**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **
| **(Mark  one)**                                   |       |                                                  |
|---------------------------------------------------|------------|-------------------------------------------------------|
| **ý**                                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)** | ** ** |
| ** **                                        | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**           | ** ** |
|                                              |       | ** **                                            | ** ** |
| **For the  quarterly period ended June 30, 2005** |
| ** **                                        |
| **OR**                                            |
|                                              |       |                                                  |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)** | ** ** |
| ** **                                        | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**           | ** ** |

 

**For thetransition period from           to           **

 

**Commissionfile number 0-13875**

 

**LANCERCORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Texas**                        |   | **74-1591073**                        |
|----------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of |   | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)  |   |                                  |

 

**6655LANCER BLVD.**

**SANANTONIO, TEXAS**

(Address ofprincipal executive offices)

 

**(210)310-7000**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý   No o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange ActRule 12b-2).  Yes o   No ý

 

The number ofshares of registrant’s common stock outstanding as of July 27, 2005 was9,503,028.

 

 

----

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.** **Financial Statements.**

 

**LANCERCORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 

(Amounts inthousands, except share data)

 

ASSETS

** **
| ** **                                                            | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                            | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                            | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
|                                                                  |       |            |       |             |       |
| Current  assets:                                                      |       |            |       |             |       |
| Cash                                                                  |       | $               | 5,123      |             | $          | 5,196 |   |
| Receivables:                                                          |       |            |       |             |       |
| Trade  accounts and notes                                             |       | 19,414          |       | 16,733           |       |
| Other                                                                 |       | 705             |       | 801              |       |
|                                                                  |       | 20,119          |       | 17,534           |       |
| Less  allowance for doubtful accounts                                 |       | (260            | )          | (420             | )          |
|                                                                  |       |            |       |             |       |
| Net  receivables                                                      |       | 19,859          |       | 17,114           |       |
|                                                                  |       |            |       |             |       |
| Inventories,  net                                                     |       | 25,984          |       | 24,495           |       |
| Prepaid  expenses                                                     |       | 866             |       | 406              |       |
| Deferred  tax asset                                                   |       | 829             |       | 824              |       |
|                                                                  |       |            |       |             |       |
| Total  current assets                                                 |       | 52,661          |       | 48,035           |       |
|                                                                  |       |            |       |             |       |
| Net  property, plant and equipment                                    |       | 30,154          |       | 29,999           |       |
| Investment  in joint ventures                                         |       | 2,698           |       | 2,388            |       |
| Goodwill                                                              |       | 1,879           |       | 1,879            |       |
| Intangibles  and other assets, at cost, less accumulated amortization |       | 3,494           |       | 3,186            |       |
|                                                                  |       |            |       |             |       |
|                                                                  |       | $               | 90,886     |             | $          | 85,487 |   |

 

See accompanyingnotes to consolidated financial statements.

 

2

----

 

**LANCERCORPORATION**

**CONSOLIDATEDBALANCE SHEETS (continued)**

(Amounts inthousands, except share data)

 

LIABILITIES ANDSHAREHOLDERS’ EQUITY

** **
| ** **                                                                                                                                                                | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                                                                                | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
|                                                                                                                                                                      |       |            |       |             |       |
| Current  liabilities:                                                                                                                                                     |       |            |       |             |       |
| Accounts  payable                                                                                                                                                         |       | $               | 7,968      |             | $          | 7,555 |   |
| Current  maturities of long-term debt                                                                                                                                     |       | 1,350           |       | 1,345            |       |
| Deferred  licensing and maintenance fees                                                                                                                                  |       | 329             |       | 451              |       |
| Progress  billings                                                                                                                                                        |       | 134             |       | —           |       |
| Accrued  expenses and other liabilities                                                                                                                                   |       | 7,068           |       | 8,029            |       |
| Income  taxes payable                                                                                                                                                     |       | 1,177           |       | 286              |       |
| Total  current liabilities                                                                                                                                                |       | 18,026          |       | 17,666           |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Deferred  tax liability                                                                                                                                                   |       | 3,115           |       | 3,401            |       |
| Long-term  debt, excluding current maturities                                                                                                                             |       | 54              |       | 132              |       |
| Deferred  licensing and maintenance fees                                                                                                                                  |       | 1,354           |       | 1,273            |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Total  liabilities                                                                                                                                                        |       | 22,549          |       | 22,472           |       |
|                                                                                                                                                                      |       |            |       |             |       |
| 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; 9,566,254 issued and  9,502,028 outstanding in 2005, and 9,522,054 issued and 9,457,828 outstanding  in 2004 |       | 95              |       | 95               |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Additional  paid-in capital                                                                                                                                               |       | 13,450          |       | 13,208           |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Accumulated  other comprehensive income                                                                                                                                   |       | 14              |       | 523              |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Deferred  compensation                                                                                                                                                    |       | —          |       | (18              | )          |
|                                                                                                                                                                      |       |            |       |             |       |
| Retained  earnings                                                                                                                                                        |       | 55,138          |       | 49,567           |       |
|                                                                                                                                                                      |       |            |       |             |       |
| Less  common stock in treasury, at cost; 64,226 shares in 2005 and 2004                                                                                                   |       | (360            | )          | (360             | )          |
|                                                                                                                                                                      |       |            |       |             |       |
| Total  shareholders’ equity                                                                                                                                          |       | 68,337          |       | 63,015           |       |
|                                                                                                                                                                      |       |            |       |             |       |
|                                                                                                                                                                      |       | $               | 90,886     |             | $          | 85,487 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

----

 

**LANCERCORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

 

(Amounts in thousands,except share data)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Net  sales                                    |       | $                      | 35,362     |                 | $          | 31,696 |   | $ | 66,985 |   | $ | 61,203 |   |
| Cost  of sales                                |       | 23,862                 |       | 21,499               |       | 45,305 |   | 42,405 |   |
| Gross  profit                                 |       | 11,500                 |       | 10,197               |       | 21,680 |   | 18,798 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 7,252                  |       | 7,880                |       | 14,199 |   | 15,392 |   |
| Other  operating expense (income)             |       | 81                     |       | —               |       | (176 | ) | (327 | ) |
| Operating  income                             |       | 4,167                  |       | 2,317                |       | 7,657 |   | 3,733 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Other  income (expense):                      |       |                   |       |                 |       |   |   |   |   |
| Interest  expense                             |       | (31                    | )          | (144                 | )          | (60 | ) | (253 | ) |
| Income  from joint ventures                   |       | 405                    |       | 100                  |       | 659 |   | 253 |   |
| Other  income (expense), net                  |       | 20                     |       | (34                  | )          | 245 |   | (8 | ) |
|                                          |       | 394                    |       | (78                  | )          | 844 |   | (8 | ) |
| Income  before income taxes                   |       | 4,561                  |       | 2,239                |       | 8,501 |   | 3,725 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Income  tax expense (benefit):                |       |                   |       |                 |       |   |   |   |   |
| Current                                       |       | 1,625                  |       | 953                  |       | 3,214 |   | 1,557 |   |
| Deferred                                      |       | (83                    | )          | (136                 | )          | (286 | ) | (199 | ) |
|                                          |       | 1,542                  |       | 817                  |       | 2,928 |   | 1,358 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Net  income                                   |       | $                      | 3,019      |                 | $          | 1,422 |   | $ | 5,573 |   | $ | 2,367 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Common  Shares Outstanding:                   |       |                   |       |                 |       |   |   |   |   |
| Basic                                         |       | 9,491,181              |       | 9,367,895            |       | 9,477,308 |   | 9,367,664 |   |
| Diluted                                       |       | 9,688,332              |       | 9,460,051            |       | 9,675,850 |   | 9,465,304 |   |
|                                          |       |                   |       |                 |       |   |   |   |   |
| Earnings  Per Share:                          |       |                   |       |                 |       |   |   |   |   |
| Basic  earnings                               |       | $                      | 0.32       |                 | $          | 0.15 |   | $ | 0.59 |   | $ | 0.25 |   |
| Diluted  earnings                             |       | $                      | 0.31       |                 | $          | 0.15 |   | $ | 0.58 |   | $ | 0.25 |   |

 

See accompanyingnotes to consolidated financial statements.

