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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, 1999
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation Federal ID Number
20333 S. Normandie Avenue, Torrance, California 90502
Registrant's address Zip
(310) 787-5200
Registrant's telephone number
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, $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, 1999: 1,870,754 the aggregate market value of the common
shares held by non-affiliates of the Registrant was approximately $184
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 November 29, 1999 are incorporated by reference
into Part III of this report.
PAGE 1 OF 24 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 56% 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.
Green coffee prices continue to be affected by the actions of producer
organizations. The most prominent of these are the Colombian Coffee
Federation (CCF), the Association of Coffee Producing Countries (ACPC) and
the International Coffee Organization (ICO). These organizations seek to
increase green coffee prices, largely by attempting to restrict supplies,
thereby limiting the availability of green coffee to coffee consuming
nations.
Trademarks & Patents: Registrant owns approximately 38 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 29
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 U.S. Food Service 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.
Working Capital: Registrant finances its operations internally.
Management believes that working capital from internal sources will be
adequate for the coming year.
Foreign Operations: Registrant has no material revenues that result from
foreign operations.
2
Other: On June 30, 1999, Registrant employed 1,127 employees; 448 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.
1999
1998
High Low Dividend High Low Dividend
1st Quarter $239.00 $174.88 $0.70 $154.00 $127.00 $0.60
2nd Quarter 228.00 180.00 0.70 188.00 144.00 0.65
3rd Quarter 225.00 164.88 0.70 193.00 163.00 0.65
4th Quarter 211.00 183.00 0.70 239.00 191.00 0.65
There were 541 holders of record on July 16, 1999.
Item 6. Selected Financial Data
(In thousands, except per share data)
1999 1998 1997 1996 1995
Net sales $221,571 $240,092 $224,802 $224,075 $234,662
Income from operations 36,770 40,955 16,789 29,198 25,235
Net income 28,865 33,400 16,690 23,363 19,517
Net income per share $15.16 $17.34 $8.66 $12.13 $10.13
Total assets $324,836 $307,012 $276,849 $260,890 $244,340
Dividends declared per share $2.80 $2.55 $2.40 $2.15 $2.00
3
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 except ratio data)
1999 1998 1997
Current assets $181,549 $194,828 $170,346
Current liabilities 15,918 16,159 16,380
Working capital $165,631 $178,699 $153,966
Quick ratio 9.09:1 9.46:1 7.96:1
Capital Expenditures $ 6,167 $ 3,035 $ 4,403
Results of Operations
The trends that have characterized the past several years continued in
1999: (1) a volatile market for green coffee, (2) a large Brazilian coffee
harvest in 1998 coming to market during 1999, (3) lower sales volume, (4)
lower roast coffee prices, (5) strong profit margins.
All raw materials have a degree of volatility, and the green coffee market
is no exception. This market has seemed to be even more unsettled since
the 1994 frosts in Brazil, so that perceived coffee shortages have resulted
in green coffee cost fluctuations of more than 100% during the past several
years. Price declines started during fiscal 1998 continued throughout 1999
when the record Brazilian harvest 1998 came to market. Lower costs of raw
materials resulted in price pressure on finished goods, and Registrant's
sales and cost of sales both declined. Sales volume also declined.
Net sales reached $221,571,000 in 1999 as compared to $240,092,000 in 1998,
and $224,802,000 in 1997. Gross profit decreased to $131,737,000 in 1999,
or 59% of sales, compared to $132,124,000 in 1998, or 55% of sales, and
$107,792,000 in 1997, or 48% of sales.
Operating expenses, composed of selling and general and administrative
expenses have remained comparatively stable, increasing to $94,967,000 in
1999 from $91,169,000 in 1998 and $91,003,000 in 1997. Other income,
decreased to $11,745,000 in 1999 as compared to $11,882,000 in 1998, and
$10,521,000 in 1997.
Income before taxes increased to $48,515,000 or 22% of sales in 1999, as
compared to $52,837,000 or 22% of sales in 1998 and $27,310,000 or 12% of
sales in 1997. Net income for fiscal year 1999 reached $28,865,000, or
$15.16 per share, as compared to $33,400,000, or $17.34 per share, in 1998
and $16,690,000, or $8.66 per share, in 1997.
