**Exhibit 10.6**

 

ESOP LOAN AGREEMENT NO. 2

 

This ESOP Loan Agreement No. 2 (the “Second Agreement”) dated asof July 21, 2003 is entered into by and between FARMER BROS. CO., aCalifornia corporation (“Lender”), and WELLS FARGO BANK, N.A., (the “Trustee”)as trustee for the FARMER BROS. CO. EMPLOYEE STOCK OWNERSHIP PLAN (the“Borrower” or the “ESOP”).

 

RECITALS

 

A. The Lender has adopted an employee stock ownership plan to purchaseand hold FARMER BROS. CO. stock on behalf of the eligible employees of Lender. TheESOP is intended to qualify as an employee stock ownership plan under section4975(c)(7) of the Internal Revenue Code of 1986, as amended (the “Code”),and Section 407(d)(6) of the Employee Retirement Income Security Act of1974, as amended (“ERISA”).  The ESOPprovides that the ESOP may obtain loans to purchase shares of Lender’sstock.  It is intended that loans made underthis Agreement shall qualify for an exemption under Section 4975(d) ofthe Code from being a prohibited transaction under Section 4975(c) ofthe Code.

 

B. Pursuant to the ESOP Loan Agreement dated March 28, 2000 asamended by Amendment No. 1 to ESOP Loan Agreement (“First Agreement”), asof the date hereof the ESOP has acquired 170,426 shares of the 300,000 sharesof the Company’s common stock for which a loan was authorized by the FirstAgreement.

 

C. The provisions for loan advances under the First Agreement expiredon July 31, 2003.

 

D. On July 21, 2003 Lender’s Board of Directors authorized a loanto the ESOP, without limitation as to amount, to purchase the remainder(129,574 shares) of the 300,000 originally authorized.  Such remaining shares are called “Shares” herein.

 

E. The ESOP Plan Committee by action dated October 6, 2003 hasauthorized the execution of the Second Agreement.

 

ARTICLE 1:  The ESOP Loan

 

1.1 Subject to the terms set forth herein, the Lender agrees to lend tothe Borrower the Principal Amount, or such portion of the Principal Amount asthe Borrower elects to receive from time to time under Section 1.2 of thisSecond Agreement (the “Loan”).

 

1.2 During the period commencing with the date hereof and ending on July 31,2005, the Borrower may elect from time to time to receive from Lender an advance(an “Advance”). Amounts Advanced and repaid may be reborrowed prior toJuly 31, 2005.  An election toreceive an Advance shall be made by the Borrower in writing to the Lender andshall specify the amount of the Advance requested and the date on which theBorrower requests that such funds be made available.  Such date shall be no less than threebusiness days prior to the date the notice of such election is received by theLender, unless the Lender in its sole discretion waives such requirement.

 

1.3 The Borrower hereby agrees that it will use the entire proceeds ofeach Advance within a reasonable time after receipt to acquire Shares throughopen market purchases or from the Lender or any shareholder of Lender.  If for any reason such purchases cannot beeffected within a reasonable time, the Borrower must make a principalprepayment of the Loan with all such unused proceeds.

 

1.4 Borrower’s indebtedness is evidenced by a Promissory Note of evendate (the “Note”) in the form attached hereto as Exhibit “A”.  The Lender shall

 

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enter upon the schedule attached to the Note the date and principalamount of each Advance.

 

1.5 Interest shall accrue on the balance of unpaid principal from thedate of each Advance until the payment due date as described in the Note.

 

1.6 To secure payment of the Promissory Note, Borrower grants Lender a securityinterest in the Shares purchased with the loan proceeds under the ESOP PledgeAgreement attached hereto as Exhibit “B”.

 

1.7 The Borrower shall make principal and interest payments to the Lenderaccording to the terms of the Note.  Thedate and amount of each payment, principal or interest, shall be entered on theschedule to the Note.

