** **

** **

**UNITEDSTATES**

**SECURITIESAND 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 endedMarch 31, 2009**

** **

**OR**

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

** **

**For thetransition 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 by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x NO o

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  YES o NO o

 

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

 

**On April 30, 2009 the registrant had 16,075,080 shares outstandingof its common stock, par value $1.00 per share, which is the registrant’s onlyclass of common stock.**

 

 

 

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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)

 
| ** **                                                                                            | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                            | ** ** | **(Unaudited)**         | ** ** | ** **             | ** ** |
| ASSETS                                                                                                |       |                    |       |                   |       |
| Current Assets:                                                                                       |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                            |       | $                       | 24,985     |                   | $          | 9,973 |   |
| Short term  investments                                                                               |       | 39,036                  |       | 113,286                |       |
| Accounts and  notes receivable, net                                                                   |       | 40,052                  |       | 19,856                 |       |
| Inventories                                                                                           |       | 72,945                  |       | 54,253                 |       |
| Income tax  receivable                                                                                |       | 2,441                   |       | 2,879                  |       |
| Deferred income  taxes                                                                                |       | 7,485                   |       | 7,485                  |       |
| Prepaid expenses                                                                                      |       | 8,391                   |       | 10,018                 |       |
| Total current  assets                                                                                 |       | $                       | 195,335    |                   | $          | 217,750 |   |
|                                                                                                  |       |                    |       |                   |       |
| Property, plant  and equipment, net                                                                   |       | $                       | 107,124    |                   | $          | 69,065 |   |
| Goodwill and  other intangible assets, net                                                            |       | 28,839                  |       | 17,568                 |       |
| Other assets                                                                                          |       | 2,034                   |       | 746                    |       |
| Deferred income  taxes                                                                                |       | 15,333                  |       | 7,855                  |       |
| Total assets                                                                                          |       | $                       | 348,665    |                   | $          | 312,984 |   |
|                                                                                                  |       |                    |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                            |       |                    |       |                   |       |
| Current  liabilities:                                                                                 |       |                    |       |                   |       |
| Accounts payable                                                                                      |       | $                       | 23,161     |                   | $          | 12,169 |   |
| Bank loan  outstanding                                                                                |       | 26,219                  |       | —                 |       |
| Accrued payroll  expenses                                                                             |       | 11,981                  |       | 8,449                  |       |
| Other                                                                                                 |       | 9,279                   |       | 8,291                  |       |
| Total current  liabilities                                                                            |       | $                       | 70,640     |                   | $          | 28,909 |   |
| Accrued  postretirement benefits                                                                      |       | $                       | 17,530     |                   | $          | 17,620 |   |
| Other long term  liabilities                                                                          |       | 2,912                   |       | —                 |       |
| Total  liabilities                                                                                    |       | $                       | 91,082     |                   | $          | 46,529 |   |
| Commitments and  contingencies                                                                        |       | —                  |       | —                 |       |
| Stockholders’  equity:                                                                           |       |                    |       |                   |       |
| Common stock,  $1.00 par value, authorized 25,000,000 shares; 16,075,080 issued and  outstanding |       | $                       | 16,075     |                   | $          | 16,075 |   |
| Additional  paid-in capital                                                                           |       | 30,818                  |       | 30,612                 |       |
| Retained  earnings                                                                                    |       | 244,808                 |       | 257,693                |       |
| Unearned ESOP  shares                                                                                 |       | (34,722                 | )          | (38,529                | )          |
| Less accumulated  comprehensive income                                                                |       | 604                     |       | 604                    |       |
| Total  stockholders’ equity                                                                      |       | $                       | 257,583    |                   | $          | 266,455 |   |
| Total  liabilities and stockholders’ equity                                                      |       | $                       | 348,665    |                   | $          | 312,984 |   |

 

The accompanying notes are an integralpart of these financial statements.

 

2

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**FARMER BROS. CO.**

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

** **
| ** **                              | ** ** | **Three months ended March 31,** | ** ** | **Nine months ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                               |       | $                                     | 85,604     |                                 | $          | 67,276 |   | $ | 228,657 |   | $ | 199,576 |   |
| Cost of goods  sold                     |       | 42,946                                |       | 36,618                               |       | 117,730 |   | 106,015 |   |
| Gross profit                            |       | $                                     | 42,658     |                                 | $          | 30,658 |   | $ | 110,927 |   | $ | 93,561 |   |
| Selling expenses                        |       | 35,279                                |       | 25,191                               |       | 93,476 |   | 74,029 |   |
| General and  administrative expenses    |       | 8,985                                 |       | 6,471                                |       | 23,098 |   | 22,272 |   |
| Operating  expenses                     |       | $                                     | 44,264     |                                 | $          | 31,662 |   | $ | 116,574 |   | $ | 96,301 |   |
| Loss income from  operations            |       | $                                     | (1,606     | )                                    | $          | (1,004 | ) | $ | (5,647 | ) | $ | (2,740 | ) |
| Other income  (expense)                 |       |                                  |       |                                 |       |   |   |   |   |
| Dividend income                         |       | 752                                   |       | 965                                  |       | 2,701 |   | 3,042 |   |
| Interest income                         |       | 350                                   |       | 776                                  |       | 1,288 |   | 2,999 |   |
| Other, net  expense                     |       | (2,419                                | )          | (3,754                               | )          | (13,082 | ) | (11,816 | ) |
| Total other  expense                    |       | $                                     | (1,317     | )                                    | $          | (2,013 | ) | $ | (9,093 | ) | $ | (5,775 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |
| Loss before  taxes                      |       | (2,923                                | )          | (3,017                               | )          | (14,740 | ) | (8,515 | ) |
| Income tax  benefit                     |       | (1,486                                | )          | (307                                 | )          | (7,113 | ) | (4,624 | ) |
| Net loss                                |       | $                                     | (1,437     | )                                    | $          | (2,710 | ) | $ | (7,627 | ) | $ | (3,891 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |
| Basic and fully  diluted loss per share |       | $                                     | (0.10      | )                                    | $          | (0.19 | ) | $ | (0.53 | ) | $ | (0.27 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  shares outstanding    |       | 14,532,868                            |       | 14,313,274                           |       | 14,480,971 |   | 14,255,374 |   |
| Dividends declared  per share           |       | $                                     | 0.115      |                                 | $          | 0.115 |   | $ | 0.350 |   | $ | 0.345 |   |
|                                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integralpart of these financial statements.

 

3

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**FARMER BROS. CO.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)**

 
| ** **                                                                       | ** ** | **Nine months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                           |       |                                 |       |   |   |
| Net loss                                                                         |       | $                                    | (7,627     | ) | $ | (3,891 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                   |       | 12,410                               |       | 8,095 |   |
| Deferred income  taxes                                                           |       | (7,478                               | )          | — |   |
| Gain (loss) on  sales of assets                                                  |       | 340                                  |       | (47 | ) |
| ESOP and share  based compensation expense                                       |       | 4,013                                |       | 3,979 |   |
| Net loss on  investments                                                         |       | 13,543                               |       | 11,947 |   |
| Change in  operating assets and liabilities:                                     |       |                                 |       |   |   |
| Short term  investments                                                          |       | 60,706                               |       | 31,893 |   |
| Accounts and  notes receivable                                                   |       | (20,196                              | )          | (1,670 | ) |
| Inventories                                                                      |       | (2,254                               | )          | (14,144 | ) |
| Income tax  receivable                                                           |       | 438                                  |       | 4,490 |   |
| Goodwill and  intangibles                                                        |       | —                               |       | (755 | ) |
| Prepaid expenses                                                                 |       | 2,765                                |       | (3,225 | ) |
| Other assets                                                                     |       | (1,289                               | )          | — |   |
| Accounts payable                                                                 |       | 10,992                               |       | 1,697 |   |
| Bank loan                                                                        |       | 26,219                               |       | — |   |
| Accrued payroll  expenses and other liabilities                                  |       | 3,817                                |       | 1,878 |   |
| Accrued  postretirement benefits                                                 |       | (91                                  | )          | (8,597 | ) |
| Other long-term  liabilities                                                     |       | 2,913                                |       | — |   |
| Total  adjustments                                                               |       | 106,849                              |       | $ | 35,541 |   |
| Net cash  provided by operating activities                                       |       | 99,221                               |       | $ | 31,650 |   |
| Cash flows from  investing activities:                                           |       |                                 |       |   |   |
| Purchases of  property, plant and equipment                                      |       | (30,740                              | )          | (11,648 | ) |
| Purchase of DSD  Coffee Business                                                 |       | (48,286                              | )          | — |   |
| Proceeds from  sales of property, plant and equipment                            |       | 75                                   |       | 158 |   |
| Net cash used in  investing activities                                           |       | $                                    | (78,951    | ) | $ | (11,490 | ) |
| Cash flows from  financing activities:                                           |       |                                 |       |   |   |
| Dividends paid                                                                   |       | (5,257                               | )          | (4,819 | ) |
| Net cash used in  financing activities                                           |       | $                                    | (5,257     | ) | $ | (4,819 | ) |
| Net increase  (decrease) in cash and cash equivalents                            |       | 15,012                               |       | 15,341 |   |
| Cash and cash  equivalents at beginning of period                                |       | 9,973                                |       | 12,586 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                    | 24,985     |   | $ | 27,927 |   |

 

The accompanying notes are an integralpart of these financial statements.

 

4

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**Notes to Consolidated Financial Statements**

** **

**Note 1. Unaudited Financial Statements**

** **

*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 and nine month periods ended March 31,2009 are not necessarily indicative of the results that may be expected for thefiscal year ending June 30, 2009.

