative Expenses
(In thousands)
June 30,
2005 2004
Employee medical costs $ 6,945 $ 6,091
ESOP 7,163 6,298
ITthat project expenses 3,035 3,400
IT project depreciation 3,228 1,467
SOX compliance 1,100 360
Total $21,471 $17,616
As a result of lower profit margins and higher operating expenses, the Company
had an operating losswill begin depreciating in fiscal 2005 of ($6,583,000)2007.
Total other income (expense) in fiscal 2006 was $6,970,000 as compared to operating
income of $3,763,000 in fiscal 2004.
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 Income2005. This increase is primarily the result of $12,219,000 inhigher interest rates during fiscal 2004. Other, net (expense) was ($10,887,000) for fiscal 2005 as compared
to Other, net income2006 and the reduction of $6,305,000 for fiscal 2004.
Higherlosses 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) income during fiscal 2005 includedconsisted of net realized coffee trading gains of $3,655,000 offset by realizedand unrealized coffee trading losses of ($16,764,000).
Rising interest rates have helped 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,12,992,000), offset by net income in fiscal 2004 included $5,778,000
of non-recurring income.
gains on other investments.
As a result of the forgoing factors, the net lossincome for fiscal 20052006 was ($5,427,000)$4,756,000 as compared to a net income $12,687,000 for fiscal 2004. Net loss per common share wasof ($0.40)5,427,000) in fiscal 2005 as compared to net income per
common share of $0.81 in fiscal 2004.
Fiscal 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.
The National Restaurant Association forecasted that industry sales would
increase 4.4% for calendar 2004, but despite the persistent efforts of our
sales force we did not keep pace with this forecast. We note that regional
results often do not reflect national averages and our California operations,
representing our largest marketing area, showed limited improvement in fiscal
2004.
Consumer sentiment and spending patterns, which we believe affects our
customers, were not enhanced in fiscal 2004 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 fiscal 2003. The
average cost of green coffee throughout fiscal 2004 exceeded that of fiscal
2003 by 15%. Through price adjustments we were, on average, able to maintain
margins for fiscal 2004, although shrinking gross profit margins were
experienced during the last half of the fiscal year. Selling and General &
Administrative Expenses in fiscal 2004 increased 11% to $118,421,000 from
$107,008,000 in fiscal 2003.
As a result of these factors, operating income in 2004 decreased 83% to
$3,763,000 from $23,888,000 in fiscal 2003.
Other income decreased 11% to $12,219,000 in fiscal 2004 as compared to
$13,683,000 in fiscal 2003. Low interest rates limited investment
returns, and the expenditure of more than $111 million to purchase stock from
the Crowe family 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. The Company received payment on a key man life
insurance policy on Mr. Farmer that was 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 awards 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 2003.2005. Net income per common share decreased 38%was $0.34 in fiscal 2004 to $0.81 per share2006 as compared to $1.30a net loss per common share of ($0.40) in fiscal 2003.
2005.
Contractual obligations.
Obligations
The following table contains supplemental information regarding total contractual obligations as of June 30, 2005.
(In2007 (in thousands) Less Than More Than
Total One Year 2-3 Years 4-5 Years 5 years
Operating lease obligations $1,690 $783 $776 $131 $ -
.
|
| Payment due by period: |
| ||||||||||||||||||||
|
|
|
| Less Than |
|
|
|
|
| More Than |
| ||||||||||||
|
| Total |
| One Year |
| 1-3 Years |
| 3-5 Years |
| 5 years |
| ||||||||||||
Operating lease obligations |
| $ | 2,067 |
|
| $ | 1,105 |
|
|
| $ | 853 |
|
|
| $ | 109 |
|
|
| — |
|
|
Off-Balance Sheet Arrangements.
Arrangements
The Company has no off-balance sheet arrangements.
Item 7A. QualitativeQuantitative and QuantitativeQualitative Disclosures About Market Risk
Interest Rate 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, 2005,2007, over 90% of these funds were invested in U.S. Treasury securities and
approximately 50% of these issues have maturities shorter than 90 days. This
portfolio's interest rate risk is not hedged and itswith an average maturity is
approximately 90of 99 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 $1,110,000.
$918,000.
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, 2005.2007. 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 stock 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, 2005 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -150 basis points $65,717 $0 $65,717 $65,717
- -100 basis points $64,852 $0 $64,852 $64,852
Unchanged $61,660 $239 $61,899 $61,899
+100 basis points $56,881 $3,800 $60,681 $60,681
+150 basis points $54,280 $6,220 $60,500 $60,500
|
| Market Value at June 30, 2007 |
| Change in Market |
| ||||||||||||||||
|
| Preferred |
| Futures and |
| Total |
| Value of Total |
| ||||||||||||
Interest Rate Changes |
|
|
| Securities |
| Options |
| Portfolio |
| Portfolio |
| ||||||||||
|
| (In thousands) |
| ||||||||||||||||||
-150 basis points |
|
| $ | 71,100 |
|
|
| $ | 0 |
|
| $ | 71,100 |
|
| $ | 4,890 |
|
| ||
-100 basis points |
|
| $ | 69,486 |
|
|
| $ | 1 |
|
| $ | 69,487 |
|
| $ | 3,277 |
|
| ||
Unchanged |
|
| $ | 65,165 |
|
|
| $ | 1,045 |
|
| $ | 66,210 |
|
| $ | 0 |
|
| ||
+100 basis points |
|
| $ | 60,230 |
|
|
| $ | 5,892 |
|
| $ | 66,122 |
|
| $ | (88 | ) |
| ||
+150 basis points |
|
| $ | 57,736 |
|
|
| $ | 8,940 |
|
| $ | 66,676 |
|
| $ | 466 |
|
| ||
Commodity Price Changes
Risk
We are exposed to commodity price risk arising from changes in the market price of green coffee. We price ourThe Company prices green coffee inventory on the LIFO basis and CBI prices green coffee on an average cost basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Volatile price increases cannot, because of competition and market conditions, always bepassedbe passed on to our customers. From time to time the Company 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 income (expense) income.
.
On June 30, 20052007 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.
Item 8. Financial Statements and Supplementary Data
18
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
Subsidiaries
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and SubsidiarySubsidiaries as of June 30, 20052007 and 2004,2006, and the related consolidated statements of operations, stockholders'stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2005.2007. 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 SubsidiarySubsidiaries at June 30, 20052007 and 2004,2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2005,2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, on June 30, 2007, the Company changed its method of accounting for defined benefit pension and postretirement plans in accordance with Statement of Financial Accounting Standards No. 158.
