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Farmer Bros. Must Allow Vote, SEC Says

Shareholder proposal would require greater disclosure of the coffee firm's investments.

November 23, 2002|Jerry Hirsch | Times Staff Writer

The Securities and Exchange Commission has turned up the heat on coffee roaster Farmer Bros. Co., possibly clearing the way for shareholders to learn more about the company's financial strategies and how its huge pot of assets is being invested.

Torrance-based Farmer Bros. was ordered by the SEC to let shareholders vote on a measure that would force the company to provide more detailed financial information. Farmer Bros. is sitting on $295 million in cash and investments -- an amount equivalent to about half of its total stock market value. To the chagrin of some shareholders, most of the money is invested in low-yielding U.S. government securities.

Franklin Mutual Advisors, which owns 9.6% of Farmer Bros. stock, submitted a proposal in June that if passed would require the coffee business to comply with the Investment Company Act of 1940. Among other things, the act stiffens the responsibilities of independent directors and mandates greater disclosure about a firm's investments and their performance.

Generally, a firm with 40% or more of its assets in investment securities and cash must adhere to the stricter disclosure rules. Farmer's stockpile of cash and securities represents about 70% of its corporate assets.

Whether the proposal passes could turn on the dynamics of the extended family of Roy F. Farmer, the 86-year-old chairman and chief executive, who has closely guarded control of the company for 50 years.

The son of the founder, Farmer owns about 10% of the company. But through a set of family trusts, he holds the voting rights to more than 40% of the company's shares. It is not clear whether family members who side with Franklin Mutual can persuade Farmer to vote their shares according to their wishes.

Farmer has been at odds over board representation and other matters with his 85-year-old sister, Catherine Crowe, and her children. The Crowe family owns nearly one-quarter of Farmer Bros. shares.

Farmer Bros. delayed its annual shareholders meeting while its attorneys fought to keep the Franklin Mutual proposal off the ballot. The company argued to the SEC that the proposal was too vague and would cause Farmer Bros. to violate several securities laws because the firm was not structured to be in compliance with the Investment Company Act.

But in a Nov. 15 letter to Farmer Bros., the commission said, "We are unable to concur with your view that Farmer Bros. may exclude the proposal."

"I think it is good that the SEC enforces the right to put this proposal on the company's proxy statement, but it is unfortunate that management of the company needs to be told that the SEC will enforce shareholder rights," said Gary Lutin, an investment banker and corporate governance activist working with Franklin Mutual.

Farmer Bros. has not announced a new date for the annual meeting.

Farmer and his son Roy E. Farmer, the company's president, did not return calls.

Last month the SEC ruled in favor of a different Farmer Bros. effort to block a shareholders proposal. Mitchell Partners, a Costa Mesa money manager, had sought a vote to require that the company's board have a majority of independent directors. Though it won that battle, Farmer Bros. eventually will have to accede to a similar requirement based on recent corporate reform legislation and Nasdaq listing requirements.

A group of shareholders that includes Franklin Mutual is alarmed by the investment by Farmer Bros. of $234 million in Treasury securities, which Lutin estimates posted a 1.73% return during the last quarter. Lutin said the rest of the portfolio had a 7% return, close to the 8% the company has said it expects to earn for its pension assets.

In a letter to Farmer Bros. directors Thursday, Lutin wrote that "while there may be some unrevealed business reason for this new investment policy," shareholders feared that the investment in the government securities was a ploy to avoid running afoul of ratios that determine whether a company must comply with the Investment Company Act. The ratio test for compliance with the act excludes government securities.

"In any event, the difference between returns of 8% and 2% on $234 million, without further accumulations, would cost shareholders $14 million annually," Lutin wrote.

Lutin urged the board of Farmer Bros. to take the following actions to improve its communication with shareholders:

* Nominate a majority of independent directors for election at this year's annual meeting rather than wait until next year to comply with new laws and Nasdaq listing requirements.

* Establish a separate entity to manage the company's investment funds in compliance with the Investment Company Act, allowing the coffee processing and distribution operations to be managed independently of the investment fund structure.

* Commit to retaining professionally qualified advisors to examine corporate restructuring and strategic alternatives.

Although Farmer Bros. is a public company, fewer than 1,000 of its nearly 2 million shares outstanding change hands daily, on average. Its shares did not trade Friday but rose $2.35 on Thursday to close at $310 on Nasdaq.

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