Item 1. Business - ----------------
Outlet Centre Partners (the "Registrant") is a limited partnership formed in March 1987 under the laws of the State of Illinois, which raised $30,000,000 from sales of Limited Partnership Interests. The Registrant owns (through subsidiaries) the Factory Outlet Centre (the "Centre") located in Bristol, Wisconsin as described under "Property" (Item 2). The Partnership Agreement provides that the proceeds from any sale or refinancing of the Centre will not be reinvested in new acquisitions. The Registrant's operations consist exclusively of investment in and operation of income producing real property, and all financial information included in this report relates to this industry segment.
The Centre is subject to certain competitive conditions in the market in which the property is located. See Item 7. Liquidity and Capital Resources for additional information.
Overall, the investment real estate market saw gradual improvement over the last year. This improvement has taken place in an environment of generally low interest rates and little or no new supply, parameters which may not exist in the next few years. Demand for real estate space, while projected to improve in line with the overall economy, is also vulnerable to external forces. The major challenges facing the real estate industry today include increased international competition, corporate restructurings, new computer and communications technologies, an aging population and potential revisions of the tax code. In addition, the increased flow of capital to real estate through new vehicles such as commercial mortgage-backed securities and REITs could spur new construction at unsupportable levels, as well as impact existing property values.
Shopping centers are the most troubled asset class in real estate currently. Unlike other asset classes, construction of power shopping centers, those with a preponderance of "big box" retailers, occurred at a brisk pace during the early 1990s, and now a shake-out of retailers is taking place. Retailers posted lackluster sales in 1995, particularly in the latter half of the year, and similar results are expected for 1996. The slight rise in interest rates in 1995 also contributed to low sales growth in interest rate sensitive sectors such as automobiles and home furnishings. Nevertheless, retail properties are particularly unique, and those with strong tenant alignments should better weather the current slowdown. In the long-term, however, retail real estate is also vulnerable to technological changes (e.g. home shopping) which could drastically alter the retail distribution system.
The Registrant has one property which it continues to own and operate. The General Partner has no current plans to sell the property; however, the receipt of an attractive unsolicited offer or changing market conditions could change the current plan.
Activity for the purchase of limited partnership interests ("tender offer") has increased in real estate limited partnerships generally. Many of these tender offers have been made by investors seeking to make a profit from the purchase of the interests. In the event a tender offer is made for interests in the Registrant, the General Partner will issue a response to limited partners expressing the General Partner's opinion regarding the offer. Certain administrative costs will be incurred to respond to a tender offer. The General Partner cannot predict with any certainty what impact a tender offer will have on the operations or management of the Registrant.
The Registrant, by virtue of its ownership of real estate, is subject to federal and state laws and regulations covering various environmental issues. Management of the Registrant utilizes the services of environmental consultants to assess a wide range of environmental issues and to conduct tests for environmental contamination as appropriate. The General Partner is not aware of any potential liability due to environmental issues or conditions that would be material to the Registrant.
The officers and employees of Balcor Partners-XXII, the General Partner of the Registrant, and its affiliates perform services for the Registrant. The Registrant currently has no employees engaged in its operations.
Item 2.

Item 2. Property - ----------------
As of December 31, 1995, the Registrant owns the Factory Outlet Centre, a regional enclosed mall containing approximately 310,000 square feet located on approximately 33 acres in Bristol, Wisconsin.
The property is held subject to a mortgage loan.
In the opinion of the General Partner, the Registrant has provided for adequate insurance coverage for the property.
See Notes to Financial Statements for other information regarding the property investment.
Item 3.

Item 3. Legal Proceedings - -------------------------
The Registrant is not subject to any material pending legal proceedings, nor were any such proceedings terminated during the fourth quarter of 1995.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1995. PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and it is not anticipated that one will develop; therefore, the market value of the Limited Partnership Interests cannot reasonably be determined. For information regarding previous distributions, see Financial Statements, Statements of Partners' Capital, and Item 7. Liquidity and Capital Resources.
As of December 31, 1995, the number of record holders of Limited Partnership Interests of the Registrant was 2,049.
Item 6.

Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------- Results of Operations - ---------------------
Operations - ----------
Summary of Operations - ---------------------
Property operations decreased at the Centre during 1995 as compared to 1994. This resulted in an increase in the Partnership's net loss during 1995 when compared to 1994. Lower administrative expense partially offset the decrease in property operations. The Centre's operations stabilized and began to improve during 1994 due to renovations and leasing efforts undertaken during 1994 and 1993. As a result, the net loss decreased during 1994 as compared to 1993. Further discussion of the operations of Outlet Centre Partners (the "Partnership") is summarized below.
1995 Compared to 1994 - ---------------------
The Partnership bills tenants on a monthly basis for common area maintenance, advertising costs and other operating expenses of the Centre based on estimates. Adjustments are periodically made to these billings once the Partnership has determined the actual amounts due. The periodic adjustment of billings during 1994, combined with slightly lower occupancy at the Centre during 1995, have resulted in a decrease in service income during 1995 when compared to 1994.
As a result of higher interest rates and higher average cash balances, interest income on short-term investments increased during 1995 when compared to 1994.
As a result of legal, portfolio management and other professional fees incurred during 1994 in connection with the June 1994 refinancing, administrative expenses decreased during 1995 when compared to 1994.
1994 Compared to 1993 - ---------------------
The Partnership receives rents from certain tenants based on a percentage of their gross sales in excess of stipulated minimums. Higher sales for some tenants at the Centre and higher average occupancy caused an increase in percentage and base rents, resulting in an increase in rental income during 1994 when compared to 1993.
An increase in the amount billable, combined with the periodic adjustment of billings during 1994, resulted in an increase in service income during 1994 when compared to 1993.
An increase in the principal balance and interest rate on the Centre's mortgage loan due to the June 1994 refinancing caused an increase in interest expense on the mortgage note payable during 1994 when compared to 1993.
Additional capitalized improvements at the Centre resulted in an increase in depreciation expense during 1994 when compared to 1993.
During the first half of 1993, advertising and other promotional expenses were incurred in order to promote the Centre. During 1994, lower advertising costs were partially offset by higher insurance expense and repair upgrades to the Centre's heating and air conditioning system, resulting in a decrease in property operating expense during 1994 as compared to 1993.
A lower assessed value levied by the local taxing authority resulted in a decrease in real estate taxes during 1994 when compared to 1993.
Higher portfolio management, legal and accounting fees incurred in connection with the June 1994 refinancing of the Centre's mortgage loan caused an increase in administrative expenses during 1994 when compared to 1993. Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership increased as of December 31, 1995 when compared to December 31, 1994. The cash flow provided by the Partnership's operating activities reflects operations of the Centre plus interest income earned on short-term investments, partially offset by administrative expenses of the Partnership. The Partnership used cash to fund its investing activity consisting of the funding of tenant improvements and its financing activities consisting of the payment of distributions to Limited Partners and the payment of principal on the mortgage note payable.
As of December 31, 1995, the occupancy rate at the Centre was 86%, and during each of 1995 and 1994, the Centre generated positive cash flow, which is defined as an amount equal to the property's revenue receipts less property related expenses, which include debt service payments.
