UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM
10-K/A10-KANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30,
20032006OR
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 NumberRegistrant 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: Noneincluding area code 310-787-5200Securities 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 ofeach class Namethe Securities Act. YES þ NO oIndicate 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 OTCthe Act. YES o NO þIndicate 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 theRegistrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X]þ NO[ ]oIndicate 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]oIndicate 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 theþThe aggregate market value of the voting and non-voting common
sharesequity held by non-affiliatesofcomputed by reference to theRegistrantclosing 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, anddistribute 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 preparefood,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 productsmake uprepresented approximately 50% of our totalsales. Nosales and no single product other than coffeeaccountsaccounted for more than 10%or moreofrevenue. Our products are sold directly from delivery trucks by sales representatives who solicit, sell, and otherwise maintainourcustomer'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, whichisalso 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 grownmainlyoutside the United States and can be subject to volatile pricefluctuations resulting from supply concerns related to crop availabilityfluctuations. Weather, real or perceived shortages, political unrest, labor actions andrelated conditions such as weather, political events and social instabilityarmed conflict in coffee producingnations. Governmentnations, and government actions, including treaties and traderestrictionscontrols betweenour ownthe U.S. andforeign governmentscoffee producing nations, canalso 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 tothecoffee 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 astea, drycocoa, dehydrated milk products, salt and sugar.All of theseThese raw materials are agricultural products and can be subject to wide costvariation, butfluctuations. Such fluctuations, however, historicallyno combination of these raw materials hashave not hadthea material effect on our operatingresults 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 salestoduring the summer months from seasonal businesses located inpopularvacation areas.Distribution: Our productsSales are
distributedmade “off-truck” to our institutional food service customers at their places of business by our sales representatives who are responsible for soliciting, sellingdivisionsand collecting frombranchesand otherwisemaintaining our customer accounts. Our distribution trucks are replenished from warehouses located in
mosta number ofthe largecities 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 thesewarehouses and try to minimize our inventorywarehouses. Inventory levelswithinare maintained at each branchwarehouse. 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 accountswouldis not likely to havenoa 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 saleseffort, 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 CoffeeCompany 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:OperationsWe have no material revenues
that resultfrom foreign operations.Other:On June 30,
2003,2006 we employed1,104 employees; 4611,091 employees, 441 of whom are subject to collective bargaining agreements.The effects of complianceCompliance with governmentprovisions regulatingregulations relating to the discharge of materials into the environmenthavehas 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 makeitsavailable, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Qorand current reports on Form 8-Kreports orincluding amendments theretoavailableas 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 thepublic on a real time basis on the Commission's EDGAR website. The EDGAR websiteproper recording and reporting of our financial results, there can befound in the "Filingsno assurance that future regulations, implementing SOX andForms (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, willmake 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 stageproductour products inmore 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 awhole, and mostwhole. Our warehouses vary in size from2,500-12,000 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 believeboth theour existing plant andthe 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 HoldersNone. Executive Officers Of Registrant Name Age Position Last Five Years Roy F. Farmer 87 Chairman, Chief Executive Officer priorDuring 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 ofChairman, 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 ofAnglin, 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 andRelated Shareholder MattersIssuer Purchases of Equity SecuritiesWe have one class of common stock which is traded
inon theoverNASDAQ National Market under thecounter market.symbol “FARM.” Thebidfollowing table sets forth the high and low sales pricesindicated belowof the shares of Common Stock of the Company. Prices are as reportedbyon the NASDAQ National Market and represent prices between dealers, without including retailmark 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 September11, 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 onJuly 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 OperationsManagement's DiscussionManagement’s discussion and
