UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 20032005
Commission file number: 0-1375
FARMER BROS. CO.
California(exact name of registrant as specified in its charter)
Delaware 95-0725980
State(State of Incorporation Federal ID NumberIncorporation) (I.R.S. Employer Identification No.)
20333 South Normandie Avenue, Torrance, California 90502
Registrant's address
(310) 787-5200(address of principal executive offices) (Zip Code)
Registrant's telephone number, Securities registered pursuant to Section 12(b) of the Act: Noneincluding area 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 OTCNASDAQ
Indicate by check mark whether the Registrantregistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrantregistrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
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. [X][ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
1, 2003: 1,926,414 and theThe aggregate market value of the voting and non-voting common sharesequity held
by non-affiliates ofcomputed by reference to the Registrantclosing price at which the
Farmer Bros. Co. common stock was sold on June 30, 2005 was approximately $638$145
million.
On September 1, 2005 the registrant had 16,075,080 shares outstanding of
its common stock, par value $1.00 per share, which is the registrant's only
class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
the definitive proxy statement for the fiscal year ended June 30, 2005 that is
expected to be filed with the U.S. Securities and Exchange Commission on or
before October 28, 2005.
PART I
Item 1. Business
General: Farmer Bros. Co. (the "Company", "we", "our" or "Farmer Bros.?) is a
manufacturer and distributor of coffee and spices to the institutional food
service segment. The Company was incorporated in California in 1923. We
manufacture1923, and
distribute areincorporated in Delaware in 2004.
Our product line that includes roasted coffee,
coffee related products (coffee filters, stir sticks, sugar and creamers),
teas, cocoa, spices, and soup and beverage bases tois specifically focused on the needs of our market segment:
restaurants and other institutional food service establishments that prepare
food,and market meals, including hotels, hospitals, convenience stores and fast
food outlets. TheOur product line includes roasted coffee, coffee related
products such as coffee filters, sugar and creamers, assorted teas, cocoa,
spices, and soup and beverage bases. Our product line presently includes over
300 items. Roasted coffee products make upAbout 50% of our total sales.sales are roasted coffee products. No
single product other than coffee accounts for more than 10% or more of revenue. Our
products are sold directly from delivery trucks by sales representatives who
solicit, sell, and otherwise maintain our customer's accounts.
Raw Materials and Supplies: Our primary raw material is green coffee.revenue.
Coffee purchasing, roasting and packaging takes place at our Torrance,
California plant, which is also serves as the distribution hub for our branches.
Sales are made "off-truck" to our institutional food service customers at
their places of business by our sales representatives who are responsible
for soliciting, selling, collecting from and otherwise maintaining our
customer accounts.
Raw Materials and Supplies: Our primary raw material is green coffee, an
agricultural commodity. Green coffee is an agricultural commodity. We purchase our green coffee
through domestic commodity brokers. Coffee ismainly grown mainly outside the United States
and can be subject to volatile price fluctuations resulting from
supply concerns related to crop availability and related conditions such as
weather,fluctuations. Weather, political events,
labor actions and social instabilityarmed conflict in coffee producing nations. Governmentnations, and government
actions, including treaties and trade restrictionscontrols between our ownthe U.S. and foreign governmentscoffee
producing nations, can also influence prices.affect the price of green coffee.
Green coffee prices arecan 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 the coffee consuming nations. In recent
years the green coffee market has been influenced by additional production from
a variety of producers, notably Vietnam and Brazil. These additional supplies
have had the tendency to hold prices down.
Other raw materials used in the manufacture of the non-coffee products (?allied
productsproducts?) in our product line include a wide variety of spices, including
pepper, chilies, oregano &and thyme, as well as
tea, dry cocoa, dehydrated milk products,
salt and sugar. All of theseThese raw materials are agricultural products and can be
subject to wide cost variation, butfluctuations. Such fluctuations, however, historically
no combination of these raw materials hashave not had thea material effect on our operating results as has green coffee.results.
Trademarks &and Patents: We own approximately 3872 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 providesprovide some sales stability during the warmer months when coffee
consumption ordinarily decreases. Additionally, the summer monthswe usually experience an
increase in sales toduring the summer months from seasonal businesses located in
popular vacation areas.
Distribution: Our selling divisions distribute our products are distributedto our
institutional food service customers at their places of business by our selling divisionssales
representatives. Our distribution trucks are replenished from brancheswarehouses
located in most of the large 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 and try to minimize our
inventorywarehouses. Inventory levels withinare maintained at each branch
warehouse.warehouse consisting of our complete product line and additional safety stocks
to accommodate a modest interruption in supply.
Customers: No single customer represents a significant concentration of
sales. TheAs a result, the loss of one or more of our larger customer accounts wouldis
not likely to have noa material adverse effect on our results of operations. We
serve a wide variety of customers, from small restaurants and donut shops to
large institutional buyers like restaurant chains, hospitals hotels, contract
food services and convalescent hospitals. Customer contact, our distribution
network and our service quality, which isare integral to our sales effort, is often secondary to
product pricing for customers with their own distribution systems. Such
customers can be very price sensitive.effort.
Competition: We face competition from many sources, including multi-
nationalthe
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 Boyd Coffee Company and Lingle Bros. Coffee. WeCompany. Management believes we may have some competitive
advantages due to our longevity, strong regional roots and our sales and
service force. We differentiate ourselves from our competitors by the quality
of our products, our distribution network and our customer service. Some of
our competitors do not do their own distribution, however 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. Our customer
base is price sensitive and we are often faced with price competition.
Working Capital: We finance our operations internally, and we believe that
working capital from internal sources will be adequate for the coming fiscal
year.
Foreign Operations: We have no material revenues that result from foreign
operations.
Other: On June 30, 2003,2005 we employed 1,1041,084 employees; 461 are456 were subject to
collective bargaining agreements. The effects of complianceCompliance with government provisions regulatingregulations
relating to the discharge of materials into the environment havehas not had a
material effect on our financial condition or results of operations. The
nature of our business does not provide for maintenance of or reliance upon a
sales backlog.
Registrant'sWe file reports electronically with the U.S. Securities and Exchange Commission
(?SEC?), including Forms 10-K, 10-Q, 8-K and amendments thereto. The public
may read and copy any materials filed with the SEC at the SEC's Public Reading
Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. 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.
Our Internet website address is http://www.farmerbroscousa.com.
Registrant doeswww.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 make
itsavailable on our website, free of charge, copies of our annual report on Form
10-K, quarterly reports on Form 10-Q orand current reports on Form 8-K reports orincluding
amendments thereto available on its website. The Company believes that doing so is
unnecessary inasmuch as those reports are availablesoon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the public on a real
time basis on the Commission's EDGAR website.SEC. The EDGAR website can be found
in the "FilingsCompany?s Code of
Ethics for its Principal Executive and Forms (EDGAR)" section of the Securities & Exchange
Commission site, http://www.sec.gov/edgar/searchedgar/companysearch.html. For
those who are unable to access the Commission's website, the Company will make
paper copies of its form 10-K, 10-Q and 8-K filings and amendments thereto
available without charge upon written request addressed to Mr. John E. Simmons,
ChiefPrincipal Financial Officer, Farmer Bros. Co., 20333 S. Normandie Avenue, Torrance,
CA 90502.
Item 2. Properties
Our largest and most significant facilityofficers is the roasting plant, warehouses
and administrative offices in Torrance, California. This facility is our
primary manufacturing facility and the distribution hub for our fleet.
We stage product in more than 100 small branch warehouses throughout our
service area. These warehouses taken together represent a vital part of
our business, but no individual warehouse is material to the group as a
whole, and most warehouses vary in size from 2,500-12,000 sq. feet. We
believe both the existing plant and the distribution warehouses will continue
to provide adequate capacity for the foreseeable future. A complete
list of facilities is found in Exhibit (99).
Item 3. Legal Proceedings
We are both defendant and plaintiff in various legal proceedings incidental
to our business which are ordinary and routine. It is our opinion that the
resolution of these lawsuits will not have a material impactalso
posted on our financial
condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Executive Officers Of Registrant
Name Age Position Last Five Years
Roy F. Farmer 87 Chairman, Chief Executive Officer prior to
March 19, 2003
Roy E. Farmer 51 President, Chief Executive Officer since March 19,
2003, Chief Operating Officer previously, son of
Chairman, R.F. Farmer
Guenter W. Berger 66 Vice President - Production
Kenneth R. Carson 63 Vice President - Sales
John E. Simmons 52 Treasurer, Chief Financial Officer
John M. Anglin(1) 56 Secretary since 2003, and Partner in Law Firm of Anglin,
Flewelling, Rasmussen, Campbell & Trytten, LLP,
Pasadena, California since 2003; partner in
Law Firm of Walker, Wright, Tyler and Ward,
LLP, Los Angeles, California, previously.
(1) Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP provides legal
services to the Company.
All officers are elected annually by the Board of Directors and serve at the
pleasure of the Board.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
We have one class of common stock which is traded in the over the counter
market. The bid prices indicated below are as reported by NASDAQ and
represent prices between dealers, without including retail mark up, mark
down or commission, and do not necessarily represent actual trades.
2003 2002
High Low Dividend High Low Dividend
1st Quarter $356.00 $304.00 $0.90 $259.50 $215.00 $0.85
2nd Quarter $335.00 $301.01 $0.90 $267.75 $192.00 $0.85
3rd Quarter $319.99 $303.50 $0.90 $304.00 $268.98 $0.85
4th Quarter $365.99 $303.24 $0.90 $370.99 $306.00 $0.85
There were 3,415 holders of record on September 11, 2003.
Item 6. Selected Financial Data
(In thousands, except per share data)
2003 2002 2001 2000 1999
Net sales $201,558 $205,857 $215,431 $218,688 $221,571
Income from operations $23,888 $38,210 $42,115 $48,965 $36,770
Net Income $23,629 $30,560 $36,178 $37,576 $28,865
Net income per share $13.02 $16.54 $19.62 $20.22 $15.16
Proforma net income (a) $36,488 $35,445 $27,327
Proforma net income (b) per share $19.79 $19.08 $14.36
Total assets $416,415 $417,524 $390,395 $353,467 $324,836
Dividends per share $3.60 $3.40 $3.20 $3.00 $2.80
(a) Upon adoption of SFAS No. 133 on July 1, 2000, the Company reclassified
its investments held as "available for sale" to the "trading" category
which resulted in an entry to recognize the accumulated unrealized loss of
$3,894,000. The "proforma" amounts above summarize the effect on earnings
and earnings per share on prior years' results as if the change had been in
effect for those periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis discusses the results of operations as
reflected in the Company's consolidated financial statements. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors.
The results of operations for the years ended June 30, 2003, 2002 and 2001 are
not necessarily indicative of the results that may be expected for any future
period. The following discussion should be read in combination with the
consolidated financial statements and the notes thereto included in Item 8 of
this report and with the "Risk Factors" described below.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to inventory valuation, including LIFO reserves, the allowance
for doubtful accounts, deferred tax assets, liabilities related to retirement
benefits, liabilities resulting from self-insurance of our worker's
compensation liabilities, and litigation. We base our estimates on historical
experience and other relevant factors that are believed to be reasonable under
the circumstances.
While we believe that the historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated financial statements, actual results may differ
from these estimates, which could require the Company to make adjustments to
these estimates in future periods.
Investments: Our investments consist of investment grade marketable debt
instruments issued by the US Government and major US and foreign corporations,
equity securities, primarily preferred stock, and various derivative
instruments, primarily exchange traded treasury futures and options, green
coffee forward contracts and commodity purchase agreements. All derivatives
not designated as accounting hedges are marked to market and changes are
recognized in current earnings. The fair value of derivative instruments is
based upon broker quotes where possible.
Allowance for Doubtful Accounts: We maintain an allowance for estimated
losses resulting from the inability of our customers to meet their obligations.
Our ability to maintain a relatively small reserve is directly related to our
ability to collect from our customers when our sales people regularly interact
with our customers in person. This method of operation has provided us with a
historically low bad debt experience.
Inventories: Inventories are valued at the lower of cost or market and the
costs of coffee and allied products are determined on the Last In, First Out
(LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for
on the First In, First Out (FIFO) basis. We regularly evaluate these
inventories to determine that market conditions are correctly reflected in the
recorded carrying value.
Self-Insurance Retention: We are self-insured for California workers'
compensation insurance and utilize historical analysis to determine and record
the estimates of expected future expenses resulting from worker's compensation
claims. Additionally, we accrue for estimated losses not covered by insurance
for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans: We have two defined benefit plans that provide retirement
benefits for the majority of our employees (the balance of our employees are
covered by union defined benefit plans). We obtain actuarial valuations for
both plans and at present we discount the pension obligations using 5.60%
discount rate and we estimate an 8% return on plan assets. Our retiree
medical plan is not funded and shares the same discount rate as the defined
benefit plans. We also project an initial medical trend rate of 10% ultimately
reducing to 5.5% in 6 years.
The performance of the stock market and other investments as well as the
overall health of the economy can have a material effect on pension investment
returns and these assumptions. A change in these assumptions could have an
effect on operating results.
