SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation Federal ID Number
20333 South Normandie Avenue, Torrance, California 90502
Registrant's address
(310) 787-5200
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on
which registered
Common stock, $1.00 par value OTC
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 requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
1, 2003: 1,926,414 and the aggregate market value of the common shares
held by non-affiliates of the Registrant was approximately $638 million.
PART I
Item 1. Business
General: Farmer Bros. Co. was incorporated in California in 1923. We
manufacture and distribute a product line that includes roasted coffee,
coffee related products (coffee filters, stir sticks, sugar and creamers),
teas, cocoa, spices, and soup and beverage bases to restaurants and other
institutional establishments that prepare food, including hotels, hospitals,
convenience stores and fast food outlets. The product line presently includes
over 300 items. Roasted coffee products make up 50% of total sales. No
single product other than coffee accounts for 10% or more of revenue. Our
products are sold directly from delivery trucks by sales representatives who
solicit, sell, and otherwise maintain our customer's accounts.
Raw Materials and Supplies: Our primary raw material is green coffee.
Coffee purchasing, roasting and packaging takes place at our Torrance,
California plant, which is also the distribution hub for our branches.
Green coffee is an agricultural commodity. We purchase our green coffee
through domestic commodity brokers. Coffee is grown mainly outside the
United States and can be subject to volatile price fluctuations resulting from
supply concerns related to crop availability and related conditions such as
weather, political events and social instability in coffee producing
nations. Government actions and trade restrictions between our own and
foreign governments can also influence prices.
Green coffee prices are affected by the actions of producer organizations.
The most prominent of these are the Colombian Coffee Federation (CCF), the
Association of Coffee Producing Countries (ACPC) and the International
Coffee Organization (ICO). These organizations seek to increase green
coffee prices largely by attempting to restrict supplies, thereby limiting
the availability of green coffee to the coffee consuming nations. In recent
years the green coffee market has been influenced by additional production from
a variety of producers, notably Vietnam and Brazil. These additional supplies
have had the tendency to hold prices down.
Other raw materials used in the manufacture of allied products include a
wide variety of spices, including pepper, chilies, oregano & thyme, as well as
tea, dry cocoa, dehydrated milk products, salt and sugar. All of these
agricultural products can be subject to wide cost variation, but historically
no combination of these raw materials has had the material effect on our
operating results as has green coffee.
Trademarks & Patents: We own approximately 38 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 the best sales months. However, our product line and geographic
diversity provides some sales stability during the warmer months when
coffee consumption ordinarily decreases. Additionally, the summer months
usually experience an increase in sales to seasonal businesses located in
popular vacation areas.
Distribution: Our products are distributed by our selling divisions from
branches located in most of the large cities in the western United
States. We operate our own long haul trucking fleet to more effectively
control the supply of products to these warehouses and try to minimize our
inventory levels within each branch warehouse.
Customers: No customer represents a significant concentration of sales.
The loss of one or more of our larger customer accounts would have no
material adverse effect on our operations. Customer contact and service
quality, which is integral to our sales effort, is often secondary to
product pricing for customers with their own distribution systems. Such
customers can be very price sensitive.
Competition: We face competition from many sources, including multi-
national manufacturers of retail products such as Procter & Gamble and Sara
Lee Foods, grocery distributors Sysco and U.S. Food Service and
regional coffee roasters Boyd Coffee Company and Lingle Bros. Coffee. We may
have some competitive advantages due to our longevity, strong regional roots
and sales and service force. Our customer base is price sensitive and we are
often faced with price competition.
Working Capital: We finance our operations internally, and we believe that
working capital from internal sources will be adequate for the coming year.
Foreign Operations: We have no material revenues that result from foreign
operations.
Other: On June 30, 2003, we employed 1,104 employees; 461 are subject to
collective bargaining agreements. The effects of compliance with
government provisions regulating discharge of materials into the
environment have 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's Internet website address is http://www.farmerbroscousa.com.
Registrant does not make its Form 10-K, 10-Q or 8-K reports or amendments
thereto available on its website. The Company believes that doing so is
unnecessary inasmuch as those reports are available to the public on a real
time basis on the Commission's EDGAR website. The EDGAR website can be found
in the "Filings and Forms (EDGAR)" section of the Securities & Exchange
Commission site, http://www.sec.gov/edgar/searchedgar/companysearch.html. For
those who are unable to access the Commission's website, the Company will make
paper copies of its form 10-K, 10-Q and 8-K filings and amendments thereto
available without charge upon written request addressed to Mr. John E. Simmons,
Chief Financial Officer, Farmer Bros. Co., 20333 S. Normandie Avenue, Torrance,
CA 90502.
Item 2. Properties
Our largest and most significant facility is the roasting plant, warehouses
and administrative offices in Torrance, California. This facility is our
primary manufacturing facility and the distribution hub for our fleet.
We stage product in more than 100 small branch warehouses throughout our
service area. These warehouses taken together represent a vital part of
our business, but no individual warehouse is material to the group as a
whole, and most warehouses vary in size from 2,500-12,000 sq. feet. We
believe both the existing plant and the distribution warehouses will continue
to provide adequate capacity for the foreseeable future. A complete
list of facilities is found in Exhibit (99).
Item 3. Legal Proceedings
We are both defendant and plaintiff in various legal proceedings incidental
to our business which are ordinary and routine. It is our opinion that the
resolution of these lawsuits will not have a material impact on our financial
condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Executive Officers Of Registrant
Name Age Position Last Five Years
Roy F. Farmer 87 Chairman, Chief Executive Officer prior to
March 19, 2003
Roy E. Farmer 51 President, Chief Executive Officer since March 19,
2003, Chief Operating Officer previously, son of
Chairman, R.F. Farmer
Guenter W. Berger 66 Vice President - Production
Kenneth R. Carson 63 Vice President - Sales
John E. Simmons 52 Treasurer, Chief Financial Officer
John M. Anglin(1) 56 Secretary since 2003, and Partner in Law Firm of Anglin,
Flewelling, Rasmussen, Campbell & Trytten, LLP,
Pasadena, California since 2003; partner in
Law Firm of Walker, Wright, Tyler and Ward,
LLP, Los Angeles, California, previously.
(1) Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP provides legal
services to the Company.
All officers are elected annually by the Board of Directors and serve at the
pleasure of the Board.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
We have one class of common stock which is traded in the over the counter
market. The bid prices indicated below are as reported by NASDAQ and
represent prices between dealers, without including retail mark up, mark
down or commission, and do not necessarily represent actual trades.
2003 2002
High Low Dividend High Low Dividend
1st Quarter $356.00 $304.00 $0.90 $259.50 $215.00 $0.85
2nd Quarter $335.00 $301.01 $0.90 $267.75 $192.00 $0.85
3rd Quarter $319.99 $303.50 $0.90 $304.00 $268.98 $0.85
4th Quarter $365.99 $303.24 $0.90 $370.99 $306.00 $0.85
There were 3,415 holders of record on September 11, 2003.
