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, 2000
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation Federal ID Number
20333 South Normandie Avenue, Torrance, California
Registrant's address
(310) 787-5200
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on
which registered
Common stock, $1.00 par value OTC
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
7, 2000: 1,926,414 and the aggregate market value of the common shares
held by non-affiliates of the Registrant was approximately $129 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 November 27, 2000 are incorporated by reference into
Part III of this report.
PAGE 1 OF 24 PAGES
PART I
Item 1. Business
General: Farmer Bros. Co. 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: Our primary raw material is green coffee.
Roast coffee sales account for approximately 54% of revenues. Coffee
purchasing, roasting and packaging takes place at our Torrance, California
plant, which is also the distribution hub for our branches. Green coffee
is purchased through domestic commodity brokers. Coffee is an agricultural
commodity, and is subject to fluctuations of both price and supply. We
have 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: We own approximately 38 registered U.S. trademarks
which are integral to customer identification of our products. It is not
possible to assess the impact of the loss of such identification.
Seasonality: We experience some seasonal influences. The winter months
are the best sales months. Our product line and geographic diversity
provides some sales stability during the summertime decline in coffee
consumption during the warmer months.
Distribution: Our products are distributed by our 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. We operate our 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 us. Customer contact and service quality, which
is integral to our sales effort, is often secondary to product pricing for
customers with their own distribution systems.
Competition: We face 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. We have some competitive
advantages due to our longevity, strong regional roots and sales and
service force. Our customer base is price sensitive and we are often faced
with price competition.
Working Capital: We finance our operations internally. We believe that
working capital from internal sources will be adequate for the coming year.
Foreign Operations: We have no material revenues that result from foreign
operations.
Other: On June 30, 2000, we employed 1,115 employees; 455 are subject to
collective bargaining agreements. The effects of compliance with
government provisions regulating discharge of materials into the
environment have not had a material effect on our financial condition or
results of operations. The nature of our business does not provide for
maintenance of or reliance upon a sales backlog.
Item 2. Properties
Our largest facility is the 474,000 sq. ft. roasting plant, warehouses and
administrative offices in Torrance, California. We believe the existing
plant will continue to provide adequate production capacity for the
foreseeable future.
Item 3. Legal Proceedings
We are a defendant in various legal proceedings incidental to our business
which are ordinary and routine. It is our opinion that the resolution of
these lawsuits will not have a material impact on our financial condition
or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
We have one class of common stock which is traded in the over the counter
market. The bid prices indicated below are as reported by NASDAQ and
represent prices between dealers, without including retail mark up, mark
down or commission, and do not necessarily represent actual trades.
2000 1999
High Low Dividend High Low Dividend
1st Quarter $208.00 $164.00 $0.75 $239.00 $174.88 $0.70
2nd Quarter 174.75 158.00 0.75 228.00 180.00 0.70
3rd Quarter 179.00 150.00 0.75 225.00 164.88 0.70
4th Quarter 191.13 158.00 0.75 211.00 183.00 0.70
There were 541 holders of record on July 21, 2000.
Item 6. Selected Financial Data
(In thousands, except per share data)
2000 1999 1998 1997 1996
Net sales $218,688 $221,571 $240,092 $224,802 $224,075
Income from operations 48,965 36,770 40,955 16,789 29,198
Net income 37,576 28,865 33,400 16,690 23,363
Net income per share $20.22 $15.16 $17.34 $8.66 $12.13
Total assets $353,467 $324,836 $307,012 $276,849 $260,890
Dividends declared per
share $3.00 $2.80 $2.55 $2.40 $2.15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
We continue to maintain a strong working capital position, and believe cash
requirements for the coming year will be provided by internal sources. We
have no major commitments for capital expenditures at this time.
During fiscal 2000 the Board of Directors established an internally
leveraged Employee Stock Ownership Plan (ESOP). The Board authorized a
loan of up to $50,000,000 to the ESOP to purchase up to 300,000 shares of
our common stock. At June 30, 2000, the ESOP loan balance is $14,136,000.
We anticipate that future ESOP loan advances will be funded by internal
sources.
