Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

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

** **

**For the quarterly period ended September 30,2009**

** **

**OR**

** **
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the transition period from                 to                 **

** **

**Commission file number:    0-1375**

** **

**FARMERBROS. 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 bycheck mark whether the registrant: (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x NO o

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o NO o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act (Check one):

 

| Large accelerated file o                      |   | Accelerated filer x         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated file o                        |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES o NO x

 

On November 5,2009 the registrant had 16,123,580 shares outstanding of its common stock, parvalue $1.00 per share, which is the registrant’s only class of common stock.

 

 

 

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**FARMER BROS. CO.****FORM 10-Q QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                                      | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I  FINANCIAL INFORMATION                                                                              |       |     |
|                                                                                                            |       |     |
| Item 1. Financial Statements                                                                                    |       |     |
|                                                                                                            |       |     |
| Consolidated Balance Sheets at September 30, 2009  (unaudited) and June 30, 2009                      |       | 1        |
|                                                                                                            |       |     |
| Consolidated Statements of Operations for the Three  Months Ended September 30, 2009 and 2008 (unaudited)  |       | 2        |
|                                                                                                            |       |     |
| Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2009  and 2008 (unaudited) |       | 3        |
|                                                                                                            |       |     |
| Notes to Consolidated Financial Statements (unaudited)                                                          |       | 4        |
|                                                                                                            |       |     |
| Item 2. Management’s Discussion and Analysis of Financial  Condition and Results of Operations             |       | 15       |
|                                                                                                            |       |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                             |       | 17       |
|                                                                                                            |       |     |
| Item 4. Controls and Procedures                                                                                 |       | 18       |
|                                                                                                            |       |     |
| Item 4T. Controls and Procedures                                                                                |       | 19       |
|                                                                                                            |       |     |
| PART II  OTHER INFORMATION                                                                                 |       |     |
|                                                                                                            |       |     |
| Item 6. Exhibits                                                                                                |       | 19       |
|                                                                                                            |       |     |
| SIGNATURES                                                                                                      |       | 20       |
|                                                                                                            |       |     |
| EXHIBIT INDEX                                                                                                   |       | 21       |

 

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**PART I - FINANCIAL INFORMATION**

** **

**Item1.********Financial Statements**

 

**FARMER BROS. CO.CONSOLIDATED BALANCE SHEETS**(Dollars in thousands, except share and per share data)

 
| ** **                                                                                             | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                             | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| ** **                                                                                             | ** ** | **(Unaudited)**        | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                             | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current Assets:                                                                                        |       |                   |       |              |       |
| Cash and cash equivalents                                                                              |       | $                      | 1,396      |              | $          | 20,038 |   |
| Short term investments                                                                                 |       | 50,710                 |       | 42,926            |       |
| Accounts and notes receivable, net                                                                     |       | 43,135                 |       | 45,744            |       |
| Inventories                                                                                            |       | 79,274                 |       | 68,961            |       |
| Income tax receivable                                                                                  |       | 3,751                  |       | 4,163             |       |
| Deferred income taxes                                                                                  |       | 1,088                  |       | 1,089             |       |
| Prepaid expenses                                                                                       |       | 2,210                  |       | 3,625             |       |
| Total current assets                                                                                   |       | 181,564                |       | 186,546           |       |
| Property, plant and equipment, net                                                                     |       | 115,202                |       | 112,063           |       |
| Goodwill and other intangible assets, net                                                              |       | 27,944                 |       | 28,758            |       |
| Other assets                                                                                           |       | 1,745                  |       | 1,758             |       |
| Deferred income taxes                                                                                  |       | 892                    |       | 892               |       |
| Total assets                                                                                           |       | $                      | 327,347    |              | $          | 330,017 |   |
|                                                                                                   |       |                   |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                          |       |                   |       |              |       |
| Current liabilities:                                                                                   |       |                   |       |              |       |
| Accounts payable                                                                                       |       | $                      | 33,044     |              | $          | 34,627 |   |
| Accrued payroll expenses                                                                               |       | 16,202                 |       | 13,121            |       |
| Short-term borrowings under revolving credit  facility                                                 |       | 8,093                  |       | 16,182            |       |
| Short-term obligations under capital leases                                                            |       | 822                    |       | 908               |       |
| Deferred state taxes                                                                                   |       | 2,242                  |       | 2,198             |       |
| Other                                                                                                  |       | 9,343                  |       | 9,421             |       |
| Total current liabilities                                                                              |       | 69,746                 |       | 76,457            |       |
| Accrued postretirement benefits                                                                        |       | 18,206                 |       | 18,259            |       |
| Long-term obligations under capital leases                                                             |       | 205                    |       | 344               |       |
| Accrued pension liabilities                                                                            |       | 40,785                 |       | 38,468            |       |
| Total liabilities                                                                                      |       | 128,942                |       | 133,528           |       |
| Commitments and contingencies                                                                          |       |                   |       |              |       |
| Stockholders’ equity:                                                                             |       |                   |       |              |       |
| Preferred stock, $1.00 par value, 500,000 shares  authorized and none issued                           |       | —                 |       | —            |       |
| Common stock, $1.00 par value, 25,000,000 shares  authorized; 16,078,111 shares issued and outstanding |       | 16,078                 |       | 16,078            |       |
| Additional paid-in capital                                                                             |       | 31,337                 |       | 31,135            |       |
| Retained earnings                                                                                      |       | 218,285                |       | 217,792           |       |
| Unearned ESOP shares                                                                                   |       | (32,383                | )          | (33,604           | )          |
| Less accumulated comprehensive loss                                                                    |       | (34,912                | )          | (34,912           | )          |
| Total stockholders’ equity                                                                        |       | 198,405                |       | 196,489           |       |
| Total liabilities and stockholders’ equity                                                        |       | $                      | 327,347    |              | $          | 330,017 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**FARMER BROS. CO.CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin thousands, except share and per share data)**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net sales                                     |       | $                                          | 112,127    |   | $ | 66,524 |   |
| Cost of goods sold                            |       | 57,823                                     |       | 35,573 |   |
| Gross profit                                  |       | 54,304                                     |       | 30,951 |   |
| Selling expenses                              |       | 44,298                                     |       | 28,004 |   |
| General and administrative expenses           |       | 12,505                                     |       | 7,202 |   |
| Operating expenses                            |       | 56,803                                     |       | 35,206 |   |
| Loss from operations                          |       | (2,499                                     | )          | (4,255 | ) |
| Other income (expense):                       |       |                                       |       |   |   |
| Dividend income                               |       | 679                                        |       | 1,047 |   |
| Interest income                               |       | 93                                         |       | 477 |   |
| Interest expense                              |       | (139                                       | )          | — |   |
| Other, net income (expense)                   |       | 4,461                                      |       | (9,850 | ) |
| Total other income (expense)                  |       | 5,094                                      |       | (8,326 | ) |
| Income (loss) before taxes                    |       | 2,595                                      |       | (12,581 | ) |
| Income tax expense (benefit)                  |       | 396                                        |       | (6,496 | ) |
| Net income (loss)                             |       | $                                          | 2,199      |   | $ | (6,085 | ) |
|                                          |       |                                       |       |   |   |
| Basic and diluted net income (loss) per share |       | $                                          | 0.15       |   | $ | (0.42 | ) |
|                                          |       |                                       |       |   |   |
| Weighted average shares outstanding           |       | 14,748,564                                 |       | 14,429,074 |   |
|                                          |       |                                       |       |   |   |
| Dividends declared per share                  |       | $                                          | 0.115      |   | $ | 0.115 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**FARMER BROS. CO.CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin thousands)**