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'sSubsidiaries’ internal control over financial reporting as of June 30, 2005,2007, 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 7, 200510, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
September 7, 2005
| ||
Los Angeles, California |
19
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars
(Dollars in thousands, except share and per share data)
June 30, 2005 June 30, 2004
ASSETS
Current assets:
Cash and cash equivalents $9,814 $21,807
Short term investments 171,055 176,903
Accounts and notes receivable, net 15,485 14,565
Inventories 41,086 35,579
Income tax receivable 4,064 408
Deferred income taxes - 775
Prepaid expenses 3,715 2,683
Total current assets $245,219 $252,720
Property, plant and equipment, net 42,671 42,300
Notes receivable 0 143
Other assets 21,268 21,609
Deferred income taxes 5,765 1,099
Total assets $314,923 $317,871
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,852 $9,589
Accrued payroll expenses 7,590 6,999
Deferred income taxes 321 -
Other 4,930 4,601
Total current liabilities $20,693 $21,189
Accrued postretirement benefits $29,344 $26,984
Total liabilities $50,037 $48,173
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value,
authorized 25,000,000 shares; $16,075 $16,075
16,075,080 issued and outstanding
Additional paid-in capital 32,292 32,248
Retained earnings 272,791 283,654
Unearned ESOP shares (55,415) (61,542)
Less accumulated comprehensive loss (857) (737)
Total stockholders' equity $264,886 $269,698
Total liabilities and
stockholders' equity $314,923 $317,871
|
| June 30, 2007 |
| June 30, 2006 |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| $ | 12,586 |
|
|
| $ | 5,333 |
|
|
Short term investments |
|
| 158,050 |
|
|
| 176,336 |
|
| ||
Accounts and notes receivable, net |
|
| 17,651 |
|
|
| 13,250 |
|
| ||
Inventories |
|
| 44,996 |
|
|
| 45,008 |
|
| ||
Deferred income taxes |
|
| 2,462 |
|
|
| 3,300 |
|
| ||
Prepaid expenses |
|
| 3,617 |
|
|
| 3,581 |
|
| ||
Total current assets |
|
| $ | 239,362 |
|
|
| $ | 246,808 |
|
|
Property, plant and equipment, net |
|
| 52,667 |
|
|
| 46,385 |
|
| ||
Goodwill and other intangible assets |
|
| 16,959 |
|
|
| — |
|
| ||
Pension and other non-current assets |
|
| 13,024 |
|
|
| 17,427 |
|
| ||
Deferred income taxes |
|
| 15,597 |
|
|
| 6,617 |
|
| ||
Total assets |
|
| $ | 337,609 |
|
|
| $ | 317,237 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||
Accounts payable |
|
| $ | 8,702 |
|
|
| $ | 4,197 |
|
|
Accrued payroll expenses |
|
| 7,480 |
|
|
| 6,235 |
|
| ||
Other |
|
| 10,914 |
|
|
| 6,146 |
|
| ||
Total current liabilities |
|
| 27,096 |
|
|
| 16,578 |
|
| ||
Accrued postretirement benefits |
|
| 44,297 |
|
|
| 31,436 |
|
| ||
Total liabilities |
|
| 71,393 |
|
|
| 48,014 |
|
| ||
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 |
|
| 30,823 |
|
|
| 31,518 |
|
| ||
Retained earnings |
|
| 272,406 |
|
|
| 271,733 |
|
| ||
Unearned ESOP shares |
|
| (44,240 | ) |
|
| (50,103 | ) |
| ||
Less accumulated comprehensive loss |
|
| (8,848 | ) |
|
| — |
|
| ||
Total stockholders’ equity |
|
| $ | 266,216 |
|
|
| $ | 269,223 |
|
|
Total liabilities and stockholders’ equity |
|
| $ | 337,609 |
|
|
| $ | 317,237 |
|
|
The accompanying notes are an integral part of these financial statements.
20
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
(Dollars in thousands, except share and per share data)
Years ended June 30,
2005 2004 2003
Net sales $198,420 $193,589 $201,558
Cost of goods sold 82,964 71,405 70,662
Gross profit $115,456 $122,184 $130,896
Selling expense 92,112 92,029 88,658
General and administrative expenses 29,927 26,392 18,350
Operating expenses $122,039 $118,421 $107,008
(Loss) income from operations ($6,583) $3,763 $23,888
Other income (expense):
Dividend income 3,420 3,396 3,246
Interest income 2,721 2,518 3,974
Other, net (expense) income (10,887) 6,305 6,463
Total other (expense) income ($4,746) $12,219 $13,683
(Loss) income before taxes (11,329) 15,982 37,571
Income tax (benefit) expense (5,902) 3,295 13,942
Net (loss) income ($5,427) $12,687 $23,629
Net (loss) income per common share ($0.40) $0.81 $1.30
Weighted average shares outstanding 13,653,420 15,576,450 18,145,910
|
| Years ended June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Net sales |
| $ | 216,259 |
| $ | 207,453 |
| $ | 198,420 |
|
Cost of goods sold |
| 89,492 |
| 84,910 |
| 82,964 |
| |||
Gross profit |
| $ | 126,767 |
| $ | 122,543 |
| $ | 115,456 |
|
Selling expense |
| 102,622 |
| 100,354 |
| 92,112 |
| |||
General and administrative expenses |
| 28,221 |
| 25,154 |
| 29,927 |
| |||
Operating expenses |
| $ | 130,843 |
| $ | 125,508 |
| $ | 122,039 |
|
(Loss) from operations |
| $ | (4,076 | ) | $ | (2,965 | ) | $ | (6,583 | ) |
Other income (expense): |
|
|
|
|
|
|
| |||
Dividend income |
| 3,923 |
| 3,597 |
| 3,420 |
| |||
Interest income |
| 5,768 |
| 4,445 |
| 2,721 |
| |||
Other, net income (expense) |
| 1,233 |
| (1,072 | ) | (10,887 | ) | |||
Total other income (expense) |
| $ | 10,924 |
| $ | 6,970 |
| $ | (4,746 | ) |
Income (loss) before taxes |
| 6,848 |
| 4,005 |
| (11,329 | ) | |||
Income tax expense (benefit) |
| 33 |
| (751 | ) | (5,902 | ) | |||
Net income (loss) |
| $ | 6,815 |
| $ | 4,756 |
| $ | (5,427 | ) |
Net income (loss) per common share |
| $ | 0.48 |
| $ | 0.34 |
| $ | (0.40 | ) |
Weighted average shares outstanding |
| 14,106,011 |
| 13,890,609 |
| 13,653,420 |
| |||
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,
2005 2004 2003
Cash flows from operating activities:
Net (loss) income ($5,427) $12,687 $23,629
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 8,396 7,098 5,776
Deferred income taxes (3,510) (1,536) 3,989
Gain on sales of assets (100) (94) (498)
ESOP compensation expense 6,171 5,516 4,269
Net loss (gain) on investments 11,571 (706) (5,625)
Change in assets and liabilities:
Short term investments (5,723) (12,914) 16,721
Accounts and notes receivable (777) (759) 279
Inventories (5,507) (877) 2,659
Income tax receivable (3,656) 2,470 (325)
Prepaid expenses and other assets (637) 4,064 (1,128)
Accounts payable (1,737) 6,268 (1,506)
Accrued payroll, expenses and
other liabilities 920 (762) 930
Accrued postretirement benefits 2,126 2,285 1,904
Other long term liabilities - (5,570) 84
Total adjustments $7,537 4,483 27,529
Net cash provided by
operating activities $2,110 $17,170 $51,158
Cash flows from investing activities:
Purchases of property, plant and equipment (8,832) (7,683) (9,089)
Proceeds from sales of property,
plant and equipment 165 132 630
Net cash used in investing activities ($8,667) ($7,551) ($8,459)
Cash flows from financing activities:
Dividends paid (5,436) (5,621) (6,523)
ESOP contributions - (32,412) (24,237)
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 ($5,436) ($6,798) ($30,760)
Net (decrease) increase in cash
and cash equivalents ($11,993) $2,821 $11,939
Cash and cash equivalents at beginning of year 21,807 18,986 7,047
Cash and cash equivalents at end of year $9,814 $21,807 $18,986
|
| Years ended June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 6,815 |
| $ | 4,756 |
| $ | (5,427 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation |
| 9,324 |
| 8,963 |
| 8,396 |
| |||
Deferred income taxes |
| (8,141 | ) | (5,001 | ) | (3,510 | ) | |||
Gain on sales of assets |
| (244 | ) | (396 | ) | (100 | ) | |||
ESOP compensation expense |
| 5,168 |
| 4,538 |
| 6,171 |
| |||
Net (gain) loss on investments |
| (819 | ) | 2,301 |
| 11,571 |
| |||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Short term investments |
| 19,104 |
| (7,582 | ) | (5,723 | ) | |||
Accounts and notes receivable |
| (675 | ) | 2,235 |
| (777 | ) | |||
Inventories |
| 4,200 |
| (3,922 | ) | (5,507 | ) | |||
Income tax receivable |
| 0 |
| 4,064 |
| (3,656 | ) | |||
Prepaid expenses and other assets |
| 5,026 |
| 5,056 |
| (637 | ) | |||
Accounts payable |
| (614 | ) | (3,655 | ) | (1,737 | ) | |||
Accrued payroll, expenses and other liabilities |
| 5,634 |
| (139 | ) | 920 |
| |||
Accrued postretirement benefits |
| 4,013 |
| 2,396 |
| 2,126 |
| |||
Total adjustments |
| $ | 41,976 |
| $ | 8,858 |
| $ | 7,537 |
|
Net cash provided by operating activities |
| $ | 48,791 |
| $ | 13,614 |
| $ | 2,110 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Investment in subsidiary (acquisition of CBI net of cash acquired) |
| (23,167 | ) | — |
| — |
| |||
Purchases of property, plant and equipment |
| (12,485 | ) | (12,840 | ) | (8,832 | ) | |||
Proceeds from sales of property, plant and equipment |
| 256 |
| 559 |
| 165 |
| |||
Net cash used in investing activities |
| $ | (35,396 | ) | $ | (12,281 | ) | $ | (8,667 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Dividends paid |
| (6,142 | ) | (5,814 | ) | (5,436 | ) | |||
Net cash used in financing activities |
| $ | (6,142 | ) | $ | (5,814 | ) | $ | (5,436 | ) |
Net increase (decrease) in cash and cash equivalents |
| $ | 7,253 |
| $ | (4,481 | ) | $ | (11,993 | ) |
Cash and cash equivalents at beginning of year |
| 5,333 |
| 9,814 |
| 21,807 |
| |||
Cash and cash equivalents at end of year |
| $ | 12,586 |
| $ | 5,333 |
| $ | 9,814 |
|
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
Shares Amount Capital Earnings Shares -Loss Total
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 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
The accompanying notes are an integral part of these financial statements.
