**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**Annual Report Pursuant to Section13 or 15 (d) of theSecurities Exchange Act of 1934**

 
| **For  the fiscal year ended December 31, 2002** | **Commission file number 0-13875** |
|--------------------------------------------------|------------------------------------|

 

**Lancer Corporation**

(Exact name of registrantas specified in its charter)

 
| **Texas**                                                                  |   | **74-1591073**                     |
|----------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)           |   | (IRS Employer  Identification No.) |
|                                                                       |   |                               |
| **6655 Lancer Blvd., San Antonio,  Texas**                                 |   | **78219**                          |
| (Address of principal  executive offices)                                  |   | (Zip Code)                         |
|                                                                       |   |                               |
| Registrant’s telephone  number, including area code**(210) 310-7000** |
|                                                                       |   |                               |
| Securities registered  pursuant to Section 12 (b) of the Act:              |
| **NONE**                                                                   |
|                                                                       |   |                               |
| Securities registered  pursuant to Section 12 (g) of the Act:              |
| **Common Stock, par value $.01 per  share**                                |
| (Title of class)                                                           |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES  ý  NO  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ý

 

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

YES  o  NO  ý

 

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

 

The aggregate market value of the registrant’s commonstock, par value $.01 per share, as of March 6, 2003, held by non-affiliates ofthe registrant was approximately $37,791,011 based on the closing saleprice.  For purposes of this computation,all executive officers, directors and 5% beneficial owners of the registrantare deemed to be affiliates.  Suchdetermination 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 ofMarch 6, 2003 was 9,345,931.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

 

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Portions of the registrant’s definitive proxy statement to be filedwith the Securities and Exchange Commission (the “Commission”) not later than120 days after the end of the fiscal year covered by this report and preparedfor the 2003 annual meeting of shareholders are incorporated by reference intoPart III of this report.

 

This document contains certain “forward-looking” statements as suchterm is defined in the Private Securities Litigation Reform Act of 1995 andinformation relating to the Company and its subsidiaries that are based on thebeliefs 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 similarimport, as they relate to the Company or its subsidiaries or Companymanagement, 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 ofcertain factors including, without limitation, competitive factors, generaleconomic conditions, customer relations, relationships with vendors, theinterest 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 bythe Company with the Securities and Exchange Commission.  Based upon changing conditions, should anyone or more of these risks or uncertainties materialize, or should anyunderlying assumptions prove incorrect, actual results may vary materially fromthose described herein as anticipated, believed, estimated, expected, forecast,planned or intended.  The Company doesnot intend to update these forward-looking statements.

 

**PART I**

 

**ITEM 1.****                                     BUSINESS**

 

**General**

 

Lancer designs, engineers, manufactures and markets fountain softdrink, beer and citrus beverage dispensing systems, and other equipment for usein the food service and beverage industry. Lancer also markets frozen beverage dispensers manufactured by a jointventure that is 50% owned by the Company. Lancer’s products are sold by Company personnel and through independentdistributors and agents principally to major soft drink companies (primarilyThe Coca-Cola Company), bottlers, equipment distributors, beer breweries andfood service chains for use in various food and beverage operations.  The Company is a vertically integratedmanufacturer whose tooling, production, assembly and testing capabilitiesenable it to fabricate a substantial portion of the components used in Companyproducts.  In addition, the Company isan innovator of new products in the beverage dispensing industry and has alarge technical staff supported by state-of-the-art engineering facilities todevelop these new products and to enhance existing product lines in response tochanging industry requirements and specific customer demands.

 

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

 

**TheBeverage Dispensing Industry**

 

The manufacture of fountain soft drink and other beverage dispensingsystems 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 dispensingsystems generally sell most of their products to one or more major soft drinkcompanies, licensed bottlers, large international breweries, equipmentdistributors 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, inturn sell or lease the dispensing systems to restaurants, convenience stores,concessionaires and other food and beverage operators.  Soft drink companies generally recommendthat their affiliates purchase beverage dispensing systems from approvedmanufacturers.  Informal, long-termrelationships between certain manufacturers and soft drink companies havebecome the norm in the industry.

 

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**Products**

 

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

 

Soft Drink, Citrus, and Frozen Beverage Dispensers

 

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

 

Lancer manufactures several models of mechanically cooled citrusdispensing systems for counter top use. The Coca-Cola Company is the primarycustomer for the Company’s citrus dispensing products.

 

Lancer FBD Partnership, Ltd., a joint venture in which Lancer owns a50% interest, manufactures frozen beverage dispensers.  Prior to May 1, 2002, the joint venture soldits production to Lancer, and Lancer marketed and distributed the equipment tothird parties.  Effective May 1, 2002,the joint venture began selling directly to most third party customers, and incertain situations, paying a commission to Lancer.

 

The prices of the Company’s dispensing systems vary depending ondispensing capacity, number of drink selections, speed of beverage flow andother customer requirements.  Sales ofsoft drink, citrus, and frozen beverage dispensers for the years ended December31, 2002, 2001 and 2000, accounted for approximately 45%, 41% and 38% of totalsales, respectively.

 

Post-Mix Dispensing Valves

 

The Company manufactures and sells post-mix dispensing valves which mixsyrup and carbonated water at a preset ratio. The valves are designed to be interchangeable with existing post-mixvalves used with Coca-Cola products. The Company manufactures accessories for the valves, includingpush-button activation, water-only dispensing mechanisms, portion controls andother automatically activated valve controls. The Company’s primary valve, the LEV, has been designated by TheCoca-Cola Company as the standard valve for the U.S. market.  Lancer uses the LEV in many of its owndispensing systems, and also sells the valve to competing equipmentmakers.  For the years ended December31, 2002, 2001 and 2000, sales of valves and related accessories accounted forapproximately 10%, 11% and 12% of total net sales, respectively.

 

Beer Dispensing Systems

 

The Company manufactures and markets beer dispensing equipment andrelated accessories.  Products includechillers, taps, fonts, dispensers and kegs. Lancer’s operations in Australia and New Zealand account for most of theCompany’s sales of beer related equipment. Sales of beer equipment represented 6%, 5% and 7% of total net sales inthe years ended December 31, 2002, 2001 and 2000, respectively.

 

Other Related Products and Services

 

The Company remanufactures various dispensing systems and sellsreplacement parts in connection with the remanufacturing process.  Revenues from remanufacturing activitieswere 6%, 5% and 4% of net sales in the years ended December 31, 2002, 2001 and2000.

 

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

 

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**ProductResearch and Development**

 

In order to maintain its competitive position, the Company continuouslyseeks to improve and enhance its line of existing beverage dispensing systemsand equipment, and to develop new products to meet the demands of the food andbeverage industry.  Some projects areoriginated by Company personnel while others are initiated by customers,primarily The Coca-Cola Company.  TheCompany has, from time to time, entered into agreements with customers todesign and develop new products.  Forthe years ended December 31, 2002, 2001 and 2000, Company-sponsored researchand development expenses were $2.3 million, $2.4 million and $2.9 million, respectively.

 

**Production,Inventory and Raw Materials**

 

The Company’s major products typically contain a number of metal and/orplastic 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 areproduced in the Company’s tool and die and mold departments.  Other manufacturing processes includewelding, polishing, painting, tube bending, metal turning, stamping, andassembling of printed circuit boards and wire harnesses.  The Company assembles the various parts andcomponents into finished products, or sells them as spare parts.

 

Substantially all raw materials and parts not manufactured internallyare readily available from other commercial sources.  The Company has not experienced any significant shortages in thesupply 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 amountsof raw materials and parts, but attempts to control its inventory throughextrapolation of historical production requirements and by using its specificknowledge of the market.  In addition,the Company would be able to manufacture some purchased parts if shortages ofthese parts were to occur.  There can beno assurances, however, that these measures will be entirely successful or thatdisruptive shortages will not occur in the future.

 

**Backlog**

 

The Company’s manufacturing operations are driven by actual andforecasted customer demand. The Company’s backlog of unfilled orders wasapproximately $5.2 million, $7.8 million and $6.0 million at December 31, 2002,2001 and 2000, respectively.  It isanticipated that 2002 backlog orders will be filled in 2003.

 

**Marketingand Customers**

 

The Company’s products are marketed on a wholesale basis in the UnitedStates through a network of independent distributors and salaried salesrepresentatives.  The principalpurchasers of Company products are major soft drink companies, bottlers,breweries, beverage equipment dealers, restaurants, convenience stores, andother end users.

 

Substantially all of the Company’s sales are derived from, or influencedby, The Coca-Cola Company.  Lancer is apreferred supplier to The Coca-Cola Company. Direct sales to The Coca-Cola Company, the Company’s largest customer,accounted for approximately 35%, 36% and 27% of the Company’s total net salesfor the years ended December 31, 2002, 2001 and 2000, respectively.  None of the Company’s customers, includingThe Coca-Cola Company, are contractually obligated to purchase minimumquantities 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 theCompany.  Lancer does not expect anysignificant, long-term volume or price reductions in its business with TheCoca-Cola Company.  If they were tooccur, however, such reductions would have a material adverse impact on theCompany’s financial position and its results of operations.

 

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The Company and The Coca-Cola Company have entered into a masterdevelopment agreement which governs development of various products.  Products that are developed pursuant to thisagreement may be sold only to The Coca-Cola Company or its designatedagents.  The agreement generallyprovides that The Coca-Cola Company will also retain the rights to any toolingit pays for and any resulting patents. The Company is obligated under the development agreement to make itsmanufacturing capabilities available for the benefit of The Coca-Cola Companyas they relate to, and are required for, selected projects.  The Company supplies engineering andresearch and development personnel, designs, develops and creates prototypes,and obtains either an exclusive or a non-exclusive license to manufacture andmarket the resulting products. Generally, the Company warrants all such products for one year.  The Coca-Cola Company may terminate thedevelopment agreement at any time, subject to certain conditions.

 

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

 

**InternationalSales**

 

For the years ended December 31, 2002, 2001 and 2000, the Company’ssales to customers outside the United States were approximately 32%, 30% and35% of total net sales, respectively. The Company has sales employees, distributors, and/or licensees in LatinAmerica, Europe, Africa and Asia.  TheCompany manufactures products in Australia and Mexico, and operates warehousesin Belgium, Ecuador, New Zealand, and Russia.

 

The Company’s foreign sales and operations could be adversely affectedby foreign currency fluctuations, exchange controls, tax policies,deterioration of foreign economies, the expropriation of Company property, andother political actions and economic events. Although the Company attempts to limit such risks, there can be noassurance that these efforts will be successful.

 

**FinancialInformation About Segments and Geographic Areas**

 

The Company organizes its business into the followinggeographical segments:  the North Americaregion, the Latin America region, the Asia/Pacific region, and the Europeregion.  The North America regionconsists of the United States and Canada. The Europe region includes the Middle East and Africa.  The Brazil segment is reported asdiscontinued operations for 2000, 2001 and 2002 in the Consolidated Statementof Operations.  See footnote 2 forfurther discussion of discontinued operations. During 2002, the Company placed the Asia region and the Pacific regionunder common management.  The two regionsare now combined for segment reporting purposes.

 

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

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

 

Additional financial information about segments andgeographic areas is set forth in Note 15 to the Consolidated FinancialStatements.

 

4

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**Competition**

 

The business of manufacturing and marketing beverage dispensing systemsand related equipment is highly competitive and is characterized by rapidlychanging technology.  Competition isprimarily based upon product suitability, reliability, technologicaldevelopment and expertise, price, product warranty and delivery time.  In addition, the Company frequently competeswith companies having substantially greater financial resources than theCompany.  The Company has been able tocompete successfully in the past, and believes it will be able to do so in thefuture.

 

**Employees**

 

As of December 31, 2002, the Company had 1,556 full-time employees ofwhom 71 were engaged in engineering and technical support, 1,270 inmanufacturing, 95 in marketing and sales and 120 in general management andadministrative positions.  647 employeeswork in the United States, primarily at the Company’s facilities in SanAntonio, Texas.  722 employees work atthe Company’s facility in Piedras Negras, Mexico, and a total of 105 people areemployed by the Company’s subsidiaries in Australia and New Zealand.  Certain sales representatives are located invarious parts of the United States, Latin America, Europe and Asia.  None of the U.S. employees are representedby a union or are subject to collective bargaining agreements.  Substantially all full-time United Statesemployees are eligible to participate in the Company’s employee profit sharingplan and various other benefit programs.

 

**IntellectualProperty**

 

The Company presently owns 79 United States patents and numerouscorresponding foreign patents. Addditionally, it has 35 pending U.S. patent applications andcorresponding foreign patent applications. The Company’s products covered by patents or pending patent applicationsinclude food, beverage and ice beverage dispensing equipment andcomponents.  The patents have aremaining life of 2 to 18 years. Management does not believe the expiration of such patents will have asignificant adverse impact on continuing operations.

 

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

 

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

 

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

 

**EnvironmentalMatters**

 

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

 

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There are no material environmental claims pending or, to the Company’sknowledge, threatened against the Company. The Company also believes that its operations are in material compliancewith current U.S., state, and foreign laws and regulations.  The Company estimates that any expensesincurred in maintaining compliance with current laws and regulations will nothave 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 thatcurrently unforeseen environmental incidents will not occur, or that pastnon-compliance with environmental laws will not be discovered on the Company’sproperties.

 

**ITEM 2.****                                     PROPERTIES**

 

The Company’s primary manufacturing and administrative facilities arelocated in several buildings in San Antonio, Texas, totaling approximately471,000 square feet, including three buildings owned by Lancer coveringapproximately 409,000 square feet of space, the largest of which is located ona 40-acre tract of land in the southeast sector of San Antonio.  The Company owns and operates facilitieslocated in Piedras Negras, Mexico consisting of 195,000 square feet ofcompleted space.  The Company alsoleases a small facility in Auckland, New Zealand, a 42,846 square foot plant inBeverley, South Australia, a suburb of Adelaide, and small facilities inBrisbane, Melbourne, and Sydney, Australia; Brussels, Belgium; Quito, Ecuador;Moscow, Russia; and Monterrey, Mexico.  TheCompany leases approximately 210,000 square feet of space throughout the world.

 

Total net rent expense for real estate was $1.0 million, $1.2 millionand $1.5 million in 2002, 2001 and 2000, respectively.  Total rent expense includes $89,000 in 2002,2001 and 2000 for certain properties that are leased from a partnershipcontrolled by certain shareholders.  SeeNote 7 of Notes to Consolidated Financial Statements and “Certain Relationshipsand Related Transactions” for more information.

