SEC Filing - Farmer Brothers

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 Commission file number: 0-1375 FARMER BROS. CO. California 95-0725980 State of Incorporation Federal ID Number 20333 S. Normandie Avenue, Torrance, California 90502 Registrant's address Zip (310) 787-5200 Registrant's telephone number Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name on each exchange on which registered Common stock, $1.00 par value OTC Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Number of shares of Common Stock, $1.00 par value, outstanding as of August 2, 1999: 1,870,754 the aggregate market value of the common shares held by non-affiliates of the Registrant was approximately $184 million. Documents Incorporated by Reference Certain portions of the Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Annual Meeting of Shareholders of the Registrant to be held on November 29, 1999 are incorporated by reference into Part III of this report. PAGE 1 OF 24 PAGES

PART I Item 1. Business General: Farmer Bros. Co. (the "Company" or "Registrant") was incorporated in California in 1923, and is in the business of roasting, packaging and distributing coffee and allied products to restaurants, hotels, hospitals, convenience stores and fast food outlets. Raw Materials and Supplies: Registrant's primary raw material is green coffee. Roast coffee sales account for approximately 56% of revenues. Coffee purchasing, roasting and packaging takes place at Registrant's Torrance, California plant, which is also the distribution hub for its branches. Green coffee is purchased through domestic commodity brokers. Coffee is an agricultural commodity, and is subject to fluctuations of both price and supply. Registrant has not been confronted by shortages in the supply of green coffee. Green coffee is grown outside the United States and can be subject to volatile price fluctuations resulting from concerns about crop availability and related conditions, such as weather, political events and social instability, in coffee producing nations. Government actions and trade restrictions between our own and foreign governments can also influence prices. Green coffee prices continue to be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation (CCF), the Association of Coffee Producing Countries (ACPC) and the International Coffee Organization (ICO). These organizations seek to increase green coffee prices, largely by attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. Trademarks & Patents: Registrant owns approximately 38 registered U.S. trademarks which are integral to customer identification of its products. It is not possible to assess the impact of the loss of such identification. Seasonality: Registrant experiences some seasonal influences. The winter months are the best sales months. Registrant's product line and geographic diversity provides some sales stability during the summertime decline in coffee consumption during the warmer months. Distribution: Registrant's products are distributed by its selling divisions from 97 branches located in most large cities throughout the 29 western states. The diversity of the product line (over 300 products) and size of the geographic area served requires each branch to maintain a sizable inventory. Registrant operates its own trucking fleet to more effectively control the supply of these warehouses. Customers: No customer represents a significant concentration of sales. The loss of any one or more of the larger customer accounts would have no material adverse effect on the Company. Customer contact and service quality, which is integral to Registrant's sales effort, is often secondary to product pricing for customers with their own distribution systems. Competition: Registrant faces competition from many sources, including multi-national companies like Procter and Gamble, Nestle and Philip Morris, grocery distributors like Sysco and U.S. Food Service and regional roasters like Boyd Coffee Co., Lingle Bros. and Royal Cup. Registrant has some competitive advantages due to its longevity, strong regional roots and sales and service force. Registrant's customer base is price sensitive and the Company is often faced with price competition. Working Capital: Registrant finances its operations internally. Management believes that working capital from internal sources will be adequate for the coming year. Foreign Operations: Registrant has no material revenues that result from foreign operations. 2

Other: On June 30, 1999, Registrant employed 1,127 employees; 448 are subject to collective bargaining agreements. The effects of compliance with government provisions regulating discharge of materials into the environment have not had a material effect on the Company's financial condition or results of operations. The nature of Registrant's business does not provide for maintenance of or reliance upon a sales backlog. Item 2. Properties Registrant's largest facility is the 474,000 sq. ft. roasting plant, warehouses and administrative offices in Torrance, California. Registrant believes the existing plant will continue to provide adequate production capacity for the foreseeable future. Item 3. Legal Proceedings Registrant is a defendant in various legal proceedings incidental to its business which are ordinary and routine. It is management's opinion that the resolution of these lawsuits will not have a material impact on the Company's financial condition or results of operations. Item 4. Submission of Matters to A Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Registrant has one class of common stock which is traded in the over the counter market. The bid prices indicated below are as reported by NASDAQ and represent prices between dealers, without including retail mark up, mark down or commission, and do not necessarily represent actual trades. 1999 1998 High Low Dividend High Low Dividend 1st Quarter $239.00 $174.88 $0.70 $154.00 $127.00 $0.60 2nd Quarter 228.00 180.00 0.70 188.00 144.00 0.65 3rd Quarter 225.00 164.88 0.70 193.00 163.00 0.65 4th Quarter 211.00 183.00 0.70 239.00 191.00 0.65 There were 541 holders of record on July 16, 1999. Item 6. Selected Financial Data (In thousands, except per share data) 1999 1998 1997 1996 1995 Net sales $221,571 $240,092 $224,802 $224,075 $234,662 Income from operations 36,770 40,955 16,789 29,198 25,235 Net income 28,865 33,400 16,690 23,363 19,517 Net income per share $15.16 $17.34 $8.66 $12.13 $10.13 Total assets $324,836 $307,012 $276,849 $260,890 $244,340 Dividends declared per share $2.80 $2.55 $2.40 $2.15 $2.00 3

