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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 0-13875
Lancer Corporation
(Exact name of registrant as specified in its charter)
Texas 74-1591073
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 W. Turbo, San Antonio, Texas 78216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (210) 344-3071
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock, par value $.01 per
share, as of March 20, 1997, held by non-affiliates of the registrant was
approximately $57,347,272 based on the closing sale price. For purposes of this
computation, all executive officers, directors and 5% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
to be an admission that such officers, directors or 5% beneficial owners are, in
fact, affiliates of the Company.
The number of shares of the registrant's common stock outstanding as of March
20, 1997, was 5,836,898.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission (the Commission) not later than 120 days
after the end of the fiscal year covered by this report and prepared for the
1997 annual meeting of shareholders are incorporated by reference into Part III
of this report.
PART I
ITEM 1. BUSINESS
General
Lancer designs, engineers, manufactures and markets fountain soft drink
dispensing systems, citrus beverage dispensing systems, and other equipment for
use in the food service and beverage industry. During the fourth quarter of
1996, Lancer began marketing frozen beverage dispensers manufactured by a joint
venture that is 50% owned by the Company. Lancers products are sold by Company
personnel and through independent distributors and agents principally to major
soft drink companies (primarily The Coca-Cola Company), bottlers, equipment
distributors and food service chains for use in various food and beverage
operations. The Company is a vertically integrated manufacturer whose tooling,
production, assembly and testing capabilities enable it to fabricate a
substantial portion of the components used in Company products. In addition, the
Company is an innovator of new products in the beverage dispensing industry and
has a large technical staff supported by state-of-the-art engineering facilities
to develop these new products and to enhance existing product lines in response
to changing industry requirements and specific customer demands.
The Company was incorporated in Texas on December 18, 1967, and initially
manufactured parts for beverage dispensing equipment. The Company designed,
engineered, manufactured and marketed its first mechanically cooled soft drink
dispensing system in 1971. Since that time, the Company has expanded its
engineering and production facilities and has developed new products, including
various configurations of the Company's mechanically and ice cooled beverage
dispensing systems, syrup pumps, carbonators and other related equipment,
accessories and parts.
Strategy
The Companys strategy is to increase sales through (i) its continued emphasis
on developing and manufacturing technologically superior, reliable, high quality
products, (ii) the development of new and enhanced products in anticipation of
market demand and (iii) emphasis on establishing a strategic international
manufacturing and distribution network to enhance customer service throughout
the world.
In keeping with this strategy, Lancer acquired its Australian subsidiary in the
fourth quarter of 1995. In the fourth quarter of 1996, the Company added a new
product line by forming a joint venture to develop and manufacture a new frozen
beverage dispenser. In the first quarter of 1997, the Company completed the
purchase of the assets of a Brazilian manufacturer and marketer of fountain soft
drink and beer dispensing equipment. The Brazilian subsidiary is expected to
strengthen the Companys position in Latin America. Also, in the first quarter
of 1997, Lancer signed a letter of intent to acquire another strategically based
manufacturer and marketer of beverage dispensing equipment. The transaction is
expected to close in the second quarter of 1997. Finally, the Company continues
to internally develop new products and technologies designed to meet customer
needs.
The Beverage Dispensing Industry
The manufacture of soft drink and citrus dispensing systems and other related
equipment is a rapidly changing industry. Technological changes and improvements
continue to be manifested in the development, manufacture and introduction of
new products and processes. Manufacturers of such beverage dispensing systems
generally sell most of their products to one or more major soft drink companies,
licensed bottlers, equipment distributors and food service chains. In order to
facilitate sales of their beverage products to end-users, soft drink companies
and their affiliates, in turn, sell or lease the dispensing systems to
restaurants, convenience stores, concessionaires and other food and beverage
operators. Soft drink companies generally recommend that their affiliates
purchase beverage dispensing systems from approved manufacturers. Most
manufacturers of beverage dispensing systems therefore seek to have their
products approved by as many soft drink companies as possible and informal,
long-term relationships between certain manufacturers and soft drink companies
have become the norm in the industry.
Products
The Company's products can be divided into three major categories: (i) soft
drink and citrus dispensing systems; (ii) post-mix dispensing valves; and (iii)
other related products, including carbonators, refurbished products, syrup pumps
and related accessories, ice dispensers, ice baggers, beer dispensers,
carbonator fittings and other miscellaneous parts and equipment for various
dispensing systems.
1
Beverage Dispensing Systems
The Company manufactures and sells a broad range of mechanically cooled and ice
cooled soft drink and citrus dispensing systems. These systems are non-coin
operated. The type of equipment and configuration of each model varies according
to intended use and, to some extent, specific customer needs. The Company's
mechanically cooled dispensing systems chill beverages as they run through
stainless steel tubing inside a self-contained refrigeration unit. In the
Company's ice cooled dispensing systems, the beverage is cooled as it runs
through stainless steel tubing encased in an aluminum cold plate which serves as
the heat transfer element when covered with ice. Several of the ice cooled
systems also dispense ice. The Company manufactures both post-mix and pre-mix
dispensing equipment for each of the mechanically cooled and ice cooled systems.
The Company also manufactures and markets self-contained, mechanically cooled
citrus dispensing systems for countertop use. The units use electronic controls
to dispense preset mix ratios for different flavored juice concentrates. Under
an agreement with The Coca-Cola Company, the citrus dispenser may be sold only
to The Minute Maid Company, a division of The Coca-Cola Company, or its
designated agents.
The prices of the Company's dispensing systems vary depending on dispensing
capacity, number of drink selections, speed of beverage flow and other customer
requirements. Sales of complete dispensing systems for the years ended December
31, 1996, 1995 and 1994, accounted for approximately 53%, 55% and 49% of total
net sales, respectively.
Post-Mix Dispensing Valves
The Company manufactures and sells post-mix dispensing valves which mix syrup
and water at a preset ratio. The valves are designed to be interchangeable with
existing post-mix valves used with Coca-Cola products. The Company manufactures
accessories for the valves, including push-button activation, water-only
dispensing mechanisms, portion controls and other automatically activated valve
controls. The Companys primary valve, the LEV, has been designated by The
Coca-Cola Company as the standard valve for the U.S. market. Lancer uses the LEV
in many of its own dispensing systems, and also sells the valve to competing
equipment makers. For the years ended December 31, 1996, 1995 and 1994, sales of
LEV post-mix valves accounted for approximately 16%, 20% and 23% of total net
sales, respectively.
Other Related Products and Services
The Company manufactures a carbonator which produces carbonated water for use in
beverage systems. For the years ended December 31, 1996, 1995 and 1994, sales of
carbonators accounted for approximately 2%, 1% and 4% of total net sales,
respectively. The Company manufactures ice bagger machines under an exclusive
agreement with Packaged Ice, Inc., an affiliate. Sales of ice bagger machines
for the years ended December 31, 1996, 1995 and 1994, accounted for
approximately 2%, 1%, and 3% of total net sales, respectively.
The Company also refurbishes, for a fee, various dispensing systems and sells
replacement parts in connection with such refurbishments. For the years ended
December 31, 1996, 1995 and 1994, revenues generated from these services
accounted for approximately 4%, 5%, and 4% of total net sales, respectively.
Other products manufactured by the Company include syrup pumps, stainless steel
and brass fittings, carbon dioxide regulator components, disconnect sockets used
on five-gallon syrup tanks, quality control testing equipment, recirculating
beer equipment and accessories, water filtering systems, and a variety of other
products, parts and accessories for use with beverage dispensing systems.
Product Research and Development
In order to maintain its competitive position, the Company continuously seeks to
improve and enhance its line of existing beverage dispensing systems and
equipment and develops new products to meet the demands of the food and beverage
industry. Some projects are originated by Company personnel while others are
initiated by customers, primarily The Coca-Cola Company. The Company has, from
time to time, entered into agreements with customers to design and develop new
products. For the years ended December 31, 1996, 1995 and 1994,
Company-sponsored research and development expenses were $913,000, $737,000, and
$695,000, respectively.
2
Production, Inventory and Raw Materials
The Company manufactures many of the plastic components and other parts used in
its products. The Company maintains complete tool and die and mold departments
which produce and maintain the necessary tools and molds to manufacture these
components. The manufacture of major products generally involves a tooling
process using metal dies, fixtures and thermal plastic injection molds. Other
manufacturing processes include welding, polishing, painting, tube bending,
metal turning, stamping, and assembling of printed circuit boards and wire
harnesses.
Substantially all raw materials and parts not manufactured internally are
readily available from other commercial sources. The Company has not experienced
any significant shortages in the supply of its raw materials and parts over the
past several years. Shortages can occur from time to time, however, and could
delay or limit the manufacture of the Company's products. Such a disruption
could adversely affect the Company's operations. The Company does not stockpile
large amounts of raw materials and parts, but attempts to control its inventory
through extrapolation of historical production requirements and its specific
knowledge of the market. In addition, the Company is able to manufacture some
purchased parts that may occasionally be unavailable in desired quantities when
needed. There can be no assurances, however, that these measures will be
entirely successful or that disruptive shortages will not occur in the future.
Backlog
The Company's manufacturing operations are driven by actual and forecasted
customer demand. The Company's backlog of unfilled orders was approximately $
10.1 million, $10.2 million and $7.1 million at December 31, 1996, 1995 and
1994, respectively. It is anticipated that 1996 backlog orders will be filled in
1997.
