**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**FORM 10-Q**

 

**Quarterly report pursuant to section 13 or 15 (d)of the Securities Exchange Act of 1934**

 
| **For  the quarter ended June 30, 2004** | ** ** | **Commission  file number 0-13875** |
|-----------------------------------------------|------------|-------------------------------------|

 

**LANCER CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Texas**                                                                           | ** ** | **74-1591073**                     |
|-------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                    |       | (IRS employer  identification no.) |
|                                                                                |       |                               |
| **6655  Lancer Blvd., San Antonio, Texas**                                          | ** ** | **78219**                          |
| (Address of  principal executive offices)                                           |       | (Zip Code)                         |
|                                                                                |       |                               |
| Registrant’s  telephone number, including area code:   **(210) 310-7000** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

**YES     ****o          NO **    ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).

 

**YES     ****o          NO**     ý

 

Indicate the number ofshares outstanding of each of the issuers of classes of common stock, as of thelatest practicable date.

 

| **Title**                               | ** ** | **Shares outstanding as of**August 4, 2004 |
|-----------------------------------------|------------|-------------------------------------------------|
| ** **                              | ** ** | ** **                                      |
| Common stock,  par value $.01 per share |       | 9,380,931                                       |

 

 

----

 

**Item 1** - **Financial Statements**

 

**LANCERCORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 

(Amounts inthousands, except share data)

 

ASSETS

 
| ** **                                                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                                  |       |                    |       |                        |       |
| Current  assets:                                                      |       |                    |       |                        |       |
| Cash                                                                  |       | $                       | 4,689      |                        | $          | 1,129 |   |
| Receivables:                                                          |       |                    |       |                        |       |
| Trade  accounts and notes                                             |       | 17,465                  |       | 14,226                      |       |
| Other                                                                 |       | 900                     |       | 1,268                       |       |
|                                                                  |       | 18,365                  |       | 15,494                      |       |
| Less  allowance for doubtful accounts                                 |       | (649                    | )          | (745                        | )          |
|                                                                  |       |                    |       |                        |       |
| Net  receivables                                                      |       | 17,716                  |       | 14,749                      |       |
|                                                                  |       |                    |       |                        |       |
| Inventories                                                           |       | 24,962                  |       | 24,502                      |       |
| Prepaid  expenses                                                     |       | 1,354                   |       | 474                         |       |
| Tax  refund receivable                                                |       | —                  |       | 225                         |       |
| Deferred  tax asset                                                   |       | 537                     |       | 568                         |       |
|                                                                  |       |                    |       |                        |       |
| Total  current assets                                                 |       | 49,258                  |       | 41,647                      |       |
|                                                                  |       |                    |       |                        |       |
| Property,  plant and equipment, at cost:                              |       |                    |       |                        |       |
| Land                                                                  |       | 1,432                   |       | 1,432                       |       |
| Buildings                                                             |       | 22,261                  |       | 22,211                      |       |
| Machinery  and equipment                                              |       | 23,654                  |       | 22,769                      |       |
| Tools  and dies                                                       |       | 12,788                  |       | 12,709                      |       |
| Leaseholds,  office equipment and vehicles                            |       | 10,540                  |       | 10,796                      |       |
| Assets  in progress                                                   |       | 2,101                   |       | 2,597                       |       |
|                                                                  |       | 72,776                  |       | 72,514                      |       |
| Less  accumulated depreciation and amortization                       |       | (40,165                 | )          | (38,395                     | )          |
|                                                                  |       |                    |       |                        |       |
| Net  property, plant and equipment                                    |       | 32,611                  |       | 34,119                      |       |
|                                                                  |       |                    |       |                        |       |
| Long-term  investments                                                |       | 2,194                   |       | 1,786                       |       |
| Intangibles  and other assets, at cost, less accumulated amortization |       | 4,819                   |       | 4,726                       |       |
|                                                                  |       |                    |       |                        |       |
|                                                                  |       | $                       | 88,882     |                        | $          | 82,278 |   |

 

See accompanyingnotes to consolidated financial statements.

 

2

----

 

**LANCERCORPORATION**

 

(Amounts inthousands, except share data)

 

LIABILITIES AND SHAREHOLDERS’EQUITY

 
| ** **                                                                                                                                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                 | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                                                                                                       |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                      |       |                    |       |                        |       |
| Accounts  payable                                                                                                                          |       | $                       | 9,191      |                        | $          | 6,609 |   |
| Current  installments of long-term debt                                                                                                    |       | 2,740                   |       | 2,735                       |       |
| Line  of credit with bank                                                                                                                  |       | 3,000                   |       | 1,000                       |       |
| Deferred  licensing and maintenance fees                                                                                                   |       | 794                     |       | 1,021                       |       |
| Accrued  expenses and other liabilities                                                                                                    |       | 7,844                   |       | 6,964                       |       |
| Taxes  payable                                                                                                                             |       | 849                     |       | —                      |       |
| Total  current liabilities                                                                                                                 |       | 24,418                  |       | 18,329                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Deferred  tax liability                                                                                                                    |       | 973                     |       | 1,175                       |       |
| Long-term  debt, excluding current installments                                                                                            |       | 7,495                   |       | 8,268                       |       |
| Deferred  licensing and maintenance fees                                                                                                   |       | 2,255                   |       | 2,396                       |       |
| Other  long-term liabilities                                                                                                               |       | 73                      |       | 147                         |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Total  liabilities                                                                                                                         |       | 35,214                  |       | 30,315                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Commitments  and contingencies                                                                                                             |       |                    |       |                        |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Shareholders’  equity:                                                                                                                |       |                    |       |                        |       |
| Preferred  stock, without par value 5,000,000 shares authorized; none issued                                                               |       | —                  |       | —                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Common  stock, $.01 par value:                                                                                                             |       |                    |       |                        |       |
| 50,000,000  shares authorized; 9,432,119 issued and 9,367,895 outstanding in 2004, and  9,426,121 issued and 9,361,895 outstanding in 2003 |       | 94                      |       | 94                          |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Additional  paid-in capital                                                                                                                |       | 12,878                  |       | 12,848                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Accumulated  other comprehensive (income) loss                                                                                             |       | (724                    | )          | 6                           |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Deferred  compensation                                                                                                                     |       | (52                     | )          | (92                         | )          |
|                                                                                                                                       |       |                    |       |                        |       |
| Retained  earnings                                                                                                                         |       | 41,832                  |       | 39,467                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
| Less  common stock in treasury, at cost; 64,226 shares in 2004 and 2003                                                                    |       | (360                    | )          | (360                        | )          |
|                                                                                                                                       |       |                    |       |                        |       |
| Total  shareholders’ equity                                                                                                           |       | 53,668                  |       | 51,963                      |       |
|                                                                                                                                       |       |                    |       |                        |       |
|                                                                                                                                       |       | $                       | 88,882     |                        | $          | 82,278 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

----

 

**LANCERCORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

 

(Amounts inthousands, except share data)

