Farmer Bros. Co., including its consolidated subsidiaries unless the context otherwise requires, (the “Company,” “we,” “our” or “Farmer Bros.”) is a manufacturer, wholesaler and distributor of coffee and spices to the institutional food service segment. The Company was incorporated in California in 1923, and reincorporated in Delaware in 2004. On April 27, 2007, we completed the acquisition of Coffee Bean Holding Co., Inc., a Delaware corporation (“CBH”), the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), a specialty coffee roaster and wholesaler headquartered in Portland, Oregon (the “CBI Acquisition”).
Our product line is specifically focused on the needs of our market segment: institutional food service establishments that prepare and market meals and food products, including restaurants, hotels and hospitals, as well as retailers such as convenience stores, coffee houses, general merchandisers and grocery stores. Our product line includes roasted coffee, coffee related products such as coffee filters, sugar and creamers, assorted teas, cocoa, spices, and soup and beverage bases. Our product line presently includes over 400 items. For the past three fiscal years sales of roasted coffee products represented approximately 50% of our total sales and no single product other than coffee accounted for more than 10% of our revenue. Coffee purchasing, roasting and packaging takes place at our Torrance, California and Portland, Oregon plants. Our Torrance plant also serves as the distribution hub for our branches.
Our primary raw material is green coffee, an agricultural commodity. Green coffee is mainly grown outside the United States and can be subject to volatile price fluctuations. Weather, real or perceived shortages, political unrest, labor actions and armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the U.S. and coffee producing nations, can affect the price of green coffee.
Green coffee prices can also 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.
Other raw materials used in the manufacture of our non-coffee products (“allied products”) include a wide variety of spices, such as pepper, chilies, oregano and thyme, as well as cocoa, dehydrated milk products, salt and sugar. These raw materials are agricultural products and can be subject to wide cost fluctuations. Such fluctuations, however, historically have not had a material effect on our operating results.
We own 91 registered trademarks, which are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification.
We experience some seasonal influences. The winter months are generally the best sales months. However, our product line and geographic diversity provide some sales stability during the warmer months when coffee consumption ordinarily decreases. Additionally, we usually experience an increase in sales during the summer months from seasonal businesses located in vacation areas.
Most sales are
made “off-truck” to our institutional food service customers at their places of
business by our sales representatives who are responsible for soliciting,
selling and collecting from and otherwise maintaining our customer accounts.
Our distribution trucks are replenished from warehouses located in a number of
cities in the western United States. We operate our own long haul trucking
fleet in an effort to more effectively control the supply of products to these
warehouses. Inventory levels are maintained at each branch warehouse consisting
of our complete product line and additional safety stocks to accommodate a
modest interruption in supply. A portion of our products are distributed by
third parties or are direct shipped via common carrier. As one of the largest
wholesale specialty coffee roasters in the nation, CBI markets their unique
specialty coffee line primarily to coffee houses and private-label retailers
and other national accounts utilizing a variety of distribution channels. In
contrast, Farmer Bros. serves a variety of traditional coffee blends at different
price points to restaurants, hotels, hospitals, etc. utilizing its own
distribution network. We believe the combination of the two marketing
approaches and the combined product line (adding over 100 SKU’s) allows the two
companies to better serve their current and prospective customers’ needs
without regard to the means of distribution. No single customer
represents a significant concentration of sales. As a result, the loss of one
or more of our larger customer accounts is not likely to have a material
adverse effect on our results of operations. We serve a wide variety of
customers, from small restaurants and donut shops to large institutional buyers
like restaurant chains, hospitals, hotels, contract food services and
convalescent hospitals. Customer contact, our distribution network and our
service quality, are integral to our sales effort. As a result of the CBI
Acquisition we added additional customer categories that include gourmet coffee
houses, national foodservice, national mass market merchandisers and grocery
stores. We face
competition from many sources, including the institutional food service
divisions of multi-national manufacturers of retail products such as Procter &
Gamble (Folgers Coffee), Kraft Foods (Maxwell House Coffee) and Sara Lee Foods
(Superior Coffee), wholesale grocery distributors such as Sysco and U.S. Food
Service, and regional institutional coffee roasters such as S & D
Coffee Company and Boyd Coffee Company. Management believes we may have some
competitive advantages due to our longevity and strong regional roots. Our
focus on the quality of our products, our distribution network and our customer
service are the major factors that differentiate us from our competitors. Competition is robust, and
is primarily based on products and price, with distribution often a major
factor. Most of our customers rely on us for distribution, however some of our
customers use third party distribution or conduct their own distribution. Some
of our customers are “price” buyers, seeking the low cost provider with little
