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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, 1999 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 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 10, 2000, held by non-affiliates of the registrant was
approximately $22,747,170 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
10, 2000 was 9,124,857.
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.
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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.
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.
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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, 1999, 1998 and 1997, accounted for approximately
48%, 50% and 51% 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,
1999, 1998 and 1997, sales of valves and related accessories accounted for
approximately 12%, 13%, and 14% 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
7%, 6% and 8% of total net sales in the years ended December 31, 1999, 1998 and
1997, 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 3%, 4%, and 4% of net sales in the years ended
December 31, 1999, 1998 and 1997.
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 29%, 26% and 23% of the
Company's total net sales for the years ended December 31, 1999, 1998 and 1997,
respectively.
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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, 1999, 1998 and 1997,
Company-sponsored research and development expenses were $2.7 million, $2.2
million, and $1.5 million, 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
$10.1 million, $13.0 million and $8.2 million at December 31, 1999, 1998 and
1997, respectively. It is anticipated that 1999 backlog orders will be filled in
2000.
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 25%, 23% and 24% of the Company's total net sales for the
years ended December 31, 1999, 1998 and 1997, respectively. None of the
Company's customers, including The Coca-Cola Company, are contractually
obligated to purchase minimum quantities of Lancer products. Consequently, The
Coca-Cola Company has the ability to adversely affect, directly or indirectly,
the volume and price of the products sold by the Company. Lancer does not expect
any significant volume or price reductions in its business with The Coca-Cola
Company. If they were to occur, however, such reductions would have a material
adverse impact on the Company's financial position and its results of
operations.
The Company and The Coca-Cola Company have entered into a master development
agreement which governs development of various products. Products that are
developed pursuant to this agreement may be sold only to The Coca-Cola Company
or its designated agents. The agreement generally provides that The Coca-Cola
Company will also retain the rights to any tooling it pays for and any resulting
patents. The Company is obligated under the development agreement to make its
manufacturing capabilities available for the benefit of The Coca-Cola Company as
they relate to, and are required for, selected projects. The Company supplies
engineering and research and development personnel, designs, develops and
creates prototypes, and obtains either an exclusive or a non-exclusive license
to manufacture and market the resulting products. Generally, the Company
warrants all such products for
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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, 1999, 1998 and 1997, the Company's sales to
customers outside the United States were approximately 35%, 48% and 48% 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,
Ecuador, 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
The Company organizes its business into the following geographical segments: the
North America region, the Latin America region, the Brazil region, the Europe
region, the Asia region, and the Pacific region. The North America region
consists of the United States and Canada. The Europe region includes the Middle
East and Africa. The Company's net sales and operating income (loss) for 1999,
1998 and 1997 follow (amounts in thousands):
North Latin
America America Pacific Brazil Other
-------- -------- -------- -------- --------
Net sales:
1999 $ 85,889 $ 11,225 $ 15,407 $ 2,065 $ 15,254
1998 72,372 21,624 15,459 6,142 22,826
1997 62,397 10,900 13,121 8,542 24,407
Operating income (loss):
1999 $ 8,451 $ 528 $ 1,535 $ (6,819) $ 1,868
1998 15,691 3,282 2,199 (1,743) 4,426
1997 14,677 662 1,097 311 3,166
Additional financial information about segments and geographic areas is set
forth in Note 14 to the Consolidated Financial Statements.
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.
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EMPLOYEES
As of December 31, 1999, the Company had 1,369 full-time employees of whom 74
were engaged in engineering and technical support, 1,106 in manufacturing, 76 in
marketing and sales and 113 in general management and administrative positions.
622 employees work in the United States, primarily at the Company's facilities
in San Antonio, Texas. 591 employees work at the Company's facility in Piedras
Negras, Mexico, 27 are employed by the Company's Brazilian subsidiary, and a
total of 98 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.
INTELLECTUAL PROPERTY
The Company presently owns 47 United States patents and numerous corresponding
foreign patents. It has 24 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 3 to 19 years.
Management does not believe the expiration of such patents will have a
significant adverse impact on continuing operations.
The Company seeks to improve its products and to obtain patents on these
improvements. As a result, the Company believes its patent portfolio will
expand, thereby lessening its reliance on any one particular patent. The Company
also believes its competitive position is enhanced by its existing patents and
that any future patents will continue to enhance this position. There can be no
assurance, however, that the Company's existing or future patents will continue
to provide a competitive advantage, nor can there be any assurance that the
Company's competitors will not produce non-infringing competing products.
In addition to Company-owned patents, Lancer has assigned patents to the
Company's customers, primarily The Coca-Cola Company. These patents are the
result of special development projects between Lancer and its customers. These
projects are typically paid for by the customer, with Lancer either retaining
licenses to manufacture the products covered by these patents for the customer,
or granting such licenses to the customer. The Company occasionally acquires
patent protection for products that are complimentary to products whose patents
are controlled by third parties.
The name "Lancer" is the federally registered trademark of the Company. It is
also registered in many foreign countries. In certain instances, the Company
grants a non-exclusive license to its distributors, primarily foreign, to use
the trademark subject to control by the Company.
ENVIRONMENTAL MATTERS
The Company's operations are subject to increasingly stringent federal, state,
local, and foreign laws and regulations relating to the protection of the
environment. In the United States, these environmental laws and regulations,
which are implemented by the Environmental Protection Agency and comparable
state agencies, govern the management of hazardous waste, the discharge of
pollutants into the air and into surface and ground water, and the manufacture
and disposal of certain substances.
There are no material environmental claims pending or, to the Company's
knowledge, threatened against the Company. The Company also believes that its
operations are in material compliance with current U.S., state, and foreign laws
and regulations. The Company estimates that any expenses incurred in maintaining
compliance with current laws and regulations will not have a material effect on
the Company's earnings or capital expenditures. The Company can provide no
assurance, however, that the current regulatory requirements will not change, or
that currently unforeseen environmental incidents will not occur, or that past
non-compliance with environmental laws will not be discovered on the Company's
properties.
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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 195,000 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; Quito, Ecuador; Moscow,
Russia; and Monterrey, Mexico. The Company leases approximately 482,000 square
feet of space throughout the world.
Total net rent expense for real estate was $1.5 million, $1.4 million and $1.4
million in 1999, 1998 and 1997, 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 7 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, 1999.
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.
