**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended December 31,2008**

** **

**OR**

** **

**o**  TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from                    to                 **

** **

**Commission file number:    0-1375**

** **

**FARMER BROS.CO.**

(exact name of registrant as specified in its charter)

 

| **Delaware**                                                                        | ** ** | **95-0725980**                       |
|-------------------------------------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                                                            |       | (I.R.S. Employer Identification No.) |
| ** **                                                                          | ** ** | ** **                           |
| **20333 South  Normandie Avenue  Torrance, California**                             | ** ** | **90502**                            |
| (address of principal executive offices)                                            |       | (Zip Code)                           |
|                                                                                |       |                                 |
| Registrant’s telephone number, including  area code:  **(310)  787-5200** |

 

Indicate by check mark whether the registrant: (1) has filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. YES x    NO o

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting company.

 

Large Accelerated Filer o    Accelerated Filer x    Non-Accelerated Filer o    Smaller reporting company o

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). YES o    NO x

 

On February 1, 2009 the registrant had 16,075,080 sharesoutstanding of its common stock, par value $1.00 per share, which is theregistrant’s only class of common stock.

 

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FARMER BROS. CO.**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except share and per sharedata)**

 
| ** **                                                                                      | ** ** | **December 31, 2008** | ** ** | **June 30, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)**                 | ** ** | ** **                  | ** ** |
| ASSETS                                                                                          |       |                            |       |                        |       |
| Current assets:                                                                                 |       |                            |       |                        |       |
| Cash and cash  equivalents                                                                      |       | $                               | 40,826     |                        | $          | 9,973 |   |
| Short term  investments                                                                         |       | 43,972                          |       | 113,286                     |       |
| Accounts and  notes receivable, net                                                             |       | 24,564                          |       | 19,856                      |       |
| Inventories                                                                                     |       | 55,872                          |       | 54,253                      |       |
| Income tax  receivable                                                                          |       | 3,514                           |       | 2,879                       |       |
| Deferred income  taxes                                                                          |       | 12,452                          |       | 7,485                       |       |
| Prepaid expenses                                                                                |       | 11,407                          |       | 10,018                      |       |
| Total current  assets                                                                           |       | $                               | 192,607    |                        | $          | 217,750 |   |
|                                                                                            |       |                            |       |                        |       |
| Property, plant  and equipment, net                                                             |       | $                               | 85,162     |                        | $          | 69,065 |   |
| Goodwill and  other intangible assets, net                                                      |       | 16,346                          |       | 17,568                      |       |
| Other assets                                                                                    |       | 3,161                           |       | 746                         |       |
| Deferred income  taxes                                                                          |       | 7,855                           |       | 7,855                       |       |
| Total assets                                                                                    |       | $                               | 305,131    |                        | $          | 312,984 |   |
|                                                                                            |       |                            |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                      |       |                            |       |                        |       |
| Current  liabilities:                                                                           |       |                            |       |                        |       |
| Accounts payable                                                                                |       | $                               | 8,362      |                        | $          | 12,169 |   |
| Accrued payroll  expenses                                                                       |       | 9,316                           |       | 8,449                       |       |
| Other                                                                                           |       | 8,241                           |       | 8,291                       |       |
| Total current  liabilities                                                                      |       | $                               | 25,919     |                        | $          | 28,909 |   |
| Accrued  postretirement benefits                                                                |       | $                               | 17,508     |                        | $          | 17,620 |   |
| Other long term  liabilities                                                                    |       | 2,311                           |       | —                      |       |
| Total  liabilities                                                                              |       | $                               | 45,738     |                        | $          | 46,529 |   |
| Commitments and  contingencies                                                                  |       | —                          |       | —                      |       |
| Stockholders’  equity:                                                                     |       |                            |       |                        |       |
| Common stock,  $1.00 par value, authorized 25,000,000 shares; 16,075,080 issued and outstanding |       | $                               | 16,075     |                        | $          | 16,075 |   |
| Additional  paid-in capital                                                                     |       | 30,753                          |       | 30,612                      |       |
| Retained  earnings                                                                              |       | 247,951                         |       | 257,693                     |       |
| Unearned ESOP  shares                                                                           |       | (35,990                         | )          | (38,529                     | )          |
| Less accumulated  comprehensive income                                                          |       | 604                             |       | 604                         |       |
| Total  stockholders’ equity                                                                |       | $                               | 259,393    |                        | $          | 266,455 |   |
| Total  liabilities and stockholders’ equity                                                |       | $                               | 305,131    |                        | $          | 312,984 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

1

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**FARMER BROS.CO.CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except share and per share data)(Unaudited)**

 
| ** **                                  | ** ** | **Three months ended December 31,** | ** ** | **Six months ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                   |       | $                                                       | 76,530     |                                                  | $          | 71,359 |   | $ | 143,053 |   | $ | 132,302 |   |
| Cost of goods  sold                         |       | 39,212                                                  |       | 37,183                                                |       | 74,784 |   | 69,399 |   |
| Gross profit                                |       | $                                                       | 37,318     |                                                  | $          | 34,176 |   | $ | 68,269 |   | $ | 62,903 |   |
| Selling expense                             |       | 30,193                                                  |       | 25,485                                                |       | 58,197 |   | 48,840 |   |
| General and  administrative expenses        |       | 6,912                                                   |       | 7,902                                                 |       | 14,114 |   | 15,802 |   |
| Operating  expenses                         |       | $                                                       | 37,105     |                                                  | $          | 33,387 |   | $ | 72,311 |   | $ | 64,642 |   |
| Income (loss)  from operations              |       | $                                                       | 213        |                                                  | $          | 789 |   | $ | (4,042 | ) | $ | (1,739 | ) |
| Other (expense)  income                     |       |                                                    |       |                                                  |       |   |   |   |   |
| Dividend income                             |       | 902                                                     |       | 1,050                                                 |       | 1,949 |   | 2,077 |   |
| Interest income                             |       | 461                                                     |       | 965                                                   |       | 938 |   | 2,224 |   |
| Other, net  (expense) income                |       | (812                                                    | )          | (5,168                                                | )          | (10,662 | ) | (8,062 | ) |
| Total other  (expense) income               |       | $                                                       | 551        |                                                  | $          | (3,153 | ) | $ | (7,775 | ) | $ | (3,761 | ) |
| Income (loss)  before taxes                 |       | 764                                                     |       | (2,364                                                | )          | (11,817 | ) | (5,500 | ) |
| Income tax  expense (benefit)               |       | 870                                                     |       | (2,137                                                | )          | (5,627 | ) | (4,320 | ) |
| Net loss                                    |       | $                                                       | (106       | )                                                     | $          | (227 | ) | $ | (6,190 | ) | $ | (1,180 | ) |
|                                        |       |                                                    |       |                                                  |       |   |   |   |   |
| Basic and fully  diluted earnings per share |       | $                                                       | (0.01      | )                                                     | $          | (0.02 | ) | $ | (0.43 | ) | $ | (0.08 | ) |
|                                        |       |                                                    |       |                                                  |       |   |   |   |   |
| Weighted average  shares outstanding        |       | 14,480,971                                              |       | 14,255,374                                            |       | 14,455,023 |   | 14,226,424 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