Income Taxes: Deferred income taxes are determined based on the temporary
differences between the financial reporting and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse. We do not presently have a valuation
allowance for our deferred tax assets as we currently believe it is more likely
than not that we will realize our deferred tax assets.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and
believe that our short and long term cash requirements for the coming
year will be provided by internal sources. We have no major commitments
for capital expenditures at this time. The following projects could require a
substantial commitment of funds:
1. We have purchased land in Chico, California and will purchase land in
Bakersfield, California to construct replacements for existing facilities in
those locations. We expect to begin construction in time to occupy the new
warehouses before the end of fiscal 2004. The combined cost for the two
warehouses is not expected to exceed $3,000,000.
2. We have completed the first year of a multi-year upgrading of our
internal management information system. During 2003 we expended $4,767,000 for
hardware, software, infrastructure, training and consulting. At this time our
financial systems (general ledger, accounts receivable, accounts payable, fixed
assets and payroll) are on the new system. In the coming year we expect to
convert our allied and coffee manufacturing plants followed by our selling
divisions. We expect the additional costs associated with this project in 2004
could exceed $3,000,000, not including the added fixed costs to maintain the
new system.
3. On July 23, 2003 the Board of Directors authorized a loan to the
Company's Employee Stock Ownership Plan for the purchase of 129,575 additional
shares of the Company's common stock. Based upon the closing price of the
Company's stock on September 22, 2003, this could require an expenditure of
$42,900,000. The ESOP was created in 2000 as a way to better align the long-
term interests of its employees and shareholders. The Company has loaned the
ESOP $39,580,000 for this same purpose. On June 30, 2003 the ESOP loan balance
was $35,227,000.
(In thousands)
2003 2002 2001
Current assets $346,617 $348,434 $318,879
Current liabilities $16,659 $16,259 $17,655
Working capital $329,958 $332,175 $301,334
Capital expenditures $9,089 $5,039 $5,912
Results of Operations
Years ended June 30, 2003 and 2002
Net sales in fiscal 2003 decreased 2.1% to $201,558,000 as compared to
$205,857,000 in fiscal 2002. The Company continued to experience a decline in
coffee sales. There are a number of trends that we believe affect this result.
We are in the third year of an economic downturn that has been especially hard
on our core service area of California. Our entire 29 state service area has
felt the combination of lay-offs, job uncertainty and the high cost of living
that makes consumers careful how they spend their money. As consumers cut back
on expenses, one of the easiest places to save is spending in restaurants.
Tourism and travel continues to be down domestically. This is especially so in
the Far East where the Japanese economy has not been strong, and last summer
the area had to deal with SARS. Business travel also continues to be down.
Our primary market is the independently owned and operated restaurant and
restaurant chains. The weak economy is especially hard on these entrepreneurs
who do not have the geographic or "thematic" diversity of the large restaurant
chains. The success of coffee shops selling specialty coffees has spawned many
imitators. Although we compete favorably with our own line of specialty
coffees, our customers feel the effect of fewer sales dollars (in part because
of the recession) being divided among more direct competitors.
Green coffee costs for fiscal 2003 increased approximately 25% over those of
fiscal 2002. As a result gross profit decreased 5.2% to $130,896,000, or 65%
of sales, in fiscal 2003 as compared to $138,093,000, or 67% of sales, in
fiscal 2002.
Selling expenses for the 2003 fiscal year increased 3.1% to $88,658,000 as
compared to $86,025,000 in fiscal 2002. General & administrative expenses
increased 32.4% in fiscal 2003 to $18,350,000 as compared to $13,858,000 in
fiscal 2002. Operating expenses, composed of selling and general and
administrative expenses, increased $7,125,000, or 7.1%, to $107,008,000 during
fiscal 2003, or 53% of sales, as compared to $99,883,000, or 49% of sales, in
fiscal 2002. This increase primarily includes additional costs of the ESOP
$1,886,000, computer consulting and training $1,309,000, insurance (including
workers compensation) $1,300,000, life insurance $1,045,000, defined benefit
and post retirement benefit plan costs $997,000 and the cost of coffee brewing
equipment $897,000, offset by decreases in legal expenses $941,000 and payroll
$815,000.
Other income in fiscal 2003 increased $2,533,000 or 22.7% to $13,683,000 as
compared to $11,150,000 in fiscal 2002. This is primarily the result of the
volatility of the capital markets introduced by an accounting change in 2001
that required unrealized gains and losses on investments to be realized as
incurred. Prior to that time our hedging efforts reduced much of this
volatility. Interest rates have declined throughout 2003 and remain at low
levels. The major components of this change from 2002 include an increase in
unrealized gains of $5,607,000, off set by decrease in interest income of
$3,287,000 and realized losses $1,897,000 and realized gains $1,864,000.
Pretax income in fiscal 2003 decreased 23.9% to $37,571,000, or 18.6% of sales,
as compared to $49,360,000, or 24% of sales, in fiscal 2002. Net income in
fiscal 2003 decreased 22.7% to $23,629,000, or 11.7% of sales, as compared to
$30,569,000, or 14.9% of sales in fiscal 2002. Earnings per share in fiscal
2003 decreased 21.3% to $13.02 as compared to $16.54 in fiscal 2002.
Years ended June 30, 2002 and 2001
Fiscal 2002 was challenging for us. Although green coffee costs remained
relatively stable throughout the year, the events of September 11, 2001 were
felt throughout the period. Recession related reductions in business and
personal travel and entertainment expenses combined with reduced activities
outside the home resulting from public concern about terrorist activities
resulted in decreased sales and profitability. As depicted in the "Change in
Earnings per Share" analysis below, our 2002 net sales declined 4.4%. Net
sales decreased to $205,857,000 in 2002 as compared to $215,431,000 in 2001.
Gross profit decreased to $138,093,000 in fiscal 2002, or 67% of sales,
compared to $141,400,000 in fiscal 2001, or 66% of sales. The world supply of
green coffee was ample, and some producing countries have discussed
a variety of approaches to improve producer profitability, including production
decreases, decreased farm maintenance and farm worker layoffs. To date, none
of these approaches appears to have had a material effect on green coffee
prices.
Operating expenses, comprised of selling and general and administrative
expenses were $99,883,000 in 2002 as compared to $99,285,000 in 2001. A
$3,339,000 increase, or 28%, in employee benefits expenses in fiscal 2002,
including the costs of employee benefit plans and medical coverage, was
substantially offset by a decrease in payroll expenses, (1%), vehicle related
expenses (including maintenance, gas & oil), (6%), and coffee brewing equipment
costs, (36%).
Other income decreased 36% to $11,150,000 in 2002 as compared to $17,401,000 in
2001. The 2001 amount includes the accumulated unrealized loss of $3,894,000
resulting from the accounting change that year. Exclusive of the accounting
change, other income decreased 48% in 2002 from $21,295,000 in 2001. This
decrease is primarily the result of lower interest rates during 2002 as the
Federal Reserve Board has attempted to stimulate the economy. Our investments
continue to be in short term money market instruments: primarily investment
grade commercial paper, corporate notes and US treasury and agency debt. At
June 30, 2002 we held approximately $168,000,000 in US Treasury Bills.
Income before taxes decreased 21% to $49,360,000, or 24% of sales, for the year
ended June 30, 2002, as compared to $59,516,000, or 28% of sales, in the prior
fiscal year. Net income, before cumulative effect of accounting change, for
fiscal year 2002 was $30,569,000, or $16.54 per share, as compared to
$36,488,000, or $19.79 per share, in 2001.
Change in Earnings Per Share
The following provides additional information regarding changes in
operating results.
Net income per common share 2003 2002 2001
$13.02 $16.54 $19.62
Percentage change:
2003-2002 2002-2001
Net sales -2.1% -4.4%
Cost of goods sold -4.3% -8.5%
Gross profit -5.2% -2.3%
Operating expenses 7.1% 0.6%
Income from operations -37.5% -9.3%
Provisions for income taxes -25.8% -18.4%
Net income -22.7% -15.5%
A summary of the change in earnings per share, which highlights
factors discussed earlier, is as follows:
Per Share Earnings
2003-2002 2002-2001
Coffee: Prices -$0.45 $0.15
Volume -1.74 -3.71
Cost -0.85 2.25
Gross profit -3.04 -1.31
Allied products: Gross profit 0.48 -0.48
Operating expenses -4.93 -0.32
Other income 1.50 -3.38
Provision for income taxes 2.48 2.29
Accounting change 0.00 0.17
Change in weighted average
shares outstanding -0.01 -0.05
Net income -$3.52 -$3.08
Risk FactorsInternet website.
RISK FACTORS
Certain statements contained in this Annual Report on Form 10-K regarding the
risks, circumstances and financial trends that may affect our future operating
results, financial position and cash flows may be forward-looking statements
within the meaning of federal securities laws. These statements are based on
management's current expectations, assumptions, estimates and observations
about our business and are subject to risks and uncertainties. As a result,
actual results could materially differ from the forward lookingforward-looking statements
contained herein. These forward lookingforward-looking statements can be identified by the
use of words like "expects," "plans," "believes," "intends," "will," "assumes"
and other words of similar meanings.meaning. These and other similar words can be
identified by the fact that they do not relate solely to historical or current
facts. While we believe our assumptions are reasonable, we caution that it is
impossible to predict the impact of such factors which could cause actual
results to differ materially from predicted results. We intend these forward-
looking statements to speak only at the time of this report and do not
undertake to update or revise these projections as more information becomes
available. For these statements, we claim the protection of the safe harbor
for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
FactorsThe Company?s business, its future performance and forward-looking statements
are affected by general industry and market conditions and growth rates,
general U.S. and non-U.S. economic and political conditions (including the
global economy), competition, interest rate and currency exchange rate
fluctuations, and other events. The following items are representative of the
risks, uncertainties and other conditions that could cause ourmay impact the Company?s
business, future performance and the forward-looking statements that it makes
in this Annual Report on Form 10-K or that it may make in the future. Our
actual results could differ materially from projected results due to materially differ from those
expressedsome or
implied by any forward looking statements described herein
include:
Green coffee price volatility.
Our results of operations can vary dramatically with the volatilityall of the factors discussed below.
OUR EFFORTS TO SECURE AN ADEQUATE SUPPLY OF QUALITY COFFEES MAY BE UNSUCCESSFUL
AND EXPOSE US TO COMMODITY PRICE RISK.
Maintaining a steady supply of green coffee market. Virtually allis essential to keep inventory
levels low and secure sufficient stock to meet customer needs. To help ensure
future supplies, we may purchase our coffee on forward contracts for delivery
as long as six months in the future. In the event of non-performance by the
suppliers, the Company could be exposed to credit and supply risk. Entering
into such future commitments also leaves the Company subject to purchase price
risk. Various techniques are used to hedge these purchases against untoward
price movement. Competitive factors make it difficult for the Company to "pass
through" such price fluctuation to its customers. Therefore, unpredictable
price changes can have an immediate effect on operating results that cannot be
corrected in the short run. To reduce its exposure to the volatile fluctuation
of green coffee costs, Farmer Bros. has, from 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 "Quantitative and Qualitative Disclosures about Market Risk."
INCREASES IN THE COST OF GREEN COFFEE COULD REDUCE OUR GROSS MARGIN AND PROFIT.
Coffee is mainly grown outside the United States.
Some of the producing countries have experienced a variety of problems,
including civil war in PeruU.S. and Indonesia, rebel insurgents in the Philippines
and the threat of economic collapse in Brazil. Green coffee can be one of the
most volatile of commodities. It is subject to allvolatile price
fluctuations. Weather, real or perceived shortages, labor actions and
political unrest in coffee producing nations, and government actions, including
treaties and trade controls between the factors that influenceU.S. and coffee producing nations, can
affect the price of agricultural products including weather (especially droughtgreen coffee. Green coffee prices have been affected in
the past, and frost), world supplies,may be affected in the future, by the actions of certain
organizations and associations, such as the International Coffee Organization
or the Association of Coffee Producing Countries. These organizations have
historically attempted to establish commodity price controls of green coffee
through agreements that establish export quotas or by restricting coffee
supplies worldwide. These organizations, or others, may succeed in raising
green coffee prices.
In the past, we generally have been able to pass increases in green coffee
costs to our own and foreign governments
(including trade restrictions, farm subsidies & currency devaluations),
transportation issues (including port and trucker strikes domestically andcustomers. 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 producing countries), and insect pests (cigarette beetle and broca).
Competition.
Our customer base has undergone a dramatic shiftfuture. Similarly, rapid sharp decreases
in the past decade. This is
the resultcost of several factors, including competition fromgreen 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, and from other beverages. Other coffee companies include multi-
nationalincluding multi-national
firms with vastsubstantially greater financial, marketing and operating resources
than the Company. Large roasters like Folgers (Proctor & Gamble) and Maxwell
House (Kraft) have volumes far in excess of ours, with a business model that is
verysubstantially different from ours. We compete with those firms and superior information technologies. Large restaurant chainsothers for
a wide variety of customers, from small restaurants and otherdonut shops, to large
institutional buyers (representinglike restaurant chains, hospitals, hotels, contract food
services and convalescent hospitals and other similar institutions) often preferhospitals. 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 "price leader" and find insufficient value in the sales & service aspectquality of our business. We believe someproducts, of our
competitors are willing to accept smaller
profit margins from some customers because they do not have the distribution
and service organization we do. In addition, there are numerous beverages
competing for the same restaurant dollar. Soft drinks, bottled water, flavored
coffees & teas all have grown at the expense of a "standard" cup of coffee. We
believe the growth of coffee shops that roast their own coffee has also
contributed to the decrease in demand for the "standard" cup of coffee.
