Forum Report: Value Enhancement Objectives for 2005

The agenda for Forum attention during the coming year is likely to be focused on the concerns of Farmer Bros. shareholders – and also the beneficiaries of employee and family trusts that hold the stock – about the continuing deterioration of the company’s coffee processing and food distribution operations.

The current value of your investment, having fallen 43% during the past year from $39.39 per share to close yesterday at $22.56, reflects an understandable marketplace reaction to a steady decline of sales and operating income from the coffee enterprise for which Farmer Bros. is broadly recognized. But many value investors would consider this an over-reaction, based on the intrinsic values of the company’s component operating business, real estate, and investment funds. As indicated in the rough analysis presented below, a value range in excess of $40 per share could be realized by managers who are able to simply match industry averages in their use of the company’s assets.

A $40 per share value enhancement objective may therefore be reasonable, but many investors would question whether it can be achieved without a change of management. Under these circumstances it is assumed that the Forum will need to address the current board’s willingness to make changes. It may also be desirable for Forum participants to develop independent proposals for management changes, including possible joint venture or sale transactions to turn the coffee business over to executives who are capable of restoring its competitive viability.

The deteriorating business situation, particularly in the context of recently adopted management entrenchment provisions, will of course require our fresh consideration of information requirements and communication processes. I will welcome your thoughts on the subject, and look forward to providing whatever Forum support you may require to finally achieve the $40 per share value enhancement objective in 2005.

Farmer Bros. Component Values


Shares outstanding:	16,075,080

		Dollars (000)	Per Share
Book value		269,698	16.78
Deduct investment funds		-198,710	-12.36
Enterprise book value		70,988	$4.42
	Valuation Multiple
Alternative Enterprise Valuations
Industry Price to Sales Ratio	1.76	340,717	21.20
Industry Price to Book	4.80	340,742	21.20
Industry Price to Tangible Book	8.19	581,392	36.17
Average		420,950	$26.19

Low Range Value Estimate
Food processing enterprise		340,717	21.20
Real estate sale-leaseback (Torrance)		20,000	1.24
Distribute investment funds		198,710	12.36
Total		559,427	$34.80

High Range Value Estimate
Food processing enterprise		581,392	36.17
Real estate sale-leaseback (Torrance)		60,000	3.73
Distribute investment funds		198,710	12.36
Total		840,102	$52.26

Average Range Value Estimate
Food processing enterprise		420,950	26.19
Real estate sale-leaseback (Torrance)		40,000	2.49
Distribute investment funds		198,710	12.36
Total		659,660	$41.04
Sources: 1. Company financial data was obtained from its Form 10-K annual report for the year ending June 30, 2004. 2. Industry multiples were reported for the Reuters Food Processing index at the close of business on January 6, 2005. 3. Real estate valuation ranges for the company’s Torrance, California property are based on the company’s 1997 Form 10-K report that the building was 474,000 square feet and on a CoStar database report that the land was 878,605 square feet.