2

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**FARMER BROS. CO.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Six months ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                           |       |                                                  |       |   |   |
| Net loss                                                                         |       | $                                                     | (6,190     | ) | $ | (1,180 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                                  |       |   |   |
| Depreciation and  amortization                                                   |       | 7,256                                                 |       | 5,293 |   |
| Deferred income  taxes                                                           |       | (4,969                                                | )          | — |   |
| Gain (loss) on  sales of assets                                                  |       | 372                                                   |       | (98 | ) |
| ESOP and share  based compensation expense                                       |       | 2,680                                                 |       | 2,628 |   |
| Net loss on  investments                                                         |       | 10,792                                                |       | 8,146 |   |
| Change in  operating assets and liabilities:                                     |       |                                                  |       |   |   |
| Short term  investments                                                          |       | 58,521                                                |       | 10,727 |   |
| Accounts and  notes receivable                                                   |       | (4,708                                                | )          | (3,060 | ) |
| Inventories                                                                      |       | (1,618                                                | )          | (8,554 | ) |
| Income tax  receivable                                                           |       | (634                                                  | )          | (5,440 | ) |
| Goodwill and  intangibles                                                        |       | —                                                |       | (351 | ) |
| Prepaid expenses                                                                 |       | (1,389                                                | )          | (3,319 | ) |
| Other assets                                                                     |       | (2,416                                                | )          | — |   |
| Accounts payable                                                                 |       | (3,808                                                | )          | 1,025 |   |
| Accrued payroll  expenses and other liabilities                                  |       | 818                                                   |       | (1,107 | ) |
| Accrued  postretirement benefits                                                 |       | (112                                                  | )          | 1,823 |   |
| Other long-term  liabilities                                                     |       | 2,311                                                 |       | — |   |
| Total  adjustments                                                               |       | $                                                     | 63,096     |   | $ | 7,713 |   |
| Net cash  provided by operating activities                                       |       | $                                                     | 56,906     |   | $ | 6,533 |   |
| Cash flows from  investing activities:                                           |       |                                                  |       |   |   |
| Purchases of  property, plant and equipment                                      |       | (22,522                                               | )          | (6,166 | ) |
| Proceeds from  sales of property, plant and equipment                            |       | 20                                                    |       | 133 |   |
| Net cash used in  investing activities                                           |       | $                                                     | (22,502    | ) | $ | (6,033 | ) |
| Cash flows from  financing activities:                                           |       |                                                  |       |   |   |
| Dividends paid                                                                   |       | (3,551                                                | )          | (3,216 | ) |
| Net cash used in  financing activities                                           |       | $                                                     | (3,551     | ) | $ | (3,216 | ) |
| Net increase  (decrease) in cash and cash equivalents                            |       | 30,853                                                |       | (2,716 | ) |
| Cash and cash  equivalents at beginning of period                                |       | 9,973                                                 |       | 12,586 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                                     | 40,826     |   | $ | 9,870 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**Notes to Consolidated Financial Statements**

 

**Note 1. Unaudited Financial Statements**

 

*Basis of Presentation*

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States (“GAAP”) for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals,unless otherwise indicated) considered necessary for a fair presentation of theinterim financial data have been included. Operating results for the three and six month periods ended December 31,2008 are not necessarily indicative of the results that may be expected for thefiscal year ending June 30, 2009.

 

Theaccompanying unaudited consolidated financial statements should be read in conjunctionwith the consolidated financial statements and footnotes thereto included inthe Farmer Bros. Co. annual report on Form 10-K for the fiscal year ended June 30,2008.

 

*CoffeeBrewing Equipment and Service*

 

TheCompany has reclassified its reporting for expenses related to coffee brewingequipment provided to customers.  Thesecosts include the cost of the equipment, depreciation on capitalized equipmentas well as the cost of servicing that equipment (including service employees’salaries and the cost of supplies and parts). Accordingly, such costs are reported as cost of sales in theaccompanying financial statements for the fiscal quarters ended December 31,2008 and 2007, in the amounts of $2.2 million and $5.1 million respectively,and for the six month periods ended December 31, 2008 and 2007, in theamounts of $4.5 million and $10.2 million, respectively.  In prior periods, these costs were presentedas selling expenses. This change impacts reported gross profit in the periodspresented by these amounts. The change reduces gross profit but has no impacton net income, total assets, or cash flows in period.

 

*Use of Estimates*

 

The preparation of financial statements inaccordance with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the consolidated financial statements andaccompanying notes.  Actual results maydiffer from those estimates.

 

*Net Loss per Share*

 

Net loss per share has been computed inaccordance with Statement of Financial Accounting Standards No. 128, “*Earnings per Share*” excluding unallocated shares held by theCompany’s Employee Stock Ownership Plan. Net loss per share is computed by dividing income available to commonstockholders by the number of weighted average shares outstanding.  For purposes of computing earnings per share,all potentially dilutive instruments are anti-dilutive because of the net losspresented for all periods.

 

*NewAccounting Pronouncements*

 

In March 2008, the FinancialAccounting Standards Board “FASB” issued Statement of Financial AccountingStandards No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” “SFAS 161” whichamends and expands Statement of Financial Accounting Standards No. 133, “*Accounting for Derivative Instruments and Hedging Activities*.”  SFAS 161 requires tabular disclosure of thefair value of derivative instruments and their gains and losses.  This Statement also requires disclosureregarding the credit—risk related contingent features in derivative agreements,counterparty credit risk, and strategies and objectives for using derivativeinstruments.  The Company is required toadopt SFAS 161 in the third quarter of fiscal 2009.  The Company does not currently believe thatadopting SFAS 161 will have a material impact on its consolidated financialstatements.

 

Effective July 1, 2008, the Companyadopted Statement of Financial Accounting Standards No. 159, “*The Fair Value for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115*” (“SFAS 159”).  SFAS 159 allows companies the option toirrevocably elect, on a contract by contract basis, fair value as the initialand subsequent measurement for certain financial assets and financialliabilities.  The Company has not elected

 

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the option for fair valuemeasurement under SFAS 159 for any additional financial assets or financialliabilities that were not previously recognized at fair market value.

 

In December 2007, the FASB issuedStatement of Financial Accounting Standards No. 141 (revised 2007), *“Business Combination*s” (“SFAS 141R”). SFAS 141Rsignificantly changes the accounting for business combinations in a number ofareas, including the treatment of contingent consideration, pre-acquisitioncontingencies, transaction costs, in-process research and development andrestructuring costs. In addition, under SFAS 141R, changes in an acquiredentity’s deferred tax assets and uncertain tax positions after the measurementperiod will impact income tax expense. SFAS 141R is effective for fiscal yearsbeginning after December 15, 2008. The Company will adopt SFAS 141Rbeginning in the first quarter of fiscal 2010. SFAS 141R will change theCompany’s accounting treatment for business combinations on a prospectivebasis.

 

In December 2007, the FASB issuedStatement of Financial Accounting Standards No. 160, *“NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”*(“SFAS 160”). SFAS 160 changes the accounting and reporting for minorityinterests, which will be re-characterized as non-controlling interests andclassified as a component of equity. This new consolidation methodsignificantly changes the accounting for transactions with minority interestholders. SFAS 160 is effective for fiscal years beginning after December 15,2008. The Company will adopt SFAS 160 beginning in the first quarter offiscal 2010. The Company does not currently believe that adopting SFAS 160will have a material impact on its consolidated financial statements.

 

In April 2008, the FASB issued FASBStaff Position (“FSP”) SFAS No. 142-3 *“Determination of theUseful Life of Intangible Assets”* (“FSP SFAS 142-3”). FSP SFAS 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognizable intangibleasset under Statement of Financial Accounting Standards No. 142, *“Goodwill and Other Intangible Assets”* (“SFAS 142”). FSPSFAS 142-3 is intended to improve the consistency between the useful lifeof a recognizable intangible asset under SFAS 142 and the period ofexpected cash flows used to measure the fair value of the asset under SFAS142.FSP SFAS 142-3 is effective for fiscal years beginning after December 15,2008. The Company will adopt FSP SFAS 142-3 beginning in the first quarterof fiscal 2010. FSP SFAS 142-3 will change the Company’s determination ofuseful lives for intangible assets on a prospective basis.