Sales & Distribution Network.
We believe our sales and distribution network to be one of the best in the
industry. It is also expensive to operate.and our customer service. Some of our competitors market
through wholesale grocers. Therefore they do not
have to address certain
issues thatdo 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 do, including gasolineprovide. We
compete well when service and oil prices,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 costsdemand for coffee. Shifts in
consumer preferences away from a ?standard? cup of purchasing,
maintaining and insuring a fleet of delivery vehicles, the costs of purchasing
or leasing and maintaining distribution warehouses throughout the country, or
the costs of hiring, training and paying benefits forcoffee could adversely
affect our route sales
professionals. We find that competitors unencumbered with this overhead
sometimes choose to be very price competitive throughout our service area.
General economic and market conditions.profitability. Our primary market is restaurants and other food
service establishments. We also provide coffee and related products to
offices. We believe the success of this businessour 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 locations.dollar. Our restaurant customers report that competition from such
beverages continues to dilute demand for coffee. Consumers who choose soft
drinks, bottled water, and flavored coffees and teas are all reducing the
restaurant dollar formerly spent on a "standard" cup of coffee. Some
restaurants that only sell coffee and flavored coffee products may have
expanded the beverage market somewhat, but these coffee shops have also taken
market share from existing Farmer Bros. customers. Although we have a line of
products that compares favorably with products sold in such "specialty coffee"
stores, most of our customers are restaurants that do not specialize in coffee
drinks.
REDUCTIONS IN DESCRETIONARY 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 "eating"dining out." A weaker economyEconomic conditions may also cause
businesses to cut back on theirreduce travel and entertainment expenses, and even reduce or eliminatecause office
coffee benefits.
Self insurance.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. 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. Although we carry insurance, our
deductibles require that we bear a substantial liability.risks up to significant deductible amounts. The
premiums associated with our insurance have recently increased substantially.
General liability, fire, workers' compensation, director & officer,directors and officers
liability, life, employee medical, dental &and vision and automobile present a
large potential liability. While we accrue for this liability based on
historical experience, future lossesclaims may exceed lossesclaims we have incurred in the
past. Risks from possible acquisitionsShould a different amount of claims occur compared to what was estimated
or costs of the claims increase or decrease beyond what was anticipated,
reserves recorded may not be sufficient and newthe accruals may need to be
adjusted accordingly in future periods.
EMPLOYEE STRIKES AND OTHER LABOR-RELATED DISUPTIONS MAY ADVERSELY AFFECT OUR
OPERATIONS.
We have union contracts relating to the majority of our workforce in our
California, Oregon, Washington and Nevada markets. 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.
WE MAY ENTER INTO NEW BUSINESS VENTURES THAT COULD HAVE A NEGATIVE IMPACT ON
OPERATING RESULTS.
From time to time, we evaluate potential business ventures.
The Company regularly evaluates opportunities that may enhance shareholder
value.ventures and acquisitions.
Entering into any such transaction entails many risks, any of which could
materially harm our business. There is no assurance that any such venture,
should we decide to enter into one, will accrue the projected returns. It is
possible that such ventures could result in losses or returns that would have a
negative impact on operating income.
Stock purchasesresults.
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 salesblending methods essential to the flavor and
richness of our coffee and, therefore, essential to our brand. Because the
Company's roasting methods cannot be patented, we would be unable to prevent
competitors from copying these methods if such methods became known. If our
competitors copy our roasts or blends, the value of our brand may be
diminished, and we may lose customers to our competitors. In addition,
competitors may be able to develop roasting or blending methods that are more
advanced than our production methods, which may also harm our competitive
position.
BECAUSE A SUBSTANTIAL PORTION OF OUR BUSINESS IS BASED IN CALIFORNIA, TEXAS,
COLORADO, ARIZONA AND WASHINGTON, AN INTERRUPTION IN OPERATIONS IN ANY OF THESE
MARKETS WOULD ADVERSELY IMPACT OUR BUSINESS.
Over half of our business is conducted in California, Texas, Colorado, Arizona
and Washington. We expect that these operations will continue to generate a
substantial portion of our revenue. A significant interruption in operations
at our facilities in these markets, whether as a result of an earthquake,
natural disaster, terrorism or other causes, could significantly impair our
ability to operate our business. Our major manufacturing facility and
distribution hub is in Los Angeles County. An interruption to highway
arteries, gas mains or electrical service in this area could restrict our
ability to supply our branches with product and would adversely impact our
business.
OUR OPERATING RESULTS MAY HAVE SIGNIFICANT FLUCTUATIONS FROM QUARTER TO QUARTER
WHICH COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE.
From time to time, our operating results likely will fall below investor
expectations. These results are influenced by major shareholders.
Approximately 53%a number of all outstanding shares are owned or controlled by Company
employees, officers and directors. The combined holdings of the 7 largest
institutions are approximately 22% of outstanding shares. Including the
holdings of a former director of approximately 10% of outstanding shares,
current and former management and institutions control approximately 85% of
shares. Future sales of Company stock by these shareholders could adversely
and unpredictably affectfactors, including:
a. fluctuations in the price of green coffee;
b. competition from existing or new competitors in our shares.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.
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, THE PRICE OF OUR STOCK MAY BE
NEGATIVELY AFFECTED.
For the fiscal year just ended, June 30, 2005, we had a net loss of
($5,427,000). We could suffer additional losses in future years and as a
result our stock price could decline.
FUTURE FUNDING DEMANDS UNDER PENSION PLANS FOR CERTAIN UNION EMPLOYEES ARE
UNKNOWN.
We participate in two multi-employer defined benefit plans for certain union
employees. The management, funding status and future viability of these plans
is not known at this time. The nature of the contract with these plans allows
for future funding demands that are outside our control or ability to estimate.
WE RELY ON A SINGLE THIRD PARTY SUPPLIER TO MANAGE OUR INTEGRATED ORACLE SYSTEM
THAT IS INTEGRAL TO THE SUCCESS AND OPERATION OF OUR BUSINESS.
We rely on WTS, a company affiliated with Oracle, and its employees, in
connection with the hosting of our integrated Management Information System.
This System is essential to our operations and currently includes all
accounting and production software applications. By the end of fiscal 2006,
WTS will also host our Route Sales application software. If WTS were to
experience financial, operational, or quality assurance difficulties, or if
there were any other disruption in our relationship with WTS, we might be
unable to produce financial statements, fill replenishment orders for our
branch warehouses, issue payroll checks, process payments to our vendors or
bill customers. Any of these items could have a material adverse effect on the
Company.
WE ARE DEPENDENT ON ENTERPRISE RESOURCE MANAGEMENT (?ERP?) SOFTWARE TO OPERATE
OUT BUSINESS. SHOULD WE FAIL TO OPERATED 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,
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. Additionally, we believe employee stock
ownership helpsemployees and to better align the efforts of our employees
with the interests of our shareholders.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 13 years. It is possible that additional shares could be acquired
that might deplete the Company's cash. We expect that the future re-funding
liability of the existing shares in the ESOP will increase and require
additional investment as the ESOP matures and individual holdings grow. When
employees vested in the ESOP leave the Company, they have the right to "put"
their shares to the Company for cash. This requires the Company to repurchase
the shares at the current market value. When shares are fully distributed, the
Company's re-funding liability is approximately $63,000,000 at current share
prices.
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 August 1, 2005, members of the Farmer family 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,? 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 because investors often perceive disadvantages in owning stock in
companies with such concentrated ownership.
ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US.
We have adopted a stockholder rights plan (the ?Rights Plan?) and declared a
dividend distribution of one preferred share purchase right (a ?Right?) for
each outstanding share of our common stock to 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 board
of 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 board of directors regarding such
acquisition.
In addition, our board of directors has approved loaning
sufficient fundsthe authority to acquire a total of 300,000issue up to 500,000
shares of Preferred Stock (of which 170,425200,000 shares have been acquireddesignated 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 board
of directors. Further, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit us
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, even if such combination is favored by a
majority of stockholders, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change of control or management.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SOX SECTION
404 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
As directed by SOX Section 404, the SEC adopted rules requiring us, as a public
company, to include a report of management on our internal controls over
financial reporting in our annual report on Form 10-K and quarterly reports on
Form 10-Q that contains an assessment by management of the effectiveness of our
internal controls over financial reporting. In addition, our independent
auditors must attest to and report on management?s assessment of the
effectiveness of our internal controls over financial reporting as of June 30, 2003. A totalthe end
of $39,580,000the fiscal year. Compliance with the SOX Section 404 has been loaneda challenge
for many companies. Our ability to continue to comply is an uncertainty 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 ESOPlevel at
which these controls are documented, designed, operated, tested or assessed, or
if the independent auditors interpret the requirements, rules or regulations
differently than we do, then they may decline to attest to management?s
assessment or may issue a report that is qualified. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with SOX Section 404. Failure to maintain an
effective internal control environment could have a material adverse effect on
our stock price. In addition, there can be no assurance that we will be able to
remediate material weaknesses, if any, that may be identified in future
periods.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE COVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including SOX, new SEC and Public Accounting Oversight Board
regulations and Nasdaq National Market rules, are creating uncertainty for
this purpose.public companies. These purchasesnew 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, and will depletecontinue 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 working capital
and increaseregular independent
accounting firm, internal costs associated with documenting the ESOP, especially future funding (i.e.,
requirementadequacy 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 providecomply with new or changed laws, regulations and standards differ
from the ESOPactivities 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 liquidity for shares tendered backlaws and regulations pertaining
to the ESOP by departing employees). We expectproper recording and reporting of our financial results, there can be no
assurance that as the ESOP acquires additional
shares, the Companyfuture regulations, implementing SOX and otherwise, will assume a higher fixed cost which maynot
have a material effectadverse impact on future earnings.
External factors: strikes, natural disasters, actsour reported results as compared with prior
reporting periods.
Item 2. Properties
Our largest and most significant facility consists of warour roasting plant,
warehouses and other
difficulties.
Over halfadministrative offices in Torrance, California. This facility
is our primary manufacturing facility and the distribution hub for our long
haul trucking fleet. We stage our products in 101 small branch warehouses
throughout our service area. These warehouses, taken together, represent a
vital part of our business, but no individual warehouse is conductedmaterial to the
group as a whole. Our warehouses vary in California, Oregon & Washington.
This areasize from approximately 2,500 to
20,000 square feet. We believe our existing plant and branch warehouses will
continue to provide adequate capacity for the foreseeable future.
A complete list of properties and facilities operated by Farmer Bros. is
prone to seismic activityattached hereto, and a major earthquake could have a
significant negative effect on our operations. Our major manufacturing
facilityincorporated herein by reference, as Exhibit 99.1.
Item 3. Legal Proceedings
We are both defendant and distribution hub isplaintiff in Los Angeles, and a serious interruption to
highway arteries, gas mains or electrical service could restrict our ability to
supply our branches with product.
Most of our customers are located throughout the western United States, with
concentrations in major cities. We depend on our own route sales network for
reaching our customers. Any interruption of that distribution system could
have material negative consequences for us. Our major product, coffee, is
grown primarily in the tropics. Hurricanes, monsoons, tornados, severe winter
storms, drought and floods all have an affect on our customers and our sources
of supply.
Strikes against our suppliers or their transportation vendors could restrict
our ability to obtain our supply of green coffee and other supplies. Coffee is
shipped to us by sea from every producing country, and by rail from Mexico.
Any major interruption in that flow, for example, trucker strikes in Brazil,
railroad strikes in Mexico, coffee processors strikes in El Salvador, or
longshoremen strikes in U.S. ports, can reduce our ability to maintain our flow
of green coffeevarious legal proceedings incidental
to our production facilitybusiness which are ordinary and ultimately toroutine. It is our customers.
Coffee is perishable, and although its shelf life is lengthy compared to other
typesopinion that the
resolution of agricultural products, it doesthese lawsuits will not allow for any significant stock-
piling.
Acts of war or terrorism.
Any action domestically or in a coffee producing country that interrupts the
supply of green coffee to our plant or restricts our delivery of finished
product to our warehouses and customers can have a material impact on our operating results. Civil war in Columbiafinancial
condition or Peru,results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None during the fourth quarter of fiscal 2005.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
We have one class of common stock which is traded on the NASDAQ National
Market under the symbol "FARM." The following table sets forth the high and
low sales prices of the shares of Common Stock of the Company. Prices are as
reported on the NASDAQ National Market and represent prices between dealers,
without including retail mark-up, mark-down or terrorist actionscommission, and do not
necessarily represent actual trades.
On March 4, 2004, a ten-for-one stock split in the Philippines or elsewhere, can haveform of a material effectone-time stock
dividend was declared. Each stockholder of record on our operations if we
are unable to receive or replace key coffee shipments. If suitable substitute
sourcesApril 23, 2004 received
nine additional shares for every share of supply can be located, they are often found at a much higher price.
ERP System Conversion.
Last yearFarmer Bros. Common Stock held. The
new shares were registered on the books of the Company began a multiyear program to update its management
information systems. This has proven to be a challenging conversion. Weat the close of business
on May 10, 2004. Share and per share amounts have had some successesbeen restated in the early phases of implementation of the new systems.
There are many open issues, and the more difficult implementations will occur
in the coming year. It is possible that increasing conversion costs, potential
complications resulting from the conversion itself, and system problems in our
use of the new software could have a material impact on our future operating
results.