Item 6. Selected Financial Data
(In thousands, except per share data)
2003 2002 2001 2000 1999
Net sales $201,558 $205,857 $215,431 $218,688 $221,571
Income from operations $23,888 $38,210 $42,115 $48,965 $36,770
Net Income $23,629 $30,560 $36,178 $37,576 $28,865
Net income per share $13.02 $16.54 $19.62 $20.22 $15.16
Proforma net income (a) $36,488 $35,445 $27,327
Proforma net income (b) per share $19.79 $19.08 $14.36
Total assets $416,415 $417,524 $390,395 $353,467 $324,836
Dividends per share $3.60 $3.40 $3.20 $3.00 $2.80
(a) Upon adoption of SFAS No. 133 on July 1, 2000, the Company reclassified
its investments held as "available for sale" to the "trading" category
which resulted in an entry to recognize the accumulated unrealized loss of
$3,894,000. The "proforma" amounts above summarize the effect on earnings
and earnings per share on prior years' results as if the change had been in
effect for those periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis discusses the results of operations as
reflected in the Company's consolidated financial statements. The following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors.
The results of operations for the years ended June 30, 2003, 2002 and 2001 are
not necessarily indicative of the results that may be expected for any future
period. The following discussion should be read in combination with the
consolidated financial statements and the notes thereto included in Item 8 of
this report and with the "Risk Factors" described below.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to inventory valuation, including LIFO reserves, the allowance
for doubtful accounts, deferred tax assets, liabilities related to retirement
benefits, liabilities resulting from self-insurance of our worker's
compensation liabilities, and litigation. We base our estimates on historical
experience and other relevant factors that are believed to be reasonable under
the circumstances.
While we believe that the historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated financial statements, actual results may differ
from these estimates, which could require the Company to make adjustments to
these estimates in future periods.
Investments: Our investments consist of investment grade marketable debt
instruments issued by the US Government and major US and foreign corporations,
equity securities, primarily preferred stock, and various derivative
instruments, primarily exchange traded treasury futures and options, green
coffee forward contracts and commodity purchase agreements. All derivatives
not designated as accounting hedges are marked to market and changes are
recognized in current earnings. The fair value of derivative instruments is
based upon broker quotes where possible.
Allowance for Doubtful Accounts: We maintain an allowance for estimated
losses resulting from the inability of our customers to meet their obligations.
Our ability to maintain a relatively small reserve is directly related to our
ability to collect from our customers when our sales people regularly interact
with our customers in person. This method of operation has provided us with a
historically low bad debt experience.
Inventories: Inventories are valued at the lower of cost or market and the
costs of coffee and allied products are determined on the Last In, First Out
(LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for
on the First In, First Out (FIFO) basis. We regularly evaluate these
inventories to determine that market conditions are correctly reflected in the
recorded carrying value.
Self-Insurance Retention: We are self-insured for California workers'
compensation insurance and utilize historical analysis to determine and record
the estimates of expected future expenses resulting from worker's compensation
claims. Additionally, we accrue for estimated losses not covered by insurance
for liability, auto, medical and fire up to the deductible amounts.
Retirement Plans: We have two defined benefit plans that provide retirement
benefits for the majority of our employees (the balance of our employees are
covered by union defined benefit plans). We obtain actuarial valuations for
both plans and at present we discount the pension obligations using 5.60%
discount rate and we estimate an 8% return on plan assets. Our retiree
medical plan is not funded and shares the same discount rate as the defined
benefit plans. We also project an initial medical trend rate of 10% ultimately
reducing to 5.5% in 6 years.
The performance of the stock market and other investments as well as the
overall health of the economy can have a material effect on pension investment
returns and these assumptions. A change in these assumptions could have an
effect on operating results.
Income Taxes: Deferred income taxes are determined based on the temporary
differences between the financial reporting and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse. We do not presently have a valuation
allowance for our deferred tax assets as we currently believe it is more likely
than not that we will realize our deferred tax assets.
Liquidity and Capital Resources
We have been able to maintain a strong working capital position, and
believe that our short and long term cash requirements for the coming
year will be provided by internal sources. We have no major commitments
for capital expenditures at this time. The following projects could require a
substantial commitment of funds:
1. We have purchased land in Chico, California and will purchase land in
Bakersfield, California to construct replacements for existing facilities in
those locations. We expect to begin construction in time to occupy the new
warehouses before the end of fiscal 2004. The combined cost for the two
warehouses is not expected to exceed $3,000,000.
2. We have completed the first year of a multi-year upgrading of our
internal management information system. During 2003 we expended $4,767,000 for
hardware, software, infrastructure, training and consulting. At this time our
financial systems (general ledger, accounts receivable, accounts payable, fixed
assets and payroll) are on the new system. In the coming year we expect to
convert our allied and coffee manufacturing plants followed by our selling
divisions. We expect the additional costs associated with this project in 2004
could exceed $3,000,000, not including the added fixed costs to maintain the
new system.
3. On July 23, 2003 the Board of Directors authorized a loan to the
Company's Employee Stock Ownership Plan for the purchase of 129,575 additional
shares of the Company's common stock. Based upon the closing price of the
Company's stock on September 22, 2003, this could require an expenditure of
$42,900,000. The ESOP was created in 2000 as a way to better align the long-
term interests of its employees and shareholders. The Company has loaned the
ESOP $39,580,000 for this same purpose. On June 30, 2003 the ESOP loan balance
was $35,227,000.
(In thousands)
2003 2002 2001
Current assets $346,617 $348,434 $318,879
Current liabilities $16,659 $16,259 $17,655
Working capital $329,958 $332,175 $301,334
Capital expenditures $9,089 $5,039 $5,912
Results of Operations
Years ended June 30, 2003 and 2002
Net sales in fiscal 2003 decreased 2.1% to $201,558,000 as compared to
$205,857,000 in fiscal 2002. The Company continued to experience a decline in
coffee sales. There are a number of trends that we believe affect this result.
We are in the third year of an economic downturn that has been especially hard
on our core service area of California. Our entire 29 state service area has
felt the combination of lay-offs, job uncertainty and the high cost of living
that makes consumers careful how they spend their money. As consumers cut back
on expenses, one of the easiest places to save is spending in restaurants.
Tourism and travel continues to be down domestically. This is especially so in
the Far East where the Japanese economy has not been strong, and last summer
the area had to deal with SARS. Business travel also continues to be down.
Our primary market is the independently owned and operated restaurant and
restaurant chains. The weak economy is especially hard on these entrepreneurs
who do not have the geographic or "thematic" diversity of the large restaurant
chains. The success of coffee shops selling specialty coffees has spawned many
imitators. Although we compete favorably with our own line of specialty
coffees, our customers feel the effect of fewer sales dollars (in part because
of the recession) being divided among more direct competitors.
