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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, 1997 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.)
6655 Lancer Blvd., San Antonio, Texas 78219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (210) 310-7000
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 23, 1998, held by non-affiliates of the registrant was
approximately $71,676,787 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
23, 1998, was 8,914,490.
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
1998 annual meeting of shareholders are incorporated by reference into Part III
of this report.
This document contains certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "forecast," "plan," and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions which exist
or must be made as a result of certain factors including, without limitation,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, one-time events and other factors described herein
and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, forecast, planned or intended. The
Company does not intend to update these forward-looking statements.
PART I
ITEM 1. BUSINESS
General
Lancer designs, engineers, manufactures and markets fountain soft drink, beer
and citrus beverage dispensing systems, and other equipment for use in the food
service and beverage industry. Lancer also markets frozen beverage dispensers
manufactured by a joint venture that is 50% owned by the Company. Lancer's
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, beer breweries 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 Company's strategy is to increase sales through (i) its continued emphasis
on providing technologically superior, reliable, high quality products to its
customers, (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 1997, Lancer completed expansions of its manufacturing capacity in San
Antonio, Texas and in Piedras Negras, Mexico. The Company believes the
expansions will allow production to grow with customer demand. In the first
quarter of 1997, Lancer completed the purchase of the assets of a Sao Paulo,
Brazil, based manufacturer and marketer of fountain soft drink and beer
dispensing equipment. The Brazilian operation has improved Lancer's ability to
serve its customers in the region. In the second quarter of 1997, the Company
acquired a manufacturer of beer and fountain soft drink dispensing equipment
based in Auckland, New Zealand. Lancer also opened a sales office and warehouse
facility in Brussels, Belgium to improve delivery of its products to European,
Middle Eastern and North African customers.
1
The Beverage Dispensing Industry
The manufacture of fountain soft drink and other beverage dispensing systems is
a rapidly changing industry. Technological changes and improvements continue to
be reflected 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, large international breweries, equipment distributors and food service
chains. In order to facilitate sales of their beverage products to end-users,
soft drink companies and some breweries, and their respective 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. 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 four major categories: (i) fountain
soft drink and citrus dispensers; (ii) post-mix dispensing valves; (iii) beer
dispensing systems; and (iv) other products and services.
Soft Drink and Citrus Dispensers
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 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 fountain systems.
Lancer manufactures several models of mechanically cooled citrus dispensing
systems for counter top use. The Minute Maid Company, a division of The Coca
Cola Company, is the primary customer for the Company's citrus dispensing
products.
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 soft drink and citrus dispensers for the years ended
December 31, 1997, 1996 and 1995, accounted for approximately 47%, 54% and 55%
of total 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 Company's 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, 1997, 1996 and 1995, sales of
valves and related accessories accounted for approximately 14%, 16% and 20% of
total net sales, respectively.
Beer Dispensing Systems
The Company manufactures and markets beer dispensing equipment and related
accessories. Products include chillers, taps, fonts, dispensers and kegs.
Lancer's operations in Australia, Brazil and New Zealand account for most of the
Company's sales of beer related equipment. Sales of beer equipment represented
8%, 1% and 0% of total net sales in the years ended December 31, 1997, 1996 and
1995, respectively.
2
Other Related Products and Services
The Company remanufactures various dispensing systems and sells replacement
parts in connection with the remanufacturing process. For the years ended
December 31, 1997, 1996 and 1995, revenues from these activities accounted for
approximately 4%, 4% and 5% of sales, respectively.
Lancer FBD Partnership, Ltd., a joint venture in which Lancer owns a 50%
interest, manufactures frozen beverage dispensers. Sales of the dispensers
represented 4%, 2% and 0% of Lancer's total net sales in the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company manufactures and/or markets a variety of other products including
syrup pumps, carbonators, stainless steel and brass fittings, carbon dioxide
regulator components, ice bagger machines, water filtering systems, and a
variety of other products, parts and accessories for use with beverage
dispensing systems. Lancer also provides logistics services to certain of its
customers. Together, these parts and services constitute 23%, 23% and 20% of the
Company's total net sales for the years ended December 31, 1997, 1996 and 1995,
respectively.
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 to develop 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, 1997, 1996 and 1995,
Company-sponsored research and development expenses were $1,467,000, $913,000
and $737,000, respectively.
Production, Inventory and Raw Materials
The Company's major products typically contain a number of metal and/or plastic
parts that are manufactured by the Company. The production of these parts
usually requires metal dies, fixtures, thermal plastic injection molds, and
other tooling, some of which are produced in the Company's tool and die and mold
departments. Other manufacturing processes include welding, polishing, painting,
tube bending, metal turning, stamping, and assembling of printed circuit boards
and wire harnesses. The Company assembles the various parts and components into
finished products, or sells them as spare parts.
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 by using its
specific knowledge of the market. In addition, the Company would be able to
manufacture some purchased parts if shortages of these parts were to occur.
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 $8.2
million, $10.1 million, $10.2 million at December 31, 1997, 1996 and 1995,
respectively. It is anticipated that 1997 backlog orders will be filled in 1998.
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, breweries, beverage equipment dealers, restaurants,
convenience stores, and other end users.
3
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 24%, 33% and 50% of the Company's total net sales for the
years ended December 31, 1997, 1996 and 1995, respectively. None of the
Company's customers, including The Coca-Cola Company, are contractually
obligated to purchase minimum quantities 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 Company's 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 be sold only 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 its
manufacturing capabilities available 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.
The Company and The Coca-Cola Company have entered into certain logistics
support agreements under which the Company warehouses and distributes new and
used products owned by The Coca-Cola Company. The two parties also have entered
into agreements which provide for the remanufacturing of used dispensing
equipment owned by The Coca-Cola Company. During 1997, the Company expanded the
scope of all such arrangements with The Coca-Cola Company.
International Sales
For the years ended December 31, 1997, 1996 and 1995, the sales to customers
outside the United States were approximately 48%, 43% and 35% of total net
sales, respectively. The Company has sales employees, distributors, and/or
licensees in Latin America, Europe, Africa and Asia. The Company manufactures
products in Australia, Brazil, Mexico and New Zealand, and operates warehouses
in Belgium and Russia.