 

**Note 2. Investments and Derivative Instruments**

 

The Company purchases various derivativeinstruments as investments or to create economic hedges of its interest raterisk and commodity price risk. At December 31, 2008 and June 30,2008, derivative instruments are not designated as accounting hedges as definedby Statement of Financial Accounting Standards No. 133, *“Accounting for Derivative Instruments and Hedging Activities*.”The fair value of derivative instruments is based upon broker quotes. TheCompany records unrealized gains and losses on trading securities and changesin the market value of certain coffee contracts meeting the definition ofderivatives in Other, net (expense) income.

 

The Company adopted Statement of Financial Accounting Standards No. 157,“*Fair Value Measurement*s” (“SFAS 157”) onJuly 1, 2008.  SFAS 157 defines fairvalue and expands disclosure for each major asset and liability categorymeasured at fair value on either a recurring or nonrecurring basis.  Under SFAS 157, the Company groups itsassets and liabilities at fair value in three levels, based on the markets inwhich the assets and liabilities are traded and the reliability of theassumptions used to determine fair value. These levels are:

 

·                  Level1 — Valuation is based upon quoted prices for identical instruments traded inactive markets.

·                  Level2 — Valuation is based upon quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active, and model-based valuation techniques for which all significantassumptions are observable in the market.

·                  Level3 — Valuation is generated from model-based techniques that use significantassumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions thatmarket participants would use in pricing the asset or liability.  Valuation techniques include use of optionpricing models, discounted cash flow models and similar techniques.

 

TheCompany’s preferred stock has been grouped as follows at December 31, 2008(in thousands, unaudited):

 

5

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| ** **      | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Preferred stock |       | $         | 42,976     |             | $          | 10,419           |       | $                | 32,557     |   | $ | — |   |
|                 |            |           |            |                  |            |                  |            |                  |            |  |  |  |  |

 

Investments, consisting of marketable debtand equity securities and money market instruments, are held for tradingpurposes and are stated at fair value.

 

Investments are as follows (in thousands):

 
| ** **                              | ** ** | **December 31, 2008** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **(Unaudited)**                 | ** ** | ** **                  | ** ** |
| Trading securities  at fair value       |       |                            |       |                        |       |
| U.S. Treasury  Obligations              |       | $                               | —     |                        | $          | 54,517 |   |
| Preferred Stock                         |       | 42,976                          |       | 58,204                      |       |
| Futures, options  and other derivatives |       | 996                             |       | 565                         |       |
|                                    |       | $                               | 43,972     |                        | $          | 113,286 |   |

 

Gains and losses, both realized and unrealized, are included inOther, net (expense) income.  Netrealized and unrealized gains and losses are as follows (unaudited):

 
| ** **                   | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                         |       |                            |       |                            |       |
| Net realized  gains (losses) |       | $                               | 238        |                            | $          | (2,537 | ) |
| Net unrealized  losses       |       | (11,030                         | )          | (5,525                          | )          |
|                         |       | $                               | (10,792    | )                               | $          | (8,062 | ) |

 

**Note 3. Inventories**

 
| **December 30, 2008 ** | ** ** | **Processed**           | ** ** | **Unprocessed** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------|------------|-----------|------------|
| **(Unaudited)**                       | ** ** | **(In thousands)** | ** ** |
| Coffee                                |       | $                       | 10,808     |            | $          | 18,119    |       | $ | 28,927 |   |
| Allied products                       |       | 13,845                  |       | 4,856           |       | 18,701    |       |
| Coffee brewing  equipment             |       | 1,883                   |       | 6,361           |       | 8,244     |       |
|                                  |       | $                       | 26,536     |            | $          | 29,336    |       | $ | 55,872 |   |

 
| **June 30, 2008** | ** ** | **Processed**       | ** ** | **Unprocessed** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| ** **                  | ** ** | **(In  thousands)** | ** ** |
| Coffee                      |       | $                   | 9,929      |            | $          | 16,933    |       | $ | 26,862 |   |
| Allied products             |       | 14,440              |       | 4,601           |       | 19,041    |       |
| Coffee brewing  equipment   |       | 1,883               |       | 6,467           |       | 8,350     |       |
|                        |       | $                   | 26,252     |            | $          | 28,001    |       | $ | 54,253 |   |

 

Inventories are valued at the lower ofcost or market.  Costs of coffee andallied products are determined on the last in, first out (LIFO) basis.  Costs of coffee brewing equipmentmanufactured are accounted for on the first in, first out (FIFO) basis.  An actual valuation of inventory under theLIFO method is made only at the end of each year based on the inventory levelsand costs at that time.  Accordingly,interim LIFO calculations must necessarily be based on management’s estimatesof expected year-end inventory levels and costs.  Because these estimates are subject to manyforces beyond management’s control, interim results are subject to the finalyear-end LIFO inventory valuation.

 

6

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**Note 4. Employee Benefit Plans**

** **

The Company provides pension plans formost full time employees. Generally the plans provide benefits based on yearsof service and/or a combination of years of service and earnings. Retirees arealso eligible for medical and life insurance benefits.

 

*Company Pension Plans*

* *

The Company has a defined benefit plan forall employees not covered under a collective bargaining agreement (Farmer Bros.Co. Plan) and defined benefit pension plan (Brewmatic Co. Plan) for certain hourlyemployees covered under a collective bargaining agreement.  The net periodic benefit costs for thedefined benefit plans are as follows (unaudited):

 

*Componentsof net periodic benefit cost*

 
| ** **                                      | ** ** | **Three months ended  December 31,** | ** ** | **Six months ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | **(In thousands)**                             | ** ** | **(In thousands)**                           | ** ** |
| Service cost                                    |       | $                                                   | 615        |                                              | $          | 589 |   | $ | 1,230 |   | $ | 1,178 |   |
| Interest cost                                   |       | 1,477                                               |       | 1,278                                             |       | 2,954 |   | 2,556 |   |
| Expected return  on plan assets                 |       | (1,769                                              | )          | (2,017                                            | )          | (3,538 | ) | (4,034 | ) |
| Amortization of  net (gain)/loss*               |       | 145                                                 |       | 2                                                 |       | 290 |   | 4 |   |
| Amortization of  transition (asset)/obligation* |       | —                                              |       | —                                            |       | — |   | — |   |
| Amortization of  prior service cost/(credit)*   |       | 50                                                  |       | 15                                                |       | 101 |   | 30 |   |
| Net periodic  benefit (credit) cost             |       | $                                                   | 518        |                                              | $          | (133 | ) | $ | 1,037 |   | $ | (266 | ) |

 

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*  These amounts represent the estimated portionof the net (gain)/loss, transition (asset)/obligation, and net prior servicecost/(credit) remaining in accumulated other comprehensive income that isexpected to be recognized as a component of net periodic benefit cost over thecurrent fiscal year.

 

*Weighted-averageassumptions used to determine net periodic benefit cost*

 
| ** **                         | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| Discount rate                      |       | 6.80             | %          | 6.00             | %          |
| Expected  long-term rate of return |       | 8.25             | %          | 8.25             | %          |
| Rate of  compensation increase     |       | 3.00             | %          | 3.00             | %          |

 

*Basisused to determine expected long-term return on plan assets*

 

Historical and future expected rates of return of multiple assetclasses were analyzed to develop a risk-free real rate of return and riskpremiums for each asset class.  Theoverall rate for each asset class was developed by combining a long-terminflation component, the risk-free real rate of return, and the associated riskpremium.  A weighted average rate ofreturn was developed based on those overall rates of return and the targetasset allocations of the plans.

