SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation IRS Employer Identification Number
20333 S. Normandie Avenue, Torrance, California 90502
Registrant's address
(310) 787-5200
Registrant's telephone number
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of December
31, 2003: 1,482,569 and the aggregate market value of the common shares
held by non-affiliates of the Registrant was approximately $200 million.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Dollars in thousands, except per share data)
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months For the six months
ended December 31, ended December 31,
2003 2002 2003 2002
Net sales $51,511 $54,118 $97,176 $104,507
Cost of goods sold 18,938 18,964 34,971 37,821
Gross profit 32,573 35,154 62,205 66,686
Selling expense 22,967 22,816 45,284 43,560
General and administrative expense 6,482 4,019 12,740 7,453
Operating expenses 29,449 26,835 58,024 51,013
Income from operations 3,124 8,319 4,181 15,673
Other income:
Dividend income 881 772 1,683 1,629
Interest income 570 1,074 1,221 2,361
Other, net -403 -573 1,169 -952
1,048 1,273 4,073 3,038
Income before taxes 4,172 9,592 8,254 18,711
Income taxes 1,607 3,693 3,178 7,204
Net income $2,565 $5,899 $5,076 $11,507
Weighted average shares outstanding 1,751,266 1,822,296 1,767,097 1,836,747
Earnings per common share $1.46 $3.24 $2.87 $6.26
Dividends declared per share $0.95 $0.90 $1.90 $1.80
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
2003 2003
ASSETS
Current assets:
Cash and cash equivalents $23,046 $18,986
Restricted cash 1,060 975
Short term investments 162,954 274,444
Accounts and notes receivable, net 13,815 13,756
Inventories 34,114 34,702
Income tax receivable 2,546 2,878
Prepaid expenses 2,121 876
Total current assets 239,656 346,617
Property, plant and equipment, net 41,998 41,753
Notes receivable 193 193
Other assets 25,181 26,390
Deferred income taxes 1,462 1,462
Total assets $308,490 $416,415
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,932 $3,321
Accrued payroll expenses 6,323 7,362
Deferred income taxes 976 976
Other 4,343 5,000
Total current liabilities 15,574 16,659
Accrued postretirement benefits 26,208 25,041
Other long term liabilities 5,570 5,570
Total Liabilities 47,352 47,270
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
and outstanding 1,482,569 1,482 1,926
Additional paid-in capital 14,935 18,798
Retained earnings 278,576 382,831
Unearned ESOP shares -32,809 -33,364
Less accumulated comprehensive loss -1,046 -1,046
Total shareholders' equity 261,138 369,145
Total liabilities and
shareholders' equity $308,490 $416,415
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six months ended December 31,
2003 2002
Cash flows from operating activities:
Net income $5,076 $11,507
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 3,508 2,802
(Gain) loss on sales of assets -45 -383
ESOP compensation expense 2,343 1,923
Net (gain) loss on investments 1,323 -1,544
Change in assets and liabilities:
Short term investments -994 14,412
Accounts and notes receivable -78 -4,559
Inventories 588 1,073
Income tax receivable 332 2,553
Prepaid expenses and other assets -36 -2,107
Accounts payable 611 881
Accrued payroll and expenses and
other liabilities -1,696 471
Accrued postretirement benefits 1,167 979
Total adjustments 7,023 16,501
Net cash provided by operating activities $ 12,099 $28,008
Cash flows from investing activities:
Purchases of property, plant and equipment -3,760 -2,940
Proceeds from sales of property,
plant and equipment 52 497
Notes repaid 19 29
Net cash used in investing activities -3,689 -2,414
Cash flows from financing activities:
Dividends paid -3,088 -3,289
ESOP contributions -1,177 -15,351
Proceeds from sale of short term investments 111,161 -
Purchase of capital stock -111,161 -
Net cash used in financing activities -4,265 -18,640
Net increase in cash and cash equivalents 4,145 6,954
Cash and cash equivalents at beginning of year 19,961 7,047
Cash and cash equivalents at end of year $24,106 $14,001
Supplemental disclosure of cash flow information:
Income tax payments 2,250 4,502
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended
December 31, 2003 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2004.
The balance sheet at June 30, 2003 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Farmer Bros Co. annual report on Form 10-K
for the year ended June 30, 2003.