 

The accompanyingunaudited consolidated financial statements should be read in conjunction withthe consolidated financial statements and footnotes thereto included in theFarmer Bros. Co. annual report on Form 10-K for the fiscal year ended June 30,2008.

 

*CoffeeBrewing Equipment and Service*

 

The Company has reclassifiedits reporting for expenses related to coffee brewing equipment provided tocustomers.  These costs include the costof the equipment, depreciation on capitalized equipment and the cost ofservicing that equipment (including service employees’ salaries and the cost ofsupplies and parts).  Such costs arereported as cost of goods sold in the accompanying financial statements for thefiscal quarters ended March 31, 2009 and 2008, in the amounts of $2.5million and $5.1 million respectively, and for the nine month periods ended March 31,2009 and 2008, in the amounts of $7.1 million and $15.4 million,respectively.  In prior periods, thesecosts were reported as selling expenses. This change reduces reported grossprofit in the periods presented by these amounts, but has no impact on netincome, total assets, or cash flows in any period.

 

In the fourth quarter offiscal 2008 the Company began capitalizing certain of its coffee brewingequipment.  During the three month andnine month periods ended March 31, 2009, the Company capitalized coffeebrewing equipment in the amounts of $681,000 and $3,221,000, respectively.During the three month and nine month periods ended March 31, 2009, theCompany had depreciation expense related to capitalized coffee brewingequipment reported as cost of goods sold in the amounts of $842,000 and$1,132,000, respectively.

 

*NetLoss Per Share*

 

Net loss per share has been computed in accordance with Statementof Financial Accounting Standards No. 128, “*Earnings perShare,*” excluding unallocated shares held by the Company’s EmployeeStock Ownership Plan.  Net loss per shareis computed by dividing net loss by the number of weighted average sharesoutstanding.  For purposes of computingnet loss per share, all potentially dilutive instruments are anti-dilutivebecause of the net loss presented for all periods.

 

*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.

 

*Long-Lived Assets*

 

Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Under Statement of Financial Accounting StandardsNo. 142, “*Goodwill and Other Intangible Assets*”**(“SFAS 142”), goodwill and other indefinite-livedintangible assets are not amortized but instead are reviewed for impairmentannually and on an interim basis if events or changes in circumstances betweenannual tests indicate that an asset might be impaired.

 

*NewAccounting Pronouncements*

 

Effective January 1, 2009, the Company adopted Statement ofFinancial Accounting Standards No. 161, “*Disclosuresabout Derivative Instruments and Hedging Activities*” (“SFAS 161”)which amends and expands Statement of Financial Accounting Standards No. 133.  SFAS 161 requires tabular disclosure of thefair value of derivative instruments and their gains and losses.  This Statement also requires disclosureregarding the credit-risk related contingent features in derivative agreements,counterparty credit risk and strategies and objectives for using derivativeinstruments.

 

In April 2009, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) SFAS 107-1 and APB 28-1, *“Interim Disclosures About Fair Value of Financial Instruments”*(“FSP SFAS 107-1”). FSP SFAS 107-1 amends SFAS No. 107, *“Disclosures about Fair Values of Financial Instruments” and AccountingPrinciples Board Opinion No. 28, “Interim Financial Reporting,”*to require disclosures about fair value 

 

5

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of financial instruments in interim financial statements. FSP SFAS107-1 is effective for interim periods ending after June 15, 2009, withearly adoption permitted for periods ending after March 15, 2009. TheCompany will adopt the disclosure requirements of FSP SFAS 107-1 in the fourthquarter of fiscal 2009.

 

Effective July 1, 2008, the Company adopted Statement ofFinancial Accounting Standards No. 159, “*The FairValue for Financial Assets and Financial Liabilities — Including an Amendmentof FASB Statement No. 115*” (“SFAS 159”).  SFAS 159 allows companies the option toirrevocably elect, on a contract by contract basis, fair value as the initialand subsequent measurement for certain financial assets and financialliabilities.  The Company has not electedthe option for fair value measurement under SFAS 159 for any additionalfinancial assets or financial liabilities that were not previously recognizedat fair market value.

 

In April 2008, the FASB issued FSP SFAS No. 142-3,*“Determination of the Useful Life of Intangible Assets”* (“FSPSFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognizable intangible asset under SFAS 142. FSP SFAS 142-3 isintended to improve the consistency between the useful life of a recognizableintangible asset under SFAS 142 and the period of expected cash flows usedto measure the fair value of the asset under SFAS142. FSP SFAS 142-3 iseffective for fiscal years beginning after December 15, 2008. TheCompany will adopt FSP SFAS 142-3 beginning in the first quarter of fiscal2010. FSP SFAS 142-3 will change the Company’s determination of useful livesfor intangible assets on a prospective basis.

 

In December 2008, the FASB issued FSP SFAS 132(R)-1, *“Employers’ Disclosures about Postretirement Benefit Plan Assets”*(“FSPSFAS 132(R)-1”). FSP SFAS 132(R)-1 amends SFAS No. 132(R), *“Employer’s Disclosures about Pensions and Other PostretirementBenefits,”* to require additional disclosures about assets held in anemployer’s defined benefit pension or other postretirement plan. FSP SFAS132(R)-1 is effective for fiscal years ending after December 15, 2009,with early adoption permitted. The Company will adopt the disclosurerequirements of FSP SFAS 132(R)-1 beginning with our fiscal 2010 annual report.

 

In April 2009, the FASB issued FSP SFAS 157-4, *“Determining Fair Value When the Volume and Level of Activity for theAsset or Liability has Significantly Decreased and Identifying Transactionsthat are Not Orderly”*(“FSP SFAS 157-4”). FSP SFAS 157-4 providesadditional guidance for estimating the fair value of assets and liabilitieswithin the scope of SFAS No. 157 in markets that have experienced asignificant reduction in volume and activity in relation to normal activity.FSP SFAS 157-4 is effective for interim and annual periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009. The Company will adopt FSP SFAS 157-4 in the fourth quarter of fiscal2009. The Company does not expect the adoption will have a significant impacton its consolidated financial statements.

 

**Note 2. Acquisition**

** **

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 acquired business generally consists of manufacturingand selling coffee, tea and related products through a network of facilitiesand vehicles which was acquired to complement and expand the Company’spreviously existing operations.  Thisbusiness also includes the distribution, sale and service of brewed and liquidcoffee equipment.  The results ofoperations of the DSD Coffee Business are included in the Company’sconsolidated financial statements beginning on March 1, 2009.

 

The assets purchased include, among other things, thefollowing: (i) a manufacturing plant in Houston, Texas, a spice plant inOklahoma City, Oklahoma, and a warehouse in Indianapolis, Indiana; (ii) 64 leased branch facilities in 31 states; (iii) a vehicle fleet consistingof 431 owned and leased vehicles; (iv) certain tangible personal property;(v) inventories of raw materials, work in process, finished goods andpackaging; (vi) certain contracts, permits, books and records; (vii) prepaidexpenses relating to the DSD Coffee Business; and (viii) all goodwillrelating to the DSD Coffee Business.  The Company also acquired SellerParties’ rights (including related goodwill) in the trademarks and trade namesrelating to the SUPERIOR®, MCGARVEY®, CAIN’S®, IRELAND®, JUSTIN LLOYD®,METROPOLITAN®, PREBICA®, WECHSLER®, WORLD’S FINEST® and CAFÉ ROYAL® brands.

 

6

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Subjectto certain post-closing adjustments relating to the amount of consumableinventory and prepaid expenses at closing, and after giving effect to certainreimbursement obligations of the parties relating to accounting costs, ITcarve-out costs, and transfer taxes and fees, as well as real and personalproperty tax and utility prorations, the amount paid to Seller was $45.6million, which consisted of $16.1 million of Company cash and proceeds of abank loan of $29.5 million.  The Companypaid approximately$2.7 million of acquisition related expenses. Atclosing, the Company assumed certain liabilities, including obligations undercontracts, environmental liabilities with respect to the transferredfacilities, pension liabilities, advertising and trade promotion accruals, andaccrued vacation as of the closing for hired personnel. These liabilitiesare estimated to be $609,000 for accrued vacation and $95,000 in other estimatedliabilities. Seller Partiesretained all liabilities that were not specifically assumed by the Company.  The Company is currently negotiating there-finance of existing truck leases in order to replace the current financing.  This is expected to be completed in thefourth quarter of fiscal 2009.

 

The Company assumed lease liabilities for sixty-four warehouseleases with lease terms that generally do not exceed three years.  The Company’s future minimum warehouse lease paymentsunder all its warehouse leases, including these 64 warehouses, are as follows(In thousands):

 
| Three months ending June 30, 2009 |   | $     | 1,354  |   |
|----------------------------------------|--------|-------|--------|--------|
| 2010                                   |   | 5,015 |   |
| 2011                                   |   | 1,577 |   |
| 2012                                   |   | 940   |   |
| 2013                                   |   | 483   |   |
| 2014                                   |   | 257   |   |
| thereafter                             |   | 8     |   |
| Total                                  |   | $     | 9,634  |   |

 

Inconnection with the closing, Seller Parties and the Company entered intocertain operational agreements, including trademark and formula licenseagreements, co-pack agreements, a liquid coffee distribution agreement, atransition services agreement, and a green coffee and tea purchaseagreement.  One of the co-pack agreementsprovides that Seller will manufacture branded products for the Company for aperiod of three years.  Under thisagreement the Company has agreed to purchase certain minimum product quantitiesfrom Seller subject to certain permitted reductions.  The transition services agreement providesthat Seller will perform a number of services for the Company on an interimbasis, including distribution and warehousing of finished goods for up to sixmonths and hosting, maintaining and supporting IT infrastructure andcommunications for up to eighteen months.

