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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, 1998
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 3, 1998: 1,926,414 and the aggregate market value of the common
shares held by non-affiliates of the Registrant was approximately $189
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 30, 1998 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 30 PAGES
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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 61% 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 36 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.
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Item 1. Business, Continued
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. Coffee brewing equipment is sold through distributors
in Canada and Japan and manufactured in Europe under license.
Other: On June 30, 1998, Registrant employed 1,132 employees; 454 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
3
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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.
1998 1997
High Low Dividend High Low Dividend
1st Quarter $154.00 $127.00 $0.60 $154.00 $135.00 $0.60
2nd Quarter 188.00 144.00 0.65 154.00 142.00 0.60
3rd Quarter 193.00 163.00 0.65 155.00 130 00 0.60
4th Quarter 239.00 191.00 0.65 135.00 125.00 0.60
There were 559 holders of record on July 17, 1998.
Item 6. Selected Financial Data
(In thousands, except per share data)
1998 1997 1996
Net sales $240,092 $224,802 $224,075
Income from operations 40,955 16,789 29,198
Net income 33,400 16,690 23,363
Net income per share $17.34 $8.66 $12.13
Total assets $307,012 $276,849 $260,890
Dividends declared
per share $2.55 $2.40 $2.15
1995 1994
Net sales $234,662 $193,861
Income from operations 25,235 9,488
Net income 19,517 10,330
Net income per share $10.13 $5.36
Total assets $244,340 $219,903
Dividends declared
per share $2.00 $2.00
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)
1998 1997 1996
Current assets $194,828 $170,346 $167,059
Current liabilities 16,159 16,380 14,330
Working capital $178,669 $153,966 $152,729
Quick ratio 9.46:1 7.96:1 8.51:1
Capital Expenditures $ 3,035 $ 4,403 $ 5,277
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations
Fiscal 1998 was a year of mixed results. The restaurant industry in
Registrant's service continues to exhibit weakness. California, in
particular, has been slow to show growth. The aftermath of the 1994 frosts
in the Brazil coffee growing areas and a perceived shortage of coffee beans
perpetrated by the ACPC, ICO, and the Brazilian growers during fiscal 1997
have caused the green coffee market to make dramatic price swings. Coffee
prices increased 250% from December, 1996 to the end of May, 1997. The
market may have stabilized during fiscal 1998, and world green coffee
prices have been pressured by a large 1998 Brazilian coffee crop.
Higher green coffee costs result in higher prices of roast coffee that
result in lower sales volume. During 1998 green coffee costs have
declined, and competitive pressures continue to force decreases in the
selling price of roast coffee. Although profit margins are more in line
with historic results, competition from non-coffee beverages, both hot and
cold, have reduced market share. As a result, the Company has worked hard
to maintain and improve its distribution system, has added and experimented
with new allied products and tried to restrain operating costs, with
special attention toward making its operations more efficient.
Net sales reached $240,092,000 in 1998 as compared to $224,802,000 in 1997,
and $224,075,000 in 1996. Gross profit increased to $132,124,000 in 1998,
or 55% of sales, compared to $107,792,000 in 1997, or 48% of sales, and
$118,811,000 in 1996, or 53% of sales.
Operating expenses, composed of selling and general and administrative
expenses have remained comparatively stable, increasing to $91,169,000 in
1998 from $91,003,000 in 1997 and $89,613,000 in 1996. Other income,
increased 13% to $11,882,000 in 1998 as compared to $10,521,000 in 1997,
and $9,691,000 in 1996 primarily the result of more funds invested.
Income before taxes increased to $52,837,000 or 22% of sales in 1998, as
compared to $27,310,000 or 12% of sales in 1997 and $38,889,000 or 17% of
sales in 1996. Net income for fiscal year 1998 reached $33,400,000, or
$17.34 per share, as compared to $16,690,000, or $8.66 per share, in 1997
and $23,363,000, or $12.13 per share, in 1996.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
1998 1997 1996
Net income per share $17.34 $8.66 $12.13
Percentage change:
1998 to 1997 1997 to 1996
Net sales 6.8% 0.3%
Cost of goods sold (7.7)% ll.2%
Gross profit 22.6% (9.3)%
Operating expenses 0.2% 1.6%
Income from operations 143.9% (42.5)%
Provision for income taxes 83.0% (31.6)%
Net income 100.1% (28.6)%
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
1998 vs. 1997 1997 vs. 1996
Coffee: Prices $10.80 $2.49
Volume (4.06) (3.75)
Cost 4.34 (5.13)
Gross Profit 11.08 (6.39)
Allied products: Gross Profit 1.56 0.67
Operating expenses (0.09) (0.72)
Other income 0.71 .43
Provision for income taxes (4.58) 2.54
Net income $8.68 $(3.47)
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.