concern about service, while others find great value in the service programs we
provide. We compete well when service and distribution are valued by our
customers, and are less effective when only price matters. Our customer base is price
sensitive and we are often faced with price competition. We finance our operations internally, and we believe that working
capital from internal sources will be adequate for the coming fiscal year. We have no material revenues from foreign operations. On June 30, 2007 we employed 1,233 employees, 441 of whom are
subject to collective bargaining agreements. Compliance with government
regulations relating to the discharge of materials into the environment has 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. No portion of our business may be subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
government. Our Internet website address is http://www.farmerbroscousa.com
(the website address is not intended to function as a hyperlink, and the information
contained in our website is not intended to be part of this filing), where we
make available, free of charge, copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K
including amendments thereto as soon as reasonably practicable after filing
such material electronically or otherwise furnishing it to the SEC. Certain statements contained in this annual report on Form 10-K
regarding the risks, circumstances and financial trends that may affect our
future operating results, financial position and cash flows are not based on
historical fact and are forward-looking statements within the meaning of
federal securities laws and regulations. These statements are based on
management’s current expectations, assumptions, estimates and observations of
future events and include any statements that do not directly relate to any
historical or current fact. These forward-looking statements can be identified
by the use of words like “anticipates,” “feels,” “estimates,” “projects,” “expects,”
“plans,” “believes,” “intends,” “will,” “assumes” and other words of similar
meaning. Owing to the uncertainties inherent in forward-looking statements,
actual results could differ materially from those set forth in forward-looking
statements. We intend these forward-looking statements to speak only at the
time of this report and do not undertake to update or revise these statements
as more information becomes available except as required under federal
securities laws and the rules and regulations of the SEC. Factors that
could cause actual results to differ materially from those in forward-looking
statements include, but are not limited to, fluctuations in availability and
cost of green coffee, competition, organizational changes, our ability to
successfully integrate the CBI Acquisition, the impact of a weaker economy,
business conditions in the coffee industry and food industry in general, the
Company’s continued success in attracting new customers, variances from
budgeted sales mix and growth rates, and weather and special or unusual events,
as well as other risks described in this report and other factors described
from time to time in the Company’s filings with the SEC. The following items are
representative of the risks, uncertainties and other conditions that may impact
the Company’s business, future performance and the forward-looking statements
that it makes in this annual report on Form 10-K or that it may make
in the future. Our actual results could differ materially from anticipated
results as a result of some or all of these items or from other factors. OUR EFFORTS TO SECURE AN ADEQUATE SUPPLY OF
QUALITY COFFEES MAY BE UNSUCCESSFUL AND EXPOSE US TO COMMODITY PRICE RISK. Maintaining a steady
supply of green coffee is essential to keep inventory levels low and secure
sufficient stock to meet customer needs. To help ensure future supplies, we may
purchase our coffee on forward contracts for delivery as long as six months in
the future. In the event of non-performance by the suppliers,
the Company could be exposed to credit and supply risk. Entering into such
future commitments also leaves the Company subject to purchase price risk.
Various techniques are used to hedge these purchases against untoward price movement.
Competitive factors make it difficult for the Company to “pass through” such
price fluctuations to its customers. Therefore, unpredictable price changes can
have an immediate effect on operating results that cannot be corrected in the
short run. To reduce its exposure to the volatile fluctuation of green coffee
costs, Farmer Bros. has, from time to time, entered into futures contracts to
hedge coffee purchase commitments. Open contracts associated with these hedging
activities are described in Item 7A. “Quantitative and Qualitative Disclosures
About Market Risk.” INCREASES IN THE
COST OF GREEN COFFEE COULD REDUCE OUR GROSS MARGIN AND PROFIT. Our primary raw material is green coffee, an
agricultural commodity. Green coffee is mainly grown outside the U.S. and can
be subject to volatile price fluctuations. Weather, real or perceived
shortages, labor actions, political unrest and armed conflict in coffee
producing nations, and government actions, including treaties and trade
controls between the U.S. and coffee producing nations, can affect the price of
green coffee. Green specialty coffees sell at a premium to other green coffees
due to the inability of producers to increase supply in the short run to meet
rising demand. As a result, the price spread between specialty coffee and
non-specialty coffee is likely to widen as demand continues to increase. Green coffee prices can also be affected by the
actions of producer organizations. The most prominent of these are the
Colombian Coffee Federation (CCF), the International Coffee Organization (ICO)
and the Association of Coffee Producing Countries (ACPC). These organizations
seek to increase coffee prices largely be attempting to restrict supplies,
thereby limiting the availability of green coffee to coffee consuming nations.