 

The accompanying unaudited consolidated financial statements donot include pro-forma historical information, as if the results of the DSDCoffee Business had been included from the beginning of the periods presented,since the use of forward-looking information would be necessary in order tomeaningfully present the effects of the acquisition.  Forward-looking information, rather thanhistorical information, would be required since the DSD Coffee Business wasoperated as part of a larger business within Seller and there will be adifferent operating cost structure and different operations support under theCompany’s ownership.  Net revenue of theDSD Coffee Business for the eight months ended February 28, 2009 (theeffective date of the acquisition) was approximately $134 million, andapproximately $228 million for the fiscal year ended June 30, 2008.  However theCompany has not provided forward-looking information with respect toincremental costs and expenses to be incurred because such information is notdeterminable.

 

Theacquisition has been accounted for as an asset purchase.  The total purchase price has been allocatedto tangible and intangible assets based on their estimated fair values as of February 28,2009 as determined by management based upon a third-party valuation.  The purchase price allocation has not beenfinalized, since it is possible that certain refinements may be made if additionalfacts or circumstances become known that impact the estimates as of theacquisition date. Revisions to the allocation, which may be significant, willbe reported as changes to various assets and liabilities. The purchase priceallocation is expected to be further refined and finalized during fiscal 2010.The following table summarizes the estimated fair values of the assets acquiredand liabilities assumed at the date of acquisition, based on the preliminarypurchase price allocation (dollars in thousands):

 

7

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| **Preliminary Fair Value of Assets Acquired** | ** ** | **Estimated Useful Life (years)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| Inventory                                     |       | $                                 | 16,437     |   |   |   |
| Prepaid Expense                               |       | 1,138                             |       |   |   |
| Current assets                                |       | 17,575                            |       |   |   |
|                                          |       |                              |       |   |   |
| Vehicles                                      |       | 993                               |       | 5 |   |
| Machinery                                     |       | 10,838                            |       | 3-5 |   |
| Property, plant  and equipment                |       | 5,314                             |       | 30 |   |
| Land                                          |       | 1,849                             |       |   |   |
| Fixed assets                                  |       | 18,994                            |       |   |   |
|                                          |       |                              |       |   |   |
| Trademarks                                    |       | 2,010                             |       | indefinite |   |
| Customer  Relationships                       |       | 7,324                             |       | 8 |   |
| Distribution  Agreement                       |       | 2,370                             |       | 10 |   |
| Co-pack  Agreement                            |       | 718                               |       | 6 |   |
| Intangible  assets                            |       | 12,422                            |       |   |   |
|                                          |       |                              |       |   |   |
| Total assets  acquired                        |       | 48,991                            |       |   |   |
| Liabilities  assumed                          |       | (704                              | )          |   |   |
| Net assets  acquired                          |       | $                                 | 48,287     |   |   |   |

 

Intangible assets consistof trademarks, customer relationships, and service agreements with a grosscarrying value and accumulated amortization as of March 31, 2009 of $12.4million and $107,000, respectively, which represents aggregate amortization forthe three months ended March 31, 2009. Estimated aggregate amortization of intangible assets for fiscal 2009and the following five years based on the estimated fair values of theintangible assets are $322,000; $1,284,000; $1,284,000; $1,284,000; $1,284,000;$1,284,000.

 

**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 March 31, 2009 and June 30, 2008, derivativeinstruments are not designated as accounting hedges as defined by Statement ofFinancial Accounting Standards No. 133, *“Accountingfor Derivative Instruments and Hedging Activities*.” 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 inOther, net (expense) income.

 

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

 

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

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

 

8

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

 

The Company’s preferredstock has been grouped as follows at March 31, 2009 (in thousands,unaudited):

 
| ** **      | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Preferred stock |       | $         | 38,129     |        | $          | 7,124       |       | $           | 31,005     |   | $ | — |   |
|                 |            |           |            |             |            |             |            |             |            |  |  |  |  |

 

Investments, consisting of marketable debt and equity securitiesand money market instruments, are held for trading purposes and are stated atfair value.  Investments are as follows:

 
| ** **                              | ** ** | **March 31, 2009  (Unaudited)** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **(In thousands)**              | ** ** |
| Trading  securities at fair value       |       |                                 |       |                   |       |
| U.S. Treasury  Obligations              |       | $                                    | —     |                   | $          | 54,517 |   |
| Preferred Stock                         |       | 38,129                               |       | 58,204                 |       |
| Futures, options  and other derivatives |       | 907                                  |       | 565                    |       |
|                                    |       | $                                    | 39,036     |                   | $          | 113,286 |   |

 

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

 
| ** **                     | ** ** | **Three months ended**  | ** ** | **Nine months ended**   | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|                           |       |                    |       |                    |       |   |   |   |   |
| Net realized  (losses) gains   |       | $                       | —     |                    | $          | (378 | ) | $ | 238 |   | $ | (2,915 | ) |
| Net unrealized  (losses) gains |       | (2,751                  | )          | (3,383                  | )          | (13,781 | ) | (9,032 | ) |
|                           |       | $                       | (2,751     | )                       | $          | (3,761 | ) | $ | (13,543 | ) | $ | (11,947 | ) |

 

**Note4. Inventories**

 
| **March 31, 2009** | ** ** | **Processed**       | ** ** | **Unprocessed** | ** ** | **Total**  | ** ** |
|------------------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| **(Unaudited)**              | ** ** | **(In  thousands)** | ** ** |
| ** **                   | ** ** | ** **          | ** ** | ** **      | ** ** | ** ** | ** ** |
| Coffee                       |       | $                   | 15,647     |            | $          | 25,671     |       | $ | 41,318 |   |
| Allied products              |       | 18,053              |       | 6,457           |       | 24,510     |       |
| Coffee brewing  equipment    |       | 1,997               |       | 5,120           |       | 7,117      |       |
|                         |       | $                   | 35,697     |            | $          | 37,248     |       | $ | 72,945 |   |

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

 

9

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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 5. 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 allemployees not covered under a collective bargaining agreement (Farmer Bros. Co.Plan) and non-contributory defined benefit pension plan (Brewmatic Co. Plan)for certain hourly employees covered under a collective bargainingagreement.  The net periodic benefitcosts for the defined benefit plans were as follows (unaudited):

 

*Componentsof net periodic benefit cost*

 
| ** **                                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(In thousands)**     | ** ** | **(In thousands)**    | ** ** |
| Service cost                                    |       | $                      | 615        |                  | $          | 589 |   | $ | 1,845 |   | $ | 1,767 |   |
| Interest cost                                   |       | 1,477                  |       | 1,278                 |       | $ | 4,431 |   | $ | 3,834 |   |
| Expected return  on plan assets                 |       | (1,769                 | )          | (2,017                | )          | $ | (5,307 | ) | $ | (6,051 | ) |
| Amortization of  net (gain)/loss*               |       | 145                    |       | 2                     |       | $ | 435 |   | $ | 6 |   |
| Amortization of  transition (asset)/obligation* |       | —                 |       | —                |       | $ | — |   | $ | — |   |
| Amortization of  prior service cost/(credit)*   |       | 50                     |       | 15                    |       | $ | 150 |   | $ | 45 |   |
| Net periodic  benefit (credit) cost**           |       | $                      | 518        |                  | $          | (133 | ) | $ | 1,554 |   | $ | (399 | ) |

 

----

*  These amounts representthe estimated portion of the net (gain)/loss, transition (asset)/obligation,and net prior service cost/(credit) remaining in accumulated othercomprehensive income that is expected to be recognized as a component of netperiodic benefit cost over the current fiscal year.

 

** All qualifying employees of the DSD Coffee Business whoaccepted the Company’s offer of employment were allowed to enroll in the FarmerBros. Co. Plan during March 2009. Those who enrolled in the Farmer Bros. Co. Plan were granted fullservice credit for plan vesting and eligibility but not for purposes of benefitaccruals.  The additional net periodicbenefit cost for these new plan participants is not included in this tablebecause the amount is expected to be immaterial.

 

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

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

 

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

 

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

 

10

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**Note 6. 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 lineusage, 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 was3.75% at March 31, 2009.

 

The Company is incompliance with all restrictive covenants and limitations as of March 31,2009. The Company anticipates being in compliance with all restrictivecovenants for the foreseeable future.  OnMarch 31, 2009 the Company had excess availability under the credit lineof $21.8 million.

 

**Note 7. Stock-Based Compensation**

 

On August 23, 2007, the Company’s Board of Directors approvedthe Farmer Bros. Co. 2007 Omnibus Plan (the “Plan”), which was approved by stockholderson December 6, 2007. Prior to adoption of the Plan the Company had nostock-based compensation plan.  Initialawards under the Plan were made in the third quarter of fiscal 2008, andadditional awards under the Plan were made in the second quarter of fiscal2009.   Awards issued under the Plan maytake the form of stock options, stock appreciation rights, restricted stock,restricted stock units, dividend equivalents, performance-based awards, stockpayments, cash-based awards or other incentives payable in cash or shares ofstock, or any combination thereof.  Eachaward will be set forth in a separate agreement with the person receiving theaward and will indicate the type, terms and conditions of the award.  The maximum number of shares of common stockas to which awards may be granted under the Plan is 1,000,000, subject toadjustment as provided in the Plan.

 

The Company accounts forstock-based compensation in accordance with Statement of Financial AccountingStandards No. 123 (revised 2004), “*Share-Based Payment*”(“SFAS 123(R)”), and related SEC rules included in Staff AccountingBulletin No. 107 which require the measurement and recognition ofcompensation expense for all stock-based payment awards made under the Planbased on estimated fair values.