Market Price For Common Stock
1999 1998
Quarter High Low High Low
- ------------------------ --------- --------- --------- ---------
First $ 12.94 $ 8.50 $ 13.81 $ 9.44
Second 9.00 6.88 17.25 13.50
Third 10.13 5.63 18.25 9.75
Fourth 6.00 4.00 14.00 8.88
On March 10, 2000, the closing price of the Company's common stock, as reported
by the ASE, was $4.56 per share. On that date, there were 198 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.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Operating Data:
Net sales $ 129,840 $ 138,423 $ 119,367 $ 103,295 $ 76,432
Gross profit 21,686 33,407 31,350 25,088 16,439
Selling, general and
administrative expenses 22,153 19,911 20,439 14,512 9,934
Write-down of Brazilian assets 5,956 -- -- -- --
Operating (loss) income (6,423) 13,496 10,911 10,576 6,505
Interest expense 3,464 3,899 2,815 1,588 981
Interest and other income, net (2,819) (324) (1,027) (160) (1,179)
(Loss) earnings before income
taxes (7,068) 9,921 9,123 9,148 6,703
Income tax (benefit) expense (2,501) 4,078 3,037 3,415 2,612
Net (loss) earnings (4,567) 5,843 6,086 5,733 4,091
Net (loss) earnings per share
Basic $ (0.50) $ 0.64 $ 0.69 $ 0.66 $ 0.47
Diluted $ (0.50) $ 0.63 $ 0.65 $ 0.63 $ 0.46
Weighted average shares outstanding
Basic 9,124 9,060 8,863 8,722 8,701
Diluted 9,124 9,306 9,338 9,052 8,985
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Total assets $ 103,054 $ 112,840 $ 110,669 $ 82,009 $ 57,944
Short-term debt 22,683 27,094 23,444 13,553 8,448
Long-term debt, less
current installments 13,922 17,568 21,565 15,459 5,398
Shareholders' equity 44,476 48,258 42,961 37,036 31,065
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.
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RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1999 and December 31, 1998
Net sales for the year ended December 31, 1999 decreased by $8.6 million, or 6%,
to $129.8 million from $138.4 million in 1998. Sales in the Latin America region
fell $10.4 million, or 48%, because of currency devaluations and weak economic
conditions throughout the region. Brazilian sales declined $4.1 million, or 66%,
due largely to weak local economic conditions and the effects of a devaluation
of the Brazilian currency in early 1999. Asian sales were also weak in 1999.
Sales in the United States rose $13.5 million, or 18.7%. Much of the growth in
the domestic market came from strong sales of frozen beverage dispensing
equipment, which benefited from a large order from a single customer. Most of
the order was filled in 1999, and the Company believes it likely that sales of
frozen beverage equipment will decline in 2000.
Sales to customers outside the United States were 35% of net sales in 1999, and
48% of net sales in 1998.
Gross margin for the year ended December 31, 1999 was 16.7%, down from 24.1 % in
1998. Reduced production levels at plants in the United States and Mexico
negatively affected overhead absorption rates during the year. Gross margin was
further reduced by changes in the sales mix, particularly by higher sales of
frozen beverage dispensers. The Company buys the dispensers from a joint venture
of which the Company owns 50%. The Company resells the dispensers, and earns a
distribution profit, which is reflected in gross margin. The Company's 50% share
of the manufacturing profit, after elimination of profit in ending inventory, is
included in other income. Finally, the Company made a provision of approximately
$0.8 million in 1999 for certain types of equipment whose marketability has been
impaired.
Selling, general and administrative expenses were $22.2 million in 1999,
compared to $19.9 million in 1998. Product development costs rose, along with
costs associated with the newly acquired Allbar operation and the new Lancer Ice
Link subsidiary. The Company acquired Allbar in the second quarter of 1999, and
formed Lancer Ice Link in the third quarter of 1999.
In 1999, the Company expensed $6.0 million relating to the impairment of
substantially all of the Company's investment in its Brazilian subsidiary. The
Company has substantially reduced its Brazilian operations in an effort to limit
continued losses caused by the depressed business environment in much of Latin
America.
Interest expense was $3.5 million in 1999, down from $3.9 million in the prior
year, reflecting lower average borrowings. The Company reported income from its
frozen beverage joint venture of $1.7 million in 1999, versus $0.2 million in
1998. Also during 1999, the Company recorded a gain of $0.9 million on the sale
of its investment in Victory Refrigeration, a manufacturer of refrigerated
coolers. The minority interest benefit of $0.1 million stems from the Company's
majority ownership position in Lancer Ice Link, LLC, and represents the minority
partner's share of the subsidiary's losses. Lancer Ice Link's financial
statements are consolidated with those of the Company. The Company recorded a
tax benefit of $2.5 million in 1999 because of the pretax loss of $7.1 million.
The provision for income taxes was $4.1 million in 1998. The effective tax rate
fell in 1999 from the rate in 1998 because of nondeductible losses incurred by
foreign operations in 1998, which were partially deducted in 1999. The net loss
for 1999 was $4.6 million, compared to net income of $5.8 million last year.
Comparison of the Years Ended December 31, 1998 and December 31, 1997
Net sales for the year ended December 31, 1998 increased by $19.1 million, or
16%, to $138.4 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 $10.0 million, or 16%, 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 24.1%, down from 26.3% in
the prior year. Gross margin fell in 1998 primarily because of poor margins at
the Company's Brazilian subsidiary.
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Selling, general and administrative expenses for the year ended December 31,
1998 were $19.9 million, compared to $20.4 million 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.
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 $13.1 million of net cash from operating activities in 1999,
compared to $4.4 million in 1998. Cash from operations improved in 1999
primarily because of a $9.4 million reduction in inventories and a $3.0 million
decline in accounts receivable during the year.
Capital spending was $5.0 million during the year. The Company's investment in
production tooling and equipment accounted for most of the spending. The Company
expects capital spending in 2000 to decline slightly from 1999 levels.
During the second quarter of 1999, the Company acquired certain assets of an
Australian manufacturer for approximately $1.7 million. The Company financed
most of the purchase with bank debt denominated in Australian dollars, and the
remainder with cash on hand.
Net cash from operating activities in excess of capital spending requirements
was used to reduce bank borrowings. 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.
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
9
11
DISC to a FSC in 2000. 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,
1999, it would have resulted in a reduction of approximately $0.8 million in the
Company's net earnings.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. The Company plans to adopt SFAS
No. 133 effective January 1, 2001. The Company anticipates having certain
derivative instruments, principally interest rate swap agreements, at the time
of adoption. 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.
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 might 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.
Throughout 1998 and 1999, the Company assessed its Y2K readiness and took
actions to renovate or replace non-compliant systems. Additionally, the Company
communicated with third parties, particularly suppliers, to assess and reduce
external risks to the Company. The Company spent approximately $0.2 million in
this effort.
As of the date of the filing of this Form 10-K, the Company has not encountered
any material Y2K-related problems.
10
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 31, 1999, all of the Company's $36.6 million 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 $15.0 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, 1999, if interest rates were to change by one percentage point,
the Company's annual pretax income would be impacted by approximately $0.2
million.
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, 1999.
In 1999, $5.3 million of the Company's operating loss was incurred 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 $0.8
million, 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.
11
13
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 18, 2000 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 63 Chairman of the Board
George F. Schroeder 60 President, Chief Executive Officer and Director
Mark L. Freitas 39 Corporate Controller
Walter J. Biegler 58 Director
Jean M. Braley 70 Director
Charles K. Clymer 63 Director
Olivia F. Kirtley 49 Director
Michael E. Smith 58 Director
E.T. (Toby) Summers, III 52 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. Mark L. Freitas joined Lancer in 1998 and serves as Corporate Controller.
Before joining Lancer, Mr. Freitas worked for three years with Bausch & Lomb,
Inc., as a Senior Corporate Auditor and Cost Manager, and ten years in public
accounting with various firms.
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."
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.