(In thousands except ratio data)
2000 1999 1998
Current assets $188,560 $181,549 $194,828
Current liabilities 16,966 15,918 16,159
Working capital $171,594 $165,631 $178,699
Quick ratio 8.74:1 9.09:1 9.46:1
Capital Expenditures $ 14,130 $ 6,167 $ 3,035
Results of Operations
Fiscal year 2000 operations did not vary dramatically from the results of
the prior two years. The volatile green coffee market presented us with
opportunities to reduce our cost of raw materials for 2000, as supplies of
green coffee were abundant. The green coffee market has been especially
volatile since the Brazilian frosts in 1994. Perceived coffee shortages
have, in the past, resulted in green coffee cost fluctuations of more than
100%. During fiscal 2000, green coffee costs increased nearly 40% in the
first half of the year, decreasing to beginning of the year levels by the
first of June 2000. During the month of June 2000, green coffee costs
increased over 30% as the result of a weather threat to the Brazilian
coffee crop. Although sales volume continued to decline in 2000 as
compared to 1999 to 1998, improved profit margins, especially green coffee
margins, enabled us to realize record earnings in 2000.
Net sales decreased to $218,688,000 in 2000 as compared to $221,271,000 in
1999, and $240,092,000 in 1998. Gross profit increased to $141,719,000 in
2000, or 65% of sales, compared to $131,737,000 in 1999, or 59% of sales,
and $132,124,000 in 1998, or 55% of sales.
Operating expenses, composed of selling and general and administrative
expenses have remained comparatively stable, decreased to $92,754,000 in
2000 from $94,967,000 in 1999 and $91,169,000 in 1998. Other income,
increased to $12,254,000 in 2000 as compared to $11,745,000 in 1999, and
$11,882,000 in 1998.
Income before taxes reached $61,219,000 or 28% of sales in 2000, as
compared to $48,515,000 or 22% of sales in 1999 and $52,837,000 or 22% of
sales in 1998. Net income for fiscal year 2000 reached $37,576,000, or
$20.22 per share, as compared to $28,865,000, or $15.16 per share, in 1999
and $33,400,000, or $17.34 per share, in 1998.
2000 1999 1998
Net income per share $20.22 $15.16 $17.34
Percentage change:
2000 to 1999 1999 to 1998
Net sales (1.3)% (7.7)%
Cost of goods sold (14.3)% (16.8)%
Gross profit 7.6% (0.3)%
Operating expenses (2.3)% 4.2%
Income from operations 33.2% (10.2)%
Provisions for income taxes 20.3% 1.1%
Net income 30.2% (13.6)%
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
2000 vs. 1999 1999 vs. 1998
Coffee: Prices $(0.67) $(6.65)
Volume (2.89) (4.96)
Cost 6.86 9.55
Gross profit 3.30 (2.06)
Allied products: Gross profit 2.12 1.86
Operating expenses 1.19 (2.00)
Other income 0.27 (0.07)
Provision for income taxes (2.15) (0.11)
Change in weighted average shares outstanding 0.33 0.20
Net income $5.06 $(2.18)
Price Risk
Our operations are significantly impacted by the world market for our
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 Coffee, Sugar & Cocoa Exchange (CSCE) in New York and
is one of the largest and most volatile commodity markets.
The most important aspect of our operation is to secure a consistent supply
of coffee. Some proportion of green coffee price fluctuations can be
passed through to our customers, 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. We purchase our
coffee through established coffee brokers, many of which are large
international firms, to help minimize the risk of default on coffee
deliveries. We purchase much of our coffee on forward contracts for
delivery as long as six months in the future. Sometimes these contracts
are fixed price contracts, regardless of the change in price of green
coffee between the contract and delivery dates. At other times these
contracts are variable price contracts, that allow the delivered price of
contracted coffee to reflect the market price of coffee at the delivery
date.
We occasionally use 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 our green coffee inventory is
adjusted currently through its LIFO methodology. Futures contracts not
designated as hedges, and terminations of contracts designed as hedges are
marked to market and changes are recognized in current earnings. There
were no open contracts at June 30, 2000 and 1999.