 

**ITEM 3.****                                     LEGALPROCEEDINGS**

 

There are no claims or legal actions pending against the Company otherthan claims arising in the ordinary course of business.  The Company believes these claims, takinginto account reserves and applicable insurance, will not have a material adverseeffect on the Company.

 

**ITEM 4.****                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matter was submitted to the security holders for a vote by proxy orotherwise during the fourth quarter of the year ended December 31, 2002.

 

**PART II**

 

**ITEM 5.****                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED****STOCKHOLDER MATTERS**

 

The Company’s common stock is currently traded on the American StockExchange (“ASE”) under the symbol “LAN.” The following table sets forth the range of high and low market price asreported by the ASE for the periods indicated.

 

Market Price For Common Stock

 

|        |   | **2002** |   | **2001** |   |
|-------------|--------|----------|--------|----------|--------|
| **Quarter** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First       |   | $        | 5.80   |     | $      | 4.90 |   | $ | 6.50 |   | $ | 4.40 |   |
| Second      |   | 6.99     |   | 5.32     |   | 6.85 |   | 4.35 |   |
| Third       |   | 6.49     |   | 5.14     |   | 6.25 |   | 3.70 |   |
| Fourth      |   | 9.35     |   | 6.25     |   | 5.00 |   | 3.60 |   |
|             |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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

 

**ITEM 6.****                                     SELECTEDFINANCIAL DATA**

(In thousands, except per share amounts)

 
|                                                           |   | **Years Ended December 31,** |    |
|----------------------------------------------------------------|--------|------------------------------|---------|
|                                                           |   | **2002**                     |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Operating Data:                                                |   |                         |    |   |   |   |   |   |   |   |   |
| Net sales                                                      |   | $                            | 139,015 |   | $ | 122,745 |   | $ | 111,700 |   | $ | 127,775 |   | $ | 132,008 |   |
| Gross profit                                                   |   | 37,090                       |    | 26,868 |   | 25,058 |   | 21,483 |   | 33,782 |   |
| Selling, general and administrative expenses                   |   | 27,535                       |    | 22,235 |   | 21,286 |   | 21,091 |   | 18,544 |   |
| Operating income                                               |   | 9,555                        |    | 4,633 |   | 3,772 |   | 392 |   | 15,238 |   |
| Interest expense                                               |   | 1,318                        |    | 3,128 |   | 3,243 |   | 3,329 |   | 3,701 |   |
| Interest and other (income) expense, net                       |   | (51                          | )       | (992 | ) | (346 | ) | (2,869 | ) | 287 |   |
| Earnings (loss) from continuing operations before income taxes |   | 8,288                        |    | 2,497 |   | 875 |   | (68 | ) | 11,250 |   |
| Income tax expense (benefit)                                   |   | 2,669                        |    | 918 |   | 342 |   | (121 | ) | 4,530 |   |
| Earnings from continuing operations                            |   | 5,619                        |    | 1,579 |   | 533 |   | 53 |   | 6,720 |   |
| Loss (earnings) from discontinued operations                   |   | 1,613                        |    | 177 |   | (25 | ) | 4,620 |   | 877 |   |
| Net earnings (loss)                                            |   | 4,006                        |    | 1,402 |   | 558 |   | (4,567 | ) | 5,843 |   |
|                                                           |   |                         |    |   |   |   |   |   |   |   |   |
| Earnings per share:                                            |   |                         |    |   |   |   |   |   |   |   |   |
| Basic                                                          |   |                         |    |   |   |   |   |   |   |   |   |
| Earnings from continuing operations                            |   | $                            | 0.60    |   | $ | 0.17 |   | $ | 0.06 |   | $ | 0.01 |   | $ | 0.74 |   |
| Loss from discontinued operations                              |   | $                            | (0.17   | ) | $ | (0.02 | ) | $ | 0.00 |   | $ | (0.51 | ) | $ | (0.10 | ) |
| Net earnings (loss)                                            |   | $                            | 0.43    |   | $ | 0.15 |   | $ | 0.06 |   | $ | (0.50 | ) | $ | 0.64 |   |
|                                                           |   |                         |    |   |   |   |   |   |   |   |   |
| Diluted                                                        |   |                         |    |   |   |   |   |   |   |   |   |
| Earnings from continuing operations                            |   | $                            | 0.60    |   | $ | 0.17 |   | $ | 0.06 |   | $ | 0.01 |   | $ | 0.72 |   |
| Loss from discontinued operations                              |   | $                            | (0.17   | ) | $ | (0.02 | ) | $ | 0.00 |   | $ | (0.51 | ) | $ | (0.09 | ) |
| Net earnings (loss)                                            |   | $                            | 0.43    |   | $ | 0.15 |   | $ | 0.06 |   | $ | (0.50 | ) | $ | 0.63 |   |
|                                                           |   |                         |    |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                           |   |                         |    |   |   |   |   |   |   |   |   |
| Basic                                                          |   | 9,327                        |    | 9,127 |   | 9,125 |   | 9,124 |   | 9,060 |   |
| Diluted                                                        |   | 9,433                        |    | 9,315 |   | 9,290 |   | 9,124 |   | 9,306 |   |
|                                                           |   |                         |    |   |   |   |   |   |   |   |   |

 
|                                      |   | **As of December 31,** |   |
|-------------------------------------------|--------|------------------------|--------|
|                                      |   | **2002**               |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Balance Sheet Data:                       |   |                   |   |   |   |   |   |   |   |   |   |
| Total assets                              |   | $                      | 92,755 |   | $ | 96,604 |   | $ | 102,392 |   | $ | 103,054 |   | $ | 112,840 |   |
| Short-term debt                           |   | 7,726                  |   | 18,318 |   | 24,129 |   | 22,683 |   | 27,094 |   |
| Long-term debt, less current installments |   | 9,808                  |   | 11,872 |   | 12,724 |   | 13,922 |   | 17,568 |   |
| Shareholders’ equity                 |   | 50,151                 |   | 44,286 |   | 43,533 |   | 44,476 |   | 48,258 |   |
|                                           |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7.****                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

This document contains certain “forward-looking” statements as suchterm is defined in the Private Securities Litigation Reform Act of 1995 andinformation relating to the Company and its subsidiaries that are based on the

 

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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 similarimport, as they relate to the Company or its subsidiaries or Companymanagement, 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 ofcertain factors including, without limitation, competitive factors, generaleconomic conditions, customer relations, relationships with vendors, theinterest 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 bythe Company with the Securities and Exchange Commission.  Based upon changing conditions, should anyone or more of these risks or uncertainties materialize, or should anyunderlying assumptions prove incorrect, actual results may vary materially fromthose described herein as anticipated, believed, estimated, expected, forecast,planned or intended.  The Company doesnot intend to update these forward-looking statements.

 

The following discussion should be read in connection with the Company’sConsolidated Financial Statements, related notes and other financialinformation included elsewhere in this filing.

 

**Resultsof Operations**

 

### *Comparison of the Years Ended December 31, 2002 andDecember 31, 2001*

 

###### **ContinuingOperations**

Net sales for the year ended December 31, 2002 were $139.0 million, up13% from $122.7 million in 2001.  Salesin the Company’s North America region rose 11%, accounting for most of theCompany’s growth in 2002.  Sales oftraditional fountain equipment fueled the growth in North America.  Sales in Latin America rose 36% in 2002,primarily because of strong sales in Mexico. The Company was able to capitalize on several unusual opportunities in Mexicoduring 2002.  Economic conditions ingeneral, and demand for the Company’s products, remain weak throughout most ofLatin America.  Sales rose 21% in theAsia/Pacific on strong sales of beer dispensing systems in Australia.  A new sales office in Melbourne, Australia,and a newly acquired service operation in Brisbane, Australia contributed tothe Asia/Pacific region’s sales.  Withthe exception of Australia and New Zealand, most markets in the Asia/Pacificregion remain challenging.  Salesdeclined slightly in Europe, where the market is sluggish.

 

On May 1, 2002, the Company’s joint venture that manufactures frozenbeverage equipment began selling directly to most third party customers, and incertain situations, paying a commission to the Company.  Prior to May 1, 2002, the joint venture soldsubstantially all of its production to the Company, and the Company distributedthe equipment to third party customers. The change will tend to reduce the Company’s reported revenues becausethe joint venture’s operations are not consolidated with those of the Companyfor reporting purposes.

 

Gross margin was 26.7% in 2002, up from 21.9% in 2001.  Part of the margin improvement was caused byfavorable shifts in product mix.  Lowersales of frozen beverage equipment (see paragraph above) improved the Company’soverall margin because the sales of frozen equipment carried a lowerdistributor-type margin.  Higher factoryoutput also contributed to the higher gross margin in 2002, as a significantportion of the Company’s manufacturing costs is fixed.

 

Selling, general and administrative expenses were $27.5 million in2002, up from $22.2 million in 2001. Higher expenses related to employee compensation (some of which isvariable with the Company’s performance) and employee benefits caused much ofthe increase.  Spending for professionalfees related to the prosecution of patents, the exploration of businessopportunities, and product design also increased.  Additionally, bad debt expense, primarily in Latin America, rosein 2002.  Statement of FinancialAccounting Standards (“SFAS”) No. 142, which the Company adopted on January 1,2002, eliminates the amortization of goodwill. Goodwill amortization expense was $0.2 million in 2001.

 

Interest expense was $1.3 million in 2002, down from $3.1 million in2001.  $1.1 million of the decrease wascaused by lower average interest rates combined with a reduction in averagedebt outstanding in 2002.  The remainderwas attributable to the required mark-to-market adjustments of the Company’sinterest rate swap agreements.  TheCompany incurred a loss of $0.7 million from its frozen beverage equipmentjoint venture in 2002, compared to a loss of $0.3 million in 2001.  Soft sales and product development expensescontributed to the loss.  Other incomeof $1.0 million in 2001 included a $1.0 million gain relating to thecancellation of a project.  Theeffective tax rate was 32.2% in 2002, and 36.8% in 2001.  The lower rate in 2002 reflects the use ofavailable tax credits, and the fact that a larger proportion of the Company’sincome was earned in lower tax jurisdictions. Income from continuing operations was $5.6 million in 2002, and $1.6million in 2001.

 

8

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###### **DiscontinuedOperations**

Lancer decided to close its Brazilian subsidiary during the secondquarter of 2002.  The Braziliansubsidiary’s results are now classified as discontinued operations.

 

Revenue from discontinued operations was $0.5 million in 2002, downfrom $1.1 million in 2001.  During 2002,the Company recognized $1.8 million for the estimated loss from disposal ofdiscontinued operation, and incurred a $0.7 million operating loss fromdiscontinued operations.  The Company’sloss (net of tax) from discontinued operations was $1.6 million in 2002, and$0.2 million in 2001.

 

### *Comparison of the Years Ended December 31, 2001 andDecember 31, 2000*

 

###### **ContinuingOperations**

Net sales for the year ended December 31, 2001 were $122.7 million, anincrease of 10% over net sales in 2000. Sales in the North America regionaccounted 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 theimprovement in North America.  Sales inthe Latin America region improved by $2.0 million, or 25%, in 2001.  The Asia/Pacific region incurred a salesdecline of $4.3 million, or 22%. Australian sales softened in 2001 after several years of strength causedpartly by the 2000 Olympic Games in Sydney. Market conditions remained very weak in many of the developing Asianeconomies.

 

Gross margin for 2001 was 21.9%, down from 22.4% in 2000.  The decline was primarily caused by changesto the sales mix, primarily higher sales of frozen beverage equipment.  The lower gross margin on frozen beverageequipment stems from the fact that the Company bought the dispensers from ajoint venture of which the Company owns 50%. The Company resold the dispensers and earned a distribution profit,which is reflected in gross margin.  TheCompany’s 50% share of the manufacturing profit, after elimination of profit inending inventory, is included in other income. Increased manufacturing spending also contributed to the gross margindecline in 2001.

 

Selling, general and administrative expenses were $22.2 million in2001, compared with $21.3 million in 2000. Expenses associated with the Company’s Advanced Beverage Solutionssubsidiary, which was formed in the second quarter of 2000, as well as expensesrelating to employee salaries and research and development caused most of theincrease.

 

Interest expense was $3.1 million in 2001 and $3.2 million in2000.  The favorable impact of loweraverage interest rates in 2001 were partially offset by a $0.4 million expenserelating to the accounting for certain interest rate swap agreements underStatement of Financial Accounting Standards No. 133.  The Company reported a loss of $0.3 million from its frozenbeverage equipment joint venture in 2001, compared to a loss of $0.1 million in2000.  Low manufacturing volumescontributed to the loss.  The minority interestbenefit of $0.2 million in 2001 and 2000 stems from the Company’s majorityownership position in Lancer Ice Link, LLC, and represents the minoritypartner’s share of the subsidiary’s losses. Lancer Ice Link’s financial statements are consolidated with those ofthe Company.  Other income of $1.0million in 2001 includes a $1.0 million gain relating to the cancellation of aproject, and a $0.3 million write-down of the carrying value of an impairedinvestment.  The effective tax rate was36.8% in 2001, down from 39.1% in 2000. The effective rate improved in 2001 as higher pretax income diluted theimpact of nondeductible expenses. Additionally, statutory tax rates declined in certainjurisdictions.  Income from continuingoperations was $1.6 million in 2001, and $0.5 million in 2000.

 

###### **DiscontinuedOperations**

Lancer decided to close its Brazilian subsidiary during the secondquarter of 2002.  The Braziliansubsidiary’s results are now classified as discontinued operations.

 

Revenues from discontinued operations were $1.1 million in 2001, and$1.5 million in 2000.  The Companyincurred a $0.2 million loss from discontinued operations in 2001, compared toearnings from discontinued operations of $0.03 million in 2000.

 

###### **2003 Outlook**

 

In the first quarter of 2003, certain of the Company’s customers areengaged in organizational changes. These activities are having a negative impact on the Company’s salesduring the first quarter.  The Companyexpects its first quarter financial results to be weak, and for sales toimprove during the second quarter.

 

9

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## **CriticalAccounting Policies**

 

Note 1 of the “Notes to Consolidated Financial Statements” includes asummary of the significant accounting policies and methods used in thepreparation of the Company’s Consolidated Financial Statements.  The following is a discussion of the moresignificant accounting policies and methods.

 

## ***Revenue Recognition***

 

Revenue is recognized in accordance with the followingmethods:

(a)                         At thetime of shipment for all products except for those sold under agreementsdescribed in (b).The Company requires a purchase order for all sales. At thetime of the shipment, risk of ownership and title passes to the customer. Thegoods are completely assembled and packaged and the Company has no furtherperformance obligations.

