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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, 1998 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 22, 1999, held by non-affiliates of the registrant was
approximately $54,445,050 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
22, 1999 was 9,121,482.
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
1999 annual meeting of shareholders are incorporated by reference into Part III
of this report.
1
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.
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.
2
Products
The Company's products can be divided into four major categories: (i) fountain
soft drink, citrus, and frozen beverage dispensers; (ii) post-mix dispensing
valves; (iii) beer dispensing systems; and (iv) other products and services.
Soft Drink, Citrus, and Frozen Beverage 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.
Lancer FBD Partnership, Ltd., a joint venture in which Lancer owns a 50%
interest, manufactures frozen beverage dispensers. The joint venture sells its
production to Lancer, and Lancer markets and distributes the equipment to third
parties.
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, citrus, and frozen beverage dispensers for
the years ended December 31, 1998, 1997 and 1996, accounted for approximately
50%, 51% and 56% of total sales, respectively.
Post-Mix Dispensing Valves
The Company manufactures and sells post-mix dispensing valves which mix syrup
and carbonated 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,
1998, 1997 and 1996, sales of valves and related accessories accounted for
approximately 13%, 14%, and 16% 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
6%, 8% and 1% of total net sales in the years ended December 31, 1998, 1997 and
1996, respectively.
Other Related Products and Services
The Company remanufactures various dispensing systems and sells replacement
parts in connection with the remanufacturing process. Revenues from
remanufacturing activities were 4% of sales in each of the years ended December
31, 1998, 1997 and 1996
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 26%, 23% and 23% of the
Company's total net sales for the years ended December 31, 1998, 1997 and 1996,
respectively.
3
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, 1998, 1997 and 1996,
Company-sponsored research and development expenses were $2,207,000, $1,467,000
and $913,000, 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
$13.0 million, $8.2 million and $10.1 million at December 31, 1998, 1997 and
1996, respectively. It is anticipated that 1998 backlog orders will be filled in
1999.
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.
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 23%, 24% and 33% of the Company's total net sales for the
years ended December 31, 1998, 1997 and 1996, 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.
4
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.
International Sales
For the years ended December 31, 1998, 1997 and 1996, the Company's sales to
customers outside the United States were approximately 48%, 48% and 43% 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, and Mexico, and operates warehouses in Belgium,
New Zealand, 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.
Financial Information About Segments and Geographic Areas
Financial information about segments and geographic areas is set forth in Note
12 to the Consolidated Financial Statements included elsewhere in this filing.
Competition
The business of manufacturing and marketing beverage dispensing systems and
related equipment is highly competitive and is characterized by rapidly changing
technology. Competition is primarily based upon product suitability,
reliability, technological development and expertise, price, product warranty
and delivery time. In addition, the Company frequently competes with companies
having substantially greater financial resources than the Company. The Company
has been able to compete successfully in the past, and believes it will be able
to do so in the future.
Employees
As of December 31, 1998, the Company had 1,506 full-time employees of whom 75
were engaged in engineering and technical support, 1,225 in manufacturing, 80 in
marketing and sales and 126 in general management and administrative positions.
The majority of the employees work at the Company's facilities in San Antonio,
Texas. 576 employees work at the Company's facility in Piedras Negras, Mexico,
70 are employed by the Company's Brazilian subsidiary, and a total of 72 people
are employed by the Company's subsidiaries in Australia and 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.
5
Intellectual Property
The Company presently owns 37 United States patents and numerous corresponding
foreign patents. It has 17 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 18 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.
6
ITEM 2. PROPERTIES
The Company's primary manufacturing and administrative facilities are located in
several buildings in San Antonio, Texas, totaling approximately 713,000 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. 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. The Company also leases a 65,000 square foot plant in Sao
Paulo, Brazil, a 39,000 square foot plant in Auckland, New Zealand, a 38,000
square foot plant in Beverley, South Australia, a suburb of Adelaide, and small
facilities in Sydney, Australia; Brussels, Belgium; Moscow, Russia; and
Monterrey, Mexico. The Company leases 492,000 square feet of space throughout
the world.
Total net rent expense for real estate was $1,356,000, $1,359,000 and $1,093,000
in 1998, 1997 and 1996, respectively. Included in total rent expense in 1998 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, 1998.
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 a three-for-two stock dividend effective July 8, 1997.
Market Price For Common Stock
1998 1997
Quarter High Low High Low
- ------------------------ -------------------------- --------------------------
First $13.81 $9.44 $15.00 $11.92
Second 17.25 13.50 17.33 12.58
Third 18.25 9.75 17.63 14.75
Fourth 14.00 8.88 16.13 10.75
On March 22, 1999, the closing price of the Company's common stock, as reported
by the ASE, was $9.56 per share. On that date, there were 174 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.
7
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- ------------- -------------
Operating Data:
Net sales $ 138,869 $ 119,367 $ 103,295 $ 76,432 $ 71,526
Gross profit 34,006 31,429 25,088 16,439 14,312
Selling, general and
administrative expenses 19,911 20,439 14,512 9,934 9,359
Operating income 14,095 10,990 10,576 6,505 4,953
Interest expense 3,972 2,815 1,588 981 755
Interest and other income, net 202 (948) (160) (1,179) (354)
Earnings before income taxes
and extraordinary item 9,921 9,123 9,148 6,703 4,552
Income tax expense 4,078 3,037 3,415 2,612 1,602
Net earnings 5,843 6,086 5,733 4,091 2,950
Net earnings per share
Basic $ 0.64 $ 0.69 $ 0.66 $ 0.47 $ 0.36
Diluted $ 0.63 $ 0.65 $ 0.63 $ 0.46 $ 0.35
Weighted average shares outstanding
Basic 9,060 8,863 8,722 8,701 8,178
Diluted 9,306 9,338 9,052 8,985 8,460
As of December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- ------------- -------------
Balance Sheet Data:
Total assets $ 112,840 $ 110,669 $ 82,009 $ 57,944 $ 46,896
Short-term debt 27,094 23,444 13,553 8,448 7,409
Long-term debt, less
current installments 17,568 21,565 15,459 5,398 3,397
Shareholders' equity 48,258 42,961 37,036 31,065 26,919
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.