 

1.8 The Lender agrees to make contributions to the ESOP in cash or by cancellationof indebtedness from time to time and in amounts sufficient to permit theBorrower to make timely repayments of principal and interest due under theterms of the Note.  Subject to thepreceding sentence, the amount and timing of such contribution(s) shall beat the sole discretion of the Lender, after considering the amount of eachannual payment of principal and interest, the amount of any cash dividendsreceived by the ESOP on Lender’s stock and the amount, if any, of non-Lenderinvestments held by the ESOP.  The Lendershall not be required to make contributions to the ESOP in amounts in excess ofthe limitations under Sections 404(a) and 415 (c) of the Code.  The Borrower agrees that so long as anyinterest or principal amount remains payable on the Loan, Borrower will use allcash contributions, earnings thereon and cash dividends received by the ESOP tomake payments on the Loan. Borrower’s obligation to make payments on the Loanis limited to the excess of the aggregate of such contributions, earnings anddividends over prior Loan payments. Lender shall have no recourse against Borrower’s assets other than suchexcess contributions, earnings and dividends and the Shares then pledged underthe ESOP Pledge Agreement.

 

1.9 The Borrower may prepay principal or interest without premium orpenalty, any such prepayment shall be applied to the principal installments inthe inverse order of maturities.

 

1.10 The ESOP may elect to apply the proceeds from the sale of anyShares remaining subject to pledge to pay principal and interest due on theLoan in the event of the termination of the ESOP or if the ESOP ceases to be anemployee stock ownership plan under Section 4975(e)(7) of the Code.

 

ARTICLE 2:  The BorrowerRepresents And Warrants As Follows:

 

2.1 The Borrower has duly authorized the execution, delivery andperformance of this Agreement, the Note and the ESOP Pledge Agreement and anyother documents in connection with the Loan. These documents that have been or will be executed and deliveredpursuant to this Agreement constitute valid, binding obligations of the ESOP,each enforceable according to its terms.

 

2.2 The Borrower is an employee stock ownership plan established by theLender and has all requisite power and authority, as described in the ESOP plandocument, to execute, deliver and perform its obligations under this Agreement.

 

2.3 All of the proceeds of the Loan will be used by the Trustee topurchase for the ESOP shares of “employer securities” as defined in Section 409(l) ofthe Code, subject to Section1.3 above.

 

2.4 This Agreement is executed by Wells Fargo Bank, N.A. solely in its capacityas Trustee of the Farmer Bros. Co. Employee Stock Ownership Plan pursuant todirections from the ESOP.

 

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ARTICLE 3:  The Lender RepresentsAnd Warrants As Follows:

 

3.1 The Lender is a corporation duly incorporated and validly existingand in good standing under the laws of the State of California.

 

3.2 The Lender has all requisite power and authority to deliver andperform its obligations under this Agreement. The Lender has taken all corporate action to establish the ESOP and toauthorize this Agreement. This Agreement has been duly executed and deliveredby the Lender and is a legal, valid and binding obligation of the Lender.

 

3.3 Neither the execution of this Agreement nor the fulfillment of anyof the Lender’s obligations under this Agreement will conflict with or resultin a breach or violation of or constitute any default under any known rule,law, regulation, order contract or agreement of the Lender.

 

ARTICLE 4:  Miscellaneous

 

4.1 No amendment or waiver of any provision of the Agreement shall be effectiveunless set forth in an instrument in writing and signed by both parties to thisAgreement.

 

4.2 No delay or omission of Lender in exercising any right or remedyunder this Agreement shall impair such right or remedy or be construed to be a waiverof any default of an acquiescence therein, and any single or partial exerciseof any such right or remedy shall not preclude other or further exercisethereof or the exercise of any other right or remedy; and no waiver, amendmentor other variation of the terms, conditions or provisions of this Agreementwhatsoever shall be valid unless in writing signed by the Lender, and then onlyto the extend such writing specifically set forth.  All rights and remedies described in thisAgreement, the Note or other Loan documents shall be cumulative and all shallbe available to the Lender until all terms and conditions of the debt have beensatisfied.

 

4.3 This instrument, including the Exhibits hereto, is the entireagreement between the parties hereto with respect to the loan and allrepresentations, warranties, agreements or undertakings heretofore orcontemporaneously made, which are not set forth herein, are superceded hereby.