(b)                        Asproduced and at time of title transfer, for certain products manufactured andwarehoused under production and warehousing agreements with certaincustomers.  The Company had no sucharrangements after March 31, 2002.

(c)                         TheCompany has entered into an agreement with its major customer to receivepartial reimbursement for design and development.  The reimbursement is offset against cost on a percentage ofcompletion basis.

(d)                        TheCompany has agreed to provide exclusive rights for use of certain tools to itsmajor customer.  These tools areincluded in fixed assets and are depreciated over the life of the asset.  The corresponding license and maintenancefees are recorded as deferred income and recognized over the life of theagreement, which approximates the life of the corresponding asset.

 

## ***Reserve for Slow Moving and Obsolete Inventory***

 

The Company’s provides for slow moving inventory basedon an analysis of the aging and utility of the inventory. Obsolete inventory is100% reserved at the time the product is deemed obsolete due to technologicaladvances and discontinuation of products. In addition, management’s evaluationof the specific items also influences the reserve.  The Company’ believes that the reserve as of  December 31, 2002 is adequate to provide forexpected losses.

 

## ***Reserve for Medical Costs and Worker’s Compensation***

 

The Company maintains a self-insurance program formajor 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 basedon the Company’s estimate of claims incurred as of the end of the year. TheCompany uses detail lag reports provided by the insurance administrator todetermine an appropriate reserve balance. The Company has provided for bothreported medical costs and incurred but not reported medical costs in theaccompanying consolidated balance sheets. The Company has a maximum liability of $100,000 per participant perpolicy year.  Amounts in excess of thestated maximum are covered under a separate policy provided by an insurancecompany.

 

The Company is self-insured for all workers’ compensation claimssubmitted by Texas employees for on-the-job injuries. The estimate of the lossreserves necessary for claims are based on the Company’s estimate of claimsincurred as of the December 31, 2002. In addition to detail lag reportsprovided by the insurance administrator, the Company uses an injury report todetermine an appropriate reserve balance. The Company has provided for bothreported costs and incurred but not reported costs of workers’ compensationcoverage in the accompanying consolidated balance sheets**. **In an effort to provide for catastrophic events, the Companycarries an excess indemnity policy for workers’ compensation claims.  All claims paid under the policy are subjectto 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 potentiallosses.  However, multiple occurrencesof serious injuries to employees could have a material adverse effect on theCompany’s financial position or its results of operations.

 

#### ***Allowance for Doubtful Accounts***

 

The Company maintains its allowance for doubtful accounts at a balanceadequate to reduce accounts receivable to the amount of cash expected to berealized on collection. The methodology used to determine the minimum allowanceis based on the Company’s prior collection experience. Specific customers’financial strength and circumstance also influence the balance. Accounts thatare determined to be uncollectible are written-off in the period in which theyare determined to be uncollectible.

 

10

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**Liquidityand Capital Resources**

 

The Company’s principal sources of liquidity are cash flows fromoperations and amounts available under the Company’s existing lines of credit.  The Company has met, and currently expectsthat it will continue to meet, substantially all of its working capital andcapital expenditure requirements as well as its debt service requirements withfunds provided by operations and borrowings under its credit facilities.

 

Cash provided by operating activities was $18.2 million, compared to$11.9 million in 2001.  The Company’simproved profitability, combined with a reduction of inventory and accountsreceivable during the year contributed to the improved cash flow.

 

Capital spending was $3.7 million in 2002.  The Company’s investment in production tooling and equipmentaccounted for most of the spending. During the year, the Company bought the assets of a service company inAustralia for $0.3 million.  Additionally,the Company invested $0.5 million in a company engaged in the commercializationof milk products.  The capital spending,the assets acquired in Australia, the milk investment, and a $12.7 millionreduction of debt were financed with cash provided from operations.

 

During 2002, the Company amended its credit facilities with its primarylenders.  The amendment reduced theamount of the revolving facility from $30.0 million to $25.0 million, andextended the expiration of the facilities to July 15, 2005.  The Company’s bank facilities require thatthe Company maintain certain financial ratios and other covenants.  The Company is in compliance with thefinancial ratios and covenants contained in the credit agreement.

 

###### **ContractualObligations**

 

The following table provides a summary of the Company’s contractualobligations as of December 31, 2002. Additional details about these items are included in the notes to theconsolidated financial statements (amounts in thousands).

 
|                                |   | **Payments  Due by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
| **Contractual obligations**         |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007 and  After** |   | **Total** |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Indebtedness                        |   | $                           | 2,726  |   | $ | 1,540 |   | $ | 8,136 |   | $ | 132 |   | $ | — |   | $ | 12,534 |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                    |   | 629                         |   | 488 |   | 218 |   | 161 |   | 360 |   | 1,856 |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Other                               |   | 147                         |   | 147 |   | 109 |   | — |   | — |   | 403 |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | $                           | 3,502  |   | $ | 2,175 |   | $ | 8,463 |   | $ | 293 |   | $ | 360 |   | $ | 14,793 |   |

 

In addition, the Companyhas a $25.0 million revolving credit facility that expires July 15, 2005.  The balance of the revolving facility was$5.0 million at December 31, 2002.

 

**Inflation**

 

Management believes inflation has not had a significant impact on itsbusiness or operations.

 

**Seasonality**

 

The Company’s net sales in the fourth quarter of its fiscal years havefrequently been lower than in other quarters because of seasonality in thecapital spending budgets of many of the Company’s customers.

 

11

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**Accountingand Tax Matters**

 

The Company established a DISC in 1979 in order to defer federal incometaxes on its foreign sales.  In late1984, the Internal Revenue Code (the “Code”) was amended to limit the benefitsof a DISC, primarily by imposing an interest charge on the accumulated deferredfederal income taxes of a DISC.  At thesame time, the Code was amended to permit the creation of a Foreign SalesCorporation (“FSC”).  Under the currentCode, the FSC is no longer a separate foreign sales entity. A new category ofincome – 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 Companyfrom maintaining the DISC and have qualifying foreign trade incomeconcurrently. At the time of liquidation of the DISC, the Company would berequired to provide for federal income taxes on the $2.4 million ofundistributed earnings of the DISC, for which federal income taxes have notpreviously been provided.  The Companywould be able to pay such federal income taxes over a ten-year period.  If the DISC had been liquidated on December31, 2002, it would have resulted in a reduction of approximately $0.8 millionin the Company’s net earnings.

 

The Company elected to treat the Brazilian subsidiary as a partnershipfor U.S. tax purposes for the year ended December 31, 1999. This election hasenabled the Company to recognize for U.S. income tax purposes a loss of $7.7million on its investment in the Brazilian operation. The Internal RevenueService (the “Service”) is examining the Company’s U.S. income tax return for1999 including the deduction of the loss on its investment in the Brazilianoperation, and has proposed the disallowance of the deduction. With theliquidation of the Brazilian subsidiary in 2002, the Service is reviewing thedeductibility of the loss in 2002. The Company does not believe that anysignificant adjustments will be required as a result of this examination.

 

SFAS No. 143, “Accounting for Asset Retirement Obligations,” issued inJune 2001, establishes financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The standardapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and (or)normal use of the asset.  The Company isrequired and plans to adopt the provisions of SFAS No. 143 for the quarterending March 31, 2003.  To accomplishthis, the Company must identify all legal obligations for asset retirementobligations, if any, and determine the fair value of these obligations on thedate of adoption.  The Company believesthe adoption of SFAS No. 143 will not have a material impact on the Company’sfinancial statements.

 

SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” issued in July 2002, addresses financial accounting and reportingfor costs associated with exit or disposal activities.  It nullifies EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 requires that a liability berecognized for the cost associated with an exit or disposal activity only whenthe liability is incurred, that is, when it meets the definition of a liabilityin the FASB conceptual framework. SFAS No. 146 also establishes fair value asthe objective for initial measurement of liabilities related to exit ordisposal activities. The Statement is effective for exit or disposal activitiesthat are initiated after December 31, 2002. The Company believes the adoptionof SFAS No. 146 will not have a material impact on the Company’s financialstatements.

 

In November 2002, the Financial Accounting Standards Board (FASB)issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” This Interpretation elaborates on the disclosures to be made by aguarantor in its financial statements about its obligations under guaranteesissued.  The Interpretation alsoclarifies that a guarantor is required to recognize, at inception of aguarantee, a liability for the fair value of the obligation undertaken. Theinitial recognition and measurement provisions of the Interpretation areapplicable to guarantees issued or modified after December 31, 2002.  The disclosure requirements are effectivefor financial statements of periods ending after December 15, 2002.  The Company does not expect the adoption ofInterpretation No. 45 to have a material impact on the Company’s financial statements.

 

SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure,” issued in December 2002, amends SFAS No. 123 “Accounting forStock-Based Compensation” to provide alternative methods of transition for avoluntary change to the fair-value based method of accounting for stock-basedemployee compensation.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148are effective for fiscal years ending after December 15, 2002.  The interim disclosure provisions areeffective for financial statements for interim periods beginning after December15, 2002.  The Company will continue toaccount for stock-based compensation using the intrinsic value method under APBOpinion No. 25.  The disclosuremodifications required for fiscal years ending after December 15, 2002 areincluded in the notes to these financial statements.

 

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Interpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51,” issued in January 2003, addresses theconsolidation by business enterprises of variable interest entities as definedin the Interpretation.  InterpretationNo. 46 applies immediately to variable interests in variable interest entitiescreated and/or obtained after January 31, 2003.  The application of this Interpretation is not expected to have amaterial impact on the Company’s financial statements.

 

## **Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

On December 31, 2002, substantially all of the Company’s $17.5 millionof 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’svariable rate debt.  The Company has enteredinto a Swap Agreement with a notional amount of $5.0 million.  Under the Swap Agreement, the Company pays afixed interest rate of 5.98%, while receiving a floating rate payment equal tothe three month LIBOR rate determined on a quarterly basis with settlementoccurring on specific dates.  Based onexposures on December 31, 2002, if interest rates were to change by onepercentage point, the Company’s annual pretax income would be impacted byapproximately $0.1 million.

 

The Company does not trade in interest rate swaps with the objective ofearning financial gain on interest rate fluctuations.  The Company had no additional derivative financial instruments atDecember 31, 2002.

 

In 2002, $1.4 million of the Company’s operating income was incurred byforeign subsidiaries with a functional currency other than the United Statesdollar.  If the average annual exchangerate of the functional currencies of those subsidiaries were to fluctuate by10% against the United States dollar, the operating profit of thosesubsidiaries could be impacted by as much as $0.1 million, when translated toUnited States dollars.  This analysisdoes not consider the effect of changes in costs, demand, asset values, orother unpredictable factors that could result from currency fluctuations.

 

**ITEM 8.****                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The Financial Statements required to be presented under Item 8 arehereby incorporated by reference to the Financial Statements beginning at pageF-1 of this Form 10-K (the “Financial Statements”).

 

**ITEM 9.****                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**PART III**

 

**ITEM 10.****                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information set forth under the captions “Election****ofDirectors” and “Executive Officers” in the Company’s proxy statement for its2003 Annual Meeting of Shareholders, which is to be filed with the Commission,describes all persons to be nominated to become directors and all executiveofficers of the Company as required in response to this item and isincorporated herein by reference.  Theinformation set forth under the caption “Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s proxy statement which is to be filedwith the Commission is incorporated herein by reference.

 

**ITEM 11.****                              EXECUTIVECOMPENSATION**

 

The information set forth under the caption “Compensation and CertainTransactions” in the Company’s proxy statement for its 2003 Annual Meeting ofShareholders, which is to be filed with the Commission, sets forth

 

13

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information regarding executive compensation and certain transactionsas required in response to this item and is incorporated herein by reference.

 

**ITEM 12.****                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT**

 

The information set forth under the caption “Security Ownership ofCertain Beneficial Owners and Management” in the Company’s proxy statement forits 2003 Meeting of Shareholders, which is to be filed with the Commission,describes the security ownership of certain beneficial owners and management asrequired in response to this item and is incorporated herein by reference.

 

**EquityCompensation Plan Information**

 
| **Plan  Category**                                        |   | **Number of  securities to be  issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted  average exercise  price of outstanding options,  warrants and rights** |   | **Number of  securities  remaining available for  future issuance  (excluding securities  reflected in column (a))** |   |
|-----------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                      |   | **(a)**                                                                                             |   | **(b)**                                                                            |   | **(c)**                                                                                                              |   |
| Equity compensation plan approved by security holders     |   | 360,851                                                                                             |   | $  5.14                                                                       |   | 472,351                                                                                                              |   |
| Equity compensation plan not approved by security holders |   | 25,800                                                                                              |   | $  9.00                                                                       |   | 174,200                                                                                                              |   |
| Total                                                     |   | 386,651                                                                                             |   | $  5.40                                                                       |   | 646,551                                                                                                              |   |

 

In 2002, the Company’s Board of Directors adopted a nonqualified stockoption plan of 200,000 shares covering directors, employees, and other keyindividuals.  A copy of the plan isattached to this Form 10-K as Exhibit 10.45. For additional information concerning the Company’s stock option plans,see Note 6 to the Financial Statements.

 

**ITEM 13.****                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information set forth under the caption “Certain Transactions” inthe Company’s proxy statement for its 2003 Annual Meeting of Shareholders,which is to be filed with the Commission, sets forth information regardingcertain relationships and related transactions as required in response to thisitem and is incorporated herein by reference.

 

**ITEM14.****                              CONTROLSAND PROCEDURES**

 

(a)                   Within the 90days prior to the date of filing this Form 10-K, the Company carried out anevaluation, under the supervision of the Chief Executive Officer and the ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Exchange Act Rule 13a– 14.  Based upon that evaluation, theCompany’s Chief Executive Officer and its Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

(b)                  There have beenno significant changes in the Company’s internal controls or in other factorswhich could significantly affect internal controls subsequent to the date theCompany carried out its evaluation.

 

**PART IV**

 

**ITEM 15.****                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a) 1. The following documents are filed as part of this Annual Reporton Form 10-K:

 

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(1) Financial statements:

 

The financial statementsfiled as a part of this report are listed in the “Index to ConsolidatedFinancial Statements and Schedule” referenced in Item 8.

