SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation Federal ID Number
20333 South Normandie Avenue, Torrance, California
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 [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
2, 2002: 1,926,414 and the aggregate market value of the common shares
held by non-affiliates of the Registrant was approximately $645 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 and creamers), teas,
cocoa, spices, and soup and beverage bases to restaurants and other
institutional establishments that prepare food, including restaurants,
hotels, hospitals, convenience stores and fast food outlets. The product
line presently includes over 300 items. Roasted coffee products make up
54% 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 large cities throughout 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 any 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 like Procter & Gamble and Sara
Lee Foods, grocery distributors like Sysco and U.S. Food Service and
regional coffee roasters like Boyd Coffee Co. and Lingle Bros. 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, 2002, we employed 1,113 employees; 470 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.
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.
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.
2002 2001
High Low Dividend High Low Dividend
1st Quarter $259.50 $215.00 $0.85 $194.19 $165.00 $0.80
2nd Quarter $267.75 $192.00 $0.85 $211.00 $176.88 $0.80
3rd Quarter $304.00 $268.98 $0.85 $258.52 $188.00 $0.80
4th Quarter $370.99 $306.00 $0.85 $239.00 $205.00 $0.80
There were 2,667 holders of record on August 2, 2002.
Item 6. Selected Financial Data
(In thousands, except per share data)
2002 2001 2000 1999 1998
Net sales $205,857 $215,431 $218,688 $221,571 $240,092
Income from operations $38,210 $42,115 $48,965 $36,770 $40,955
Net income $30,569 $36,178 $37,576 $28,865 $33,400
Net income per share $16.54 $19.62 $20.22 $15.16 $17.34
Proforma net income (a) $36,488 $35,445 $27,327 $33,702
Proforma net income (a)
per share $19.79 $19.08 $14.36 $17.71
Total assets $417,524 $390,395 $353,467 $324,836 $307,012
Dividends per share $3.40 $3.20 $3.00 $2.80 $2.55
(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, 2002, 2001 and 2000 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 historically
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 7.20%
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 11% 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 both 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, but intend to begin a multi-year
upgrading of our internal management information system. Additionally we are
prepared to loan additional funds to the employee stock ownership plan (ESOP)
for purchase of up to 300,000 shares of Farmer Bros Co. common stock at a cost
not to exceed $50,000,000. At June 30, 2002 the ESOP loan balance was
$13,243,000.
(In thousands except ratio data)
2002 2001 2000
Current assets(a) $348,434 $318,879 $188,560
Current liabilities $16,259 $17,655 $16,966
Working capital $332,175 $301,224 $171,594
Capital Expenditures $5,039 $5,912 $14,130
(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.
Results of Operations
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 are
still being felt. 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 continues to be 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 appear 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 decreases 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.
Years ended June 30, 2001 and 2000
Fiscal 2001 presented us with a less volatile green coffee market than 2000.
World green coffee supplies, bolstered by new supply from Vietnam and Brazil
pressured green coffee prices. Green coffee prices at June 30, 2001 were
down about 34% from the beginning of 2001. The coffee crop in Brazil, the
world's largest coffee producer, weathered the 2001 frost season (during our
summer) and a good crop was harvested. As depicted in the "Change in Earnings
per Share" analysis below, our 2001 sales declined 1.5%. Net sales decreased
to $215,431,000 in 2001 as compared to $218,688,000 in 2000. The primary cause
of our sales decline was reduced coffee usage by our customers who attributed
this decrease to a variety of causes which, although not quantifiable, included
the increasing number of competing beverages (both hot & cold) and a decrease
in consumer spending.
Gross profit decreased to $141,400,000 in fiscal 2001, or 66% of sales,
compared to $141,719,000 in 2000, or 65% of sales. During fiscal 2001, green
coffee prices declined about 35% as compared to fiscal 2000 prices; however, as
described below gross profit was impacted by the change in accounting for
coffee contracts. During fiscal 2000, green coffee costs increased nearly 40%
in the first half of the year, decreasing to beginning of the year levels by
the first of June 2000. During the month of June 2000, green coffee costs
increased over 30% as the result of a weather threat to the Brazilian coffee
crop.
