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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, 1997
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation Federal ID Number
20333 S. Normandie Avenue, Torrance, California 90502
Registrant's address Zip
(310) 787-5200
Registrant's telephone number
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 on each exchange on which registered
Common stock, OTC
$1.00 par value
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 31, 1997: 1,926,414 and the aggregate market value of the common
shares held by non-affiliates of the Registrant was approximately $139
million.
Documents Incorporated by Reference
Certain portions of the Registrant's definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, in connection with the Annual Meeting of Shareholders of the
Registrant to be held on December 1, 1997 are incorporated by reference
into Part III of this report. The Form 8-K/A dated and filed with the SEC
on April 14, 1997 is incorporated by reference into Part II of this report.
PAGE 1 OF 27 PAGES
PART I
Item 1. Business
General: Farmer Bros. Co. (the "Company" or "Registrant") was incorporated
in California in 1923, and is in the business of roasting, packaging and
distributing coffee and allied products to restaurants, hotels, hospitals,
convenience stores and fast food outlets.
Raw Materials and Supplies: Registrant's primary raw material is green
coffee. Roast coffee sales account for approximately 60% of revenues.
Coffee purchasing, roasting and packaging takes place at Registrant's
Torrance, California plant, which is also the distribution hub for its
branches. Green coffee is purchased through domestic commodity brokers.
Coffee is an agricultural commodity, and is subject to fluctuations of both
price and supply. Registrant has not been confronted by shortages in the
supply of green coffee. Green coffee is grown outside the United States
and can be subject to volatile price fluctuations resulting from concerns
about 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.
Trademarks & Patents: Registrant owns approximately 34 registered U.S.
trademarks which are integral to customer identification of its products.
It is not possible to assess the impact of the loss of such identification.
Seasonality: Registrant experiences some seasonal influences. The winter
months are the best sales months. Registrant's product line and geographic
diversity provides some sales stability during the summertime decline in
coffee consumption during the warmer months.
Distribution: Registrant's products are distributed by its selling
divisions from 97 branches located in most large cities throughout the
western states. The diversity of the product line (over 300 products) and
size of the geographic area served requires each branch to maintain a
sizable inventory. Registrant operates its own trucking fleet to more
effectively control the supply of these warehouses.
Customers: No customer represents a significant concentration of sales.
The loss of any one or more of the larger customer accounts would have no
material adverse effect on the Company. Customer contact and service
quality, which is integral to Registrant's sales effort, is often secondary
to product pricing for customers with their own distribution systems.
Competition: Registrant faces competition from many sources, including
multi-national companies like Procter and Gamble, Nestle and Philip Morris,
grocery distributors like Sysco and Rykoff-Sexton and regional roasters
like Boyd Coffee Co., Lingle Bros. and Royal Cup. Registrant has some
competitive advantages due to its longevity, strong regional roots and
sales and service force. Registrant's customer base is price sensitive and
the Company is often faced with price competition.
Item 1. Business, Continued
Working Capital: Registrant finances its operations internally.
Management believes that working capital from internal sources will be
adequate for the coming year. Registrant maintains a $50,000,000 line of
credit with Bank of America. There is no commitment fee or compensating
balance requirement and the line was not used in fiscal year 1997.
Foreign Operations: Registrant has no material revenues that result from
foreign operations. Coffee brewing equipment is sold through distributors
in Canada and Japan and manufactured in Europe under license.
Other: On June 30, 1997, Registrant employed 1,168 employees; 410 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 the Company's financial
condition or results of operations. The nature of Registrant's business
does not provide for maintenance of or reliance upon a sales backlog.
Item 2. Properties
Registrant's largest facility is the 474,000 sq. ft. roasting plant,
warehouses and administrative offices in Torrance, California. Registrant
believes the existing plant will continue to provide adequate production
capacity for the foreseeable future.
Item 3. Legal Proceedings
Registrant is a defendant in various legal proceedings incidental to its
business which are ordinary and routine. It is management's opinion that
the resolution of these lawsuits will not have a material impact on the
Company's 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
Registrant has 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.