 

(2) Financial statement schedule:

 

The financial statement schedule filed as a part ofthis report is listed in the “Index to Consolidated Financial Statements andSchedule” 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                                                                                                                                                       |
| 10.4  | *      | 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.                                                                          |
| 10.16 | *      | Form of Nonstatutory Stock Option Agreement under  the 1992 Non-Statutory Stock Option Plan                                                                                                |
| 10.27 | ++     | Credit Agreement, dated July 15,1996, between Lancer  Corporation and The Frost National Bank and The Boatmen’s National Bank of  St. Louis                                           |
| 10.28 | ++     | Term A Note, dated July 15,1996, between Lancer  Corporation and The Frost National Bank and The Boatmen’s National Bank of  St. Louis                                                |
| 10.29 | ++     | Term B Note, dated July 15,1996, between Lancer  Corporation and The Frost National Bank and The Boatmen’s National Bank of  St. Louis                                                |
| 10.30 | ++     | Revolving Note, dated July 15,1996, between Lancer  Corporation and The Frost National Bank and The Boatmen’s National Bank of  St. Louis                                             |
| 10.31 | ++     | Acquisition Note, dated July 15,1996, between Lancer  Corporation and The Frost National Bank and The Boatmen’s National Bank of  St. Louis                                           |
| 10.32 | ++     | Stock Pledge, dated July 15,1996, between Lancer  Corporation and The Frost National Bank                                                                                                  |
| 10.33 | ++     | Parent and Affiliate Guaranties, dated July 15,1996,  between Lancer Corporation or its subsidiaries and The Frost National Bank                                                           |
| 10.34 | #      | Lancer Corporation Stock Incentive Plan, Effective  Date March 1, 1996                                                                                                                     |
| 10.35 | +++    | Master Lease Agreement dated September 4, 1996  between Lancer Partnership, Ltd. and CCA Financial, Inc.                                                                                   |
| 10.36 | ##     | First Amendment to Credit Agreement dated May 12,  1997 between Lancer Partnership, Ltd. and The Frost National Bank and  NationsBank, N.A.                                                |
| 10.37 | ##     | Second Amendment to Credit Agreement dated December  31, 1997 between Lancer Partnership, Ltd. and The Frost National Bank and  NationsBank, N.A.                                          |
| 10.38 | ###    | Third Amendment to Credit Agreement dated July 15,  1998 between Lancer Corporation and The Frost National Bank and NationsBank,  N.A.                                                     |
| 10.39 | **     | Fourth Amendment to Credit Agreement dated March 15,  1999 between Lancer Corporation and The Frost National Bank and NationsBank,  N.A.                                                   |
| 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.                                                                                                  |
| 10.44 |   | Second Amendment to Seventh Amendment and Restated  Credit Agreement betweenLancer Corporation and The Frost National Bank,  Harris Trust and Savings Bank, and Whitney National Bank.     |
| 10.45 |   | Lancer Corporation Stock Option Plan of 2002.                                                                                                                                              |

 

15

----

 
| 21.1 |   | List of Significant Subsidiaries of the Registrant                                                                                                                        |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23.1 |   | Consent of KPMG LLP                                                                                                                                                       |
| 99.1 |   | Certification of Chief Executive Officer of Lancer  Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. |
| 99.2 |   | Certification of Chief Financial Officer of Lancer  Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. |

 
| *      | 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.                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                     |
| +      | This exhibit is  incorporated by reference to the Exhibit to the Registrant’s Form 10-K for  the year ended December 31, 2001.                                                                                                                                                                                                                      |

 

(b) Reports on Form 8-K:

 

The Company filed a report on Form 8-K dated February27, 2003.  The report incorporated theCompany’s earnings release for the period ended December 31, 2002.

 

The Company filed a report on Form 8-K dated March 10,2003.  The report incorporated theCompany’s press release announcing a new Chief Financial Officer.

 

16

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

LANCER CORPORATION

 
| by:                     | /s/ GEORGE F. SCHROEDER |   |
|-------------------------|-------------------------|--------|
| George F. Schroeder     | March 26, 2003          |
| Chief Executive Officer |                    |
|                         |                         |        |  |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**             |   | **Title**                                                    |   | **Date**       |
|---------------------------|--------|--------------------------------------------------------------|--------|----------------|
|                      |   |                                                         |   |           |
| /s/ ALFRED A. SCHROEDER   |   | Chairman of the Board                                        |   | March 26, 2003 |
| Alfred A. Schroeder       |   |                                                         |   | Date           |
|                      |   |                                                         |   |           |
| /s/ GEORGE F. SCHROEDER   |   | Chief Executive Officer and Director                         |   | March 26, 2003 |
| George F. Schroeder       |   | (principal executive officer)                                |   | Date           |
|                      |   |                                                         |   |           |
| /s/ MARK L. FREITAS       |   | Chief Financial Officer                                      |   | March 26, 2003 |
| Mark L. Freitas           |   | (principal financial officer, principal accounting  officer) |   | Date           |
|                      |   |                                                         |   |           |
| /s/ WALTER J. BIEGLER     |   | Director                                                     |   | March 26, 2003 |
| Walter J. Biegler         |   |                                                         |   | Date           |
|                      |   |                                                         |   |           |
| /s/ JEAN M. BRALEY        |   | Director                                                     |   | March 26, 2003 |
| Jean M. Braley            |   |                                                         |   | Date           |
|                      |   |                                                         |   |           |
| /s/ NORBORNE P. COLE, JR. |   | Director                                                     |   | March 26, 2003 |
| Norborne P. Cole, Jr.     |   |                                                         |   | Date           |
|                      |   |                                                         |   |           |
| /s/ OLIVIA F. KIRTLEY     |   | Director                                                     |   | March 26, 2003 |
| Olivia F. Kirtley         |   |                                                         |   | Date           |
|                      |   |                                                         |   |           |
| /s/ RICHARD C. OSBORNE    |   | Director                                                     |   | March 26, 2003 |
| Richard C. Osborne        |   |                                                         |   | Date           |

 

17

----

 

###### **CERTIFICATIONS**

I, George F. Schroeder, certify that:

 

1.                    I havereviewed this annual report on Form 10-K of Lancer Corporation;

 

2.                    Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)         designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)        evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)         presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors or persons performing the equivalent function:

 

a)         all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)        any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  March 26, 2003

 

 
| /s/ GEORGE F. SCHROEDER |   |
|-------------------------|--------|
| George F. Schroeder     |
| Chief Executive Officer |

 

18

----

 

**CERTIFICATIONS**

I, Mark L. Freitas, certify that:

 

1.                    I havereviewed this annual report on Form 10-K of Lancer Corporation;

 

2.                    Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)         designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)        evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)         presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors or persons performing the equivalent function:

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  March 26, 2003

 

 
| /s/ MARK L. FREITAS     |   |
|-------------------------|--------|
| Mark L. Freitas         |
| Chief Financial Officer |

 

19

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS AND SCHEDULE

 
| **LANCER CORPORATION AND SUBSIDIARIES**                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Independent Auditors’  Report                                                                                                                            |
|                                                                                                                                                          |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                                 |
|                                                                                                                                                          |
| Consolidated  Statements of Operations for each of the years in the three-year period ended  December 31, 2002                                                |
|                                                                                                                                                          |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income (Loss) for each  of the years in the three-year periodended  December 31, 2002 |
|                                                                                                                                                          |
| Consolidated  Statements of Cash Flows for each of the years in the three-year period ended  December 31, 2002                                                |
|                                                                                                                                                          |
| Notes to  Consolidated Financial Statements                                                                                                                   |
|                                                                                                                                                          |
| Schedule for the  years ended December 31, 2002, 2001 and 2000                                                                                                |
|                                                                                                                                                          |
| II-Reserve  accounts                                                                                                                                          |

 

All other schedules for which provision is made in the applicable rulesand regulations of the Securities and Exchange Commission have been omitted asthe schedules are not required under the related instructions, are notapplicable, or the information required thereby is set forth in theconsolidated financial statements or notes thereto.

 

F-1

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

The Board of Directors and ShareholdersLancer Corporation:

 

We have audited the accompanying consolidated balance sheets of LancerCorporation and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations, shareholders’ equity and comprehensiveincome (loss), and cash flows for each of the years in the three-year periodended December 31, 2002. These consolidated financial statements andconsolidated financial statement schedule are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements and consolidated financial statement schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of LancerCorporation and subsidiaries as of December 31, 2002 and 2001 and the resultsof their operations and their cash flows for each of the years in thethree-year period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States of America.  Also in our opinion, the relatedconsolidated financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall 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 forderivative instruments and hedging activities. The Company has also adopted the provisions of Statement of FinancialAccounting Standards No. 142, “Goodwill and other Intangible Assets,” effectiveJanuary 1, 2002.

 

KPMG LLP

 

San Antonio, Texas

February 26, 2003

 

F-2

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETSDecember 31, 2002 and 2001

 

(Amounts in thousands,except share data)

 

ASSETS

 
|                                                                   |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                   |   |     |   |     |   |
| Current assets:                                                        |   |     |   |     |   |
| Cash                                                                   |   | $        | 3,241  |     | $      | 1,849 |   |
| Receivables:                                                           |   |     |   |     |   |
| Trade accounts  and notes                                              |   | 17,265   |   | 17,781   |   |
| Other                                                                  |   | 1,039    |   | 850      |   |
|                                                                   |   | 18,304   |   | 18,631   |   |
| Less allowance  for doubtful accounts                                  |   | (979     | )      | (467     | )      |
| Net receivables                                                        |   | 17,325   |   | 18,164   |   |
| Inventories                                                            |   | 29,094   |   | 32,160   |   |
| Prepaid expenses                                                       |   | 264      |   | 655      |   |
| Deferred income  tax asset                                             |   | 285      |   | 211      |   |
| Total current  assets                                                  |   | 50,209   |   | 53,039   |   |
|                                                                   |   |     |   |     |   |
| Property, plant  and equipment, at cost:                               |   |     |   |     |   |
| Land                                                                   |   | 1,432    |   | 1,260    |   |
| Buildings                                                              |   | 21,837   |   | 21,840   |   |
| Machinery and  equipment                                               |   | 22,073   |   | 21,339   |   |
| Tools and dies                                                         |   | 12,137   |   | 11,256   |   |
| Leaseholds,  office equipment and vehicles                             |   | 10,165   |   | 9,037    |   |
| Assets in  progress                                                    |   | 1,455    |   | 1,194    |   |
|                                                                   |   | 69,099   |   | 65,926   |   |
| Less accumulated  depreciation and amortization                        |   | (34,224  | )      | (29,925  | )      |
| Net property,  plant and equipment                                     |   | 34,875   |   | 36,001   |   |
|                                                                   |   |     |   |     |   |
| Long-term  receivables ($106 and $407 due from officers, respectively) |   | 127      |   | 612      |   |
| Long-term  investments                                                 |   | 2,303    |   | 2,278    |   |
| Intangibles and  other assets, at cost, less accumulated amortization  |   | 5,241    |   | 4,674    |   |
|                                                                   |   |     |   |     |   |
|                                                                   |   | $        | 92,755 |     | $      | 96,604 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-3

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

CONSOLIDATEDBALANCE SHEETS (Continued)December 31, 2002 and 2001

 

(Amounts in thousands,except share data)

 

LIABILITIES ANDSHAREHOLDERS’ EQUITY

 
|                                                                                                                                                           |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Current  liabilities:                                                                                                                                          |   |     |   |     |   |
| Accounts payable                                                                                                                                               |   | $        | 10,141 |     | $      | 7,911 |   |
| Current  installments of long-term debt                                                                                                                        |   | 2,726    |   | 2,718    |   |
| Line of credit  with bank                                                                                                                                      |   | 5,000    |   | 15,600   |   |
| Deferred  licensing and maintenance fees                                                                                                                       |   | 1,449    |   | 1,295    |   |
| Accrued expenses  and other liabilities                                                                                                                        |   | 7,977    |   | 5,058    |   |
| Taxes payable                                                                                                                                                  |   | 182      |   | 1,507    |   |
| Total current  liabilities                                                                                                                                     |   | 27,475   |   | 34,089   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Deferred income  tax liability                                                                                                                                 |   | 2,342    |   | 1,421    |   |
| Long-term debt,  excluding current installments                                                                                                                |   | 9,808    |   | 11,872   |   |
| Deferred  licensing and maintenance fees                                                                                                                       |   | 2,686    |   | 4,478    |   |
| Other long-term  liabilities                                                                                                                                   |   | 293      |   | 403      |   |
|                                                                                                                                                           |   |     |   |     |   |
| Total  liabilities                                                                                                                                             |   | 42,604   |   | 52,263   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Commitments and  contingencies                                                                                                                                 |   | —   |   | —   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Minority  interest                                                                                                                                             |   | —   |   | 55       |   |
|                                                                                                                                                           |   |     |   |     |   |
| Shareholders'  equity:                                                                                                                                         |   |     |   |     |   |
| Preferred stock,  without par value:  5,000,000 shares authorized; none issued                                                                                 |   | —   |   | —   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Common stock,  $.01 par value:  50,000,000 shares authorized; 9,396,119 issued and 9,338,545 outstanding in  2002 and 9,127,757 issued and outstanding in 2001 |   | 93       |   | 91       |   |
|                                                                                                                                                           |   |     |   |     |   |
| Additional  paid-in capital                                                                                                                                    |   | 12,710   |   | 11,943   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Accumulated  other comprehensive loss                                                                                                                          |   | (2,389   | )      | (3,976   | )      |
|                                                                                                                                                           |   |     |   |     |   |
| Deferred  compensation                                                                                                                                         |   | (169     | )      | —   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Retained  earnings                                                                                                                                             |   | 40,234   |   | 36,228   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Less common  stock in treasury, at cost; 57,574 shares in 2002                                                                                                 |   | (328     | )      | —   |   |
|                                                                                                                                                           |   |     |   |     |   |
| Total  shareholders' equity                                                                                                                                    |   | 50,151   |   | 44,286   |   |
|                                                                                                                                                           |   |     |   |     |   |
|                                                                                                                                                           |   | $        | 92,755 |     | $      | 96,604 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-4

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF OPERATIONSYears ended December 31, 2002, 2001 and 2000

 

