SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1999 Commission file number 0-1375 FARMER BROS. CO. California 95-0725980 State of Incorporation Federal ID Number 20333 S. Normandie Avenue, Torrance, California 90502 Registrant's Address Zip (310) 787-5200 Registrant's telephone number Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES [X] NO [ ] Number of shares of Common Stock outstanding: 1,851,039 as of December 31, 1999. PAGE 1 OF 11 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Dollars in thousands, except per share data) FARMER BROS. CO. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months For the six months ended December 31, ended December 31, 1999 1998 1999 1998 Net sales $56,303 $58,408 $109,371 $112,443 Cost of goods sold 23,400 26,313 43,698 49,233 32,903 32,095 65,673 63,210 Selling expense 20,230 19,836 40,160 39,750 General and administrative expenses 2,214 1,914 4,205 3,794 22,444 21,750 44,365 43,544 Income from operations 10,459 10,345 21,308 19,666 Other income (expense): Dividend income 654 582 1,269 1,187 Interest income 2,384 2,290 4,654 4,529 Other, net 363 (42) 109 358 3,401 2,830 6,032 6,074 Income before taxes 13,860 13,175 27,340 25,740 Income taxes 5,544 5,270 10,936 10,296 Net income $ 8,316 $ 7,905 $ 16,404 $ 15,444 Earnings per common share $4.45 $4.10 $8.77 $8.02 Weighted average shares outstanding 1,870,134 1,926,414 1,870,444 1,926,414 Dividends declared per common share $0.75 $0.70 $1.50 $1.40 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, 1999 1999 ASSETS Current assets: Cash and cash equivalents $ 9,948 $ 4,403 Short term investments 94,972 122,203 Accounts and notes receivable, net 21,676 18,199 Inventories 33,680 33,675 Income tax receivable - 249 Deferred income taxes 2,391 2,391 Prepaid expenses 931 429 Total current assets 163,598 181,549 Property, plant and equipment, net 36,213 31,543 Notes receivable 3,884 3,884 Long term investments, net 105,806 81,760 Other assets 22,475 21,382 Deferred income taxes 5,724 4,718 Total assets $337,700 $324,836 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,096 $ 4,786 Accrued payroll expenses 5,156 5,388 Other 6,681 5,744 Total current liabilities 18,933 15,918 Accrued postretirement benefits 18,512 17,707 Other long term liabilities 3,500 3,500 22,012 21,207 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued 1,926,414 and outstanding 1,851,039 shares at December 31, 1999 and 1,870,754 shares at June 30, 1999 1,851 1,871 Additional paid-in capital 3,131 3,164 Retained earnings 293,680 283,191 Accumulated other comprehensive (loss) (1,907) (515) Total shareholders' equity 296,755 287,711 Total liabilities and shareholders' equity $337,700 $324,836 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended December 31, 1999 1998 Cash flows from operating activities: Net Income $ 16,404 $ 15,444 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,872 2,770 Other 43 (55) Net loss (gain) on investments 182 (158) Changes in assets and liabilities: Accounts and notes receivable (3,545) (2,349) Inventories (5) 2,448 Income tax receivable 249 453 Prepaid expenses and other assets (1,633) (952) Accounts payable 2,310 3,712 Accrued payroll expenses and other liabilities 705 (1,816) Accrued postretirement benefits 805 887 Total adjustments $ 1,983 $ 4,940 Net cash provided by operating activities $ 18,387 $ 20,384 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the six months ended December 31, 1999 1998 Net cash provided by operating activities: $ 18,387 $ 20,384 Cash flows from investing activities: Purchases of property, plant and equipment (7,722) (2,528) Proceeds from sales of property, plant and equipment 176 62 Purchases of investments (162,031) (325,859) Proceeds from sales of investments 162,636 312,627 Notes issued - (54) Notes repaid 68 88 Net cash used in investing activities (6,873) (15,664) Cash flows from financing activities: Dividends paid (2,809) (2,697) Purchase of common stock (3,160) - Net cash used in financing activities (5,969) (2,697) Net increase in cash and cash equivalents 5,545 2,023 Cash and cash equivalents at beginning of year 4,403 6,800 Cash and cash equivalents at end of quarter $ 9,948 $ 8,823 Supplemental disclosure of cash flow information: Income tax payments $ 9,993 $ 10,504 The accompanying notes are an integral part of these financial statements. Notes to Consolidated Financial Statements (Unaudited) Note 1. Unaudited Financial Statements The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is Management's opinion that all adjustments of a normal recurring nature necessary for a fair statement of the results of operations for the interim periods have been made. Note 2. Investments The Company hedges interest rate risk in its portfolio of preferred stock. Deferred gains and losses associated with the hedge are $265,000 and ($923,000) at December 31, 1999 and June 30, 1999, respectively. Gross Gross (In thousands) Unrealized Unrealized Fair December 31, 1999 Cost Loss Gain Value Current Assets Commercial Paper $ - - - - U.S. Government Obligations 95,283 (311) - $ 94,972 $ 95,283 (311) - $ 94,972 Non-Current Assets U.S. Government Obligations 59,892 (1,373) - 58,519 Municipal debt 1,695 (9) - 1,686 Preferred stocks 38,967 (2,228) 803 37,542 Corporate bonds 3,083 (341) 4 2,746 Liquid asset fund and other 4,304 - 1,009 5,313 $107,941 (3,951) 1,816 $105,806 Gross Gross (In thousands) Unrealized Unrealized Fair June 30, 1999 Cost Loss Gain Value Current Assets Commercial Paper $ 11,895 - 27 $ 11,922 U.S. Government Obligations 110,368 (126) 39 110,281 $122,263 (126) 66 $122,203 Non-Current Assets U.S. Government Obligations $ 35,015 (842) - $ 34,173 Municipal debt 1,695 (8) - 1,687 Preferred stocks 37,538 (548) 2,049 39,039 Corporate bonds 5,075 (461) - 4,614 Liquid asset fund and other 2,247 - - 2,247 $ 81,570 (1,859) 2,049 $ 81,760 The contractual maturities of debt securities classified as current and non- current available for sale are as follows: Maturities Fair Value (In thousands) 12/31/99 06/30/99 Within 1 year $ 94,972 $122,203 After 1 year through 5 years 60,205 35,860 $155,177 $158,063 Gross realized gains and losses from available for sale securities were $714,000 and $(897,000) at December 31, 1999, respectively, and $979,000 and $(821,000) at December 31, 1998, respectively. Note 3. Inventories (In thousands) Processed Unprocessed Total December 31, 1999 Coffee $ 3,822 $ 9,220 $13,042 Allied products 9,041 4,940 13,981 Coffee brewing equipment 1,823 4,834 6,657 $14,686 $18,994 $33,680 June 30, 1999 Coffee $ 3,619 $ 9,314 $12,933 Allied products 11,078 3,424 14,502 Coffee brewing equipment 2,258 3,982 6,240 $16,955 $16,720 $33,675 Note 4. Comprehensive Income Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS 130) "Reporting Comprehensive Income". SFAS 130 requires disclosure of total non-stockholder changes in equity in interim periods and additional disclosures of the components of non-stockholder changes in equity on an annual basis. Total non-stockholder changes in equity includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. For the three months For the six months ended December 31, ended December 31, (In thousands) 1999 1998 1999 1998 Net income $ 8,316 $ 7,905 $16,404 $15,444 Unrealized investment gains (losses), net (1,010) (736) (1,392) (1,641) Total comprehensive income $ 7,306 $ 7,169 $15,012 $13,803 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales for the second quarter of fiscal 2000 decreased 4% to $56,303,000 from $58,408,000 in the same quarter of the prior fiscal year and net sales for the first half of fiscal 2000 decreased 3% to $109,371,000 from $112,443,000 in the first half of fiscal 1999. Decreased roast coffee sales volume and lower roast coffee prices offset increased sales of allied products and combined with lower green coffee costs resulted in increased gross profit. Second quarter gross profit increased 3% to $32,903,000 or 58% of sales, as compared to $32,095,000, or 55% of sales, in the same quarter of fiscal 1999. Gross profit for the first half of fiscal 2000 increased 4% to $65,673,000 or 60% of sales from $63,210,000 or 56% of sales during the same period of fiscal 1999. Operating expenses increased 3% to $22,444,000 in the second quarter of fiscal 2000 as compared to $21,750,000 in the second quarter of fiscal 1999. Operating expenses for the first half of fiscal 1999 increased 2% to $44,365,000 from $43,544,000 during the same period of fiscal 1999. Income after taxes for the second quarter of fiscal 2000 reached $8,316,000, or $4.45 per share, as compared to $8,088,000, or $4.32 per share, in the first quarter of fiscal 2000 and $7,905,000, or $4.10 per share, in the same quarter of fiscal 1999. Net income for the first half of fiscal 2000 reached $16,404,000, or $8.77 per share, as compared to $15,444,000, or $8.02 per share, in the first six months of fiscal 1999. QUARTERLY SUMMARY OF RESULTS (In thousands of dollars) 12/31/98 03/31/99 06/30/99 09/30/99 12/31/99 Net sales 58,408 55,207 53,921 53,068 56,303 Gross profit 32,095 35,153 33,374 32,770 32,903 Operating income 10,345 12,144 4,960 10,849 10,459 Net income 7,905 9,159 4,262 8,088 8,316 (As a percentage of sales) 12/31/98 03/31/99 06/30/99 09/30/99 12/31/99 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 54.95 63.67 61.89 61.75 58.44 Operating income 17.71 22.00 9.20 20.44 18.58 Net income 13.53 16.59 7.90 15.24 14.77 (In dollars) 12/31/98 03/31/99 06/30/99 09/30/99 12/31/99 EPS 4.10 4.83 2.29 4.32 4.45 Employee Stock Ownership Plan On December 21, 1999, Registrant filed a Form 8-K in which the Company announced that it established an employee stock ownership plan (ESOP) effective January 1, 2000. This plan provides the Registrant with a flexible means of acquiring Company stock from any source. In addition to providing existing employees with a long-term incentive plan, the ESOP also helps make the Company's compensation package more competitive in a tight labor market and it provides all shareholders with a source of liquidity. The plan will initially be established as a leveraged ESOP and the Company will be the initial lender. The Company expects to make the necessary investment in this program to purchase up to 300,000 shares of Company stock at times and in increments compatible with other corporate objectives. Approximately 77,500 shares, owned by a subsidiary, have been acquired for this purpose and Registrant expects to make additional share contributions either through open market purchases and negotiated purchase transactions or by issuing