 

4

----

 

**LANCERCORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

 

(Amounts inthousands)

 
| ** **                                                                                     | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** |
| ** **                                                                                     | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash  flow from operating activities:                                                          |       |                 |       |   |   |
| Net  income                                                                                    |       | $                    | 5,573      |   | $ | 2,367 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities |       |                 |       |   |   |
| Depreciation  and amortization                                                                 |       | 1,829                |       | 2,371 |   |
| Deferred  licensing and maintenance fees                                                       |       | 143                  |       | (312 | ) |
| Deferred  revenue                                                                              |       | 134                  |       | — |   |
| Inventory  and receivable reserves                                                             |       | 144                  |       | (80 | ) |
| Deferred  income taxes                                                                         |       | (301                 | )          | (190 | ) |
| Gain  on sale and disposal of assets                                                           |       | (176                 | )          | (327 | ) |
| (Income)  loss from joint ventures                                                             |       | (659                 | )          | (253 | ) |
| Stock-based  compensation expense                                                              |       | 18                   |       | 40 |   |
| Changes  in assets and liabilities:                                                            |       |                 |       |   |   |
| Receivables                                                                                    |       | (2,527               | )          | (3,199 | ) |
| Prepaid  expenses                                                                              |       | (464                 | )          | (880 | ) |
| Income  taxes receivable                                                                       |       | —               |       | 225 |   |
| Inventories                                                                                    |       | (2,026               | )          | (749 | ) |
| Intangibles  and other assets                                                                  |       | (411                 | )          | (126 | ) |
| Accounts  payable                                                                              |       | 514                  |       | 2,714 |   |
| Accrued  expenses and other liabilities                                                        |       | (901                 | )          | 979 |   |
| Income  taxes payable                                                                          |       | 938                  |       | 838 |   |
| Net  cash provided by operating activities                                                     |       | 1,828                |       | 3,418 |   |
| Cash  flow from investing activities:                                                          |       |                 |       |   |   |
| Proceeds  from sale of assets                                                                  |       | 755                  |       | 467 |   |
| Acquisition  of property, plant and equipment                                                  |       | (2,988               | )          | (1,123 | ) |
| Investment  in joint ventures                                                                  |       | (569                 | )          | (155 | ) |
| Distributions  from joint ventures                                                             |       | 917                  |       | — |   |
| Net  cash used in investing activities                                                         |       | (1,885               | )          | (811 | ) |
| Cash  flow from financing activities:                                                          |       |                 |       |   |   |
| Borrowings  under line of credit                                                               |       | —               |       | 4,300 |   |
| Repayments  under line of credit                                                               |       | —               |       | (2,300 | ) |
| Retirement  of long-term debt                                                                  |       | (73                  | )          | (768 | ) |
| Net  proceeds from exercise of stock options                                                   |       | 242                  |       | 30 |   |
| Net  cash provided by financing activities                                                     |       | 169                  |       | 1,262 |   |
| Effect  of exchange rate changes on cash                                                       |       | (185                 | )          | (309 | ) |
| Net  increase (decrease) in cash                                                               |       | (73                  | )          | 3,560 |   |
| Cash  at beginning of period                                                                   |       | 5,196                |       | 1,129 |   |
| Cash  at end of period                                                                         |       | $                    | 5,123      |   | $ | 4,689 |   |
|                                                                                           |       |                 |       |   |   |
| Supplemental  cash flow informaton:                                                            |       |                 |       |   |   |
| Cash  paid for interest                                                                        |       | $                    | 53         |   | $ | 221 |   |
| Cash  paid for income taxes                                                                    |       | 1,679                |       | — |   |

 

See accompanyingnotes to consolidated financial statements.

 

5

----

 

LANCER CORPORATION

 

NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS

 

**1.  Organization and Basis of Presentation.**

 

We design, engineer,manufacture and market fountain soft drink, beer and citrus beverage dispensingsystems, and other equipment for use in the food service and beverageindustry.  We also market frozen beverage dispensers manufactured byLancer FBD Partnership, Ltd., a partnership in which we own a 50% partnershipinterest.  Our products are sold by our personnel and through independentdistributors and agents principally to major soft drink companies (primarilyThe Coca-Cola Company), bottlers, equipment distributors, beer breweries,restaurants and convenience stores for use in various food and beverageoperations.  We are a vertically integrated manufacturer with tooling,production, assembly and testing capabilities that enable us to fabricate asubstantial portion of the components used in our products.  In addition,we are an innovator of new products in the beverage dispensing industry.  We have a large technical staff supported bystate-of-the-art engineering facilities to develop new products and to enhanceour existing product lines in response to changing industry requirements andspecific customer demands.

 

Our accompanyingunaudited consolidated financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In our opinion, these financial statements contain all adjustments,consisting of normal recurring accruals unless otherwise disclosed, necessaryto present fairly the financial position, results of operations and cash flowsfor the periods indicated.  Oursignificant accounting policies were disclosed in the notes to the consolidatedfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2004, 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 to the current year’s presentation. Wehave revised our previously reported results of operations for the threeand six months ended June 30, 2004 to reclassify one item from non-operating tooperating expense.  This item consists ofa $327,000 gain on the sale and disposal of assets.  Previously, this item was presented asnon-operating expenses in “Other Income (Expense)”.  As noted in the following reconciliation, thereclassification increased the amount of our previously reported operatingincome for the six months ended June 30, 2004, but did not affect our previouslyreported net earnings, earnings per share, financial position, or cash flows. 

 
| **(Amounts in 000s)**                     | ** ** | **Three Months  June 30,  2004** | ** ** | **Six Months  June 30,  2004** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| Operating  income as previously reported  |       | $                                | 2,317      |                           | $          | 3,406 |   |
| Gain  on sale and disposal of assets      |       | —                           |       | 327                            |       |
| Operating  income after reclassifications |       | $                                | 2,317      |                           | $          | 3,733 |   |

 

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

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs”, an amendment of ARBNo. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormalamounts of idle facility expense, freight, handling costs and wasted materials(spoilage) should be recognized as current-period charges and require theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The pronouncement is effective forinventory costs incurred during fiscal years beginning after June 15, 2005.  Earlier application is permitted forinventory costs incurred during fiscal years beginning after November 23, 2004.We currently recognize as period costs any abnormal amounts of idle facilityexpense, freight, handling costs and wasted materials, and allocate fixedproduction overhead to inventory based on the normal capacity of the productionfacilities. We do not believe that 

 

6

----

 

the adoption of thispronouncement will have a significant impact on our results of operations orfinancial position. We will adopt this pronouncement beginning January 1, 2006.

 

In December 2004, theFASB issued SFAS No. 123(R) –*Share-Based Payment,*which replaces SFAS No. 123 –*Accounting forStock-Based Compensation*, and supersedes APB Opinion No. 25 –*Accounting for Stock Issued to Employees*. In March 2005,the Securities and Exchange Commission (SEC) issued Staff Accounting BulletinNo. 107 – *Share-Based Payment,*which providesinterpretive guidance related to SFAS No. 123(R). SFAS No. 123(R) requires compensationcosts related to share-based payment transactions to be recognized in thefinancial statements. With limited exceptions, the amount of compensation costis measured based on the grant-date fair value of the equity or liabilityinstruments issued. SFAS No. 123(R) requires liability awards to be remeasuredeach reporting period and compensation costs to be recognized over the periodthat an employee provides service in exchange for the award. In April 2005, theSEC delayed the effective date of SFAS No. 123(R) to the beginning of theannual reporting period that begins after June 15, 2005. We are currentlyevaluating the effect that adoption of this statement will have on ourfinancial position and results of operations.

 

On December 21, 2004, theFASB issued “Application of FASB Statement No. 109, **Accounting for Income Taxes,** to the Tax Deduction on QualifiedProduction Activities Provided by the American Jobs Creation Act of 2004”, aFASB Staff Position (FSP) that provides guidance on the application of SFAS No.109 to the tax deduction on qualified production activities provided by theAmerican Jobs Creation Act of 2004. FSP FAS 109-1 states that the qualifiedproduction activities deduction should be accounted for as a special deductionin accordance with SFAS No. 109, whereby the deduction is contingent upon thefuture performance of specific activities, including wage levels. The FASB alsoconcluded that the special deductions should be considered with measuringdeferred taxes and assessing a valuation allowance. The impact on our resultsof operations or financial position of FSP FAS 109-1 lowered our effective taxrate in the first six months of 2005 to 34.4% compared to 36.4% in the firsthalf of 2004.

 

In May 2005, theFinancial Accounting Standards Board issued FASB Statement No. 154, “AccountingChanges and Error Corrections,” a replacement of APB Opinion No. 20 and FASBStatement No. 3.  The Statement providesguidance on the accounting for and reporting of accounting changes and errorcorrections.  It establishes, unlessimpracticable, retrospective application as the required method for reporting achange in accounting principle in the absence of explicit transitionrequirements specific to the newly adopted accounting principle.  This Statement is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.

 

At the June 2005 meeting,the Emerging Issues Task Force reached a consensus on EITF 05-6,”Determiningthe Amortization Period for Leasehold Improvements Purchased after LeaseInception or acquired in a Business Combination.”  The consensus reached is that the leaseholdimprovements, whether acquired in a business combination or placed in servicesignificantly after and not contemplated at or near the beginning of the leaseterm, should be amortized over the shorter of the useful life of the assets ora term that includes required lease periods and renewals that are deemed to bereasonably assured.  The consensus inthis issue, which is to be applied to leasehold improvements that are purchasedor acquired in reporting periods beginning after June 29, 2005, will not have amaterial impact on our financial statements.