8
Results of Operations
Comparison of the Years Ended December 31, 1998 and December 31, 1997
Net sales for the year ended December 31, 1998 increased by $19.5 million, or
16%, to $138.9 million from $119.4 million in 1997. Sales in Latin America rose
$10.7 million, or 98%, due largely to the Company's efforts to align itself with
key bottlers in the region. Additionally, the Company added sales and technical
staff in Monterrey, Mexico and in other parts of Latin America during the year.
Sales in the United States rose $10.4 million, or 17%, as sales of ice cooled
fountain equipment increased from 1997 levels. Sales in Brazil and Asia declined
in 1998, suffering from poor economic conditions.
Sales to customers outside the United States represented 48% of net sales in
both 1998 and 1997.
Gross margin for the year ended December 31, 1998 was 24%, down from 26% in the
prior year. Gross margin fell in 1998 primarily because of poor margins at the
Company's Brazilian subsidiary.
Selling, general and administrative expenses for the year ended December 31,
1998 were $19.9 million (14% of sales), compared to $20.4 million (17% of sales)
in 1997. Operating expenses were unusually high in 1997 because of non-recurring
costs associated with the Company's acquisitions in Brazil and New Zealand, the
establishment of a subsidiary in Belgium, and the implementation of the
Company's primary computer system.
Interest expense for the year ended December 31, 1998 was $4.0 million, up from
$2.8 million in 1997. The increase resulted from higher average borrowings to
finance asset growth. The Company's income tax rate was 41% in 1998, compared to
33% in 1997. The effective rate was unusually high in 1998 because the Company's
losses in Brazil were not deductible against income earned outside of Brazil.
The effective rate in 1997 was unusually low, primarily because of tax credits
for research and development expenditures incurred prior to 1997.
Net earnings for the year ended December 31, 1998 were $5.8 million, a 4%
decrease from $6.1 million earned in 1997. Net earnings per diluted share
declined to $0.63 in 1998 from $0.65 in 1997.
Comparison of the Years Ended December 31, 1997 and December 31, 1996
Net sales for the year ended December 31, 1997 increased by $16.1 million, or
16%, to $119.4 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. Latin
American sales rose $2.1 million or 24%, due in part to strong demand in South
American markets.
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 margin for the year ended December 31, 1997 was 26%, compared to 24% in
1996. The improved margin 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.
9
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.
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 $4.4 million of cash from operating activities in 1998, up from
$3.1 million in 1997. Cash from operations improved in 1998 because of slower
inventory growth and a decline in accounts receivable.
Capital spending was $5.2 million in 1998. Lancer completed construction of a
32,000 square foot office addition to its primary facility in San Antonio during
the first quarter of 1998. Most of the remaining capital investment was for
production equipment and tooling. Lancer expects capital spending in 1999 to
decline slightly from 1998 levels.
The Company funded a portion of its capital spending with bank debt. During
1998, the Company increased its revolving bank facility to $35.0 million. The
bank facilities require that the Company maintain certain financial ratios and
other covenants. The Company is in compliance with, or has obtained waivers of,
the 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 have
frequently been lower than in other quarters because of seasonality in the
capital spending budgets of many of the Company's customers.
Accounting Matters
The Company established a DISC in 1979 in order to defer federal income taxes on
its foreign sales. In late 1984, the Internal Revenue Code (the "Code") was
amended to limit the benefits of a DISC, primarily by imposing an interest
charge on the accumulated deferred federal income taxes of a DISC. At the same
time, the Code was amended to permit the creation of a Foreign Sales Corporation
("FSC"). Under the Code, as amended, a portion of a FSC's income is subject to
federal income taxes, while a portion is permanently exempt from federal income
taxes. As a result, at some point, the interest charge the Company incurs on the
deferred federal income taxes of its DISC will equal or exceed the taxes it
would have incurred had it operated a FSC. Current tax regulations prevent the
Company from maintaining the DISC and a FSC concurrently. The Company does not
plan to convert from the DISC to a FSC in 1999. At the time of such a
conversion, the Company would 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. The Company would be able to pay such
federal income taxes over a ten-year period. If the DISC had been converted on
December 31, 1998, it would have resulted in a reduction of approximately
$801,000 in the Company's net earnings.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting comprehensive income
and its components in a full set of financial statements. The Statement requires
only additional disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
10
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
established standards for the way in which publicly-held companies report
financial and descriptive information about their operating segments in
financial statements for both interim and annual periods, and requires
additional disclosures with respect to products and services, geographic areas
of operation and major customers. (See Note 12 in the Notes to Consolidated
Financial Statements.)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement provides guidance on
accounting and financial reporting for derivative instruments and hedging
activities. The Statement requires the recognition of all derivatives as either
assets or liabilities in the consolidated balance sheet, and the periodic
measurement of those instruments at fair value. SFAS No. 133 requires adoption
no later than January 1, 2000. The Company is currently analyzing and assessing
the impact that the adoption of SFAS No. 133 is expected to have on its
consolidated results of operations, cash flows and financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective for
the Company's 1999 consolidated financial statements. In the opinion of the
Company's management, it is not anticipated that the adoption of SOP 98-5 will
have a material effect on the consolidated financial statements of the Company.
