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, 2001 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 14, 2002, held by non-affiliates of the registrant was approximately $21,787,193 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 14, 2002 was 9,326,101. 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 2001 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 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, 2001, 2000 and 1999, accounted for approximately 41%, 38% and 48% 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, 2001, 2000 and 1999, sales of valves and related accessories accounted for approximately 11%, 12% 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, Brazil and New Zealand account for most of the Company's sales of beer related equipment. Sales of beer equipment represented 5%, 7% and 7% of total net sales in the years ended December 31, 2001, 2000 and 1999, 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 5%, 4% and 3% of net sales in the years ended December 31, 2001, 2000 and 1999. 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 38%, 39% and 29% of the Company's total net sales for the years ended December 31, 2001, 2000 and 1999, respectively. 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, 2001, 2000 and 1999, Company-sponsored research and development expenses were $2.4 million, $2.9 million, and $2.7 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 $7.8 million, $6.0 million and $10.1 million at December 31, 2001, 2000 and 1999, respectively. It is anticipated that 2001 backlog orders will be filled in 2002. 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 36%, 27% and 25% of the Company's total net sales for the years ended December 31, 2001, 2000 and 1999, 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. 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 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, 2001, 2000 and 1999, the Company's sales to customers outside the United States were approximately 30%, 35% 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, 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 2001, 2000, and 1999 follow (amounts in thousands): North Latin America America Pacific Brazil Europe Asia -------- -------- -------- -------- -------- -------- Net sales: 2001 $ 87,770 $ 9,816 $ 13,137 $ 1,092 $ 9,856 $ 2,133 2000 73,373 7,850 16,638 1,538 10,895 2,944 1999 85,889 11,225 15,407 2,065 9,471 5,783 Operating income (loss): 2001 $ 11,105 $ 587 $ 1,358 $ (247) $ 1,601 $ 56 2000 9,056 827 2,196 10 1,923 285 1999 8,451 528 1,535 (6,819) 1,023 845 Additional financial information about segments and geographic areas is set forth in Note 14 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, 2001, the Company had 1,309 full-time employees of whom 69 were engaged in engineering and technical support, 1,046 in manufacturing, 75 in marketing and sales and 119 in general management and administrative positions. 593 employees work in the United States, primarily at the Company's facilities in San Antonio, Texas. 573 employees work at the Company's facility in Piedras Negras, Mexico, 13 are employed by the Company's Brazilian subsidiary, and a total of 82 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 89 United States patents and numerous corresponding foreign patents. It has 22 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 1 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 583,000 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 53,000 square foot plant in Sao Paulo, Brazil, a 5,400 square foot plant in Auckland, New Zealand, a 69,700 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 415,000 square feet of space throughout the world. Total net rent expense for real estate was $1.2 million, $1.5 million and $1.5 million in 2001, 2000 and 1999, respectively. Total rent expense includes $89,000 in 2001, 2000 and 1999 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, 2001. 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 2001 2000 Quarter High Low High Low ------------- ----------------------- ----------------------- First $ 6.50 $ 4.40 $ 5.63 $ 4.13 Second 6.85 4.35 4.75 3.50 Third 6.25 3.70 4.88 3.56 Fourth 5.00 3.60 6.50 4.25 6 On March 14, 2002, the closing price of the Company's common stock, as reported by the ASE, was $5.45 per share. On that date, there were 256 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 earnings to support future growth. ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts) Years Ended December 31, ------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Operating Data: Net sales $ 123,804 $ 113,238 $ 129,840 $ 138,423 $ 119,367 Gross profit 27,112 25,575 21,686 33,407 31,350 Selling, general and administrative expenses 22,759 21,792 22,153 19,911 20,439 Write-down of Brazilian assets - - 5,956 - - Operating income (loss) 4,353 3,783 (6,423) 13,496 10,911 Interest expense 3,200 3,297 3,464 3,899 2,815 Interest and other income, net (1,076) (427) (2,819) (324) (1,027) Earnings (loss) before income taxes 2,229 913 (7,068) 9,921 9,123 Income tax expense (benefit) 827 355 (2,501) 4,078 3,037 Net earnings (loss) 1,402 558 (4,567) 5,843 6,086 Net earnings (loss) per share Basic $ 0.15 $ 0.06 $ (0.50) $ 0.64 $ 0.69 Diluted $ 0.15 $ 0.06 $ (0.50) $ 0.63 $ 0.65 Weighted average shares outstanding Basic 9,127 9,125 9,124 9,060 8,863 Diluted 9,315 9,290 9,124 9,306 9,338 As of December 31, ------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- --------- --------- --------- --------- Balance Sheet Data: Total assets $ 96,300 $ 102,392 $ 103,054 $ 112,840 $ 110,669 Short-term debt 18,318 24,129 22,683 27,094 23,444 Long-term debt, less current installments 11,872 12,724 13,922 17,568 21,565 Shareholders' equity 44,286 43,533 44,476 48,258 42,961 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. 7 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. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 Net sales for the year ended December 31, 2001 increased by $10.6 million, or 9%, to $123.8 million from $113.2 million in 2000. Sales in the North America region accounted for all of the increase, rising $14.4 million, or 20%. Sales of traditional fountain dispensers, frozen beverage dispensers, and other accessory products contributed to the improvement in North America. Sales in the Latin America region (excluding Brazil) improved by $2.0 million, or 25%, in 2001. Sales fell 29% in Brazil, and 28% in Asia, as market conditions remained very weak in those areas. The Pacific region incurred a sales decline of $3.5 million, or 21%. Sales in the region softened in 2001 after several years of strength caused partly by the 2000 Olympic Games in Australia. Gross margin for 2001 was 21.9%, down from 22.6% in 2000. The decline was primarily caused by changes to the sales mix, primarily higher sales of frozen beverage equipment. The lower gross margin on frozen beverage equipment stems from the fact that 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. Increased manufacturing spending also