Green coffee costs for fiscal 2003 increased approximately 25% over those of
fiscal 2002. As a result gross profit decreased 5.2% to $130,896,000, or 65%
of sales, in fiscal 2003 as compared to $138,093,000, or 67% of sales, in
fiscal 2002.
Selling expenses for the 2003 fiscal year increased 3.1% to $88,658,000 as
compared to $86,025,000 in fiscal 2002. General & administrative expenses
increased 32.4% in fiscal 2003 to $18,350,000 as compared to $13,858,000 in
fiscal 2002. Operating expenses, composed of selling and general and
administrative expenses, increased $7,125,000, or 7.1%, to $107,008,000 during
fiscal 2003, or 53% of sales, as compared to $99,883,000, or 49% of sales, in
fiscal 2002. This increase primarily includes additional costs of the ESOP
$1,886,000, computer consulting and training $1,309,000, insurance (including
workers compensation) $1,300,000, life insurance $1,045,000, defined benefit
and post retirement benefit plan costs $997,000 and the cost of coffee brewing
equipment $897,000, offset by decreases in legal expenses $941,000 and payroll
$815,000.
Other income in fiscal 2003 increased $2,533,000 or 22.7% to $13,683,000 as
compared to $11,150,000 in fiscal 2002. This is primarily the result of the
volatility of the capital markets introduced by an accounting change in 2001
that required unrealized gains and losses on investments to be realized as
incurred. Prior to that time our hedging efforts reduced much of this
volatility. Interest rates have declined throughout 2003 and remain at low
levels. The major components of this change from 2002 include an increase in
unrealized gains of $5,607,000, off set by decrease in interest income of
$3,287,000 and realized losses $1,897,000 and realized gains $1,864,000.
Pretax income in fiscal 2003 decreased 23.9% to $37,571,000, or 18.6% of sales,
as compared to $49,360,000, or 24% of sales, in fiscal 2002. Net income in
fiscal 2003 decreased 22.7% to $23,629,000, or 11.7% of sales, as compared to
$30,569,000, or 14.9% of sales in fiscal 2002. Earnings per share in fiscal
2003 decreased 21.3% to $13.02 as compared to $16.54 in fiscal 2002.
Years ended June 30, 2002 and 2001
Fiscal 2002 was challenging for us. Although green coffee costs remained
relatively stable throughout the year, the events of September 11, 2001 were
felt throughout the period. Recession related reductions in business and
personal travel and entertainment expenses combined with reduced activities
outside the home resulting from public concern about terrorist activities
resulted in decreased sales and profitability. As depicted in the "Change in
Earnings per Share" analysis below, our 2002 net sales declined 4.4%. Net
sales decreased to $205,857,000 in 2002 as compared to $215,431,000 in 2001.
Gross profit decreased to $138,093,000 in fiscal 2002, or 67% of sales,
compared to $141,400,000 in fiscal 2001, or 66% of sales. The world supply of
green coffee was ample, and some producing countries have discussed
a variety of approaches to improve producer profitability, including production
decreases, decreased farm maintenance and farm worker layoffs. To date, none
of these approaches appears to have had a material effect on green coffee
prices.
Operating expenses, comprised of selling and general and administrative
expenses were $99,883,000 in 2002 as compared to $99,285,000 in 2001. A
$3,339,000 increase, or 28%, in employee benefits expenses in fiscal 2002,
including the costs of employee benefit plans and medical coverage, was
substantially offset by a decrease in payroll expenses, (1%), vehicle related
expenses (including maintenance, gas & oil), (6%), and coffee brewing equipment
costs, (36%).
Other income decreased 36% to $11,150,000 in 2002 as compared to $17,401,000 in
2001. The 2001 amount includes the accumulated unrealized loss of $3,894,000
resulting from the accounting change that year. Exclusive of the accounting
change, other income decreased 48% in 2002 from $21,295,000 in 2001. This
decrease is primarily the result of lower interest rates during 2002 as the
Federal Reserve Board has attempted to stimulate the economy. Our investments
continue to be in short term money market instruments: primarily investment
grade commercial paper, corporate notes and US treasury and agency debt. At
June 30, 2002 we held approximately $168,000,000 in US Treasury Bills.
Income before taxes decreased 21% to $49,360,000, or 24% of sales, for the year
ended June 30, 2002, as compared to $59,516,000, or 28% of sales, in the prior
fiscal year. Net income, before cumulative effect of accounting change, for
fiscal year 2002 was $30,569,000, or $16.54 per share, as compared to
$36,488,000, or $19.79 per share, in 2001.
Change in Earnings Per Share
The following provides additional information regarding changes in
operating results.
Net income per common share 2003 2002 2001
$13.02 $16.54 $19.62
Percentage change:
2003-2002 2002-2001
Net sales -2.1% -4.4%
Cost of goods sold -4.3% -8.5%
Gross profit -5.2% -2.3%
Operating expenses 7.1% 0.6%
Income from operations -37.5% -9.3%
Provisions for income taxes -25.8% -18.4%
Net income -22.7% -15.5%
A summary of the change in earnings per share, which highlights
factors discussed earlier, is as follows:
Per Share Earnings
2003-2002 2002-2001
Coffee: Prices -$0.45 $0.15
Volume -1.74 -3.71
Cost -0.85 2.25
Gross profit -3.04 -1.31
Allied products: Gross profit 0.48 -0.48
Operating expenses -4.93 -0.32
Other income 1.50 -3.38
Provision for income taxes 2.48 2.29
Accounting change 0.00 0.17
Change in weighted average
shares outstanding -0.01 -0.05
Net income -$3.52 -$3.08
Risk 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.
Contractual obligations
The following table contains supplemental information regarding total
contractual obligations as of June 30, 2003.
(In thousands) Less Than More Than
Total One Year 2-3 Years 4-5 Years 5 years
Operating lease obligations $1,402 $667 $650 $85 $ -
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 discount commercial paper, medium term notes,
federal agency issues and treasury securities. As of June 30, 2003 over 95% of
these funds were invested in treasury securities and more than 50% of these
issues have maturities shorter than 120 days. This portfolio's interest rate
risk is not hedged and its average maturity is approximately 150 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.
Our portfolio of preferred securities includes investments in derivatives
that provide a natural economic hedge of interest rate risk. We review the
interest rate sensitivity of these securities and (a) enter into "short
positions" in futures contracts on U.S. Treasury securities or (b) hold put
options on such futures contracts in order to reduce the impact of certain
interest rate changes on such preferred stocks. Specifically, we attempt
to manage the risk arising from changes in the general level of interest
rates. We do not transact in futures contracts or put options for
speculative purposes.
