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, 2002

Commission file number 0-13875

 

Lancer Corporation

(Exact name of registrant as specified in its charter)

 

Texas		74-1591073
(State or other jurisdiction of incorporation or organization)		(IRS Employer 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  ý  NO  o

 

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.  ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Act).

YES  o  NO  ý

 

On June 28, 2002, the aggregate market value of Common Stock held by non-affiliates (based on the closing market price) was $27,058,510.

 

The aggregate market value of the registrant’s common stock, par value $.01 per share, as of March 6, 2003, held by non-affiliates of the registrant was approximately $37,791,011 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 6, 2003 was 9,345,931.

 

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 2003 annual meeting of shareholders are incorporated by reference into Part III of this report.

 

This document contains certain “forward-looking” statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management.  When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “plan,” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements.  Such statements reflect the current risks, uncertainties and assumptions which exist or must be made as a result of certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission.  Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, forecast, planned or intended.  The Company does not intend to update these forward-looking statements.

 

PART I

 

ITEM 1.                                     BUSINESS

 

General

 

Lancer designs, engineers, manufactures and markets fountain soft drink, beer and citrus beverage dispensing systems, and other equipment for use in the food service and beverage industry.  Lancer also markets frozen beverage dispensers manufactured by a joint venture that is 50% owned by the Company.  Lancer’s products are sold by Company personnel and through independent distributors and agents principally to major soft drink companies (primarily The Coca-Cola Company), bottlers, equipment distributors, beer breweries and food service chains for use in various food and beverage operations.  The Company is a vertically integrated manufacturer whose tooling, production, assembly and testing capabilities enable it to fabricate a substantial portion of the components used in Company products.  In addition, the Company is an innovator of new products in the beverage dispensing industry and has a large technical staff supported by state-of-the-art engineering facilities to develop these new products and to enhance existing product lines in response to changing industry requirements and specific customer demands.

 

The Company was incorporated in Texas on December 18, 1967, and initially manufactured parts for beverage dispensing equipment.  The Company designed, engineered, manufactured and marketed its first mechanically cooled soft drink dispensing system in 1971.  Since that time, the Company has expanded its engineering and production facilities and has developed new products, including various configurations of the Company’s mechanically and ice cooled beverage dispensing systems, syrup pumps, carbonators and other related equipment, accessories and parts.

 

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.

 

1

 

Products

 

The Company’s products can be divided into four major categories: (i) fountain soft drink, citrus, and frozen beverage dispensers; (ii) post-mix dispensing valves; (iii) beer dispensing systems; and (iv) other products and services.

 

Soft Drink, Citrus, and Frozen Beverage Dispensers

 

The Company manufactures and sells a broad range of mechanically cooled and ice cooled soft drink and citrus dispensing systems.  These systems are non-coin operated.  The type of equipment and configuration of each model varies according to intended use and specific customer needs.  The Company’s mechanically cooled dispensing systems chill beverages as they run through stainless steel tubing inside a self-contained refrigeration unit.  In the Company’s ice cooled dispensing systems, the beverage is cooled as it runs through stainless steel tubing encased in an aluminum cold plate which serves as the heat transfer element when covered with ice.  Several of the ice cooled systems also dispense ice.  The Company manufactures both post-mix and pre-mix dispensing equipment for each of the mechanically cooled and ice cooled fountain systems.

 

Lancer manufactures several models of mechanically cooled citrus dispensing systems for counter top use. The 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.  Prior to May 1, 2002, the joint venture sold its production to Lancer, and Lancer marketed and distributed the equipment to third parties.  Effective May 1, 2002, the joint venture began selling directly to most third party customers, and in certain situations, paying a commission to Lancer.

 

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, 2002, 2001 and 2000, accounted for approximately 45%, 41% and 38% 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, 2002, 2001 and 2000, sales of valves and related accessories accounted for approximately 10%, 11% and 12% 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 and New Zealand account for most of the Company’s sales of beer related equipment.  Sales of beer equipment represented 6%, 5% and 7% of total net sales in the years ended December 31, 2002, 2001 and 2000, 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 6%, 5% and 4% of net sales in the years ended December 31, 2002, 2001 and 2000.