Note 2. Investments
Short term investments are as follows (in thousands):
December 31 June 30
2003 2003
U.S. Treasury Obligations $105,842 $220,057
Preferred Stock and Other 56,118 53,898
Futures, options and
other derivative investments 994 490
Total short term investments $162,954 $274,445
Note 3. Inventories
(In thousands)
December 31, 2003
Processed Unprocessed Total
Coffee $3,976 $9,285 $13,261
Allied products 11,298 4,323 15,621
Coffee brewing equipment 2,123 3,109 5,232
$17,397 $16,717 $34,114
June 30, 2003
Processed Unprocessed Total
Coffee $3,853 $9,155 $13,008
Allied products 11,776 4,213 15,989
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,702
Interim LIFO Calculations
An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must necessarily be based
on management's estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond management's control,
interim results are subject to the final year-end LIFO inventory valuation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Financial Condition
On December 24, 2003, the Company purchased the 443,845 shares of its
common stock held by the Crowe Family and related trusts for approximately
$111 million or approximately $250 per share. The purchase is part of a
settlement of all outstanding issues between the Crowe and Farmer families
and was approved by California's Superior Court for Los Angeles County.
Concurrently with the purchase, the Company's Employee Stock Ownership Plan
(ESOP) agreed to purchase 124,939 shares at the same price, $250/share,
fulfilling its previously announced authorization for the ESOP to purchase
300,000 shares or 18.7% of outstanding shares. This portion of the transaction
was completed on January 11, 2004.
Estimated future costs to complete the information systems project exceed
$7,000,000, and the project is expected to continue until December 2004.
(in thousands) December 30, June 30,
2003 2003
Current assets $239,656 $348,617
Current liabilities 15,574 $ 16,659
Working capital $224,082 $331,958
Total assets $308,490 $416,415
All present and future liquidity needs are expected to be met by internal
sources. The Company tries not to rely on banks or other third parties for
its working capital and other liquidity needs. There have been no changes in
the needs or commitments described in the Company's Annual Report on Form 10-
K/A.
Results of Operations
All operating trends discussed in the Form 10-K/A for fiscal 2003 have
continued into the first half of fiscal 2004. These trends resulted in a 5%
decrease of net sales for the second quarter of fiscal 2004 to $51,511,000 as
compared to $54,118,000 in the fiscal quarter ended December 31, 2002. Year to
date sales decreased 7% to $97,176,000 as compared to $104,507,000 in the first
half of fiscal 2003. In addition to the previously mentioned trends, the
Company had decreased coffee brewing equipment sales of $3,812,000 in the
current fiscal year as compared to the same period of fiscal 2003.
Gross profit for the quarter ended December 31, 2003 decreased to $32,572,000
as compared to $35,153,000 in the same quarter of fiscal 2003. The average
cost of green coffee during the first half of fiscal 2004 has decreased 2%
since the June 30, 2003 year end, and is 6% lower than the average cost of
green coffee for the same fiscal period of the prior fiscal year. Gross profit
for the first half of fiscal 2004 decreased 7% to $62,205,000 as compared to
$66,686,000 in the same period of the prior fiscal year primarily the result of
decreased sales.
Operating expenses in the second quarter of fiscal 2004, consisting of selling
and general and administrative expenses, increased 10% to $29,449,000 as
compared to $26,834,000 in the same quarter of fiscal 2003. Operating
expenses for the first half of fiscal 2004 increased 14% to $58,024,000 as
compared to $51,013,000 in the same period of fiscal year 2003. This increase
is primarily attributed to costs associated with our multi year program to
update our information systems, increased employee benefits and legal expenses.
2004 2003
Information systems $ 3,494,000 $ 373,000
Employee benefits 9,566,000 7,121,000
Legal services 1,266,000 415,000
Total $14,326,000 $7,909,000
Not included in the costs summarized above are Sarbannes-Oxley compliance
costs that are expected to exceed $500,000 over the balance of fiscal 2004.
Also not included are the additional costs associated with the recent
purchase of a sizable block of stock by the ESOP. The additional non-cash
charge associated with this purchase is expected to exceed $2,000,000 per
year.
Other income in the second quarter of fiscal 2004 decreased 30% to $1,048,000
from $1,273,000 in the second quarter of fiscal 2003. Interest earned
decreased 47% to $570,000 as compared to $1,074,000 in the quarter ended
December 31, 2002. Other income for the first half of fiscal 2004 increased
34% to $4,073,000 from $3,038,000 in the same period of the prior fiscal
year. Short term investments decreased 41%, or $111,490,000, to
$162,954,000 at December 31, 2003 as compared to $274,444,000 at June 30,
2003. This decrease is the primarily the result of the share purchase
described in the Liquidity and Capital Resources section above.