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.
In the first quarter of 1997, Lancer completed the purchase of the assets of a
Sao Paulo, Brazil, based manufacturer of fountain soft drink and beer dispensing
equipment. In the second quarter of 1997, the Company acquired a manufacturer of
beer and fountain soft drink dispensing equipment based in Auckland, New
Zealand. Also, in 1997, Lancer opened a sales office and warehouse facility in
Brussels, Belgium.
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.
4
Employees
As of December 31, 1997, the Company had 1,569 full-time employees of whom 79
were engaged in engineering and technical support, 1,305 in manufacturing, 79 in
marketing and sales and 106 in general management and administrative positions.
The majority of the employees work at the Company's facilities in San Antonio,
Texas. 545 employees work at the Company's facility in Piedras Negras, Mexico,
94 are employed by the Company's Brazilian subsidiary, 57 are employed by the
Company's Australian subsidiary, and 31 work in New Zealand. Certain sales
representatives are located in various parts of the United States, Latin
America, Europe and Asia. 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 34 United States patents and numerous corresponding
foreign patents. It has 10 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 4 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. There can be no
assurance, however, 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 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.
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. The Company can provide no
assurance, however, 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.
5
ITEM 2. PROPERTIES
The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio, Texas, totaling approximately 723,000 square
feet, including three buildings owned by Lancer covering approximately 410,000
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 220,000 square foot plant expansion at
the Company's primary San Antonio facility was completed in 1997. In the first
quarter of 1998, the Company completed construction of approximately 32,000
square feet of office space at its primary San Antonio facility. The Company
owns and operates facilities located in Piedras Negras, Mexico consisting of
192,000 square feet of completed space, including 56,000 square feet of space
that was completed in 1997. The Company also leases a 59,000 square foot plant
in Sao Paulo, Brazil, a 34,000 square foot plant in Auckland, New Zealand, a
38,284 square foot plant in Beverley, South Australia, a suburb of Adelaide, and
small facilities in Brussels, Belgium; Moscow, Russia; and Monterrey, Mexico.
The Company leases 516,000 square feet of space throughout the world. The
Company sold a building in Chicago, Illinois during the fourth quarter of 1997.
Total net rent expense for real estate was $1,359,000, $1,093,000, and $712,000
in 1997, 1996 and 1995, respectively. Included in total rent expense in 1997 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, 1997.
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 8, 1997 and July
9, 1996.
Market Price For Common Stock
1997 1996
Quarter High Low High Low
- ----------------------- -------------------------- ---------------------------
First $15.00 $11.92 $8.00 $6.06
Second 17.33 12.58 10.56 7.22
Third 17.63 14.75 9.94 8.00
Fourth 16.13 10.75 13.92 8.67
On March 23, 1998, the closing price of the Company's common stock, as reported
by the ASE, was $13.00 per share. On that date, there were 162 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.
6
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- ------------- ------------- --------------
Operating Data:
Net sales $ 119,502 $ 103,295 $ 76,432 $ 71,526 $ 57,254
Gross profit 31,337 24,929 16,439 14,312 10,500
Selling, general and
administrative expenses (20,439) (14,512) (9,934) (9,359) (7,175)
Operating income 10,898 10,417 6,505 4,953 3,325
Interest expense (2,815) (1,588) (981) (755) (795)
Interest and other income, net 1,040 318 1,179 354 1,060
Earnings before income taxes
and extraordinary item 9,123 9,147 6,703 4,552 3,590
Income tax expense 3,037 3,415 2,612 1,602 1,416
Net earnings 6,086 5,732 4,091 2,950 2,174
Net earnings per share*
Basic $ 0.69 $ 0.66 $ 0.47 $ 0.36 $ 0.27
Diluted $ 0.65 $ 0.63 $ 0.46 $ 0.35 $ 0.26
Weighted average shares outstanding*
Basic 8,863 8,722 8,701 8,178 7,972
Diluted 9,338 9,052 8,985 8,460 8,214
* Per share amounts have been restated to reflect three-for-two stock
dividends effective July 8, 1997, July 9, 1996 and July 11, 1995
As of December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- ------------- ------------- --------------
Balance Sheet Data:
Total assets $ 110,669 $ 82,009 $ 57,944 $ 46,896 $ 38,902
Short-term debt 23,444 13,553 8,448 7,409 7,159
Long-term debt, less
current installments 21,565 15,459 5,398 3,397 2,575
Shareholders' equity 42,961 37,036 31,065 26,919 20,325
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "forecast," "plan," and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions which exist
or must be made as a result of certain factors including, without limitation,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, one-time events and other factors described herein
and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, forecast, planned or intended. The
Company does not intend to update these forward-looking statements.
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.
7
Results of Operations
Comparison of the Years Ended December 31, 1997 and December 31, 1996
Net sales for the year ended December 31, 1997 increased by $16.2 million, or
16%, to $119.5 million from $103.3 million in 1996. This increase was driven
primarily by the inclusion of sales from the Company's newly acquired operations
in Brazil and New Zealand, and by strong sales across most product lines. Sales
of mechanically cooled dispensers rose 7%, sales of ice cooled dispensers rose
13%, and spare parts sales increased 35%. The newly acquired subsidiaries
enhanced the Company's market position in beer equipment as sales of those
product lines grew 665%. The Company's joint venture in frozen beverage
dispensing systems established in 1996 also contributed to growth during the
year as sales of frozen beverage dispensers grew 193% during 1997. Sales of new
citrus dispensers declined 36% from 1996 levels. The Company's primary customer
has significantly reduced purchases of new equipment, but has increased the
remanufacture of existing equipment. Lancer's remanufacturing revenues increased
24% in 1997.
Sales to customers outside the United States represented 48% of net sales for
the year ended December 31, 1997, compared to 43% for the prior year.
Gross profit for the year ended December 31, 1997 increased by $6.4 million, or
26%, to $31.3 million from $24.9 million for the prior year, due to the higher
sales and an improvement in manufacturing gross margin to 26% in 1997 from 24%
in 1996. This improvement reflects product mix changes and management's ongoing
efforts to control costs through manufacturing process enhancements.