1999 1998 1997
Net income per share $15.16 $17.34 $8.66
Percentage change:
1999 to 1998 1998 to 1997
Net sales (7.7)% 6.8%
Cost of goods sold (16.8)% (7.7)%
Gross profit (0.3)% 22.6%
Operating expenses 4.2% 0.2%
Income from operations (10.2)% 143.9%
Provision for income taxes 1.1% 83.0%
Net income (13.6)% 100.1%
4
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
1999 vs. 1998 1998 vs. 1997
Coffee: Prices $(6.65) $10.80
Volume (4.96) (4.06)
Cost 9.55 4.34
Gross Profit (2.06) 11.08
Allied products: Gross Profit 1.86 1.56
Operating expenses (2.00) (0.09)
Other income (0.07) 0.71
Provision for income taxes (0.11) (4.58)
Change in weighted average shares outstanding 0.20 0.00
Net income $(2.18) $(8.68)
Price Risk
The Company's operations are significantly impacted by the world market for
its primary product: coffee. Coffee is an agricultural product that is
produced in many nations around the world. Although it is consumed in
those nations, the largest coffee consuming nation is the United States,
followed by the nations of Western Europe. Green coffee is traded
domestically on the New York Coffee, Sugar & Cocoa Exchange (CSCE), and is
one of the largest and most volatile commodity markets.
The most important aspect of the Company's operations is to secure a
consistent supply of coffee. Some proportion of green coffee price
fluctuations can be passed through to Registrant's customers, even if
lagging the market changes; but maintaining a steady supply of green coffee
is essential to keep inventory levels low and sufficient stock to meet
customer needs. Registrant purchases all its coffee through established
coffee brokers, many of which are large international firms, to help
minimize the risk of default on coffee deliveries. The Company purchases
much of its coffee on forward contracts, occasionally for delivery as long
as six months in the future. Sometimes these contracts are fixed price
contracts, regardless of the change in the 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.
The Company occasionally uses futures contracts to hedge exposure to coffee
price fluctuations. Gains on hedging transactions are deferred as an
adjustment to the carrying value of the inventory. Losses on the hedging
transactions are recognized in earnings currently and the Company's green
coffee inventory is adjusted currently through its LIFO methodology.
Futures contracts not designated as hedges, and terminations of contracts
designated as hedges are marked to market and changes are recognized in
current earnings. The Company had no open contracts at June 30, 1999, 1998
and 1997.
Year 2000 Issues
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computers with
embedded chips or computer programs with date sensitive software could
recognize a date using "00" as the year 1900 rather than the year 2000.
Miscalculations and system failures could result in the temporary inability
of a company to process transactions, invoices and other normal business
operations.
State of Readiness & Costs
The Company evaluated its operations and found its non-information
technology areas (manufacturing, packaging, trucking) have little exposure.
Information systems are the primary source of Registrant's Year 2000
issues. Registrant has identified and resolved system deficiencies using a
5
combination of reprogramming existing software, conversion to new systems
and/or hardware, and eliminating certain systems. The Company does not
believe its ability to operate its major accounting, billing and inventory
control systems will be effected. The Company's costs of correcting its
Year 2000 issues have been expensed as incurred and the amounts have not
been material.
Registrant does business with many vendors. The Company is not aware of
any external party with a Year 2000 issue that would materially impact
Registrant's operating results. However, the Company has no means of
ensuring that external agents are able to solve any Year 2000 issues
without effecting Registrant, nor is there any way for Registrant to assess
non-compliance by external parties.
Risks
The worst case that might occur to effect Registrant is likely to result
from external parties far removed from Registrant. Utility deliveries,
including gas (for the roasters), electricity, and telephone, could all
have an effect on Registrant, depending on the length and timing of
delivery failures. Registrant relies on raw materials that are
agricultural products, primarily coffee, produced and shipped from around
the world. It is not possible to determine whether green coffee processing
(including milling and packaging) and shipping, including port operations,
customs and ocean freight carriers will be able to make raw material
deliveries without delay. Registrant maintains several weeks supply of
green coffee, but it is not known whether such stocks will be needed. The
costs of delayed or cancelled raw material shipments cannot be estimated at
this time.