 

**Note 5. Stock-Based Compensation**

 

On August 23, 2007, the Company’sBoard of Directors approved the Farmer Bros. Co. 2007 Omnibus Plan (the “Plan”),which was approved by stockholders on December 6, 2007. Prior to adoptionof the Plan the Company had no stock-based compensation plan.  Initial awards under the Plan were made inthe third quarter of fiscal 2008, and additional awards under the Plan weremade in the second quarter of fiscal 2009.  Awards issued under the Plan may

 

7

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take the form of stock options, stock appreciation rights,restricted stock, restricted stock units, dividend equivalents,performance-based awards, stock payments, cash-based awards or other incentivespayable in cash or shares of stock, or any combination thereof.  Each award will be set forth in a separateagreement with the person receiving the award and will indicate the type, termsand conditions of the award.  The maximumnumber of shares of common stock as to which awards may be granted under thePlan is 1,000,000, subject to adjustment as provided in the Plan.

 

TheCompany accounts for stock-based compensation in accordance with Statement ofFinancial Accounting Standards No. 123 (revised 2004), “*Share-Based Payment*” (“SFAS 123R”), and related SEC rules includedin Staff Accounting Bulletin No. 107 which require the measurement andrecognition of compensation expense for all stock-based payment awards madeunder the Plan based on estimated fair values.

 

*Stock Options*

 

SFAS 123R requires companies to estimate the fairvalue of stock-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s Consolidated Statement of Operations. Prior to fiscal 2008 theCompany did not have stock-based compensation.

 

Stock-based compensation expense recognized during theperiod is based on the value of the portion of stock-based payment awards thatis ultimately expected to vest during the period. Compensation expenserecognized for all stock option awards granted is recognized using thestraight-line method over the vesting period of three years. The stock-basedcompensation expense recognized in the Company’s consolidated statement ofoperations for the three and six month periods ended December 31, 2008 isbased on awards ultimately expected to vest. Currently, management estimatesthat there will be no forfeitures based on the Company’s historical turnover.SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates.

 

The Company uses the Black-Scholes option valuationmodel, which requires management to make certain assumptions for estimating thefair value of stock options at the date of the grant. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of traded optionsthat have no vesting restrictions and are fully transferable. In addition,option valuation models require the input of highly subjective assumptionsincluding the expected stock price volatility. Because the Company’s stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimates, in management’s opinion the existing modelsmay not necessarily provide a reliable single measure of the fair value of theCompany’s stock options. Although the fair value of stock options is determinedin accordance with SFAS 123R using an option valuation model, that valuemay not be indicative of the fair value observed in a willing buyer/willing sellermarket transaction.

 

Thefollowing are the weighted average assumptions used in the Black-Scholesvaluation model for the six months ended December 31, 2008:

 
| ** **                       | ** ** | **FY 2009** | ** ** |
|----------------------------------|------------|------------------|------------|
| Average fair  value of options   |       | $                | 6.68       |   |
| Risk-free  interest rate         |       | 5.45             | %          |
| Dividend yield                   |       | 2.2              | %          |
| Expected life                    |       | 5 years          |       |
| Expected stock  price volatility |       | 32.4             | %          |
|                                  |            |                  |            |  |

 

The following table summarizes stockoption activity from adoption of the Plan through December 31, 2008:

 

8

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| ** **                             | ** ** | **Number of Stock  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                | ** ** | ** **                                 | ** ** | **(Years)**                                | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  July 1, 2008      |       | 118                                    |       | $                                          | 22.62      |                                       | $          | 6.60                                |       | $ | — |   |
| Activity:                              |       |                                   |       |                                       |       |                                       |       |                                |       |
| Granted                                |       | 114                                    |       | 21.76                                      |       | 6.46                                       |       | —                              |       |
| Forfeited                              |       | —                                 |       | —                                     |       | —                                     |       | —                              |       |
| Exercised                              |       | —                                 |       | —                                     |       | —                                     |       | —                              |       |
| Expired                                |       | —                                 |       | —                                     |       | —                                     |       | —                              |       |
| Outstanding at  December 31, 2008 |       | 232                                    |       | $                                          | 21.98      |                                       | $          | 6.53                                |       | $ | 629 |   |
| Exercisable at  December 31, 2008 |       | —                                 |       | $                                          | —     |                                       | $          | —                              |       | $ | — |   |

 

On December 11, 2008, the Company granted 114,000options with an exercise price of $21.76 per share to eligible employees,officers and directors under the Plan. The aggregate intrinsic value in the table above represents the totalpretax intrinsic value, based on the Company’s closing stock price of $24.94 atDecember 31, 2008, the last trading day of the quarter, which would havebeen received by award holders had all award holders exercised their awardsthat were in-the-money as of that date. As of December 31, 2008, there was approximately $1,260,000 ofunrecognized compensation cost related to stock options.  Compensation expense recognized in generaland administrative expense for the three and six month periods ended December 31,2008 was $60,000 and $139,000, respectively.

 

*Restricted Stock*

 

On December 11,2008, the Company granted 26,000 shares of restricted stock, with a weightedaverage grant date fair value of $21.76 per share to eligible employees,officers and directors under the Plan.   Shares of restricted stock vest at the end of three years from the grantdate. Compensation expense is recognized on a straight-line basis over theservice period based on the estimated fair value of the restricted stock.Compensation expense recognized in general and administrative expense for thethree and six month periods ended December 31, 2008 was $48,000 and$108,000, respectively.   As of December 31,2008, there was approximately $952,000 of unrecognized compensation costrelated to restricted stock.

 

The following table summarizes the status of theCompany’s restricted stock as of December 31, 2008:

 
| ** **                             | ** ** | **Restricted Stock  Grants** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**           | ** ** | ** **                                                  | ** ** |
| Outstanding at  July 1, 2008      |       | 25                                |       | $                                                           | 22.67      |   |
| Activity:                              |       |                              |       |                                                        |       |
| Granted                                |       | 26                                |       | 21.76                                                       |       |
| Forfeited                              |       | —                            |       | —                                                      |       |
| Exercised                              |       | —                            |       | —                                                      |       |
| Expired                                |       | —                            |       | —                                                      |       |
| Outstanding at  December 31, 2008 |       | 51                                |       | $                                                           | 22.22      |   |
| Exercisable at  December 31, 2008 |       | —                            |       | $                                                           | —     |   |

 

**Note6.  Income Taxes**

 

InSeptember 2008, the Internal Revenue Service (“IRS”) completed anexamination of the Company’s U.S. income tax returns for the fiscal years endedJune 30, 2004, 2005 and 2006. The Company and the IRS reached a settlementon certain issues which resulted in a decrease to the Company’s totalunrecognized tax benefits of $421,000 (excluding interest and penalties).  Of this amount, $266,000 has been realized asincome in the current fiscal year.

 

9

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Californianotified the Company in January 2008 of their intent to conduct a stateexamination upon the finalization of the IRS examination.  The Californiaexamination has not commenced as of December 31, 2008. The Company believes it is reasonably possiblethat a portion of its total unrecognized tax benefits will decrease in the next12 months upon the conclusion of this, and other ongoing stateexaminations.  However, it is prematureto assess the range of the reasonably possible changes to the Company’sunrecognized tax benefits.