contributed to the gross margin decline in 2001. Selling, general and administrative expenses were $22.8 million in 2001, compared with $21.8 million in 2000. Expenses associated with the Company's Advanced Beverage Solutions subsidiary, which was formed in the second quarter of 2000, as well as expenses relating to employee salaries and research and development caused most of the increase. Interest expense was $3.2 million in 2001 and $3.3 million in 2000. The favorable impact of lower average interest rates in 2001 were partially offset by a $0.4 million expense relating to the accounting for certain interest rate swap agreements under Statement of Financial Accounting Standards No. 133. The Company reported a loss of $0.3 million from its frozen beverage equipment joint venture in 2001, compared to a loss of $0.1 million in 2000. Low manufacturing volumes contributed to the loss. The minority interest benefit of $0.2 million in 2001 and 2000 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. Other income of $1.1 million in 2001 includes a $1.0 million gain relating to the cancellation of a project, and a $0.3 million write-down of the carrying value of an impaired investment. The effective tax rate was 37.1% in 2001, down from 38.9% in 2000. The effective rate improved in 2001 as higher pretax income diluted the impact of nondeductible expenses. Additionally, statutory tax rates declined in certain jurisdictions. Net income was $1.4 million in 2001, and $0.6 million in 2000. COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 Net sales for the year ended December 31, 2000 were $113.2 million, down $16.6 million, or 13%, from $129.8 million in 1999. Sales in the North America region declined $12.5 million, or 15%. Substantially all of the decline was caused by lower sales of frozen beverage equipment. During 1999, the Company shipped a large, non-recurring order of frozen beverage equipment to a single customer. Revenue in Latin America (excluding Brazil) fell $3.4 million, or 30%, while sales in Brazil fell $0.5 million, or 26%. Sales in Asia declined $2.8 million, or 49%. Results in Latin America and Asia continued to suffer from poor economic conditions. Sales rose $1.4 million or, 15%, in Europe partly because of improved sales of frozen beverage equipment. The Company's business in the Pacific region continued to benefit from activity related to the 2000 Olympic Games in Australia, rising $1.2 million, or 8%. 8 Gross margin for the year ended December 31, 2000 was 22.6%, compared to 16.7% in 1999. In the 1999 period, gross margin was negatively impacted by factors including reduced production levels that led to insufficient overhead absorption, an $0.8 million reserve for certain types of equipment whose marketability had become impaired, and changes in the sales mix toward lower margin products, particularly frozen beverage equipment. The lower gross margin on frozen beverage equipment stems from the fact that 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. Selling, general and administrative expenses were $21.8 million in 2000, down from $22.2 million in 1999. In 2000, increases in research and development spending, expenses associated with the Company's Advanced Beverage Solutions subsidiary which was formed in the second quarter of 2000, and employment costs were offset by reductions in a number of discretionary spending categories. 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 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 $3.3 million in 2000, down from $3.5 million in the prior year, reflecting lower average borrowings. The Company reported a loss of $0.1 million from its frozen beverage joint venture in 2000, compared to income of $1.7 million in 1999. The decline in joint venture income was caused by the joint venture producing fewer dispensers in 2000 than in 1999. The Company recorded a gain of $0.9 million in 1999 on the sale of its investment in Victory Refrigeration, a manufacturer of refrigerated coolers. 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 provision for income taxes was $0.4 million in 2000. The Company recorded a tax benefit of $2.5 million in 1999 because of the pretax loss of $7.1 million. The effective rate rose in 2000 because nondeductible expenses were a larger percentage of pretax income in 2000 than in 1999. Additionally, a larger proportion of income was earned in high tax jurisdictions in 2000. Net income in 2000 was $0.6 million, compared to a net loss of $4.6 million in 1999. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of the critical accounting policies or methods used in the preparation of financial statements. Note 1 of the "Notes to Consolidated Financial Statements" includes a summary of the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements. The following is a discussion of the more significant accounting policies and methods. REVENUE RECOGNITION Revenue is recognized in accordance with the following methods: (a) At the time of shipment for all products except for those sold under agreement described in (b).The Company requires a purchase order for all sales. At the time of the shipment, risk of ownership and title passes to the customer. The goods are completely assembled and packaged and the Company has no further performance obligations. (b) As produced and at time of title transfer, for certain products manufactured and warehoused under production and warehousing agreements with certain customers. (c) 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. (d) 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. RESERVE FOR SLOW MOVING AND OBSOLETE INVENTORY The Company's provides for slow moving inventory based on an analysis of the aging and utility of the inventory. Obsolete inventory is 100% reserved at the time the product is deemed obsolete due to technological advances and 9 discontinuation of products. In addition, management's evaluation of the specific items also influences the reserve. The Company' believes that the reserve as of December 31, 2001 is adequate to provide for expected losses. RESERVE FOR MEDICAL AND WORKER'S COMPENSATION 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 estimate of the loss reserves necessary for claims is based on the Company's estimate of claims incurred as of the end of the year. The Company uses detail lag reports provided by the insurance administrator to determine an appropriate reserve balance. The Company has provided for both reported medical costs 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. The Company is self-insured for all workers' compensation claims submitted by Texas employees for on-the-job injuries. The estimate of the loss reserves necessary for claims are based on the Company's estimate of claims incurred as of the December 31, 2001. In addition to detail lag reports provided by the insurance administrator, the Company uses an injury report to determine an appropriate reserve balance. The Company has provided for both reported costs and incurred but not reported costs of workers' compensation coverage in the accompanying consolidated balance sheets. 