Staffing.
There is little depth of management in certain positions and a loss of one or
more of these key employees could have a material effect on our operations and
competitive position. We have union contracts relating to our employees
serving our California, Oregon, Washington and Nevada markets. Although we
believe union relations have been amicable in the past, there is no assurance
that this will continue in the future.
Hedging activities
The most important aspect of our operation is to secure a consistent supply
of coffee. Some proportion of green coffee price fluctuations can be
passed through to our customers, with some delay; but maintaining a steady
supply of green coffee is essential to keep inventory levels low and sufficient
stock to meet customer needs. We purchase our coffee through established
coffee brokers to help minimize the risk of default on coffee deliveries. To
help ensure future supplies, we purchase much of our coffee on forward
contracts for delivery as long as six months in the future. Sometimes these
contracts are fixed price contracts, where the price of the purchase is set
regardless of the change in price of green coffee between the contract and
delivery dates. At other times these contracts are variable price contracts
that allow the delivered price of contracted coffeetable
below to reflect the marketsplit.
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
There were approximately 4,091 holders of record on September 12, 2005.
Holders of record is based upon the number of record holders and individual
participants in security position listings.
Effective as of March 17, 2005, our Board of Directors approved a stockholder
rights plan (the "Rights Plan"), pursuant to which the Company 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 share of the Company's
Common Stock to stockholders of record at the close of business on March 28,
2005. Each Right, when exercisable, will entitle the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, $1.00 par value per share, at a purchase price
of $112.50, subject to adjustment. The description and terms of the Rights are
set forth in the Rights Plan. Initially, ownership of the Rights is evidenced
by the certificates representing our Common Stock then outstanding, and no
separate Rights Certificates, as defined in the Rights Plan, have been
distributed. The Rights are not exercisable until the distribution date, as
described in the Rights Agreement, and will expire on March 28, 2015, unless
they are earlier redeemed, exchanged or terminated as provided in the Rights
Plan. No rights have been exercised at this time.
Item 6. Selected Financial Data
(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 (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 Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis discusses the results of operations as
reflected in the Company's consolidated financial statements. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors.
The results of operations for the fiscal years ended June 30, 2005, 2004 and
2003 are not necessarily indicative of the results that may be expected for any
future period. The following discussion should be read in combination with the
consolidated financial statements and the notes thereto included in Item 8 of
this report and with the "Risk Factors" described in Item 1.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to inventory valuation, including LIFO reserves, the
allowance for doubtful accounts, deferred tax assets, liabilities related to
retirement benefits, liabilities resulting from self-insurance of our workers?
compensation liabilities, and litigation. We base our estimates on historical
experience and other relevant factors that are believed to be reasonable under
the circumstances.
While we believe that the historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated financial statements, actual results may
differ from these estimates, which could require the Company to make
adjustments to these estimates in future periods.
Investments: Our investments consist of investment grade marketable debt
instruments issued by the 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 at the delivery date.
Futuresforward contracts and commodity purchase agreements. All
derivatives not designated as hedges, and terminations of contracts
designated asaccounting hedges are marked to market and
changes are recognized in current earnings. Open contractsThe fair value of derivative
instruments is based upon broker quotes where possible.
Allowance for Doubtful Accounts: We maintain an allowance for estimated
losses resulting from the inability of our customers to meet their
obligations. Our ability to maintain a relatively small reserve is directly
related to our ability to collect from our customers when our salespeople
regularly interact with our customers in person. This method of operation has
provided us with a historically low bad debt experience.
Inventories: Inventories are valued at the lower of cost or market and the
costs of coffee and allied products are determined on the last in, first out
(LIFO) basis. Costs of coffee brewing equipment manufactured are accounted
for on the first in, first out (FIFO) basis. We regularly evaluate these
inventories to determine whether market conditions are correctly reflected in
the recorded carrying value.
Self-Insurance Retention: We are self-insured for California workers'
compensation insurance and use historical analysis to determine and record
the estimates of expected future expenses resulting from workers? compensation
claims. Additionally, we accrue for estimated losses not covered by insurance
for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans: We have two defined benefit plans that provide retirement
benefits for the majority of our employees (the balance of our employees are
covered by union defined benefit plans). We obtain actuarial valuations for
both plans and at present we discount the pension obligations using a 5.30%
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%
ultimately reducing to 5.5% in 6 years.
Income Taxes: Deferred income taxes are determined based on the temporary
differences between the financial reporting and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse. We presently have a valuation
allowance for the portion of 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 each quarter we reevaluate our
estimate related to the valuation allowance and our assumptions related to the
specific tax assets.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and
believe that our short and long term cash requirements 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 purchased 443,845 shares (pre-split) of its
common stock held by the Crowe Family and related trusts for approximately $111
million, or approximately $250 per share (pre-split). Concurrently with this
purchase, the Company offered its Employee Stock Ownership Plan (ESOP) the
opportunity to acquire 124,939 shares (pre-split) at the same price. This
portion of the transaction was completed on January 11, 2004 when the Company
issued said shares to the ESOP. 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 on this matter can be found in Note 11 to the
accompanying financial statements.
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
At June 30, 2005 we had no major commitments for new capital expenditures. The
following ongoing projects are addressedexpected to be completed in fiscal 2006:
1. Construction of warehouses 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 fourth
quarter of fiscal 2005 we closed escrow on the purchase of a warehouse in
Oakland, California, to meet the needs of our growing Northern California
service area. The total cost for this facility, after improvements, is not
expected to exceed $3 million.
2. We are entering the final year of a multi-year upgrading of 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
Net sales in fiscal 2005 increased $4,831,000 or 2% to $198,420,000 from
$193,589,000 in fiscal 2004, primarily because of higher sales prices of roast
coffee. During fiscal 2005 we initiated additional programs intended to
improve sales. We revised our sales incentive program to more clearly focus
our sales people. In an effort to advance our image more clearly and
aggressively with current and potential customers, we redesigned our
merchandising and point of sale materials used by our customers, and we have
set an aggressive trade show schedule with a new booth. Most importantly, we
have assembled a team 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), fruit smoothies (an iced beverage), an expanded line of teas, liquid
coffee, and some new seasonal products like Pumpkin Pie Cappuccino.
Cost of goods sold in fiscal 2005 increased 16% to $82,964,000 or 42% of sales,
as compared to $71,405,000, or 37% of sales, in fiscal 2004. The average cost
of green coffee in fiscal 2005 exceeded that of fiscal 2004 by 74%. A
volatile, sustained increase in green coffee prices in the second and third
quarters of fiscal 2005 resulted in a decrease in profit margins on roast
coffee during those periods. 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 2005 increased 3% to
$122,039,000 from $118,421,000 in fiscal 2004. This increase is primarily
attributed to costs associated with the employee medical program, the cost of
the ESOP, the project-related costs of our multi-year information systems
project and consulting costs related to compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 (?SOX?) as summarized in the following Item 7A.
Intable.
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
IT 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 eventCompany
had an operating loss in fiscal 2005 of non-performance($6,583,000) 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
counter parties,Company to hedge against a decline in commodity prices. Total Other Expense was
($4,746,000) in fiscal 2005 as compared to Total Other Income of $12,219,000 in
fiscal 2004. Other, net (expense) was ($10,887,000) for fiscal 2005 as compared
to Other, net income of $6,305,000 for fiscal 2004.
Higher green coffee prices during fiscal 2005 resulted in a decrease in the
value of green coffee futures and options used by the Company could
be exposed to credithedge against
a decline in commodity prices. Other, net (expense) income during fiscal 2005
included realized coffee trading gains of $3,655,000 offset by realized coffee
trading losses of ($16,764,000).
Rising interest rates 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, net income in fiscal 2004 included $5,778,000
of non-recurring income.
As a result of the forgoing factors the net loss for fiscal 2005 was
($5,427,000) as compared to net income $12,687,000 for fiscal 2004. Net loss
per common share was ($0.40) in fiscal 2005 as compared to net income per
common share of $0.81 in fiscal 2004.
Fiscal years ended June 30, 2004 and supply risk.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 monitorsreceived payment on a key man life
insurance policy on Mr. Farmer that was not taxable and paid the financial
viabilitydeferred
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 counter partiesfollowing.
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 an attemptfiscal 2003. Net income per common share decreased 38% in
fiscal 2004 to minimize this risk.$0.81 per share as compared to $1.30 per common share in fiscal
2003.
Contractual obligationsobligations.
The following table contains supplemental information regarding total
contractual obligations as of June 30, 2003.2005.
(In thousands) Less Than More Than
Total One Year 2-3 Years 4-5 Years 5 years
Operating lease obligations $1,402 $667 $650 $85$1,690 $783 $776 $131 $ -
Off-Balance Sheet Arrangements.
The Company has no off-balance sheet arrangements.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market value risk arising from changes in interest rates
on our securities portfolio. Our portfolio of investment grade money
market instruments can include at any given time discount commercial paper,
medium term notes, federal agency issues and treasury securities. As of June
30, 20032005, over 95%90% of these funds were invested in treasuryU.S. Treasury securities and
more thanapproximately 50% of these issues have maturities shorter than 12090 days. This
portfolio's interest rate risk is not hedged and its average maturity is
approximately 15090 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 $2,200,000.$1,110,000.
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" 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, 2003.2005. This
table is predicated on an instantaneous change in the general level of
interest rates and assumes predictable relationships between the prices of
preferred securities holdings, the yields on U.S. Treasury securities and
related futures and options.
The number and type of futures and options contracts entered into depends
on, among other items, the specific maturity and issuer redemption
provisions for each preferred securitystock held, the slope of the Treasury
yield curve, the expected volatility of U.S. Treasury yields, and the costs of
using futures and/or options.
Interest Rate Changes
(In thousands) Market Value at June 30, 20032005 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -150 basis points $58,072$65,717 $0 $58,072 $3,710$65,717 $65,717
- -100 basis points 57,206 2 $57,208 2,847$64,852 $0 $64,852 $64,852
Unchanged 53,898 478 $54,376 0$61,660 $239 $61,899 $61,899
+100 basis points 49,215 4,233 $53,448 913$56,881 $3,800 $60,681 $60,681
+150 basis points 46,870 6,512 $53,382 980$54,280 $6,220 $60,500 $60,500
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of green coffee. We price our inventory on the LIFO basis. In the
normal course of business we hold a large green coffee inventory and enter into
forward commodity purchase agreements with suppliers and we purchase exchange tradedsuppliers. We are subject to price
risk resulting from the volatility of green coffee contracts. The
following table demonstratesprices. Volatile price
increases cannot, because of competition and market conditions, always bepassed
on to our customers. From time to time the impactCompany will hold a mix of futures
contracts and options to help hedge against volatile green coffee price
decreases. Gains and losses on these derivative instruments are realized
immediately in Other, net (expense) income.
On June 30, 2005 we had no open hedge derivative contracts, and our entire
exposure to commodity risk was in the potential change of our inventory value
resulting from changes in the market price of green coffee on inventory and green coffee contracts at June 30, 2003. It
assumes an immediate change in the price of green coffee, and the valuations of
coffee futures and relevant commodity purchase agreements at June 30, 2003.
Commodity Risk Disclosure
(In thousands)
Market Value
Coffee Futures & Change in Market Value
Coffee Cost Change Inventory Options Total Derivatives Inventory
-10% $12,000 $35 $12,035 $23 -$1,008
unchanged 13,008 23 13,031 0
10% 14,000 0 14,000 -23 992
At June 30, 2003 the derivatives consisted mainly of commodity futures with
maturities shorter than three months.coffee.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To theReport of Independent Registered Public Accounting Firm
The Board of Directors and ShareholdersStockholders of
Farmer Bros. Co. and Subsidiary
We have audited the accompanying consolidated balance sheets of Farmer Bros.
Co. and Subsidiary (the "Company") as of June 30, 20032005 and 2002,2004, and the related consolidated
statements of income,operations, stockholders' equity and cash flows and
shareholders' equity for each of the
three years in the period ended June 30, 2003.2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on thethese financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Farmer Bros. Co.
and Subsidiary at June 30, 20032005 and 2002,2004, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003,2005, in conformity with accounting
principlesU.S. generally accepted accounting
principles.
We also have audited, in accordance with the United States.standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Farmer Bros.
Co. and Subsidiary's internal control over financial reporting as of June 30,
2005, 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, 2005 expressed an unqualified opinion
thereon.