(Amounts in thousands,except share data)

 
|                                                                                                            |   | **2002**  |    | **2001**  |   | **2000**  |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------|---------|-----------|--------|-----------|--------|
|                                                                                                            |   |      |    |      |   |      |   |
| Net sales                                                                                                       |   | $         | 139,015 |      | $      | 122,745   |   | $ | 111,700 |   |
| Cost of sales                                                                                                   |   | 101,925   |    | 95,877    |   | 86,642    |   |
| Gross profit                                                                                                    |   | 37,090    |    | 26,868    |   | 25,058    |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Selling, general  and administrative expenses                                                                   |   | 27,535    |    | 22,235    |   | 21,286    |   |
| Operating income                                                                                                |   | 9,555     |    | 4,633     |   | 3,772     |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Other (income)  expense:                                                                                        |   |      |    |      |   |      |   |
| Interest expense                                                                                                |   | 1,318     |    | 3,128     |   | 3,243     |   |
| Loss from joint  ventures                                                                                       |   | 653       |    | 296       |   | 82        |   |
| Minority  interest                                                                                              |   | (55       | )       | (239      | )      | (248      | )      |
| Interest and  other income, net                                                                                 |   | (649      | )       | (1,049    | )      | (180      | )      |
|                                                                                                            |   | 1,267     |    | 2,136     |   | 2,897     |   |
| Income from  continuing operations before income taxes                                                          |   | 8,288     |    | 2,497     |   | 875       |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Income tax  expense (benefit):                                                                                  |   |      |    |      |   |      |   |
| Current                                                                                                         |   | 1,440     |    | 1,319     |   | 1,292     |   |
| Deferred                                                                                                        |   | 1,229     |    | (401      | )      | (950      | )      |
| Income tax  expense                                                                                             |   | 2,669     |    | 918       |   | 342       |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Income from  continuing operations                                                                              |   | 5,619     |    | 1,579     |   | 533       |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Discontinued  operations:                                                                                       |   |      |    |      |   |      |   |
| Loss (gain) from  operations of discontinued Brazilian subsidiary (including loss on disposal  of  $1,760) |   | 2,442     |    | 268       |   | (38       | )      |
| Income tax  (benefit) expense                                                                                   |   | (829      | )       | (91       | )      | 13        |   |
| Loss (earnings)  from discontinued operations                                                                   |   | 1,613     |    | 177       |   | (25       | )      |
| Net earnings                                                                                                    |   | $         | 4,006   |      | $      | 1,402     |   | $ | 558 |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Common Shares  and Equivalents Outstanding:                                                                     |   |      |    |      |   |      |   |
| Basic                                                                                                           |   | 9,326,529 |    | 9,127,062 |   | 9,124,857 |   |
| Diluted                                                                                                         |   | 9,433,193 |    | 9,314,789 |   | 9,290,003 |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Earnings Per  Share:                                                                                            |   |      |    |      |   |      |   |
| Basic                                                                                                           |   |      |    |      |   |      |   |
| Earnings from continuing  operations                                                                            |   | $         | 0.60    |      | $      | 0.17      |   | $ | 0.06 |   |
| Loss from  discontinued operations                                                                              |   | $         | (0.17   | )         | $      | (0.02     | )      | $ | 0.00 |   |
| Net earnings                                                                                                    |   | $         | 0.43    |      | $      | 0.15      |   | $ | 0.06 |   |
|                                                                                                            |   |      |    |      |   |      |   |
| Diluted                                                                                                         |   |      |    |      |   |      |   |
| Earnings from  continuing operations                                                                            |   | $         | 0.60    |      | $      | 0.17      |   | $ | 0.06 |   |
| Loss from  discontinued operations                                                                              |   | $         | (0.17   | )         | $      | (0.02     | )      | $ | 0.00 |   |
| Net earnings                                                                                                    |   | $         | 0.43    |      | $      | 0.15      |   | $ | 0.06 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-5

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)Years ended December 31, 2002, 2001 and 2000

 

(Amounts in thousands,except share data)

 
|                                                                              |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  and Other  Comprehensive  Income (Loss)** |   | **Deferred  Compensation** |   | **Retained  Earnings** |   | **Treasury  Stock** |   | **Total  Shareholders’  Equity** |   |
|-----------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|----------------------------------------------------------|--------|----------------------------|--------|------------------------|--------|---------------------|--------|---------------------------------------|--------|
| 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                                |   |
| Comprehensive income:                                                             |   |              |   |                             |   |                                                     |   |                       |   |                   |   |                |   |                                  |   |
| Net earnings                                                                      |   | —            |   | —                           |   | —                                                   |   | —                     |   | 4,006                  |   | —              |   | 4,006                                 |   |
| Cumulative translation adjustment                                                 |   | —            |   | —                           |   | 1,567                                                    |   | —                     |   | —                 |   | —              |   | 1,567                                 |   |
| Unrealized gain on investment, net of tax                                         |   | —            |   | —                           |   | 6                                                        |   | —                     |   | —                 |   | —              |   | 6                                     |   |
| Unrealized loss on derivative instruments:                                        |   |              |   |                             |   |                                                     |   |                       |   |                   |   |                |   |                                  |   |
| Reclassification adjustment for loss included in interest expense                 |   | —            |   | —                           |   | 14                                                       |   | —                     |   | —                 |   | —              |   | 14                                    |   |
| Total comprehensive income:                                                       |   |              |   |                             |   |                                                     |   |                       |   |                   |   |                |   | 5,593                                 |   |
| Exercise of 268,362 stock options for cash and by surrender of shares             |   | 2                 |   | 372                              |   | —                                                   |   | —                     |   | —                 |   | (328                | )      | 46                                    |   |
| Compensatory element of stock options granted                                     |   | —            |   | 395                              |   | —                                                   |   | (395                       | )      | —                 |   | —              |   | —                                |   |
| Amortization of deferred compensation                                             |   | —            |   | —                           |   | —                                                   |   | 226                        |   | —                 |   | —              |   | 226                                   |   |
| Balance December 31, 2002                                                         |   | $                 | 93     |                             | $      | 12,710                                                   |   | $                          | (2,389 | )                      | $      | (169                | )      | $                                     | 40,234 |   | $ | (328 | ) | $ | 50,151 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-6

----

 

LANCER CORPORATIONAND SUBSIDIARIES

 

CONSOLIDATED STATEMENTSOF CASH FLOWS

Years ended December 31,2002, 2001 and 2000

 

(Amounts in thousands)

 
|                                                                                           |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flow from  operating activities:                                                          |   |     |   |     |   |     |   |
| Net earnings                                                                                   |   | $        | 4,006  |     | $      | 1,402    |   | $ | 558 |   |
|                                                                                           |   |     |   |     |   |     |   |
| Adjustments to  reconcile net earnings to net cash (used in) provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation and  amortization                                                                 |   | 4,959    |   | 4,816    |   | 4,205    |   |
| Deferred  licensing and maintenance fees                                                       |   | (1,638   | )      | 1,126    |   | (472     | )      |
| Deferred income  taxes                                                                         |   | 844      |   | (453     | )      | (704     | )      |
| (Gain) loss on  sale and disposal of assets                                                    |   | (4       | )      | (6       | )      | 10       |   |
| Writedown of  Brazilian assets, net of taxes                                                   |   | 1,548    |   | —   |   | —   |   |
| Stock-based  compensation expense                                                              |   | 226      |   | —   |   | —   |   |
| Minority  interest                                                                             |   | (55      | )      | (239     | )      | (248     | )      |
| Loss from joint  ventures                                                                      |   | 653      |   | 296      |   | 82       |   |
| Impairment of  investment                                                                      |   | 30       |   | 279      |   | —   |   |
| Change in assets  and liabilities, net of effects from purchase of subsidiary:                 |   |     |   |     |   |     |   |
| Receivables                                                                                    |   | 1,167    |   | (1,532   | )      | 635      |   |
| Prepaid expenses                                                                               |   | 391      |   | (13      | )      | (177     | )      |
| Income taxes  receivable                                                                       |   | —   |   | —   |   | 3,505    |   |
| Inventories                                                                                    |   | 3,145    |   | 7,678    |   | (4,646   | )      |
| Other assets                                                                                   |   | (649     | )      | (720     | )      | (365     | )      |
| Accounts payable                                                                               |   | 1,857    |   | (868     | )      | 409      |   |
| Accrued expenses                                                                               |   | 2,502    |   | (239     | )      | 1,098    |   |
| Income taxes  payable                                                                          |   | (762     | )      | 343      |   | 584      |   |
| Net cash  provided by operating activities                                                     |   | 18,220   |   | 11,870   |   | 4,474    |   |
|                                                                                           |   |     |   |     |   |     |   |
| Cash flow from  investing activities:                                                          |   |     |   |     |   |     |   |
| Proceeds from  sale of assets                                                                  |   | 20       |   | 52       |   | 2        |   |
| Acquisition of  property, plant and equipment                                                  |   | (3,658   | )      | (3,998   | )      | (5,166   | )      |
| Acquisition of  subsidiary company, net of cash acquired                                       |   | (252     | )      | —   |   | —   |   |
| Proceed from  (purchase of) long-term investments                                              |   | (502     | )      | 7        |   | 209      |   |
| Net cash (used  in) investing activities                                                       |   | (4,392   | )      | (3,939   | )      | (4,955   | )      |
|                                                                                           |   |     |   |     |   |     |   |
| Cash flow from  financing activities:                                                          |   |     |   |     |   |     |   |
| Net (repayments)  borrowings under line of credit agreements                                   |   | (10,600  | )      | (5,400   | )      | 3,400    |   |
| Proceeds from  issuance of long-term debt                                                      |   | —   |   | 697      |   | —   |   |
| Retirement of  long-term debt                                                                  |   | (2,056   | )      | (1,960   | )      | (3,075   | )      |
| Net proceeds  from exercise of stock options                                                   |   | 46       |   | 10       |   | —   |   |
| Net cash (used  in) provided by financing activities                                           |   | (12,610  | )      | (6,653   | )      | 325      |   |
| Effect of  exchange rate changes on cash                                                       |   | 174      |   | (200     | )      | (300     | )      |
| Net increase  (decrease) in cash                                                               |   | 1,392    |   | 1,078    |   | (456     | )      |
| Cash at  beginning of year                                                                     |   | 1,849    |   | 771      |   | 1,227    |   |
| Cash at end of  year                                                                           |   | $        | 3,241  |     | $      | 1,849    |   | $ | 771 |   |

 

See accompanying notes toconsolidated financial statements

 

F-7

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**1.Summary of Significant Accounting Policies**

 

Principles of Consolidation

 

Lancer Corporation (the “Company”) designs, engineers, manufactures andmarkets fountain soft drink and other beverage dispensing systems and relatedequipment for use in the food service and beverage industry.  The consolidated financial statementsinclude the accounts of the Company and its majority-owned subsidiaries, withsignificant 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 (netrealizable value).

 

Certain items in inventory have become obsolete due to technologicaladvances and discontinuation of products. The Company has taken these items into consideration in valuing itsinventory.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost.  Depreciation is calculated on astraight-line basis over estimated useful lives ranging from 5 to 39years.  Long-lived assets are evaluatedannually for possible impairment adjustments which may be required.  See note 2 for discussion of discontinuedoperations.

 

Maintenance, repair and purchases of small tools and dies are expensedas incurred.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of costs over fair value of assets ofbusinesses acquired.  The Companyadopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,”as of January 1, 2002.  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are not amortized, but instead tested forimpairment at least annually in accordance with the provisions of SFAS No.142.  SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets.”

 

In connection with SFAS No. 142’s transitional goodwill impairmentevaluation, the Statement required the Company to perform an assessment ofwhether there was an indication that goodwill is impaired as of the date ofadoption.  To accomplish this, theCompany was required to identify its reporting units and determine the carryingvalue of each reporting unit by assigning assets and liabilities, including theexisting goodwill and intangible assets, to those reporting units as of January1, 2002.  The Company was required todetermine the fair value of each reporting unit and compare it to the carryingamount of the reporting unit within six months of January 1, 2002.  To the extent the carrying amount of areporting unit exceeded the fair value of the reporting unit, the Company wouldbe required to perform the second step of the transitional impairment test, asthis is an indication that the reporting unit goodwill may be impaired.  The Company has  completed its transitional impairment test as described above inthe second quarter of 2002, as well as the annual impairment test as ofDecember 31, 2002, and determined that its goodwill was not impaired.

 

The Company has approximately $1.9 million and $1.6 million ofgoodwill, net of accumulated amortization of $0.8 million and $0.8 million, atDecember 31, 2002 and 2001, respectively. Amortization expense related to goodwill for the years ended December31, 2001 and 2000 was $0.2 million and $0.1 million, respectively.

 

F-8

----

 

LANCER CORPORATION ANDSUBSIDIARIES

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

A reconciliation of the effects of the adoption of SFAS No. 142 on netincome and basic and diluted earnings per share is as follows (amounts inthousands, except share data):

 
|                                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net earnings                                        |   | $        | 4,006  |     | $      | 1,402    |   | $ | 558 |   |
| Add back  goodwill amortization (net of tax effect) |   | —   |   | 147      |   | 84       |   |
| Adjusted net  earnings                              |   | $        | 4,006  |     | $      | 1,549    |   | $ | 642 |   |
|                                                |   |     |   |     |   |     |   |
| Basic earnings  per common share:                   |   |     |   |     |   |     |   |
| Net earnings                                        |   | $        | 0.43   |     | $      | 0.15     |   | $ | 0.06 |   |
| Add back  goodwill amortization (net of tax effect) |   | —   |   | 0.02     |   | 0.01     |   |
| Adjusted net  earnings                              |   | $        | 0.43   |     | $      | 0.17     |   | $ | 0.07 |   |
|                                                |   |     |   |     |   |     |   |
| Diluted earnings  per common share:                 |   |     |   |     |   |     |   |
| Net earnings                                        |   | $        | 0.43   |     | $      | 0.15     |   | $ | 0.06 |   |
| Add back  goodwill amortization (net of tax effect) |   | —   |   | 0.02     |   | 0.01     |   |
| Adjusted net  earnings                              |   | $        | 0.43   |     | $      | 0.17     |   | $ | 0.07 |   |

 

Other intangible assets with definite useful lives are recorded on thebasis of cost in accordance with SFAS No. 142, and are amortized on astraight-line basis.  The Companyassesses the recoverability of its other intangible assets by determiningwhether the amortization of the intangible balance over its remaining usefullife can be recovered through projected undiscounted future cash flows over theremaining amortization period.  Ifprojected undiscounted future cash flows indicate that an unamortizedintangible asset will not be recovered, an impairment loss is recognized basedon projected discounted future cash flows. Cash flow projections are based on trends of historical performance andmanagement’s estimate of future performance, given consideration of existing andanticipated competitive and economic conditions.

 

The Company has approximately $3.3 million and $3.1 million ofintangible assets, net of accumulated amortization of $0.7 million and $0.5million, at December 31, 2002 and 2001, respectively.  Amortization expense related to other intangible assets was $0.3million, $0.2 million and $0.2 million for the years ended December 31, 2002,2001 and 2000, respectively.  Estimatedamortization expense is $0.2 million for each of the five years ending December31, 2007.

