UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
2006
OR
o TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State
(Exact Name of Incorporation Federal ID Number
Registrant as Specified in Its Charter)
Delaware | 95-0725980 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
20333 South Normandie Avenue, Torrance, California, 90502
Registrant's address
(310) 787-5200
Registrant's
(Address of Principal Executive Offices; Zip Code)
Registrants’s telephone number, Securities registered pursuant to Section 12(b) of the Act: None
including 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 | NASDAQ |
Indicate by check mark if the Act:
Titleregistrant is a well-known seasoned issuer, as defined in Rule 405 of each class Namethe Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of each exchange on
which registered
Common stock, $1.00 par value OTC
the Act. YES o NO þ
Indicate by check mark whether the Registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]þ NO [ ]
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [X]o NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
1, 2003: 1,926,414 and theþ
The 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, 2006 was approximately $638$146 million.
On September 1, 2006 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, 2006 that is expected to be filed with the U.S. Securities and Exchange Commission on or before October 28, 2006.
Farmer Bros. Co. (the “Company,” “we,” “our” 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. RoastedFor the past three fiscal years sales of roasted coffee products make uprepresented approximately 50% of our total sales. Nosales and no single product other than coffee accountsaccounted 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.
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 availabilityfluctuations. Weather, real or perceived shortages, political unrest, labor actions and related conditions such as
weather, political events 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 our non-coffee products (“allied productsproducts”) include a wide variety of spices, includingsuch as 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.
We own approximately 3862 registered U.S. trademarks, which are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification.
Seasonality:
We experience some seasonal influences. The winter months are generally the best sales months. However, our product line and geographic diversity 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 products
Sales are distributedmade “off-truck” to our institutional food service customers at their places of business by our sales representatives who are responsible for soliciting, selling divisionsand collecting from branchesand otherwise
maintaining our customer accounts. Our distribution trucks are replenished from warehouses located in mosta number 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.
Customers: warehouse consisting of our complete product line and additional safety stocks to accommodate a modest interruption in supply.
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.
Competition: effort.
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 outsource their product distribution, while others conduct their own distribution. Some of our customers are “price” buyers, seeking the low cost provider with little concern about service; others find great value in the service programs we provide. We compete well when service and distribution are valued by our customers, and are less effective when only price matters. Our customer base is price sensitive and we are often faced with price competition.
We finance our operations internally, and we believe that working capital from internal sources will be adequate for the coming fiscal year.
Foreign Operations: Operations
We have no material revenues that result from foreign operations.
Other:
On June 30, 2003,2006 we employed 1,104 employees; 4611,091 employees, 441 of whom are subject to collective bargaining agreements. The effects of complianceCompliance with government provisions regulatingregulations relating to the discharge of materials into the environment havehas not had a material effect on our financial condition or results of operations. The nature of our business does not provide for maintenance of or reliance upon a sales backlog. Registrant'sNo portion of our business may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
We file reports electronically with the U.S. Securities and Exchange Commission (“SEC”), including Forms 10-K, 10-Q, 8-K and amendments thereto. The public may read and copy any materials filed with the SEC at the SEC’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), where we make itsavailable, 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 availableas soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The Company’s Code of Ethics for its principal executive and principal financial officers is also posted on our Internet website.
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-looking statements contained herein. These forward-looking statements can be identified by the use of words like “expects,” “plans,” “believes,” “intends,” “will,” “assumes” and other words of similar 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 statements 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.
The Company’s business, its website.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 may impact the Company’s business, future performance and the forward-looking statements that it makes in this Annual Report on Form 10-K or that it may make in the future. Our actual results could differ materially from anticipated results due to some or all of the factors discussed below.
OUR EFFORTS TO SECURE AN ADEQUATE SUPPLY OF QUALITY COFFEES MAY BE UNSUCCESSFUL AND EXPOSE US TO COMMODITY PRICE RISK.
Maintaining a steady supply of green coffee is essential to keep inventory levels low and secure sufficient stock to meet customer needs. To help ensure future supplies, we may purchase our coffee on forward contracts for delivery as long as six months in the future. In the event of non-performance by the suppliers, the Company could be exposed to credit and supply risk. Entering into such future commitments also leaves the Company subject to purchase price risk. Various techniques are used to hedge these purchases against untoward price movement. Competitive factors make it difficult for the Company to “pass through” such price fluctuation to its customers. Therefore, unpredictable price changes can have an immediate effect on operating results that cannot be corrected in the short run. To reduce its exposure to the volatile fluctuation of green coffee costs, Farmer Bros. has, from time to time, entered into futures contracts to hedge 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.
Our primary raw material is green coffee, an agricultural commodity. Green coffee is mainly grown outside the U.S. and can be subject to volatile price fluctuations. Weather, real or perceived shortages, labor actions, political unrest and armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the U.S. and coffee producing nations, can affect the price of green coffee. Green coffee prices can also be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation (CCF), the International Coffee Organization (ICO) and the Association of Coffee Producing Countries (ACPC). These organizations seek to increase coffee prices largely be attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. As a result these organizations or others may succeed in raising green coffee prices.
In the past, we generally have been able to pass increases in green coffee costs to our customers. However, there can be no assurance that we will be successful in passing such fluctuations on to our customers without losses in sales volume or gross margin in the future. Similarly, rapid sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE EFFECTIVELY.
We primarily compete with other coffee companies, including multi-national firms with substantially greater financial, marketing and operating resources than the Company. We face competition from many sources including the food service divisions of multi-national manufacturers of retail products such as Proctor and Gamble (Folgers Coffee), Kraft Foods (Maxwell House Coffee) and Sara Lee Foods (Superior Coffee), wholesale grocery distributors such as Sysco and U.S. Food Service, and regional coffee roasters such as Boyd Coffee Company. Some of our competitors outsource their product distribution, while others conduct their own distribution. Large roasters have volumes far in excess of ours, with a business model that is substantially different from ours. We compete with those firms and others for a wide variety of customers, from small restaurants and donut shops, to large institutional buyers like restaurant chains, hospitals, hotels, contract food services and convalescent hospitals. If we do not succeed in differentiating ourselves from our competitors or our competitors adopt our strategies, then our competitive position may be weakened. At Farmer Bros. we differentiate ourselves from our competitors by the quality of our products, our distribution network and our customer service. Some of our customers are “price” 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.
CHANGES IN CONSUMER PREFERENCES COULD ADVERSELY AFFECT OUR BUSINESS.
Our continued success depends, in part, upon the demand for coffee. Shifts in consumer preferences away from a “standard” cup of coffee could adversely affect our profitability. Our primary market is restaurants and other food service establishments. We also provide coffee and related products to offices. We believe the success of our market segment is dependent upon personal and business expenditures in restaurants and other food service businesses. There are many beverages, hot and cold, competing for the same restaurant dollar. Our restaurant customers report that competition from such beverages continues to dilute the demand for coffee. Consumers who choose soft drinks, bottled water, and flavored coffees and teas are all reducing the restaurant dollar formerly spent on a “standard” cup of coffee. While restaurants and coffee houses that sell “specialty” coffee and flavored coffee products may have increased
the demand for coffee beverages, many of these establishments have taken market share from existing Farmer Bros. customers. We have a line of products that compares favorably with products sold in such “specialty coffee” stores, but most of our restaurant customers do not specialize in coffee drinks. As a result, a further shift toward “specialty” coffee houses may adversely impact the demand for the Company’s products.
REDUCTIONS IN DISCRETIONARY SPENDING COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant extent on a number of factors that affect discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. In a slow economy, businesses and individuals scale back their discretionary spending on travel and entertainment, including “dining out.” Economic conditions may also cause businesses to reduce travel and entertainment expenses, and even cause office coffee benefits to be eliminated. These factors could reduce demand for our products or impose practical limits on pricing, either of which could adversely affect our business, financial condition, operating results and cash flows.
OUR SALES AND DISTRIBUTION NETWORK IS COSTLY TO MAINTAIN.
Our sales and distribution network requires a large investment to maintain and operate. Costs include the fluctuating cost of gasoline, diesel and oil, the costs associated with managing, purchasing, maintaining and insuring a fleet of delivery vehicles, the costs of maintaining distribution warehouses throughout the country, and the costs of hiring, training and managing our route sales professionals. Many of these costs are beyond our control, and others are fixed rather than variable. Some competitors use alternate methods of distribution that eliminate some of the costs associated with our method of distribution.
WE ARE SELF-INSURED. OUR RESERVES MAY NOT BE SUFFICIENT TO COVER FUTURE CLAIMS.
We are self-insured for many risks up to significant deductible amounts. The premiums associated with our insurance have recently increased substantially. General liability, fire, workers’ compensation, directors and officers liability, life, employee medical, dental and vision and automobile risks present a large potential liability. While we accrue for this liability based on historical experience, future claims may exceed claims we have incurred in the past. Should a different amount of claims occur compared to what was estimated or the cost of the claims increase or decrease beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods.
EMPLOYEE STRIKES AND OTHER LABOR-RELATED DISRUPTIONS MAY ADVERSELY AFFECT OUR OPERATIONS.
We have union contracts relating to the majority of our workforce in California, Oregon, Washington and Nevada. Although we believe union relations have been amicable in the past, there is no assurance that this will continue in the future. There are potential adverse effects of labor disputes with our own employees or by others who provide transportation (shipping lines, truck drivers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. These actions could restrict our ability to obtain, process and/or distribute our products.
WE MAY ENTER INTO NEW BUSINESS VENTURES THAT COULD HAVE A NEGATIVE IMPACT ON OPERATING RESULTS.
From time to time, we evaluate potential business ventures and acquisitions. Entering into any such transaction entails many risks, any of which could materially harm our business. There is no assurance that any such venture, should we decide to enter into one, will accrue the projected returns. It is possible that such ventures could result in losses or returns that would have a negative impact on operating results.
5
OUR ROASTING AND BLENDING METHODS ARE NOT PROPRIETARY, SO COMPETITORS MAY BE ABLE TO DUPLICATE THEM, WHICH COULD HARM OUR COMPETITIVE POSITION.
We consider our roasting and blending methods essential to the flavor and richness of our coffee and, therefore, essential to our brand. Because the Company’s roasting methods cannot be patented, we would be unable to prevent competitors from copying these methods if such methods became known. If our competitors copy our roasts or blends, the value of our brand may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
BECAUSE A SUBSTANTIAL PORTION OF OUR BUSINESS IS BASED IN CALIFORNIA, TEXAS, COLORADO, ARIZONA AND WASHINGTON, AN INTERRUPTION IN OPERATIONS IN ANY OF THESE MARKETS WOULD ADVERSELY IMPACT OUR BUSINESS.
Over half of our business is conducted in California, Texas, Colorado, Arizona and Washington. We expect that these operations will continue to generate a substantial portion of our revenue. A significant interruption in operations at our facilities in these markets, whether as a result of an earthquake, natural disaster, terrorism or other causes, could significantly impair our ability to operate our business. Our major manufacturing facility and distribution hub is in Los Angeles County. The majority of our green coffee comes through the Port of Los Angeles or the Port of Long Beach. Any interruption to port operations, highway arteries, gas mains or electrical service in this area could restrict our ability to supply our branches with product and would adversely impact our business.
OUR OPERATING RESULTS MAY HAVE SIGNIFICANT FLUCTUATIONS FROM QUARTER TO QUARTER WHICH COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE.
From time to time, our operating results likely will fall below investor expectations. These results are influenced by a number of factors, including fluctuations in the price of green coffee, competition from existing or new competitors in our industry and changes in consumer preferences.
Quarterly fluctuations in our operating results as the result of these factors or for any other reason, could cause our stock price to decline. Accordingly, we believe that period-to-period comparisons of our historical or future operating results are not necessarily meaningful, and such comparisons should not be relied upon as indicators of future performance.
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.
For the fiscal year ended June 30, 2006, we had an operating loss of ($2,965,000). For the fiscal year ended June 30, 2005, we had an operating loss of ($6,583,000) and a net loss of ($5,427,000). We could suffer additional losses in future years and as a result our stock price could decline.