 
| ** **                                                    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Net  sales                                                    |       | $                       | 31,696     |                    | $          | 29,370 |   | 61,203 |   | $ | 56,244 |   |
| Cost  of sales                                                |       | 21,499                  |       | 21,680                  |       | 42,404 |   | 42,760 |   |
| Gross  profit                                                 |       | 10,197                  |       | 7,690                   |       | 18,799 |   | 13,484 |   |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Selling,  general and administrative expenses                 |       | 7,880                   |       | 6,692                   |       | 15,392 |   | 13,274 |   |
| Operating  income                                             |       | 2,317                   |       | 998                     |       | 3,407 |   | 210 |   |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Other  (income) expense:                                      |       |                    |       |                    |       |   |   |   |   |
| Interest  expense                                             |       | 144                     |       | 156                     |       | 253 |   | 324 |   |
| (Income)  loss from joint ventures                            |       | (100                    | )          | 261                     |       | (253 | ) | 487 |   |
| Other  (income) expense, net                                  |       | 34                      |       | (25                     | )          | (319 | ) | (226 | ) |
|                                                          |       | 78                      |       | 392                     |       | (319 | ) | 585 |   |
| Income  (loss) from continuing operations before income taxes |       | 2,239                   |       | 606                     |       | 3,726 |   | (375 | ) |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Income  tax expense (benefit):                                |       |                    |       |                    |       |   |   |   |   |
| Current                                                       |       | 953                     |       | 1,020                   |       | 1,558 |   | 881 |   |
| Deferred                                                      |       | (136                    | )          | (694                    | )          | (199 | ) | (526 | ) |
|                                                          |       | 817                     |       | 326                     |       | 1,359 |   | 355 |   |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Income  (loss) from continuing operations                     |       | 1,422                   |       | 280                     |       | 2,367 |   | (730 | ) |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Discontinued  operations:                                     |       |                    |       |                    |       |   |   |   |   |
| (Loss)  from operations of discontinued Brazilian subsidiary  |       | —                  |       | (76                     | )          | — |   | (120 | ) |
| Income  tax benefit                                           |       | —                  |       | 26                      |       | — |   | 763 |   |
| Income  (loss) from discontinued operations                   |       | —                  |       | (50                     | )          | — |   | 643 |   |
| Net  earnings (loss)                                          |       | $                       | 1,422      |                    | $          | 230 |   | 2,367 |   | $ | (87 | ) |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Common  Shares Outstanding:                                   |       |                    |       |                    |       |   |   |   |   |
| Basic                                                         |       | 9,367,895               |       | 9,353,706               |       | 9,367,664 |   | 9,349,542 |   |
| Diluted                                                       |       | 9,460,051               |       | 9,449,974               |       | 9,465,304 |   | 9,349,542 |   |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Earnings  Per Share:                                          |       |                    |       |                    |       |   |   |   |   |
| Basic                                                         |       |                    |       |                    |       |   |   |   |   |
| Earnings  (loss) from continuing operations                   |       | $                       | 0.15       |                    | $          | 0.03 |   | 0.25 |   | $ | (0.08 | ) |
| Earnings  (loss) from discontinued operations                 |       | $                       | —     |                    | $          | (0.01 | ) | — |   | $ | 0.07 |   |
| Net  earnings                                                 |       | $                       | 0.15       |                    | $          | 0.02 |   | 0.25 |   | $ | (0.01 | ) |
|                                                          |       |                    |       |                    |       |   |   |   |   |
| Diluted                                                       |       |                    |       |                    |       |   |   |   |   |
| Earnings  (loss) from continuing operations                   |       | $                       | 0.15       |                    | $          | 0.03 |   | 0.25 |   | $ | (0.08 | ) |
| Earnings  (loss) from discontinued operations                 |       | $                       | —     |                    | $          | (0.01 | ) | — |   | $ | 0.07 |   |
| Net  earnings                                                 |       | $                       | 0.15       |                    | $          | 0.02 |   | 0.25 |   | $ | (0.01 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

4

----

 

**LANCERCORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

 

(Amounts inthousands)

 
| ** **                                                                                     | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                     | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| Cash  flow from operating activities:                                                          |       |                    |       |   |   |
| Net  earnings (loss)                                                                           |       | $                       | 2,367      |   | $ | (87 | ) |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities |       |                    |       |   |   |
| Depreciation  and amortization                                                                 |       | 2,371                   |       | 2,797 |   |
| Deferred  licensing and maintenance fees                                                       |       | (312                    | )          | (335 | ) |
| Deferred  income taxes                                                                         |       | (190                    | )          | (685 | ) |
| Loss  (gain) on sale and disposal of assets                                                    |       | (328                    | )          | 55 |   |
| Gain  on sale of long-term investment                                                          |       | —                  |       | (220 | ) |
| (Income)  loss from joint ventures                                                             |       | (253                    | )          | 487 |   |
| Stock-based  compensation expense                                                              |       | 40                      |       | 42 |   |
| Changes  in assets and liabilities:                                                            |       |                    |       |   |   |
| Receivables                                                                                    |       | (3,294                  | )          | 467 |   |
| Prepaid  expenses                                                                              |       | (880                    | )          | (548 | ) |
| Income  taxes receivable                                                                       |       | 225                     |       | (955 | ) |
| Inventories                                                                                    |       | (734                    | )          | 1,789 |   |
| Other  assets                                                                                  |       | (126                    | )          | (310 | ) |
| Accounts  payable                                                                              |       | 2,714                   |       | (2,201 | ) |
| Accrued  expenses                                                                              |       | 980                     |       | (1,097 | ) |
| Income  taxes payable                                                                          |       | 838                     |       | (168 | ) |
|                                                                                           |       |                    |       |   |   |
| Net  cash provided by (used in) operating activities                                           |       | 3,418                   |       | (969 | ) |
| Cash  flow from investing activities:                                                          |       |                    |       |   |   |
| Proceeds  from sale of assets                                                                  |       | 467                     |       | 15 |   |
| Acquisition  of property, plant and equipment                                                  |       | (1,123                  | )          | (2,104 | ) |
| Proceeds  from sale of long-term investments                                                   |       | —                  |       | 318 |   |
| Investment  in joint ventures                                                                  |       | (155                    | )          | — |   |
|                                                                                           |       |                    |       |   |   |
| Net  cash used in investing activities                                                         |       | (811                    | )          | (1,771 | ) |
| Cash  flow from financing activities:                                                          |       |                    |       |   |   |
| Net  borrowings under line of credit agreements                                                |       | 2,000                   |       | 2,000 |   |
| Retirement  of long-term debt, net of proceeds                                                 |       | (768                    | )          | (764 | ) |
| Net  proceeds from exercise of stock options                                                   |       | 30                      |       | 135 |   |
|                                                                                           |       |                    |       |   |   |
| Net  cash provided by financing activities                                                     |       | 1,262                   |       | 1,371 |   |
|                                                                                           |       |                    |       |   |   |
| Effect  of exchange rate changes on cash                                                       |       | (309                    | )          | 265 |   |
| Net  increase (decrease) in cash                                                               |       | 3,560                   |       | (1,104 | ) |
| Cash  at beginning of period                                                                   |       | 1,129                   |       | 3,241 |   |
|                                                                                           |       |                    |       |   |   |
| Cash  at end of period                                                                         |       | $                       | 4,689      |   | $ | 2,137 |   |
|                                                                                           |       |                    |       |   |   |
| Supplemental  cash flow informaton:                                                            |       |                    |       |   |   |
| Cash  paid for interest                                                                        |       | $                       | 785        |   | $ | 359 |   |
| Cash  paid for (refunded) for income taxes                                                     |       | —                  |       | — |   |

 

See accompanyingnotes to consolidated financial statements.

 

5

----

 

LANCER CORPORATION

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

 

**1.****     Organization and Basis ofPresentation**

 

Lancer Corporation (the “Company”) designs, engineers,manufactures and markets fountain soft drink and other beverage dispensingsystems and related equipment for use in the food service and beverageindustry. The Company sells its products through Company personnel, and throughindependent distributors and agents, principally to major soft drink companies(primarily The Coca-Cola Company), bottlers, equipment distributors, beerbreweries and food service chains for use in various food and beverageoperations. Lancer is a vertically integrated manufacturer, fabricating asignificant portion of the components used in Company products.  Lancer was incorporated in Texas in 1967.

 

The accompanyingunaudited consolidated financial statements of Lancer Corporation (“theCompany”) have been prepared in conformity with accounting principles generallyaccepted in the United States of America for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  In the opinion of management, these financialstatements contain all adjustments, consisting of normal recurring accrualsunless otherwise disclosed, necessary to present fairly the financial position,results of operations and cash flows for the periods indicated.  Significant accounting policies followed bythe Company were disclosed in the notes to the consolidated financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2003, and no material changes have occurred withrespect to these policies.  The year-endconsolidated balance sheet data was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States. The consolidated results of operations for the periods reported are notnecessarily indicative of the results to be experienced for the entire currentyear.

 

Certain amounts in theconsolidated financial statements for prior periods have been reclassified toconform with the current year’s presentation.

 

**2.****     NewAccounting Pronouncements**

 

In December 2003, the Financial AccountingStandards Board issued FASB Interpretation No. 46 (revised December 2003)(“Interpretation 46”), “Consolidation of Variable Interest Entities.”  Application of this interpretation isrequired in our financial statements for interests in variable interestentities that are considered to be special-purpose entities for the year endedDecember 31, 2003.  The Companydetermined that it does not have any arrangements or relationships withspecial-purpose entities.  Application ofInterpretation 46 for all other types of variable entities is required for ourCompany effective March 31, 2004.

 

SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,” issued inApril 2003, amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under FASB Statement No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  SFAS No. 149 isgenerally effective for contracts entered into or modified after June 30,2003.  The adoption of SFAS No. 149 didnot have a material impact on the Company’s financial statements.

 

SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity,” issued in May 2003, establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). Many of those instruments were previouslyclassified as equity.  The Statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003, except for mandatorily redeemable financialinstruments of nonpublic entities.  Theadoption of SFAS No. 150 did not have a material impact on the Company’sfinancial statements.

 

6

----

 

**3.****     DiscontinuedOperations**

 

During the quarter endedJune 30, 2002, the Company decided to close its Brazilian subsidiary.Accordingly, the Company has reported the results of operations of theBrazilian subsidiary as discontinued operations in the Consolidated Statementsof Operations.