Selling, general and administrative expenses for the year ended December 31,
1997 were $20.4 million, (17% of sales), up from $14.5 million (14% of sales) in
1996. The increase was primarily driven by the recent acquisitions, and by
non-recurring expenses relating to the Company's expansion in Western Europe and
the implementation of a fully integrated manufacturing MRP II system. Small
increases in company-sponsored research and development expenses and in
administrative personnel to support the Company's growth also contributed to the
overall increase in expenses.
Interest expense for the year ended December 31, 1997 was $2.8 million, up from
$1.6 million in 1996. This increase resulted from higher average borrowings to
fund asset growth. The Company's income tax rate was 33% in 1997 compared to 37%
in 1996. In 1997, the Company applied for, and received tax credits for research
and development expenditures incurred in prior years. Tax planning reduced the
impact of foreign and state taxes, further lowering the effective tax rate in
1997.
Net earnings for the year ended December 31, 1997 were $6.1 million, a 6%
increase over the $5.7 million earned in 1996. Net earnings per diluted share
improved 3% to $0.65 in 1997 from $0.63 in 1996.
Comparison of the Years Ended December 31, 1996 and December 31, 1995
Net sales for the year ended December 31, 1996 increased by $26.9 million, or
35%, to $103.3 million from $76.4 million in 1995. This increase was driven
primarily by the inclusion of the Company's 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 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%, to $24.9 million from $16.4 million for the prior year, due to the higher
sales and an improvement in manufacturing gross margin to 24% in 1996 from 22%
in 1995. This improvement reflects product mix changes and management's ongoing
efforts to control costs through manufacturing process enhancements.
Selling, general and administrative expenses for the year ended December 31,
1996 were $14.5 million, (14% of sales), up from $9.9 million (13% 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 Company's growth.
8
Interest expense for the year ended December 31, 1996 was $1.6 million, up from
$1.0 million in 1995. This increase resulted from higher average borrowings to
fund asset growth. The Company's 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 40%
increase over the $4.1 million earned in 1995. Net earnings per diluted share
improved 39% to $0.63 in 1996 from $0.46 in 1995.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flows from operations and
amounts available under the Company's existing lines of credit. The Company has
met, and currently expects that it will continue to meet, substantially all of
its working capital and capital expenditure requirements as well as its debt
service requirements with funds provided by operations and borrowings under its
credit facilities.
Lancer generated $3.1 million of cash from operating activities in 1997,
compared to $3.5 million of cash used by operating activities in 1996. Record
earnings in 1997 were partially offset by an increase in inventory and accounts
receivable. The increase in current assets was caused by sales growth and by
slower inventory turns.
Capital spending was $9.9 million in 1997. During the year, the Company
completed a 220,000 square foot plant expansion at its primary facility in San
Antonio, and a 56,000 square foot plant expansion in Piedras Negras, Mexico. The
Company also completed most of a 32,000 square foot office addition to its
primary facility in San Antonio. The space was completed and occupied in the
first quarter of 1998, consolidating three San Antonio office locations. Lancer
expects capital spending levels in 1998 to be less than half of those in 1997.
In the first quarter of 1997, Lancer completed the purchase of a Sao Paulo,
Brazil, based manufacturer and marketer of fountain soft drink and beer
dispensing equipment. The $6.0 million purchase price was financed with $2.0
million of cash and a $4.0 million note issued to the seller. Lancer funded the
cash portion of the purchase price with bank debt.
In the second quarter of 1997, the Company bought the assets of an Auckland, New
Zealand based manufacturer of beer and fountain soft drink equipment for $3.3
million. Consideration consisted of 122,832 shares of Lancer Corporation common
stock (adjusted for the three-for-two stock split effected July 8, 1997) valued
at approximately $1.6 million, plus $1.7 million in cash. Lancer financed the
cash portion of the acquisition with bank debt.
Lancer funded a portion of its capital spending and the cash portion of its
acquisitions with bank debt. In July, 1996, the Company entered into an
agreement with two banks for $42.5 million of five year credit facilities. The
facilities included 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. In May,
1997, the Company increased its revolving facility from $17.5 million to $25.0
million. In December, 1997, the Company increased its revolving facility from
$25.0 million to $30.0 million. The increase to $30.0 million is effective
through July 15, 1998, when the facility will decrease to $25.0 million. Certain
financial covenants were amended through July 15, 1998. The Company is in
compliance with respect to financial ratios and covenants contained in the
credit agreement.
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.
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.
9
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. The Company, prevented by current tax
regulations from maintaining both the DISC and a FSC at the same time, has
determined it may be advantageous to convert the DISC to a FSC. The conversion
to a FSC could take place in 1998. 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 have not
previously been provided. If the DISC had been converted on December 31, 1997,
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 (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share." The Statement 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 adopted SFAS No. 128 in
1997. All prior-period earnings per share data presented in the accompanying
consolidated financial statements has been restated to conform to the
requirements of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. The
Company believes that the disclosure of comprehensive income in accordance with
the provisions of SFAS No. 130 will not materially impact the manner of
presentation of its financial statements as currently and previously reported.
Year 2000
In 1997, Lancer implemented a BaaN ERP manufacturing system which is year 2000
compliant. The Company is also working with its vendors and processing banks to
ensure that their systems are year 2000 compliant. The Company does not expect
to incur any additional material expenses relating to year 2000 compliance.
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.
10
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 28, 1998 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 61 Chairman of the Board
George F. Schroeder 58 President, Chief Executive Officer and Director
John P. Herbots 50 Vice President Finance, CFO and Director
Walter J. Biegler 56 Director
Jean M. Braley 68 Director
Charles K. Clymer 62 Director
Michael E. Smith 57 Director
Charles W. Thomas 44 Vice President of Marketing
Robert W. Abbott 59 Vice President-Asia
Richard M. Abraham 47 Vice President-Pacific
Jose A. Canales, Jr. 52 Vice President-Latin America
Robert E. Gehl 36 Vice President-Europe
James R. Sprinkle 50 Vice President-North America
Samuel Durham 49 Vice President of Engineering
Michael U. Raymondi 51 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 has been a
private investor since 1985. 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.