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
| ||||||||||||||||
|
|
|
|
|
| Additional |
|
|
| Unearned |
| Comprehensive |
|
|
| ||||||||||||||||
|
| Common |
| Stock |
| Paid-in |
| Retained |
| ESOP |
| Income |
|
|
| ||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| (Loss) |
| Total |
| ||||||||||||||||
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 |
| |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
| 6,815 |
|
|
|
|
|
|
|
|
|
| 6,815 |
| ||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,848 | ) |
| (8,848 | ) | ||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,033 | ) | ||||||
Dividends ($0.44 per share) |
|
|
|
|
|
|
|
|
|
|
|
| (6,142 | ) |
|
|
|
|
|
|
|
|
| (6,142 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| (695 | ) |
|
|
|
|
|
| 5,863 |
|
|
|
|
|
| 5,168 |
| ||||||
Balance at June 30, 2007 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 30,823 |
|
|
| $ | 272,406 |
|
|
| ($44,240 | ) |
|
| ($8,848 | ) |
| $ | 266,216 |
| ||
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 and brokered sales to restaurants, hotels and hospitals as well as retailers such as convenience stores, coffee houses, general merchandisers and fast
food outlets.grocery stores.. The Company'sCompany’s products are distributed by its selling divisions from branch warehouses located in most large cities throughout the western United States.
States, and through a variety of alternate distribution channels.
Acquisition of Coffee Bean International, Inc
On April 27, 2007, the Company acquired 100% of the outstanding common shares of Coffee Bean Holding Company, Inc., a Delaware corporation (“CBH”), the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), a gourmet specialty coffee roaster and wholesaler headquartered in Portland, Oregon. The purchase price was $23.6 million in cash, including transaction costs of approximately $1.4 million, net of the amount of all outstanding indebtedness of CBH and its subsidiaries. The results of operations of CBH have been included in the Company’s consolidated financial statements since April 27, 2007. Through this acquisition, the Company added additional customer categories including gourmet coffee houses, national foodservice operators, national convenience stores, national mass market merchandisers and grocery stores.
The Company has obtained a third-party valuation of CBH’s acquired net assets. The purchase price allocation has not been finalized, since it is possible that certain refinements may be made if additional facts or circumstances become known that impacts the estimates as of the acquisition date. The purchase price allocation is expected to be finalized during fiscal 2008. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, based on the preliminary purchase price allocation (in millions):
Current assets, excluding inventories |
| $ | 4.3 |
|
Inventories |
| 4.2 |
| |
Property, plant and equipment |
| 3.1 |
| |
Customer relationships |
| 10.1 |
| |
Trade names |
| 4.1 |
| |
Goodwill |
| 3.3 |
| |
Total assets acquired |
| $ | 29.1 |
|
Liabilities assumed |
| (5.5 | ) | |
Net assets acquired |
| $ | 23.6 |
|
The customer relationships include both contractual and non-contractual relationships, and have estimated lives ranging from 3.5 to 8 years. Because these relationships have definite lives, the Company will amortize the assets over the estimated lives on a straight-line basis. The CBI trade name has an indefinite life and thus is not subject to amortization. Other trade names owned by CBI have estimated lives of 3 years.
The goodwill is expected to be deductible for tax purposes.
Amortization expense for intangible assets amounted to approximately $527,000 for the fiscal year ended June 30, 2007.
The following is a summary of estimated aggregate amortization expense for each of the next five fiscal years (in thousands):
FY 2008 |
| $ | 2,108 |
|
FY 2009 |
| 2,108 |
| |
FY 2010 |
| 1,971 |
| |
FY 2011 |
| 1,514 |
| |
FY 2012 |
| 1,377 |
| |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiarysubsidiaries FBC Finance Company.Company and CBH. 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, 20052007 and 20042006 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, 2005,2007, 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 for the Company are determined on the last in, first out (LIFO) basis. Costs of coffee and allied products at CBI are determined on an average cost 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 straight-line method. 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 the Company?sCompany’s customers at their places of business by the Company?sCompany’s route sales employees. Revenue is recognized at the time the Company?sCompany’s sales representatives physically deliver products to customers and title passes.
passes or when products are accepted by the customer when shipped by third party delivery.
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)6). The Company has no dilutive shares for any of the three fiscal years in the period ended June 30, 2005.2007. 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 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's
Company’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, TheExcluding Goodwill and Indefinite-Lived Intangible Assets
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, 2005.
2007.
Goodwill and Other Indefinite-Lived Intangible Assets
Under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Under SFAS 142, indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the net assets of the respective reporting units, including goodwill. If the fair value of the reporting unit is less than the carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes Step 2 to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less then the carrying amount of goodwill, an impairment loss is recognized equal to the difference.
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 calendar year 2007 to 2010.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year presentation.
New pronouncements
Pronouncements
In November 2004,September 2006 the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs.
157, Fair Value Measurements (“SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, Inventory
Pricing,157”). This new standard provides guidance for using fair value to clarifymeasure assets and liabilities. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the accounting for abnormal amounts use
of idle facility
expense, freight, handling costs and wasted material.fair value in any new circumstances. Under SFAS No. 151 requires
that those items be recognized as current period charges and requires that
allocation of fixed production overheads157, fair value refers to the cost of conversionprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The FASB clarifies the principle that fair value should be based on the normal capacityassumptions market participants would use when pricing the asset or liability. The provisions of this statement must be implemented in the first quarter of the production facilities.Company’s fiscal year 2008. The Company does not expect that the adoption of SFAS 157 will have a significant impact on the Company’s financial position and results of operations.
In June 2006, the FASB issued Interpretation No. 15148, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS 109, Accounting for Income Taxes (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the 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 fiscal years beginning after JuneDecember 15, 2005.2006. The Company will adopt this
Statement effectiveadopted FIN 48 on July 1, 2005,2007, as required. The cumulative effect of adopting FIN 48, if any, will be recorded in retained earnings and other accounts as applicable. The Company does not expect that the adoption toof FIN 48 will have a materialsignificant impact on the Company'sCompany’s financial position or results of operations or
cash flows.
In December 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004, which states that the FASB believes that the qualified
production activities deduction provided by the American Jobs Creation Act of
2004 ("the Act") should be accounted for as a special deduction in accordance
with SFAS No. 109. This FSP was effective upon issuance. FSP 109-1 has not had,
nor is it expected to have, a material impact on the Company's financial
position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. This statement eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of Accounting Principles Board ("APB")
Opinion No. 29 and replaces it with an exception for exchanges that do not have
commercial substance. This Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company will adopt this Statement
effective July 1, 2005, and does not expect the adoption to have a material
impact on the Company's financial position, results of operations or cash
flows.
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
determine either the period-specific effects or the cumulative 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 will
adopt this Statement effective July 1, 2005, and does not expect the adoption
to have a material impact on the Company's financial position, results of
operations or cash flows.
operations.