 

**3.   Supplemental Balance Sheet and IncomeStatement Information.**

 

*Balance Sheet Information*:

 

**Inventory:**  We state inventories at the lower of cost (ona first-in, first-out basis for finished goods and work in process, and anaverage cost basis for raw materials and supplies) or market.  Our inventory components consist of thefollowing items (amounts in thousands):

 

7

----

 
| ** **                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|--------------------|------------|------------------------|------------|
| Finished  goods            |       | $                  | 10,415     |                   | $          | 11,143 |   |
| Work  in process           |       | 6,532              |       | 5,593                  |       |
| Raw  material and supplies |       | 9,037              |       | 7,759                  |       |
|                       |       | $                  | 25,984     |                   | $          | 24,495 |   |

 

**Property, Plant and Equipment:**  Our net property, plant and equipment consistof the following items (amounts in thousands):

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                 | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|                                       |       |         |       |             |       |
| Land                                       |       | $            | 1,082      |             | $          | 1,082 |   |
| Buildings                                  |       | 22,070       |       | 22,056           |       |
| Machinery  and equipment                   |       | 19,058       |       | 19,633           |       |
| Tools  and dies                            |       | 10,701       |       | 10,775           |       |
| Leaseholds,  office equipment and vehicles |       | 8,755        |       | 8,542            |       |
| Assets  in progress                        |       | 3,109        |       | 1,365            |       |
| Assets  available for sale                 |       | —       |       | 780              |       |
|                                       |       | 64,775       |       | 64,233           |       |
| Less  accumulated depreciation             |       | (34,621      | )          | (34,234          | )          |
| Net  property, plant and equipment         |       | $            | 30,154     |             | $          | 29,999 |   |

 

**Intangibles and Other Assets:**  Our netintangibles and other assets consist of the following items (amounts inthousands):

 
| ** **                           | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                 |       |               |       |                   |       |
| Patents                              |       | $                  | 4,251      |                   | $          | 3,848 |   |
| Accumulated  amortization of patents |       | (869               | )          | (774                   | )          |
| Net  intangibles                     |       | 3,382              |       | 3,074                  |       |
| Deposits                             |       | 112                |       | 112                    |       |
| Net  intangibles and other assets    |       | $                  | 3,494      |                   | $          | 3,186 |   |

 

**Accrued Expenses:**  Ouraccrued expenses consist of the following items (amounts in thousands):

* *
| ** **                             | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|----------------------------------------|------------|--------------------|-------------|------------------------|------------|
|                                   |       |               |        |                   |       |
| Payroll  and related expenses          |       | $                  | 3,683       |                   | $          | 4,159 |   |
| Commissions                            |       | 569                |        | 328                    |       |
| Health  and workers’ compensation |       | 242                |        | 303                    |       |
| Property  taxes                        |       | 284                |        | 226                    |       |
| Interest                               |       | 186                |        | 189                    |       |
| Warranty                               |       | 1,200              |        | 1,257                  |       |
| Other  taxes                           |       | 291                |        | 505                    |       |
| Other  accrued expenses                |       | 613                |        | 1,062                  |       |
|                                   |       | $                  |  7,068 |                   | $          |  8,029 |   |

 

8

----

 

*Income Statement Information.*

 

**Other Operating Income:**  Our otheroperating income consists of the following items (amounts in thousands):

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                  | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Gain)  loss on sale and disposal of assets |       | $                      | 81         |                 | $          | — |   | $ | (176 | ) | $ | (327 | ) |
|                                        |       | $                      | 81         |                 | $          | — |   | $ | (176 | ) | $ | (327 | ) |

** **

**Other Income (Expense):**  Our otherincome (expenses) consist of the following items (amounts in thousands):

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                         | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income                                   |       | $                      | 34         |                 | $          | 7 |   | $ | 62 |   | $ | 7 |   |
| Bank  charges                                      |       | (45                    | )          | (42                  | )          | (83 | ) | (82 | ) |
| Royalties  income - net                            |       | 2                      |       | 32                   |       | 44 |   | 84 |   |
| Exchange  gains (losses)                           |       | 21                     |       | (57                  | )          | 56 |   | (36 | ) |
| Gain  from sale of non operating asset             |       | —                 |       | —               |       | 72 |   | — |   |
| Extinguishment  of guarantee of joint venture debt |       | —                 |       | —               |       | 33 |   | — |   |
| Miscellaneous                                      |       | 8                      |       | 26                   |       | 61 |   | 19 |   |
| Total                                              |       | $                      | 20         |                 | $          | (34 | ) | $ | 245 |   | $ | (8 | ) |

 

**4.   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 197,150 and 92,156 shares for the three months endedJune 30, 2005 and 2004, respectively. The dilutive effect of stock options approximated 198,542 and 97,640 forthe six months ended June 30, 2005 and 2004, respectively.

 

9

----

 

**5.   Stock Compensation Plans.**

 

We utilize theintrinsic value method, as permitted under provisions of APB Opinion No. 25 andrelated interpretations, in measuring stock-based compensation foremployees.  If we had elected torecognize compensation cost based on the fair value of the options granted atgrant date as prescribed by SFAS No. 123R, net earnings and net earnings pershare would have been adjusted to the pro forma amounts indicated in the tablebelow (amounts in thousands, except share data):

 
| ** **                                                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                           | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  earnings - as reported                                                                                          |       | $                      | 3,019      |                 | $          | 1,422 |   | $ | 5,573 |   | $ | 2,367 |   |
| Add:  Total stock-based compensation expense determined under the intrinsic value  method, net of tax                |       | 6                      |       | 10                   |       | 12 |   | 27 |   |
| Deduct:  Total stock-based compensation expense determined under fair value based  method for all awards, net of tax |       | (181                   | )          | (25                  | )          | (355 | ) | (53 | ) |
| Net  earnings - pro forma                                                                                            |       | $                      | 2,844      |                 | $          | 1,407 |   | $ | 5,230 |   | $ | 2,341 |   |
| Net  earnings per basic share-as reported                                                                            |       | $                      | 0.32       |                 | $          | 0.15 |   | $ | 0.59 |   | $ | 0.25 |   |
| Net  earnings per basic share-pro forma                                                                              |       | $                      | 0.30       |                 | $          | 0.15 |   | $ | 0.55 |   | $ | 0.25 |   |
|                                                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Net  earnings per diluted share-as reported                                                                          |       | $                      | 0.31       |                 | $          | 0.15 |   | $ | 0.58 |   | $ | 0.25 |   |
| Net  earnings per diluted share-pro forma                                                                            |       | $                      | 0.29       |                 | $          | 0.15 |   | $ | 0.54 |   | $ | 0.25 |   |
|                                                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Weighted-average  fair value of options, granted during the period                                                   |       | $                      | 8.33       |                 | $          | — | (1) | $ | 8.33 |   | $ | — | (1) |

 

The fair value of eachoption granted in the three and six months ended June 30, 2005 and 2004,respectively, is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following assumptions:

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                   |       |                   |       |                 |       |   |   |   |   |
| Expected  life (years) |       | 7                      |       | —               | (1)        | 7 |   | — | (1) |
| Interest  rate         |       | 4.0                    | %          | —               | (1)        | 4.0 | % | — | (1) |
| Volatility             |       | 48.0                   | %          | —               | (1)        | 48.0 | % | — | (1) |
| Dividend  yield        |       | None                   |       | None                 |       | None |   | None |   |

 

----

(1) No options were granted during the three andsix months ended June 30, 2004.

 

10

----

 

**6.   Other Comprehensive Income.**

 

The line item, “Accumulatedother comprehensive income” on the accompanying consolidated balance sheetsincludes foreign currency gains and unrealized gain (loss) on investment.

 

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

 
| ** **                    | ** ** | **Cumulative  Translation   Adjustment** | ** ** | **Unrealized Loss   on Investments** | ** ** | **Total** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| Balance  at December 31, 2003 |       | $                                        | —     |                                 | $          | 6         |       | $ | 6 |   |
| Current  period change        |       | 523                                      |       | (6                                   | )          | 517       |       |
| Balance  at December 31, 2004 |       | $                                        | 523        |                                 | $          | —    |       | $ | 523 |   |
| Current  period change        |       | (509                                     | )          | —                               |       | (509      | )          |
| Balance  at June 30, 2005     |       | $                                        | 14         |                                 | $          | —    |       | $ | 14 |   |

 

**Disclosure of related tax effectsallocated to each component of Accumulated Other Comprehensive Income**

 
| ** **                                     | ** ** | **Before-tax   amount** | ** ** | **Tax (expense)   benefit** | ** ** | **Net of tax   amount** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **2004**                                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Cumulative  translation adjustments            |       | $                       | 523        |                        | $          | —                  |       | $ | 523 |   |
| Reclassifiaction  adjustment for realized loss |       | (6                      | )          | —                      |       | (6                      | )          |
| Total  Other Comprehensive income              |       | $                       | 517        |                        | $          | —                  |       | $ | 517 |   |
|                                           |       |                    |       |                        |       |                    |       |
| **2005**                                       |       |                    |       |                        |       |                    |       |
| Cumulative  translation adjustments            |       | $                       | (509       | )                           | $          | —                  |       | $ | (509 | ) |
| Total  Other Comprehensive income              |       | $                       | (509       | )                           | $          | —                  |       | $ | (509 | ) |

 

**7. Investment in Joint Ventures.**

 

At June 30, 2005 ourlong-term investments consisted of the following:

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                 | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|                                       |       |         |       |             |       |
| Investment  in Lancer FBD Partnership Ltd. |       | $            | 1,994      |             | $          | 2,046 |   |
| Investment  in Moo Technologies, LLC       |       | 704          |       | 342              |       |
| Total  long-term investments               |       | $            | 2,698      |             | $          | 2,388 |   |

 

Our 50% share of netearnings from both joint ventures, after elimination of profit in endinginventory, is included in other income.

 

We own 50% of Lancer FBDPartnership, Ltd., a manufacturer of frozen beverage equipment.  Lancer FBD pays us a commission on sales ofLancer FBD products that we generate through our sales force.  Lancer FBD paid us sales commissions of $0.2million and $0.1 million for the three-month periods ended June 30, 2005 and2004, and $0.3 

 

11

----

 

million and $0.1 millionfor the six months ended June 30, 2005 and 2004, respectively.  Ourportion of Lancer FBD’s income was $0.5 million and $0.2 million for the threemonths ended June 30, 2005 and 2004, and $0.9 million and $0.4 million for thesix months ended June 30, 2005 and 2004, respectively.  Lancer FBD’s purchases from us were $0.4million and $0.3 million for the three months ended June 30, 2005 and 2004, and$0.7 million and $0.6 million for the six months ended June 30, 2005 and 2004,respectively.  Lancer FBD had a balancedue to us of $0.4 million on June 30, 2005, and $0.2 million onDecember 31, 2004.