The Centre experienced a high rate of lease expirations during 1995. However, through successful leasing strategies and efforts, many tenant leases were renewed. These leasing strategies and efforts are continuing as additional tenant leases expire. The Centre has also continued its media and marketing campaign. In addition, continued repairs and upgrades are required in order for the Centre to remain attractive to tenants and shoppers. The success of this media campaign and the leasing and repair programs will impact the level of future cash flow which may be generated by the Centre, as well as the future sale price which may be obtained by the Partnership. Lakeside Marketplace, an outlet strip center located three miles south of the Centre, has announced construction of their third phase which they anticipate to have completed by the fourth quarter of 1996. This 120,000 square foot expansion may impact the ability to lease the Centre as well as tenant sales.
The Partnership made distributions totaling $5.53 and $27.63 per Interest in 1995 and 1993, respectively. See Statement of Partners Capital for additional information. All of these distributions were comprised of Net Cash Receipts. In January 1994, quarterly distributions to Limited Partners were suspended in order to provide the working capital necessary to complete the refinancing of the Centre's mortgage note payable. With the completion of the refinancing in June 1994 and the subsequent replenishing of cash reserves from operations, the Partnership resumed quarterly distributions in October 1995. In January 1996, the Partnership paid $165,810 ($5.527 per Interest) to the holders of Limited Partnership Interests for the fourth quarter of 1995. Including the January 1996 distribution, investors have received distributions of Net Cash Receipts of $277.37 and Net Cash Proceeds of $263.08, totaling $540.45 per $1,000 Interest.
The Partnership has one property which it continues to own and operate. The General Partner has no current plans to sell the property; however, the receipt of an attractive unsolicited offer or changing market conditions could change the current plan.
In 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which establishes accounting standards for impairment of long-lived assets and long-lived assets to be disposed of. This statement has been adopted by the Partnership as of January 1, 1995, and did not have a material impact on the financial position or results of operations of the Partnership. Inflation has several types of potentially conflicting impacts on real estate investments. Short-term inflation can increase real estate operating costs which may or may not be recovered through increased rents and/or sales prices, depending on general or local economic conditions. In the long term, inflation can be expected to increase operating costs and replacement costs and may lead to increased rental revenues and real estate values.
Comparison of Actual Operations and the Financial Forecast - ----------------------------------------------------------
The Financial Forecast and Supplemental Projections included in the Partnership's Prospectus forecasted the operations of the Partnership for a ten year period beginning January 1, 1988 and ending December 31, 1997. The Partnership incurred a net loss of $203,933 during the year ended December 31, 1995, whereas net income of approximately $1,348,000 was originally forecasted for this period. The difference was primarily a result of lower than forecasted rental income and higher expenditures related to the ongoing media and marketing campaign and various improvements at the Centre. The General Partner anticipates that the actual operations for 1996 will also be significantly lower than the forecasted operations for 1996 in the Prospectus due to lower than originally forecasted rental collections. In addition, the Centre expects to continue its media and marketing campaign, and leasing and tenant improvement costs are expected to be incurred in retaining existing tenants as well as attracting new ones. The expenditures associated with these programs are designed to help the Centre remain competitive in the future. Although these expenditures reduce cash flow from operations, they are intended to help provide for the long-term stability of the Centre.
Item 8.

Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
The net effect of the differences between the financial statements and the tax returns is summarized as follows:
December 31, 1995 December 31, 1994 ----------------------- ------------------------- Financial Tax Financial Tax Statements Returns Statements Returns ---------- --------- ---------- ---------
Total assets $23,620,607 $27,809,423 $24,143,296 $28,071,202 Partners' capital (deficit): General Partner (1,155,107) (522,372) (1,153,068) (523,491) Limited Partners 11,389,169 15,000,191 11,756,873 15,055,201 Net (loss) income: General Partner (2,039) 1,119 (1,188) 3,665 Limited Partners (201,894) 110,800 (117,649) 18,520 Per Limited Partner- ship Interest (6.73) 3.69 (3.92) .60 Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
Effective October 18, 1995, the Registrant has terminated its audit agreement with Arthur Andersen LLP to act as the Registrant's independent accounting firm and has engaged Coopers & Lybrand L.L.P. as its new independent accounting firm. The report of Arthur Andersen LLP on the financial statements of the Registrant in the past two years did not contain any adverse opinion or any disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. There existed no disagreements relating to any matter of accounting principles or practices, financial statement disclosures, auditing scope and procedures or compliance with applicable rules which resulted in the termination of Arthur Andersen LLP as the Registrant's independent accounting firm. The decision to change accounting firms was approved by the General Partner of the Registrant. PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Partners-XXII, its General Partner, has a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers and significant employees of the General Partner of the Registrant are as follows:
TITLE OFFICERS ----- --------
Chairman, President and Chief Thomas E. Meador Executive Officer Senior Vice President Alexander J. Darragh Senior Vice President Josette V. Goldberg Senior Vice President Alan G. Lieberman Senior Vice President, Chief Brian D. Parker Financial Officer, Treasurer and Assistant Secretary Senior Vice President John K. Powell, Jr.
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. He is also Senior Vice President of American Express Company and is responsible for its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (February 1955) joined Balcor in September 1988 and is responsible for due diligence analysis and real estate advisory services for Balcor and American Express Company. He also has supervisory responsibility for Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban Geography from Queen's University and in Urban Planning from Northwestern University.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary responsibility for all human resources matters. In addition, she has supervisory responsibility for Balcor's MIS functions. Ms. Goldberg has been designated as a Senior Human Resources Professional (SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for Balcor's property sales and capital markets functions. Mr. Lieberman is a Certified Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and, as Chief Financial Officer and Chief Accounting Officer, is responsible for Balcor's financial, legal and treasury functions. He is a Director of The Balcor Company. Mr. Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy from DePaul University. John K. Powell Jr. (June 1950) joined Balcor in September 1985 and is responsible for portfolio and asset management matters relating to Balcor's partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk management and investor services functions. He received a Master of Planning degree from the University of Virginia. Mr. Powell has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1995.
Item 11.

Item 11. Executive Compensation - -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the executive officers and directors of the General Partner. Certain of these officers receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 7 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the Limited Partnership Interests of the Registrant.
(b) Neither Balcor Partners-XXII nor its partners and officers own any Limited Partnership Interests of the Registrant.
Relatives and affiliates of the partners and officers of the General Partner do not own any interests.
(c) The Registrant is not aware of any arrangements, the operation of which may result in a change of control of the Registrant.
Item 13.

Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a & b) See Note 7 of Notes to Financial Statements for additional information relating to transactions with affiliates.
See Note 3 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters. PART IV
Item 14.

Item 14. Exhibits and Reports on Form 8-K - -----------------------------------------
(a) (1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership previously filed as Exhibit 3 to Amendment No. 1 to Registrant's Registration Statement on Form S-11 dated April 2, 1987 (Registration No. 33-13097), is incorporated herein by reference.
(4) Form of Subscription Agreement previously filed as Exhibit No. 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated April 2, 1987 (Registration No. 33-13097) and Form of Confirmation regarding Interests in the Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-16717) are incorporated herein by reference.
(16) Letter from Arthur Anderson LLP dated October 18, 1995 regarding the change in the Registrant's certifying accountant previously filed as Exhibit 16 to the Registrant's Current Report on Form 8-K dated October 18, 1995(Commission File No. 0-16717) is incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1995 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K dated October 18, 1995 was filed (Commission File No. 0-16717) reporting a change in the Registrant's certifying accountant.