As a result these organizations or others may succeed in raising green coffee
prices. In the past, we generally
have been able to pass on increases in green coffee costs to our customers.
However, there can be no assurance that we will be successful in passing such
fluctuations on to our customers without losses in sales volume or gross margin
in the future. Similarly, rapid, sharp decreases in the cost of green coffee
could also force us to lower sales prices before realizing cost reductions in
our green coffee inventory. OUR INDUSTRY IS
HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE
EFFECTIVELY. We primarily compete with
other coffee companies, including multi-national firms with substantially
greater financial, marketing and operating resources than the Company. We face
competition from many sources including the food service divisions of
multi-national manufacturers of retail products such as Proctor and Gamble
(Folgers Coffee), Kraft Foods (Maxwell House Coffee) and Sara Lee Foods
(Superior Coffee), wholesale grocery distributors such as Sysco and U.S. Food
Service, and regional coffee roasters such as S & D Coffee Company and Boyd
Coffee Company. If we do not succeed in differentiating ourselves from our
competitors or our competitors adopt our strategies, then our competitive
position may be weakened. CHANGES IN
CONSUMER PREFERENCES COULD ADVERSELY AFFECT OUR BUSINESS. Our continued success
depends, in part, upon the demand for coffee. We believe that competition from
other beverages continues to dilute the demand for coffee. Consumers who choose
soft drinks, juices, bottled water, teas and other beverages all reduce
spending on coffee. Consumer trends away from coffee could negatively impact
our business. REDUCTIONS IN DISCRETIONARY SPENDING COULD ADVERSELY
AFFECT OUR BUSINESS. Our success depends to a
significant extent on a number of factors that affect discretionary consumer
spending, including economic conditions, disposable consumer income and
consumer confidence. In a slow economy, businesses and individuals scale back
their discretionary spending on travel and entertainment, including “dining
out,” as well as the purchase of high-end consumables like specialty coffee. Economic
conditions may also cause businesses to reduce travel and entertainment
expenses, and even cause office coffee benefits to be eliminated. These factors
could reduce demand for our products or impose practical limits on pricing,
either of which could adversely affect our business, financial condition,
operating results and cash flows. OUR SALES AND DISTRIBUTION NETWORK IS COSTLY TO
MAINTAIN. Our sales and distribution
network requires a large investment to maintain and operate. Costs include the
fluctuating cost of gasoline, diesel and oil, the costs associated with
managing, purchasing, maintaining and insuring a fleet of delivery vehicles,
the costs of maintaining distribution warehouses throughout the country, and
the costs of hiring, training and managing our route sales professionals. Many of
these costs are beyond our control, and others are fixed rather than variable.