 

We own 50% of MooTechnologies, LLC, a developmental stage limited liability company engaged inthe commercialization of concentrated shelf-stable milk products. Our portionof Moo Technology’s loss was $0.1 million for both of the three months endedJune 30, 2005 and 2004, and $0.2 million for both of the six months ended June30, 2005 and 2004, respectively.  We haveinvested $1.3 million in Moo Technologies since its inception, including $0.6million during the first six months of 2005, bringing our investment net oflosses in the company to $0.7 million as of June 30, 2005.  We expect Moo Technologies to continue to incurlosses through at least 2005, and we expect to continue to fund MooTechnologies in a manner consistent with our past funding practices.

 

12

----

 

**8.   Segment and Geographic Information.**

 

We are engaged in the manufacture and distribution ofbeverage dispensing equipment and related parts and components.  We manage our business by geographic regionand have four main geographical region segments.  Sales are attributed to a region based on theordering location of the customer.

 
| ** **                        | ** ** | **North**   | ** ** | **Latin**   | ** ** | **Asia/**   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|---------------|------------|------------|------------|
| **(amounts  in thousands)**       | ** ** | **America** | ** ** | **America** | ** ** | **Pacific** | ** ** | **Europe** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| ** **                        | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three  months ended June 30, 2005 |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total  revenues                   |       | $           | 22,902     |        | $          | 2,232       |       | $          | 6,620      |          | $          | 3,608      |       | $ | — |   | $ | 35,362 |   |
| Depreciation  and amortization    |       | 729         |       | 50          |       | 106         |       | 11         |       | —        |       | 896        |       |
| Operating  income (loss)          |       | 6,368       |       | 428         |       | 457         |       | 545        |       | (3,631        | )          | 4,167      |       |
| Long-lived  assets                |       | 27,656      |       | 3,426       |       | 1,712       |       | 168        |       |          |       | 32,962     |       |
| Goodwill,  net                    |       | —      |       | —      |       | 1,879       |       | —     |       | —        |       | 1,879      |       |
| Capital  expenditures             |       | 2,185       |       | —      |       | 88          |       | (1         | )          |          |       | 2,272      |       |
| ** **                        | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three  months ended June 30, 2004 |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total  revenues                   |       | $           | 20,618     |        | $          | 1,381       |       | $          | 6,203      |          | $          | 3,494      |       | $ | — |   | $ | 31,696 |   |
| Depreciation  and amortization    |       | 1,007       |       | 67          |       | 96          |       | 9          |       | —        |       | 1,179      |       |
| Operating  income (loss)          |       | 5,601       |       | (145        | )          | 425         |       | 447        |       | (4,011        | )          | 2,317      |       |
| Long-lived  assets                |       | 28,998      |       | 4,148       |       | 1,651       |       | 125        |       | —        |       | 34,922     |       |
| Goodwill,  net                    |       | —      |       | 50          |       | 1,879       |       | —     |       | —        |       | 1,929      |       |
| Capital  expenditures             |       | 362         |       | 99          |       | 136         |       | —     |       | —        |       | 597        |       |
|                              |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Six  months ended June 30, 2005   |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total  revenues                   |       | $           | 43,297     |        | $          | 4,051       |       | $          | 12,331     |          | $          | 7,306      |       | $ | — |   | $ | 66,985 |   |
| Depreciation  and amortization    |       | 1,487       |       | 111         |       | 210         |       | 21         |       | —        |       | 1,829      |       |
| Operating  income (loss)          |       | 12,082      |       | 866         |       | 574         |       | 1,124      |       | (6,989        | )          | 7,657      |       |
| Long-lived  assets                |       | 27,656      |       | 3,426       |       | 1,712       |       | 168        |       | —        |       | 32,962     |       |
| Goodwill,  net                    |       | —      |       | —      |       | 1,879       |       | —     |       | —        |       | 1,879      |       |
| Capital  expenditures             |       | 2,690       |       | —      |       | 247         |       | 51         |       | —        |       | 2,988      |       |
|                              |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Six  months ended June 30, 2004   |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total  revenues                   |       | $           | 38,954     |        | $          | 2,475       |       | $          | 12,823     |          | $          | 6,951      |       | $ | — |   | $ | 61,203 |   |
| Depreciation  and amortization    |       | 2,029       |       | 115         |       | 207         |       | 20         |       | —        |       | 2,371      |       |
| Operating  income (loss)          |       | 9,729       |       | (308        | )          | 1,139       |       | 1,036      |       | (7,863        | )          | 3,733      |       |
| Long-lived  assets                |       | 28,998      |       | 4,148       |       | 1,651       |       | 125        |       | —        |       | 34,922     |       |
| Goodwill,  net                    |       | —      |       | 50          |       | 1,879       |       | —     |       | —        |       | 1,929      |       |
| Capital  expenditures             |       | 711         |       | 206         |       | 198         |       | 8          |       | —        |       | 1,123      |       |

 

All intercompany revenuesare eliminated in computing revenues and operating income.  Corporate administration and engineeringexpenses are included in a Corporate segment rather than allocated among ourgeographic region segments.

 

**9.****              ProductWarranties.**

 

We generally warrant our products against certainmanufacturing and other defects.  Theseproduct warranties are provided for specific periods of time from the date ofsale.  As of June 30, 2005 and December31, 2004, we had accrued $1.2 million and $1.3 million, respectively, forestimated product warranty claims.  Theaccrued product warranty costs are based primarily on actual warranty claims aswell as current information on repair costs. Warranty claims expense was $0.12 million and $0.09 million for thethree months ended June 30, 2005 and 2004, 

 

13

----

 

respectively. Warranty claims expense was $0.23 million and $0.25 million for the sixmonths ended June 30, 2005 and 2004, respectively.

 

The following chart sets forth our product warrantycosts for the periods ending June 30, 2005 and 2004 

 
| **(amounts  in thousands):**                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued  product warranty costs as of January 1              |       | $          | 1,257      |       | $          | 586 |   |
| Liabilities  accrued for warranties issued during the period |       | 87         |       | 654        |       |
| Warranty  claims paid during the period                      |       | (144       | )          | (246       | )          |
| Accrued  product warranty costs as of June 30                |       | $          | 1,200      |       | $          | 994 |   |

 

**10.  Other Guaranties.**

 

During 2003, Lancer FBDobtained a $1.5 million revolving credit facility from a bank.  We enteredinto a Continuing Guarantee Agreement with the lender pursuant to which weguaranteed the repayment of the partnership’s debt, which expiredannually.  In accordance with FASB Interpretation (“FIN”) No. 45, werecorded a liability of $22,500, which represents the estimated value of theguaranty.  See “Item 2, Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Critical Accounting Policies – Guaranties”.  The Lancer FBD credit facility, by its terms,expired during the first quarter of 2005 and was not renewed, and the lenderreleased us from our guaranty of the FBD facility.  We reversed the liability associated with theguaranty, resulting in income of $22,500 during the first quarter of 2005.

 

On March 5, 2003, MooTechnologies obtained a $0.75 million revolving credit facility from abank.  We entered into a CommercialGuarantee with the lender pursuant to which we guaranteed the repayment of theMoo Technologies, LLC debt.  We recordeda liability of $11,250 in 2003, which represents the estimated value of theguaranty.  See “Item 2, Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies – Guaranties”. During the first quarter of 2005, Moo Technologies repaid all amountsdue under its revolving credit facility and terminated the facility, and thelender released us from our guaranty of the facility.  We reversed the liability associated with theguaranty, resulting in income of $11,250 during the first quarter of 2005.

 

**11.****       Other Matters.**

 

*AuditCommittee Investigation*. In June 2003, our Audit Committee began conducting an internal investigation.The investigation was related to allegations raised by a lawsuit against TheCoca-Cola Company by a former Coca-Cola employee, Matthew Whitley. Although wewere not a defendant to the lawsuit, certain allegations contained in thelawsuit specifically involved us. The investigation was later expanded toinclude allegations raised in certain press articles.

 

During theinvestigation, we were unable to file our quarterly reports for the second andthird quarters of 2003 with the Securities and Exchange Commission.  On December 5, 2003, we provided financialinformation for the second and third quarters of 2003 in exhibits to a Form8-K, in order to provide information to the investing public while the investigationcontinued.

 

Our inability tofile our quarterly report for the second quarter of 2003 with the SEC on atimely basis violated the American Stock Exchange (AMEX) continued listingstandards, specifically Section 1003(d) of the AMEX Company Guide. We submitteda formal action plan to regain compliance with AMEX on September 30, 2003 andAMEX accepted the plan on October 8, 2003. After the initial acceptance, werevised the plan with the approval of AMEX in order to accommodate newdevelopments, including our inability to file our annual report on Form 10-Kfor 2003 and our quarterly report on Form 10-Q for the first quarter 2004.

 

14

----

 

On January 30,2004, we announced that the Audit Committee investigation had concluded and theAudit Committee had released a general summary of the investigation findings.On July 1, 2004, we filed all past due and current periodic reports with theSecurities and Exchange Commission and regained compliance with the AMEXlisting standards.

