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[letterhead]
LUTIN & COMPANY
575 Madison Avenue
New York, New York 10022
Telephone (212) 605-0335
Facsimile (212) 605-0325
November
21, 2002
By telecopier:
310/320-2436
Messrs. John M. Anglin,
Guenter W. Berger,
Lewis A. Coffman,
Roy E. Farmer,
Roy F. Farmer, and
John H. Merrell
c/o Farmer Bros. Co.
20333 South Normandie Avenue
Torrance, California 90502
To the members of the board of
directors of Farmer Bros. Co.:
Assuming the recent
SEC response to your arguments about shareholder proposals leaves no other
reason to postpone the annual meeting, this letter is intended to summarize
certain investor interests for your consideration in planning the meeting's
agenda.
First, offering my
observations as adviser to the "Forum" for Farmer Bros. shareholders,
investors may reasonably view some of management's recent conduct as
follows:
• Use of shareholder
assets: While management certified in September that it continues to
assume an 8% expected return on pension assets ‑‑ and uses that 8%
assumption as the basis for its accounting of pension assets and expenses in
the audited financial statements signed by directors -- the company
simultaneously invested $234 million of its shareholders' assets in
low‑yield US government securities, reducing the interest return on the
non‑equity portion of the corporate investment portfolio to a 1.73% annual
rate during the last quarter. (The preferred stock portion of the portfolio
continued to generate a respectable dividend return in the 7% range.)
Management has offered no explanation for this dramatic reallocation of 79%
of the company's $295 million investment funds. While there may be some
unrevealed business reason for this new investment policy, investors
familiar with regulatory issues may be concerned that the change in the
portfolio's proportion of US government securities could be intended to meet
a ratio test that would provide management with an arguable basis for their
continued opposition to the reporting and oversight requirements of the
Investment Company Act of 1940 ("ICA"). In any event, the difference
between returns of 8% and 2% on $234 million, without further accumulations,
would cost shareholders $14 million annually.
• Shareholder voting
rights: Management has recently spent significant amounts of the
shareholders' money and management resources in an effort to prevent
shareholders from exercising their rights to vote on two proposals. Both
proposals would have subjected management to increased oversight.
Management succeeded in getting SEC staff concurrence to block voting on the
proposal to establish an independent board this year based on a questionable
claim that its provisions could not be legally implemented, even though the
company will have to adopt essentially the same independent board provisions
within a year or two to comply with new laws and Nasdaq listing
requirements. Management also argued, unsuccessfully, to block shareholder
voting on a separate proposal to manage the company's investment funds in
compliance with the disclosure and management controls applicable to other
fund managers, based on reasons that included a troubling claim that
registration under the ICA could subject the company to enforcement relating
to current violations of law.
• Disclosures of
information relevant to investors: Management has continued to defer
its legally required response to a major shareholder's July 26, 2002 demand
for information that investment companies are obligated to report publicly
under SEC regulations. Even though the company is managing a $295 million
fund, representing 70% of total corporate assets, investors cannot obtain
the information routinely provided by other fund managers about specific
investments, administrative expenses, or even who is responsible for
managing the investments. More generally, management does not report
sufficient information about any of its business operations to permit
effective evaluation or monitoring, and its executive officers consistently
refuse to respond to normal investor and journalist inquiries.
In this context, it
is suggested that you consider taking the following or similar actions to
assure investors that the current directors of Farmer Bros. can be relied
upon to address shareholder interests:
1. Include the Mitchell
Partners proposal for an independent board in the proxy statement to allow a
shareholder vote on it, even though the SEC staff said they will not
initiate an enforcement action if you exclude it.
Or, alternatively,
take actions yourselves to nominate a majority of independent directors for
election at this year's annual meeting, rather than wait until next year to
comply with new laws and Nasdaq listing requirements.
2. In a public SEC
filing, report the information about investments and management that is
required for funds subject to the ICA.
3. Establish a separate
entity to manage the company's investment funds in compliance with the ICA,
allowing the coffee processing and distribution operations to be managed
independently of the investment fund structure.
4. Commit to the
engagement of professionally qualified advisers for an examination of
corporate restructuring and strategic alternatives.
Please let me know if
you have any questions about these or other shareholder interests. As
previously stated, your participation in Forum communications will always be
welcomed.
Very
truly yours,
Gary
Lutin
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