1997 1996
High Low Dividend High Low Dividend
1st Quarter $154.00 $135.00 $ 0.60 $130.00 $116.00 $ 0.50
2nd Quarter 154.00 142.00 0.60 147.00 125.00 0.55
3rd Quarter 155.00 130 00 0.60 144.00 131.75 0.55
4th Quarter 135.00 125.00 0.60 143.00 130.00 0.55
There were 608 holders of record on June 30, 1997.
Item 6. Selected Financial Data
(In thousands, except per share data)
1997 1996 1995
Net sales $224,802 $224,075 $234,662
Income from operations 16,789 29,198 25,235
Net income 16,690 23,363 19,517
Net income per share $8.66 $12.13 $10.13
Total assets $276,849 $260,890 $244,340
Dividends declared
per share $2.40 $2.15 $2.00
1994 1993
Net sales $193,861 $190,679
Income from operations 9,488 29,929
Net income 10,330 18,950
Net income per share $5.36 $9.84
Total assets $219,903 $216,266
Dividends declared
per share $2.00 $1.80
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Registrant continues to maintain a strong working capital position, and
management believes cash requirements for the coming year will be provided
by internal sources. Registrant has no major commitments for capital
expenditures at this time.
(In thousands) 1997 1996 1995
Current assets $170,346 $167,059 $149,806
Current liabilities 16,380 14,330 18,724
Working capital $153,966 $152,729 $131,082
Quick ratio 7.96:1 8.51:1 5.73:1
Capital Expenditures $ 4,403 $ 5,277 $ 9,085
Results of Operations
The market for green coffee has been especially volatile during the past
three years. During 1994, Brazil, the world's largest green coffee
producer suffered a series of frosts that damaged its 1994-1995 crop of
green coffee. The cost of green coffee soared by 40% as the market
adjusted to a perceived coffee shortage. Higher green coffee costs were
eventually reflected in selling prices of roast coffee during 1995. The
higher selling prices resulted in lower sales volume in 1995 and 1996.
During 1997, concerns about green coffee stocks, labor problems in coffee
producing countries and the possibility of weather related crop reductions
pushed prices up again.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Coffee prices increased by 250% from December, 1996, to the end of May,
1997. As Registrant raises roast coffee prices to reflect higher green
coffee costs, roast coffee sales volume has declined. It has been reported
by the National Coffee Association that in 1995, after the Brazilian frost,
high coffee prices reduced consumption by 14%. Cost increases of this
magnitude take a period of time to work through inventories, even if green
coffee costs were to decline immediately.
Net sales reached $224,802,000 in 1997 as compared to $224,075,000 in 1996,
and $234,662,000 in 1995. Gross profit decreased to $107,792,000 in 1997,
or 48% of sales, compared to $118,811,000, or 53% of sales, in 1996 and
$112,899,000, or 48% of sales in 1995. Registrant's customers are price
sensitive, and the Company is generally forced to absorb some coffee cost
fluctuations in order to provide stable and predictable pricing.
Operating expenses, composed of selling and general and administrative
expenses increased 2% to $91,003,000 in 1997 from $89,613,000 in 1996, and
$87,664,000 in 1995. Other income, increased 9% to $10,521,000 in 1997 as
compared to $9,691,000 in 1996, and $6,049,000 in 1995 primarily due to an
improved interest rate environment during the 1996 and 1997 fiscal years.
Income before taxes decreased to $27,310,000 or 12% of sales in 1997, as
compared to $38,889,000 or 17% of sales in 1996 and $31,284,000 or 13% of
sales in 1995. Net income for fiscal year 1997 reached $16,690,000, or
$8.66 per share, as compared to $23,363,000, or $12.13 per share, in 1996
and $19,517,000, or $10.13 per share, in 1995.