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Registrant continues to maintain a strong working capital position, and management believes cash requirements for the coming year will be provided by internal sources. Registrant has no major commitments for capital expenditures at this time. (In thousands except ratio data) 1999 1998 1997 Current assets $181,549 $194,828 $170,346 Current liabilities 15,918 16,159 16,380 Working capital $165,631 $178,699 $153,966 Quick ratio 9.09:1 9.46:1 7.96:1 Capital Expenditures $ 6,167 $ 3,035 $ 4,403 Results of Operations The trends that have characterized the past several years continued in 1999: (1) a volatile market for green coffee, (2) a large Brazilian coffee harvest in 1998 coming to market during 1999, (3) lower sales volume, (4) lower roast coffee prices, (5) strong profit margins. All raw materials have a degree of volatility, and the green coffee market is no exception. This market has seemed to be even more unsettled since the 1994 frosts in Brazil, so that perceived coffee shortages have resulted in green coffee cost fluctuations of more than 100% during the past several years. Price declines started during fiscal 1998 continued throughout 1999 when the record Brazilian harvest 1998 came to market. Lower costs of raw materials resulted in price pressure on finished goods, and Registrant's sales and cost of sales both declined. Sales volume also declined. Net sales reached $221,571,000 in 1999 as compared to $240,092,000 in 1998, and $224,802,000 in 1997. Gross profit decreased to $131,737,000 in 1999, or 59% of sales, compared to $132,124,000 in 1998, or 55% of sales, and $107,792,000 in 1997, or 48% of sales. Operating expenses, composed of selling and general and administrative expenses have remained comparatively stable, increasing to $94,967,000 in 1999 from $91,169,000 in 1998 and $91,003,000 in 1997. Other income, decreased to $11,745,000 in 1999 as compared to $11,882,000 in 1998, and $10,521,000 in 1997. Income before taxes increased to $48,515,000 or 22% of sales in 1999, as compared to $52,837,000 or 22% of sales in 1998 and $27,310,000 or 12% of sales in 1997. Net income for fiscal year 1999 reached $28,865,000, or $15.16 per share, as compared to $33,400,000, or $17.34 per share, in 1998 and $16,690,000, or $8.66 per share, in 1997. 1999 1998 1997 Net income per share $15.16 $17.34 $8.66 Percentage change: 1999 to 1998 1998 to 1997 Net sales (7.7)% 6.8% Cost of goods sold (16.8)% (7.7)% Gross profit (0.3)% 22.6% Operating expenses 4.2% 0.2% Income from operations (10.2)% 143.9% Provision for income taxes 1.1% 83.0% Net income (13.6)% 100.1% 4

Change in Earnings Per Share A summary of the change in earnings per share, which highlights factors discussed earlier, is as follows: Per Share Earnings Per Share Earnings 1999 vs. 1998 1998 vs. 1997 Coffee: Prices $(6.65) $10.80 Volume (4.96) (4.06) Cost 9.55 4.34 Gross Profit (2.06) 11.08 Allied products: Gross Profit 1.86 1.56 Operating expenses (2.00) (0.09) Other income (0.07) 0.71 Provision for income taxes (0.11) (4.58) Change in weighted average shares outstanding 0.20 0.00 Net income $(2.18) $(8.68) Price Risk The Company's operations are significantly impacted by the world market for its primary product: coffee. Coffee is an agricultural product that is produced in many nations around the world. Although it is consumed in those nations, the largest coffee consuming nation is the United States, followed by the nations of Western Europe. Green coffee is traded domestically on the New York Coffee, Sugar & Cocoa Exchange (CSCE), and is one of the largest and most volatile commodity markets. The most important aspect of the Company's operations is to secure a consistent supply of coffee. Some proportion of green coffee price fluctuations can be passed through to Registrant's customers, even if lagging the market changes; but maintaining a steady supply of green coffee is essential to keep inventory levels low and sufficient stock to meet customer needs. Registrant purchases all its coffee through established coffee brokers, many of which are large international firms, to help minimize the risk of default on coffee deliveries. The Company purchases much of its coffee on forward contracts, occasionally for delivery as long as six months in the future. Sometimes these contracts are fixed price contracts, regardless of the change in the price of green coffee between the contract and delivery dates. At other times these contracts are variable price contracts, that allow the delivered price of contracted coffee to reflect the market price of coffee at the delivery date. The Company occasionally uses futures contracts to hedge exposure to coffee price fluctuations. Gains on hedging transactions are deferred as an adjustment to the carrying value of the inventory. Losses on the hedging transactions are recognized in earnings currently and the Company's green coffee inventory is adjusted currently through its LIFO methodology. Futures contracts not designated as hedges, and terminations of contracts designated as hedges are marked to market and changes are recognized in current earnings. The Company had no open contracts at June 30, 1999, 1998 and 1997. Year 2000 Issues The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computers with embedded chips or computer programs with date sensitive software could recognize a date using "00" as the year 1900 rather than the year 2000. Miscalculations and system failures could result in the temporary inability of a company to process transactions, invoices and other normal business operations. State of Readiness & Costs The Company evaluated its operations and found its non-information technology areas (manufacturing, packaging, trucking) have little exposure. Information systems are the primary source of Registrant's Year 2000 issues. Registrant has identified and resolved system deficiencies using a 5