Year 2000
The Year 2000 ("Y2K") issue arose because some computer programs use two-digit
date fields to designate a year. Some of these programs with two-digit date
fields will not recognize the year 2000, or may confuse it with the year 1900.
This date recognition problem could cause erroneous calculations, or could cause
entire systems to malfunction.
The Company has adopted a two-phase approach to the Year 2000 threat. In the
Assessment Phase, the Company generates a comprehensive inventory of the
Company's date-oriented systems, and determines which are not Y2K compliant. The
Renovation/Replacement Phase involves correcting or replacing non-compliant
systems. The Company has completed 92% of the Assessment Phase, and plans to
have finished substantially all of the Assessment Phase by March 31, 1999. The
Renovation/Replacement Phase is being executed as non-compliant systems are
identified. The Company expects that it will have corrected high-priority
non-compliant systems by June 30, 1999, and medium-priority non-compliant
systems by September 30, 1999.
In the second quarter of 1998, the Company initiated correspondence with its
suppliers to determine their Y2K readiness. The Company plans to monitor the
readiness of its key suppliers throughout 1999. The Company intends to determine
the Y2K readiness of its key customers during 1999. The Coca-Cola Company was
the Company's largest customer in 1998, accounting for 23% of sales.
The Company's primary information technology ("IT") system is a BaaN ERP system
that was installed in 1996, and upgraded in 1998. The Company believes the BaaN
system, and other major IT systems, are Y2K compliant. Among non-IT systems, the
Company has replaced a non-compliant payroll system, and expects to have
upgraded or replaced its non-compliant timekeeping system by June 30, 1999. As
of December 31, 1998, the Company has committed more than half of the $200,000
it expects to spend on all of the Company's Y2K issues.
The Company believes there is low risk of any internal critical system not being
Y2K-compliant by the end of 1999. The Company continues to assess its risk
exposure attributable to external factors and suppliers. Although the Company
has no reason to conclude that any specific supplier represents a risk, the most
likely worst-case Y2K scenario would entail production disruption due to
inability of suppliers to deliver critical parts. The Company is unable to
quantify such a scenario, but it could potentially result in a material adverse
impact on the results of operations, liquidity or financial position of the
Company. The Company does not now have a formal contingency plan to deal with
non-performance by suppliers. The Company intends, however, to monitor the Y2K
readiness of key suppliers throughout 1999, and to develop a contingency plan
for any supplier whose lack of preparedness may jeopardize the Company's
operations.
11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 31, 1998, all of the Company's $44,663,000 of debt outstanding was
variable rate debt. The Company uses interest rate swap agreements (the "Swap
Agreements") to hedge a portion of the interest rate risk associated with the
Company's variable rate debt. The Company has entered into Swap Agreements with
a combined notional amount of $18.0 million. Under the Swap Agreements, the
Company pays 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. Based on exposures
on December 31, 1998, if interest rates were to change by one percentage point,
the Company's annual pretax income would be impacted by approximately $267,000.
The Company does not trade in interest rate swaps with the objective of earning
financial gain on interest rate fluctuations. The Company had no additional
derivative financial instruments at December 31, 1998.
In 1998, $456,000 of the Company's operating profit was earned by foreign
subsidiaries with a functional currency other than the United States dollar. If
the average annual exchange rate of the functional currencies of those
subsidiaries were to fluctuate by 10% against the United States dollar, the
operating profit of those subsidiaries could be impacted by as much as $394,000,
when translated to United States dollars. This analysis does not consider the
effect of changes in costs, demand, asset values, or other unpredictable factors
that could result from currency fluctuations.
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.
12
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 27, 1999 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 information set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's proxy statement which is to be filed with
the Commission 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
Michael W. Andaloro 52 Chief Operating Officer
David E. Green 42 Chief Financial Officer
Christi A. Rohmer 34 Controller
Walter J. Biegler 56 Director
Jean M. Braley 68 Director
Charles K. Clymer 62 Director
Michael E. Smith 57 Director
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. Michael W. Andaloro joined Lancer in 1998 as Chief Operating Officer. Mr.
Andaloro previously held various senior positions, including Vice President
Operations and Group Vice President of Technical Services, during 15 years with
Pioneer Flour Mills in San Antonio, Texas. Mr. Andaloro is a business resource
planning specialist, having led Pioneer in a successful Class A MRP II
implementation.
Mr. David E. Green joined Lancer in 1998 as Chief Financial Officer. Before
coming to Lancer, Mr. Green spent 14 years with Coca-Cola Bottling Company of
the Southwest, a wholly-owned subsidiary of Texas Bottling Group. Mr. Green
served in senior positions including Vice President Operations and Chief
Financial Officer. Before joining Coca-Cola Bottling Company of the Southwest,
Mr. Green worked four years in public accounting with Deloitte Haskins & Sells.
Ms. Rohmer joined Lancer in 1995 and serves as Corporate Controller. Before
joining Lancer, Ms. Rohmer worked for five years as Assistant Controller for
Pioneer Flour Mills, and three years in public accounting with Ernst & Young,
LLP.
Mr. Walter J. Biegler has served as a director of the Company since 1985. Mr.
Biegler is a private investor. From 1991 until 1998, he was Chief Financial
Officer of Periodical Management Group, Inc., a San Antonio, Texas distributor
of periodicals, books and specialty items in the United States, Mexico and the
Virgin Islands. 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."