1997 1996 1995
Net income per share $8.66 $12.13 $10.13
Percentage change:
1997 to 1996 1996 to 1995
Net sales 0.3% (4.5)%
Cost of goods sold 11.2% (13.6)%
Gross profit (9.3)% 5.2%
Operating expenses 1.6% 2.2%
Income from operations (42.5)% 15.7%
Provision for income taxes (31.6)% 31.9%
Net income (28.6)% 19.7%
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Change in Earnings Per Share
A summary of the change in earnings per share, which highlights factors
discussed earlier, is as follows:
Per Share Earnings Per Share Earnings
1997 vs. 1996 1996 vs. 1995
Coffee: Prices $2.49 $(2.02)
Volume (3.75) (3.47)
Cost (5.13) 7.32
Gross Profit (6.39) 1.83
Allied products: Gross Profit 0.67 1.24
Operating expenses (0.72) (1.01)
Other income .43 1.89
Provision for income taxes 2.54 (1.95)
Net income $(3.47) $ 2.00
Price Risk
The Company's operations are significantly impacted by the world market for
green coffee, its largest product. Coffee is an agricultural product and
fundamental shifts in supply or demand produce dramatic price effects.
Coffee is traded domestically on the New York Coffee, Sugar & Cocoa Exchange,
and is one of the largest and most volatile commodity markets. Although
the Company attempts to manage its exposure to price risk by managing its
inventory level, there is no assurance that future green coffee price
fluctuations can be passed on to Registrant's customers. Registrant is
unable to predict either the direction or duration of coffee price swings,
and cautions against using past results to predict future results.
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 sheet of Farmer Bros.
Co. and Subsidiary (the "Company") as of June 30, 1997, and the related
consolidated statements of income, cash flows, and shareholders' equity for
the year ended June 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit
provided 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, 1997 and the consolidated results of
their operations and their cash flows for the year ended June 30, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Long Beach, California
September 12, 1997
Item 8. Financial Statements and Supplementary Data, Continued
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Farmer Bros. Co. and Subsidiary
We have audited the consolidated balance sheet of Farmer Bros. Co. and
Subsidiary (the "Company") as of June 30, 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
two years in the period ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the
Company as of June 30, 1996, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1995.
Coopers & Lybrand L.L.P.
Los Angeles, California
September 25, 1996
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, June 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 34,174 $ 28,165
Short term investments 77,791 74,937
Accounts and notes receivable, net 18,401 18,822
Inventories 35,176 40,818
Income tax receivable 2,216 1,000
Deferred income taxes 1,804 2,616
Prepaid expenses 784 701
Total current assets 170,346 167,059
Property, plant and equipment, net 32,526 33,343
Notes receivable 2,977 1,841
Long term investments 51,341 40,058
Other assets 18,035 17,320
Deferred income taxes 1,624 1,269
Total assets $276,849 $260,890
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,510 $ 4,635
Accrued payroll expenses 4,247 4,153
Other 4,623 5,542
Total current liabilities 16,380 14,330
Accrued postretirement benefits 14,347 12,892
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
and outstanding 1,926,414 shares 1,926 1,926
Additional paid-in capital 568 568
Retained earnings 242,907 230,840
Investment valuation allowance 721 334
Total shareholders' equity 246,122 233,668
Total liabilities and
shareholders' equity $276,849 $260,890
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Years Ended June 30,
1997 1996 1995
Net sales $224,802 $224,075 $234,662
Cost of goods sold 117,010 105,264 121,763
107,792 118,811 112,899
Selling expense 82,967 81,515 76,313
General and admini-
strative expense 8,036 8,098 11,351
91,003 89,613 87,664
Income from operations 16,789 29,198 25,235
Other income (expense):
Dividend income 2,662 2,549 2,459
Interest income 6,624 6,128 4,403
Other, net 1,235 1,014 (813)
10,521 9,691 6,049
Income before taxes 27,310 38,889 31,284
Income taxes 10,620 15,526 11,767
Net income $ 16,690 $ 23,363 $ 19,517
Net income per share $8.66 $12.13 $10.13
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30,
1997 1996 1995
Cash flows from operating
activities:
Net income $16,690 $23,363 $19,517
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 5,353 5,698 4,677
Deferred income taxes 197 145 (170)
Other (144) (645) (47)
Net (gain) loss on
investments (641) (510) 1,384
Change in assets and
liabilities:
Accounts and notes
receivable 466 (383) (2,460)
Inventories 5,642 (4,057) (1,851)
Income tax receivable (1,216) 265 4,092
Prepaid expenses and
other assets (1,014) (1,931) (2,401)
Accounts payable 2,875 (4,773) 6,036
Accrued payroll
expenses and other
liabilities (825) 379 200
Accrued postretirement
benefits 1,455 1,387 1,495
Total adjustments 12,148 (4,425) 10,955
Net cash provided by operating