combination of reprogramming existing software, conversion to new systems and/or hardware, and eliminating certain systems. The Company does not believe its ability to operate its major accounting, billing and inventory control systems will be effected. The Company's costs of correcting its Year 2000 issues have been expensed as incurred and the amounts have not been material. Registrant does business with many vendors. The Company is not aware of any external party with a Year 2000 issue that would materially impact Registrant's operating results. However, the Company has no means of ensuring that external agents are able to solve any Year 2000 issues without effecting Registrant, nor is there any way for Registrant to assess non-compliance by external parties. Risks The worst case that might occur to effect Registrant is likely to result from external parties far removed from Registrant. Utility deliveries, including gas (for the roasters), electricity, and telephone, could all have an effect on Registrant, depending on the length and timing of delivery failures. Registrant relies on raw materials that are agricultural products, primarily coffee, produced and shipped from around the world. It is not possible to determine whether green coffee processing (including milling and packaging) and shipping, including port operations, customs and ocean freight carriers will be able to make raw material deliveries without delay. Registrant maintains several weeks supply of green coffee, but it is not known whether such stocks will be needed. The costs of delayed or cancelled raw material shipments cannot be estimated at this time. In general, disruptions in the domestic economy could also have a negative impact on Registrant's customers and their ability to use and pay for the Company's products. The amount of lost or delayed revenue cannot be reasonably estimated at this time. Contingency Plans There is no formal contingency plan at this time. The Company will maintain a sizable green coffee inventory, and determine whether additional steps (including manual procedures, staffing needs and adjusting branch inventory levels) should be taken as the key date approaches. Accounting Pronouncements Recently issued accounting changes are described in Note 1 to the consolidated financial statements. Item 7a. Qualitative and Quantitative Disclosures About Market Risk Securities are recorded at fair value and unrealized gains or losses have been recorded as a separate component of shareholders equity. The Company maintains two distinct portfolios of securities, both portfolios are classified as available for sale. The Company's portfolio of investment grade money market instruments includes bankers acceptances, discount commercial paper, federal agency issues and treasury securities. As of June 30, 1999, over 78% of these funds were invested in instruments with maturities shorter than one year. The remaining balance matures during fiscal 2001 and 2002. This portfolio's interest rate risk is unhedged. Its average maturity is approximately 200 days. A 100 basis point move in the general level of interest rates would result in a change in the market value of the portfolio of approximately $1,650,000. The Company is exposed to market value risk arising from changes in interest rates on its portfolio of preferred securities. The Company reviews the interest rate sensitivity of these securities and (a) enters into "short positions" in futures contracts on U.S. Treasury securities or (b) holds put options on such futures contracts in order to reduce the impact of certain interest rate changes on such preferred stocks. Specifically, the Company attempts to manage the risk arising from changes in the general level of interest rates. The Company does not transact in futures contracts or put options for speculative purposes. 6

The following table demonstrates the impact of varying interest rate changes based on the preferred stock holdings, futures and options positions, and market yield and price relationships at June 30, 1999. This table is predicated on an instantaneous change in the general level of interest rates and assumes predictable relationships between the prices of preferred securities holdings, the yields on U.S. Treasury securities, and related futures and options. Interest Rate Changes (In thousands) Market Value of Change in Market Preferred Futures and Total Value of Total Securities Options Portfolio Portfolio - -200 basis points "(b.p.") $50,688.3 $ 0.0 $50,688.3 $ 5,527.8 - -100 b.p. 47,591.9 13.9 47,605.8 2,445.3 Unchanged 44,034.8 1,125.7 45,160.5 0.0 +100 b.p. 40,488.0 4,216.8 44,704.8 (455.7) +200 b.p. 37,204.9 7,340.6 44,545.5 (615.0) The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred security held, the slope of the Treasury yield curve, the expected volatility of Treasury yields, and the costs of using futures and/or options. Commodity Price Changes The Company is exposed to commodity price risk arising from changes in the market price of coffee. Registrant tries to manage this risk by adjusting its inventory position. Commodity hedge instruments are sometimes used, depending on market conditions. As of June 30, 1999 there were no open hedge positions. See Items 1 and 7 for futher discussion of inventory and price risk. 7