 

The Company manufactures and/or markets a variety of other products including syrup pumps, carbonators, stainless steel and brass fittings, carbon dioxide regulator components, water filtering systems, and a variety of other products, accessories, and spare parts for use with beverage dispensing systems.  Prior to March 31, 2002, Lancer also provided logistics services to certain of its customers.  Together, these parts and services constitute 33%, 38% and 39% of the Company’s total net sales for the years ended December 31, 2002, 2001 and 2000, respectively.  During 2002, the Company purchased a 50% interest in a joint venture that markets concentrated shelf-stable milk for foodservice customers.  The investment is accounted for under the equity method.

 

2

 

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, 2002, 2001 and 2000, Company-sponsored research and development expenses were $2.3 million, $2.4 million and $2.9 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 $5.2 million, $7.8 million and $6.0 million at December 31, 2002, 2001 and 2000, respectively.  It is anticipated that 2002 backlog orders will be filled in 2003.

 

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 35%, 36% and 27% of the Company’s total net sales for the years ended December 31, 2002, 2001 and 2000, 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, long-term 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.

 

3

 

The Company and The Coca-Cola Company have entered into a master development agreement which governs development of various products.  Products that are developed pursuant to this agreement may be sold only to The Coca-Cola Company or its designated agents.  The agreement generally provides that The Coca-Cola Company will also retain the rights to any tooling it pays for and any resulting patents.  The Company is obligated under the development agreement to make its manufacturing capabilities available for the benefit of The Coca-Cola Company as they relate to, and are required for, selected projects.  The Company supplies engineering and research and development personnel, designs, develops and creates prototypes, and obtains either an exclusive or a non-exclusive license to manufacture and market the resulting products.  Generally, the Company warrants all such products for one year.  The Coca-Cola Company may terminate the development agreement at any time, subject to certain conditions.

 

The Company and The Coca-Cola Company have entered into agreements under which the Company remanufactures used products owned by The Coca-Cola Company.

 

International Sales

 

For the years ended December 31, 2002, 2001 and 2000, the Company’s sales to customers outside the United States were approximately 32%, 30% and 35% of total net sales, respectively.  The Company has sales employees, distributors, and/or licensees in Latin America, Europe, Africa and Asia.  The Company manufactures products in Australia 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 Asia/Pacific region, and the Europe region.  The North America region consists of the United States and Canada.  The Europe region includes the Middle East and Africa.  The Brazil segment is reported as discontinued operations for 2000, 2001 and 2002 in the Consolidated Statement of Operations.  See footnote 2 for further discussion of discontinued operations.  During 2002, the Company placed the Asia region and the Pacific region under common management.  The two regions are now combined for segment reporting purposes.

 

The Company’s net sales and operating income for 2002, 2001, and 2000 follow (amounts in thousands):

 

		North America			Latin America			Asia/Pacific			Europe
Net sales:
2002		$	97,575		$	13,351		$	18,555		$	9,534
2001		87,770			9,816			15,303			9,856
2000		73,373			7,850			19,582			10,895
Operating income:
2002		$	17,430		$	1,979		$	1,785		$	1,360
2001		11,115			587			1,446			1,601
2000		9,056			827			2,481			1,923

 

Additional financial information about segments and geographic areas is set forth in Note 15 to the Consolidated Financial Statements.

 

4

 

Competition

 

The business of manufacturing and marketing beverage dispensing systems and related equipment is highly competitive and is characterized by rapidly changing technology.  Competition is primarily based upon product suitability, reliability, technological development and expertise, price, product warranty and delivery time.  In addition, the Company frequently competes with companies having substantially greater financial resources than the Company.  The Company has been able to compete successfully in the past, and believes it will be able to do so in the future.