Ms. Olivia F. Kirtley has served as a director of the Company since 1999. She is
immediate Past Chair of the American Institute of Certified Public Accountants
(AICPA), the national professional organization for over 350,000 CPAs in
business and industry, public practice, government and education. She is
currently Vice President of Vermont American Corporation, a leading global
manufacturer and marketer of power tool accessories, headquartered in
Louisville, Kentucky. Ms. Kirtley has been with Vermont American over 20 years
and also held
12
14
the positions of Chief Financial Officer, Treasurer and Director of Tax. Ms.
Kirtley has served on the Board of Directors of Res Care, Inc. since 1998.
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.
Mr. E.T. (Toby) Summers, III has served as a director of the Company since 1999.
Mr. Summers is a private investor and principal in The Harvest Group, Inc., a
private equity investment firm. Mr. Summers served in a variety of leadership
positions with Coca-Cola Bottling Company of the Southwest from 1973 through
1998. Most recently he held the position of President and Chief Operating
Officer from 1988 through 1998 until the company's merger with Coca-Cola
Enterprises. Mr. Summers also served as Chairman of the Board of Directors of
Western Container Corporation, a manufacturer of plastic bottles for the
beverage industry, and as a member of the Board of Governors of the National
Coca-Cola Bottlers' Association from 1989-1998.
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. During 1999, the Board of Directors of the Company maintained an
Audit Committee, a Compensation Committee and a Stock Option Committee. The
members of the Audit Committee were Walter J. Biegler, Charles K. Clymer Michael
E. Smith, and E.T. Summers, III. The Audit Committee met three times in 1999.
The members of the Compensation Committee were Walter J. Biegler, Charles K.
Clymer and Michael E. Smith. No member of the Compensation Committee was an
executive officer of the Company. The Compensation Committee met once in 1999.
The members of the Stock Option Committee were Walter A. Biegler, Charles K.
Clymer and Michael E. Smith. The Stock Option Committee met four times in 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation and Certain
Transactions" in the Company's proxy statement for its May 18, 2000 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 18, 2000
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 18, 2000 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:
13
15
The financial statements filed as a part of this report are listed in
the "Index to Consolidated Financial Statements and Schedule" referenced
in Item 8.
(2) Financial statement schedule:
The financial statement schedule filed as a part of this report is
listed in the "Index to Consolidated Financial Statements and Schedule"
referenced in Item 8.
(3) Exhibits:
3.1* Registrants Articles of Incorporation and amendments thereto
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate, $0.01 par value, of
Registrant
10.1* Lancer Corporation Profit Sharing Plan
10.2* 1992 Non-Statutory Stock Option Plan
10.3* 1987 Incentive Stock Option Plan
10.4* Master Development Agreement, dated January 12, 1984, between
Lancer Corporation and The Coca-Cola Company
10.5* Net Lease Agreement, dated July 1, 1974, between Lancer
Corporation and Lancer Properties dated as of June 3, 1977
10.13* 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
10.27++ 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.
10.38### Third Amendment to Credit Agreement dated July 15, 1998
between Lancer Corporation and The Frost National Bank and
NationsBank, N.A.
10.39** Fourth Amendment to Credit Agreement dated March 15, 1999
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
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
* 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.
14
16
+ 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.
** This exhibit is incorporated by reference to the Exhibit to the
Registrant's Form 10-Q for the quarter ended June 30, 1999.
(b) Reports on Form 8-K: None
15
17
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 24, 2000
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 24, 2000
- -------------------------- ------------------------------- -------------------
Alfred A. Schroeder Date
/s/ GEORGE F. SCHROEDER President and Director March 24, 2000
- -------------------------- ------------------------------- -------------------
George F. Schroeder (principal executive officer) Date
/s/ WALTER J. BIEGLER Director March 24, 2000
- -------------------------- ------------------------------- -------------------
Walter J. Biegler Date
/s/ JEAN M. BRALEY Director March 24, 2000
- -------------------------- ------------------------------- -------------------
Jean M. Braley Date
/s/ CHARLES K. CLYMER Director March 24, 2000
- -------------------------- ------------------------------- -------------------
Charles K. Clymer Date
/s/ OLIVIA F. KIRTLEY Director March 24, 2000
- -------------------------- ------------------------------- -------------------
Olivia F. Kirtley Date
/s/ MICHAEL E. SMITH Director March 24, 2000
- -------------------------- ------------------------------- -------------------
Michael E. Smith Date
/s/ E. T. SUMMERS, III Director March 24, 2000
- -------------------------- ------------------------------- -------------------
E. T. Summers, III Date
16
18
LANCER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
LANCER CORPORATION AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the years in the three-year period
ended December 31, 1999 F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for each of the years in the three-year period ended December 31, 1999 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999 F-7
Notes to Consolidated Financial Statements F-8
Schedule for the years ended December 31, 1999, 1998 and 1997
II-Reserve account F-22
LANCER FBD PARTNERSHIP, LTD.
Report of Independent Public Accountants F-23
Balance Sheet as of December 31, 1999 F-24
Statement of Income for the year ended December 31, 1999 F-26
Statement of Partner's Capital for the year ended December 31, 1999 F-27
Statement of Cash Flows for the year ended December 31, 1999 F-28
Notes to Financial Statements F-29
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
19
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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, 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
February 29, 2000
F-2
20
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Amounts in thousands, except share data)
ASSETS
1999 1998
---------- ----------
Current assets:
Cash $ 1,227 $ 1,119
Receivables:
Trade accounts and notes 17,483 20,867
Other 537 565
---------- ----------
18,020 21,432
Less allowance for doubtful accounts (414) (326)
---------- ----------
Net receivables 17,606 21,106
---------- ----------
Inventories 36,166 46,129
Prepaid expenses 465 559
Income taxes receivable 3,505 212
Deferred tax asset 134 117
---------- ----------
Total current assets 59,103 69,242
---------- ----------
Property, plant and equipment, at cost:
Land 1,260 1,260
Buildings 21,880 21,770
Machinery and equipment 20,531 19,699
Tools and dies 9,025 7,018
Leaseholds, office equipment and vehicles 8,941 8,148
Assets in progress 1,821 1,201
---------- ----------
63,458 59,096
Less accumulated depreciation and amortization (27,795) (24,597)
---------- ----------
Net property, plant and equipment 35,663 34,499
---------- ----------
Long-term receivables ($746 and $371 due
from officers, respectively) 1,029 620
Long-term investments 3,053 3,317
Intangibles and other assets, at cost, less
accumulated amortization 4,206 5,162
---------- ----------
$ 103,054 $ 112,840
========== ==========
See accompanying notes to consolidated financial statements.
F-3
21
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1999 and 1998
(Amounts in thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
--------- ---------
Current liabilities:
Accounts payable $ 9,119 $ 8,855
Current installments of long-term debt 5,083 4,794
Line of credit with bank 17,600 22,300
Deferred licensing and maintenance fees 619 466
Accrued expenses and other liabilities 4,091 5,528
--------- ---------
Total current liabilities 36,512 41,943
Deferred tax liability 3,102 2,939
Long-term debt, excluding current installments 13,922 17,568
Deferred licensing and maintenance fees 4,500 2,132
--------- ---------
Total liabilities 58,036 64,582
--------- ---------
Commitments and contingencies -- --
Minority interest 542 --
Shareholders' equity:
Preferred stock, without par value:
5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value:
50,000,000 shares authorized; 9,124,857 and 9,121,482
issued and outstanding in 1999 and 1998, respectively 91 91
Additional paid-in capital 11,933 11,913
Accumulated other comprehensive loss (1,816) (2,581)
Retained earnings 34,268 38,835
--------- ---------
Total shareholders' equity 44,476 48,258
--------- ---------
$ 103,054 $ 112,840
========= =========
See accompanying notes to consolidated financial statements.