In general, disruptions in the domestic economy could also have a negative
impact on Registrant's customers and their ability to use and pay for the
Company's products. The amount of lost or delayed revenue cannot be
reasonably estimated at this time.
Contingency Plans
There is no formal contingency plan at this time. The Company will
maintain a sizable green coffee inventory, and determine whether additional
steps (including manual procedures, staffing needs and adjusting branch
inventory levels) should be taken as the key date approaches.
Accounting Pronouncements
Recently issued accounting changes are described in Note 1 to the
consolidated financial statements.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
Securities are recorded at fair value and unrealized gains or losses have
been recorded as a separate component of shareholders equity. The Company
maintains two distinct portfolios of securities, both portfolios are
classified as available for sale.
The Company's portfolio of investment grade money market instruments
includes bankers acceptances, discount commercial paper, federal agency
issues and treasury securities. As of June 30, 1999, over 78% of these
funds were invested in instruments with maturities shorter than one year.
The remaining balance matures during fiscal 2001 and 2002. This
portfolio's interest rate risk is unhedged. Its average maturity is
approximately 200 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 $1,650,000.
The Company is exposed to market value risk arising from changes in
interest rates on its portfolio of preferred securities. The Company
reviews the interest rate sensitivity of these securities and (a) enters
into "short positions" in futures contracts on U.S. Treasury securities or
(b) holds put options on such futures contracts in order to reduce the
impact of certain interest rate changes on such preferred stocks.
Specifically, the Company attempts to manage the risk arising from changes
in the general level of interest rates. The Company does not transact in
futures contracts or put options for speculative purposes.
6
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, 1999. 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 of Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points "(b.p.") $50,688.3 $ 0.0 $50,688.3 $ 5,527.8
- -100 b.p. 47,591.9 13.9 47,605.8 2,445.3
Unchanged 44,034.8 1,125.7 45,160.5 0.0
+100 b.p. 40,488.0 4,216.8 44,704.8 (455.7)
+200 b.p. 37,204.9 7,340.6 44,545.5 (615.0)
The number and type of futures and options contracts entered into depends
on, among other items, the specific maturity and issuer redemption
provisions for each preferred security held, the slope of the Treasury
yield curve, the expected volatility of Treasury yields, and the costs of
using futures and/or options.
Commodity Price Changes
The Company is exposed to commodity price risk arising from changes in the
market price of coffee. Registrant tries to manage this risk by adjusting
its inventory position. Commodity hedge instruments are sometimes used,
depending on market conditions. As of June 30, 1999 there were no open
hedge positions. See Items 1 and 7 for futher discussion of inventory and
price risk.
7
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, 1999 and 1998, and
the related consolidated statements of income, cash flows, and
shareholders' equity for the three years in the period ended June 30, 1999.
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 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 Farmer
Bros. Co. and Subsidiary at June 30, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Long Beach, California
September 3, 1999
8
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, June 30,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 4,403 $ 6,800
Short term investments 122,203 128,004
Accounts and notes receivable, net 18,199 18,006
Inventories 33,675 38,067
Income tax receivable 249 649
Deferred income taxes 2,391 2,776
Prepaid expenses 429 526
Total current assets 181,549 194,828
Property, plant and equipment, net 31,543 30,551
Notes receivable 3,884 3,988
Long term investments 81,760 55,801
Other assets 21,382 19,527
Deferred income taxes 4,718 2,317
Total assets $324,836 $307,012
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,786 $ 5,605
Accrued payroll expenses 5,388 4,876
Other 5,744 5,678
Total current liabilities 15,918 16,159
Accrued postretirement benefits 17,707 15,941
Other long term liabilities 3,500 -
21,207 15,941
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares;
issued 1,924,414 and outstanding
1,870,754 in 1999 and 1,926,414
in 1998 1,871 1,926
Additional paid-in capital 3,164 568
Retained earnings 283,191 271,395
Accumulated other comprehensive income (515) 1,023
Total shareholders' equity 287,711 274,912
Total liabilities and
shareholders' equity $324,836 $307,012
The accompanying notes are an integral part of these financial statements.