Operating expenses, composed of selling and general and administrative
expenses increased to $99,285,000 in 2001 from $92,754,000 in 2000. This
increase in 2001 was primarily the result of an increase of $2,181,000, or 32%,
in the cost of providing coffee brewing equipment to our customers and an
increase of $2,678,000, or 4.2%, in payroll & employee benefits expenses as
compared to fiscal 2000. This increase is primarily related to the cost of our
employee stock ownership plan.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-An Amendment of FASB Statement
133." The adoption of Statement Nos. 133 and 138 on July 1, 2001 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. Upon adoption of
SFAS 133, securities were reclassified from the "available for sale" to the
"trading" category. This resulted in the recognition of the accumulated
unrealized loss of $3,894,000 in other income. All investments, consisting
of marketable debt and equity securities, interest rate futures or options
and money market instruments, are now held for trading purposes and are
stated at fair value. Gains and losses, both realized and unrealized, are
now included in other income and expense. Other income increased to
$17,401,000 in 2001 as compared to $12,254,000 in 2000 as the result of an
increase in trading securities and coffee contracts net of the reclassification
adjustment described above.
Income before taxes was $59,516,000 or 28% of sales in 2001, as compared to
$61,219,000 or 28% of sales in 2000. Net income for fiscal year 2001 was
$36,178,000, or $19.62 per share, as compared to $37,576,000, or $20.22 per
share, in 2000.
Change in Earnings Per Share
The following provides additional information regarding changes in
operating results.
2002 2001 2000
Net income per common share $16.54 $19.62 $20.22
Percentage change:
2002 to 2001 2001 to 2000
Net sales (4.4)% (1.5)%
Cost of goods sold (8.5)% (3.8)%
Gross profit (2.3)% (0.2)%
Operating expenses 0.6 % 7.0 %
Income from operations (9.3)% (14.0)%
Provisions for income taxes (18.4)% (2.6)%
Net income (15.5)% (3.7)%
A summary of the change in earnings per share, which highlights
factors discussed earlier, is as follows:
Per Share Earnings
2002 vs. 2001 2001 vs. 2000
Coffee: Prices $ 0.15 $ 0.32
Volume (3.71) (3.20)
Cost 2.25 2.09
Gross profit (1.31) (0.79)
Allied products: Gross profit (0.48) 0.62
Operating expenses (0.32) (3.54)
Other income (3.38) 2.79
Provision for income taxes 2.29 0.33
Accounting change 0.17 (0.17)
Change in weighted average
shares outstanding (0.05) 0.16
Net income $ (3.08) $(0.60)
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 often 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 52% of all outstanding shares are owned or controlled by Company
employees, officers and directors. The combined holdings of the 8 largest
institutions are approximately 24% of outstanding shares. Including the
holdings of a former director of approximately 10% of outstanding shares,
current and former management and institutions control approximately 83% of
shares. Future sales of Company stock 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 up to
$50,000,000 to acquire shares. As additional shares come available, we expect
that a substantial additional amount will be approved to finance that
acquisition of shares. This 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 take on a growing 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 disbursed 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.
Our internal management information system is several years old and in need of
updating. The Company has embarked on a two year program to update these
systems by converting to a single enterprise-wide software. We believe this
will be a challenging conversion. While our personnel and consultants are
working to make the conversion a success, it is possible that the conversion
cost, 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, 2002 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.
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 includes discount commercial paper, medium term notes,
federal agency issues and treasury securities. As of June 30, 2002 over
80% of these funds were invested in instruments with maturities shorter
than 180 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 $2,400,000.
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, 2002. 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.
Interest Rate Changes
(In thousands)
Market Value at June 30, 2002 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points "(b.p.")$56,169 $0 $56,169 $6,477
- -100 b.p. 53,071 6 53,077 3,385
Unchanged 48,873 819 49,692 0
+100 b.p. 44,693 4,679 49,372 (320)
+200 b.p. 40,735 8,257 48,992 (700)
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.
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, 2002. 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, 2002.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee June 30, 2002 Change in Market Value
Change Inventory Futures & Options Total Derivatives Inventory
- -10% $12,448 $121 $12,569 $58 ($1,383)
unchanged 13,831 63 13,894 -
+10% 15,214 5 15,219 (58) $1,383
At June 30, 2002 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, 2002 and 2001, and
the related consolidated statements of income, cash flows, and
shareholders' equity for the three years ended June 30, 2002. 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, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for derivative financial
instruments in 2001.