13
Mr. Charles K. Clymer has served as a director of the Company since 1996. Mr.
Clymer retired from The Coca-Cola Company in 1993 after 31 years of service. He
held managerial positions with Coca-Cola International including 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.
Mr. Michael E. Smith has served as a director of the Company since 1985. Mr.
Smith is presently a principal shareholder and Executive Vice President of
Gosling & Sachse, 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.
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 1998. 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 1998. The members of the Stock
Option Committee are Walter A. Biegler, Charles K. Clymer and Michael E. Smith.
The Stock Option Committee met four times in 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation and Certain
Transactions" in the Company's proxy statement for its May 27, 1999 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 27, 1999
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 27, 1999 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.
14
(3) Exhibits:
3.1* Registrants Articles of Incorporation and amendments thereto
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate, $0.01 par value, of
Registrant
10.1* Lancer Corporation Profit Sharing Plan
10.2* 1992 Non-Statutory Stock Option Plan
10.3* 1987 Incentive Stock Option Plan
10.4* Master Development Agreement, dated January 12, 1984,
between Lancer Corporation and The Coca-Cola Company
10.5* Net Lease Agreement, dated July 1, 1974, between Lancer
Corporation and Lancer Properties dated as of June 3, 1977
10.6* Loan Agreement, dated as of July 24, 1991, between
Lancer Corporation and First Interstate Bank
10.7* Security Agreement, dated as of July 24, 1991, between Lancer
Corporation and First Interstate Bank of Texas
10.8* Fourth Amendment to Loan Agreement and Loan Documents, dated
as of July 29, 1994, between Lancer Corporation and First
Interstate Bank
10.9* Modification of Deeds of Trust, dated as of May 15, 1993, for
the benefit of First Interstate Bank, as modified by the
Second Modification of Deeds of Trust, dated as of April 8,
1994, and the Third Modification of Deeds of Trust, dated as
of July 29, 1994
10.10* Form of Guaranty Agreement, dated July 29, 1994, executed by
each of the subsidiaries of Lancer Corporation in favor of
First Interstate Bank of Texas
10.13* 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
10.19** Revolving Promissory Note, dated as of July 29, 1994, between
Lancer Corporation and First Interstate Bank of Texas, N.A.
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.
15
10.38### Third Amendment to Credit Agreement dated July 15, 1998
between Lancer Corporation and The Frost National Bank and
NationsBank, N.A.
21.1 List of Significant Subsidiaries of the Registrant
23.1 Consent of KPMG 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.
*** 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.
## These exhibits are incorporated by reference to the Exhibit to the
Registrant's Form 10-K for the year ended December 31, 1997.
### This exhibit is incorporated by reference to the Exhibit to the
Registrant's Form 10-Q for the quarter ended June 30, 1998.
(b) Reports on Form 8-K: None
16
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 26, 1999
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 26, 1999
- ------------------------- ------------------------- --------------------
Alfred A. Schroeder
/s/ GEORGE F. SCHROEDER President and Director March 26, 1999
- ------------------------- ------------------------- --------------------
George F. Schroeder (principal executive officer)
/s/ WALTER J. BIEGLER Director March 26, 1999
- ------------------------- ------------------------- --------------------
Walter J. Biegler
/s/ JEAN M. BRALEY Director March 26, 1999
- ------------------------- ------------------------- --------------------
Jean M. Braley
/s/ CHARLES K. CLYMER Director March 26, 1999
- ------------------------- ------------------------- --------------------
Charles K. Clymer
/s/ MICHAEL E. SMITH Director March 26, 1999
- ------------------------- ------------------------- --------------------
Michael E. Smith
17
LANCER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1998 F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for each of the years in the three-year period ended December 31, 1998 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
Schedule for the years ended December 31, 1998, 1997 and 1996
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 Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lancer Corporation
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, 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 LLP
San Antonio, Texas
March 23, 1999
F-2
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
-------------------- --------------------
Current assets:
Cash $ 1,118,848 $ 1,850,779
Receivables:
Trade accounts and notes 20,866,928 21,892,601
Other 565,254 1,109,425
-------------------- --------------------
21,432,182 23,002,026
Less allowance for doubtful accounts (326,000) (363,000)
-------------------- --------------------
Net receivables 21,106,182 22,639,026
-------------------- --------------------
Inventories 46,128,697 44,414,567
Prepaid expenses 559,472 178,869
Income taxes receivable 211,760 -
Deferred tax asset 117,241 220,849
-------------------- --------------------
Total current assets 69,242,200 69,304,090
-------------------- --------------------
Property, plant and equipment, at cost:
Land 1,259,938 1,259,938
Buildings 21,769,690 18,152,535
Machinery and equipment 19,699,040 17,732,999
Tools and dies 7,017,936 5,520,759
Leaseholds, office equipment and vehicles 8,148,299 6,714,519
Construction in progress 1,200,506 4,701,452
-------------------- --------------------
59,095,409 54,082,202
Less accumulated depreciation and amortization (24,596,773) (22,186,770)
-------------------- --------------------
Net property, plant and equipment 34,498,636 31,895,432
-------------------- --------------------
Long-term receivables ($370,569 and $358,890 due
from affiliates, respectively) 619,800 724,959
Long-term investments 3,317,131 3,274,390
Intangibles and other assets, at cost, less
accumulated amortization 5,162,200 5,470,117
-------------------- --------------------
$ 112,839,967 $ 110,668,988
==================== ====================
See accompanying notes to consolidated financial statements.