11
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. Richard M. Abraham has been employed by the Company as Vice
President-Pacific since April 1, 1997. He was previously a principal owner of
Applied Beverage Systems (1990), Ltd. ("ABS") in Auckland, New Zealand, since
1986. The Company acquired substantially all of the assets of ABS in April,
1997.
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, Jean M. Braley, Charles K. Clymer and
Michael E. Smith. The Audit Committee met once in 1997. 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 1997. The members of the Stock
Option Committee are Walter A. Biegler, Charles K. Clymer and Michael E. Smith.
The Stock Option Committee met seven times in 1997.
12
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation and Certain
Transactions" in the Company's proxy statement for its May 28, 1998 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.
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 28, 1998
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 28, 1998 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
13
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.
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 Boatmen's
National Bank of St. Louis
10.28++ Term A Note, dated July 15,1996, between Lancer Corporation
and The Frost National Bank and The Boatmen's National Bank of
St. Louis
10.29++ Term B Note, dated July 15,1996, between Lancer Corporation
and The Frost National Bank and The Boatmen's National Bank of
St. Louis
10.30++ Revolving Note, dated July 15,1996, between Lancer Corporation
and The Frost National Bank and The Boatmen's National Bank of
St. Louis
10.31++ Acquisition Note, dated July 15,1996, between Lancer
Corporation and The Frost National Bank and The Boatmen's
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, 1996
10.35+++ Master Lease Agreement dated September 4, 1996 between
Lancer Partnership, Ltd. and CCA Financial, Inc.
10.36 First Amendment to Credit Agreement dated May 12, 1997 between
Lancer Partnership, Ltd. and The Frost National Bank and
NationsBank, N.A.
10.37 Second Amendment to Credit Agreement dated December 31, 1997
between Lancer Partnership, Ltd. and The Frost National Bank
and NationsBank, N.A.
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
Registrant's 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
Registrant's Form 10-K for the year ended December 31, 1994.
14
*** These exhibits are incorporated by reference to the Exhibit to the
Registrant's Form 10-Q for the quarter ended June 30, 1995.
+ These exhibits are incorporated by reference to the Exhibit to the
Registrant's Form 10-K for the year ended December 31, 1995.
++ These exhibits are incorporated by reference to the Exhibit to the
Registrant's Form 10-Q for the quarter ended June 30, 1995.
+++ This exhibit is incorporated by reference to the Exhibit to the
Registrant's Form 10-K for the year ended December 31, 1996.
# This exhibit is incorporated by reference to the Exhibit to the
Registrant's 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.
15
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 27, 1998
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 27, 1998
Alfred A. Schroeder Date
/s/ GEORGE F. SCHROEDER President and Director March 27, 1998
George F. Schroeder (principal executive officer) Date
/s/ JOHN P. HERBOTS Vice President Finance & Director March 27, 1998
John P. Herbots (principal financial and accounting officer) Date
/s/ WALTER J. BIEGLER Director March 27, 1998
Walter J. Biegler Date
/s/ JEAN M. BRALEY Director March 27, 1998
Jean M. Braley Date
/s/ CHARLES K. CLYMER Director March 27, 1998
Charles K. Clymer Date
/s/ MICHAEL E. SMITH Director March 27, 1998
Michael E. Smith Date
16
LANCER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Independent Auditors Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1997 F-5
Consolidated Statements of Shareholders Equity for each of the years in the
three-year period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
Schedule for the years ended December 31, 1997, 1996 and 1995
II-Reserve account F-20
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 Companys 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, 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
March 11, 1998
F-2
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
-------------------- -------------------
Current assets:
Cash $ 1,850,779 $ 1,016,425
Receivables:
Trade accounts and notes 22,674,269 19,686,318
Refundable income taxes 1,483 396,495
Other 298,274 690,034
-------------------- -------------------
22,974,026 20,772,847
Less allowance for doubtful accounts (335,000) (185,000)
-------------------- -------------------
Net receivables 22,639,026 20,587,847
-------------------- -------------------
Inventories:
Raw materials and supplies 1,996,536 1,269,404
Work in process 28,980,250 18,425,735
Finished goods 13,437,781 8,543,784
-------------------- -------------------
Total inventories 44,414,567 28,238,923
Prepaid expenses ( $0 and $4,624 due
from affiliates, respectively) 178,869 243,937
Deferred tax asset 220,849 64,513
-------------------- -------------------
Total current assets 69,304,090 50,151,645
-------------------- -------------------
Property, plant and equipment, at cost:
Land 1,259,938 1,307,663
Buildings 18,152,535 9,681,466
Machinery and equipment 17,839,310 14,925,713
Tools and dies 8,454,022 8,448,506
Leaseholds, office equipment and vehicles 6,776,193 5,945,069
Construction in progress 1,600,204 5,162,508
-------------------- -------------------
54,082,202 45,470,925
Less accumulated depreciation and amortization (22,186,770) (19,676,377)
-------------------- -------------------
Net property, plant and equipment 31,895,432 25,794,548
-------------------- -------------------
Long-term receivables ($ 358,890 and $306,232 due
from affiliates, respectively) 724,959 404,007
Long-term investments 3,273,621 2,975,000
Intangibles and other assets, at cost, less
accumulated amortization 5,470,886 2,684,073
-------------------- -------------------
$ 110,668,988 $ 82,009,273
==================== ===================
See accompanying notes to consolidated financial statements.