 

As of June 30, 2008 and December 31,2008, the Company had not recognized the following tax benefits in itsconsolidated financial statements:

 
| **(in thousands, unaudited)**                                                            | ** ** | **December 31,  2008** | ** ** | **June 30,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Total  unrecognized tax benefits*                                                                  |       | $                           | 387        |                    | $          | 808 |   |
| Unrecognized tax  benefits that would affect the Company’s effective tax rate, if recognized* |       | $                           | 255        |                    | $          | 668 |   |

 

----

* Not including interestand penalties

 

TheCompany’s effective tax rate of 45.9% primarily consists of its statutoryfederal and state combined rate of 38.9% (benefit) plus a 5.9% (benefit)related to the Company’s dividends received deduction.  The federal andstate rates represent a benefit in the current year because the Company is in aloss position.

 

During the quarter ended December 31,2008, the Company established a valuation allowance of $427,000 against aportion of its deferred tax assets related to capital loss carry forwards.  The Company has capital loss carry forwardsthat will expire in the future if they are not used.  These losses mayonly be offset against realized capital gains. Due to the recentunrealized losses incurred in the Company’s investment portfolio and generaldownturn in market conditions, the Company has concluded that avaluation allowance is required under Statement of Financial AccountingStandards No. 109, “*Accounting for IncomeTaxes*,” as it is not “‘more likely than not” that sufficient capitalgains will be realized before the expiration of the capital losses.

 

Note 6.  **Pending Acquisition**

 

Pursuant an Asset Purchase Agreement (the “PurchaseAgreement”) with Sara Lee Corporation and its affiliate (collectively, the “Seller”),the Company will purchase certain assets used in connection with the Seller’sDSD Coffee Business, which generally consists of manufacturing and sellingcoffee, tea and related products through a network of facilities andvehicles.  This business also includes the distribution, sale and serviceof brewed and liquid coffee equipment.  The assets to be purchased includemanufacturing plants in Houston, Texas and Oklahoma City Oklahoma,approximately 61 leased warehouses and one owned warehouse, approximately 445vehicles, and all DSD Coffee Business inventory, trademarks and trade names;the most well known being SUPERIOR®, MCGARVEY®, CAIN’S®, IRELAND®, JUSTINLLOYD®, METROPOLITAN® and PREBICA®.  TheCompany anticipates hiring approximately 800 employees associated with Seller’sDSD business.  At closing, the Companywill assume certain liabilities, including obligations under contracts,environmental liabilities with respect to the transferred facilities, pensionliabilities, advertising and trade promotion accruals, and accrued vacation asof the closing for hired personnel.

 

The purchase price is $45.4 million, subject tocertain adjustments, including the amount of inventory and prepaid expenses atclosing, as well as additional amounts associated with (i) certainaccounting costs and costs to provide the Company with information technologyto operate the purchased assets, which costs will be shared by the parties; and(ii) reimbursement by the Company of certain accrued vacation associatedwith the hired personnel.  The transaction is expected to close by February 28,2009.  In connection with the closing, theSeller and the Company will enter into certain operational agreements,including trademark and formula license agreements, co-pack agreements, aliquid coffee distribution agreement, a transition services agreement, and agreen coffee and tea purchase agreement. The transaction is subject tocustomary closing conditions, as well as completion of the informationtechnology carve-out and delivery of historical financial statements of the DSDBusiness. The Purchase Agreement also includes customary indemnificationobligations of the parties.

 

10

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

** **

**Forward-Looking Statements**

** **

Certainstatements contained in this quarterly report on Form 10-Q regarding therisks, circumstances and financial trends that may affect our future operatingresults, financial position and cash flows are not based on historical fact andare forward-looking statements within the meaning of federal securities lawsand regulations.  These statements arebased on management’s current expectations, assumptions, estimates andobservations of future events and include any statements that do not directlyrelate to any historical or current fact. These forward-looking statements can be identified by the use of wordslike “anticipates,” “feels,” “estimates,” “projects,” “expects,” “plans,” “believes,”“intends,” “will,” “assumes” and other words of similar meaning.  Owing to the uncertainties inherent inforward-looking statements, actual results could differ materially from thoseset forth in forward-looking statements. A forward-looking statement is neither a prediction nor a guarantee offuture events or circumstances, and those future events or circumstances maynot occur.  Users should not place unduereliance on the forward-looking statements, which speak only as of the date ofthis report.  The Company undertakes noobligation to update or alter any forward-looking statements, whether as aresult of new information, future events or otherwise, except as required bythe federal securities laws. Factors that could cause actual results to differmaterially from those in forward-looking statements include, but are notlimited to, fluctuations in availability and cost of green coffee, competition,organizational changes, the impact of a weaker economy, business conditions inthe coffee industry and food industry in general, the Company’s continuedsuccess in attracting new customers, variances from budgeted sales mix andgrowth rates, and weather and special or unusual events, as well as other risksdescribed in this report and other factors described from time to time in theCompany’s filings with the SEC.

 

**PendingAcquisition**

 

As described in the Company’s current report on Form 8-Kfiled with the SEC on December 8, 2008, Farmer Bros. Co. has entered intoan Asset Purchase Agreement (the “Purchase Agreement”) with Sara LeeCorporation and its affiliate (collectively, the “Seller”).

 

Pursuant to the Purchase Agreement, the Company willpurchase certain assets used in connection with the Seller’s DSD CoffeeBusiness, which generally consists of manufacturing and selling coffee, tea andrelated products through a network of facilities and vehicles.  This businessalso includes the distribution, sale and service of brewed and liquid coffeeequipment.

 

The assets to be purchased include manufacturingplants in Houston, Texas and Oklahoma City Oklahoma, approximately 61 leasedwarehouses and one owned warehouse, approximately 445 vehicles, and all DSDCoffee Business inventory, trademarks and trade names; the most well knownbeing SUPERIOR®, MCGARVEY®, CAIN’S®, IRELAND®, JUSTIN LLOYD®, METROPOLITAN® andPREBICA®.  The Company anticipates hiringapproximately 800 employees associated with Seller’s DSD business.

 

At closing, the Company will assume certainliabilities, including obligations under contracts, environmental liabilitieswith respect to the transferred facilities, pension liabilities, advertisingand trade promotion accruals, and accrued vacation as of the closing for hiredpersonnel.

 

The purchase price is $45.4 million, subject tocertain adjustments, including the amount of inventory and prepaid expenses atclosing, as well as additional amounts associated with (i) certainaccounting costs and costs to provide the Company with information technologyto operate the purchased assets, which costs will be shared by the parties; and(ii) reimbursement by the Company of certain accrued vacation associatedwith the hired personnel.  The transaction is expected to close by February 28,2009. We havecapitalized approximately $1.1 million of expenses associated with the pendingacquisition of the DSD assets of Sara Lee Corporation.

 

In connection with the closing, the Seller and theCompany will enter into certain operational agreements, including trademark andformula license agreements, co-pack agreements, a liquid coffee distributionagreement, a transition services agreement, and a green coffee and tea purchaseagreement.

 

11

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The transaction is subject to customary closingconditions, as well as completion of the information technology carve-out anddelivery of historical financial statements of the DSD Business. The PurchaseAgreement also includes customary indemnification obligations of the parties.

 

The foregoing description of the Purchase Agreementdoes not purport to be complete and is qualified in its entirety by referenceto the Purchase Agreement, a copy of which is filed as an exhibit to thisCompany’s quarterly report on Form 10-Q.