Accounting Pronouncements
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-An Amendment of FASB Statement
133." The statements require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not designated as
hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. As discussed in Note 1 to the
consolidated financial statements, the adoption of Statement Nos. 133 and
138 on July 1, 2000 will result in the recognition of additional expense in
the amount of $4,410,000 recognized in the statement of net income and a
reduction of $4,410,000 in other comprehensive loss.
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. We maintain
two distinct portfolios of securities, both portfolios are classified as
available for sale at June 30, 2000.
Our portfolio of investment grade money market instruments includes bankers
acceptances, discount commercial paper, medium term notes and federal
agency issues and treasury securities. As of June 30, 2000 over 72% 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 251 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 $1,815,000.
We are exposed to market value risk arising from changes in interest rates
on our portfolio of preferred securities. We review the interest rate
sensitivity of these securities and (a) enter into "short positions" in
futures contracts on U.S. Treasury securities or (b) hold put options on
such futures contracts in order to reduce the impact of certain interest
rate changes on such preferred stocks. Specifically, we attempt to manage
the risk arising from changes in the general level of interest rates. We
do not transact in futures contracts or put options for speculative
purposes.
The following table demonstrates the impact of varying interest rate
changes based on the preferred stock holdings, futures and options
positions, and market yield and price relationships at June 30, 2000. This
table is predicated on an instantaneous change in the general level of
interest rates and assumes predictable relationships between the prices of
preferred securities holdings, the yields on U.S. Treasury securities and
related futures and options.
Interest Rate Changes
(In thousands)
Market Value at June 30, 2000 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
-200 basis points "(b.p.")$51,115.0 0.0 $51,115.0 $6,345.1
-100 b.p. 47,900.5 2.4 47,902.9 3,133.0
Unchanged 44,215.0 554.9 44,769.9 0.0
+100 b.p. 40,537.4 3,853.9 44,391.3 (378.6)
+200 b.p. 37,116.3 7,066.9 44,183.2 (586.7)
The number and type of futures and options contracts entered into depends
on, among other items, the specific maturity and issuer redemption
provisions for each preferred security held, the slope of the Treasury
yield curve, the expected volatility of Treasury yields, and the costs of
using futures and/or options.
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of coffee. We try to manage this risk by adjusting our inventory
position. Commodity hedge instruments are sometimes used, depending on
market conditions. As of June 30, 2000 there were no open hedge positions.
See Items 1 and 7 for further discussion of inventory and price risk.
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, 2000 and 1999, and
the related consolidated statements of income, cash flows, and
shareholders' equity for the three years ended June 30, 2000. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Farmer
Bros. Co. and Subsidiary at June 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/Ernst & Young LLP
Long Beach, California
September 15, 2000
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, June 30,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 15,504 $ 4,403
Short term investments 114,346 122,203
Accounts and notes receivable, net 18,494 18,199
Inventories 36,770 33,675
Income tax receivable 1,340 249
Deferred income taxes 1,224 2,391
Prepaid expenses 882 429
Total current assets 188,560 181,549
Property, plant and equipment, net 38,741 31,543
Notes receivable 3,081 3,884
Long term investments 94,243 81,760
Other assets 23,975 21,382
Deferred income taxes 4,867 4,718
Total assets $353,467 $324,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,921 $ 4,786
Accrued payroll expenses 5,953 5,388
Other 5,092 5,744
Total current liabilities 16,966 15,918
Accrued postretirement benefits 19,198 17,707
Other long term liabilities 4,190 3,500
23,388 21,207
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
1,926,414 and outstanding 1,926,414
in 2000 and 1,870,754 in 1999 1,926 1,871
Additional paid-in capital 16,359 3,164
Retained earnings 311,153 283,191
Unearned ESOP shares (13,679) -
Accumulated other comprehensive loss (2,646) (515)
Total shareholders' equity 313,113 287,711
Total liabilities and shareholders' equity $353,467 $324,836
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
For the years ended June 30,
2000 1999 1998
Net sales $218,688 $221,571 $240,092
Cost of goods sold 76,969 89,834 107,968
141,719 131,737 132,124