/s/Ernst & Young LLP
Long Beach, California
September 6, 2002
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 7,047 $ 29,001
Short term investments 285,540 234,179
Accounts and notes receivable, net 14,004 15,326
Inventories 37,361 35,780
Income tax receivable 2,553 2,991
Deferred income taxes 1,188 1,092
Prepaid expenses 741 510
Total current assets 348,434 318,879
Property, plant and equipment, net 38,572 39,094
Notes receivable 224 2,727
Other assets 27,622 26,432
Deferred income taxes 2,672 3,263
Total assets $417,524 $390,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,827 $ $5,153
Accrued payroll expenses 6,407 6,421
Other 5,025 6,081
Total current liabilities 16,259 17,655
Accrued postretirement benefits 22,726 20,800
Other long term liabilities 5,486 4,892
Total Liabilities 44,471 43,347
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 17,627 16,629
Retained earnings 365,725 341,434
Unearned ESOP shares (12,225) (12,941)
Total shareholders' equity 373,053 347,048
Total liabilities and
shareholders' equity $417,524 $390,395
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
Years ended June 30,
2002 2001 2000
Net sales $205,857 $215,431 $218,688
Cost of goods sold 67,764 74,031 76,969
138,093 141,400 141,719
Selling expense 86,025 84,524 82,858
General and administrative expense 13,858 14,761 9,896
99,883 99,285 92,754
Income from operations 38,210 42,115 48,965
Other income:
Dividend income 3,198 3,039 2,741
Interest income 7,261 12,308 10,080
Other, net 691 2,054 (567)
11,150 17,401 12,254
Income before taxes 49,360 59,516 61,219
Income taxes 18,791 23,028 23,643
Income before cumulative effect
of accounting change $30,569 $36,488 $37,576
Cumulative effect of accounting
change (net of income taxes
of $205) - (310) -
Net income $30,569 $36,178 $37,576
Income per common share:
Before cumulative effect of
accounting change $16.54 $19.79 $20.22
Cumulative effect of
accounting change - ($0.17) -
Net income per common share $16.54 $19.62 $20.22
Pro forma assuming accounting changes
were retroactively applied
Net income $36,488 $35,445
Net income per common share $19.79 $19.08
Weighted average shares
outstanding 1,848,395 1,843,392 1,858,034
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,
2002 2001 2000
Cash flows from operating activities:
Net income $30,569 $36,178 $37,576
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Cumulative effect of accounting change - 310 -
Depreciation 5,493 5,527 5,628
Deferred income taxes 495 1,736 2,505
(Gain) loss on sales of assets (239) (131) 686
ESOP compensation expense 2,529 1,398 489
Net (gain) loss on investments (51) (1,614) 1,502
Net unrealized loss on investments
reclassified as trading - 2,337 -
Change in assets and liabilities:
Short term investments (51,310) (23,976) -
Accounts and notes receivable 1,220 2,769 (335)
Inventories (1,581) 990 (3,095)
Income tax receivable 438 (1,651) (1,091)
Prepaid expenses and other assets (1,421) (2,130) (3,128)
Accounts payable (326) (768) 1,135
Accrued payroll and expenses and
other liabilities (1,070) 1,457 (87)
Accrued postretirement benefits 1,926 1,602 1,491
Other long term liabilities 594 702 690
Total adjustments (43,303) (11,442) 6,390
Net cash (used in) provided by operating activities (12,734) $24,736 $43,966
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,
2002 2001 2000
Net cash (used in) provided by
operating activities $(12,734) $24,736 $43,966
Cash flows from investing activities:
Purchases of property, plant and equipment (5,039) (5,912) (14,130)
Proceeds from sales of property,
plant and equipment 307 207 700
Purchases of available for sale investments - - (278,083)
Proceeds from sales of available for
sale investments - - 268,337
Notes issued (35) (78) -
Notes repaid 2,640 831 843
Net cash used in investing activities $ (2,127) ($4,952) ($22,333)
Cash flows from financing activities:
Dividends paid (6,278) (5,897) (5,580)
Common stock repurchased - - (4,103)
Common stock issued - - 13,287
ESOP contributions (815) (390) (14,136)
Net cash used in financing activities (7,093) (6,287) (10,532)
Net (decrease) increase in cash
and cash equivalents (21,954) 13,497 11,101
Cash and cash equivalents at beginning of year 29,001 15,504 4,403
Cash and cash equivalents at end of year $ 7,047 $29,001 $15,504
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated
(Dollars in thousands, except share data) Additional Unearned Other
Common Stock Paid-in Retained Esop Comprehensive
Shares Amount Capital Earnings Shares Income (Loss) Total
Balance at June 30,1999 1,870,754 $1,871 $3,164 $283,191 $0 ($515) $287,711
Comprehensive income
Net income 37,576 37,576
Other comprehensive income,
net of taxes - -
Change in unrealized gain on
available for sale securities (2,512) (2,512)
Reclassification adjustment
for realized gain 381 381
(2,131) (2,131)
Total comprehensive income 35,445
Dividends ($3.00 per share) (5,580) (5,580)
Common stock repurchased (25,715) (26) (43) (4,034) (4,103)
Common stock issued to ESOP 81,375 81 13,206 (13,287) 0
ESOP contributions (849) (849)
ESOP compensation expense 32 457 489
Balance at June 30,2000 1,926,414 $1,926 $16,359 $311,153 ($13,679) ($2,646) $313,113
Comprehensive income
Net income 36,178 36,178
Transition adjustment for SFAS No. 133 2,646 2,646
Total comprehensive income 2,646 2,646
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 1,926,414 $1,926 $16,629 $341,434 ($12,941) - $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 1,926,414 $1,926 $17,627 $365,725 ($12,225) - $373,053
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of
roasting, packaging, and distributing coffee and allied products through direct
sales to restaurants, hotels, hospitals, convenience stores and fast food
outlets. The Company's products are distributed by its selling divisions from
branch warehouses located in most large cities throughout the western United
States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary FBC Finance Company. All significant inter-company
balances and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with accounting
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.