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, 20052007 and 2004,2006, 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:
(In thousands)
2005 2004
Trading securities at fair value
U.S. Treasury Obligations $109,134 $119,528
Preferred Stock 61,682 56,037
Futures, options and other derivatives 239 1,338
$171,055 $176,903
|
| 2007 |
| 2006 |
| ||||
|
| (In thousands) |
| ||||||
Trading securities at fair value |
|
|
|
|
|
|
| ||
U.S. Treasury Obligations |
|
| $ | 91,840 |
|
| $ | 113,502 |
|
Preferred Stock |
|
| 65,165 |
|
| 61,716 |
| ||
Futures, options and other derivatives |
|
| 1,045 |
|
| 1,092 |
| ||
Other |
|
| 0 |
|
| 26 |
| ||
|
|
| $ | 158,050 |
|
| $ | 176,336 |
|
Gains and losses, both realized and unrealized, are included in otherOther, net income and expense. Gross realized gains/losses at June 30, are as follows:
2005 2004 2003
Gains $5,599 $12,259 $6,553
Losses ($21,112) ($6,955) ($7,309)
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (In thousands) |
| |||||||
Gains |
| $ | 4,189 |
| $ | 5,071 |
| $ | 5,599 |
|
Losses |
| ($3,123 | ) | $ | (1,660 | ) | $ | (21,112 | ) | |
28
Note 3 Allowance for Doubtful Accounts
(In thousands)
2005 2004
Balance at beginning of year $345 $345
Additions 194 181
Deductions (229) (181)
Balance at end of year $310 $345
Note 43. Inventories
(In thousands)
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
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, 2007 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
|
| (In thousands) |
| |||||||||||||
Coffee |
|
| $ | 6,916 |
|
|
| $ | 12,103 |
|
| $ | 19,019 |
| ||
Allied products |
|
| 14,501 |
|
|
| 3,299 |
|
| 17,800 |
| |||||
Coffee brewing equipment |
|
| 2,120 |
|
|
| 6,057 |
|
| 8,177 |
| |||||
|
|
| $ | 23,537 |
|
|
| $ | 21,459 |
|
| $ | 44,996 |
| ||
June 30, 2006 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
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 |
| ||
Current cost of coffee and allied productsproduct inventories is greater than the LIFO cost by approximately $16,506,000$18,467,000 and $2,427,000$18,750,000 as of June 30, 20052007 and 2004,2006, respectively.
The change in the Company'sCompany’s green coffee and allied product inventories during fiscal 2005, 2004,2007, 2006, and 20032005 resulted in LIFO (increments)/decrements which had
the effect of (decreasing)/increasing (loss)/income before taxesresulted in a net increase (decrease) in gross profit for those years by $1,969,000, ($971,000) and ($1,747,000), ($499,000) and $64,000, respectively.
Note 54. Property, Plant and Equipment
(In thousands)
2005 2004
Buildings and facilities $42,757 $41,179
Machinery and equipment 49,642 48,945
Capitalized software costs 12,689 9,016
Office furniture and equipment 6,301 5,912
$111,389 $105,052
Accumulated depreciation (74,865) (68,899)
Land 6,147 6,147
Total property plant and equipment $42,671 $42,300
|
| 2007 |
| 2006 |
| ||
|
| (In thousands) |
| ||||
Buildings and facilities |
| $ | 51,510 |
| $ | 47,561 |
|
Machinery and equipment |
| 56,439 |
| 50,375 |
| ||
Capitalized software costs |
| 14,321 |
| 14,318 |
| ||
Office furniture and equipment |
| 8,305 |
| 6,824 |
| ||
|
| $ | 130,575 |
| $ | 119,078 |
|
Accumulated depreciation |
| (86,502 | ) | (79,166 | ) | ||
Land |
| 8,594 |
| 6,473 |
| ||
Total property, plant and equipment |
| $ | 52,667 |
| $ | 46,385 |
|
Maintenance and repairs charged to expense for the years ended June 30, 2007, 2006 and 2005 2004,were $12,417,000, $12,112,000 and 2003 were $10,719,000, $11,151,000 and $11,022,000, respectively.
Note 65. 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.
In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This standard requires recognition of the funded status of a benefit plan in the balance sheet. The standard also requires recognition in other comprehensive income of certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS No. 158 provides recognition and disclosure elements to be effective as of the end of fiscal years ending after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company adopted the recognition provisions
of SFAS No.158 and applied them to the funded status of its defined benefit and postretirement plans resulting in a decrease in stockholders’ equity of $8.8 million.
Incremental Effect of Applying FASB Statement No. 158
on Individual Line Items in the Statement of Financial Position
|
| Before |
|
|
| Post Retirement |
| After |
| ||||||||||||
|
| Application of |
| Pension |
| Medical |
| Application of |
| ||||||||||||
|
| Statement 158 |
| Adjustments |
| Adjustments |
| Statement 158 |
| ||||||||||||
Pension and other non-current assets |
|
| $ | 17,240 |
|
|
| $ | (4,216 | ) |
|
|
|
|
|
| $ | 13,024 |
|
| |
Deferred income taxes (noncurrent) |
|
| 10,009 |
|
|
| 1,632 |
|
|
| $ | 3,956 |
|
|
| 15,597 |
|
| |||
Total assets |
|
| 336,237 |
|
|
| (2,584 | ) |
|
| 3,956 |
|
|
| 337,609 |
|
| ||||
Current liabilities |
|
| 25,538 |
|
|
|
|
|
|
| 1,558 |
|
|
| 27,096 |
|
| ||||
Accrued postretirement benefits |
|
| 35,635 |
|
|
|
|
|
|
| 8,662 |
|
|
| 44,297 |
|
| ||||
Accumulated other comprehensive loss |
|
| 0 |
|
|
| (2,584 | ) |
|
| (6,264 | ) |
|
| (8,848 | ) |
| ||||
Total stockholders’ equity |
|
| $ | 275,064 |
|
|
| $ | (2,584 | ) |
|
| $ | (6,264 | ) |
|
| $ | 266,216 |
|
|
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 $2,278,000, $2,114,000$2,373,000, $2,366,000 and $2,104,000$2,278,000 for the fiscal years ended June 30, 2007, 2006 and 2005, 2004 and 2003, 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, 2005.
Disclosure30.
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (OCI)
|
| Farmer Bros. Plan |
| Brewmatic Plan |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
| (In thousands) |
| (In thousands) |
| ||||||||
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 2,053 |
| $ | 2,756 |
| $ | 41 |
| $ | 58 |
|
Interest cost |
| 4,759 |
| 4,310 |
| 209 |
| 200 |
| ||||
Expected return on plan assets |
| (6,666 | ) | (6,346 | ) | (287 | ) | (278 | ) | ||||
Amortization of net (gain)/loss |
| 2 |
| 924 |
| 33 |
| 82 |
| ||||
Amortization of prior service cost/(credit) |
| 7 |
| 7 |
| 53 |
| 56 |
| ||||
Net periodic benefit cost |
| $ | 155 |
| $ | 1,651 |
| $ | 49 |
| $ | 118 |
|
Other Changes Recognized in OCI |
|
|
|
|
|
|
|
|
| ||||
Net (gain)/loss |
| $ | (5,063 | ) | N/A* |
| $ | (247 | ) | N/A* |
| ||
Prior service cost/(credit) |
| 0 |
| N/A* |
| 0 |
| N/A* |
| ||||
Amortization of net gain/(loss) |
| (2 | ) | N/A* |
| (34 | ) | N/A* |
| ||||
Amortization of transition asset/(obligation) |
| 0 |
| N/A* |
| 0 |
| N/A* |
| ||||
Amortization of prior service (cost)/credit |
| (7 | ) | N/A* |
| (53 | ) | N/A* |
| ||||
Total recognized in other comprehensive income |
| $ | (5,072 | ) | N/A* |
| $ | (334 | ) | N/A* |
| ||
Total recognized in net periodic benefit cost and OCI |
| $ | (4,917 | ) | N/A* |
| $ | (285 | ) | N/A* |
| ||
Weighted-average assumptions used to determine net periodic benefit cost |
|
|
|
|
|
| |||||||
Discount rate |
| 6.25 | % | 5.30 | % | 6.25 | % | 5.30 | % | ||||
Expected long-term return on plan assets |
| 8.00 | % | 8.00 | % | 8.00 | % | 8.00 | % | ||||
Rate of compensation increase |
| 3.00 | % | 3.00 | % | N/A |
| N/A |
| ||||
* These items are new this year due to the application of SFAS 158. Retrospective application is not required.
Basis Used to Determine Expected Long-term Return on Plan Assets
Historical and future projected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the Company Pension Plans
(In thousands)
Years ended June 30
2005 2004
Change in benefit obligation
Benefit obligation atrisk-free real rate of return, and the beginningassociated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the year $69,516 $71,853
Service cost 2,117 2,375
Interest cost 4,284 3,954
Plan participants contributions 189 191
Amendments 0 0
Actuarial loss/(gain) 14,358 (5,961)
Benefits paid (3,623) (2,896)
Benefit obligation at
the endplan.