Selling expense 82,858 81,321 82,207
General and administrative expense 9,896 13,646
8,962
92,754 94,967 91,169
Income from operations 48,965 36,770 40,955
Other income:
Dividend income 2,741 2,388 2,591
Interest income 10,080 8,870 8,055
Other, net (567) 487 1,236
12,254 11,745 11,882
Income before taxes 61,219 48,515 52,837
Income taxes 23,643 19,650 19,437
Net income $ 37,576 $ 28,865 $ 33,400
Net income per common share $20.22 $15.16 $17.34
Weighted average
shares outstanding 1,858,034 1,903,420 1,926,414
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30,
2000 1999 1998
Cash flows from operating activites:
Net income $37,576 $28,865 $33,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,628 5,202 4,980
Deferred income taxes 2,505 (993) (1,912)
Loss on sales of assets 686 (195) (72)
ESOP contribution expense 489 - -
Net (gain) loss on investments 1,502 13 (864)
Change in assets and liabilities:
Accounts and notes receivable (335) (177) 965
Inventories (3,095) 4,392 (2,891)
Income tax receivable (1,091) 400 1,567
Prepaid expenses and other assets (3,128) (1,841) (1,298)
Accounts payable 1,135 (819) (1,905)
Accrued payroll and expenses
and other liabilities (87) 578 1,684
Accrued postretirement benefits 1,491 1,766 1,594
Other long term liabilities 690 3,500 -
Total adjustments 6,390 11,826 1,848
Net cash provided by operating activities $43,966 $40,691 $35,248
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30,
2000 1999 1998
Net cash provided by operating activities $ 43,966 $ 40,691 $ 35,248
Cash flows from investing activities:
Purchases of property, plant and equipment (14,130) (6,167) (3,035)
Proceeds from sales of property, plant
and equipment 700 252 165
Purchases of investments (278,083) (577,336) (485,098)
Proceeds from sales of investments 268,337 554,603 431,839
Notes issued - (54) (1,668)
Notes repaid 843 142 87
Net cash used in investing activities (22,333) (28,560) (57,710)
Cash flows from financing activities:
Dividends paid (5,580) (5,344) (4,912)
Common stock repurchased (4,103) (11,817) -
Common stock issued 13,287 2,633 -
ESOP contributions (14,136) - -
Net cash used in financing activities (10,532) (14,528) (4,912)
Net increase (decrease) in cash
and cash equivalents 11,101 (2,397) (27,374)
Cash and cash equivalents at beginning of year 4,403 6,800 34,174
Cash and cash equivalents at end of year $ 15,504 $ 4,403 $ 6,800
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
Accumulated
Additional Unearned Other
Common Stock Paid-in Retained ESOP Comprehensive
Shares Amount Capital Earnings Shares Income (Loss) Total
________________________________________________________________________________
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 ($2.55 per share) (4,912) (4,912)
Balance at
June 30, 1998 1,926,414 $1,926 $568 $271,395 $- $1,023 274,912
Comprehensive income 28,865 28,865
Net income
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 ($2.80 per share) (5,344) (5,344)
Common stock
repurchased (71,621) (71) (21) (11,725) (11,817)
Common stock
issued 15,961 16 2,617 2,633
Balance at
June 30, 1999 1,870,754 $1,871 $3,164 $283,191 $- $(515) $287,711
Comprehensive income
Net income 37,576 37,576
Other comprehensive income,
net of taxes ($1,487)
Change in unrealized gain on
available for sale securities (2,512) (2,512)
Reclassification adjustment
for realized gain 381 381
(2,131) (2,131)
Total comprehensive income 35,445
Dividends ($3.00 per share) (5,580) (5,580)
Common stock
repurchased (25,715) (26) (43) (4,034) (4,103)
Common stock
issued to ESOP 81,375 81 13,206 (13,287) -
ESOP contributions (849) (849)
ESOP costs 32 457 489
Balance at
June 30, 2000 1,926,414 $1,926 $16,359 $311,153 ($13,679) ($2,646)$313,113
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Organization
The Company, which operates in one business segment, is in the business of
roasting, packaging, and distributing coffee and allied products through direct
sales to restaurants, hotels, hospitals, convenience stores and fast food
outlets. The Company's products are distributed by its selling divisions from
97 branches located in most large cities througout 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 accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of 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 futures contracts or
contracts designated as hedges were outstanding at June 30, 2000 or 1999. 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. All other assets are depreciated using the sum-of-the
years' digits and straight-line methods. The following useful lives are used:
Building and facilities 10 to 30 years
Machinery and equipment 3 to 5 years
Office furniture and equipment 5 years
When assets are sold or retired the asset and related depreciation allowance
are eliminated from the records and any gain or loss on disposal is included in
operations. Maintenance and repairs are charged to expense, 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.