**(Unaudited)**

** **
| ** **                                                                                                                   | ** ** | **Three  months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                                                                        |       |                                       |       |   |   |
| Net income (loss)                                                                                                            |       | $                                          | 2,199      |   | $ | (6,085 | ) |
| Adjustments to reconcile net income (loss) to net cash  (used in) provided by operating activities: |       |                                       |       |   |   |
| Depreciation and amortization                                                                                                |       | 5,875                                      |       | 3,406 |   |
| Deferred income taxes                                                                                                        |       | 44                                         |       | (6,179 | ) |
| Loss on sales of assets                                                                                                      |       | —                                     |       | 173 |   |
| ESOP and share based compensation expense                                                                                    |       | 1,572                                      |       | 1,273 |   |
| Net (gain) loss on investments                                                                                               |       | (4,229                                     | )          | 9,871 |   |
| Gain on sales or property, plant and equipment                                                                               |       | (21                                        | )          | (8 | ) |
| Change in operating assets and liabilities:                                                                                  |       |                                       |       |   |   |
| Short term investments                                                                                                       |       | (3,555                                     | )          | 53,031 |   |
| Accounts and notes receivable                                                                                                |       | 2,609                                      |       | (705 | ) |
| Inventories                                                                                                                  |       | (10,313                                    | )          | (3,117 | ) |
| Income tax receivable                                                                                                        |       | 412                                        |       | (292 | ) |
| Prepaid expenses and other assets                                                                                            |       | 1,427                                      |       | 731 |   |
| Accounts payable                                                                                                             |       | (1,330                                     | )          | (1,049 | ) |
| Accrued payroll expenses and other liabilities                                                                               |       | 3,002                                      |       | 1,591 |   |
| Accrued postretirement benefits                                                                                              |       | (52                                        | )          | 33 |   |
| Other long-term liabilities                                                                                                  |       | 2,178                                      |       | — |   |
| Total adjustments                                                                                                            |       | (2,381                                     | )          | 58,759 |   |
| Net cash (used in) provided by operating activities                                                                          |       | (182                                       | )          | 52,674 |   |
| Cash flows from investing activities:                                                                                        |       |                                       |       |   |   |
| Purchases of property, plant and equipment                                                                                   |       | (8,613                                     | )          | (12,843 | ) |
| Proceeds from sales of property, plant and equipment                                                                         |       | 435                                        |       | — |   |
| Net cash used in investing activities                                                                                        |       | (8,178                                     | )          | (12,843 | ) |
| Cash flows from financing activities:                                                                                        |       |                                       |       |   |   |
| Repayments on revolving credit line, net                                                                                     |       | (8,267                                     | )          | — |   |
| Payments on capital lease obligations                                                                                        |       | (160                                       | )          | — |   |
| Dividends paid                                                                                                               |       | (1,855                                     | )          | (1,749 | ) |
| Net cash used in financing activities                                                                                        |       | (10,282                                    | )          | (1,749 | ) |
| Net (decrease) increase in cash and cash equivalents                                                                         |       | (18,642                                    | )          | 38,082 |   |
| Cash and cash equivalents at beginning of period                                                                             |       | 20,038                                     |       | 9,973 |   |
| Cash and cash equivalents at end of period                                                                                   |       | $                                          | 1,396      |   | $ | 48,055 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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** **

**FARMER BROS. CO.**

** **

**Notes to Consolidated Financial Statements**

** **

**(Unaudited)**

** **

**Note 1.**          Farmer Bros. Co. and Summary of Significant Accounting Policies

** **

***The Company***

 

Farmer Bros. Co. is amanufacturer, wholesaler and distributor of coffee and non-coffee (“allied”)products to the institutional food service segment. The Company wasincorporated in California in 1923, and reincorporated in Delaware in 2004.

 

***Basis of Presentation***

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.  Accordingly, they do not includeall 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 months ended September 30, 2009 arenot necessarily indicative of the results that may be expected for the fiscalyear ending June 30, 2010.

 

These accompanyingunaudited interim consolidated financial statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K, as amended, for thefiscal year ended June 30, 2009, filed with the Securities and ExchangeCommission (the “SEC”) on September 15, 2009.

 

The Company consideredevents through November 9, 2009, for purposes of determining whether anyevent warranted recognition or disclosure in its quarterly financial statementsas of and for the three months ended September 30, 2009.

 

***Use of Estimates***

 

The preparation of financial statements in accordance with GAAPrequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.  Actual results may differ from thoseestimates.

 

***Reclassifications***

 

Certainreclassifications have been made to prior year balances to conform to thecurrent year presentation.

 

***Fair Value Measurements***

 

Effective July 1,2009, the Company implemented the requirements of ASC 820-10 “Fair ValueMeasurements” of the Financial Accounting Standards Board (the “FASB”) AccountingStandards Codification (“ASC”) for its financial assets and liabilities. Fairvalue is the price that would be received to sell an asset, or paid to transfera liability, in an orderly transaction between market participants. The Companymaximizes the use of observable market inputs, minimizes the use ofunobservable market inputs and discloses in the form of an outlined hierarchythe details of such fair value measurements.

 

See Note 3 foradditional information.

 

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***CoffeeBrewing Equipment and Service***

 

The Company recordsexpenses related to coffee brewing equipment provided to customers in cost ofgoods sold.  These costs includedepreciation on capitalized equipment and the cost of servicing that equipment(including service employees’ salaries, cost of transportation and the cost ofsupplies and parts).  Cost of coffeebrewing equipment and service included in the accompanying financial statementsfor the fiscal quarters ended September 30, 2009 and 2008, is $5.5 millionand $2.2 million, respectively.  TheCompany capitalized coffee brewing equipment in the amounts of $4.2 million and$2.1 million during the three months ended September 30, 2009 and 2008,respectively.  Depreciation expenserelated to capitalized coffee brewing equipment reported as cost of goods soldwas $1.2 million and $0.1 million, in the fiscal quarters ended September 30,2009 and 2008, respectively.

 

***Revenue Recognition***

 

Most products are soldand delivered to the Company’s customers at their places of business by theCompany’s route sales employees. Revenue is recognized at the time the Company’ssales representatives physically deliver products to customers and title passesor upon acceptance by the customer when shipped by third party delivery.

 

In connection with theacquisition of the DSD Coffee Business described in Note 2, the Company enteredinto an agreement with Sara Lee Corporation (“Sara Lee”) pursuant to which theCompany performs co-packing services for Sara Lee as Sara Lee’s agent. TheCompany recognizes revenue from this arrangement on a net basis, net of directcosts of revenue. As of September 30, 2009, the Company had $6.1 millionof receivables from Sara Lee related to this arrangement, which are included in“other receivables” (see Note 4).

 

***Net Income (Loss) Per Common Share***

 

Basic earnings (loss)per share (“EPS”) is computed by dividing net income (loss) by the weightedaverage common shares outstanding, including unvested share payment awards thatcontain rights to receive non-forfeitable dividends but excluding unallocatedshares held by the Company’s Employee Stock Ownership Plan. Diluted EPSincludes the effect of any potential shares outstanding, which for the Companyconsists of dilutive stock options. The (see Note 10) dilutive effect of stockoptions is calculated using the treasury stock method with an offset fromexpected proceeds upon exercise of the stock options and unrecognizedcompensation expense. For the three months ended September 30, 2009 and2008 the Company had no dilutive shares. Accordingly, the accompanyingunaudited consolidated financial statements present only basic EPS.

 

Effective July 1,2009, the Company began using the “Two-Class Method” to compute EPS.  The Two-Class Method considersrestricted stock with a right to receive non-forfeitable dividends asparticipating securities and is included in the calculation of EPS.  The effect for the three months ended September 30,2009 and 2008 was not material.

 

***Dividends Declared***

 

The following dividendswere declared in the first quarter of fiscal 2010 on the date indicated (inthousands, except per share amounts):

 
| ** **            | ** ** | ** **            | ** ** | **Dividend amount** | ** ** |
|-----------------------|------------|-----------------------|------------|---------------------|------------|
| **Record date**       | ** ** | **Payment date**      | ** ** | **Total**           | ** ** | **Per share** | ** ** |
|                  |       |                  |       |                |       |   |   |
| October 23, 2009 |       | November 9, 2009 |       | $                   | 1,855      |   | $ | 0.115 |   |
|                       |            |                       |            |                     |            |  |  |  |  |

 

***Impairment of Goodwill and Intangible Assets***

 

The Company performs anannual goodwill and indefinite-lived intangible assets impairment test as of June 30of each fiscal year.  Goodwill and otherindefinite lived intangible assets are not amortized but instead are reviewedfor 

 

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impairment annually andon an interim basis if events or changes in circumstances between annual testsindicate that an asset might be impaired. Indefinite lived intangible assetsare tested for impairment by comparing their fair values to their carryingvalues. Testing for impairment of goodwill is a two-step process. The firststep requires the Company to compare the fair value of its reporting units tothe carrying value of the net assets of the respective reporting units,including goodwill. If the fair value of the reporting unit is less than thecarrying value, goodwill of the reporting unit is potentially impaired and the Companythen completes step two to measure the impairment loss, if any. The second steprequires the calculation of the implied fair value of goodwill by deducting thefair value of all tangible and intangible net assets of the reporting unit fromthe fair value of the reporting unit. If the implied fair value of goodwill isless than the carrying amount of goodwill, an impairment loss is recognizedequal to the difference.  In addition toan annual test, goodwill and indefinite lived intangible assets must also betested on an interim basis if events or circumstances indicate that theestimated fair value of such assets has decreased below their carrying value.There were no such events or circumstances during the fiscal quarter ended September 30,2009.

 

***RecentlyAdopted Accounting Standards***

 

Effective July 1,2009, the FASB issued SFAS No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162” (“SFAS No. 168”). Under SFAS No. 168,the historical GAAP hierarchy was eliminated and the Accounting StandardsCodification (“ASC”) became the single official source of authoritative,non-governmental GAAP, other than guidance issued by the SEC. All otherliterature became non-authoritative. SFAS No. 168 became effective forfinancial statements issued for interim and annual periods ending after September 15,2009. It has been codified within ASC 105, “Generally Accepted AccountingPrinciples” (“Topic 105”). The Company adopted Topic 105 on July 1, 2009.Since Topic 105 does not change GAAP, the standard did not impact the Company’sfinancial statements.