F-4
22
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands, except share data)
1999 1998 1997
----------- ----------- -----------
Net sales $ 129,840 $ 138,423 $ 119,367
Cost of sales 108,154 105,016 88,017
----------- ----------- -----------
Gross profit 21,686 33,407 31,350
Selling, general and administrative expenses 22,153 19,911 20,439
Write-down of Brazilian assets 5,956 -- --
----------- ----------- -----------
Operating (loss) income (6,423) 13,496 10,911
----------- ----------- -----------
Other (income) expense:
Interest expense 3,464 3,899 2,815
Income from joint venture (1,677) (154) (54)
Gain on sale of investment (895) -- --
Minority interest (124) -- --
Interest and other income, net (123) (170) (973)
----------- ----------- -----------
645 3,575 1,788
----------- ----------- -----------
(Loss) earnings before income taxes (7,068) 9,921 9,123
----------- ----------- -----------
Income tax (benefit) expense:
Current (2,675) 2,772 2,809
Deferred 174 1,306 228
----------- ----------- -----------
(2,501) 4,078 3,037
----------- ----------- -----------
Net (loss) earnings $ (4,567) $ 5,843 $ 6,086
=========== =========== ===========
Common Shares and Equivalents Outstanding:
Basic 9,123,527 9,059,539 8,863,263
Diluted 9,123,527 9,305,796 9,337,524
(Loss) Earnings Per Share:
Basic $ (0.50) $ 0.64 $ 0.69
Diluted $ (0.50) $ 0.63 $ 0.65
See accompanying notes to consolidated financial statements.
F-5
23
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands, except share data)
Accumulated
Additional and Other Total
Common Paid-in Comprehensive Retained Shareholders'
Stock Capital Income (Loss) Earnings Equity
-------- ---------- ------------- ----------- -------------
Balance December 31, 1996 $ 58 $ 9,888 $ 184 $ 26,906 $ 37,036
Comprehensive income:
Net earnings -- -- -- 6,086 6,086
Cumulative translation adjustment -- -- (1,912) -- (1,912)
---------
Total comprehensive income: -- -- -- -- 4,174
---------
Exercise of 34,387 stock options -- 194 -- -- 194
Stock issued for acquisition
of subsidiary 1 1,555 -- -- 1,556
Three-for-two stock dividend 30 (30) -- -- --
------ --------- --------- --------- ---------
Balance December 31, 1997
89 11,607 (1,728) 32,992 42,960
Comprehensive income:
Net earnings -- -- -- 5,843 5,843
Cumulative translation adjustment -- -- (853) -- (853)
---------
Total comprehensive income: 4,990
---------
Acquisition and retirement of 40,608
share of common stock -- (591) -- -- (591)
Exercise of 259,906 stock options 2 897 -- 899
------ --------- --------- --------- ---------
Balance December 31, 1998 91 11,913 (2,581) 38,835 48,258
Comprehensive loss:
Net loss -- -- -- (4,567) (4,567)
Cumulative translation adjustment -- -- 829 -- 829
Unrealized loss on investment,
net of tax -- -- (64) -- (64)
---------
Total comprehensive loss: (3,802)
---------
Exercise of 3,375 stock options -- 20 -- -- 20
------ --------- --------- --------- ---------
Balance December 31, 1999 $ 91 $ 11,933 $ (1,816) $ 34,268 $ 44,476
====== ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
24
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
-------- -------- --------
Cash flow from operating activities:
Net (loss) earnings $ (4,567) $ 5,843 $ 6,086
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,990 2,888 3,149
Deferred licensing and maintenance fees 2,521 494 286
Deferred income taxes 174 1,321 511
Loss (gain) on sale and disposal of assets 22 16 (203)
Gain on sale of long-term investments (895) -- --
Minority interest (124) -- --
Earnings from joint venture (1,677) (154) (54)
Impairment of Brazilian assets 5,956 -- --
Change in assets and liabilities, net of effects
from purchase of subsidiary:
Receivables 3,041 1,401 (1,663)
Prepaid expenses 95 (381) 82
Income taxes receivable (3,300) (212) --
Inventories 9,431 (2,174) (12,764)
Other assets (567) (439) 423
Accounts payable 303 (3,098) 4,658
Accrued expenses (1,298) (930) 1,478
Income taxes payable (12) (193) 237
Other long-term liabilities -- -- 820
-------- -------- --------
Net cash provided by operating activities 13,093 4,382 3,046
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of assets 16 7 257
Acquisition of property, plant and equipment (4,957) (5,216) (9,923)
Acquisition of subsidiary company (1,719) -- (3,768)
Proceeds (purchase) of long-term investments and affiliates 2,738 111 (184)
-------- -------- --------
Net cash used in investing activities (3,922) (5,098) (13,618)
-------- -------- --------
Cash flow from financing activities:
Net (repayments) borrowings under line of credit agreements (4,700) 3,300 7,300
Proceeds from issuance of long-term debt 1,457 -- 7,050
Retirement of long-term debt (4,827) (3,647) (2,338)
Net proceeds from exercise of stock options 20 308 194
-------- -------- --------
Net cash (used in) provided by financing activities (8,050) (39) 12,206
-------- -------- --------
Effect of exchange rate changes on cash (1,013) 23 (799)
Net increase (decrease) in cash 108 (732) 835
Cash at beginning of year 1,119 1,851 1,016
-------- -------- --------
Cash at end of year $ 1,227 $ 1,119 $ 1,851
======== ======== ========
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
25
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company designs, engineers, manufactures and markets fountain soft drink and
other beverage dispensing systems and related equipment for use in the food
service and beverage industry. The consolidated financial statements include the
accounts of Lancer Corporation (the "Company") and its majority-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. See note 2 for discussion of impairment of Brazilian
assets.
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. See note 2 for discussion of
impairment of Brazilian assets.
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. (See note 3)
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, accounted for as an available-for-sale security, is recorded at
fair value with net unrealized gains and losses reported, net of tax, in other
comprehensive income. The fair value is determined by quoted market prices.
Net Earnings per Share
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 and 474,261 shares in 1998 and 1997, respectively. Basic
and diluted earnings per share were the same for 1999. Options to purchase
approximately 110,750, 56,500 and 19,500 shares in 1999, 1998, and 1997,
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.
F-8
26
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1997, the Company declared a three-for-two stock split 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 split.
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 certain customers.
The Company has entered into an agreement with its major customer to receive
partial reimbursement for design 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 Statement of Financial Accounting Standards ("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 $2.7 million, $2.2 million and $1.5 million for the years
ended December 31, 1999, 1998 and 1997, 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 6)
F-9
27
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 (loss) income consists of net (loss) earnings, currency
translation adjustment, and unrealized loss on investment 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.