 

*US Attorney and Securities and Exchange CommissionInvestigations*. In August 2003, the US Attorney’s Officeinformed us that it was conducting an investigation arising from allegationsraised in a lawsuit against The Coca-Cola Company by a former Coca-Colaemployee, Matthew Whitley, and requested certain information, which wesupplied. On January 13, 2004, we received written notice that the Securitiesand Exchange Commission had issued a formal order of investigation, datedDecember 2, 2003, that appeared to concern matters which were the subject ofour prior Audit Committee investigation (which concluded in January 2004)including certain allegations relating to us that were contained in the Whitleylawsuit against The Coca-Cola Company. We have cooperated, and intend tocooperate in any continuing investigations of the US Attorney’s Office or theSecurities and Exchange Commission.  Wehave not had substantive contact relating to these investigations with eitherthe US Attorney’s Office or the Securities and Exchange Commission since July2004.

 

On April 18, 2005, The Coca-Cola Company announcedthat the Justice Department had closed its investigation of allegations raisedin the Matthew Whitley lawsuit and that they had reached a settlement with theSecurities and Exchange Commission regarding their investigation relating tocertain allegations set forth in the Matthew Whitley lawsuit. The settlementbetween The Coca-Cola Company and the Securities and Exchange Commission, asdescribed in the Security and Exchange Commission’s Order InstitutingCease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-DesistOrder Pursuant to Section 8A of the Securities Act of 1933 and Section 21C ofthe Securities Exchange Act of 1934, In the Matter of The Coca-Cola Company,dated April 18, 2005, did not relate to the business dealings between Lancerand The Coca-Cola Company or any of the allegations from the Matthew Whitleylawsuit that involved Lancer.

 

We have not beenadvised by the US Attorney’s Office that their investigation of mattersrelating to Lancer has been closed, nor have we been advised by the Securitiesand Exchange Commission of the status of their investigation of Lancer asdescribed under their formal order of investigation or what, if any, effect TheCoca-Cola Company’s settlement with the Securities and Exchange Commission hador will have on either investigation. Therefore, we are unable at this point topredict the scope or outcome of any ongoing Justice Department or Securitiesand Exchange Commission investigations, and note that, if the investigationsare in fact continuing, they could still result in the institution ofadministrative, civil injunctive or criminal proceedings, the imposition offines and penalties, and/or other remedies and sanctions.

 

**Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

This reportcontains certain “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. We desire to take advantage of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995 andwe are including this statement for the expressed purpose of availing ourselvesof the protection of the safe harbor with respect to all of suchforward-looking statements. These forward-looking statements describe futureplans or strategies and include our expectations of future financial resultsand often include words such as “may,” “will,” “should,” “expect,” “intend,” “estimate,”“anticipate,” “believe,” “predict,” “plan,” “potential,” and “continue,” andthe negatives of these terms and variations of them or similar terminology.These forward-looking statements involve known and unknown risks, uncertaintiesand other factors that may cause our actual results, performance orachievements to be materially different from results expressed or implied bythe forward-looking statements.  Factorsthat could affect actual results include but are not limited to:

 

•                  general economic trends;

•                  ability to service our debt;

•                  availability of capital sources;

•                  currency fluctuations;

•                  fluctuations in our operating costs;

•                  competitive practices in the industryin which we compete;

 

15

----

 

•                  changes in our labor conditions;

•                  our capital expenditure requirements;

•                  technological changes andinnovations;

•                  legislative or regulatoryrequirements;

•                  operating changes and product needsof our main customer, The Coca-Cola Company;

•                  losses from litigation; and

•                  all other factors described hereinunder “Risk Factors.”

 

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

 

We do notundertake and specifically disclaim any obligation to update anyforward-looking statements to reflect occurrence of anticipated or unanticipatedevents or circumstances after the date of such statements.

 

The following discussion shouldbe read in connection with our Consolidated Financial Statements, related notesand other financial information included elsewhere in this document.

 

**Overview**

 

***General****.*  We design,engineer, manufacture and market fountain soft drink, beer and citrus beveragedispensing systems, and other equipment for use in the food service andbeverage industry.  We also market frozenbeverage dispensers manufactured by Lancer FBD, a partnership in which we own a50% partnership interest.  Our productsare sold by our employees and through independent distributors and agentspredominantly to major soft drink companies (primarily The Coca-Cola Company,which influences substantially more than half of our sales), bottlers,equipment distributors, beer breweries, restaurants and convenience stores foruse in various food and beverage operations. We are a vertically integrated manufacturer with tooling, production,assembly and testing capabilities that enable us to fabricate a substantialportion of the components used in our products.  Our primary manufacturingand administrative facility is located in San Antonio, Texas. We have salesemployees, distributors, and/or licensees in Latin America, Europe, Africa andAsia. We manufacture products in Australia and Piedras Negras, Mexico, andoperate warehouses in Australia, Belgium, Mexico, New Zealand, and the UnitedKingdom.

 

Our products can bedivided into four major categories: (i) fountain soft drink, citrus, and frozenbeverage dispensers, which includes a broad range of mechanically cooled andice cooled soft drink and citrus dispensing systems; (ii) post-mix dispensingvalves, which mix syrup and carbonated water at a preset ratio; (iii) beerdispensing systems and related accessories; and (iv) other products andservices, which includes various dispensing systems and replacement parts inconnection with the remanufacturing process.

 

**Critical Accounting Policies**

 

The ConsolidatedFinancial Statements and Notes to Consolidated Financial Statements containinformation that is important to management’s discussion and analysis. The preparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities.

 

Critical accountingpolicies are those that reflect significant judgments and uncertainties and mayresult in materially different results under different assumptions andconditions.  We believe that our critical accounting policies are limitedto those described below.  For a detailed discussion on the application ofthese and other accounting policies, see “Note 1 - Summary of SignificantAccounting Policies” in the Notes to Consolidated Financial Statements.

 

*Revenue Recognition*

 

We recognize revenue inaccordance with the following methods:

 

### **(a)**          At the time of shipment for allproducts except for those sold under agreements described in (b). We require apurchase order for all sales. At the time of the shipment, risk of ownershipand title passes to 

 

16

----

 

### **our customer. The goods are completely assembled andpackaged and we have no further performance obligations.**

 

### **(b)**         On a percentage of completion basisfor installation contracts exceeding 90 days in length.

 

### **(c)**          We have entered into an agreementwith The Coca-Cola Company to receive partial reimbursement for design anddevelopment.  The reimbursement is offset against cost on a percentage ofcompletion basis.

 

### **(d)**         Prior to 2003, we had agreed toprovide exclusive rights for use of certain tools to The Coca-Cola Company. These tools are included in fixed assets and are depreciated over the life ofthe asset.  The corresponding license and maintenance fees are recorded asdeferred income and recognized over the life of the agreement, whichapproximates the life of the corresponding asset. After 2002, the Company hasagreed to maintain certain tools that are the property of The Coca-ColaCompany. The corresponding maintenance fees are recorded as deferred licensingand maintenance fees and recognized over the life of the corresponding tool.

 

*Reserve for Slow Moving andObsolete Inventory*

 

We provide for slowmoving inventory based on an analysis of the aging and utility of theinventory. Obsolete inventory is 100% reserved at the time the product isdeemed obsolete due to technological advances and discontinuation of products.In addition, management’s evaluation of the specific items also influences thereserve.  We believe that the reserve as of June 30, 2005 is adequateto provide for expected losses.

 

*Medical Costs and Worker’sCompensation Accrual*

 

We maintain aself-insurance program for major medical and hospitalization coverage foremployees in the United States and their dependents, which is partially fundedby payroll deductions.  The estimate of the accrual necessary for claimsis based on our estimate of claims incurred as of the end of the quarter. Weuse detail lag reports provided by the insurance administrator to determine anappropriate reserve balance at year end. In addition to detail lag reportsprovided by the insurance administrator, we use an outside actuary report on anannual basis at year-end in determining an appropriate accrual balance. We haveprovided for both reported medical costs and incurred but not reported medicalcosts in the accompanying consolidated financial statements.  We have amaximum liability of $100,000 per participant per policy year.  Amounts inexcess of the stated maximum are covered under a separate policy provided by aninsurance company.

 

We areself-insured for all workers’ compensation claims submitted by Texas employeesfor on-the-job injuries. The estimate of the accrual necessary for claims isbased on our estimate of claims incurred as of June 30, 2005. In additionto detail lag reports provided by the insurance administrator, we use an injuryreport to determine an appropriate reserve balance. We have provided for bothreported costs and incurred but not reported costs of workers’ compensationcoverage in the consolidated financial statements.  In an effort toprovide for catastrophic events, we carry an excess indemnity policy forworkers’ compensation claims.  All claims paid under the policy aresubject to an annual deductible of $500,000 per claim to be paid by us. Based upon our past experience, management believes that we have adequatelyprovided for potential losses.  However, multiple occurrences of seriousinjuries to our employees could have a material adverse effect on our financialposition or our results of operations.