 

In December 2008,the FASB issued FSP SFAS 132(R)-1, “Employers’ Disclosures about PostretirementBenefit Plan Assets” (“FSP SFAS 132(R)-1”). FSP SFAS 132(R)-1 amends SFAS No. 132(R),“Employer’s Disclosures about Pensions and Other Postretirement Benefits,” torequire additional disclosures about assets held in an employer’s definedbenefit pension or other postretirement plan. FSP SFAS 132(R)-1 is effectivefor fiscal years ending after December 15, 2009 and is effective for theCompany in fiscal 2010. FSP SFAS 132(R)-1 was codified within Topic 715 “Compensation-RetirementBenefits.”

 

In June 2008, theFASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Grantedin Share Based Payment Transactions Are Participating Securities” (“FSP No. EITF03-6-1”). FSP No. EITF 03-6-1 clarifies that share based payment awardsthat entitle their holders to receive non-forfeitable dividends before vestingshould be considered participating securities and included in the calculationof basic EPS. The Company adopted FSP No. EITF 03-06-1 on July 1,2009.  Adoption of the standard did nothave a material impact on the Company’s consolidated financial statements. FSP No. EITF03-6-1 was codified within ASC 260, “Earnings Per Share.”

 

In April 2008, theFASB issued FSP No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill and Other Intangible Assets.” The Companyadopted FSP No. FAS 142-3 on July 1, 2009 on a prospectivebasis.  Adoption of the standard did nothave a material impact on the Company’s consolidated financial statements. FSP No. FAS142-3 was codified within ASC 275, “Risks and Uncertainties”, and ASC 350, “Intangibles-Goodwilland Other.”

 

In December 2007,the FASB issued SFAS No. 141 (Revised), “Business Combinations” (“SFAS141(R)”), replacing SFAS No. 141, “Business Combinations” (“SFAS 141”),and SFAS No. 160, “Noncontrolling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) retainsthe fundamental requirements of SFAS 141, broadens its scope by applying theacquisition method to all transactions and other events in which one entityobtains control over one or more other businesses, and requires, among otherthings, that assets acquired and liabilities assumed be measured at fair value asof the acquisition date, that liabilities related to contingent considerationsbe recognized at the acquisition date and re-measured at fair value in eachsubsequent reporting period, that acquisition related costs be expensed asincurred, and that income be recognized if the fair value of the net assetsacquired exceeds the fair value of the consideration transferred. SFAS 160establishes accounting and reporting standards for noncontrolling interests(i.e., minority interests) in a subsidiary, including changes in a parent’sownership interest in a subsidiary and requires, among other things, thatnoncontrolling interests in subsidiaries be classified as a separate componentof equity. Except for the presentation and disclosure requirements of SFAS 160,which are to be applied retrospectively for all periods presented, SFAS 141(R) andSFAS 

 

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160 are to be appliedprospectively in financial statements issued for fiscal years beginning after December 15,2008. SFAS 141(R) and SFAS 160 were effective for the Company beginning July 1,2009.  Although the accounting on futuretransactions is expected to be impacted, the Company did not have any materialimpact to its historical financial statements from the adoption of SFAS 141(R) andSFAS 160.

 

Additionally, forbusiness combinations for which the acquisition date occurs prior to theeffective date of SFAS 141(R), the acquirer is required to apply therequirements of ASC 740, “Income Taxes,” as amended by SFAS 141(R),prospectively. After the effective date of SFAS 141(R), changes in thevaluation allowance for acquired deferred tax assets and dispositions ofuncertain income tax positions must be recognized as an adjustment to incometax expense, rather than through goodwill. The impact of the adoption of SFAS141(R) on the Company’s consolidated financial statements will largely bedependent on the size and nature of the business combinations completed after July 1,2009. SFAS 141(R) was codified within Topic 805, “BusinessCombinations” (“Topic 805”).

 

In April 2009, theFASB issued FSP No. 141R-1 “Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies” (“FSP No. 141R-1”).FSP No. 141R-1 amends the provisions in SFAS 141(R) for the initialrecognition and measurement, subsequent measurement and accounting, anddisclosures for assets and liabilities arising from contingencies in businesscombinations. FSP No. 141R-1 eliminates the distinction betweencontractual and non-contractual contingencies, including the initialrecognition and measurement criteria in SFAS 141(R), and instead carriesforward most of the provisions in SFAS 141(R) for acquired contingencies.FSP No. 141R-1 is effective for contingent assets and contingentliabilities acquired in business combinations for which the acquisition date ison or after the beginning of the first annual reporting period beginning on orafter December 15, 2008. The Company adopted FSP141R-1 on July 1,2009.  Adoption of the standard did nothave a material impact on the Company’s consolidated financial statements. FSP No. 141R-1was codified within Topic 805.

 

In April 2009, theFASB issued FSP No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS No. 107-1and APB No. 28-1”). FSP FAS No. 107-1 and APB No. 28-1 amendsSFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” torequire disclosures about the fair value of financial instruments for interimreporting periods ending after June 15, 2009. The Company adopted FSP FAS No. 107-1and APB No. 28-1 on July 1, 2009. Adoption of the standards did not have an impact on the Company’sfinancial statement disclosures.  FSP FASNo. 107-1 and APB No. 28-1 were codified within ASC 825, “FinancialInstruments.”

 

***NewAccounting Pronouncements***

 

In June 2008, theFASB released a proposed SFAS, “Disclosure of Certain Loss Contingencies, anamendment of FASB Statements No. 5 and 141)” (the “Proposed Statement”),for a comment period that ended during August 2008. The Proposed Statementwould (a) expand the population of loss contingencies that are required tobe disclosed, (b) require disclosure of specific quantitative andqualitative information about those loss contingencies, (c) require atabular reconciliation of recognized loss contingencies and (d) provide anexemption from disclosing certain required information if disclosing thatinformation would be prejudicial to an entity’s position in a dispute. TheProposed Statement would be effective for financial statements issued forfiscal years ending after December 15, 2008, and for interim and annualperiods in subsequent fiscal years. When and if the Proposed Statement isapproved in final form by the FASB, the Company will evaluate whether theadoption of the Proposed Statement will have any material impact on itsfinancial position or results of operations. Following the effective date ofthe ASC, SFAS No. 5 was codified within Topic 450, “Contingencies.”

 

In August 2009, theFASB issued ASU No. 2009-5, which amends ASC 820, “Fair Value Measurementsand Disclosures” (“Topic 820”) as it relates to the fair value measurement ofliabilities. ASU No. 2009-5 provides clarification that in circumstancesin which a quoted price in an active market for the identical liability is notavailable, an entity is required to measure fair value utilizing one or more ofthe following techniques: (1) a valuation technique that uses the quotedmarket price of an identical liability or similar liabilities when traded asassets; or (2) another valuation technique that is consistent with theprinciples of Topic 820, such as a present value technique. The Company willadopt ASU No. 2009-5 in the second quarter of fiscal 2010. The Company isevaluating the impact of ASU No. 2009-5 on the Company’s consolidatedfinancial statements.

 

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*** ***

**Note 2.**          Acquisition

** **

*Acquisitionof DSD Coffee Business*

 

Effective as of February 28,2009, the Company completed the acquisition from Sara Lee Corporation, aMaryland corporation (“Seller”), and Saramar, L.L.C., a Delaware limitedliability company (“Saramar” and collectively with Seller, “Seller Parties”) ofcertain assets used in connection with Seller Parties’ direct store deliverycoffee business in the United States (the “DSD Coffee Business”). The acquiredbusiness generally consists of manufacturing and selling coffee, tea andrelated products through a network of facilities and vehicles which wasacquired to complement and expand the Company’s previously existing operations.This business also includes the distribution, sale and service of brewed andliquid coffee equipment, as well as the right to distribute sauces anddressings to customers of the DSD Coffee Business. The results of operations ofthe DSD Coffee Business were included in the Company’s consolidated financialstatements beginning on March 1, 2009.

 

The assetspurchased include, among other things, the following: (i) a manufacturingplant in Houston, Texas, a spice plant in Oklahoma City, Oklahoma, and awarehouse in Indianapolis, Indiana; (ii) 64 leased branch facilities in 31states; (iii) a vehicle fleet consisting of 431 owned and leased vehicles;(iv) certain tangible personal property; (v) inventories of rawmaterials, work in process, finished goods and packaging; (vi) certaincontracts, permits, books and records; (vii) prepaid expenses relating tothe DSD Coffee Business; and (viii) all goodwill relating to the DSDCoffee Business. The Company also acquired Seller Parties’ rights (includingrelated goodwill) in the trademarks and trade names relating to the SUPERIOR®, MCGARVEY®,CAIN’S®, IRELAND®,JUSTIN LLOYD®, METROPOLITAN®,PREBICA®, WECHSLER®,WORLD’S FINEST® and CAFÉ ROYAL® brands.