 

***Stock Options***

 

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

 

Stock-based compensation expense recognized during theperiod is based on the value of the portion of stock-based payment awards thatis ultimately expected to vest during the period. Compensation expenserecognized for all stock option awards granted is recognized using thestraight-line method over the vesting period of three years. The stock-basedcompensation expense recognized in the Company’s consolidated statement ofoperations for the three and nine month periods ended March 31, 2009 isbased on awards ultimately expected to vest. Currently, management estimatesthat there will be no forfeitures based on the Company’s historical turnover.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates.

 

The Company uses the Black-Scholes option valuationmodel, which requires management to make certain assumptions for estimating thefair value of stock options at the date of the grant. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option valuation 

 

11

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models require the input of highly subjectiveassumptions including the expected stock price volatility. Because the Company’sstock options have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimates, in management’s opinion the existing modelsmay not necessarily provide a reliable single measure of the fair value of theCompany’s stock options. Although the fair value of stock options is determinedin accordance with SFAS 123(R) using an option valuation model, thatvalue may not be indicative of the fair value observed in a willingbuyer/willing seller market transaction.

 

The following are the weighted average assumptionsused in the Black-Scholes valuation model for the nine months ended March 31,2009:

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

 

The Company’s assumption regarding expected stockprice volatility is based on the historical volatility of the Company’s stockprice. The risk-free interest rate is based on U.S. Treasury zero-coupon issuesat the date of grant with a remaining term equal to the expected life of thestock options.

 

The following table summarizes stock option activityfor fiscal 2009:

 

**OutstandingAwards**

 
| ** **                                        | ** ** | **Number of  Stock Options  (In thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average Fair  Value** | ** ** | **Weighted Average  Remaining Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value (In  thousands)** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| Balance,  July 1, 2008                       |       | 121.5                                        |       | $                                      | 22.66      |                              | $          | 6.16                                          |       | 0.0                                             |       | $ | 0 |   |
| Granted                                           |       | 110.5                                        |       | $                                      | 21.76      |                              | $          | 6.68                                          |       | 0.0                                             |       | $ | 0 |   |
| Balance,  March 31, 2009                     |       | 232.0                                        |       | $                                      | 22.23      |                              | $          | 6.41                                          |       | 6.3                                             |       | $ | 0 |   |
| Vested and  exercisable, March 31, 2009      |       | 39.2                                         |       | $                                      | 22.64      |                              | $          | 6.13                                          |       | 5.9                                             |       | $ | 0 |   |
| Vested and  expected to vest, March 31, 2009 |       | 232.0                                        |       | $                                      | 22.23      |                              | $          | 6.41                                          |       | 6.3                                             |       | $ | 0 |   |

 

**Unvested Awards**

 
| ** **                          | ** ** | **Number of  Awards (In  thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Weighted Average  Remaining  Amortization  Period (Years)** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| Outstanding at  July 1, 2008   |       | 121.5                                 |       | $                                      | 22.66      |                                          | $          | 6.16                                                          |       | 0.0 |   |
| Granted                             |       | 110.5                                 |       | $                                      | 21.76      |                                          | $          | 6.68                                                          |       | 0.0 |   |
| Vested                              |       | (39.2                                 | )          | $                                      | 22.64      |                                          | $          | 6.13                                                          |       | 0.0 |   |
| Outstanding at  March 31, 2009 |       | 192.8                                 |       | $                                      | 22.15      |                                          | $          | 6.47                                                          |       | 2.4 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on the Company’s closingstock price of $17.80 at March 31, 2009, representing the last trading dayof the quarter, which would have been received by award holders had all awardholders exercised their awards that were in-the-money as of that date.  As of March 31, 2009, there wasapproximately $1,138,000 of unamortized compensation expense related to stockoptions.  The value of awards vesting inthe period was approximately $240,000. Compensation expense recognized in general and administrative expensesfor the three and nine month periods ended March 31, 2009 was $122,123 and$261,789, respectively.

 

12

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***Restricted Stoc****k*

 

Shares of restrictedstock vest at the end of three years from the grant date. Compensation expenseis recognized on a straight-line basis over the service period based on theestimated fair value of the restricted stock. Compensation expense recognizedin general and administrative expenses for the three and nine month periodsended March 31, 2009 was $92,000 and $200,000, respectively.  The value of awards vesting in thethree-month period was $69,000.  As of March 31,2009, there was approximately $853,000 of unamortized compensation expenserelated to restricted stock.

 

The following tablesummarizes the status of the Company’s restricted stock as of March 31,2009:

** **

**OutstandingAwards**

 
| ** **                                        | ** ** | **Shares Awarded  (In thousands)** | ** ** | **Weighted Average  Fair Value** | ** ** | **Weighted Average  Remaining Life  (Years)** | ** ** | **Aggregate Intrinsic  Value (In thousands)** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| Balance,  July 1, 2008                       |       | 25.6                               |       | $                                | 22.67      |                                          |       |                                          | $          | 545,280 |   |
| Granted                                           |       | 25.4                               |       | $                                | 21.76      |                                          |       |                                          | $          | 552,704 |   |
| Cancelled/Forfeited                               |       | (1.0                               | )          | $                                | 21.76      |                                          |       |                                          | $          | 11,440 |   |
| Balance,  March 31, 2009                     |       | 51.0                               |       | $                                | 22.22      |                                          | 2.3        |                                          | $          | 898,900 |   |
| Vested and  exercisable, March 31, 2009      |       | 3.0                                |       | $                                | 22.70      |                                          | 1.9        |                                          | $          | 53,951 |   |
| Vested and  expected to vest, March 31, 2009 |       | 50.5                               |       | $                                | 22.22      |                                          | 2.3        |                                          | $          | 898,900 |   |

 

**Unvested Awards**

 
| ** **                          | ** ** | **Shares Awarded  (In thousands)** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| Outstanding at  July 1, 2008   |       | 25.6                               |       | $                                            | 22.67      |   |
| Granted                             |       | 25.4                               |       | $                                            | 21.76      |   |
| Vested                              |       | (3.0                               | )          | $                                            | 22.70      |   |
| Cancelled/Forfeited                 |       | (0.5                               | )          | $                                            | 21.76      |   |
| Outstanding at  March 31, 2009 |       | 47.5                               |       | $                                            | 22.19      |   |

 

**Note8.  Income Taxes**

 

In September 2008,the Internal Revenue Service (“IRS”) completed an examination of the Company’sU.S. income tax returns for the fiscal years ended June 30, 2004, 2005 and2006. The Company and the IRS reached a settlement on certain issues whichresulted in a decrease to the Company’s total unrecognized tax benefits of$421,000 (excluding interest and penalties). Of this amount, $266,000 was realized as income in the current fiscalyear.

 

California is currentlyconducting a state examination of the Company’s open tax return years. The Company believes it is reasonably possible that a portion ofits total unrecognized tax benefits will decrease in the next 12 months uponthe conclusion of this, and other ongoing state examinations.  However, it is premature to assess the rangeof the reasonably possible changes to the Company’s unrecognized tax benefits.

 

As of June 30, 2008 and March 31, 2009, the Company hadnot recognized the following tax benefits in its consolidated financialstatements:

 
| ** **                                                                                        | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **(In thousands)**      | ** ** |
| Total  unrecognized tax benefits*                                                                 |       | $                       | 377        |                   | $          | 808 |   |
| Unrecognized tax  benefits that would affect the Company’s effective tax rate, if recognized |       | $                       | 249        |                   | $          | 668 |   |

 

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* Not including interest and penalties.

 

13

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The Company’s effective tax rate without discrete items of 46.2%primarily consists of its statutory federal and state combined rate of 38.9%(benefit) plus a 5.9% (benefit) related to the Company’s dividends receiveddeduction.  The federal and state ratesrepresent a benefit in the current year because the Company is in a lossposition.

 

In the previous quarter, the Company established a valuationallowance of $427,000 against a portion of its deferred tax assets related tocapital loss carryforwards.  The Companyhas capital loss carryforwards that will expire in the future if they are notused. These losses may only be offset against realized capital gains. Dueto the recent unrealized losses incurred in the Company’s investment portfolioand general downturn in market conditions, the Company has concluded that avaluation allowance is required under Statement of Financial AccountingStandards No. 109, *“Accounting for IncomeTaxes,”* as it is not “more likely than not” that sufficient capitalgains will be realized before the expiration of the capital losses.

 

**Note9.  Loss per Share**

 

The following table sets forth the calculation of basic anddiluted loss per share (in thousands, except per share data):

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** | **Nine months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                                                                                 | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                                             |       | $                                     | (1,437     | )                                    | $          | (2,710 | ) | $ | (7,627 | ) | $ | (3,891 | ) |
| Denominator:                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  shares outstanding - basic                                         |       | 14,533                                |       | 14,313                               |       | 14,481 |   | 14,225 |   |
| Dilutive common  shares issuable upon exerciseof stock options and restricted stock* |       | —                                |       | —                               |       | — |   | — |   |
| Weighted average  shares outstanding - diluted                                       |       | 14,533                                |       | 14,313                               |       | 14,481 |   | 14,225 |   |
|                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Loss per share:                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Basic and  diluted                                                                   |       | $                                     | (0.10      | )                                    | $          | (0.19 | ) | $ | (0.53 | ) | $ | (0.27 | ) |
|                                                                                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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* Stock options and restricted stock have been excluded from thecalculation of diluted loss per share as their effect would be anti-dilutive.