6
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
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, 1998, 1997
and 1996.
Year 2000 Issues
With the arrival of the year 2000, there exists a significant issue that
directly impacts the ability of information systems and non-computing
equipment to handle dates in their processing. Management continues to
assess these issues, and has identified three major computer systems that
are not year 2000 compliant. Efforts are underway to convert or replace
these systems to new software and or new hardware. The cost of the
conversion of these systems is not material and has been expensed as
incurred. Registrant expect to be substantially completed during fiscal
1999. Production hardware, non-information technology systems and external
agents have been assessed. Registrant continues to review the situation,
but has no reason at this time to believe that any material impact will
result.
Accounting Pronouncements
Recently issued accounting changes are described in Note A 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, 1998, over 98% of these
funds were invested in instruments with maturities shorter than one year.
The remaining balance matures during fiscal 2000. This portfolio's
interest rate risk is unhedged. Its average maturity is approximately 90
days and a 100 basis point move in the Fed Funds Rate would not have a
material effect on Registrant's results of operations.
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
7
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Item 7a. Qualitative and Quantitative Disclosures About Market Risk,
Continued
in the general level of interest rates. The Company does not transact in
futures contracts or put options for speculative purposes.
The following table demonstrates the impact of varying interest rate
changes based on the preferred stock holdings, futures and options
positions, and market yield and price relationships at June 30, 1998. 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 $47,430.3 $ 0.0 $47,430.3 $ 4,653.3
("b.p.")
- -100 b.p. 45,124.3 0.3 45,124.6 2,347.6
Unchanged 42,353.8 423.2 42,777.0 -
+100 b.p. 39,443.7 2,971.2 42,414.9 (362.1)
+200 b.p. 36,615.7 5,673.2 42,288.9 (488.1)
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. At June 30, 1998 the hedge consisted
entirely of put options on the U.S. Treasury Bond futures contract.
Commodity Price Changes
The Company is exposed to commodity price risk arising from changes in the
market price of 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, 1998 there were no open
hedge positions. See Items 1 and 7 for futher discussion of inventory and
price risk.
8
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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, 1998 and 1997, and the
related consolidated statements of income, cash flows, and shareholders'
equity for the two years in the period ended June 30, 1998. 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 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 audit
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, 1998 and 1997 and the consolidated
results of their operations and their cash flows for the two years in the
period ended June 30, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Long Beach, California
September 16, 1998
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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 statements of income, shareholders' equity
and cash flows of Farmer Bros. Co. for the year 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 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
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the Company's consolidated results of its
operations and its cash flows for the year ended June 30, 1996 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
September 25, 1996
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FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, June 30,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 6,800 $ 34,174
Short term investments 128,004 77,791
Accounts and notes receivable, net 18,006 18,401
Inventories 38,067 35,176
Income tax receivable 649 2,216
Deferred income taxes 2,776 1,804
Prepaid expenses 526 784
Total current assets 194,828 170,346
Property, plant and equipment, net 30,551 32,526
Notes receivable 3,988 2,977
Long term investments 55,801 51,341
Other assets 19,527 18,035
Deferred income taxes 2,317 1,624
Total assets $307,012 $276,849
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,605 $ 7,510
Accrued payroll expenses 4,876 4,247
Other 5,678 4,623
Total current liabilities 16,159 16,380
Accrued postretirement benefits 15,941 14,347
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 271,395 242,907
Investment valuation allowance 1,023 721
Total shareholders' equity 274,912 246,122
Total liabilities and
shareholders' equity $307,012 $276,849
The accompanying notes are an integral part of these financial statements.
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FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Years Ended June 30,
1998 1997 1996
Net sales $240,092 $224,802 $224,075
Cost of goods sold 107,968 117,010 105,264
132,124 107,792 118,811
Selling expense 82,207 82,967 81,515
General and admini-
strative expense 8,962 8,036 8,098
91,169 91,003 89,613
Income from operations 40,955 16,789 29,198
Other income:
Dividend income 2,591 2,662 2,549
Interest income 8,055 6,624 6,128
Other, net 1,236 1,235 1,014
11,882 10,521 9,691
Income before taxes 52,837 27,310 38,889
Income taxes 19,437 10,620 15,526
Net income $ 33,400 $ 16,690 $ 23,363
Net income per share $17.34 $8.66 $12.13
Weighted Average
Shares Outstanding 1,926,414 1,926,414 1,926,414
The accompanying notes are an integral part of these financial statements.