 

Subject to certainpost-closing adjustments relating to the amount of consumable inventory andprepaid expenses at closing, and after giving effect to certain reimbursementobligations of the parties relating to accounting costs, IT carve-out costs,and transfer taxes and fees, as well as real and personal property tax andutility prorations, the amount paid to Seller was $45.6 million, whichconsisted of $16.1 million of Company cash and proceeds of a bank loan of$29.5 million. The Company paid approximately $2.7 million ofacquisition related expenses. At closing, the Company assumed 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. As of September 30, 2009, these liabilities are estimated to bea total of $2.0 million consisting of $1.3 million for costs related to exitingcertain acquired operations, $0.6 million for accrued vacation and $0.1 millionin other estimated liabilities. Seller Parties retained all liabilities thatwere not specifically assumed by the Company. The Company re-financed andreplaced certain leases relating to the DSD Coffee Business vehicles in thefourth quarter of fiscal 2009. Additionally, the Company assumed leaseliabilities for sixty-four branch facility leases with lease terms thatgenerally do not exceed three years.

 

In connection withthe closing, Seller Parties and the Company entered into certain operationalagreements, including trademark and formula license agreements, co-packagreements, a liquid coffee distribution agreement, a transition servicesagreement, and a green coffee and tea purchase agreement. One of the co-packagreements provides that Seller will manufacture branded products for theCompany for a period of three years. Under this agreement the Company hasagreed to purchase certain minimum product quantities from Seller subject tocertain permitted reductions. The transition services agreement provides thatSeller will perform a number of services for the Company on an interim basis,including distribution and warehousing of finished goods for up to six monthsand hosting, maintaining and supporting IT infrastructure and communications forup to eighteen months.

 

The accompanyingconsolidated financial statements do not include pro-forma historicalinformation, as if the results of the DSD Coffee Business had been includedfrom the beginning of the periods presented, since the use of forward-lookinginformation would be necessary in order to meaningfully present the effects ofthe acquisition. Forward-looking information, rather than historicalinformation, would be required since the DSD Coffee Business was operated aspart of a larger business within Seller and there will be a different operatingcost structure and different operations support under the Company’s ownership.Net revenue of the DSD Coffee Business for the eight months ended February 28,2009 (the effective date of the acquisition) was approximately$134 million, and approximately $228 million for the fiscal yearended June 30, 2008. Net revenue for the DSD Coffee Business for the threemonths ended September 30, 2009 was approximately $43.7 million.  However, the Company has not providedforward-looking information with respect to incremental costs and expenses tobe incurred because such information is not determinable.

 

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The acquisitionhas been accounted for as an asset purchase. The total purchase price has beenallocated to tangible and intangible assets based on their estimated fairvalues as of February 28, 2009 as determined by management based upon athird-party valuation. The purchase price allocation has not been finalized,since it is possible that certain adjustments may be made if additional factsor circumstances become known that impact the estimates. Revisions to the allocation,which may be significant, and relate primarily to exit activities, will bereported as changes to various assets and liabilities. The purchase priceallocation is expected to be finalized during fiscal 2010.

 

The followingtable summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition, based on the preliminarypurchase price allocation:

 
| **Fair Value of Assets Acquired**     | ** ** | ** ** | ** ** | **Estimated Useful  Life (years)** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------|------------|
| Inventory                             |       | $          | 16,437     |                               |       |   |
| Prepaid  expense                      |       | 1,138      |       |                               |       |
| Current  assets                       |       | 17,575     |       |                               |       |
| Vehicles                              |       | 1,044      |       | 5                                  |       |
| Machinery                             |       | 10,954     |       | 3-5                                |       |
| Property,  plant & equipment |       | 5,577      |       | 30                                 |       |
| Land                                  |       | 1,945      |       |                               |       |
| Fixed  assets                         |       | 19,520     |       |                               |       |
| Trademarks                            |       | 2,115      |       | indefinite                         |       |
| Customer  relationships               |       | 7,855      |       | 8                                  |       |
| Distribution  agreement               |       | 2,493      |       | 10                                 |       |
| Co-pack  agreement                    |       | 755        |       | 6                                  |       |
| Intangible  assets                    |       | 13,218     |       |                               |       |
| Total  assets acquired                |       | 50,313     |       |                               |       |
| Liabilities                           |       | (2,026     | )          |                               |       |
| Net  assets acquired                  |       | $          | 48,287     |                               |       |   |

 

Intangible assetsconsist of trademarks, customer relationships, and service agreements with agross carrying value and accumulated amortization as of September 30, 2009of $13.2 million and $0.8 million, respectively. The accumulatedamortization represents aggregate amortization for the seven months ended September 30,2009 from February 28, 2009, the date of acquisition. Estimated aggregateamortization of intangible assets for each of the following five years based onthe estimated fair values of the intangible assets is expected to beapproximately $1.4 million.

 

**Note 3.**          Investments and Derivative Instruments

** **

The Company purchases various derivative instruments asinvestments or to create economic hedges of its interest rate risk andcommodity price risk. At September 30, 2009 and June 30, 2008,derivative instruments are not designated as accounting hedges. The fair valueof derivative instruments is based upon broker quotes. The Company recordsunrealized gains and losses on trading securities and changes in the marketvalue of certain coffee contracts meeting the definition of derivatives in “Other,net income (expense).”

 

The Company groups its assets andliabilities at fair value in three levels, based on the markets in which theassets and liabilities are traded and the reliability of the assumptions usedto determine fair value.  These levelsare:

 

·                  Level 1 — Valuation is based upon quoted prices foridentical instruments traded in active markets.

·                  Level 2 — Valuation is based upon quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-based valuationtechniques for which all significant assumptions are observable in the market.

·                  Level 3 — Valuation is generated from model-basedtechniques that use significant assumptions not observable in the market.  These unobservable assumptions reflectestimates of assumptions that market participants would use in pricing theasset or liability.  Valuation techniquesinclude use of option pricing models, discounted cash flow models and similartechniques.

 

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The Company’s preferredstock investments have been grouped as follows at September 30, 2009:

 
| **(In  thousands)** | ** ** | **Total**       | ** ** | **Level  1** | ** ** | **Level  2** | ** ** | **Level  3** | ** ** |
|---------------------|------------|-----------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **          | ** ** | **(Unaudited)** | ** ** |
| Preferred stock     |       | $               | 50,294     |         | $          | 16,030       |       | $            | 34,264     |   | $ | — |   |
|                     |            |                 |            |              |            |              |            |              |            |  |  |  |  |

 

Investments, consisting of marketable debt and equity securities,money market instruments and various derivative instruments, are held fortrading purposes and are stated at fair value. Investments are as follows:

 
| ** **                              | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-------------------|------------|
| **(In  thousands)**                     | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| ** **                              | ** ** | **(Unaudited)**        | ** ** | ** **        | ** ** |
| Trading securities at  fair value       |       |                   |       |              |       |
| Preferred Stock                         |       | $                      | 50,294     |              | $          | 42,466 |   |
| Futures, options and  other derivatives |       | 416                    |       | 460               |       |
|                                    |       | $                      | 50,710     |              | $          | 42,926 |   |

 

Gains and losses, both realized and unrealized, are included in “Other,net income (expense).”  Net realized andunrealized gains and losses are as follows:

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                          | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                           | ** ** |
| Net  realized gains                         |       | $                                         | 55         |   | $ | 19 |   |
| Net  unrealized gains (losses)              |       | 4,174                                     |       | (9,890 | ) |
| Net  realized and unrealized gains (losses) |       | $                                         | 4,229      |   | $ | (9,871 | ) |

 

The followingtable shows gross unrealized losses and fair value for those investments thatwere in an unrealized loss position as of September 30, 2009 and June 30,2009, aggregated by the length of time those investments have been in acontinuous loss position:

 
| ** **         | ** ** | **September 30, 2009 (Unaudited)** | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **Less than 12 Months**                 | ** ** | **Total** | ** ** |
| **(In thousands)** | ** ** | **Fair Value**                          | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** |
|               |       |                                    |       |   |   |   |   |   |   |
| Preferred Stock    |       | $                                       | 1,146      |   | $ | (16 | ) | $ | 22,195 |   | $ | (9,691 | ) |
|                    |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **June 30, 2009 (Unaudited)** | ** ** |
|--------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **Less than 12 Months**            | ** ** | **Total** | ** ** |
| **(In thousands)** | ** ** | **Fair Value**                     | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** | **Unrealized Loss** | ** ** |
|               |       |                               |       |   |   |   |   |   |   |
| Preferred Stock    |       | $                                  | 3,438      |   | $ | (714 | ) | $ | 26,009 |   | $ | (11,718 | ) |
|                    |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

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**Note 4.**          Accounts Receivable, net

** **
| ** **                       | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|------------------------|------------|-------------------|------------|
| **(In  thousands)**              | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| ** **                       | ** ** | **(Unaudited)**        | ** ** | ** **        | ** ** |
|                             | ** ** | ** **             | ** ** | ** **        | ** ** |
| Trade Receivables                |       | $                      | 38,254     |              | $          | 37,076 |   |
| Other receivables                |       | 6,078                  |       | 9,841             |       |
| Allowance for doubtful  accounts |       | (1,197                 | )          | (1,173            | )          |
|                             |       | $                      | 43,135     |              | $          | 45,744 |   |