 

## **Long-term Investments**

 

The Company owns a 50% interest in a joint venture, Lancer FBDPartnership, Ltd., which manufactures frozen beverage dispensing systems.  The investment is accounted for under theequity method.  The remaining 50% isowned by the developer of the technology utilized by the joint venture.  The joint venture owns the rights to thattechnology. (See note 3.)

 

The Company purchased a 50% interest in a joint venture, Lauch LancerLLC, d.b.a. Moo Technologies, which markets concentrated shelf-stable milk forfoodservice customers.  The investmentis accounted for under the equity method. The remaining 50% is owned by the developer of the technology utilizedby the joint venture.  The joint ventureowns the right to that technology.  (Seenote 3).

 

Also included in long-term investments is an investment in the commonstock of Packaged Ice, Inc., a company that sells ice bagger machinesmanufactured by the Company.  Lancerowns less than 10% of the common stock of Packaged Ice, Inc.  The investment, accounted for as an available-for-salesecurity, is recorded at fair value with net unrealized gains and lossesreported, net of tax, in other comprehensive income.  The fair value is determined by quoted market prices.

 

F-9

----

 

## **Derivative Instruments**

 

The Company accounts for derivative instruments using the principles ofStatement of Financial Accounting Standard (SFAS) No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 133 provides guidance on accounting and financialreporting for derivative instruments and hedging activities.  SFAS No. 133 requires the recognition of allderivatives as either assets or liabilities on the consolidated balance sheet,and the periodic measurement of those instruments at fair value.  The Company determined that hedge accountingwould not be elected for derivatives existing at January 1, 2001, whichconsisted of interest rate swap agreements. The Company entered into the swap agreements to effectively fix theinterest rate on a portion of its debt in order to lessen the Company’sexposure to floating rate debt.  Changesin the fair value of those derivatives are recorded in income.  The adoption of SFAS No. 133 as of January1, 2001, resulted in a cumulative-effect-type expense to other comprehensiveincome of $0.051 million which is recognized in interest expense over the termof the interest rate swap agreements ranging from 11 months to 24 months.  As of December 31, 2002 and 2001, the fairvalue of the interest rate swap agreements was a liability of $0.053 millionand $0.379 million respectively, which is included in accrued expenses in theaccompanying financial statements. During 2002 and 2001, the Company recognized in interest expense $0.014million and $0.037 million relating to the transition adjustment.  Interest expense was reduced by $0.311million in 2002 and increased by $0.328 million in 2001, relating to the changein the fair value of the interest rate swap agreements.

 

Net Earnings per Share

 

Basic earnings per share is calculated using the weighted averagenumber of common shares outstanding and diluted earnings per share iscalculated assuming the issuance of common shares for all dilutive potentialcommon shares outstanding during the reporting period.  The dilutive effect of stock optionsapproximated 106,664, 187,727, and 165,146 shares in 2002, 2001 and 2000,respectively.  Options to purchaseapproximately 82,550, 132,250, and 293,875 shares in 2002, 2001 and 2000,respectively, were outstanding but were not included in the computation becausethe exercise price is greater than the average market price of the commonshares.

 

Revenue Recognition

 

Revenue is recognized in accordance with the following methods:

(a)          At the time of shipmentfor all products except for those sold under agreement described in (b).TheCompany 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 completelyassembled and packaged and the Company has no further performance obligations.

(b)         As produced and at timeof title transfer, for certain products manufactured and warehoused underproduction and warehousing agreements with certain customers.  The Company had no such arrangements afterMarch 31, 2002.

(c)          The Company has enteredinto an agreement with its major customer to receive partial reimbursement fordesign and development.  Thereimbursement is offset against cost on a percentage of completion basis.

(d)         The Company has agreed toprovide exclusive rights for use of certain tools to its major customer.  These tools are included in fixed assets andare depreciated over the life of the asset. The corresponding license and maintenance fees are recorded as deferredincome and recognized over the life of the agreement, which approximates thelife of the corresponding asset.

 

Income Taxes

 

Income taxes are accounted for under the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on

 

F-10

----

 

deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

Provision for U.S. income taxes on the undistributed earnings offoreign subsidiaries is made only on those amounts in excess of the fundsconsidered to be permanently reinvested.

 

### *Research and Development*

 

Company-sponsored research and development costs are expensed asincurred and totaled approximately $2.3 million, $2.4 million and $2.9 millionfor the years ended December 31, 2002, 2001 and 2000, respectively.

 

# ForeignCurrency Translation

 

Assets and liabilities of non-U.S. subsidiaries that operate in a localcurrency environment are translated to U.S. dollars at year-end exchangerates.  Income and expense items aretranslated at average rates of exchange prevailing during the year.  Translation adjustments are accumulated in aseparate component of shareholders’ equity. Inventories, plant and equipment and other non-monetary assets andliabilities of non-U.S. subsidiaries that operate in U.S. dollars aretranslated at approximate exchange rates prevailing when acquired.  All other assets and liabilities aretranslated at year-end exchange rates. Inventories charged to cost of sales and depreciation are translated athistorical exchange rates.  All otherincome and expense items are translated at average rates of exchange prevailingduring the year.  For those companiesthat operate in U.S. dollars, gains and losses that result from translation areincluded in earnings.

 

Stock Compensation Plans

 

At December 31, 2002, the Company has stock option plans, which aredescribed further in Note 6.  TheCompany utilizes the intrinsic value method required under provisions of APBOpinion No. 25 and related interpretations in measuring stock-basedcompensation for employees. If the Company had elected to recognizecompensation cost based on the fair value of the options granted at grant dateas prescribed by SFAS No. 123, net earnings and net earnings per share wouldhave been adjusted to the pro forma amounts indicated in the table below(amounts in thousands, except share data):

 
|                                                                                                                 |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net earnings-as  reported                                                                                            |   | $        | 4,006  |     | $      | 1,402    |   | $ | 558 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of tax |   | (94      | )      | (161     | )      | (167     | )      |
| Net earnings-pro  forma                                                                                              |   | $        | 3,912  |     | $      | 1,241    |   | $ | 391 |   |
| Net earnings per  basic share-as reported                                                                            |   | $        | 0.43   |     | $      | 0.15     |   | $ | 0.06 |   |
| Net earnings per  basic share-pro forma                                                                              |   | $        | 0.42   |     | $      | 0.14     |   | $ | 0.04 |   |
|                                                                                                                 |   |     |   |     |   |     |   |
| Net earnings per  diluted share-as reported                                                                          |   | $        | 0.43   |     | $      | 0.15     |   | $ | 0.06 |   |
| Net earnings per  diluted share-pro forma                                                                            |   | $        | 0.41   |     | $      | 0.13     |   | $ | 0.04 |   |
|                                                                                                                 |   |     |   |     |   |     |   |
| Weighted-average  fair value of options, granted during the year                                                     |   | $        | 2.88   |     | $      | 2.02     |   | $ | 1.51 |   |

 

F-11

----

 

The fair value of each option granted in 2002, 2001 and 2000 isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following assumptions:

 
|                   |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|
| Expected life  (years) |   | 5        |   | 4        |   | 4        |   |
| Interest rate          |   | 3.0      | %      | 4.0      | %      | 5.0      | %      |
| Volatility             |   | 42.9     | %      | 44.4     | %      | 43.4     | %      |
| Dividend yield         |   | None     |   | None     |   | None     |   |

 

Comprehensive Income

 

The Company has adopted SFAS No. 130, “Reporting ComprehensiveIncome.”  SFAS No. 130 establishesstandards for reporting and presentation of comprehensive income and itscomponents in a full set of financial statements.  Comprehensive income (loss) consists of net earnings, currencytranslation adjustment, unrealized gain (loss) on investment, and unrealizedloss on derivative instruments and is presented in the consolidated statementsof shareholders’ equity and comprehensive income.  The Statement requires additional disclosures in the consolidatedfinancial statements but it does not affect the Company’s financial position orresults of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

Impairment of Long-Lived Assets

 

SFAS No. 144 provides a single accounting model for long-lived assetsto be disposed of.  SFAS No. 144 alsochanges the criteria for classifying an asset held for sale; and broadens thescope of businesses to be disposed of that qualify for reporting asdiscontinued operations and changes the timing of recognizing losses on suchoperations.  The Company adopted SFASNo. 144 on January 1, 2002.  Theadoption did not affect the Company’s financial statements.

 

In accordance with SFAS No. 144, long-lived assets, such as property,plant, and equipment, and purchased intangibles subject to amortization, arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized by theamount by which the carrying amount of the asset exceeds the fair value of theasset.  Assets to be disposed of wouldbe separately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated.  The assets and liabilitiesof a disposed group classified as held for sale would be presented separatelyin the appropriate asset and liability sections of the balance sheet.

 

Reclassifications

 

Certain amounts in the consolidated financial statements for prioryears have been reclassified to conform with the current year’s presentation.

 

F-12

----

 

Recent Accounting Pronouncements

 

SFAS No. 143, “Accounting for Asset Retirement Obligations,” issued inJune 2001 establishes financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The standardapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and (or)normal use of the asset.  The Company isrequired and plans to adopt the provisions of SFAS No. 143 for the quarterending March 31, 2003.  To accomplishthis, the Company must identify all legal obligations for asset retirementobligations, if any, and determine the fair value of these obligations on thedate of adoption.  The Company believesthe adoption of SFAS No. 143 will not have a material impact on the Company’sfinancial statements.

 

SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” issued in July 2002, addresses financial accounting and reportingfor costs associated with exit or disposal activities.  It nullifies EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 requires that a liability berecognized for the cost associated with an exit or disposal activity only whenthe liability is incurred, that is, when it meets the definition of a liabilityin the FASB conceptual framework. SFAS No. 146 also establishes fair value asthe objective for initial measurement of liabilities related to exit ordisposal activities. The Statement is effective for exit or disposal activitiesthat are initiated after December 31, 2002. The Company believes the adoptionof SFAS No. 146 will not have a material impact on the Company’s financialstatements.

 

In November 2002, the Financial Accounting Standards Board (FASB)issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” This Interpretation elaborates on the disclosures to be made by aguarantor in its financial statements about its obligations under guaranteesissued.  The Interpretation alsoclarifies that a guarantor is required to recognize, at inception of a guarantee,a liability for the fair value of the obligation undertaken. The initialrecognition and measurement provisions of the Interpretation are applicable toguarantees issued or modified after December 31, 2002.  The disclosure requirements are effectivefor financial statements of periods ending after December 15, 2002.  The Company does not expect the adoption ofInterpretation No. 45 to have a material impact on the Company’s financialstatements.

 

SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure,” issued in December 2002, amends SFAS No. 123 “Accounting forStock-Based Compensation” to provide alternative methods of transition for avoluntary change to the fair-value based method of accounting for stock-basedemployee compensation.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148are effective for fiscal years ending after December 15, 2002.  The interim disclosure provisions areeffective for financial statements for interim periods beginning after December15, 2002.  The Company will continue toaccount for stock-based compensation using the intrinsic value method under APBOpinion No. 25.  The disclosuremodifications required for fiscal years ending after December 15, 2002 areincluded in the notes to these financial statements.

 

Interpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51,” issued in January 2003, addresses theconsolidation by business enterprises of variable interest entities as definedin the Interpretation.  InterpretationNo. 46 applies immediately to variable interests in variable interest entitiescreated and/or obtained after January 31, 2003.  The application of this Interpretation is not expected to have amaterial impact on the Company’s financial statements.

 

F-13

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**2.Discontinued Operations**

 

During the quarter ended June 30, 2002, the Company decided to closeits Brazilian subsidiary.  In connectionwith the closure of the Brazilian subsidiary, the Company recorded an estimatedloss from disposal of discontinued operations of $1.8 million in the quarterended June 30, 2002 related to the write-down of the Brazilian subsidiaryassets net of expected proceeds, foreign currency translation losses, and anaccrual for estimated exit costs. Accordingly, the Company has reported theresults of operations of the Brazilian subsidiary as discontinued operations inthe Consolidated Statements of Operations. For business segment reportingpurposes, the Brazil operation was previously classified as the segment“Brazil.”

 

Certain information with respect to the discontinued Brazilianoperation for the years ended 2002, 2001 and 2000 is as follows (amounts inthousands):

 
|                                                |   | **Years  ended December 31,** |   |
|-----------------------------------------------------|--------|-------------------------------|--------|
|                                                |   | **2002**                      |   | **2001** |   | **2000** |   |
| Net sales                                           |   | $                             | 466    |   | $ | 1,092 |   | $ | 1,538 |   |
|                                                |   |                          |   |   |   |   |   |
| Pretax loss  (gain) from discontinued operations    |   | 682                           |   | 268 |   | (38 | ) |
| Pretax loss on  disposal of discontinued operations |   | 1,760                         |   | — |   | — |   |
| Income tax (benefit)  expense                       |   | (829                          | )      | (91 | ) | 13 |   |
| Net loss (gain)  from discontinued operations       |   | $                             | 1,613  |   | $ | 177 |   | $ | (25 | ) |

 

Assets and liabilities of the discontinued operation are as follows(amounts in thousands):

 
|                                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current assets                                      |   | $        | 293    |     | $      | 1,435    |   | $ | 1,455 |   |
| Property, plant  and equipment, net                 |   | 29       |   | 363      |   | 460      |   |
| Current  liabilities                                |   | (1,499   | )      | (1,797   | )      | (1,350   | )      |
| Net  (liabilities) assets of discontinued operation |   | $        | (1,177 | )        | $      | 1        |   | $ | 565 |   |

 

F-14

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**3. Investmentin Joint Ventures**

 

Summarized financial data for investment in joint ventures is asfollows (amounts in thousands):

 
|                                |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Condensed Statements of  Operations |   |     |   |     |   |     |   |
| Net Sales                           |   | $        | 9,127  |     | $      | 8,415    |   | $ | 8,632 |   |
| Gross profit                        |   | 874      |   | 1,078    |   | 2,251    |   |
| Net (loss)  earnings                |   | (1,430   | )      | (1,323   | )      | 154      |   |
|                                |   |     |   |     |   |     |   |
| Condensed  Balance Sheets           |   |     |   |     |   |     |   |
|                                |   |     |   |     |   |     |   |
| Current assets                      |   | $        | 2,690  |     | $      | 3,396    |   | $ | 3,225 |   |
| Non-current  assets                 |   | 4,245    |   | 3,224    |   | 3,344    |   |
|                                |   | $        | 6,935  |     | $      | 6,620    |   | $ | 6,569 |   |
|                                |   |     |   |     |   |     |   |
| Current  liabilities                |   | $        | 2,986  |     | $      | 2,389    |   | $ | 1,008 |   |
| Non-current  liabilities            |   | 1,151    |   | 2        |   | 9        |   |
| Partners’  capital             |   | 2,798    |   | 4,229    |   | 5,552    |   |
|                                |   | $        | 6,935  |     | $      | 6,620    |   | $ | 6,569 |   |

 

The Company’s 50% share of net earnings, after elimination of profit inending inventory, is included in other income. On May 1, 2002, the Company’sjoint venture that manufactures frozen beverage equipment began sellingdirectly to most third party customers, and paying a commission to theCompany.  Prior to May 1, 2002, thejoint venture sold substantially all of its production to the Company, and theCompany distributed the equipment to third party customers.

