UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 2003 | Commission file number 0-13875 |
LANCER CORPORATION
(Exact name of registrant as specified in its charter)
Texas (State or other jurisdiction of incorporation or organization) |
74-1591073 (IRS employer identification no.) |
|
6655 Lancer Blvd., San Antonio, Texas (Address of principal executive offices) |
78219 (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 o No 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
Indicate the number of shares outstanding of each of the issuers of classes of common stock, as of the latest practicable date.
Title |
Shares outstanding as of April 30, 2003 |
|
---|---|---|
Common stock, par value $.01 per share | 9,345,095 |
Reason for Amending the Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2003
During the first quarter of 2003, the Internal Revenue Service completed its audit of the Company's deduction of its investment in Brazil, and other matters. As a result, the Company reversed certain tax accruals in the three months ended March 31, 2003, resulting in an income tax benefit included in continuing operations of $1.1 million. The Company has since determined that the reversal of $0.7 million of the accruals related to the Brazilian operations should be reclassified as a tax benefit from discontinued operations. We are therefore filing this amendment to the quarterly report on Form 10-Q for the quarter ended March 31, 2003 and filed with the Securities and Exchange Commission on May 14, 2003 to reflect the reclassification in both Item 1 "Financial Statements" and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations". The reclassification has no effect on the net loss of $0.3 million, or $0.03 per share, as reported in the first quarter of 2003. The reclassification does, however, change the loss from continuing operations from $0.3 million, or $0.03 per share, to $1.0 million, or $0.11 per share. Loss from discontinued operations changes from $29 thousand, or $0.00 per share, to income of $0.7 million, or $0.08 per share, in the first quarter of 2003.
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LANCER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
|
March 31, 2003 |
December 31, 2002 |
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(Unaudited) |
|
||||||||
Current assets: | ||||||||||
Cash | $ | 1,387 | $ | 3,241 | ||||||
Receivables: | ||||||||||
Trade accounts and notes | 15,487 | 17,265 | ||||||||
Other | 1,282 | 1,039 | ||||||||
16,769 | 18,304 | |||||||||
Less allowance for doubtful accounts | (954 | ) | (979 | ) | ||||||
Net receivables | 15,815 | 17,325 | ||||||||
Inventories | 29,392 | 29,094 | ||||||||
Prepaid expenses | 1,023 | 264 | ||||||||
Tax refund receivable | 1,444 | | ||||||||
Deferred tax asset | 209 | 285 | ||||||||
Total current assets | 49,270 | 50,209 | ||||||||
Property, plant and equipment, at cost: | ||||||||||
Land | 1,432 | 1,432 | ||||||||
Buildings | 21,837 | 21,837 | ||||||||
Machinery and equipment | 22,228 | 22,073 | ||||||||
Tools and dies | 12,142 | 12,137 | ||||||||
Leaseholds, office equipment and vehicles | 10,367 | 10,165 | ||||||||
Assets in progress | 2,443 | 1,455 | ||||||||
70,449 | 69,099 | |||||||||
Less accumulated depreciation and amortization | (35,499 | ) | (34,224 | ) | ||||||
Net property, plant and equipment | 34,950 | 34,875 | ||||||||
Long-term receivables ($41 and $106 due from officers, respectively) | 59 | 127 | ||||||||
Long-term investments | 2,138 | 2,303 | ||||||||
Intangibles and other assets, at cost, less accumulated amortization | 5,511 | 5,241 | ||||||||
$ | 91,928 | $ | 92,755 | |||||||
See accompanying notes to consolidated financial statements.