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 an annual deductible of $500,000 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains its allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to be realized on collection. The methodology used to determine the minimum allowance is based on the Company's prior collection experience. Specific customers' financial strength and circumstance also influence the balance. Accounts that are determined to be uncollectible are written-off in the period in which they are determined to be uncollectible. 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 produced $11.9 million of net cash from operating activities in 2001, compared to $4.5 million in 2000. Changes in inventory levels generated $7.7 million of cash in 2001, and consumed $4.6 million in 2000. Capital spending was $4.0 million in 2001. The Company's investment in production tooling and equipment accounted for most of the spending. During 2001, the Company entered into a $0.7 million capital lease agreement to finance certain production equipment. The balance of capital spending, along with a $7.4 reduction of debt, was financed with cash provided from operations. During 2001, the Company amended its credit facilities with its primary lenders. The amendment adjusted certain financial covenants, added a fixed charge coverage covenant, and extended the expiration of the facilities to July 15, 2003. The Company's 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. 10 CONTRACTUAL OBLIGATIONS The following table provides a summary of the Company's contractual obligations as of December 31, 2001. Additional details about these items are included in the notes to the consolidated financial statements (amounts in thousands). Payments Due by Period ---------------------------------------------------------------------- 2006 and Contractual obligations 2002 2003 2004 2005 After Total -------------------------- -------- --------- -------- -------- ---------- ---------- Indebtedness $ 2,718 $ 11,464 $ 140 $ 149 $ 119 $ 14,590 Operating leases 657 357 244 47 - 1,305 Other 147 147 147 109 - 550 --------- ---------- --------- ------- ---------- ---------- Total contractual cash obligations $ 3,522 $ 11,968 $ 531 $ 305 $ 119 $ 16,445 ========= ========== ======== ========= ========== ========== 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 current Code, the FSC is no longer a separate foreign sales entity. A new category of income - extraterritorial income has been created. Under the Code, as amended, a portion of the extraterritorial income is subject to federal income taxes, while a portion is permanently exempt from federal income taxes. Current tax regulations prevent the Company from maintaining the DISC and have qualifying foreign trade income concurrently. At the time of liquidation of the DISC, 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 liquidated on December 31, 2001, it would have resulted in a reduction of approximately $0.8 million in the Company's net earnings. 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") is examining the Company's U.S. income tax return for 1999 including the deduction of the loss on its investment in the Brazilian operation, and has proposed the disallowance of the deduction. The Company believes that the Service's proposal is without merit, and intends to vigorously defend its position. The Company does not believe that any significant adjustments will be required as a result of this examination. 11 Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," issued in June 2001, establishes accounting and reporting standards for business combinations. This statement eliminates the pooling-of-interests method of accounting for business combinations and requires all business combinations to be accounted for using the purchase method. The Company adopted SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's financial statements. SFAS No. 142, "Goodwill and Other Intangible Assets," issued in June 2001, establishes accounting and reporting standards for acquired goodwill and other intangible assets. This statement addresses how goodwill and other intangible assets that are acquired or have already been recognized in the financial statements should be accounted for. Under this statement goodwill and certain other intangible assets will no longer be amortized, but will be required to be reviewed periodically for impairment of value. The Company has approximately $1.6 million of goodwill, net of accumulated amortization, on December 31, 2001. Amortization expense related to goodwill for the year ended December 31, 2001 was $163,000. The Company will adopt SFAS No. 142 on January 1, 2002. The Company is assessing the impact of SFAS No. 142 on its financial statements and believes the adoption of SFAS No. 142 will not have a material impact on the Company's financial statements. 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 is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The Company believes the adoption of SFAS No. 143 will not have a material impact on the Company's financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," issued in August 2001, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". However, it retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company is required and plans to adopt the provisions of SFAS No. 144 beginning January 1, 2002. The Company believes the adoption of SFAS No. 144 will not have a material impact on the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On December 31, 2001, substantially all of the Company's $30.2 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 $10.0 million. Under the Swap Agreements, the Company pays fixed interest rates ranging from 5.98% to 6.23%, 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, 2001, 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, 2001. In 2001, $1.1 million of the Company's operating income 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 $0.1 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. 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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 15, 2002 Annual Meeting of Shareholders, which is to be filed with the Commission, describes all persons to be nominated to become 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 65 Chairman of the Board George F. Schroeder 62 President, Chief Executive Officer and Director Christopher D. Hughes 55 Chief Operating Officer Mark L. Freitas 41 Corporate Controller Walter J. Biegler 60 Director Jean M. Braley 72 Director Norborne P. Cole, Jr. 60 Director Olivia F. Kirtley 51 Director Richard C. Osborne 58 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. Christopher D. Hughes, Chief Operating Officer, joined the Company in 2000. Prior to joining Lancer, Mr. Hughes worked for 17 years with Enodis Corporation and its predecessor entity, Scotsman Industries. He served in a variety of senior management positions with Enodis, including Vice President-Operations of Kysor Warren, President of Booth/Crystal Tips, President of Halsey Taylor, and Vice President-Operations of Scotsman Ice Systems. Prior to his association with Enodis, Mr. Hughes served as Vice-President-General Manager of Morrison-Knudsen's Central and Western Transit Operations, and as Vice President-Operations of Mooney Aircraft Corporation in Kerrville, Texas. Mr. Mark L. Freitas joined the Company 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." 