 

**Note 5.**          Inventories

** **
| **September 30, 2009** | ** ** | **Processed**           | ** ** | **Unprocessed** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------|------------|-----------|------------|
| **(Unaudited)**                  | ** ** | **(In thousands)** | ** ** |
| Coffee                           |       | $                       | 20,435     |            | $          | 21,239    |       | $ | 41,674 |   |
| Allied products                  |       | 26,204                  |       | 3,833           |       | 30,037    |       |
| Coffee brewing  equipment        |       | 5,662                   |       | 1,901           |       | 7,563     |       |
|                             |       | $                       | 52,301     |            | $          | 26,973    |       | $ | 79,274 |   |

 
| **June 30, 2009** | ** ** | **Processed**           | ** ** | **Unprocessed** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------|------------|-----------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Coffee                      |       | $                       | 15,612     |            | $          | 19,816    |       | $ | 35,428 |   |
| Allied products             |       | 20,760                  |       | 4,686           |       | 25,446    |       |
| Coffee brewing  equipment   |       | 4,745                   |       | 3,342           |       | 8,087     |       |
|                        |       | $                       | 41,117     |            | $          | 27,844    |       | $ | 68,961 |   |

 

Inventories are valued at the lower of cost or market.  Costs of coffee and allied products aredetermined 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 fiscal year based on the inventorylevels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based onmanagement’s estimates of expected fiscal year-end inventory levels andcosts.  Because these estimates aresubject to many forces beyond management’s control, interim results are subjectto the final fiscal year-end LIFO inventory valuation.

** **

**Note 6. Employee Benefit Plans**

** **

The Company provides pension plans for most full time employees.Generally the plans provide benefits based on years of service and/or acombination of years of service and earnings. Retirees are also eligible formedical and life insurance benefits.

 

*Company Pension Plans*

* *

The Company has a contributory defined benefit plan for themajority of its employees not covered under a collective bargaining agreement(Farmer Bros. Co. Plan) and non-contributory defined benefit pension plan forcertain hourly employees covered under a collective bargaining agreement(Brewmatic Plan).  The net periodicbenefit costs for the defined benefit plans were as follows:

 

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*Componentsof net periodic benefit cost*

 
| ** **                                    | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** |
| **(Unaudited)**                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **(In thousands)**     | ** ** |
| Service cost                                  |       | $                      | 1,097      |   | $ | 615 |   |
| Interest cost                                 |       | 1,527                  |       | 1,477 |   |
| Expected return on plan  assets               |       | (1,204                 | )          | (1,769 | ) |
| Amortization of net  (gain)/loss*             |       | 856                    |       | 145 |   |
| Amortization of prior  service cost/(credit)* |       | 41                     |       | 50 |   |
| Net periodic benefit  (credit) cost           |       | $                      | 2,317      |   | $ | 518 |   |

 

----

*  These amounts representthe estimated portion of the net (gain)/loss 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*

 
| ** **                         | ** ** | **Fiscal** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2009**   | ** ** | **2008** | ** ** |
| Discount rate                      |       | 6.25%      |       | 6.80% |   |
| 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 allocation of the plans.

 

**Note  7. Bank Loan**

** **

On March 2, 2009 the Company and its wholly owned subsidiary, CoffeeBean International, Inc. (“CBI”), as Borrowers, entered into a Loan andSecurity Agreement (the “Loan Agreement”), with Wachovia Bank, NationalAssociation, as Lender, providing for a $50 million senior secured revolvingcredit facility expiring in February 2012 to help finance the DSD CoffeeBusiness acquisition and for general corporate purposes.  The Loan Agreement contains a variety ofrestrictive covenants customary in an asset-based lending facility, including acash flow coverage requirement, and it places limits on capital expendituresand dividends.  All outstandingobligations under the Loan Agreement are collateralized by perfected securityinterests in the assets of the Company and CBI, excluding the preferred stockheld in investment accounts.  Therevolving line provides for advances of 85% of eligible accounts receivable and65% of eligible inventory, as defined. The agreement has an unused commitment fee of 0.375%.  The interest rate varies based upon line usage,borrowing base availability and market conditions.  The range is PRIME + 0.25% to PRIME + 0.75%or LIBOR + 2.25% to LIBOR + 2.75%, subject to a minimum for LIBOR basedadvances of 3.25%. The interest rate was 3.5% at September 30, 2009.  Due to the short-term nature of the creditfacility and the variable interest rate, fair value of the balance outstandingapproximates carrying value.

 

The Company is incompliance with all restrictive covenants and limitations as of September 30,2009 and anticipates being in compliance with all restrictive covenants for theforeseeable future.  On September 30,2009, borrowings under the credit facility were $8.1 million and the Companyhad excess availability under the credit facility of $34.8 million.

 

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**Note  8. Stock-BasedCompensation**

** **

***StockOptions***

 

No stock options were granted during the three monthsended September 30, 2009 and 2008.

 

The following table summarizes stock option activityfor three months ended September 30, 2009:

 
| **(Unaudited)**                                       | ** ** | **Number  of Shares  Underlying********Stock Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Fair Value** | ** ** | **Weighted  Average  Remaining  Life  (Years)** | ** ** | **Aggregate  Intrinsic Value********(In thousands)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|
| **Balance,  June 30, 2009**                      |       | 239,000                                                |       | $                                     | 22.22      |                              | $          | 6.41                                            |       | 6.1                                                  |       | $ | 60 |   |
| Granted                                               |       | —                                                 |       |                                  |       |                              |       |                                            |       |                                                 |       |
| Cancelled/forfeited                                   |       | (15,668                                                | )          | $                                     | 22.52      |                              | $          | 6.26                                            |       |                                                 |       | $ | 0 |   |
| **Balance,  September 30, 2009**                 |       | 223,332                                                |       | $                                     | 22.27      |                              | $          | 6.55                                            |       | 5.8                                                  |       | $ | 0 |   |
| Vested and exercisable,  September 30, 2009      |       | 39,824                                                 |       | $                                     | 22.66      |                              | $          | 6.16                                            |       | 5.4                                                  |       | $ | 0 |   |
| Vested and expected to  vest, September 30, 2009 |       | 223,332                                                |       | $                                     | 22.27      |                              | $          | 6.55                                            |       | 5.8                                                  |       | $ | 0 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on the Company’s closingstock price of $20.70 at September 30, 2009, representing the last tradingday of the quarter, which would have been received by award holders had allaward holders exercised their awards that were in-the-money as of thatdate.  As of September 30, 2009,there was approximately $0.9 million of unamortized compensation expenserelated to stock options.  No awardsvested during the three months ended September 30, 2009.  Compensation expense recognized in generaland administrative expenses for the three month period ended September 30,2009 and 2008 was $0.1 million and $63,000, respectively.

 

***Restricted Stoc****k*

 

Sharesof restricted stock vest at the end of three years from the grant date.Compensation expense is recognized on a straight-line basis over the serviceperiod based on the estimated fair value of the restricted stock. Compensationexpense recognized in general and administrative expenses for the three monthsended September 30, 2009 and 2008 was $0.1 million and $48,000,respectively.  No awards vested duringthe three months ended September 30, 2009. As of September 30, 2009, there was approximately $0.7 million ofunamortized compensation expense related to restricted stock.

 

The followingtable summarizes the status of the Company’s restricted stock as of September 30,2009:

 
| **(Unaudited)**                                  | ** ** | **Shares  Awarded** | ** ** | **Weighted  Average********Fair Value** | ** ** | **Weighted  Average  Remaining Life********(in years)** | ** ** | **Aggregate  Intrinsic  Value******** (in thousands)** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|-----------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Unvested  at June 30, 2009**              |       | 48,169              |       | $                                       | 22.19      |                                                    | 2.1        |                                                        | $          | 1,072 |   |
| Cancelled/forfeited                              |       | (2,500              | )          |                                    |       |                                                    |       | $                                                           | 52         |   |
| **Unvested  at September 30, 2009**         |       | 45,669              |       |                                    |       | 1.8                                                     |       | $                                                           | 945        |   |
| Vested and exercisable,  September 30, 2009 |       | —              |       |                                    |       |                                                    |       |                                                        |       |
| Expected to vest,  September 30, 2009       |       | 45,669              |       | $                                       | 22.22      |                                                    | 1.8        |                                                        | $          | 945 |   |

 

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**Note 9.  Income Taxes**

** **

Considerationof whether a valuation allowance should be recorded against deferred tax assetsis based on the likelihood that the benefits of the deferred tax assets will orwill not ultimately be realized in future periods. In making such assessment,significant weight is to be given to evidence that can be objectively verifiedsuch as recent operating results and less consideration is to be given to lessobjective indicators such as future earnings projections. In the fourth quarterof fiscal 2009, the Company evaluated its deferred tax assets in accordancewith these requirements.