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, 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, 2002, 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
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, 2002.
Accordingly, the consolidated financial statements present only basic net
income per share.
Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the Company evaluates the carrying value
of its property, plant and equipment on an ongoing basis and recognizes an
impairment when the estimated future undiscounted cash flows from operations
are less than the carrying value of the related long-lived assets.
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.
Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of and
is effective for fiscal years beginning after December 15, 2001. SFAS retains
certain fundamental provisions of SFAS No. 121 including recognition and
measurement of the impairment of long-lived assets to be held and used and
measurement of long-lived assets to be disposed of by sale. The Company is
presently assessing the effect of adopting SFAS No. 144.
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, 2002 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)
2002 2001
Trading securities at fair value
Corporate debt $18,863 $85,427
U.S. Treasury Obligations 184,756 61,267
U.S. Agency Obligations 26,983 31,958
Preferred Stock 48,873 46,254
Other fixed income 5,181 8,011
Futures, options and other derivatives 884 1,262
$285,540 $234,179
Note 3 Allowance for Doubtful Accounts
June 30,
(In thousands) 2002 2001 2000
Balance at beginning of year $395 $420 $470
Additions 218 346 280
Deductions (268) (371) (330)
Balance at end of year $345 $395 $420
Note 4 Inventories
June 30, 2002
(In thousands) 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
June 30, 2001
(In thousands) Processed Unprocessed Total
Coffee $4,120 $8,752 $12,872
Allied products 13,847 3,980 17,827
Coffee brewing equipment 2,201 2,880 5,081
$20,168 $15,612 $35,780
Current cost of coffee and allied products inventories is (less than) or
greater than the LIFO cost by approximately $(491,000) and $1,553,000 as of
June 2002 and 2001, respectively.
The change in the Company's green coffee and allied product inventories during
fiscal 2002, 2001, and 2000 resulted in LIFO decrements which had the effect of
increasing income before taxes those years by $207,000, 1,283,000, and
$277,000, respectively.