/s/Ernst & Young LLP
Long Beach,Los Angeles, California
September 8, 20037, 2005
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
June 30, 20032005 June 30, 20022004
ASSETS
Current assets:
Cash and cash equivalents $18,986 $7,047
Restricted cash 975 -$9,814 $21,807
Short term investments 274,444 285,540171,055 176,903
Accounts and notes receivable, net 13,756 14,00415,485 14,565
Inventories 34,702 37,36141,086 35,579
Income tax receivable 2,878 2,5534,064 408
Deferred income taxes - 1,188775
Prepaid expenses 876 7413,715 2,683
Total current assets 346,617 348,434$245,219 $252,720
Property, plant and equipment, net 41,753 38,57242,671 42,300
Notes receivable 193 2240 143
Other assets 26,390 27,62221,268 21,609
Deferred income taxes 1,462 2,6725,765 1,099
Total assets $416,415 $417,524$314,923 $317,871
LIABILITIES AND SHAREHOLDERS'STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,321 $4,827$7,852 $9,589
Accrued payroll expenses 7,362 6,4077,590 6,999
Deferred income taxes 976321 -
Other 5,000 5,0254,930 4,601
Total current liabilities 16,659 16,259$20,693 $21,189
Accrued postretirement benefits 25,041 22,726
Other long term$29,344 $26,984
Total liabilities 5,570 5,486
Total Liabilities 47,270 44,471$50,037 $48,173
Commitments and contingencies
- -
Shareholders'Stockholders' equity:
Common stock, $1.00 par value,
authorized 3,000,00025,000,000 shares; $16,075 $16,075
16,075,080 issued and outstanding
1,926,414 1,926 1,926
Additional paid-in capital 18,798 17,62732,292 32,248
Retained earnings 382,831 365,725272,791 283,654
Unearned ESOP shares -33,364 -12,225(55,415) (61,542)
Less accumulated comprehensive loss -1,046 -(857) (737)
Total shareholders'stockholders' equity 369,145 373,053$264,886 $269,698
Total liabilities and
shareholders'stockholders' equity $416,415 $417,524$314,923 $317,871
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Dollars in thousands, except share and per share data)
Years ended June 30,
2005 2004 2003 2002 2001
Net sales $198,420 $193,589 $201,558 $205,857 $215,431
Cost of goods sold 82,964 71,405 70,662 67,764 74,031
Gross profit 130,896 138,093 141,400$115,456 $122,184 $130,896
Selling expense 92,112 92,029 88,658 86,025 84,524
General and administrative expenseexpenses 29,927 26,392 18,350 13,858 14,761
Operating expenses 107,008 99,883 99,285
Income$122,039 $118,421 $107,008
(Loss) income from operations 23,888 38,210 42,115($6,583) $3,763 $23,888
Other income:income (expense):
Dividend income 3,420 3,396 3,246 3,198 3,039
Interest income 2,721 2,518 3,974 7,261 12,308
Other, net (expense) income (10,887) 6,305 6,463
691 2,054
13,683 11,150 17,401
IncomeTotal other (expense) income ($4,746) $12,219 $13,683
(Loss) income before taxes (11,329) 15,982 37,571
49,360 59,516
Income taxestax (benefit) expense (5,902) 3,295 13,942
18,791 23,028
Income before cumulative effect
of accounting changeNet (loss) income ($5,427) $12,687 $23,629
$30,569 $36,488
Cumulative effect of accounting
change (net of income taxes
of $205) - - -$310
Net income $23,629 $30,569 $36,178
Income per common share:
Before cumulative effect of
accounting change $13.02 $16.54 $19.79
Cumulative effect of
accounting change -$0.17
Net(loss) income per common share $13.02 $16.54 $19.62
Pro forma assuming accounting changes
were retroactively applied
Net income $36,448
Net income per common share $19.79($0.40) $0.81 $1.30
Weighted average shares outstanding 1,814,591 1,848,395 1,843,39213,653,420 15,576,450 18,145,910
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended June 30,
2005 2004 2003 2002 2001
Cash flows from operating activities:
Net (loss) income ($5,427) $12,687 $23,629 $30,569 $36,178
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Cumulative effect of accounting change - - 310
Depreciation 8,396 7,098 5,776 5,493 5,527
Deferred income taxes (3,510) (1,536) 3,989
495 1,736
(Gain) lossGain on sales of assets -498 -239 -131(100) (94) (498)
ESOP compensation expense 6,171 5,516 4,269
2,529 1,398
Net loss (gain) loss on investments -5,625 -51 -1,614
Net unrealized loss on investments
reclassified as trading - - 2,33711,571 (706) (5,625)
Change in assets and liabilities:
Short term investments (5,723) (12,914) 16,721 -51,310 -23,976
Accounts and notes receivable 224 1,220 2,769(777) (759) 279
Inventories (5,507) (877) 2,659 -1,581 990
Income tax receivable -325 438 -1,651(3,656) 2,470 (325)
Prepaid expenses and other assets -153 -1,421 -2,130(637) 4,064 (1,128)
Accounts payable -1,506 -326 -768(1,737) 6,268 (1,506)
Accrued payroll, and expenses and
other liabilities 920 (762) 930 -1,070 1,457
Accrued postretirement benefits 2,126 2,285 1,904 1,926 1,602
Other long term liabilities - (5,570) 84 594 702
Total adjustments 28,449 -43,303 -11,442$7,537 4,483 27,529
Net cash (used in) provided by
operating activities $52,078 -$12,734 $24,736$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
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended June 30,
2003 2002 2001
Net cash (used in) provided by
operating activities $52,078 -$12,734 $24,736
Cash flows from investing activities:
PurchasesSTOCKHOLDERS' EQUITY
(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 property, plant and equipment -9,089 -5,039 -5,912
Proceeds from sales of property,
plant and equipment 630 307 207
Notes issued - -35 -78
Notes repaid 55 2,640 831
Net cash used in investing activities -8,404 -2,127 -4,952
Cash flows from financing activities:
Dividends paid -6,523 -6,278 -5,897
ESOP contributions -24,237 -815 -390
Net cash used in financing activities -30,760 -7,093 -6,287
Net (decrease) increase in cash
and cash equivalents 12,914 -21,954 13,497
Cash and cash equivalents at beginning of year 7,047 29,001 15,504
Cash and cash equivalents at end of year $19,961 $7,047 $29,001
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and share data in thousands)
Other
Additional Unearned Comprehensive
Common Stock Paid-in Retained Esop Income
Shares Amount Capital Earnings Shares -Loss Total
Balance at June 30,2000 1,926 1,926 16,359 311,153 -13,679 -2,646 313,113
Comprehensive income
Net income 36,178 36,178
Transition adjustment for FAS 131 2,646 2,646
Total comprehensive income 38,824
Dividends ($3.20 per share) -5,897 -5,897
ESOP contributions -390 -390
ESOP compensation expense 270 1,128 1,398
Balance at June 30, 2001 1,926 1,926 16,629 341,434 -12,941 0 347,048
Comprehensive income
Net income 30,569 30,569
Total comprehensive income 30,569
Dividends ($3.40 per share) -6,278 -6,278
ESOP contributions -815 -815
ESOP compensation expense 998 1,531 2,529
Balance at June 30, 2002 1,926 1,926 17,627 365,725 -12,225 0 373,053
Comprehensive income
Net income 23,629 23,629
Minimum pension liability, net of tax ($615,000) -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 1,926 18,798 382,831 -33,364 -1,046 369,145these financial statements.
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of
roasting, packaging, and distributing coffee and allied products through
direct sales to restaurants, hotels, hospitals, convenience stores and fast
food outlets. The Company's products are distributed by its selling divisions
from branch warehouses located in most large cities throughout the western
United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary FBC Finance Company. All significant inter-company balances
and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with accounting
principlesU.S. generally
accepted in the United Statesaccounting 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 aoriginal maturity
dates of 90 days or less when purchased to be cash equivalents. Fair values of cash
equivalents approximate cost due to the short period of time to maturity.
Restricted Cash
The Company has pledged cash as collateral for a stand-by letter of credit
securing its obligations under a self insurance program. The cash is invested
in certificates of deposit with maturities that do not exceed 1 year. In the
event the Company does not perform all its responsibilities for paying out
claims, the administrator of the program has the right to draw against the
letter of credit.
Investments
The Company'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, 20032005 and 20022004 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, 2003,2005, 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's customer base and their
dispersion across many different geographic areas. The trade receivables are
short-term,short term, and all probable bad debt losses have been appropriately
considered in establishing the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or market. Costs of coffee and
allied products are determined on the Last In, First Outlast in, first out (LIFO) basis. Costs
of coffee brewing equipment manufactured are accounted for on the First In,
First Outfirst in,
first out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation of buildings and facilities is computed using the
straight-line method. All other assets are depreciated using the sum-of-the
years' digits and straight-line
methods.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
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
SalesProducts are sold and delivered to the costCompany?s customers at their places of
products sold are recordedbusiness by the Company?s route sales employees. Revenue is recognized at the
time of deliverythe Company?s sales representatives physically deliver products to
the
customer.customers and title passes.
Net Income Per Common Share
Basic earningsNet income per share ishas been computed by dividing the net income attributable to
common stockholders by the weighted average number of common shares outstanding
during the period,in accordance with SFAS Statement No.
128, "Earnings per Share" (see Note 11), excluding unallocated shares held by
the Company's Employee Stock Ownership Plan (see Note 6)7). The Company has no
dilutive shares for any of the three fiscal years in the period ended June 30,
2003.2005. Accordingly, the consolidated financial statements present only basic
net income 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")
The ESOP is accounted for in accordance with AICPA Statement of Position
("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 note
receivable. The contra account will change as compensation is recognized.
Repurchase liability is disclosed as the current value of allocated shares.
Long-lived Assets
The Company reviews the recoverability of its long-lived assets as
required by SFASStatement of Financial Accounting Standards ("SFAS") No. 144,
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 existsexisted as of or during the fiscal year
ended June 30, 2003.2005.
Shipping and Handling Costs
The Company distributes its products directly to its customers and shipping
and handling costs are consideredrecorded as Company selling expenses.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements.
The duration of these agreements extend from 20052007 to 2006.2010.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
New pronouncements
In April 2003,November 2004, the FASBFinancial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs.
SFAS No. 149, "Amendment151 amends Accounting Research Bulletin No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of Statement 133 on
Derivative Instrumentsidle facility
expense, freight, handling costs and Hedging Activities," which amends and clarifies
financial accounting and reporting derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities underwasted material. SFAS No. 133, "Accounting for Derivative Instruments151 requires
that those items be recognized as current period charges and Hedging Activities." This statementrequires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 is effective for
contracts entered into
or modified and for hedging relationships designatedfiscal years beginning after June 30, 2003.15, 2005. The Company will adopt this
Statement effective July 1, 2005, and does not expect the adoption of this statement to have a
material impact on its operatingthe Company's financial position, 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.position, results of operations or cash flows.
In June 2002,December 2004, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses issues
regarding the recognition, measurement and reporting153, Exchanges of costs associated
with exit and disposal activities, including restructuring activities.Nonmonetary
Assets, an amendment of APB Opinion No. 29. This statement requireseliminates 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 costs associated with exit or disposal activities
be recognized when theydo not have
commercial substance. This Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are incurred rather than atexpected to
change significantly as a result of the date of commitment
to an exit or disposal plan.exchange. The implementationprovisions of this
Standard did not
have a material effect on the Company.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure RequirementsStatement are effective for Guarantees,
Including Indirect Guarantees of Indebtedness for Contingencies, relating to a
guarantor's accounting for, and disclosure of Others. FIN 45 clarifies
the requirements of SFAS No. 5, Accounting of, the issuance of certain
types of guarantees. For certain guarantees issuednonmonetary asset exchanges occurring in fiscal
periods beginning after December 31, 2002,
FIN 45 requires a guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under the
guarantee. Guarantees issued prior to January 1, 2003, are not subject to
liability recognition, but are subject to expanded disclosure requirements.June 15, 2005. The Company does not believe that the adoption ofwill adopt this Interpretation has
had a material effect on its consolidated financial position or statement
of operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which
requires the Company to consolidate variable interest entities for which it
is deemed to be the primary beneficiary and disclose information about
variable interest entities in which it has a significant variable interest.
FIN 46 became effective immediately for variable interest entities formed
after January 31, 2003 and will beStatement
effective July 1, 2003 for any variable
interest entities formed prior to February 1, 2003. The Company2005, and does not believe that this Interpretation willexpect the adoption to have a material
impact on its
consolidatedthe Company's financial statements.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.
Note 2 Investments and Derivative Instruments
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
Statements 137 and 138. The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The adoption of SFAS No. 133, resulted in a cumulative
effect of an accounting change of $515,000 ($310,000 net of taxes) being
recognized in the Statement of Net Income, and a corresponding credit in other
comprehensive income.
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, 20032005 and 2004, 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
Gains and losses, both realized and unrealized, are included in other
income and expense. On July 1, 2000 the company transferred all of its investments
classified as "available for sale" at June 30, 2000 into the "trading"
category. Accordingly, the Company recognized the accumulated unrealized loss
of $3,894,000 in the consolidated statement of income.
Investments at June 30,Gross realized gains/losses are as follows:
(In thousands)2005 2004 2003
2002
Trading securities at fair value
Corporate debt $ - $18,863
U.S. Treasury Obligations 220,057 184,756
U.S. Agency Obligations - 26,983
Preferred Stock 53,897 48,873
Other fixed income - 5,181
Futures, options and other derivatives 490 884
$274,444 $285,540Gains $5,599 $12,259 $6,553
Losses ($21,112) ($6,955) ($7,309)
Note 3 Allowance for Doubtful Accounts
(In thousands)
2003 2002 20012005 2004
Balance at beginning of year $345 $395 $420$345
Additions 356 218 348194 181
Deductions -356 -268 -371(229) (181)
Balance at end of year $310 $345 $345 $397
Note 4 Inventories
(In thousands)
June 30, 20032005
Processed Unprocessed Total
Coffee $3,853 $9,155 $13,008$4,888 $12,568 $17,456
Allied products 11,776 4,213 15,98912,860 5,478 18,338
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,7022,081 3,211 5,292
$19,829 $21,257 $41,086
June 30, 20022004
Processed Unprocessed Total
Coffee $3,438 $10,393 $13,831$3,034 $10,736 $13,770
Allied products 12,482 5,116 17,59811,800 3,665 15,465
Coffee brewing equipment 2,528 3,404 5,932
$18,448 $18,913 $37,3612,341 4,003 6,344
$17,175 $18,404 $35,579
Current cost of coffee and allied products inventories is (less than) or
greater than the LIFO
cost by approximately $122,000$16,506,000 and $(491,000)$2,427,000 as of June 200330, 2005 and 2002,2004,
respectively.