 

*Classification of Costs*

 

Cost of salesgenerally includes costs relating to the procurement, manufacture, and handlingof inventory to the point of sale.  Costof sales includes inbound freight charges, purchasing and receiving costs,inspection costs, warehousing costs, internal transfer costs, and other costsof distributing product to our customers, internal or external. Gross marginsmay not be comparable to those of other entities, since some entities includeall of the costs related to their distribution network in cost of sales. We includecompensation, warehousing expenses, office expenses, and other costs relatingto maintaining our distribution subsidiaries in selling, general andadministrative expenses.  These expensesfrom distributor subsidiaries included in selling, general and administrativeexpenses were $1.3 million and $1.6 million in the three-month periods endedJune 30, 2005 and 2004, respectively and $2.6 million and $2.9 million in thesix month periods ended June 30, 2005 and 2004, respectively.  Corporate expenses relating to productdevelopment, accounting, human resources, and information technology areincluded in selling, general and administrative expenses.

 

17

----

 

*Goodwill*

 

We account for goodwilland other intangible assets in accordance with Statement of FinancialAccounting Standards SFAS No. 142, “Goodwill and Other Intangible Assets,”which requires that goodwill and certain indefinite-lived assets no longer beamortized, but instead be evaluated at least annually for impairment.  We adopted the provisions of SFAS 142 onJanuary 1, 2002.

 

The determination of thevalue of goodwill and other intangibles requires us to make estimates andassumptions about future business trends and growth.  If an event occurswhich would cause us to revise our estimates and assumptions used in analyzingthe value of our goodwill or other intangibles, such revision could result inan impairment charge that could have a material adverse impact on our resultsof operations for the period in which the impairment is recognized.

 

Goodwill is tested forimpairment annually as of September 30 or whenever an event occurs orcircumstances change that may reduce the fair value of the reporting unit belowits book value.  The impairment test is conducted for each reporting unitin which goodwill is recorded by comparing the fair value of the reporting unitwith its carrying value.  Fair value is determined primarily by computingthe future discounted cash flows expected to be generated by the reportingunit.  If the carrying value exceeds the fair value, goodwill may beimpaired. If this occurs, the fair value of the reporting unit is thenallocated to its assets and liabilities in a manner similar to a purchase priceallocation in order to determine the implied fair value of the goodwill of thereporting unit.  The implied fair value is then compared with the carryingamount of the goodwill of the reporting unit, and, if it is less, we would thenrecognize an impairment loss.

 

Other intangible assets withdefinite useful lives are recorded on the basis of cost in accordance with SFASNo. 142 and are amortized on a straight-line basis over their estimated usefullives, which range from eighteen months to fifteen years.  In accordance with SFAS No. 142, we subjectedthese assets to tests of impairment and we determined that certain patents wehold no longer have value due to technological changes and obsolescence.

 

*Allowance for Doubtful Accounts*

 

We maintain our allowancefor doubtful accounts at a balance adequate to reduce accounts receivable tothe amount of cash expected to be realized on collection. The methodology usedto determine the allowance is based on our prior collection experience.Specific customers’ financial strength and circumstance also influence thebalance of our allowance for doubtful accounts. Accounts that are determined tobe uncollectible are written-off in the period in which they are determined tobe uncollectible.

 

*Guaranties*

 

Wehave guaranteed the debt of certain of our joint venture investments in thepast and may do so in the future.  At thetime we enter into the guaranty, we record a liability in the amount of theestimated value of the guaranty.  Theguaranty value is assumed to equal the cost of obtaining a standby letter ofcredit in favor of the lender.  Wereverse the liability when the guaranty is cancelled.

 

***Segments. ***We manage our businessby geographic region, and have four main geographical region segments:  North America, Latin America, Asia/Pacific,and Europe. Corporate administrative and engineering expenses are included inthe Corporate segment, rather than allocated among our geographic regionsegments.  Each of the geographic regionscontains sales and distribution related operations.  Additionally, the North America andAsia/Pacific regions include manufacturing operations.  (We consider our maquiladora in PiedrasNegras, Mexico to be part of our North America operations, although our salesand distribution related operations in Mexico are included in our Latin Americaregion.)  A large portion of the costsassociated with the manufacturing operations is fixed, making gross margin inNorth America and Asia/Pacific sensitive to changes in sales volume.  Because most costs in our other regions arevariable, gross margin in those regions is not as sensitive to changes in salesvolume. Most of our sales and manufacturing activity occurs in the NorthAmerica region.  Additionally, ourcorporate headquarters are physically located in North America, thoughcorporate expenses are included in the Corporate segment.

 

18

----

 

**Results of Operations**

 

***Comparison of theThree-Month Periods Ended June 30, 2005 and 2004***

 

*Revenues.*

 

Revenues by GeographicSegment

(Amounts in thousands)

 
| ** **            | ** ** | ** **                 | ** ** | ** **         | ** ** | **% Change**     | ** ** |
|-----------------------|------------|----------------------------|------------|--------------------|------------|------------------|------------|
| ** **            | ** ** | **Quarter Ended June 30,** | ** ** | **Second Quarter** | ** ** |
| ** **            | ** ** | **2005**                   | ** ** | **2004**           | ** ** | **2005 vs 2004** | ** ** |
| North  America region |       | $                          | 22,902     |               | $          | 20,618           |       | 11 | % |
| Latin  America region |       | 2,232                      |       | 1,381              |       | 62               | %          |
| Asia/Pacific  region  |       | 6,620                      |       | 6,203              |       | 7                | %          |
| Europe  region        |       | 3,608                      |       | 3,494              |       | 3                | %          |
|                  |       | $                          | 35,362     |               | $          | 31,696           |       | 12 | % |

 

Net sales for the three monthsended June 30, 2005 were $35.4 million, up 12% from $31.7 million in the sameperiod of 2004.  Currency exchange ratefluctuations had a positive impact of 2% on second quarter sales in 2005.  Quarterly sales rose 11% in the North Americaregion, largely because of improved sales of recently developed products tochain account customers.  Sales improvedby 62% in the Latin America region, primarily because of increased purchases byour customers in Mexico.  Sales rose 7%in the Asia/Pacific region, reflecting the positive effect of 7% from exchangerate fluctuations.  The 3% sales increasein the Europe region was due to the positive impact from currency exchange ratefluctuations of 4%.

 

*Gross Margin*.

 

Gross Margin byGeographic Segment

(Amounts in thousands)

 
| ** **            | ** ** | **Quarter Ended June 30,** | ** ** |
|-----------------------|------------|----------------------------|------------|
| ** **            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| North  America region |       | 34.4                       | %          | 33.9 | % |
| Latin  America region |       | 27.0                       | %          | 26.5 | % |
| Asia/Pacific  region  |       | 27.1                       | %          | 27.0 | % |
| Europe  region        |       | 33.8                       | %          | 33.5 | % |
|                  |       | 32.5                       | %          | 32.2 | % |

 

Gross margin was 32.5% in thesecond quarter of 2005, compared to 32.2% in the second quarter of 2004.  Margin improved in the North America region,where higher factory output to support increased sales levels aided grossmargin.  Higher manufacturing volumetends to have a positive impact on gross margin because a significant portionof our manufacturing costs is fixed.

 

19

----

 

*Operating Expenses*.  

 

Selling, General andAdministrative Expenses by Segment

(Amounts in thousands)

 
| ** **            | ** ** | **Quarter Ended June 30,** | ** ** |
|-----------------------|------------|----------------------------|------------|
| ** **            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| North  America region |       | $                          | 1,520      |   | $ | 1,523 |   |
| Latin  America region |       | 175                        |       | 376 |   |
| Asia/Pacific  region  |       | 1,252                      |       | 1,247 |   |
| Europe  region        |       | 674                        |       | 723 |   |
| Corporate             |       | 3,631                      |       | 4,011 |   |
|                  |       | $                          | 7,252      |   | $ | 7,880 |   |

 

Selling, general andadministrative expenses were $7.3 million in the second quarter of 2005,compared to $7.9 million in the same period of 2004.  Spending declined in the Latin America regiondue to a consolidation involving the closure of four sales offices and areduction in employment.  Additionally,we incurred $0.1 million of bad debt expense in the second quarter of 2004 thatdid not recur this year.  In theCorporate segment, compliance costs associated with the requirements of Section404 of the Sarbanes-Oxley Act of 2002 were $0.4 million in the second quarterof 2005.  Although we are unable topredict the exact cost of continuing compliance with the Sarbanes-Oxley Actwith any certainty, we currently expect to spend an additional $0.4 millionduring the remainder of 2005.  During thesecond quarter of 2004, we incurred $1.1 million of audit-related expenses andcosts associated with the investigations conducted by our Audit Committee, theSecurities and Exchange Commission and the US Attorney’s Office.  We incurred $43 thousand of audit expense inthe second quarter of 2005.

 

Other operating income of $0.1million in the second quarter of 2005 consisted primarily of loss on thedisposal of assets.

 

*Non-Operating Income/Expenses.*  Thefollowing information relates to certain of our non-operating income andexpenses during the three-month periods ended June 30, 2005 and 2004:

 

•                  Income from joint ventures was $0.4 million in thesecond quarter of 2005, compared to $0.1 million in the same period of2004.  The improvement in 2005 was drivenby the profitability of Lancer FBD.  MooTechnologies LLC is a developmental stage company in which we own 50% of theoutstanding equity.  Our portion of MooTechnologies’ net loss was $0.1 million in the second quarter of both 2005 and2004.  We expect Moo Technologies tocontinue to incur losses for the remainder of 2005.

 

•                  The effective tax rate in the second quarter of2005 was 33.8%, compared to 36.5% in the second quarter of 2004.  Tax credits from the American Jobs CreationAct lowered our effective tax rate in the 2005 period.