Some competitors use alternate methods of distribution that eliminate some of
the costs associated with our method of distribution. WE ARE
SELF-INSURED. OUR RESERVES MAY NOT BE SUFFICIENT TO COVER FUTURE CLAIMS. We are self-insured for
many risks up to significant deductible amounts. The premiums associated with
our insurance have recently increased substantially. General liability, fire,
workers’ compensation, directors and officers liability, life, employee
medical, dental and vision and automobile risks present a large potential
liability. While we accrue for this liability based on historical experience,
future claims may exceed claims we have incurred in the past. Should a different
amount of claims occur compared to what was estimated or the cost of the claims
increase or decrease beyond what was anticipated, reserves recorded may not be
sufficient and the accruals may need to be adjusted accordingly in future
periods. EMPLOYEE STRIKES
AND OTHER LABOR-RELATED DISRUPTIONS MAY ADVERSELY AFFECT OUR OPERATIONS. We have union contracts
relating to the majority of our workforce located on the West Coast, including
California, Oregon, Washington and Nevada. Although we believe union relations
have been amicable in the past, there is no assurance that this will continue
in the future. There are potential adverse effects of labor disputes with our
own employees or by others who provide transportation (shipping lines, truck
drivers) or cargo handling (longshoremen), both domestic and foreign, of our
raw materials or other products. These actions could restrict our ability to
obtain, process and/or distribute our products. THE FAILURE TO
INTEGRATE SUCCESSFULLY OTHER BUSINESSES THAT WE ACQUIRE COULD ADVERSELY AFFECT
OUR BUSINESS. In April 2007,
we acquired CBI in a stock acquisition. While we have no current agreements or
binding commitments regarding any potential acquisitions, as part of our growth
strategy we may evaluate opportunities to acquire other businesses or enter
into joint ventures that would complement our existing product line, expand our
geographic reach or increase our customer base. Acquisitions entail numerous
risks, including: · the
integration of new operations, products, services and personnel; · the
diversion of management and other resources from our existing businesses; · the
inability to generate revenues from new products sufficient to offset
associated acquisition costs; · the
maintenance of uniform standards, controls, procedures and policies; · accounting
effects that may adversely affect our financial results, including the
amortization of intangible assets; · difficulties
in retaining customers of the acquired companies; · the
impairment of employee and customer relations as a result of any integration of
new management personnel or the loss of key employees of the acquired
companies; · dilution
to existing stockholders from the issuance of equity securities; and · liabilities
or other problems associated with an acquired business. Any problems we encounter
in connection with our acquisitions could have a material adverse effect on our
business. OUR ROASTING AND BLENDING METHODS ARE NOT PROPRIETARY,
SO COMPETITORS MAY BE ABLE TO DUPLICATE THEM, WHICH COULD HARM OUR
COMPETITIVE POSITION. We consider our roasting
and blending methods essential to the flavor and richness of our coffee and,
therefore, essential to our brand. Because the Company’s roasting methods
cannot be patented, we would be unable to prevent competitors from copying
these methods if such methods became known. If our competitors copy our roasts
or blends, the value of our brands may be diminished, and we may lose customers
to our competitors. In addition, competitors may be able to develop roasting or
blending methods that are more advanced than our production methods, which may
also harm our competitive position. BECAUSE A
SUBSTANTIAL PORTION OF OUR BUSINESS IS BASED IN CALIFORNIA, OREGON, TEXAS,
COLORADO, ARIZONA AND WASHINGTON, AN INTERRUPTION IN OPERATIONS IN ANY OF THESE
MARKETS WOULD ADVERSELY IMPACT OUR BUSINESS. Over half of our business
is conducted in California, Oregon, Texas, Colorado, Arizona and Washington. We
expect that these operations will continue to generate a substantial portion of
our revenue. A significant interruption in operations at our facilities in
these markets, whether as a result of an earthquake, natural disaster,
terrorism or other causes, could significantly impair our ability to operate
our business. Our major manufacturing facility and distribution hub is in Los
Angeles County. The majority of our green coffee comes through the Ports of Los
Angeles, Long Beach, San Franciso and Portland. Any interruption to port
operations, highway arteries, gas mains or electrical service in these areas
could restrict our ability to supply our branches with product and would
adversely impact our business. OUR OPERATING
RESULTS MAY HAVE SIGNIFICANT FLUCTUATIONS FROM QUARTER TO QUARTER WHICH
COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE. From time to time, our operating results likely will
fall below investor expectations. These results are influenced by a number of
factors, including fluctuations in the price of green coffee, competition from
existing or new competitors in our industry and changes in consumer
preferences. Quarterly fluctuations in our operating results as the
result of these factors or for any other reason, could cause our stock price to
decline. Accordingly, we believe that period-to-period comparisons of our
historical or future operating results are not necessarily meaningful, and such
comparisons should not be relied upon as indicators of future performance.
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.
We have incurred operating losses for each of the prior three fiscal years and a net loss in one of the prior three fiscal years. If our current strategies are unsuccessful or if we are unsuccessful in integrating the CBI Acquisition with our existing operations we may not achieve the levels of sales and earnings we expect. As a result, we could suffer additional losses in future years and our stock price could decline.
FUTURE FUNDING DEMANDS UNDER PENSION PLANS FOR CERTAIN UNION EMPLOYEES ARE UNKNOWN.
We participate in two multi-employer defined benefit plans for certain union employees. The management, funding status and future viability of these plans is not known at this time. The nature of the contracts with these plans allows for future funding demands that are outside our control or ability to estimate.