 

Certaininformation with respect to the discontinued Brazilian operation for the threemonths and six months ended June 30, 2004 and 2003 is as follows (amountsin thousands):

 
| ** **                                  | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Net  sales                                  |       | $                       | —     |                    | $          | — |   | $ | — |   | $ | — |   |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Pretax  (loss) from discontinued operations |       | —                  |       | (76                     | )          | — |   | (120 | ) |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Income  tax benefit                         |       | —                  |       | 26                      |       | — |   | 763 |   |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Income  (loss) from discontinued operations |       | $                       | —     |                    | $          | (50 | ) | $ | — |   | $ | 643 |   |

 

During the first quarterof 2003, the IRS completed its audit of the Company’s deduction of itsinvestment in the Brazilian operations, and other matters.  As a result, the Company reversed certain taxaccruals resulting in a tax benefit of $0.7 million from discontinuedoperations for the year ended December 31, 2003.

 

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

 
| ** **                                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Current  assets                            |       | $                       | —     |                        | $          | — |   |
| Property,  plant and equipment, net        |       | —                  |       | —                      |       |
| Current  liabilities                       |       | (1,227                  | )          | (1,208                      | )          |
|                                       |       |                    |       |                        |       |
| Net  liabilities of discontinued operation |       | $                       | (1,227     | )                           | $          | (1,208 | ) |

 

Current liabilitiesinclude a $1.196 million debt payable outstanding in relation to the Company’sdiscontinued Brazilian operations that was due on December 31, 2001.  The Company has not repaid the debt, pendingdiscussions with the payee relating to settlement of the debt, but it hasrecorded the balance of the debt plus interest accrued through June 30,2004 in its financial statements.  Duringthe second quarter of 2003, the payee demanded payment of the debt.  The Company has not paid the debt, but haschosen to continue to discuss the status of the debt in an attempt to reach asettlement.  The Company can make noassurance that it will be successful in negotiating such a settlement of thedebt.  The Company believes that it hasthe liquidity available to pay the debt if the circumstances so require,assuming that the Company’s ability to access cash through its credit facilityremains unimpeded. Nonpayment of a material obligation is an event of defaultunder the Company’s Credit Agreement. The Company’s lenders under the Credit Agreement have waived the eventof default caused by the nonpayment of the note to the Company’s creditfacilities.

 

#### **4.**     Inventory Components

 

Inventories arestated at the lower of cost or market on a first-in, first-out basis (averagecost as to raw materials and supplies) or market (net realizable value).  Inventory components are as follows (amountsin thousands):

 

7

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| ** **                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  goods            |       | $                       | 9,177      |                        | $          | 9,327 |   |
| Work  in process           |       | 5,817                   |       | 6,504                       |       |
| Raw  material and supplies |       | 9,968                   |       | 8,671                       |       |
|                       |       | $                       | 24,962     |                        | $          | 24,502 |   |

 

During 2003, theCompany took a charge of approximately $1.2 million on inventory unlikely to beused as intended in the production of a customer’s beverage dispensingplatform.  The Company believes there areno significant alternative uses for the inventory.  Lancer is seeking reimbursement from thecustomer, but has no formal agreement in place to that effect.  If it were to receive full reimbursement forthe inventory in the future, Lancer would recognize income of approximately$1.2 million.

 

**5.****     Net Earnings Per Share**

 

Basic earnings per shareis calculated using the weighted average number of common shares outstandingand diluted earnings per share is calculated assuming the issuance of commonshares for all potential dilutive common shares outstanding during thereporting period.  The dilutive effect ofstock options approximated 92,156 and 96,268 shares for the three months endedJune 30, 2004 and 2003.  The dilutiveeffect of stock options approximated 97,640 for the six months endedJune 30, 2004.

 

**6.****     Stock Compensation Plans**

 

The Companyutilizes the intrinsic value method required under provisions of APB OpinionNo. 25 and related interpretations in measuring stock-based compensation foremployees. If the Company had elected to recognize compensation cost based onthe fair value of the options granted at grant date as prescribed by SFAS No.123, net earnings and net earnings per share would have been djusted to the proforma amounts indicated in the table below (amounts in thousands, except sharedata):

 
| ** **                                                                                                           | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                           | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| Net  earnings (loss)-as reported                                                                                     |       | $                       | 1,422      |                    | $          | 230 |   | $ | 2,367 |   | $ | (87 | ) |
| Add:  Total stock-based compensation expense determined under the intrinsic value  method, net of tax                |       | 10                      |       | 10                      |       | 27 |   | 28 |   |
| Deduct:  Total stock-based compensation expense determined under fair value based  method for all awards, net of tax |       | (25                     | )          | (31                     | )          | (53 | ) | (58 | ) |
| Net  earnings (loss)-pro forma                                                                                       |       | $                       | 1,407      |                    | $          | 209 |   | $ | 2,341 |   | $ | (117 | ) |
| Net  earnings (loss) per basic share-as reported                                                                     |       | $                       | 0.15       |                    | $          | 0.02 |   | $ | 0.25 |   | $ | (0.01 | ) |
| Net  earnings (loss) per basic share-pro forma                                                                       |       | $                       | 0.15       |                    | $          | 0.02 |   | $ | 0.25 |   | $ | (0.01 | ) |
|                                                                                                                 |       |                    |       |                    |       |   |   |   |   |
| Net  earnings (loss) per diluted share-as reported                                                                   |       | $                       | 0.15       |                    | $          | 0.02 |   | $ | 0.25 |   | $ | (0.01 | ) |
| Net  earnings (loss) per diluted share-pro forma                                                                     |       | $                       | 0.15       |                    | $          | 0.02 |   | $ | 0.25 |   | $ | (0.01 | ) |
|                                                                                                                 |       |                    |       |                    |       |   |   |   |   |
| Weighted-average  fair value of options, granted during the period                                                   |       | $                       | —     | (1)                     | $          | 3.51 |   | $ | — | (1) | $ | 4.16 |   |

 

The fair value of eachoption granted in the three and six months ended June 30, 2004 and 2003,respectively, is estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

 

8

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| ** **             | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|                   |       |                    |       |                    |       |   |   |   |   |
| Expected  life (years) |       | —                  | (1)        | 7                       |       | — | (1) | 7 |   |
| Interest  rate         |       | —                  | (1)        | 3.3                     | %          | — | (1) | 3.3 | % |
| Volatility             |       | —                  | (1)        | 47.2                    | %          | — | (1) | 47.2 | % |
| Dividend  yield        |       | None                    |       | None                    |       | None |   | None |   |

 

----

(1)   No options were granted duringthe three and six months ended June 30, 2004.

 

**7.****     Comprehensive Income**

 

The following are thecomponents of comprehensive income (amounts in thousands):

 
| ** **                                                       | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|                                                             |       |                    |       |                    |       |   |   |   |   |
| Net  earnings (loss)                                             |       | $                       | 1,422      |                    | $          | 230 |   | $ | 2,367 |   | $ | (87 | ) |
| Foreign  currency gain (loss) arising during the period          |       | (759                    | )          | 769                     |       | (730 | ) | 1,400 |   |
| Unrealized  gain on investment, net of tax                       |       | —                  |       | —                  |       | — |   | 40 |   |
| Reclassification  adjustment for (loss) included in other income |       | —                  |       | (45                     | )          | — |   | (45 | ) |
| Comprehensive  income                                            |       | $                       | 663        |                    | $          | 954 |   | $ | 1,637 |   | $ | 1,308 |   |

 

Accumulated othercomprehensive loss on the accompanying consolidated balance sheets includesforeign currency gains, unrealized gain (loss) on investment and unrealizedloss on derivative instruments.

 

**8.****     Income Taxes**

 

The actual tax benefitfor the three and six months ended June 30, 2004 approximates the“expected” tax expense (computed by applying U.S. Federal corporate rate of 34%to earnings before income taxes). The actual tax benefit for the three and sixmonths ended June 30, 2003 differs from the “expected” tax expenseprimarily as a result of the factors described below.

 

In accordance with SFASNo. 109, no federal income taxes had been provided for the accumulatedundistributed earnings of the Company’s Domestic International SalesCorporation (the “DISC”) as of December 31, 1992.  On December 31, 1992, the accumulatedundistributed earnings of the DISC totaled $2.4 million. During the threemonths ended March 31, 2003, the Company decided to terminate the DISCelection and recorded $0.8 million in income tax expense for the taxes dueprior to December 31, 1992.

 

During the first quarterof 2003, the IRS completed its audit of the Company’s deduction of itsinvestment in the Brazilian operations, and other matters.  As a result, the Company reversed certain taxaccruals in the three months ended March 31, 2003, resulting in an incometax benefit of $1.1 million. Of this benefit, $0.7 million related to theBrazilian operations was reclassified from tax benefits of continuingoperations to tax benefits of discontinued operations for the three monthsended March 31, 2003.  See Note 3 –Discontinued Operations.