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FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30,
1998 1997 1996
Cash flows from operating
activities:
Net income $33,400 $16,690 $23,363
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 4,980 5,353 5,698
Deferred income taxes (1,912) 197 145
Other (72) (144) (645)
Net (gain) on
investments (864) (641) (510)
Change in assets and
liabilities:
Accounts and notes
receivable 965 466 (383)
Inventories (2,891) 5,642 (4,057)
Income tax receivable 1,567 (1,216) 265
Prepaid expenses and
other assets (1,298) (1,014) (1,931)
Accounts payable (1,905) 2,875 (4,773)
Accrued payroll
expenses and other
liabilities 1,684 (825) 379
Accrued postretirement
benefits 1,594 1,455 1,387
Total adjustments 1,848 12,148 (4,425)
Net cash provided by operating
activities $35,248 $28,838 $18,938
The accompanying notes are an integral part of these financial statements.
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FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended June 30,
1998 1997 1996
Net cash provided by operating
activities: $ 35,248 $ 28,838 $ 18,938
Cash flows from investing
activities:
Purchases of property,
plant and equipment (3,035) (4,403) (5,277)
Proceeds from sales of
property, plant
and equipment 165 228 284
Purchases of investments (485,098) (431,719) (259,995)
Proceeds from sales of
investments 431,839 418,869 269,955
Notes issued (1,668) (1,218) -
Notes repaid 87 37 81
Net cash (used in) provided
by investing activities (57,710) (18,206) 5,048
Cash flows from financing
activities:
Dividends paid (4,912) (4,623) (4,142)
Net cash used in financing
activities (4,912) (4,623) (4,142)
Net (decrease) increase
in cash and cash
equivalents (27,374) 6,009 19,844
Cash and cash equivalents at
beginning of year 34,174 28,165 8,321
Cash and cash equivalents at
end of year $ 6,800 $ 34,174 $ 28,165
The accompanying notes are an integral part of these financial statements.
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FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
For the Years Ended June 30,
1998 1997 1996
Common stock $ 1,926 $ 1,926 $ 1,926
Additional paid-in capital 568 568 568
Retained earnings:
Beginning balance 242,907 230,840 211,619
Net income for the year 33,400 16,690 23,363
Dividends (4,912) (4,623) (4,142)
Ending balance 271,395 242,907 230,840
Investment valuation allowance:
Beginning balance 721 334 (2)
Adjustment 302 387 336
Ending balance 1,023 721 334
Total shareholders' equity $274,912 $246,122 $233,668
Dividends declared per share $2.55 $2.40 $2.15
The accompanying notes are an integral part of these financial statements.
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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 30
days or less when purchased to be cash equivalents, which approximate fair
value.
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, 1998 or 1997.
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A. Summary of Significant Accounting Policies, Continued
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.
Net Income Per Common Share
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per
Share", was adopted in fiscal year 1998 and supersedes the Company's
previous standards for computing net income per share under Accounting
Principles Board No. 15. The new standard requires dual presentation of
net income per common share and net income per common share assuming
dilution on the face of the income statement. Basic net income 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, 1998. The financial statements
present basic net income per share.
Long-Lived Assets
In accordance with SFAS No. 121, 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.
17
<PAGE>
A. Summary of Significant Accounting Policies, Continued
Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997; SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997; SFAS No. 132, "Employers
Disclosures about Pension and Other Postretirement Benefits", which is
effective for fiscal years beginning after December 15, 1997; and SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
is effective in all fiscal quarters of fiscal years beginning after June
15, 1999.
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 will adopt this standard in fiscal 1999.
SFAS No. 131 requires 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. Adoption of this standard
will not change the number of segments (one) nor require any material
changes in disclsoure. The Company will adopt the standard in fiscal 1999.
SFAS No. 132 requires improved disclosures about pensions and other
postretirement benefits and makes the required information easier to
prepare and more understandable. The Statement addresses disclosure issues
only and does not change the existing measurement or recognition
provisions. The Company plans to adopt the standard in fiscal 1999.
SFAS No. 133 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, nor has it determined when it will
be adopted.
18
<PAGE>
B. Investments
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1998 Cost Loss Gain Value
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
(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
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
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities Fair Value
(In thousands) 6/30/98 6/30/97
Within one year $128,004 $ 77,791
After 1 year through 5 years 11,258 10,284
$139,262 $ 88,075
Gross realized gains and losses from available for sale securities were
$2,072,000 and ($1,208,000) respectively in 1998, $2,271,000 and
($1,630,000) respectively in 1997 and gross realized gains and losses from
available for sale securities were $1,907,000 and ($1,397,000) respectively
in 1996.
