Coffee Company Getting Pushed to Institute Changes

By CONOR DOUGHERTY
Staff Reporter

The largest institutional shareholder of Farmer Brothers Co. has formally renewed its efforts to force management of the tightly controlled coffee company to institute major changes in hopes of raising the stock price.

Franklin Mutual Advisers LLC, which holds a 9.7 percent stake, is asking Torrance-based Farmer Brothers to register with the SEC as an investment company, because its $282 million hoard of cash and short-term investments accounts for 70 percent of corporate assets.

Such a move would force Farmers to change how it reports its results and to hire investment professionals to oversee its portfolio.

“Farmer Brothers appears to have be become a de facto investment company, but without the benefits of being registered as one,” Franklin said in its proposal, filed with the Securities and Exchange Commission.

Under securities laws, investment companies are those with more than 40 percent of their assets, excluding cash and government securities, in investments.

Franklin officials were unavailable for comment.

Two years ago, the mutual fund group, part of the San Mateo-based Franklin Resources Inc., failed in an attempt to oppose the re-election of Farmer Brothers’ entire board. The fund was stymied by the voting power of Farmer Brothers’ chairman, Roy F. Farmer, who controls more than 40 percent of the company’s stock.

Investors long have complained that the 85-year-old Farmer, whose father founded the company in 1912, has intentionally kept the company’s stock price down to benefit his estate.

“It’s to their benefit to keep the stock price low to (lower) inheritance taxes when the company is passed on to the next generation,” said Steve Crowe, a nephew of Roy F. Farmer who is nonetheless a critic. “That’s been a theme since 1951 when the founder died.”

Farmer Brothers’ stock closed on June 27 at $348.95, up 11 percent from April 8, when the Business Journal first reported that shareholders were considering the establishment of a forum. Still, New York investment banker Gary Lutin estimates that the shares are worth at least $400 apiece, which would give the company a $770 million stock market value.

This time around, Franklin has sponsored a long-distance “shareholders forum” – similar to a shareholder meeting, but called by shareholders, not by company management, though management is invited.

The meeting, which is being conducted remotely through a Web site and via fax and phone, is being chaired by Lutin, who has had limited success in pressuring other companies to take shareholder-friendly actions.

“It’s up to shareholders to decide if they want the company to continue as it has been, or to adopt the standards that are applicable to publicly-traded companies,” Lutin said.

Lutin has chaired similar forums with companies including Amazon.com and Dun & Bradstreet. At Lone Star Steakhouse and Willamette Industries, dissident shareholders were elected to the boards not long after Lutin became involved.

In its filing, Franklin said that Farmer Brothers has been accumulating a hoard of assets in an unused reserve fund for years. Its proposal wouldn’t change how the company’s coffee business is run.

Farmer Brothers Co. reported net income of $6.4 million for the first quarter ended March 31, down from $9.8 million in the like year-earlier quarter.

First-quarter revenues were $51.3 million, vs. $54.8 million in the first quarter of 2001. As of March 31, cash and short term investments totaled $282 million, up from $255 million a year earlier.

Independent board

Another shareholder proposal, submitted by Costa Mesa hedge fund Mitchell Partners LP, moves for new rules requiring Farmer Brothers to place a majority of independent directors on its board.

The proposal also calls for cumulative voting rights, which would make it easier for dissenting shareholders to be elected as directors.

“This proposal will establish the kind of independent board that virtually all recognized authorities consider essential to effective corporate governance,” Mitchell said in its filing. “Farmer Bros. is a public company and should be run like one.”

The Mitchell proposal places strict definitions on the classification of independent directors. Cumulative voting would allow shareholders to cast all their votes for one director instead of a slate, thus concentrating their votes.

Farmer Brothers’ six-member board consists of Roy F. Farmer, his son Roy E., a company vice president, a former employee, a lawyer who has done work for the company, and an accountant not affiliated with the company. “Certainly, the company does not have a history of independent directors,” said James Mitchell, sole general partner of Mitchell Partners.

While shareholders are critical of some Farmer Brothers policies, they also feel that it’s tightly run.

“Some of the investors who have been in this for some time feel like it’s an excellent company,” Mitchell said. “But that it’s not being run for the benefit of all the shareholders.”

The proposals were issued last week in advance of a June 27 deadline for submissions to be voted on at the company’s annual shareholder meeting. Those that qualify will be included in the company’s next proxy statement and voted on at the annual, which has not yet been scheduled.

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.

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