Note 5 Property, Plant and Equipment
(In thousands)
June 30,
2002 2001
Buildings and facilities $40,914 $39,858
Machinery and equipment 48,690 48,999
Office furniture and equipment 6,055 6,280
95,659 95,137
Accumulated depreciation (62,950) (61,880)
Land 5,863 5,837
$38,572 $39,094
Maintenance and repairs charged to expense for the years ended June 30, 2002,
2001, and 2000 were $11,202,000, $10,514,000, and $10,596,000, 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 Accrued
Benefit Pensions Postretirement
Benefits
June 30, June 30,
2002 2001 2002 2001
Changes in benefit obligation
Benefit obligation at
the beginning of the year $48,909 $42,461 $22,951 18,908
Service cost 1,527 1,338 670 646
Interest cost 3,684 3,446 1,721 1,539
Plan participants' contributions 160 146 117 71
Amendments 285 (907)
Actuarial loss 3,153 4,163 651 2,633
Benefits paid (2,602) (2,645) (869)
(846)
Benefit obligation at
the end of the year $55,116 $48,909 $24,335 $22,951
Changes in plan assets
Fair value in plan assets at
the beginning of the year $79,259 $77,337 $ - $ -
Actual return on plan assets (1,285) 4,401 - -
Company contributions 21 20 752 775
Plan participants' contributions 160 146 117 71
Benefits paid (2,602) (2,645) (869) (846)
Fair value in plan assets at
the end of the year $75,553 $79,259 $ - $ -
Funded status of the Plan $20,437 $30,350 ($24,335)($22,951)
Unrecognized net asset (657) (1,314) - -
Unrecognized net gain 1,062 (11,062) 17 2,784
Unrecognized prior service cost (88) 1,016 1,592 (633)
Prepaid accrued benefit cost $20,754 $18,990 ($22,726)($20,800)
Weighted average assumptions as
of June 30:
Discount rate 7.20% 7.70% 7.20% 7.70%
Expected return on Plan assets 8.00% 8.00% - -
Rate of compensation increase 3.50% 3.50% - -
Initial medical rate trend 11.00% 12.00%
Ultimate medical trend rate 5.50% 5.50%
Number of years from initial to ultimate trend rate 6 7
Initial dental/vision trend rate 7.50% 8.00%
Ultimate dental/vision trend rate 5.50% 5.50%
Defined Accrued
Benefit Pensions Postretirement Benefits
June 30, June 30,
2002 2001 2000 2002 2001 2000
Components of net periodic
benefit costs
Service cost $ 1,527 $1,338 $1,617 $ 670 $646 $ 661
Interest cost 3,684 3,446 3,252 1,721 1,539 1,290
Expected return on
Plan assets (6,267) (6,121) (6,191) - - -
Actuarial gain - - - - - (68)
Unrecognized net
transition asset (657) (657) (657) - - -
Unrecognized net gain (268) (840) (757) (94) -
Unrecognized prior
service cost 239 239 239 286 286 286
Benefit cost (1,742) ($2,595) ($2,497) $2,677 $2,377 $2,169
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:
Other Information 2002 2001
1% Increase in Trend Rates
Effect on service + interest cost $ 90 $131
Effect on APBO 897 751
1% Decrease in Trend Rates
Effect on service + interest cost (95) (140)
Effect on APBO (963) (806)
At June 30, 2002 and 2001, the Farmer Bros. Co. Plan benefit obligation was
$52,088,000 and $46,369,000, respectively, and the prepaid benefit cost was
$19,080,000 and $17,415,000, respectively. At June 30, 2002 and 2001, the
Brewmatic Company Plan benefit obligation was $3,028,000 and $2,540,000,
respectively, and the prepaid benefit cost was $1,674,000 and $1,574,000,
respectively.
The Farmer Bros. Co. Plan owned 39,940 shares of the Company's common stock at
June 30, 2002, with a fair value of approximately $14,489,000. The Brewmatic
Co. Plan owned 2,400 shares of the Company's common stock at June 30, 2002,
with a fair value of approximately $871,000. The Company paid dividends of
$136,000 and $8,000 for the year ended June 30, 2002 to the Farmer Bros. Co.
Plan and the Brewmatic Co. Plan, respectively.
The Company contributes to two multi-employer defined benefit plans for certain
union employees. The contributions to these multi-employer pension plans were
approximately $2,183,000, $2,144,000, and $2,005,000 for 2002, 2001, and 2000
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
$595,000, $701,000, and $690,000 for the years ended June 30, 2002, 2001, and
2000, 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 year ended June 30, 2000 the Company loaned the ESOP $14,136,000, which
the ESOP used to purchase 86,575 shares of the Company's common stock. For the
year ended June 30, 2001 the Company loaned the ESOP an additional $389,880,
which the ESOP used to purchase 2,200 shares of the Company's common stock. For
the year ended June 30, 2002 the Company loaned the ESOP $815,040, which was
used by the ESOP to purchase 3,800 shares of the Company's common stock.
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, 2002 and June 30, 2001
the Company charged $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 $998,000 and $270,000 for the
years ended June 30, 2002 and June 30, 2001, respectively, is recorded as
additional paid in capital.