FUTURE FUNDING DEMANDS UNDER PENSION PLANS FOR CERTAIN UNION EMPLOYEES ARE UNKNOWN.
We participate in two multi-employer defined benefit plans for certain union employees. The management, 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 2007, WTS is also expected to host our Route Sales application software. If WTS were to experience financial, operational, or quality assurance difficulties, or if there were any other disruption in our relationship with WTS, we might be unable to produce financial statements, fill replenishment orders for our branch warehouses, issue payroll checks, process payments to our vendors or bill customers. Any of these items could have a material adverse effect on the Company.
WE ARE DEPENDENT ON ENTERPRISE RESOURCE MANAGEMENT (“ERP”) SOFTWARE TO OPERATE OUR BUSINESS. SHOULD WE FAIL TO OPERATE EFFECTIVELY OR IF WE ENCOUNTER DIFFICULTIES INTEGRATING SYSTEMS OR SUFFER ILL-TIMED POWER OR COMMUNICATIONS FAILURES, THE RESULT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
We rely on complex software and hardware to 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. In July 2006 we hired Roger M. Laverty III as President and COO. We continue to evaluate and recruit key personnel to enhance the depth of our management.
WE ARE SUBJECT TO RE-FUNDING OBLIGATIONS AND MAY ACQUIRE ADDITIONAL SHARES UNDER THE ESOP.
The Farmer Bros. Co. Employee Stock Ownership Plan was designed to help us attract and retain employees and to better align the efforts of our employees with the interests of our stockholders. To that
end, the Company has purchased 3,000,500 shares of Company stock for the ESOP to allocate to employees over the next 12 years. It is possible that additional shares could be acquired that might deplete the Company’s cash. We expect that the future re-funding liability of the existing shares in the ESOP will increase and require additional investment as the ESOP matures and individual holdings grow. When employees vested in the ESOP leave the Company, they have the right to “put” their shares to the Company for cash. This requires the Company to repurchase those shares at the current market value. Assuming all shares currently owned by the ESOP are fully distributed, the Company’s re-funding liability is approximately $64,700,000 based on the June 30, 2006 closing share price.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND MAY RESULT IN A LOWER TRADING PRICE FOR OUR STOCK THAN IF OWNERSHIP OF OUR STOCK WAS LESS CONCENTRATED.
As of September 1, 2006, members of the Farmer family or entities controlled by the Farmer family (such as trusts or business entities) as a 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 if investors perceive disadvantages in owning stock in a company with such concentrated ownership.
ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
We have adopted a stockholder rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of our common stock to 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 the authority to issue up to 500,000 shares of Preferred Stock (of which 200,000 shares have been designated as Series A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change of control of Farmer Bros. without further action by the stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including a classified board of directors, provisions eliminating the ability of stockholders to take action by written consent, and provisions limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Farmer Bros., which could
have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control or management.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), the SEC adopted rules requiring us, as a public company, to include a report of management on our internal controls over financial reporting in our annual report on Form 10-K and quarterly reports on Form 10-Q that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Compliance with SOX Section 404 has been a challenge for many companies. Our ability to continue to comply is uncertain as we expect that our internal controls will continue to evolve as our business activities change. If, during any year, our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with SOX Section 404. Failure to maintain an effective internal control environment could have a material adverse effect on our stock price. In addition, there can be no assurance that we will be able to remediate material weaknesses, if any, that may be identified in future periods.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX, new SEC and Public Accounting Oversight Board regulations and NASDAQ National Market rules, are creating uncertainty for public companies. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time related to compliance activities. Substantial costs have been incurred in fiscal 2006, and will continue to be incurred to comply with various of these mandates, including the engagement of separate public accounting firms to perform work that is now prohibited to be performed by our regular independent accounting firm, internal costs associated with documenting the adequacy of our internal controls over financial reporting and similar compliance activities, and increased costs of audit by our independent accounting firm. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our reputation may be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock. While Farmer Bros. believes that doing so is
unnecessary inasmuch as those reports are availableit has been at all times in material compliance with laws and regulations pertaining to the public on a real
time basis on the Commission's EDGAR website. The EDGAR websiteproper recording and reporting of our financial results, there can be found
in the "Filingsno assurance that future regulations, implementing SOX 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 Companyotherwise, 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,
Chief Financial Officer, Farmer Bros. Co., 20333 S. Normandie Avenue, Torrance,
CA 90502.
not have a material adverse impact on our reported results as compared with prior reporting periods.
Item 1.B. Unresolved Staff Comments
None.
Our largest and most significant facility is theconsists of our roasting plant, warehouses and administrative offices in Torrance, California. This facility is our primary manufacturing facility and the distribution hub for our long haul trucking fleet. We stage productour products in more than 100101 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 mostwhole. Our warehouses vary in size from 2,500-12,000 sq.approximately 2,500 to 20,000 square feet. Approximately 40% of these warehouses are leased with a variety of expiration dates through 2011. We believe both theour existing plant and the distributionbranch warehouses will continue to provide adequate capacity for the foreseeable future.
A complete list of properties and facilities operated by Farmer Bros. is found inattached hereto, and incorporated herein by reference, as Exhibit (99).
99.1.
We are both defendant and plaintiff in various legal proceedings incidental to our business which are ordinary and routine. It is our opinion that the resolution of these lawsuits will not have a material impact on our financial condition or results of operations.
Item 44. 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
During the fourth quarter of fiscal 2006 no matters were submitted to March 19, 2003
Roy E. Farmer 51 President, Chief Executive Officer since March 19,
2003, Chief Operating Officer previously, sona vote 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 Firmsecurity holders, through the solicitation 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.
proxies or otherwise.
10
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Related Shareholder
Matters
Issuer Purchases of Equity Securities
We have one class of common stock which is traded inon the overNASDAQ National Market under the counter
market.symbol “FARM.” The bidfollowing table sets forth the high and low sales prices indicated belowof the shares of Common Stock of the Company. Prices are as reported byon the NASDAQ National Market and represent prices between dealers, without including retail mark up, mark
downmark-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
|
| 2006 |
| 2005 |
| ||||||||||||||||||
|
| High |
| Low |
| Dividend |
| High |
| Low |
| Dividend |
| ||||||||||
1st Quarter |
| $ | 24.98 |
| $ | 19.50 |
|
| $ | 0.105 |
|
| $ | 27.55 |
| $ | 24.50 |
|
| $ | 0.100 |
|
|
2nd Quarter |
| $ | 22.87 |
| $ | 19.11 |
|
| $ | 0.105 |
|
| $ | 28.40 |
| $ | 24.03 |
|
| $ | 0.100 |
|
|
3rd Quarter |
| $ | 22.61 |
| $ | 19.31 |
|
| $ | 0.105 |
|
| $ | 29.65 |
| $ | 22.05 |
|
| $ | 0.100 |
|
|
4th Quarter |
| $ | 23.18 |
| $ | 19.72 |
|
| $ | 0.105 |
|
| $ | 24.49 |
| $ | 20.78 |
|
| $ | 0.100 |
|
|
There were 3,415approximately 3,937 holders of record on September 11, 2003.
1, 2006. Holders of record is based upon the number of record holders and individual participants in security position listings.
Effective as of March 17, 2005, our Board of Directors approved a stockholder rights plan (the “Rights Plan”), pursuant to which the Company 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
|
| For the fiscal years ended June 30, |
| |||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||
|
| (In thousands, except per share data) |
| |||||||||||||
Net sales |
| $ | 207,453 |
| $ | 198,420 |
| $ | 193,589 |
| $ | 201,558 |
| $ | 205,857 |
|
(Loss) income from operations |
| $ | (2,965 | ) | $ | (6,583 | ) | $ | 3,763 |
| $ | 23,888 |
| $ | 38,210 |
|
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
| $ | 23,629 |
| $ | 30,569 |
|
Net income (loss) per common share(a) |
| $ | 0.34 |
| $ | (0.40 | ) | $ | 0.81 |
| $ | 1.30 |
| $ | 1.65 |
|
Total assets |
| $ | 317,237 |
| $ | 314,923 |
| $ | 317,871 |
| $ | 416,415 |
| $ | 417,524 |
|
Dividends per common share(a) |
| $ | 0.42 |
| $ | 0.40 |
| $ | 0.38 |
| $ | 0.36 |
| $ | 0.34 |
|
(a) All per share 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. 133disclosures have been adjusted to reflect the stock split that became effective 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.
May 10, 2004.
11
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion
Management’s discussion and Analysisanalysis discusses the results of operations as reflected in the Company'sCompany’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, 2003, 20022006, 2005 and 20012004 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in combination with the consolidated financial statements and the notes thereto included in Item 8 of this report and with the "Risk Factors"“Risk Factors” described below.
in Item 1 of this report.
Critical Accounting Policies
Management's
Overview
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principlesU.S. generally accepted in the
United States.accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-goingongoing basis, we evaluate our estimates, including those related to inventory valuation, including LIFO reserves, the allowance for doubtful accounts, deferred tax assets, liabilities relatedrelating to retirement benefits, liabilities resulting from self-insurance of our worker'sworkers’ 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:
Investments
Our investments consist of investment grade marketable debt instruments issued by the USU.S. Government and major USU.S. and foreign corporations, equity securities, primarily preferred stock, and various derivative instruments, primarily exchange traded treasury futures and options, green coffee forward contracts and commodity purchase agreements. All derivatives not designated as accounting hedges are marked to market and changes are recognized in current earnings. The fair value of derivative instruments is based upon broker quotes where possible.
Allowance for Doubtful Accounts: 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 peoplesalespeople regularly interact with our customers in person. This method of operation has provided us with a historically low bad debt experience. Inventories: There can be no assurance this will be the case in the future.
Inventories
Inventories are valued at the lower of cost or market and the costs of coffee and allied products are determined on the Last In, First 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. We regularly evaluate these inventories to determine thatwhether market conditions are correctly reflected in the recorded carrying value.
Self-Insurance Retention: Retention
We are self-insured for California workers'workers’ compensation insurance and utilizeuse historical analysis to determine and record the estimates of expected future expenses resulting from worker'sworkers’ compensation claims. Additionally, we accrue for estimated losses not covered by insurance for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans: Plans
We have two defined benefit plans that provide retirement benefits for the majority of our employees (the balance of 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%a 6.25% 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 onaffect our operating results. Our retiree medical plan is not funded and shares the same discount rate as the defined benefit plans. We project an initial medical trend rate of 9% ultimately reducing to 5.5% in 6 years.
Income Taxes: Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We do not presently have a valuation
allowancemake certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to our deferredtax provision in future periods. Each fiscal quarter we reevaluate our tax provision and reconsider our estimates and our assumptions related to specific tax assets and liabilities, making adjustments as we currently believe it is more likely
than not that we will realize our deferred tax assets.
circumstances change.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and believe that our short and long term cash requirements for the coming
year will be provided by internal sources. We havedo not expect to rely on banks or other third parties for our working capital needs.
Our working capital is composed of the following:
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Current assets |
| $ | 246,808 |
| $ | 245,219 |
| $ | 252,720 |
|
Current liabilities |
| $ | 16,578 |
| $ | 20,693 |
| $ | 21,189 |
|
Working capital |
| $ | 230,230 |
| $ | 224,526 |
| $ | 231,531 |
|
Capital expenditures |
| $ | 12,840 |
| $ | 8,832 |
| $ | 7,683 |
|
At June 30, 2006 we had no major commitments for new capital expenditures at this time. The following projects could requireexpenditures.
Fiscal Years Ended June 30, 2006 and 2005
Overview
Management has a substantial commitmentnumber of funds:
1.short and long term initiatives underway designed to strengthen the Company’s sales and distribution network and improve sales. Our efforts are focused primarily on enhancing our brand identification, expanding our product line and customer base and improving our sales and distribution efficiency. Our initiatives include:
· Promotion of our BRAND.