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LANCER CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
|
March 31, 2003 |
December 31, 2002 |
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---|---|---|---|---|---|---|---|---|---|
|
(Unaudited) |
|
|||||||
Current liabilities: | |||||||||
Accounts payable | $ | 8,606 | $ | 10,141 | |||||
Current installments of long-term debt | 2,729 | 2,726 | |||||||
Line of credit with bank | 7,000 | 5,000 | |||||||
Deferred licensing and maintenance fees | 1,463 | 1,449 | |||||||
Accrued expenses and other liabilities | 6,944 | 7,977 | |||||||
Taxes payable | | 182 | |||||||
Total current liabilities | 26,742 | 27,475 | |||||||
Deferred tax liability | 2,289 | 2,342 | |||||||
Long-term debt, excluding current installments | 9,424 | 9,808 | |||||||
Deferred licensing and maintenance fees | 2,642 | 2,686 | |||||||
Other long-term liabilities | 257 | 293 | |||||||
Total liabilities | 41,354 | 42,604 | |||||||
Commitments and contingencies | |||||||||
Minority interest | | | |||||||
Shareholders' equity: | |||||||||
Preferred stock, without par value 5,000,000 shares authorized; none issued | | | |||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 9,409,319 issued and 9,346,709 outstanding in 2003, and 9,396,121 issued and 9,336,931 outstanding in 2002 |
93 | 93 | |||||||
Additional paid-in capital | 12,781 | 12,710 | |||||||
Accumulated other comprehensive loss | (1,716 | ) | (2,389 | ) | |||||
Deferred compensation | (141 | ) | (169 | ) | |||||
Retained earnings | 39,917 | 40,234 | |||||||
Less common stock in treasury, at cost; 62,610 shares in 2003 and 59,190 shares in 2002 | (360 | ) | (328 | ) | |||||
Total shareholders' equity | 50,574 | 50,151 | |||||||
$ | 91,928 | $ | 92,755 | ||||||
See accompanying notes to consolidated financial statements.
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LANCER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share data)
|
Three Months Ended |
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|
March 31, 2003 |
March 31, 2002 |
||||||
Net sales | $ | 26,874 | $ | 30,250 | ||||
Cost of sales | 21,080 | 23,041 | ||||||
Gross profit | 5,794 | 7,209 | ||||||
Selling, general and administrative expenses | 6,582 | 5,867 | ||||||
Operating (loss) income | (788 | ) | 1,342 | |||||
Other (income) expense: | ||||||||
Interest expense | 168 | 431 | ||||||
Loss from joint ventures | 226 | 92 | ||||||
Minority interest | | (44 | ) | |||||
Other income, net | (201 | ) | (53 | ) | ||||
193 | 426 | |||||||
(Loss) income from continuing operations before income taxes | (981 | ) | 916 | |||||
Income tax (benefit) expense: | ||||||||
Current | (139 | ) | 331 | |||||
Deferred | 168 | 4 | ||||||
29 | 335 | |||||||
(Loss) income from continuing operations | (1,010 | ) | 581 | |||||
Discontinued operations | ||||||||
Loss from operations of discontinued Brazilian subsidiary | 44 | 118 | ||||||
Income tax benefit | (737 | ) | (40 | ) | ||||
(Income) Loss from discontinued operations | (693 | ) | 78 | |||||
Net (loss) earnings | $ | (317 | ) | $ | 503 | |||
Common Shares Outstanding: | ||||||||
Basic | 9,345,331 | 9,303,771 | ||||||
Diluted | 9,345,331 | 9,388,797 | ||||||
Earnings Per Share: | ||||||||
Basic | ||||||||
Earnings from continuing operations | $ | (0.11 | ) | $ | 0.06 | |||
Loss from discontinued operations | $ | 0.08 | $ | (0.01 | ) | |||
Net (loss) earnings | $ | (0.03 | ) | $ | 0.05 | |||
Diluted | ||||||||
Earnings from continuing operations | $ | (0.11 | ) | $ | 0.06 | |||
Loss from discontinued operations | $ | 0.08 | $ | (0.01 | ) | |||
Net (loss) earnings | $ | (0.03 | ) | $ | 0.05 | |||
See accompanying notes to consolidated financial statements.
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LANCER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
|
Three Months Ended |
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|
March 31, 2003 |
March 31, 2002 |
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Cash flow from operating activities: | ||||||||||
Net (loss) earnings | $ | (317 | ) | $ | 503 | |||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | ||||||||||
Depreciation and amortization | 1,286 | 1,173 | ||||||||
Deferred licensing and maintenance fees | (30 | ) | (208 | ) | ||||||
Deferred income taxes | 10 | 4 | ||||||||
(Gain) loss on sale and disposal of assets | (11 | ) | 3 | |||||||
Minority interest | | (44 | ) | |||||||
Loss from joint ventures | 226 | 92 | ||||||||
Stock-based compensation expense | 28 | | ||||||||
Changes in assets and liabilities: | ||||||||||
Receivables | 1,851 | (2,556 | ) | |||||||
Prepaid expenses | (759 | ) | (262 | ) | ||||||
Income taxes receivable | (1,444 | ) | | |||||||
Inventories | (19 | ) | (443 | ) | ||||||
Other assets | (128 | ) | (162 | ) | ||||||
Accounts payable | (1,818 | ) | 2,690 | |||||||
Accrued expenses | (1,113 | ) | 362 | |||||||
Income taxes payable | (182 | ) | 78 | |||||||
Net cash (used in) provided by operating activities | (2,420 | ) | 1,230 | |||||||
Cash flow from investing activities: | ||||||||||
Proceeds from sale of assets | 11 | 2 | ||||||||
Acquisition of property, plant and equipment | (1,214 | ) | (467 | ) | ||||||
Proceed from (purchase of) long-term investments | | (370 | ) | |||||||
Net cash used in investing activities | (1,203 | ) | (835 | ) | ||||||
Cash flow from financing activities: | ||||||||||
Net borrowings under line of credit agreements | 2,000 | 200 | ||||||||
Retirement of long-term debt, net of proceeds | (381 | ) | (377 | ) | ||||||
Net proceeds from exercise of stock options | 69 | 14 | ||||||||
Net cash provided by (used in) financing activities | 1,688 | (163 | ) | |||||||
Effect of exchange rate changes on cash | 81 | 62 | ||||||||
Net (decrease) increase in cash | (1,854 | ) | 294 | |||||||
Cash at beginning of period | 3,241 | 1,849 | ||||||||
Cash at end of period | $ | 1,387 | $ | 2,143 | ||||||
See accompanying notes to consolidated financial statements.