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, excluding those unallocated shares held by the Company's
Employee Stock Ownership Plan (see Note 6). The Company does not have any
dilutive shares for any of the three fiscal years in the period ended June 30,
2000. Accordingly, the consolidated financial statements present only basic
net income per share.
Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the Company evaluates the carrying value
of its property, plant and equipment on an ongoing basis and recognizes an
impairment when the estimated future undiscounted cash flows from operations
are less than the carrying value of the related long-lived assets.
Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities-
An Amendment of FASB Statement 133," which require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
designated as 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.
Upon initial application of SFAS Nos. 133 and 138 on July 1, 2000, the Company
will transfer all of its investments classified as "available for sale" at June
30, 2000 into the "trading" category. Accordingly, the Company will recognize
expense of $4,410,000 in the income statement and a related reduction in other
comprehensive loss of an offsetting amount reflecting this transfer. On a
prospective basis the Company will record future unrealized gains and losses on
trading securities and changes in the market value of certain coffee contracts
meeting the definition of derivatives in other income and expense.
Note 2 Investments
(In thousands)
Gross Gross
Unrealized Unrealized Fair
Cost Loss Gain Value
June 30, 2000
Current Assets
Commercial Paper $ 22,674 $ (7) $ 1 $ 22,668
U.S. Government
Obligations 91,392 (1,402) 2 89,992
Municipal Debt 1,695 (9) - 1,686
$115,761 $(1,418) $ 3 $114,346
Non-Current Assets
U.S. Government
Obligations $ 41,845 $ (999) - $ 40,846
Corporate debt 8,000 (44) - 7,956
Preferred stocks 44,075 (2,310) 1,087 42,852
Corporate bonds 1,524 (214) - 1,310
Liquid asset fund
and other 1,279 - - 1,279
$ 96,723 $(3,567) $ 1,087 $ 94,243
Gross Gross
Unrealized Unrealized Fair
Cost Loss Gain Value
June 30, 1999
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
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities
(In thousands)
June 30, June 30,
2000 1999
Within one year $114,346 $122,203
After 1 year through 5 years 48,802 35,860
$163,148 $158,063
Gross realized gains and losses from available for sale securities were
$1,608,000 and ($3,110,000) respectively in 2000, $2,278,000 and ($2,291,000)
respectively in 1999 and gross realized gains and losses from available for
sale securities were $2,072,000 and ($1,208,000) respectively in 1998.
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, 2000 and 1999, associated with the hedge were $515,000 and
$923,000, respectively, and are included in other comprehensive loss. 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
June 30, June 30, June 30,
(In thousands) 2000 1999 1998
Balance at the beginning of year $470 $520 $555
Additions 280 205 413
Deductions (330) (255) (448)
Balance at end of year $420 $470 $520
Note 4 Inventories
June 30, 2000
(In thousands) Processed Unprocessed Total
Coffee $ 4,007 $ 9,239 $13,246
Allied products 11,922 5,210 17,132
Coffee brewing equipment 2,034 4,358 6,392
$17,963 $18,807 $36,770
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
Current cost of coffee and allied products inventories exceeds the LIFO cost by
approximately $7,863,000 and $13,915,000 as of June 2000 and 1999,
respectively.