 

4.4 This Agreement shall bind and inure to the benefit of the partieshereto and their respective successors or assigns.

 

4.5 Any notice, consent, approval or directions required or permittedto be given hereunder shall be in writing and shall be deemed duly given and receivedupon personal delivery to the addressee stated below or if mailed, forty-eight(48) hours after deposit in the United States Mail, first class postage andaddressed as required below:

 

“LENDER”

 

Treasurer’s Office

Farmer Bros. Co.

20333 South Normandie Avenue

Torrance, CA 90502

 

“BORROWER”

 

Administrative Committee

Farmer Bros. Co. Employee Stock Ownership Plan

20333 South Normandie Avenue

Torrance, CA 90502

 

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With a copy to “TRUSTEE”

 

Wells Fargo Bank, N.A.

Employee Benefit Trust

707 Wilshire Boulevard

Los Angeles, CA 90017

 

4.6 All Exhibits are incorporated herein.

 

4.7 The Trustee’s personal assets shall not be liable for any act oromission of the Trustee except in the case of gross negligence or willfulmisconduct.

 

IN WITNESS WHEREOF, the parties have executed this Second Agreement asof the date first above written.

 

“LENDER”

Farmer Bros. Co.

 
| By:                                            | /s/Roy E. Farmer   |   |
|------------------------------------------------|--------------------|--------|
| Roy E. Farmer, President                       |               |
|                                           |               |
| By:                                            | /s/John E. Simmons |   |
| John E. Simmons, Treasurer                     |               |
|                                           |               |
| “BORROWER”                           |               |
| Farmer Bros. Co. Employee Stock Ownership Plan |               |
| by Wells Fargo Bank, N.A., Trustee             |               |
|                                           |               |
|                                           |               |
| By:                                            | /s/ E. Pigott      |   |
| Title:                                         | Vice President     |   |
|                                           |               |
| By:                                            | /s/ E.L. Yeany     |   |
| Title:                                         | Vice President     |   |
|                                                |                    |        |  |  |  |

 

PROMISSORY NOTE

 

For value received, the FARMER BROS. CO. EMPLOYEE STOCK OWNERSHIP PLAN (“Borrower’)promises to pay to the order of FARMER BROS. CO., a California corporation(“Lender”), at 20333 South Normandie Avenue, Torrance, California or at such otherplace as the holder of this Note may designate, such amount as has beenadvanced by Lender as may be set forth on the attached schedule (the“Schedule”), with interest thereon as follows:

 

Each advance shall bear interest from the date made at the interestrate then applicable under this Note. The interest rate shall be an annual rateequal to 1.5% per annum over the “90-day Commercial Paper Rate” determinedinitially on the date of the first advance and thereafter adjusted quarterly onthe first business day of each calendar quarter.  The 90-day Commercial Paper Rate is theUnited States commercial paper rate for said number of days as last publishedin The Wall Street Journal as of the date of the first advance or as of anadjustment date, as applicable.  Interestshall be computed and paid on the basis of a 360-day year for the actual numberof days elapsed.  Unpaid interest shallbear interest as principal.

 

Principal is payable in annual installments on December 15 of eachyear beginning December 15, 2003 in an amount equal to the unpaidprincipal balance divided by the number of years remaining until maturity ofthis Note on

 

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December 15, 2018 when the entire unpaid principal balance shallbe due and payable.  Interest on unpaidprincipal shall be paid annually on December 15 concurrently withprincipal installments.

 

Payments shall be applied first to interest then accrued and theremainder to principal whereupon interest shall cease on principal sopaid.  Principal and interest shall bepayable in lawful money of the United States of America.

 

This Note evidences the indebtedness incurred by Borrower to the Lenderunder the ESOP Loan Agreement No. 2 dated as of July 21, 2003 by andbetween the Borrower and the Lender (the “Agreement”) the terms of which aremade a part hereof.

 

This Note may be prepaid in whole or in part at any time, withoutpremium or penalty.  Partial prepaymentsshall be applied in inverse order of maturity.

 

Except as otherwise provided in the Agreement, payments of principaland interest hereunder shall be made by the Borrower only from cashcontributions (or contributions in the form of cancellation of indebtedness),from any earnings attributable to such contributions and from any cashdividends paid on the shares of FARMER BROS. CO. common stock purchased withthe proceeds of the loan evidenced hereby. Lender’s recourse is limited as provided in Section 1.8 of theAgreement.