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LANCER CORPORATION
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, 2002 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. New Accounting Pronouncements
SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June 2001 establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. The Company adopted the provisions of SFAS No. 143 for the quarter ended March 31, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company's financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," issued in July 2002, addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability be recognized for the cost associated with an exit or disposal activity only when the liability is incurred, that is, when it meets the definition of a liability in the FASB conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company's financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods ending after December 15, 2002. The adoption of Interpretation No. 45 did not have a material impact on the Company's financial statements.
SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," issued in December 2002, amends SFAS No. 123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are
7
effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial statements for interim periods beginning after December 15, 2002. The Company will continue to account for stock-based compensation using the intrinsic value method under APB Opinion No. 25. The disclosure modifications required for interim periods ending after December 15, 2002 are included in the notes to these financial statements.
Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," issued in January 2003, addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. Interpretation No. 46 applies immediately to variable interests in variable interest entities created and/or obtained after January 31, 2003. The application of this Interpretation did not have a material impact on the Company's financial statements.
3. Discontinued Operations
During the quarter ended June 30, 2002, the Company decided to close its Brazilian subsidiary. Accordingly, the Company has reported the results of operations of the Brazilian subsidiary as discontinued operations in the Consolidated Statements of Operations.
Certain information with respect to the discontinued Brazilian operation for the three months ended March 31, 2003 and 2002 is as follows (amounts in thousands):
|
Three Months Ended |
||||||
---|---|---|---|---|---|---|---|
|
March 31, 2003 |
March 31, 2002 |
|||||
Net sales | $ | | $ | 130 | |||
Pretax loss from discontinued operations | 44 | 118 | |||||
Income tax benefit | (737 | ) | (40 | ) | |||
Net (income) loss from discontinued operations | $ | (693 | ) | $ | 78 | ||
During the first quarter of 2003, the Internal Revenue Service completed its audit of the Company's deduction of its investment in the Brazilian operations, and other matters. As a result, the Company reversed certain tax accruals resulting in a tax benefit of $0.7 million from discontinued operations.
Assets and liabilities of the discontinued operation are as follows (amounts in thousands):
|
March 31, 2003 |
December 31, 2002 |
|||||
---|---|---|---|---|---|---|---|
Current assets | $ | 145 | $ | 293 | |||
Property, plant and equipment, net | | 29 | |||||
Current liabilities | (1,369 | ) | (1,499 | ) | |||
Net liabilities of discontinued operation | $ | (1,224 | ) | $ | (1,177 | ) | |
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4. 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):
|
March 31, 2003 |
December 31, 2002 |
||||
---|---|---|---|---|---|---|
Finished goods | $ | 11,139 | $ | 10,893 | ||
Work in process | 8,434 | 7,647 | ||||
Raw material and supplies | 9,819 | 10,554 | ||||
$ | 29,392 | $ | 29,094 | |||
5. 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. Basic and diluted earnings per share are the same for the three months ended March 31, 2003. The dilutive effect of stock options approximated 85,026 shares for the three months ended March 31, 2002.