F-3
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
-------------------- --------------------
Current liabilities:
Accounts payable $ 8,854,438 $ 12,133,894
Current installments of long-term debt 4,794,400 4,444,400
Line of credit with bank 22,300,000 19,000,000
Deferred licensing and maintenance fees 466,327 538,554
Accrued expenses and other liabilities 5,528,425 6,538,003
Income taxes payable - 185,472
-------------------- --------------------
Total current liabilities 41,943,590 42,840,323
Deferred tax liability 2,938,628 1,736,405
Long-term debt, excluding current installments 17,568,150 21,565,350
Deferred licensing and maintenance fees 2,131,624 1,565,597
-------------------- --------------------
Total liabilities 64,581,992 67,707,675
-------------------- --------------------
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; 9,121,482 and 8,902,236
issued and outstanding in 1998 and 1997, respectively 91,215 89,022
Additional paid-in capital 11,912,993 11,607,504
Accumulated other comprehensive loss -
Cumulative translation adjustment (2,581,558) (1,727,719)
Retained earnings 38,835,325 32,992,506
-------------------- --------------------
Total shareholders' equity 48,257,975 42,961,313
-------------------- --------------------
$ 112,839,967 $ 110,668,988
==================== ====================
See accompanying notes to consolidated financial statements.
F-4
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------------------- -------------------- --------------------
Net sales $ 138,868,916 $ 119,366,587 $ 103,294,696
Cost of sales 104,862,935 87,937,146 78,207,012
-------------------- -------------------- --------------------
Gross profit 34,005,981 31,429,441 25,087,684
Selling, general and administrative expenses 19,910,772 20,439,019 14,512,086
-------------------- -------------------- --------------------
Operating income 14,095,209 10,990,422 10,575,598
-------------------- -------------------- --------------------
Other (income) expense:
Interest expense 3,971,746 2,814,744 1,587,510
Interest and other income, net 202,345 (947,657) (159,775)
-------------------- -------------------- --------------------
4,174,091 1,867,087 1,427,735
-------------------- -------------------- --------------------
Earnings before income taxes 9,921,118 9,123,335 9,147,863
-------------------- -------------------- --------------------
Income tax expense:
Current 2,772,468 2,809,302 3,373,117
Deferred 1,305,831 227,534 42,246
-------------------- -------------------- --------------------
4,078,299 3,036,836 3,415,363
-------------------- -------------------- --------------------
Net earnings $ 5,842,819 $ 6,086,499 $ 5,732,500
==================== ==================== ====================
Common Shares and Equivalents Outstanding:
Basic 9,059,539 8,863,263 8,722,396
Diluted 9,305,796 9,337,524 9,052,345
Earnings Per Share:
Basic $ 0.64 $ 0.69 $ 0.66
Diluted $ 0.63 $ 0.65 $ 0.63
See accompanying notes to consolidated financial statements.
F-5
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
Accumulated
Additional and Other Total
Common Paid-in Comprehensive Retained Shareholders'
Stock Capital Income (Loss) Earnings Equity
------------ ----------------- ---------------- ---------------- ----------------
Balance December 31, 1995 38,722 9,852,713 - 21,173,507 31,064,942
Comprehensive income:
Net earnings - - - 5,732,500 5,732,500
Cumulative translation adjustment 183,803 183,803
----------------
Total comprehensive income: - - - - 5,916,303
----------------
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
Comprehensive income:
Net earnings - - 6,086,499 6,086,499
Cumulative translation adjustment - - (1,911,522) - (1,911,522)
----------------
Total comprehensive income: 4,174,977
----------------
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
Comprehensive income:
Net earnings - - - 5,842,819 5,842,819
Cumulative translation adjustment - - (853,839) - (853,839)
----------------
Total comprehensive income: 4,988,980
----------------
Acquisition and retirement of 40,608
shares of common stock (406) (591,536) - - (591,942)
Exercise of 259,906 stock options 2,599 897,025 - - 899,624
------------ ----------------- ---------------- ---------------- ----------------
Balance December 31, 1998 $ 91,215 $ 11,912,993 $ (2,581,558) $ 38,835,325 $48,257,975
============ ================= ================ ================ ================
See accompanying notes to consolidated financial statements.
F-6
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------------- ----------------- -----------------
Cash flow from operating activities:
Net earnings $ 5,842,819 $ 6,086,499 $ 5,732,500
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,887,736 3,149,126 2,445,288
Deferred licensing and maintenance fees 493,800 286,316 1,190,504
Deferred income taxes 1,321,185 511,089 (22,267)
(Gain) loss on sale and disposal of assets 16,351 (203,113) (15,485)
(Earnings) loss on investments in affiliates (153,510) 12,104 -
Change in assets and liabilities, net of effects from
purchase of subsidiary:
Receivables 1,401,293 (1,663,822) (5,464,226)
Prepaid expenses (380,603) 82,490 (97,161)
Income taxes receivable (211,760) - -
Inventories (2,173,560) (12,764,438) (8,207,165)
Other assets (438,737) 423,411 (390,495)
Accounts payable (3,098,185) 4,657,659 1,589,097
Accrued expenses (930,776) 1,477,500 473,429
Income taxes payable (193,160) 237,346 (883,890)
Other long-term liabilities - 820,000 120,000
----------------- ----------------- -----------------
Net cash (used in) provided by operating activities 4,382,893 3,112,167 (3,529,871)
----------------- ----------------- -----------------
Cash flow from investing activities:
Proceeds from sale of assets 7,500 256,686 43,625
Capital expenditures (5,216,414) (9,922,830) (9,056,710)
Acquisition of subsidiary company - (3,768,375) -
Proceeds (purchase) of long-term investments 110,769 (250,000) (2,600,000)
----------------- ----------------- -----------------
Net cash used in investing activities (5,098,145) (13,684,519) (11,613,085)
----------------- ----------------- -----------------
Cash flow from financing activities:
Net borrowings under line of credit agreements 3,300,000 7,300,000 4,700,000
Proceeds from issuance of long-term debt - 7,050,000 17,950,000
Retirement of long-term debt (3,647,200) (2,338,124) (7,483,792)
Net proceeds from exercise of stock options 307,682 194,200 55,018
----------------- ----------------- -----------------
Net cash (used in) provided by financing activities (39,518) 12,206,076 15,221,226
----------------- ----------------- -----------------
Effect of exchange rate changes on cash 22,839 (799,370) 183,803
Net increase (decrease) in cash (731,931) 834,354 262,073
Cash at beginning of year 1,850,779 1,016,425 754,352
----------------- ----------------- -----------------
Cash at end of year $ 1,118,848 $ 1,850,779 $ 1,016,425
================= ================= =================
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 (Continued)
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.