 

This Note is not subject to acceleration.  In the event of default in payment of anyinstallment of principal or interest due under this Note (which will not bedeemed to have occurred if such default occurs as a result of a default byLender under Section 1.8 of the Agreement), the liability of Borrower is limitedto the amount of such installment.

 

This Note is collateralized by a pledge of stock under an ESOP Pledge Agreementof even date herewith.

 

This Note is governed by the laws of the State of California, except tothe extent preempted by federal laws.

 
| Dated: July 21, 2003 | Farmer Bros. Co. Employee Stock Ownership Plan |
|---------------------------|------------------------------------------------|
|                      |                                           |
|                      | by Wells Fargo Bank, N.A,. as Trustee          |
|                      |                                           |
|                      |                                           |
|                      | By:                                            |   |
|                      | Title:                                         |   |
|                      |                                           |
|                      | By:                                            |   |
|                      | Title:                                         |   |
|                           |                                                |  |  |  |  |  |

 

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SCHEDULE TO PROMISSORY NOTE

 
| ** ** | ** ** | **Amount of** | ** ** | **Amount of  Repayment** | ** ** | **Unpaid**   | ** ** |
|------------|------------|--------------------|------------|-------------------------------|------------|--------------|------------|
| **Date**   | ** ** | **Borrowing**      | ** ** | **Principal**                 | ** ** | **Interest** | ** ** | **Principal Balance** | ** ** |
|       |       |               |       |                          |       |         |       |   |   |
|       |       |               |       |                          |       |         |       |   |   |
|       |       |               |       |                          |       |         |       |   |   |

 

ESOP PLEDGE AGREEMENT

 

This ESOP Pledge Agreement (the “Pledge Agreement”) dated as of July 21,2003 is entered into by and between FARMER BROS. CO., a California corporation(the “Lender”) and the FARMER BROS. CO. EMPLOYEE STOCK OWNERSHIP PLAN (the “Borrower”or the “ESOP”) and WELLS FARGO BANK, N.A. (the “Pledge Holder”).

 

In accordance with the terms and conditions of the ESOP Loan Agreement No. 2dated as of July 21, 2003 (the “Agreement) and the Promissory Note (the “Note”)of even date herewith, the Borrower desires to purchase securities with theproceeds of loan advances from the Lender (the “Loan”).  Under the Agreement, Borrower agrees toborrow and Lender agrees to lend funds to enable the ESOP to purchase up to129,574 shares of the Company’s common stock (“Shares”) over and above the170,426 shares purchased under the original ESOP Loan Agreed dated March 28,2000.

 

In consideration of Lender making loan advances to Borrower forpurchase of Shares, and as security for the Note and for good and valuableconsideration, the receipt and adequacy of which are hereby acknowledged,Borrower hereby pledges and grants to lender a first priority security interestin all Shares now or hereafter acquired by Borrower with Loan proceeds ascontinuing security for the full performance and payment of the SecuredObligation. Borrower transfers to the Lender all of Borrower’s right, title andinterest in and to the pledged Shares, to be held in the physical possession ofthe Pledge Holder upon the terms and conditions set forth in this Agreement.

 

The Secured Obligation consists of payment of all of Borrower’sindebtedness to Lender Note and all renewals, extensions, modifications andnovations thereof.

 

1.             Until thisAgreement is termination, Borrower shall:

 

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1.1 Deliver to Pledge Holder all Shares purchased with Loan proceeds.

 

1.2 Not create, incur or suffer to exist any lien, encumbrance orsecurity interest against the Shares except the security interest created bythis Pledge Agreement.

 

2.             Lender agrees asfollows:

 

2.1 Except upon the occurrence of an Event of Default, as definedbelow, Lender shall not sell, exchange or otherwise dispose of any of theShares without the prior consent of the Borrower, which shall not be withheld unreasonably.