The following table demonstrates the impact of varying interest rate
changes based on the preferred stock holdings, futures and options
positions, and market yield and price relationships at June 30, 2003. 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 security held, the slope of the Treasury
yield curve, the expected volatility of 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
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of green coffee. We price our inventory on the LIFO basis. In the
normal course of business we enter into commodity purchase agreements with
suppliers and we purchase exchange traded green coffee contracts. The
following table demonstrates the impact of changes in the 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.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Farmer Bros. Co. and
Subsidiary
We have audited the accompanying consolidated balance sheets of Farmer
Bros. Co. and Subsidiary (the "Company") as of June 30, 2003 and 2002, and
the related consolidated statements of income, cash flows, and
shareholders' equity for the three years ended June 30, 2003. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States.
/s/Ernst & Young LLP
Long Beach, California
September 8, 2003
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, 2003 June 30, 2002
ASSETS
Current assets:
Cash and cash equivalents $18,986 $7,047
Restricted cash 975 -
Short term investments 274,444 285,540
Accounts and notes receivable, net 13,756 14,004
Inventories 34,702 37,361
Income tax receivable 2,878 2,553
Deferred income taxes - 1,188
Prepaid expenses 876 741
Total current assets 346,617 348,434
Property, plant and equipment, net 41,753 38,572
Notes receivable 193 224
Other assets 26,390 27,622
Deferred income taxes 1,462 2,672
Total assets $416,415 $417,524
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,321 $4,827
Accrued payroll expenses 7,362 6,407
Deferred income taxes 976 -
Other 5,000 5,025
Total current liabilities 16,659 16,259
Accrued postretirement benefits 25,041 22,726
Other long term liabilities 5,570 5,486
Total Liabilities 47,270 44,471
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
and outstanding 1,926,414 1,926 1,926
Additional paid-in capital 18,798 17,627
Retained earnings 382,831 365,725
Unearned ESOP shares -33,364 -12,225
Less accumulated comprehensive loss -1,046 -
Total shareholders' equity 369,145 373,053
Total liabilities and
shareholders' equity $416,415 $417,524
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
2003 2002 2001
Net sales $201,558 $205,857 $215,431
Cost of goods sold 70,662 67,764 74,031
Gross profit 130,896 138,093 141,400
Selling expense 88,658 86,025 84,524
General and administrative expense 18,350 13,858 14,761
Operating expenses 107,008 99,883 99,285
Income from operations 23,888 38,210 42,115
Other income:
Dividend income 3,246 3,198 3,039
Interest income 3,974 7,261 12,308
Other, net 6,463 691 2,054
13,683 11,150 17,401
Income before taxes 37,571 49,360 59,516
Income taxes 13,942 18,791 23,028
Income before cumulative effect
of accounting change $23,629 $30,569 $36,488
Cumulative effect of accounting
change (net of income taxes
of $205) - - -$310
Net income $23,629 $30,569 $36,178
Income per common share:
Before cumulative effect of
accounting change $13.02 $16.54 $19.79
Cumulative effect of
accounting change -$0.17
Net income per common share $13.02 $16.54 $19.62
Pro forma assuming accounting changes
were retroactively applied
Net income $36,448
Net income per common share $19.79
Weighted average shares outstanding 1,814,591 1,848,395 1,843,392
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended June 30,
2003 2002 2001
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
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended June 30,
2003 2002 2001
Net cash (used in) provided by
operating activities $52,078 -$12,734 $24,736
Cash flows from investing activities:
Purchases of property, plant and equipment -9,089 -5,039 -5,912
Proceeds from sales of property,
plant and equipment 630 307 207
Notes issued - -35 -78
Notes repaid 55 2,640 831
Net cash used in investing activities -8,404 -2,127 -4,952
Cash flows from financing activities:
Dividends paid -6,523 -6,278 -5,897
ESOP contributions -24,237 -815 -390
Net cash used in financing activities -30,760 -7,093 -6,287
Net (decrease) increase in cash
and cash equivalents 12,914 -21,954 13,497
Cash and cash equivalents at beginning of year 7,047 29,001 15,504
Cash and cash equivalents at end of year $19,961 $7,047 $29,001
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and share data in thousands)
Other
Additional Unearned Comprehensive
Common Stock Paid-in Retained Esop Income
Shares Amount Capital Earnings Shares -Loss Total
Balance at June 30,2000 1,926 1,926 16,359 311,153 -13,679 -2,646 313,113
Comprehensive income
Net income 36,178 36,178
Transition adjustment for FAS 131 2,646 2,646
Total comprehensive income 38,824
Dividends ($3.20 per share) -5,897 -5,897
ESOP contributions -390 -390
ESOP compensation expense 270 1,128 1,398
Balance at June 30, 2001 1,926 1,926 16,629 341,434 -12,941 0 347,048
Comprehensive income
Net income 30,569 30,569
Total comprehensive income 30,569
Dividends ($3.40 per share) -6,278 -6,278
ESOP contributions -815 -815
ESOP compensation expense 998 1,531 2,529
Balance at June 30, 2002 1,926 1,926 17,627 365,725 -12,225 0 373,053
Comprehensive income
Net income 23,629 23,629
Minimum pension liability, net of tax ($615,000) -1,046 -1,046
Total comprehensive income 22,583
Dividends ($3.60 per share) -6,523 -6,523
ESOP contributions -24,237 -24,237
ESOP compensation expense 1,171 3,098 4,269
Balance at June 30, 2003 1,926 1,926 18,798 382,831 -33,364 -1,046 369,145
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of
roasting, packaging, and distributing coffee and allied products through direct
sales to restaurants, hotels, hospitals, convenience stores and fast food
outlets. The Company's products are distributed by its selling divisions from
branch warehouses located in most large cities throughout the western United
States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary FBC Finance Company. All significant inter-company
balances and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 a maturity of 90 days
or less when purchased to be cash equivalents. Fair values of cash equivalents
approximate cost due to the short period of time to maturity.
Restricted Cash
The Company has pledged cash as collateral for a stand-by letter of credit
securing its obligations under a self insurance program. The cash is invested
in certificates of deposit with maturities that do not exceed 1 year. In the
event the Company does not perform all its responsibilities for paying out
claims, the administrator of the program has the right to draw against the
letter of credit.
Investments
The Company's investments consist of marketable debt and equity securities,
money market instruments and various derivative instruments, primarily exchange
traded treasury futures and options, green coffee forward contracts and
commodity purchase agreements. All such instruments not designated as
accounting hedges are marked to market and changes are recognized in current
earnings. At June 30, 2003 and 2002 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, the financial instruments which potentially expose the
Company to concentrations of credit risk consist of cash in financial
institutions (which exceeds federally insured limits), cash equivalents
(principally commercial paper), short term investments, investments in the
preferred stocks of other companies and trade receivables. Cash equivalents
and short term investments are not concentrated by issuer, industry or
geographic area. Maturities are generally shorter than 180 days. Other
investments are in U.S. government securities. Investments in the preferred
stocks of other companies are limited to high quality issuers and are not
concentrated by geographic area or issuer. Concentration of credit risk with
respect to trade receivables for the Company is limited due to the large number
of customers comprising the Company's customer base and their dispersion across
many different geographic areas. The trade receivables are short-term, 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 Out (LIFO) basis. Costs
of coffee brewing equipment manufactured are accounted for on the First In,
First Out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation of buildings and facilities is computed using the
straight-line method. All other assets are depreciated using the 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
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.