WE RELY ON A SINGLE THIRD PARTY SUPPLIER TO MANAGE OUR INTEGRATED ORACLE SYSTEM THAT IS INTEGRAL TO THE SUCCESS AND OPERATION OF OUR BUSINESS.
We rely on WTS, a company affiliated with Oracle, and its employees, in connection with the hosting of our integrated management information system. This system is essential to our operations and currently includes all accounting and production software applications. By the end of fiscal 2008, WTS is also expected to host our route sales application software. If WTS were to experience financial, operational, or quality assurance difficulties, or if there were any other disruption in our relationship with WTS, we might be unable to produce financial statements, fill replenishment orders for our branch warehouses, issue payroll checks, process payments to our vendors or bill customers. Any of these items could have a material adverse effect on the Company.
WE ARE DEPENDENT ON ENTERPRISE RESOURCE PLANNING (“ERP”) SOFTWARE TO OPERATE OUR BUSINESS. SHOULD WE FAIL TO OPERATE EFFECTIVELY OR IF WE ENCOUNTER DIFFICULTIES INTEGRATING SYSTEMS OR SUFFER ILL-TIMED POWER OR COMMUNICATIONS FAILURES, THE RESULT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
We rely on complex software and hardware to invoice our customers, produce customer statements, account for our inventory and manufacturing costs, fill branch inventory replenishment orders, pay our bills, pay our employees and produce our financial statements. We have in the past encountered, and in the future may encounter, software and hardware errors, system design errors and errors in the operation of our systems. This has resulted and may in the future result in a number of adverse consequences, including: users being disconnected from systems and being unable to perform their job functions, and delays in producing financial statements and other key management system information.
Reliance on such software also leaves us exposed to harmful software programs such as viruses that could disrupt our business and damage our network. It is possible that a security breach or inappropriate use of our network could expose us to the possibility of system failure or other disruption. A security breach could jeopardize security of confidential information and thereby expose the Company to potential legal liability.
THE COMPANY DEPENDS
ON THE EXPERTISE OF KEY PERSONNEL. THE UNEXPECTED LOSS OF ONE OR MORE OF THESE
KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR
COMPETITIVE POSITION. Our continued success
largely depends on the efforts and abilities of our executive officers and
other key personnel. There is limited management depth in certain key positions
throughout the Company. The unexpected loss of one or more of these key
employees could have a material adverse effect on our operations and
competitive position. WE ARE SUBJECT TO
RE-FUNDING OBLIGATIONS AND MAY ACQUIRE ADDITIONAL SHARES UNDER THE ESOP. The Farmer Bros. Co. Employee Stock Ownership Plan was
designed to help us attract and retain employees and to better align the
efforts of our employees with the interests of our stockholders. To that end,
the Company has purchased 3,000,500 shares of Company stock for the ESOP to
allocate to employees over the next 12 years. It is possible that additional
shares could be acquired that might deplete the Company’s cash. We expect that
the future re-funding liability of the existing shares in the ESOP will
increase and require additional investment as the ESOP matures and individual
holdings grow. When employees vested in the ESOP leave the Company, they have
the right to “put” their shares to the Company for cash. This requires the
Company to repurchase those shares at the current market value. Assuming all
shares currently owned by the ESOP are fully distributed, the Company’s
re-funding liability is approximately $67,700,000 based on the June 30,
2007 closing share price. CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING PRINCIPAL
STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS AND MAY RESULT IN A LOWER TRADING PRICE FOR OUR STOCK
THAN IF OWNERSHIP OF OUR STOCK WAS LESS CONCENTRATED. As of September 1,
2007, members of the Farmer family or entities controlled by the Farmer family
(including trusts and a family partnership) as a group beneficially owned
approximately 40% of our outstanding common stock. As a result, these
stockholders, acting together, may be able to influence the outcome of
stockholder votes, including votes concerning the election and removal of
directors and approval of significant corporate transactions. This level of
concentrated ownership, along with the factors described in “Risk Factors—ANTI-TAKEOVER
PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US,” may
have the effect of delaying or preventing a change in the management or voting
control of the Company. In addition, this significant concentration of share
ownership may adversely affect the trading price for our common stock if
investors perceive disadvantages in owning stock in a company with such
concentrated ownership. ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US. We have adopted a stockholder rights plan (the “Rights
Plan”) and declared a dividend distribution of one preferred share purchase
right (a “Right”) for each outstanding share of our common stock to
stockholders of record as of March 28, 2005. Each Right, when exercisable,
will entitle the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock,
$1.00 par value per share, at a purchase price of $112.50, subject to adjustment.