 

9

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**9.****     Segment and GeographicInformation**

 

The Company isengaged in the manufacture and distribution of beverage dispensing equipmentand related parts and components.  TheCompany manages its operations geographically. Sales are attributed to a region based on the ordering location of thecustomer.

 
| **(Amounts  in thousands)**            | ** ** | **North  America** | ** ** | **Latin  America** | ** ** | **Asia/  Pacific** | ** ** | **Europe** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three  months ended June 30, 2004 |       |               |       |               |       |               |       |       |       |          |       |       |       |
| Total  revenues                        |       | $                  | 20,618     |               | $          | 1,381              |       | $          | 6,203      |          | $          | 3,494      |       | $ | — |   | $ | 31,696 |   |
| Operating  income (loss)               |       | 5,600              |       | (145               | )          | 425                |       | 448        |       | (4,011        | )          | 2,317      |       |
| ** **                             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three  months ended June 30, 2003 |       |               |       |               |       |               |       |       |       |          |       |       |       |
| Total  revenues                        |       | $                  | 20,704     |               | $          | 1,753              |       | $          | 4,774      |          | $          | 2,139      |       | $ | — |   | $ | 29,370 |   |
| Operating  income (loss)               |       | 4,020              |       | (27                | )          | 36                 |       | 246        |       | (3,277        | )          | 998        |       |
|                                   |       |               |       |               |       |               |       |       |       |          |       |       |       |
| Six  months ended June 30, 2004   |       |               |       |               |       |               |       |       |       |          |       |       |       |
| Total  revenues                        |       | $                  | 38,954     |               | $          | 2,475              |       | $          | 12,823     |          | $          | 6,951      |       | $ | — |   | $ | 61,203 |   |
| Operating  income (loss)               |       | 9,724              |       | (307               | )          | 1,142              |       | 1,015      |       | (8,167        | )          | 3,407      |       |
| ** **                             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Six  months ended June 30, 2003   |       |               |       |               |       |               |       |       |       |          |       |       |       |
| Total  revenues                        |       | $                  | 39,212     |               | $          | 3,691              |       | $          | 9,694      |          | $          | 3,647      |       | $ | — |   | $ | 56,244 |   |
| Operating  income (loss)               |       | 5,300              |       | 446                |       | 604                |       | 254        |       | (6,394        | )          | 210        |       |

 

All intercompany revenuesare eliminated in computing revenues and operating income.  The corporate component of operating incomerepresents corporate general and administrative expenses.

 

**10.****  Product Warranties**

 

The Company generally warrants its products againstcertain manufacturing and other defects. These product warranties are provided for specific periods of time fromthe date of sale.  As of June 30,2004 and December 31, 2003, the Company has accrued $1.0 million and $0.6million, respectively, for estimated product warranty claims.  The accrued product warranty costs are basedprimarily on actual warranty claims as well as current information on repaircosts.  Warranty claims expense for thethree and six months ended June 30, 2004 was $0.19 million and $0.25million, respectively.  Warranty claimsexpense for the three and six months ended June 30, 2003 was $0.34 millionand $0.46 million, respectively.

 
| **(Amounts  in thousands)**                                  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|
| January 1,  2004                                        |       | $          | 586        |   |
| Liabilities  accrued for warranties issued during the period |       | 654        |       |
| Warranty  claims paid during the period                      |       | (246       | )          |
| June 30,  2004                                          |       | $          | 994        |   |

 

**11.****  Other Guaranties**

 

During 2003, Lancer FBDPartnership, Ltd., of which the Company owns 50%, obtained a $1.5 millionrevolving credit facility from a bank. The Company guaranteed the repayment of the debt.  In accordance with FIN 45, the Company hasrecorded a liability of $22,500, which represents the estimated value of theguaranty.

 

The Company alsoguaranteed a $0.75 million revolving credit facility payable by MooTechnologies, LLC (50% owned by the Company) to a bank.  The Company recorded a liability of $11,250in 2003, which represents the

 

10

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estimatedvalue of the guaranty.  Moo Technologies,LLC is a developmental stage company that reported an operating loss and nooperating revenue in 2003.

 

**12.****  OtherMatters**

 

In June 2003,the Audit Committee of the Company’s Board of Directors (the “Audit Committee”)began conducting an internal investigation (the “Investigation”). TheInvestigation was related to allegations raised by a lawsuit against The Coca-ColaCompany by a former Coca-Cola employee, Matthew Whitley. Although the Companywas not a defendant to the lawsuit, certain allegations contained in thelawsuit specifically involved the Company. The Investigation was later expandedto include allegations raised in certain press articles.

 

The Company’sformer independent auditor advised that, until the Investigation was complete,it would not be able to complete its review of the Company’s consolidatedfinancial statements for the second and third quarters of 2003. Therefore, theCompany was unable to file its quarterly reports for the second and thirdquarters of 2003 with the Securities and Exchange Commission (the “SEC”). OnDecember 5, 2003, the Company provided financial information for thesecond and third quarters of 2003 in exhibits to a Form 8-K, in order toprovide information to the investing public while the Investigation continued.

 

The Company’sinability to file its quarterly report for the second quarter of 2003 with theSEC on a timely basis violated the American Stock Exchange (“AMEX”) continuedlisting standards, specifically Section 1003(d) of the AMEX Company Guide.The Company submitted a formal action plan to regain compliance with AMEX onSeptember 30, 2003 and AMEX accepted the plan on October 8, 2003.After the initial acceptance, the Company revised the plan with the approval ofAMEX in order to accommodate new developments, including the Company’sinability to file its annual report on Form 10-K for 2003 and its quarterlyreport on Form 10-Q for the first quarter 2004.

 

InAugust 2003, the United States Attorney’s Office for the Northern Districtof Georgia (the “US Attorney’s Office”) informed the Company that it wasconducting an investigation arising from allegations raised in a lawsuitagainst The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley,and requested certain information, which the Company supplied. InJanuary 2004, the Company received written notice that the SEC had issueda formal order of investigation that appeared to concern matters which were thesubject of the Investigation. The Company has fully cooperated, and intends tocontinue to cooperate fully, with both the US Attorney’s Office and the SECinvestigations. Although the Company is unable at this point to predict thescope or outcome of these investigations, it is possible that it could resultin the institution of administrative, civil injunctive or criminal proceedings,the imposition of fines and penalties, and/or other remedies and sanctions.  The conduct of these proceedings couldadversely affect the Company’s business. In addition, the Company expects tocontinue to incur expenses associated with responding to these agencies,regardless of the outcome, and the efforts and attention of the Company’smanagement team may be diverted from normal business operations. This couldadversely affect the business, financial condition, operating results, and cashflow of the Company.

 

OnJanuary 30, 2004, the Company announced that the Investigation hadconcluded and the Audit Committee released a general summary the Investigationfindings. On February 2, 2004, our former auditor resigned from itsposition and subsequently withdrew its audit reports for the periods endedDecember 31, 2002, 2001 and 2000, advising the Company that the financialstatements and related audit reports should no longer be relied upon. Theformer auditors stated in a letter to the Company that it had determined thatlikely “illegal acts”, which had been the subject of the Investigation, hadcome to its attention and that these illegal acts would have a material effecton the Company’s financial statements. Additionally, our former auditorindicated that information had come to its attention that caused it to concludethat the Company’s accounting for revenue recognition in connection with salesof equipment to Coca-Cola North America Fountain in the years endedDecember 31, 2001 and 2002 is “not correct” and had raised concerns thatthe accounting is not correct in each of the three quarters of fiscal year2003. The Company has filed the letters from its former auditors which outlinethese assertions and have responded to them in an 8-K, filed with the SEC onFebruary 10, 2004, and two subsequent amendments to that Form 8-K, filedwith the SEC on February 24, 2004 and March 10, 2004.

 

11

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On May 14, 2004, apurported class action, cause number 04-CV-427, naming as defendants theCompany, George F. Schroeder, David F. Green and The Coca-Cola Company wasfiled in the United States District Court for the Western District of Texas byTDH Partners. The action alleges that the defendants violated Sections 10(b)and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder. No specific amount of damages was claimed and the action wasvoluntarily dismissed by the plaintiff, without prejudice, on July 15,2004. See “*Part II – Other Information – Item 1 – LegalProceedings*.”

 

On March 1,2004, the Audit Committee engaged BDO Seidman as the Company’s new independentauditor to audit the Company’s financial information for 2003, as well as forprior periods for which the former auditor had withdrawn its audit reports, andto review financial information for prior quarterly periods. This process ofaudit and review was completed by BDO Seidman on June 16, 2004, whichenabled Lancer to file all past due and current periodic reports with the SECon July 1, 2004 and to regain compliance with Section 1003(d) of theAMEX Company Guide. The reaudit did not result in any adjustment to theCompany’s previously disclosed financial statements for the prior periods.