19
<PAGE>
B. Investments, Continued
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, 1998 and 1997, associated with the hedge were $2,600,000
and $1,081,000, 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) 1998 1997 1996
Balance at beginning of year $555 $555 $545
Additions 413 429 683
Deductions (448) (429) (673)
Balance at end of year $520 $555 $555
D. Inventories
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
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
Current cost of coffee and allied products inventories exceeds the LIFO
cost by approximately $24,032,000, and $28,608,000 as of June 30, 1998 and
1997, respectively.
Decreases in the Company's green coffee inventories during fiscal 1997
resulted in a LIFO decrement which increased fiscal pre-tax income by
$4,007,000.
E. Property, Plant and Equipment
(In thousands) 1998 1997
Buildings and facilities $30,355 $30,067
Machinery and equipment 45,390 45,261
Office furniture and equipment 6,407 6,030
82,152 81,358
Accumulated depreciation (56,735) (53,966)
Land 5,134 5,134
$30,551 $32,526
20
<PAGE>
E. Property, Plant and Equipment, Continued
Maintenance and repairs charged to expense for the years ended June 30,
1998, 1997 and 1996 were $10,035,000, $11,015,000 and $11,608,000,
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 1998, 1997 and 1996 is comprised of
the following:
(In thousands) Farmer Bros. Co. Brewmatic Co.
1998
Service cost $ 1,321 $ 22
Interest cost 2,671 140
Actual return on assets (15,918) (824)
Net amortization and deferral 11,035 544
Net periodic pension benefit $ (891) $ (118)
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 $ 19
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)
21
<PAGE>
F. Retirement Plans, Continued
The funded status of the plans at June 30, 1998 was as follows:
(In thousands) Farmer Bros. Co. Brewmatic Co.
Actuarial present value of benefit
obligations:
Vested $ 39,123 $ 1,792
Non-vested 256 -
Accumulated benefit obligations 38,379 1,792
Effect of projected salary increases 3,723 355
Projected benefit obligations 43,102 2,147
Plan assets at fair value (68,586) (4,014)
Plan assets at fair value in excess
of projected benefit obligations (25,484) (1,867)
Unrecognized net asset at June 30, 1997 3,103 183
Unrecognized prior service cost (1,215) (108)
Unrecognized net gain 12,825 738
Prepaid pension cost $(10,771) $(1,054)
Assumptions for 1998:
Discount rate for plan obligations 6.70% 6.70%
Assumed long term return on assets 8.00% 8.00%
Projected compensation increases for
pay related plans 2.50% -
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 (loss) 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 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 shares of the Company's common stock
at June 30, 1998 and 1997, with a fair value of approximately $6,827,000
and $3,828,000, respectively.
22
<PAGE>
F. Retirement Plans, Continued
The Company contributes to two multi-employer defined benefit plans for
certain union employees. The contributions to these multi-employer pension
plans were approximately $1,540,000, $1,679,000 and $1,699,000 for 1998,
1997 and 1996, 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) 1998 1997
Retirees and dependents $ 6,419 $ 4,887
Fully eligible active participants 4,745 4,774
Other active plan participants 7,780 5,995
Total APBO $18,944 $15,656
Unrecognized net gain 638 2,618
Unrecognized prior service cost (3,641) (3,927)
Accrued postretirement benefit cost $15,941 $14,347
Net periodic postretirement benefit costs included the following
components:
For the years ended June 30,
(In thousands) 1998 1997 1996
Service cost $615 $512 $485
Interest cost 1,241 1,114 1,026
Amortization of unrecognized
net (gain) (58) (70)
Unrecognized prior service cost 266 285 286
Net periodic postretirement
benefit cost $2,122 $1,853 $1,727
The assumptions used to determine the APBO and net periodic postretirement
benefit costs are as follows:
For the years ended June 30,
1998 1997 1996
Discount rate, net periodic
postretirement benefit cost 6.70% 7.75% 7.75%
Discount rate, APBO 7.75% 7.75% 7.75%
Medical care cost trend rate 7.50% 9.00% 9.00%
23
<PAGE>
F. Retirement Plans, Continued
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at June 30, 1998 was 6.7%. The annual
assumed rate of increase in the per capita cost of covered medical benefits
is 7.5% for the 1998-1999 fiscal year and is assumed to decrease gradually
to 5.0% after five years and remain at that level thereafter. Covered
dental costs were assumed to increase 6.0% for the 1998-1999 fiscal year
and decrease gradually to 5.0% after five years and remain at that level
thereafter.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at June 30, 1997 was 7.75%. The annual
assumed rate of increase in the capita cost of covered medical benefits is
8.0% for the 1997-1998 fiscal year and is assumed to decrease gradually to
5.5% after five years and remain at that level thereafter. Covered dental
costs were assumed to increase 6.0% for the 1997-1998 fiscal year and
decrease gradually to 5.5% after five years and remain at that level
thereafter.