31
|
| Farmer Bros. Plan |
| Brewmatic Plan |
| ||||||||
|
| Years ended June 30, |
| Years ended June 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
| (In thousands) |
| (In thousands) |
| ||||||||
Comparison of obligations to plan assets |
|
|
|
|
|
|
|
|
| ||||
Projected benefit obligation |
| $ | 83,576 |
| $ | 77,896 |
| $ | 3,526 |
| $ | 3,456 |
|
Accumulated benefit obligation |
| 76,482 |
| 71,687 |
| 3,526 |
| 3,456 |
| ||||
Fair value of plan assets at measurement date |
| 95,557 |
| 84,960 |
| 4,076 |
| 3,697 |
| ||||
Plan assets by category |
|
|
|
|
|
|
|
|
| ||||
Equity securities |
| 70 | % | 69 | % | 71 | % | 69 | % | ||||
Debt securities |
| 22 | % | 22 | % | 21 | % | 22 | % | ||||
Real Estate |
| 8 | % | 9 | % | 8 | % | 9 | % | ||||
Total |
| 100 | % | 100 | % | 100 | % | 100 | % | ||||
Description of Investment Policy
Our investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the year $86,841 $69,516
Changeinvestment 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 plan assets
Fair value in plan assets atorder to maximize the beginning of the year $79,387 $69,247
Actualplan’s return on plan assets 8,484 12,825
Employer contributions 20 20while minimizing risk.
Target Plan participants contributions 189 191
Benefits paid (3,623) (2,896)
Fair value in plan assets at
the end of the year $84,457 $79,387
Funded status ($2,385) $9,871
Unrecognized net asset 0 0
Unrecognized actuarial loss 20,692 8,650
Unrecognized prior service cost 366 550
Net amount recognized $18,673 $19,071
Years ended June 30
(in thousands) 2005 2004
Amounts recognized in the
consolidated balance sheet
Prepaid benefit cost $17,291 $17,576
Accrued benefit liability (304) (69)
Intangible asset 301 360
Accumulated other comprehensive income 1,385 1,204
Net amount recognized $18,673 $19,071
The accumulated benefit obligation for the Farmer Bros. Co. Plan was
$74,826,000Asset Allocation
2007 | |||
Equity securities | 67.50 | % | |
Debt securities | 24.00 | % | |
Real estate | 8.50 | % | |
Total | 100.00 | % |
Estimated Future Contributions and $59,983,000 as of June 30, 2005 and June 30, 2004,
respectively. The accumulated benefit obligation for the Brewmatic Co. Plan
was $3,888,000 and $3,503,000 as of June 30, 2005 and June 30, 2004,
respectively.
Accumulated benefit obligation $78,714 $63,486
Components of net periodic benefit cost
Service cost $2,117 $2,375
Interest cost $4,284 $3,954
Expected return on plan assets ($6,238) ($5,447)
Amortization of prior service cost $184 $250
Recognized actuarial loss $70 $1,343
Net periodic benefit cost $418 $2,474
Estimated future benefit payments for years ended June 30,
(In thousands)
2006 $3,500
2007 $3,738
2008 $3,935
2009 $4,141
2010 $4,321
years 2011-2015 $25,966
Refunds
The Company expects to make no contributions forto the Farmer Bros. Co. Plan in fiscal 2006,2008, but expects to contribute approximately $23,000$26,000 to the Brewmatic Co. Plan in fiscal 2006.
Farmer Bros. Co. Plan
Assumptions:
Weighted average assumptions used to
determine benefit obligations at June 30 2005 2004
Discount rate 5.30% 6.30%
Rate of compensation increase 3.50% 3.50%
Weighted average assumptions used to
determine net periodic benefit cost
for years ended June 30 2005 2004
Discount rate 6.30% 5.60%
Rate of return on assets 8.00% 8.00%
Rate of compensation increase 3.50% 3.50%
Brewmatic Co. Plan
Assumptions:
Weighted average assumptions used to
determine benefit obligations at June 30 2005 2004
Discount rate 5.30% 6.30%
Rate of compensation increase N/A N/A
Weighted average assumptions used to
determine net periodic benefit cost
for years ended June 30 2005 2004
Discount rate 6.30% 5.60%
Rate of return on assets 8.00% 8.00%
Rate of compensation increase N/A N/A
(In thousands)
Information for pension plans with an accumulated benefit
obligation in excess of plan assets
Projected benefit obligation $3,888 $3,503
Accumulated benefit obligation $3,888 $3,503
Fair value of plan assets $3,583 $3,434
Increase (decrease) in minimum
liability included in other
comprehensive income $181 ($458)
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, 2005 and
2004.
Plan Assets
Assets are allocated between equity securities and debt securities.2008. The Company seeksis not aware of any refunds expected from postretirement plans.
Estimated Future Benefit Payments
The following benefit payments are expected to produce a stable return on well diversified investmentsbe paid over the long term in line with reasonable investment risk. Allocations
historically have been 60-80 percent equities, 20-40 percent debt; the plansnext 10 fiscal years ending:
Year ending |
|
|
| Farmer Bros. Plan |
| Brewmatic Plan |
| ||||||
|
| (In thousands) |
| (In thousands) |
| ||||||||
June 30, 2008 |
|
| $ | 3,600 |
|
|
| $ | 270 |
|
| ||
June 30, 2009 |
|
| $ | 3,750 |
|
|
| $ | 270 |
|
| ||
June 30, 2010 |
|
| $ | 3,950 |
|
|
| $ | 290 |
|
| ||
June 30, 2011 |
|
| $ | 4,130 |
|
|
| $ | 340 |
|
| ||
June 30, 2012 |
|
| $ | 4,340 |
|
|
| $ | 360 |
|
| ||
June 30, 2013 - June 30, 2017 |
|
| $ | 25,530 |
|
|
| $ | 1,840 |
|
| ||
These amounts are not invested in real estatebased on current data and other investments are not significant.
The tables below detail assets by category for the Company's pension plans.
Percent of Plan Assets
Farmer Bros. Plan Brewmatic Plan
As of June 30, As of June 30,
Asset Categories 2005 2004 2005 2004
Debt securities 14% 18% 10% 21%
Equity securities 86% 82% 90% 79%
100% 100% 100% 100%
assumptions and reflect expected future service, as appropriate.
Defined Contribution Plans
The Company also has defined contribution plans for all its eligible employees. No Company contributions have been made nor are any required to be made to these defined contribution plans.
plans during the years ended June 30, 2007, 2006 or 2005. CBI has a defined contribution plan for all of its eligible employees. Total contributions to that plan were $4,000 in the fiscal year ended June 30, 2007.
Post Retirement Benefits
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.
|
| Fiscal |
| ||||||
Change in Benefit Obligation |
|
|
| 2007 |
| 2006 |
| ||
|
| (In thousands) |
| ||||||
Accumulated Post Retirement Benefit Obligation (“APBO”) at Beginning of Year |
| $ | 29,849 |
| $ | 33,656 |
| ||
Service Cost |
| 1,648 |
| 1,269 |
| ||||
Interest Cost |
| 2,286 |
| 1,651 |
| ||||
Plan Change |
| 14,514 |
| 7,175 |
| ||||
(Gains)/Losses |
| (1,523 | ) | (12,688 | ) | ||||
Benefits Paid |
| (918 | ) | (1,214 | ) | ||||
APBO at End of Year |
| $ | 45,856 |
| $ | 29,849 |
| ||
Change in Plan Assets |
|
|
|
|
|
|
| ||
Fair Value of Plan Assets at Beginning of Year |
| $ | 0 |
| $ | 0 |
| ||
Actual Return on Assets |
| 918 |
| 1,214 |
| ||||
Employer Contribution |
| 0 |
| 0 |
| ||||
Participant Contributions |
| 0 |
| 0 |
| ||||
Benefits Paid |
| (918 | ) | (1,214 | ) | ||||
Fair Value of Plan Assets at End of Year |
| $ | 0 |
| $ | 0 |
| ||
Funded Status of Plan |
|
|
|
|
|
|
| ||
Funded Status |
| $ | (45,855 | ) | $ | (29,849 | ) | ||
Unrecognized actuarial (gain)/loss |
| * |
| (8,967 | ) | ||||
Unrecognized transition (asset)/obligation |
| * |
| 0 |
| ||||
Unrecognized prior service cost |
| * |
| 7,380 |
| ||||
Net amount recognized as of measurement date |
| * |
| $ | (31,436 | ) | |||
Contributions made after measurement date |
| * |
| 0 |
| ||||
Net amount recognized as of year end |
| * |
| $ | (31,436 | ) | |||
* This information is not required as part of current year disclosure.