The Rights expire on March 28, 2015, unless they are earlier redeemed,
exchanged or terminated as provided in the Rights Plan. Because the Rights may
substantially dilute the stock ownership of a person or group attempting to
take us over without the approval of our Board of Directors, our Rights Plan
could make it more difficult for a third party to acquire us (or a significant
percentage of our outstanding capital stock) without first negotiating with our
Board of Directors regarding such acquisition. In addition, our Board of Directors has the authority
to issue up to 500,000 shares of Preferred Stock (of which 200,000 shares have
been designated as Series A Junior Participating Preferred Stock) and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of our common stock may be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock may
have the effect of delaying, deterring or preventing a change of control of
Farmer Bros. without further action by the stockholders and may adversely
affect the voting and other rights of the holders of our common stock. Further, certain
provisions of our charter documents, including a classified board of directors,
provisions eliminating the ability of stockholders to take action by written
consent, and provisions limiting the ability of stockholders to raise matters
at a meeting of stockholders without giving advance notice, may have the effect
of delaying or preventing changes in control or management of Farmer Bros.,
which could have an adverse effect on the market price of our stock. In
addition, our charter documents do not permit cumulative voting, which may make
it more difficult for a third party to gain control of our Board of Directors.
Further, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which will prohibit us from engaging in a
“business combination” with an “interested stockholder” for a period of three
years after the date of the transaction in which the person became an
interested stockholder, even if such combination is favored by a majority of
stockholders, unless the business combination is approved in a prescribed
manner. The application of Section 203 also could have the effect of
delaying or preventing a change of control or management. FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE. As directed by Section 404
of the Sarbanes-Oxley Act of 2002 (“SOX”), the SEC adopted rules requiring
us, as a public company, to include a report of management on our internal
controls over financial reporting in our annual report on Form 10-K
and quarterly reports on Form 10-Q that contains an assessment by
management of the effectiveness of our internal controls over financial
reporting. In addition, our independent auditors must attest to and report on
management’s assessment of the effectiveness of our internal controls over
financial reporting as of the end of the fiscal year. Compliance with SOX Section 404
has been a challenge for many companies. Our ability to continue to comply is
uncertain as we expect that our internal controls will continue to evolve as
our business activities change. If, during any year, our independent auditors
are not satisfied with our internal controls over financial reporting or the
level at which these controls are documented, designed, operated, tested or
assessed, or if the independent auditors interpret the requirements, rules or
regulations differently than we do, then they may decline to attest to
management’s assessment or may issue a report that is qualified. In addition,
if we fail to maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with SOX Section 404.
Failure to maintain an effective internal control environment could have a material
adverse effect on our stock price. In addition, there can be no assurance that
we will be able to remediate material weaknesses, if any, that may be
identified in future periods. COMPLIANCE WITH
CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT
IN ADDITIONAL EXPENSES. Changing laws, regulations
and standards relating to corporate governance and public disclosure, including
SOX, new SEC and Public Accounting Oversight Board regulations and NASDAQ
National Market rules, are creating uncertainty for public companies. These new
or changed laws, regulations and standards
are subject to varying interpretations in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing bodies, which
could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, our efforts to comply with evolving laws,
regulations and standards have resulted in, and are likely to continue to
result in, increased general and administrative expenses and management time
related to compliance activities. Substantial costs have been incurred in
fiscal 2007, and will continue to be incurred to comply with various of these
mandates, including the engagement of separate public accounting firms to
perform work that is now prohibited to be performed by our regular independent
accounting firm, internal costs associated with documenting the adequacy of our