· We have purchased land in Chico, Californiadesigned and will purchase land in
Bakersfield, Californiaordered new packaging for our entire product line. The updated designs employ the use of bright colors to construct replacementsbetter appeal to modern tastes. The roll-out for existing facilities in
those locations. We expectthe new packaging is expected to begin construction in timeOctober 2006.
· We have designed, and are in the process of producing and distributing new point of sale marketing materials to occupyhelp our customers increase sales of our products. Many of these materials were distributed to customers during fiscal 2006 and others will be distributed in connection with the new warehouses beforepackaging roll-out.
· We are promoting our brand and product line in an expanded trade show schedule throughout our marketing area to highlight the end“new spirit” our packaging represents.
· Introduction of New Products.
· During fiscal 2004. The combined cost2006 we developed a variety of new products designed to appeal to both new and existing customers, including horchata (a sweet rice drink flavored with cinnamon and almond), fruit smoothies (iced beverages), an expanded line of teas, liquid coffee and some seasonal products (pumpkin pie cappuccino). We believe these new products afford us with an opportunity to engage our customers and cross-sell other products and share ideas for future new products.
· Expansion of Customer Base.
· In an effort to expand our customer base we have created a National Accounts organization to solicit larger customers and national accounts. This group is currently comprised of 15 professionals who are working from our existing branch facilities to reach potential customers throughout the two
warehouses is not expectedcountry.
· Improved Sales and Distribution Efficiency.
· In an effort to exceed $3,000,000.
2. Wecut costs and improve our sales and distribution efficiency we have completed the first year of a multi-year upgrading ofevaluated our internal management information system.branches, routes and sales staff responsibilities. In connection with these efforts we have reduced staffing and consolidated routes in certain areas, while increasing staffing in areas where we are experiencing growth.
· During 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 yearfiscal 2007 we expect to convertimplement new Route Sales application software to further enhance our alliedability to evaluate customer, product 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 travelroute profitability.
Management 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 hardconcentrate 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 withimproving 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 ofmargins and controlling our selling and general and administrative expenses, increased $7,125,000, or 7.1%,expenses. Although we were able to $107,008,000maintain gross profit margins in fiscal 2006, as compared to fiscal 2005, inflationary pressures on the cost of our raw materials and packaging supplies remains a threat to our ability to maintain these margins in the future. Despite efforts to reduce operating costs during fiscal 2003,2006, certain expenses are beyond our control, such as gasoline and diesel prices which directly impact our distribution costs. Moreover, during fiscal 2006 we also experienced
an increase of approximately $1,000,000 in compensation expenses associated with the cost of the National Accounts organization. We continue to evaluate all departments in an effort to eliminate unnecessary procedures and staff and align needed staff skills to match business requirements through re-training or 53%new hires.
Comparative Information
Net sales in fiscal 2006 increased $9,033,000 or 5% to $207,453,000 from $198,420,000 in fiscal 2005, primarily because of higher sales prices. Programs to enhance sales began during fiscal 2005 and continue to be deployed as discussed above.
Cost of goods sold in fiscal 2006 increased to $84,910,000, or 41% of sales, as compared to $99,883,000,$82,964,000, or 49%42% of sales, in fiscal 2002.2005. Although we stabilized our margins in fiscal 2006 compared to fiscal 2005, the volatility of green coffee prices, higher prices on a variety of raw materials and product packaging and strong competition have restricted our ability to return to previous gross profit margins. We continue to seek alternative and competitive sources of raw materials, packaging supplies and other key cost components in an effort to improve our profit margins. There can be no assurance that such efforts will be successful.
The average closing price of green coffee nearby contract for each of the last three fiscal years, as compiled by the New York Board of Trade, is presented in the following table.
Comparison of Average Periodic Green Coffee Prices
|
| Twelve months ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Average coffee price per pound |
| $ | 1.03 |
| $ | 0.97 |
| $ | 0.68 |
|
Change from prior year |
| 6 | % | 43 | % | 14 | % | |||
Selling, General and Administrative Expenses in fiscal 2006 increased $3,469,000 or 3% to $125,508,000 from $122,039,000 in fiscal 2005. This increase is primarily 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 ofattributed to higher coffee brewing equipment $897,000,costs largely associated with new products, higher gasoline and diesel costs and increased California workers’ compensation expense, offset by decreasesdeclines in legal expenses $941,000self-insured employee medical costs, IT project consulting costs and payroll
$815,000.
Other incomeSOX compliance consulting and auditing costs. Continuing development costs of our multi-year information systems project are currently capitalized. The new sales system implementation has been delayed and development costs associated with that project will begin depreciating in fiscal 2003 increased $2,533,000 or 22.7% to $13,683,0002007.
Principal Changes in Selling, General and Administrative Expenses
|
| For year ended June 30, |
| ||||||
|
| 2006 |
| 2005 |
| ||||
|
| (In thousands) |
| ||||||
Coffee brewing equipment |
| $ | 11,376 |
|
| $ | 9,106 |
|
|
Self-insured employee medical costs |
| 6,883 |
|
| 6,334 |
|
| ||
Fuel costs |
| 6,943 |
|
| 5,638 |
|
| ||
Workers’ compensation costs |
| 3,028 |
|
| 1,495 |
|
| ||
IT project depreciation |
| 3,915 |
|
| 3,228 |
|
| ||
IT project consulting |
| 682 |
|
| 2,272 |
|
| ||
SOX compliance consulting/auditing costs |
| 430 |
|
| 1,100 |
|
| ||
Total other income (expense) in fiscal 2006 was $6,970,000 as compared to $11,150,000($4,746,000) in fiscal 2002.2005. This increase is primarily the result of (1) higher interest rates during fiscal 2006 and (2) the volatilityreduction of
losses associated with higher green coffee prices during the second quarter of fiscal 2005 which resulted in a decrease in the value of green coffee futures and options used by the Company to hedge against a decline in commodity prices. Other, net (expense) during fiscal 2005 consisted of net realized and unrealized coffee trading losses of ($12,992,000), offset by net gains on other investments.
As a result of the capital markets introduced by an accounting change in 2001
that required unrealized gains and losses on investmentsforgoing factors, net income for fiscal 2006 was $4,756,000 as compared to be realized as
incurred. Prior to that time our hedging efforts reduced mucha net loss 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($5,427,000) in fiscal 2003 decreased 23.9%2005. Net income per common share was $0.34 in fiscal 2006 as compared to $37,571,000,a net loss per common share of ($0.40) in fiscal 2005.
Fiscal Years Ended June 30, 2005 and 2004
Net sales in fiscal 2005 increased $4,831,000 or 18.6%2% to $198,420,000 from $193,589,000 in fiscal 2004, primarily because of higher sales prices of roast coffee. During fiscal 2005 we initiated a number of programs intended to improve sales. In an effort to advance our image more clearly and aggressively with current and potential customers we redesigned our merchandising and point of sale materials and set an aggressive trade show schedule with a newly designed booth. We assembled a team of sales professionals drawn from the ranks of our route sales organization to solicit new large customer accounts. We developed some new products that we believe will appeal to both new and existing customers.
Cost of goods sold in fiscal 2005 increased 16% to $82,964,000 or 42% of sales, as compared to $49,360,000,$71,405,000, or 24%37% of sales, in fiscal 2002. Net2004. A volatile, sustained increase in green coffee prices in the second and third quarters of fiscal 2005 resulted in a decrease in profit margins on roast coffee during those periods. We attempt to pass on this cost increase to our customers through higher roast coffee prices, but sales price increases lag increases in green coffee costs, and our sales price increases did not take effect until June 2005. Additionally, volatile price increases cannot, because of competition and market conditions, always be passed on to our customers.
Selling, General and Administrative Expenses in fiscal 2005 increased 3% to $122,039,000 from $118,421,000 in fiscal 2004. This increase is primarily attributed to costs associated with the employee medical program, the cost of the ESOP, the project-related costs of our multi-year information systems project and consulting costs related to compliance with SOX Section 404 as summarized in the following table.
Principal Changes in Selling, General and Administrative Expenses
|
| June 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Employee medical costs |
| $ | 6,945 |
| $ | 6,091 |
|
ESOP |
| 7,163 |
| 6,298 |
| ||
IT project expenses |
| 3,035 |
| 3,400 |
| ||
IT project depreciation |
| 3,228 |
| 1,467 |
| ||
SOX compliance |
| 1,100 |
| 360 |
| ||
Another result of the dramatic increase in green coffee costs during fiscal 2005 was a realized loss on green coffee futures and options used by the Company to hedge against a decline in commodity prices. Total other (expense) was ($4,746,000) in fiscal 2005 as compared to Total other income of $12,219,000 in fiscal 2004. Other, net (expense) was ($10,887,000) for fiscal 2005 as compared to Other, net income of $6,305,000 for fiscal 2004.
Higher green coffee prices during fiscal 2005 resulted in a decrease in the value of green coffee futures and options used by the Company to hedge against a decline in commodity prices. Other, net
(expense) income during fiscal 2005 included realized coffee trading gains of $3,655,000 offset by realized coffee trading losses of ($16,764,000).
Rising interest rates resulted in increased interest income in fiscal 2003 decreased 22.7% to $23,629,000, or 11.7%2005, but the January 2004 purchase of sales,$111 million of Company stock from the Crowe family reduced the amount available for investment in fiscal 2005, as compared to $30,569,000, or 14.9% of salesfiscal 2004. In addition, Other, net income in fiscal 2002. Earnings per share in2004 included $5,778,000 of non-recurring income.
As a result of the forgoing factors the net loss for fiscal 2003 decreased 21.3% to $13.022005 was ($5,427,000) as compared to $16.54net income $12,687,000 for fiscal 2004. Net loss per common share was ($0.40) 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 20022005 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.
Netnet 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$0.81 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 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 looking statements
contained herein. These forward looking statements can be identified by the
use of words like "expects," "plans," "believes," "intends," "will," "assumes"
and other words of similar meanings. 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.
Factors that could cause our actual results to materially differ from those
expressed or implied by any forward looking statements described herein
include:
Green coffee price volatility.
Our results of operations can vary dramatically with the volatility of the
green coffee market. Virtually all coffee is grown outside the United States.
Some of the producing countries have experienced a variety of problems,
including civil war in Peru 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 all the factors that influence
the price of agricultural products including weather (especially drought and
frost), world supplies, the actions of our own and foreign governments
(including trade restrictions, farm subsidies & currency devaluations),
transportation issues (including port and trucker strikes domestically and in
the producing countries), and insect pests (cigarette beetle and broca).
Competition.
Our customer base has undergone a dramatic shift in the past decade. This is
the result of several factors, including competition from other coffee
companies and from other beverages. Other coffee companies include multi-
national firms with vast financial resources, a business model that is very
different and superior information technologies. Large restaurant chains and
other institutional buyers (representing hospitals, hotels, contract food
services, convalescent hospitals and other similar institutions) often prefer
the "price leader" and find insufficient value in the sales & service aspect of
our business. We believe some 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. Some of our competitors market
through wholesale grocers. Therefore they do not have to address certain
issues that we do, including gasoline and oil prices, the costs 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 for 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.
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 business market segment is dependent upon personal and business
expenditures in restaurant locations. In a slow economy businesses and
individuals scale back their discretionary spending on travel and
entertainment, including "eating out." A weaker economy may also cause
businesses to cut back on their travel and entertainment expenses, and even
reduce or eliminate office coffee benefits.
Self insurance.
We are self-insured for many risks. Although we carry insurance, our
deductibles require that we bear a substantial liability. The premiums
associated with our insurance have recently increased substantially. General
liability, fire, workers' compensation, director & officer, life, employee
medical, dental & vision and automobile present a large potential liability.
While we accrue for this liability based on historical experience, future
losses may exceed losses we have incurred in the past.
Risks from possible acquisitions and new business ventures.
The Company regularly evaluates opportunities that may enhance shareholder
value. 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 purchases and sales by major shareholders.
Approximately 53% 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 affect the price of our shares.
ESOP.