(c) Exhibits: See Item 14(a)(3) above. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of l934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
OUTLET CENTRE PARTNERS
By: /s/Brian D. Parker ------------------------- Brian D. Parker Senior Vice President, and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Partners-XXII, the General Partner
Date: March 28, 1996 --------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------- ------------------------------- ------------ President and Chief Executive Officer (Principal Executive Officer) of Balcor Partners-XXII, /s/Thomas E. Meador the General Partner March 28, 1996 - -------------------- -------------- Thomas E. Meador
Senior Vice President, and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Partners-XXII, /s/Brian D. Parker the General Partner March 28, 1996 - -------------------- -------------- Brian D. Parker
Reports of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1995 and 1994
Statements of Partners' Capital, for the years ended December 31, 1995, 1994 and 1993
Statements of Income and Expenses, for the years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Financial Statement Schedules:
Financial Statement Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein. REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of Outlet Centre Partners:
We have audited the accompanying balance sheet of Outlet Centre Partners (an Illinois Limited Partnership) as of December 31, 1995 and the related statements of partners' capital, income and expenses, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Outlet Centre Partners as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois March 27, 1996 REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of Outlet Centre Partners:
We have audited the accompanying balance sheet of OUTLET CENTER PARTNERS (an Illinois Limited Partnership) as of December 31, 1994, and the related statements of partners' capital, income and expenses, and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OUTLET CENTRE PARTNERS as of December 31, 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois February 10, 1995 OUTLET CENTRE PARTNERS (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1995 and 1994
ASSETS
1995 1994 -------------- ------------- Cash and cash equivalents $ 2,406,064 $ 1,819,294 Accounts and accrued interest receivable 40,445 74,981 Escrow deposits 961,250 929,674 Prepaid expenses 33,798 Deferred expenses, net of accumulated amortization of $124,688 in 1995 and $41,563 in 1994 290,937 374,062 -------------- ------------- 3,732,494 3,198,011 -------------- ------------- Investment in real estate: Land 2,871,183 2,871,183 Buildings and improvements 27,565,202 27,299,367 -------------- ------------- 30,436,385 30,170,550 Less accumulated depreciation 10,548,272 9,225,265 -------------- ------------- Investment in real estate, net of accumulated depreciation 19,888,113 20,945,285 -------------- ------------- $ 23,620,607 $ 24,143,296 ============== =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 137,181 $ 204,154 Due to affiliates 13,933 47,693 Accrued liabilities - principally real estate taxes 618,892 545,840 Security deposits 48,119 49,302 Mortgage note payable 12,568,420 12,692,502 -------------- ------------- Total liabilities 13,386,545 13,539,491 -------------- ------------- Limited Partners' capital (30,000 Interests issued and outstanding) 11,389,169 11,756,873 General Partner's deficit (1,155,107) (1,153,068) -------------- ------------- Total partners' capital 10,234,062 10,603,805 -------------- ------------- $ 23,620,607 $ 24,143,296 ============== =============
The accompanying notes are an integral part of the financial statements. OUTLET CENTRE PARTNERS (An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL for the years ended December 31, 1995, 1994, and 1993
Partners' Capital (Deficit) Accounts ------------------------------------------ General Limited Total Partner Partners -------------- ------------- -------------
Balance at December 31, 1992 $ 11,998,197 $ (1,147,412) $ 13,145,609
Cash distributions to Limited Partners (A) (828,750) (828,750) Net loss for the year ended December 31, 1993 (446,805) (4,468) (442,337) -------------- ------------- ------------- Balance at December 31, 1993 10,722,642 (1,151,880) 11,874,522
Net loss for the year ended December 31, 1994 (118,837) (1,188) (117,649) -------------- ------------- ------------- Balance at December 31, 1994 10,603,805 (1,153,068) 11,756,873
Cash distributions to Limited Partners (A) (165,810) (165,810) Net loss for the year ended December 31, 1995 (203,933) (2,039) (201,894) -------------- ------------- ------------- Balance at December 31, 1995 $ 10,234,062 $ (1,155,107) $ 11,389,169 ============== ============= =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1995 1994 1993 -------------- ------------- -------------
First Quarter None None $ 11.05 Second Quarter None None 5.525 Third Quarter None None 5.525 Fourth Quarter $ 5.527 None 5.525
The accompanying notes are an integral part of the financial statements. OUTLET CENTRE PARTNERS (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1995, 1994, and 1993
1995 1994 1993 -------------- ------------- ------------- Income: Rental $ 3,131,371 $ 3,136,357 $ 2,848,289 Service 2,166,699 2,319,857 2,180,945 Interest on short-term investments 113,394 44,639 36,918 -------------- ------------- ------------- Total income 5,411,464 5,500,853 5,066,152 -------------- ------------- ------------- Expenses: Interest on mortgage note payable 1,281,358 1,223,270 1,131,748 Depreciation 1,323,007 1,280,011 1,196,548 Amortization 83,125 84,895 74,286 Property operating 1,841,214 1,896,235 1,907,441 Real estate taxes 563,950 545,840 719,102 Property management fees 257,806 244,587 234,499 Administrative 264,937 344,852 249,333 -------------- ------------- ------------- Total expenses 5,615,397 5,619,690 5,512,957 -------------- ------------- ------------- Net loss $ (203,933) $ (118,837) $ (446,805) ============== ============= ============= Net loss allocated to General Partner $ (2,039) $ (1,188) $ (4,468) ============== ============= ============= Net loss allocated to Limited Partners $ (201,894) $ (117,649) $ (442,337) ============== ============= ============= Net loss per Limited Partnership Interest (30,000 issued and outstanding) $ (6.73) $ (3.92) $ (14.74) ============== ============= =============
The accompanying notes are an integral part of the financial statements. OUTLET CENTRE PARTNERS (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1995, 1994, and 1993
1995 1994 1993 -------------- ------------- ------------- Operating activities: Net loss $ (203,933) $ (118,837) $ (446,805) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation of property 1,323,007 1,280,011 1,196,548 Amortization of deferred expenses 83,125 84,895 74,286 Net change in: Accounts and accrued interest receivable 34,536 43,129 (13,014) Escrow deposits (31,576) (14,949) Prepaid expenses (33,798) Accounts payable (66,973) (143,509) 88,966 Due to affiliates (33,760) 12,438 3,090 Accrued liabilities 73,052 (173,262) (27,138) Security deposits (1,183) (16,025) (6,854) -------------- ------------- ------------- Net cash provided by operating activities 1,142,497 953,891 869,079 -------------- ------------- ------------- Investing activity: Improvements to property (265,835) (261,676) (426,216) -------------- ------------- ------------- Net cash used in investing activity (265,835) (261,676) (426,216) -------------- ------------- ------------- Financing activities: Distributions to Limited Partners (165,810) (828,750) Proceeds from refinancing of mortgage note payable 12,750,000 Repayment of mortgage note payable (11,468,631) Principal payments on mortgage note payable (124,082) (132,752) (121,052) Funding of capital improvement escrows (914,725) Payment of deferred expenses (415,625) -------------- ------------- ------------- Net cash used in finanacing activities (289,892) (181,733) (949,802) -------------- ------------- ------------- Net change in cash and cash equivalents 586,770 510,482 (506,939) Cash and cash equivalents at beginning of year 1,819,294 1,308,812 1,815,751 -------------- ------------- ------------- Cash and cash equivalents at end of year $ 2,406,064 $ 1,819,294 $ 1,308,812 ============== ============= =============
The accompanying notes are an integral part of the financial statements. OUTLET CENTRE PARTNERS (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Outlet Centre Partners is engaged exclusively in the operation of retail real estate located in Bristol, Wisconsin.
2. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) Depreciation expense is computed using the straight-line method. Rates used in the determination of depreciation are based upon the following estimated useful lives:
Years -----
Buildings and improvements 18 - 25 Furniture and fixtures 5
Depreciation expense for capitalized tenant improvements is computed using a straight-line method over the term of the lease.
Maintenance and repairs are charged to expense when incurred. Expenditures for improvements are charged to the related asset account.
(c) Effective January 1, 1995 the Partnership adopted Statement of Financial Accounting Standards, No. 121 (SFAS 121), ("Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"). Under SFAS 121, the Partnership records its investments in real estate at the lower of cost or fair value, and periodically assesses, but not less than on an annual basis, possible impairment to the value of its properties. The General Partner estimates the fair value of its properties by dividing the property's expected net operating income by a risk adjusted rate of return which considers economic and demographic conditions in the market. In the event the General Partner determines an impairment in value has occurred, and the carrying amount of the real estate asset will not be recovered, a provision is recorded to reduce the carrying basis of the property to its estimated fair value. The General Partner considers the method referred to above to result in a reasonable measurement of a property's fair value, unless other factors affecting the property's value indicate otherwise.
(d) Deferred expenses consist of financing fees which are amortized over the term of the loan agreement.
(e) Revenue is recognized on an accrual basis in accordance with generally accepted accounting principles. Income from operating leases with significant abatements and/or scheduled rent increases is recognized on a straight line basis over the respective lease term. Service income includes reimbursements from operating costs such as real estate taxes, maintenance and insurance and is recognized as revenue in the period the applicable costs are incurred.
(f) The Financial Accounting Standard Board's Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. Since quoted market prices are not available for the Partnership's financial instruments, fair values have been based on estimates using present value techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Statement No. 107 does not apply to all balance sheet items and excludes certain financial instruments and all non-financial instruments such as real estate from its disclosure requirements.
(g) Cash and cash equivalents include all unrestricted, highly liquid investments with an original maturity of three months or less. At December 31, 1995, cash and cash equivalents are held or invested in primarily one type of commercial paper.
(h) The Partnership is not liable for Federal income taxes as each partner recognizes his proportionate share of the Partnership income or loss in his tax return; therefore, no provision for income taxes is made in the financial statements of the Partnership.
(i) A reclassification has been made to the previously reported 1993 and 1994 statements in order to conform with the classification used in 1995. This reclassification has not changed the 1993 or 1994 results.
3. Partnership Agreement:
The Partnership was organized on March 13, 1987. The Partnership Agreement provides for Balcor Partners-XXII to be the General Partner and for the admission of Limited Partners through the sale of up to 30,000 Limited Partnership Interests at $1,000 per Interest. The Partnership commenced the offering of Limited Partnership Interests to the public on July 2, 1987 and completed its minimum offering on August 13, 1987. The offering was terminated on March 9, 1988, after the sale of 30,000 Limited Partnership Interests.
The Partnership and its subsidiaries own the Factory Outlet Centre (the "Centre") located in Bristol, Wisconsin. The Partnership Agreement provides that profits and losses will be allocated 1% to the General Partner and 99% to the Limited Partners.
Net Cash Receipts of the Partnership available for distribution will be distributed 90% to Limited Partners and 10% to the General Partner provided, however, that 100% of the General Partner's share of Net Cash Receipts will be subordinated to the prior receipt by Limited Partners of a Preferential Distribution of 7% for each of the first five 12-month periods following the termination of the offering and 8% for each 12-month period thereafter. For each period during which the Preferential Distribution is not attained, the General Partner's share of Net Cash Receipts will be deferred to the extent of any such deficiency and such deferred portion will be paid to the General Partner from future distributed Net Cash Receipts or from Net Cash Proceeds after required subordination levels are attained. A deficiency in the Preferential Distribution for a particular year will not by itself cause the subordination of the General Partner's share of Net Cash Receipts in later years. Net Cash Receipts will be computed after the deduction of the Partnership expenses.
Net Cash Proceeds of the Partnership which are available for distribution will be distributed to Limited Partners until they have received an amount equal to their Original Capital plus a Cumulative Distribution of 12% per annum. Thereafter, Net Cash Proceeds will be distributed to pay the General Partner an amount equal to its subordinated and unpaid share of Net Cash Receipts, and then 85% to the Limited Partners and 15% to the General Partner. Upon the dissolution and liquidation of the Partnership, Net Cash Proceeds will be distributed in accordance with the Partners' respective ending capital account balances.
4. Mortgage Note Payable:
In June 1994, the Centre's first mortgage loan was refinanced. The interest rate increased from 9.75% to 10.14%, the maturity date was extended from August 1994 to July 1999 and the monthly payments of principal and interest increased from $104,400 to $117,120. A portion of the proceeds from the new $12,750,000 first mortgage loan were used to repay the existing first mortgage loan of $11,468,631. The Centre, with a carrying value of $19,888,113 at December 31, 1995, was pledged as collateral for repayment of the mortgage loan.
Future maturities of the above note are approximately as follows:
1996 $ 137,000 1997 152,000 1998 168,000 1999 12,112,000
During the years ended December 31, 1995, 1994 and 1993, the Partnership incurred and paid interest expense on the mortgage notes payable of $1,281,358, $1,223,270 and $1,131,748, respectively.
5. Management Agreement:
As of December 31, 1995, the Centre is under a management agreement with a third-party management company. This management agreement provides for a fee of 5% of all rental and certain service receipts collected.
6. Tax Accounting:
The Partnership maintains its books in accordance with the Internal Revenue Code, rules and regulations promulgated thereunder and existing interpretations thereof. The accompanying financial statements, which are prepared in accordance with generally accepted accounting principles, will differ from the tax returns due to the different treatment of various items as specified in the Internal Revenue Code. For 1995, the net effect of these accounting differences resulted in a net loss in the financial statements compared to net income for tax reporting purposes; the difference of which is $315,852. The aggregate cost of land for federal income tax purposes is $2,871,183 and the aggregate cost of buildings and improvements for Federal income tax purposes is $27,657,717. The total cost of the above mentioned is $30,528,900.
7. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/95 12/31/94 12/31/93 --------------- -------------- -------------- Paid Payable Paid Payable Paid Payable ------- -------- ------ ------- ------ -------
Property management fees None None $225,117 None $230,289 $23,799 Reimbursement of expenses to the General Partner, at cost: Accounting $26,881 $3,057 44,324 16,613 30,090 2,483 Data processing 7,362 845 14,181 3,089 9,210 1,979 Investor communica- tions 4,458 None 18,104 6,960 18,333 1,513 Legal 14,193 537 16,205 4,073 6,001 495 Portfolio management 56,781 9,476 35,774 13,117 24,833 2,049 Other 10,715 18 17,421 3,841 35,591 2,937
Allegiance Realty Group, Inc. an affiliate of the General Partner, managed the Centre until the affiliate was sold to a third party in November 1994.
The Partnership participates in an insurance deductible program with other affiliated partnerships in which the program pays claims up to the amount of the deductible under the master insurance policies for its properties. The program is administered by an affiliate of the General Partner who receives no fee for administering the program; however, the General Partner is reimbursed for program expenses. The Partnership paid premiums to the deductible insurance program of $23,974, $27,307 and $18,499 for 1995, 1994 and 1993, respectively.