 

Asignificant negative factor was the Company’s three year historical cumulativeloss as of the end of the fourth quarter of fiscal 2009, compared to the sizeof deferred tax assets. The deferred tax assets in fiscal 2009 increased to$41.4 million as compared to $21.6 million in fiscal 2008. This increaseprimarily resulted from decreased pension asset values which in turn createdincreased pension plan contribution obligations. These considerationsoutweighed the Company’s ability to rely on projections of future taxableincome and future appreciation of pension assets as of June 30, 2009.

 

Accordingly,a valuation allowance of $33.3 million was recorded to offset this deferred taxasset.  Of this amount, $19.7 million wasrecorded as tax expense and $13.6 million was recorded as a reduction in othercomprehensive income.

 

At September 30,2009, the Company cannot conclude that it is more likely than not that thedeferred tax assets will be realized due to the recent history of losses. Asummary of the income tax provision recorded in the first quarter of fiscal2010 and 2009 is as follows:

 
| ** **                                      | ** ** | **Three months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| **(Unaudited)**                                 | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(In thousands)**                   | ** ** |
| Income  (loss) before income tax provision      |       | $                                    | 2,595      |   | $ | (12,581 | ) |
|                                            |       |                                 |       |   |   |
| Income  tax provision at federal statutory rate |       | $                                    | 882        |   | $ | (4,278 | ) |
| State  income taxes and credits                 |       | 131                                  |       | (755 | ) |
| Dividends  received deduction                   |       | (379                                 | )          | (1,191 | ) |
| Valuation  allowance                            |       | (445                                 | )          | — |   |
| Other  permanent items                          |       | 207                                  |       | (272 | ) |
| Income  tax provision                           |       | $                                    | 396        |   | $ | (6,496 | ) |

 

As of September 30, 2009 and June 30, 2009, the Companyhad not recognized the following tax benefits in its consolidated financialstatements:

 
| ** **                                                                                        | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| **(In thousands)**                                                                                | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| ** **                                                                                        | ** ** | **(Unaudited)**        | ** ** | ** **        | ** ** |
| Total unrecognized tax  benefits*                                                                 |       | $                      | 4,382      |              | $          | 4,382 |   |
| Unrecognized tax  benefits that would affect the Company’s effective tax rate if recognized* |       | $                      | 4,117      |              | $          | 4,117 |   |

 

----

| * Excluding interest  and penalties |
|-------------------------------------|

 

Californiais currently conducting a state examination of the Company’s open tax returnyears.  The Company believes it isreasonably possible that a portion of its total unrecognized tax benefits willdecrease in the next twelve months upon the conclusion of this examination, andother potential state and federal examinations. However, it is premature to assess the range of the reasonably possiblechanges to the Company’s unrecognized tax benefits.

 

**Note 10.  Net income (loss) per Share**

** **

The followingtable sets forth the calculation of basic and diluted net income (loss) pershare:

 
| ** **                                                          | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(In thousands, except per share data)**                           | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**                      | ** ** |
|                                                                |       |                                 |       |   |   |
| Net income (loss) attributable to common  stockholders - basic      |       | $                                    | 2,199      |   | $ | (6,086 | ) |
| Effect of dilutive securities:                                      |       |                                 |       |   |   |
| Net income (loss) attributable to  unvested restricted stockholders |       | —                               |       | — |   |
|                                                                |       |                                 |       |   |   |
| Total net income (loss)                                             |       | $                                    | 2,199      |   | $ | (6,085 | ) |
|                                                                |       |                                 |       |   |   |
| Weighted average common shares  outstanding - basic                 |       | 14,749                               |       | 14,404 |   |
| Effect of dilutive securities:                                      |       |                                 |       |   |   |
| Shares issuable under stock options and  restricted stock           |       | —                               |       | — |   |
|                                                                |       |                                 |       |   |   |
| Weighted average common shares  outstanding - diluted               |       | 14,749                               |       | 14,404 |   |
|                                                                |       |                                 |       |   |   |
| Basic and diluted net income (loss) per  common share               |       | $                                    | 0.15       |   | $ | (0.42 | ) |

 

Effective July 1, 2009,the Company began using the “Two-Class Method” to compute EPS since the Companyawards restricted stock with a right to receive non-forfeitable dividends andsince such awards are considered participating securities.  The Company computed EPS using the Two-Class Method for all periodspresented. For the three months ended September 30, 2009, the undistributedincome allocated to unvested restricted stock was not material.  For the three months ended September 30,2008, the Company incurred net loss and, therefore, the treasury stock methodwas used to compute EPS.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

** **

**Forward-LookingStatements**

 

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. We intend these forward-looking statements to speak only at the time ofthis report and do not undertake to update or revise these statements as moreinformation becomes available except as required under federal securities lawsand the rules and regulations of the SEC. Factors that could cause actual results to differ materially from thosein forward-looking statements include, but are not limited to, fluctuations inavailability and cost of green coffee, competition, organizational changes, ourability to successfully integrate the CBI and DSD Coffee Business acquisitions,the impact of a weaker economy, business conditions in the coffee industry andfood industry in general, our continued success in attracting new customers,variances from budgeted sales mix and growth rates, weather and special orunusual events, and changes in the quality or dividend stream of third parties’securities and other investment vehicles in which we have invested our assets,as well as other risks described in this report, and other factors describedfrom time to time in our filings with the SEC.

 

**Liquidity and Capital Resources**

** **

*CreditFacility*

 

On March 2, 2009 we entered into aLoan and Security Agreement (the “Loan Agreement”), with Wachovia Bank,National Association, as Lender, providing for a $50 million senior securedrevolving credit facility expiring in February 2012 to help finance theDSD Coffee Business acquisition and for general corporate purposes. The LoanAgreement contains a variety of restrictive covenants customary in an assetbased lending facility, including a fixed charge coverage requirement, and itplaces limits on capital expenditures and dividends. The Loan Agreement allowsus to pay dividends at the current rate, subject to certain cash flow andliquidity requirements.

 

All outstanding obligations under the LoanAgreement are collateralized by perfected security interests in our assets,excluding the preferred stock held in investment accounts. The revolving lineprovides for advances of 85% of eligible accounts receivable and 65% ofeligible inventory, as defined. The Loan Agreement has an unused commitment feeof 0.375%. The interest rate varies based upon line usage, borrowing baseavailability and market conditions. The range is PRIME + 0.25% to PRIME + 0.75%or LIBOR + 2.25% to LIBOR + 2.75%, subject to a minimum for LIBOR basedadvances of 3.25%. The interest rate was 3.5% at September 30, 2009.  Due to the short-term nature of the creditfacility and the variable interest rate, fair value of the balance outstandingapproximates carrying value.

 

We are in compliance with all restrictivecovenants and limitations as of September 30, 2009 and anticipate being incompliance with all restrictive covenants for the foreseeable future. On September 30,2009 borrowings under the credit facility were $8.1 million and we had excessavailability under the credit facility of $34.8 million.  As of October 31, 2009, approximately$12.3 million was outstanding under this credit facility.

 

*Liquidity*

 

Duringthe first quarter of fiscal 2010 we continued to finalize our planning andbegin the integration of the DSD Coffee Business into our existingoperations.  This is a broad based effortthat is expected to include SKU optimization, branch and route consolidation,conversion to the Company’s IT systems, including implementation of our mobilesales software across the DSD Coffee Business sales network, and supply chainand manufacturing streamlining.  Wecurrently estimate that integration expenses during fiscal 2010 will beapproximately $13.0 million, of which approximately $5.0 million is expected tobe capitalized.  During fiscal 2010 weexpect to incur approximately $6.0 million in expenditures associated with the

 

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installation of two roasters and other productionequipment at our Torrance facility and expenditures to replace normal wear andtear of coffee brewing equipment, vehicles and machinery and equipment.  Of these planned expenditures, we incurred approximately $8.6 million duringthe fiscal quarter ended September 30, 2009.  This included $0.5 million for vehicles, $6.8million for machinery and equipment including machinery and equipment for theDSD Coffee Business.  Approximately $4.0million of the total capital expenditures during the quarter ended September 30,2009 was associated with the integration of the DSD Coffee Business.

 

Asdescribed above, we maintain a $50 million senior secured revolving line ofcredit with Wachovia Bank.  Although weexpect cost reductions and other positive synergies from integrating the DSDCoffee Business with our operations, the timing of these improvements isuncertain.  We believe this creditfacility, in addition to our other liquid assets, provides sufficient capitalresources and flexibility to allow us to make investments in the DSD CoffeeBusiness, fund integration expenses, meet necessary working capitalrequirements and implement our business plan without relying solely on cashflows from operations.

 

Our working capital is composed of thefollowing:

 
| ** **                  | ** ** | **As of September 30,** | ** ** | **As of June 30,** | ** ** |
|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| **(In thousands)**          | ** ** | **2009**                     | ** ** | **2009**                | ** ** |
| ** **                  | ** ** | **(Unaudited)**              | ** ** | ** **              | ** ** |
| Current assets              |       | $                            | 181,564    |                    | $          | 186,546 |   |
| Current  liabilities        |       | 69,746                       |       | 76,457                  |       |
| Working capital             |       | $                            | 111,818    |                    | $          | 110,089 |   |
|                        |       |                         |       |                    |       |
| Capital  expenditures       |       | $                            | 8,613      |                    | $          | 38,901 |   |
| Purchase of business        |       | $                            | —     |                    | $          | 48,287 |   |
| Dividends paid  and payable |       | $                            | 1,855      |                    | $          | 6,631 |   |

 

As of September 30, 2009 we had nomaterial commitments for capital expenditures other than those described above.