activities $28,838 $18,938 $30,472
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended June 30,
1997 1996 1995
Net cash provided by operating
activities: $ 28,838 $ 18,938 $ 30,472
Cash flows from investing
activities:
Purchases of property,
plant and equipment (4,403) (5,277) (9,085)
Proceeds from sales of
property, plant
and equipment 228 284 266
Purchases of investments (431,719) (259,995) (164,754)
Proceeds from sales of
investments 418,869 269,955 147,263
Notes issued (1,218) - (760)
Notes repaid 37 81 91
Net cash (used in) provided
by investing activities (18,206) 5,048 (26,979)
Cash flows from financing
activities:
Dividends paid (4,623) (4,142) (3,853)
Net cash used in financing
activities (4,623) (4,142) (3,853)
Net increase (decrease)
in cash and cash
equivalents 6,009 19,844 (360)
Cash and cash equivalents at
beginning of year 28,165 8,321 8,681
Cash and cash equivalents at
end of year $ 34,174 $ 28,165 $ 8,321
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
For the Years Ended June 30,
1997 1996 1995
Common stock $ 1,926 $ 1,926 $ 1,926
Additional paid-in capital 568 568 568
Retained earnings:
Beginning balance 230,840 211,619 195,955
Net income for the year 16,690 23,363 19,517
Dividends (4,623) (4,142) (3,853)
Ending balance 242,907 230,840 211,619
Investment valuation allowance:
Beginning balance 334 (2) (1,044)
Adjustment 387 336 1,042
Ending balance 721 334 (2)
Total shareholders' equity $246,122 $233,668 $214,111
Dividends declared per share $2.40 $2.15 $2.00
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Organization
The Company is in the business of roasting, packaging, and distributing
coffee and allied products to restaurants, hotels, hospitals, convenience
stores and fast food outlets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary FBC Finance Company. All significant
intercompany balances and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues 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, which approximate fair
value.
Investments
The Company adopted Statement of Financial Accounting Standards No. 115
(SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities", as of July 1, 1994. SFAS 115 specifies the accounting
treatment of the Company's investments based on investment classifications
defined in the statement. The Company's investments have been recorded at
fair value and have been classified as "available for sale". Any
unrealized gains or losses on such investments at June 30, 1997, 1996 and
1995 have been recorded as a separate component of shareholders' equity.
The Company's investments have been recorded at fair value, as determined
by quoted market prices, and have been classified as "available for sale".
Any unrealized gains or losses have been recorded as a separate component
of shareholders' equity.
The cost of investments sold is determined on the specific identification
method. Dividend and interest income is accrued as earned.
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.
A. Summary of Significant Accounting Policies, Continued
In the normal course of business, the Company enters into commodity
purchase agreements with suppliers and futures contracts to hedge exposure
to inventory price fluctuations. Gains on the hedging transactions are
deferred as an adjustment to the carrying amount of the inventory and are
recognized in income at the time of the sale of inventory. Losses on the
hedging transactions are recognized in earnings currently as the Company
believes this appropriately reflects its LIFO methodology. Futures
contracts not designated as hedges, and terminations of contracts
designated as hedges, if any, are marked to market, and changes are
recognized in earnings currently. No contracts were outstanding at June
30, 1997 or 1996.
In the event of non-performance by the counterparties, the Company could be
exposed to credit and supply risk. The Company monitors the financial
viability of the counterparties in an attempt to minimize this risk.
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. Other assets are depreciated using the sum-of-
the-years' digits and straight line methods. The following useful lives
are used:
Buildings 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,
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.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which is
effective for periods ending after December 15, 1997; SFAS No. 129,
"Disclosures of Information About Capital Structure," which is effective
for periods ending after December 15, 1997; SFAS No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997; and, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997.
A. Summary of Significant Accounting Policies, Continued
The adoption of SFAS No. 128 and 129 will not impact the computation of
earnings per share or require any additional disclosures. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The changes in unrealized gains and losses from investments,
reported through the Investment Valuation Allowance in shareholders'
equity, is the Company's only component of comprehensive income. The
Company currently plans to adopt this standard in fiscal 1999.
