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Sent: Monday, February 23, 2004 10:24 AM
Subject: Practical choices for shareholders

 
Today's annual meeting will start a new chapter for Farmer Bros. Co.
 
Management's course is clear.  In the absence of any court or regulatory action to block the process, it is assumed they will press forward with their reorganization plan.  The only open question is whether the board will use the additional authorized shares for a 10-to-1 stock split, as promised, or for the implementation of a "poison pill" to add to their takeover defenses.
 
What we must address now is the course for shareholders.  Based on recently expressed views, investors cannot be expected to rely on the existing board of directors to manage Farmer Bros. in the best interests of its shareholders.  That leaves shareholders with a very obvious and simple choice: either replace management or surrender your interests to them.
 
For those of you who choose to protect your interests -- or those of you who have no choice -- there appears to be only one practical means of replacing management.  That is a sale of the company.
 
A sale is likely to be the only alternative that will be supported by the required votes of both non-management constituencies, the public investors holding 41% of the stock and the employee beneficiaries of the ESOP holding 19%.  Each has an interest in maximizing the long term strategic value of the company's coffee business, either purely for investment value or for a combination of that and job security.  Both independent and employee investors will benefit from the business being run by managers who are capable of growing it, and both will suffer if the business is allowed to deteriorate.  But, realistically, employees cannot be expected to vote against their existing "supervisors" -- to use the term presented bluntly by management in their February 12th solicitation of employee votes -- if those "supervisors" might remain in control afterwards.  A dissident slate of directors, by itself, is therefore unlikely to win employee support.  What employees need is an action, such as a sale, that results in a certain replacement of any "supervisors" they voted against.
 
Developing a plan for a sale will require our examination of the following:
 
    Strategic buyers able to develop the greatest value from the company's coffee processing and distribution business
    Potential value realization from real estate, securities, and other non-strategic assets
    Restructuring of ESOP transactions to relieve employee pension of $65 million debt burden
    Resolution of potential claims against directors, including recovery of corporate funds transferred to ESOP
 
Some of you have noted that you thought a sale of the company appeared to be the most sensible alternative when the Forum was initiated nearly two years ago.  I think almost everyone will now agree that you were right.  Fortunately, the developments since that time have put you in a significantly better position to achieve your objective.
 
I will welcome your comments, as always, and look forward to proceeding with this new -- and presumably final -- phase of the Forum.
 
             - GL
 
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212/605-0335
Fax: 212/605-0325
Email: gl@shareholderforum.com

 

 

 

The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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