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 14)
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.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("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. The
Company plans to adopt SFAS No. 133 effective January 1, 2001. The Company
anticipates having certain derivative instruments, principally interest rate
swap agreements, at the time of adoption. 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.
2. IMPAIRMENT OF BRAZILIAN ASSETS
As a result of the continuing poor business conditions in much of Latin America,
the Company has substantially reduced its manufacturing operations in Brazil.
Accordingly, the Company's investment in Brazil has been written-down to net
realizable value. The write-down resulted in a pre-tax charge of approximately
$6.0 million during 1999.
F-10
28
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENT IN JOINT VENTURE
Summarized financial data for investment in joint venture is as follows (amounts
in thousands):
1999 1998 1997
---------- ---------- ----------
Condensed Statement of Operations
Net Sales $ 22,991 $ 7,512 $ 6,814
Gross profit 5,480 1,557 995
Net earnings 3,826 445 245
Condensed Balance Sheet
Current assets $ 3,529 $ 2,896
Non-current assets 3,497 3,586
---------- ----------
$ 7,026 $ 6,482
========== ==========
Current liabilities $ 1,140 $ 1,194
Non-current liabilities 16 22
Partners' capital 5,870 5,266
---------- ----------
$ 7,026 $ 6,482
========== ==========
The Company's 50% share of net earnings, after elimination of profit in ending
inventory, is included in other income.
4. INCOME TAXES
An analysis of income tax expense follows (amounts in thousands):
Current Deferred Total
--------- --------- ---------
1999
Federal $ (3,563) $ 158 $ (3,405)
State 24 -- 24
Foreign 864 16 880
--------- --------- ---------
Total $ (2,675) $ 174 $ (2,501)
========= ========= =========
1998
Federal $ 1,844 $ 1,095 $ 2,939
State 52 -- 52
Foreign 876 211 1,087
--------- --------- ---------
Total $ 2,772 $ 1,306 $ 4,078
========= ========= =========
1997
Federal $ 2,367 $ 209 $ 2,576
State 62 -- 62
Foreign 380 19 399
--------- --------- ---------
Total $ 2,809 $ 228 $ 3,037
========= ========= =========
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 (amounts in thousands):
F-11
29
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1999 1998
---------- ----------
Deferred tax assets:
Compensation and benefits $ 308 264
Foreign net operating loss carryforward -- 766
Foreign creditable minimum taxes 441 295
Foreign deferred assets 101 117
All other 54 (58)
---------- ----------
Total gross deferred tax assets 904 1,384
Less valuation allowance -- (743)
---------- ----------
Net deferred tax assets 904 641
---------- ----------
Deferred tax liabilities:
Accounts receivable 85 161
Inventories 35 127
Property, plant and equipment 2,603 2,025
DISC income 1,149 1,149
---------- ----------
Total deferred tax liability 3,872 3,462
---------- ----------
Net deferred tax liability $ 2,968 $ 2,821
========== ==========
The Company has elected to treat the Brazilian subsidiary as a partnership for
U.S. tax purposes for the year ended December 31, 1999. This election has
enabled the Company to recognize for U.S. income tax purposes a loss on its
investment in the Brazilian operation, resulting in a net decrease in the total
valuation allowance for the year ended December 31, 1999 of approximately $0.7
million. 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, 1999.
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 (amounts in thousands):
1999 1998 1997
---------- ---------- ----------
Computed "expected" tax (benefit) expense $ (2,403) $ 3,373 $ 3,102
Increase (decrease) in taxes resulting from:
Effect of foreign tax losses (256) 452 90
Effect of nondeductible expenses 167 106 126
Tax credits -- -- (356)
State, net of Federal benefit 16 35 54
Effect of foreign tax rates 68 50 --
Other, net (93) 62 21
---------- ---------- ----------
$ (2,501) $ 4,078 $ 3,037
========== ========== ==========
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 $2.4 million. 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 (refunded) paid were approximately ($0.3) million, $3.2
million and $1.9 million for 1999, 1998 and 1997, respectively.
F-12
30
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT AND LINE OF CREDIT WITH BANKS
1999 1998
------- -------
(Amounts in thousands)
$25,000 notes payable to banks, due in quarterly installments plus interest
based upon prime and LIBOR (weighted average rate of 8.02% at December 31,
1999) through July 15, 2001; secured by the pledge of
a portion of the stock of foreign subsidiaries $15,974 $19,173
Note payable to seller of Brazil subsidiary, due in annual installments plus
interest based on LIBOR (weighted average interest rate of 6.34% at
December 31, 1999) through
December 31, 2001 2,392 3,189
Notes payable to bank, denominated in Australian dollars, due in monthly
installments plus interest based on the Bank Bill Swap Reference Rate
(weighted average interest rate of 7.81% at December 31, 1999) through
September 3, 2002 639 --
------- -------
19,005 22,362
Less current installments of long-term debt 5,083 4,794
------- -------
$13,922 $17,568
======= =======
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 $17.6 million at December 31, 1999 and $22.3
million at December 31, 1998. There was $4.1 million available under the
Revolving Facility on December 31, 1999. Interest accrues at a rate based upon
either LIBOR or upon the Banks' prime rate. The weighted average interest rate
was 8.35% as of December 31, 1999. The Revolving Facility expires July 15, 2001.
The Company has a $1.7 million credit facility with an Australian bank.
Availability under the credit facility is based on the original principal
balance less scheduled monthly payments. There was $1.7 million available under
the credit facility at December 31, 1999.
Annual maturities on long-term debt outstanding at December 31, 1999 are as
follows (amounts in thousands):
2000 $ 5,083
2001 13,860
2002 62
----------
$ 19,005
==========
F-13
31
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $15.0 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 as of December 31, 1999.
Actual interest paid was approximately $3.6 million, $4.0 million and $2.9
million in 1999, 1998 and 1997, respectively.
6. 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, 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
Granted 82,000 7.81 - 10.06
Canceled (90,500) 7.22 - 13.83
Exercised (3,375) 4.96 - 7.22
---------- ------------------
Outstanding at December 31, 1999 542,988 $ 1.29 - $ 16.54
========== ==================
F-14
32
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of exercisable options follows:
Number of Weighted
Range of Exercisable Avg. of
Prices Options Exercise Price
- ----------------------------------------------------------------
1997
$1.0 to 5.0 470,321 $ 1.94
$5.1 to 10.0 103,579 7.29
$10.0 to 17.0 10,100 14.34
================================================================
1998
$1.0 to 5.0 258,187 $ 1.33
$5.1 to 10.0 120,325 7.49
$10.0 to 17.0 23,400 14.23
================================================================
1999
$1.0 to 5.0 256,162 $ 1.30
$5.1 to 10.0 158,800 7.61
$10.0 to 17.0 24,400 14.94
================================================================
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 (loss ) earnings and net (loss) earnings per
share would have been adjusted to the pro forma amounts indicated in the table
below (amounts in thousands, except share data):
1999 1998 1997
---------- --------- ---------
Net (loss) earnings-as reported $ (4,567) $ 5,843 $ 6,086
Net (loss) earnings-pro forma (4,893) 5,579 5,886
Net (loss) earnings per basic share-as reported (0.50) 0.64 0.69
Net (loss) earnings per basic share-pro forma (0.54) 0.62 0.66
Net (loss) earnings per diluted share-as reported (0.50) 0.63 0.65
Net (loss) earnings per diluted share-pro forma (0.54) 0.60 0.63
Weighted-average fair value of
options, granted during the year 3.61 4.28 3.70
The fair value of each option granted in 1999, 1998 and 1997 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
1999 1998 1997
----- ----- -----
Expected life (years) 4 4 4
Interest rate 6.5% 5.4% 5.5%
Volatility 42.0% 40.4% 35.6%
Dividend yield None None None
F-15
33
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 50% of the first 6% of the salary
contributed to the plan through salary deferral. 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, 1999, 1998 and 1997 include Company contributions to the plan
of approximately $0.4 million, $0.6 million and $0.6 million, respectively.