Amounts Recognized in the Statement of Financial Position Consist of: |
|
|
|
|
|
|
| |
Current liabilities |
| $ | 1,588 |
| ** |
| ||
Noncurrent liabilities |
| 44,297 |
| ** |
| |||
Total |
| $ | 45,885 |
| ** |
| ||
|
| Fiscal |
| |||||||||
Amounts Recognized in Accumulated Other Comprehensive Income Consist of: |
|
|
| 2007 |
| 2006 |
| |||||
|
| (In thousands) |
| |||||||||
Net (gain)/loss |
|
| $(10,165 | ) |
|
| ** |
|
| |||
Transition (asset)/obligation |
|
| 0 |
|
|
| ** |
|
| |||
Prior service cost |
|
| 20,385 |
|
|
| ** |
|
| |||
Total recognized in accumulated comprehensive income |
|
| $ | 10,220 |
|
|
| ** |
|
| ||
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | |||||||||||
Unrecognized actuarial (gain)/loss | * | ** | |||||||||
Unrecognized transition (asset)/obligation | * | ** | |||||||||
Unrecognized prior service cost | * | ** | |||||||||
Total recognized in other comprehensive income | * | ** | |||||||||
Amortization of net loss (gain) | * | ** | |||||||||
Amortization of transition obligation (asset) | * | ** | |||||||||
Amortization of prior service cost | * | ** | |||||||||
Total recognized in net periodic benefit cost and other comprensive income | * | ** | |||||||||
The following weighted average assumptions were used to determineestimated net loss and prior service cost for the benefit
obligations and theother postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost.
Weighted average assumptions used to determine benefit obligation at June 30,
2005 2004
Discount rate 5.30% 6.30%
Ratecost over the next fiscal year is $382,000 and $2,175,000, respectively.
* This information is not required as part of compensationcurrent year disclosure.
** This information was not required as part of prior year disclosure.
Change in Accumulated Other Comprehensive Income |
|
|
|
|
|
|
| |||||
Amount disclosed at beginning of year |
|
| $ | 0 |
|
|
| ** |
|
| ||
Change during year prior to SFAS 158 adoption |
|
| 0 |
|
|
| ** |
|
| |||
Change due to the adoption of SFAS 158 |
|
| 10,220 |
|
|
| ** |
|
| |||
Amount disclosed at end of year |
|
| $ | (10,220 | ) |
|
| ** |
|
| ||
Incremental effect of change to SFAS 158 |
|
|
| Adjustment |
|
|
| |||||
Prepaid benefit cost |
|
| — |
|
|
| ** |
|
| |||
Accrued benefit cost*** |
|
| $ | (10,220 | ) |
|
| ** |
|
| ||
* This information is not required as part of current year disclosure.
** This information was not required as part of prior year disclosure.
*** This is an increase Initial medical ratein Accrued Benefit Cost.
Estimated Future Benefit Payments
(in thousands)
Year ending |
|
|
|
|
| |
June 30, 2008 |
| $ | 1,558 |
| ||
June 30, 2009 |
| 1,672 |
| |||
June 30, 2010 |
| 1,892 |
| |||
June 30, 2011 |
| 2,139 |
| |||
June 30, 2012 |
| 2,292 |
| |||
June 30, 2013 - June 30, 2017 |
| 15,353 |
| |||
34
Expected Contributions for the Year ending June 30, 2008 |
|
|
| (In thousands) |
| |||
Total |
|
| $ | 1,558 |
|
| ||
|
| Fiscal |
| ||||||
Components of Net Periodic Postretirement Benefit Cost |
|
|
| 2007 |
| 2006 |
| ||
|
| (In thousands) |
| ||||||
Service cost |
| $ | 1,647 |
| $ | 1,269 |
| ||
Interest cost |
| 2,286 |
| 1,650 |
| ||||
Expected return on assets |
| 0 |
| 0 |
| ||||
Amortization of unrecognized net (gain)/loss |
| (324 | ) | (151 | ) | ||||
Amortization of unrecognized prior service cost |
| 0 |
| 0 |
| ||||
Total net periodic postretirement benefit cost/(income) |
| $ | 1,508 |
| $ | 841 |
| ||
|
| $ | 5,117 |
| $ | 3,609 |
| ||
Sensitivity in Fiscal 2007 Results
Assumed health care cost 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%
Reconciliation of funded status.
(In thousands)
2005 2004
Accumulated post retirement
benefit obligation
Actives not eligible to rehire ($12,887) ($9,320)
Actives eligible to rehire (9,230) (8,275)
Retirees (11,539) (11,995)
Total APBO* ($33,656) ($29,590)
Fair market value of assets $0 $0
Funded status ($33,656) ($29,591)
Unrecognized transition obligation 0 0
Unrecognized prior service cost 1,046 1,228
Unrecognized cumulative
net loss 3,570 1,446
Accrued post retirement
benefit cost as of June 30 ($29,041) ($26,915)
Retiree medical claims paid $1,012 $916
* The APBO reflectsrates have a significant effect on the recognition of an estimate of the subsidy available
under Medicare Part D in accordance with FSP 106-2. This change decreased the
APBO by $2,132,000 as of June 30, 2005.
SFAS No. 106, as amended by SFAS No. 132, also requires the disclosure of the
effects of a 1% increase and decrease inamounts reported for the health care inflation trend
assumption on the accumulated postretirement benefit obligation and net
periodic service and interest cost. These results are shown below.
Change in inflation trend
(In thousands)
Plan Year Effect of 1%
Results Increase Decrease
Accumulated postretirement benefit
obligation as of June 30, 2005 $33,656 $4,374 ($3,268)
Service cost for plan year $1,140 $196 ($149)
Interest for plan year $1,815 $200 ($160)
Presented below is theplan. A one percentage point change in assumed health care cost trend rates would have the accumulated postretirement benefit
obligation from the prior year.
(In thousands)
2005 2004
Accumulated postretirement benefit
obligation beginning of year $29,590 $30,722
Service cost 1,140 1,231
Interest cost 1,815 1,681
Actuarial loss or (gain) 4,255 (3,128)
Benefits paid (1,012) (1,066)
Change due to Medicare Part D subsidy* (2,132) -
Accumulated postretirement benefit
obligation as of end of year $33,656 $29,590
* Recognizedfollowing effects in accordance with FSP 106-2.
Presented below is the change in the fair value of assets from the prior year.
(In thousands)
2005 2004
Fair value of plan assets at
the beginning of the year $0 $0
Actual return on plan assets 0 0
Company contributions 1,012 916
Plan participants contributions 216 150
Benefit paid (1,228) (1,066)
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, net of
expected retiree contributions.
(In thousands)
With Medicare Without Medicare Medicare
Years ended Part D Subsidy Part D Subsidy Part D Subsidy
June 30,
2006 $1,706 $1,781 $75
2007 $1,843 $1,992 $150
2008 $2,019 $2,185 $167
2009 $2,160 $2,347 $186
2010 $2,180 $2,378 $198
2011-2015 $11,412 $11,711 $299
Expected benefit payments (net of retiree contributions) $1,561
fiscal 2008:
|
| 1-Percentage Point |
| ||||||
|
| Increase |
| Decrease |
| ||||
|
| (In thousands) |
| ||||||
Effect on total of service and interest cost components |
|
| $ | 722 |
|
| $ | (556 | ) |
Effect on accumulated postretirement benefit obligation |
|
| $ | 8,988 |
|
| $ | (7,010 | ) |
Note 7.6. 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, 4.85%6.78% at June 30, 2005.
As of and for the years ended June 30,
2005 2004 2003
Loan amount (in thousands) $59,242 $64,567 $24,237
Shares purchased - 1,286,430 778,500
2007.
|
| As of and for the years ended June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Loan amount (in thousands) |
| $ | 49,640 |
| $ | 54,441 |
| $ | 59,242 |
|
Shares purchased |
| — |
| — |
| — |
| |||
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, 2005, 20042007, 2006 and 20032005 the Company charged $6,127,000, $4,234,000$5,863,000, $5,312,000 and $3,098,000$6,127,000 to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares, which was $44,000, $1,282,000($695,000), ($774,000) and $1,171,000$44,000 for the years ended June 30, 2005, 20042007, 2006 and 2003,2005, respectively, is recorded as additional paid-in capital.