F-3
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1997 and 1996
LIABILITIES AND SHAREHOLDERS EQUITY
1997 1996
------------------- -------------------
Current liabilities:
Accounts payable $ 12,133,894 $ 7,234,160
Current installments of long-term debt 4,444,400 1,852,500
Line of credit with bank 19,000,000 11,700,000
Deferred licensing and maintenance fees 538,554 1,339,868
Accrued expenses and other liabilities 5,718,003 3,356,315
Income taxes payable 185,472 -
------------------- -------------------
Total current liabilities 42,020,323 25,482,843
Deferred tax liability 1,736,405 1,038,655
Other long-term liabilities 820,000 820,000
Long-term debt, excluding current installments 21,565,350 15,459,375
Deferred licensing and maintenance fees 1,565,597 2,172,137
------------------- -------------------
Total liabilities 67,707,675 44,973,010
------------------- -------------------
Commitments and contingencies - -
Shareholders equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued - -
Common stock, $.01 par value:
50,000,000 shares authorized; 8,902,236 and 5,820,976
issued and outstanding in 1997 and 1996, respectively 89,022 58,209
Additional paid-in capital 11,607,504 9,888,244
Cumulative foreign currency translation adjustment (1,727,719) 183,803
Retained earnings 32,992,506 26,906,007
------------------- -------------------
Total shareholders equity 42,961,313 37,036,263
------------------- -------------------
$ 110,668,988 $ 82,009,273
=================== ===================
See accompanying notes to consolidated financial statements.
F-4
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------------- ------------------- ------------------
Net sales $ 119,502,337 $ 103,294,696 $ 76,431,875
Cost of sales 88,165,595 78,365,637 59,992,544
------------------- ------------------- ------------------
Gross profit 31,336,742 24,929,059 16,439,331
Selling, general and administrative expenses 20,439,019 14,512,086 9,934,211
------------------- ------------------- ------------------
Operating income 10,897,723 10,416,973 6,505,120
------------------- ------------------- ------------------
Other income (expense):
Interest expense (2,814,744) (1,587,510) (981,153)
Interest and other income, net 1,040,356 318,400 1,179,355
------------------- ------------------- ------------------
(1,774,388) (1,269,110) 198,202
------------------- ------------------- ------------------
Earnings before income taxes 9,123,335 9,147,863 6,703,322
------------------- ------------------- ------------------
Income tax expense:
Current 2,809,302 3,373,117 2,446,959
Deferred 227,534 42,246 165,246
------------------- ------------------- ------------------
3,036,836 3,415,363 2,612,205
------------------- ------------------- ------------------
Net earnings $ 6,086,499 $ 5,732,500 $ 4,091,117
=================== =================== ==================
Common Shares and Equivalents Outstanding:
Basic 8,863,263 8,722,396 8,701,025
Diluted 9,337,524 9,052,345 8,984,782
Earnings Per Share:
Basic $0.69 $0.66 $0.47
Diluted $0.65 $0.63 $0.46
See accompanying notes to consolidated financial statements.
F-5
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 1997, 1996 and 1995
Additional Cumulative Total
Common Paid-in Translation Retained Shareholders
Stock Capital Adjustment Earnings Equity
------------- ----------------- ----------------- ----------------- -----------------
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
Net earnings - - - 6,086,499 6,086,499
Cumulative foreign currency
translation adjustment - - (1,911,522) - (1,911,522)
Exercise of 34,387 stock
options 344 193,856 - - 194,200
Stock issued for
acquisition of subsidiary 819 1,555,054 - - 1,555,873
Three-for-two stock
dividend 29,650 (29,650) - - -
------------- ----------------- ----------------- ----------------- -----------------
Balance December 31, 1997 $ 89,022 $ 11,607,504 $ (1,727,719) $ 32,992,506 $ 42,961,313
============= ================= ================= ================= =================
See accompanying notes to consolidated financial statements.
F-6
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------------- ----------------- -----------------
Cash flow from operating activities:
Net earnings $ 6,086,499 $ 5,732,500 $ 4,091,117
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 3,149,126 2,445,288 2,152,169
(Gain) loss on sale and disposal of assets (203,113) (15,485) 13,985
Loss on investments in affiliates 12,104 - -
Change in assets and liabilities, net of effects
from purchase of subsidiary:
Receivables (2,067,507) (5,464,226) (3,872,837)
Refundable income taxes 403,685 - -
Prepaid expenses 82,490 (97,161) (23,969)
Inventories (12,764,438) (8,207,165) 2,283,927
Other assets 423,411 (390,495) 425,019
Accounts payable 4,657,659 1,589,097 (1,094,867)
Accrued expenses 2,297,500 473,429 601,787
Deferred licensing and maintenance fees 286,316 1,190,504 1,710,576
Income taxes payable 237,346 (883,890) 760,293
Deferred tax liability 511,089 (22,267) (100,552)
Other long-term liabilities - 120,000 180,000
----------------- ----------------- -----------------
Net cash (used) provided by operating activities 3,112,167 (3,529,871) 7,126,648
----------------- ----------------- -----------------
Cash flow from investing activities:
Proceeds from sale of assets 256,686 43,625 20,166
Capital expenditures (9,922,830) (9,056,710) (7,861,164)
Acquisition of subsidiary company (3,768,375) - (3,503,600)
Purchase of long-term investments (250,000) (2,600,000) (225,000)
----------------- ----------------- -----------------
Net cash used in investing activities (13,684,519) (11,613,085) (11,569,598)
----------------- ----------------- -----------------
Cash flow from financing activities:
Net borrowings under line of credit agreements 7,300,000 4,700,000 1,000,000
Proceeds from issuance of long-term debt 7,050,000 17,950,000 6,929,000
Retirement of long-term debt (2,338,124) (7,483,792) (4,889,170)
Proceeds from issuance of common stock - - -
Proceeds from exercise of stock options 194,200 55,018 55,082
----------------- ----------------- -----------------
Net cash provided by financing activities 12,206,076 15,221,226 3,094,912
----------------- ----------------- -----------------
Effect of exchange rate changes on cash (799,370) 183,803 -
Net increase (decrease) in cash 834,354 262,073 (1,348,038)
Cash at beginning of year 1,016,425 754,352 2,102,390
----------------- ----------------- -----------------
Cash at end of year $ 1,850,779 $ 1,016,425 $ 754,352
================= ================= =================
Lancer issued debt of $3,986,000 and stock of $1,555,873 to the sellers of the subsidiaries acquired in 1997.
The non-cash portion of these transactions is excluded from the above statement.
See accompanying notes to consolidated financial statements.
F-7
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of 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 consolidated financial statements include the
accounts of Lancer Corporation (the Company) and its wholly-owned subsidiaries,
with intercompany balances and transactions eliminated in consolidation. The
subsidiaries consist of the following:
Lancer Partnership, Ltd. is the primary operating entity in the United States.