Revenue Recognition
Sales and the cost of products sold are recorded at the time of delivery to the
customer.
Net Income Per Common Share
Basic earnings per share is computed by dividing the net income attributable to
common stockholders by the weighted average number of common shares outstanding
during the period, excluding unallocated shares held by the Company's
Employee Stock Ownership Plan (see Note 6). The Company has no dilutive shares
for any of the three fiscal years in the period ended June 30, 2003.
Accordingly, the consolidated financial statements present only basic net
income per share.
Long-lived Assets
The Company reviews the recoverability of its long-lived assets as
required by SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The
estimated future cash flows are based upon, among other things, assumptions
about expected future operating performance, and may differ from actual
cash flows. Long-lived assets evaluated for impairment are grouped with
other assets to the lowest level for which identifiable cash flows are
largely independent of the cash flows of other groups of assets and
liabilities. If the sum of the projected undiscounted cash flows (excluding
interest) is less than the carrying value of the assets, the assets will be
written down to the estimated fair value in the period in which the
determination is made. The Company has determined that no impairment of
long-lived assets exists as of June 30, 2003.
Shipping and Handling Costs
The Company distributes its products directly to its customers and shipping
and handling costs are considered Company selling expenses.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements. The
duration of these agreements extend from 2005 to 2006.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
New pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement is effective for contracts entered into
or modified and for hedging relationships designated after June 30, 2003.
The Company does not expect the adoption of this statement to have a
material impact on its operating results or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses issues
regarding the recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring activities. This
statement requires that costs associated with exit or disposal activities
be recognized when they are incurred rather than at the date of commitment
to an exit or disposal plan. The implementation of this Standard did not
have a material effect on the Company.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness for Contingencies, relating to a
guarantor's accounting for, and disclosure of Others. FIN 45 clarifies
the requirements of SFAS No. 5, Accounting of, the issuance of certain
types of guarantees. For certain guarantees issued after December 31, 2002,
FIN 45 requires a guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under the
guarantee. Guarantees issued prior to January 1, 2003, are not subject to
liability recognition, but are subject to expanded disclosure requirements.
The Company does not believe that the adoption of this Interpretation has
had a material effect on its consolidated financial position or statement
of operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which
requires the Company to consolidate variable interest entities for which it
is deemed to be the primary beneficiary and disclose information about
variable interest entities in which it has a significant variable interest.
FIN 46 became effective immediately for variable interest entities formed
after January 31, 2003 and will 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.
Note 2 Investments and Derivative Instruments
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
Statements 137 and 138. The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The adoption of SFAS No. 133, resulted in a cumulative
effect of an accounting change of $515,000 ($310,000 net of taxes) being
recognized in the Statement of Net Income, and a corresponding credit in other
comprehensive income.
The Company purchases various derivative instruments as investments or to
create economic hedges of its interest rate risk and commodity price
risk. At June 30, 2003 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.
Gains and losses, both realized and unrealized, are included in other income
and expense. On July 1, 2000 the company transferred all of its investments
classified as "available for sale" at June 30, 2000 into the "trading"
category. Accordingly, the Company recognized the accumulated unrealized loss
of $3,894,000 in the consolidated statement of income.
Investments at June 30, 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
Note 3 Allowance for Doubtful Accounts
(In thousands)
2003 2002 2001
Balance at beginning of year $345 $395 $420
Additions 356 218 348
Deductions -356 -268 -371
Balance at end of year $345 $345 $397
Note 4 Inventories
(In thousands)
June 30, 2003
Processed Unprocessed Total
Coffee $3,853 $9,155 $13,008
Allied products 11,776 4,213 15,989
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,702
June 30, 2002
Processed Unprocessed Total
Coffee $3,438 $10,393 $13,831
Allied products 12,482 5,116 17,598
Coffee brewing equipment 2,528 3,404 5,932
$18,448 $18,913 $37,361
Current cost of coffee and allied products inventories is (less than) or
greater than the LIFO cost by approximately $122,000 and $(491,000) as of
June 2003 and 2002, respectively.
The change in the Company's green coffee and allied product inventories during
fiscal 2003, 2002, and 2001 resulted in LIFO decrements (increment) which had
the effect of increasing income before taxes those years by $64,000, $207,000,
and 1,283,000, respectively.
Note 5 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
Maintenance and repairs charged to expense for the years ended June 30, 2003,
2002, and 2001 were $11,022,000, $11,202,000, and $10,514,000, respectively.
Note 6 Employee Benefit Plans
The Company has a contributory defined benefit pension plan for all employees
not covered under a collective bargaining agreement (Farmer Bros. Co. Plan) and
a non-contributory defined benefit pension plan (Brewmatic Co. Plan) for
certain hourly employees covered under a collective bargaining agreement. The
Company's funding policy is to contribute annually at a rate that is intended
to fund benefits as a level percentage of salary (non-bargaining) and as a
level dollar cost per participant (bargaining) over the working lifetime of the
plan participants. Benefit payments are determined under a final payment
formula (non-bargaining) and flat benefit formula (bargaining).
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 retirees contributions are fixed at a current level.
The plan is not funded.