The Farmer Bros. Co. Employee Stock Ownership Plan was designed to help us
attract and retain employees. Additionally, we believe employee stock
ownership helps align the efforts of our employees with the interests of our
shareholders. To that end, the board of directors has approved loaning
sufficient funds to acquire a total of 300,000 shares of which 170,425 shares
have been acquired as of June 30, 2003. A total of $39,580,000 has been loaned
to the ESOP for this purpose. These purchases will deplete our working capital
and increase costs associated with the ESOP, especially future funding (i.e.,
requirement to provide the ESOP with liquidity for shares tendered back to the
ESOP by departing employees). We expect that as the ESOP acquires additional
shares, the Company will assume a higher fixed cost which may have a material
effect on future earnings.
External factors: strikes, natural disasters, acts of war and other
difficulties.
Over half of our business is conducted in California, Oregon & Washington.
This area is prone to seismic activity and a major earthquake could have a
significant negative effect on our operations. Our major manufacturing
facility and distribution hub is in Los Angeles, and a serious interruption to
highway arteries, gas mains or electrical service could restrict our ability to
supply our branches with product.
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 coffee to our production facility and ultimately to our customers.
Coffee is perishable, and although its shelf life is lengthy compared to other
types of agricultural products, it does 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 Columbia or Peru, or terrorist actions in the
Philippines or elsewhere, can have a material effect on our operations if we
are unable to receive or replace key coffee shipments. If suitable substitute
sources of supply can be located, they are often found at a much higher price.
ERP System Conversion.
Last year the Company began a multiyear program to update its management
information systems. This has proven to be a challenging conversion. We have
had some successes 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 coffee to reflect the market price
of coffee at the delivery date.
Futures contracts not designated as hedges, and terminations of contracts
designated as hedges, are marked to market and changes are recognized in
current earnings. Open contracts at June 30, 2003 are addressed in the
following Item 7A.
In the event of non-performance by the counter parties, the Company could
be exposed to credit and supply risk. The Company monitors the financial
viability of the counter parties in an attempt to minimize this risk.
fiscal 2004.
Contractual obligations
Obligations
The following table contains supplemental information regarding total contractual obligations as of June 30, 2003.
(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 $ -
2006.
|
| Total |
| Less Than |
| 2-3 Years |
| 4-5 Years |
| More Than |
| ||||||||||||
|
| (In thousands) |
| ||||||||||||||||||||
Operating lease obligations |
| $ | 1,551 |
|
| $ | 739 |
|
|
| $ | 685 |
|
|
| $ | 127 |
|
|
| — |
|
|
Off-Balance Sheet Arrangements
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, 20032006, over 95%90% of these funds were invested in treasuryU.S. Treasury securities and more than 50%approximately 43% of these issues have maturities shorter than 12090 days. This portfolio'sportfolio’s interest rate risk is not hedged and its average maturity is approximately 15080 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.
$1,150,000.
Our portfolio of preferred securities includes investments in derivatives that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and (a) enter into "short
positions"“short positions” in futures contracts on U.S. Treasury securities or (b) hold put options on such futures contracts in order to reduce the impact of certain interest rate changes on such preferred stocks. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes.
The following table demonstrates the impact of varying interest rate changes based on the preferred stock holdings, futures and options positions, and market yield and price relationships at June 30, 2003.2006. This table is predicated on an instantaneous change in the general level of interest rates and assumes predictable relationships between the prices of preferred securities holdings, the yields on U.S. Treasury securities and related futures and options.
The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred securitystock held, the slope of the Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options.
Interest Rate Changes
(In thousands) Market Value at June 30, 2003 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -150 basis points $58,072 $0 $58,072 $3,710
- -100 basis points 57,206 2 $57,208 2,847
Unchanged 53,898 478 $54,376 0
+100 basis points 49,215 4,233 $53,448 913
+150 basis points 46,870 6,512 $53,382 980
|
| Market Value at June 30, 2006 |
| Change in Market |
| ||||||||||||||||
|
| Preferred |
| Futures and |
| Total |
| Value of Total |
| ||||||||||||
Interest Rate Changes |
|
|
| Securities |
| Options |
| Portfolio |
| Portfolio |
| ||||||||||
|
| (In thousands) |
| ||||||||||||||||||
-150 basis points |
|
| $ | 68,248 |
|
|
| $ | 0 |
|
| $ | 68,248 |
|
| $ | 5,440 |
|
| ||
-100 basis points |
|
| $ | 66,355 |
|
|
| $ | 2 |
|
| $ | 66,357 |
|
| $ | 3,549 |
|
| ||
Unchanged |
|
| $ | 61,716 |
|
|
| $ | 1,092 |
|
| $ | 62,808 |
|
| $ | 0 |
|
| ||
+100 basis points |
|
| $ | 56,475 |
|
|
| $ | 5,880 |
|
| $ | 62,355 |
|
| $ | (453 | ) |
| ||
+150 basis points |
|
| $ | 53,907 |
|
|
| $ | 8,804 |
|
| $ | 62,711 |
|
| $ | (97 | ) |
| ||
We are exposed to commodity price risk arising from changes in the market price of green coffee. We price our inventory on the LIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers and we purchase exchange tradedsuppliers. We are subject to price risk resulting from the volatility of green coffee contracts. The
following table demonstratesprices. Volatile price increases cannot, because of competition and market conditions, always be passed on to our customers. From time to time the impactCompany will hold a mix of futures contracts and options to help hedge against volatile green coffee price decreases. Gains and losses on these derivative instruments are realized immediately in Other, net (expense) income.
On June 30, 2006 we had no open hedge derivative contracts, and our entire exposure to commodity risk was in the potential change of our inventory value resulting from changes in the market price of green coffee on inventory and green coffee contracts at June 30, 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 the
18
Report 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, 20032006 and 2002,2005, 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, 2003.2006. These financial statements are the responsibility of the Company'sCompany’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, 20032006 and 2002,2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2003,2006, in conformity with accounting
principlesU.S. generally accepted accounting principles.
We also have audited, in accordance with the United States.
/s/Ernst & Young LLP
Long Beach, Californiastandards of the Public Company Accounting Oversight Board (United States), the effectiveness of Farmer Bros. Co. and Subsidiary’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 8, 2003
7, 2006 expressed an unqualified opinion thereon.
| |
Los Angeles, California | |
September 7, 2006 |
19
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars
(Dollars in thousands, except share data)
June 30, 2003 June 30, 2002
ASSETS
Current assets:
Cash and cash equivalents $18,986 $7,047
Restricted cash 975 -
Short term investments 274,444 285,540
Accounts and notes receivable, net 13,756 14,004
Inventories 34,702 37,361
Income tax receivable 2,878 2,553
Deferred income taxes - 1,188
Prepaid expenses 876 741
Total current assets 346,617 348,434
Property, plant and equipment, net 41,753 38,572
Notes receivable 193 224
Other assets 26,390 27,622
Deferred income taxes 1,462 2,672
Total assets $416,415 $417,524
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,321 $4,827
Accrued payroll expenses 7,362 6,407
Deferred income taxes 976 -
Other 5,000 5,025
Total current liabilities 16,659 16,259
Accrued postretirement benefits 25,041 22,726
Other long term liabilities 5,570 5,486
Total Liabilities 47,270 44,471
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
and outstanding 1,926,414 1,926 1,926
Additional paid-in capital 18,798 17,627
Retained earnings 382,831 365,725
Unearned ESOP shares -33,364 -12,225
Less accumulated comprehensive loss -1,046 -
Total shareholders' equity 369,145 373,053
Total liabilities and
shareholders' equity $416,415 $417,524
per share data)
|
| June 30, 2006 |
| June 30, 2005 |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| $ | 5,333 |
|
|
| $ | 9,814 |
|
|
Short term investments |
|
| 176,336 |
|
|
| 171,055 |
|
| ||
Accounts and notes receivable, net |
|
| 13,250 |
|
|
| 15,485 |
|
| ||
Inventories |
|
| 45,008 |
|
|
| 41,086 |
|
| ||
Income tax receivable |
|
| — |
|
|
| 4,064 |
|
| ||
Deferred income taxes |
|
| 3,300 |
|
|
| — |
|
| ||
Prepaid expenses |
|
| 3,581 |
|
|
| 3,715 |
|
| ||
Total current assets |
|
| $ | 246, 808 |
|
|
| $ | 245,219 |
|
|
Property, plant and equipment, net |
|
| 46,385 |
|
|
| 42,671 |
|
| ||
Other assets |
|
| 17,427 |
|
|
| 21,268 |
|
| ||
Deferred income taxes |
|
| 6,617 |
|
|
| 5,765 |
|
| ||
Total assets |
|
| $ | 317,237 |
|
|
| $ | 314,923 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||
Accounts payable |
|
| $ | 4,197 |
|
|
| $ | 7,852 |
|
|
Accrued payroll expenses |
|
| 6,235 |
|
|
| 7,590 |
|
| ||
Deferred income taxes |
|
| — |
|
|
| 321 |
|
| ||
Other |
|
| 6,146 |
|
|
| 4,930 |
|
| ||
Total current liabilities |
|
| $ | 16,578 |
|
|
| $ | 20,693 |
|
|
Accrued postretirement benefits |
|
| $ | 31,436 |
|
|
| $ | 29,344 |
|
|
Total liabilities |
|
| $ | 48,014 |
|
|
| $ | 50,037 |
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
| ||
Common stock, $1.00 par value, authorized 25,000,000 shares; 16,075,080 issued and outstanding |
|
| $ | 16,075 |
|
|
| $ | 16,075 |
|
|
Additional paid-in capital |
|
| 31,518 |
|
|
| 32,292 |
|
| ||
Retained earnings |
|
| 271,733 |
|
|
| 272,791 |
|
| ||
Unearned ESOP shares |
|
| (50,103 | ) |
|
| (55,415 | ) |
| ||
Less accumulated comprehensive loss |
|
| — |
|
|
| (857 | ) |
| ||
Total stockholders’ equity |
|
| $ | 269,223 |
|
|
| $ | 264,886 |
|
|
Total liabilities and stockholders’ equity |
|
| $ | 317,237 |
|
|
| $ | 314,923 |
|
|
The accompanying notes are an integral part of these financial statements.
20
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(DollarsOPERATIONS
(Dollars in thousands, except share data)
2003 2002 2001
Net sales $201,558 $205,857 $215,431
Cost of goods sold 70,662 67,764 74,031
Gross profit 130,896 138,093 141,400
Selling expense 88,658 86,025 84,524
General and administrative expense 18,350 13,858 14,761
Operating expenses 107,008 99,883 99,285
Income from operations 23,888 38,210 42,115
Other income:
Dividend income 3,246 3,198 3,039
Interest income 3,974 7,261 12,308
Other, net 6,463 691 2,054
13,683 11,150 17,401
Income before taxes 37,571 49,360 59,516
Income taxes 13,942 18,791 23,028
Income before cumulative effect
of accounting change $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 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
Weighted average shares outstanding 1,814,591 1,848,395 1,843,392
data)
|
| Years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Net sales |
| $ | 207,453 |
| $ | 198,420 |
| $ | 193,589 |
|
Cost of goods sold |
| 84,910 |
| 82,964 |
| 71,405 |
| |||
Gross profit |
| $ | 122,543 |
| $ | 115,456 |
| $ | 122,184 |
|
Selling expense |
| 100,354 |
| 92,112 |
| 92,029 |
| |||
General and administrative expenses |
| 25,154 |
| 29,927 |
| 26,392 |
| |||
Operating expenses |
| $ | 125,508 |
| $ | 122,039 |
| $ | 118,421 |
|
(Loss) income from operations |
| $ | (2,965 | ) | $ | (6,583 | ) | $ | 3,763 |
|
Other income (expense): |
|
|
|
|
|
|
| |||
Dividend income |
| 3,597 |
| 3,420 |
| 3,396 |
| |||
Interest income |
| 4,445 |
| 2,721 |
| 2,518 |
| |||
Other, net (expense) income |
| (1,072 | ) | (10,887 | ) | 6,305 |
| |||
Total other income (expense) |
| $ | 6,970 |
| $ | (4,746 | ) | $ | 12,219 |
|
Income (loss) before taxes |
| 4,005 |
| (11,329 | ) | 15,982 |
| |||
Income tax (benefit) expense |
| (751 | ) | (5,902 | ) | 3,295 |
| |||
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
|
Net income (loss) per common share |
| $ | 0.34 |
| $ | (0.40 | ) | $ | 0.81 |
|
Weighted average shares outstanding |
| 13,890,609 |
| 13,653,420 |
| 15,576,450 |
| |||
The accompanying notes are an integral part of these financial statements.