Decrease in the Company's green coffee and allied product inventories during
fiscal 2000 and 1999 resulted in LIFO decrements which had the effect of
increasing income before taxes those years by $277,000 and $564,000,
respectively.
Note 5 Property, Plant and Equipment
June 30, June 30,
(In thousands) 2000 1999
Buildings and facilities $37,994 $31,841
Machinery and equipment 48,072 46,247
Office furniture and equipment 6,206 6,726
92,272 84,814
Accumulated depreciation (59,368) (58,574)
Land 5,837 5,303
$38,741 $31,543
Maintenance and repairs charged to expense for the years ended June 30, 2000,
1999 and 1998 were $10,596,000, $10,992,000, and $10,035,000, respectively.
Note 6 Employee Benefit Plans
The Company has a contributory defined benefit pension plan for all employees
not covered under a collective bargaining agreement (Farmer Bros. Co. Plan) and
a non-contributory defined benefit pension plan (Brewmatic Co. Plan) for
certain hourly employees covered under a collective bargaining agreement. The
Company's funding policy is to contribute annually at a rate that is intended
to fund benefits as a level percentage of salary (non-bargaining) and as a
level dollar cost per participant (bargaining) over the working lifetime of the
plan participants. Benefit payments are determined under a final payment
formula (non-bargaining) and flat benefit formula (bargaining).
The Company sponsors defined benefit postretirement medical and dental plans
that cover non-union employees and retirees, and certain union locals. The
plan is contributory and retirees contributions are fixed at a current level.
The plan is unfunded.
(In thousands) Defined Accrued
Benefit Pensions Postretirement Benefits
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Changes in benefit obligation
Benefit obligation at
the beginning of the year $45,744 $45,249 $18,953 $18,944
Service cost 1,617 1,662 661 745
Interest cost 3,251 3,000 1,290 1,246
Plan participants contributions 132 135 74 76
Amendments - 411 - -
Actuarial gain (5,835) (2,412) (1,318) (1,472)
Benefits paid (2,448) (2,301) (752) (586)
Benefit obligation at
the end of the year $42,461 $45,744 $18,908 $18,953
Changes in plan assets
Fair value in plan assets at
the beginning of the year $78,153 $72,600 - -
Actual return on plan assets 1,483 7,702 - -
Company contributions 16 17 $ 678 $ 510
Plan participants contributions 132 135 74 76
Benefit paid (2,447) (2,301) (752) (586)
Fair value in plan assets at
the end of the year $77,337 $78,153 $ - $ -
Funded status of the Plan $34,876 $32,408 $(18,908) $(18,953)
Unrecognized net asset (1,971) (2,628) - -
Unrecognized net gain (17,785) (17,415) 3,070 3,355
Unrecognized prior service cost 1,255 1,494 (3,360) (2,109)
Prepaid benefit cost $16,375 $13,859 $(19,198) $(17,707)
Weighted average assumptions as
of June 30:
Discount rate 8.30% 7.25% 8.30% 7.25%
Expected return on Plan assets 8.00% 8.00% - -
Salary increase rate increase 4.00% 3.00% - -
Initial medical rate trend 9.00% 7.00%
Ultimate medical trend rate 5.00% 5.00%
Number of years from initial to ultimate trend rate 8 4
Initial dental/vision trend rate 8.00% 6.00%
Ultimate dental/vision trend rate 5.00% 5.00%
Defined Accrued
Benefit Pensions Postretirement Benefits
June 30, June 30, June 30, June 30, June30, June 30,
2000 1999 1998 2000 1999 1998
Components of net periodic
benefit costs
Service cost $ 1,617 $ 1,662 $1,343 $ 661 $ 745 $ 615
Interest cost 3,252 3,000 2,811 1,290 1,246 1,241
Expected return on Plan assets (6,191) (5,747) (4,568) - - -
Actuarial gain - - - (68) - (20)
Unrecognized net transition asset(657) (658) (657) - - -
Unrecognized net gain (757) (514) (141) - - -
Unrecognized prior service cost 239 239 202 286 286 286
Benefit cost $(2,497)($2,018) ($1,010) $2,169 $2,277 $2,122
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 $117 ($126)
Effect on postretirment benefit obligation $925 ($991)
The Farmer Bros. Co. Plan owned 39,940 shares of the Company's common stock at
June 30, 2000, with a fair value of approximately $6,990,000. The Brewmatic
Co. Plan owned 2,400 shares of the Company's common stock at June 30, 2000,
with a fair value of approximately $420,000. The Company paid dividends of
$119,820 and $7,200 for the year ended June 30, 2000 to the Farmer Bros. Co.