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 5 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.
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.
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 investment is carried at cost at December 31, 1998, which approximates
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 246,257, 474,261 and
329,949 shares in 1998, 1997 and 1996, respectively. Options to purchase
approximately 56,500, 19,500 and 0 shares in 1998, 1997, and 1996, 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.
During 1997 and 1996, 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 Company's common stock have been restated to give effect to the
stock splits.
F-8
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Revenue is recognized in accordance with the following methods:
(a) At time of shipment for all products except for those sold under
agreements described in (b);
(b) As produced, for certain products manufactured and warehoused under
production and warehousing agreements with two customers, principally
The Coca-Cola Company, which is the Company's largest single customer.
The Company has entered into an agreement with its major customer to receive
partial reimbursement for research and development. The reimbursement is offset
against cost on a percentage of completion basis. In addition, the Company has
agreed to provide exclusive rights for use of certain tools to its major
customer. These tools are included in fixed assets and are depreciated over the
life of the asset. The corresponding license and maintenance fees are recorded
as deferred income and recognized over the life of the agreement which
approximates the life of the corresponding asset.
Income Taxes
Amounts in the financial statements related to income taxes are calculated using
the principles of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No.
109, 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. 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 $2,207,000, $1,467,000 and $913,000 for the years ended
December 31, 1998, 1997 and 1996, 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
shareholders' 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 No.123 are made in the notes to the
consolidated financial statements. (See note 4)
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and currency translation adjustment
and is presented in the consolidated statements of shareholders' equity and
comprehensive income. The Statement requires additional disclosures in the
consolidated financial statements but it does not affect the Company's financial
position or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
F-9
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment Disclosures
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. (See Note 12)
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 year's presentation.
2. Income Taxes
An analysis of income tax expense follows:
1998 Current Deferred Total
- -------------- ---------------- --------------- ----------------
Federal $ 1,843,946 $ 1,094,950 $ 2,938,896
State 52,262 - 52,262
Foreign 876,260 210,881 1,087,141
---------------- --------------- ----------------
Total $ 2,772,468 $ 1,305,831 $ 4,078,299
================ =============== ================
1997
- --------------
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
================ =============== ================
F-10
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
net deferred tax liability relate to the following:
1998 1997
---------------- ----------------
Deferred tax assets:
Inventories $ - $ 438,493
Compensation and benefits 357,352 620,670
Foreign net operating loss carryforward 765,857 171,810
Foreign creditable minimum taxes 295,000 -
All other 61,724 173,893
---------------- ----------------
Total gross deferred tax assets 1,479,933 1,541,546
Less valuation allowance (743,350) (136,680)
---------------- ----------------
Net deferred tax assets 736,583 1,404,866
---------------- ----------------
Deferred tax liabilities:
Accounts receivable 288,294 580,753
Inventories 184,742 -
Property, plant and equipment 2,053,094 1,527,792
DISC income 1,031,840 811,877
---------------- ----------------
Total deferred tax liability 3,557,970 2,920,422
---------------- ----------------
Net deferred tax liability $ 2,821,387 $ 1,515,556
================ ================
The net change in the total valuation allowance for the year ended December 31,
1998 was an increase of approximately $607,000. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. Based
on the expectation of future taxable income and that the deductible temporary
differences will offset existing taxable temporary differences, management
believes it is more likely than not the Company will realize the benefits, net
of valuation allowance, of these deductible differences at December 31, 1998.
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:
1998 1997 1996
---------------- --------------- ----------------
Computed "expected" tax expense $ 3,373,180 $ 3,101,934 $ 3,110,274
Increase (decrease) in taxes resulting from:
Effect of nondeductible foreign tax losses 451,970 89,847 40,794
Effect of nondeductible expenses 106,246 125,884 163,343
Tax credits - (355,690) -
State, net of Federal benefit 34,493 54,137 92,565
Effect of foreign tax rates 50,144 - -
Other, net 62,266 20,724 8,387
================ =============== ================
$ 4,078,299 $ 3,036,836 $ 3,415,363
================ =============== ================
In accordance with SFAS No. 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, SFAS No. 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 Company's effective tax rate.
Actual net income taxes paid were approximately $3,165,000, $1,920,000 and
$3,720,000 for 1998, 1997 and 1996, respectively.