Lancer International Sales, Inc. (DISC) is a qualified Interest-Charge Domestic
International Sales Corporation, which markets the Companys products
internationally. The DISC is a wholly-owned subsidiary created to operate under
Federal income tax regulations.
Lancer Europe, S.A. is a wholly-owned subsidiary incorporated to market and
distribute the Companys products to the European Union and certain other foreign
countries.
Lancer Pacific 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 Companys 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.
Lancer de Mexico, S.A. de C.V. is a wholly-owned subsidiary incorporated to
market and distribute the Companys 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 Lancer de Mexico, S.A. de C.V.
Lancer do Brasil, Ltda., acquired in the first quarter of 1997, is a
wholly-owned subsidiary which manufactures and distributes fountain soft drink
and beer dispensing systems in Brazil and surrounding Latin American countries.
Lancer Pacific Ltd., acquired in the second quarter of 1997, is a wholly-owned
subsidiary which manufactures and distributes fountain soft drink and beer
dispensing systems in New Zealand, Australia and Brazil.
OOO Lancer Sales Company is a wholly-owned subsidiary which distributes fountain
soft drink dispensing systems in Russia and surrounding Eastern European
countries.
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 its 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 39 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 twenty to 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. The carrying
value of the investment at December 31, 1997 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. Lancer owns less than 10% of the common stock of Packaged Ice, Inc.
The carrying value of the investment at December 31, 1997 approximates the
market value.
Net Earnings per Share
The Company adopted the Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, in 1997, and accordingly, basic earnings per share is
calculated using the weighted average number of common shares outstanding and
diluted earnings per share is calculated assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The dilutive effect of stock options approximated 474,261, 329,949, and
283,757 shares in 1997, 1996 and 1995, respectively. Options to purchase
approximately 19,500, 0, and 7,904 shares in 1997, 1996, and 1995, respectively,
were outstanding but were not included in the computation because the exercise
price is greater than the average market price of the common shares. All
prior-period earnings per share data presented in the consolidated financial
statements have been restated to conform to the requirements of SFAS No. 128.
During 1997, 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 Companys 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.
F-9
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Amounts in the financial statements related to income taxes are calculated using
the principles of Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes (FAS 109). Under FAS 109, prepaid and deferred taxes
reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards. These deferred taxes are measured by applying currently enacted
tax rates.
Provision for U.S. income taxes on the undistributed earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
Research and Development
Company-sponsored research and development costs are expensed as incurred and
totaled approximately $1,467,000, $913,000 and $737,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the year. Translation adjustments are accumulated in a separate component of
stockholders equity. Inventories, plant and equipment and other non-monetary
assets and liabilities of non-U.S. subsidiaries that operate in U.S. dollars are
translated at approximate exchange rates prevailing when acquired. All other
assets and liabilities are translated at year-end exchange rates. Inventories
charged to cost of sales and depreciation are translated at historical exchange
rates. All other income and expense items are translated at average rates of
exchange prevailing during the year. For those companies that operate in U.S.
dollars, gains and losses that result from translation are included in earnings.
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.
F-10
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Income Taxes
An analysis of income tax expense follows:
1997 Current Deferred Total
- ------------- ---------------- ---------------- ---------------
Federal $ 2,366,565 $ 208,454 $ 2,575,019
State 62,370 - 62,370
Foreign 380,367 19,080 399,447
---------------- ---------------- ---------------
Total $ 2,809,302 $ 227,534 $ 3,036,836
================ ================ ===============
1996
- -------------
Federal $ 3,105,988 $ 29,827 $ 3,135,815
State 138,251 609 138,860
Foreign 128,878 11,810 140,688
---------------- ---------------- ---------------
Total $ 3,373,117 $ 42,246 $ 3,415,363
================ ================ ===============
1995
- -------------
Federal $ 2,171,342 $ 126,191 $ 2,297,533
State 275,617 2,575 278,192
Foreign - 36,480 36,480
---------------- ---------------- ---------------
Total $ 2,446,959 $ 165,246 $ 2,612,205
================ ================ ===============
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:
1997 1996
---------------- ----------------
Deferred tax assets:
Accounts receivable $ - $ 282,582
Inventory 438,493 -
Compensation and benefits 620,670 547,224
NOL carryforward, expiring through 2012 171,810 203,546
All other 173,893 -
---------------- ----------------
Total deferred tax assets 1,404,866 1,033,352
Deferred tax liabilities:
Accounts receivable 580,753 -
Inventory - 190,678
Property, plant and equipment 1,527,792 953,431
DISC income 811,877 662,547
All other - 200,838
---------------- ----------------
Total deferred tax liability 2,920,422 2,007,494
---------------- ----------------
Net deferred tax liability $ 1,515,556 $ 974,142
================ ================
F-11
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The actual tax expense differs from the "expected" tax expense (computed by
applying U.S. Federal corporate rate of 34% to earnings before income taxes) as
follows:
1997 1996 1995
---------------- ---------------- ---------------
Computed "expected" tax expense $3,101,934 $3,110,274 $2,279,130
Increase (decrease) in taxes resulting from:
Effect of nondeductible foreign tax losses 89,847 40,794 93,364
Effect of nondeductible expenses 125,884 163,343 52,772
Tax credits (355,690) - -
State, net of Federal benefit 54,137 92,565 181,907
Other, net 20,724 8,387 5,032
================ ================ ===============
$3,036,836 $3,415,363 $2,612,205
================ ================ ===============
In accordance with FAS 109, no federal and state income taxes have been provided
for the accumulated undistributed earnings of the DISC as of December 31, 1992.
On December 31, 1992, the accumulated undistributed earnings of the DISC totaled
$2,357,000. Should the DISC terminate in the future, FAS 109 would require
federal and state income taxes be provided. Such a provision would result in a
federal and state income tax charge to the financial statements, thereby
increasing the Companys effective tax rate. The Company is considering
converting the DISC to a Foreign Sales Corporation in 1998.