The change in the Company's green coffee and allied product inventories during
fiscal 2003, 2002,2005, 2004, and 20012003 resulted in LIFO (increments)/decrements (increment) which had
the effect of (decreasing)/increasing (loss)/income before taxes for those
years by $64,000, $207,000,($1,747,000), ($499,000) and 1,283,000,$64,000, respectively.
Note 5 Property, Plant and Equipment
(In thousands)
2003 20022005 2004
Buildings and facilities $40,907 $40,914$42,757 $41,179
Machinery and equipment 48,969 48,69049,642 48,945
Capitalized software costs 3,934 012,689 9,016
Office furniture and equipment 5,845 6,055
$99,655 $95,6596,301 5,912
$111,389 $105,052
Accumulated depreciation -63,851 -62,950(74,865) (68,899)
Land 5,949 5,863
$41,753 $38,5726,147 6,147
Total property plant and equipment $42,671 $42,300
Maintenance and repairs charged to expense for the years ended June 30, 2005,
2004, and 2003 2002,were $10,719,000, $11,151,000 and 2001 were $11,022,000, $11,202,000, and $10,514,000, respectively.
Note 6 Employee Benefit Plans
The Company provides pension plans for most full time employees. Generally
the plans provide benefits based on years of service and/or a combination of
years of service and earnings. Retirees are also eligible for medical and
life insurance benefits.
Union Pension Plans
The Company contributes to two multi-employer defined benefit plans for
certain union employees. The contributions to these multi-employer pension
plans were approximately $2,278,000, $2,114,000 and $2,104,000 for the years
ended June 30, 2005, 2004 and 2003, respectively.
Company Pension Plans
The Company has a contributory defined benefit pension plan for all employees not covered under a
collective bargaining agreement (Farmer Bros. Co. Plan) and
a non-contributory 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.
Disclosure for the Company Pension Plans
(In thousands)
Years ended June 30
2005 2004
Change in benefit obligation
Benefit obligation at
the beginning 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 end of the year $86,841 $69,516
Change in plan assets
Fair value in plan assets at
the beginning of the year $79,387 $69,247
Actual return on plan assets 8,484 12,825
Employer contributions 20 20
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 Company's funding policy isaccumulated benefit obligation for the Farmer Bros. Co. Plan was
$74,826,000 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
The Company expects to make no contributions for the Farmer Bros. Co. Plan in
fiscal 2006, but expects to contribute annuallyapproximately $23,000 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. The
Company seeks to produce a rate that is intended
to fund benefits as a level percentage of salary (non-bargaining) and as a
level dollar cost per participant (bargaining)stable return on well diversified investments over
the working lifetimelong term in line with reasonable investment risk. Allocations
historically have been 60-80 percent equities, 20-40 percent debt; the plans
are not invested in real estate and other investments are not significant.
The tables below detail assets by category for the Company's pension plans.
Percent of the
plan participants. Benefit paymentsPlan 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%
Defined Contribution Plans
The Company also has defined contribution plans for all eligible employees.
No Company contributions have been made nor are determined under a final payment
formula (non-bargaining) and flat benefit formula (bargaining).required to be made to these
defined contribution plans.
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 retireesretiree contributions are fixed at a current level.
The plan is not funded.
(In thousands)
Defined Postretirement
Benefit Plans Benefit Plans
June 30, June 30,
2003 2002 2003 2002
Changes inThe following weighted average assumptions were used to determine the benefit
obligation
Benefit obligation atobligations and the beginning of the year $55,116 $48,909 $24,335 $22,951
Service cost 1,708 1,527 765 670
Interest cost 3,886 3,684 1,712 1,721
Plan participants contributions 180 160 0 117
Amendments 0 285 0 -906
Actuarial gain 13,797 3,153 4,665 651
Benefits paid -2,834 -2,602 -755 -869
Benefit obligation at
the end of the year $71,853 $55,116 $30,722 $24,335
Change in plan assets
Fair value in plan assets at
the beginning of the year $75,552 $79,259 $0 $0
Actual return on plan assets -3,674 -1,285 0 0
Company contributions 23 21 755 752
Plan participants contributions 180 160 132 117
Benefit paid -2,834 -2,602 887 -869
Fair value in plan assets at
the end of the year $69,247 $75,552 $0 $0
2003 2002 2003 2002
Funded status -$2,606 $20,437 -$30,722 -$24,335
Unrecognized net asset 0 -657 0 0
Unrecognized net (gain)/loss 23,330 -88 4,682 17
Unrecognized prior service cost 800 1,062 1,410 1,592
Net amount recognized $21,524 $20,754 -$24,630 -$22,726
Statements of Financial Position
Prepaid pension cost 19,854 $20,754
Accrued pension liability -411 0
Intangible asset 420 0
Accumulated other comprehensive income 1,661 0
Net amount recognized $21,524 $20,754periodic benefit cost.
Weighted average assumptions as
ofused to determine benefit obligation at June 30:30,
2005 2004
Discount rate 5.60% 7.20% 5.60% 7.20%
Expected return on Plan assets 8.00% 8.00% - -
Salary5.30% 6.30%
Rate of compensation increase rate increase 3.50% 3.50% - -
Initial medical rate trend 10.00% 11.00%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% 7.50%7.00%
Ultimate dental/vision trend rate 5.50% 5.00%
Components5.50%
Reconciliation of net periodic benefit costs:funded status.
(In thousands)
Defined Benefit Plans Postretirement Benefit
Plans
June 30, June 30,
2003 2002 2001 2003 2002 2001
Service cost $1,708 $1,527 $1,338 $765 $670 $646
Interest cost 3,886 3,684 3,445 1,712 1,721 1,539
Expected return on Plan2005 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 -5,965 -6,267 -6,121 - - -$0 $0
Funded status ($33,656) ($29,591)
Unrecognized net
transition asset -657 -657 -657 - - -
Unrecognized net gain 18 -269 -841 - - -94obligation 0 0
Unrecognized prior service cost 262 239 239 182 286 286
Benefit1,046 1,228
Unrecognized cumulative
net loss 3,570 1,446
Accrued post retirement
benefit cost -$748 -$1,743 -$2,595 $2,659 $2,677 $2,377as of June 30 ($29,041) ($26,915)
Retiree medical claims paid $1,012 $916
* The assumedAPBO reflects 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 in the health care costinflation trend
rate has a significant effectassumption on the amounts
reported. A one-percentage point changeaccumulated postretirement benefit obligation and net
periodic service and interest cost. These results are shown below.
Change in the assumed health care costinflation trend
rate would have the following effects:
(In thousands)
Plan Year Effect of 1%
Results Increase Decrease
Accumulated Postretirement Benefitpostretirement benefit
obligation as of June 30, 2003 $30,722 $4,474 -$3,5612005 $33,656 $4,374 ($3,268)
Service and interest cost for plan year 2,477 390 312$1,140 $196 ($149)
Interest for plan year $1,815 $200 ($160)
Presented below is the change in the accumulated postretirement benefit
obligation from the prior year.
(In thousands)
2005 2004
Accumulated Postretirement Benefitpostretirement 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
* Recognized 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,
2002 $24,335 $897 -$963
Service and interest cost for
plan year 2,391 90 -$95
The Company contributes to two multi-employer defined2006 $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 plans for certain
union employees. The contributions to these multi-employer pension plans were
approximately $2,104,000, $2,183,000 and $2,144,000, for 2003, 2002 and 2001,
respectively. The Company also has defined contribution plans for eligible
union and non-union employees. No Company contributions have been made nor are
required to be made to either defined contribution plan.
"Other long term liabilities" represents deferred compensation payable to a
company officer. The deferred compensation plan provides for deferred
compensation awards to earn interest based upon the Company's average ratepayments (net of return on its investments. Total deferred compensation expense amounted to
$84,000, $594,000 and $702,000, for the years ended June 30, 2003, 2002 and
2001, respectively.retiree contributions) $1,561
Note 7. Employee Stock Ownership Plan
On January 1, 2000, the Company established theThe Farmer Bros. Co. Employee Stock Ownership Plan (ESOP) was established in
2000 to provide benefits to all employees. The Board of
Directors authorizedplan is a loan of up to $50,000,000 toleveraged ESOP in
which Company is the ESOP to purchase up to
300,000 shares of Farmer Bros. Co. common stock secured by the stock purchased.lender. The loan will be repaid from the Company's
discretionary plan contributions over a fifteen year term atwith a variable rate
of interest, 3.30%4.85% at June 30, 2002.2005.
As of and for the years ended June 30,
2005 2004 2003 2002 2001
Loan amount (in thousands) $59,242 $64,567 $24,237 $815 $390
Shares purchased 77,850 3,800 2,200- 1,286,430 778,500
Shares purchased with loan proceeds 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-
equity account "Unearned ESOP Shares" and are excluded from earnings per share
calculations.
During the fiscal years ended June 30, 2003, 20022005, 2004 and 20012003 the Company charged
$3,098,000, $1,531,000$6,127,000, $4,234,000 and $1,136,000 respectively,$3,098,000 to compensation expense related to the
ESOP. The difference between cost and fair market value of committed to be
released shares, which was $1,171,000, $998,000$44,000, $1,282,000 and $270,000$1,171,000 for the years
ended June 30, 2003, 20022005, 2004 and 2001,2003, respectively, is recorded as additional
paid inpaid-in capital.
June 30,
2003 20022005 2004
Allocated shares 25,592 16,083636,572 400,110
Committed to be released shares 7,170 3,636119,434 106,140
Unallocated shares 138,718 74,0032,242,671 2,494,250
Total ESOP shares 171,480 93,722
(In thousands)2,998,677 3,000,500
Fair value of ESOP shares $58,181 $34,000(In thousands) $66,751 $75,013
Note 78 Income Taxes
The current and deferred components of the provision for income taxes consist
of the following:
(In thousands)
June 30,
(In thousands)2005 2004 2003
2002 2001
Current: FederalCurrent federal ($1,703) $4,753 $8,030
$15,367 $17,607
State $1,923 $2,929 $3,685Current state (689) 78 1,923
Total current provision ($2,392) $4,831 $9,953
$18,296 $21,292
Deferred: FederalDeferred federal ($1,165) ($1,402) $3,775
$434 $1,451
State $214 $61 $285Deferred state ( 2,345) (134) 214
Total deferred provision ($3,510) ($1,536) $3,989
$495 $1,736Total tax provision ($5,902) $3,295 $13,942 $18,791 $23,028
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:follow.
(In thousands)
June 30,
2005 2004 2003 2002 2001
Statutory tax rate 35%34% 35% 35%
Income tax (benefit) expense
at statutory rate ($3,852) $5,594 $13,150 $17,276 $20,831
State income tax
(net federal tax benefit) (696) 831 1,389
1,943 2,552Life insurance proceeds 0 (1,476) 0
Dividend income exclusion -808 -767 -731(819) (821) (808)
Valuation allowance 1,379 0 0
Results of state exams (2,492) (896) 211
Other (net) 211 339 376578 63 0
($5,902) $3,295 $13,942 $18,791 $23,028
Income taxes paid $2,356 $3,443 $10,429 $17,881 $24,879
The primary components of temporary differences which give rise to the
Company's net deferred tax assets are as follows:
(In thousands)
June 30,
2003 20022005 2004
Deferred tax assets:
Postretirement benefits $10,384 $8,938$11,664 $10,572
Accrued liabilities 4,859 4,426
State taxes - 791
$15,243 $14,1553,121 2,893
Capital loss carryover 4,427 0
Other 780 65
Total deferred tax assets $19,992 $13,530
Deferred tax liabilities:
Pension assets -$8,205 -$7,877($7,040) ($6,566)
Unrealized gain on investments (2,759) (1,176)
Other -6,552 -2,418
-$14,757 -$10,295(3,370) (3,914)
Total deferred tax liabilities ($13,169) ($11,656)
Valuation allowance (1,379) 0
Net deferred tax assets $486 $3,860$5,444 $1,874
The Company has approximately $10.2 million and $15.5 million of federal and
state capital loss carry forwards, respectively, that will expire on June 30,
2010, unless previously utilized. A 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 which management believes realization is
uncertain.
Note 89 Other Current Liabilities
Other current liabilities consist of the following:
June 30,
(In thousands) 2003 20022005 2004
Accrued workers' compensation liabilities $2,898 $3,119
Current portion of deferred taxes - -$2,725 $2,758
Dividends payable 1,734 1,6371,608 1,527
Other 368 269
$5,000 $5,025(including net taxes payable) 597 316
$4,930 $4,601
Note 910 Commitments and Contingencies
The Company incurred rent expense of approximately $736,000, $698,000,$779,000, $753,000, and
$700,000$736,000 for the fiscal years ended June 30, 2003, 2002,2005, 2004 and 2001,2003, respectively,
and is obligated under leases for branch warehouses. A few of
theSome leases have renewal
options that allow the Company, as lessee, to extend the lease at the Company'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:
June 30, (in(In thousands)
2004 $667
2005 420
2006 230$783
2007 53535
2008 32
$1,402241
2009 110
2010 21
Total $1,690
The Company is a party to various pending legal and administrative
proceedings. It is management's opinion that the outcome of such proceedings
will not have a material impact on the Company's financial position, results
of operations, or cash flows.