 

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

** **

**Forward-Looking Statements**

** **

Certain statementscontained in this quarterly report on Form 10-Q regarding the risks, circumstancesand financial trends that may affect our future operating results, financialposition and cash flows are not based on historical fact and areforward-looking statements within the meaning of federal securities laws andregulations.  These statements are basedon management’s current expectations, assumptions, estimates and observationsof future events and include any statements that do not directly relate to anyhistorical or current fact.  Theseforward-looking statements can be identified by the use of words like “anticipates,”“feels,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,”“assumes” and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements,actual results could differ materially from those set forth in forward-lookingstatements.  A forward-looking statementis neither a prediction nor a guarantee of future events or circumstances, andthose future events or circumstances may not occur.  Users should not place undue reliance on theforward-looking statements, which speak only as of the date of thisreport.  The Company undertakes noobligation to update or alter any forward-looking statements, whether as aresult of new information, future events or otherwise, except as required bythe federal securities laws. Factors that could cause actual results to differmaterially from those in forward-looking statements include, but are notlimited to, fluctuations in availability and cost of green coffee, competition,organizational changes, our ability to successfully integrate both the DSDCoffee Business and CBI acquisitions, the impact of a weaker economy, businessconditions in the coffee industry and food industry in general, the Company’scontinued success in attracting new customers, variances from budgeted salesmix and growth rates, weather and special or unusual events, and changes in thequality or dividend stream of third parties’ securities and other investmentvehicles in which the Company 

 

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has invested itsshort-term assets, as well as other risks described in this report, includingin Part II, Item 1A, and other factors described from time to time in theCompany’s filings with the SEC.

 

**Acquisition**

 

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 acquired business generally consists ofmanufacturing and selling coffee, tea and related products through a network offacilities and vehicles which was acquired to complement and expand theCompany’s previously existing operations. This business also includes the distribution, sale and service of brewedand liquid coffee equipment.The results of operations of the DSD Coffee Businessare included in the Company’s consolidated financial statements beginning on March 1,2009.

 

Theassets purchased include, among other things, the following: (i) amanufacturing plant in Houston, Texas, a spice plant in Oklahoma City, Oklahoma,and a warehouse in Indianapolis, Indiana; (ii)  64 leased branchfacilities in 31 states; (iii) a vehicle fleet consisting of 431 owned andleased vehicles; (iv) certain tangible personal property; (v) inventoriesof raw materials, 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.

 

Subjectto certain post-closing adjustments relating to the amount of consumableinventory and prepaid expenses at closing, and after giving effect to certainreimbursement obligations of the parties relating to accounting costs, ITcarve-out costs, and transfer taxes and fees, as well as real and personalproperty tax and utility prorations, the amount paid to Seller was $45.6million, which consisted of $16.1 million of Company cash and proceeds of abank loan of $29.5 million.  The Companyalso paid approximately$2.7 million of acquisition related expenses. Atclosing, the Company assumed certain liabilities, including obligations undercontracts, environmental liabilities with respect to the transferredfacilities, pension liabilities, advertising and trade promotion accruals, andaccrued vacation as of the closing for hired personnel. These liabilitiesare estimated to be $609,000 for accrued vacation and $95,000 in otherestimated liabilities. Seller Partiesretained all liabilities that were not specifically assumed by the Company. TheCompany is currently negotiating the re-finance of existing truck leases inorder to replace the current financing. This is expected to be completed in the fourth quarter of fiscal 2009.

 

The Company assumed leases for sixty-four warehouse leases withlease terms that generally do not exceed three years.  The Company’s future minimum warehouse leasepayments under all its warehouse leases, including these sixty four warehouses,are as follows (in thousands):

 
| Three months ending June 30, 2009 |   | $     | 1,354  |   |
|----------------------------------------|--------|-------|--------|--------|
| 2010                                   |   | 5,015 |   |
| 2011                                   |   | 1,577 |   |
| 2012                                   |   | 940   |   |
| 2013                                   |   | 483   |   |
| 2014                                   |   | 257   |   |
| thereafter                             |   | 8     |   |
| Total                                  |   | $     | 9,634  |   |

 

Inconnection with the closing, Seller Parties and the Company entered intocertain operational agreements, including trademark and formula licenseagreements, co-pack agreements, a liquid coffee distribution agreement, atransition services agreement, and a green coffee and tea purchaseagreement.  One of the co-pack agreementsprovides that Seller will manufacture branded products for the Company for aperiod of three years.  Under thisagreement the Company has agreed to purchase certain minimum product quantitiesfrom Seller subject to certain 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 communicationsfor up to eighteen months.

 

15

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The accompanying unaudited consolidated financial statements donot include pro-forma historical information, as if the results of the DSDCoffee Business had been included from the beginning of the periods presented,since the use of forward-looking information would be necessary in order tomeaningfully present the effects of the acquisition.  Forward-looking information, rather thanhistorical information, would be required since the DSD Coffee Business wasoperated as part of a larger business within Seller and there will be adifferent operating cost structure and different operations support under theCompany’s ownership.  Net revenue of theDSD Coffee Business for the eight months ended February 28, 2009 (theeffective date of the acquisition) was approximately $134 million, andapproximately $228 million for the fiscal year ended June 30, 2008.  However the Company has not providedforward-looking information with respect to incremental costs and expenses tobe incurred because such information is not determinable.

 

Theacquisition has been accounted for as an asset purchase.  The total purchase price has been allocatedto tangible and intangible assets based on their estimated fair values as of February 28,2009 as determined by management based upon a third-party valuation.  The purchase price allocation has not beenfinalized, since it is possible that certain refinements may be made ifadditional facts or circumstances become known that impact the estimates as ofthe acquisition date. Revisions to the allocation, which may be significant,will be reported as changes to various assets and liabilities. The purchaseprice allocation is expected to be further refined and finalized during fiscal2010. The following table summarizes the estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition, based on thepreliminary purchase price allocation (dollars in thousands):

 
| **Preliminary Fair Value of Assets Acquired** | ** ** | **Estimated Useful Life (years)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| Inventory                                     |       | $                                 | 16,437     |   |   |   |
| Prepaid Expense                               |       | 1,138                             |       |   |   |
| Current assets                                |       | 17,575                            |       |   |   |
|                                          |       |                              |       |   |   |
| Vehicles                                      |       | 993                               |       | 5 |   |
| Machinery                                     |       | 10,838                            |       | 3-5 |   |
| Property, plant  and equipment                |       | 5,314                             |       | 30 |   |
| Land                                          |       | 1,849                             |       |   |   |
| Fixed assets                                  |       | 18,994                            |       |   |   |
|                                          |       |                              |       |   |   |
| Trademarks                                    |       | 2,010                             |       | indefinite |   |
| Customer  Relationships                       |       | 7,324                             |       | 8 |   |
| Distribution  Agreement                       |       | 2,370                             |       | 10 |   |
| Co-pack  Agreement                            |       | 718                               |       | 6 |   |
| Intangible  assets                            |       | 12,422                            |       |   |   |
|                                          |       |                              |       |   |   |
| Total assets  acquired                        |       | 48,991                            |       |   |   |
| Liabilities  assumed                          |       | (704                              | )          |   |   |
| Net assets  acquired                          |       | $                                 | 48,287     |   |   |   |

 

**Liquidity and Capital Resources**

** **

*CreditFacility*

 

On March 2, 2009 the Company and CBI, as Borrowers, entered into a Loanand Security 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, 

 

16

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and it places limits oncapital expenditures and dividends.  Alloutstanding obligations under the Loan Agreement are collateralized byperfected security interests in the assets of the Company and CBI, excludingthe preferred stock held in investment accounts. The revolving line providesfor advances of 85% of eligible accounts receivable and 65% of eligibleinventory, as defined.  The agreement hasan unused commitment fee of 0.375%.  Theinterest rate varies based upon line usage, borrowing base availability andmarket conditions.  The range is PRIME +0.25% to PRIME + 0.75% or LIBOR + 2.25% to LIBOR + 2.75%, subject to a minimumfor LIBOR based advances of 3.25%.  Theinterest rate was 3.75% at March 31, 2009.

 

The Company is incompliance with all restrictive covenants and limitations as of March 31,2009. The Company anticipates being in compliance with all restrictivecovenants for the foreseeable future.  OnMarch 31, 2009 the Company had additional availability under the creditline of $21.8 million.

 

*Liquidity*

 

The continued weaknessin the economy and the sustained decline in the housing market have keptpressure on the financial markets and reduced the value and liquidity of thepreferred stock we hold.  In order tohave sufficient liquidity to complete the acquisition of the DSD CoffeeBusiness without selling our preferred stock investments, we obtained a $50million senior secured revolving line of credit with Wachovia Bank describedabove.  Although we expect costreductions and other positive synergies from integrating the DSD CoffeeBusiness with the Company’s operations, the timing of these improvements isuncertain.  We believe this creditfacility, in addition to the Company’s other liquid assets, provides sufficientcapital resources and flexibility to allow the Company to make investments inthe DSD Coffee Business, fund integration expenses, meet necessary workingcapital requirements and implement its business plan without relying solely oncash flow from operations.  Futureliquidity, both short and long term, can be negatively affected by currenteconomic conditions.

 

During the fiscal quarter ended March 31, 2009 we incurredapproximately $2,385,000 of capital expenditures.  This included vehicles of $1,100,000,machinery and equipment of $465,000 and development costs related tointegrating the DSD Coffee Business into the Company’s IT infrastructure.  Improvements to the Torrance plant have beendelayed as a result of the acquisition and construction delays, and willcontinue into fiscal 2010.  The Company’smobile sales system installation was completed in April 2009.

