<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 14(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 the number of shares outstanding of each of the issuers of classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
TITLE SHARES OUTSTANDING AS OF
NOVEMBER 7, 2000
<S> <C>
Common stock, par value $.01 per share 9,124,857
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,196 $ 1,227
Receivables:
Trade accounts and notes 19,277 17,483
Other 420 537
--------- ---------
19,697 18,020
Less allowance for doubtful accounts (348) (414)
--------- ---------
Net receivables 19,349 17,606
--------- ---------
Inventories 39,384 36,166
Prepaid expenses 667 465
Income tax receivable -- 3,505
Deferred tax asset 134 134
--------- ---------
Total current assets 60,730 59,103
--------- ---------
Property, plant and equipment, at cost:
Land 1,260 1,260
Buildings 21,898 21,880
Machinery and equipment 21,016 20,531
Tools and dies 9,933 9,025
Leaseholds, office equipment and vehicles 10,062 8,941
Assets in progress 2,822 1,821
--------- ---------
66,991 63,458
Less accumulated depreciation and amortization (30,519) (27,795)
--------- ---------
Net property, plant and equipment 36,472 35,663
--------- ---------
Long-term receivables ($653 and $746 due
from officers, respectively) 924 1,029
Long-term investments 2,736 3,053
Intangibles and other assets,
at cost, less accumulated amortization 3,838 4,206
--------- ---------
$ 104,700 $ 103,054
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,653 $ 9,119
Current installments of long-term debt 2,197 5,083
Line of credit with bank 20,900 17,600
Deferred licensing and maintenance fees 774 619
Accrued expenses and other liabilities 4,810 4,091
Taxes payable 1,312 --
--------- ---------
Total current liabilities 39,646 36,512
Deferred tax liability 2,754 3,102
Long-term debt, excluding current installments 13,871 13,922
Deferred licensing and maintenance fees 3,530 4,500
--------- ---------
Total liabilities 59,801 58,036
--------- ---------
Commitments and contingencies -- --
Minority interest 343 542
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
issued and outstanding 91 91
Additional paid-in capital 11,933 11,933
Accumulated other comprehensive loss (3,406) (1,816)
Retained earnings 35,938 34,268
--------- ---------
Total shareholders' equity 44,556 44,476
--------- ---------
$ 104,700 $ 103,054
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 29,641 $ 29,183 $ 88,921 $ 103,483
Cost of sales 22,932 28,329 67,819 86,987
----------- ----------- ----------- -----------
Gross profit 6,709 854 21,102 16,496
Selling, general and
administrative expenses 5,067 5,673 16,152 16,221
Impairment of Brazilian assets -- 5,956 -- 5,956
----------- ----------- ----------- -----------
Operating income (loss) 1,642 (10,775) 4,950 (5,681)
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense 873 857 2,341 2,661
(Earnings) loss from joint venture 3 (324) 35 (1,852)
Gain on sale of investment -- (895) -- (895)
Minority interest (64) (67) (199) (67)
Other (income) expense, net (57) 16 (107) 9
----------- ----------- ----------- -----------
755 (413) 2,070 (144)
----------- ----------- ----------- -----------
Income (loss) before income taxes 887 (10,362) 2,880 (5,537)
----------- ----------- ----------- -----------
Income tax expense (benefit):
Current 181 (3,075) 1,558 (1,369)
Deferred 157 (205) (348) 13
----------- ----------- ----------- -----------
338 (3,280) 1,210 (1,356)
----------- ----------- ----------- -----------
Net earnings (loss) $ 549 $ (7,082) $ 1,670 $ (4,181)
=========== =========== =========== ===========
Common Shares Outstanding:
Basic 9,124,857 9,124,509 9,124,857 9,123,252
Diluted 9,270,287 9,124,509 9,279,553 9,123,252
Earnings (Loss) Per Share:
Basic $ 0.06 $ (0.78) $ 0.18 $ (0.46)
Diluted $ 0.06 $ (0.78) $ 0.18 $ (0.46)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net earnings (loss) $ 1,670 $(4,181)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 3,126 2,904
Deferred licensing and maintenance fees (815) 12
Deferred income taxes (348) (7)
(Gain) loss on sale and disposal of assets (1) 22
Gain on sale of long-term investments -- (895)
Minority interest (200) (67)
Loss (earnings) from joint venture 35 (1,852)
Impairment of Brazilian assets -- 5,956
Changes in assets and liabilities:
Receivables (2,590) 1,180
Prepaid expenses (202) (258)
Income taxes receivable 3,505 (2,644)
Inventories (3,894) 8,962
Other assets (215) 533
Accounts payable 1,192 (1,896)
Accrued expenses 831 22
Income taxes payable 1,367 --
------- -------
Net cash provided by operating activities 3,461 7,791
------- -------
Cash flow from investing activities:
Proceeds from sale of assets 2 14
Acquisition of property, plant and equipment (3,958) (3,917)
Acquisition of subsidiary company -- (1,720)
Cash proceeds from long-term investments and affiliates 236 2,405
------- -------
Net cash used in investing activities (3,720) (3,218)
------- -------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit agreements 3,300 (1,900)
Retirement of long-term debt, net of proceeds (2,873) (2,015)
Proceeds from exercise of stock options -- 20
------- -------
Net cash provided by (used in) financing activities 427 (3,895)
------- -------
Effect of exchange rate changes on cash (199) (1,194)
------- -------
Net decrease in cash (31) (516)
Cash at beginning of period 1,227 1,119
------- -------
Cash at end of period $ 1,196 $ 603
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
All adjustments (consisting of normal recurring adjustments) have been made
which are necessary for a fair presentation of financial position and results of
operations. All intercompany balances and transactions have been eliminated in
consolidation. It is suggested that the consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the December 31, 1999 Annual Report on Form 10-K.