 

**Results of Operations**

** **

Our net sales in the first quarter offiscal 2010 increased $45.6 million, or 69%, to $112.1 million as compared to$66.5 million in the first quarter of fiscal 2009.  This increase is primarily due to theaddition of $43.7 million in net sales from the DSD Coffee Business and a $2.7million increase in net sales from CBI. Total combined unit sales for the first quarter of fiscal 2010 increased62% from the first quarter of fiscal 2009. Unit sales, excluding CBI, for the first quarter of fiscal 2010increased 70% from the first quarter of fiscal 2009.  This increase resulted primarily from theacquisition of the DSD Coffee Business, which has been included in ourconsolidated financial statements since March 1, 2009.

 

The acquisition of the DSD Coffee Businesshas added to our top line sales and our geographic reach.  Some of the new regions we now serve, forexample in Michigan, continue to experience more negative economic conditionsthan in our pre-acquisition service area. We expect the ongoing weakness in the economy and reduced consumerspending will continue to impact our sales through the remainder of fiscal2010.

 

Gross profit in the first quarter offiscal 2010 increased $23.3 million, or 75%, to $54.3 million, as compared to$31.0 million in the first quarter of fiscal 2009.  Gross margin increased to 48% in the firstquarter of fiscal 2010 from 47% in the first quarter of fiscal 2009.  Approximately 93% of this increase is fromthe addition of the DSD Coffee Business and 6% of this increase is fromCBI.  Additionally, total coffee brewingequipment and service costs in the first quarter of fiscal 2010 was $5.5million as compared to $2.2 million in the first quarter of fiscal 2009.

 

In the first quarter of fiscal 2010,operating expenses increased $21.6 million, or 61%, to $56.8 million, or 51% ofsales, from $35.2 million, or 53% of sales, in the comparable quarter of fiscal2009.  Operating expenses in the firstquarter of fiscal 2010 include $18.3 million in operating expenses associatedwith the DSD Coffee Business.

 

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Our loss from operations in the firstquarter of fiscal 2010 was ($2.5) million as compared to ($4.3) million in the firstquarter of fiscal 2009.  Cash flowremains strong, with non-cash expenses for depreciation and amortization, andESOP and share-based compensation expense in the amount of $7.4 million in thefirst quarter of fiscal 2010, as compared to $4.7 million in the same quarterof the prior fiscal year.

 

Total other income for the first quarterof fiscal 2010 was $5.1 million as compared to total other expense of ($8.3)million in the first quarter of fiscal 2009. The improvement in total otherincome in the first quarter of fiscal 2010 is primarily the result of improvedresults from our preferred stock portfolio which recorded net realized andunrealized gains in the first quarter of fiscal 2010 as compared to netrealized and unrealized losses in the first quarter of fiscal 2009.

 

As a result of the forgoing factors, netincome in the first quarter of fiscal 2010 was $2.2 million, or $0.15 pershare, as compared to net loss of ($6.1) million, or ($0.42) per share, in thefirst quarter of fiscal 2009.

 

**Item 3. Qualitative and Quantitative Disclosures About Market Risk**

** **

**Interest Rate Risk**

 

We are exposed to market value riskarising from changes in interest rates on our securities portfolio. Ourportfolio of preferred securities has sometimes included investments inderivatives that provide a natural economic hedge of interest rate risk. Wereview the interest rate sensitivity of these securities and (a) may enterinto “short positions” in futures contracts on U.S. Treasury securities or (b) mayhold put options on such futures contracts in order to reduce the impact ofcertain interest rate changes on such preferred stocks. Specifically, weattempt to manage the risk arising from changes in the general level ofinterest rates. We do not transact in futures contracts or put options forspeculative purposes.

 

The number and type of futures and optionscontracts entered into depends on, among other items, the specific maturity andissuer redemption provisions for each preferred stock held, the slope of theU.S. Treasury yield curve, the expected volatility of U.S. Treasury yields, andthe costs of using futures and/or options.

 

As of September 30, 2009 there wereno futures or options contracts in place as an interest rate hedge.

 

The following table demonstrates the impactof varying interest rate changes based on the preferred stock holdings, futuresand options positions, and market yield and price relationships at September 30,2009. 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.

 
| ** **                          | ** ** | **Market  Value at September 30, 2009** | ** ** | **Changes  in Market** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **Preferred**                                | ** ** | **Futures  and**       | ** ** | **Total** | ** ** | **Value  of Total** | ** ** |
| **Interest Rate Changes** | ** ** | **Securities**                               | ** ** | **Options**            | ** ** | **Portfolio** | ** ** | **Portfolio** | ** ** |
| ** **                          | ** ** | **(In  thousands)**                          | ** ** |
| -150 basis  points                  |       | $                                            | 51,816     |                   | $          | — |   | $ | 51,816 |   | $ | 1,522 |   |
| -100 basis  points                  |       | $                                            | 51,566     |                   | $          | — |   | $ | 51,566 |   | $ | 1,272 |   |
| Unchanged                           |       | $                                            | 50,294     |                   | $          | — |   | $ | 50,294 |   | $ | — |   |
| +100 basis  points                  |       | $                                            | 47,700     |                   | $          | — |   | $ | 47,700 |   | $ | (2,594 | ) |
| +150 basis  points                  |       | $                                            | 46,165     |                   | $          | — |   | $ | 46,165 |   | $ | (4,129 | ) |

 

Our revolving line of credit with Wachovia Bank is ata variable rate. The interest rate varies based upon line usage, borrowing baseavailability and market conditions. The range is PRIME + 0.25% toPRIME + 0.75% or LIBOR + 2.25% to LIBOR + 2.75%, subjectto a minimum for LIBOR based advances of 3.25%. The balance outstanding as of September 30,2009 was $8.1 million and the interest rate at September 30, 2009 was3.5%.

 

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The following table demonstrates the impact ofinterest rate changes on our interest expense on the revolving credit facilityfor a full year based on the outstanding balance and interest rate as of September 30,2009:

 
| ** **                | ** ** | **Interest** | ** ** | **Annual Interest** | ** ** |
|---------------------------|------------|--------------|------------|---------------------|------------|
| **Interest Rate Changes** | ** ** | **Rate**     | ** ** | **Expense**         | ** ** |
| ** **                | ** ** | ** **   | ** ** | **(In thousands)**  | ** ** |
|                      |       |         | ** ** | ** **          | ** ** |
| -150 basis  points        |       | 2.00%        |       | $                   | 162        |   |
| -100 basis  points        |       | 2.50%        |       | $                   | 202        |   |
| Unchanged                 |       | 3.50%        |       | $                   | 283        |   |
| +100 basis  points        |       | 4.50%        |       | $                   | 364        |   |
| +150 basis  points        |       | 5.00%        |       | $                   | 405        |   |

 

**Commodity Price Risk**

** **

We are exposed tocommodity price risk arising from changes in the market price of green coffee.We price green coffeeinventory on the last-in,first-out (LIFO)basis. In the normal course of business we hold a large green coffee inventoryand enter into forward commodity purchase agreements with suppliers. We aresubject to price risk resulting from the volatility of green coffee prices. Due to competition andmarket conditions, volatileprice increases cannot always be passed on to our customers. Fromtime to time we may holda mix of futures contracts and options to help hedge against volatile greencoffee price decreases.Gains and losses on these derivative instruments are realized immediately in “Other, net(expense) income.”

 

On June 30, 2009 we had no open hedge derivativecontracts, and our entire exposure to commodity risk was in thepotential change ofour inventory value resulting from changes in the market priceof green coffee. Thefollowing table demonstrates the impact of changes in market value of coffeecost on market value of coffee forward purchase contracts:

 
| ** **              | ** ** | **Market  Value**   | ** ** | **Change in  Market Value** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Coffee**          | ** ** | **Futures &**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Coffee Cost  Change** | ** ** | **Inventory**       | ** ** | **Options**                 | ** ** | **Total** | ** ** | **Derivatives** | ** ** | **Inventory** | ** ** |
| ** **              | ** ** | **(In  thousands)** | ** ** |
| -10%                    |       | $                   | 38,000     |                        | $          | (623 | ) | $ | 37,377 |   | $ | (623 | ) | $ | (3,674 | ) |
| unchanged               |       | $                   | 41,674     |                        | $          | 416 |   | $ | 42,090 |   | $ | — |   | $ | — |   |
| 10%                     |       | $                   | 46,000     |                        | $          | 623 |   | $ | 46,623 |   | $ | 623 |   | $ | 4,326 |   |

 

**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 “ExchangeAct”), is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the SEC.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationwe are required to disclose in the reports that we file or submit under theExchange Act is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosures.