Analysisanalysis discusses the results of operations as reflected in theCompany'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 and20012004 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” describedbelow.in Item 1 of this report.Critical Accounting Policies
Management'sOverview
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 acceptedin 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 anon-goingongoing basis, we evaluate our estimates, including those related to inventory valuation, including LIFO reserves, the allowance for doubtful accounts, deferred tax assets, liabilitiesrelatedrelating to retirement benefits, liabilities resulting from self-insurance of ourworker'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 majorUSU.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:AccountsWe 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 theFirst In, First Outfirst in, first out (FIFO) basis. We regularly evaluate these inventories to determinethatwhether market conditions are correctly reflected in the recorded carrying value.Self-Insurance
Retention:RetentionWe are self-insured for California
workers'workers’ compensation insurance andutilizeuse historical analysis to determine and record the estimates of expected future expenses resulting fromworker'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:PlansWe 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 couldhave 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:TaxesDeferred 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 ourdeferredtax 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 aswe 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 yearwill be provided by internal sources. Wehavedo 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 offunds: 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 andwill purchase land in Bakersfield, Californiaordered new packaging for our entire product line. The updated designs employ the use of bright colors toconstruct replacementsbetter appeal to modern tastes. The roll-out forexisting facilities in those locations. We expectthe new packaging is expected to beginconstructionintimeOctober 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 newwarehouses 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 havecompleted the first year of a multi-year upgrading ofevaluated ourinternal 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 toconvertimplement new Route Sales application software to further enhance ouralliedability to evaluate customer, product andcoffee 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 onthese 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 ourown 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 resultgross profitdecreased 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 administrativeexpenses, 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 fiscal2003,2006, certain expenses are beyond our control, such as gasoline and diesel prices which directly impact our distribution costs. Moreover, during fiscal 2006 we also experiencedan 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, or49%42% of sales, in fiscal2002.2005. 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 bydecreasesdeclines inlegal expenses $941,000self-insured employee medical costs, IT project consulting costs andpayroll $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 fiscal2003 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 fiscal2002.2005. This increase is primarily the result of (1) higher interest rates during fiscal 2006 and (2) thevolatilityreduction oflosses 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 tobe realized as incurred. Prior to that time our hedging efforts reduced mucha net loss ofthis 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 fiscal2003 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, or24%37% of sales, in fiscal2002. 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 ofsales,$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 fiscal2002. 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 fiscal2002. 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 share2003 2002 2001 $13.02 $16.54 $19.62 Percentage change: 2003-2002 2002-2001 Net sales -2.1% -4.4% Costofgoods 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 inearnings 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
obligationsObligationsThe 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
One Year
2-3 Years
4-5 Years
More Than
5 years
(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, over95%90% of these funds were invested intreasuryU.S. Treasury securities andmore than 50%approximately 43% of these issues have maturities shorter than12090 days. Thisportfolio'sportfolio’s interest rate risk is not hedged and its average maturity is approximately15080 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 coffeecontracts. 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 theimpactCompany 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 the18
Report of Independent Registered Public Accounting Firm
The Board of Directors and
ShareholdersStockholders of
Farmer Bros. Co. and SubsidiaryWe have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and Subsidiary
(the "Company")as of June 30,20032006 and2002,2005, and the related consolidated statements ofincome,operations, stockholders’ equity and cash flowsand shareholders' equityfor each of the three years in the period ended June 30,2003.2006. These financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion onthethese financial statements based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited 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 and2002,2005, 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 withaccounting 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 September8, 20037, 2006 expressed an unqualified opinion thereon.