 

F-15

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**4.Income Taxes**

 

An analysis of income tax expense (benefit) follows (amounts inthousands):

 
|                      |   | **Current** |   | **Deferred** |   | **Total** |   |
|---------------------------|--------|-------------|--------|--------------|--------|-----------|--------|
| 2002                      |   |        |   |         |   |      |   |
| Continuing operations:    |   |        |   |         |   |      |   |
| Federal                   |   | $           | 364    |         | $      | 1,121     |   | $ | 1,485 |   |
| State                     |   | 24          |   | —       |   | 24        |   |
| Foreign                   |   | 1,052       |   | 108          |   | 1,160     |   |
| Total                     |   | $           | 1,440  |         | $      | 1,229     |   | $ | 2,669 |   |
| Discontinued operations:  |   |        |   |         |   |      |   |
| Federal                   |   | $           | (444   | )            | $      | (385      | )      | $ | (829 | ) |
|                      |   |        |   |         |   |      |   |
| 2001                      |   |        |   |         |   |      |   |
| Continuing operations:    |   |        |   |         |   |      |   |
| Federal                   |   | $           | 362    |         | $      | (407      | )      | $ | (45 | ) |
| State                     |   | 24          |   | —       |   | 24        |   |
| Foreign                   |   | 933         |   | 6            |   | 939       |   |
| Total                     |   | $           | 1,319  |         | $      | (401      | )      | $ | 918 |   |
| Discontinued operations:  |   |        |   |         |   |      |   |
| Federal                   |   | $           | — |         | $      | (91       | )      | $ | (91 | ) |
|                      |   |        |   |         |   |      |   |
| 2000                      |   |        |   |         |   |      |   |
| Continuing  operations:   |   |        |   |         |   |      |   |
| Federal                   |   | $           | (64    | )            | $      | (957      | )      | $ | (1,021 | ) |
| State                     |   | 24          |   | —       |   | 24        |   |
| Foreign                   |   | 1,332       |   | 7            |   | 1,339     |   |
| Total                     |   | $           | 1,292  |         | $      | (950      | )      | $ | 342 |   |
| Discontinued  operations: |   |        |   |         |   |      |   |
| Federal                   |   | $           | — |         | $      | 13        |   | $ | 13 |   |
|                           |        |             |        |              |        |           |        |  |  |  |  |

 

F-16

----

 

Temporary differences between the financial statement carrying amountsand tax bases of assets and liabilities that give rise to significant portionsof the net deferred tax liability relate to the following (amounts inthousands):

 
|                                               |   | **2002** |   | **2001** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax  assets:                              |   |     |   |     |   |
| Accounts  receivable                               |   | $        | 229    |     | $      | 190 |   |
| Inventory                                          |   | 1,449    |   | 701      |   |
| Compensation and  benefits                         |   | 353      |   | 141      |   |
| Net operating  loss carryforward, expiring in 2020 |   | 63       |   | 1,364    |   |
| Minimum taxes  creditable in foreign jurisdictions |   | 639      |   | 503      |   |
| US tax credits                                     |   | 741      |   | 611      |   |
| Other                                              |   | 233      |   | 252      |   |
| Total gross  deferred tax assets                   |   | 3,707    |   | 3,762    |   |
|                                               |   |     |   |     |   |
| Deferred tax  liabilities:                         |   |     |   |     |   |
| Property, plant  and equipment                     |   | 3,495    |   | 3,283    |   |
| DISC income                                        |   | 1,746    |   | 1,385    |   |
| Foreign deferred  liabilities                      |   | 523      |   | 304      |   |
| Total deferred  tax liability                      |   | 5,764    |   | 4,972    |   |
| Net deferred tax  liability                        |   | $        | 2,057  |     | $      | 1,210 |   |

 

In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. Based on the expectation of future taxable income and that thedeductible temporary differences will offset existing taxable temporarydifferences, management believes it is more likely than not the Company willrealize the benefits of these deductible differences at December 31, 2002.

 

The actual tax expense (benefit) differs from the “expected” taxexpense (benefit) (computed by applying U.S. Federal corporate rate of 34% toearnings before income taxes) as follows (amounts in thousands):

 
|                                                                            |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Computed  “expected” tax expense (benefit) from continuing operations |   | $        | 2,818  |     | $      | 849      |   | $ | 298 |   |
| Increase  (decrease) in taxes resulting from:                                   |   |     |   |     |   |     |   |
| Effect of tax  credits                                                          |   | (129     | )      | (118     | )      | (144     | )      |
| Effect of  nondeductible expenses                                               |   | 78       |   | 44       |   | 99       |   |
| State, net of  Federal benefit                                                  |   | 16       |   | 16       |   | 16       |   |
| Effect of  foreign tax rates                                                    |   | (26      | )      | 34       |   | 83       |   |
| Other, net                                                                      |   | (88      | )      | 93       |   | (10      | )      |
|                                                                            |   | $        | 2,669  |     | $      | 918      |   | $ | 342 |   |

 

In accordance with SFAS No. 109, no federal income taxes have beenprovided for the accumulated undistributed earnings of the DISC as of December31, 1992.  On December 31, 1992, theaccumulated 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 federaland state income tax charge to the financial statements, thereby increasing theCompany’s effective tax rate.

 

The Company elected to treat the Brazilian subsidiary as a partnershipfor U.S. tax purposes for the year ended December 31, 1999. This election hasenabled the Company to recognize for U.S. income tax purposes a loss of $7.7million on its investment in the Brazilian operation. The Internal RevenueService (the “Service”) is examining the Company’s U.S. income tax return for1999 including the deduction of the loss on its investment in the Brazilianoperation, and has proposed the disallowance of the deduction.  With the liquidation of the Braziliansubsidiary in

 

F-17

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2002, the Service is reviewing the deductibility of the loss in 2002.The Company does not believe that any significant adjustments will be requiredas a result of this examination.

 

Actual net Federal income taxes (refunded) paid were approximately $1.2million, nil and ($3.0) million, for 2002, 2001, and 2000, respectively.

 

**5.Long-term Debt and Line of Credit with Banks**

 
| **(Amounts in thousands)**                                                                                                                                                                                                                                             |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| $ 11,487 notes payable to  banks, due in quarterly installments plus interest based upon prime and LIBOR  (weighted average rate of 2.84% at December 31, 2002) through July 15, 2005;  secured by substantially all of the Company’s assets in the United States |   | $        | 10,786 |     | $      | 12,724 |   |
|                                                                                                                                                                                                                                                                   |   |     |   |     |   |
| Note payable to  seller of Brazil subsidiary, due in annual installments plus interest based  on LIBOR (weighted average interest rate of 2.17% at December 31, 2002)  through December 31, 2002                                                                       |   | 1,196    |   | 1,196    |   |
|                                                                                                                                                                                                                                                                   |   |     |   |     |   |
| Capital lease  payable to bank, due in monthly installments plus interest of 6.72% through  November 1, 2006                                                                                                                                                           |   | 552      |   | 670      |   |
|                                                                                                                                                                                                                                                                   |   | 12,534   |   | 14,590   |   |
|                                                                                                                                                                                                                                                                   |   |     |   |     |   |
| Less current  installments of long-term debt                                                                                                                                                                                                                           |   | 2,726    |   | 2,718    |   |
|                                                                                                                                                                                                                                                                   |   | $        | 9,808  |     | $      | 11,872 |   |

 

The Company also has a $25.0 million revolving credit facility (the“Revolving Facility”) from three banks. Borrowings under the Revolving Facility are based on certain percentagesof accounts receivable and inventories. The Revolving Facility is collateralized by substantially all of theCompany’s assets in the United States. Amounts outstanding under the revolving facility were $5.0 million atDecember 31, 2002 and $15.6 million at December 31, 2001.  There was $13.7 million available under theRevolving Facility on December 31, 2002. Interest accrues at a rate based upon either LIBOR or upon the Banks’prime rate.  The weighted averageinterest rate was 2.55% as of December 31, 2002.  The Revolving Facility expires July 15, 2005.

 

The note payable to the seller of the Company’s Brazil subsidiary wasdue on December 31, 2001.  Because ofthe unfavorable business conditions in Brazil, the holder of the note has notdemanded payment of the amount due.  TheCompany has not repaid the $1.196 million balance pending discussions with theholder of the note to restructure the debt.

 

F-18

----

 

Annual maturities on long-term debt outstanding at December 31, 2002are as follows (amounts in thousands):

 
| 2003   |   | 2,726 |   |
|--------|--------|-------|--------|
| 2004   |   | 1,540 |   |
| 2005   |   | 8,136 |   |
| 2006   |   | 132   |   |
|   |   | $     | 12,534 |   |
|        |        |       |        |  |

 

To manage its exposure to fluctuations in interest rates, the Companyhas entered into interest rate swap agreements (the “Swap Agreements”) with anotional principal amount of $5.0 million. Interest rate swap agreements involve the exchange of interestobligations on fixed and floating rate debt without the exchange of theunderlying principal amounts.  Thedifference paid or received on the swap agreement is recognized as anadjustment to interest expense.  TheCompany’s Swap Agreement provides that the Company pay a fixed interest rate of5.98%, while receiving a floating rate payment equal to the three month LIBORrate determined on a quarterly basis with settlement occurring on specific dates.  While the Company has credit risk associatedwith this financial instrument, no loss is anticipated due to nonperformance bythe counterparties to these agreements because of the financial strength of thefinancial institution involved.

 

The Credit Facilities and the Revolving Credit Facility require thatthe Company maintain certain financial ratios and other covenants. The Companyis in compliance with all of these financial ratios and covenants as ofDecember 31, 2002.

 

Actual interest paid was approximately $1.7 million, $3.0 million and$3.2 million in 2002, 2001 and 2000, respectively.

 

**6.Employee Benefit Plans**

 

Common Stock Options

 

The Company has stock option plans under which incentive andnon-qualified options may be granted. Options are granted at the market price per share at the grantdate.  Options generally becomeexercisable in 20% increments beginning on the grant date and expire ten yearsfrom the grant date.

 

During the third quarter of 2002, the Company’s Board of Directorsextended the life of the Company’s outstanding stock options by fiveyears.  The change resulted in anexpense of $0.4 million, $0.2 million of which was recognized during the thirdand fourth quarters of 2002.  Theremaining $0.2 million will be recognized ratably as the options vest.

 

F-19

----

 

A summary of transactions for all options follows:

 
|                              |   | **Stock Options** |   | **Option Price**                    |                     |
|-----------------------------------|--------|-------------------|--------|-------------------------------------|--------------------------|
| 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 |   |
| Granted                           |   | 110,300           |   | 3.60 -     9.00 |                     |
| Canceled                          |   | (57,700           | )      | 3.56 -   16.54            |                     |
| Exercised                         |   | (268,362          | )      | 1.30 -     3.56 |                     |
| Outstanding at  December 31, 2002 |   | 386,651           |   | $                                   | 3.56 -   13.63 |   |

 

A summary of exercisable options follows:

 
| **Range of  Prices** |   | **Exercisable  Options** |   | **Avg. of  Exercise Price** |   |
|----------------------|--------|--------------------------|--------|-----------------------------|--------|
| 2000                 |   |                     |   |                        |   |
| $ 1.0 to 5.0         |   | 300,761                  |   | $                           | 1.66   |   |
| $ 5.1 to 10.0        |   | 191,375                  |   | $                           | 7.67   |   |
| $ 10.1 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   |   |
| $ 10.1 to 17.0       |   | 40,700                   |   | $                           | 14.95  |   |
|                 |   |                     |   |                        |   |
| 2002                 |   |                     |   |                        |   |
| $ 1.0 to 5.0         |   | 128,100                  |   | $                           | 3.84   |   |
| $ 5.1 to 10.0        |   | 64,010                   |   | $                           | 7.94   |   |
| $ 10.1 to 17.0       |   | 11,500                   |   | $                           | 13.52  |   |

 

**Self-Insured Medical Plan**

 

The Company maintains a self-insurance program for major medical andhospitalization coverage for employees and their dependents, which is partiallyfunded by payroll deductions.  TheCompany has provided for both reported, and incurred but not reported, medicalcosts in the accompanying consolidated balance sheets.  The Company has a maximum liability of$100,000 per employee / dependent per year. Amounts in excess of the stated maximum are covered under a separatepolicy provided by an insurance company.

 

**Workers’ Compensation Coverage**

 

The Company is self-insured for all workers’ compensation claimssubmitted by employees for on-the-job injuries.  The Company has provided for both reported, and incurred but notreported, costs of workers’ compensation coverage in the accompanyingconsolidated balance sheets**.**

 

In an effort to provide for catastrophic events, the Company carries anexcess indemnity policy for workers’ compensation claims.  All claims paid under the policy are subjectto 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

 

F-20

----

 

provided for potential losses. However, multiple occurrences of serious injuries to employees couldhave a material adverse effect on the Company’s financial position and itsresults 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 eligibilityrequirements.  Participants may elect tocontribute up to 15% of their annual wages, subject to certain IRSlimitations.  The Company matchesemployee 401(k) contributions to the plan at a rate of 50% of the first 6% ofthe salary contributed to the plan through salary deferral.  In addition, the Company, at the discretionof the Board of Directors, may make profit sharing contributions to theplan.  The accompanying consolidatedstatements of income for the years ended December 31, 2002, 2001 and 2000include Company contributions to the plan of approximately $0.5 million, $0.2million and $0.5 million, respectively.

 

The Company is also required to make contributions to a definedcontribution plan for the employees of its Australian subsidiary.  Contributions during 2002, 2001 and 2000totaled approximately $0.2 million, $0.1 million, and $0.2 million,respectively.