 

**Liquidity and Capital Resources**

** **

The Company expects to fund the purchase price for theassets described above with cash and debt. The Company expects to make an additional investment (above the purchaseprice) of approximately $15 million to finance working capital in fiscal 2009,and not more than $20 million to finance integration expenses, transactioncosts and capital expenditures from operations, cash and debt in future years.

 

The continued weakness in the economy during fiscal2009 and the sustained decline in the U.S. housing market kept pressure on thefinancial markets and have reduced the value and liquidity of the preferredstock we hold.  As a result, we are negotiatingwith a commercial bank for a line of credit to provide sufficient liquidity toenable the Company to achieve its goals and provide time for the financialmarkets to recover.  In the event we havenot secured acceptable financing with a bank or other commercial lender priorto closing the acquisition, a portion of the purchase price may include a $20million secured promissory note in favor of the Seller.

 

During the fiscal quarter ended December 31, 2008we incurred approximately $4 million to substantially complete CBI’s newplant.  Planned spending in fiscal 2009includes $10 million investment in our Torrance plant, most of which will occurin the second half of fiscal 2009, to provide more roasting and packagingflexibility and to further reduce material handling.  We have over 60% of our branches operating onthe new mobile sales software and hardware installation and the remainingbranch sales locations are expected to be installed by the end of the fourthquarter of fiscal 2009 at an estimated cost of approximately $1.6 million.

 

Our working capital is composed of the following (unaudited, inthousands):

 
| ** **            | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets        |       | $                           | 192,607    |                        | $          | 231,031 |   |
| Current  liabilities  |       | 25,919                      |       | 27,019                      |       |
| Working capital       |       | $                           | 166,688    |                        | $          | 204,012 |   |
|                  |       |                        |       |                        |       |
| Capital  expenditures |       | $                           | 22,522     |                        | $          | 6,166 |   |
| Dividends paid        |       | $                           | 3,551      |                        | $          | 3,216 |   |

 

At December 31, 2008 we had nomaterial commitments for capital expenditures other than those described above.

 

**Results of Operations**

** **

The Company’s net sales in the secondquarter of fiscal 2009 increased 7%, or $5,170,000, to $76,530,000 as comparedto $71,359,000 in the second quarter of fiscal 2008; units sold increased 4% inthis period as compared to the same period in the prior year.  Net sales for the first half of fiscal 2009increased 8%, or $10,751,000, to $143,053,000 from $132,302,000 in the sameperiod of fiscal 2008, primarily due to higher selling prices, reflectingincreased product costs, offset by a 2% decrease in units sold.  We expect weakness in the general economy andreduced consumer spending will have a continued impact on our sales through theremainder of fiscal 2009.

 

Cost of goods sold in the second quarterof fiscal 2009 increased 5% to $39,212,000 or 51% of sales as compared to$37,183,000, or 52% of sales, in the second quarter of fiscal 2008.  Gross profit in the second quarter of fiscal2009 increased $3,142,000 to $37,318,000, or 49% of sales, as compared to$34,176,000, or 48% of sales, in the second quarter of fiscal 2008.   Cost of goods sold for the first six monthsof fiscal 2009 increased $5,386,000 to $74,785,000 as compared to $69,399,000in the same period of fiscal 2008.  Grossprofit in the first half of 2009 increased $5,366,000 to $68,269,000, or 48% ofsales, as compared to $62,903,000, or 48% of sales, in the same

 

12

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period of fiscal 2008. Higher commodity prices and higher fuel costs have kept pressure on ourprofit margins in the first half of fiscal 2009 as compared to the same periodof fiscal 2008.  While we make everyeffort to pass these higher costs through to our customers, competitionrestricts our ability to do so.  Wecannot predict whether the current profit margins can be maintained.

 

Operating expenses in the second quarterof fiscal 2009 increased $3,719,000 to $37,105,000 from $33,386,000 in thesecond quarter of fiscal 2008, largely because of increased sellingexpenses.  Selling expenses for the threemonths ended December 31, 2008 increased $4,708,000, or 39% of sales, to$30,193,000 from 36% of sales or $25,485,000 in the same period of fiscal2008.  Selling expenses for the firsthalf of fiscal 2009 increased to $58,197,000, or 41% of sales, from$48,840,000, or 37% of sales, in the same period of fiscal 2008.  This increase is primarily the result ofhigher sales and a $1.8 million (19%) increase in freight costs in the firsttwo quarters of fiscal 2009.

 

Our income from operations in the secondquarter of fiscal 2009 was $213,000 as compared to income from operations of$790,000 in the same quarter of fiscal 2008. Loss from operations in the first half of fiscal 2009 was ($4,042,000)as compared to ($1,739,000) in the same period of fiscal 2008.

 

Total other income (expense) in the secondquarter of fiscal 2009 was $551,000 as compared to an expense of ($3,153,000)in the second quarter of fiscal 2008. Total other (expense) in the first half of fiscal 2009 was ($7,775,000)as compared to ($3,761,000) in the first half of fiscal 2008.  These changes are primarily the result ofchanges in Other, net (expense) income, which reflects realized and unrealizedlosses (gains) in our preferred stock portfolio.  Financial market conditions described in our Form 10-Kfor the year ended June 30, 2008 have continued into the first half offiscal 2009.  The downturn in the housingmarket combined with real estate financing and liquidity issues have putpressure on the valuations of the preferred stocks we hold.   The Company has no direct exposure tosub-prime mortgages, but financial companies compose approximately 85% of theuniverse of preferred stocks.  Sellingpressure from leveraged investors who need liquidity and a new supply ofpreferred issues taking advantage of lower dividend rates have resulted in adownward pressure on values.

 

Investor demand for the safety of U.S.Treasury instruments has flattened the U.S. Treasury yield curve and widenedspreads between preferred stocks and U.S. Treasury instruments.  We believe that preferred stocks arecurrently priced cheaper to U.S. Treasury bond yields than they have evertraded.  Although aggressive easing ofinterest rates by the world’s central banks and other economic stimulus actionsby governments may eventually have positive effects on this situation, weexpect little improvement until the housing market stabilizes.

 

As a result of the forgoing factors, netloss for the second quarter of fiscal 2009 was ($106,000), or ($0.01) pershare, as compared to a net loss of ($228,000), or ($0.02) per share, in thesecond quarter of fiscal 2008.   Net lossfor the first two quarters of fiscal 2009 was ($6,190,000), or ($0.42) pershare as compared to ($1,180,000), or ($0.08) per share, in the same period offiscal 2008.