June 30,
2002 2001
Allocated shares 16,083 6,673
Committed to be released share 3,636 2,939
Unallocated shares 74,003 79,163
Total ESOP Shares 93,722 88,775
Fair value of ESOP shares $34,000,000 $20,685,000
Note 7 Income Taxes
The current and deferred components of the provision for income taxes consist
of the following:
June 30,
(In thousands) 2002 2001 2000
Current: Federal $15,367 $17,607 $18,249
State 2,929 3,685 2,889
$18,296 21,292 21,138
Deferred: Federal 434 1,451 1,174
State 61 285 1,334
495 1,736 2,505
$18,791 $23,028 $23,643
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:
June 30,
2002 2001 2000
Statutory tax rate 35.0% 35.0% 35.0%
Income tax expense at statutory rate $17,276 $20,831 $21,427
State income tax (net federal tax benefit) 1,943 2,552 2,809
Dividend income exclusion (767) (731) (660)
Other (net) 339 376 67
$18,791 $23,028 $23,643
Income taxes paid $17,881 $24,879 $22,622
The primary components of temporary differences which give rise to the
Company's net deferred tax assets are as follows:
(In thousands) June 30,
2002 2001
Deferred tax assets:
Postretirement benefits $ 8,938 $ 8,239
Accrued liabilities 4,426 4,364
State taxes 791 941
$14,155 $13,544
Deferred tax liabilities:
Pension assets $(7,877) $(7,236)
Other (2,418) (1,953)
(10,295) (9,189)
Net deferred tax assets $ 3,860 $ 4,355
Note 8 Other Current Liabilities
(In thousands)
Other current liabilities consist of the following:
June 30,
2002 2001
Accrued workers' compensation liabilities $3,119 $3,316
Dividends payable 1,637 1,541
Other 269 1,224
$5,025 $6,081
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, 2002, 2001, and 2000,
respectively, and is obligated under leases for branch warehouses. Certain
leases contain renewal options.
Future minimum lease payments are as follows:
June 30, (In thousands)
2003 $ 615
2004 449
2005 203
2006 89
2007 51
$1,407
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,
2001 2001 2002 2002
Net sales $49,400 $54,755 $51,298 $50,404
Gross profit 32,569 37,337 34,786 33,401
Income from operations 9,286 11,891 9,843 7,190
Net income 7,763 9,733 6,406 6,667
Net income per common share $4.21 $5.27 $3.47 $3.60
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
Net sales $52,015 $57,795 $54,814 $50,807
Gross profit 32,303 38,631 36,413 34,053
Income from operations 9,458 14,764 11,882 6,011
Income before cumulative
effect adjustment 7,911 11,807 9,793 6,977
Net income 7,601 11,807 9,793 6,977
Income per common share before
cumulative effect
adjustment $4.30 $6.40 $5.32 $3.78
Net income per common share $4.13 $6.40 $5.32 $3.78
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Name Age Served as a Director Principal Occupation
Continuously Since for the Last Five Years
Roy F. Farmer (1) 86 1951 Chairman and Chief Executive Officer
Roy E. Farmer (1) 50 1993 President and Chief Operating Officer
Guenter W. Berger 65 1980 Vice President - Production
Lewis A. Coffman 83 1983 Retired (formerly Vice President - Sales)
John M. Anglin(2) 55 1985 Partner in Law Firm of Anglin, Flewelling,
Rasmussen, Campbell & Trytten, LLP, Pasadena,
California since 2002; partner in Law Firm
of Walker, Wright, Tyler and Ward, LLP,
Los Angeles, California, previously.
John H. Merrell 58 2001 Partner in Accounting Firm of Hutchinson
and Bloodgood LLP, Glendale, California
(1) Roy F. Farmer is the father of Roy E. Farmer.
(2) Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP provides legal
services to the Company.
Executive Officers
Name Age Position Last Five Years
Roy F. Farmer 86 Chairman and Chief Executive Officer.
Roy E. Farmer 50 President and Chief Operating Officer,
son of CEO, R. F. Farmer.
Guenter W. Berger 65 Vice President of Production.
Kenneth R. Carson 62 Vice President of Sales.
John E. Simmons 51 Secretary-Treasurer since 2001; Treasurer since 1985.
All officers are elected annually by the Board of Directors and serve at the
pleasure of the Board.
Item 11. Executive Compensation
Summary Compensation Table
Annual Other
Name and Principal Fiscal Compensation Annual All Other
Position Year Salary Bonus(2) Compensation
Compensation(1)
ROY F. FARMER 2002 $1,000,000 $450,000 $ - $138,815 (3)
Chairman and CEO 2001 $1,000,000 $450,000 $ - $117,482 (3)
2000 $1,000,000 $500,000 $ - $104,721 (3)
ROY E. FARMER 2002 $325,730 $300,000 $ - $425
President and COO 2001 $309,000 $300,000 $ - $383
2000 $302,933 $250,000 $ - $343
GUENTER W. BERGER 2002 $238,113 $100,000 $ - $630
Vice President, 2001 $224,149 $100,000 $ - $570
Production 2000 $221,561 $100,000 $ - $520
KENNETH R. CARSON 2002 $208,544 $75,000 $ - $384
Vice President, Sales 2001 $197,080 $75,000 $ - $356
2000 $194,805 $75,000 $ - $331
JOHN E. SIMMONS 2002 $188,584 $75,000 $ - $148
Treasurer 2001 $178,849 $75,000 $ - $181
2000 $175,114 $75,000 $ - $166
(1) 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.