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Farmer Bros. Co. and Subsidiary We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and Subsidiary (the "Company") as of June 30, 1999 and 1998, and the related consolidated statements of income, cash flows, and shareholders' equity for the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmer Bros. Co. and Subsidiary at June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. Ernst & Young LLP Long Beach, California September 3, 1999 8

FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) June 30, June 30, 1999 1998 ASSETS Current assets: Cash and cash equivalents $ 4,403 $ 6,800 Short term investments 122,203 128,004 Accounts and notes receivable, net 18,199 18,006 Inventories 33,675 38,067 Income tax receivable 249 649 Deferred income taxes 2,391 2,776 Prepaid expenses 429 526 Total current assets 181,549 194,828 Property, plant and equipment, net 31,543 30,551 Notes receivable 3,884 3,988 Long term investments 81,760 55,801 Other assets 21,382 19,527 Deferred income taxes 4,718 2,317 Total assets $324,836 $307,012 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,786 $ 5,605 Accrued payroll expenses 5,388 4,876 Other 5,744 5,678 Total current liabilities 15,918 16,159 Accrued postretirement benefits 17,707 15,941 Other long term liabilities 3,500 - 21,207 15,941 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued 1,924,414 and outstanding 1,870,754 in 1999 and 1,926,414 in 1998 1,871 1,926 Additional paid-in capital 3,164 568 Retained earnings 283,191 271,395 Accumulated other comprehensive income (515) 1,023 Total shareholders' equity 287,711 274,912 Total liabilities and shareholders' equity $324,836 $307,012 The accompanying notes are an integral part of these financial statements. 9

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) For the Years Ended June 30, 1999 1998 1997 Net sales $221,571 $240,092 $224,802 Cost of goods sold 89,834 107,968 117,010 131,737 132,124 107,792 Selling expense 81,321 82,207 82,967 General and administrative expense 13,646 8,962 8,036 94,967 91,169 91,003 Income from operations 36,770 40,955 16,789 Other income: Dividend income 2,388 2,591 2,662 Interest income 8,870 8,055 6,624 Other, net 487 1,236 1,235 11,745 11,882 10,521 Income before taxes 48,515 52,837 27,310 Income taxes 19,650 19,437 10,620 Net income $ 28,865 $ 33,400 $ 16,690 Earnings per common share $15.16 $17.34 $8.66 Weighted average shares outstanding 1,903,420 1,926,414 1,926,414 The accompanying notes are an integral part of these financial statements. 10

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the years ended June 30, 1999 1998 1997 Cash flows from operating activities: Net income $28,865 $33,400 $16,690 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,202 4,980 5,353 Deferred income taxes (993) (1,912) 197 Other (195) (72) (144) Net (gain) loss on investments 13 (864) (641) Change in assets and liabilities: Accounts and notes receivable (177) 965 466 Inventories 4,392 (2,891) 5,642 Income tax receivable 400 1,567 (1,216) Prepaid expenses and other assets (1,841) (1,298) (1,014) Accounts payable (819) (1,905) 2,875 Accrued payroll expenses and other liabilities 578 1,684 (825) Accrued postretirement benefits 1,766 1,594 1,455 Other long term liabilities 3,500 - - Total adjustments 11,826 1,848 12,148 Net cash provided by operating activities $40,691 $35,248 $28,838 The accompanying notes are an integral part of these financial statements. 11

FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the Years Ended June 30, 1999 1998 1997 Net cash provided by operating activities: $ 40,691 $ 35,248 $ 28,838 Cash flows from investing activities: Purchases of property,plant and equipment (6,167) (3,035) (4,403) Proceeds from sales of property, plant and equipment 252 165 228 Purchases of investments (577,336) (485,098) (431,719) Proceeds from sales of investments 554,603 431,839 418,869 Notes issued (54) (1,668) (1,218) Notes repaid 142 87 37 Net cash used in investing activities (28,560) (57,710) (18,206) Cash flows from financing activities: Dividends paid (5,344) (4,912) (4,623) Common stock repurchased (11,817) - - Common stock sold 2,633 - - Net cash used in financing activities (14,528) (4,912) (4,623) Net (decrease) increase in cash and cash equivalents (2,397) (27,374) 6,009 Cash and cash equivalents at beginning of year 6,800 34,174 28,165 Cash and cash equivalents at end of year $ 4,403 $ 6,800 $ 34,174 The accompanying notes are an integral part of these financial statements. 12