SFAS No. 131 requiries a public enterprise to report financial and
descriptive information about its reportable operating segments based upon
the way management organizes segments within the enterprise for making
operating decisions and assessing performances. The Company is currently
analyzing the various requirements of this standard in order to determine
what additional disclosures, if any, will be required. The Company plans
to adopt the standard in fiscal 1999.
B. Investments
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1997 Cost Loss Gain Value
Current Assets
Commercial Paper $14,814 - 129 $14,943
U.S. Government
Obligations 63,059 (211) - $62,848
$77,873 (211) 129 $77,791
Non-Current Assets
U.S. Government
Obligations $10,453 (169) - $10,284
Corporate debt - - -
Preferred stocks 36,816 (23) 2,575 39,368
Liquid asset fund
and other 1,689 - - 1,689
$48,958 (192) 2,575 $51,341
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1996 Cost Loss Gain Value
Current Assets
Commercial Paper $34,609 (7) 173 $34,775
U.S. Government
Obligations 40,129 - 33 40,162
$74,738 (7) 206 $74,937
Non-Current Assets
U.S. Government
Obligations $ 2,096 (53) - $ 2,043
Corporate debt 1,400 (50) - 1,350
Preferred stocks 34,475 (418) 1,057 35,114
Liquid asset fund
and other 1,551 - - 1,551
$39,522 (521) 1,057 $40,058
B. Investments, Continued
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities Fair Value
(In thousands) 6/30/97 6/30/96
Within one year $77,791 $74,937
After 1 year through 5 years 10,284 2,043
After 5 years through 10 years - 1,350
$88,075 $78,330
Gross realized gains and losses from available for sale securities were
$2,271,000 and ($1,630,000) respectively in 1997, $1,907,000 and
($1,397,000) respectively in 1996 and gross realized gains from available
for sale securities were $1,857,000 in 1995.
The Company hedges interest rate risk in its portfolio of preferred stocks.
A substantial portion of the preferred stock portfolio was hedged with put
options on U.S. Treasury futures traded on a national exchange. Deferred
losses at June 30, 1997 and 1996, associated with the hedge were $1,081,000
and $162,000, respectively. Such deferred gains and losses are recognized
in other income as the related unrealized gains and losses in the preferred
stock portfolio are realized.
C. Allowance for Doubtful Accounts and Notes Receivable
(In thousands) 1997 1996 1995
Balance at beginning of year $555 $545 $445
Additions 429 683 527
Deductions (429) (673) (427)
Balance at end of year $ 555 $555 $545
D. Inventories
June 30, 1997
(In thousands) Processed Unprocessed Total
Coffee $ 3,564 $10,024 $13,588
Allied products 10,551 3,794 14,345
Coffee brewing equipment 2,310 4,933 7,243
$16,425 $18,751 $35,176
June 30, 1996
(In thousands) Processed Unprocessed Total
Coffee $ 5,302 $12,259 $17,561
Allied products 10,846 4,847 15,693
Coffee brewing equipment 2,475 5,089 7,564
$18,623 $22,195 $40,818
Current cost of coffee and allied products inventories exceeds the LIFO
cost by approximately $28,608,000, and $20,475,000 as of June 30, 1997 and
1996, respectively.
D. Inventories, Continued
Decreases in the Company's green coffee inventories during fiscal 1997 and
1995 resulted in LIFO decrements which increased fiscal pre-tax income by
$4,007,000 and $1,008,000, respectively.
E. Property, Plant and Equipment
(In thousands) 1997 1996
Buildings and facilities $30,067 $28,759
Machinery and equipment 45,261 44,439
Office furniture and equipment 6,030 6,236
81,358 79,434
Accumulated depreciation (53,966) (51,225)
Land 5,134 5,134
$32,526 $33,343
Maintenance and repairs charged to expense for the years ended June 30,
1997, 1996 and 1995 were $11,015,000, $11,608,000 and $10,545,000,
respectively.
F. Retirement Plans
The Company has a contributory defined benefit pension plan for all
employees not covered under a collective bargaining agreement (Farmer Bros.