Actual net income taxes paid were approximately $1,920,000, $3,720,000 and
$1,920,000 for 1997, 1996 and 1995, respectively.
3. Long-term Debt and Line of Credit with Banks
1997 1996
------------------- ------------------
Notes payable to banks, due in quarterly
installments plus interest based upon
prime and LIBOR (weighted average rate
of 7.73% at December 31, 1997) through
July 15, 2001; secured by the pledge of
a portion of the stock of foreign subsidiaries $ 22,023,750 $ 17,311,875
Note payable to seller of Brazil subsidiary, due
in annual installments plus interest based
on LIBOR (weighted average interest rate of
6.44% at December 31, 1997) through
December 31, 2001 3,986,000 -
------------------- ------------------
26,009,750 17,311,875
Less current installments of long-term debt 4,444,400 1,852,500
=================== ==================
$ 21,565,350 $ 15,459,375
=================== ==================
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 Facilities. Principal payments on the
Credit Facilities 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.
F-12
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In May,
1997, the Company increased its revolving facility from $17.5 million to $25.0
million. In December, 1997, the Company increased its revolving facility from
$25.0 million to $30.0 million. The increase to $30.0 million is effective
through July 15, 1998, when the facility will decrease to $25.0 million. Certain
financial covenants were amended through July 15, 1998. Amounts outstanding
under revolving loans were $19.0 million on December 31, 1997 and $11.7 million
on December 31, 1996. The Revolving Facility expires July 15, 2001.
Annual maturities on long-term debt outstanding at December 31, 1997 are as
follows:
1998 $ 4,444,400
1999 3,997,200
2000 3,997,200
2001 13,570,950
==================
$ 26,009,750
==================
To manage its exposure to fluctuations in interest rates, the Company has
entered into interest rate swap agreements (the Swap Agreements) for a combined
notional principal amount of $18.0 million. The Swap Agreements have termination
dates ranging from August, 1999 to January, 2003. 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 ranging from 5.98% to 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
financial strength of the financial institutions involved.
The Credit Facilities 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 approximately $2,922,000, $1,432,000 and $964,000 in
1997, 1996 and 1995, 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.
F-13
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of transactions for all options follows:
Stock Options Option Price
---------------- -------------------------
Outstanding at December 31, 1994 553,586 $ 1.29 - 4.97
Granted 20,324 4.93 - 6.28
Canceled (10,874) 2.37 - 4.97
Exercised (23,247) 2.37
---------------- -------------------------
Outstanding at December 31, 1995 539,789 $ 1.29 - 6.28
Granted 292,845 7.22 - 10.00
Exercised (18,969) 2.37 - 7.22
---------------- -------------------------
Outstanding at December 31, 1996 813,665 $ 1.29 - 10.00
Granted 50,500 11.63 - 16.54
Canceled (31,140) 7.22 - 8.58
Exercised (34,387) 1.29 - 7.22
================ =========================
Outstanding at December 31, 1997 798,638 $ 1.29 - $ 16.54
================ =========================
A summary of exercisable options follows:
Stock Options Option Price
---------------- -----------------------
1995 406,062 $ 1.29 - $ 6.28
================ =======================
1996 515,543 $ 1.29 - $10.00
================ =======================
1997 584,000 $ 1.29 - $16.54
================ =======================
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:
1997 1996
---------------- ----------------
Net income-as reported $ 6,086,499 $ 5,732,500
Net income-pro forma 5,886,407 5,592,553
Net earnings per basic share-as reported 0.69 0.66
Net earnings per basic share-pro forma 0.66 0.64
Net earnings per diluted share-as reported 0.65 0.63
Net earnings per diluted share-pro forma 0.63 0.62
Weighted-average fair value of
options, granted during the year 3.70 2.44
F-14
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option granted in 1997 and 1996 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions:
1997 1996
---------------- ----------------
Expected life (years) 4 4
Interest rate 5.5% 5.8%
Volatility 35.6% 33.9%
Dividend yield None None
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 approximately $1,052,000, $896,000 and $478,000 in 1997, 1996
and 1995, 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, 1997,
1996 and 1995 the total amount expensed for workers compensation coverage was
$217,000, $291,000 and $479,000, 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.
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, 1997, 1996 and 1995 include Company contributions to the plan of
approximately $576,000, $520,000 and $359,000, respectively.
The Company is also required to make contributions to a defined contribution
plan for the employees of Lancer Pacific Pty. Ltd. Contributions during 1997
totaled approximately $32,000.
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.
F-15
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1996 the Company entered into a $4.3 million lease, of which $3.3 million
and $2.5 million were funded at December 31, 1997 and December 31, 1996,
respectively, 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. The lease has been recorded as an
operating lease.
At December 31, 1997, future minimum lease payments required under all
noncancelable operating leases are as follows:
1998 $1,874,319
1999 1,487,728
2000 816,148
================
Total minimum lease payments $4,178,195
================
Total rental expense was approximately $1,930,000, $1,223,000 and $712,000 in
1997, 1996 and 1995, 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 approximately $385,000, $297,000 and $310,000 in 1997, 1996 and 1995,
respectively.
6. Long-term Receivables
Long-term receivables are interest bearing and include $359,000 and $306,000 due
from officers for the years ended December 31, 1997 and 1996, respectively.
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 approximate 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.
F-16
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
8. Acquisition of Subsidiary
Through its wholly-owned subsidiary, Lancer do Brasil,Ltda. the Company
completed the purchase of all of the outstanding common shares of Comercial Vila
Formosa, Ltda. (Formosa), a Brazilian-based manufacturer and distributor of soft
drink fountain and beer dispensing equipment in the first quarter of 1997. The
purchase price of $6 million was financed with a $4 million note issued to the
seller and $2 million in cash funded with bank debt. The excess of the purchase
price over the fair value of the assets acquired of $3 million has been recorded
as goodwill and is being amortized on a straight-line basis over 30 years. The
acquisition was accounted for under the purchase method of accounting with the
results of operations included in the consolidated financial statements from the
date of acquisition.