9
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
For the Years Ended June 30,
1999 1998 1997
Net sales $221,571 $240,092 $224,802
Cost of goods sold 89,834 107,968 117,010
131,737 132,124 107,792
Selling expense 81,321 82,207 82,967
General and administrative expense 13,646 8,962 8,036
94,967 91,169 91,003
Income from operations 36,770 40,955 16,789
Other income:
Dividend income 2,388 2,591 2,662
Interest income 8,870 8,055 6,624
Other, net 487 1,236 1,235
11,745 11,882 10,521
Income before taxes 48,515 52,837 27,310
Income taxes 19,650 19,437 10,620
Net income $ 28,865 $ 33,400 $ 16,690
Earnings per common share $15.16 $17.34 $8.66
Weighted average shares
outstanding 1,903,420 1,926,414 1,926,414
The accompanying notes are an integral part of these financial statements.
10
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30,
1999 1998 1997
Cash flows from operating activities:
Net income $28,865 $33,400 $16,690
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,202 4,980 5,353
Deferred income taxes (993) (1,912) 197
Other (195) (72) (144)
Net (gain) loss on investments 13 (864) (641)
Change in assets and liabilities:
Accounts and notes receivable (177) 965 466
Inventories 4,392 (2,891) 5,642
Income tax receivable 400 1,567 (1,216)
Prepaid expenses and other assets (1,841) (1,298) (1,014)
Accounts payable (819) (1,905) 2,875
Accrued payroll
expenses and other liabilities 578 1,684 (825)
Accrued postretirement benefits 1,766 1,594 1,455
Other long term liabilities 3,500 - -
Total adjustments 11,826 1,848 12,148
Net cash provided by operating activities $40,691 $35,248 $28,838
The accompanying notes are an integral part of these financial statements.
11
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended June 30,
1999 1998 1997
Net cash provided by operating activities: $ 40,691 $ 35,248 $ 28,838
Cash flows from investing activities:
Purchases of property,plant and equipment (6,167) (3,035) (4,403)
Proceeds from sales of property,
plant and equipment 252 165 228
Purchases of investments (577,336) (485,098) (431,719)
Proceeds from sales of investments 554,603 431,839 418,869
Notes issued (54) (1,668) (1,218)
Notes repaid 142 87 37
Net cash used in investing activities (28,560) (57,710) (18,206)
Cash flows from financing activities:
Dividends paid (5,344) (4,912) (4,623)
Common stock repurchased (11,817) - -
Common stock sold 2,633 - -
Net cash used in financing activities (14,528) (4,912) (4,623)
Net (decrease) increase in
cash and cash equivalents (2,397) (27,374) 6,009
Cash and cash equivalents at beginning of year 6,800 34,174 28,165
Cash and cash equivalents at end of year $ 4,403 $ 6,800 $ 34,174
The accompanying notes are an integral part of these financial statements.
12
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
Additional Other
Common Stock Paid-In Retained Comprensive
Shares Amount Capital Earnings Income Total
____________________________________________________________________________________________
Balance at June 30, 1996 1,926,414 $1,926 $568 $230,840 $334 $233,668
Comprehensive income
Net income 16,690 16,690
Change in unrealized gain on
available for sale securities 387 387
Total comprehensive income 17,077
Dividends (4,623) (4,623)
Balance at June 30, 1997 1,926,414 $1,926 $568 $242,907 $721 246,122
Comprehensive income
Net income 33,400 33,400
Change in unrealized gain on
available for sale securities 302 302
Total comprehensive income 33,702
Dividends (4,912) (4,912)
Balance at June 30, 1998 1,926,414 $1,926 $568 $271,395 $1,023 274,912
Comprehensive income
Net income 28,865 28,865
Other comprehensive income,
net of taxes ($1,024)
Change in unrealized gain
on available for sale securities (1,939) (1,939)
Reclassification adjustment
for realized gain 401 401
(1,538) (1,538)
Total comprehensive income 27,327
Dividends (5,344) (5,344)
Common stock repurchased (71,621) (71) (21) (11,725) (11,817)
Common stock sold by subsidiary 15,961 16 2,617 2,633
Balance at June 30, 1999 1,870,754 $1,871 $3,164 $283,191 $(515) $287,711
The accompanying notes are an integral part of these financial statements.