(In thousands)
Defined Postretirement
Benefit Plans Benefit Plans
June 30, June 30,
2003 2002 2003 2002
Changes in benefit obligation
Benefit obligation at
the beginning of the year $55,116 $48,909 $24,335 $22,951
Service cost 1,708 1,527 765 670
Interest cost 3,886 3,684 1,712 1,721
Plan participants contributions 180 160 0 117
Amendments 0 285 0 -906
Actuarial gain 13,797 3,153 4,665 651
Benefits paid -2,834 -2,602 -755 -869
Benefit obligation at
the end of the year $71,853 $55,116 $30,722 $24,335
Change in plan assets
Fair value in plan assets at
the beginning of the year $75,552 $79,259 $0 $0
Actual return on plan assets -3,674 -1,285 0 0
Company contributions 23 21 755 752
Plan participants contributions 180 160 132 117
Benefit paid -2,834 -2,602 887 -869
Fair value in plan assets at
the end of the year $69,247 $75,552 $0 $0
2003 2002 2003 2002
Funded status -$2,606 $20,437 -$30,722 -$24,335
Unrecognized net asset 0 -657 0 0
Unrecognized net (gain)/loss 23,330 -88 4,682 17
Unrecognized prior service cost 800 1,062 1,410 1,592
Net amount recognized $21,524 $20,754 -$24,630 -$22,726
Statements of Financial Position
Prepaid pension cost 19,854 $20,754
Accrued pension liability -411 0
Intangible asset 420 0
Accumulated other comprehensive income 1,661 0
Net amount recognized $21,524 $20,754
Weighted average assumptions as
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%
Number 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%
Components of net periodic benefit costs:
(In thousands)
Defined Benefit Plans Postretirement Benefit
Plans
June 30, June 30,
2003 2002 2001 2003 2002 2001
Service cost $1,708 $1,527 $1,338 $765 $670 $646
Interest cost 3,886 3,684 3,445 1,712 1,721 1,539
Expected return on Plan
assets -5,965 -6,267 -6,121 - - -
Unrecognized net
transition asset -657 -657 -657 - - -
Unrecognized net gain 18 -269 -841 - - -94
Unrecognized prior
service cost 262 239 239 182 286 286
Benefit cost -$748 -$1,743 -$2,595 $2,659 $2,677 $2,377
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage point change in the assumed health care cost trend
rate would have the following effects:
(In thousands)
Plan Year Effect of 1%
Results Increase Decrease
Accumulated Postretirement Benefit
obligation as of June 30, 2003 $30,722 $4,474 -$3,561
Service and interest cost for
plan year 2,477 390 312
Accumulated Postretirement Benefit
obligation as of June 30, 2002 $24,335 $897 -$963
Service and interest cost for
plan year 2,391 90 -$95
The Company contributes to two multi-employer defined 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 rate of
return on its investments. Total deferred compensation expense amounted to
$84,000, $594,000 and $702,000, for the years ended June 30, 2003, 2002 and
2001, respectively.
Employee Stock Ownership Plan
On January 1, 2000, the Company established the Farmer Bros. Co. Employee Stock
Ownership Plan (ESOP) to provide benefits to all employees. The Board of
Directors authorized a loan of up to $50,000,000 to the ESOP to purchase up to
300,000 shares of Farmer Bros. Co. common stock secured by the stock purchased.
The loan will be repaid from the Company's discretionary plan contributions
over a fifteen year term at a variable rate of interest, 3.30% at June 30,
2002.
for the years ended June 30,
2003 2002 2001
Loan amount (in thousands) $24,237 $815 $390
Shares purchased 77,850 3,800 2,200
Shares purchased with loan proceeds are held by the plan trustee for allocation
among participants as the loan is repaid. The unencumbered shares are
allocated to participants using a compensation-based formula. Subject to
vesting requirements, allocated shares are owned by participants and shares are
held by the plan trustee until the participant retires.
The Company reports compensation expense equal to the fair market price of
shares committed to be released to employees in the period in which they are
committed. The cost of shares purchased by the ESOP which have not been
committed to be released or allocated to participants are shown as a contra-
equity account "Unearned ESOP Shares" and are excluded from earnings per share
calculations. During the fiscal years ended June 30, 2003, 2002 and 2001
the Company charged $3,098,000, $1,531,000 and $1,136,000 respectively, 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
and $270,000 for the years ended June 30, 2003, 2002 and 2001, respectively, is
recorded as additional paid 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
Note 7 Income Taxes
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
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
The primary components of temporary differences which give rise to the
Company's net deferred tax assets are as follows:
(In thousands)
June 30,
2003 2002
Deferred tax assets:
Postretirement benefits $10,384 $8,938
Accrued liabilities 4,859 4,426
State taxes - 791
$15,243 $14,155
Deferred tax liabilities:
Pension assets -$8,205 -$7,877
Other -6,552 -2,418
-$14,757 -$10,295
Net deferred tax assets $486 $3,860
Note 8 Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
2003 2002
Accrued workers' compensation liabilities $2,898 $3,119
Current portion of deferred taxes - -
Dividends payable 1,734 1,637
Other 368 269
$5,000 $5,025
Note 9 Commitments and Contingencies
The Company incurred rent expense of approximately $736,000, $698,000, and
$700,000 for the fiscal years ended June 30, 2003, 2002, and 2001,
respectively, and is obligated under leases for branch warehouses. A few of
the leases have renewal options that allow the Company, as lessee, to extend
the lease at the Company's option for one or two years at a pre-agreed rental
rate. The Company also has operating leases for computer hardware with terms
that do not exceed three years.
Future minimum lease payments are as follows:
June 30, (in thousands)
2004 $667
2005 420
2006 230
2007 53
2008 32
$1,402
The Company is a party to various pending legal and administrative proceedings.
It is management's opinion that the outcome of such proceedings will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
Note 10 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
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures. The Company's Chief Executive Officer and
Chief Financial Officer have concluded that as of June 30, 2003, there is
reasonable assurance that the Company's disclosure controls and procedures will
meet their objectives and that the disclosure controls and procedures are
effective at 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 date of evaluation by the
Chief Executive Officer and Chief Financial Officer.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Served as a
Director
Continuously Principal Occupation
Name Age Since for the Last Five Years
Roy F. Farmer (1) 87 1951 Chairman, Chief Executive Officer prior
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 Hutchinson
and Bloodgood LLP, Glendale, California
John Samore, Jr. 57 2003 Independent Consultant and CPA, Los
Angeles, California since 2002; Retired
Tax Partner with the Accounting Firm
Arthur Andersen LLP, Los Angeles,
California
Thomas A. Maloof 51 2003 Chief Financial Officer of Hospitality
Marketing Concepts, Irvine, California
since 2001; President of
Perinatal Practice Management-Alfigen
The Genetices Institute, Pasadena,
California previously
(1) Roy F. Farmer is 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. Based on a review of
filings received by it or representations from Company officers and directors,
the Company believes that all filing requirements applicable to Company
officers and directors were met for fiscal 2003.
Item 11. Executive Compensation
Summary Compensation Table
Annual Annual Other
Name and Principal FiscalCompensation Compensation Annual All Other
Position Year Salary Bonus(1) Compensation Compensation(2)
ROY F. FARMER 2003 $850,000 -0- $ - $164,683(3)
Chairman; CEO until 2002 $1,000,000 $450,000 $ - $138,815(3)
March 19, 2003 2001 $1,000,000 $450,000 $ - $117,482(3)
ROY E. FARMER 2003 $335,585 $400,000 $ - $465
President; CEO from 2002 $325,730 $300,000 $ - $425
March 19, 2003 2001 $309,000 $300,000 $ - $383
GUENTER W. BERGER 2003 $244,477 $100,000 $ - $700
Vice President, 2002 $238,113 $100,000 $ - $630
Production 2001 $224,149 $100,000 $ - $570
KENNETH R. CARSON 2003 $214,889 $100,000 $ - $414
Vice President, 2002 $208,544 $75,000 $ - $384
Sales 2001 $197,080 $75,000 $ - $356
JOHN E. SIMMONS 2003 $203,472 $100,000 $ - $216
Treasurer 2002 $188,584 $75,000 $ - $148
2001 $178,849 $75,000 $ - $181
(1) Awarded under the Company's Incentive Compensation Plan. The awards for
fiscal 2003 were based primarily upon the Company's earnings achieved that
year. (See "Compensation Committee Report," supra.).