(2) Awarded under the Company's Incentive Compensation Plan. The awards for
fiscal 2002 were based primarily upon the Company's earnings achieved that
year. Roy F. Farmer's award has been deferred until death or retirement.
The awards to the other officers were paid currently (See "Compensation
Committee Report," infra.).
(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
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 76,750
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 above table shows estimated annual benefits payable for the 2002 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.
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 2001).
Credited years of service through December 31, 2001 were as follows:
Guenter W. Berger - 37 years; Roy E. Farmer - 25 years; Kenneth R. Carson -
36 years; John E. Simmons - 20 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
Each director who is not a Company employee is 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). A
director also will receive reimbursement of travel expenses from outside the
greater Los Angeles area to attend a meeting.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee (the "Committee") is comprised of John M.
Anglin, a director, Lewis A. Coffman, a director and retired executive
officer of the Company, and John H. Merrell, a director.
Compensation Committee Report
The Compensation Committee, comprised of Messrs. Anglin, Coffman and
Merrell, met once in fiscal 2002. The Compensation Committee makes all
determinations with respect to executive compensation and administers the
Company's Incentive Compensation Plan.
Compensation 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.
Chief Executive Officer Compensation
In 1999 the Committee obtained a competitive compensation study
prepared by Ernst & Young LLP relating to Roy F. Farmer's compensation. The
study concluded that the total direct compensation paid to CEO's of companies
deemed comparable by Ernst & Young LLP was in the range of $669,700 to
$1,444,000. The term "total direct compensation", as used in the Ernst &
Young LLP study, does not include retirement benefits (including pension
plans, 401(k) plans, deferred compensation plans and supplemental retirement
plans or split-dollar life insurance programs) typically provided to CEO's of
successful companies. The Committee determined that the retirement benefits
provided to Mr. Farmer were well below those provided to CEO's of comparable
companies.
The Committee determined that Roy F. Farmer's salary for the fiscal
year ended June 30, 2002, excluding the award under the Company's Incentive
Compensation Plan (see below), be $1,000,000. This represents no change from
fiscal 2001.
Incentive Compensation Plan
The Company made awards under its Incentive Compensation Plan (the
"Plan") for fiscal 2002 to all executive officers. The Committee felt that
awards were justified in light of the Company's performance in 2002.
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
2002 under the Incentive Compensation Plan was in excess of $15 million. Of
the available pool, the Committee awarded a total of $1 million of which
$450,000 was awarded to Roy F. Farmer, the Company's Chief Executive Officer,
and $550,000 in toto was awarded to the other executive officers.
The award to Roy F. Farmer is payable in five annual installments
commencing upon retirement. The unpaid balance of the award is payable upon
death. Under the terms of the Plan, the unpaid balance of deferred awards is
increased by a growth factor keyed to the Company's average return on
invested funds. Under Plan provisions, the unpaid portion of deferred awards
is forfeited in the event the recipient engages in activities competitive
with the Company or is guilty of malfeasance.
In making the award to Roy F. Farmer, the Committee was motivated
primarily by the earnings achieved by the Company in 2002 and Mr. Farmer's
substantial contribution to those earnings.
John M. Anglin
Lewis A. Coffman
John H. Merrell
Performance Graph
Comparison of Five-Year Cumulative Total Return*
Farmer Brothers Co., Russell 2000 Index And Value
Line Food Processing Index
(Performance Results Through 6/30/02)
1997 1998 1999 2000 2001 2002
Farmer Brothers Co. 100.00 191.78 164.68 144.78 189.44 298.02
Russell 2000 Index 100.00 116.13 117.14 132.38 129.50 116.87
Food Processing 100.00 134.95 129.38 134.32 163.58 201.16
Assumes $100 invested at the close of trading 6/30/97 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
(a) Beneficial Ownership Reporting Compliance
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 835,071 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%
c/o Farmer Bros. Co.
20333 South Normandie Ave.
Torrance, California 90502
Franklin Mutual Advisers, LLC 184,688 shares (4) 9.59%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Attn: Bradley Takahashi
(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 60 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 September 19, 2002 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.