Plan and the Brewmatic Co. Plan, respectively.
The Company contributes to two multi-employer defined benefit plans for certain
union employees. The contributions to these multi-employer pension plans were
approximately $2,005,000, $2,196,000 and $1,540,000 for 2000, 1999 and 1998,
respectively. The Company also has a defined contribution plan for eligible
non-union employees. During the year ended June 30, 2000, the Company
established a defined contribution plan for eligible union employees. No
Company contributions have been made nor are required to be made to either
defined contribution plan.
Other long term liabilities represents deferred compensation payable to an
officer of the Company. The deferred compensation plan provides for deferred
compensation awards to earn interest based upon the Company's average rate of
return on its investments. Total deferred compensation expense amounted to
$690,000 and $3,500,000 for the years ended June 30, 2000 and 1999,
respectively.
Employee Stock Ownership Plan
On January 1, 2000, the Company established the Farmer Bros. Co. Employee Stock
Ownership Plan (ESOP) to provide benefits to all employees. The Board of
Directors authorized a loan of up to $50,000,000 to the ESOP to purchase up to
300,000 shares of Farmer Bros. Co. common stock secured by the stock purchased.
The loan will be repaid from the Company's discretionary plan contributions
over a fifteen year term at a variable rate of interest, 8.08% at June 30,
2000.
For the period ended June 30, 2000 the Company loaned the ESOP $14,136,000
which the ESOP used to purchase 86,575 shares of the Company's common stock,
including 55,660 shares held by the Company's subsidiary at June 30, 1999 and
considered constructively retired for accounting purposes.
Shares purchased with loan proceeds are held by the plan trustee for allocation
among participants as the loan is repaid. The unencumbered shares are
allocated to participants using a compensation-based formula. Subject to
vesting requirements, allocated shares are owned by participants, and shares
are held by the plan trustee until the participant retires.
The Company reports compensation expense equal to the fair market price of
shares committed to be released to employees in the period in which they are
committed. The cost of shares purchased by the ESOP which have not been
committed to be released or allocated to participants are shown as a contra-
equity account "Unearned ESOP Shares" and are excluded from earnings per share
calculations. During the fiscal year ended June 30, 2000 the Company charged
$489,000 to compensation expense related to the ESOP. Dividends received by
the ESOP on its investment in the Company's common stock in the amount of
$62,000 were recorded as compensation expense for the period ended June 30,
2000. The difference between cost and fair market value of committed to be
released shares, which was $32,000 for the year ended June 30, 2000, is
recorded as additional paid in capital.