 

*Net Earnings/Loss*.  Netearnings were $3.0 million in the second quarter of 2005, compared to $1.4million in the second quarter of 2004. Higher sales and gross margin, plus lower operating expenses, causedmost of the improvement in profitability.

 

20

----

 

***Comparison of theSix-Month Periods Ended June 30, 2005 and 2004***

 

Revenues.

* *

Revenues by GeographicSegment

(Amounts in thousands)

 
| ** **            | ** ** | ** **                    | ** ** | ** **           | ** ** | **% Change**     | ** ** |
|-----------------------|------------|-------------------------------|------------|----------------------|------------|------------------|------------|
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** | **First Six Months** | ** ** |
| ** **            | ** ** | **2005**                      | ** ** | **2004**             | ** ** | **2005 vs 2004** | ** ** |
| North  America region |       | $                             | 43,297     |                 | $          | 38,954           |       | 11 | % |
| Latin  America region |       | 4,051                         |       | 2,475                |       | 64               | %          |
| Asia/Pacific  region  |       | 12,331                        |       | 12,823               |       | -4               | %          |
| Europe  region        |       | 7,306                         |       | 6,951                |       | 5                | %          |
|                  |       | $                             | 66,985     |                 | $          | 61,203           |       | 9 | % |

 

Net sales for the six monthsended June 30, 2005 were $67.0 million, up 9% from $61.2 million in the sameperiod of 2004.  Currency exchange ratefluctuations had a positive impact of 1% on sales in the 2005 period.  Sales rose 11% in the North America region,largely because of improved sales of recently developed products to chainaccount customers.  Sales rose 64% in theLatin America region. The improvement in Latin America was centered in Mexico,and included $0.4 million from the sale of equipment that we had previouslyrented to our customers.  Sales declined4% in the Asia/Pacific region, despite the positive effect of 5% from exchangerate fluctuations.  We experienced lowerdemand for both fountain and beer systems in Australia, our largest market inthe Asia/Pacific region.  A 5% salesincrease in the Europe region was primarily due to the 4% positive impact fromcurrency exchange rate fluctuations.

 

*Gross Margin*.

 

Gross Margin byGeographic Segment

(Amounts in thousands)

 
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------|------------|
| ** **            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| North  America region |       | 34.6                          | %          | 31.3 | % |
| Latin  America region |       | 29.2                          | %          | 25.8 | % |
| Asia/Pacific  region  |       | 25.0                          | %          | 28.7 | % |
| Europe  region        |       | 33.1                          | %          | 32.6 | % |
|                  |       | 32.4                          | %          | 30.7 | % |

 

Gross margin was 32.4% in thefirst half of 2005, compared to 30.7% in the first half of 2004.  Much of the improvement came in the NorthAmerica region, where higher factory output to support increased sales levelsaided gross margin.  Higher manufacturingvolume tends to have a positive impact on gross margin because a significantportion of our manufacturing costs is fixed. Gross margin increased in the Latin America region due largely to marginassociated with the sale of equipment that we had previously rented to ourcustomers.  In the Asia/Pacific region,gross margin declined in the first half of 2005 because of lower factory outputat our manufacturing facility in Australia, and $0.2 million of factoryrelocation expense.

 

21

----

 

*Operating Expenses*.  

 

Selling, General andAdministrative Expenses by Segment

(Amounts in thousands)

 
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------|------------|
| ** **            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| North  America region |       | $                             | 2,928      |   | $ | 2,944 |   |
| Latin  America region |       | 318                           |       | 811 |   |
| Asia/Pacific  region  |       | 2,410                         |       | 2,541 |   |
| Europe  region        |       | 1,297                         |       | 1,233 |   |
| Corporate             |       | 7,246                         |       | 7,863 |   |
|                  |       | $                             | 14,199     |   | $ | 15,392 |   |

 

Selling, general andadministrative expenses were $14.2 million in the first half of 2005, comparedto $15.4 million in the same period of 2004. Spending declined in the Latin America region due to a consolidationinvolving the closure of four sales offices and a reduction in employment.  Additionally, improved credit quality of ouraccounts receivable in the Latin America region allowed us to reverse $0.1million of bad debt reserve in the first half of 2005, while we incurred $0.1million of bad debt expense in the region in the 2004 period.  In the Corporate segment, compliance costsassociated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002were $0.6 million in the first half of 2005. Although we are unable to predict the exact cost of continuingcompliance with the Sarbanes-Oxley Act with any certainty, we currently expectto spend an additional $0.4 million during the remaining two quarters of2005.  During the first half of 2004, weincurred $2.1 million of audit-related expenses and costs associated with theinvestigations conducted by our Audit Committee, the Securities and ExchangeCommission and the US Attorney’s Office. We incurred $0.2 million of audit expense in the first half of 2005.

 

Other operating income in thesecond quarter of 2005 consisted primarily of a $0.3 million gain on the saleof land and improvements located in Bee County, Texas.  See “Liquidity and Capital Resources – CashProvided by Operations and Capital Expenditures” below.  In the 2004 period, other operating incomeconsisted primarily of a $0.4 million gain relating to insurance proceeds froma claim of damages from a fire that occurred in 2003.

 

*Non-Operating Income/Expenses.*  Thefollowing information relates to certain of our non-operating income andexpenses during the six-month periods ended June 30, 2005 and 2004:

 

•                  Income from joint ventures was $0.7 million in thefirst half of 2005, compared to $0.3 million in the same period of 2004.  The improvement in 2005 was driven by theprofitability of Lancer FBD.  MooTechnologies LLC is a developmental stage company in which we own 50% of theoutstanding equity.  Our portion of MooTechnologies’ net loss was $0.1 million in the first half of 2005, and $0.2million in the same period of 2004.  Weexpect Moo Technologies to continue to incur losses for the remainder of 2005.

•                  The effective tax rate in the first six months of2005 was 34.4%, compared to 36.4% in the first half of 2004. Tax credits fromthe American Jobs Creation Act lowered our effective tax rate in the 2005period.

 

*Net Earnings/Loss*.  Netearnings were $5.6 million in the first half of 2005, compared to $2.4 millionin the first half of 2004.  Higher salesand gross margin, plus lower operating expenses, caused most of the improvementin profitability.

 

22

----

 

**Liquidity and Capital Resources**

 

*General.*  Our principal sources of liquidity are cashflows from operations and amounts available under our lines of credit. We havemet, and currently expect that we will continue to meet, substantially all ofour working capital and capital expenditure requirements, as well as our debtservice requirements, with funds provided by operations and borrowings underour credit facility.

 

*Cash Provided by Operations andCapital Expenditures.*

Cash provided by operatingactivities was $1.8 million in the first half of 2005, down from $3.4 millionin the first half of 2004.  During the2005 period, inventory growth and lower accrued expenses more than offsethigher net earnings, causing the negative comparison to the prior year.  We made capital expenditures of $3.0 millionand $1.1 million during the first half of 2005 and 2004, respectively.  Most of the capital spending in both periodswas for production equipment and tooling.

 

During the first quarterof 2005, we completed the sale of 546.65 acres of land and improvements,located in Bee and Karnes Counties, Texas, to Schroeder Land and CattleCompany, Incorporated (SLCC). The purchase price of $0.7 million approximatesthe average of two independent third party appraisals on the property.  SLCC is owned by the children of Alfred A.Schroeder and George F. Schroeder.  BothAlfred A. Schroeder and George F. Schroeder are our employees, members of ourBoard, and significant shareholders of our stock.  Lance M. Schroeder, son of Alfred A. Schroeder,is our Vice President of Corporate Development and is a 25% owner of SLCC.  We had previously used the property, commonlyknown as the Monteola Ranch, for entertaining customers and other businessassociates.  We realized a gain of $257thousand on the transaction in the first quarter of 2005.

 

*Credit Facility.*  As of June 30, 2005, there were no amountsoutstanding under our $15.0 million revolving credit facility, and $15.0 millionwas available for borrowing.  Also as ofJune 30, 2005, we were in compliance with all of the covenants of the creditfacility.

 

*Disputed Debt*.  We have a $1.196 million principal amount ofdisputed debt payable in relation to our discontinued Brazilian operations thatwas due on December 31, 2001.  We haverecorded the balance of the disputed debt plus interest in the amount of $0.16million accrued through June 30, 2005 in our financial statements. During thesecond quarter of 2003, the payee demanded payment of the debt, and we made asettlement offer. We have had no discussions with the payee since 2003. We maynot be successful in negotiating a settlement of this disputed debt, in whichcase the total amount would remain due and payable.  If that were to occur, we would have todetermine what other options are available to us, including litigation. If wedetermined that the debt should simply be paid at that time, we believe that wewould likely have sufficient funding available, through our cash reservesand/or our available capacity under our credit facility, to pay the disputeddebt.

 

At June 30, 2005 andDecember 31, 2004, long-term obligations consisted of the following:

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------|------------|------------------|------------|
| **(amounts  in thousands)**  | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|                         |       |         |       |             |       |
| Credit  facility             |       | $            | —     |             | $          | — |   |
| Disputed  debt               |       | 1,196        |       | 1,196            |       |
| Capital  lease obligation    |       | 208          |       | 281              |       |
| Total  long-term obligations |       | 1,404        |       | 1,477            |       |
| Less:  Current maturities    |       | 1,350        |       | 1,345            |       |
| Long-term  obligations, net  |       | $            | 54         |             | $          | 132 |   |

 

23

----

 

**Off-Balance Sheet Arrangements**

 

We own 50% of Lancer FBD, amanufacturer of frozen beverage dispensing equipment. We guaranteed repaymentof Lancer FBD’s $1.5 million credit facility with a bank until the facility’sexpiration on March 3, 2005.  After theexpiration of the facility, the bank released our guarantee.  Accordingly, we reversed an accrual for thevalue of the guaranty, resulting in income of $22,500 during the first quarterof 2005.  Lancer’s portion of Lancer FBD’snet income in 2004 was $1.4 million, and its share of Lancer FBD’s net incomein the six months ended June 30, 2005 was $0.9 million.