13 Mr. Norborne P. Cole, Jr. has served as a director of the Company since 2001. He has been a consultant since 1998. From 1994-1998, Mr. Cole was Managing Director/CEO of Coca-Cola Amatil in Sydney, Australia. From 1991-1994, Mr. Cole was President and CEO of Coca-Cola Bottling, SA in Paris, France. From 1989-1990, he was Regional Manager of Coca-Cola Benelux + Denmark. Mr. Cole held a number of positions with The Coca-Cola Company and Coca-Cola bottlers from 1966 to 1989. Ms. Olivia F. Kirtley has served as a director of the Company since 1999. She is a Certified Public Accountant, and is currently Chair of the Board of the American Institute of Certified Public Accountants (AICPA) Board of Examiners, which oversees the uniform CPA Examination for the United States. The AICPA is the national professional organization for over 350,000 CPAs in business and industry, public practice, government and education. From 1998-1999, Ms. Kirtley served as Chair of the AICPA. Until 2000, Ms. Kirtley was Vice President of Vermont American Corporation, a leading global manufacturer and marketer of power tool accessories, headquartered in Louisville, Kentucky. Ms. Kirtley was with Vermont American over 20 years and held 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. She has served on the Board of Directors of Alderwoods Group, Inc. since 2002. Mr. Richard C. Osborne has served as a director of the Company since 2001. He has been a private equity investor since 2000. From 1989-1999, Mr. Osborne served as Chairman, Chief Executive Officer and President of Scotsman Industries, a manufacturer of beverage dispensing equipment, ice machines, display cases, walk-in coolers and refrigeration equipment. He worked in a variety of positions with Scotsman from 1979-1989. Prior to joining Scotsman, Mr. Osborne worked with The Pillsbury Company and General Motors. 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 2001, 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 Olivia F. Kirtley, Walter J. Biegler, and Norborne P. Cole, Jr. The Audit Committee met seven times in 2001. The members of the Compensation Committee were Richard C. Osborne, Jean M. Braley, and Norborne P. Cole, Jr. No member of the Compensation Committee was an executive officer of the Company. The Compensation Committee met three times in 2001. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Compensation and Certain Transactions" in the Company's proxy statement for its May 15, 2002 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 15, 2002 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. 14 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 15, 2002 Annual Meeting of Shareholders, which is to be filed with the Commission, sets forth information regarding certain relationships and related transactions as required in response to this item and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial statements: The financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Schedule" referenced in Item 8. (2) Financial statement schedule: The financial statement schedule filed as a part of this report is listed in the "Index to Consolidated Financial Statements and Schedule" referenced in Item 8. (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. 15 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. 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. 10.42 First Amendment to Seventh Amendment and Restated Credit Agreement between Lancer Corporation and The Frost National Bank, Harris Trust and Savings Bank, and Whitney National Bank. 10.43 Master Lease and Supplement between The Frost National Bank and Lancer Partnership, Ltd. 21.1 List of Significant Subsidiaries of the Registrant 23.1 Consent of KPMG LLP * These exhibits are incorporated by reference to the same Exhibit to the Registrant's Registration Statement No. 33-82434 filed on Form S-1 with the Securities and Exchange Commission (the "Commission") on August 5, 1994, as amended by Amendment No. 1 to Form S-1 Registration Statement with the Commission on August 23, 1994. ++ These exhibits are incorporated by reference to the 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. *** This exhibit is incorporated by reference to the Exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 2000. (b) Reports on Form 8-K: None 16 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LANCER CORPORATION by: /s/ GEORGE F. SCHROEDER George F. Schroeder March 25, 2002 President and CEO 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 25, 2002 ----------------------- ----------------------------- ----------------- Alfred A. Schroeder Date /s/ GEORGE F. SCHROEDER President and Director March 25, 2002 ------------------------ ----------------------------- ----------------- George F. Schroeder (principal executive officer) Date /s/ WALTER J. BIEGLER Director March 25, 2002 ------------------------ ----------------------------- ----------------- Walter J. Biegler Date /s/ JEAN M. BRALEY Director March 25, 2002 ------------------------ ----------------------------- ----------------- Jean M. Braley Date /s/ NORBORNE P. COLE, JR. Director March 25, 2002 ------------------------ ------------------------------ ----------------- Norborne P. Cole, Jr. Date /s/ OLIVIA F. KIRTLEY Director March 25, 2002 ------------------------ ----------------------------- ----------------- Olivia F. Kirtley Date /s/ RICHARD C. OSBORNE Director March 25, 2002 ------------------------ ----------------------------- ----------------- Richard C. Osborne Date 17 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, 2001 and 2000 F-3 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2001 F-5 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2001 F-6 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001 F-7 Notes to Consolidated Financial Statements F-8 Schedule for the years ended December 31, 2001, 2000 and 1999 II-Reserve account F-23 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 schedule are not required under the related instructions, are not applicable,or the information required thereby is set forth in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Lancer Corporation: We have audited the accompanying consolidated balance sheets of Lancer Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities. KPMG LLP San Antonio, Texas March 7, 2002 F-2 LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (Amounts in thousands, except share data) ASSETS 2001 2000 ---------- ---------- Current assets Cash $ 1,849 $ 771 Receivables: Trade accounts and notes 17,477 16,222 Other 850 643 ---------- ---------- 18,327 