21
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
(Dollars in thousands)
Years ended June 30,
2003 2002 2001
Cash flows from operating activities:
Net income $23,629 $30,569 $36,178
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Cumulative effect of accounting change - - 310
Depreciation 5,776 5,493 5,527
Deferred income taxes 3,989 495 1,736
(Gain) loss on sales of assets -498 -239 -131
ESOP compensation expense 4,269 2,529 1,398
Net (gain) loss on investments -5,625 -51 -1,614
Net unrealized loss on investments
reclassified as trading - - 2,337
Change in assets and liabilities:
Short term investments 16,721 -51,310 -23,976
Accounts and notes receivable 224 1,220 2,769
Inventories 2,659 -1,581 990
Income tax receivable -325 438 -1,651
Prepaid expenses and other assets -153 -1,421 -2,130
Accounts payable -1,506 -326 -768
Accrued payroll and expenses and
other liabilities 930 -1,070 1,457
Accrued postretirement benefits 1,904 1,926 1,602
Other long term liabilities 84 594 702
Total adjustments 28,449 -43,303 -11,442
Net cash (used in) provided by
operating activities $52,078 -$12,734 $24,736
|
| Years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 4,756 |
| $ | (5,427 | ) | $ | 12,687 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation |
| 8,963 |
| 8,396 |
| 7,098 |
| |||
Deferred income taxes |
| (5,001 | ) | (3,510 | ) | (1,536 | ) | |||
Gain on sales of assets |
| (396 | ) | (100 | ) | (94 | ) | |||
ESOP compensation expense |
| 4,538 |
| 6,171 |
| 5,516 |
| |||
Net loss (gain) on investments |
| 2,301 |
| 11,571 |
| (706 | ) | |||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Short term investments |
| (7,582 | ) | (5,723 | ) | (12,914 | ) | |||
Accounts and notes receivable |
| 2,235 |
| (777 | ) | (759 | ) | |||
Inventories |
| (3,922 | ) | (5,507 | ) | (877 | ) | |||
Income tax receivable |
| 4,064 |
| (3,656 | ) | 2,470 |
| |||
Prepaid expenses and other assets |
| 5,056 |
| (637 | ) | 4,064 |
| |||
Accounts payable |
| (3,655 | ) | (1,737 | ) | 6,268 |
| |||
Accrued payroll, expenses and other liabilities |
| (139 | ) | 920 |
| (762 | ) | |||
Accrued postretirement benefits |
| 2,396 |
| 2,126 |
| 2,285 |
| |||
Other long term liabilities |
| — |
| — |
| (5,570 | ) | |||
Total adjustments |
| $ | 8,858 |
| $ | 7,537 |
| $ | 4,483 |
|
Net cash provided by operating activities |
| $ | 13,614 |
| $ | 2,110 |
| $ | 17,170 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
| (12,840 | ) | (8,832 | ) | (7,683 | ) | |||
Proceeds from sales of property, plant and equipment |
| 559 |
| 165 |
| 132 |
| |||
Net cash used in investing activities |
| $ | (12,281 | ) | $ | (8,667 | ) | $ | (7,551 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Dividends paid |
| (5,814 | ) | (5,436 | ) | (5,621 | ) | |||
ESOP contributions |
| — |
| — |
| (32,412 | ) | |||
Proceeds from sale of short term investments |
| — |
| — |
| 111,161 |
| |||
Purchase of capital stock |
| — |
| — |
| (111,161 | ) | |||
Sale of capital stock |
| — |
| — |
| 31,235 |
| |||
Net cash used in financing activities |
| $ | (5,814 | ) | $ | (5,436 | ) | $ | (6,798 | ) |
Net (decrease) increase in cash and cash equivalents |
| $ | (4,481 | ) | $ | (11,993 | ) | $ | 2,821 |
|
Cash and cash equivalents at beginning of year |
| 9,814 |
| 21,807 |
| 18,986 |
| |||
Cash and cash equivalents at end of year |
| $ | 5,333 |
| $ | 9,814 |
| $ | 21,807 |
|
The accompanying notes are an integral part of these financial statements.
22
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF 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)
|
| Common |
| Stock |
| Additional |
| Retained |
| Unearned |
| Other |
| Total |
| ||||||||||||||
Balance at June 30, 2003 |
| 1,926,414 |
|
| $ | 1,926 |
|
|
| $ | 18,798 |
|
| $ | 382,831 |
|
| $ | (33,364 | ) |
|
| $ | (1,046 | ) |
| $ | 369,145 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 12,687 |
|
|
|
|
|
|
|
|
| 12,687 |
| ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 309 |
|
| 309 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,996 |
| ||||||
Dividends ($3.80 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,621 | ) |
|
|
|
|
|
|
|
| (5,621 | ) | ||||||
ESOP contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (32,412 | ) |
|
|
|
|
| (32,412 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| 1,282 |
|
|
|
|
| 4,234 |
|
|
|
|
|
| 5,516 |
| ||||||
Purchase capital stock |
| (443,845 | ) |
| (444 | ) |
|
| (4,474 | ) |
| (106,243 | ) |
|
|
|
|
|
|
|
| (111,161 | ) | ||||||
Issue capital stock |
| 124,939 |
|
| 125 |
|
|
| 31,110 |
|
|
|
|
|
|
|
|
|
|
|
| 31,235 |
| ||||||
Stock dividend |
| 14,467,572 |
|
| 14,468 |
|
|
| (14,468 | ) |
|
|
|
|
|
|
|
|
|
|
| 0 |
| ||||||
Balance at June 30, 2004 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 32,248 |
|
| $ | 283,654 |
|
| $ | (61,542 | ) |
|
| $ | (737 | ) |
| $ | 269,698 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
| (5,427 | ) |
|
|
|
|
|
|
|
| (5,427 | ) | ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (120 | ) |
| (120 | ) | ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,547 |
| ||||||
Dividends ($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,436 | ) |
|
|
|
|
|
|
|
| (5,436 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| 44 |
|
|
|
|
| 6,127 |
|
|
|
|
|
| 6,171 |
| ||||||
Balance at June 30, 2005 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 32,292 |
|
| $ | 272,791 |
|
| $ | (55,415 | ) |
|
| $ | (857 | ) |
| $ | 264,886 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 4,756 |
|
|
|
|
|
|
|
|
| 4,756 |
| ||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 857 |
|
| 857 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,613 |
| ||||||
Dividends ($0.42 per share) |
|
|
|
|
|
|
|
|
|
|
| (5,814 | ) |
|
|
|
|
|
|
|
| (5,814 | ) | ||||||
ESOP compensation expense |
|
|
|
|
|
|
|
| (774 | ) |
|
|
|
| 5,312 |
|
|
|
|
|
| 4,538 |
| ||||||
Balance at June 30, 2006 |
| 16,075,080 |
|
| $ | 16,075 |
|
|
| $ | 31,518 |
|
| $ | 271,733 |
|
| $ | (50,103 | ) |
|
| $ | 0 |
|
| $ | 269,223 |
|
The accompanying notes are an integral part of 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 -1,046 369,145
these financial statements.
23
Notes to Consolidated Financial Statements
Note 11. Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of roasting, packaging, and distributing coffee and allied products through direct sales to restaurants, hotels, hospitals, convenience stores and fast food outlets. The Company'sCompany’s products are distributed by its selling divisions from branch warehouses located in most large cities throughout the western United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary FBC Finance Company. All 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
Investments
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'sCompany’s investments consist of marketable debt and equity securities, money market instruments and various derivative instruments, primarily exchange traded treasury futures and options, green coffee forward contracts and commodity purchase agreements. All such derivative instruments not designated as accounting hedges are marked to market and changes are recognized in current earnings. At June 30, 20032006 and 20022005 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, 2003,2006, the financial instruments which potentially expose the Company to concentrations of credit risk consist of cash in financial institutions (which exceeds federally insured limits), cash equivalents (principally commercial paper), short term investments, investments in the preferred stocks of other companies and trade receivables. Cash equivalents and short term investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 180 days. Other investments are in U.S. government securities. Investments in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer. Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company'sCompany’s customer base and their dispersion across many different geographic areas. The trade receivables are short-term,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. The following useful lives are used:
Building and facilities 10 to 30 years
Machinery and equipment 3 to 5 years
Office furniture and equipment 5 years
Capitalized software 3 years
Building and facilities | 10 to 30 years | ||
Machinery and equipment | 3 to 5 years | ||
Office furniture and equipment | 5 years | ||
Capitalized software | 3 years |
When assets are sold or retired the asset and related depreciation allowance are eliminated from the records and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and betterments are capitalized.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. A valuation allowance is recorded, if necessary, to reduce deferred tax assets to an amount management believes is more likely than not to be realized.
Revenue Recognition
Sales
Products 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 (Loss) Per Common Share
Basic earnings
Net income (loss) 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” excluding unallocated shares held by the Company'sCompany’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, 2003.2006. Accordingly, the consolidated financial statements present only basic net income (loss) per share. Long-livedA ten-for-one stock split in the form of a one-time stock dividend became effective May 10, 2004. All share and per share amounts used in calculating net income (loss) per share have been restated to reflect the split.
Employee Stock Ownership Plan (“ESOP”)
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
When there are indicators of impairment, the Company reviews the recoverability of its long-lived assets as required by SFASStatement of Financial Accounting Standards (“SFAS”) No. 144, Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company has determined that no indicators of impairment of long-lived assets existsexisted as of or during the fiscal year ended June 30, 2003.
2006.
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
Pronouncements
In April 2003,June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109, Accounting for Income Taxes (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 no later than July 1, 2007, as required. The cumulative effect of adopting FIN 48, if any, will be recorded in retained earnings and other accounts as applicable. The Company does not expect that the adoption of FIN 48 will have a significant impact on the Company’s financial position and results of operations.
In May 2005, the FASB issued SFAS No. 149, "Amendment154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement 133 on
Derivative Instruments 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 underNo. 3.” SFAS No. 133, "Accounting154 requires retrospective application to prior periods’ financial statements for Derivative Instruments and
Hedging Activities." This statementchanges 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 contracts entered into
or modifiedaccounting changes and for hedging relationships designatedcorrections of errors made in fiscal years beginning after June 30, 2003.December 15, 2005. The Company will adopt this Statement effective July 1, 2006, and does not expect the adoption of this statement to have a material impact on its operating results or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses issues
regarding the recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring activities. This
statement requires that costs associated with exit or disposal activities
be recognized when they are incurred rather than at the date of commitment
to an exit or disposal plan. The implementation 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 Requirements 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 issued 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.
The Company does not believe that the adoption of this Interpretation has
had a material effect on its consolidatedCompany’s financial position, results of operations 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 be effective July 1, 2003 for any variable
interest entities formed prior to February 1, 2003. The Company does not
believe that this Interpretation will have a material impact on its
consolidated financial statements.
cash flows.
Note 22. 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, 20032006 and 2005, derivative instruments are not designated as accounting hedges as defined by SFAS No. 133. The fair value of derivative instruments is based upon broker quotes. The Company records unrealized gains and losses on trading securities and changes in the market value of certain coffee contracts meeting the definition of derivatives in other income and expense.
Investments, consisting of marketable debt and equity securities and money market instruments, are held for trading purposes and are stated at fair value.
