LOGO
INTERNAL COMMUNICATION FOR BETTER COOPERATION
Date: February 13, 2004
To: All ESOP Participants
From: John Simmons
Treasurer
Re: Proxy Questions
On behalf of the Board of Directors, I have attached some additional
information regarding this years Proxy Statement and a sample proxy card
indicating how to vote if you wish to support the Board's recommendations.
We hope this information answers most of your questions.
A hard copy is being mailed, but we wanted you to have this electronic
version.
LOGO
INTERNAL COMMUNICATION FOR BETTER COOPERATION
Date: February 12, 2004
To: All ESOP Shareholders
From: John Simmons
Treasurer
Re: Annual Meeting of Shareholders
As shareholders of Farmer Bros. Co. you should have received your Proxy
Statement and Proxy Card by now. Proposal 3 (to reincorporate in Delaware)
has generated a number of questions. Following are some of the questions we
have heard, along with short answers.
Is the Company being sold or positioned to be sold?
No. That is not our plan or intention.
Much of the criticism that's been leveled against Proposal 3 has nothing to do
with our plan to reincorporate the company in Delaware. Rather, most of the
criticism has been leveled at certain parts of the new corporate charter and
bylaws that may make it more difficult for outsiders to force a sale without
careful review. Additionally, the recent purchase of Company shares by the
ESOP will give employees a greater voice in any decision to approve such a
transaction.
Is any part of our business moving to Delaware?
No. We will be legally incorporated there, but no employee will relocate to
Delaware and none of our operations will move anywhere as the result of the
reincorporation. The vast majority of California's public companies are
incorporated in Delaware.
Why reincorporate in Delaware now, after all these years?
We believe, along with many other respected companies, that Delaware's
corporation law and principles of corporate governance are among the most
reliable in the nation. Delaware law has been tested through a large number
of court cases and has a reputation of being more predictable. By becoming a
Delaware corporation we will all have a better understanding of the rules.
Why does this matter?
In a world in which lawsuits are common, we believe it is better to be
protected by the laws of the land than threatened by them. California
corporate law is untested in some areas, which means that certain aspects of
these laws are not understood clearly until a court has ruled on them. This
can add to our risk unnecessarily.
In addition, by moving to Delaware we hope to minimize the risks of creative
"interpretation" of California law. We saw an example this year of how a
creative reading of California law could be used to harass our board: one of
our shareholders proposed to remove the indemnification of directors,
retroactively. We could not agree with this - it would harm our ability to
bring the best people into our company, and expose our board members to
potentially large liability even in nuisance lawsuits. Our attorneys believed
this proposal was based on a faulty interpretation of the law, and the Staff
of the U.S. Securities and Exchange Commission did not disagree with our
decision NOT to include the proposal on this year's proxy. Delaware law, in
contrast, is much clearer and less open to creative interpretation.
Is indemnification a big deal?
In order to attract and retain qualified directors and officers, who are
charged with the responsibility of overseeing operations and making the hard
decisions about the company's future direction, companies must offer more than
competitive pay - companies also must protect these "supervisors" with
insurance and indemnification for their actions. Without this insurance and
indemnification, the directors and officers could be personally sued for their
actions - even if they acted in good faith - and these individuals would have
to pay for their defense out of their own pockets, even if it was a nuisance
lawsuit. We want our directors to make the best decisions for the Company
without fear of being sued by shareholders who disagree.
Please note that this indemnification does not extend to criminal acts, such
as those described in the newspapers about other companies. It covers normal
and reasonable actions and decisions of those individuals during the time that
they are overseeing the company.
We are fortunate to have a board and management that includes a number of very
accomplished and successful people with a lot of business experience, a lot of
integrity, and great records of building and contributing their knowledge to
successful companies. These are people with a lot to give - and a lot to lose.
In our view, no company can attract and retain quality people in these key
positions without this indemnification.
Didn't someone claim that if the Company reincorporated in Delaware management
and the board would no longer be held accountable for any of their actions?
In our opinion, anyone who makes such a claim is seriously mistaken, and those
in the press who repeated such statements were either very gullible or merely
biased.
The vast majority of California's largest publicly-held companies, including a
number of America's best run and must successful companies, are incorporated
in Delaware. In each of these companies - and in Farmer Bros. if the
shareholders agree to reincorporate in Delaware - shareholders will continue
to have many rights, including the ability to hold management and the board of
directors accountable. It's preposterous to claim otherwise.
In Delaware our shareholders will continue to vote on major issues. They will
continue to elect directors. Shareholders still will be able to submit
proposals for shareholder votes. They will still be able to attend annual
meetings and speak directly to everyone who's there. Letters from concerned
shareholders will continue to be read and considered. Shareholders will
continue to be able to sue the company, regulatory bodies will continue to
regulate the company, and, in the event that criminal or unlawful acts ever
occur, these will be prosecuted, as they are with the Delaware corporations
that make headlines every day.