Note 1011 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 12 Quarterly Financial Data (Unaudited)
(In thousands except per share data)data; all per share disclosures have been split
adjusted.)
September 30 December 31 March 31 June 30
2002 2002 2003 20032004 2004 2005 2005
Net sales $50,389 $54,118 $49,267 $47,784$46,708 $51,220 $50,271 $50,221
Gross profit $31,532 $35,154 $32,038 $32,172$29,239 $30,298 $29,343 $26,576
Income (loss) from operations $7,354 $8,319 $4,985 $3,230$1,002 $699 ($2,167) ($6,117)
Net income $5,608 $5,899 $6,339 $5,783(loss) $1,497 ($4,068) $856 ($3,712)
Net income per common share $3.03 $3.24 $3.52 $3.23shares $0.11 ($0.30) $0.06 ($0.27)
September 30 December 31 March 31 June 30
2001 2001 2002 20022003 2003 2004 2004
Net sales $49,400 $54,755 $51,298 $50,404$45,665 $51,511 $49,069 $47,345
Gross profit $32,569 $37,337 $34,786 $33,401$29,632 $32,573 $30,581 $29,398
Income (loss) from operations $9,286 $11,891 $9,843 $7,190$1,057 $3,124 $743 ($1,161)
Net income $7,763 $9,733 $6,406 $6,667$2,511 $2,565 $5,603 $2,008
Net income per common share $4.21 $5.27 $3.47 $3.60shares $0.14 $0.15 $0.42 $0.15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial DisclosureDisclosure.
None.
Item 9A. Controls and Procedures.
The Company's Chief Executive OfficerDisclosure controls and Chief Financial Officer haveprocedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 (the
?Exchange Act?) is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information we are required to disclose in the reports that we file
or submit under the Exchange Act is accumulated and communicated to our
management as appropriate to allow timely decisions regarding required
disclosures.
As of June 30, 2005, our management, with the participation of our chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures pursuant to
Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Exchange Act. Based
upon this evaluation, our chief executive officer and our chief financial
officer concluded that, as of June 30, 2003, there is
reasonable assurance that the Company's2005, our disclosure controls and
procedures will
meetwere (1) designed to ensure that material information relating to
our company is accumulated and made known to our management, including our
chief executive officer and chief financial officer, in a timely manner,
particularly during the period in which this report was being prepared and
(2) effective, in that they provide reasonable assurance that information we
are required to disclose in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC?s rules and forms.
Management believes, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the 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 over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Exchange
Act Rules 13(a)-15(f) and 15(d)-15(f). With the participation of the chief
executive officer and 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 ?
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.
Ernst & Young LLP, an independent registered public accounting firm, has
audited our management?s assessment of the effectiveness of our internal
control over financial reporting as of June 30, 2005, as stated in their objectivesreport
which is included herein.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act)
during our fiscal quarter ended June 30, 2005, that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
We have audited management's assessment, included in the accompanying
?Management Report on Internal Control over Financial Reporting,? that Farmer
Bros. Co. and Subsidiary maintained effective internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Farmer Bros. Co.
and Subsidiary's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the disclosurecompany are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls and procedures are
effective at the "reasonable assurance" level. There were no significantmay
become inadequate because of changes in conditions, or that the Company'sdegree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Farmer Bros. Co. and Subsidiary
maintained effective internal controls orcontrol over financial reporting as of June 30,
2005, is fairly stated, in other factors that could
significantly affect these controls subsequent toall material respects, based on the dateCOSO criteria.
Also, in our opinion, Farmer Bros. Co. and Subsidiary maintained, in all
material respects, effective internal control over financial reporting as of
evaluation byJune 30, 2005, based on the Chief Executive OfficerCOSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of June 30, 2005 and Chief Financial Officer.2004, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 2005 of Farmer Bros. Co. and Subsidiary and our
report dated September 7, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
September 7, 2005
Item 9B. Other Information. None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Served as a
Director
Continuously Principal Occupation
Name Age Since for the Last Five Years
Roy F. Farmer (1) 87 1951 Chairman, Chief Executive Officer priorThe information required by this item will be subsequently incorporated herein
by reference to March 19, 2003
Roy E. Farmer (1) 51 1993 President, Chief Executive Officer since
March 19, 2003, Chief Operating Officer
previously
Guenter W. Berger 66 1980 Vice President - Production
Lewis A. Coffman 84 1983 Retired (formerly Vice President - Sales)
John H. Merrell 59 2001 Partner in Accounting Firm of Hutchinsonour Proxy Statement expected to be dated and Bloodgood LLP, Glendale, California
John Samore, Jr. 57 2003 Independent Consultant and CPA, Los
Angeles, California since 2002; Retired
Tax Partnerfiled with the Accounting Firm
Arthur Andersen LLP, Los Angeles,
California
Thomas A. Maloof 51 2003 Chief Financial Officer of Hospitality
Marketing Concepts, Irvine, California
since 2001; President of
Perinatal Practice Management-Alfigen
The Genetices Institute, Pasadena,
California previously
(1) Roy F. Farmer isSEC
on or before October 28, 2005.
To the father of Roy E. Farmer.
(2) Mr. Maloof is also a director of PC Mall, Inc. a publicly traded company
listed on the NASDAQ National Market. None of the other directors
is a director of any other publicly-held company.
The Company's board of directors has determined that at least one member of the
Company's Audit Committee is an "audit committee financial expert" as defined
in item 401(h)(2) of Regulation S-K under the Securities Exchange Act of 1934,
as amended. That person is John H. Merrell, the Company's Audit Committee
Chairman. Mr. Merrell is "independent" as that term is used in item 7(d)(3)(iv)
of Schedule 14A under the Securities Exchange Act of 1934, as amended.
Information regarding the Company's executive officers appears in Part I
pursuant to instructions 3 of Item 401(b) of Regulation S-K.
The Company has adopted a "code of ethics" within the meaning of Item 406(b) of
Regulation S-K under the Securities Exchange Act of 1934, as amended. The code
of ethics is applicable to the Company's Chief Executive Officer and to the
Company's Chief Financial Officer who is also the Company's principal
accounting officer. The Company has no controller or other person performing
that function. A copy of the Company's code of ethics can be obtained without
charge upon written request addressed to Mr. John E. Simmons, Chief Financial
Officer, Farmer Bros. Co., 20333 S. Normandie Avenue, Torrance, CA 90502.
Section 16(a) Beneficial Ownership Reporting Compliance. BasedCompany?s knowledge, based solely on a review of filings received by it or representations from Company officers and directors,the copies of such
reports furnished to the Company believesand written representations that all filing requirements applicable to Company
officers and directorsno other
reports were met for fiscal 2003.
Item 11. Executive Compensation
Summary Compensation Table
Annual Annual Other
Name and Principal FiscalCompensation Compensation Annual All Other
Position Year Salary Bonus(1) Compensation Compensation(2)
ROY F. FARMER 2003 $850,000 -0- $ - $164,683(3)
Chairman; CEO until 2002 $1,000,000 $450,000 $ - $138,815(3)
March 19, 2003 2001 $1,000,000 $450,000 $ - $117,482(3)
ROY E. FARMER 2003 $335,585 $400,000 $ - $465
President; CEO from 2002 $325,730 $300,000 $ - $425
March 19, 2003 2001 $309,000 $300,000 $ - $383
GUENTER W. BERGER 2003 $244,477 $100,000 $ - $700
Vice President, 2002 $238,113 $100,000 $ - $630
Production 2001 $224,149 $100,000 $ - $570
KENNETH R. CARSON 2003 $214,889 $100,000 $ - $414
Vice President, 2002 $208,544 $75,000 $ - $384
Sales 2001 $197,080 $75,000 $ - $356
JOHN E. SIMMONS 2003 $203,472 $100,000 $ - $216
Treasurer 2002 $188,584 $75,000 $ - $148
2001 $178,849 $75,000 $ - $181
(1) Awarded under the Company's Incentive Compensation Plan. The awards for
fiscal 2003 were based primarily upon the Company's earnings achieved that
year. (See "Compensation Committee Report," supra.).
(2) Except as stated in footnote (3) the amount shown represents the dollar
value of the benefit to the executive officer for the years shown under the
Company's executive life insurance plan.
(3) The amount shown for Roy F. Farmer represents P.S. 58 costs of the two
split-dollar life insurance policies purchased pursuant to the prior
employment agreement with Mr. Farmer which expired in 1998 plus the dollar
value of the benefit to him under the Company's executive life insurance
plan.
Pension Plan Table
The following table shows estimated annual benefits payable for the
2003 plan year under the Company's retirement plan upon retirement at age 62
to persons at various average compensation levels and years of credited
service based on a straight life annuity. The retirement plan is a
contributory defined benefit plan covering all non-union Company employees.
The following figures assume that employee contributions (2% of annual gross
earnings) are made throughout the employees' first five years of service and
are not withdrawn. After five years of participation in the plan, employees
make no further contributions. Benefits under a predecessor plan are
included in the following figures. Maximum annual combined benefits under
both plans generally cannot exceed the lesser of $200,000 or the average of
the employee's highest three years of compensation.
Annualized Pension Compensation
for Highest 60 Consecutive Months Credited Years of Service
in Last Ten Years of Employment 20 25 30 35
$100,000 $30,000 $37,500 $45,000 $52,500
$125,000 $37,500 $46,875 $56,250 $65,625
$150,000 $45,000 $56,250 $67,500 $78,750
$170,000 $52,500 $65,625 $78,750 $91,875
$200,000 $60,000 $75,000 $90,000 $105,000
$250,000 $60,000 $75,000 $90,000 $105,000
The earnings of executive officers by which benefits in part are
measured consist of the amounts reportable under "Annual Compensation" in the
Summary Compensation Table less certain allowance items (none in 2003).
Credited years of service through December 31, 2002 were as follows:
Guenter W. Berger - 38 years; Roy E. Farmer - 26 years; Kenneth R. Carson -
37 years; John E. Simmons - 21 years. After 37 years of credited service,
Roy F. Farmer began receiving maximum benefitsrequired during fiscal 1988.
The above straight life annuity amounts are not subject to deductions
for Social Security or other offsets. Other payment options, one of which is
integrated with Social Security benefits, are available.
Compensation of Directors
For fiscal 2003, each director who was not a Company employee (an "outside
director")was paid an annual retainer fee of $10,000 and the additional sum of
$1,000 for each board meeting and committee meeting (if not held in conjunction
with a board meeting). For fiscal 2004, outside directors will receive an
annual retainer fee of $20,000 and an additional $1,500 for each board meeting
and committee meeting (if not held in conjunction with a board meeting)
attended, and the Audit Committee Chairman will receive an additional annual
retainer fee of $2,500. A director also receives reimbursement of travel
expenses from outside the greater Los Angeles area to attend a meeting.
Compensation Committee Report
The Compensation Committee (the "Committee") is a standing committee of the
Board of Directors and is comprised of independent directors John Samore, Jr.,
Thomas A. Maloof, Lewis A. Coffman and John H. Merrell. The Compensation
Committee met twice in fiscal 2003. The Compensation Committee makes all
determinations with respect to executive compensation and administers
the Company's Incentive Compensation Plan. The Compensation Committee report
follows:
Compensation Committee Report - Philosophy and Objectives
The Committee believes that once base salaries of executive officers
are established at competitive levels, increases should generally reflect
cost of living changes and that individual performance should be rewarded by
bonuses or other incentive compensation awards. The Committee believes that
most of the officers will be incentivized to a greater degree by such a
program.
Executive Officer Compensation
In 2003 the Committee obtained a compensation study prepared by Valuemetrics
Advisors, Inc., relating to officer and director compensation. The report
concluded that the current executive officers, excluding the Chairman, were
underpaid when compared to their counterparts at size-adjusted peer group
companies. Consistent with the Committee's expressed compensation policy of
paying a competitive base salary, the Committee has increased base salaries to
Messrs. Roy E. Farmer, Berger, Simmons and Carson by an aggregate of $201,577
for fiscal 2004. This increase also reflects Roy E. Farmer's increased
responsibilities as the Company's new Chief Executive Officer. With respect to
the Chairman, the Committee noted that Roy F. Farmer served in the capacity of
Chairman and CEO from the period July 1, 2002 through March 19, 2003 and served
as non-CEO Chairman, advisor to Roy E. Farmer, the current CEO, and reserve
coffee buyer and cupper for the period March 20, 2003 through June 30, 2003.
The Committee noted that Mr. Farmer had been on medical leave for much of that
period but nevertheless continued to bear the responsibilities of his office,
conferred with Roy E. Farmer on a regular basis, and participated in all
material management decisions pertaining to the Company. Based on these
factors, the Committee determined that Roy F. Farmer's salary for the fiscal year ended June 30, 2003 be reduced to $850,000. The Company's performance for
fiscal 2003 was not a material factor in this determination. No bonus was
awarded to Roy F. Farmer under2005, its officers,
directors and ten percent shareholders complied with all applicable Section
16(a) filing requirements, with the Company's Incentive Compensation Plan for
that year.