In April 1997, the Company acquired certain assets and liabilities of Applied
Beverage Systems (1990), Ltd. (ABS). Located in New Zealand, ABS manufactures
and distributes fountain soft drink and beer dispensing systems. The purchase
price of $3.3 million was financed by borrowings of $1.5 million under the
Companys credit facilities and 122,832 shares of Lancer Corporation common stock
based on a price of approximately $12.67 per share, adjusted for the
three-for-two stock split effected July 8, 1997. The acquisition has been
accounted for by the purchase method and accordingly, the results of operations
of ABS have been included in the Companys consolidated financial statements from
the date of acquisition. The excess of the purchase price over the fair value of
the net identifiable assets acquired of $476,000 has been recorded as goodwill
and is being amortized over 30 years.
Assuming the acquisitions of Formosa and ABS had occurred at the beginning of
1997 and 1996, pro-forma operating results of the Company would be as follows
(in thousands except for per share data):
Years Ended December 31,
-------------------------------------
1997 1996
---------------- ----------------
Net Sales $ 121,378 $ 123,530
Net earnings 6,054 6,532
Net earnings per basic share 0.68 0.75
Net earnings per diluted share 0.65 0.72
The above pro-forma amounts are based upon certain assumptions and estimates
which the Company believes are reasonable, and do not reflect any benefit from
economies which might be achieved from combined operations. The pro-forma
results do not necessarily represent results which would have occurred if the
acquisitions had taken place on the basis assumed above nor are they indicative
of the results of future combined operations.
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 businesses acquired in the purchase transactions are as follows
(in thousands):
1997 1995
---------------- ----------------
Fair value of assets acquired, including goodwill $ 9,737 $ 5,248
Liabilities assumed (427) (1,744)
================ ================
Net assets acquired $ 9,310 $ 3,504
================ ================
F-17
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
Supplemental Balance Sheet and Income Statement Information
Accrued expenses consist of the following (in thousands):
As of December 31,
-------------------------------------
1997 1996
---------------- ----------------
Payroll and related expenses $ 2,676 $ 1,608
Commissions 540 344
Workers compensation accrual - current 300 300
Property taxes 525 47
Health insurance 178 107
Interest 694 237
Other 805 713
================ ================
$ 5,718 $ 3,356
================ ================
The following provides information regarding net sales to major customers, domestically and internationally (in
thousands):
1997 Percent of 1996 Percent of 1995 Percent
Net Sales Net Sales of Net
Sales
-------------- ---------------------------- --------------------------- -----------
United States:
The Coca-Cola Company $ 28,961 24% $ 32,325 32% $ 37,425 49%
Other 33,569 28% 27,177 25% 12,355 16%
-------------- ----------- -------------- ----------- ------------- -----------
62,530 52% 59,502 57% 49,780 65%
-------------- ----------- -------------- ----------- ------------- -----------
Export:
The Coca-Cola Company 42 0% 159 1% 527 1%
Other 56,930 48% 43,634 42% 26,125 34%
-------------- ----------- -------------- ----------- ------------- -----------
56,972 48% 43,793 43% 26,652 35%
-------------- ----------- -------------- ----------- ------------- -----------
$ 119,502 100% $ 103,295 100% $ 76,432 100%
============== =========== ============== =========== ============= ===========
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.
F-18
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
The Companys foreign operations consist of that of its wholly-owned subsidiaries
Industrias Lancermex, S.A. de C.V., Lancer de Mexico, S.A. de C.V., Servicios
Lancermex, S.A. de C.V., Lancer Pacific Pty, Ltd., Lancer Pacific, Ltd. Lancer
do Brasil, Ltda., Lancer Europe, S.A., and OOO Lancer Sales Company. A summary
of operating results and assets of the foreign operations follows:
1997 1996 1995
------------------- ------------------ -----------------
Total revenue $ 25,673,556 $ 11,454,678 $ 2,517,495
Operating income (loss) 1,144,875 218,112 (120,568)
Assignable assets, as of December 31 26,531,773 14,888,994 10,184,422
Management believes that gross profit on export sales is not materially
different from that on domestic sales.
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 Companys financial position or results of
operations.
11. Quarterly Financial Information (Unaudited)
The Company uses the gross profit method to estimate cost of goods sold on a
quarterly basis, and therefore must make year-end adjustments based on ending
inventory levels. Consequently, the fourth quarter margin calculation adjusts
for estimates made in the prior three quarters. In 1997, the Companys cost
estimates proved conservative, resulting in a larger that anticipated
improvement in gross margin for the fourth quarter. The following table reflects
the quarterly results for 1997 and 1996 (in thousands except for per share
data):
Three Months Ended
--------------------------------------------------------------------
1997 March June September December
31 30 30 31
-------------- -------------- -------------- --------------
Net Sales $ 30,398 $ 32,295 $ 29,844 $ 26,965
Gross Profit 7,665 7,941 7,630 8,101
Net earnings 1,790 1,801 1,025 1,470
Earnings Per Share:
Basic $ 0.20 $ 0.20 $ 0.12 $ 0.17
Diluted $ 0.19 $ 0.19 $ 0.11 $ 0.16
Three Months Ended
--------------------------------------------------------------------
1996 March June September December
31 30 30 31
-------------- -------------- -------------- --------------
Net Sales $ 23,678 $ 25,602 $ 27,896 $ 26,119
Gross Profit 5,703 6,120 6,486 6,620
Net earnings 1,340 1,526 1,509 1,358
Earnings Per Share:
Basic $ 0.15 $ 0.18 $ 0.17 $ 0.16
Diluted $ 0.15 $ 0.17 $ 0.16 $ 0.15
F-19
LANCER CORPORATION AND SUBSIDIARIES
SCHEDULE II
RESERVE ACCOUNT
Balance at Additions
Beginning of Charged to Deductions Balance at
Description Year Expense from Account End of Year
- ------------------------------------ ------------------------------------------------------------------------
Allowance for doubtful accounts:
December 31, 1997 $ 185,000 $ 150,000 $ - $ 335,000
December 31, 1996 $ 85,000 $ 106,645 $ 6,645 $ 185,000
December 31, 1995 $ 85,000 $ 2,083 $ 2,083 $ 85,000
- ----------------------------------------------------------------------------------------------------------------------
F-20