 

Due to itsinability to deliver audited financial statements for the year 2003 to itslenders and other events and circumstances, the Company was in default underthe terms of the Seventh Amendment and Restated Credit Agreement, as amended(the “Former Credit Agreement”). Due mainly to certain “cross-default”provisions, the Company also came into default under certain of its guarantiesand a capital lease.

 

Effective June 30,2004, the Company and its lenders entered into the Amended and Restated CreditAgreement (the “Credit Agreement”).  Theknown defaults under the Company’s guarantees and capital lease have been waivedas of June 30, 2004. For further discussion relating to the Former CreditAgreement and the Credit Agreement, see Part I – Financial Information - Item2- “*Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources – Debt.”*

 

## **Item 2 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

This reportcontains certain “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. TheCompany desires to take advantage of the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995 and is including thisstatement for the expressed purpose of availing itself of the protection of thesafe harbor with respect to all of such forward-looking statements. Theseforward-looking statements describe future plans or strategies and include theCompany’s expectations of future financial results. The Company’s ability topredict results or the effect of future plans or strategies is inherentlyuncertain and the Company can give no assurance that those results orexpectations will be attained. Factors that could affect actual results includebut are not limited to:

 

•      general economic trends;

•      ability to service its debt;

•      availability of capital sources;

•      currency fluctuations;

•      fluctuations in operating costs;

•      competitive practices in the industry in which it competes;

•      changes in labor conditions;

•      its capital expenditure requirements;

•      technological changes and innovations;

•      legislative or regulatory requirements;

•      operatingchanges and product needs of its main customer, The Coca-Cola Company;

•      losses from litigation; and

•      all other factors described herein under “Risk Factors.”

 

12

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These and otherfactors should be considered in evaluating the forward-looking statements, andundue reliance should not be placed on such statements.

 

The Company doesnot undertake and specifically disclaims any obligation to update anyforward-looking statements to reflect occurrence of anticipated orunanticipated events or circumstances after the date of such statements.

 

The followingdiscussion should be read in connection with the Company’s ConsolidatedFinancial Statements, related notes and other financial information includedelsewhere in this document.

 

**Resultsof Operations**

 

*General.*  Lancer Corporation (“Lancer” or the“Company”) designs, engineers, manufactures and markets fountain soft drink,beer and citrus beverage dispensing systems, and other equipment for use in thefood service and beverage industry.  TheCompany also markets frozen beverage dispensers manufactured by a joint venturethat is 50% owned by the Company.  TheCompany’s products are sold by Company personnel and through independentdistributors and agents principally to major soft drink companies (primarilyThe Coca-Cola Company, which influences substantially more than half of theCompany’s sales), bottlers, equipment distributors, beer breweries, restaurantsand convenience stores for use in various food and beverage operations. TheCompany’s primary manufacturing and administrative facility is located in SanAntonio, Texas. The Company has sales employees, distributors, and/or licenseesin Latin America, Europe, Africa and Asia. The Company manufactures products inAustralia and Mexico, and operates warehouses in Belgium, Ecuador, New Zealand,and the United Kingdom.

 

The Company is avertically integrated manufacturer whose tooling, production, assembly andtesting capabilities enable it to fabricate a substantial portion of thecomponents used in Company products.  Inaddition, the Company is an innovator of new products in the beveragedispensing industry and has a large technical staff supported bystate-of-the-art engineering facilities to develop these new products and toenhance existing product lines in response to changing industry requirementsand specific customer demands.

 

The Company’s productscan be divided into four major categories: (i) fountain soft drink, citrus, andfrozen beverage dispensers, which includes a broad range of mechanically cooledand ice cooled soft drink and citrus dispensing systems; (ii) post-mixdispensing valves, which mix syrup and carbonated water at a preset ratio;(iii) beer dispensing systems and related accessories; and (iv) other productsand services, which includes various dispensing systems and replacement partsin connection with the remanufacturing process.

 

*Events.*On January 30, 2004, the Company announced that the Audit CommitteeInvestigation had concluded and the Audit Committee released a general summarythe Investigation findings. On February 2, 2004, our former auditor resignedfrom its position and subsequently withdrew its audit reports for the periodsended December 31, 2002, 2001 and 2000, advising the Company that thefinancial statements and related audit reports should no longer be relied upon.

 

On March 1, 2004,the Audit Committee engaged BDO Seidman as the Company’s new independentauditor to audit the Company’s financial information for 2003, as well as forprior periods for which the former auditor had withdrawn its audit reports, andto review financial information for prior quarterly periods. This process ofaudit and review was completed by BDO Seidman on June 16, 2004. Thereaudit did not result in any adjustment to the Company’s previously disclosedfinancial statements for the prior periods.

 

On July 1,2004, the Company filed the following reports with the SEC: Form 10-K/A for the2002 fiscal year, Form 10-Q/A for the 2003 first quarter,Forms 10-Q for the 2003 second and third quarters, Form 10-K for the fiscalyear 2003 and Form 10-Q for the 2004 first quarter. The filing of these reportsenabled the Company to become current in its filing obligations with the SECand to regain compliance with Section 1003(d) of the AMEX Company Guide.

 

Effective June 30,2004, the Company and its lenders entered into the new Credit Facility,providing for, among other things a waiver for all past defaults under theprior Credit Facility.  See Part I –Financial Information - Item 2- “*Management’s Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources – Debt”*.

 

13

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*AccountingPolicies.***The Companyhas listed what it believes to be its most important accounting policiesbelow.   See “*Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies” and “*Note 1 - Summary of SignificantAccounting Policies in the Notes to Consolidated Financial Statements”contained in the 2003 Annual Report on Form 10-K filed with the SEC onJuly 1, 2004.

 

**RevenueRecognition.** Revenue is recognized in accordance withthe following methods:

 

(1)           At the time of shipmentfor all products except for those sold under agreements 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.

 

(2)           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.

 

(3)           The Company has enteredinto an agreement with its major customer to receive partial reimbursement for designand development.  The reimbursement isoffset against cost on a percentage of completion basis.

 

(4)           The Company has agreedto provide exclusive rights for use of certain tools to its majorcustomer.  These tools are included infixed 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.

 

**Reservefor Slow Moving and Obsolete Inventory**. The Company’sprovides for slow moving inventory based on an analysis of the aging andutility of the inventory. Obsolete inventory is 100% reserved at the time theproduct is deemed obsolete due to technological advances and discontinuation ofproducts. In addition, management’s evaluation of the specific items alsoinfluences the reserve.  The Company’believes that the reserve as of December 31, 2003 is adequate to providefor expected losses.

 

Comparison of theThree-Month Periods Ended June 30, 2004 and 2003

 

Revenues by GeographicSegment

(Amounts in thousands)

 
| ** **     | ** ** | ** **                      | ** ** | ** **                       | ** ** | **% Change** | ** ** |
|----------------|------------|---------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **     | ** ** | **Quarter Ended June 30,** | ** ** | **Second Quarter  2004 vs 2003** | ** ** |
| **2004**       | ** ** | **2003**                        |
| North  America |       | $                               | 20,618     |                             | $          | 20,704       |       | 0 | % |
| Latin  America |       | 1,381                           |       | 1,753                            |       | -21          | %          |
| Asia/Pacific   |       | 6,203                           |       | 4,774                            |       | 30           | %          |
| Europe         |       | 3,494                           |       | 2,139                            |       | 63           | %          |
|           |       | $                               | 31,696     |                             | $          | 29,370       |       | 8 | % |

 

*Revenues*.  Net sales for the three months endedJune 30, 2004 were $31.7 million, up 8% from sales in the same period of2003.  Currency exchange ratefluctuations had a positive impact on sales of 2%.  In the North America region, sales in thesecond quarter of 2004 declined slightly from last year.  Sales fell 21% in the Latin America region,as market conditions remained weak. Sales rose 30% in the Asia/Pacific region, including the positive effectof 12% from exchange rate movements. Most of the improvement came in Australia, where beer and fountain saleswere strong.  Sales in the Europe regionincreased 63%, due largely to improved shipments of valves.  Production issues with one of the Company’svalve products negatively impacted sales in the Europe region in the 2003period.  Additionally, incremental salesin the United Kingdom, where Lancer established an operation in 2003, boostedresults for the Europe region.  Finally,sales in the region received a 10% positive impact from exchange ratefluctuations.

 

14

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*Gross Margin*.  Gross margin was 32.2% in the quarter endedJune 30, 2004, compared to 26.2% in the same quarter of 2003.  The improvement in 2004 was largely due tomanufacturing cost reductions, including a reduction in the number ofmanufacturing employees, improved manufacturing efficiency, and a shift of someoperations to a lower cost facility.  Thebenefits of higher factory output also contributed to the higher gross margin.