16,865 Less allowance for doubtful accounts (467) (379) ---------- ---------- Net receivables 17,860 16,486 ---------- ---------- Inventories 32,160 40,224 Prepaid expenses 655 642 Deferred tax asset 211 273 ---------- ---------- Total current assets 52,735 58,396 ---------- ---------- Property, plant and equipment, at cost: Land 1,260 1,260 Buildings 21,983 21,981 Machinery and equipment 23,037 21,838 Tools and dies 12,884 11,273 Leaseholds, office equipment and vehicles 10,826 10,143 Assets in progress 1,194 1,581 ========== ========== 71,184 68,076 Less accumulated depreciation and amortization (35,183) (31,384) ========== ========== Net property, plant and equipment 36,001 36,692 ---------- ---------- Long-term recivables ($407 and $529 due from officers, respectively) 612 761 Long term investments 2,278 2,599 Intangibles and other assets, at cost, less accumulated amortization 4,674 3,944 ---------- ---------- $96,300 $ 102,392 ========== ========== See accompanying notes to consolidated financial statements. F-3 LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, 2001 and 2000 (Amounts in thousands, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------- ------------- Current liabilities: Accounts payable $ 7,911 $ 8,962 Current installments of long-term debt 2,718 3,129 Line of credit with bank 15,600 21,000 Deferred licensing and maintenance fees 1,295 774 Accrued expenses and other liabilities 4,754 5,071 Taxes payable 896 584 ------------- ------------- Total current liabilities 33,174 39,520 Deferred tax liability 2,032 2,448 Long-term debt, excluding current installments 11,872 12,724 Deferred licensing and maintenance fees 4,478 3,873 Other long-term liabilities 403 - ------------- ------------- Total liabilities 51,959 58,565 ------------- ------------- Commitments and contingencies - - Minority interest 55 294 Shareholders' equity: Preferred stock, without par value: 5,000,000 shares authorized; none issued - - Common stock, $.01 par value: 50,000,000 shares authorized; 9,127,757 and 9,124,857 issued and outstanding in 2001 and 2000, respectively 91 91 Additional paid in capital 11,943 11,933 Accumulated other comprehensive loss (3,976) (3,317) Retained earnings 36,228 34,826 ------------- ------------- Total shareholders' equity 44,286 43,533 ------------- ------------- $ 96,300 $ 102,392 ============= ============= See accompanying notes to consolidated financial statements. F-4 LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2001, 2000 and 1999 (Amounts in thousands, except share data) 2001 2000 1999 ------------ ------------ ------------ Net sales $ 123,804 $ 113,238 $ 129,840 Cost of sales 96,692 87,663 108,154 ------------ ------------ ------------ Gross profit 27,112 25,575 21,686 Selling, general and administrative expenses 22,759 21,792 22,153 Write-down of Brazilian assets - - 5,956 ------------ ------------ ------------ Operating income (loss) 4,353 3,783 (6,423) ------------ ------------ ------------ Other (income) expense: Interest expense 3,200 3,297 3,464 Loss (income) from joint venture 296 82 (1,677) Gain on sale of investment - - (895) Minority interest (239) (248) (124) Interest and other income, net (1,133) (261) (123) ------------ ------------ ------------ 2,124 2,870 645 ------------ ------------ ------------ Earnings (loss) before income taxes 2,229 913 (7,068) ------------ ------------ ------------ Income tax expense (benefit): Current 957 1,059 (2,675) Deferred (130) (704) 174 ------------ ------------ ------------ 827 355 (2,501) ------------ ------------ ------------ Net earnings (loss) $ 1,402 $ 558 $ (4,567) ============ ============ ============ Common Shares and Equivalents Outstanding: Basic 9,127,062 9,124,857 9,123,527 Diluted 9,314,789 9,290,003 9,123,527 Earnings (Loss) Per Share: Basic $ 0.15 $ 0.06 $ (0.50) Diluted $ 0.15 $ 0.06 $ (0.50) See accompanying notes to consolidated financial statements. F-5 LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Years ended December 31, 2001, 2000 and 1999 (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, 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 Comprehensive loss: Net earnings - - - 558 558 Cumulative translation adjustment - - (1,393) - (1,393) Unrealized loss on investment, net of tax - - (108) - (108) -------------- Total comprehensive loss: (943) ----------- --------------- -------------- -------------- -------------- Balance December 31, 2000 91 11,933 (3,317) 34,826 43,533 Comprehensive Income: Net earnings - - - 1,402 1,402 Cumulative translation adjustment - - (817) - (817) Reclassification adjustment for realized loss included in net income, net of tax 172 172 Unrealized loss on derivative instruments: Initial loss upon Adoption of SFAS No. 133 - - (51) - (51) Reclassification adjustment for loss included in interest expense - - 37 - 37 -------------- Total comprehensive income: 743 -------------- Exercise of 2,900 stock options - 10 - - 10 ----------- --------------- -------------- -------------- -------------- Balance December 31, 2001 $ 91 $ 11,943 $ (3,976) $ 36,228 $ 44,286 =========== =============== ============== ============== ============== See accompanying notes to consolidated financial statements. F-6 LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999 (Amounts in thousands) 2001 2000 1999 ------------- ------------- ------------- Cash flow from operating activities: Net earnings (loss) $ 1,402 $ 558 $ (4,567) Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 4,816 4,205 3,990 Deferred licensing and maintenance fees 1,126 (472) 2,521 Deferred income taxes (453) (704) 174 (Gain) loss on sale and disposal of assets (6) 10 22 Gain on sale of long-term investments - - (895) Minority interest (239) (248) (124) Loss (earnings) from joint venture 296 82 (1,677) Impairment of investment 279 - - Impairment of Brazilian assets - - 5,956 Change in assets and liabilities, net of effects from purchase of subsidiary: Receivables (1,532) 635 3,041 Prepaid expenses (13) (177) 95 Income taxes receivable - 3,505 (3,300) Inventories 7,678 (4,646) 9,431 Other assets (720) (365) (567) Accounts payable (868) 409 303 Accrued expenses (239) 1,098 (1,298) Income taxes payable 343 584 (12) ------------- ------------- ------------ Net cash provided by operating activities 11,870 4,474 13,093 ------------- ------------- ------------ Cash flow from investing activities: Proceeds from sale of assets 52 2 16 Acquisition of property, plant and equipment (3,998) (5,166) (4,957) Acquisition of subsidiary company - - (1,719) Proceeds of long-term investments and affiliates 7 209 2,738 ------------- ------------- ------------ Net cash used in investing activities (3,939) (4,955) (3,922) ------------- ------------- ------------ Cash flow from financing activities: Net borrowings (repayments) under line of credit agreements (5,400) 3,400 (4,700) Proceeds from issuance of long-term debt 697 - 1,457 Retirement of long-term debt (1,960) (3,075) (4,827) Net proceeds from exercise of stock options 10 - 20 ------------- ------------- ------------ Net cash (used in) provided by financing activities (6,653) 325 (8,050) ------------- ------------- ------------ Effect of exchange rate changes on cash (200) (300) (1,013) Net increase (decrease) in cash 1,078 (456) 108 Cash at beginning of year 771 1,227 1,119 ------------- ------------- ------------ Cash at end of year $ 1,849 $ 771 $ 1,227 ============= ============= ============ See accompanying notes to consolidated financial statements F-7 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Lancer Corporation (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 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 in 1999. 