8. Rentals under Operating Leases:
The Partnership receives rental income from the leasing of retail shopping center space under operating leases. The minimum future rentals (excluding amounts representing executory costs such as taxes, maintenance and insurance) based on operating leases held at December 31, 1995 are approximately as follows:
1996 $ 2,850,000 1997 2,248,000 1998 1,723,000 1999 1,317,000 2000 745,000 Thereafter 878,000
Minimum future rentals do not include amounts which may be received from certain tenants based upon a percentage of their gross sales in excess of stipulated minimums. Percentage rentals totaled approximately $224,000 for 1995, $221,000 for 1994 and $98,000 for 1993. The Partnership is subject to the usual business risks regarding the collection of the above-mentioned rentals.
9. Fair Values of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments at December 31, 1995 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest receivable, accounts and accrued interest payable approximates fair value.
Mortgage note payable: Based on borrowing rates available to the Partnership at the end of 1995 for mortgage loans with similar terms and maturities, the fair value of the mortgage note payable approximates the carrying value.
10. Subsequent Event:
In January 1996, the Partnership paid $165,810 to Limited Partners representing the regular quarterly distribution of available Net Cash Receipts of $5.527 per Interest for the fourth quarter of 1995.


Item 1. Business
General: Farmer Bros. Co. (the Company or Registrant) was incorporated in California in 1923, and is engaged in the production and sale of coffee, spices and a variety of allied products to the institutional food service industry.
Raw Materials and Supplies: Coffee is the largest product in the line and is responsible for approximately 63% of corporate revenues. Purchasing, roasting and packaging coffee takes place at Registrant's Torrance plant, which is also the distribution hub for its branches.
Green coffee is purchased through domestic commodity brokers. Agricultural commodities are subject to fluctuations of both price and supply. Registrant has not been confronted by shortages in the supply of green coffee, but has been faced with price fluctuations.
Trademarks & Patents: Registrant owns approximately 23 registered U.S. trademarks which are integral to customer identification of its products. It is not possible to assess the impact of the loss of such identification.
Seasonality: Registrant experiences some seasonal influences. The winter months are the best sales months. Registrant's product line and geographic diversity provides some sales stability during the summertime decline in coffee consumption during the warmer months.
Distribution: Registrant's products are distributed by its selling divisions from 96 branches located in most urban centers in the western states. The diversity of the product line (over 300 products) and size of the area served requires each branch to stock a sizable inventory. Registrant maintains its own trucking fleet to better control the supply of these warehouses.
Customers: No single customer represents a large enough portion of sales to have a material effect on Registrant. The customer contact and service quality which is integral to Registrant's sales effort is often secondary to product pricing for customers with their own distribution systems.
Competition: Registrant faces competition from many sources, including multi-national firms like Procter and Gamble, Nestle and Philip Morris, grocery distributors like Sysco and Rykoff-Sexton and regional roasters like Boyd Coffee Co., Lingle Bros. and Royal Cup.
Registrant has some competitive advantages due to its longevity, strong regional roots and sales and service force. Registrant's customer base is price sensitive and the Company is often faced with price competition.
Working Capital: Registrant makes every effort to finance operations internally. Management believes that working capital from internal sources will be adequate for the coming year. Registrant maintains a $50,000,000 line of credit with First Interstate Bank of California. There is no commitment fee or compensating balance requirement and the line was not used in fiscal 1995.
Item 1. Business, Continued
Foreign Operations: Registrant has no material revenues that result from foreign operations. Coffee brewing equipment is sold through distributors in Canada and Japan and manufactured in Europe under license.
Other: On June 30, 1995, Registrant employed 1,172 employees, 486 are subject to collective bargaining agreements.
There have been no material effects of compliance with government provisions regulating discharge of materials into the environment.
The nature of Registrant's business does not provide for maintenance of or reliance upon a sales backlog.
Item 2.

Item 2. Properties
Registrant's largest facility is the 474,000 sq. ft. roasting plant, warehouses and administrative offices in Torrance, California. Registrant believes the existing plant will continue to provide adequate production capacity for the foreseeable future.
Item 3.

Item 3. Legal Proceedings
Registrant is a defendant in various legal proceedings incidental to its business which are ordinary and routine. It is management's opinion that the resolution of these lawsuits will have no material financial impact on the Company.
Item 4.

Item 4. Submission of Matters to A Vote of Security Holders
None.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Registrant has one class of common stock which is traded in the over the counter market. The bid prices indicated below are as reported by NASDAQ and represent prices between dealers, without including retail mark up, mark down or commission, and do not necessarily represent actual trades.
1995 1994 High Low Dividend High Low Dividend 1st Quarter $134.00 $123.00 $ 0.50 $156.00 $145.00 $ 0.50 2nd Quarter 132.00 120.00 0.50 156.00 134.00 0.50 3rd Quarter 130.00 117.00 0.50 151.00 126.00 0.50 4th Quarter 132.00 120.00 0.50 148.00 123.00 0.50
There were 654 holders of record on June 30, 1995.
Item 6.

Item 6. Selected Financial Data (Dollars in thousands, except per share data)
1995 1994 1993 Net sales $234,662 $193,861 $190,679 Income from operations 25,235 9,488 29,929 Net income 19,517 10,330 18,950* Net income per share $10.13 $5.36 $9.84* Total assets $244,340 $219,903 $216,266 Dividends declared per share $2.00 $2.00 $1.80
1992 1991 Net sales $197,312 $196,232 Income from operations 27,494 28,016 Net income 20,226 21,394 Net income per share $10.50 $11.11 Total assets $190,714 $171,361 Dividends declared per share $1.60 $1.40
* Includes the cumulative impact of adopting Statement of Financial Accounting Standards Nos. 109 ("SFAS 109"), "Accounting for Income Taxes" and 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions" as of July 1, 1992, which reduced net income for the year ended June 30, 1993 by approximately $5,294,000 or $2.75 per share. (See Notes F and G to Consolidated Financial Statements)
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Registrant continues to maintain a strong working capital position, and management believes cash requirements for the coming year will be provided by internal sources. Registrant has no major commitments for capital expenditures at this time. Construction of a new laboratory building in its Torrance compound will be completed this fall at an estimated cost of $2.5 million. The Company also has a branch warehouse nearing completion in Austin, Texas with a cost of $725,000 and expects to start construction of a similar facility in Memphis, Tennessee.
The Company maintains a $50 million line of credit with First Interstate Bank of California. There was no bank debt incurred during fiscal 1995.
1995 1994 1993 (Dollars in thousands) Current assets $149,806 $103,375 $155,148 Current liabilities 18,724 12,488 15,269 Working capital $131,082 $ 90,887 $139,879 Quick ratio 5.73:1 4.76:1 7.77:1 Capital Expenditures $ 9,085 $ 6,658 $ 5,388
Results of Operations
The volatile green coffee market continues to effect Registrant. Green coffee costs soared last year as Brazil, the world's largest coffee producer, sustained frost damage to the coffee crop. Speculation about the extent of crop losses spurred green coffee costs to eight year highs. Higher green coffee costs have been passed on to Registrant's customers with higher selling prices of roast coffee, but higher prices result in lower sales volume and customer resistance to higher prices result in smaller margins.
Net sales increased 21% to $234,662,000 in 1995 as compared to $193,861,000 in 1994 as the result of higher roast coffee prices, offset by a 7% decrease in coffee volume. Gross profit increased to $112,899,000 in 1995, or 48% of sales, compared to $94,295,000, or 49% of sales, in 1994. This is still less than the $114,258,000 gross profit, or 60% of sales, reached in fiscal 1993. Other expenses increased 3% to $87,664,000 in 1995 from $84,807,000 in 1994 and $84,329,000 in 1993.