One of the differences between California and Delaware law is that, under
Delaware law, some actions by shareholders can be limited or even precluded,
such as the right to call meetings between annual meetings. However, as
shareholders you still hold the directors accountable for their actions, and
you show that by the way you vote your shares at the annual meeting.
Why are the anti-takeover portions separated out?
An interpretation of Securities and Exchange Commission rules requires us to
highlight the proposals that might make a corporate battle for control more
difficult for dissident shareholders, so that the current shareholders can
better understand these changes.
These measures, as a group, effectively encourage anyone seeking to gain
control of the Company to negotiate with the board of directors. The Board
will have the ability to determine whether the interests of the Company and
all of its shareholders would be served. The Board will always be
accountable to the shareholders for their actions.
What is a stock split?
One provision in our Delaware reincorporation proposal is to authorize or
allow the Board to issue more stock. Shortly after the reincorporation takes
place, we expect the Board to approve a 10 for 1 stock split: all holders will
receive 10 shares of stock for each share presently owned. Think of it this
way: you start with a $100 bill and you get change of 10 bills of $10 each -
the value's the same, but sometimes a $10 bill is easier to trade. Similarly,
this "split" isn't likely to really change the value of your holdings: 1 share
of stock before the split will control the same share of earnings and the same
share of the company's assets as 10 shares after the split. We believe this
may make it easier to trade the stock and reduce the bid-ask spread
(sometimes as high as $15) that market makers have established for our stock.
Should the proposal to reincorporate in Delaware be defeated, there is no
indication at this time that the Board would consider changing the corporate
charter of the California Corporation to allow a stock split. Any such change
in the charter would require a separate vote by the shareholders.
What is this Investment Company Act concern all about?
The Investment Company Act of 1940 ("ICA") was designed to regulate investment
companies like mutual funds and closed-end investment funds. Some people have
pointed to the amount of cash and investments that the Company has made over
decades. If, at some point, it is determined that we really are primarily
engaged in being an investment company instead of being primarily engaged in
being a coffee company, we might have to sell the coffee company and operate
as an investment company - or keep the coffee company and use some of the
cash and investments, for example, to make business acquisitions, to buy back
more of our stock or pay a special dividend.
Management strongly disagrees with this view of our business, and recent
events would seem to support our position. Perhaps, because of these events
there will be fewer concerns about this issue in the future.
1. On December 4, 2003 a shareholder brought a suit against the Company and
its directors. He claimed that the Company is an unregistered investment
company, and that loans made to the ESOP to buy Company stock are therefore
illegal (investment companies can't make such loans) and that the stock
purchased should not be allowed to be voted. On December 23, 2003, the U.S.
District Court ruled that this shareholder not have standing to bring this
case, and that even if he did have standing, he had failed to show a
likelihood of prevailing on the merits of his claim. In other words, he
didn't have the right to bring the lawsuit to begin with, but if he had, the
facts he presented were not sufficient to support his claim that we are an
investment company. On February 4, 2004 that shareholder withdrew his lawsuit.
2. On December 24, 2003 we used over $110,000,000 of our investments to
purchase company stock at a price well below market. This reduced our
investments by that amount, which we think reduces the ability of a critic to
contend that we are not primarily engaged in being a coffee company. By the
way, this stock purchase enabled the ESOP to achieve our stated goal of
acquiring 300,000 Company shares, and at a substantial cost savings to the
Company.
3. Last summer we hired an investment bank, Credit Suisse First Boston, to
help us in continuing to seek strategic options to improve our earnings
outlook. Options under ongoing consideration include -- subject to market
conditions and available opportunities -- potential acquisitions of other
companies or businesses, buying back additional shares and payment of
extraordinary dividends. Although there's no assurance that any of these
options will be implemented, these options may help us protect our existing
business - and they would further reduce the amount of cash and investments
held by the company.
Does my vote really matter?
Absolutely. The ESOP controls the voting of 300,000 shares, 18.7% of the
outstanding shares. The proxy voting rules require that the proposal must win
by the vote of a majority of the shares outstanding. With 1,607,508 shares
outstanding, a proposal can pass only if it receives an affirmative vote - a
"yes" vote - of 803,755 shares. The Farmer Family intends to vote their
633,020 shares in favor of these proposals, but your vote is necessary for
them to pass.
There have been approximately 25,500 shares allocated through the ESOP to more
than 1,100 employees since its inception in 2000. Employees will vote these
allocated shares and the bank trustee will vote the shares not yet allocated
to employees in the same manner and proportion as those voted by the
employees.