June 30,
2005 2004
Allocated shares 636,572 400,110
Committed to be released shares 119,434 106,140
Unallocated shares 2,242,671 2,494,250
Total ESOP shares 2,998,677 3,000,500
Fair value
|
| June 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
Allocated shares |
| 846,735 |
| 628,792 |
| ||
Committed to be released shares |
| 110,000 |
| 119,440 |
| ||
Unallocated shares |
| 2,029,280 |
| 2,242,665 |
| ||
Total ESOP shares |
| 2,986,015 |
| 2,990,897 |
| ||
|
| (In thousands) |
| ||||
Fair value of ESOP shares |
| $ | 67,723 |
| $ | 64,737 |
|
Note 7. Other Current Liabilities
Other current liabilities consist of ESOP shares (In thousands) $66,751 $75,013
the following:
|
| June 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| (In thousands) |
| ||||
Accrued workers’ compensation liabilities |
| $ | 4,372 |
| $ | 4,052 |
|
Dividends payable |
| 1,768 |
| 1,688 |
| ||
Postretirement medical liability |
| 1,558 |
| 0 |
| ||
Other (including net taxes payable) |
| 3,216 |
| 406 |
| ||
|
| $ | 10,914 |
| $ | 6,146 |
|
The current and deferred components of the provision for income taxes consist of the following:
(In thousands)
June 30,
2005 2004 2003
Current federal ($1,703) $4,753 $8,030
Current state (689) 78 1,923
Total current provision ($2,392) $4,831 $9,953
Deferred federal ($1,165) ($1,402) $3,775
Deferred state ( 2,345) (134) 214
Total deferred provision ($3,510) ($1,536) $3,989
Total tax provision ($5,902) $3,295 $13,942
|
| June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (In thousands) |
| |||||||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | 2,511 |
| $ | 3,124 |
| $ | (1,703 | ) |
State |
| 74 |
| 1,126 |
| (689 | ) | |||
Total current position |
| $ | 2,585 |
| $ | 4,250 |
| $ | (2,392 | ) |
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| $ | (1,864 | ) | $ | (4,338 | ) | $ | (1,165 | ) |
State |
| (689 | ) | (663 | ) | (2,345 | ) | |||
Total deferred position |
| $ | (2,553 | ) | $ | (5,001 | ) | $ | (3,510 | ) |
Total tax provision |
| $ | 33 |
| $ | (751 | ) | $ | (5,902 | ) |
36
A reconciliation of the provision for income taxes to the statutory federal
income tax expense (benefit) to the federal statutory tax rate is as follow.
(In thousands)
June 30,
2005 2004 2003
Statutory tax rate 34% 35% 35%
Income tax (benefit) expense
at statutory rate ($3,852) $5,594 $13,150
State income tax
(net federal tax benefit) (696) 831 1,389
Life insurance proceeds 0 (1,476) 0
Dividend income exclusion (819) (821) (808)
Valuation allowance 1,379 0 0
Results of state exams (2,492) (896) 211
Other (net) 578 63 0
($5,902) $3,295 $13,942
Income taxes paid $2,356 $3,443 $10,429
follows:
|
| June 30, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Federal statutory tax rate |
| 34 | % | 34 | % | 34 | % | |||
|
| (In thousands) |
| |||||||
Income tax expense at stautory rate |
| $ | 2,328 |
| $ | 1,362 |
| $ | (3,852 | ) |
State income tax (net of federal tax benefit) |
| 55 |
| 206 |
| (696 | ) | |||
Officer life insurance proceeds |
| 0 |
| 0 |
| 0 |
| |||
Dividend income exclusion |
| (918 | ) | (849 | ) | (819 | ) | |||
Valuation allowance |
| 0 |
| (1,379 | ) | 1,379 |
| |||
Change in contingency reserve (net) |
| 358 |
| 406 |
| (2,492 | ) | |||
Research tax credit |
| (945 | ) |
|
|
|
| |||
Other (net) |
| (845 | ) | (497 | ) | 578 |
| |||
|
| $ | 33 |
| $ | (751 | ) | $ | (5,902 | ) |
Income taxes paid |
| $ | 116 |
| $ | 2,301 |
| $ | 2,356 |
|
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,
2005 2004
Deferred tax assets:
Postretirement benefits $11,664 $10,572
Accrued liabilities 3,121 2,893
Capital loss carryover 4,427 0
Other 780 65
Total deferred tax assets $19,992 $13,530
Deferred tax liabilities:
Pension assets ($7,040) ($6,566)
Unrealized gain on investments (2,759) (1,176)
Other (3,370) (3,914)
Total deferred tax liabilities ($13,169) ($11,656)
Valuation allowance (1,379) 0
Net deferred tax assets $5,444 $1,874
|
| June 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| (In thousands) |
| ||||
Deferred tax assets: |
|
|
|
|
| ||
Postretirement benefits |
| 17,749 |
| $ | 12,187 |
| |
Accrued liabilities |
| 3,643 |
| 3,266 |
| ||
Capital loss carryover |
| 3,270 |
| 2,807 |
| ||
Other |
| 1,186 |
| 1,808 |
| ||
|
| $ | 25,848 |
| $ | 20,068 |
|
Deferred tax liabilities: |
|
|
|
|
| ||
Pension assets |
| $ | (4,851 | ) | $ | (6,563 | ) |
Unrealized gain on investments |
| (448 | ) | (449 | ) | ||
Other |
| (2,489 | ) | (3,139 | ) | ||
|
| $ | (7,789 | ) | $ | (10,151 | ) |
Valuation allowance |
| 0 |
| 0 |
| ||
Net deferred tax assets |
| $ | 18,059 |
| $ | 9,917 |
|
The Company has approximately $10.2$7.7 million and $15.5$13.7 million of federal and state capital loss carry forwards, respectively, that will expire on June 30, 2010, unless previously utilized. ADuring the year ended June 30, 2006, the valuation allowance of $1.4 million has
been established to reflect the amount of deferred tax asset related to the capital loss carry forward for whichforwards was released as management believes realization is uncertain.
Note 9 Other Current Liabilities
Other current liabilities consistmore likely than not based upon projected generation of capital gains prior to the expiration of the following:
June 30,
(In thousands) 2005 2004
Accrued workers' compensation liabilities $2,725 $2,758
Dividends payable 1,608 1,527
Other (including net taxes payable) 597 316
$4,930 $4,601
carry forward period, based on facts and circumstances at this time.
Note 109. Commitments and Contingencies
The Company incurred rent expense of approximately $779,000, $753,000,$914,000, $907,000 and $736,000$779,000 for the fiscal years ended June 30, 2005, 20042007, 2006 and 2003,2005, respectively, and is obligated under leases for branch warehouses. Some 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)
2006 $783
2007 535
2008 241
2009 110
2010 21
Total $1,690
|
| (In thousands) |
| |||
2008 |
|
| $ | 1,105 |
|
|
2009 |
|
| 520 |
|
| |
2010 |
|
| 333 |
|
| |
2011 |
|
| 86 |
|
| |
2012 |
|
| 23 |
|
| |
Total |
|
| $ | 2,067 |
|
|
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 $1.00 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
operations 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 1210. 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
2004 2004 2005 2005
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 per common shares $0.11 ($0.30) $0.06 ($0.27)
September 30 December 31 March 31 June 30
2003 2003 2004 2004
Net sales $45,665 $51,511 $49,069 $47,345
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 shares $0.14 $0.15 $0.42 $0.15
|
| September 30, |
| December 31, |
| March 31, |
| June 30, |
| ||||||||||
|
| 2006 |
| 2006 |
| 2007 |
| 2007 |
| ||||||||||
|
| (In thousands except share data) |
| ||||||||||||||||
Net sales |
|
| $ | 48,264 |
|
|
| $ | 55,476 |
|
|
| $ | 54,382 |
|
| $ | 58,137 |
|
Gross profit |
|
| $ | 28,083 |
|
|
| $ | 32,481 |
|
|
| $ | 31,664 |
|
| $ | 34,539 |
|
(Loss) income from operations |
|
| $ | (2,737 | ) |
|
| $ | 1,140 |
|
|
| $ | (2,247 | ) |
| $ | (232 | ) |
Net income |
|
| $ | 1,013 |
|
|
| $ | 2,953 |
|
|
| $ | 1,512 |
|
| $ | 1,337 |
|
Net income per common share |
|
| $ | 0.07 |
|
|
| $ | 0.21 |
|
|
| $ | 0.11 |
|
| $ | 0.09 |
|
|
| September 30, |
| December 31, |
| March 31, |
| June 30, |
| ||||||||||
|
| 2005 |
| 2005 |
| 2006 |
| 2006 |
| ||||||||||
|
| (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 share |
|
| $ | (0.08 | ) |
|
| $ | 0.30 |
|
|
| $ | 0.18 |
|
| $ | (0.06 | ) |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Disclosure
None.