 

The Company isre-evaluating its previously planned capital expenditures in light of theacquisition and integration of the DSD Coffee Business.  This process is expected to continue throughthe balance of fiscal 2009.  Our revisedbusiness plan is likely to require an increase in the previous amount ofinvestment and will change the priority and timing of capital expenditures forthe remainder of fiscal 2009 and for fiscal 2010.

 

Our working capital is composed of the following (in thousands):

 
| ** **                       | ** ** | **March 31, 2009  (Unaudited)** | ** ** | **June 30, 2008** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| Current assets                   |       | $                                    | 195,335    |                   | $          | 217,750 |   |
| Current  liabilities             |       | 70,640                               |       | 28,909                 |       |
| Working Capital                  |       | $                                    | 124,695    |                   | $          | 188,841 |   |
|                             |       |                                 |       |                   |       |
| Capital  expenditures            |       | $                                    | 30,740     |                   | $          | 24,293 |   |
| Purchase of DSD  Coffee Business |       | $                                    | 48,587     |                   | $          | — |   |
| Dividends paid                   |       | $                                    | 5,257      |                   | $          | 6,670 |   |

 

At March 31, 2009 we had no material commitments for capitalexpenditures other than those described above.

 

**Results of Operations**

** **

The Company’s net sales in the third quarter of fiscal 2009increased $18,328,000, or 21%, to $85,604,000 as compared to $67,276,000 in thethird quarter of fiscal 2008.  Net salesfor the first nine months of fiscal 2009 increased $29,081,000, or 15%, to$228,657,000 as compared to $199,576,000 in the same period of fiscal2008.  This increase is primarily theresult of increased sales at CBI of $2,404,000 in the third quarter and$11,430,000 in the first nine months of fiscal 2009, and the added sales fromthe DSD 

 

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Coffee Business of $14,391,000 for the period from March 1,2009 through March 31, 2009.  Unitsales, not including the DSD Coffee Business, for the third quarter and firstnine months of fiscal 2009 increased 0.2% and 0.1%, respectively.

 

The recent acquisition of the DSD Coffee Business has added to ourtop line sales and our geographic reach. Some of the new regions we now serve, for example in Michigan, areexperiencing more negative economic conditions than in our pre-acquisitionservice area.  We expect the ongoingweakness in the economy and reduced consumer spending will continue to impactour sales through the remainder of calendar 2009.

 

Gross profit in the third quarter of fiscal 2009 increased 39% to$42,659,000, or 50% of sales, as compared to $30,658,000, or 46% of sales, inthe third quarter of fiscal 2008. Approximately 14% of this increase is from CBI, and approximately 50% ofthis increase is from the addition of the DSD Coffee Business.  Gross profit in the first nine months offiscal 2009 increased $17,365,000 to $110,926,000, or 49% of sales, as comparedto $93,561,000, or 47% of sales, in the same period of fiscal 2008.  Approximately 9% of this increase resultsfrom CBI.  Additionally, coffee brewingequipment costs for the three month periods ended March 31,2009 and 2008 were $2,568,000 and $5,120,000 respectively, and for the ninemonth periods ended March 31, 2009 and 2008, were $7,071,000 and$15,359,000, respectively.  Coffeebrewing equipment cost decreased in the current fiscal year because we begancapitalizing certain coffee brewing equipment in the fourth quarter of fiscal2008.

 

Operating expenses in the third quarter of fiscal 2009 increased$12,060,000 to $44,264,000, or 52% of sales, from $31,662,000 in the sameperiod of fiscal 2008. Operating expenses for the first nine months of fiscal2009 increased to $116,574,000, or 51% of sales, from $96,301,000, or 48% of sales,in the same period of fiscal 2008.  Thisincludes additional operating expenses associated with the DSD Coffee Businessfor the period from March 1, 2009 through March 31, 2009 in theamount of $4,759,000.  Other significantcost increases for the first nine months of fiscal 2009 include freight costsof $1,761,000, reflecting higher fuel prices and increased shipping costsrelated to increased sales by CBI and an increase in salaries and benefits of approximately3% over the prior nine month period, not including the payroll and benefitcosts for hired personnel in the DSD Coffee Business.

 

Our loss from operations in the third quarter of fiscal 2009 was($1,606,000) as compared to ($1,004,000) in the same quarter of fiscal2008.  Our loss from operations for thefirst three quarters of fiscal 2009 was ($5,647,000) as compared to($2,740,000) in the same period of the prior fiscal year.

 

Total other expense for the third quarter of fiscal 2009 was($1,317,000) as compared to ($2,013,000) in the same period of fiscal 2008.Total other expense for the first three quarters of fiscal 2009 was($9,093,000) as compared to ($5,775,000) in the same period of fiscal 2008.These changes are primarily the result of changes in Other, net (expense)income, which reflects realized and unrealized losses (gains) in our preferredstock portfolio.  Financial marketconditions described in our Form 10-K for the fiscal year ended June 30,2008 have continued in fiscal 2009.  Thedownturn in the housing market combined with real estate financing andliquidity issues have contributed to the overall market downturn.   The Company has no direct exposure tosub-prime mortgages, but the financial companies caught in the mortgagedownturn compose approximately 85% of the universe of preferred stocks.  Selling pressure from leveraged investors whoneed liquidity and a new supply of preferred issues taking advantage of lowerdividend rates have resulted in a downward pressure on values.

 

Investor demand for the safety of U.S. Treasury instruments hasflattened the U.S. Treasury yield curve and widened spreads between preferredstocks and U.S. Treasury instruments.  Webelieve that preferred stocks are currently priced cheaper to U.S. Treasurybond yields than they have ever traded. Although aggressive easing of interest rates by the world’s centralbanks and other economic stimulus actions by governments may eventually havepositive effects on this situation, we expect little improvement until thehousing market stabilizes.

 

As a result of the forgoing factors, net loss for the thirdquarter of fiscal 2009 was ($1,437,000), or ($0.10) per share, as compared to anet loss of ($2,710,000), or ($0.19) per share, in the third quarter of fiscal2008.  Net loss for the first nine monthsof fiscal 2009 was ($7,627,000), or ($0.53) per share as compared to a net lossof ($3,891,000), or ($0.27) per share, in the same period of the prior fiscalyear.

 

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**QuarterlyFinancial Data**

 
| ** **                     | ** ** | **June 30,**                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2008**                              | ** ** | **2008**               | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| ** **                     | ** ** | **(In thousands, except share data)** | ** ** |
| Net Sales                      |       | $                                     | 66,907     |                   | $          | 66,524                |       | $                  | 76,530     |   | $ | 85,604 |   |
| Gross Profit                   |       | $                                     | 25,851     |                   | $          | 30,951                |       | $                  | 37,318     |   | $ | 42,658 |   |
| (Loss) Income  from Operations |       | $                                     | (7,901     | )                      | $          | (4,255                | )          | $                  | 213        |   | $ | (1,606 | ) |
| Net Loss                       |       | $                                     | (4,034     | )                      | $          | (6,085                | )          | $                  | (106       | ) | $ | (1,438 | ) |
| Earnings per  share            |       | $                                     | (0.27      | )                      | $          | (0.42                 | )          | $                  | 0.01       |   | $ | (0.10 | ) |

 
| ** **                     | ** ** | **June 30,**                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2007**                              | ** ** | **2007**               | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                     | ** ** | **(In thousands, except share data)** | ** ** |
| Net Sales                      |       | $                                     | 58,137     |                   | $          | 60,943                |       | $                  | 71,359     |   | $ | 67,276 |   |
| Gross Profit                   |       | $                                     | 29,452     |                   | $          | 28,727                |       | $                  | 34,177     |   | $ | 30,657 |   |
| (Loss) Income  from Operations |       | $                                     | (232       | )                      | $          | (2,528                | )          | $                  | 789        |   | $ | (1,004 | ) |
| Net Loss                       |       | $                                     | 1,337      |                   | $          | (953                  | )          | $                  | (227       | ) | $ | (2,710 | ) |
| Earnings per  share            |       | $                                     | 0.09       |                   | $          | (0.07                 | )          | $                  | (0.02      | ) | $ | (0.19 | ) |

 

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

** **

**Interest Rate Risk**

 

We are exposed to market value risk arising from changes ininterest rates on our securities portfolio. Our portfolio of investment grademoney market instruments can include at any given time: discount commercialpaper, medium term notes, federal agency issues and treasury securities.  As of March 31, 2009, over 90% of thesefunds were invested in a money market fund which invests in investment gradecommercial paper and U.S. Treasury securities. The funds are available on demand, and are currently covered under theU.S. Treasury Department Guarantee Program for Money Market Funds.  As a result the funds have been classified ascash equivalents.

 

From time to time, our portfolio of preferred securities includesinvestments in derivatives that provide a natural economic hedge of interestrate risk. We review the interest rate sensitivity of these securities and (a) enterinto “short positions” in futures contracts on U.S. Treasury securities or (b) holdput options on such futures contracts in order to reduce the impact of certaininterest rate changes on such preferred stocks. Specifically, we attempt tomanage the risk arising from changes in the general level of interest rates. Wedo not transact in futures contracts or put options for speculative purposes.

 

The following table demonstrates the impact of varying interestrate changes based on the preferred stock holdings, futures and optionspositions, and market yield and price relationships at March 31, 2009.This table is predicated on an instantaneous change in the general level ofinterest rates and assumes predictable relationships between the prices ofpreferred securities holdings, the yields on U.S. Treasury securities andrelated futures and options.

 

The number and type of futures and options contracts entered intodepends on, among other items, the specific maturity and issuer redemption provisionsfor each preferred stock held, the slope of the U.S. Treasury yield curve, theexpected volatility of U.S. Treasury yields, and the costs of using futuresand/or options.