Co.) and a non-contributory defined benefit pension plan for certain hourly
employees covered under a collective bargaining agreement (Brewmatic Co.).
The Company's funding policy is to contribute annually at a rate that is
intended to fund benefits as a level percentage of salary (Farmer Bros.
Co.) and as a level dollar cost per participant (Brewmatic Co.) over the
working lifetime of the plan participants. Benefit payments are determined
under a final pay formula (Farmer Bros. Co.) and flat benefit formula
(Brewmatic Co.)
The net periodic pension benefit for 1997, 1996 and 1995 is comprised of
the following:
(In thousands) Farmer Bros. Co. Brewmatic Co.
1997
Service cost $ 1,300 $ 21
Interest cost 2,479 133
Actual return on assets (7,099) (491)
Net amortization and deferral 2,772 248
Net periodic pension benefit $ (548) $ (89)
1996
Service cost $ 1,200 $ 96
Interest cost 2,310 131
Actual return on assets (7,621) (499)
Net amortization and deferral 3,773 284
Net periodic pension benefit $ (338) $ (65)
F. Retirement Plans, Continued
1995
Service cost $ 875 $ 16
Interest cost 2,083 119
Actual return on assets (5,358) 304
Net amortization and deferral 1,738 (507)
Net periodic pension benefit $ (662) $ (68)
The funded status of the plans at June 30, 1997 was as follows:
(In thousands) Farmer Bros. Co. Brewmatic Co.
Actuarial present value of benefit
obligations:
Vested $31,544 $ 1,792
Non-vested 184 -
Accumulated benefit obligations 31,728 1,792
Effect of projected salary increases 3,457 25
Projected benefit obligations 35,185 1,817
Plan assets at fair value (54,536) (3,262)
Plan assets at fair value in excess
of projected benefit obligations (19,351) (1,445)
Unrecognized net asset at June 30, 1996 3,723 219
Unrecognized prior service cost (1,397) (126)
Unrecognized net gain 7,146 429
Prepaid pension cost $(9,879) $( 923)
Assumptions for 1997:
Discount rate for plan obligations 7.75% 7.75%
Assumed long term return on assets 8.00% 8.00%
Projected compensation increases for
pay related plans 3.10% -
The funded status of the plans at June 30, 1996 was as follows:
(In thousands) Farmer Bros. Co. Brewmatic Co.
Actuarial present value of benefit
obligations:
Vested $29,278 $1,741
Non-vested 172 -
Accumulated benefit obligations 29,450 1,741
Effect of projected salary increases 3,183 43
Projected benefit obligations 32,633 1,784
Plan assets at fair value (49,203) (2,861)
Plan assets at fair value in excess
of projected benefit obligations (16,570) (1,077)
Unrecognized net asset at June 30, 1995 4,344 256
Unrecognized prior service cost (1,580) (145)
Unrecognized net gain (loss) 4,475 149
Prepaid pension cost $(9,331) $ (817)
Assumptions for 1996:
Discount rate for plan obligations 7.75% 7.75%
Assumed long term return on assets 8.00% 8.00%
Projected compensation increases for
pay related plans 3.10% -
F. Retirement Plans, Continued
The assets of each plan are primarily invested in publicly traded stocks
and bonds, U.S. government securities and money market funds. The Farmer
Bros. Co. Retirement Plan owned 28,565 and 27,765 shares of the Company's
common stock at June 30, 1997 and 1996, respectively, with a fair value of
approximately $3,828,000 and $3,832,000, 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 $1,695,000, $1,699,000 and $1,635,000 for 1997,
1996 and 1995, respectively. The Company also has a defined contribution
plan for eligible non-union employees. No Company contributions have been
made nor are required to be made to this plan.
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 unfunded.