6. 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. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated in the table below (amounts in thousands, except share data):
|
March 31, 2003 |
March 31, 2002 |
|||||
---|---|---|---|---|---|---|---|
Net (loss) earnings-as reported | $ | (317 | ) | $ | 503 | ||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax | (28 | ) | (24 | ) | |||
Net (loss) earnings-pro forma | $ | (345 | ) | $ | 479 | ||
Net (loss) earnings per basic share-as reported | $ | (0.03 | ) | $ | 0.05 | ||
Net (loss) earnings per basic share-pro forma | $ | (0.04 | ) | $ | 0.05 | ||
Net (loss) earnings per diluted share-as reported | $ | (0.03 | ) | $ | 0.05 | ||
Net (loss) earnings per diluted share-pro forma | $ | (0.04 | ) | $ | 0.05 | ||
Weighted-average fair value of options, granted during the period | $ | 5.15 | $ | 2.09 |
9
The fair value of each option granted in the three months ended March 31, 2003 and 2002, respectively, is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
Three Months Ended |
||||
---|---|---|---|---|---|
|
March 31, 2003 |
March 31, 2002 |
|||
Expected life (years) | 7 | 5 | |||
Interest rate | 3.3 | % | 3.0 | % | |
Volatility | 47.5 | % | 42.9 | % | |
Dividend yield | None | None |
7. Comprehensive Income
The following are the components of comprehensive income (amounts in thousands):
|
Three Months Ended |
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---|---|---|---|---|---|---|---|---|
|
March 31, 2003 |
March 31, 2002 |
||||||
Net (loss) earnings | $ | (317 | ) | $ | 503 | |||
Foreign currency gain arising during the period | 633 | 309 | ||||||
Unrealized gain (loss) on investment (net of tax) | 40 | (14 | ) | |||||
Unrealized loss on derivative instruments: | ||||||||
Reclassification adjustment for loss included in interest expense | | 5 | ||||||
Comprehensive income | $ | 356 | $ | 803 | ||||
Accumulated other comprehensive loss on the accompanying consolidated balance sheets includes foreign currency gains, unrealized (gain) loss on investment and unrealized loss on derivative instruments.
8. Income Taxes
The actual tax benefit for the three months ended March 31, 2003 differs from the "expected" tax benefit (computed by applying U.S. Federal corporate rate of 34% to earnings before income taxes) primarily as a result of two offsetting factors as described below.
In accordance with SFAS No. 109, no federal income taxes had 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. In the quarter ended March 31, 2003 the Company decided to terminate the DISC election and recorded $0.8 million in income tax expense for the taxes due prior to December 31, 1992.
The Company 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 of $7.7 million on its investment in the Brazilian operation. The Internal Revenue Service (the "Service") and the Company have resolved the Services' challenge of the Company's deduction of its investment in Brazil. As a result, the Company reversed certain tax
10
accruals, resulting in an income tax benefit of $0.4 million to continuing operations, and $0.7 million to discontinued operations.
9. 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).
|
North America |
Latin America |
Asia / Pacific |
Europe |
Corporate |
Total |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended March 31, 2003 | ||||||||||||||||||||
Total revenues | $ | 18,509 | $ | 1,938 | $ | 4,919 | $ | 1,508 | $ | | $ | 26,874 | ||||||||
Operating income (loss) | 1,287 | 473 | 556 | 8 | (3,112 | ) | (788 | ) | ||||||||||||
Three months ended March 31, 2002 |
||||||||||||||||||||
Total revenues | $ | 22,225 | $ | 1,641 | $ | 3,805 | $ | 2,579 | $ | | $ | 30,250 | ||||||||
Operating income (loss) | 2,930 | (8 | ) | 494 | 731 | (2,805 | ) | 1,342 |
All intercompany revenues are eliminated in computing revenues and operating income. The corporate component of operating income represents corporate general and administrative expenses.
10. Product Warranties
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time from the date of sale. The Company has accrued $0.6 million and $0.5 million for estimated product warranty claims for the periods ending March 31, 2003 and December 31, 2002, respectively. The accrued product warranty costs are based primarily on actual warranty claims as well as current information on repair costs. Warranty claims expense for the three months ended March 31, 2003 was $0.12 million. Warranty settlements resulted in a reduction of expenses of $0.02 million for the three months ended March 31, 2002.
11. Other Guaranties
During the first quarter of 2003, Lancer FBD Partnership, Ltd., of which the Company owns 50%, obtained a $1,500,000 revolving credit facility from a bank. The Company guaranteed the repayment of the debt. In accordance with FIN 45, the Company has recorded a liability of $22,500, which represents the estimated cost of the guaranty.