For example, if employees vote 90% of their shares in favor of any proposal,
the independent trustee will vote 90% of the unallocated shares in favor of
the proposal. As you vote your allocated shares, as ESOP beneficiaries, you
are actually voting the entire 300,000 shares. You therefore have a
meaningful - some would say vital - voice in the outcome of this and future
proxy votes. Your vote matters so much that we want to be sure you vote, and
we believe it is in the best interests of all Farmer Bros. employees to follow
the board's recommendation:
The Board of Directors recommends that you
VOTE YES ON PROPOSALS 1, 2, & 3
AND
VOTE NO ON PROPOSAL 4.
The Board of Directors Recommends that you:
VOTE YES ON PROPOSALS 1, 2, &3 AND VOTE NO ON PROPOSAL 4
VOTE YES ON PROPOSALS 1, 2, &3 AND VOTE NO ON PROPOSAL 4
This solicitation is being made on behalf of the Board of Directors of Farmer
Bros. Co. For additional information we urge you to read the Proxy Statement
in its entirety.
Page 5 2/12/2004
The Board of Directors recommends that you
VOTE YES ON PROPOSALS 1, 2, & 3
AND
VOTE NO ON PROPOSAL 4.
Page 5 2/12/2004
COMPANY'S SAMPLE PROXY CARD
The Board of Directors Recommends a Vote FOR Proposals One, Two and Three(A)-
(F) and AGAINST Proposal Four.
Please note that if any one of Proposals Three (A)-(F) is not approved by the
Shareholders, none of Proposals Three(A)-(F) will be approved.
PROPOSAL ONE: Election of Directors (Note: If the proposal to
reincorporate the Company in the State of Delaware (Proposal Three(A)) with the
additional anti-takeover measures (Proposals Three(B)-(F)) is approved, the
seven directors will be elected to a classified Board of Directors, with Class
I directors being elected for a one-year term, Class II directors being elected
to a two-year term and Class III directors being elected to a three-year term.
If the proposal to reincorporate in the State of Delaware is not approved, all
seven directors will be elected for a one-year term.)
Class I Class II Class III
01 Roy F. Farmer 02 Guenter W. Berger 03 John H. Merrell
04 Lewis A. Coffman 05 Thomas A. Maloof 06 Roy E. Farmer
07 John Samore, Jr.
The Board of Directors Recommends a Vote FOR all nominees
X Vote FOR all nominees Vote WITHHELD for all
(except as marked) nominees
(Instructions: To withhold authority to vote for any indicated nominee, write
the number(s) of the nominee(s) in the box provided to the right.)
PROPOSAL TWO: Approval of appointment of Ernst & Young LLP as the Company's
independent public accountants for fiscal year 2004
The Board of Directors Recommends a Vote FOR Proposal Two
For Against Abstain
X
PROPOSALS THREE(A)-(F): X FOR ALL
AGAINST ALL
ABSTAIN ON ALL
The Board of Directors Recommends a Vote FOR ALL Proposals Three(A)-(F)
Proposal Three(A): Approval of the reincorporation of the Company in the
State of Delaware (Note: A failure to approve Proposal Three(B) will result in
a failure to approve Proposals Three(A)-(F))
For Against Abstain
Proposal Three(B): Approval of the elimination of the right of our
shareholders to act by written consent (Note: A failure to approve Proposal
Three(B) will result in a failure to approve Proposals Three(A)-(F))
For Against Abstain
Proposal Three(C): Approval of the implementation of a classified Board of
Directors (Note: A failure to approve Proposal Three(C) will result in a
failure to approve Proposals Three(A)-(F))
For Against Abstain
Proposal Three(D): Approval of the elimination of the right of
shareholders holding ten percent 10%) or more of the voting shares to call a
special meeting of shareholders (Note: A failure to approve Proposal Three(D)
will result in a failure to approve Proposals Three(A)-(F))
For Against Abstain
Proposal Three(E): Approval of the elimination of cumulative voting for
our directors (Note: A failure to approve Proposal Three(E) will result in a
failure to approve Proposals Three(A)-(F))
For Against Abstain
Proposal Three(F): Approval of the increase in authorized shares of common
stock of the Company from 3,000,000 shares to 25,000,000 shares, and
authorization of 500,000 shares of preferred stock of the Company (Note: A
failure to approve Proposal Three(F) will result in a failure to approve
Proposals Three(A)-(F))
For Against Abstain
PROPOSAL FOUR: Shareholder proposal to amend the Company's bylaws to restore
cumulative voting
The Board of Directors Recommends a Vote AGAINST Proposal Four
For X Against Abstain
DISCRETIONARY AUTHORITY IS CONFERRED ON ALL MATTERS, FOR WHICH A GRANT OF SUCH
AUTHORITY IS PROPER. SEE PROXY STATEMENT "VOTING REQUIREMENTS," Pg. [42].
Date: 2/13/04
Your Signature Here
Signature(s) in Box
Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
IMPORTANT NOTE:
Make sure to sign and date you proxy card.