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) Additional Other Common Stock Paid-In Retained Comprensive Shares Amount Capital Earnings Income Total ____________________________________________________________________________________________ Balance at June 30, 1996 1,926,414 $1,926 $568 $230,840 $334 $233,668 Comprehensive income Net income 16,690 16,690 Change in unrealized gain on available for sale securities 387 387 Total comprehensive income 17,077 Dividends (4,623) (4,623) Balance at June 30, 1997 1,926,414 $1,926 $568 $242,907 $721 246,122 Comprehensive income Net income 33,400 33,400 Change in unrealized gain on available for sale securities 302 302 Total comprehensive income 33,702 Dividends (4,912) (4,912) Balance at June 30, 1998 1,926,414 $1,926 $568 $271,395 $1,023 274,912 Comprehensive income Net income 28,865 28,865 Other comprehensive income, net of taxes ($1,024) Change in unrealized gain on available for sale securities (1,939) (1,939) Reclassification adjustment for realized gain 401 401 (1,538) (1,538) Total comprehensive income 27,327 Dividends (5,344) (5,344) Common stock repurchased (71,621) (71) (21) (11,725) (11,817) Common stock sold by subsidiary 15,961 16 2,617 2,633 Balance at June 30, 1999 1,870,754 $1,871 $3,164 $283,191 $(515) $287,711 The accompanying notes are an integral part of these financial statements. 13

Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Organization The Company, which operates in one business segment, is in the business of roasting, packaging, and distributing coffee and allied products through direct sales to restaurants, hotels, hospitals, convenience stores and fast food outlets. Registrant's products are distributed by its selling divisions from 97 branches located in most large cities throughout the 29 western states. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary FBC Finance Company. All significant intercompany balances and transactions have been eliminated. Financial Statement Preparation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of 30 days or less when purchased to be cash equivalents. Investments The Company's investments have been recorded at fair value and have been classified as "available for sale". Any unrealized gains or losses have been recorded as a separate component of shareholders' equity. The cost of investments sold is determined on the specific identification method. Dividend and interest income is accrued as earned. Inventories Inventories are valued at the lower of cost or market. Costs of coffee and allied products are determined on the Last In, First Out (LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for on the First In, First Out (FIFO) basis. In the normal course of business, the Company enters into commodity purchase agreements with suppliers and futures contracts to hedge exposure to inventory price fluctuations. Gains on the hedging transactions are deferred as an adjustment to the carrying amount of the inventory and are recognized in income at the time of the sale of inventory. Losses on the hedging transactions are recognized in earnings currently as the Company believes this appropriately reflects its LIFO methodology. Futures contracts not designated as hedges, and terminations of contracts designated as hedges, if any, are marked to market, and changes are recognized in earnings currently. No contracts were outstanding at June 30, 1999 or 1998. In the event of non-performance by the counterparties, the Company could be exposed to credit and supply risk. The Company monitors the financial viability of the counterparties in an attempt to minimize this risk. Property, Plant and Equipment Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation of buildings and facilities is computed using the straight-line method. Other assets are depreciated using the sum-of- the-years' digits and straight line methods. The following useful lives are used: 14

Buildings and facilities 10 to 30 years Machinery and equipment 3 to 5 years Office furniture and equipment 5 years When assets are sold or retired the asset and related depreciation allowance are eliminated from the records and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, betterments are capitalized. Income Taxes Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. Revenue Recognition Sales and the cost of products sold are recorded at the time of delivery to the customer. Common Stock Shares of the Company's common stock held by the Company's subsidiary (55,660 shares @ June, 30, 1999) are held primarily for purposes of benefit plans and are considered constructively retired for accounting purposes. Earnings Per Common Share Basic earnings per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. The Company does not have any dilutive shares for any of the three fiscal years in the period ended June 30, 1999. Accordingly, the financial statements present only basic net income per share. Long-Lived Assets Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the Company evaluates the carrying value of its property, plant and equipment on an ongoing basis and recognizes an impairment when the estimated future undiscounted cash flows from operations are less than the carrying value of the related long-lived assets. Accounting Pronouncements The Financial Accounting Standards Board has issued SFAS No. 133, which requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. The Company plans to adopt this standard in fiscal 2001. 15