 

19

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As of March 31, 2009 there were no futures or optionscontracts in place as an interest rate hedge.

 
| ** **                          | ** ** | **Market Value at March 31, 2009** | ** ** | **Changes in Market** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Preferred**                           | ** ** | **Futures and**       | ** ** | **Total** | ** ** | **Value of Total** | ** ** |
| **Interest Rate Changes** | ** ** | **Securities**                          | ** ** | **Options**           | ** ** | **Portfolio** | ** ** | **Portfolio** | ** ** |
| ** **                          | ** ** | **(In thousands)**                      | ** ** |
| -150 basis points                   |       | $                                       | 38,762     |                  | $          | — |   | $ | 38,762 |   | $ | 633 |   |
| -100 basis points                   |       | $                                       | 38,639     |                  | $          | — |   | $ | 38,639 |   | $ | 510 |   |
| Unchanged                           |       | $                                       | 38,129     |                  | $          | — |   | $ | 38,129 |   | $ | — |   |
| +100 basis points                   |       | $                                       | 36,751     |                  | $          | — |   | $ | 36,751 |   | $ | (1,378 | ) |
| +150 basis points                   |       | $                                       | 35,440     |                  | $          | — |   | $ | 35,440 |   | $ | (2,689 | ) |

 

The Company is subject tointerest rate risk related to its borrowings used to finance acquisitions andfor general corporate purposes.  Risinginterest rates may adversely affect the Company’s results of operations andcash flows related to its variable-rate bank borrowings under the creditfacility with Wachovia. If the current loan balance had been outstanding forthe first nine months of fiscal 2009, a 100 basis point increase in the lender’sbase rate over that period would have caused the Company to incur approximately$197,000 additional interest charges for the nine months ended March 31,2009; and if the base rate were to have declined by 100 basis points theCompany would have realized a similar amount of interest savings.

 

**Commodity Price Risk**

** **

We are exposed to commodity price risk arising from changes in themarket price of green coffee. We price our coffee inventory on the LIFO basis.In the normal course of business we hold a large green coffee inventory andenter into forward commodity purchase agreements with suppliers. We are subjectto price risk resulting from the volatility of green coffee prices. Volatileprice increases cannot, because of competition and market conditions, always bepassed on to our customers.  From time totime the Company will hold a mix of futures contracts and options to help hedgeagainst volatile green coffee price changes. Gains and losses on these derivative instruments are realizedimmediately in Other, net (expense) income. At March 31, 2009 the potential change in fair value of commodityderivatives assuming a 10% change in the price of green coffee wasapproximately $740,000.

 

**Item 4. Controls and Procedures**

** **

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),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.

 

As of March 31,2009, our management, with the participation of our Chief Executive Officer andChief Financial Officer, carried out an evaluation of the effectiveness of ourdisclosure 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 March 31, 2009, ourdisclosure controls and procedures were effective.

 

**Changes in InternalControl over Financial Reporting**

** **

Management hasdetermined that there has been a change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgatedunder the Exchange Act) during our fiscal quarter ended March 31, 2009that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

During the fiscalquarter ended March 31, 2009 the Company entered into a transitionservices agreement with Sara Lee Corporation to host, maintain and support theIT infrastructure of the DSD Coffee Business acquired on February 28, 2009for up to eighteen months.  This changein our internal operations is reasonably likely to affect our internalcontrols.  IT support is critical to theongoing operation of the DSD Coffee Business during the transition period.  Management’s ability to maintain our internalcontrol over financial reporting depends significantly on the reliability ofthese systems for which we will rely on Sara Lee Company for up to eighteenmonths under the transition services agreement.

 

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**PART II - OTHER INFORMATION**

** **

**Item1A.  Risk Factors.**

 

The followingadditional risk factors should be read together with the risk factors set forthin our Annual Report on Form 10-K, Part I, Item 1A, for the fiscalyear ended June 30, 2008.  All suchrisk factors, taken together, are representative of the risks, uncertaintiesand other conditions that may impact the Company’s business, future performanceand the forward-looking statements that it makes in this quarterly report on Form 10-Qor that it may make in the future. Our actual results could differ materiallyfrom anticipated results as a result of some or all of these items or fromother factors.

 

**Ourfailure to successfully integrate the DSD Coffee Business into our business maycause us to fail to realize the expected synergies and other benefits of theacquisition, which could adversely affect our future results.**

 

The integration ofthe DSD Coffee Business into our business is a complex, costly andtime-consuming process which presents significant challenges and risks to ourbusiness, including:

 

·                       distraction of management from ongoingbusiness concerns;

 

·                       assimilation and retention of employeesand customers of the DSD Coffee Business;

 

·                       differences in the culture of the DSDCoffee Business and the Company’s culture;

 

·                       unforeseen difficulties in integratingthe DSD Coffee Business, including information systems and accounting controls;

 

·                       failure of the DSD Coffee Business tocontinue to generate income at the levels upon which we based our acquisitiondecision;

 

·                       managing the DSD Coffee Businessoperations through its offices in Downers Grove, Illinois, which is distantfrom the Company’s headquarters in Torrance, California;

 

·                       expansion into new geographical marketsin which we have limited or no experience;

 

·                       integration of technologies, services andproducts; and

 

·                       achievement of appropriate internalcontrol over financial reporting.

 

We may fail tosuccessfully complete the integration of the DSD Coffee Business into ourbusiness and, as a result, may fail to realize the operating efficiencies,synergies, economies of scale, cost savings and other benefits expected fromthe acquisition. We may fail to grow and build profits in the DSD CoffeeBusiness or achieve sufficient cost savings through the integration ofcustomers or administrative and other operational activities. Furthermore, wemust achieve these objectives without adversely affecting our revenues. If weare not able to successfully achieve these objectives, the anticipated benefitsof the acquisition may not be realized fully or at all, or it may take longerto realize them than expected, and our results of operations could be adverselyaffected.

 

**We arerelying on Sara Lee to provide us with certain transition services that arecritical to the ongoing operation of the DSD Coffee Business.**

 

We continue torely on Sara Lee to provide us with certain services previously provided bySara Lee to the DSD Coffee Business for a transition period of up to eighteen(18) months depending on the specific service. These services include maintaining the IT infrastructure andcommunications services, including network hosting, monitoring andreporting.  Sara Lee provides the supportfor the software and processes that record and maintain sales transactions,create accounts receivable and bill customers, maintain accounts payable andpay vendors, provide inventory control and generally provide for most criticalbusiness accounting needs.  Thesetransition services are critical to the ongoing operation of the DSD CoffeeBusiness during the transition period.

 

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If Sara Lee fails or is unable to continue to provide such services tous, we may be unable to service customers of the DSD Coffee Business which mayharm our reputation and adversely affect the business, financial condition andresults of operations of the DSD Coffee Business. Our dependency on Sara Leefor IT services during the transition period may increase the risk of materialinternal control deficiencies and the related probability of a restatement ofour operating results as a result of untraced accounting errors within the SaraLee maintained software and/or Sara Lee’s inability to effectively maintainboth internal controls and data integrity.

 

**Uponexpiration of the transition period, we may be unable to provide the transitionservices ourselves or obtain such services from a third-party on commerciallyreasonable terms.**

 

After the dates onwhich Sara Lee is no longer required to provide transition services to us, weexpect that such services will be provided by our internal operations orthird-party service providers. These services include integrating the ITinfrastructure of several hardware and software systems.  A failure to identify all of the componentsof IT infrastructure and personnel necessary to transition successfully fromSara Lee may adversely impact our ability to operate the DSD Coffee Businessfollowing the transition period. There can be no assurance that we will be ableto develop the ability to provide any of these services ourselves on a costefficient basis or obtain such services from a third-party on commerciallyreasonable terms.

 

**We rely on information technology in ouroperations, and any material failure, inadequacy, interruption or securityfailure of that technology could affect our ability to effectively operate ourbusiness.**

 

We rely on informationtechnology systems across our operations, including for management of oursupply chain, point-of-sale processing, and various other processes andtransactions. Our ability to effectively manage our business and coordinate theproduction, distribution and sale of our products depends significantly on thereliability and capacity of these systems. The failure of these systems tooperate effectively, problems with transitioning to upgraded or replacementsystems, our inability to integrate the DSD Coffee Business systems with ours,or a breach in security of these systems could cause delays in product salesand reduced efficiency of the Company’s operations, and significant capitalinvestments could be required to remediate the problem.

 

**Ourlevel of indebtedness could adversely affect our ability to raise additionalcapital to fund our operations, and limit our ability to react to changes inthe economy or our industry.**

 

The Company has a$50 million senior secured revolving credit facility.  As of March 31, 2009, approximately$26.2 million was outstanding under this credit facility.  The incurrence of additional debt under ourcredit facility could adversely affect our business and limit our ability toplan for or respond to changes in our business. Additionally, our borrowingsunder the credit facility are at variable rates of interest, exposing us to therisk of increased interest rates, which could lead to a decrease in our netincome.  Our debt obligations could also:

 

·                       increase our vulnerability to generaladverse economic and industry conditions;

 

·                       require us to dedicate a portion of ourcash flow from operations to payments on our indebtedness, thereby reducing theavailability of our cash flow for other purposes, including our operations,future business opportunities and capital expenditures;

 

·                       limit our flexibility in planning for, orreacting to, changes in our business and the industry in which we operatethereby placing us at a competitive disadvantage compared to our competitorsthat may have less debt; and

 

·                       limit, by the financial and otherrestrictive covenants in our loan agreement, our ability to borrow additionalfunds; and

 

·                       have a material adverse effect on us ifwe fail to comply with the covenants in our loan agreement because such failurecould result in an event of default which, if not cured or waived, could resultin our indebtedness becoming immediately due and payable.