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 in 1999. LONG-TERM INVESTMENTS The Company owns 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. F-8 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVE INSTRUMENTS The Company accounts for derivative instruments using the principles of Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 provides guidance on accounting and financial reporting for derivative instruments and hedging activities. SFAS No. 133 requires the recognition of all derivatives as either assets or liabilities on the consolidated balance sheet, and the periodic measurement of those instruments at fair value. The Company has determined that hedge accounting will not be elected for derivatives existing at January 1, 2001, which consist of interest rate swap agreements. The Company entered into the swap agreements to effectively fix the interest rate on a portion of its debt in order to lessen the Company's exposure to floating rate debt. Future changes in the fair value of those derivatives will be recorded in income. The adoption of SFAS No. 133 as of January 1, 2001, resulted in a cumulative-effect-type expense to other comprehensive income of $51,000 which will be recognized in interest expense over the term of the interest rate swap agreements ranging from 11 months to 24 months. As of December 31, 2001, the fair value of the interest rate swap agreements was a liability of $379,000, which is included in accrued expenses in the accompanying financial statements. During 2001, the Company recognized in interest expense $37,000 relating to the transition adjustment and $328,000 relating to the change in the fair value of the interest rate swap agreements, respectively. 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 187,727, 165,146, and 0 shares in 2001, 2000 and 1999, respectively. Options to purchase approximately 132,250, 293,875 and 110,750, shares in 2001, 2000 and 1999, 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. 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 and at time of title transfer, 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 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. F-9 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT Company-sponsored research and development costs are expensed as incurred and totaled approximately $2.4 million, $2.9 million and $2.7 million for the years ended December 31, 2001, 2000 and 1999, 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 "Accounting for Stock-Based Compensation" are made in the notes to the consolidated financial statements. (See note 6.) COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income (loss) consists of net earnings (loss), currency translation adjustment, unrealized gain (loss) on investment, and unrealized loss on derivative instruments 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. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. F-10 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 141, "Business Combinations," issued in June 2001, establishes accounting and reporting standards for business combinations. This statement eliminates the pooling-of-interests method of accounting for business combinations and requires all business combinations to be accounted for using the purchase method. The Company adopted SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's financial statements. SFAS No. 142, "Goodwill and Other Intangible Assets," issued in June 2001, establishes accounting and reporting standards for acquired goodwill and other intangible assets. This statement addresses how goodwill and other intangible assets that are acquired or have already been recognized in the financial statements should be accounted for. Under this statement goodwill and certain other intangible assets will no longer be amortized, but will be required to be reviewed periodically for impairment of value. The Company has approximately $1.6 million of goodwill, net of accumulated amortization, at December 31,2001. Amortization expense related to goodwill for the year ended December 31, 2001 was $163,000. The Company will adopt SFAS No. 142 on January 1, 2002. The Company is assessing the impact of SFAS No. 142 on its financial statements and believes the adoption of SFAS No. 142 will not have a material impact on the Company's financial statements. 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 is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The Company believes the adoption of SFAS No. 143 will not have a material impact on the Company's financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," issued in August 2001, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". However, it retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company is required and plans to adopt the provisions of SFAS No. 144 beginning January 1, 2002. The Company believes the adoption of SFAS No. 144 will not have a material impact on the Company's financial statements. 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 inventory, manufacturing equipment and goodwill 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. The amount of the write-down was determined based on both internal and external independent valuations. F-11 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENT IN JOINT VENTURE Summarized financial data for investment in joint venture is as follows (amounts in thousands): CONDENSED STATEMENT OF OPERATIONS 2001 2000 1999 --------------------------------- ------------- ------------- ------------- Net Sales $ 8,415 $ 8,632 $ 22,991 Gross profit 1,078 2,251 5,480 Net (loss) earnings (1,323) 154 3,826 CONDENSED BALANCE SHEET ----------------------- Current assets $ 3,396 $ 3,225 Non-current assets 3,224 3,344 ------------- ------------- $ 6,620 $ 6,569 ============= ============= Current liabilities $ 2,389 $ 1,008 Non-current liabilities 2 9 Partners' capital 4,229 5,552 ------------- ------------- $ 6,620 $ 6,569 ============= ============= The Company's 50% share of net earnings, after elimination of profit in ending inventory, is included in other income. The Company purchases substantially all equipment manufactured by the joint venture as it is produced. 