Incentive Compensation Plan
The Company made awards under its Incentive Compensation Plan (the
"Plan") for fiscal 2003 to all executive officers other than Roy F. Farmer. The
Committee felt that awards were justified in lightexception of the Company's performance
in 2003, although financial results were below those achievedfilings listed in the
prior two
years. Total awards for fiscal 2003 were $700,000 as compared to $1,000,000
for each of fiscal 2002 and 2001.
Under the provisions of the Plan, a percentage of the Company's annual
pre-tax income is made available for cash or deferred awards. The percentage
varies from three percent of pre-tax income over $14 million to six percent
of pre-tax income of $24 million or more. Amounts available for awards but
not awarded are carried forward. The pool available for awards for fiscal
2003 under the Incentive Compensation Plan was in excess of $15 million. Of
the available pool, the Committee awarded a total of $700,000 of which
$400,000 was awarded to Roy E. Farmer, the Company's Chief Executive Officer,
and $300,000 in toto was awarded to the other executive officers.
Lewis A. Coffman
John H. Merrell
John Samore, Jr.
Thomas A. Maloof
Compensation Committee Interlocks and Insider Participation.
For fiscal 2003 persons serving on the Company's Compensation Committee were
John H. Merrell, an outside director, Lewis A. Coffman, an outside director and
retired executive officer of the Company, Thomas A. Maloof, an outside
director, John Samore, Jr., an outside director and John M. Anglin, an outside
director and legal counsel to the Company, who on April 30, 2003 resigned and
became the Company's Secretary.
Performance Graph
Comparison of Five-Year Cumulative Total Return*
Farmer Brothers Co., Russell 2000 Index And Value
Line Food Processing Index
(Performance Results Through 6/30/03)
1998 1999 2000 2001 2002 2003
Farmer Brothers Co 100.00 85.87 75.49 98.78 155.39 146.56
Russell 2000 Index 100.00 100.87 113.99 111.51 100.64 97.53
Food Processing 100.00 95.87 99.53 121.22 149.07 141.77
Assumes $100 invested at the close of trading 6/30/98 in Farmer Brothers
Co. common stock, Russell 2000 Index and Food Processing Index.
*Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believedRegistrant?s Proxy Statement expected to be reliable, butdated and filed with the publisher is not responsible for any errorsSEC on or
omissions contained herein.before October 28, 2005.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and
(a) Related Stockholder Matters
The following are all persons knowninformation required by this item will be subsequently incorporated herein
by reference to management who beneficially own
more than 5% of the Company's common stock:
Amountour Proxy Statement expected to be dated and Nature Percent
Name and Address of of Beneficial of
Beneficial Owner Ownership (1) Class
Roy F. Farmer 835,115 shares (2) 43.35%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
Catherine E. Crowe 203,430 shares (3) 10.56%
7421 Stewart Avenue
Los Angeles, CA 90045
Franklin Mutual Advisers, LLC 184,688 shares (4) 9.59%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Attn: Bradley Takahashi
Farmer Bros. Co. Employee
Stock Ownership Plan 171,480 shares (5) 8.90%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Includes 171,041 shares owned outright by Mr. Farmer and his wife as
trustees of a revocable living trust, 662,121 shares held by various trusts
of which Mr. Farmer is sole trustee for the benefit of family members, 1,849
shares owned by his wife and 104 shares beneficially owned by Mr. Farmer
through the Company's Employee Stock Ownership Plan ("ESOP"), rounded to the
nearest whole share.
(3) Excludes 9,900 shares held by trusts for Mrs. Crowe's benefit. Mr.
Farmer is sole trustee of said trusts and said shares are included in his
reported holdings.
(4) According to a Schedule 13D/A filed with the Securities and Exchange
Commission dated July 31, 2003 by Franklin Mutual Advisers, LLC
("Franklin"), FranklinSEC
on that date beneficially owned 184,688 shares
(9.59%). Franklin is reported to have sole voting and investment power over
these shares pursuant to certain Investment Advisory contracts with one or more record shareholders, which advisory clients are the record owners of the
184,688 shares.
(5) The ESOP plan committee, comprised of Company officers, directs the
voting of 145,888 unallocated shares and if plan participants fail to vote,
25,592 allocated shares and has sole dispositive power over 145,888 shares.
(b) The following sets forth the beneficial ownership of the common stock
of the Company by each director and nominee, each executive officer named in
the Summary Compensation Table, and all directors and executive officers as a
group:
Number of Shares and Nature
Name of Beneficial Ownership (1) Percent of Class
Guenter W. Berger 608(2)(8) *
Kenneth R. Carson 359(3)(8) *
Lewis A. Coffman 15(4) *
Roy E. Farmer 38,320(5)(8) 1.99%
Roy F. Farmer (See "Principal Shareholders," supra) *
Thomas A. Maloof None -
John H. Merrell None -
John Samore, Jr. None -
John E. Simmons 471(6)(8) *
All directors and exec
officers as a group (10 persons) 1,020,776(7) 52.99%
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Held in trust with voting and investment power shared by Mr. Berger and
his wife. Includes 109 shares beneficially owned by Mr. Berger through the
Company's ESOP, rounded to the nearest whole share.
(3) Includes 109 shares beneficially owned by Mr. Carson through the
Company's ESOP, rounded to the nearest whole share.
(4) Voting and investment power shared with spouse.
(5) Includes 4,000 shares owned outright by Mr. Farmer, 34,211 shares held
by various trusts of which Mr. Farmer is sole trustee and 109 shares
beneficially owned by Mr. Farmer through the Company's ESOP, rounded to the
nearest whole share. Excludes 21,218 shares held in a trust of which Roy F.
Farmer is sole trustee (reported under Roy F. Farmer's name in Principal
Shareholders, supra) and of which Roy E. Farmer is the beneficiary.
(6) Voting and investment power shared with spouse. Includes 109 shares
beneficially owned by Mr. Simmons through the Company's ESOP, rounded to the
nearest whole share.
(7) Includes 145,888 unallocated shares held by the Company's ESOP over
which officers, as members of the plan committee, have shared indirect voting
power. Excludes 25,592 allocated shares held by the Company's ESOP over
which plan committee members have voting rights only if the participants fail
to vote.
(8) Excludes ESOP shares (other than the 109 shares reported) over which
this officer, in his capacity as a member of the plan committee, shares
indirect voting power. The excluded unallocated ESOP shares are included in
the group holdings. See footnote (7).
* Less than 1%.before October 28, 2005.
Item 13. Certain Relationships and Related Transactions
None.The information required by this item will be subsequently incorporated herein
by reference to our Proxy Statement expected to be dated and filed with the SEC
on or before October 28, 2005.
Item 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billedinformation required by Ernst & Young, LLP forthis item will be subsequently incorporated herein
by reference to our Proxy Statement expected to be dated and filed with the audit of the Company's
annual financial statements and review of financial statements included in the
Company's quarterly reportsSEC
on Form 10-Q were $135,000 for the fiscal year
ended June 30, 2002 ("fiscal 2002") and $154,000 for the fiscal year ended June
30, 2003 ("fiscal 2003").
Audit-Related Fees
The aggregate fees billed by Ernst & Young, LLP for assurance and related
services reasonably related to the performance of the audit of the Company's
financial statements and not reported under Audit Fees, above, were $55,000 for
fiscal 2002 and $-0- for fiscal 2003. These audit-related services consisted
of employee benefit plan audits.
Tax Fees.
The aggregate fees billed by Ernst & Young, LLP for tax compliance, tax advice
and tax planning services were $32,000 for fiscal 2002 and $126,000 for fiscal
2003. These tax services consisted of state tax representation and
miscellaneous consulting on federal taxation matters.
All Other Fees.
For fiscal 2002 and 2003, Ernst & Young, LLP provided no services other than
audit, audit-related and tax services.
The Audit Committee has considered the effect of Ernst & Young, LLP's providing
tax services and other non-audit services on the firm's independence. All
engagements for services by Ernst & Young LLP or other independent accountants
are subject to prior approval by the Audit Committee. Prior approval was given
for all services provided by Ernst & Young LLP in fiscal 2003before October 28, 2005.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 10-K.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, 20032005 and 2002.2004.
Consolidated Statements of IncomeOperations for the Years Ended
June 30, 2003, 20022005, 2004 and 2001.2003.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 20022005, 2004 and 2001.2003.
Consolidated Statements of Shareholders'Stockholders' Equity For the Years
Ended June 30, 2003, 2002,2005, 2004 and 2001.2003.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: Financial Statement Schedules
are omitted as they are not applicable, ofor the required information
is given in the consolidated financial statements ofand notes thereto.
(b) Reports3. The exhibits to this Annual Report on Form 8-K.
A form 8-K dated April 30, 200310-K are listed on the
accompanying index to exhibits and are incorporated herein by reference or are
filed with the Commission on May 1, 2003
announced the election of Thomas A. Maloof and John Samore, Jr. to the
Company's Board of Directors. A majorityas part of the seven Directors are now
independent.
A form 8-K dated July 23, 2003 andAnnual Report on Form 10-K.
Each management contract or compensation plan required to be filed with the Commission on July 24, 2003
announced approvalas an
exhibit is identified by the Board of Directors of a loan by the Company to the
ESOP to purchase up to 129,575 shares of Farmer Bros. Co. common stock.
(c) Exhibits
(3)an asterisk (*).
(b) Exhibits: See Exhibit Index
SIGNATURES
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.
By: /s/ Roy E. Farmer
Roy E. Farmer,Guenter W. Berger
Guenter W. Berger, Chairman, President and Chief Executive Officer
Date: October 24, 2003September 13, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Roy E. Farmer
Roy E. Farmer,Guenter W. Berger
Guenter W. Berger, Chairman, President and Chief Executive Officer
and Director
(principal executive officer)
Date: October 24, 2003September 13, 2005
/s/John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: October 24, 2003September 13, 2005
/s/ Guenter W. Berger
Guenter W. Berger, Vice President and Director
Date: October 24, 2003
/s/ Lewis A. Coffman
Lewis A. Coffman
Director
Date: October 24, 2003September 13, 2005
/s/Thomas A. Maloof
Thomas A. Maloof
Director
Date: October 24, 2003September 13, 2005
/s/John H. Merrell
John H. Merrell
Director
Date: October 24, 2003September 13, 2005
/s/John Samore, Jr.
John Samore, Jr.
Director
Date: October 24,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
EXHIBIT INDEX
3.1 Certificate of Incorporation (filed as an exhibit to the Form 10-Q for
the quarter ended March 31, 2004 and incorporated herein by reference).
3.2 By-laws (filed as an exhibit to the Form 10-Q for the quarter ended March
31, 2004 and incorporated herein by reference).
4 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).
4.1 Rights Agreement dated March 17, 2005 by and between Farmer Bros. Co. and
Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 17, 2005 and incorporated herein by
reference).
10.1 The Farmer Bros. Co. Pension Plan for Salaried Employees (filed as an
exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated
herein by reference).*
10.2 The Farmer Bros. Co. Incentive Compensation Plan (filed as an exhibit to
the Form 10-K for the year ended June 30, 2002 and incorporated herein by
reference).*
10.3 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 Exhibitand
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-OxleySarbanes-
Oxley Act of 2002
I, Roy E. Farmer, President and Chief Executive2002. (filed herewith)
31.2 Principal Financial Officer of Farmer Bros. Co.
("Registrant"), certifies that:
1. I have reviewed this Annual Report on Form 10-K of Registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omitCertification Pursuant to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined inSecurities Exchange
Act Rules 13a-15(e)13a-14 and 15d-15(e) for the Registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures,15d-14 as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosure in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: September 26, 2003
/s/ Roy E. Farmer
Roy E. Farmer
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CertificationAdopted 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
I, John E. Simmons, Treasurer and Chief2002.
(furnished herewith)
32.2 Principal Financial Officer of Farmer Bros. Co.
("Registrant"), certifies that:
1. I have reviewed this Annual Report on Form 10-K of Registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omitCertification Pursuant to state a material fact necessary18 U.S.C. Section
1350 as Adopted Pursuant to make the statements made, in lightSection 906 of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosure in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: September 26, 2003
/s/ John E. Simmons
John E. Simmons
Treasurer and Chief Financial Officer
principal financial and accounting officer
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
10.1 Incentive Compensation Plan (3)
21.1 Subsidiaries of the Registrant (4)
31.1 Certification of Chief Executive Officer (Section 302 of Sarbanes-Oxley Act of 2002) (filed herewith)
31.2 Certificate of Chief Financial Officer (Section 302 of Sarbanes-Oxley
Act of 2002) (filed herewith)
32.1 Certificate of Chief Executive Officer (Section 906 of Sarbanes-Oxley
Act of 2002)2002.
(furnished as exhibit herewith)
32.2 Certification of Chief Financial Officer (Section 906 of Sarbanes-Oxley
Act of 2002) (furnished as exhibit herewith)
99.1 List of Propertiesproperties. (filed as exhibit herewith)
(1) Incorporated by reference from Company's report on Form 8K
filed January 29, 2002
(2) Incorporated by reference from Company's report on Form 10K/A
filed February 15, 2002
(3) Incorporated by reference from Company's report on Form 10K
filed September 30, 2002
(4) Incorporated by reference from Company's report on Form 10K
filed September 30, 200214