The Company is also required to make contributions to a defined contribution
plan for the employees of Lancer Pacific Pty. Ltd. Contributions during 1999,
1998 and 1997 totaled approximately $80,000, $47,000 and $32,000, respectively.
7. 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.
At December 31, 1999, future minimum lease payments required under all
noncancelable operating leases are as follows (amount in thousands):
2000 2,045
2001 656
2002 535
2003 268
2004 179
--------
Total minimum lease payments $ 3,683
========
F-16
34
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total rental expense was approximately $2.8 million, $2.6 million and $1.9
million in 1999, 1998 and 1997, respectively.
The Company is party to agreements to provide warehousing space and services for
certain of its customers. Rental income related to the warehousing agreements
totaled approximately $1.1 million, $0.8 million and $0.4 million in 1999, 1998
and 1997, respectively.
8. LONG-TERM RECEIVABLES
Long-term receivables are interest bearing and include approximately $0.7
million and $0.4 million due from officers as of December 31, 1999 and 1998,
respectively.
9. 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.
Long-term Receivables
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.
Long-term Investments
Long-term investments, excluding investment in joint venture, 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. The fair market value of interest rate
swap agreements were approximately $0.2 million as of December 31, 1999.
10. ACQUISITIONS
During the second quarter of 1999, the Company acquired certain assets and
liabilities of Allbar Manufacturing, an Australian company, for approximately
$1.7 million. The Company funded the purchase with $1.5 million of bank
borrowings denominated in Australian dollars, and with cash on hand. The
acquisition has been accounted for by the purchase method, and accordingly, the
results of operations of Allbar 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 identifiable assets acquired $0.5 million has
been recorded as goodwill, and is being amortized over 20 years. The operating
results of the Company would not have been significantly different had the
acquisition occurred at the beginning of 1999.
During the third quarter of 1999, the Company formed Lancer Ice Link, LLC.
Lancer Ice Link is a joint venture formed to develop and commercialize ice
transport technology. The Company's partner contributed intellectual
F-17
35
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
property rights in return for a 40% ownership interest. The Company owns the
remaining 60%, and has agreed to fund certain development costs incurred by the
joint venture. Lancer Ice Link's financial statements are consolidated with
those of the Company. 40% of the losses of Lancer Ice Link have been recorded as
income from minority interest in the Company's Consolidated Statements of
Operations.
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 was 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. During 1999, the Company wrote-off the goodwill
associated with the Brazilian acquisition because of the poor business
conditions in Brazil.
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 $0.5 million has been recorded
as goodwill and is being amortized over 30 years.
Details of the businesses acquired in the purchase transactions are as follows
(amounts in thousands):
1997
----------
Fair value of assets acquired, including goodwill $ 9,737
Liabilities assumed (427)
----------
Net assets acquired $ 9,310
==========
11. SUPPLEMENTAL BALANCE SHEET AND INCOME STATEMENT INFORMATION
Inventory components are as follows (amounts in thousands):
1999 1998
-------- --------
Finished goods $ 14,662 $ 21,651
Work in process 10,828 11,371
Raw material and supplies 10,676 13,107
-------- --------
$ 36,166 $ 46,129
======== ========
Accrued expenses consist of the following (amounts in thousands):
As of December 31,
---------------------
1999 1998
-------- --------
Payroll and related expenses $ 1,706 $ 2,193
Commissions 170 165
Health and workers' compensation 481 336
Property taxes 330 657
Interest 344 433
Other 1,060 1,744
-------- --------
$ 4,091 $ 5,528
======== ========
F-18
36
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. 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.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the third quarter of 1999, the Company wrote-off approximately $6.0 million
of its investment in Brazil as a result of continuing poor economic conditions
in that country. The fourth quarter of 1999 included an unfavorable inventory
adjustment of $0.8 million resulting from a physical inventory count. The fourth
quarter of 1998 included a $1.3 million operating loss and inventory adjustment
in the Company's Brazilian operations. The fourth quarter of 1998 also included
a favorable adjustment of $0.8 million from the reduction of workers'
compensation and medical reserves due to favorable claims experience. The
following table reflects the quarterly results for 1999 and 1998 (in thousands
except for share data):
Three Months Ended
----------------------------------------------------
1999 March June September December
- ---- 31 30 30 31
--------- --------- --------- ---------
Net sales $ 36,228 $ 38,072 $ 29,183 $ 26,357
Gross profit 8,068 7,575 854 5,189
Net earnings (loss) 1,451 1,449 (7,082) (385)
Earnings (loss) per share:
Basic $ 0.16 $ 0.16 $ (0.78) $ (0.04)
Diluted $ 0.16 $ 0.16 $ (0.78) $ (0.04)
Three Months Ended
----------------------------------------------------
1998 March June September December
- ---- 31 30 30 31
--------- --------- --------- ---------
Net sales $ 36,192 $ 37,128 $ 36,469 $ 28,634
Gross profit 9,333 9,606 9,320 5,148
Net earnings 2,126 2,149 1,840 (272)
Earnings per share:
Basic $ 0.24 $ 0.24 $ 0.20 $ (0.03)
Diluted $ 0.23 $ 0.23 $ 0.20 $ (0.03)
14. 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
manages its operations geographically. Sales are attributed to a region based on
the ordering location of the customer.