F-11
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term Debt and Line of Credit with Banks
1998 1997
------------------ -------------------
$25,000,000 notes payable to banks, due in quarterly
installments plus interest based upon
prime and LIBOR (weighted average rate
of 7.11% at December 31, 1998) through
July 15, 2001; secured by the pledge of
a portion of the stock of foreign subsidiaries $ 19,173,750 $ 22,023,750
Note payable to seller of Brazil subsidiary, due
in annual installments plus interest based
on LIBOR (weighted average interest rate
of 5.78% at December 31, 1998) through
December 31, 2001 3,188,800 3,986,000
------------------ -------------------
22,362,550 26,009,750
Less current installments of long-term debt 4,794,400 4,444,400
================== ===================
$ 17,568,150 $ 21,565,350
================== ===================
The Company also has a $35.0 million revolving credit facility (the "Revolving
Facility") from two banks. Borrowings under the Revolving Facility are based on
certain percentages of accounts receivable and inventories. Amounts outstanding
under the revolving facility were $22.3 million at December 31, 1998 and $19.0
million at December 31, 1997. There was $4,232,000 available under the Revolving
Facility on December 31, 1998. Interest accrues at a rate based upon either
LIBOR or upon the Banks' prime rate. The weighted average interest rate was 7.1%
as of December 31, 1998. The Revolving Facility expires July 15, 2001.
Annual maturities on long-term debt outstanding at December 31, 1998 are as
follows:
1999 $ 4,794,400
2000 3,997,200
2001 13,570,950
=================
$ 22,362,550
=================
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. 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 Company's 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 or has obtained waivers for all of these financial ratios and
covenants.
Actual interest paid was approximately $3,973,000, $2,922,000 and $1,432,000 in
1998, 1997 and 1996, respectively.
F-12
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Employee Benefit Plans
Common Stock Options
The Company has stock option plans under which incentive and non-qualified
options may be granted. Options are granted at the market price per share at the
grant date. Options generally become exercisable in 20% increments beginning on
the grant date and expire five years from the grant date.
A summary of transactions for all options follows:
Stock Options Option Price
---------------- -------------------------
Outstanding at December 31, 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
Granted 44,000 9.63 - 13.63
Canceled (27,869) 4.93 - 7.39
Exercised (259,906) 2.37 - 7.39
---------------- -------------------------
Outstanding at December 31, 1998 554,863 $ 1.29 - $ 16.54
================ =========================
A summary of exercisable options follows:
Stock Options Option Price
---------------- -----------------------
1996 515,543 $ 1.29 - $ 10.00
================ =======================
1997 584,000 $ 1.29 - $ 16.54
================ =======================
1998 401,912 $ 1.29 - $ 16.54
================ =======================
The Company has adopted the disclosure-only provisions of 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:
1998 1997 1996
---------------- ---------------- ----------------
Net income-as reported $ 5,842,819 $ 6,086,499 $ 5,732,500
Net income-pro forma 5,579,315 5,886,407 5,592,553
Net earnings per basic share-as reported 0.64 0.69 0.66
Net earnings per basic share-pro forma 0.62 0.66 0.64
Net earnings per diluted share-as reported 0.63 0.65 0.63
Net earnings per diluted share-pro forma 0.60 0.63 0.62
Weighted-average fair value of
options, granted during the year 4.28 3.70 2.44
F-13
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option granted in 1998 and 1997 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
---------------- ---------------- ----------------
Expected life (years) 4 4 4
Interest rate 5.4% 5.5% 5.8%
Volatility 40.4% 35.6% 33.9%
Dividend yield None 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 provided for both reported, and
incurred but not reported, medical costs in the accompanying consolidated
balance sheets. 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.
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. In 1998, due to continuing declines in
the annual cost of claims, the Company reduced its reserve for the estimated
cost of incurred claims.
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. Based upon the
Company's 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 Company's 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, 1998, 1997 and 1996 include Company contributions to the plan of
approximately $559,000, $576,000 and $520,000, respectively.
The Company is also required to make contributions to a defined contribution
plan for the employees of Lancer Pacific Pty. Ltd. Contributions during 1998 and
1997 totaled approximately $47,000 and $32,000, respectively.
5. Leases
The Company rents a building, in which a portion of its manufacturing facilities
are located, under an operating lease from a partnership controlled by certain
shareholders. The month-to-month agreement provides for monthly rental payments
of $7,400, and the payment of real estate taxes, insurance and maintenance
expenses.
The Company rents an integrated computer system and other technology oriented
equipment under an operating lease which expires in September 2000.
F-14
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1998, future minimum lease payments required under all
noncancelable operating leases are as follows:
1999 1,997,144
2000 1,086,720
2001 90,720
================
Total minimum lease payments $ 3,174,584
================
Total rental expense was approximately $2,603,000 , $1,930,000 and $1,223,000 in
1998, 1997and 1996, 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 $749,000, $385,000 and $297,000 in 1998, 1997 and 1996,
respectively.
6. Long-term Receivables
Long-term receivables are interest bearing and include approximately $371,000
and $359,000 due from officers for the years ended December 31, 1998 and 1997,
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 Company's cash, trade receivables and trade payables
approximate market value.
Notes Receivable
The carrying amount of the Company's notes receivable approximates fair market
value 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 Company's 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-15
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 20
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
Company's 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 Company's 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.
Details of the businesses acquired in the purchase transactions are as follows
(in thousands):
1997
----------------
Fair value of assets acquired, including goodwill $ 9,737
Liabilities assumed (427)
================
Net assets acquired $ 9,310
================
Supplemental Balance Sheet and Income Statement Information
Inventory components are as follows (dollars in thousands):
1998 1997
------------- -------------
Raw materials and supplies $ 13,107 $ 12,617
Work in process 11,371 10,948
Finished goods 21,651 20,850
------------- -------------
$ 46,129 $ 44,415
============= =============
F-16
0
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued expenses consist of the following (in thousands):
As of December 31,
------------------------------------
1998 1997
---------------- ----------------
Payroll and related expenses $ 2,193 $ 2,676
Commissions 165 540
Health and workers' compensation 336 1,298
Property taxes 657 525
Interest 433 694
Other 1,744 805
================ ================
$ 5,528 $ 6,538
================ ================
10. Contingencies
The Company is a party to various lawsuits and claims generally incidental to
its business. The ultimate disposition of these matters is not expected to have
a significant adverse effect on the Company's financial position or results of
operations.