 

*Operating Expenses*.  Selling, general and administrative expenseswere $7.8 million in the second quarter of 2004, compared to $6.7 million inthe second quarter of 2003.  During the2004 quarter, professional fees rose $0.8 million over prior year levels,primarily due to the re-audit of the years 2000, 2001 and 2002, and relatedmatters.  Compensation expense rose $0.7 million in the 2004 quarter.  Variable compensation accruals based on theCompany’s performance in 2004 made up most of the increase.   Finally, exchange rate fluctuations causedspending to increase by $0.2 million over the second quarter of 2003.

 

*Non-Operating Income/Expenses.*

 

•      Interest expense was $0.1 million in the secondquarter of 2004, down slightly from $0.2 million in the same period lastyear.  Lower average borrowings in the2004 period more than offset the impact of higher interest rates.

 

•      Income from joint ventures was $0.1 million inthe second quarter of 2004, compared to a loss of $0.3 million in the firstquarter of 2003.  The improvement in 2004was driven by the profitability of the Company’s 50% owned joint venture LancerFBD Partnership, Ltd. (“Lancer FBD”).

 

•      The effective tax rate in the second quarter of2004 was 36.5%, compared to 53.8% in the same period of 2003.  The Company made certain adjustments in thesecond quarter of 2003 following the filing of the Company’s 2002 income taxreturn.  The adjustments resulted inadditional income tax expense of $0.1 million. Because income from continuing operations before income tax was $0.6million in the second quarter of 2003, the additional income tax expense causeda disproportionate increase to the Company’s effective tax rate.

 

*Net Earnings/Loss*.  Net earnings were $1.4 million in the secondquarter of 2004, up from $0.2 million in the second quarter of 2003.  Higher sales and a higher gross margin led tothe improved profitability in the 2004 period.

 

Comparison of theSix-Month Periods Ended June 30, 2004 and 2003

 

Revenues by GeographicSegment

(Amounts in thousands)

 
| ** **     | ** ** | ** **                          | ** ** | ** **                         | ** ** | **% Change** | ** ** |
|----------------|------------|-------------------------------------|------------|------------------------------------|------------|--------------|------------|
| ** **     | ** ** | **Six Montrhs Ended June 30,** | ** ** | **First Six Months  2004 vs 2003** | ** ** |
| **2004**       | ** ** | **2003**                            |
| North  America |       | $                                   | 38,954     |                               | $          | 39,212       |       | -1 | % |
| Latin  America |       | 2,475                               |       | 3,691                              |       | -33          | %          |
| Asia/Pacific   |       | 12,823                              |       | 9,694                              |       | 32           | %          |
| Europe         |       | 6,951                               |       | 3,647                              |       | 91           | %          |
|           |       | $                                   | 61,203     |                               | $          | 56,244       |       | 9 | % |

 

*Revenues*.  Net sales for the first six months of 2004were $61.2 million, up 9% from sales in the same period of 2003.  Currency exchange rate fluctuations had apositive impact of 4% on net sales.  Inthe North America region, sales declined 1% in the first half of 2004. Salesdeclined 33% in the Latin America region, where market conditions remain weak.  In the Asia/Pacific region, sales increased32%, aided by a positive impact from currency exchange rates of 19%.  The improvement was centered in Australia,where beer and fountain equipment sales were strong.  Sales rose 91% in the Europe region,including a 19% positive effect from currency fluctuations.  Valve sales increased in Europe, afterproduction issues with one of the Company’s valve products negatively impactedsales in the Europe region in the 2003 period. Incremental sales in the United Kingdom, where Lancer established anoperation in 2003, also contributed to the improvement in the Europe region.

 

15

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*Gross Margin*.  Gross margin was 30.7% in the first half of2004, compared to 24.0% in the first half of 2003. The improvement in 2004 waslargely due to manufacturing cost reductions, including a reduction in thenumber of manufacturing employees, improved manufacturing efficiency, and ashift of some operations to a lower cost facility.  The benefits of higher factory output alsocontributed to the higher gross margin.

 

*Operating Expenses*.  Selling, general and administrative expenseswere $15.4 million in the first half of 2004, compared to $13.3 million in thesame period of 2003.  Professional feesrose $1.8 million in the 2004 period, primarily because of the re-audit of theyears 2000, 2001and 2002, and legal fees from the investigation conducted bythe Securities and Exchange Commission, the US Attorney’s Office, and the AuditCommittee of the Company’s Board of Directors. Compensation expense rose $0.9 million in thefirst half of 2004.  Variablecompensation accruals based on the Company’s performance in 2004 made up mostof the increase.   Finally, exchange ratefluctuations caused spending in the first half of 2004 to increase by $0.5million over 2003 levels.

 

*Non-Operating Income/Expenses.*

 

•      Interest expense was $0.3 million in the firsthalf of both 2004 and 2003.  Higheraverage interest rates in the 2004 period were offset by lower averageborrowings.

 

•      Income from joint ventures was $0.3 million inthe first half of 2004, compared to a loss of $0.5 million in the first half of2003.  The improvement in 2004 was drivenby the profitability of the Company’s 50% owned joint venture Lancer FBD.  During the first half of 2004, one of LancerFBD’s customers agreed to reimburse it for $0.5 million of inventory that hadbeen impaired during 2003.

 

•      Other income in the first half of 2004 included a$0.4 million gain relating to insurance proceeds from a claim that occurred in2003.

 

•      The effective tax rate was 36.5% in the first sixmonths of 2004.  During the first half of2003, the Company recorded a $0.8 million charge to income tax expensestemming from the decision to terminate the DISC election for the Company’ssubsidiary that exports products from the United States. Additionally, theInternal Revenue Service completed its audit of the Company’s deduction of itsinvestment in Brazil, and other matters. As a result of the resolution, Lancerreversed certain tax accruals, resulting in an income tax benefit of$0.4 million.

 

*Net Earnings/Loss*.  Net earnings were $2.4 million in the firsthalf of 2004, compared to a loss of $0.1 million in the first half of2003.  Higher sales and a higher grossmargin led to the improved profitability in the 2004 period.

 

**Outlook**

 

During 2003, theCompany took a charge of approximately $1.2 million on inventory unlikely to beused as intended in the production of a customer’s beverage dispensingplatform.  The Company believes there are no significant alternative usesfor the inventory.  Lancer is seeking reimbursement from the customer forthe inventory, as well as for certain expenses relating to the project, but canmake no assurance that it will be successful in obtaining all of thereimbursement that it seeks.  If it were to receive reimbursement in thefuture, Lancer would likely recognize income in the amount of thereimbursement.

 

During the firsthalf of 2004, the Company incurred $1.0 million of expenses relating to theInvestigation conducted by the Audit Committee, the investigations conducted bythe SEC and the US Attorney’s Office, and the negotiation of the amendment tothe Company’s credit facilities.  TheCompany expects to continue to incur expense from the investigations andrelated matters during 2004. Additionally, the Company incurred $1.2 million of expense in the firsthalf of 2004 from the audit of the Company’s financial statements for fiscalyears 2000, 2001, 2002 and 2003.  TheCompany expects audit expense for the remainder of 2004 to approximatehistorical levels.

 

**Liquidityand Capital Resources**

 

*General.*  The Company’s principal sources of liquidityare cash flows from operations and amounts available under the Company’s linesof credit. The Company has met, and currently expects that it will continue tomeet,

 

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substantiallyall of its working capital and capital expenditure requirements, as well as itsdebt service requirements, with funds provided by operations and borrowingsunder its credit facilities.

 

*CashProvided by Operations and Capital Expenditures.*  Cash provided by operating activities was$3.4 million in the first half of 2004, compared to cash used in operatingactivities of $1.0 million in the first half of 2003.  The improvement in 2004 was caused largely bythe Company’s profitability, and by an increase in accounts payable.  The Company made capital expenditures of $1.1million during the first half of 2004, primarily for equipment and tooling.

 

*Debt.*  The Company has a $1.196 million debt payableoutstanding in relation to the Company’s discontinued Brazilian operations thatwas due on December 31, 2001.  TheCompany has not repaid the debt, pending discussions with the payee relating tosettlement of the debt, but it has recorded the balance of the debt plusinterest accrued through June 30, 2004 in its financial statements.  During the second quarter of 2003, the payeedemanded payment of the debt.  TheCompany has not paid the debt, but has chosen to continue to discuss the statusof the debt in an attempt to reach a settlement.  The Company can make no assurance that itwill be successful in negotiating such a settlement of the debt.  The Company believes that it has theliquidity available to pay the debt if the circumstances so require, assumingthat the Company’s ability to access cash through its credit facility remainsunimpeded. Nonpayment of a material obligation is an event of default under theCompany’s Credit Agreement.  TheCompany’s lenders under the Credit Agreement have waived the event of defaultcaused by the nonpayment of the note to the Company’s credit facilities.