Note 2 Investments (In thousands) Gross Gross Unrealized Unrealized Fair June 30, 1999 Cost Loss Gain Value Current Assets Commercial Paper $ 11,895 - $ 27 $ 11,922 U.S. Government Obligations 110,368 $(126) 39 110,281 $122,263 $(126) $ 66 $122,203 Non-Current Assets U.S. Government Obligations $ 35,015 $ (842) - $ 34,173 Municipal debt 1,695 ( 8) - 1,687 Preferred stocks 37,538 (548) $2,049 39,039 Corporate bonds 5,075 (461) - 4,614 Liquid asset fund and other 2,247 - - 2,247 $ 81,570 $(1,859) $ 2,049 $ 81,760 June 30, 1998 Current Assets Commercial Paper $ 95,838 - $ 594 $ 96,432 U.S. Government Obligations 31,608 $ (36) - 31,572 $127,446 $ (36) $ 594 $128,004 Non-Current Assets U.S. Government Obligations $ 9,725 $(151) - $ 9,574 Municipal debt 1,695 (11) - 1,684 Preferred stocks 36,504 (52) $3,978 40,430 Liquid asset fund and other 4,067 - 46 4,113 $ 51,991 $(214) $4,024 $ 55,801 The contractual maturities of debt securities classified as current and non- current available for sale are as follows: Maturities Fair Value (In thousands) 6/30/99 6/30/98 Within one year $122,203 $128,004 After 1 year through 5 years 35,860 11,258 $158,063 $139,262 Gross realized gains and losses from available for sale securities were $2,278,000 and ($2,291,000) respectively in 1999, $2,072,000 and ($1,208,000) respectively in 1998 and gross realized gains and losses from available for sale securities were $2,271,000 and ($1,630,000) respectively in 1997. The Company hedges interest rate risk in its portfolio of preferred stocks. A substantial portion of the preferred stock portfolio was hedged with put options on U.S. Treasury futures traded on a national exchange. Deferred losses at June 30, 1999 and 1998, associated with the hedge were $923,000 and $2,600,000, respectively. Such deferred gains and losses are recognized in other income as the related unrealized gains and losses in the preferred stock portfolio are realized. Note 3 Allowance for Doubtful Accounts and Notes Receivable (In thousands) 1999 1998 1997 Balance at beginning of year $520 $555 $555 Additions 205 413 429 Deductions (255) (448) (429) Balance at end of year $470 $520 $555 16

Note 4 Inventories June 30, 1999 (In thousands) Processed Unprocessed Total Coffee $ 3,619 $ 9,314 $12,933 Allied products 11,078 3,424 14,502 Coffee brewing equipment 2,258 3,982 6,240 $16,955 $16,720 $33,675 June 30, 1998 (In thousands) Processed Unprocessed Total Coffee $ 4,119 $10,406 $14,525 Allied products 12,025 5,079 17,104 Coffee brewing equipment 2,191 4,247 6,438 $18,335 $19,732 $38,067 Current cost of coffee and allied products inventories exceeds the LIFO cost by approximately $13,915,000, and $24,032,000 as of June 30, 1999 and 1998, respectively. Decreases in the Company's green coffee and allied product inventories during fiscal 1999 and 1997 resulted in LIFO decrements which had the effect of increasing income before taxes those years by $564,000 and $4,007,000, respectively. Note 5 Property, Plant and Equipment (In thousands) 1999 1998 Buildings and facilities $31,841 $30,355 Machinery and equipment 46,247 45,390 Office furniture and equipment 6,726 6,407 84,814 82,152 Accumulated depreciation (58,574) (56,735) Land 5,303 5,134 $31,543 $30,551 Maintenance and repairs charged to expense for the years ended June 30, 1999, 1998 and 1997 were $10,992,000, $10,035,000 and $11,015,000, respectively. Note 6 Retirement Plans The Company has a contributory defined benefit pension plan for all employees not covered under a collective bargaining agreement and a non- contributory defined benefit pension plan for certain hourly employees covered under a collective bargaining agreement. The Company's funding policy is to contribute annually at a rate that is intended to fund benefits as a level percentage of salary (non-bargaining) and as a level dollar cost per participant (bargaining) over the working lifetime of the plan participants. Benefit payments are determined under a final pay formula (non-bargaining) and flat benefit formula (bargaining). The Company sponsors defined benefit postretirement medical and dental plans that cover non-union employees and retirees, and certain union locals. The plan is contributory and retirees contributions are fixed at a current level. The plan is unfunded. 17