 

**Quarterly Financial Data(Unaudited)**

 
| ** **                          | ** ** | **March 31,  2008**                                  | ** ** | **June 30,  2008** | ** ** | **September 30,  2008** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In thousands, except share data)** | ** ** |
| Net sales                           |       | $                                                         | 67,276     |                    | $          | 66,907                  |       | $                           | 66,524     |   | $ | 76,530 |   |
| Gross profit                        |       | $                                                         | 30,657     |                    | $          | 25,851                  |       | $                           | 30,951     |   | $ | 37,318 |   |
| (Loss) income  from operations      |       | $                                                         | (1,004     | )                       | $          | (7,901                  | )          | $                           | (4,255     | ) | $ | 213 |   |
| Net loss                            |       | $                                                         | (2,710     | )                       | $          | (4,034                  | )          | $                           | (6,085     | ) | $ | (106 | ) |
| Net (loss)  income per common share |       | $                                                         | (0.19      | )                       | $          | (0.27                   | )          | $                           | (0.42      | ) | $ | 0.01 |   |

 
| ** **                          | ** ** | **March 31,  2007**                                  | ** ** | **June 30,  2007** | ** ** | **September 30,  2007** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In thousands, except share data)** | ** ** |
| Net sales                           |       | $                                                         | 54,382     |                    | $          | 58,137                       |       | $                           | 60,943     |   | $ | 71,359 |   |
| Gross profit                        |       | $                                                         | 26,993     |                    | $          | 29,452                       |       | $                           | 28,727     |   | $ | 34,177 |   |
| (Loss) income  from operations      |       | $                                                         | (2,247     | )                       | $          | (232                         | )          | $                           | (2,528     | ) | $ | 789 |   |
| Net income  (loss)                  |       | $                                                         | 1,512      |                    | $          | 1,337                        |       | $                           | (953       | ) | $ | (227 | ) |
| Net income  (loss) per common share |       | $                                                         | 0.11       |                    | $          | 0.09                         |       | $                           | (0.07      | ) | $ | (0.02 | ) |

 

13

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**Item 3. Qualitative and QuantitativeDisclosures About Market Risk**

 

**Interest Rate Risk**

 

We are exposed to market value riskarising from changes in interest rates on our securities portfolio. Ourportfolio of investment grade money market instruments can include at any giventime: discount commercial paper, medium term notes, federal agency issues andtreasury securities.  As of December 31,2008, over 90% of these funds were invested in a money market fund whichinvests in investment grade commercial paper and U.S. Treasury securities.  The funds are available on demand, and arecurrently covered under the U.S. Treasury Department Guarantee Program forMoney Market Funds.  As a result thefunds have been classified as cash equivalents.

 

From time to time, our portfolio ofpreferred securities includes investments in derivatives that provide a naturaleconomic hedge of interest rate risk. We review the interest rate sensitivityof these securities and (a) enter into “short positions” in futurescontracts on U.S. Treasury securities or (b) hold put options on suchfutures contracts in order to reduce the impact of certain interest ratechanges on such preferred stocks. Specifically, we attempt to manage the riskarising from changes in the general level of interest rates. We do not transactin futures contracts or put options for speculative purposes.

 

The following table demonstrates theimpact of varying interest rate changes based on the preferred stock holdings,futures and options positions, and market yield and price relationships at December 31,2008. This table is predicated on an instantaneous change in the general levelof interest rates and assumes predictable relationships between the prices ofpreferred securities holdings, the yields on U.S. Treasury securities andrelated futures and options.

 

The number and type of futures and options contracts entered intodepends on, among other items, the specific maturity and issuer redemptionprovisions for each preferred stock held, the slope of the U.S. Treasury yieldcurve, the expected volatility of U.S. Treasury yields, and the costs of usingfutures and/or options.

 

As of December 31, 2008 there were no futures or optionscontracts in place as an interest rate hedge.

 
| ** **                          | ** ** | **Market Value at December 31, 2008** | ** ** | **Changes in Market** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|
| **Interest Rate Changes** | ** ** | **Preferred  Securities**                                      | ** ** | **Futures and  Options**   | ** ** | **Total  Portfolio** | ** ** | **Value of Total  Portfolio** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                             | ** ** |
| -150 basis  points                  |       | $                                                              | 43,542     |                            | $          | — |   | $ | 43,542 |   | $ | 566 |   |
| -100 basis  points                  |       | $                                                              | 43,419     |                            | $          | — |   | $ | 43,419 |   | $ | 443 |   |
| Unchanged                           |       | $                                                              | 42,976     |                            | $          | — |   | $ | 42,976 |   | $ | — |   |
| +100 basis  points                  |       | $                                                              | 42,046     |                            | $          | — |   | $ | 42,046 |   | $ | (930 | ) |
| +150 basis  points                  |       | $                                                              | 41,134     |                            | $          | — |   | $ | 41,134 |   | $ | (1,842 | ) |

 

**Commodity Price Risk**

** **

We are exposed to commodity price riskarising from changes in the market price of green coffee. We price our coffeeinventory on the LIFO basis. In the normal course of business we hold a largegreen coffee inventory and enter into forward commodity purchase agreementswith suppliers. We are subject to price risk resulting from the volatility ofgreen coffee prices. Volatile price increases cannot, because of competitionand market conditions, always be passed on to our customers.  From time to time the Company will hold a mixof futures contracts and options to help hedge against volatile green coffeeprice changes.  Gains and losses on thesederivative instruments are realized immediately in Other, net (expense)income.  At December 31, 2008 thepotential change in fair value of commodity derivatives assuming a 10% changein the price of green coffee was approximately $400,000.

 

**Item 4. Controls and Procedures**

** **

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Securities Exchange Act of 1934, as amended  (the “Exchange Act”), is recorded, processed,summarized and reported, within the time periods specified in the rules andforms of the SEC. Disclosure controls and procedures include, withoutlimitation, controls and

 

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procedures designed toensure that information we are required to disclose in the reports that we fileor submit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures.

 

Asof December 31, 2008, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, carried out an evaluation of theeffectiveness of our disclosure controls and procedures pursuant to Rule 13(a)-15(e) promulgatedunder the Exchange Act. Based upon this evaluation, our Chief Executive Officerand Chief Financial Officer concluded that, as of December 31, 2008, ourdisclosure controls and procedures were effective.

 

**Changesin Internal Control over Financial Reporting**

** **

Managementhas determined that there has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgatedunder the Exchange Act) during our fiscal quarter ended December 31, 2008,that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II- OTHER INFORMATION**

** **

**Item 4. Submission of Matters to a Vote of Security Holders**

** **

On December 11, 2008the Company held its Annual Meeting.  Ofthe 16,100,280 shares of common stock outstanding and entitled to vote at theAnnual Meeting, 15,012,581 were represented at the meeting, or a 93% quorum.

 

At the Annual Meeting,stockholders:

 

1.             Elected each of the following two (2) individualsto the Board of Directors to serve a three-year term as Class II directorsuntil the Annual Meeting of Stockholders in 2011 and until their successorshave been duly elected and qualified:

 
| **Director Nominee** | ** ** | **Votes Cast For** | ** ** | **Votes Withheld** | ** ** |
|---------------------------|------------|------------------------------|------------|-------------------------|------------|
| Guenter W.  Berger        |       | 14,778,798                   |       | 233,783                 |       |
| Thomas A. Maloof          |       | 14,793,861                   |       | 218,720                 |       |

 

The other directors whoseterm of office as a director continued after the meeting are:  Roger M. Laverty III; Martin A. Lynch; JamesJ. McGarry; John H. Merrell; and Carol Farmer Waite.

 

2.             Ratified the selection of Ernst & Young LLP asthe Company’s independent registered public accounting firm for the fiscal yearending June 30, 2009.   There were 14,861,387 votes for the appointment,118,438 votes against the appointment, 32,756 abstentions and no brokernon-votes.

 

**Item6. Exhibits**

 

See Exhibit Index.