Marketing and Customers
The Company's products are marketed on a wholesale basis in the United States
through a network of independent distributors and salaried sales
representatives. The principal purchasers of Company products are major soft
drink companies, bottlers, beverage equipment dealers, restaurants, convenience
stores, and other end users.
Substantially all of the Company's sales are derived from, or influenced by, The
Coca-Cola Company. Lancer is a preferred supplier to The Coca-Cola Company.
Direct sales to The Coca-Cola Company, the Company's largest customer, accounted
for approximately 33%, 50% and 46% of the Company's total net sales for the
years ended December 31, 1996, 1995 and 1994, respectively. None of the
Companys customers, including The Coca-Cola Company, are contractually
obligated to purchase minimum volumes of Lancer products. Consequently, The
Coca-Cola Company has the ability to adversely affect, directly or indirectly,
the volume and price of the products sold by the Company. Lancer does not expect
any significant volume or price reductions in its business with The Coca-Cola
Company. If they were to occur, however, such reductions would have a material
adverse impact on the Companys financial position and its results of
operations.
The Company and The Coca-Cola Company have entered into a master development
agreement which governs development of various products. Products that are
developed pursuant to this agreement may only be sold to The Coca-Cola Company
or its designated agents. The agreement generally provides that The Coca-Cola
Company will also retain the rights to any tooling it pays for and any resulting
patents. The Company is obligated under the development agreement to make
available its manufacturing capabilities for the benefit of The Coca-Cola
Company as they relate to, and are required for, selected projects. The Company
supplies engineering and research and development personnel, designs, develops
and creates prototypes, and obtains either an exclusive or a non-exclusive
license to manufacture and market the resulting products. Generally, the Company
warrants all such products for one year. The Coca-Cola Company may terminate the
development agreement at any time, subject to certain conditions.
Additionally, the Company and The Coca-Cola Company have entered into certain
warehousing agreements under which the Company warehouses new and used products
owned by The Coca-Cola Company, as well as agreements which provide for the
refurbishment of used dispensing equipment owned by The Coca-Cola Company.
During 1996, the Company expanded the scope of its warehousing arrangement with
The Coca-Cola Company.
3
International Sales
For the years ended December 31, 1996, 1995 and 1994, the Company's total net
sales derived from sales to customers in foreign countries were approximately
43%, 35% and 29% , respectively. The Company has sales employees, distributors,
and/or licensees in Latin America, Europe, and Asia. The Company manufactures
product in Mexico and Australia, and operates a warehouse in Russia.(See note 9)
The Company's foreign sales and operations could be adversely affected by
foreign currency fluctuations, exchange controls, tax policies, deterioration of
foreign economies, the expropriation of Company property, and other political
actions and economic events. Although the Company attempts to limit such risks,
there can be no assurance that these efforts will be successful.
During the first quarter of 1997, the Company completed the purchase of a
Brazilian manufacturer and marketer of beverage dispensing equipment. The
acquired business produced 1996 net sales of approximately $14 million.
Competition
The business of manufacturing and marketing beverage dispensing systems and
related equipment is highly competitive and is characterized by rapidly changing
technology. Competition is primarily based upon product suitability,
reliability, technological development and expertise, price, product warranty
and delivery time. In addition, the Company frequently competes with companies
having substantially greater financial resources than the Company. The Company
has been able to compete successfully in the past, and believes it will be able
to do so in the future.
Employees
As of December 31, 1996, the Company had 1,376 full-time employees of whom 77
were engaged in engineering and technical support, 1,143 in manufacturing, 62 in
marketing and sales and 94 in general management and administrative positions.
While the majority of the employees work at the Company's facilities in San
Antonio, Texas, 454 employees work at the Company's maquiladora and related
companies located in Piedras Negras, Mexico, and 73 employees are employed by
the Companys Australian subsidiary. Certain sales representatives are located
in various parts of the U.S., Mexico, Europe and the Far East. None of the U.S.
employees are represented by a union or are subject to collective bargaining
agreements. Substantially all full-time United States employees are eligible to
participate in the Company's employee profit sharing plan and various other
benefit programs.
Intellectual Property
The Company presently owns 36 United States patents and numerous corresponding
foreign patents. It has 13 pending U.S. patent applications and corresponding
foreign patent applications. The Company's products covered by patents or
pending patent applications include food, beverage and ice beverage dispensing
equipment and components. The patents have a remaining life of 6 to 19 years.
Management does not believe the expiration of such patents will have a
significant adverse impact on continuing operations.
The Company seeks to improve its products and to obtain patents on these
improvements. As a result, the Company believes its patent portfolio will
expand, thereby lessening its reliance on any one particular patent. The Company
also believes its competitive position is enhanced by its existing patents and
that any future patents will continue to enhance this position. However, there
can be no assurance that the Company's existing or future patents will continue
to provide a competitive advantage, nor can there be any assurance that the
Company's competitors will not produce non-infringing competing products.
In addition to Company-owned patents, Lancer has assigned numerous patents to
the Company's customers, primarily The Coca-Cola Company. These patents are the
result of special development projects between Lancer and its customers. These
projects are typically paid for by the customer, with Lancer either retaining
licenses to manufacture the products covered by these patents for the customer,
or granting such licenses to the customer. The Company occasionally acquires
patent protection for products that are complimentary to products whose patents
are controlled by third parties.
4
The name Lancer is the federally registered trademark of the Company. It is
also registered in many foreign countries. In certain instances, the Company
grants a non-exclusive license to its distributors, primarily foreign, to use
the trademark subject to control by the Company.
Environmental Matters
The Company's operations are subject to increasingly stringent federal, state,
local, and foreign laws and regulations relating to the protection of the
environment. In the United States, these environmental laws and regulations,
which are implemented by the Environmental Protection Agency and comparable
state agencies, govern the management of hazardous waste, the discharge of
pollutants into the air and into surface and ground water, and the manufacture
and disposal of certain substances.
There are no material environmental claims pending or, to the Company's
knowledge, threatened against the Company. The Company also believes that its
operations are in material compliance with current U.S., state, and foreign laws
and regulations. The Company estimates that any expenses incurred in maintaining
compliance with current laws and regulations will not have a material effect on
the Company's earnings or capital expenditures. However, the Company can provide
no assurances that the current regulatory requirements will not change, or that
currently unforeseen environmental incidents will not occur, or that past
non-compliance with environmental laws will not be discovered on the Company's
properties.
ITEM 2. PROPERTIES
The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio, Texas, totaling 516,038 square feet, including
three buildings owned by Lancer covering approximately 144,000 square feet of
space, the largest of which is located on a 40-acre tract of land in the
southeast sector of San Antonio. A 218,000 square foot expansion is under
construction at the Companys primary San Antonio facility. In 1997, the Company
expects to begin construction on approximately 30,000 square feet of office
space at its primary San Antonio facility. The addition is expected to be
completed in late 1997 or early 1998. The Company owns and operates facilities
located in Piedras Negras, Mexico that consist of 127,495 square feet of
completed space plus 56,000 square feet of space under construction. The Company
also leases a 4,000 square foot sales office in Monterrey, Mexico, and a 38,284
square foot plant in Beverley, South Australia, a suburb of Adelaide. Facilities
under lease account for 431,322 square feet of space. The Company also owns a
building in Chicago, Illinois, with approximately 47,000 square feet of space,
of which a major portion is currently leased to outside tenants. The lease
expires March 31, 1997, and the building is under contract to be sold.
Total net rent expense was $1,223,000, $712,000, and $776,000 in 1996, 1995 and
1994, respectively. Included in total rent expense in 1996 is $89,000 for
certain properties that are leased from a partnership controlled by certain
shareholders. See Note 5 of Notes to Consolidated Financial Statements and
Certain Relationships and Related Transactions for more information.
ITEM 3. LEGAL PROCEEDINGS
There are no claims or legal actions pending against the Company other than
claims arising in the ordinary course of business. The Company believes these
claims, taking into account reserves and applicable insurance, will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the security holders for a vote by proxy or otherwise
during the fourth quarter of the year ended December 31, 1996.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is currently traded on the American Stock Exchange
(ASE) under the symbol LAN. The following table sets forth the range of high and
low market price as reported by the ASE for the periods indicated. Prices are
adjusted for three-for-two stock dividends effective July 9, 1996 and July 11,
1995
Market Price For Common Stock
1996 1995
Quarter High Low High Low
- ----------------------- -------------------------- ---------------------------
First $12.00 $9.08 $8.22 $6.83
Second 15.83 10.83 9.05 7.22
Third 14.92 12.00 10.59 9.33
Fourth 20.88 13.00 10.67 8.67
On March 20, 1997, the closing price of the Company's common stock, as reported
by the ASE, was $19.63 per share. On that date, there were 167 holders of record
of the Company's common stock, not including shares held by brokers and
nominees. The Company has not declared a cash dividend on the common stock to
date. It is a general policy of the Company to retain future earnings to support
future growth.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ------------- ------------- ------------- --------------
Operating Data:
Net sales $ 102,308 $75,912 $70,900 $56,661 $44,729
Gross profit 24,554 16,075 14,193 10,482 7,891
Selling, general and
administrative expenses (14,434) (9,880) (9,239) (7,157) (6,409)
Operating income 10,120 6,195 4,954 3,325 1,482
Interest expense (1,588) (981) (755) (795) (884)
Interest and other income, net 616 1,489 354 1,060 911
Earnings before income taxes
and extraordinary item 9,148 6,703 4,553 3,590 1,509
Income tax expense 3,415 2,612 1,602 1,416 451
Net earnings 5,733 4,091 2,951 2,174 1,465
Net earnings per share* $ 0.94 $ 0.68 $ 0.52 $ 0.40 $ 0.28
Weighted average shares outstanding* 6,076 5,989 5,674 5,388 5,298
* Per share amounts have been restated to reflect a three-for-two
stock dividend effective July 11, 1995 and July 9, 1996
As of December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ------------- ------------- ------------- --------------
Balance Sheet Data:
Total assets $ 82,009 $57,944 $46,896 $38,902 $37,762
Short-term debt 13,553 8,448 7,409 7,159 6,522
Long-term debt, less
current installments 15,459 5,398 3,397 2,575 3,589
Shareholders' equity 37,036 31,065 26,919 20,325 17,923
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the Company's
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this filing.