Los Angeles, California
September 7, 2006
19
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS(Dollars
(Dollars in thousands, except sharedata) June 30, 2003 June 30, 2002 ASSETS Current assets: Cashandcash 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 $417,524per 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 OFINCOME (DollarsOPERATIONS
(Dollars in thousands, except sharedata) 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 Generalandadministrative 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 Incomepercommon share: Before cumulative effect of accounting change $13.02 $16.54 $19.79 Cumulative effect of accounting change -$0.17 Net income per commonshare$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 1,843,392data)
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 OFCASH 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
Shares
Stock
Amount
Additional
Paid-in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Other
Comprehensive
Income
(Loss)
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 -1,046 369,145these financial statements.23
Notes to Consolidated Financial Statements
Note
11. Summary of Significant Accounting PoliciesOrganization
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
significantinter-company balances and transactions have been eliminated.Financial Statement Preparation
The preparation of financial statements in conformity with
accounting principlesU.S. generally acceptedin 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 lesswhen purchasedto be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.Restricted CashInvestments
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 and20022005 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 theCompany'sCompany’s customer base and their dispersion across many different geographic areas. The trade receivables areshort-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 theFirst 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 facilitiesis 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
SalesProducts are sold and delivered to the
costCompany’s customers at their places ofproducts sold are recordedbusiness by the Company’s route sales employees. Revenue is recognized at the timeof deliverythe Company’s sales representatives physically deliver products tothe customer.customers and title passes.Net Income (Loss) Per
CommonShareBasic earningsNet income (loss) per share
ishas been computedby 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 theCompany'sCompany’s Employee Stock Ownership Plan (see Note6)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
TheWhen 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 assetsexistsexisted 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 to2006.2010.Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year presentation.
New
pronouncementsPronouncementsIn
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 Statement133 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 forDerivative 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 forcontracts entered into or modifiedaccounting changes andfor hedging relationships designatedcorrections of errors made in fiscal years beginning afterJune 30, 2003.December 15, 2005. The Company will adopt this Statement effective July 1, 2006, and does not expect the adoptionof this statementto have a material impact onits operating results or financial position. In June 2002,theFASB 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 orstatement 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 InstrumentsIn 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 BalanceDoubtful 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 $37,361are 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) orgreater than the LIFO cost by approximately$122,000$18,750,000 and$(491,000)$16,506,000 as of June200330, 2006 and2002,2005, respectively.The change in the
Company'sCompany’s green coffee and allied product inventories during fiscal2003, 2002,2006, 2005, and20012004 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) and1,283,000,($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 and20012004 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 PlansThe 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
contributorydefined benefitpensionplan for all employees not covered under a collective bargaining agreement (Farmer Bros. Co. Plan) anda non-contributorydefined 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
As of June 30,
Brewmatic Plan
As of June 30,
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 arate 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 theplan 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 aredetermined underused to develop afinal payment formula (non-bargaining) and flat benefit formula (bargaining).core asset allocation based on thespecific 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 inThe following weighted average assumptions were used to determine the benefit
obligation Benefit obligation atobligations and thebeginning 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 Unrecognizednetasset 0 -657 0 0 Unrecognized net (gain)/loss 23,330 -88 4,682 17 Unrecognized prior service cost 800 1,062 1,410 1,592 Net amount recognized $21,524 $20,754 -$24,630 -$22,726 Statements of Financial Position Prepaid pension cost 19,854 $20,754 Accrued pension liability -411 0 Intangible asset 420 0 Accumulated other comprehensive income 1,661 0 Net amount recognized $21,524 $20,754periodic benefit cost.Weighted average assumptions
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 ofnet 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 ontheamounts 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 changeindecreased theassumed 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 ofJune 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
Part D Subsidy
Without Medicare
Part D Subsidy
Medicare
Part D Subsidy
(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 ofreturn 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 theThe Farmer Bros. Co. Employee Stock Ownership Plan (ESOP) was established in 2000 to provide benefits to all employees. The
Board of Directors authorizedplan is aloan of up to $50,000,000 toleveraged ESOP in which Company is theESOP 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 theCompany'sCompany’s discretionary plan contributions over a fifteen year termatwith 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 $3902006.