4. INCOME TAXES An analysis of income tax expense (benefit) follows (amounts in thousands): 2001 Current Deferred Total ------- ------- -------- ------- Federal $ -- $ (246) $ (246) State 24 -- 24 Foreign 933 116 1,049 ------- ------- ------- Total $ 957 $ (130) $ 827 ======= ======= ======= 2000 ------- Federal $ (297) $ (680) $ (977) State 24 -- 24 Foreign 1,332 (24) 1,308 ------- ------- ------- Total $ 1,059 $ (704) $ 355 ======= ======== ======= 1999 ------- Federal $(3,563) $ 158 $(3,405) State 24 -- 24 Foreign 864 16 880 ------- -------- ------- Total $(2,675) $ 174 $(2,501) ======= ======== ======= F-12 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): 2001 2000 ------------ ---------- Deferred tax assets: Accounts receivable $ 217 $ 85 Inventory 257 382 Compensation and benefits 141 349 Net operating loss carryforward, expiring in 2020 1,364 579 Minimum taxes creditable in foreign jurisdictions 503 323 Foreign deferred assets 114 108 Other 252 392 ------------ ---------- Total gross deferred tax assets 2,848 2,218 ------------ ---------- Deferred tax liabilities: Property, plant and equipment 3,283 3,007 DISC income 1,386 1,386 ------------ ---------- Total deferred tax liability 4,669 4,393 ------------ ---------- Net deferred tax liability $ 1,821 $ 2,175 ============ ========== 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 of these deductible differences at December 31, 2001. The actual tax expense (benefit) differs from the "expected" tax expense (benefit) (computed by applying U.S. Federal corporate rate of 34% to earnings before income taxes) as follows (amounts in thousands): 2001 2000 1999 ------- ------- ------- Computed "expected" tax expense (benefit) $ 758 $ 310 $(2,403) Increase (decrease) in taxes resulting from: Effect of foreign tax losses - - (256) Effect of nondeductible expenses 44 99 167 State, net of Federal benefit 16 16 16 Effect of foreign tax rates 34 83 68 Other, net (25) (153) (93) ------- ------- ------- $ 827 $ 355 $(2,501) ======= ======= ======= 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 to 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. F-13 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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") is examining the Company's U.S. income tax return for 1999 including the deduction of the loss on its investment in the Brazilian operation, and has proposed the disallowance of the deduction. The Company believes that the Service's proposal is without merit, and intends to vigorously defend its position. The Company does not believe that any significant adjustments will be required as a result of this examination. Actual net Federal income taxes (refunded) paid were approximately $0.0, ($3.0) million, and ($0.3) million for 2001, 2000, and 1999, respectively. 5. LONG-TERM DEBT AND LINE OF CREDIT WITH BANKS (Amounts in thousands) 2001 2000 --------- -------- $14,824 notes payable to banks, due in quarterly installments plus interest based upon prime and LIBOR (weighted average rate of 4.43% at December 31, 2001) through July 15, 2003; secured by substantially all of the Company's assets in the United States $ 12,724 $ 14,124 Note payable to seller of Brazil subsidiary, due in annual installments plus interest based on LIBOR (weighted average interest rate of 2.68% at December 31, 2001) through December 31, 2001 1,196 1,594 Capital lease payable to bank, due in monthly installments plus interest of 6.72% through November 1, 2006 670 - Other - 135 --------- -------- 14,590 15,853 Less current installments of long-term debt 2,718 3,129 --------- -------- $ 11,872 $ 12,724 ========= ======== The Company also has a $30.0 million revolving credit facility (the "Revolving Facility") from three banks. Borrowings under the Revolving Facility are based on certain percentages of accounts receivable and inventories. The Revolving Facility is collateralized by substantially all of the Company's assets in the United States. Amounts outstanding under the revolving facility were $15.6 million at December 31, 2001 and $21.0 million at December 31, 2000. There was $5.4 million available under the Revolving Facility on December 31, 2001. Interest accrues at a rate based upon either LIBOR or upon the Banks' prime rate. The weighted average interest rate was 4.24% as of December 31, 2001. The Revolving Facility expires July 15, 2003. The note payable to the seller of the Company's Brazil subsidiary was due on December 31, 2001. Because of the unfavorable business conditions in Brazil, the holder of the note has not demanded payment of the amount due. The Company has not repaid the $1.196 million balance pending discussions with the holder of the note to restructure the debt. F-14 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Annual maturities on long-term debt outstanding at December 31, 2001 are as follows (amounts in thousands): 2002 $ 2,718 2003 11,464 2004 140 2005 149 2006 119 ---------- $ 14,590 ========== 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 $10.0 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 6.23%, 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 institution 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 with all of these financial ratios and covenants as of December 31, 2001. Actual interest paid was approximately $3.0 million, $3.2 million and $3.6 million in 2001, 2000 and 1999, 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, 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 Granted 225,000 3.57 - 5.00 Canceled (22,950) 3.57 - 13.25 --------------- ---------------------- Outstanding at December 31, 2000 745,038 $ 1.29 - $ 16.54 Granted 29,000 5.51 - 6.06 Canceled (168,725) 3.56 - 10.00 Exercised (2,900) 3.57 - 3.57 --------------- ---------------------- Outstanding at December 31, 2001 602,413 $ 1.29 16.54 =============== ====================== F-15 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of exercisable options follows: Number of Weighted Range of Exercisable Avg. of Prices Options Exercise Price --------------------------------------------------------------------- 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 ===================================================================== 2000 $1.0 to 5.0 300,761 $ 1.66 $5.1 to 10.0 191,375 $ 7.67 $10.0 to 17.0 32,100 $ 14.97 ===================================================================== 2001 $1.0 to 5.0 340,562 $ 1.91 $5.1 to 10.0 46,600 $ 8.54 $10.0 to 17.0 40,700 $ 14.95 ===================================================================== The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation has been recognized for the stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net earnings (loss) and net earnings (loss) per share would have been adjusted to the pro forma amounts indicated in the table below (amounts in thousands, except share data): 2001 2000 1999 --------- -------- --------- Net earnings (loss) as reported $ 1,402 $ 558 $ (4,567) Net earnings (loss) pro forma 1,158 305 (4,893) Net earnings (loss) per basic share-as reported 0.15 0.06 (0.50) Net earnings (loss) per basic share-pro forma 0.13 0.03 (0.54) Net earnings (loss) per diluted share-as reported 0.15 0.06 (0.50) Net earnings (loss) per diluted share-pro forma 0.12 0.03 (0.54) Weighted-average fair value of options, granted