13
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. Registrant's products are distributed by its selling
divisions from 97 branches located in most large cities throughout the 29
western states.
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 30
days or less when purchased to be cash equivalents.
Investments
The Company's investments have been recorded at fair value 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.
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, 1999 or 1998.
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:
14
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.
Common Stock
Shares of the Company's common stock held by the Company's subsidiary (55,660
shares @ June, 30, 1999) are held primarily for purposes of benefit plans
and are considered constructively retired for accounting purposes.
Earnings 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. The Company does not have any
dilutive shares for any of the three fiscal years in the period ended June
30, 1999. Accordingly, the 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.
Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133, which
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 will either be offset
against the change in fair value of the hedged 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 will be immediately recognized in
earnings. The Company has not yet determined what the effect of SFAS No.
133 will be on the earnings and financial position of the Company. The
Company plans to adopt this standard in fiscal 2001.
15
Note 2 Investments
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1999 Cost Loss Gain Value
Current Assets
Commercial Paper $ 11,895 - $ 27 $ 11,922
U.S. Government Obligations 110,368 $(126) 39 110,281
$122,263 $(126) $ 66 $122,203
Non-Current Assets
U.S. Government Obligations $ 35,015 $ (842) - $ 34,173
Municipal debt 1,695 ( 8) - 1,687
Preferred stocks 37,538 (548) $2,049 39,039
Corporate bonds 5,075 (461) - 4,614
Liquid asset fund and other 2,247 - - 2,247
$ 81,570 $(1,859) $ 2,049 $ 81,760
June 30, 1998
Current Assets
Commercial Paper $ 95,838 - $ 594 $ 96,432
U.S. Government Obligations 31,608 $ (36) - 31,572
$127,446 $ (36) $ 594 $128,004
Non-Current Assets
U.S. Government Obligations $ 9,725 $(151) - $ 9,574
Municipal debt 1,695 (11) - 1,684
Preferred stocks 36,504 (52) $3,978 40,430
Liquid asset fund and other 4,067 - 46 4,113
$ 51,991 $(214) $4,024 $ 55,801
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities Fair Value
(In thousands) 6/30/99 6/30/98
Within one year $122,203 $128,004
After 1 year through 5 years 35,860 11,258
$158,063 $139,262
Gross realized gains and losses from available for sale securities were
$2,278,000 and ($2,291,000) respectively in 1999, $2,072,000 and
($1,208,000) respectively in 1998 and gross realized gains and losses from
available for sale securities were $2,271,000 and ($1,630,000) respectively
in 1997.
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, 1999 and 1998, associated with the hedge were $923,000
and $2,600,000, 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.
Note 3 Allowance for Doubtful Accounts and Notes Receivable
(In thousands) 1999 1998 1997
Balance at beginning of year $520 $555 $555
Additions 205 413 429
Deductions (255) (448) (429)
Balance at end of year $470 $520 $555
16
Note 4 Inventories
June 30, 1999
(In thousands) Processed Unprocessed Total
Coffee $ 3,619 $ 9,314 $12,933
Allied products 11,078 3,424 14,502
Coffee brewing equipment 2,258 3,982 6,240
$16,955 $16,720 $33,675
June 30, 1998
(In thousands) Processed Unprocessed Total
Coffee $ 4,119 $10,406 $14,525
Allied products 12,025 5,079 17,104
Coffee brewing equipment 2,191 4,247 6,438
$18,335 $19,732 $38,067
Current cost of coffee and allied products inventories exceeds the LIFO
cost by approximately $13,915,000, and $24,032,000 as of June 30, 1999 and
1998, respectively.
Decreases in the Company's green coffee and allied product inventories
during fiscal 1999 and 1997 resulted in LIFO decrements which had the effect
of increasing income before taxes those years by $564,000 and $4,007,000,
respectively.
Note 5 Property, Plant and Equipment
(In thousands) 1999 1998
Buildings and facilities $31,841 $30,355
Machinery and equipment 46,247 45,390
Office furniture and equipment 6,726 6,407
84,814 82,152
Accumulated depreciation (58,574) (56,735)
Land 5,303 5,134
$31,543 $30,551
Maintenance and repairs charged to expense for the years ended June 30,
1999, 1998 and 1997 were $10,992,000, $10,035,000 and $11,015,000,
respectively.