Income before taxes increased to $31,284,000 or 13% of sales in 1995, as compared to $16,689,000 or 9% of sales in 1994 and $39,538,000 or 21% of sales in 1993. 1994 earnings were depressed by a volatile increase in green coffee market costs. Net income for fiscal 1995 reached $19,517,000, or $10.13 per share, as compared to $10,330,000, or $5.36 per share, in 1994 and $18,950,000, or $9.84 per share, in 1993.
Registrant adopted the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities" during the first quarter of fiscal 1995. In accordance with SFAS 115, prior period financial statements have not been restated. The adoption of SFAS 115 did not have a significant effect upon the Company's financial condition or results of operation.
1995 1994 1993* Income per share: Before accounting changes $10.13 $ 5.36 $12.59 Cumulative effect of accounting changes - - (2.75) Net income per share $10.13 $ 5.36 $ 9.84
Percentage change: 1995 to 1994 1994 to 1993 Net sales 21.1% 1.7% Cost of goods sold 22.3% 30.3% Gross profit 19.7% (17.5%) Operating expenses 3.4% 0.6% Income from operations 166.0% (68.3%) Provision for income taxes 85.0% (58.4%) Income before accounting changes 88.9% (57.4%) Net income 88.9% (45.5%)
* The Company adopted SFAS 106 and SFAS 109 in 1993.
Change in Earnings Per Share A summary of the change in earnings per share, which highlights factors discussed earlier, is as follows: Per Share Earnings Per Share Earnings 1995 vs. 1994 1994 vs. 1993 Coffee: Prices $24.11 $ 1.66 Volume (4.08) (2.02) Cost (10.27) (11.10) Gross Profit 9.76 (11.46)
Allied products: Gross Profit (0.10) 1.10 Operating expenses (1.48) (0.25) Other income (0.60) (1.25) Provision for income taxes (2.81) 4.63 Income before accounting changes 4.77 (7.23) Cumulative effect of accounting changes* - 2.75 Net income $4.77 $(4.48)
* The Company adopted SFAS 106 and SFAS 109 in 1993.
Price Risk The Company's operations are significantly impacted by the world market for green coffee, its largest product. Coffee is an agricultural product and fundamental shifts in supply or demand can have a dramatic effect on its price. Coffee is traded domestically on the New York Coffee Tea and Cocoa Exchange, and is one of the largest and most volatile commodity markets. At present, the Company manages its exposure to price risk by managing its inventory level. Registrant is unable to predict either the direction or duration of coffee price swings, and cautions against using past results to predict future results.
Item 8.

Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Farmer Bros. Co. and Subsidiary
We have audited the consolidated financial statements of Farmer Bros. Co. and Subsidiary ("the Company") as listed in Item 14(a) of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes B, F and G to the consolidated financial statements, the Company changed its methods of accounting for certain investments in debt and equity securities in 1995 and for postretirement benefits other than pensions and income taxes in 1993.
Coopers & Lybrand L.L.P.
Los Angeles, California September 22, 1995
FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, June 30, 1995 1994
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary FBC Finance Company. All significant intercompany balances and transactions have been eliminated.
Cash Equivalents The Company considers all highly liquid investments with a maturity of 30 days or less when purchased to be cash equivalents, which approximate market.
Investments The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities, as of July 1, 1994. SFAS 115 specifies the accounting treatment of the Company's investments based on investment classifications defined in the statement. The Company's investments have been recorded at fair value and in accordance with SFAS 115 have been classified as "available for sale". Any unrealized gains or losses on such investments at June 30, 1995 have been recorded as a separate component of shareholders' equity (Note B).
As required by SFAS 115, prior year financial statements have not been restated. Therefore, investments in marketable equity securities as of June 30, 1994 are carried at the lower of cost or market. Other investments as of June 30, 1994 are carried at amortized cost which approximate market. A valuation allowance as of June 30, 1994 is included in shareholders' equity that represents any net unrealized loss from non-current investments.
The cost of investments sold is determined on the specific identification method. Dividend and interest income is accrued as earned.
Inventories Inventories are valued at the lower of cost or market. Costs of coffee and allied products are determined on the Last In, First Out (LIFO) basis. Costs of coffee brewing equipment manufactured are accounted for on the First In, First Out (FIFO) basis.
In the normal course of business, the Company enters into commodity purchase agreements with suppliers and futures contracts to minimize exposure to inventory price fluctuations. Decreases in the market value of the commodity purchase agreements, if any, are recognized in earnings currently. In the event of non-performance by the counterparties, the Company could be exposed to credit and supply risk. The Company monitors the financial viability of the counterparties. Futures contracts not designated as hedges are marked to market and changes are recognized in earnings currently.
A. Summary of Significant Accounting Policies, Continued
Property, Plant and Equipment Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation of buildings and facilities is computed using the straight-line method. Other assets are depreciated using the sum-of- the-years' digits and straight line methods. The following useful lives are used:
Buildings and facilities 10 to 30 years Machinery and equipment 3 to 5 years Office furniture and equipment 5 years
When assets are sold or retired the asset and related depreciation allowance is eliminated from the records and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, betterments are capitalized.
Income Taxes Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse.
B. Investments 1995 1994 Fair Cost Value* Cost Market (In thousands) Current Assets U.S. Government Obligations $80,608 $80,530 $34,839* $34,924 $80,608 $80,530 $34,839 $34,924
Non-Current Assets U.S. Government Obligations $ 8,617 $ 8,610 $39,599* $38,621 Corporate bonds 1,599 1,569 1,799* 1,796 Preferred stocks 30,456 31,896 28,260 27,216* Liquid asset fund and other 1,262 1,262 3,346* 3,346 $41,934 $43,337 $73,004 $70,979 * carrying value
The contractual maturities of debt securities classified as current and non- current available for sale are the following.
Fair Value Maturities 6/30/95 6/30/94 (In thousands) Within one year $80,530 $34,924 After 1 year through 5 years 8,610 38,621 After 5 years through 10 years 1,569 1,796 $90,709 $75,341
B. Investments, Continued
Effective July 1, 1994, the Company adopted SFAS 115. As of June 30, 1995 all investments held by the Company were classified as available for sale. The gross unrealized gains and (losses) on securities classified as available for sale were $1,732,000 and ($407,000), respectively, in 1995. Gross realized gains from available for sale securities were $1,857,000.
The Company hedges interest rate risk in its portfolio of preferred stock. As of June 30, 1995, a substantial portion of the preferred stock portfolio was hedged with put options on US Treasury futures traded on a national exchange. Deferred losses at June 30, 1995, associated with the hedge were $1,329,000. Such deferred losses will be recognized in other income as the related unrealized gains in the preferred stock portfolio are realized.
C. Allowance for Doubtful Accounts and Notes Receivable
1995 1994 1993 (In thousands)
Balance at beginning of year $445 $530 $614 Additions 527 184 339 Deductions (427) (269) (423) Balance at end of year $545 $445 $530
D. Inventories
June 30, 1995 Processed Unprocessed Total (In thousands)
Coffee $ 3,093 $10,809 $13,902 Allied products 11,308 4,096 15,404 Coffee brewing equipment 2,120 5,335 7,455 $16,521 $20,240 $36,761
June 30, 1994 Processed Unprocessed Total
Coffee $ 3,182 $10,829 $14,011 Allied products 10,395 3,022 13,417 Coffee brewing equipment 1,712 5,770 7,482 $15,289 $19,621 $34,910
Current cost of coffee and allied products inventories exceeds the LIFO cost by approximately $30,246,000, and $6,700,000 as of June 30, 1995 and 1994, respectively.