Results of Operations
Comparison of the Years Ended December 31, 1996 and December 31, 1995
Net sales for the year ended December 31, 1996 increased by $26.4 million, or
34.8%, to $102.3 million from $75.9 million in 1995. This increase was driven
primarily by the inclusion of the Companys Australian subsidiary for a full
year, and by strong sales across most product lines. Excluding sales of the
Australian subsidiary, sales of mechanically cooled dispensers rose 42%, sales
of ice cooled dispensers rose 69%, and spare parts sales increased 56%. Sales of
citrus dispensers declined 35% from 1995 levels, as the Company introduced a
major new product line. International sales represented 43% of the net sales for
the year ended December 31, 1996, compared to 35% for the prior year.
Gross profit for the year ended December 31, 1996 increased by $8.5 million, or
52.8%, to $24.6 million from $16.1 million for the prior year, due to the higher
sales and an improvement in manufacturing gross margin to 24.0% in 1996 from
21.2% in 1995. This improvement reflects product mix changes and managements
ongoing efforts to control costs through manufacturing process enhancements.
Selling, general and administrative expenses for the year ended December 31,
1996 were $14.4 million, (14.1% of sales), up from $9.9 million (13.0% of sales)
in 1995. The increase was primarily driven by increased worldwide selling
expenses, by an increase in company-sponsored research and development expense,
and by a general increase in personnel to support the Companys growth.
Interest expense for the year ended December 31, 1996 was $1.6 million, up from
$0.9 million in 1995. This increase resulted from higher average borrowings to
fund asset growth. The Companys income tax rate was 37% in 1996 compared to 39%
in 1995. The lower rate was primarily the result of tax planning relating to
foreign and state taxes.
Net earnings for the year ended December 31, 1996 were $5.7 million, a 39.0%
increase over the $4.1 million earned in 1995. Net earnings per share improved
38.2% to $0.94 in 1996 from $0.68 in 1995.
Comparison of the Years Ended December 31, 1995 and December 31, 1994
Net sales for the year ended December 31, 1995 increased by $5.0 million, or
7.1%, to $75.9 million from $70.9 million for the prior year. This increase was
caused primarily by a 39% increase in shipments of citrus dispensers, a 22%
increase in ice cooled dispensers, and a 28% increase in spare part sales.
International sales accounted for 35.0% of net sales for the year ended December
31, 1995, as compared to 29.0% for the prior year.
Gross profit for the year ended December 31, 1995 increased by $1.9 million, or
13.3%, to $16.1 million from $14.2 million for the prior year, due to an
improvement in manufacturing gross margin to 21.2% in 1995 from 20.0% in 1994.
This improvement reflects product mix changes and lower manufacturing and
support costs. In 1995, the Company continued to benefit from further reductions
in labor costs as a result of moving additional assembly and manufacturing
operations to its maquiladora plant in Piedras Negras, Mexico.
Selling, general and administrative expenses for the year ended December 31,
1995 increased by approximately $0.7 million, or 6.9%, to $9.9 million from $9.2
million for the prior year. This increase reflected additional engineering costs
for new product development and technical support, increased selling expenses to
sustain a higher level of sales, and higher variable costs related to those
sales.
Interest expense for the year ended December 31, 1995, increased approximately
$226,000, or 30.0%, to $981,000 from $755,000 for the prior year. This increase
resulted from increased average borrowings, due primarily to funding
requirements for construction of the Companys expanded facilities in Mexico.
7
Interest and other income for the year ended December 31, 1995, increased by
approximately $1.1 million, or 321.2%, to $1.5 million from $354,000 for the
prior year. The increase was due primarily to increased sales commissions of
$716,000 related to sales of beverage coolers, and an increase of $50,000 in
warehousing cost reimbursements from The Coca-Cola Company.
The Companys income tax rate was 39% in 1995, compared to 35% in 1994. The
increase was driven by higher state taxes and nondeductible foreign losses.
Net earnings for the year ended December 31, 1995, increased by approximately
$1.1 million, or 38.7%, to $4.1 million ($0.68 per share) from $3.0 million
($0.52 per share) for the prior year. This increase was due primarily to
increased net sales, an improvement in operating income and an increase in other
income.
Liquidity and Capital Resources
Cash used in operations was $3.3 million in 1996, compared to cash provided by
operations of $7.1 million in 1995. Record earnings in 1996 were more than
offset by increases in inventory and accounts receivable. Lancers strong sales
growth caused part of the increase in current assets. The addition of several
new product lines also contributed to the inventory increase. Management is
focused on managing current assets aggressively in 1997.
Capital expenditures were $9.1 million in 1996, up from $7.9 million in 1995. In
1996, Lancer began construction on a 218,000 square foot addition of
manufacturing and warehouse space to the primary San Antonio facility. The
Company also completed most of a 56,000 square foot expansion of its facility in
Piedras Negras, Mexico. The Company expects to complete the two projects in the
second quarter of 1997. It is anticipated that capital spending in 1997 will
increase somewhat over 1996 levels. In addition to completing the two expansion
projects mentioned above, the Company plans to build office space at its primary
San Antonio plant in 1997. The new office space will consolidate three San
Antonio office locations. The Company expects to borrow approximately $4 million
on its credit facilities in 1997 to fund construction spending.
Working capital requirements and capital spending were funded with bank
borrowings. In July, 1996, the Company entered into an agreement with two banks
for $42.5 million of five year credit facilities. The facilities include a $17.5
million revolving loan, and loans totaling $25.0 million to fund capital
spending and acquisitions. The credit facilities require that the Company
maintain certain financial ratios and other covenants. The Company is in
compliance with respect to these financial ratios and covenants. To manage its
exposure to interest rate fluctuations, the Company entered into two interest
rate swap transactions in 1996 covering a combined notional principal amount of
$8.0 million.
In October, 1996, the Company formed a joint venture to manufacture frozen
beverage dispensing systems. Lancer paid $2.6 million in cash for a 50% interest
in Lancer FBD Partnership, Ltd. The funds were borrowed under the bank
facilities.
During 1996, the Company entered into a $4.3 million lease to finance a new
integrated computer system and other technology oriented equipment. The lease is
for a period of 48 months, unless it is terminated by the Company after 24
months. Approximately $2.5 million was funded under the lease in 1996. The
Company believes the computer system will contribute to improved operating
efficiencies in the future.
In December, 1996, the Company agreed to purchase a manufacturer and marketer of
fountain soft drink and beer dispensing equipment based in Sao Paulo, Brazil.
The transaction was completed in the first quarter of 1997. The $6.1 million
purchase price was financed with borrowings under the Companys credit
facilities, and with long term financing provided by the seller. The Company
purchased had 1996 net sales of approximately $14 million.
In the first quarter of 1997, the Company signed a letter of intent to acquire
the assets of an entity which manufactures and distributes beverage dispensing
equipment. The anticipated purchase price is approximately $3.5 million. The
Company expects to finalize the transaction during the second quarter of 1997.
Because of its anticipated growth, the Company may need additional debt and/or
equity financing. The Company believes it will be successful in obtaining the
financing it needs.
8
Inflation
Management believes inflation has not had a significant impact on its
business or operations.
Seasonality
The Company's net sales in the fourth quarter of its fiscal years historically
have been subject to seasonal changes primarily as a result of the reduced funds
available in the capital expenditure budgets of Lancer's customers.
Accounting Matters
The Company established a DISC in 1979 in order to defer federal income taxes on
its foreign sales. In late 1984, the Internal Revenue Code (the Code) was
amended to limit the benefits of a DISC, primarily by imposing an interest
charge on the accumulated deferred federal income taxes of a DISC. At the same
time, the Code was amended to permit the creation of a Foreign Sales Corporation
(FSC). Under the Code, as amended, a portion of a FSC's income is subject to
federal income taxes, while a portion is permanently exempt from federal income
taxes. As a result, at some point, the interest charge the Company incurs on the
deferred federal income taxes of its DISC will equal or exceed the taxes it
would have incurred had it operated a FSC. Since the Company cannot maintain the
DISC and FSC at the same time under current tax regulations, the Company has
determined it will be advantagous to convert the DISC to a FSC and plans to
convert in 1997. At the time of such a conversion, the Company will be required
to provide for federal income taxes on the $2.4 million of undistributed
earnings of the DISC, for which federal income taxes had not previously been
provided. If the DISC had been converted on December 31, 1996, it would have
resulted in a reduction of approximately $801,000 in the Company's net earnings.
The Company will be able to pay such federal income taxes over a ten-year
period; thus the Company does not anticipate that payments of such federal
income taxes will significantly affect the Company's cash from operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 Earnings per Share. The Statement,
which is effective for financial statements issued after December 15, 1997,
simplifies the standards for computing earnings per share and makes the U.S.
standard for computing earnings per share more compatible with the EPS standards
of other countries. The Company plans to adopt this Statement in the first
quarter of 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule included herein
for information required for Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption Election of Directors in the
Company's proxy statement for its May 22, 1997 Annual Meeting of Shareholders,
which is to be filed with the Commission, describes the directors of the Company
as required in response to this item and is incorporated herein by reference.