Note 6 Retirement Plans
The Company has a contributory defined benefit pension plan for all
employees not covered under a collective bargaining agreement and a non-
contributory defined benefit pension 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 pay
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 unfunded.
17
Defined Accrued
(In thousands) Benefit Pensions Postretirement Benefits
1999 1998 1999 1998
Changes in benefit obligation
Benefit obligation benefit at
the beginning of the year $45,249 $37,002 $18,944 $15,656
Service cost 1,662 1,343 745 615
Interest cost 3,000 2,811 1,246 1,241
Plan Participants contributions 135 125 76 75
Amendments 411 - - -
Actuarial gain (2,412) 6,050 (1,472) 1,960
Benefits paid (2,301) (2,082) (586) (603)
Benefit obligation benefit at
the end of the year $45,744 $45,249 $18,953 $18,944
Changes in plan assets
Fair value in plan assets at
the beginning of the year $72,600 $57,798 - -
Actual return on plan assets 7,702 16,744 - -
Company contributions 17 14 $ 510 $ 528
Plan participants contributions 135 127 76 75
Benefit paid (2,301) (2,083) (586) (603)
Fair value in plan assets at
the end of the year $78,153 72,600 $ - $ -
Funded status of the Plan $32,408 $27,351 $(18,953) (18,944)
Unrecognized net asset (2,628) (3,286) - -
Unrecognized net gain (17,415) (13,563) 3,355 (638)
Unrecognized prior service cost 1,494 1,323 (2,109) 3,641
Prepaid benefit cost $13,859 $11,825 $(17,707) $(15,941)
Weighted average assumptions as
of December 31:
Discount rate 7.25% 6.70% 7.25% 6.70%
Expected return on Plan assets 8.00% 8.00% - -
Rate of compensation increase 3.00% 2.50% - -
Initial medical rate trend 7.00% 7.50%
Ultimate medical trend rate 5.00% 5.00%
Number of years from initial to ultimate trend rate 4 5
Initial dental/vision trend rate 6.00% 6.00%
Ultimate dental/vision trend rate 5.00% 5.00%
Defined Accrued
Benefit Pensions Postretirement Benefits
1999 1998 1997 1999 1998 1997
Components of net periodic
benefit costs
Service cost $1,662 $1,343 $1,321 $745 $615 $512
Interest cost 3,000 2,811 2,612 1,246 1,241 1,114
Expected return on
Plan assets (5,747) (4,568) (7,590) - -
Actuarial Gain - - - - (20) -
Unrecognized net transition
asset (658) (657) (657) - - -
Unrecognized net gain (514) (141) - - - (58)
Unrecognized prior
service cost 239 202 202 286 286 285
Benefit cost ($2,018) ($1,010) ($4,112) $2,277 $2,122 $1,853
18
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:
1% Increase 1% Decrease
Effect on service and interest cost $ 127.7 $ (138.7)
Effect on postretirement benefit obligation $ 1,079.0 $ (1,161.5)
The Farmer Bros. Co. Retirement Plan owned 39,940 shares of the Company's
common stock at June 30, 1999 and 28,565 shares of the Company's stock at
June 30, 1998, with a fair value of approximately $7,988,000 and
$6,827,000, respectively. The Brewmatic Company Retirement plan owned
2,400 shares of the Company's common stock at June 30, 1999 with a fair
value of approximately $480,000.
The Company contributes to two multi-employer defined benefit plans for
certain union employees. The contributions to these multi-employer pension
plans were approximately $2,196,000, $1,540,000 and $1,679,000 for 1999,
1998 and 1997, 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.
Other long term liabilities represents deferred compensation payable to an
officer of the Company.