 

**7.Leases**

 

The Company rents a building, in which a portion of its manufacturingfacilities are located, under an operating lease from a partnership controlledby certain shareholders.  Themonth-to-month agreement provides for monthly rental payments of $7,400, andthe payment of real estate taxes, insurance and maintenance expenses.

 

At December 31, 2002, future minimum lease payments required under allnoncancelable operating leases are as follows (amounts in thousands):

 
| 2003                          |   | $   | 629    |   |
|-------------------------------|--------|-----|--------|--------|
| 2004                          |   | 488 |   |
| 2005                          |   | 218 |   |
| 2006                          |   | 161 |   |
| 2007                          |   | 360 |   |
| Total minimum  lease payments |   | $   | 1,856  |   |

 

Total rental expense was approximately $1.0 million, $1.3 million and$2.5 million in 2002, 2001 and 2000, respectively.

 

The Company has been party to agreements to provide warehousing spaceand services for certain of its customers. Rental income related to thewarehousing agreements totaled approximately $0.2 million, $1.7 million and$1.2 million in 2002, 2001 and 2000, respectively.  These agreements were terminated in 2002.

 

**8.Long-term Receivables**

 

Long-term receivables are interest bearing and include approximately$0.1 million and $0.4 million due from officers as of December 31, 2002 and2001, respectively.

 

F-21

----

 

**9. FairValue of Financial Instruments**

 

The Company is required to disclose estimated fair value of itsfinancial instruments, including derivative financial instruments, for which itis practicable to estimate fair value. The following methods and assumptions were used to estimate the fairmarket value of each class of financial instrument for which it is practicableto estimate that value.

 

Cash, Trade Receivables, and Trade Payables

 

The carrying amounts of the Company’s cash, trade receivables and tradepayables approximate market value.

 

Long-term Receivables

 

The carrying amount of the Company’s notes receivable approximates fairmarket value based on the actual interest rates paid on the interest bearingnotes.

 

Long-term Investments

 

Long-term investments, excluding investment in joint ventures, arestated at approximate market value based upon the current nature of theinvestments. The Company’s investment in Packaged Ice, Inc. was written-down by$0.03 million and $0.3 million to the fair market value at December 31, 2002and 2001, respectively.

 

Debt

 

The carrying amount of the Company’s long-term debt and short-term debtapproximate market value as the rates are variable or are fixed at currentmarket rates.

 

Swap Agreements

 

The carrying amount of the Company’s interest rate swap agreementsapproximate market value.  The fairmarket value of interest rate swap agreements was approximately $0.05 millionand $0.4 million as of December 31, 2002 and 2001, respectively.

 

**10.Acquisitions**

 

During the second quarter of 2002, the Company acquired certain assetsand liabilities of BMS Refrigeration Pty. Ltd., an Australian company, forapproximately $0.252 million. The acquisition has been accounted for by thepurchase method, and accordingly, the results of operations of BMS have beenincluded in the Company’s consolidated financial statements from the date ofacquisition. The excess of the purchase price over the fair value of theidentifiable assets acquired of $0.126 million has been recorded asgoodwill.  The operating results of theCompany would not have been significantly different had the acquisitionoccurred at the beginning of 2002.

 

F-22

----

 

**11.Supplemental Balance Sheet and Income Statement Information**

 

Inventory components are as follows (amounts in thousands):

 

|                       |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Finished goods             |   | $        | 10,893 |     | $      | 14,350 |   |
| Work in process            |   | 7,647    |   | 8,199    |   |
| Raw material and  supplies |   | 10,554   |   | 9,611    |   |
|                       |   | $        | 29,094 |     | $      | 32,160 |   |

 

Accrued expenses consist of the following (amounts in thousands):

 

|                                   |   | **As of  December 31,** |   |
|----------------------------------------|--------|-------------------------|--------|
|                                   |   | **2002**                |   | **2001** |   |
| Payroll and  related expenses          |   | $                       | 3,936  |   | $ | 1,786 |   |
| Commissions                            |   | 395                     |   | 499 |   |
| Health and  workers’ compensation |   | 909                     |   | 561 |   |
| Property taxes                         |   | 539                     |   | 297 |   |
| Interest                               |   | 339                     |   | 679 |   |
| Warranty                               |   | 526                     |   | 304 |   |
| Other taxes                            |   | 140                     |   | 109 |   |
| Other accrued  expenses                |   | 1,193                   |   | 823 |   |
|                                   |   | $                       | 7,977  |   | $ | 5,058 |   |

 

**12.Product Warranties**

 

The Company generally warrants its products against certainmanufacturing and other defects.  Theseproduct warranties are provided for specific periods of time from the date ofsale.  As of December 31, 2002 and 2001,the Company has accrued $0.5 million and $0.3 million, respectively, forestimated product warranty claims.  Theaccrued product warranty costs are based primarily on actual warranty claims aswell as current information on repair costs. Warranty claims expense for each of the years 2002, 2001 and 2000 were$0.199 million, $0.159 million and $0.090 million.

 

**13.Contingencies**

 

The Company is a party to various lawsuits and claims generallyincidental to its business.  Theultimate disposition of these matters is not expected to have a significantadverse effect on the Company’s financial position or results of operations.

 

F-23

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**14.Quarterly Financial Information (Unaudited)**

 

The fourth quarter of 2001 includes animpairment loss of $0.3 million related to the other than temporary decline inthe market value of the Company’s investment in Packaged Ice, Inc.  The following table reflects the quarterlyresults for 2002 and 2001 (in thousands except for share data):

 
|                 |   | **Three  Months Ended** |   |
|----------------------|--------|-------------------------|--------|
| **2002**             |   | **March  31**           |   | **June  30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
| Net sales            |   | $                       | 30,250 |   | $ | 37,306 |   | $ | 37,298 |   | $ | 34,161 |   |
| Gross profit         |   | 7,209                   |   | 9,732 |   | 11,031 |   | 9,118 |   |
| Net earnings         |   | 503                     |   | 582 |   | 1,876 |   | 1,045 |   |
|                 |   |                    |   |   |   |   |   |   |   |
| Earnings per  share: |   |                    |   |   |   |   |   |   |   |
| Basic                |   | $                       | 0.05   |   | $ | 0.06 |   | $ | 0.20 |   | $ | 0.11 |   |
| Diluted              |   | $                       | 0.05   |   | $ | 0.06 |   | $ | 0.20 |   | $ | 0.11 |   |

 
|                        |   | **Three  Months Ended** | ** ** |
|-----------------------------|--------|-------------------------|------------|
| **2001**                    |   | **March  31**           |       | **June  30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
| Net sales                   |   | $                       | 29,669     |   | $ | 31,207 |   | $ | 31,166 |   | $ | 30,703 |   |
| Gross profit                |   | 7,025                   |       | 7,332 |   | 7,217 |   | 5,294 |   |
| 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 | ) |

 

F-24

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**15.****Segmentand Geographic Information**

 

The Company and its subsidiaries are engaged in the manufacture anddistribution of beverage dispensing equipment and related parts andcomponents.  The Company manages itsoperations geographically.  Sales areattributed to a region based on the ordering location of the customer.

 
| **Amounts in thousands**                  |   | **North  America** |   | **Latin  America** |   | **Asia/Pacific** |   | **Brazil** |   | **Europe** |   | **Corporate** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|--------|--------------------|--------|------------------|--------|------------|--------|------------|--------|---------------|--------|-----------|--------|
| Year ended  December 31, 2002             |   |               |   |               |   |             |   |       |   |       |   |          |   |      |   |
| Total revenues                            |   | $                  | 97,575 |               | 13,351 |             | 18,555 |       | — |       | 9,534  |          | — |      | $      | 139,015 |   |
| Depreciation and  amortization            |   | 4,525              |   | 164                |   | 222              |   | —     |   | 48         |   | —        |   | 4,959     |   |
| Operating income                          |   | 17,430             |   | 1,979              |   | 1,785            |   | —     |   | 1,360      |   | (12,999       | )      | 9,555     |   |
| Identifiable  assets at December 31, 2002 |   | 66,668             |   | 10,194             |   | 12,538           |   | 322        |   | 3,033      |   | —        |   | 92,755    |   |
| Capital  expenditures                     |   | 2,591              |   | 487                |   | 535              |   | —     |   | 45         |   | —        |   | 3,658     |   |
|                                      |   |               |   |               |   |             |   |       |   |       |   |          |   |      |   |
| Year ended  December 31, 2001             |   |               |   |               |   |             |   |       |   |       |   |          |   |      |   |
| Total revenues                            |   | $                  | 87,770 |               | 9,816  |             | 15,303 |       | — |       | 9,856  |          | — |      | $      | 122,745 |   |
| Depreciation and  amortization            |   | 4,132              |   | 170                |   | 317              |   | 136        |   | 61         |   | —        |   | 4,816     |   |
| Operating income                          |   | 11,115             |   | 587                |   | 1,446            |   | —     |   | 1,601      |   | (10,116       | )      | 4,633     |   |
| Identifiable  assets at December 31, 2001 |   | 67,721             |   | 13,677             |   | 9,080            |   | 1,798      |   | 4,328      |   | —        |   | 96,604    |   |
| Capital  expenditures                     |   | 3,292              |   | 471                |   | 221              |   | 12         |   | 2          |   | —        |   | 3,998     |   |
|                                      |   |               |   |               |   |             |   |       |   |       |   |          |   |      |   |
| Year ended  December 31, 2000             |   |               |   |               |   |             |   |       |   |       |   |          |   |      |   |
| Total revenues                            |   | $                  | 73,373 |               | 7,850  |             | 19,582 |       | — |       | 10,895 |          | — |      | $      | 111,700 |   |
| Depreciation and  amortization            |   | 3,583              |   | 156                |   | 342              |   | 60         |   | 64         |   | —        |   | 4,205     |   |
| Operating income                          |   | 9,056              |   | 827                |   | 2,481            |   | —     |   | 1,923      |   | (10,515       | )      | 3,772     |   |
| 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     |   |

 

All intercompany revenues are eliminated in computing revenues andoperating income.  The corporatecomponent of operating income represents corporate general and administrativeexpenses.  Identifiable assets are thoseassets identified with the operations in each geographic area.  The revenues and operating income fromBrazil have been included in discontinued operations.  During 2002, the Company placed the Asia region and the Pacificregion under common management.  The tworegions are now combined for segment reporting purposes.

 

F-25

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Substantially all revenues result from the sales of products andservices associated with beverage dispensing. The products can be divided into four major categories: (i) fountainsoft drink and citrus dispensers; (ii) post-mix dispensing valves; (iii) beerdispensing systems; and (iv) other products and services as follows (Amounts inthousands):

 
|                                               |   | **2002** |    | **2001** |   | **2000** |   |
|----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Soft drink,  citrus and frozen beverage dispensers |   | $        | 62,470  |     | $      | 50,703   |   | $ | 42,209 |   |
| Post mix dispensing  valves                        |   | 13,452   |    | 13,725   |   | 13,334   |   |
| Beer dispensing  systems                           |   | 8,757    |    | 5,887    |   | 8,190    |   |
| Other                                              |   | 54,336   |    | 52,430   |   | 47,967   |   |
| Total revenue                                      |   | $        | 139,015 |     | $      | 122,745  |   | $ | 111,700 |   |

 

The following provides information regarding net sales to majorcustomers, domestically and internationally (amounts in thousands):

 
|                       |   | **2002** |    | **Percent of  Net Sales** |   | **2001** |   | **Percent of  Net Sales** |    | **2000** |   | **Percent of  Net Sales** |   |
|----------------------------|--------|----------|---------|---------------------------|--------|----------|--------|---------------------------|---------|----------|--------|---------------------------|--------|
| United States:             |   |     |    |                      |   |     |   |                      |    |     |   |                      |   |
| The Coca-Cola  Company     |   | $        | 49,241  |                      | 35     | %        | $      | 44,163                    |    | 36       | %      | $                         | 29,649 |   | 27 | % |
| Other                      |   | 45,998   |    | 33                        |   | 42,025   |   | 34                        |    | 42,829   |   | 38                        |   |
|                       |   | 95,239   |    | 68                        |   | 86,188   |   | 70                        |    | 72,478   |   | 65                        |   |
|                       |   |     |    |                      |   |     |   |                      |    |     |   |                      |   |
| Outside of  United States: |   |     |    |                      |   |     |   |                      |    |     |   |                      |   |
| Other                      |   | 43,776   |    | 32                        |   | 36,557   |   | 30                        |    | 39,222   |   | 35                        |   |
|                       |   | $        | 139,015 |                      |   | 100      | %      | $                         | 122,745 |     |   | 100                       | %      | $ | 111,700 |   |   | 100 | % |
|                            |        |          |         |                           |        |          |        |                           |         |          |        |                           |        |  |  |  |  |  |  |

 

In addition to sales made directly to The Coca-Cola Company,substantially all sales to other entities are significantly influenced by TheCoca-Cola Company.  Any disruption orchange in the relationship with The Coca-Cola Company could have a materialadverse effect on the results of operations of the Company.

 

F-26

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SCHEDULE II

 

RESERVE ACCOUNTS

 
| **Description**                                          |   | **Balance at  Beginning of  Year** |   | **Additions  Charged to  Expense** |   | **Deductions  from Account** |   | **Balance at  End of Year** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Allowance for  doubtful accounts (amounts in thousands): |   |                               |   |                               |   |                         |   |                        |   |
|                                                     |   |                               |   |                               |   |                         |   |                        |   |
| December 31,  2002                                       |   | $                                  | 467    |                               | $      | 622                          |   | $                           | 110    |   | $ | 979 |   |
| December 30,  2001                                       |   | $                                  | 379    |                               | $      | 122                          |   | $                           | 34     |   | $ | 467 |   |
| December 31,  2000                                       |   | $                                  | 414    |                               | $      | 66                           |   | $                           | 101    |   | $ | 379 |   |

 
| **Description**                                    |   | **Balance at  Beginning of  Year** |   | **Additions  Charged to  Expense** |   | **Deductions  from Account** |   | **Balance at  End of Year** |   |
|----------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Inventory  reserve account (amounts in thousands): |   |                               |   |                               |   |                         |   |                        |   |
|                                               |   |                               |   |                               |   |                         |   |                        |   |
| December 31,  2002                                 |   | $                                  | 1,478  |                               | $      | 3,916                        |   | $                           | 1,642  |   | $ | 3,752 |   |
| December 31,  2001                                 |   | $                                  | 1,483  |                               | $      | 489                          |   | $                           | 494    |   | $ | 1,478 |   |
| December 31,  2000                                 |   | $                                  | 847    |                               | $      | 860                          |   | $                           | 224    |   | $ | 1,483 |   |

 

F-27

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