 

Asof September 30, 2009, 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 September 30, 2009, 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 September 30, 2009that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

Duringthe fiscal quarter ended March 31, 2009 the Company entered into atransition services agreement with Sara Lee to host, maintain and support theIT infrastructure of the DSD Coffee Business for up to eighteen months.  This change in our internal operations isreasonably likely to affect our internal controls.  IT support is critical to the ongoingoperation of the

 

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DSDCoffee Business during the transition period. Management’s ability to maintain our internal control over financialreporting depends significantly on the reliability of these systems for whichwe will rely on Sara Lee for up to eighteen months under the transitionservices agreement.

 

**Item 4T. Controls and Procedures**

** **

None.

 

**PART II - OTHER INFORMATION**

** **

**Item 6. Exhibits**

** **

**See Exhibit Index.**

 

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**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| **Name**                      | ** ** | **Title**               | ** ** | **Date**              |
|-------------------------------|------------|-------------------------|------------|-----------------------|
| ** **                    | ** ** | ** **              | ** ** | ** **            |
|                          |       | President and           |       |                  |
| /s/ ROGER M. LAVERTY III |       | Chief Executive Officer |       | November 9, 2009 |
| Roger M. Laverty III          |       | (principal executive    |       |                  |
|                          |       | officer)                |       |                  |
|                          |       |                    |       |                  |
|                          |       | Treasurer and           |       |                  |
| /s/ JOHN E. SIMMONS      |       | Chief Financial Officer |       | November 9, 2009 |
| John E. Simmons               |       | (principal financial    |       |                  |
|                          |       | officer)                |       |                  |

 

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**EXHIBIT INDEX**

 
| 3.1    |   | Certificate of  Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2009 filed with the SEC  on May 11, 2009 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Amended and  Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on  Form 8-K filed with the SEC on June 8, 2006 and incorporated herein  by reference).                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1    |   | Certificate of  Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on  Form 8-K filed with the SEC on March 17, 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 Current Report on 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 as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended December 31, 2008 filed with the SEC on February 10,  2009 and incorporated herein by reference).                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Amendment  No. 1 to Asset Purchase Agreement, dated February 27, 2009, by and  among Sara Lee Corporation, Saramar, LLC and Farmer Bros. Co.  (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K/A  for the fiscal year ended June 30, 2009 filed with the SEC on  September 15, 2009 and incorporated herein by reference).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3   |   | 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  Current Report on Form 8-K filed with the SEC on May 1, 2007 and  incorporated herein by reference).                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Loan and  Security Agreement, dated March 2, 2009, by and among Farmer Bros. Co.  and Coffee Bean International, Inc., as Borrowers, Coffee Bean  Holding Co., Inc., FBC Finance Company and SL Realty, LLC, as  Guarantors, and Wachovia Bank, National Association, as Lender (filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended December 31, 2008 filed with the SEC on February 10,  2009 and incorporated herein by reference).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Amendment  No. 1 to Loan and Security Agreement and Consent, dated March 2,  2009, by and among Farmer Bros. Co. and Coffee Bean  International, Inc., as Borrowers, Coffee Bean  Holding Co., Inc. and FBC Finance Company, as Guarantors, and  Wachovia Bank, National Association, as Lender (filed as Exhibit 10.5 to  the Company’s Annual Report on Form 10-K/A for the fiscal year ended  June 30, 2009 filed with the SEC on September 15, 2009 and  incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Amendment  No. 2 to Loan and Security Agreement and Consent, dated July 27,  2009, by and among Farmer Bros. Co. and Coffee Bean  International, Inc., as Borrowers, Coffee Bean  Holding Co., Inc. and FBC Finance Company, as Guarantors, and  Wachovia Bank, National Association, as Lender (filed herewith).                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Farmer  Bros. Co. Pension Plan for Salaried Employees (filed as  Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the  fiscal year ended June 30, 2007 filed with the SEC on September 13,  2007 and incorporated herein by reference).*                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Farmer  Bros. Co. 2005 Incentive Compensation Plan (Amended and Restated as of  December 31, 2008) (filed as Exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended December 31,  2008 filed with the SEC on February 10, 2009 and incorporated herein by  reference).*                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Farmer  Bros. Co. Amended and Restated Employee Stock Ownership Plan (filed as  exhibit 10.5 to the Company’s Annual Report on Form 10-K for the  fiscal year ended June 30, 2007 filed with the SEC on September 13,  2007 and incorporated herein by reference).*                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | ESOP Loan  Agreement No. 2, dated July 21, 2003 between Farmer Bros. Co.  and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee  Stock Ownership Plan (filed as Exhibit 10.6 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2008 filed  with the SEC on February 10, 2009 and incorporated herein by reference).                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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 Current Report on Form 8-K filed with the SEC on  June 8, 2006 and incorporated herein by reference).*                                                                                                                                                                                                                                                     |

 

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| 10.12  |   | Amendment  No. 1 to Employment Agreement, dated as of December 5, 2007, by and  between Farmer Bros. Co. and Roger M. Laverty III (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed  with the SEC on December 11, 2007 and incorporated herein by reference).*                                                                                                                                                  |
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| 10.13  |   | Amendment  No. 2 to Employment Agreement, dated as of December 31, 2008, by  and between Farmer Bros. Co. and Roger M. Laverty III (filed as  Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended December 31, 2008 filed with the SEC on February 10,  2009 and incorporated herein by reference).*                                                                                                 |
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| 10.14  |   | Employment  Agreement, dated as of March 3, 2008, by and between Farmer  Bros. Co. and Drew H. Webb (filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed with the SEC on March 7, 2008 and  incorporated herein by reference).*                                                                                                                                                                                           |
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| 10.15  |   | Amendment  No. 1 to Employment Agreement, dated as of December 31, 2008, by  and between Farmer Bros. Co. and Drew H. Webb (filed as  Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended December 31, 2008 filed with the SEC on  February 10, 2009 and incorporated herein by reference).*                                                                                                         |
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| 10.16  |   | Employment  Agreement, dated as of March 14, 2009, by and between Farmer  Bros. Co. and Heidi L. Modaro (filed as Exhibit 10.15 to the  Company’s Annual Report on Form 10-K/A for the fiscal year ended  June 30, 2009 filed with the SEC on September 15, 2009 and  incorporated herein by reference).*                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Consulting  Agreement, dated as of March 2, 2009, by and between Farmer Bros. Co.  and Michael J. King (filed as Exhibit 10.16 to the Company’s Annual  Report on Form 10-K/A for the fiscal year ended June 30, 2009 filed  with the SEC on September 15, 2009 and incorporated herein by  reference).*                                                                                                                                  |
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| 10.18  |   | 2007 Omnibus  Plan (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed with the SEC on August 29, 2007 and incorporated  herein by reference) *                                                                                                                                                                                                                                                                                    |
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| 10.19  |   | Form of  2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  with the SEC on February 26, 2008 and incorporated herein by  reference).*                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20  |   | Form of  2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock  Award Agreement (filed as Exhibit 10.2 to the Company’s Current Report  on Form 8-K filed with the SEC on February 26, 2008 and  incorporated herein by reference).*                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21  |   | Stock Ownership  Guidelines for Directors and Executive Officers (filed as Exhibit 10.3  to the Company’s Current Report on Form 8-K filed with the SEC on  February 26, 2008 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  Current Report on 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 10.3 to the Company’s Current Report  on 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  Current Report on Form 8-K filed with the SEC on December 11, 2007  and incorporated herein by reference) *                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.25  |   | Form of  Fiscal 2008 Award Letter under Farmer Bros. Co. 2005 Incentive  Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report  on Form 8-K filed with the SEC on October 3, 2008 and incorporated  herein by reference).*                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.26  |   | Amendment 2008-1  to the Farmer Bros. Co. Amended and Restated Employee Stock Ownership  Plan (filed as Exhibit 10.30 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2008 filed with the  SEC on February 10, 2009 and incorporated herein by reference).*                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.27  |   | Good Faith  Amendment to comply with Code Section 401(a)(31)(B) as amended by  the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) for  the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan  (filed as Exhibit 10.31 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2008 filed with the  SEC on February 10, 2009 and incorporated herein by reference).* |
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| 10.28  |   | Form of  Change in Control Severance Agreement for Executive Officers of the Company  (with schedule of executive officers attached) (filed herewith).*                                                                                                                                                                                                                                                                                                                 |

 

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| 10.29  |   | Form of  Indemnification Agreement for Directors and Officers of the Company, as  adopted on May 18, 2006 and as amended on December 31, 2008 (with  updated schedule of indemnitees attached) (filed as Exhibit 10.28 to the  Company’s Annual Report on Form 10-K/A for the fiscal year ended  June 30, 2009 filed with the SEC on September 15, 2009 and  incorporated herein by reference).* |
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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 14.1   |   | Farmer  Bros. Co. Code of Conduct and Ethics adopted on August 26, 2009  (filed as Exhibit 14.1 to the Company’s Current Report on Form 8-K  filed with the SEC on August 31, 2009 and incorporated herein by  reference).                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 or compensatory planor arrangement.

 

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