Note 7 Income Taxes
The current and deferred components of the provision for income taxes
consist of the following:
(In thousands) 1999 1998 1997
Current: Federal $16,937 $17,128 $ 8,168
State 3,706 4,221 2,255
20,643 21,349 10,423
Deferred: Federal (1,032) (1,543) 257
State 39 (369) (60)
(993) (1,912) 197
$19,650 $19,437 $10,620
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:
1999 1998 1997
Statutory tax rate 35.0% 35.0% 35.0%
(In thousands)
Income tax expense at statutory rate $16,980 $18,493 $ 9,559
State income tax (net of federal tax benefit) 2,434 2,504 1,426
Dividend income exclusion (595) (639) (661)
Other (net) 831 (921) 296
$19,650 $19,437 $10,620
Income taxes paid $20,850 $19,231 $13,799
19
The primary components of temporary differences which give rise to the
Company's net deferred tax assets at June 30, 1999 and 1998 are as follows:
(In thousands) June 30, June 30,
1999 1998
Deferred tax assets:
Postretirement benefits $7,078 $6,458
Accrued liabilities 1,927 1,777
State taxes 860 796
Other 3,801 2,269
13,666 11,300
Deferred tax liabilities:
Pension assets (5,214) (4,460)
Other (1,343) (1,747)
(6,557) (6,207)
Net deferred tax assets $7,109 $5,093
Note 8 Other Current Liabilities
Other current liabilities consist of the following:
(In thousands) 1999 1998
Accrued workers'
compensation liabilities $3,921 $3,561
Dividends payable 1,349 1,252
Other 474 865
$5,744 $5,678
Note 9 Commitments and Contingencies
The Company incurred rent expense of approximately $691,000, $654,000, and
$658,000, for the fiscal years ended June 30, 1999, 1998 and 1997,
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)
2000 $554
2001 442
2002 335
2003 293
2004 163
thereafter 7
$1,794
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.
During 1999 the Company began construction of new warehouses in Carson
City, Nevada, Kansas City, Missouri and Torrance, California. Commitments
under construction contracts at June 30, 1999 totaled approximately
$7,100,000.
Concentration of Credit Risk: At June 30, 1999, 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
20
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.
Note 10 Quarterly Financial Data (Unaudited)
Quarter Ended
09/30/98 12/31/98 03/31/99 06/30/99
(In thousands except per share data)
Net sales $54,035 $58,408 $55,207 $53,921
Gross profit 31,115 32,095 35,153 33,374
Income from operations 9,321 10,345 12,144 4,960
Net income 7,539 7,905 9,159 4,262
Net income per share $3.91 $4.10 $4.83 $2.29
Quarter Ended
09/30/97 12/31/97 03/31/98 06/30/98
(In thousands except per share data)
Net sales $59,497 $64,062 $58,951 $57,582
Gross profit 29,326 36,161 32,249 34,388
Income from operations 7,652 13,377 10,067 9,859
Net income 6,228 9,782 8,020 9,370
Net income per share $3.23 $5.08 $4.16 $4.86
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
21
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 November 29, 1999 (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, 1999, pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
Name Age Position
Roy F. Farmer 83 Chairman of Board of Directors since 1951.
Roy E. Farmer 47 President since 1993; various positions
since 1976, son of Chairman of the
Board, R.F. Farmer
Guenter W. Berger 62 Vice President of Production, Director
since 1980; various positions since 1960.
Kenneth R. Carson 59 Vice President of Sales since 1990; Sales
Management since 1968.
David W. Uhley 58 Secretary since 1985; various positions
since 1968.
John E. Simmons 48 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, 1999 and 1998.
Consolidated Statements of Income For the Years Ended
June 30, 1999, 1998 and 1997.
22
Consolidated Statements of Cash Flows For the Years Ended June
30, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity For the Years
Ended June 30,1999, 1998 and 1997.
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.
Not applicable.
(c) Exhibits required by Item 601 of Regulation S-K.
Not applicable.
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.
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.
By: Roy F. Farmer
(Roy F. Farmer, Chief Executive Officer and Chairman of the Board of
Directors)
Date: September 28, 1999
By: John E. Simmons
(John E. Simmons, Treasurer and Chief Financial and Accounting Officer)
Date: September 28, 1999
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, President and Director
Date: August 26, 1999
Guenter W. Berger, Vice President and Director
Date: August 26, 1999
Lewis A. Coffman, Director
Date: August 26, 1999
John M. Anglin, Director
Date: August 26, 1999