 

22

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**Restrictivecovenants in our credit facility may restrict our ability to pursue ourbusiness strategies.**

 

Our senior securedrevolving credit facility contains various covenants that limit our abilityand/or our subsidiaries’ ability to, among other things:

 

·                       incur additional indebtedness;

 

·                       pay dividends on or make distributions inrespect of capital stock or make certain other restricted payments orinvestments;

 

·                       sell assets;

 

·                       create liens on certain assets to securedebt; and

 

·                       consolidate, merge, sell or otherwisedispose of all or substantially all of our assets.

 

Our creditfacility also contains restrictive covenants that require the Company and itssubsidiaries to maintain specified financial ratios and satisfy other financialcondition tests. Our ability to meet those financial ratios and tests may beaffected by events beyond our control, and there can be no assurance that wewill meet those tests. The breach of any of these covenants or financial ratioscould result in a default under the credit facility and the lender could electto declare all amounts borrowed thereunder, together with accrued interest, tobe due and payable and could proceed against the collateral securing thatindebtedness.

 

**Ourbusiness is subject to risks associated with the ongoing financial crisis andweakening economy.**

 

Our revenues andperformance depend significantly on consumer confidence and spending, whichhave recently deteriorated due to current economic conditions. This economicdownturn and decrease in consumer spending may adversely impact our revenues,ability to market our products or otherwise implement our businessstrategy.  Additionally, many of theeffects and consequences of the global financial crisis and a broader globaleconomic downturn are currently unknown; any one or all of them couldpotentially have a material adverse effect on the our liquidity and capitalresources, including our ability to sell third-party securities in which wehave invested some of our short-term assets or raise additional capital, ofneeded, or the ability of our lender to honor draws on our credit facility, orotherwise negatively impact our business and financial results.

 

**Item 6. Exhibits**

** **

See Exhibit Index.

 

23

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**SIGNATURES**

** **

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

 
| **Name**                      | ** ** | **Title**                                     | ** ** | **Date**           |
|-------------------------------|------------|-----------------------------------------------|------------|--------------------|
|                          |       |                                          |       |               |
| /s/ ROGER M. LAVERTY III |       | President and Chief Executive Officer         |       |               |
| Roger M.  Laverty III         |       | (principal executive officer)                 |       | May 11,  2009 |
|                          |       |                                          |       |               |
|                          |       |                                          |       |               |
| /s/ JOHN E. SIMMONS      |       | Treasurer and Chief Financial Officer         |       |               |
| John E.  Simmons              |       | (principal financial and accounting  officer) |       | May 11,  2009 |

 

24

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**EXHIBITINDEX**

 
| 3.1    | Certificate  of Incorporation (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2    | Amended  and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Form 8-K  filed with the SEC on June 8, 2006 and incorporated herein by  reference).                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    | Certificate  of Designations of Series A Junior Participating Preferred Stock (filed  as Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on  March 18, 2005 and incorporated herein by reference).                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2    | Rights  Agreement dated March 17, 2005 by and between Farmer Bros. Co. and Wells  Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s  Form 8-K filed with the SEC on March 18, 2005 and incorporated  herein by reference).                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3    | Specimen  Stock Certificate (filed as Exhibit 4.1 to the Company’s Form 8-A/A  filed with the SEC on February 6, 2009 and incorporated herein by  reference).                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1   | Asset  Purchase Agreement, dated as of December 2, 2008, by and among Sara Lee  Corporation, Saramar, LLC and Farmer Bros. Co. (filed as Exhibit 10.1 to  the Company’s Form 10-Q for the quarter ended December 31, 2008 and  incorporated herein by reference).                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2   | Stock  Purchase Agreement, dated April 27, 2007, by and among Farmer Bros. Co.,  Coffee Bean Holding Co., Inc., and the Stockholders of Coffee Bean  Holding Co., Inc. (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on May 1, 2007 and incorporated herein  by reference).                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3   | 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 Form 10-Q for the quarter ended  December 31, 2008 and incorporated herein by reference). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4   | Farmer  Bros. Co. Amended and Restated Pension Plan for Salaried Employees (filed as  Exhibit 10.1 to the Company’s Form 10-K for the year ended  June 30, 2007 and incorporated herein by reference).*                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   | Farmer  Bros. Co. Amended and Restated 2005 Incentive Compensation Plan (filed as  Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended  December 31, 2008 and incorporated herein by reference).*                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   | Farmer  Bros. Co. Amended and Restated Employee Stock Ownership Plan (filed as  Exhibit 10.5 to the Company’s Form 10-K for the year ended  June 30, 2007 and incorporated herein by reference).*                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   | Amendment  2008-1 to the Farmer Bros. Co. Amended and Restated Employee Stock Ownership  Plan (filed as Exhibit 10.30 to the Company’s Form 10-Q for the  quarter ended December 31, 2008 and incorporated herein by reference).*                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   | Good  Faith Amendment to the Farmer Bros. Co. Amended and Restated Employee Stock  Ownership Plan to comply with Code Section 401(a)(31)(B) as amended  by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)  (filed as Exhibit 10.31 to the Company’s Form 10-Q for the quarter  ended December 31, 2008 and incorporated herein by reference).*                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   | Loan  Agreement dated July 21, 2003 between the Company and Wells Fargo Bank,  Trustee of the Farmer Bros. Co. Employee Stock Ownership Plan (filed as  Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended  December 31, 2008 and incorporated herein by reference).                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  | Form of  Change in Control Severance Agreements entered into with each of the  following officers: Michael J. King and John E. Simmons (filed as  Exhibit 99 to the Company’s Form 10-Q for the quarter ended  March 31, 2005 and incorporated herein by reference).*                                                                                                                                                        |

 

25

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| 10.11  | Change  in Control Severance Agreement (Laverty), dated as of June 2, 2006, by  and between Farmer Bros. Co. and Roger M. Laverty III (filed as  Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on  June 8, 2006 and incorporated herein by reference).*                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.12  | Change  in Control Severance Agreement (Webb), dated as of March 3, 2008, by and  between Farmer Bros. Co. and Drew H. Webb (filed as Exhibit 10.4 to the  Company’s Form 8-K filed with the SEC on June 8, 2006 and  incorporated herein by reference).*                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.13  | Form of  Amendment No. 1 to Change in Control Severance Agreement entered into  with each of the following officers: Roger M. Laverty III, Drew H. Webb, John  E. Simmons and Michael J. King (filed as Exhibit 10.10 to the Company’s  Form 10-Q for the quarter ended December 31, 2008 and incorporated  herein by reference).* |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.14  | Employment  Agreement, dated as of June 2, 2006, by and between Farmer Bros. Co. and  Roger M. Laverty III (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on June 8, 2006 and incorporated herein  by reference).*                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.15  | Amendment  No. 1 to Employment Agreement, dated December 5, 2007, between  Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.1 to the  Company’s Form 8-K/A filed with the SEC on December 11, 2007 and  incorporated herein by reference)*                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  | Amendment  No. 2 to Employment Agreement, dated December 31, 2007, between  Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.13 to the  Company’s Form 10-Q for the quarter ended December 31, 2008 and  incorporated herein by reference).*                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  | Employment  Agreement, dated March 3, 2008, by and between Farmer Bros. Co. and Drew  H. Webb (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on March 7, 2008 and incorporated herein by reference).*                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.18  | Amendment  No. 1 to Employment Agreement, dated December 31, 2007, between  Farmer Bros. Co. and Drew H. Webb (filed as Exhibit 10.15 to the  Company’s Form 10-Q for the quarter ended December 31, 2008 and  incorporated herein by reference).*                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.19  | 2007  Omnibus Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed  with the SEC on August 29, 2007 and incorporated herein by reference) *                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.20  | Form of  2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed  as Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on  February 26, 2008 and incorporated herein by reference).*                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.21  | Form of  2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock  Award Agreement (filed as Exhibit 10.2 to the Company’s Form 8-K  filed with the SEC on February 26, 2008 and incorporated herein by  reference).*                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.22  | Stock  Ownership Guidelines for Directors and Executive Officers (filed as  Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on  February 26, 2008 and incorporated herein by reference).*                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.23  | Form of  Indemnification Agreement for Directors and Officers of the Company, as  adopted on May 18, 2006 (filed as Exhibit 10.1 to the Company’s  Form 8-K filed with the SEC on December 11, 2007 and incorporated  herein by reference).*                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.24  | Form of  Award Letter (Fiscal 2006) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 99.1 to the Company’s Form 8-K filed with  the SEC on August 30, 2006 and incorporated herein by reference).*                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.25  | Form of  2007 Target Award Notification Letter under Farmer Bros. Co. 2005 Incentive  Compensation Plan (filed as Exhibit 99.1 to the Company’s Form 8-K  filed with the SEC on December 22, 2006 and incorporated herein by  reference).*                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 10.26  | Form of  Award Letter (Fiscal 2007) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on August 29, 2007 and incorporated herein by reference).*                                                                                                            |

 

26

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| 10.27  | Form of  2008 Target Award Notification Letter under Farmer Bros. Co. 2005 Incentive  Compensation Plan (filed as Exhibit 10.2 to the Company’s Form 8-K  filed with the SEC on December 11, 2007 and incorporated herein by  reference).* |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| 10.28  | Form of  Award Letter (Fiscal 2008) under Farmer Bros. Co. 2005 Incentive Compensation  Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with  the SEC on October 3, 2008 and incorporated herein by reference).*               |
|   |                                                                                                                                                                                                                                                                |
| 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 plan or arrangement.**

 

27

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