Defined Accrued (In thousands) Benefit Pensions Postretirement Benefits 1999 1998 1999 1998 Changes in benefit obligation Benefit obligation benefit at the beginning of the year $45,249 $37,002 $18,944 $15,656 Service cost 1,662 1,343 745 615 Interest cost 3,000 2,811 1,246 1,241 Plan Participants contributions 135 125 76 75 Amendments 411 - - - Actuarial gain (2,412) 6,050 (1,472) 1,960 Benefits paid (2,301) (2,082) (586) (603) Benefit obligation benefit at the end of the year $45,744 $45,249 $18,953 $18,944 Changes in plan assets Fair value in plan assets at the beginning of the year $72,600 $57,798 - - Actual return on plan assets 7,702 16,744 - - Company contributions 17 14 $ 510 $ 528 Plan participants contributions 135 127 76 75 Benefit paid (2,301) (2,083) (586) (603) Fair value in plan assets at the end of the year $78,153 72,600 $ - $ - Funded status of the Plan $32,408 $27,351 $(18,953) (18,944) Unrecognized net asset (2,628) (3,286) - - Unrecognized net gain (17,415) (13,563) 3,355 (638) Unrecognized prior service cost 1,494 1,323 (2,109) 3,641 Prepaid benefit cost $13,859 $11,825 $(17,707) $(15,941) Weighted average assumptions as of December 31: Discount rate 7.25% 6.70% 7.25% 6.70% Expected return on Plan assets 8.00% 8.00% - - Rate of compensation increase 3.00% 2.50% - - Initial medical rate trend 7.00% 7.50% Ultimate medical trend rate 5.00% 5.00% Number of years from initial to ultimate trend rate 4 5 Initial dental/vision trend rate 6.00% 6.00% Ultimate dental/vision trend rate 5.00% 5.00% Defined Accrued Benefit Pensions Postretirement Benefits 1999 1998 1997 1999 1998 1997 Components of net periodic benefit costs Service cost $1,662 $1,343 $1,321 $745 $615 $512 Interest cost 3,000 2,811 2,612 1,246 1,241 1,114 Expected return on Plan assets (5,747) (4,568) (7,590) - - Actuarial Gain - - - - (20) - Unrecognized net transition asset (658) (657) (657) - - - Unrecognized net gain (514) (141) - - - (58) Unrecognized prior service cost 239 202 202 286 286 285 Benefit cost ($2,018) ($1,010) ($4,112) $2,277 $2,122 $1,853 18

The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1% Increase 1% Decrease Effect on service and interest cost $ 127.7 $ (138.7) Effect on postretirement benefit obligation $ 1,079.0 $ (1,161.5) The Farmer Bros. Co. Retirement Plan owned 39,940 shares of the Company's common stock at June 30, 1999 and 28,565 shares of the Company's stock at June 30, 1998, with a fair value of approximately $7,988,000 and $6,827,000, respectively. The Brewmatic Company Retirement plan owned 2,400 shares of the Company's common stock at June 30, 1999 with a fair value of approximately $480,000. The Company contributes to two multi-employer defined benefit plans for certain union employees. The contributions to these multi-employer pension plans were approximately $2,196,000, $1,540,000 and $1,679,000 for 1999, 1998 and 1997, respectively. The Company also has a defined contribution plan for eligible non-union employees. No Company contributions have been made nor are required to be made to this plan. Other long term liabilities represents deferred compensation payable to an officer of the Company. Note 7 Income Taxes The current and deferred components of the provision for income taxes consist of the following: (In thousands) 1999 1998 1997 Current: Federal $16,937 $17,128 $ 8,168 State 3,706 4,221 2,255 20,643 21,349 10,423 Deferred: Federal (1,032) (1,543) 257 State 39 (369) (60) (993) (1,912) 197 $19,650 $19,437 $10,620 A reconciliation of the provision for income taxes to the statutory federal income tax expense is as follows: 1999 1998 1997 Statutory tax rate 35.0% 35.0% 35.0% (In thousands) Income tax expense at statutory rate $16,980 $18,493 $ 9,559 State income tax (net of federal tax benefit) 2,434 2,504 1,426 Dividend income exclusion (595) (639) (661) Other (net) 831 (921) 296 $19,650 $19,437 $10,620 Income taxes paid $20,850 $19,231 $13,799 19

The primary components of temporary differences which give rise to the Company's net deferred tax assets at June 30, 1999 and 1998 are as follows: (In thousands) June 30, June 30, 1999 1998 Deferred tax assets: Postretirement benefits $7,078 $6,458 Accrued liabilities 1,927 1,777 State taxes 860 796 Other 3,801 2,269 13,666 11,300 Deferred tax liabilities: Pension assets (5,214) (4,460) Other (1,343) (1,747) (6,557) (6,207) Net deferred tax assets $7,109 $5,093 Note 8 Other Current Liabilities Other current liabilities consist of the following: (In thousands) 1999 1998 Accrued workers' compensation liabilities $3,921 $3,561 Dividends payable 1,349 1,252 Other 474 865 $5,744 $5,678 Note 9 Commitments and Contingencies The Company incurred rent expense of approximately $691,000, $654,000, and $658,000, for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, and is obligated under leases for branch warehouses. Certain leases contain renewal options. Future minimum lease payments are as follows: June 30, (In thousands) 2000 $554 2001 442 2002 335 2003 293 2004 163 thereafter 7 $1,794 The Company is a party to various pending legal and administrative proceedings. It is management's opinion that the outcome of such proceedings will not have a material impact on the Company's financial position, results of operations, or cash flows. During 1999 the Company began construction of new warehouses in Carson City, Nevada, Kansas City, Missouri and Torrance, California. Commitments under construction contracts at June 30, 1999 totaled approximately $7,100,000. Concentration of Credit Risk: At June 30, 1999, financial instruments which potentially expose the Company to concentrations of credit risk consist of cash in financial institutions (which exceeds federally insured limits), cash equivalents (principally commercial paper), short term investments, investments in the preferred stocks of other companies and accounts receivable. Commercial paper investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 90 days. Other investments are in U.S. government securities. Investment 20

