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.
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
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