 

15

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**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Name**                      | ** ** | **Title**                             | ** ** | **Date**               |
|-------------------------------|------------|---------------------------------------|------------|------------------------|
|                          |       |                                  |       |                   |
|                          |       |                                  |       |                   |
| /s/ ROGER M. LAVERTY III |       | President and Chief Executive Officer |       | February 5,  2008 |
| Roger M.  Laverty III         |       | (principal executive officer)         |       |
|                          |       |                                  |       |                   |
|                          |       |                                  |       |                   |
| /s/ JOHN E. SIMMONS      |       | Treasurer and Chief Financial Officer |       |                   |
| John E.  Simmons              |       | (principal financial and accounting   |       | February 5,  2008 |
|                          |       | officer)                              |       |                   |

 

16

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| **EXHIBIT  INDEX** |
|--------------------|
|               |   |   |
| 3.1                |   | Certificate  of Incorporation (filed as Exhibit 99 to the Company’s Form 10-Q  for the quarter ended March 31, 2004 and incorporated herein by  reference). |
|               |   |   |
| 3.2                |   | Amended  and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Form 8-K  filed with the SEC on June 8, 2006 and incorporated herein by  reference). |
|               |   |   |
| 4.1                |   | Certificate  of Designations of Series A Junior Participating Preferred Stock (filed  as Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on  March 18, 2005 and incorporated herein by reference). |
|               |   |   |
| 4.2                |   | Rights  Agreement dated March 17, 2005 by and between Farmer Bros. Co. and Wells  Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s  Form 8-K filed with the SEC on March 18, 2005 and incorporated  herein by reference). |
|               |   |   |
| 4.3                |   | Specimen  Stock Certificate (filed as Exhibit 4.1 to the Company’s Form 8-A/A filed  with the SEC on February 6, 2009 and incorporated herein by reference). |
|               |   |   |
| 10.1               |   | Asset  Purchase Agreement, dated as of December 2, 2008, by and among Sara Lee  Corporation, Saramar, LLC and Farmer Bros. Co.(filed herewith). |
|               |   |   |
| 10.2               |   | Stock  Purchase Agreement, dated April 27, 2007, by and among Farmer Bros. Co.,  Coffee Bean Holding Co., Inc., and the Stockholders of Coffee Bean  Holding Co., Inc. (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on May 1, 2007 and incorporated herein  by reference). |
|               |   |   |
| 10.3               |   | Farmer  Bros. Co. Amended and Restated Pension Plan for Salaried Employees (filed as  Exhibit 10.1 to the Company’s Form 10-K for the year ended  June 30, 2007 and incorporated herein by reference).* |
|               |   |   |
| 10.4               |   | Farmer  Bros. Co. Amended and Restated 2005 Incentive Compensation Plan (filed  herewith).* |
|               |   |   |
| 10.5               |   | Farmer  Bros. Co. Amended and Restated Employee Stock Ownership Plan (filed as  Exhibit 10.5 to the Company’s Form 10-K for the year ended  June 30, 2007 and incorporated herein by reference).* |
|               |   |   |
| 10.6               |   | Loan  Agreement dated July 21, 2003 between the Company and Wells Fargo Bank,  Trustee of the Farmer Bros. Co. Employee Stock Ownership Plan (filed  herewith). |
|               |   |   |
| 10.7               |   | Form of  Change in Control Severance Agreements entered into with each of the  following officers: Michael J. King and John E. Simmons (filed as  Exhibit 99 to the Company’s Form 10-Q for the quarter ended  March 31, 2005 and incorporated herein by reference).* |
|               |   |   |
| 10.8               |   | Change  in Control Severance Agreement (Laverty), dated as of June 2, 2006, by  and between Farmer Bros. Co. and Roger M. Laverty III (filed as  Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on  June 8, 2006 and incorporated herein by reference).* |
|               |   |   |
| 10.9               |   | Change  in Control Severance Agreement (Webb), dated as of March 3, 2008, by and  between Farmer Bros. Co. and Drew H. Webb (filed as Exhibit 10.4 to the  Company’s Form 8-K filed with the SEC on June 8, 2006 and  incorporated herein by reference).* |
|               |   |   |
| 10.10              |   | Form of  Amendment No. 1 to Change in Control Severance Agreement entered into  with each of the following officers: Roger M. Laverty III, Drew H. Webb, John  E. Simmons and Michael J. King (filed herewith).* |
|               |   |   |
| 10.11              |   | Employment  Agreement, dated as of June 2, 2006, by and between Farmer Bros. Co. and  Roger M. Laverty III (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on June 8, 2006 and incorporated herein  by reference).* |
|               |   |   |
| 10.12              |   | Amendment  No. 1 to Employment Agreement, dated December 5, 2007, between  Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.1 to the  Company’s Form 8-K/A filed with the SEC on December 11, 2007 and incorporated  herein by reference)* |
|               |   |   |
| 10.13              |   | Amendment  No. 2 to Employment Agreement, dated December 31, 2007, between  Farmer Bros. Co. and Roger M. Laverty III (filed herewith).* |
|               |   |   |
| 10.14              |   | Employment  Agreement, dated March 3, 2008, by and between Farmer Bros. Co. and Drew  H. Webb (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on March 7, 2008 and incorporated herein by reference).* |
|               |   |   |
| 10.15              |   | Amendment  No. 1 to Employment Agreement, dated December 31, 2007, between  Farmer Bros. Co. and Drew H. Webb (filed herewith).* |
|               |   |   |
| 10.16              |   | 2007  Omnibus Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed  with the SEC on August 29, 2007 and incorporated herein by reference) * |

 

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| 10.17  |   | Form of  2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed  as Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on  February 26, 2008 and incorporated herein by reference).*                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                       |
| 10.18  |   | Form of  2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock Award  Agreement (filed as Exhibit 10.2 to the Company’s Form 8-K filed  with the SEC on February 26, 2008 and incorporated herein by  reference).*           |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.19  |   | Stock  Ownership Guidelines for Directors and Executive Officers (filed as  Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on  February 26, 2008 and incorporated herein by reference).*                                                    |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.20  |   | Form of  Indemnification Agreement for Directors and Officers of the Company, as  adopted on May 18, 2006 (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on December 11, 2007 and incorporated  herein by reference).* |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.21  |   | Form of  Award Letter (Fiscal 2006) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 99.1 to the Company’s Form 8-K filed with  the SEC on August 30, 2006 and incorporated herein by reference).*                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.22  |   | Form of  2007 Target Award Notification Letter under Farmer Bros. Co. 2005 Incentive  Compensation Plan (filed as Exhibit 99.1 to the Company’s Form 8-K  filed with the SEC on December 22, 2006 and incorporated herein by  reference).*        |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.23  |   | Form of  Award Letter (Fiscal 2007) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on August 29, 2007 and incorporated herein by reference).*                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.24  |   | Form of  2008 Target Award Notification Letter under Farmer Bros. Co. 2005 Incentive  Compensation Plan (filed as Exhibit 10.2 to the Company’s Form 8-K  filed with the SEC on December 11, 2007 and incorporated herein by  reference).*        |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.25  |   | Form of  Award Letter (Fiscal 2008) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on October 3, 2008 and incorporated herein by reference).*                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.30  |   | Amendment  2008-1 to the Farmer Bros. Co. Amended and Restated Employee Stock Ownership  Plan (filed herewith).                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.31  |   | Good  Faith Amendment to the Farmer Bros. Co. Amended and Restated Employee Stock  Ownership Plan to comply with Code Section 401(a)(31)(B) as amended by the Economic  Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (filed herewith).                        |
|   |   |                                                                                                                                                                                                                                                                       |
| 31.1   |   | Principal  Executive Officer Certification Pursuant to Securities Exchange Act  Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. (filed herewith)                                                                  |
|   |   |                                                                                                                                                                                                                                                                       |
| 31.2   |   | Principal  Financial Officer Certification Pursuant to Securities Exchange Act  Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. (filed herewith)                                                                  |
|   |   |                                                                                                                                                                                                                                                                       |
| 32.1   |   | Principal  Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (furnished herewith)                                                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 32.2   |   | Principal  Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished  herewith)                                                                                       |

 

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* Management contract orcompensatory plan or arrangement.

 

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