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 proceedsare 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 ESOPShares"Shares” and are excluded from earnings per share calculations.During the fiscal years ended June 30,
2003, 20022006, 2005 and20012004 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 and2001,2004, respectively, is recorded as additionalpaid 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 $3,8602010, 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 LiabilitiesOther 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 ContingenciesThe 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 and2001,2004, 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 theCompany'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 theCompany'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
2005
December 31
2005
March 31
2006
June 30
2006
(In thousands except share data)
Net sales
$
48,424
$
54,950
$
53,561
$
50,518
Gross profit
$
28,885
$
33,154
$
32,039
$
28,465
(Loss) income from operations
$
(1,124
)
$
3,149
$
67
$
(5,057
)
Net (loss) income
$
(1,079
)
$
4,164
$
2,463
$
(792
)
Net (loss) income per common
share
$
(0.08
)
$
0.30
$
0.18
$
(0.06
)
September 30
2004
December 31
2004
March 31
2005
June 30
2005
Net sales
$
46,708
$
51,220
$
50,271
$
50,221
Gross profit
$
29,239
$
30,298
$
29,343
$
26,576
Income (loss) from operations
$
1,002
$
699
$
(2,167
)
$
(6,117
)
Net income (loss)
$
1,497
$
(4,068
)
$
856
$
(3,712
)
Net income (loss) per common
share
$
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'sProceduresDisclosure 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 procedureswill 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, andprocedures 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 ofevaluation bythe Chief Executive Officer and Chief FinancialOfficer.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 SubsidiaryWe 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
September 7, 200639
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 priorThe information required by this item will be subsequently incorporated herein by reference to
March 19, 2003 Roy E. Farmer (1) 51 1993 President, Chief Executive Officer since March 19, 2003, Chief Operating Officer previously Guenter W. Berger 66 1980 Vice President - Production Lewis A. Coffman 84 1983 Retired (formerly Vice President - Sales) John H. Merrell 59 2001 Partner in Accounting Firm of Hutchinsonour Proxy Statement expected to be dated andBloodgood LLP, Glendale, California John Samore, Jr. 57 2003 Independent Consultant and CPA, Los Angeles, California since 2002; Retired Tax Partnerfiled with theAccounting 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 offilings received by it or representations from Company officers and directors,the copies of such reports furnished to the Companybelievesand written representations thatall filing requirements applicable to Company officers and directorsno other reports weremet 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 duringfiscal 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 forthe 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 theCompany'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 ofthe Company's performance in 2003, although financial results were belowthoseachievedfilings listed in theprior 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 bereliable, butdated and filed with thepublisher is not responsible for any errorsSEC on oromissions 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 MattersThe
following are all persons knowninformation required by this item will be subsequently incorporated herein by reference tomanagement who beneficially own more than 5% of the Company's common stock: Amountour Proxy Statement expected to be dated andNature 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/Afiled with theSecurities and Exchange Commission dated July 31, 2003 by Franklin Mutual Advisers, LLC ("Franklin"), FranklinSEC onthat 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 oneormore 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 FeesServicesThe
aggregate fees billedinformation required byErnst & Young, LLP forthis item will be subsequently incorporated herein by reference to our Proxy Statement expected to be dated and filed with theaudit of the Company's annual financial statements and review of financial statements included in the Company's quarterly reportsSEC onForm 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 LLPorother independent accountants are subject to prior approval by the Audit Committee. Prior approval was given for all services provided by Ernst & Young LLP in fiscal 2003before October 28, 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 and2002.2005.Consolidated Statements of
IncomeOperations for the Years Ended
June 30,2003, 20022006, 2005 and2001.2004.Consolidated Statements of Cash Flows for the Years Ended
June 30,2003, 20022006, 2005 and2001.2004.Consolidated Statements of
Shareholders'Stockholders’ Equity For the Years
Ended June 30,2003, 2002,2006, 2005 and2001.2004.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 statementsofand notes thereto.(b) Reports3. The exhibits to this Annual Report on Form
8-K. A form 8-K dated April 30, 200310-K are listed on the accompanying index to exhibits and are incorporated herein by reference or are filedwith 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 theseven 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 bythe 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