(2) Except as stated in footnote (3) the amount shown represents the dollar
value of the benefit to the executive officer for the years shown under the
Company's executive life insurance plan.
(3) The amount shown for Roy F. Farmer represents P.S. 58 costs of the two
split-dollar life insurance policies purchased pursuant to the prior
employment agreement with Mr. Farmer which expired in 1998 plus the dollar
value of the benefit to him under the Company's executive life insurance
plan.
Pension Plan Table
The following table shows estimated annual benefits payable for the
2003 plan year under the Company's retirement plan upon retirement at age 62
to persons at various average compensation levels and years of credited
service based on a straight life annuity. The retirement plan is a
contributory defined benefit plan covering all non-union Company employees.
The following figures assume that employee contributions (2% of annual gross
earnings) are made throughout the employees' first five years of service and
are not withdrawn. After five years of participation in the plan, employees
make no further contributions. Benefits under a predecessor plan are
included in the following figures. Maximum annual combined benefits under
both plans generally cannot exceed the lesser of $200,000 or the average of
the employee's highest three years of compensation.
Annualized Pension Compensation
for Highest 60 Consecutive Months Credited Years of Service
in Last Ten Years of Employment 20 25 30 35
$100,000 $30,000 $37,500 $45,000 $52,500
$125,000 $37,500 $46,875 $56,250 $65,625
$150,000 $45,000 $56,250 $67,500 $78,750
$170,000 $52,500 $65,625 $78,750 $91,875
$200,000 $60,000 $75,000 $90,000 $105,000
$250,000 $60,000 $75,000 $90,000 $105,000
The earnings of executive officers by which benefits in part are
measured consist of the amounts reportable under "Annual Compensation" in the
Summary Compensation Table less certain allowance items (none in 2003).
Credited years of service through December 31, 2002 were as follows:
Guenter W. Berger - 38 years; Roy E. Farmer - 26 years; Kenneth R. Carson -
37 years; John E. Simmons - 21 years. After 37 years of credited service,
Roy F. Farmer began receiving maximum benefits during fiscal 1988.
The above straight life annuity amounts are not subject to deductions
for Social Security or other offsets. Other payment options, one of which is
integrated with Social Security benefits, are available.
Compensation of Directors
For fiscal 2003, each director who was not a Company employee (an "outside
director")was paid an annual retainer fee of $10,000 and the additional sum of
$1,000 for each board meeting and committee meeting (if not held in conjunction
with a board meeting). For fiscal 2004, outside directors will receive an
annual retainer fee of $20,000 and an additional $1,500 for each board meeting
and committee meeting (if not held in conjunction with a board meeting)
attended, and the Audit Committee Chairman will receive an additional annual
retainer fee of $2,500. A director also receives reimbursement of travel
expenses from outside the greater Los Angeles area to attend a meeting.
Compensation Committee Report
The Compensation Committee (the "Committee") is a standing committee of the
Board of Directors and is comprised of independent directors John Samore, Jr.,
Thomas A. Maloof, Lewis A. Coffman and John H. Merrell. The Compensation
Committee met twice in fiscal 2003. The Compensation Committee makes all
determinations with respect to executive compensation and administers
the Company's Incentive Compensation Plan. The Compensation Committee report
follows:
Compensation Committee Report - Philosophy and Objectives
The Committee believes that once base salaries of executive officers
are established at competitive levels, increases should generally reflect
cost of living changes and that individual performance should be rewarded by
bonuses or other incentive compensation awards. The Committee believes that
most of the officers will be incentivized to a greater degree by such a
program.
Executive Officer Compensation
In 2003 the Committee obtained a compensation study prepared by Valuemetrics
Advisors, Inc., relating to officer and director compensation. The report
concluded that the current executive officers, excluding the Chairman, were
underpaid when compared to their counterparts at size-adjusted peer group
companies. Consistent with the Committee's expressed compensation policy of
paying a competitive base salary, the Committee has increased base salaries to
Messrs. Roy E. Farmer, Berger, Simmons and Carson by an aggregate of $201,577
for fiscal 2004. This increase also reflects Roy E. Farmer's increased
responsibilities as the Company's new Chief Executive Officer. With respect to
the Chairman, the Committee noted that Roy F. Farmer served in the capacity of
Chairman and CEO from the period July 1, 2002 through March 19, 2003 and served
as non-CEO Chairman, advisor to Roy E. Farmer, the current CEO, and reserve
coffee buyer and cupper for the period March 20, 2003 through June 30, 2003.
The Committee noted that Mr. Farmer had been on medical leave for much of that
period but nevertheless continued to bear the responsibilities of his office,
conferred with Roy E. Farmer on a regular basis, and participated in all
material management decisions pertaining to the Company. Based on these
factors, the Committee determined that Roy F. Farmer's salary for the fiscal
year ended June 30, 2003 be reduced to $850,000. The Company's performance for
fiscal 2003 was not a material factor in this determination. No bonus was
awarded to Roy F. Farmer under the Company's Incentive Compensation Plan for
that year.
Incentive Compensation Plan
The Company made awards under its Incentive Compensation Plan (the
"Plan") for fiscal 2003 to all executive officers other than Roy F. Farmer. The
Committee felt that awards were justified in light of the Company's performance
in 2003, although financial results were below those achieved in the prior two
years. Total awards for fiscal 2003 were $700,000 as compared to $1,000,000
for each of fiscal 2002 and 2001.
Under the provisions of the Plan, a percentage of the Company's annual
pre-tax income is made available for cash or deferred awards. The percentage
varies from three percent of pre-tax income over $14 million to six percent
of pre-tax income of $24 million or more. Amounts available for awards but
not awarded are carried forward. The pool available for awards for fiscal
2003 under the Incentive Compensation Plan was in excess of $15 million. Of
the available pool, the Committee awarded a total of $700,000 of which
$400,000 was awarded to Roy E. Farmer, the Company's Chief Executive Officer,
and $300,000 in toto was awarded to the other executive officers.
Lewis A. Coffman
John H. Merrell
John Samore, Jr.
Thomas A. Maloof
Compensation Committee Interlocks and Insider Participation.
For fiscal 2003 persons serving on the Company's Compensation Committee were
John H. Merrell, an outside director, Lewis A. Coffman, an outside director and
retired executive officer of the Company, Thomas A. Maloof, an outside
director, John Samore, Jr., an outside director and John M. Anglin, an outside
director and legal counsel to the Company, who on April 30, 2003 resigned and
became the Company's Secretary.
