Forum Report: February Progress with Definition of Strategic Alternatives

The following summaries of our progress in the definition of strategic alternatives for Farmer Bros. shareholders include brief reports of issues which some of you may want to know more about. You should of course feel free to call for more information.

Prospective strategic relationships: The company with which we've agreed to engage in exclusive explorations, as reported last month, has been given a preliminary list of business combination issues developed with the Chapman Group, the food industry investment banking firm engaged to advise shareholder interests, as a foundation for discussions over the next few weeks. It should be emphasized that these issues and the general objectives we've established are based on our efforts to accommodate the interests of all Farmer Bros. shareholders, including independent "public" investors as well as Farmer family members and the employee beneficiaries of the company ESOP. If explorations progress smoothly, within a month or two we should be able to define the general provisions of a proposal to combine the existing Farmer Bros. coffee business with those of an operation that has complementary geographic and customer resources, under the management of people with a solid record of successful expansion.

Specifically on the subject of employee interests in a revived Farmer Bros. business operation, there has been no response to my February 14 letter requesting the board's investigation of reported misleading solicitations of employee support for current management. (A February 16 news article reported only that a company spokesman declined to comment on the letter.) A copy of the letter was sent to the SEC enforcement official who has been responsible for addressing other Farmer Bros. issues.

Real estate recapitalization: Since we now have at least a general sense of expected direction for the key strategic relationship, we have been able to progress also with explorations of alternatives for shareholder realization of full value from the Farmer Bros. real estate assets. Our current focus is on what is essentially a recapitalization transaction, which would involve selling the property ownership rights at appraised values to specialized real estate investors who simultaneously enter into long-term lease agreements with the Farmer Bros. operating company (or its combined successor). All the property used in the coffee business would therefore remain under the company's control, at economically justified market rental rates, while the company's shareholders would be able to obtain the cash value established by current levels of demand for real estate investments. More will be reported, of course, as specific terms of a proposal are defined over the next several weeks.

Information requirements: There have been more communications during the past month with the lawyer representing Farmer Bros. management about the company's acknowledged obligation to provide the information demanded in a December 9, 2005 shareholder Delegate's letter. In summary, the lawyer has presented an unconventional form of confidentiality agreement but has offered to cooperate by preparing summaries of the requested information. An exchange of letters from earlier this month has been posted on the Forum web site, and a scanned copy of the lawyer's latest letter received today will be made available within a few days from a link on the same page:

Management Attorney's Offer to Accommodate Shareholder Delegate's Demand for Records

(January 26 - February 8, 2006)

The management lawyer's efforts to impose an impractical confidentiality agreement on the Delegate should be carefully observed by those of you who are interested in the process of shareholder demands for information, either in relation to Farmer Bros. or for broader application to other situations. Professor Rosenthal, one of the Forum's active Advisory participants, has alerted us to an example of what management may try to do -- and what we are naturally trying to avoid -- in an SEC filing yesterday by Cardinal Capital (the same fund manager that led a dissident effort in the Hollinger situation): after providing the records required by Cardinal's Delaware Section 220 demand, InfoUSA (NasdaqNM:IUSA) has claimed that Cardinal violated the provisions of their confidentiality agreement as well as securities laws by using information that was defined as confidential to make investment decisions. While Cardinal's lawyer may have good arguments to win ultimate court support for Cardinal's position, a confidentiality agreement which is effectively designed as a foundation for this kind of legal squabbling can be very costly, not only to the dissident but to all the shareholders whose corporate assets are being squandered on the management side.