internal controls over financial reporting and similar compliance activities,
and increased costs of audit by our independent accounting firm. If our efforts
to comply with new or changed laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities
related to practice, our reputation may be harmed and we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC. Any such
action could adversely affect our financial results and the market price of our
common stock. While Farmer Bros. believes that it has been at all times in
material compliance with laws and regulations pertaining to the proper
recording and reporting of our financial results, there can be no assurance
that future regulations, implementing SOX and otherwise, will not have a
material adverse impact on our reported results as compared with prior
reporting periods. Item 1.B. Unresolved Staff Comments None. Our largest and
most significant facility consists of our roasting plant, warehouses and
administrative offices in Torrance, California. This facility is our primary
manufacturing facility and the distribution hub for our long haul trucking
fleet. We presently lease a manufacturing facility in Portland, Oregon that is
the manufacturing and distribution point for our specialty coffee, grocery and
mass market customers. We stage our products in 101 small branch warehouses
throughout our service area. These warehouses, taken together, represent a
vital part of our business, but no individual warehouse is material to the
group as a whole. Our warehouses vary in size from approximately 2,500 to
20,000 square feet. Approximately 40% of our facilities are leased with a
variety of expiration dates through 2011. We believe our
Torrance plant and branch warehouses will continue to provide adequate capacity
for the foreseeable future. We are currently seeking to expand our Portland
plant to accommodate anticipated growth. A complete list of properties and facilities operated by Farmer
Bros. is attached hereto, and incorporated herein by reference, as Exhibit 99.1. We are both defendant and plaintiff 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 During the fourth
quarter of fiscal 2007 no matters were submitted to a vote of security holders,
through the solicitation of proxies or otherwise.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We have one class of common stock which is traded on the NASDAQ National Market under the symbol “FARM.” The following table sets forth, for the periods indicated, the dividends paid and the high and low sales prices of the shares of common stock of the Company as quoted on the NASDAQ National Market.
|
|
|
Fiscal year ended June 30, 2007 |
|
Fiscal year ended June 30, 2006 |
|
||||||||||||||||||
|
|
|
High |
|
Low |
|
Dividend |
|
High |
|
Low |
|
Dividend |
|
||||||||||
|
1st Quarter |
|
$ |
21.13 |
|
$ |
20.70 |
|
|
$ |
0.11 |
|
|
$ |
24.98 |
|
$ |
19.50 |
|
|
$ |
0.105 |
|
|
|
2nd Quarter |
|
$ |
21.48 |
|
$ |
20.97 |
|
|
$ |
0.11 |
|
|
$ |
22.87 |
|
$ |
19.11 |
|
|
$ |
0.105 |
|
|
|
3rd Quarter |
|
$ |
20.61 |
|
$ |
20.23 |
|
|
$ |
0.11 |
|
|
$ |
22.61 |
|
$ |
19.31 |
|
|
$ |
0.105 |
|
|
|
4th Quarter |
|
$ |
22.73 |
|
$ |
22.12 |
|
|
$ |
0.11 |
|
|
$ |
23.18 |
|
$ |
19.72 |
|
|
$ |
0.105 |
|
|
There were approximately 3,893 holders of record on September 1, 2007. Holders of record is based upon the number of record holders and individual participants in security position listings.
Performance Graph The chart set forth below shows the value of an investment of $100
on June 30, 2002 in each of Farmer Bros. Co. common stock, the
Russell 2000 Index and the Value Line Food Processing Index. All values assume
reinvestment of the pre-tax value of dividends paid by companies included in
these indices and are calculated as of June 30 of each year. The
historical stock price performance of the Company’s common stock shown in the
performance graph below is not necessarily indicative of future stock price
performance. Comparison
of Five-Year Cumulative Total Return*
Farmer Bros. Co. $ 100.00 $ 94.51 $ 75.56 $ 63.70 $ 63.24 $ 67.35 Russell 2000 Index $ 100.00 $ 96.91 $ 127.85 $ 138.26 $ 156.63 $ 180.20 Food Processing $ 100.00 $ 95.10 $ 119.42 $ 126.55 $ 130.05 $ 164.82 Assumes $100 invested at
the close of trading 6/30/02 in Farmer Bros. Co. common stock, Russell 2000
Index, and Value Line Food Processing Index. *Cumulative total return assumes reinvestment of
dividends. Source:
Value Line, Inc. Factual material is obtained from sources believed to
be reliable, but the publisher is not responsible for any errors or omissions
contained herein. Item 6. Selected Financial Data For the fiscal years ended June 30,
(In thousands, except per share data) Net sales $ 216,259 $ 207,453 $ 198,420 $ 193,589 $ 201,558 (Loss) income from
operations (4,076 ) $ (2,965 ) $ (6,583 ) $ 3,763 $ 23,888 Net income (loss) $ 6,815
Farmer Bros. Co., Russell 2000 Index And Value Line Food Processing Index
(Performance Results Through 6/30/07)