(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
Roy F. Farmer (See "Item 12(a)," supra)
Guenter W. Berger 560(2) *
Lewis A. Coffman 15(3) *
Roy E. Farmer 38,271(4) 1.99%
John M. Anglin None -
Kenneth R. Carson 310(5) *
John E. Simmons 422(6) *
John H. Merrell None -
All directors and exec
officers as a group (8 persons) 992,228(7) 51.51%
* Less than 1%.
(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 60 shares beneficially owned by Mr. Berger through the
Company's ESOP, rounded to the nearest whole share. Excludes other shares
owned by Company benefit plans over which Mr. Berger has shared voting
and/or investment power as a member of the plan committees. Mr. Berger
disclaims beneficial ownership of such benefit plan shares. See footnote (7)
below.
(3) Voting and investment power shared with spouse.
(4) Includes 4,000 shares owned outright by Mr. Farmer, 34,211 shares held
by various trusts of which Mr. Farmer is sole trustee and 60 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 Item 12(a),
supra) and of which Roy E. Farmer is the beneficiary. Excludes other shares
owned by Company benefit plans over which Mr. Farmer has shared voting
and/or investment power as a member of the plan committees. Mr. Farmer
disclaims beneficial ownership of such benefit plan shares. See footnote (7)
below.
(5) Includes 60 shares beneficially owned by Mr. Carson through the
Company's ESOP, rounded to the nearest whole share. Excludes other shares
owned by Company benefit plans over which Mr. Carson has shared voting
and/or investment power as a member of the plan committees. Mr. Carson
disclaims beneficial ownership of such benefit plan shares. See footnote (7)
below.
(6) Voting and investment power shared with spouse, includes 60 shares
beneficially owned by Mr. Simmons through the Company's ESOP, rounded to the
nearest whole share. Excludes other shares owned by Company benefit plans
over which Mr. Simmons has shared voting and/or investment power as a member
of the plan committees. Mr. Simmons disclaims beneficial ownership of
such benefit plan shares. See footnote (7) below.
(7) Includes 77,639 unallocated shares held by the Company's ESOP and 39,940
shares held by the Farmer Bros Co. Plan (pension) over which officers,
as members of the plan committees, have direct or indirect voting and
investment power. Excludes 16,083 allocated shares held by the Company's
ESOP over which plan committee members have voting rights only if the
participants fail to vote.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information set forth in Items 10 and 11 of
this Form 10-K Annual Report.
PART IV
Item 14. 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, 2002 and 2001.
Consolidated Statements of Income for the Years Ended
June 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2002, 2001 and 2000.
Consolidated Statements of Shareholders' Equity For the Years
Ended June 30, 2002, 2001, and 2000.
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) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
(c) Exhibits
(3)(i) Amended and Restated Articles of Incorporation filed January 29, 2002.
(3)(ii) By-Laws: Registrant's bylaws as amended are incorporated by reference
to Registrant's report on Form 10-K/A filed February 15, 2002.
(10) Material contracts:
10.1 The Farmer Bros. Co. Pension Plan for Salaried Employees: filed
herewith.
10.2 The Farmer Bros. Co. Incentive Compensation Plan: filed herewith.
10.3 The Farmer Bros. Co. Employee Stock Ownership Plan: filed herewith.
(21) Subsidiaries of the Registrant:
Subsidiary information filed herewith.
(99) Additional Exhibits.
Property information filed herewith.
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 F. Farmer
Roy F. Farmer, Chief Executive Officer and Director
Date: September 25, 2002
By: /s/ John E. Simmons
John E. Simmons, Treasurer and Chief Financial and Accounting Officer
Date: September 25, 2002
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 Director
Date: September 25, 2002
/s/ John M. Anglin
John M. Anglin, Director
Date: September 25, 2002
/s/ Guenter W. Berger
Guenter W. Berger, Vice President and Director
Date: September 25, 2002
CERTIFICATIONS
I, Roy F. Farmer, certify that:
1. I have reviewed this annual report on Form 10-K of Farmer Bros. Co.;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
/s/ Roy F. Farmer
____________________________
Roy F. Farmer, Chief Executive Officer
Dated: September 25, 2002.
I, John E. Simmons, certify that:
1. I have reviewed this annual report on Form 10-K of Farmer Bros. Co.;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
/s/ John E. Simmons
____________________________
John E. Simmons, Chief Financial Officer
Dated: September 25, 2002.