The following table sets forth certain information concerning the executive
officers and directors of the Company:
Name Age Position with the Company
Alfred A. Schroeder 60 Chairman of the Board
George F. Schroeder 57 President, Chief Executive Officer and Director
John P. Herbots 49 Vice President Finance and Director
Walter J. Biegler 55 Director
Jean M. Braley 67 Director
Charles K. Clymer 61 Director
Michael E. Smith 56 Director
Charles W. Thomas 43 Vice President of Marketing
Robert W. Abbott 58 Vice President-Asia
Jose A. Canales, Jr. 51 Vice President-Latin America
Robert E. Gehl 35 Vice President-Europe
James R. Sprinkle 49 Vice President-Domestic Sales
Samuel Durham 48 Vice President of Engineering
Michael U. Raymondi 50 Vice President of Operations
Mr. Alfred A. Schroeder is a co-founder of the Company and has served as
Chairman of the Board of Directors of the Company since its inception in 1967.
His primary responsibilities include conceptual engineering design, new product
development and corporate planning. He is the brother of George F. Schroeder,
and is also a partner in Lancer Properties. See Certain Relationships and
Related Transactions.
Mr. George F. Schroeder is a co-founder of the Company and has served as Chief
Executive Officer, President and a director of the Company since 1967. His
primary responsibilities include strategic planning, marketing, overall
production management and corporate administration. He is the brother of Alfred
A. Schroeder, and is also a partner in Lancer Properties. See Certain
Relationships and Related Transactions.
Mr. John P. Herbots joined the Company as Vice President of Finance and
Administration in February 1995. On August 7, 1995, Mr. Herbots was appointed
Chief Financial Officer and Treasurer. Prior to joining Lancer, Mr. Herbots was
Executive Vice President of MK Rail Corporation and from 1990 until 1992, served
as Vice President and Chief Financial Officer for Morrison Knudsen Corporation's
Rail Systems Group. Prior to that he was Vice President and CFO of Avline
Leasing Corporation for one year, of Lancer Corporation for one year and of
Fairchild Aircraft Corporation for four years. Mr. Herbots was elected to the
Board of Directors in May 1995.
Mr. Walter J. Biegler has served as a director of the Company since 1985. He has
held the position of Chief Financial Officer of Periodical Management Group,
Inc., a San Antonio, Texas concern which distributes periodicals, books and
specialty items in the United States, Mexico and the Virgin Islands, since
November 1991. Prior to November 1991, he served as the Chief Financial Officer
and Senior Vice President-Finance of La Quinta Motor Inns, Inc. of San Antonio,
Texas, a national hotel chain.
Ms. Jean M. Braley has served as a director of the Company since 1976. She
served as Secretary of the Company from 1982 to 1985. Ms. Braley is currently
and has been involved for the last ten years in personal investments as her
principal occupation. She is also a partner in Lancer Properties. See Certain
Relationships and Related Transactions.
Mr. Charles K. Clymer has served as a director of the Company since December,
1996. Mr. Clymer retired from The Coca-Cola Company in 1993 after 31 years of
service. Managerial positions held with Coca-Cola International included Manager
of Chile, Director and Senior Vice President of Coca-Cola (Japan) Company
Limited, and Vice President of On Premise Market Development and Customer
Service for the Latin America Group.
10
Mr. Michael E. Smith has served as a director of the Company since 1985. Mr.
Smith is presently a principal shareholder and Vice President of Bailey-Gosling
Associates, Inc., an insurance brokerage firm. He has been employed by the same
firm since 1968. Mr. Smith has been the Company's insurance broker since 1981.
Mr. Charles W. Thomas joined the Company as Vice President of Marketing on
February 12, 1996. Prior to joining Lancer, Mr. Thomas was employed for 15 years
by what is now The Minute Maid Company, a Division of The Coca-Cola Company.
While at The Minute Maid Company, Mr. Thomas held positions as Director of
Marketing, Director of Field Sales and Director of Technical Development.
Mr. Robert W. Abbott has been employed by the Company since 1974. Mr. Abbott
became Vice President-Asia in 1997. From 1976 until January, 1997, he has held
various senior sales positions. Prior to his employment by Lancer, Mr. Abbott
was employed by The Coca-Cola Company.
Mr. Jose A. Canales, Jr., joined the Company as Vice President-Latin America in
August 1995. Prior to joining Lancer, Mr. Canales was the International Sales
Manager for Pioneer Flour Mills in San Antonio. From 1982 to 1993, he held
various management positions within the Latin American steel industry with Trade
Arbed of Luxembourg, Fundidora in Mexico and Huntco Steel in the United States.
From 1972 to 1982, he represented W. W. Grainger within Mexico and Latin
America.
Mr. Robert E. Gehl joined the Company in February 1997 as Vice President-Europe.
Before coming to Lancer, Mr. Gehl was Managing Director of Europe for Multiplex
GMbH for five years, and was Director of Sales and Marketing of Jetspray London,
Ltd. for two years.
Mr. James R. Sprinkle joined the Company in April 1984 as Director of National
Accounts. Mr. Sprinkle assumed the responsibilities of Vice President-Domestic
Sales in May 1993. Prior to his employment by Lancer, Mr. Sprinkle was employed
by The Coca-Cola Company.
Mr. Samuel Durham joined the Company in June 1979 and he has held the position
of Vice President of Engineering since May 1993. He is primarily responsible for
coordinating new product design through its introduction into the market and
works directly with the engineering department of the Company's primary
customer. Before joining the Company, Mr. Durham was employed by Polyvend, a
manufacturer of vending equipment.
Mr. Michael U. Raymondi joined the Company as Vice President of Operations in
August 1994. Prior to joining Lancer, Mr. Raymondi was employed by Minnesota
Rubber, a rubber and plastics products company, as General Manager for three
years. Prior to that, Mr. Raymondi was employed by National O-Ring as Plant
Manager for five years.
All directors of the Company are elected annually. The executive officers are
elected annually by, and serve at the discretion of, the Company's Board of
Directors. The Board of Directors of the Company currently maintains an Audit
Committee, a Compensation Committee and a Stock Option Committee. The members of
the Audit Committee are Walter J. Biegler, Charles K. Clymer, and Michael E.
Smith. The Audit Committee met once in 1996. The members of the Compensation
Committee are Walter J. Biegler, Charles K. Clymer, and Michael E. Smith. No
member of the Compensation Committee is an executive officer of the Company. The
Compensation Committee met once in 1996. The members of the Stock Option
Committee are Walter A. Biegler, Charles K. Clymer, and Michael E. Smith. The
Stock Option Committee met five times in 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption Compensation and Certain
Transactions in the Company's proxy statement for its May 22, 1997 Annual
Meeting of Shareholders, which is to be filed with the Commission, sets forth
information regarding executive compensation and certain transactions as
required in response to this item and is incorporated herein by reference.
11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions Principal Shareholders and Election
of Directors in the Company's proxy statement for its May 22, 1997 Annual
Meeting of Shareholders, which is to be filed with the Commission, describes the
security ownership of certain beneficial owners and management as required in
response to this item and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption Certain Relationships and Related
Transactions in the Company's proxy statement for its May 22, 1997 Annual
Meeting of Shareholders, which is to be filed with the Commission, sets forth
information regarding certain relationships and related transactions as required
in response to this item and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial statements:
The financial statements filed as a part of this report are
listed in the Index to Consolidated Financial Statements and
Schedule referenced in Item 8.
(2) Financial statement schedule:
The financial statement schedule filed as a part of this report is
listed in the Index to Consolidated Financial Statements and Schedule
referenced in Item 8.
(3) Exhibits:
3.1* Registrants Articles of Incorporation and amendments thereto
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate, $0.01 par value, of Registrant
10.1* Lancer Corporation Profit Sharing Plan
10.2* 1992 Non-Statutory Stock Option Plan
10.3* 1987 Incentive Stock Option Plan
10.4* Master Development Agreement, dated January 12, 1984, between Lancer Corporation and The
Coca-Cola Company
10.5* Net Lease Agreement, dated July 1, 1974, between Lancer Corporation and Lancer Properties dated
as of June 3, 1977
10.6* Loan Agreement, dated as of July 24, 1991, between Lancer Corporation and First Interstate Bank
10.7* Security Agreement, dated as of July 24, 1991, between Lancer Corporation and First Interstate
Bank of Texas
10.8* Fourth Amendment to Loan Agreement and Loan Documents, dated as of July 29, 1994, between
Lancer Corporation and First Interstate Bank
10.9* Modification of Deeds of Trust, dated as of May 15, 1993, for the benefit of First Interstate
Bank, as modified by the Second Modification of Deeds of Trust, dated as of April 8, 1994, and
the Third Modification of Deeds of Trust, dated as of July 29, 1994
10.10* Form of Guaranty Agreement, dated July 29, 1994, executed by each of the subsidiaries of Lancer
Corporation in favor of First Interstate Bank of Texas
10.11* Master Security Agreement, dated as of July 28, 1992, between Lancer Corporation and CIT
Group/Equipment Financing, Inc.
10.12* Agreement for Purchase and Sale of Assets and Business (Vaculator division), dated August 5,
1993, between Lancer Corporation and Newco Enterprises, Inc.
10.13* Development and Manufacturing Agreement, dated April 13, 1993, between Lancer Corporation and
Packaged Ice, Inc.