F-19
37
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
North Latin All
Amounts in thousands America America Pacific Brazil Other Corporate Total
--------- --------- ------- ------ ------ --------- -------
Year ended December 31, 1999
Total revenues $ 85,889 $ 11,225 15,407 2,065 15,254 -- 129,840
Depreciation and amortization 3,250 151 429 139 21 -- 3,990
Operating income (loss) 8,451 528 1,535 (6,819) 1,868 (11,986) (6,423)
Identifiable assets December 31, 1999 78,766 7,742 12,128 1,297 3,121 -- 103,054
Capital expenditures 4,819 4 55 63 16 -- 4,957
Year ended December 31, 1998
Total revenues $ 72,372 $ 21,624 15,459 6,142 22,826 -- 138,423
Depreciation and amortization 2,317 21 245 284 21 -- 2,888
Operating income (loss) 15,691 3,282 2,199 (1,743) 4,426 (10,359) 13,496
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 (loss) 14,677 662 1,097 311 3,166 (9,002) 10,911
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
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):
1999 1998 1997
---------- ---------- ----------
Soft drink, citrus and frozen
beverage dispensers $ 62,886 $ 69,446 $ 60,778
Post mix dispensing valves 15,222 18,702 16,694
Beer dispensing systems 9,641 8,768 9,920
Other 42,091 41,507 31,975
---------- ---------- ----------
Total revenue $ 129,840 $ 138,423 $ 119,367
========== ========== ==========
F-20
38
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following provides information regarding net sales to major customers,
domestically and internationally (amounts in thousands):
Percent of Percent of Percent of
1999 Net Sales 1998 Net Sales 1997 Net Sales
---------- ---------- ---------- ---------- ---------- ----------
United States:
The Coca-Cola Company $ 32,394 25% $ 31,816 23% $ 28,961 24%
Other 51,838 40 40,556 29 33,436 28
---------- ---------- ---------- ---------- ---------- ----------
84,232 65 72,372 52 62,397 52
---------- ---------- ---------- ---------- ---------- ----------
Outside of United States:
The Coca-Cola Company 12 -- 34 -- 42 --
Panamerican Beverages, Inc. 1,818 1 14,861 11 7,212 6
Other 43,778 34 51,156 37 49,716 42
---------- ---------- ---------- ---------- ---------- ----------
45,608 35 66,051 48 56,970 48
---------- ---------- ---------- ---------- ---------- ----------
$ 129,840 100% $ 138,423 100% $ 119,367 100%
========== ========== ========== ========== ========== ==========
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-21
39
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SCHEDULE II
RESERVE ACCOUNT
Balance at Additions
Beginning of Charged to Deductions Balance at
Description Year Expense from Account of Year
- ----------------- ------------ ---------- ------------ ----------
Allowance for doubtful accounts (amounts in thousands):
December 31, 1999 $ 326 $ 154 $ 66 $ 414
December 31, 1998 $ 363 $ 61 $ 98 $ 326
December 31, 1997 $ 185 $ 178 $ -- $ 363
F-22
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lancer Frank Corporation, General Partner,
Lancer Investment Corporation, Limited Partner,
Jimmy I. Frank, Limited Partner, and
Nita T. Frank, Limited Partner,
the Partners of Lancer FBD Partnership, Ltd.:
We have audited the accompanying balance sheet of Lancer FBD Partnership, Ltd.
(the Company), as of December 31, 1999, and the related statements of income,
partners' capital and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lancer FBD Partnership, Ltd.,
at December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 10, 2000
F-23
41
LANCER FBD PARTNERSHIP, LTD.
BALANCE SHEET
December 31, 1999
ASSETS
- ------
CURRENT ASSETS:
Cash $ 667,192
Trade accounts receivable-
Third-party customers 72,254
Lancer Corporation 43,829
Inventories-
Raw materials and subassemblies 2,055,021
Finished goods 679,444
Other current assets 11,414
-----------
Total current assets 3,529,154
-----------
FURNITURE AND EQUIPMENT:
Leasehold improvements 60,362
Furniture and fixtures 165,231
Equipment 472,417
-----------
698,010
Less- Allowance for depreciation (153,028)
-----------
Total furniture and equipment 544,982
-----------
PATENT, net 2,938,479
-----------
OTHER ASSETS 13,346
-----------
Total assets $ 7,025,961
===========
The accompanying notes are an integral part of this financial statement.
F-24
42
LANCER FBD PARTNERSHIP, LTD.
BALANCE SHEET (Continued)
December 31, 1999
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
CURRENT LIABILITIES:
Trade accounts payable-
Third-party suppliers $ 247,457
Lancer Corporation 30,446
Gagemaker, Inc. 35,919
Accrued expenses-
Lancer Corporation 147,640
Gagemaker, Inc. 7,622
Other accrued 391,031
Warranty reserve 274,186
Current portion of note payable 5,770
-----------
Total current liabilities 1,140,071
-----------
LONG-TERM LIABILITIES:
Note payable 15,835
-----------
Total noncurrent liabilities 15,835
-----------
PARTNERS' CAPITAL:
Lancer Frank Corporation, General Partner 54,741
Lancer Investment Corporation, Limited Partner 2,907,658
Jimmy I. Frank, Limited Partner 1,453,828
Nita T. Frank, Limited Partner 1,453,828
-----------
Total partners' capital 5,870,055
-----------
Total liabilities and partners' capital $ 7,025,961
===========
The accompanying notes are an integral part of this financial statement.
F-25
43
LANCER FBD PARTNERSHIP, LTD.
STATEMENT OF INCOME
Year ended December 31, 1999
SALES, net of discounts of $453,981 $ 22,991,007
COST OF GOODS SOLD 17,511,299
------------
GROSS PROFIT 5,479,708
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 906,340
------------
OPERATING INCOME 4,573,368
------------
OTHER EXPENSES (INCOME):
Research and development 598,184
Interest, net (52,681)
Amortization of patent 212,412
Other, net (10,419)
------------
Total other expenses 747,496
------------
NET INCOME $ 3,825,872
============
The accompanying notes are an integral part of this financial statement.
F-26
44
LANCER FBD PARTNERSHIP, LTD.
STATEMENT OF PARTNERS' CAPITAL
Year ended December 31, 1999
Partners' Partners'
Capital, Capital,
January 1, Partner Net December 31,
1999 Distributions Income 1999
----------- ------------- ----------- ------------
GENERAL PARTNER:
Lancer Frank Corporation $ 48,705 $ (32,223) $ 38,259 $ 54,741
LIMITED PARTNERS:
Lancer Investment Corporation 2,608,888 (1,595,037) 1,893,807 2,907,658
Jimmy I. Frank 1,304,444 (797,519) 946,903 1,453,828
Nita T. Frank 1,304,444 (797,519) 946,903 1,453,828
----------- ----------- ----------- -----------
$ 5,266,481 $(3,222,298) $ 3,825,872 $ 5,870,055
=========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
F-27
45
LANCER FBD PARTNERSHIP, LTD.
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,825,872
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation of furniture and equipment 82,004
Amortization of patent 212,412
Changes in operating assets and liabilities-
Increase in accounts receivable, third-party customers (72,254)
Decrease in accounts receivable, Lancer Corporation 340,718
Increase in inventory (956,423)
Increase in other assets (9,279)
Decrease in trade accounts payable, third-party suppliers (275,561)
Increase in trade accounts payable, Lancer Corporation 23,996
Decrease in accounts payable, Gagemaker, Inc. (201,594)
Increase in accrued expenses, Lancer Corporation 123,379
Decrease in accrued expenses, Gagemaker, Inc. (8,841)
Increase in accrued expenses, other 80,663
Increase in warranty reserve 203,649
------------
Net cash provided by operating activities 3,368,741
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (197,644)
Payments on note payable (5,180)
------------
Net cash used in investing activities (202,824)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner distributions (3,222,298)
------------
Net cash used in financing activities (3,222,298)
------------
DECREASE IN CASH (56,381)
CASH, beginning of year 723,573
------------
CASH, end of year $ 667,192
============
INTEREST PAID $ 2,647
============
The accompanying notes are an integral part of this financial statement.