For the year ended June 30, 1995, a decrease in the Company's green coffee inventories resulted in a LIFO decrement which increased current year pre- tax income by approximately $1,008,000.
E. Property, Plant and Equipment 1995 1994 (In thousands)
Buildings and facilities $26,902 $23,760 Machinery and equipment 43,099 46,237 Office furniture and equipment 8,362 2,217 78,363 72,214 Accumulated depreciation (49,980) (47,997) Land 4,830 4,726 $33,213 $28,943
Maintenance and repairs charged to expense for the years ended June 30, 1995, 1994 and 1993 were $10,545,000, $9,137,000 and $9,056,000, respectively.
F. Retirement Plans
The Company has a contributory defined benefit pension plan for all employees not covered under a collective bargaining agreement (Farmer Bros. Co.) and a non-contributory defined benefit pension plan for certain hourly employees covered under a collective bargaining agreement (Brewmatic Co.). The Company's funding policy is to contribute annually at a rate that is intended to fund benefits as a level percentage of salary (Farmer Bros. Co.) and as a level dollar cost per participant (Brewmatic Co.) over the working lifetime of the plan participants. Benefit payments are determined under a final pay formula (Farmer Bros. Co.) and flat benefit formula (Brewmatic Co.)
The net periodic pension benefit for 1995, 1994 and 1993 are comprised of the following:
Farmer Bros. Co. Brewmatic Co. (In thousands) Service cost $ 875 $ 16 Interest cost 2,083 119 Actual return on assets (5,358) 304 Net amortization and deferral 1,738 (507) Net periodic pension benefit $ (662) $ (68) Service cost $ 594 $ 14 Interest cost 1,869 116 Actual return on assets (94) 6 Net amortization and deferral (3,651) (216) Net periodic pension benefit $(1,282) $ (80) Service cost $ 588 $ 16 Interest cost 1,629 110 Actual return on assets (5,870) (260) Net amortization and deferral 2,719 76 Net periodic pension benefit $ (934) $ (58)
F. Retirement Plans, Continued
The funded status of the plans at June 30, 1995 was as follows: Farmer Bros. Co. Brewmatic Co. (In thousands) Actuarial present value of benefit obligations: Vested $27,133 $1,621 Non-vested 154 - Accumulated benefit obligations 27,287 1,621 Effect of projected salary increases 3,075 - Projected benefit obligations 30,362 1,621 Plan assets at fair value (43,121) (2,509) Plan assets at fair value in excess of projected benefit obligations (12,759) (888) Unrecognized net asset at June 30, 1995 4,965 292 Unrecognized prior service cost (1,763) (104) Unrecognized net gain (loss) 565 (40) Prepaid pension cost $(8,992) $ (740)
Assumptions for 1995: Discount rate for plan obligations 7.75% 7.75% Assumed long term return on assets 8.00% 8.00% Projected compensation increases for pay related plans 3.10% -
The funded status of the plans at June 30, 1994 was as follows: Farmer Bros. Co. Brewmatic Co. (In thousands) Actuarial present value of benefit obligations: Vested $ 22,710 $ 1,590 Non-vested 110 - Accumulated benefit obligations 22,820 1,590 Effect of projected salary increases 3,724 - Projected benefit obligations 26,544 1,590 Plan assets at fair value (39,111) (2,295) Plan assets at fair value in excess of projected benefit obligations (12,567) (705) Unrecognized net asset at June 30, 1994 5,585 329 Unrecognized prior service cost (304) (117) Unrecognized net loss (1,045) (167) Prepaid pension cost $ (8,331) $ (660)
Assumptions for 1994: Discount rate for plan obligations 7.75% 7.75% Assumed long term return on assets 8.00% 8.00% Projected compensation increases for pay related plans 3.10% -
The assets of each plan are primarily invested in publicly traded stocks and bonds, U.S. government securities and money market funds. The Farmer Bros. Co. Retirement Plan owned 21,765 shares of the Company's common stock at June 30, 1995 and 1994 with a fair value of approximately $2,666,000 and $2,677,000, respectively.
F. Retirement Plans, Continued
The Company contributes to two multi-employer defined benefit plans for certain union employees. The contributions to these multi-employer pension plans were approximately $1,635,000, $1,615,000 and $1,610,000, for 1995, 1994 and 1993, respectively. The Company also has a defined contribution plan for eligible non-union employees. No Company contributions have been made nor required to be made to this plan.
Farmer Bros. Co. sponsors defined benefit postretirement medical and dental plans that cover non-union employees and retirees, and certain union locals. The plan is contributory; retirees contributions are fixed at a current level. The plan is unfunded.
The Plan's accumulated postretirement benefit obligation (APBO) is as follows: June 30, June 30, 1995 1994 (In thousands) Retirees and dependents $5,387 $5,276 Fully eligible active participants 5,869 3,300 Other active plan participants 7,575 2,030 Total APBO $18,831 $10,606
Unrecognized net (loss) gain (2,828) (596) Unrecognized prior service cost (4,498) - Accrued postretirement benefit cost $11,505 $10,010
Net periodic postretirement benefit costs included the following components: For the years ended June 30, 1995 1994 1993 (In thousands) Service cost $587 $496 $457 Interest cost 1,042 756 681 Amortization of unrecognized net loss 58 - - Unrecognized Prior Service Cost 71 - - Net periodic postretirement benefit cost $1,758 $1,252 $1,138
A 9.5 percent annual rate increase in the per capita costs of covered medical care benefits was assumed for the fiscal year ending June 30, 1995, gradually decreasing to 5.5 percent by the fiscal year ending June 30, 2003 and remaining level thereafter. A 6 percent annual rate increase in the per capita costs of covered dental care benefits was assumed for all years. Increasing the assumed health care costs trend rates by one percentage point each year would increase the accumulated postretirement benefit obligation as of June 30, 1995 by $1,318,000 and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for the fiscal year ending June 30, 1995 by $134,000. A discount rate of 8.0% was used to calculate net periodic postretirement benefit cost for the fiscal year ending June 30, 1995, and
F. Retirement Plans, Continued
7.75% was used to determine the accumulated postretirement benefit obligation as of June 30, 1995.
During fiscal 1995, the Company added prescription drug coverage for retirees covered under the medical and dental plan. The additional retiree health benefits increased the unrecognized prior service cost by approximately $4,498,000 as of June 30, 1995.
A 10 percent annual rate increase in the per capita costs of covered medical care benefits was assumed for the fiscal year ending June 30, 1994, gradually decreasing to 5.5 percent by the fiscal year ending June 30, 2004 and remaining level thereafter. A 6 percent annual rate increase in the per capita costs of covered dental care benefits was assumed for all years. Increasing the assumed health care costs trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 1994 by $876,000 and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for the fiscal year ending June 30, 1994 by $109,000. A discount rate of 8.5% was used to calculate net periodic postretirement benefit cost for the fiscal year ending June 30, 1994, and 8.0% was used to determine the accumulated postretirement benefit obligation as of June 30, 1994.