12
10.14* Manufacturer's Representation Agreement, dated June 1993, between Lancer Corporation and
Middleby Marshall Inc., doing business as Victory - A Middleby Company
10.15* Form of Notice of Grant of Stock Option under the 1987 Incentive Stock Option Plan
10.16* Form of Nonstatutory Stock Option Agreement under the 1992 Non-Statutory Stock Option Plan
10.17** Schedule No. 5, dated February 18, 1994, to Master Security Agreement between Lancer
Corporation and CIT Group/Equipment
10.18** Schedule No. 6, dated May 24, 1994, to Master Security Agreement between Lancer Corporation and
CIT Group/Equipment Financing, Inc.
10.19** Revolving Promissory Note, dated as of July 29, 1994, between Lancer Corporation and First
Interstate Bank of Texas, N.A.
10.20** Schedule No. 7, dated November 1, 1994, to Master Security Agreement between Lancer Corporation
and CIT Group/Equipment Financing, Inc.
10.21+ Fifth Amendment to Loan Agreement and Loan Documents, dated November 8, 1994, between Lancer
Corporation and First Interstate Bank
10.22+ Sixth Amendment to Loan Agreement and Loan Documents, dated July 6, 1995, between Lancer
Corporation and First Interstate Bank
10.23*** Seventh Amendment to Loan Agreement and Loan Documents, dated August 1, 1995, between Lancer
Corporation and First Interstate Bank
10.24+ Eighth Amendment to Loan Agreement and Loan Documents, dated December 29, 1995, between Lancer
Corporation and First Interstate Bank
10.27++ Credit Agreement, dated July 15,1996, between Lancer Corporation and The Frost National Bank
and The Boatmens National Bank of St. Louis
10.28++ Term A Note, dated July 15,1996, between Lancer Corporation and The Frost National Bank and The
Boatmens National Bank of St. Louis
10.29++ Term B Note, dated July 15,1996, between Lancer Corporation and The Frost National Bank and The
Boatmens National Bank of St. Louis
10.30++ Revolving Note, dated July 15,1996, between Lancer Corporation and The Frost National Bank and
The Boatmens National Bank of St. Louis
10.31++ Acquisition Note, dated July 15,1996, between Lancer Corporation and The Frost National Bank
and The Boatmens National Bank of St. Louis
10.32++ Stock Pledge, dated July 15,1996, between Lancer Corporation and The Frost National Bank
10.33++ Parent and Affiliate Guaranties, dated July 15,1996, between Lancer Corporation or its
subsidiaries and The Frost National Bank
10.34# Lancer Corporation Stock Incentive Plan, Effective Date March 1, 1997
10.35+++ Master Lease Agreement dated September 4, 1996 between Lancer Partnership, Ltd. and CCA
Financial, Inc.
21.1 List of Significant Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
* These exhibits are incorporated by reference to the same Exhibit to the
Registrants Registration Statement No. 33-82434 filed on Form S-1 with
the Securities and Exchange Commission (the Commission)on August 5,
1994, as amended by Amendment No. 1 to Form S-1 Registration Statement
with the Commission on August 23, 1994.
** These exhibits are incorporated by reference to the same Exhibit to the
Registrants Form 10-K for the year ended December 31, 1994.
*** These exhibits are incorporated by reference to the Exhibit to the
Registrants Form 10-Q for the quarter ended June 30, 1995.
+ These exhibits are incorporated by reference to the Exhibit to the
Registrants Form 10-K for the year ended December 31, 1995.
++ These exhibits are incorporated by reference to the Exhibit to the
Registrants Form 10-Q for the quarter ended June 30, 1995.
+++ This exhibit is incorporated by reference to the Exhibit to the
Registrants Form 10-K for the year ended December 31, 1996.
# This exhibit is incorporated by reference to the Exhibit to the
Registrants Proxy dated April 22, 1996.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K in January, 1997, relating to
the acquisition of its Brazilian subsidiary. No reports on Form 8-K
were filed during 1996.
13
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.
LANCER CORPORATION
by: /s/ George F. Schroeder
George F. Schroeder March 28, 1997
President
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
- ----------------------- ------------------- --------------
/s/ ALFRED A. SCHROEDER Chairman of the Board March 28, 1997
Alfred A. Schroeder
/s/ GEORGE F. SCHROEDER President and Director March 28, 1997
George F. Schroeder (principal executive officer)
/s/ JOHN P. HERBOTS Vice President Finance & Director March 28, 1997
John P. Herbots (principal financial and accounting officer)
/s/ WALTER J. BIEGLER Director March 28, 1997
Walter J. Biegler
/s/ JEAN M. BRALEY Director March 28, 1997
Jean M. Braley
/s/ CHARLES K. CLYMER Director March 28, 1997
Charles K. Clymer
/s/ MICHAEL E. SMITH Director March 28, 1997
Michael E. Smith
14
LANCER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1996 F-5
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8
Schedule for the years ended December 31, 1996, 1995 and 1994
II-Reserve account F-18
All other schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission have been omitted as the
schedules are not required under the related instructions, are not applicable,
or the information required thereby is set forth in the consolidated financial
statements or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancer Corporation:
We have audited the consolidated financial statements of Lancer Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lancer Corporation
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
San Antonio, Texas
February 27, 1997
F-2
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
-------------------- -------------------
Current assets:
Cash $ 1,016,425 $ 754,352
Receivables:
Trade accounts and notes 19,686,318 14,431,531
Refundable income taxes 396,495 -
Other 690,034 272,214
-------------------- -------------------
20,772,847 14,703,745
Less allowance for doubtful accounts (185,000) (85,000)
-------------------- -------------------
Net receivables 20,587,847 14,618,745
-------------------- -------------------
Inventories:
Raw materials and supplies 1,269,404 3,490,396
Work in process 18,425,735 11,982,620
Finished goods 8,543,784 4,558,742
-------------------- -------------------
Total inventories 28,238,923 20,031,758
Prepaid expenses ( $4,624 and $56,698 due
from affiliates, respectively) 243,937 146,776
Deferred tax asset 64,513 -
-------------------- -------------------
Total current assets
50,151,645 35,551,631
-------------------- -------------------
Property, plant and equipment, at cost:
Land 1,307,663 977,888
Buildings 9,681,466 7,950,514
Machinery and equipment 14,925,713 13,255,089
Tools and dies 8,448,506 7,927,246
Leaseholds, office equipment and vehicles 5,945,069 4,969,712
Construction in progress 5,162,508 1,361,906
-------------------- -------------------
45,470,925 36,442,355
Less accumulated depreciation and amortization
(19,676,377) (17,242,089)
-------------------- -------------------
Net property, plant and equipment 25,794,548 19,200,266
-------------------- -------------------
Long-term receivables ($ 306,232 and $251,764 due
from affiliates, respectively) 404,007 512,388
Long-term investments 2,975,000 375,000
Intangibles and other assets, at cost, less
accumulated amortization 2,684,073 2,304,578
-------------------- -------------------
$ 82,009,273 $ 57,943,863
==================== ===================
See accompanying notes to consolidated financial statements.
F-3
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1996 and 1995
LIABILITIES AND SHAREHOLDERS EQUITY
1996 1995
------------------- -------------------
Current liabilities:
Accounts payable $ 7,234,160 $ 5,645,063
Current installments of long-term debt 1,852,500 1,448,093
Line of credit with bank 11,700,000 7,000,000
Deferred licensing and maintenance fees 1,339,868 815,901
Accrued expenses and other liabilities 3,356,315 2,882,886
Income taxes payable - 487,395
------------------- -------------------
Total current liabilities 25,482,843 18,279,338
Deferred tax liability 1,038,655 996,409
Other long-term liabilities 820,000 700,000
Long-term debt, excluding current installments 15,459,375 5,397,574
Deferred licensing and maintenance fees 2,172,137 1,505,600
------------------- -------------------
Total liabilities 44,973,010 26,878,921
------------------- -------------------
Shareholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, $.01 par value:
10,000,000 shares authorized; 5,820,976 and 3,872,221
issued and outstanding in 1996 and 1995, respectively 58,209 38,722
Additional paid-in capital 9,888,244 9,852,713
Cumulative foreign currency translation adjustment 183,803 -
Retained earnings 26,906,007 21,173,507
Commitments and contingencies - -
------------------- -------------------
Total shareholders' equity 37,036,263 31,064,942
------------------- -------------------
$ 82,009,273 $ 57,943,863
=================== ===================
See accompanying notes to consolidated financial statements.
F-4
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------------- ------------------ ------------------
Net sales $ 102,308,422 $ 75,912,289 $ 70,899,829
Cost of sales 77,754,400 59,836,951 56,706,572
------------------- ------------------ ------------------
Gross profit 24,554,022 16,075,338 14,193,257
Selling, general and administrative expenses 14,434,066 9,880,172 9,238,922
------------------- ------------------ ------------------
Operating income 10,119,956 6,195,166 4,954,335
------------------- ------------------ ------------------
Other income (expense):
Interest expense (1,587,510) (981,153) (755,485)
Interest and other income, net 615,417 1,489,309 353,600
------------------- ------------------ ------------------
(972,093) 508,156 (401,885)
------------------- ------------------ ------------------
Earnings before income taxes 9,147,863 6,703,322 4,552,450
------------------- ------------------ ------------------
Income taxes expense (benefit):
Current 3,373,117 2,446,959 1,637,930
Deferred 42,246 165,246 (36,034)
------------------- ------------------ ------------------
3,415,363 2,612,205 1,601,896
------------------- ------------------ ------------------
Net earnings $ 5,732,500 $ 4,091,117 $ 2,950,554
=================== ================== ==================
Weighted average shares outstanding 6,076,341 5,988,540 5,674,199
=================== ================== ==================
Net earnings per share $ 0.94 $ 0.68 $ 0.52
=================== ================== ==================
See accompanying notes to consolidated financial statements.