11. 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. The fourth quarter of 1998
included a $1.3 million operating loss and inventory adjustment in the Company's
Brazilian operations. The quarter also included a favorable adjustment of
$820,000 from the reduction of workers' compensation and medical reserves due to
favorable claims experience. The following table reflects the quarterly results
for 1998 and 1997 (in thousands except for per share data):
Three Months Ended
-------------------------------------------------------------------------
1998 March June September December
- ---- 31 30 30 31
-------------- --------------- -------------- ---------------
Net sales $ 36,305 $ 37,241 $ 36,582 $ 28,741
Gross profit 9,455 9,725 9,434 5,392
Net earnings (loss) 2,126 2,149 1,840 (272)
Earnings (loss) per share:
Basic $ 0.24 $ 0.24 $ 0.20 $ (0.03)
Diluted $ 0.23 $ 0.23 $ 0.20 $ (0.03)
Three Months Ended
-------------------------------------------------------------------------
1997 March June September December
- ---- 31 30 30 31
-------------- --------------- -------------- ---------------
Net sales $ 30,398 $ 32,295 $ 29,735 $ 26,939
Gross profit 7,665 8,069 7,612 8,083
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
F-17
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Segment and Geographic Information
The Company and its subsidiaries are engaged in the manufacture and distribution
of beverage dispensing equipment and related parts and components. The Company's
reportable segments are based on the geographic area of the final customer as
indicated by the following (dollars in thousands):
Domestic America Pacific Brazil Other Corporate Total
------------ ---------- ---------- ---------- --------------------- -------------
Year ended December 31, 1998
Total revenues $ 72,818 21,624 15,459 6,142 22,826 - $ 138,869
Depreciation and amortization 2,317 21 245 284 21 - 2,888
Operating income 16,290 3,282 2,199 (1,743) 4,426 (10,359) 14,095
Identifiable assets December 31, 1998 88,274 4,496 9,233 6,319 4,518 - 112,840
Capital expenditures 4,697 5 78 392 44 - 5,216
Year ended December 31, 1997
Total revenues 62,397 10,900 13,121 8,542 24,407 - 119,367
Depreciation and amortization 2,702 19 229 193 6 - 3,149
Operating income 14,756 662 1,097 311 3,166 (9,002) 10,990
Identifiable assets December 31, 1997 87,807 4,007 9,402 7,733 1,720 - 110,669
Capital expenditures 8,499 110 153 1,095 66 - 9,923
Year ended December 31, 1996
Total revenues 59,531 8,819 9,682 - 25,263 - 103,295
Depreciation and amortization 2,380 12 53 - - - 2,445
Operating income 12,008 1,242 377 - 4,551 (7,602) 10,576
Identifiable assets December 31, 1996 72,062 2,410 7,041 - 496 - 82,009
Capital expenditures 8,841 - 216 - - - 9,057
All intercompany revenues are eliminated in computing revenues and operating
income. The corporate component of operating income represents corporate general
and administrative expenses. Identifiable assets are those assets identified
with the operations in each geographic area.
Substantially all revenues result from the sales of products and services
associated with beverage dispensing. The 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 as follows (dollars in thousands):
1998 1997 1996
---------------- ---------------- ----------------
Soft drink, citrus and frozen
beverage dispensers $ 69,446 $ 60,778 $ 57,266
Post mix dispensing valves 18,702 16,694 16,802
Beer dispensing systems 8,768 9,920 1,297
Other 41,953 31,975 27,930
---------------- ---------------- ----------------
Total revenue $ 138,869 $ 119,367 $ 103,295
================ ================ ================
F-18
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following provides information regarding net sales to major customers,
domestically and internationally (in thousands):
1998 Percent of Net 1997 Percent of 1996 Percent of
Sales Net Sales Net Sales
------------- ------------- ------------- ------------ -------------- ------------
United States:
The Coca-Cola Company $ 31,816 23% $ 28,961 24% $ 32,325 32%
Other 41,002 29 33,436 28 27,206 25
------------- ------------- ------------- ------------ -------------- ------------
72,818 52 62,397 52 59,531 57
------------- ------------- ------------- ------------ -------------- ------------
Export:
The Coca-Cola Company 34 - 42 - 159 -
Panamerican Beverages, Inc. 14,861 11 7,212 6 2,666 3
Other 51,156 37 49,716 42 40,939 40
------------- ------------- ------------- ------------ -------------- ------------
66,051 48 56,970 48 43,764 43
------------- ------------- ------------- ------------ -------------- ------------
$138,869 100% $119,367 100% $ 103,295 100%
============= ============= ============= ============ ============== ============
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-19
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SCHEDULE II
RESERVE ACCOUNT
Description Balance at Additions Deductions from Balance at End
Beginning of Year Charged to Account of Year
Expense
- ------------------------------------- -------------------------------------------------------------------------
Allowance for doubtful accounts:
December 31, 1998 $ 363,000 $ 61,000 $ 98,000 $ 326,000
December 31, 1997 $ 185,000 $ 178,000 $ - $ 363,000
December 31, 1996 $ 85,000 $ 106,645 $ 6,645 $ 185,000
- --------------------------------------------------------------------------------
F-20