In 1993, the Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires the accrual method of accounting for these benefits rather than the Company's previous policy of recording these benefits when paid. The Company recognized the Accumulated Postretirement Benefit Obligation as of July 1, 1992 of $8,130,000. On an after-tax basis, the cumulative effect of this charge was $4,901,000 or $2.55 per share.
G. Income Taxes
Effective July 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." The cumulative effect of adopting SFAS 109 resulted in a charge of $393,000 or $.20 per share.
G. Income Taxes, Continued
The primary components of temporary differences which give rise to the Company's net deferred tax asset at June 30, 1995 and June 30, 1994 are as follows:
June 30, June 30, 1995 1994 (In thousands) Deferred tax assets: Postretirement benefits $4,700 $4,068 Accrued liabilities 1,307 2,014 State taxes 543 287 Other 1,242 922 7,792 7,291
Deferred tax liabilities: Pension assets 3,976 3,653 Other 22 14 3,998 3,667 Net deferred tax asset $3,794 $3,624
Deferred tax assets are expected to be realized against future taxable income and have not been reduced by a valuation allowance.
The current and deferred components of the provision for income taxes consist of the following:
1995 1994 1993 (In thousands) Current: Federal $ 9,529 $ 4,385 $11,991 State 2,406 1,276 2,837 11,935 5,661 14,828
Deferred: Federal (145) 642 372 State (23) 56 94 (168) 698 466 $11,767 $ 6,359 $15,294
A reconciliation of the provision for income taxes to the statutory federal income tax expense is as follows:
1995 1994 1993 (In thousands, except percentages) Statutory tax rate 35.0% 35.0% 34.5% Income tax expense at statutory rate $10,949 $ 5,841 $13,641 State income tax (net of federal tax benefit) 1,549 865 1,856 Dividend income exclusion (581) (324) (302) Other (net) (150) (23) 99 $11,767 $ 6,359 $15,294
Income taxes paid $10,908 $10,993 $15,636
H. Other Current Liabilities 1995 1994 (In thousands) Accrued workers' compensation liabilities $3,178 $ 3,112 Dividends payable 963 963 Other 464 468 $4,605 $ 4,543
I. Line of Credit
The Company has a credit line of $50,000,000. The line has no fee or compensating balance requirement.
J. Commitments and Contingencies
The Company incurred rent expense of approximately $678,000, $666,000, and $686,000, for the years ended June 30, 1995, 1994 and 1993, respectively, and is obligated under leases for branch warehouses with terms not exceeding five years. Certain leases contain renewal options.
Future minimum lease payments are as follows:
June 30, (In thousands)
1996 $519 1997 368 1998 255 1999 57 2000 10
The Company is a party to various pending legal and administrative proceedings. It is management's opinion that the outcome of such proceedings will have no material financial impact on the Company.
Concentration of Credit Risk: At June 30, 1995, financial instruments which potentially subject the Company to concentrations of credit risk consist of cash in financial institutions (which periodically exceed federally insured limits), cash equivalents (principally commercial paper), short term investments and investments in the preferred stocks of other companies. Commercial paper investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 90 days. Other investments are in U.S. government securities. Investment in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer.
K. Quarterly Financial Data (Unaudited)
Quarter Ended
09/30/94 12/31/94 03/31/95 06/30/95 (In thousands, except per share data) Net sales $54,182 $62,598 $59,514 $58,368 Gross profit 25,908 30,085 26,818 30,088 Income from operations 4,514 8,023 4,448 8,250 Net income 3,757 5,706 3,220 6,834 Net income per share $1.95 $2.96 $1.67 $3.55
Quarter Ended
09/30/93 12/31/93 03/31/94 06/30/94* (In thousands, except per share data) Net sales $46,998 $49,564 $48,628 $48,671 Gross profit 26,010 27,621 26,811 13,853 Income (loss) from operations 5,244 5,889 4,679 (6,324) Net income (loss) 4,365 4,196 3,932 (2,163) Net income (loss) per share $2.27 $2.18 $2.04 $(1.13)
* Results were negatively impacted by the sudden increase in green coffee prices which occurred in the fourth quarter of 1994.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information to be set forth in the section entitled "Election of Directors" in the definitive proxy statement involving the election of directors in connection with the Annual Meeting of Shareholders to be held on November 27, 1995 (the "Proxy Statement") which section is incorporated herein by reference. The Proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after June 30, 1995, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
Name Age Position
Roy F. Farmer 79 Chairman of Board of Directors since 1951.
Roy E. Farmer 43 President since 1993; various positions since 1976, son of Chairman of the Board, R.F. Farmer.
Guenter W. Berger 58 Vice President of Production, Director since 1980; various positions since 1960.
Kenneth R. Carson 55 Vice President of Sales since 1990; Sales Management since 1968.
David W. Uhley 54 Secretary since 1985; various positions since 1968.
John E. Simmons 44 Treasurer since 1985; various positions since 1980.
All officers are elected annually by the Board of Directors and serve at the pleasure of the Board.
Item 11.

Item 11. Executive Compensation
Reference is made to the information to be set forth in the section entitled "Management Remuneration" in the Proxy Statement, which is incorporated herein by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information to be set forth in the sections entitled "Principal Shareholders" and "Election of Directors" in the Proxy Statement, which is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
Reference is made to the information to be set forth in the sections entitled "Principal Shareholders" and "Election of Directors" in the Proxy Statement, which is incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of Financial Statements and Financial Statement Schedules 1. Financial Statements included in Item 8: Consolidated Balance Sheets as of June 30, 1995 and 1994. Consolidated Statements of Income For the Years Ended June 30, 1995, 1994 and 1993. Consolidated Statements of Cash Flows For the Years Ended June 30, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity For the Years Ended June 30, 1995, 1994 and 1993. Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in the consolidated financial statements or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K. See item (c) below.
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K during the quarter ended June 30, 1995.
(c) Exhibits required by Item 601 of Regulation S-K.
Exhibits 3. Articles of incorporation and by-laws. Filed with the Form 10-K for the fiscal year ended June 30, 1986. 4. Instruments defining the rights of security holders, including indentures. Not applicable. 9. Voting trust agreement. Not applicable. 10. Material contracts Not applicable. 11. Statement re computation of per share earnings. Not applicable. 12. Statements re computation of ratios. Not applicable. 13. Annual report to security holders, Form 10-Q or quarterly report to security holders. Not applicable. 18. Letter re change in accounting principles. Not applicable. 19. Previously unfiled documents. Not applicable.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K, Continued
22. Subsidiaries of the Registrant. Not applicable. 23. Published report regarding matters submitted to vote of security holders. Not applicable. 24. Consents of experts and counsel. Not applicable. 25. Power of attorney. Not applicable. 28. Additional exhibits. Not applicable. 29. Information from reports furnished to state insurance regulatory authorities. Not applicable.
(d) Financial statements required by Regulation S-X but excluded from the annual report to shareholders by Rule 14a - 3(b). None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Farmer Bros. Co.
By: Roy F. Farmer (Roy F. Farmer, Chief Executive Officer and Chairman of the Board of Directors) Date: September 25, 1995
By: John E. Simmons (John E. Simmons, Treasurer and Chief Financial and Accounting Officer) Date: September 25, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Roy E. Farmer Roy E. Farmer, President and Director Date: September 25, 1995
Guenter W. Berger Guenter W. Berger, Vice President and Director Date: September 25, 1995
Lewis A. Coffman Lewis A. Coffman, Director Date: September 25, 1995
John M. Anglin, Director Date: September 25, 1995
Catherine E. Crowe, Director Date: September 25, 1995