F-5
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 1996, 1995 and 1994
Additional Cumulative Total
Common Paid-in Translation Retained Shareholder's
Stock Capital Adjustment Earnings Equity
------------- ---------------- ------------------ ----------------- -----------------
Balance December 31, 1993 $ 23,622 $ 6,169,507 $ - $ 14,131,836 $ 20,324,965
Net earnings - - - 2,950,554 2,950,554
Issuance of 300,000 shares
of common stock, net of
offering expenses 2,000 3,531,083 - - 3,533,083
Exercise of 27,996 stock
options, including tax
benefit of $43,003 124 110,017 - - 110,141
------------- ---------------- ------------------ ----------------- -----------------
Balance December 31, 1994 25,746 9,810,607 - 17,082,390 26,918,743
Net earnings - - - 4,091,117 4,091,117
Exercise of 15,498 stock
options 89 54,993 - - 55,082
Three-for-two stock dividend 12,887 (12,887) - - -
------------- ---------------- ------------------ ----------------- -----------------
Balance December 31, 1995 38,722 9,852,713 - 21,173,507 31,064,942
Net earnings - - - 5,732,500 5,732,500
Cumulative foreign currency
translation adjustment - - 183,803 - 183,803
Exercise of 12,646 stock
options 108 54,910 - - 55,018
Three-for-two stock dividend 19,379 (19,379) - - -
------------- ---------------- ------------------ ----------------- -----------------
Balance December 31, 1996 $ 58,209 $ 9,888,244 $ 183,803 $ 26,906,007 $ 37,036,263
============= ================ ================== ================= =================
See accompanying notes to consolidated financial statements.
F-6
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------------- ----------------- -----------------
Cash flow from operating activities:
Net earnings $ 5,732,500 $ 4,091,117 $ 2,950,554
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 2,445,288 2,152,169 1,843,177
(Gain) loss on sale and disposal of assets (15,485) 13,985 28,679
Effect of foreign currency translation 183,803 - -
Change in assets and liabilities, net of effects
from purchase of subsidiary:
Receivables (5,464,226) (3,872,837) 218,488
Prepaid expenses (97,161) (23,969) (4,522)
Inventories (8,207,165) 2,283,927 (5,783,544)
Other assets (390,495) 425,019 (143,666)
Accounts payable 1,589,097 (1,094,867) (356,526)
Accrued expenses 473,429 601,787 (32,771)
Deferred licensing and maintenance fees 1,190,504 1,710,576 610,925
Income taxes payable (883,890) 760,293 (359,449)
Deferred tax liability (22,267) (100,552) (36,034)
Other long-term liabilities 120,000 180,000 160,000
----------------- ----------------- -----------------
Net cash (used) provided by operating activities (3,346,068) 7,126,648 (904,689)
----------------- ----------------- -----------------
Cash flow from investing activities:
Proceeds from sale of assets 43,625 20,166 31,595
Acquisition of property, plant and equipment (9,056,710) (7,861,164) (2,942,641)
Acquisition of subsidiary company - (3,503,600) -
Purchase of long-term investments (2,600,000) (225,000) (150,000)
----------------- ----------------- -----------------
Net cash used in investing activities (11,613,085) (11,569,598)
(3,061,046)
----------------- ----------------- -----------------
Cash flow from financing activities:
Net borrowings under line of credit agreements 4,700,000 1,000,000 700,000
Proceeds from issuance of long-term debt 17,950,000 6,929,000 5,035,072
Retirement of long-term debt (7,483,792) (4,889,170) (4,663,338)
Proceeds from issuance of common stock - - 3,533,083
Proceeds from exercise of stock options 55,018 55,082 110,141
----------------- ----------------- -----------------
Net cash provided by financing activities 15,221,226 3,094,912 4,714,958
----------------- ----------------- -----------------
Net increase (decrease) in cash 262,073 (1,348,038) 749,223
Cash at beginning of year 754,352 2,102,390 1,353,167
----------------- ----------------- -----------------
Cash at end of year $ 1,016,425 $ 754,352 $ 2,102,390
================= ================= =================
See accompanying notes to consolidated financial statements.
F-7
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General and Principles of Consolidation
The consolidated financial statements include the accounts of Lancer Corporation
(the Company), its wholly-owned subsidiaries, Lancer International Sales, Inc.
(DISC), Lancer Ltd., Glenn Pleass Holdings Pty. Ltd., Industrias Lancermex, S.A.
de C.V., Nueva Distribuidora Lancermex, S.A. de C.V. and Servicios Lancermex,
S.A. de C.V. All intercompany balances and transactions are eliminated in
consolidation.
The Company designs, engineers, manufactures and markets fountain soft drink and
other beverage dispensing systems and related equipment for use in the food
service and beverage industry.
The DISC is a qualified Interest-Charge Domestic International Sales
Corporation, which markets the Company's products internationally. The DISC is a
wholly-owned subsidiary created to operate under Federal income tax regulations.
Lancer Ltd. is a wholly-owned subsidiary incorporated to market and distribute
the Company's products to the European Union and certain other foreign
countries.
Glenn Pleass Holdings Pty. Ltd,. acquired in December 1995, is a wholly-owned
subsidiary which manufactures and distributes the Companys products in Australia
and surrounding Pacific Rim countries.
Industrias Lancermex, S.A. de C.V. is a wholly-owned subsidiary incorporated to
assemble the Company's products and components in Mexico. Industrias Lancermex,
S.A. de C.V. is a maquiladora plant operating under both U.S. and Mexican
customs laws.
Nueva Distribuidora Lancermex, S.A. de C.V. is a wholly-owned subsidiary
incorporated to market and distribute the Company's products in Mexico. This
company has no employees but receives services and support from Servicios
Lancermex, S.A. de C.V.
Servicios Lancermex, S.A. de C.V. is a wholly-owned subsidiary incorporated to
provide all of the services required by Nueva Distribuidora Lancermex, S.A. de
C.V.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis (average cost as to raw materials and supplies) or market (net realizable
value).
Certain items in inventory have become obsolete due to technological advances
and discontinuation of products. The Company has taken these items into
consideration in valuing the inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated on
a straight-line basis over estimated useful lives ranging from 3 to 30 years.
Long-lived assets are evaluated annually for possible impairment adjustments
which may be required. No such adjustments have been required.
Maintenance, repair and purchases of small tools and dies are expensed as
incurred.
F-8
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangibles and Other Assets
Intangibles and other assets consist principally of patents and goodwill.
Patents are amortized over the estimated useful lives of the respective assets
using the straight-line method. Goodwill is being amortized using the
straight-line method over thirty years. The Company continually evaluates the
carrying value of goodwill as well as the amortization period to determine
whether adjustments are required. No such adjustments have been required.
Long-term Investments
In October 1996 the Company invested $2.6 million to obtain a 50% interest in a
joint venture, Lancer FBD Partnership, Ltd., which manufactures frozen beverage
dispensing systems. The investment is accounted for under the equity method. The
remaining 50% is owned by the developer of the technology utilized by the joint
venture. The joint venture now owns the rights to that technology. Results of
operations of the joint venture were not significant during 1996 and the
carrying value of the investment at December 31, 1996 approximates the market
value.
Also included in long-term investments is an investment in the common stock of
Packaged Ice, Inc., a company which sells ice bagger machines manufactured by
the Company.
Net Earnings per Share
Net earnings per share are based on the weighted average number of common and
common equivalent (dilutive stock options) shares outstanding each period. Fully
diluted earnings per share would not be different than net earnings per share.
During 1996 and 1995, the Company declared three-for-two stock splits effected
in the form of dividends. All references in the consolidated financial
statements to number of shares, per share amounts, stock option data and market
prices of the Companys common stock have been restated to give effect to the
stock splits.
Revenue Recognition
Revenue is recognized in accordance with the following methods:
(a) At time of shipment for all products except for those sold under
agreements described in (b);
(b) As produced, for certain products manufactured and warehoused under
production and warehousing agreements with two customers, principally
The Coca-Cola Company, which is the Company's largest single
customer.
The Company has entered into an agreement with its major customer to receive
partial reimbursement for research and development. The reimbursement is offset
against cost on a percentage of completion basis. In addition, the Company has
agreed to provide exclusive rights for use of certain tools to its major
customer. These tools are included in fixed assets and are depreciated over the
life of the asset. The corresponding license and maintenance fees are recorded
as deferred income and recognized over the life of the agreement which
approximates the life of the corresponding asset.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred amounts are measured using enacted tax
rates expected to apply to taxable earnings in the year those temporary
differences are expected to be recovered or settled.
No Federal income taxes have been provided on the undistributed earnings of the
DISC ($2,357,000 at December 31, 1992) since the tax laws allow for the
indefinite deferral of a portion of the earnings of such entities. Effective
January 1, 1993, in accordance with SFAS No. 109, the Company began to provide
Federal income taxes on the undistributed earnings of the DISC, which had the
effect of increasing the Company's effective tax rate.