The health care cost trend rate assumption can have a significant effect on
the amounts reported. For example, increasing the assumed health care cost
trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of June 30, 1998 by
$1,088,900 and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the 1997-1998 fiscal year
by $148,500.
G. Income Taxes
The current and deferred components of the provision for income taxes
consist of the following:
(In thousands) 1998 1997 1996
Current: Federal $17,128 $ 8,168 $12,621
State 4,221 2,255 2,760
21,349 10,423 15,381
Deferred: Federal (1,543) 257 (48)
State (369) (60) 193
(1,912) 197 145
$19,437 $10,620 $15,526
24
<PAGE>
G. Income Taxes, Continued
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:
1998 1997 1996
Statutory tax rate 35.0% 35.0% 35.0%
(In thousands)
Income tax expense
at statutory rate $18,493 $9,559 $13,611
State income tax
(net of federal tax benefit) 2,504 1,426 1,919
Dividend income exclusion (639) (661) (622)
Other (net) (921) 296 618
$19,437 $10,620 $15,526
Income taxes paid $19,231 $13,799 $14,820
The primary components of temporary differences which give rise to the
Company's net deferred tax assets at June 30, 1998 and 1997 are as follows:
(In thousands) June 30, June 30,
1998 1997
Deferred tax assets:
Postretirement benefits $6,458 $5,726
Accrued liabilities 1,777 1,616
State taxes 796 474
Unicap adjustment 822 144
Other 2,026 1,552
11,879 9,512
Deferred tax liabilities:
Pension assets (4,460) (3,986)
Tax depreciation over book (1,579) (1,598)
Other (747) (500)
(6,786) (6,084)
Net deferred tax assets $5,093 $3,428
H. Other Current Liabilities
Other current liabilities consist of the following:
(In thousands) 1998 1997
Accrued workers'
compensation liabilities $3,561 $3,293
Dividends payable 1,252 1,156
Other 865 174
$5,678 $4,623
25
<PAGE>
I. Commitments and Contingencies
The Company incurred rent expense of approximately $654,000, $658,000, and
$682,000, for the fiscal years ended June 30, 1998, 1997 and 1996,
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)
1999 $521
2000 324
2001 243
2002 101
2003 65
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.
Concentration of Credit Risk: At June 30, 1998, 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
09/30/97 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
(Per share)
Net income $3.23 $5.08 $4.16 $4.86
26
<PAGE>
J. Quarterly Financial Data (Unaudited), Continued
Quarter Ended
09/30/96 12/31/96 03/31/97 06/30/97
(In thousands except per share data)
Net sales $52,785 $57,460 $55,336 $59,221
Gross profit 27,416 31,506 21,896 26,974
Income (loss) 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
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 accountants.
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 30, 1998 (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, 1998, pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
Name Age Position
Roy F. Farmer 82 Chairman of Board of Directors since 1951.
Roy E. Farmer 46 President since 1993; various positions since
1976, son of Chairman of the Board,
R.F. Farmer.
Guenter W. Berger 61 Vice President of Production, Director
since 1980; various positions since 1960.
Kenneth R. Carson 58 Vice President of Sales since
1990; Sales Management since 1968.
David W. Uhley 57 Secretary since 1985; various positions
since 1968.
John E. Simmons 47 Treasurer since 1985; various positions
since 1980.
27
<PAGE>
Item 10. Directors and Executive Officers of the Registrant, Continued
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, 1998 and 1997.
Consolidated Statements of Income For the Years
Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1998, 1997 and 1996.
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.
Exhibits
3. Articles of incorporation and by-laws.
Filed with the Form 10-K for the fiscal year
ended June 30, 1986.
28
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K., Continued
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.
29
<PAGE>
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 25, 1998
By: John E. Simmons
(John E. Simmons, Treasurer and
Chief Financial and Accounting Officer)
Date: September 25, 1998
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 21, 1998
Guenter W. Berger, Vice President and Director
Date: August 21, 1998
Lewis A. Coffman, Director
Date: August 21, 1998
John M. Anglin, Director
Date: August 21, 1998
Catherine E. Crowe, Director
Date: August 21, 1998
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