Performance Graph
Comparison of Five-Year Cumulative Total Return*
Farmer Brothers Co., Russell 2000 Index And Value
Line Food Processing Index
(Performance Results Through 6/30/03)
1998 1999 2000 2001 2002 2003
Farmer Brothers Co 100.00 85.87 75.49 98.78 155.39 146.56
Russell 2000 Index 100.00 100.87 113.99 111.51 100.64 97.53
Food Processing 100.00 95.87 99.53 121.22 149.07 141.77
Assumes $100 invested at the close of trading 6/30/98 in Farmer Brothers
Co. common stock, Russell 2000 Index and Food Processing Index.
*Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
(a) Related Stockholder Matters
The following are all persons known to management who beneficially own
more than 5% of the Company's common stock:
Amount and Nature Percent
Name and Address of of Beneficial of
Beneficial Owner Ownership (1) Class
Roy F. Farmer 835,115 shares (2) 43.35%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
Catherine E. Crowe 203,430 shares (3) 10.56%
7421 Stewart Avenue
Los Angeles, CA 90045
Franklin Mutual Advisers, LLC 184,688 shares (4) 9.59%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Attn: Bradley Takahashi
Farmer Bros. Co. Employee
Stock Ownership Plan 171,480 shares (5) 8.90%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Includes 171,041 shares owned outright by Mr. Farmer and his wife as
trustees of a revocable living trust, 662,121 shares held by various trusts
of which Mr. Farmer is sole trustee for the benefit of family members, 1,849
shares owned by his wife and 104 shares beneficially owned by Mr. Farmer
through the Company's Employee Stock Ownership Plan ("ESOP"), rounded to the
nearest whole share.
(3) Excludes 9,900 shares held by trusts for Mrs. Crowe's benefit. Mr.
Farmer is sole trustee of said trusts and said shares are included in his
reported holdings.
(4) According to a Schedule 13D/A filed with the Securities and Exchange
Commission dated July 31, 2003 by Franklin Mutual Advisers, LLC
("Franklin"), Franklin on that date beneficially owned 184,688 shares
(9.59%). Franklin is reported to have sole voting and investment power over
these shares pursuant to certain Investment Advisory contracts with one or
more record shareholders, which advisory clients are the record owners of the
184,688 shares.
(5) The ESOP plan committee, comprised of Company officers, directs the
voting of 145,888 unallocated shares and if plan participants fail to vote,
25,592 allocated shares and has sole dispositive power over 145,888 shares.
(b) The following sets forth the beneficial ownership of the common stock
of the Company by each director and nominee, each executive officer named in
the Summary Compensation Table, and all directors and executive officers as a
group:
Number of Shares and Nature
Name of Beneficial Ownership (1) Percent of Class
Guenter W. Berger 608(2)(8) *
Kenneth R. Carson 359(3)(8) *
Lewis A. Coffman 15(4) *
Roy E. Farmer 38,320(5)(8) 1.99%
Roy F. Farmer (See "Principal Shareholders," supra) *
Thomas A. Maloof None -
John H. Merrell None -
John Samore, Jr. None -
John E. Simmons 471(6)(8) *
All directors and exec
officers as a group (10 persons) 1,020,776(7) 52.99%
(1) Sole voting and investment power unless indicated otherwise in following
footnotes.
(2) Held in trust with voting and investment power shared by Mr. Berger and
his wife. Includes 109 shares beneficially owned by Mr. Berger through the
Company's ESOP, rounded to the nearest whole share.
(3) Includes 109 shares beneficially owned by Mr. Carson through the
Company's ESOP, rounded to the nearest whole share.
(4) Voting and investment power shared with spouse.
(5) Includes 4,000 shares owned outright by Mr. Farmer, 34,211 shares held
by various trusts of which Mr. Farmer is sole trustee and 109 shares
beneficially owned by Mr. Farmer through the Company's ESOP, rounded to the
nearest whole share. Excludes 21,218 shares held in a trust of which Roy F.
Farmer is sole trustee (reported under Roy F. Farmer's name in Principal
Shareholders, supra) and of which Roy E. Farmer is the beneficiary.
(6) Voting and investment power shared with spouse. Includes 109 shares
beneficially owned by Mr. Simmons through the Company's ESOP, rounded to the
nearest whole share.
(7) Includes 145,888 unallocated shares held by the Company's ESOP over
which officers, as members of the plan committee, have shared indirect voting
power. Excludes 25,592 allocated shares held by the Company's ESOP over
which plan committee members have voting rights only if the participants fail
to vote.
(8) Excludes ESOP shares (other than the 109 shares reported) over which
this officer, in his capacity as a member of the plan committee, shares
indirect voting power. The excluded unallocated ESOP shares are included in
the group holdings. See footnote (7).
* Less than 1%.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billed by Ernst & Young, LLP for the audit of the Company's
annual financial statements and review of financial statements included in the
Company's quarterly reports on Form 10-Q were $135,000 for the fiscal year
ended June 30, 2002 ("fiscal 2002") and $154,000 for the fiscal year ended June
30, 2003 ("fiscal 2003").
Audit-Related Fees
The aggregate fees billed by Ernst & Young, LLP for assurance and related
services reasonably related to the performance of the audit of the Company's
financial statements and not reported under Audit Fees, above, were $55,000 for
fiscal 2002 and $-0- for fiscal 2003. These audit-related services consisted
of employee benefit plan audits.
Tax Fees.
The aggregate fees billed by Ernst & Young, LLP for tax compliance, tax advice
and tax planning services were $32,000 for fiscal 2002 and $126,000 for fiscal
2003. These tax services consisted of state tax representation and
miscellaneous consulting on federal taxation matters.
All Other Fees.
For fiscal 2002 and 2003, Ernst & Young, LLP provided no services other than
audit, audit-related and tax services.
The Audit Committee has considered the effect of Ernst & Young, LLP's providing
tax services and other non-audit services on the firm's independence. All
engagements for services by Ernst & Young LLP or other independent accountants
are subject to prior approval by the Audit Committee. Prior approval was given
for all services provided by Ernst & Young LLP in fiscal 2003
PART IV
Item 15. Exhibits, 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, 2003 and 2002.
Consolidated Statements of Income for the Years Ended
June 30, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 2002 and 2001.
Consolidated Statements of Shareholders' Equity For the Years
Ended June 30, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules: Financial Statement Schedules
are omitted as they are not applicable, of the required information
is given in the consolidated financial statements of notes thereto.
(b) Reports on Form 8-K.
A form 8-K dated April 30, 2003 and filed with the Commission on May 1, 2003
announced the election of Thomas A. Maloof and John Samore, Jr. to the
Company's Board of Directors. A majority of the seven Directors are now
independent.
A form 8-K dated July 23, 2003 and filed with the Commission on July 24, 2003
announced approval by the Board of Directors of a loan by the Company to the
ESOP to purchase up to 129,575 shares of Farmer Bros. Co. common stock.
(c) Exhibits
(3) See Exhibit Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FARMER BROS. CO.
By: /s/ Roy E. Farmer
Roy E. Farmer, Chief Executive Officer
Date: October 24, 2003
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
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