12. Other Matters
In June 2003, the Audit Committee of the Company's Board of Directors (the "Audit Committee") began conducting an internal investigation (the "Investigation"). The Investigation was related to allegations raised by a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley. Although the Company was not a defendant to the lawsuit, certain allegations contained in the lawsuit specifically involved the Company. The Investigation was later expanded to include allegations raised in certain press articles.
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The Company's former independent auditors, KPMG LLP, advised that, until the Investigation was complete, they would not be able to complete their review of the Company's consolidated financial statements for the second and third quarters of 2003. Therefore, the Company was unable to file its quarterly reports for the second and third quarters with the Securities and Exchange Commission (the "SEC"). On December 5, 2003, the Company provided financial information for the second and third quarters of 2003 in exhibits to a Form 8-K, in order to provide information to the investing public while the Investigation continued.
The Company's inability to file its quarterly report for the second quarter of 2003 with the SEC on a timely basis violated the American Stock Exchange ("AMEX") continued listing standards, specifically Section 1003(d) of the AMEX Company Guide. The Company submitted a formal action plan to regain compliance with AMEX on September 30, 2003 and AMEX accepted the plan on October 8, 2003. Since the initial acceptance, the Company has had to revise the plan with the approval of AMEX in order to accommodate new developments, including the Company's inability to file its annual report on Form 10-K for 2003 and its quarterly report on Form 10-Q for the first quarter 2004. The plan currently indicates that the Company expects to regain compliance with the listing standards on or near June 30, 2004. By accepting the plan and its revisions, AMEX has provided the Company with an extension of time in order to regain compliance and is allowing the Company to maintain its listing, subject to periodic progress reviews by the AMEX staff. If the Company does not make progress consistent with the plan or regain compliance in a time and manner acceptable to AMEX, the AMEX staff could initiate delisting procedures. The Company intends to make all efforts to comply fully with the plan, although no assurance can be made that it will achieve compliance by the target date or otherwise progress in a manner acceptable to AMEX.
In August of 2003, the United States Attorney's Office for the Northern District of Georgia (the "US Attorney's Office") informed the Company that it was conducting an investigation arising from allegations raised in a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley, and requested certain information, which the Company supplied. In January 2004, the Company received written notice that the SEC had issued a formal order of investigation that appeared to concern matters which were the subject of the Investigation. The Company has fully cooperated, and intends to continue to cooperate fully, with both the US Attorney's Office and the SEC investigations. Although the Company is unable at this point to predict the scope or outcome of these investigations, it is possible that it could result in the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, and/or other remedies and sanctions. The conduct of these proceedings could adversely affect the Company's business. In addition, the Company expects to continue to incur expenses associated with responding to these agencies, regardless of the outcome, and the efforts and attention of our management team may be diverted from normal business operations. This could adversely affect our business, financial condition, operating results, and cash flow.
On January 30, 2004, the Company announced that the Investigation had concluded and the Audit Committee released a general summary of the Investigation findings. On February 2, 2004, KPMG resigned from its position as independent auditors of the Company. In addition, KPMG withdrew its December 31, 2002, 2001 and 2000 audit reports and advised the Company that the financial statements and related audit reports should no longer be relied upon. KPMG stated in a letter to the Company that they had determined that likely illegal acts, which had been the subject of the Investigation, had come to their attention and that these likely illegal acts would have a material effect
12
on the Company's financial statements. Additionally, KPMG indicated that information had come to their attention that caused them to conclude that the Company's accounting for revenue recognition in connection with sales of equipment to Coca Cola North America Fountain in the years ended December 31, 2001 and 2002 is not correct and has raised concerns that the accounting is not correct in each of the three quarters of fiscal year 2003. The Company has filed the letters from KPMG which outline these assertions and have responded to them in an 8-K, filed with the SEC on February 10, 2004, and two subsequent amendments to that Form 8-K, filed with the SEC on February 24, 2004 and March 10, 2004.
On May 14, 2004, a purported class action, cause number 04-CV-427, naming as defendants the Company, George F. Schroeder, David F. Green and The Coca-Cola Company was filed in the United States District Court for the Western District of Texas by TDH Partners. The action alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, the complaint alleges that during the period October 26, 2000 to February 4, 2004, the defendants engaged in a pattern of fraudulent conduct involving the issuance of a series of false and misleading statements because they materially described inaccurately the nature of Lancer's revenue, with a goal of manipulating the sales of fountain products. The action also alleges that Lancer's public statements failed to fully reveal that it had major manufacturing problems, which resulted in a high defect rate in its products and that Lancer engaged in a fraudulent scheme with its largest customer, to artificially create demand for a new line of soda machine dispensers that Lancer was manufacturing for the customer to sell to its commercial customers. No specific amount of damages has been claimed. Neither the Company nor George F. Schroeder has been served with the lawsuit as of the date of this filing.