in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer. Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different geographic areas. The trade receivables are short-term, and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts. Note 10 Quarterly Financial Data (Unaudited) Quarter Ended 09/30/98 12/31/98 03/31/99 06/30/99 (In thousands except per share data) Net sales $54,035 $58,408 $55,207 $53,921 Gross profit 31,115 32,095 35,153 33,374 Income from operations 9,321 10,345 12,144 4,960 Net income 7,539 7,905 9,159 4,262 Net income per share $3.91 $4.10 $4.83 $2.29 Quarter Ended 09/30/97 12/31/97 03/31/98 06/30/98 (In thousands except per share data) Net sales $59,497 $64,062 $58,951 $57,582 Gross profit 29,326 36,161 32,249 34,388 Income from operations 7,652 13,377 10,067 9,859 Net income 6,228 9,782 8,020 9,370 Net income per share $3.23 $5.08 $4.16 $4.86 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 21

PART III Item 10. Directors and Executive Officers of the Registrant Reference is made to the information to be set forth in the section entitled "Election of Directors" in the definitive proxy statement involving the election of directors in connection with the Annual Meeting of Shareholders to be held on November 29, 1999 (the "Proxy Statement") which section is incorporated herein by reference. The Proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after June 30, 1999, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. Name Age Position Roy F. Farmer 83 Chairman of Board of Directors since 1951. Roy E. Farmer 47 President since 1993; various positions since 1976, son of Chairman of the Board, R.F. Farmer Guenter W. Berger 62 Vice President of Production, Director since 1980; various positions since 1960. Kenneth R. Carson 59 Vice President of Sales since 1990; Sales Management since 1968. David W. Uhley 58 Secretary since 1985; various positions since 1968. John E. Simmons 48 Treasurer since 1985; various positions since 1980. All officers are elected annually by the Board of Directors and serve at the pleasure of the Board. Item 11. Executive Compensation Reference is made to the information to be set forth in the section entitled "Management Remuneration" in the Proxy Statement, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Reference is made to the information to be set forth in the sections entitled "Principal Shareholders" and "Election of Directors" in the Proxy Statement, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Reference is made to the information to be set forth in the sections entitled "Principal Shareholders" and "Election of Directors" in the Proxy Statement, which is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) List of Financial Statements and Financial Statement Schedules 1. Financial Statements included in Item 8: Consolidated Balance Sheets as of June 30, 1999 and 1998. Consolidated Statements of Income For the Years Ended June 30, 1999, 1998 and 1997. 22

Consolidated Statements of Cash Flows For the Years Ended June 30, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity For the Years Ended June 30,1999, 1998 and 1997. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in the consolidated financial statements or notes thereto. 3. Exhibits required by Item 601 of Regulation S-K. See item (c) below. (b) Reports on Form 8-K. Not applicable. (c) Exhibits required by Item 601 of Regulation S-K. Not applicable. Exhibits 3. Articles of incorporation and by-laws. Filed with the Form 10-K for the fiscal year ended June 30, 1986. 4. Instruments defining the rights of security holders, including indentures. Not applicable. 9. Voting trust agreement. Not applicable. 10. Material contracts Not applicable. 11. Statement re computation of per share earnings. Not applicable. 12. Statements re computation of ratios. Not applicable. 13. Annual report to security holders, Form 10-Q or quarterly report to security holders. Not applicable. 18. Letter re change in accounting principles. Not applicable. 19. Previously unfiled documents. Not applicable. 22. Subsidiaries of the Registrant. Not applicable. 23. Published report regarding matters submitted to vote of security holders. Not applicable. 24. Consents of experts and counsel. Not applicable. 25. Power of attorney. Not applicable. 28. Additional exhibits. Not applicable. 29. Information from reports furnished to state insurance regulatory authorities. Not applicable. (d) Financial statements required by Regulation S-X but excluded from the annual report to shareholders by Rule 14a - 3(b) None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Farmer Bros. Co. By: Roy F. Farmer (Roy F. Farmer, Chief Executive Officer and Chairman of the Board of Directors) Date: September 28, 1999 By: John E. Simmons (John E. Simmons, Treasurer and Chief Financial and Accounting Officer) Date: September 28, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Roy E. Farmer, President and Director Date: August 26, 1999 Guenter W. Berger, Vice President and Director Date: August 26, 1999 Lewis A. Coffman, Director Date: August 26, 1999 John M. Anglin, Director Date: August 26, 1999

5 1000 12-MOS JUN-30-1999 JUN-30-1999 4403 122203 18199 470 33675 181549 84814 58574 324836 15918 0 0 0 1926 273000 324836 221571 221571 89834 94967 0 0 0 48515 19650 28865 0 0 0 28865 15.16 15.16