The Plan's accumulated postretirement benefit obligation (APBO) is as
follows:
June 30, June 30,
(In thousands) 1997 1996
Retirees and dependents $ 4,887 $ 5,191
Fully eligible active participants 4,774 4,430
Other active plan participants 5,995 5,089
Total APBO $15,656 $14,710
Unrecognized net (loss) gain 2,618 2,394
Unrecognized prior service cost (3,927) (4,212)
Accrued postretirement benefit cost $14,347 $12,892
Net periodic postretirement benefit costs included the following
components:
For the years ended June 30,
(In thousands) 1997 1996 1995
Service cost $512 $485 $587
Interest cost 1,114 1,026 1,042
Amortization of unrecognized
net (gain) loss (58) (70) 58
Unrecognized prior service cost 285 286 71
Net periodic postretirement
benefit cost $1,853 $1,727 $1,758
The assumptions used to determine the APBO and net periodic postretirement
benefit costs are as follows:
For the years ended June 30,
1997 1996 1995
Discount rate, net periodic
postretirement benefit cost 7.75% 7.75% 8.00%
Discount rate, APBO 7.75% 7.75% 7.75%
Medical care cost trend rate* 9.00% 9.00% 9.50%
F. Retirement Plans, Continued
*Assumed to decline gradually to 5.5% in 2003 and thereafter.
Dental care cost trend rate for 1997, 1996 and 1995 was 6.00%.
Increasing the assumed health care costs trend rates by one percentage
point each year would increase the APBO as of June 30, 1997 and 1996 by
$808,000 and $759,000, respectively, and increase the aggregate of the
service cost and interest cost components of net periodic postretirement
benefit cost for the fiscal years ended June 30, 1997 and 1996 by $133,000
and $124,000, respectively
G. Income Taxes
The current and deferred components of the provision for income taxes
consist of the following:
(In thousands) 1997 1996 1995
Current: Federal $ 8,168 $12,621 $ 9,529
State 2,255 2,760 2,406
10,423 15,381 11,935
Deferred: Federal 257 (48) (145)
State (60) 193 (23)
197 145 (168)
$10,620 $15,526 $11,767
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:
1997 1996 1995
Statutory tax rate 35.0% 35.0% 35.0%
(In thousands)
Income tax expense
at statutory rate $9,559 $13,611 $10,949
State income tax
(net of federal tax benefit) 1,426 1,919 1,549
Dividend income exclusion (661) (622) (581)
Other (net) 296 618 (150)
$10,620 $15,526 $11,767
Income taxes paid $13,799 $14,820 $10,908
G. Income Taxes, Continued
The primary components of temporary differences which give rise to the
Company's net deferred tax assets at June 30, 1997 and 1996 are as follows:
(In thousands) June 30, June 30,
1997 1996
Deferred tax assets:
Postretirement benefits $5,726 $5,185
Accrued liabilities 1,616 1,164
State taxes 474 688
Other 694 954
8,510 7,991
Deferred tax liabilities:
Pension assets (3,986) (4,082)
Other (1,096) (24)
(5,082) (4,106)
Net deferred tax assets $3,428 $3,885
H. Other Current Liabilities
Other current liabilites consist of the following:
(In thousands) 1997 1996
Accrued workers'
compensation liabilities $3,293 $3,292
Dividends payable 1,156 1,060
Other 174 1,190
$4,623 $5,542
I. Commitments and Contingencies
The Company incurred rent expense of approximately $658,000, $682,000, and
$678,000, for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively, and is obligated under leases for branch warehouses with
terms not exceeding five years. Certain leases contain renewal options.
Future minimum lease payments are as follows:
June 30, (In thousands)
1998 $510
1999 281
2000 124
2001 72
2002 19
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.
I. Commitments and Contingencies, Continued
Concentration of Credit Risk: At June 30, 1997, 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
accounts receivable. Commercial paper investments are not concentrated by
issuer, industry or geographic area. Maturities are generally shorter than
90 days. Other investments are in U.S. government securities. Investment
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.