F-9
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research and Development
Company-sponsored research and development costs are expensed as incurred and
totaled approximately $913,000, $737,000 and $695,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Foreign Currency Translation
The Company has foreign subsidiaries located in Australia, Mexico and the United
Kingdom. Foreign subsidiary income and expenses are translated into United
States dollars at the average rates of exchange prevailing during the year. The
assets and liabilities are translated into United States dollars at the rates of
exchange on either the balance sheet date, or on the transaction date based upon
the functional currency unit. The Australian dollar is the functional currency
of the Australian subsidiary, and therefore, related translation adjustments are
accumulated as a separate component of shareholders equity. The U.S. dollar is
the functional currency of the subsidiaries in Mexico and the United Kingdom
with the related foreign currency translation gains and losses being recorded in
the statements of income as they occur. For the years ended December 31, 1996,
1995 and 1994 the Company recognized foreign translation losses of $29,000
$87,000 and $306,000, respectively. The Company included such losses in interest
and other income, net in the accompanying consolidated statements of income.
Stock Compensation Plans
The Company utilizes the intrinsic value method required under provisions of APB
Opinion No. 25 and related Interpretations in measuring stock-based compensation
for employees. In addition, the required pro forma disclosures of net income and
net income per share as if the fair value method of accounting for stock based
compensation had been applied under SFAS 123 are made in the notes to the
consolidated financial statements. (See note 4) The disclosure provisions of
SFAS 123 are effective for options granted in fiscal years beginning in 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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 differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the current years presentation.
2. Income Taxes
The actual tax expense differs from the expected tax expense (benefit) (computed
by applying U.S. Federal corporate rate of 34% to earnings before income taxes)
as follows:
1996 1995 1994
---------------- ---------------- ---------------
Computed expected tax expense $ 3,110,274 $ 2,279,130 $ 1,547,833
Increase (decrease) in taxes resulting from:
Effect of nondeductible foreign losses 40,794 93,364 54,705
Effect of nondeductible expenses 163,343 52,772 31,433
Other, net 8,387 5,032 (86,496)
State, net of Federal benefit 92,565 181,907 54,421
================ ================ ===============
$ 3,415,363 $ 2,612,205 $ 1,601,896
================ ================ ===============
F-10
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
net deferred tax liability relate to the following:
1996 1995
---------------- ----------------
Plant and equipment, principally due to differences in depreciation $ 1,164,420 $ 1,150,146
Income of the DISC 693,258 549,330
Employee benefit accruals (553,722) (513,942)
Other, net (primarily accruals) (329,814) (189,125)
================ ================
Net deferred tax liability $ 974,142 $ 996,409
================ ================
Foreign tax expense has not been significant. The Company intends to repatriate
the undistributed earnings of its foreign subsidiaries only when it is
advantageous for the Company to do so. The Company does not anticipate an
additional tax liability at the time of repatriation of these undistributed
earnings as the tax rates in the foreign jurisdictions the Company has
operations in are equal to or higher than the U.S. tax rate.
Actual net income taxes paid were $3,720,000, $1,920,000 and $2,115,000 for
1996, 1995 and 1994, respectively.
3. Long-term Debt and Line of Credit with Bank
1996 1995
------------------- ------------------
Note payable to bank, due in quarterly
installments plus interest based upon
prime and LIBOR (weighted average rate
of 6.78% at December 31, 1996) through
July 15, 2001; secured by the pledge of
a portion of the stock of a foreign subsidiary $ 17,311,875 $ -
Note payable to bank, due in equal monthly principal
installments plus interest at 7.75% through
December 31, 1999; secured by equipment; repaid in 1996 - 5,000,000
Note payable to bank, due in equal monthly principal
installments plus interest at prime less .25%
(8.25% at December 31, 1995) through
January 15, 1999; unsecured; repaid in 1996 - 1,845,667
------------------- ------------------
17,311,875 6,845,667
Less current installments of long-term debt 1,852,500 1,448,093
------------------- ------------------
$ 15,459,375 $ 5,397,574
=================== ==================
On July 15, 1996, the Company entered into an agreement with two banks to
replace its existing long-term borrowings with $25.0 million of new long-term
credit facilities (the Credit Facilities) All outstanding long-term debt was
repaid with borrowings on the Credit Facility. Principal payments on the Credit
Facility are due quarterly along with interest which accrues at a rate based
upon either the London Interbank Offered Rate (LIBOR) or upon the Banks prime
rate. The notes mature on July 15, 2001.
In July, 1996, the Company also obtained a $17.5 million revolving credit
facility (the Revolving Facility) from two banks. The Revolving Facility
replaced a $12.0 million facility. Borrowings under the Revolving Facility are
based on certain percentages of accounts receivable and inventories. Interest
accrues at a rate based upon either LIBOR or upon the Banks prime rate. Amounts
outstanding under revolving loans were $11.7 million on December 31, 1996 and
$7.0 million on December 31, 1995. The Revolving Facility expires July 15, 2001.
F-11
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Annual maturities on long-term debt outstanding at December 31, 1996 are as
follows:
1997 $ 1,852,500
1998 2,302,500
1999 2,652,500
2000 2,652,500
2001 7,851,875
==================
$ 17,311,875
==================
To manage its exposure to fluctuations in interest rates, the Company has
entered into two interest rate swap agreements (the Swap Agreements) for a
combined notional principal amount of $8.0 million. The Swap Agreements
terminate in August, 1999 and November, 2001. Interest rate swap agreements
involve the exchange of interest obligations on fixed and floating rate debt
without the exchange of the underlying principal amounts. The difference paid or
received on the swap agreement is recognized as an adjustment to interest
expense. The Companys Swap Agreements provide that the Company pay fixed
interest rates of 6.255% and 6.345%, while receiving a floating rate payment
equal to the three month LIBOR rate determined on a quarterly basis with
settlement occurring on specific dates. While the Company has credit risk
associated with this financial instrument, no loss is anticipated due to
nonperformance by the counterparties to these agreements because of the credit
worthiness of the financial institution.
The Credit Facility and the Revolving Credit Facility require that the Company
maintain certain financial ratios and other covenants. The Company is in
compliance with respect to these financial ratios and covenants.
Actual interest paid was $1,432,000, $964,000 and $763,000 in 1996, 1995 and
1994, respectively.
4. Employee Benefit Plans
Common Stock Options
The Company has stock option plans under which incentive and non-qualified
options may be granted. Options are granted at the market price per share at the
grant date. Options generally become exercisable in 20% increments beginning on
the grant date and expire five years from the grant date.
A summary of transactions for all options follows:
Stock Options Option Price
---------------- -------------------------
Outstanding at December 31, 1993 379,053 $ 1.94 - $ 3.91
Granted 18,000 7.45
Exercised (27,996) 1.94 - 3.55
---------------- -------------------------
Outstanding at December 31, 1994 369,057 1.94 - 7.45
Granted 13,550 7.39 - 9.42
Canceled (7,250) 3.55 - 7.45
Exercised (15,498) 3.55
---------------- -------------------------
Outstanding at December 31, 1995 359,859 1.94 - 9.42
Granted 195,230 10.83 - 15.00
Exercised (12,646) 3.56 - 10.83
---------------- -------------------------
Outstanding at December 31, 1996 542,443 $ 1.94 - $ 15.00
================ =========================
F-12
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of exercisable options follows:
Stock Options Option Price
---------------- -----------------------
1994 246,842 $ 1.94 - $ 7.45
================ =======================
1995 270,708 $ 1.94 - $ 9.42
================ =======================
1996 343,695 $ 1.94 - $15.00
================ =======================
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) Accounting for Stock-Based
Compensation. Accordingly, no compensation has been recognized for the stock
option plans. If the Company had elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS No.
123, net earnings and net earnings per share would have been reduced to the pro
forma amounts indicated in the table below:
1996 1995
--------------- ---------------
Net income-as reported $5,732,500 $4,091,117
Net income-pro forma 5,592,553 4,085,589
Net earnings per share-as reported 0.94 0.68
Net earnings per share-pro forma 0.92 0.68
Weighted-average fair value of options,
granted during the year 2.81 3.75
The fair value of each option granted in 1996 and 1995 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 33.9% based upon historical stock price
fluctuations; risk-free interest rate of 5.8%; expected lives of 4 years; and no
expected dividend yield.
Self-Insured Hospitalization Plan
The Company maintains a self-insurance program for major medical and
hospitalization coverage for employees and their dependents which is partially
funded by payroll deductions. The Company has a maximum liability of $75,000 per
employee / dependent per year. Amounts in excess of the stated maximum are
covered under a separate policy provided by an insurance company. The total
amount expensed under the self-insurance major medical program, net of employee
contributions, was $896,000, $478,000 and $695,000 in 1996, 1995 and 1994,
respectively.
Workers' Compensation Coverage
The Company is self-insured for all workers' compensation claims submitted by
employees for on-the-job injuries. The Company has provided for both reported
and incurred but not reported costs of workers' compensation coverage in the
accompanying consolidated balance sheets. For the years ended December 31, 1996,
1995 and 1994 the total amount expensed for workers' compensation coverage was
$291,000, $479,000 and $525,000, respectively.
In an effort to provide for catastrophic events, the Company carries an excess
indemnity policy for workers compensation claims. All claims paid under the
policy are subject to a deductible to be paid by the Company. The Company has
recorded an accrual for workers compensation claims, a portion of which has
been classified as an other long-term liability based on the expected long-term
nature of its payout. Based upon the Companys past experience, management
believes that the Company has adequately provided for potential losses. However,
multiple occurrences of serious injuries to employees could have a material
adverse effect on the Companys financial position or its results of operations.