Item 9A. Controls and Procedures.
Procedures
Disclosure Controls and Procedures
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?“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.
38
As of June 30, 2005,2007 our management, with the participation of our chief
executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13(a)-15(e)13a-15(e) and 15(d)-15(e)15d-15(e) promulgated under the Exchange Act. Based upon this evaluation, our chief executive officerChief Executive Officer and our chief financial
officerChief Financial Officer concluded that, as of June 30, 2005,2007, our disclosure controls and procedures were (1) designed to ensure that material information relating to our companyCompany is accumulated and made known to our management, including our chief executive officerChief Executive Officer and chief financial officer,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?sSEC’s rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no 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 overOver 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 13(a)-15(f)13a-15(f) and 15(d)-15(f)15d-15(f). With the participation of the chief
executive officerChief Executive Officer and chief financial officer,Chief Financial 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 ?
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, 2005.
2007.
On April 27, 2007, the Company acquired CBH, and its wholly owned subsidiary CBI. Due to the timing of the acquisition, CBH, and its wholly owned subsidiary CBI, were not included in management’s assessment and report on internal control over financial reporting as of June 30, 2007, the year the acquisition closed. CBI’s operations since the acquisition are included in the 2007 consolidated financial statements of Farmer Bros. Co. and its subsidiaries and constitutes 8% of total assets and 8% of net assets, respectively, as of June 30, 2007, and 3% of net sales and (18%) of net income for the year then ended.
Ernst & Young LLP, an independent registered public accounting firm, has
audited our management?s assessment ofissued an attestation report on the effectiveness of ourCompany’s internal control over financial reporting as of June 30, 2005,2007, as stated in their report which is included herein.
Changes in Internal Control overOver 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, 2005,2007, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
Subsidiaries
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 effectiveSubsidiaries’ internal control over financial reporting as of June 30, 2005,2007, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Farmer Bros. Co. and Subsidiary'sSubsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying “Management Report on 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'scompany’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,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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'scompany’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'scompany’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'scompany’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
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment that Farmer Bros. Co.of and Subsidiary
maintained effectiveconclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Coffee Bean International, Inc. (CBI), which is included in the 2007 consolidated financial statements of Farmer Bros. Co. and Subsidiaries and constituted 8% and 8% of total assets and net assets, respectively, as of June 30, 2005, is fairly stated, in all material respects, based on2007, and 3% and (18%) of net sales and net income, respectively, for the COSO criteria.
Also, inyear then ended. Our audit of internal control over financial reporting of Farmer Bros. Co. and Subsidiaries also did not include an evaluation of the internal control over financial reporting of CBI.
In our opinion, Farmer Bros. Co. and SubsidiarySubsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005,2007, based onthe COSO criteria.
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Farmer Bros. Co. and Subsidiaries as of June 30, 20052007 and 2004,2006, and the related consolidated statements of operations, stockholders'income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 20052007 of Farmer Bros. Co. and SubsidiarySubsidiaries and our report dated September 7, 200510, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
September 7, 2005
| ||
Los Angeles, California |
40
None.
Item 10. Directors, and Executive Officers of the Registrant
and Corporate Governance
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, 2005.
2007.
To the Company?sCompany’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended June 30, 2005,2007, its officers, directors and ten percent shareholdersstockholders complied with all applicable Section 16(a) filing requirements, with the exception of those filings listed in the Registrant?sCompany’s Proxy Statement expected to be dated and filed with the SEC on or before October 28, 2005.
2007.
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, 2005.
2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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, 2005.
2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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, 2005.
2007.
Item 14. Principal Accountant Fees and Services.
Services
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, 2005.
2007.
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, 20052007 and 2004.
2006.
Consolidated Statements of Operations for the Years Ended
June 30, 2005, 20042007, 2006 and 2003.
2005.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2005, 20042007, 2006 and 2003.
2005.
Consolidated Statements of Stockholders'Stockholders’ Equity Forfor the Years
Ended June 30, 2005, 20042007, 2006 and 2003.
2005.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in the consolidated financial statements and notes thereto.
3. The exhibits to this Annual Report on Form 10-K are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of the Annual Report on Form 10-K.
Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*).
(b) Exhibits: See Exhibit Index
42
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/Guenter W. Berger
Guenter W. Berger, Chairman, President and Chief Executive Officer
Date: September 13, 2005
FARMER BROS. CO. | ||||
By: | /s/ GUENTER W. BERGER | |||
Guenter W. Berger, | ||||
Chairman and Chief Executive Officer | ||||
Date: September 10, 2007 | ||||
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/Guenter W. Berger
Guenter W. Berger, Chairman, President and Chief Executive Officer
(principal executive officer)
Date: September 13, 2005
/s/John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: September 13, 2005
/s/Lewis A. Coffman
Lewis A. Coffman
Director
Date: September 13, 2005
/s/Thomas A. Maloof
Thomas A. Maloof
Director
Date: September 13, 2005
/s/John H. Merrell
John H. Merrell
Director
Date: September 13, 2005
/s/John Samore, Jr.
John Samore, Jr.
Director
Date: September 13, 2005
/s/Carol Farmer Waite
Carol Farmer Waite
Director
Date: September 13, 2005
/s/Kenneth R. Carson
Kenneth R. Carson
Director
Date: September 13, 2005
Name | Title | Date | ||||||||
/s/ GUENTER W. BERGER | Chairman and Chief Executive | September 10, 2007 | ||||||||
Guenter W. Berger | Officer (principal executive officer) | |||||||||
/s/ JOHN E. SIMMONS | Treasurer and Chief Financial | |||||||||
John E. Simmons | Officer (principal financial and | September 10, 2007 | ||||||||
accounting officer) | ||||||||||
/s/ ROGER M. LAVERTY III | Director, President and Chief | September 10, 2007 | ||||||||
Roger M. Laverty III | Operating Officer | |||||||||
/s/ JOHN H. MERRELL | Director | September 10, 2007 | ||||||||
John H. Merrell | ||||||||||
/s/ THOMAS A. MALOOF | Director | September 10, 2007 | ||||||||
Thomas A. Maloof | ||||||||||
/s/ JOHN SAMORE, JR. | Director | September 10, 2007 | ||||||||
John Samore, Jr. | ||||||||||
/s/ CAROL FARMER WAITE | Director | September 10, 2007 | ||||||||
Carol Farmer Waite | ||||||||||
/s/ JAMES J. MCGARRY | Director | September 10, 2007 | ||||||||
James J. McGarry | ||||||||||
43
3.1 | Certificate of Incorporation (filed as an exhibit to the Form 10-Q for the quarter ended March 31, 2004 | |
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 herewith).* | |
10.2 | 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).* | |
10.3 | 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).* | |
10.4 | 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).* | |
10.5 | The Farmer Bros. Co. Employee Stock Ownership Plan (filed herewith).* | |
10.6 | 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).* | |
10.7 | 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).* | |
10.8 | 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). | |
10.9 | 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).* | |
10.10 | 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).* | |
10.11 | 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).* | |
10.12 | Form of 2007 Target Award Notification Letter 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 December 22, 2006 and incorporated herein by reference).* |
10.13 | Stock Purchase Agreement, dated April 27, 2007, by and among Farmer Bros. Co., Coffee Bean Holding Co., Inc., and the Stockholders of Coffee Bean Holding Co., Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2007 and incorporated herein by reference). | |
10.14 | 2007 Omnibus Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2007 and incorporated herein by reference).* | |
10.15 | Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on May 18, 2006 (with schedule of indemnitees attached) (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2007 and incorporated herein by reference).* | |
10.16 | Form of Award Letter (Fiscal 2007) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2007 and incorporated herein by reference).* | |
21.1 | List of all Subsidiaries of Farmer Bros. Co. (filed herewith) | |
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 | Properties List |
*
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 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).*
10.4 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).*
10.5 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).*
10.6 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).
10.7 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).*
14. Code of Ethics of Principal Executive Officer and Principal Accounting
Officer. (filed herewith)
21. Subsidiaries of the registrant. (filed herewith)
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)
14
Management contract or compensatory plan or arrangement.
45