 

2.2 Within ten (10) days after each payment of principal under theLoan, Lender shall cause the Pledge Holder to release a number of the Sharesheld hereunder.  The number of Shares tobe released shall be calculated by multiplying the number of Shares held by thePledge Holder immediately before the release by a fraction the numerator of whichis the amount of the latest principal and interest payment and denominator ofwhich is the sum of the numerator and the remaining unpaid principal andinterest payments of the Loan.

 

3.             So long as no Eventof Default, as defined below, has occurred and is continuing:

 

3.1 Borrower shall have the right to vote the Shares, grant or withholdconsent, or exercise any other right or privilege with respect to the Shares allowedunder Article 8 of the FARMER BROS. CO. EMPLOYEE STOCK OWNERSHIP PLAN (the“Plan Document”).

 

4.             The Pledge Holderagrees as follows:

 

4.1 Lender hereby appoints WELLS FARGO BANK, N.A., to act as PledgeHolder and Pledge Holder accepts such appointment.

 

4.2 Borrower will deliver to the Pledge Holder the Shares acquired withthe proceeds of the Loan advances.

 

4.3 The Shares will be held in a segregated account by the PledgeHolder for the benefit of the Lender in accordance with the terms andconditions of this Pledge Agreement.

 

4.4 The Pledge Holder shall release from the pledge the number ofShares required by Section 2.2.

 

4.5 The Lender may remove the Pledge Holder and substitute anotherentity or person to function as Pledge Holder. Upon receipt by a Pledge Holderof any such notice of removal and substitution, said Pledge Holder shalltransfer to the successor Pledge Holder Shares, documents of title, and relatedbooks and records.

 

5.             Event of Default:

 

5.1 If the Borrower fails to make any installment of principal orinterest due under the Note within ten (10) days after receipt of writtennotice of non- payment from Lender, an Event of Default shall have occurred.

 

6.             Upon Occurrence ofan Event of Default:

 

6.1 Lender shall have all rights and remedies afforded a secured partyand all other rights and remedies available under applicable law, all of whichshall

 

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be cumulative, but subject to all limitations set forth herein, or inthe Agreement, or Note, or under Section 4975 of the Internal Revenue Codeof 1986, as amended, or under the Employee Retirement Income Security Act of 1974,as amended.

 

6.2 The Lender shall have the right at any time after the occurrence ofan Event of Default to repurchase, sell or otherwise convert to cash all or anyportion of the Shares remaining subject to pledge, provided that such Shares maybe so applied only in an amount necessary to cure the Event of Default. Theproceeds of any sale of Shares shall be applied first to the payment of theLender’s reasonable expenses incurred in effecting such sale or other disposition,including but not limited to attorneys’ fees, and thereafter to Borrower’sliabilities under the Note, Any surplus remaining with the Lender after paymentof such expenses and liabilities shall be returned to the Borrower.

 

IN WITNESS WHEREOF, the parties hereto have executed this PledgeAgreement as of the date first above written.

 
|                                           |   | “PLEDGEE”                        |
|------------------------------------------------|--------|--------------------------------------------|
|                                           |   |                                       |
|                                           |   | FARMER BROS. CO., a California corporation |
|                                           |   |                                       |
|                                           |   | By:                                        | /s/Roy E. Farmer |
|                                           |   |                                       | Roy E. Farmer, President |
|                                           |   |                                       |
|                                           |   | By:                                        | /s/John E. Simmons |
|                                           |   |                                       | John E. Simmons, Treasurer |
|                                           |   |                                       |
|                                           |   | “PLEDGOR”                        |
|                                           |   |                                       |
| FARMER BROS. CO. EMPLOYEE STOCK OWNERSHIP PLAN |
| by WELLS FARGO BANK, N.A., as Trustee          |
|                                           |   |                                       |
| By:                                            |   |                                       |   |
| Title:                                         |   |                                       |   |
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| By:                                            |   |                                       |   |
| Title:                                         |   |                                       |   |
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| “PLEDGE HOLDER”                      |   |                                       |
|                                           |   |                                       |
| WELLS FARGO BANK, N.A.                         |   |                                       |
|                                           |   |                                       |
| By:                                            |   |                                       |   |
| Title:                                         |   |                                       |   |
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| By:                                            |   |                                       |   |
| Title:                                         |   |                                       |   |
|                                                |        |                                            |  |  |  |

 

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