 

Prior to June 30,2004, the Company, along with certain of its subsidiaries, was a party to theFormer Credit Agreement, which provided for a term loan in the aggregate amountof $14.8 million, consisting of $12.9 million in Term A loans and $1.9 millionin Term B loans and a $25.0 million revolving loan amount (the “Former CreditFacility”) with The Frost National Bank as the Administrative Agent and as alender (“Frost”), Harris Trust and Savings Bank (“Harris”) and Whitney NationalBank (“Whitney” and together with Frost and Harris, the “Lenders”). Due to theCompany’s inability to deliver audited financial statements for the year 2003 toits lenders and certain other events and circumstances, the Company came intodefault under the terms of its Former Credit Agreement.

 

Effective June 30,2004, the Company and the Lenders came to terms on a new credit facility (the“Credit Facility”) which replaced the Former Credit Facility and entered intothe Credit Agreement which provided for (i) aggregate term loans in the amountof $9.0 million, consisting of $8.2 million in Term A loans and $0.8 million inTerm B loans (the Term A and Term B loans are referred to herein as the “TermLoans”), and (ii) a $10.0 million revolving loan amount (the “Line of Credit”).The Term Loan amounts were based on the existing balances of the Former CreditFacility.

 

As of June 30, 2004,the outstanding balance on the Line of Credit was $3.0 million, with unusedavailability of $7.0 million and cash of $4.7 million. The term loans had acombined June 30, 2004 balance of $8.7 million.

 

Principal balancesoutstanding under the Credit Facility bear interest per annum at the sum of thebase rate plus 2.0%.  The base rate isdefined as the greater of (i) the variable rate per annum (as established byFrost from time to time as its corporate base rate for short-term commercialloans to corporate buyers) and (ii) the overnight cost of funds of Frost asdetermined solely by Frost, plus a margin of 0.5% per annum.  At June 30, 2004, the weighted averageinterest rate of borrowings outstanding under the Credit Facility was 6.00%.  Interest on base rate loans is payable on thelast day of each quarter.  The Companypays a quarterly fee on the average availability under the Line of Credit basedon an annual rate of 0.2%.

 

The Credit Facilityrequires quarterly payments of $275,000 on the Term Aloans and $75,000 on the Term B loans beginning on June 30, 2004, providedthat the Term loans are paid in full on or before July 15, 2005.   The Line of Credit expires onJanuary 31, 2005.

 

Subject to certainconditions, mandatory prepayments of the Term A loan are required to be madewith portions of the proceeds from the issuance or sale of any indebtedness asdefined in the Credit Agreement.  Amandatory payment on the outstanding amount under the Line of Credit isrequired if such outstanding amount exceeds the Consolidated Borrowing Base,which is determined based on certain percentages of accounts receivable andinventory.

 

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The Credit Facilitycontains financial covenants which include limitations on indebtedness and themaintenance of certain financial ratios, as defined in the Credit Facility, andis collateralized by substantially all of the Company’s assets in the UnitedStates. At June 30, 2004, the Company was in compliance with thesecovenants.

 

At June 30, 2004 andDecember 31, 2003, long-term obligations consisted of the following:

 
| **(Amounts  in thousands)**        | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                               |       |                    |       |                        |       |
| Credit  facility – term loans |       | $                       | 8,687      |                        | $          | 9,386 |   |
| Other                              |       | 1,548                   |       | 1,617                       |       |
| Total  long-term obligations       |       | 10,235                  |       | 11,003                      |       |
| Less:  Current maturities     |       | 2,740                   |       | 2,735                       |       |
| Long-term  obligations, net        |       | $                       | 7,495      |                        | $          | 8,268 |   |

 

**RiskFactors**

 

***TheCompany has been the Target of Securities Litigation and May Again Be theTarget of Further Actions, Which May Be Costly and Time Consuming to Defend.***

 

On May 14, 2004, apurported class action naming as defendants the Company, George F. Schroeder,David F. Green and The Coca-Cola Company was filed in the United StatesDistrict Court for the Western District of Texas. On July 15, 2004, theplaintiff’s voluntarily dismissed the lawsuit, without prejudice. *See Part II – Other Information – Item 1 - Legal Proceedings.*Although the lawsuit was dismissed, securities class action litigation is oftenbrought against a company following a decline in the market price of itssecurities. The uncertainty of the currently pending SEC and US Attorneyinvestigations could lead to more volatility in our stock price. The Companymay in the future be the target of securities class action claims similar tothose described above.

 

If the Company became atarget of future class action claims, it would likely require significantcommitment of the Company’s financial and management resources and time, whichmay seriously harm the business, financial condition and results of operationsof the Company.

 

***Weare Subject to a Formal SEC Inquiry and an Investigation by the US Attorney.***

 

InAugust 2003, the US Attorney’s Office informed the Company that it wasconducting an investigation arising from allegations raisedin a lawsuit against The Coca-Cola Company by a former Coca-Cola employee,Matthew Whitley, and requested certain information, which the Company supplied.In January 2004, the Company received written notice that the SEC hadissued a formal order of investigation that appeared to concern matters whichwere the subject of the Investigation. The Company has fully cooperated, andintends to continue to cooperate fully, with both the US Attorney’s Office andthe SEC investigations. Although the Company is unable at this point to predictthe scope or outcome of these investigations, it is possible that it couldresult in the institution of administrative, civil injunctive or criminalproceedings, the imposition of fines and penalties, and/or other remedies andsanctions.  The conduct of theseproceedings could adversely affect the Company’s business. The Company expectsto continue to incur expenses associated with responding to these agencies,regardless of the outcome, and the efforts and attention of the Company’smanagement team may be diverted from normal business operations which could, inturn adversely affect the Company’s business, financial condition, operatingresults, and cash flow. The Company intends to continue to cooperate with theSEC and comply with the SEC’s requests for information.  The Company cannot predict when the SEC willconclude its inquiry, or the outcome and impact thereof.

 

In addition, under theterms of the Company’s Credit Facility, certain governmentally imposed fines orcease and desist orders are an event of default and could result in thetermination of the loan commitments and acceleration of the outstanding debtthereunder. Such termination and acceleration of the credit facility couldadversely affect the Company’s business, financial condition, operating resultsand cash flow. See Part I – Financial Information - Item 2- “*Management’s Discussion and Analysis of Financial Condition and Resultsof Operations – Liquidity and Capital Resources – Debt*”**for more information relating to the Credit Facility.

 

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***TheCompany’s Vendors, Suppliers and Customers May React Adverselyto the ongoing investigation by the SEC and US Attorney.***

 

The Company’sfuture success depends in large part on the support of its suppliers andcustomers, who may react adversely to the ongoing investigation by the SEC andUS Attorney.  Negative publicity aboutthe Company may cause some of our potential customers to defer purchases of ourproducts. The Company’s vendors and suppliers may re-examine their willingnessto do business with the Company if they lose confidence in its ability tofulfill its commitments.

 

***Provisionsin the Company’s Certificate of Incorporation and Bylaws and Texas Law CouldDelay or Discourage a Takeover which Could Adversely Affect the Price of theCompany’s Common Stock.***

 

The Company’sboard of directors has the authority to issue up to 5 million shares ofpreferred stock and to determine the price, rights, preferences, privileges,and restrictions, including voting rights, of those shares without any furthervote or action by holders of our common stock. If preferred stock is issued, the voting and other rights of the holdersof the Company’s common stock may be subject to, and may be adversely affected by,the rights of the holders of our preferred stock.  The issuance of preferred stock may have theeffect of delaying or preventing a change of control of the Company that couldhave been at a premium price to the Company’s stockholders.

 

Certain provisionsof the Company’s certificate of incorporation and bylaws could discouragepotential takeover attempts and make attempts to change management bystockholders difficult.  The Company’sboard of directors has the authority to impose various procedural and otherrequirements that could make it more difficult for the Company’s stockholdersto effect certain corporate actions.  Anyvacancy on the Company’s board of directors may be filled by a vote of themajority of directors then in office.

 

In addition, certainprovisions of Texas law could have the effect of delaying or preventing achange in control of the Company. Section 13.03 of the Texas Business Corporation Act, for example,prohibits a Texas corporation from engaging in any business combination withany affiliated shareholder for a period of three years from the date the personbecame an affiliated shareholder unless certain conditions are met.

 

***TheTrading Price of the Company’s Common Stock Has Been,and Is Expected to Continue to Be, Volatile.***

 

The American StockExchange, where our stock trades, and stock markets in general, havehistorically experienced extreme price and volume fluctuations that haveaffected companies unrelated to their individual operating performance. Thetrading price of our common stock has been and is likely to continue to bevolatile due to such factors as:

 

•      variations in quarterlyresults of operations;

•      announcements of newproducts or acquisitions by the Company’s competitors;

•      governmental regulatoryaction;

•      resolution of pending orunasserted litigation, including the existing purported class action;

•      resolution of theCompany’s SEC or US Attorney investigations; and

•      general trends in theCompany’s industry and overall market conditions.

