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Forum Report: ESOP Issues and Exploration of Strategic Alternatives

(September 21, 2005)

Sent: Wednesday, September 21, 2005 3:48 PM
Subject: ESOP issues and exploration of strategic alternatives

The Form 10-K annual report filed by Farmer Bros. last week and the subsequent trading of the company’s stock below $20 per share have raised questions relating specifically to the Employee Stock Ownership Plan (“ESOP”) and more generally to the company’s strategic alternatives.
ESOP Issues
Addressing first the ESOP issues, the stock it acquired in 2004 for $25 per share with borrowed funds is now worth considerably less.  At the current $20 per share trading range, the total 2,998,677 shares held by the ESOP are now worth only about $60 million, and the 2,242,671 “unallocated” shares that secure the ESOP debt obligations – reported to have a balance of $59.2 million as of June 30, 2005 – are worth less than $45 million.  In other words, the ESOP has a net value of approximately zero, and is obligated to make future debt payments that are about $15 million more than the value of stock that will be allocated to employees.
You may recall that the Forum had asked the SEC in a September 30, 2004 letter to investigate possible violations of securities laws in relation to the company’s transactions with the ESOP and management’s control of its assets.  Neither the SEC nor the company has reported any result of that request.
Strategic Alternatives
Since there are no indications that current management will either improve performance or initiate appropriate actions to prevent further deterioration of shareholder value, some of the company’s investors have expressed an interest in developing their own strategic alternatives.  I will therefore be organizing a program to explore and negotiate these alternatives, with provisions for private participation by shareholders who have an interest and are willing to respect the required confidentiality conditions.
Anyone who wishes to consider involvement in this process is encouraged to call me for more information.
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325



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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