Investments at June 30, are as follows:
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Trading securities at fair value |
|
|
|
|
| ||
U.S. Treasury Obligations |
| $ | 113,502 |
| $ | 109,134 |
|
Preferred Stock |
| 61,716 |
| 61,660 |
| ||
Futures, options and other derivatives |
| 1,092 |
| 239 |
| ||
Other |
| 26 |
| 22 |
| ||
|
| $ | 176,336 |
| $ | 171,055 |
|
Gains and losses, both realized and unrealized, are included in other income and expense. 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.
InvestmentsGross realized gains/losses at June 30, are as follows:
(In thousands)
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 $285,540
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Gains |
| $ | 5,071 |
| $ | 5,599 |
| $ | 12,259 |
|
Losses |
| $ | (1,660 | ) | $ | (21,112 | ) | $ | (6,955 | ) |
Note 33. Allowance for Doubtful Accounts
(In thousands)
2003 2002 2001
Balance
Doubtful accounts at beginning of year $345 $395 $420
Additions 356 218 348
Deductions -356 -268 -371
Balance at end of year $345 $345 $397
Note 4 Inventories
(In thousands) June 30, 2003
Processed Unprocessed Total
Coffee $3,853 $9,155 $13,008
Allied products 11,776 4,213 15,989
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,702
June 30, 2002
Processed Unprocessed Total
Coffee $3,438 $10,393 $13,831
Allied products 12,482 5,116 17,598
Coffee brewing equipment 2,528 3,404 5,932
$18,448 $18,913 $37,361
are as follows:
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Balance at beginning of year |
| $ | 310 |
| $ | 345 |
|
Additions |
| 107 |
| 194 |
| ||
Deductions |
| (152 | ) | (229 | ) | ||
Balance at end of year |
| $ | 265 |
| $ | 310 |
|
June 30, 2006 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
|
| (In thousands) |
| |||||||||||||
Coffee |
|
| $ | 4,949 |
|
|
| $ | 12,735 |
|
| $ | 17,684 |
| ||
Allied products |
|
| 15,556 |
|
|
| 4,487 |
|
| 20,043 |
| |||||
Coffee brewing equipment |
|
| 1,528 |
|
|
| 5,753 |
|
| 7,281 |
| |||||
|
|
| $ | 22,033 |
|
|
| $ | 22,975 |
|
| $ | 45,008 |
| ||
June 30, 2005 |
|
|
| Processed |
| Unprocessed |
| Total |
| |||||||
Coffee |
|
| $ | 4,888 |
|
|
| $ | 12,568 |
|
| $ | 17,456 |
| ||
Allied products |
|
| 12,860 |
|
|
| 5,478 |
|
| 18,338 |
| |||||
Coffee brewing equipment |
|
| 2,081 |
|
|
| 3,211 |
|
| 5,292 |
| |||||
|
|
| $ | 19,829 |
|
|
| $ | 21,257 |
|
| $ | 41,086 |
| ||
Current cost of coffee and allied products inventories is (less than) or
greater than the LIFO cost by approximately $122,000$18,750,000 and $(491,000)$16,506,000 as of June 200330, 2006 and 2002,2005, respectively.
The change in the Company'sCompany’s green coffee and allied product inventories during fiscal 2003, 2002,2006, 2005, and 20012004 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,($971,000), ($1,747,000) and 1,283,000,($499,000), respectively.
Note 55. Property, Plant and Equipment
(In thousands)
2003 2002
Buildings and facilities $40,907 $40,914
Machinery and equipment 48,969 48,690
Capitalized software costs 3,934 0
Office furniture and equipment 5,845 6,055
$99,655 $95,659
Accumulated depreciation -63,851 -62,950
Land 5,949 5,863
$41,753 $38,572
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Buildings and facilities |
| $ | 47,561 |
| $ | 42,757 |
|
Machinery and equipment |
| 50,375 |
| 49,642 |
| ||
Capitalized software costs |
| 14,318 |
| 12,689 |
| ||
Office furniture and equipment |
| 6,824 |
| 6,301 |
| ||
|
| $ | 119,078 |
| $ | 111,389 |
|
Accumulated depreciation |
| (79,166 | ) | (74,865 | ) | ||
Land |
| 6,473 |
| 6,147 |
| ||
Total property plant and equipment |
| $ | 46,385 |
| $ | 42,671 |
|
Maintenance and repairs charged to expense for the years ended June 30, 2003,
2002,2006, 2005 and 20012004 were $11,022,000, $11,202,000,$12,112,000, $10,719,000 and $10,514,000,$11,151,000, respectively.
Note 66. Employee Benefit Plans
The Company provides pension plans for most full time employees. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. Retirees are also eligible for medical and life insurance benefits.
Union Pension Plans
The Company contributes to two multi-employer defined benefit plans for certain union employees. The contributions to these multi-employer pension plans were approximately $2,400,000, $2,278,000 and $2,114,000 for the years ended June 30, 2006, 2005 and 2004, 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, 2006.
28
Disclosure for the Company Pension Plans
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Change in benefit obligation |
|
|
|
|
| ||
Benefit obligation at the beginning of the year |
| $ | 86,841 |
| $ | 69,516 |
|
Service cost |
| 2,815 |
| 2,117 |
| ||
Interest cost |
| 4,510 |
| 4,284 |
| ||
Plan participants contributions |
| 235 |
| 189 |
| ||
Amendments |
| 0 |
| 0 |
| ||
Actuarial (gain)/loss |
| (9,653 | ) | 14,358 |
| ||
Benefits paid |
| (3,397 | ) | (3,623 | ) | ||
Benefit obligation at the end of the year |
| $ | 81,351 |
| $ | 86,841 |
|
Change in plan assets |
|
|
|
|
| ||
Fair value in plan assets at the beginning of the year |
| $ | 84,457 |
| $ | 79,387 |
|
Actual return on plan assets |
| 7,337 |
| 8,484 |
| ||
Employer contributions |
| 24 |
| 20 |
| ||
Plan participants contributions |
| 235 |
| 189 |
| ||
Benefits paid |
| (3,397 | ) | (3,623 | ) | ||
Fair value in plan assets at the end of the year |
| $ | 88,656 |
| $ | 84,457 |
|
Funded status |
| $ | 7,305 |
| $ | (2,385 | ) |
Unrecognized net asset |
| 0 |
| 0 |
| ||
Unrecognized actuarial loss |
| 9,321 |
| 20,692 |
| ||
Unrecognized prior service cost |
| 302 |
| 366 |
| ||
Net amount recognized |
| $ | 16,928 |
| $ | 18,673 |
|
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Amounts recognized in the consolidated balance sheet |
|
|
|
|
| ||
Prepaid benefit cost |
| $ | 16,928 |
| $ | 17,291 |
|
Accrued benefit liability |
| — |
| (304 | ) | ||
Intangible asset |
| — |
| 301 |
| ||
Accumulated other comprehensive income |
| — |
| 1,385 |
| ||
Net amount recognized |
| $ | 16,928 |
| $ | 18,673 |
|
The Company's funding policyaccumulated benefit obligation for the Farmer Bros. Co. Plan was $71,896,000 and $74,826,000 as of June 30, 2006 and June 30, 2005, respectively. The accumulated benefit obligation for the Brewmatic Co. Plan was $3,457,000 and $3,888,000 as of June 30, 2006 and June 30, 2005, respectively.
|
| Years ended June 30 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated benefit obligation |
| $ | 75,144 |
| $ | 78,714 |
|
Components of net periodic benefit cost |
|
|
|
|
| ||
Service cost |
| $ | 2,814 |
| $ | 2,117 |
|
Interest cost |
| $ | 4,510 |
| $ | 4,284 |
|
Expected return on plan assets |
| $ | (6,624 | ) | $ | (6,238 | ) |
Amortization of prior service cost |
| $ | 63 |
| $ | 184 |
|
Amortization of net (gain)/loss |
| $ | 1,006 |
| $ | 70 |
|
Net periodic benefit cost |
| $ | 1,769 |
| $ | 418 |
|
Estimated future benefit payments for years ended June 30,
|
| (In thousands) |
| |||
2007 |
|
| $ | 3,750 |
|
|
2008 |
|
| $ | 3,940 |
|
|
2009 |
|
| $ | 4,120 |
|
|
2010 |
|
| $ | 4,320 |
|
|
2011 |
|
| $ | 4,630 |
|
|
years 2012 - 2016 |
|
| $ | 28,420 |
|
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
The Company expects to make no contributions to the Farmer Bros. Co. Plan in fiscal 2007, but expects to contribute approximately $25,000 to the Brewmatic Co. Plan in fiscal 2007.
Assumptions: |
|
|
|
|
|
Weighted average assumptions used to determine benefit obligations at June 30 |
|
|
|
|
|
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
| 3.50 | % | 3.50 | % |
Weighted average assumptions used to determine net periodic benefit cost for years ended June 30 |
|
|
|
|
|
|
| 2006 |
| 2005 |
|
Discount rate |
| 5.30 | % | 6.30 | % |
Rate of return on assets |
| 8.00 | % | 8.00 | % |
Rate of compensation increase |
| 3.50 | % | 3.50 | % |
Assumptions:
Weighted average assumptions used to determine benefit obligations at June 30
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
| N/A |
| N/A |
|
Weighted average assumptions used to determine net periodic benefit cost for years ended June 30
|
| 2006 |
| 2005 |
|
Discount rate |
| 5.30 | % | 6.30 | % |
Rate of return on assets |
| 8.00 | % | 8.00 | % |
Rate of compensation increase |
| N/A |
| N/A |
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Projected benefit obligation |
| $ | 3,457 |
| $ | 3,888 |
|
Accumulated benefit obligation |
| $ | 3,457 |
| $ | 3,888 |
|
Fair value of plan assets |
| $ | 3,697 |
| $ | 3,583 |
|
(Decrease) increase in minimum liability included in other comprehensive income |
| $ | (1,385 | ) | $ | 181 |
|
To develop the expected long term rate of return on asset assumption the Company considers the current level of returns on long term bonds and equities, the level of risk associated with each asset class and the expectations for future returns of each asset class. The long-term return on asset assumption for our plans is 8% for the years ended June 30, 2006 and 2005.
The tables below detail assets by category for the Company’s pension plans.
|
| Farmer Bros. Plan |
| Brewmatic Plan |
| ||||||||||||||
Asset Categories |
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Equity securities |
|
| 69 | % |
|
| 86 | % |
|
| 69 | % |
|
| 90 | % |
| ||
Debt securities |
|
| 22 | % |
|
| 14 | % |
|
| 22 | % |
|
| 10 | % |
| ||
Real estate |
|
| 9 | % |
|
| 0 | % |
|
| 9 | % |
|
| 0 | % |
| ||
|
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
| ||
Description of Investment Policy
Our investment strategy for employee benefit plans is to contribute annually atbuild an efficient, well-diversified portfolio based on 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) over the working lifetimelong-term, strategic outlook of the plan participants. Benefit paymentsinvestment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are determined underused to develop a final payment
formula (non-bargaining) and flat benefit formula (bargaining).
core asset allocation based on the
specific needs of each plan. The core asset allocation utilizes multiple investment managers in order to maximize the plan’s return while minimizing risk.
2006 | |||
Equity securities | 67.5 | % | |
Debt securities | 24.0 | % | |
Real estate | 8.5 | % | |
Total | 100.0 | % |
The Company also has defined contribution plans for all eligible employees. No Company contributions have been made nor are any required to be made to these defined contribution plans.
The Company sponsors defined benefit postretirement medical and dental plans that cover non-union employees and retirees, and certain union locals. The plan is contributory and 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 in
The 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 $20,754
periodic benefit cost.