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Item 2Management'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.
Critical Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of the Company's Critical Accounting Policies.
Results of Operations
Comparison of the Three-Month Periods Ended March 31, 2003 and 2002
Continuing Operations
Net sales for the three months ended March 31, 2003 were $26.9 million, down 11% from $30.3 million in the same period of 2002. Sales declined 17% in the North America region. During the first quarter, certain of the Company's major customers were engaged in organizational changes. Those activities had a negative effect on the Company's sales. The Company expects sales to the major customer to improve gradually during the second quarter of 2003. Sales declined 42% in the Europe region, due to production problems with one of the Company's valve products, and a generally weak market for equipment. The Company expects the production issues to be resolved during the second quarter. Sales in the Asia/Pacific region rose 29%. Incremental business from the Brisbane, Australia service operation acquired by the Company in the second quarter of 2002, and a large project in Australia contributed to the sales strength. Latin America sales rose 18% on improved sales in Mexico.
Gross margin for the first quarter was 21.6% in 2003, compared to 23.8% in 2002. Lower factory output caused most of the decline in gross margin, as a significant portion of the Company's manufacturing costs is fixed.
Selling, general and administrative expenses were $6.6 million in the three months ended March 31, 2003, up from $5.9 million in the same period last year. Higher employee benefit costs, plus incremental costs associated with the Australian service operation acquired in the second quarter of 2002, caused most of the increase.
Interest expense was $0.2 million in the first quarter of 2003, down from $0.4 million in the 2002 period. The decline was caused by lower average borrowings combined with lower average interest rates. Loss from joint ventures rose to $0.2 million in the first quarter of 2003 from $0.1 million in the same quarter of 2002. The Company's Lancer FBD Partnership ("Lancer FBD") which manufactures frozen beverage equipment accounted for most of the loss. Soft sales and product development expenses contributed to the loss at Lancer FBD. Demand for Lancer FBD's products improved
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significantly late in the first quarter of 2003, and management believes that the entity will contribute to Lancer's profitability in coming quarters. Several items affected Lancer's income tax expense during the first quarter of 2003. First, the Company recorded a $0.8 million charge to income tax expense stemming from the decision to terminate the DISC election for the Company's subsidiary that exports from the United States. Additionally, the Internal Revenue Service completed its audit of the Company's deduction of its investment in Brazil, and other matters. As a result, Lancer reversed certain tax accruals, resulting in an income tax benefit of $0.4 million. The Company's net loss in the first quarter of 2003 was $1.0 million, compared to a net profit of $0.5 million in the first quarter of 2002.
Discontinued Operations
Lancer decided to close its Brazilian subsidiary during the second quarter of 2002. The Brazilian subsidiary's results are now classified as discontinued operations.
Revenue from discontinued operations was nil in the first three months of 2003, and $0.1 million in the same period of 2002. The Company's reversal of accruals following the completion of the Internal Revenue Service audit mentioned above resulted in an income tax benefit from discontinued operations of $0.7 million. The first quarter income (net of tax) from discontinued operations was $0.7 million in 2003, compared to a loss of $78 thousand in 2002.
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 the financial covenants contained in the credit agreement that governs the Company's primary credit facilities.
Cash used in operating activities was $2.4 million in the first three months of 2003, compared to $1.2 million of cash provided by operating activities in the same period last year. The Company made capital expenditures of $1.2 million in the 2003 period, primarily for the expansion of a production facility in Piedras Negras, Mexico, and for equipment and tooling. The capital spending was financed with bank borrowings.
Accounting Matters
In accordance with SFAS No. 109, no federal income taxes had 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. In the quarter ended March 31, 2003 the Company decided to terminate the DISC election and recorded $0.8 million in income tax expense for the taxes due prior to December 31, 1992.
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Item 6Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K dated April 29, 2003. The report incorporated the Company's earnings release for the period ended March 31, 2003.
The Company filed a report on Form 8-K dated May 7, 2003. The report incorporated the Company's news release announcing a frozen beverage equipment agreement.
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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)
June 28, 2004 |
By: |
/s/ CHRISTOPHER D. HUGHES Christopher D. Hughes Chief Executive Officer |
|
June 28, 2004 |
By: |
/s/ MARK L. FREITAS Mark L. Freitas Chief Financial Officer |
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