during the year 2.02 1.51 3.61 The fair value of each option granted in 2001, 2000 and 1999 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2001 2000 1999 --------- -------- --------- Expected life (years) 4 4 4 Interest rate 4.0% 5.0% 6.5% Volatility 44.4% 43.4% 42.0% Dividend yield None None None F-16 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SELF-INSURED MEDICAL 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 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 of $500,000 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, 2001, 2000 and 1999 include Company contributions to the plan of approximately $0.2 million, $0.5 million and $0.4 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 2001, 2000 and 1999 totaled approximately $0.1 million, $0.2 million, and $0.1 million, 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. At December 31, 2001, future minimum lease payments required under all noncancelable operating leases are as follows (amounts in thousands): 2002 $ 657 2003 357 2004 244 2005 47 ---------- Total minimum lease payments $ 1,305 ========== Total rental expense was approximately $1.3 million, $2.5 million and $2.8 million in 2001, 2000 and 1999, respectively. F-17 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $1.7 million, $1.2 million and $1.1 million in 2001, 2000 and 1999, respectively. 8. LONG-TERM RECEIVABLES Long-term receivables are interest bearing and include approximately $0.4 million and $0.5 million due from officers as of December 31, 2001 and 2000, 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. The Company's investment in Packaged Ice, Inc. was written-down by $279,000 to the fair market value at December 31, 2001. DEBT The carrying amount of the Company's long-term debt and short-term debt approximate market value as the rates are variable or are fixed at current market rates. SWAP AGREEMENTS The carrying amount of the Company's interest rate swap agreements approximate market value. The fair market value of interest rate swap agreements was approximately $(0.4) million as of December 31, 2001. F-18 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. 11. SUPPLEMENTAL BALANCE SHEET AND INCOME STATEMENT INFORMATION Inventory components are as follows (amounts in thousands): 2001 2000 --------- --------- Finished goods $ 14,350 $ 16,407 Work in process 8,199 11,043 Raw material and supplies 9,611 12,774 --------- --------- $ 32,160 $ 40,224 ========= ========= Accrued expenses consist of the following (amounts in thousands): As of December 31, -------------------- 2001 2000 --------- --------- Payroll and related expenses $ 1,786 $ 1,832 Commissions 499 556 Health and workers' compensation 561 604 Property taxes 297 319 Interest 679 434 Other 932 1,326 --------- --------- $ 4,754 $ 5,071 ========= ========= 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. F-19 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The fourth quarter of 2001 includes an impairment loss of $0.3 million related to the Company's investment in Packaged Ice, Inc. The following table reflects the quarterly results for 2001 and 2000 (in thousands except for share data): Three Months Ended -------------------------------------------- 2001 March June September December ---- 31 30 30 31 -------- -------- ---------- --------- Net sales $ 30,015 $ 31,441 $ 31,388 $ 30,960 Gross profit 7,127 7,383 7,252 5,350 Net earnings (loss) 871 482 561 (512) Earnings (loss) per share: Basic $ 0.10 $ 0.05 $ 0.06 $ (0.06) Diluted $ 0.09 $ 0.05 $ 0.06 $ (0.06) Three Months Ended -------------------------------------------- 2000 March June September December ---- 31 30 30 31 -------- -------- ---------- --------- Net sales $ 27,679 $ 31,463 $ 29,562 $ 24,534 Gross profit 6,187 8,068 6,630 4,690 Net earnings (loss) 315 806 549 (1,112) Earnings (loss) per share: Basic $ 0.03 $ 0.09 $ 0.06 $ (0.12) Diluted $ 0.03 $ 0.09 $ 0.06 $ (0.12) 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-20 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS North Latin Amounts in thousands America America Pacific Brazil Europe Asia Corporate Total ---------- ---------- ---------- --------- ----------- ---------- ---------- ------------ Year ended December 31, 2001 Total revenues $ 87,770 9,816 13,137 1,092 9,856 2,133 - $ 123,804 Depreciation and amortization 4,132 170 317 136 61 - 4,816 Operating income (loss) 11,105 587 1,358 (247) 1,601 56 (10,107) 4,353 Identifiable assets - at December 31, 2001 67,417 13,677 9,080 1,798 4,328 - - 96,300 Capital expenditures 3,292 471 221 12 2 - - 3,998 Year ended December 31, 2000 Total revenues $ 73,373 7,850 16,638 1,538 10,895 2,944 - $ 113,238 Depreciation and amortization 3,583 156 342 60 64 - - 4,205 Operating income (loss) 9,056 827 2,196 10 1,923 285 (10,514) 3,783 Identifiable assets - at December 31, 2000 76,885 9,348 9,522 1,915 4,722 - - 102,392 Capital expenditures 3,916 290 471 368 121 - - 5,166 Year ended December 31, 1999 Total revenues $ 85,889 11,225 15,407 2,065 9,471 5,783 - $ 129,840 Depreciation and amortization 3,250 151 429 139 21 - - 3,990 Operating income (loss) 8,451 528 1,535 (6,819) 1,023 845 (11,986) (6,423) Identifiable assets at 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 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 (Amounts in thousands): 2001 2000 1999 --------- ---------- --------- Soft drink, citrus and frozen beverage dispensers $ 51,001 $ 43,045 $ 62,886 Post mix dispensing valves 13,818 13,359 15,222 Beer dispensing systems 6,281 8,472 9,641 Other 52,704 48,362 42,091 --------- --------- --------- Total revenue $ 123,804 $ 113,238 $ 129,840 ========= ========= ========= F-21 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following provides information regarding net sales to major customers, domestically and internationally (amounts in thousands): Percent of Percent of Percent of 2001 Net Sales 2000 Net Sales 1999 Net Sales --------- ---------- --------- ---------- --------- ---------- United States: The Coca-Cola Company $ 44,163 36% $ 29,649 27% $ 32,394 25% Other 42,025 34 42,829 38 51,838 40 --------- ---------- --------- ---------- --------- ---------- 86,188 70 72,478 65 84,232 65 --------- ---------- --------- ---------- --------- ---------- Outside of United States: Other 37,616 30 40,760 35 45,608 35 --------- ---------- --------- ---------- --------- ---------- 37,616 30 40,760 35 45,608 35 --------- ---------- --------- ---------- --------- ---------- $ 123,804 100% $ 113,238 100% $ 129,840 100% ========= ========== ========= ========== ========= ========== 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-22 LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE II RESERVE ACCOUNT Balance at Additions Beginning of Charged to Deductions Balance at Description Year Expense from Account End of Year ----------- ------------ ---------- -------------- ----------- Allowance for doubtful accounts (amounts in thousands): December 30, 2001 $ 379 $ 122 $ 34 $ 467 December 31, 2000 $ 414 $ 66 $ 101 $ 379 December 31, 1999 $ 326 $ 154 $ 66 $ 414 F-23