Weighted average assumptions asused to determine benefit obligation at June 30,
|
| 2006 |
| 2005 |
|
Discount rate |
| 6.25 | % | 5.30 | % |
Rate of compensation increase |
|
|
|
|
|
Initial medical rate trend |
| 9.00 | % | 10.00 | % |
Ultimate medical trend rate |
| 5.50 | % | 5.50 | % |
Number of years from initial to ultimate trend rate |
| 6 |
| 6 |
|
Initial dental/vision trend rate |
| 6.50 | % | 7.00 | % |
Ultimate dental/vision trend rate |
| 5.50 | % | 5.50 | % |
Reconciliation of June 30:
Discount rate 5.60% 7.20% 5.60% 7.20%
Expected return on Plan assets 8.00% 8.00% - -
Salary increase rate increase 3.50% 3.50% - -
Initial medical rate trend 10.00% 11.00%
Ultimate medical trend rate 5.50% 5.50%
Numberfunded status.
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated post retirement benefit obligation (“APBO”) |
|
|
|
|
| ||
Actives not eligible to rehire |
| $ | (10,625 | ) | $ | (12,887 | ) |
Actives eligible to rehire |
| (7,269 | ) | (9,230 | ) | ||
Retirees |
| (11,955 | ) | (11,539 | ) | ||
Total APBO* |
| $ | (29,849 | ) | $ | (33,656 | ) |
Fair market value of assets |
| $ | 0 |
| $ | 0 |
|
Funded status |
| $ | (29,849 | ) | $ | (33,656 | ) |
Unrecognized transition obligation |
| 0 |
| 0 |
| ||
Unrecognized prior service cost |
| 7,380 |
| 1,046 |
| ||
Unrecognized cumulative net loss |
| (8,967 | ) | 3,570 |
| ||
Accrued post retirement benefit cost as of June 30 |
| $ | (31,436 | ) | $ | (29,041 | ) |
Retiree medical claims paid |
| $ | 1,214 |
| $ | 1,012 |
|
* The APBO reflects the recognition of years from initial to ultimate trend rate 6 6
Initial dental/vision trend rate 7.00% 7.50%
Ultimate dental/vision trend rate 5.50% 5.00%
Componentsan estimate of net periodic benefit costs:
(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 Plan
assets -5,965 -6,267 -6,121 - - -
Unrecognized net
transition asset -657 -657 -657 - - -
Unrecognized net gain 18 -269 -841 - - -94
Unrecognized prior
service cost 262 239 239 182 286 286
Benefit cost -$748 -$1,743 -$2,595 $2,659 $2,677 $2,377
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage pointsubsidy available under Medicare Part D in accordance with FASB Staff Position No. FAS 106-2 (“FSP FAS 106-2”). This change indecreased the assumed health care cost trend
rate would have the following effects:
(In thousands)
Plan Year Effect of 1%
Results Increase Decrease
Accumulated Postretirement Benefit
obligationAPBO by $2,132,000 as of June 30, 2003 $30,722 $4,474 -$3,561
Service2005.
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 inflation trend assumption on the accumulated postretirement benefit obligation and net periodic service and interest cost forcost. These results are shown below.
|
| Plan Year |
| Effect of 1% |
| |||||||||
|
| Results |
| Increase |
| Decrease |
| |||||||
|
| (In thousands) |
| |||||||||||
Accumulated postretirement benefit obligation as of June 30, 2006 |
|
| $ | 29,849 |
|
|
| $ | 2,510 |
|
| $ | (2,105 | ) |
Service cost for plan year ended June 30, 2006 |
|
| $ | 1,269 |
|
|
| $ | 177 |
|
| $ | (137 | ) |
Interest for plan year ended June 30, 2006 |
|
| $ | 1,650 |
|
|
| $ | 145 |
|
| $ | (120 | ) |
Presented below is the change in the accumulated postretirement benefit obligation from the prior year.
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Accumulated postretirement benefit obligation beginning of year |
| $ | 33,656 |
| $ | 29,590 |
|
Service cost |
| 1,269 |
| 1,140 |
| ||
Interest cost |
| 1,651 |
| 1,815 |
| ||
Actuarial loss or (gain) |
| (12,688 | ) | 4,255 |
| ||
Benefits paid |
| (1,214 | ) | (1,012 | ) | ||
Plan change |
| 7,175 |
| — |
| ||
Change due to Medicare Part D subsidy* |
| — |
| (2,132 | ) | ||
Accumulated postretirement benefit obligation as of end of year |
| $ | 29,849 |
| $ | 33,656 |
|
* Recognized in accordance with FSP FAS 106-2.
Presented below is the change in the fair value of assets from the prior year.
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Fair value of plan assets at the beginning of the year |
| $ | 0 |
| $ | 0 |
|
Actual return on plan assets |
| 0 |
| 0 |
| ||
Company contributions |
| 1,214 |
| 1,012 |
| ||
Plan participants contributions |
| 253 |
| 216 |
| ||
Benefit paid |
| (1,467 | ) | (1,228 | ) | ||
Fair value of plan assets at the end of the year |
| $ | 0 |
| $ | 0 |
|
Presented below is a table of projected benefit payments from the plan, year 2,477 390 312
Accumulated Postretirement Benefit
obligation asnet of 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 definedexpected retiree contributions.
Years ended June 30, |
|
|
| With Medicare |
| Without Medicare |
| Medicare |
| |||||||||
|
| (In thousands) |
| |||||||||||||||
2007 |
|
| $ | 1,592 |
|
|
| $ | 1,689 |
|
|
| $ | 97 |
|
| ||
2008 |
|
| $ | 1,774 |
|
|
| $ | 1,884 |
|
|
| $ | 110 |
|
| ||
2009 |
|
| $ | 1,918 |
|
|
| $ | 2,042 |
|
|
| $ | 124 |
|
| ||
2010 |
|
| $ | 2,125 |
|
|
| $ | 2,259 |
|
|
| $ | 133 |
|
| ||
2011 |
|
| $ | 2,205 |
|
|
| $ | 2,350 |
|
|
| $ | 145 |
|
| ||
2012-2016 |
|
| $ | 12,808 |
|
|
| $ | 13,633 |
|
|
| $ | 825 |
|
| ||
Expected 2007 benefit 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): $1,458,000.
Note 7. Employee Stock Ownership Plan
On January 1, 2000, the Company established the
The 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'sCompany’s discretionary plan contributions over a fifteen year term atwith a variable rate of interest, 3.30%6.85% at June 30, 2002.
for the years ended June 30,
2003 2002 2001
Loan amount (in thousands) $24,237 $815 $390
2006.
|
| As of and for the years ended June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Loan amount (in thousands) |
| $ | 54,441 |
| $ | 59,242 |
| $ | 64,567 |
|
Shares purchased |
| — |
| — |
| 1,286,430 |
| |||
Shares purchased 77,850 3,800 2,200
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-
equitycontra-equity account "Unearned“Unearned ESOP Shares"Shares” and are excluded from earnings per share calculations.
During the fiscal years ended June 30, 2003, 20022006, 2005 and 20012004 the Company charged $3,098,000, $1,531,000$5,312,000, $6,127,000 and $1,136,000 respectively,$4,234,000 to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares, which was $1,171,000, $998,000($774,000) , $44,000 and $270,000$1,282,000 for the years ended June 30, 2003, 20022006, 2005 and 2001,2004, respectively, is recorded as additional paid inpaid-in capital.
June 30,
2003 2002
Allocated shares 25,592 16,083
Committed to be released shares 7,170 3,636
Unallocated shares 138,718 74,003
Total ESOP shares 171,480 93,722
(In thousands)
Fair value of ESOP shares $58,181 $34,000
|
| June 30, |
| ||
|
| 2006 |
| 2005 |
|
Allocated shares |
| 846,737 |
| 636,572 |
|
Committed to be released shares |
| 119,440 |
| 119,434 |
|
Unallocated shares |
| 2,019,839 |
| 2,242,671 |
|
Total ESOP shares |
| 2,986,016 |
| 2,998,677 |
|
|
| (In thousands) |
| ||||
Fair value of ESOP shares |
| $ | 64,737 |
| $ | 66,751 |
|
The current and deferred components of the provision for income taxes consist of the following:
June 30,
(In thousands) 2003 2002 2001
Current: Federal $8,030 $15,367 $17,607
State $1,923 $2,929 $3,685
$9,953 $18,296 $21,292
Deferred: Federal $3,775 $434 $1,451
State $214 $61 $285
$3,989 $495 $1,736
$13,942 $18,791 $23,028
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Current federal |
| $ | 3,124 |
| $ | (1,703 | ) | $ | 4,753 |
|
Current state |
| 1,126 |
| (689 | ) | 78 |
| |||
Total current provision |
| $ | 4,250 |
| $ | (2,392 | ) | $ | 4,831 |
|
Deferred federal |
| $ | (4,338 | ) | $ | (1,165 | ) | $ | (1,402 | ) |
Deferred state |
| (663 | ) | (2,345 | ) | (134 | ) | |||
Total deferred provision |
| $ | (5,001 | ) | $ | (3,510 | ) | $ | (1,536 | ) |
Total tax provision |
| $ | (751 | ) | $ | (5,902 | ) | $ | 3,295 |
|
A reconciliation of the provision for income taxes to the statutory federal income tax expense is as follows:
June 30,
2003 2002 2001
Statutory tax rate 35% 35% 35%
Income tax expense at statutory rate $13,150 $17,276 $20,831
State income tax (net federal tax benefit) 1,389 1,943 2,552
Dividend income exclusion -808 -767 -731
Other (net) 211 339 376
$13,942 $18,791 $23,028
Income taxes paid $10,429 $17,881 $24,879
|
| June 30, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
| (In thousands) |
| |||||||
Federal statutory tax rate |
| 34 | % | 34 | % | 35 | % | |||
Income tax expense (benefit) at statutory rate |
| $ | 1,362 |
| $ | (3,852 | ) | $ | 5,594 |
|
State income tax (net federal tax benefit) |
| 206 |
| (696 | ) | 831 |
| |||
Life insurance proceeds |
| 0 |
| 0 |
| (1,476 | ) | |||
Dividend income exclusion |
| (849 | ) | (819 | ) | (821 | ) | |||
Valuation allowance |
| (1,379 | ) | 1,379 |
| 0 |
| |||
Change in contingency reserve |
| 406 |
| (2,492 | ) | (896 | ) | |||
Other (net) |
| (497 | ) | 578 |
| 63 |
| |||
|
| $ | (751 | ) | $ | (5,902 | ) | $ | 3,295 |
|
Income taxes paid |
| $ | 2,301 |
| $ | 2,356 |
| $ | 3,443 |
|
35
The primary components of temporary differences which give rise to the Company'sCompany’s net deferred tax assets are as follows:
(In thousands)
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (In thousands) |
| ||||
Deferred tax assets: |
|
|
|
|
| ||
Postretirement benefits |
| $ | 12,187 |
| $ | 11,664 |
|
Accrued liabilities |
| 3,266 |
| 3,121 |
| ||
Capital loss carry forwards |
| 2,807 |
| 4,427 |
| ||
Other |
| 1,808 |
| 780 |
| ||
Total deferred tax assets |
| $ | 20,068 |
| $ | 19,992 |
|
Deferred tax liabilities: |
|
|
|
|
| ||
Pension assets |
| $ | (6,563 | ) | $ | (7,040 | ) |
Unrealized gain on investments |
| (449 | ) | (2,759 | ) | ||
Other |
| (3,139 | ) | (3,370 | ) | ||
Total deferred tax liabilities |
| $ | (10,151 | ) | $ | (13,169 | ) |
Valuation allowance |
| 0 |
| (1,379 | ) | ||
Net deferred tax assets |
| $ | 9,917 |
| $ | 5,444 |
|
The Company has approximately $6.8 million and $12.0 million of federal and state capital loss carry forwards, respectively, that will expire on June 30, 2003 2002
Deferred tax assets:
Postretirement benefits $10,384 $8,938
Accrued liabilities 4,859 4,426
State taxes - 791
$15,243 $14,155
Deferred tax liabilities:
Pension assets -$8,205 -$7,877
Other -6,552 -2,418
-$14,757 -$10,295
Net deferred tax assets $486 $3,860
2010, unless previously utilized. During the year ended June 30, 2006, the valuation allowance related to the capital loss carry forwards has been released as management believes realization is more likely than not based upon projected generation of capital gains prior to the expiration of the carry forward period, based on facts and circumstances at this time.