J. Quarterly Financial Data (Unaudited)
Quarter Ended
09/30/96 12/31/96 03/31/97 06/30/97
(In thousands)
Net sales $52,785 $57,460 $55,336 $59,221
Gross profit 27,416 31,506 21,896 26,974
Income from
operations 5,717 8,633 (71) 2,510
Net income 4,659 6,834 1,595 3,602
(Per share)
Net income $2.42 $3.55 $0.83 $1.86
Quarter Ended
09/30/95 12/31/95 03/31/96 06/30/96
(In thousands)
Net sales $55,038 $58,571 $56,774 $53,692
Gross profit 27,527 30,865 30,885 29,534
Income from
operations 6,413 8,007 7,939 6,839
Net income 4,791 6,573 6,391 5,608
(Per share)
Net income $2.49 $3.41 $3.32 $2.91
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Registrant incorporates by reference Form 8-K/A dated and filed with the
SEC on April 14, 1997, which reported the engagement of Ernst & Young LLP
as its new independent accountant.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information to be set forth in the section
entitled "Election of Directors" in the definitive proxy statement
involving the election of directors in connection with the Annual Meeting
of Shareholders to be held on December 1, 1997 (the "Proxy Statement")
which section is incorporated herein by reference. The Proxy statement
will be filed with the Securities and Exchange Commission no later than 120
days after June 30, 1996, pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
Name Age Position
Roy F. Farmer 81 Chairman of Board of Directors since 1951.
Roy E. Farmer 45 President since 1993; various positions since
1976, son of Chairman of the Board,
R.F. Farmer.
Guenter W. Berger 60 Vice President of Production, Director
since 1980; various positions since 1960.
Kenneth R. Carson 57 Vice President of Sales since
1990; Sales Management since 1968.
David W. Uhley 56 Secretary since 1985; various positions
since 1968.
John E. Simmons 46 Treasurer since 1985; various positions
since 1980.
All officers are elected annually by the Board of Directors and serve at
the pleasure of the Board.
Item 11. Executive Compensation
Reference is made to the information to be set forth in the section
entitled "Management Remuneration" in the Proxy Statement, which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information to be set forth in the sections
entitled "Principal Shareholders" and "Election of Directors" in the Proxy
Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information to be set forth in the sections
entitled "Principal Shareholders" and "Election of Directors" in the Proxy
Statement, which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) List of Financial Statements and Financial Statement Schedules
1. Financial Statements included in Item 8:
Consolidated Balance Sheets as of June 30, 1997 and 1996.
Consolidated Statements of Income For the Years
Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Financial Statement Schedules are omitted as they are not
applicable, or the required information is given in
the consolidated financial statements or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K.
See item (c) below.
(b) Reports on Form 8-K.
Registrant filed a report on Form 8-K/A on April 14, 1997
to report a change in certifying accountant.
(c) Exhibits required by Item 601 of Regulation S-K.
Exhibits
3. Articles of incorporation and by-laws.
Filed with the Form 10-K for the fiscal year
ended June 30, 1986.
4. Instruments defining the rights of security holders,
including indentures.
Not applicable.
9. Voting trust agreement.
Not applicable.
10. Material contracts
Not applicable.
11. Statement re computation of per share earnings.
Not applicable.
12. Statements re computation of ratios.
Not applicable.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K., Continued
13. Annual report to security holders, Form 10-Q or
quarterly report to security holders.
Not applicable.
18. Letter re change in accounting principles.
Not applicable.
19. Previously unfiled documents.
Not applicable.
22. Subsidiaries of the Registrant.
Not applicable.
23. Published report regarding matters submitted to
vote of security holders.
Not applicable.
24. Consents of experts and counsel.
Not applicable.
25. Power of attorney.
Not applicable.
28. Additional exhibits.
Not applicable.
29. Information from reports furnished to state insurance
regulatory authorities.
Not applicable.
(d) Financial statements required by Regulation S-X
but excluded from the annual report to shareholders by
Rule 14a - 3(b).
None.
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.
Roy F. Farmer
By: Roy F. Farmer
(Roy F. Farmer, Chief Executive Officer and
Chairman of the Board of Directors)
Date: September 26, 1997
John E. Simmons
By: John E. Simmons
(John E. Simmons, Treasurer and
Chief Financial and Accounting Officer)
Date: September 26, 1997
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.
Roy E. Farmer
Roy E. Farmer, President and Director
Date: August 21, 1997
Guenter W. Berger
Guenter W. Berger, Vice President and Director
Date: August 21, 1997
Lewis A. Coffman
Lewis A. Coffman, Director
Date: August 21, 1997
John M. Anglin
John M. Anglin, Director
Date: August 21, 1997
Catherine E. Crowe
Catherine E. Crowe, Director
Date: August 21, 1997