As the result of the above mentioned factors, net income for the second
quarter of fiscal 2004 decreased 57% to $2,565,000 or $1.46 per share, as
compared to $5,899,000, or $3.24 per share, in the second quarter of fiscal
2003. Net income for the first half of fiscal 2004 decreased 56% to
$5,076,000 or $2.87 per share, as compared to $11,507,000 or $6.26 in the
same period of the prior fiscal year.
Quarterly Summary of Results (in thousands of dollars):
12/31/02 03/31/03 06/30/03 09/30/03 12/31/03
Net sales $54,118 $49,267 $47,784 $45,665 $51,511
Gross profit $35,154 $32,038 $32,172 $29,632 $32,573
Income from operations $8,319 $4,985 $3,230 $1,057 $3,124
Net income $5,899 $6,339 $5,783 $2,511 $2,565
Net income per share $3.24 $3.52 $3.23 $1.41 $1.46
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q regarding
The risks, circumstances and financial trends that may affect our future
operating results, financial position and cash flows may be forward-looking
statements within the meaning of federal securities laws. These statements
are based on management's current expectations, assumptions, estimates and
observations about our business and are subject to risks and uncertainties.
As a result, actual results could materially differ from the forward looking
statements contained herein. These forward looking statements can be
identified by the use of words like "expects," "plans," "believes,"
"intends," "will," "assumes" and other words of similar meanings. These and
other similar words can be identified by the fact that they do not relate
solely to historical or current facts. While we believe our assumptions are
reasonable, we caution that it is impossible to predict the impact of such
factors which could cause actual results to differ materially from predicted
results. We intend these forward-looking statements to speak only at the
time of this report and do not undertake to update or revise these
projections as more information becomes available. For these statements, we
claim the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Financial Markets
We are exposed to market value risk arising from changes in interest rates on
our securities portfolio. Our portfolio of investment grade money market
instruments includes discount commercial paper, medium term notes, federal
agency issues and treasury securities. As of December 31, 2003 over 50% of
these funds were invested in instruments with maturities shorter than 92 days.
This portfolio's interest rate risk is not hedged and its average maturity is
approximately 44 days. A 100 basis point increase in the general level of
interest rates would result in a change in the market value of the portfolio
of approximately $1,071,000.
Our portfolio of preferred securities includes investments in derivatives that
provide a natural economic hedge of interest rate risk. We review the
interest rate sensitivity of these securities and (a) enter into "short
positions" in futures contracts on U.S. Treasury securities or (b) hold put
options on such futures contracts in order to reduce the impact of certain
interest rate changes on such preferred stocks. Specifically, we attempt to
manage the risk arising from changes in the general level of interest rates.
We do not transact in futures contracts or put options for speculative
purposes.
The following table demonstrates the impact of varying interest rate changes
based on the preferred stock holdings, futures and options positions, and
market yield and price relationships as of December 31, 2003. 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 December 31, 2003 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
-150 basis points
("b.p.") $62,245 $2 $62,247 $5,309
-100 b.p. 60,592 36 60,627 3,419
Unchanged 56,104 1,104 57,208 0
+100 b.p. 50,936 5,552 56,488 (720)
+150 b.p. 48,424 8,058 56,482 (726)
The number and type of future and option contracts entered into depends on,
among other items, the specific maturity and issuer redemption provisions for
each preferred stock held, the slope of the Treasury yield curve, the expected
volatility of Treasury yields, and the costs of using futures and/or options.
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of green coffee. We price our inventory on the LIFO basis. In the
normal course of business, we enter into commodity purchase agreements with
suppliers and we purchase green coffee contracts.
The following table demonstrates the impact of changes in the price of green
coffee on inventory and green coffee contracts at December 31, 2003. It
assumes an immediate change in the price of green coffee, and the valuations
of coffee index futures and put options and relevant commodity purchase
agreements at December 31, 2003.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee Futures Change in Market Value
Change Inventory & Options Totals Derivatives Inventory
-20% $12,000 $ 2,907 $14,907 $2,907 ($1,261)
unchanged 13,261 110 13,371 - -
20% 15,000 ($2,797) 12,203 (373) $1,739
At December 31, 2003 the derivatives consisted mainly of commodity futures
with maturities shorter than four months.