Certain amounts in the consolidated financial statements for prior periods have
been reclassified to conform with the current year's presentation.
2. INVENTORY COMPONENTS
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). Inventory components are as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods $16,639 $14,662
Work in process 9,610 10,828
Raw material and supplies 13,135 10,676
------- -------
$39,384 $36,166
======= =======
</TABLE>
3. 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 potential dilutive common shares
outstanding during the reporting period. The dilutive effect of stock options
approximated 145,430 shares for the three months ended September 30, 2000, and
154,696 shares for the nine months ended September 30, 2000. Basic and diluted
earnings per share were the same for the three months ended and nine months
ended September 30, 1999.
6
<PAGE> 7
LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
The following are the components of comprehensive income (loss) (amounts in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 549 $(7,082) $ 1,670 $(4,181)
Foreign currency loss arising
during the period (793) (779) (1,559) (2,087)
Less reclassification adjustment for losses
included in net loss -- 3,263 -- 3,263
------- ------- ------- -------
Net foreign currency translation gain (loss) (793) 2,484 (1,559) 1,176
Unrealized loss on investment (net of tax) (89) (216) (31) (114)
------- ------- ------- -------
Comprehensive income (loss) $ (333) $(4,814) $ 80 $(3,119)
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive loss on the accompanying consolidated balance
sheets includes foreign currency translation adjustments and unrealized loss on
investment.
5. 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. (Amounts in thousands)
<TABLE>
<CAPTION>
North Latin
America America Pacific Brazil Europe Asia Corporate Total
--------- --------- --------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended September 30, 2000
Total revenues $ 19,027 $ 2,185 $ 4,569 $ 312 $ 2,759 $ 789 $ -- $ 29,641
Operating income (loss) 2,926 348 929 (29) 229 241 (3,002) 1,642
Three months ended September 30, 1999
Total revenues $ 20,664 $ 2,194 $ 3,905 $ 523 $ 1,310 $ 587 $ -- $ 29,183
Operating income (loss) (1,853) (170) 447 (6,164) (63) 73 (3,045) (10,775)
Nine months ended September 30, 2000
Total revenues $ 56,682 $ 6,094 $ 13,678 $ 1,174 $ 8,757 $ 2,536 $ -- $ 88,921
Operating income (loss) 9,281 1,013 2,215 22 1,298 886 (9,765) 4,950
Nine months ended September 30, 1999
Total revenues $ 69,343 $ 9,181 $ 10,497 $ 1,349 $ 7,636 $ 5,477 $ -- $ 103,483
Operating income (loss) 6,597 610 1,045 (6,717) 940 799 (8,955) (5,681)
</TABLE>
All intercompany revenues are eliminated in computing revenues and operating
income. The corporate component of operating income represents corporate general
and administrative expenses.
7
<PAGE> 8
LANCER CORPORATION AND SUBSIDIARIES
ITEM 2 - 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.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended September 30, 2000 and 1999
Net sales for the quarter ended September 30, 2000 were $29.6 million, up 2%
from net sales in the third quarter of 1999. Sales more than doubled in the
Company's Europe region, and Pacific sales rose 17%. Sales in the North America
region declined 8%, primarily because of lower sales of frozen beverage
equipment.
Gross margin in the third quarter of 2000 was 22.6%, up from 2.9% in the third
quarter last year. In the 1999 period, gross margin was negatively impacted by
factors including reduced production levels that led to insufficient overhead
absorption, changes in the sales mix toward lower margin products, and an $0.8
million reserve for certain types of equipment whose marketability had become
impaired.
Selling, general and administrative expenses were $5.1 million for the third
quarter of 2000 compared to $5.7 million for the third quarter of 1999. Lower
spending for research and development helped drive the improvement. In the
quarter ended September 30, 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 substantially reduced its Brazilian operations in an
effort to limit losses caused by the depressed business environment in much of
Latin America.