F-28
46
LANCER FBD PARTNERSHIP, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION:
Lancer FBD Partnership, Ltd. (the Company), a Texas limited partnership, was
formed on October 7, 1996, and is engaged in the production and sale of frozen
beverage dispensers and related products. The ownership structure of the Company
consists of a general partner, Lancer Frank Corporation (1 percent), and three
limited partners, Lancer Investment Corporation (49.5 percent), Jimmy I. Frank
(24.75 percent) and Nita T. Frank (24.75 percent). Lancer Frank Corporation is
owned by Lancer Corporation (50 percent) and Jimmy I. Frank and Nita Frank (50
percent). Lancer Corporation (a public company) owns 100 percent of Lancer
Investment Corporation. The Company commenced operations in October 1996.
The Company receives administrative support from Gagemaker, Inc. (Gagemaker),
and Lancer Corporation (Lancer), both related entities. The Company also has a
supply and sole distributor agreement with Gagemaker and Lancer, respectively
(refer to Note 4). The Company sells all finished goods to Lancer. The Company
is economically dependent upon its relationship with these related entities.
2. SIGNIFICANT ACCOUNTING POLICIES:
Trade Accounts Receivable
Management of the Company believes no allowance for doubtful accounts is
required at December 31, 1999.
Concentration of Credit Risk
Trade accounts receivable from Lancer represent approximately 38 percent of the
total trade accounts receivable as of December 31, 1999. The maximum loss that
would be incurred by the Company if the related party failed to perform would be
$43,829.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market. The
Company capitalizes overhead related to inventory by calculating the total of
direct and indirect overhead allocable to inventory as a percentage of inventory
purchases for the year multiplying this percentage by ending inventory to
calculate capitalized overhead.
Furniture and Equipment
Furniture and equipment are stated at the lower of cost or fair market value as
of the time the assets are placed in service. The Company periodically assesses
the value of their long-lived assets to assure events or changes in
circumstances have not adversely affected the carrying amounts of the assets.
The equipment is depreciated over the estimated useful lives using a tax-based
method which approximates straight-line. Estimated useful lives for depreciation
purposes are as follows:
Leasehold improvements 2 to 5 years
Furniture and fixtures 3 to 10 years
Equipment 10 years
F-29
47
LANCER FBD PARTNERSHIP, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999
Revenue Recognition
The Company sells products directly to Lancer, a related party, recognizing
revenue at the time the products are shipped. All shipments have terms of FOB
shipping point.
Returns and Allowances
The Company has not had a history of significant sales returns and, as such, no
sales allowance has been established. The Company's payment terms are net 30
days, with a 2 percent discount granted to Lancer if payment is received within
10 days.
Warranty Costs
The Company warrants the refrigeration component of its products for a period of
five years. The Company also provides a one-year warranty covering parts.
Warranty costs are accrued based on estimated future warranty claims. The
Company occasionally performs warranty work on dispensers produced by FCB
Engineering, Inc. (FCB), a company owned by Jimmy I. Frank, prior to the
Company's formation. During 1999, these costs were approximately $15,000.
Patent
Patent, including legal costs incurred to acquire the patent, is being amortized
on a straight-line basis over 17 years. The Company periodically evaluates the
recoverability of the patent by assessing whether the unamortized balance can be
recovered over its remaining life through cash flows generated by the underlying
assets. Patent amortization expense was $212,412 for the year ended December 31,
1999. Accumulated amortization was $672,531 at December 31, 1999.
Research and Development
Research and development costs are charged to expense as incurred. Research and
development costs consist of all costs related to the Company's research and
development program, including payroll, general and administrative and prototype
manufacturing costs. Research and development expense was $598,184 for the year
ended December 31, 1999.
Income Taxes
The Company is taxed as a partnership under the Internal Revenue Code. Income or
loss is reported for federal income tax purposes by the respective partners.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-30
48
LANCER FBD PARTNERSHIP, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999
3. LEASES:
The Company leases office space under operating leases. Future minimum payments
on operating leases are as follows:
Year ending December 31-
1999 $ 128,489
2000 134,096
2001 117,494
2002 27,732
2003 and thereafter 9,244
----------
Total $ 417,055
==========
Rent expense for the year ended December 31, 1999, was $131,430.
4. RELATED-PARTY TRANSACTIONS:
The Company entered into a supply agreement (the Supply Agreement) with
Gagemaker on October 9, 1996. Under the Supply Agreement, the Company agreed to
purchase a key component of its product from Gagemaker. The Supply Agreement
remains effective for as long as the Company manufactures frozen beverage
dispensers that require the key component provided by Gagemaker. Gagemaker must
comply with certain conditions under the Supply Agreement, such as competitive
pricing, quality products and ability to meet the demand of the Company.
The Company entered into a distributor agreement (the Distributor Agreement)
with Lancer on October 9, 1996. Under the Distributor Agreement, the Company
agreed to grant Lancer exclusive distributor rights worldwide for all frozen
beverage dispensers manufactured by the Company. The Distributor Agreement
remains in effect as long as the Company's Partnership remains intact or until
one of the parties is adjudicated bankrupt, voluntarily or involuntarily.
Gagemaker and Lancer provide certain administrative and purchasing functions on
behalf of the Company. The Company is allocated a portion of the salaries and
associated expenses relating to these services. The costs charged to the Company
during 1999 were approximately $284,198.
The Company purchases certain raw materials from Gagemaker under the Supply
Agreement. Purchases from Gagemaker during 1999 totaled approximately
$5,492,657.
The Company sells to Lancer under the Distributor Agreement. Sales to Lancer,
net of discounts, were approximately $22,450,856 during 1999. The Company also
purchases certain raw materials from Lancer. Total purchases during 1999 from
Lancer were approximately $840,137.
In December 1999, the Company purchased frozen beverage dispensers from Lancer.
These dispensers were produced by FCB prior to formation of the Company. The
Company incurred costs to upgrade and refurbish the dispensers and,
subsequently, sold the dispensers to Lancer for an amount equal to the purchase
price. The loss related to this transaction is reflected in the current year
income statement in the amount of $106,641.
F-31
49
LANCER FBD PARTNERSHIP, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999
In August 1999, the Company began a research and development operation in San
Antonio. This operation is housed in a warehouse facility leased by Lancer. The
Company occupies approximately 1 percent of Lancer's leased facility and pays no
rent to Lancer. The Company also utilizes a separate Lancer warehouse for
storage and pays no rent to Lancer.
The Company paid contractor wages to several related parties including Jim Frank
and Nita Frank, limited partners, and George Schroeder and Alfred Schroeder,
president and vice president, respectively, of Lancer, in the amount of $17,500
each.
All related-party receivables and payables are shown on the balance sheet.
5. CONTINGENCIES:
During 1999, under an oral agreement and at Lancer's request, the Company
purchased and reworked certain frozen beverage dispensers that were produced by
FCB prior to formation of the Company at a loss to the Company (see Note 4).
While no written agreement exists, Lancer may from time to time require the
Company to incur losses under similar oral arrangements.
F-32
50
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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
10.13* 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
10.27++ 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.
10.38### Third Amendment to Credit Agreement dated July 15, 1998
between Lancer Corporation and The Frost National Bank and
NationsBank, N.A.
10.39** Fourth Amendment to Credit Agreement dated March 15, 1999
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
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
* 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 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.
** This exhibit is incorporated by reference to the Exhibit to the
Registrant's Form 10-Q for the quarter ended June 30, 1999.