Item 4 Controls & Procedures
As of December 31, 2003, with the participation of the Chief Executive Officer
and Chief Financial officer, we evaluated the effectiveness of our disclosure
controls and procedures and and concluded that they were effective as of that
date. No changes occurred during the quarter ended December 31, 2003 that
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except that during that quarter we
implemented part of our multi-year program to update our information systems
which program includes enhancements to such internal controls.
PART II OTHER INFORMATION
Item 1. Legal proceedings.
On December 4, 2003, Leonard Rosenthal brought suit in United States District
Court for the Central District of California (Case No. CV03845) against the
Company, the present directors and a former director ("Directors"), on behalf
of himself and a purported class of persons (the "Rosenthal Litigation"). The
Plaintiff alleged that the Company was operating as an unregistered investment
company in violation of the Investment Company Act of 1940 (the "ICA"). The
Plaintiff also alleged that the Company's loans of corporate funds to the ESOP
to purchase stock of the Company violate federal law and that such purchases
by the ESOP were intended to preserve the voting control of the Farmer family
and entrench management. In addition, the Plaintiff alleged that the Company
was pursuing an estate planning strategy designed to depress the stock price in
order to lessen the estate taxes anticipated on the death of Roy F. Farmer.
Plaintiff sought recovery against the Directors in an amount not less than
the amount of the loans to the ESOP. Plaintiff also filed a motion for a
preliminary injunction to prevent the Company and the Directors from voting the
Company stock beneficially owned by the ESOP at the Annual Meeting. On
December 23, 2003, the U.S. District Court denied plaintiff's motion, ruling,
inter alia, that plaintiff lacked standing to bring an action for violation of
the ICA and that plaintiff had failed to show a likelihood of prevailing at
trial on his claims that the Company was in violation of the ICA or that the
Directors had violated their duties with respect to the ESOP.
On February 4, 2004, Leonard Rosenthal filed a Notice of Dismissal Without
Prejudice with the United States District Court for the Central District of
California.
Item 2. Changes in securities none.
Item 3. Defaults upon senior securities. none.
Item 4. Submission of matters to a vote of security holders. none.
Item 5. Other information none.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits.
10.1 Settlement Agreement 12/24/2003 among the Company, the Farmer Family and
the Crowe Family
10.2 Mutual General Release 12/24/03 among the Company, the Farmer Family and
the Crowe Family
10.3 Stock Purchase Agreement 12/24/03 among the Company, Catherine Crowe and
Roy F. Farmer as Trustee of various trusts
10.4 Stock Purchase Agreement 01/09/04 between Wells Fargo Bank, Trustee of
the Farmer Bros. Co. ESOP and the Company
31.1 Certification of Chief Executive Officer (Section 302 of the Sarbannes-
Oxley Act of 2002)
31.2 Certification of Chief Financial Officer (Section 302 of the Sarbannes-
Oxley Act of 2002)
32.1 Certification of Chief Executive Officer (Section 906 of the Sarbannes-
Oxley Act of 2002)
32.2 Certification Chief Financial Officer (Section 906 of the Sarbannes-Oxley
Act of 2002)
99.1 Plan Amendment 2 12/22/03 to ESOP
99.2 Plan Amendment 3 12/23/03 to ESOP
99.3 Loan Agreement 07/21/2003 between Wells Fargo Bank, Trustee of the
Farmer Bros. Co. ESOP and the Company
(b) Reports on Form 8-K.
Reports on Form 8-K were filed as follows:
A form 8-K dated July 23, 2003 and filed with the Commission on July 24, 2003
announced approval by the Board of Directors of a loan by the Company to the
ESOP to purchase up to 129,575 shares of Farmer Bros. Co. common stock.
A form 8-K dated December 24, 2003 and filed with the Commission on December
24, 2003 announced the purchase of all Crowe family shares at a cost of
approximately $110.96 million, and the rejection of a request for injunction on
behalf of a shareholder by U.S. District Judge Margaret M. Morrow.
A form 8-K dated January 12, 2004 and filed with the Commission on January 12,
2004 announced finalization of the purchase of the ESOP's purchase of 129,575
shares of Farmer Bros. Co. common stock bringing the ESOP's holdings to 300,000
shares or 18.7% of the Company's shares outstanding.
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.
FARMER BROS. CO.
/s/ Roy E. Farmer
Roy E. Farmer, President and Chief Executive Officer and Director
(principal executive officer)
Date: February 18, 2004
/s/ John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: February 18, 2004