The ESOP shares as of June 30, 2000 are as follows:
Allocated shares -
Committed to be released shares 2,886
Unallocated shares 83,689
Total ESOP Shares 86,575
Fair value of unearned ESOP shares $15,151,000
Note 7 Income Taxes
The current and deferred components of the provision for income taxes consist
of the following:
June 30, June 30, June 30,
(In thousands) 2000 1999 1998
Current: Federal $18,249 $16,937 $17,128
State 2,889 3,706 4,221
21,138 20,643 21,349
Deferred: Federal 1,174 (1,032) (1,543)
State 1,331 39 (369)
2,505 (993) (1,912)
$23,643 $19,650 $19,437
A reconciliation of the provision for income taxes to the statutory federal
income tax expense is as follows:
June 30, June 30, June 30,
2000 1999 1998
Statutory tax rate 35.0% 35.0% 35.0%
(In thousands)
Income tax expense at statutory rate $21,427 $16,980 $18,493
State income tax (net federal tax benefit) 2,809 2,434 2,504
Dividend income exclusion (660) (595) (639)
Other (net) 67 831 (921)
$23,643 $19,650 $19,437
Income taxes paid $23,386 $20,850 $19,231
The primary components of temporary differences which give rise to the
Company's net deferred tax assets are as follows:
(In thousands) June 30, June 30,
2000 1999
Deferred tax assets:
Postretirement benefits $7,658 $7,078
Accrued liabilities 3,501 3,326
State taxes 1,006 860
Other 1,748 2,402
13,913 13,666
Deferred tax liabilities:
Pension assets (6,206) (5,214)
Other (1,616) (1,343)
(7,822) (6,557)
Net deferred tax assets $6,091 $7,109
Note 8 Other Current Liabilities
Other current liabilities consist of the following:
June 30, June 30,
(In thousands) 2000 1999
Accrued workers' compensation
liabilities $3,373 $3,921
Dividends payable 1,445 1,349
Other 274 474
$5,092 $5,744
Note 9 Commitments and Contingencies
The Company incurred rent expense of approximately $700,000, $691,000 and
$654,000, for the fiscal years ended June 30, 2000, 1999 and 1998,
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)
2001 $597
2002 488
2003 386
2004 204
2005 63
$1,738
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 2000 the Company began construction of a new warehouse in Castroville,
California, and continued with its warehouse project in Torrance, California.
Commitments under construction contracts at June 30, 2000 totaled approximately
$2,000,000.
Concentration of Credit Risk: June 30, 2000, 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 180 days.
Other investments are in U.S. government securities. Investments in the
preferred stocks of other companies are limited to high quality issuers and are
not concentrated by geographic area or issuer. Concentration of credit risk
with respect to trade receivable 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)
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
(In thousands except per share data)
Net sales $53,068 $56,303 $56,354 $52,963
Gross profit 32,770 32,903 38,230 37,816
Income from operations 10,849 10,459 13,913 13,744
Net income 8,088 8,316 10,364 10,808
Net income per share $4.32 $4.45 $5.60 $5.85
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
(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
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
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 27, 2000 (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, 2000,
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
Name Age Position
Roy F. Farmer 84 Chairman of Board of Directors since 1951.
Roy E. Farmer 48 President since 1993; various positions since 1976,
son of Chairman of the Board, R. F. Farmer.
Guenter W. Berger 63 Vice President of Production, Director since 1980;
Various positions since 1960.
Kenneth R. Carson 60 Vice President of Sales since 1990; Sales Management
Since 1968.
David W. Uhley 59 Secretary since 1985; various positions since 1968.
John E. Simmons 49 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 10-K.
(a) List of Financial Statements and Financial Statement Schedules
1. Financial Statements included in Item 8:
Consolidated Balance Sheets as of June 30, 2000 and 1999.
Consolidated Statements of Income for the Years Ended
June 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998.
Consolidated Statements of Shareholders' Equity For the Years
Ended June 30, 2000, 1999, and 1998.
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. Statement 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 mattes submitted to vote of security holders.
Not applicable.
24. Consents of experts and counsel.
Not applicable.
25. Power of attorney.
Not applicable.
28. Additional exhibits.
Not applicable.
29. Information from reports furnished to state insurance regulatory
authorities.
Not applicable.
(d) Financial statements required by Regulation S-X but excluded from the
annual report to shareholders by Rule 14a -3(b)
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FARMER BROS. CO.
Roy F. Farmer
By: Roy F. Farmer
(Roy F. Farmer, Chief Executive Officer and Chairman of the Board of Directors)
Date: September 28, 2000
John E. Simmons
By: John E. Simmons
(John E. Simmons, Treasurer and Chief Financial and Accounting Officer)
Date: September 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Roy E. Farmer
Roy E. Farmer, President and Director
Date:
Guenter W. Berger
Guenter W. Berger, Vice President and Director
John M. Anglin
John M. Anglin, Director
Date:
Catherine E. Crowe
Catherine E. Crowe, Director
Date:
