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Franklin Mutual Letter Urging Management to Seek SEC View of Compliance

(September 19, 2002)

Copied below is the text of a September 19,  2002 letter from Franklin Mutual Advisers, LLC, to Farmer Bros. Co., urging management to eliminate any question about the company's compliance with the Investment Company Act of 1940 ("ICA") by simply asking the SEC whether it agrees with management's position.

This letter refers to an August 16, 2002 letter concerning Franklin Mutual's July 26, 2002 demand for inspection of records,  and to an August 26, 2002 letter from Wilmer Cutler & Pickering,* representing Farmer Bros., requesting SEC concurrence with management's stated intent to exclude Franklin Mutual's shareholder proposal from the company's proxy statement for voting at the annual meeting.

Issues raised by the August 26th attorney's letter to the SEC had also been addressed in an August 29, 2002 letter to the company's directors, without response.

As a 9.6% shareholder, Franklin Mutual has filed  a copy of the September 19, 2002 letter in an SEC Form 13D/A to disclose their request for management response to investor concerns.

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* The August 26, 2002 letter has not yet been made available in electronic form.  Requests for fax copies may be sent to farm@shareholderforum.com.

 

[FRANKLIN MUTUAL SERIES FUND INC.]

 

September 19, 2002

By fax to 310.320.2436

Mr. Roy F. Farmer

Chairman
Farmer Bros. Co.
20333 South Normandie Avenue
Torrance, CA 90502

 

Dear Mr. Farmer:

We have not yet received a response from Farmer Bros. Co. (“the “Company”) to our August 16, 2002 letter addressed to your Treasurer, Mr. Simmons. In that letter, we asked when you would be prepared to make records available for our inspection as required by our July 26, 2002 demand pursuant to Section 1601 of the California Corporations Code, or, alternatively, whether you would provide all investors with a public report of the information we sought.

 

We have, however, received a copy of the August 26, 2002 letter from Matthew Chambers of Wilmer Cutler & Pickering written to the staff of the Securities and Exchange Commission ("SEC") on behalf of Farmer Bros., stating that you intend to exclude our shareholder proposal from the Company's proxy statement for shareholder voting at the annual meeting. Although we intend to submit to the SEC a reply to your objections, some of the arguments raised by Mr. Chambers disturbed us sufficiently to warrant our contacting you prior to doing so.

 

Mr. Chambers stated in his letter to the SEC that Farmer Bros. would be in violation of securities laws if it registered under the Investment Company Act of 1940 (“ICA”), citing examples which included specified Company transactions with the affiliated employee stock option plan. Left unsaid by Mr. Chambers is the fact that, if Farmer Bros. currently meets the ICA definition of an investment company and has no basis for exemption from the applicable regulations, it would be in violation of the ICA regardless of whether our shareholder proposal is included in Farmer Bros.’ proxy or whether it is ever approved or not by shareholders.

 

As shareholders, we are extremely concerned about whether or not Farmer Bros. is in compliance with the ICA. Two major reasons underlie our concern: (1) the potential liabilities to the Company arising from any violations of the ICA, and (2) the failure of shareholders to receive the protections intended by the ICA. We assume that you, as a fellow shareholder and also as a director with fiduciary responsibilities to your other shareholders, would share our concern as to whether the Company is in compliance with the ICA.

 

You have known at least since April that Farmer Bros. appears to meet the ICA definition of an investment company and was consequently at risk of being in violation of the ICA. The fact that the Company has not stated publicly since that date that it is NOT an investment company implies either of two things. Either you never checked to see whether in fact Farmer Bros. met the statutory definition or you did and have determined not to announce your findings.

 

As to the first possibility, it is inconceivable to us that, in light of your fiduciary duties as a director, you and the board wouldn’t have immediately made the necessary inquiry to determine whether the Company was an investment company as defined in the ICA. However, it is almost as inconceivable to us that you would have investigated the matter and then deliberately chosen not to disclose your findings to your shareholders. We fail to see any justification for the Company’s silence given your fiduciary duties as a director, as well as your disclosure obligations as an officer and director of a public company.

 

Against this background, we now are in receipt of Mr. Chambers’ statement that the Company would be in violation of the ICA if it registered as an investment company. Although his statement alone is not explicit enough to warrant any conclusions as to whether the Company is an investment company as defined in the ICA, we see a possible opportunity to eliminate needless back and forth regarding our proposal. We believe it would expedite the task of the SEC staff to resolve the appropriateness of our shareholder proposal if Mr. Chambers would expand upon his statement and simply tell the SEC whether the Company  is an investment company under the ICA.

 

We therefore urge you to resolve this matter by informing the SEC (1) whether you believe the Company is, or is not, an investment company as defined by the ICA, and (2) if it is an investment company, of any basis you may have identified for exempting Farmer Bros. from ICA registration requirements, with a request for Staff concurrence with your position in the form of a “no-action” letter.

 

In order for us to timely submit a reply to the SEC staff, please let us know by the close of business on September 24, 2002 whether you intend to comply with this request. Please also let us know at that time when you intend to respond to our earlier July 26th request for records. We will then provide the SEC with whatever reply is appropriate by September 26, 2002, and will encourage the Staff to defer its attention to your attorney’s arguments regarding our proposal until that time.

 

Very truly yours,

MUTUAL BEACON FUND
MUTUAL DISCOVERY FUND

By: FRANKLIN MUTUAL ADVISERS, LLC


_______________________________________
Name:  David Winters
Title: President, CEO & CIO
Ph:   973.912.2177

 

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.

For additional information or to be included in an email distribution list, send an inquiry to farm@shareholderforum.com.