new shares to the ESOP. Year 2000 Issues During this early part of year 2000, Registrant has not realized any material effect of year 2000 issues. It is to early to conclude that no further issues need be addressed, and the Company is proceeding with its business plan. Market Risk Disclosures Financial Markets Securities are recorded at fair value and unrealized gains or losses have been recorded as a separate component of shareholders equity. The Company maintains two distinct portfolios of securities, both portfolios are classified as available for sale. The Company's portfolio of investment grade money market instruments includes bankers acceptances, discount commercial paper, federal agency issues and treasury securities. As of December 31, 1999, over 40% of these funds were invested in instruments with maturities shorter than three months. The remaining balance matures during fiscal 2001 and 2002. This portfolio's interest rate risk is unhedged. Its average maturity is approximately 255 days and a 100 basis point move in the Fed Funds Rate is illustrated in the following table. Interest Rate Changes (In thousands) Change in Market Market Value of December 31, 1999 Value of Fixed Fixed Income Investments Income Investments - -100 b.p. $164,632 1,590 unchanged $163,042 - +100 b.p. $161,452 (1,590) The Company is exposed to market value risk arising from changes in interest rates on its portfolio of preferred securities. The Company reviews the interest rate sensitivity of these securities and (a) enters into "short positions" in futures contracts on U.S. Treasury securities or (b) holds put options on such futures contracts in order to reduce the impact of certain interest rate changes on such preferred stocks. Specifically, the Company attempts to manage the risk arising from changes in the general level of interest rates. The Company does not transact in futures contract 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 between the prices of preferred securities holdings, the yields on U.S. Treasury securities, and related futures and options. Interest Rate Changes (In thousands) Market Value at December 31, 1999 Change in Market Preferred Futures and Total Value of Total Securities Options Portfolio Portfolio - -200 basis points $47,252.4 $0.9 $47,253.3 $4,624.3 ("b.p.") - -100 b.p 43,898.7 179.5 44,078.2 1,449.2 Unchanged 40,378.2 2,250.8 42,629.0 0.0 +100 b.p. 37,037.1 5,638.8 42,675.9 46.9 +200 b.p. 34,023.8 8,501.3 42,525.1 (104.0) 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 security held, the slope of the Treasury yield cure, the expected volatility of Treasury yields, and the costs of using futures and/or options. At December 31, 1999 the hedge consisted entirely of put options on the U.S. Treasury Bond futures contract. Commodity Price Changes The Company is exposed to commodity price risk arising from changes in the market price of green coffee. Registrant prices its inventory on the LIFO basis. In the normal course of business, the Company enters into commodity purchase agreements with suppliers, and futures contracts to hedge exposure to inventory price fluctuations. The Company does not transact in futures contracts or put options for speculative purposes. The following table demonstrates the impact of changes in the price of green coffee inventory and hedge instruments at December 31, 1999. It assumes an immediate change in the price of green coffee, and the demonstrable relationship between the price of green coffee and the valuations of coffee index futures and put options and relevant commodity purchase agreements at December 31, 1999, and does not take into account fluctuations of inventory levels and futures and options activity. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee December 31, 1999 Change in Change Inventory Futures & Options Total Market Value - -10% $13,042 $ 2,046 $15,088 $ 1,683 unchanged $13,042 $ 363 $13,405 - +10% $13,042 $(1,320) $11,722 $(1,683) At December 31, 1999 the hedge consisted of commodity futures with maturities shorter than three months. PART II OTHER INFORMATION Item 1. Legal proceedings. not applicable. Item 2. Changes in securities. none. Item 3. Defaults upon senior securities. none. Item 4. Submission of matters to a vote of security holders. none. Item 5. Other information. none. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. not applicable. (4) Instruments defining the rights of security holders, including indentures. not applicable. (11) Statement re computations of per share earnings. not applicable. (15) Letter re unaudited interim financial information. not applicable. (18) Letter re change in accounting principles. not applicable. (19) Report furnished to security holders. not applicable. (22) Published report regarding matters submitted to vote of security holders. not applicable. (23) Consents of experts and counsel. not applicable. (24) Power of attorney. not applicable. (27) Financial Data Schedule See attached Form Ex-27. (99) Additional exhibits. not applicable. (b) Reports on Form 8-K December 21, 1999. SIGNATURES Pursuant to the requirements 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. Date: February 14, 2000 FARMER BROS. CO. (Registrant) John E. Simmons John E. Simmons Treasurer and Chief Financial Officer