F-13
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Profit Sharing Plan
The Company has established an employee profit sharing and 401(k) plan, which
covers substantially all United States employees who meet the eligibility
requirements. Participants may elect to contribute up to 15% of their annual
wages, subject to certain IRS limitations. The Company matches employee 401(k)
contributions to the plan at a rate of $0.10 per each $1.00 of employee
contribution up to 3 % of annual compensation. In addition, the Company, at the
discretion of the Board of Directors, may make profit sharing contributions to
the plan. The accompanying consolidated statements of income for the years ended
December 31, 1996, 1995 and 1994 include Company contributions to the plan of
$520,000, $359,000 and $270,000, respectively.
The Company is also required to make contributions to a defined contribution
plan for the employees of Glenn Pleass Holdings Pty. Ltd. Contributions during
1996 totaled $65,000.
5. Leases
The Company leases a building, in which a portion of its manufacturing
facilities are located, under an operating lease from a partnership controlled
by certain shareholders. The lease agreement provides for monthly rental
payments of $6,600 through 1998, and the payment of real estate taxes, insurance
and maintenance expenses. In addition, the Company leases property adjacent to
the building from the partnership on a month to month basis. In conjunction with
a 1992 debt refinancing, the Company advanced $220,000 to this partnership.
Repayment of this advance will be made through a reduction of lease payments
otherwise due between the Company and the partnership and includes an interest
charge at a rate of 9.25% per annum on the outstanding balance of the advance.
Included in other assets and prepaid expenses in the accompanying consolidated
balance sheets is $5,000 in 1996 and $61,000 in 1995 remaining due from the
partnership for this advance.
During 1996 the Company entered into a $4.3 million lease, of which $2.5 million
has been funded at December 31, 1996, to finance a new integrated computer
system and other technology oriented equipment. The lease is for a period of 48
months, unless it is terminated by the Company after 24 months.
At December 31, 1996, future minimum lease payments required under all
noncancelable operating leases are as follows:
1997 $ 1,815,829
1998 1,675,475
1999 957,159
2000 597,239
----------------
Total minimum lease payments $ 5,045,702
================
Total rental expense was $1,223,000, $712,000 and $776,000 in 1996, 1995 and
1994, respectively.
The Company is party to agreements to provide warehousing space and services for
The Coca-Cola Company. Rental income related to the warehousing agreements
totaled $297,000, $310,000 and $259,000 in 1996, 1995 and 1994, respectively.
6. Long-term Receivables
Long-term receivables are interest bearing and include $306,000 and $252,000 due
from officers for the years ended December 31, 1996 and 1995, respectively.
F-14
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Fair Value of Financial Instruments
The Company is required to disclose estimated fair value of its financial
instruments, including derivative financial instruments, for which it is
practicable to estimate fair value. The following methods and assumptions were
used to estimate the fair market value of each class of financial instrument for
which it is practicable to estimate that value.
Cash, Trade Receivables, and Trade Payables
The carrying amounts of the Companys trade receivables and trade payables
approximate market value.
Notes Receivable
The carrying amount of the Companys notes receivable approximates fair market
value estimated based on the actual interest rates paid on the interest bearing
notes and imputed rate used to determine the recorded value of the non-interest
bearing notes.
Long-term Investments
Long-term investments are stated at approximated market value based upon the
current nature of the investments.
Debt and Swap Agreements
The carrying amount of the Companys long-term debt, short-term debt, and
interest rate swap agreements approximate market value as the rates are variable
or are fixed at current market rates.
8. Acquisition of Subsidiary
In December 1995, the Company acquired 100% of the stock of Glenn Pleass
Holdings Pty. Ltd. (GPH) for $3.5 million. GPH is an Australian based
manufacturer and distributor of beverage dispensing systems. The acquisition was
recorded in accordance with the purchase method of accounting and, as such, the
Company recognized the excess cost of the assets acquired over the estimated
fair value of such assets, or $2.0 million, as goodwill which is being amortized
over thirty years. Results of operations are included in the Companys
consolidated statement of income from the date of acquisition.
Details of the business acquired in the purchase transaction are as follows (in
thousands):
1995
----------------
Fair value of assets acquired, including goodwill $ 5,248
Liabilities assumed (1,744)
================
Net cash paid for the acquisition $ 3,504
=================
Assuming the sale was consummated as of the beginning of years ended December
31, 1995 and 1994 fiscal years, pro forma operating results of the Company would
be as follows (in thousands except for per share data):
Years Ended December 31,
-----------------------------------
1995 1994
--------------- ---------------
Net Sales $ 83,898 $ 77,913
Net earnings 3,927 3,312
Net earnings per share 0.65 0.59
Number of shares used in calculation 5,988 5,675
F-15
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
9. Supplemental Balance Sheet and Income Statement Information
Accrued expenses consist of the following (in thousands):
As of December 31,
-------------------------------------
1996 1995
---------------- ----------------
Payroll and related expenses $ 1,608 $ 1,238
Commissions 344 465
Workers' compensation accrual - current 300 300
Property taxes 47 255
Health insurance 107 122
Interest 237 122
Other 713 380
================ ================
$ 3,356 $ 2,883
================ ================
The following provides information regarding net sales to major customers,
domestically and internationally (in thousands):
1996 Percent of 1995 Percent of 1994 Percent
Net Sales Net Sales of Net Sales
------------- -------------------------- --------------------------- -----------
United States:
The Coca-Cola Company $ 32,325 32% $ 37,425 49% $ 31,747 45%
Other 26,190 25% 11,835 16% 18,266 26%
------------- ----------- ------------ ----------- ------------- -----------
58,515 57% 49,260 65% 50,013 71%
------------- ----------- ------------ ----------- ------------- -----------
Export:
The Coca-Cola Company 159 1% 527 1% 198 1%
Other 43,634 42% 26,125 34% 20,689 28%
------------- ----------- ------------ ----------- ------------- -----------
43,793 43% 26,652 35% 20,887 29%
------------- ----------- ------------ ----------- ------------- -----------
$102,308 100% $ 75,912 100% $ 70,900 100%
============= =========== ============ =========== ============= ===========
In addition to sales made directly to The Coca-Cola Company, substantially all
sales to other entities are significantly influenced by The Coca-Cola Company.
Any disruption or change in the relationship with The Coca-Cola Company could
have a material adverse effect on the results of operations of the Company.
The Company's foreign operations consist of that of its wholly-owned
subsidiaries Industrias Lancermex, S.A. de C.V., Nueva Distribuidora Lancermex,
S.A. de C.V., Servicios Lancermex, S.A. de C.V., Glenn Pleass Holdings Pty,
Ltd., and Lancer Ltd. A summary of operating results and asset of the foreign
operations is as follows:
1996 1995 1994
----------------- -------------------- -----------------
Total revenue $ 11,454,678 $ 2,517,495 $ 3,694,853
Operating income (loss) 218,112 (120,568) 115,146
Assignable assets, as of December 31 14,888,994 10,184,422 3,264,579
Management believes that gross profit on export sales is not materially
different from that on domestic sales.
F-16
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
10. Contingencies
The Company is a party to various lawsuits and claims generally incidental to
its business. The ultimate disposition of these matters is not expected to have
a significant adverse effect on the Company's financial position or results of
operations.
11. Subsequent Events
During the first quarter of 1997, the Company completed the purchase of a
manufacturer and marketer of fountain soft drink and beer dispensing equipment
based in Sao Paulo, Brazil. The purchase price of $6.1 million was financed with
borrowings under the Companys Credit Facilities, and with long-term financing
provided by the seller. The operating results and assets of acquired company are
less than 10% of consolidated operating results and assets of the Company and
are not considered material for disclosure purposes.
Subsequent to December 31, 1996 the Company also signed a letter of intent to
acquire the assets of an entity which manufactures and distributes beverage
dispensing equipment. The anticipated purchase price is approximately $3.5
million and will be financed with borrowings under the Credit Facilities and
issuance of common stock. The Company expects to finalize the transaction during
the second quarter of 1997.
12. Quarterly Financial Information (Unaudited)
The Company uses the gross profit method to determine cost of sales and
estimates the inventory components for interim periods after considering various
factors including historical percentages and price increases. The following
table reflects the quarterly results for 1996 and 1995 (in thousands except for
per share data):
Three Months Ended
-------------------------------------------------------------
1996 March June September December
31 30 30 31
------------ ------------ ------------ ------------
Net Sales $ 23,452 $ 25,334 $ 27,605 $ 25,917
Gross Profit 5,610 6,024 6,414 6,506
Net earnings 1,340 1,526 1,509 1,358
Net earnings per share 0.22 0.25 0.25 0.22
Three Months Ended
-------------------------------------------------------------
1995 March June September December
31 30 30 31
------------ ------------ ------------ ------------
Net Sales $ 20,341 $ 21,313 $ 17,376 $ 16,882
Gross Profit 3,868 4,263 3,675 4,269
Net earnings 969 1,314 814 994
Net earnings per share 0.16 0.22 0.13 0.17
F-17
LANCER CORPORATION AND SUBSIDIARIES
SCHEDULE II
RESERVE ACCOUNT
Description Balance at Additions Deductions from Balance at
Beginning of Year Charged to Account End of Year
Expense
- ------------------------------------ ----------------- ------------- ------------------ -----------
Allowance for doubtful accounts:
December 31, 1996 $ 85,000 $ 106,645 $ 6,645 $ 185,000
December 31, 1995 85,000 2,083 2,083 85,000
December 31, 1994 85,000 106,121 106,121 85,000
- ----------------------------------------------------------------------------------------------------------------
F-18