Note 89. Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
2003 2002
Accrued workers' compensation liabilities $2,898 $3,119
Current portion of deferred taxes - -
Dividends payable 1,734 1,637
Other 368 269
$5,000 $5,025
|
| June 30, |
| ||||||
|
| 2006 |
| 2005 |
| ||||
|
| (In thousands) |
| ||||||
Accrued workers’ compensation liabilities |
|
| $ | 4,052 |
|
| $ | 2,725 |
|
Dividends payable |
|
| 1,688 |
|
| 1,608 |
| ||
Other (including net taxes payable) |
|
| 406 |
|
| 597 |
| ||
|
|
| $ | 6,146 |
|
| $ | 4,930 |
|
Note 910. Commitments and Contingencies
The Company incurred rent expense of approximately $736,000, $698,000,$907,000, $779,000 and $700,000$753,000 for the fiscal years ended June 30, 2003, 2002,2006, 2005 and 2001,2004, respectively, and is obligated under leases for branch warehouses. A few of
theSome leases have renewal options that allow the Company, as lessee, to extend the lease at the Company'sCompany’s option for one or two years at a pre-agreed rental rate. The Company also has operating leases for computer hardware with terms that do not exceed three years.
Future minimum lease payments for future fiscal years are as follows:
June 30, (in thousands)
2004 $667
2005 420
2006 230
2007 53
2008 32
$1,402
|
| (In thousands) |
| |||
2007 |
|
| $ | 739 |
|
|
2008 |
|
| 448 |
|
| |
2009 |
|
| 237 |
|
| |
2010 |
|
| 106 |
|
| |
2011 |
|
| 21 |
|
| |
Total |
|
| $ | 1,551 |
|
|
The Company is a party to various pending legal and administrative proceedings. It is management'smanagement’s opinion that the outcome of such proceedings will not have a material impact on the Company'sCompany’s financial position, results of operations, or cash flows.
Note 1011. Quarterly Financial Data (Unaudited) (In thousands except per share data)
September 30 December 31 March 31 June 30
2002 2002 2003 2003
Net sales $50,389 $54,118 $49,267 $47,784
Gross profit $31,532 $35,154 $32,038 $32,172
Income from operations $7,354 $8,319 $4,985 $3,230
Net income $5,608 $5,899 $6,339 $5,783
Net income per common share $3.03 $3.24 $3.52 $3.23
September 30 December 31 March 31 June 30
2001 2001 2002 2002
Net sales $49,400 $54,755 $51,298 $50,404
Gross profit $32,569 $37,337 $34,786 $33,401
Income from operations $9,286 $11,891 $9,843 $7,190
Net income $7,763 $9,733 $6,406 $6,667
Net income per common share $4.21 $5.27 $3.47 $3.60
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||||||||
|
| (In thousands except share data) |
| ||||||||||||||||
Net sales |
|
| $ | 48,424 |
|
|
| $ | 54,950 |
|
|
| $ | 53,561 |
|
| $ | 50,518 |
|
Gross profit |
|
| $ | 28,885 |
|
|
| $ | 33,154 |
|
|
| $ | 32,039 |
|
| $ | 28,465 |
|
(Loss) income from operations |
|
| $ | (1,124 | ) |
|
| $ | 3,149 |
|
|
| $ | 67 |
|
| $ | (5,057 | ) |
Net (loss) income |
|
| $ | (1,079 | ) |
|
| $ | 4,164 |
|
|
| $ | 2,463 |
|
| $ | (792 | ) |
Net (loss) income per common |
|
| $ | (0.08 | ) |
|
| $ | 0.30 |
|
|
| $ | 0.18 |
|
| $ | (0.06 | ) |
|
| September 30 |
| December 31 |
| March 31 |
| June 30 |
| ||||||||||
Net sales |
|
| $ | 46,708 |
|
|
| $ | 51,220 |
|
|
| $ | 50,271 |
|
| $ | 50,221 |
|
Gross profit |
|
| $ | 29,239 |
|
|
| $ | 30,298 |
|
|
| $ | 29,343 |
|
| $ | 26,576 |
|
Income (loss) from operations |
|
| $ | 1,002 |
|
|
| $ | 699 |
|
|
| $ | (2,167 | ) |
| $ | (6,117 | ) |
Net income (loss) |
|
| $ | 1,497 |
|
|
| $ | (4,068 | ) |
|
| $ | 856 |
|
| $ | (3,712 | ) |
Net income (loss) per common |
|
| $ | 0.11 |
|
|
| $ | (0.30 | ) |
|
| $ | 0.06 |
|
| $ | (0.27 | ) |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures. The Company'sProcedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures.
As of June 30, 2006 our management, with the participation of our Chief Executive Officer and Chief Financial Officer, havecarried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2003, there is
reasonable assurance that the Company's2006, our disclosure controls and procedures will
meet their objectiveswere (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our Chief Executive Officer and Chief Financial Officer, in a timely manner, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the disclosureobjectives of the controls system are met, and procedures are
effective atno evaluation of controls can provide absolute assurance that all control deficiencies and instances of fraud, if any, within a company have been detected.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the "reasonable assurance" level. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the dateparticipation of evaluation by the Chief Executive Officer and Chief Financial Officer.
Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of June 30, 2006.
Ernst & Young LLP, an independent registered public accounting firm, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2006, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiary
We have audited management’s assessment, included in the accompanying “Management Report on Internal Control over Financial Reporting,” that Farmer Bros. Co. and Subsidiary maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Farmer Bros. Co. and Subsidiary’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Farmer Bros. Co. and Subsidiary maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Farmer Bros. Co. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2006 of Farmer Bros. Co. and Subsidiary and our report dated September 7, 2006 expressed an unqualified opinion thereon.
| |
Los Angeles, California |
39
None.
Item 10. Directors and Executive Officers of the Registrant
Directors
Served as a
Director
Continuously Principal Occupation
Name Age Since for the Last Five Years
Roy F. Farmer (1) 87 1951 Chairman, Chief Executive Officer prior
The 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, 2006.
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 under2006, 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, 2006.
Item 11. Executive Compensation
The information required by this item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the SEC on or before October 28, 2006.
Item 12. Security Ownership of Certain Beneficial Owners and Management 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, 2006.
Item 13. Certain Relationships and Related Transactions
None.
The information required by this item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the SEC on or before October 28, 2006.
Item 14. Principal Accountant Fees and Services.
Audit Fees
Services
The aggregate fees billedinformation required by Ernst & Young, LLP forthis item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with the audit of the Company's
annual financial statements and review of financial statements included in the
Company's quarterly reportsSEC on Form 10-Q were $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 2003
before October 28, 2006.
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K.
(a) List of Financial Statements and Financial Statement Schedules:
1. Financial Statements included in Item 8:
Consolidated Balance Sheets as of June 30, 20032006 and 2002.
2005.
Consolidated Statements of IncomeOperations for the Years Ended
June 30, 2003, 20022006, 2005 and 2001.
2004.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 20022006, 2005 and 2001.
2004.
Consolidated Statements of Shareholders'Stockholders’ Equity For the Years
Ended June 30, 2003, 2002,2006, 2005 and 2001.
2004.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, ofor the required information is given in the consolidated financial statements ofand notes thereto.
(b) Reports
3. The exhibits to this Annual Report on Form 8-K.
A form 8-K dated 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
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FARMER BROS. CO.
By: /s/ Roy E. Farmer
Roy E. Farmer, Chief Executive Officer
Date: October 24, 2003
FARMER BROS. CO. | |||
By: | /s/ GUENTER W. BERGER | ||
Guenter W. Berger, | |||
Chairman and Chief Executive Officer | |||
Date: September 11, 2006 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Roy E. Farmer
Roy E. Farmer, President and Chief Executive Officer and Director
(principal executive officer)
Date: October 24, 2003
/s/ John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: October 24, 2003
/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, 2003
/s/ Thomas A. Maloof
Thomas A. Maloof
Director
Date: October 24, 2003
/s/ John H. Merrell
John H. Merrell
Director
Date: October 24, 2003
/s/ John Samore, Jr.
John Samore, Jr.
Director
Date: October 24, 2003
Exhibit 31.1
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, Roy E. Farmer, President and Chief Executive 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 omit 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 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/ Roy E. Farmer
Roy E. Farmer
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, John E. Simmons, Treasurer and Chief 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 omit 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 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
Name | Title | Date | ||||||||
/s/ GUENTER W. BERGER | Chairman and Chief Executive | September 11, 2006 | ||||||||
Guenter W. Berger | Officer (principal executive officer) | |||||||||
/s/ JOHN E. SIMMONS | Treasurer and Chief Financial | |||||||||
John E. Simmons | Officer (principal financial and | September 11, 2006 | ||||||||
accounting officer) | ||||||||||
/s/ LEWIS A. COFFMAN | Director | September 11, 2006 | ||||||||
Lewis A. Coffman | ||||||||||
/s/ JOHN H. MERRELL | Director | September 11, 2006 | ||||||||
John H. Merrell | ||||||||||
/s/ THOMAS A. MALOOF | Director | September 11, 2006 | ||||||||
Thomas A. Maloof | ||||||||||
/s/ JOHN SAMORE, JR. | Director | September 11, 2006 | ||||||||
John Samore, Jr. | ||||||||||
/s/ CAROL FARMER WAITE | Director | September 11, 2006 | ||||||||
Carol Farmer Waite | ||||||||||
/s/ KENNETH R. CARSON | Director | September 11, 2006 | ||||||||
Kenneth R. Carson | ||||||||||
42
EXHIBIT INDEX
3.1 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) (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 Properties (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, 2002
3.1 | Certificate of Incorporation (filed as an exhibit to the Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference). | |
3.2 | Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference). | |
4.1 | Certificate of Designations of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 17, 2005 and incorporated herein by reference). | |
4.2 | Rights Agreement dated March 17, 2005 by and between Farmer Bros. Co. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 17, 2005 and incorporated herein by reference). | |
10.1 | The Farmer Bros. Co. Pension Plan for Salaried Employees (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.2 | The Farmer Bros. Co. Incentive Compensation Plan (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.3 | Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 12, 2005 and incorporated herein by reference).* | |
10.4 | Form of Notification Letter Under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 12, 2005 and incorporated herein by reference).* | |
10.5 | Form of Award Letter (Fiscal 2006) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2006 and incorporated herein by reference).* | |
10.6 | The Farmer Bros. Co. Employee Stock Ownership Plan (filed as an exhibit to the Form 10-K for the year ended June 30, 2002 and incorporated herein by reference).* | |
10.7 | Farmer Bros. Co. Employee Stock Ownership Plan Amendment 2 (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference).* | |
10.8 | Farmer Bros. Co. Employee Stock Ownership Plan Amendment 3 (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference).* | |
10.9 | Loan Agreement dated July 21, 2003 between the Company and Wells Fargo Bank, Trustee of the Farmer Bros Co. Employee Stock Ownership Plan (filed as an exhibit to the Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by reference). | |
10.10 | Form of Change in Control Severance Agreements entered into with each of the following officers: Guenter Berger, Michael J. King and John E. Simmons (filed as an exhibit to the Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).* | |
10.11 | Change in Control Severance Agreement (Laverty), dated as of June 2, 2006, by and between Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference).* |
10.12 | Employment Agreement, dated as of June 2, 2006, by and between Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2006 and incorporated herein by reference).* | |
10.13 | Form of Indemnification Agreement for Directors and Officers of the Company (filed as Exhibit 10.01 to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2006 and incorporated herein by reference).* | |
21.1 | Subsidiaries of the registrant. (filed as an exhibit to the Form 10-K for the year ended June 30, 2005 and incorporated herein by reference.) | |
31.1 | Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) | |
31.2 | Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) | |
32.1 | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) | |
32.2 | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) | |
99.1 | List of properties. (filed herewith) |
44