 

Employees

 

As of December 31, 2002, the Company had 1,556 full-time employees of whom 71 were engaged in engineering and technical support, 1,270 in manufacturing, 95 in marketing and sales and 120 in general management and administrative positions.  647 employees work in the United States, primarily at the Company’s facilities in San Antonio, Texas.  722 employees work at the Company’s facility in Piedras Negras, Mexico, and a total of 105 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 79 United States patents and numerous corresponding foreign patents.  Addditionally, it has 35 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 2 to 18 years.  Management does not believe the expiration of such patents will have a significant adverse impact on continuing operations.

 

The Company seeks to improve its products and to obtain patents on these improvements.  As a result, the Company believes its patent portfolio will expand, thereby lessening its reliance on any one particular patent.  The Company also believes its competitive position is enhanced by its existing patents and that any future patents will continue to enhance this position.  There can be no assurance, however, that the Company’s existing or future patents will continue to provide a competitive advantage, nor can there be any assurance that the Company’s competitors will not produce non-infringing competing products.

 

In addition to Company-owned patents, Lancer has assigned patents to the Company’s customers, primarily The Coca-Cola Company.  These patents are the result of special development projects between Lancer and its customers.  These projects are typically paid for by the customer, with Lancer either retaining licenses to manufacture the products covered by these patents for the customer, or granting such licenses to the customer.  The Company occasionally acquires patent protection for products that are complimentary to products whose patents are controlled by third parties.

 

The name “Lancer” is the federally registered trademark of the Company.  It is also registered in many foreign countries.  In certain instances, the Company grants a non-exclusive license to its distributors, primarily foreign, to use the trademark subject to control by the Company.

 

Environmental Matters

 

The Company’s operations are subject to increasingly stringent federal, state, local, and foreign laws and regulations relating to the protection of the environment.  In the United States, these environmental laws and regulations, which are implemented by the Environmental Protection Agency and comparable state agencies, govern the management of hazardous waste, the discharge of pollutants into the air and into surface and ground water, and the manufacture and disposal of certain substances.

 

5

 

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.

 

ITEM 2.                                     PROPERTIES

 

The Company’s primary manufacturing and administrative facilities are located in several buildings in San Antonio, Texas, totaling approximately 471,000 square feet, including three buildings owned by Lancer covering approximately 409,000 square feet of space, the largest of which is located on a 40-acre tract of land in the southeast sector of San Antonio.  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 small facility in Auckland, New Zealand, a 42,846 square foot plant in Beverley, South Australia, a suburb of Adelaide, and small facilities in Brisbane, Melbourne, and Sydney, Australia; Brussels, Belgium; Quito, Ecuador; Moscow, Russia; and Monterrey, Mexico.  The Company leases approximately 210,000 square feet of space throughout the world.

 

Total net rent expense for real estate was $1.0 million, $1.2 million and $1.5 million in 2002, 2001 and 2000, respectively.  Total rent expense includes $89,000 in 2002, 2001 and 2000 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, 2002.

 

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

 

 

6

 

On March 6, 2003, the closing price of the Company’s common stock, as reported by the ASE, was $8.45 per share.  On that date, there were 244 holders of record of the Company’s common stock, not including shares held by brokers and nominees.  The Company believes that there are approximately 2,000 beneficial owners of the Company’s common stock.  The Company has not declared a cash dividend on the common stock to date.  It is a general policy of the Company to retain earnings to support future growth.

 

ITEM 6.                                     SELECTED FINANCIAL DATA

(In thousands, except per share amounts)

 

		Years Ended December 31,
		2002			2001			2000			1999			1998
Operating Data:
Net sales		$	139,015		$	122,745		$	111,700		$	127,775		$	132,008
Gross profit		37,090			26,868			25,058			21,483			33,782
Selling, general and administrative expenses		27,535			22,235			21,286			21,091			18,544
Operating income		9,555			4,633			3,772			392			15,238
Interest expense		1,318			3,128			3,243			3,329			3,701
Interest and other (income) expense, net		(51		)	(992		)	(346		)	(2,869		)	287
Earnings (loss) from continuing operations before income taxes		8,288			2,497