Interest expense was $0.9 million in the third quarter of 2000 and 1999. The
Company's earnings from its frozen beverage joint venture declined by $0.3
million in the third quarter of 2000 because of lower production levels at the
joint venture. In the third quarter of 1999, the Company sold its investment in
Victory Refrigeration, recording a gain of $0.9 million. The minority interest
benefit of $0.1 million in the third quarter of both 2000 and 1999 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
effective tax rate was 38.1% in the third quarter of 2000. The Company recorded
a tax benefit of $3.3 million in the third quarter of 1999 because of the
pre-tax loss of $10.4 million. Net income for the third quarter of 2000 was $0.5
million, compared to a net loss of $7.1 million last year.
8
<PAGE> 9
Comparison of the Nine-Month Periods Ended September 30, 2000 and 1999
Net sales for the nine months ended September 30, 2000 were $88.9 million, down
14% from net sales in the same period of 1999. Sales in North America fell 18%,
largely because of lower sales of frozen beverage equipment. Sales declined 54%
in Asia, and 34% in the Latin America region (excluding Brazil). Market
conditions in Asia and Latin America continued to be unfavorable during the
first nine months of 2000. Sales in the Pacific region rose 30% due largely to
strong sales of beer equipment. Sales in the Europe region rose 15%.
Gross margin was 23.7% in the first three quarters of 2000, compared to 15.9% in
the first three quarters of 1999. In the 1999 period, gross margin was
negatively impacted by factors including reduced production levels that led to
insufficient overhead absorption, changes in the sales mix toward lower margin
products, and an $0.8 million reserve for certain types of equipment whose
marketability had become impaired.
Selling, general and administrative expenses were $16.2 million in the nine
months ended September 30, 2000 and 1999. During the 1999 period, the Company
expensed $6.0 million relating to the impairment of substantially all of the
Company's investment in its Brazilian subsidiary. The Company substantially
reduced its Brazilian operations in an effort to limit losses caused by the
depressed business environment in much of Latin America.
Interest expense was $2.3 million in the first three quarters of 2000, down from
$2.7 million in the same period last year primarily because of lower average
borrowings. The Company's earnings from its frozen beverage joint venture
declined by $1.9 million in the first three quarters of 2000 because of lower
production levels at the joint venture. The Company sold its investment in
Victory Refrigeration in the 1999 period and recorded a gain of $0.9 million.
The minority interest benefit of $0.2 million in 2000 and $0.1 million in 1999
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
effective tax rate was 42% in the first nine months of 2000. The Company
recorded a tax benefit of $1.4 million in the first three quarters of 1999
because of the pre-tax loss of $5.5 million. Net income for the first nine
months of 2000 was $1.7 million, compared to a net loss of $4.2 million for the
same period last year.
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. The Company is in compliance with, or has obtained waivers
of, the financial covenants contained in the credit agreement that governs the
Company's primary credit facilities.
Cash provided by operating activities was $3.5 million in the first nine months
of 2000, compared to $7.8 million in the same period last year. The Company made
capital expenditures of $4.0 million in the first nine months of 2000, primarily
for production tooling and equipment.
Subsequent to September 30, 2000, the Company amended its credit facilities with
its primary lenders. The primary changes were the following: the expiration of
the facilities was extended until July 15, 2002, certain financial covenants
were adjusted, scheduled quarterly principal payments were reduced to $0.35
million, the facilities were collateralized by substantially all of the
Company's assets in the United States, and the revolving credit facility was
reduced to $30.0 million. The financial statements in this filing reflect the
amended terms. The restated credit agreement and related documents are exhibits
to this Form 10-Q.
Accounting Matters
The Company maintains a DISC in order to defer income taxes on its foreign
sales. The Company continues to evaluate the benefit of converting the DISC to a
Foreign Sales Corporation. At the time of such conversion, the Company will be
required to provide for federal income taxes on $2.4 million of undistributed
earnings of the DISC. See 1999 Form 10-K.
9
<PAGE> 10
The Internal Revenue Service is examining the Company's U.S. income tax return
for 1995. Management does not believe that any significant adjustments will be
required as a result of this review.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the Company's market risk factors
since December 31, 1999.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
10.40 Seventh Amendment and Restated Credit
Agreement dated October 26, 2000 between
Lancer Corporation and The Frost National
Bank, Harris Trust and Savings Bank, and
Whitney National Bank
10.41 Security Agreement between Lancer
Corporation and The Frost National Bank,
Harris Trust and Savings Bank, and Whitney
National Bank
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements 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
(REGISTRANT)
November 10, 2000 By: /s/ GEORGE F. SCHROEDER
-----------------------
George F. Schroeder
President and CEO
November 10, 2000 By: /s/ MARK L. FREITAS
-------------------
Mark L. Freitas
Vice President - Controller
11
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.40 Seventh Amendment and Restated Credit Agreement dated October 26, 2000
between Lancer Corporation and The Frost National Bank, Harris Trust
and Savings Bank, and Whitney National Bank
10.41 Security Agreement between Lancer Corporation and The Frost National
Bank, Harris Trust and Savings Bank, and Whitney National Bank
27 Financial Data Schedule
</TABLE>