 

Movements inprices of equity securities in general may also affect the market price of theCompany’s common stock.

 

***RelianceUpon The Coca-Cola Company***

 

Substantially morethan half of the Company’s sales are derived from or influenced by TheCoca-Cola Company. Direct sales to The Coca-Cola Company, the Company’s largestcustomer, accounted for approximately 28%, 35% and 36% of the Company’s netsales for the years ended December 31, 2003, 2002 and 2001, respectively.The Company does not have a long-term supply contract with The Coca ColaCompany or its any of its other customers. As a result, The Coca Cola Companyhas the ability to adversely affect, directly or indirectly, the volume andprice of the products sold by the Company. While the Company does notanticipate the loss or reduction in this business or

 

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theimposition or significant price constraints based upon Lancer’s past experienceand current relations with The Coca Cola Company, any such occurrence wouldhave a material adverse effect upon the Company and its results of operation.

 

***Competition***

 

The business ofmanufacturing and marketing beverage dispensing systems and other relatedequipment is characterized by rapidly changing technology and is highlycompetitive, with competition based primarily upon product suitability andreliability, price, product warranty, technical expertise and delivery time. Inaddition, the Company frequently competes with companies having substantiallygreater financial resources than the Company. Although the Company believes ithas been able to compete successfully in the past, there can be no assurancethat it will be able to do so in the future.

 

***Dividends***

 

Since itsinception, the Company has not paid, and it has no current plans to pay, cashdividends on the Common Stock. The Company currently intends to retain allearnings to support the Company’s operations and future growth. The payment ofany future dividends will be determined by the Board of Directors based uponthe Company’s earnings, financial condition and cash requirements, restrictionsin financing agreements, business conditions and other factors the Board ofDirectors may deem relevant. The Company’s debt financing agreements prohibitthe payment of dividends without lender approval.

 

***VotingPower***

 

The directors andexecutive officers of the Company beneficially own approximately 35% of theoutstanding shares of the Common Stock. As a result, the directors andexecutive officers of the Company will have the ability to affect the vote ofthe Company’s shareholders on significant corporate actions requiringshareholder approval, including mergers, share exchanges and sales of all orsubstantially all of the Company’s assets. With such voting power, thedirectors and executive offers of the Company may also have the ability todelay or prevent a change in control of the Company.

 

# **Item3 - Quantitative and Qualitative Disclosures AboutMarket Risk**

 

There have been nosignificant changes in the Company’s market risk factors sinceDecember 31, 2003.

 

**Item 4 – Controls and Procedures**

 

An evaluation wascarried out under the supervision and with the participation of the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined under SEC rules). Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

InJanuary 2004, the Company’s Audit Committee completed its investigation,which began in June 2003. During, and at the conclusion of theinvestigation, the Audit Committee made recommendations with respect toimprovements in the Company’s internal controls. The recommendations includedsupplementing the internal audit function with external resources, obtainingwritten confirmation of compliance with the Company’s Code of Conduct on aquarterly basis by certain management employees and annually by all employees,and a review by Internal Audit of electronic and paper record-keeping processesand procedures and implementation of its recommendations. The Company reviewed andmade enhancements to electronic and paper record-keeping processes andprocedures during the fourth quarter of 2003 and implemented the otherrecommendations during 2004. Other than as described above, there have been nosignificant changes during the fourth quarter of 2003 in the Company’s internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date the Company carried out its evaluation.

 

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On February 2, 2004,our former auditor resigned from its position as independent auditors of theCompany and withdrew its December 31, 2002, 2001 and 2000 audit reports,advising the Company that the financial statements and related audit reportsshould no longer be relied upon. Our former auditor stated in a letter to theCompany that, among other things, it had determined that likely illegal acts,which had been the subject of the Audit Committee investigation, had come toits attention and that these likely illegal acts would have a material effecton the Company’s financial statements. The Company filed a Form 8-K with theSEC on February 10, 2004 (the “Original 8-K”) which set forth certaindisclosure relating to our former auditor’s resignation and the circumstancessurrounding the resignation. Subsequently, the Company filed two amendments tothe Original 8-K, one filed with the SEC on February 24, 2004 (the “FirstAmendment”) and the other on March 10, 2004 (the “Second Amendment”).

 

In response to theOriginal 8-K disclosure, our former auditor submitted a letter to the Companydated February 20, 2004 (the “Letter”) which was filed with the FirstAmendment. The Letter stated that our former auditor believed the investigativereport indicated that the Audit Committee’s investigation had uncoveredevidence as to the following:

 

(i) Preparation ofdocumentation inconsistent with the underlying economic substance as totransactions between the Company and Coca-Cola North America Fountain;

(ii) Improperpersonal use of corporate assets;

(iii) Unapprovedloans to Company officers and directors;

(iv) Improperlymaintained books and records;

(v) Non-disclosureof related-party transactions; and

(vi)Improper re-invoicing at the Company’s Mexico facility.

 

The Company filed aresponse to the various assertions stated in (i) – (vi)above in the First Amendment.  Our formerauditor subsequently supplied the Company with a letter, which was filed withthe Second Amendment, that addressed the Company’sconclusions contained in the First Amendment.

 

**Part II – Other Information**

 

**Item 1 - Legal Proceedings**

 

InAugust 2003, the US Attorney’s Office informed the Company that it wasconducting an investigation arising from allegations raisedin a lawsuit against The Coca-Cola Company by a former Coca-Cola employee,Matthew Whitley and requested certain information, which the Company supplied.On January 13, 2004, the Company received written notice that the SEC hadissued a formal order of investigation, dated December 2, 2003, that appearsto concern matters which were the subject of the Audit Committee investigation,including allegations contained in the Matthew Whitley lawsuit against TheCoca-Cola Company. The Company is unable at this point to predict the scope oroutcome of these investigations. The Company has cooperated, and intends tocontinue to cooperate, with both the US Attorney’s Office and the SECinvestigations.

 

On May 14, 2004, apurported class action, cause number 04-CV-427, naming as defendants theCompany, George F. Schroeder, David F. Green and The Coca-Cola Company wasfiled in the United States District Court for the Western District of Texas byTDH Partners.  The action alleged thatthe defendants violated Sections 10(b) and 20(a) of the Securities Exchange Actof 1934 and Rule 10b-5 promulgated thereunder. No specific amount of damages was ever claimed, and neither the Companynor George F. Schroeder was ever served with the lawsuit.   On July 15, 2004, the plaintiffsvoluntarily dismissed the lawsuit, without prejudice.

 

**Item 2 –**NotApplicable

 

**Item 3 -**NotApplicable

 

**Item 4 -**NotApplicable

 

**Item 5 –**NotApplicable

 

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**Item 6 - Exhibits and Reports onForm 8-K**

 

(a)           Exhibits:

 

31.1         Certification of ChiefExecutive Officer of Lancer Corporation pursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934, as amended.

 

31.2         Certification of ChiefFinancial Officer of Lancer Corporation pursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934, as amended.

 

32.1         Certification of ChiefExecutive Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2         Certification of ChiefFinancial Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.1*       Current Report on Form 8-K,filed with the Commission on February 10, 2004.

 

99.2*       First Amendment to theCurrent Report on Form 8-K, filed with the Commission on February 24,2004.

 

99.3*       Second Amendment to theCurrent Report on Form 8-K, filed with the Commission on March 10, 2004.

 

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*      These exhibits areincorporated by reference to the Registrant’s Form 10-Q for the quarter endedMarch 31, 2004, filed with the Commission on July 1, 2004.

 

(b)           Reports on Form 8-K:

 

The Company filed areport on Form 8-K on April 26, 2004 which discloses the Company’sposition regarding a second unsolicited mini-tender offer for the Company’sshares of common stock under the Form 8-K Item 5.

 

The Company filed areport on Form 8-K on April 22, 2004 which discloses certain defaults bythe Company under its Seventh Amendment and Restated Credit Agreement.

 

The Company filed areport on Form 8-K on April 26, 2004 which incorporates by reference theCompany’s news release announcing the American Stock Exchange’s acceptance ofLancer’s revised compliance plan.

 

The Company filed areport on Form 8-K on May 19, 2004 which discloses unaudited financialinformation for the year 2003 and unreviewed financial information for thefirst quarter of 2004.

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

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**LANCER CORPORATION**

**(Registrant)**

 

 
| August 12, 2004 | By:    | /s/ CHRISTOPHER D.  HUGHES |   |
|----------------------|--------|----------------------------|--------|
|                 |   | Christopher D. Hughes      |
|                 |   | Chief Executive Officer    |
|                 |   |                       |
|                 |   |                       |
| August 12, 2004 | By:    | /s/ MARK L. FREITAS        |   |
|                 |   | Mark L. Freitas            |
|                 |   | Chief Financial Officer    |

 

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