 

We own 50% of MooTechnologies, a developmental stage limited liability company engaged in thecommercialization of concentrated shelf-stable milk products.  Until recently, we guaranteed MooTechnologies’ $0.75 million revolving credit facility with a bank.  During the first quarter of 2005, MooTechnologies repaid all amounts outstanding under the revolving credit facilityand terminated the facility, and the lender released us from our guaranty.  Our portion of Moo Technology’s loss was $0.3million in 2004, and $0.2 million during the first half of 2005.  We have invested $1.4 million in MooTechnologies since its inception, including $0.6 million during the first halfof 2005, bringing our net investment in the company to $0.7 million as of June30, 2005.  We expect Moo Technologies tobe unprofitable through at least 2005, and we expect to continue to fund MooTechnologies in a manner consistent with what we have done in the past.

 

**Risk Factors**

 

**Risks Relating to Our Business**

 

***Oursuccess is reliant upon our relationship with The Coca-Cola Company.***

 

Substantially morethan half of our sales are derived from, or influenced by, The Coca-ColaCompany. Direct sales to The Coca-Cola Company, our largest customer, accountedfor approximately 23%, 28% and 35% of our net sales for the years endedDecember 31, 2004, 2003 and 2002, respectively. We do not have a long-termsupply contract with The Coca-Cola Company or any of our other customers. As aresult, The Coca-Cola Company has the ability to adversely affect, directly or indirectly,the volume and price of the products sold by us. While we do not anticipate theloss or reduction in this business or the imposition of significant priceconstraints based upon our past experience and current relations with The CocaCola Company, any such occurrence would have a material adverse effect on usand our results of operation.

 

***Ourbusiness is subject to rapidly changing technologies and is highly competitive.***

 

The business ofmanufacturing and marketing beverage dispensing systems and other relatedequipment is characterized by rapidly changing technology and is highlycompetitive. In addition, we frequently compete with companies havingsubstantially greater financial resources than ours. Although we have been ableto compete successfully in the past, if we were to lose any or all of ourcompetitive advantages or if our competitors were able to provide productsuitability and reliability, price, product warranty, technical expertise anddelivery time, in a manner superior to ours, we would likely lose our marketshare and demand for our products would decline. In addition, if our existinglong standing relationships with certain of our customers, including TheCoca-Cola Company, were to be disrupted or become unfriendly, our competitors maybe afforded an opportunity to provide their products to our customers and beginto develop their own strong relationships with our customers. Since theserelationships have become so important in our industry, these events would makeour ability to continue to provide our products much more difficult and inturn, the newly formed relationships would become more difficult barriers toovercome as time progressed.

 

***Weare subject to a formal Securities and Exchange Commission inquiry and aninvestigation by the US Attorney.***

 

In August 2003,the US Attorney’s Office informed us that it was conducting an investigationarising from allegations raised in a lawsuit against The Coca-Cola Company by aformer Coca-Cola employee, Matthew Whitley, and requested certain information,which we supplied. In January 2004, we received written notice that 

 

24

----

 

the Securities andExchange Commission had issued a formal order of investigation that appeared toconcern matters which were the subject of the Investigation. We have fullycooperated, and intend to fully cooperate with any continuing investigation bythe US Attorney’s Office or the Securities and Exchange Commission. See Note 12to the “Notes to the Consolidated Financial Statements” for more informationrelating to these investigations. Although we are unable at this point topredict the scope or outcome of these investigations, it is possible that theycould result in the institution of administrative, civil injunctive or criminalproceedings, the imposition of fines and penalties, and/or other remedies andsanctions. The conduct of these type of proceedings could adversely affect ourbusiness. We may incur further expenses associated with responding to theseagencies, regardless of the outcome, and the efforts and attention of ourmanagement team may be diverted from normal business operations which could, inturn, adversely affect our business, financial condition, operating results,and cash flow.

 

In addition, under theterms of our new credit facility, certain governmentally imposed fines or ceaseand desist orders are an event of default and could result in the terminationof the loan commitments and acceleration of the outstanding debt thereunder. Ifwe did not have sufficient cash to pay the accelerated amount, we would need tofind alternate funding sources, sell assets, or find other ways to raise thecash, none of which we can guarantee we would be able to do on commerciallyreasonable terms or at all.

 

Finally, ourfuture success depends in large part on the support of our suppliers andcustomers, who may react adversely to the investigations by the Securities andExchange Commission and US Attorney. Negative publicity about us may cause some of our potential customers todefer purchases of our products. Our vendors and suppliers may re-examine theirwillingness to do business with us if they lose confidence in our ability tofulfill our commitments.

 

***Wehave been the target of securities litigation and may again be the target offurther actions, which may be costly and time consuming to defend.***

 

We have been the targetof securities class action litigation in the past. Securities class actionlitigation is often brought against a company following a decline in the marketprice of its securities. Certain factors, including the uncertainty of theSecurities and Exchange Commission and US Attorney’s Office investigationscould lead to more volatility in our stock price, which could in turn cause usto be the target of future securities class action claims. If we were to becomea target of future class action claims, it would likely require significantcommitment of our financial and management resources and time, subvertingresources and time away from our other business needs, which may materially andadversely affect our business, financial condition and results of operations.

 

***Ourdirectors and executive officers have substantial voting power, giving them theability to influence corporate actions.***

 

Our directors andexecutive officers beneficially own approximately 40% of the outstanding sharesof our common stock. As a result, our directors and executive officers willhave the ability to affect the vote of our shareholders on significantcorporate actions requiring shareholder approval, including mergers, shareexchanges and sales of all or substantially all of our assets. With such votingpower, our directors and executive officers may also have the ability to delayor prevent a change in control of our company.

 

***Ourinvestment in Moo Technologies may not provide us with any investment return orcould result in a total loss of the investment.***

 

We own a 50%interest in Moo Technologies, a developmental stage limited liability companyengaged in the commercialization of milk products.  Our net investment was $0.7 million at June30, 2005, including $0.6 million that we invested in the first half of2005.  Moo Technologies’ inability togenerate material revenues and/or profits in the future could lead to theimpairment of some or all of our investment and such investment could bepermanently lost.

 

25

----

 

***Doingbusiness in foreign countries creates certain risks not found in doing businessin the United States.***

 

Doing business inforeign countries carries with it certain risks that are not found in doingbusiness in the United States. We currently derive a portion of our revenuesfrom international sales of our products and services and intend to look forways to expand our international operations. The risks of doing business inforeign countries that could result in losses against which we are not insuredinclude:

 

•             exposure to local economic conditions;

•             potential adverse changes in thediplomatic relations of foreign countries with the United States;

•             hostility from local populations;

•             the adverse effect of currency exchangecontrols;

•             restrictions on the withdrawal of foreigninvestment and earnings;

•             government policies against businessesowned by foreigners;

•             investment restrictions or requirements;

•             expropriations of property;

•             the potential instability of foreigngovernments;

•             the risk of insurrections;

•             foreign exchange restrictions;

•             withholding and other taxes on remittancesand other payments by subsidiaries; and

•             changes in taxation structure.

 

***Foreignexchange rates may cause future losses in our international operations.***

 

Because we ownassets overseas and derive revenues from our international operations, we mayincur currency translation losses due to changes in the values of foreigncurrencies and in the value of the U.S. dollar. We cannot predict the effect ofexchange rate fluctuations upon future operating results.

 

***Provisionsin our Certificate of Incorporation and Bylaws and Texas law could delay ordiscourage a takeover which could adversely affect the price of our commonstock.***

 

Our Board has theauthority to issue up to 5 million shares of preferred stock and to determinethe price, rights, preferences, privileges, and restrictions, including votingrights, of those shares without any further vote or action by holders of ourcommon stock.  If preferred stock isissued, the voting and other rights of the holders of our common stock may besubject to, and may be adversely affected by, the rights of the holders of ourpreferred stock.  The issuance ofpreferred stock may have the effect of delaying or preventing a change ofcontrol that could have been at a premium price to our stockholders.

 

Certain provisionsof our certificate of incorporation and bylaws could discourage potentialtakeover attempts and make attempts to change management by stockholdersdifficult.  Our Board has the authorityto impose various procedural and other requirements that could make it moredifficult for our stockholders to effect certain corporate actions. Any vacancyon our Board may be filled by a vote of the majority of directors then inoffice.

 

In addition,certain provisions of Texas law could have the effect of delaying or preventinga change in control of our 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.

 

**RisksRelating to Our Common Stock**

 

***Thetrading price of our 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:

 

26

----

 

•                  variations in quarterly results ofour operations;

•                  announcements of new products oracquisitions by our competitors;

•                  governmental regulatory action;

•                  resolution of pending or unassertedlitigation;

•                  final resolution of the Securitiesand Exchange Commission or US Attorney investigations of which we are asubject; and

•                  general trends in our industry andoverall market conditions.

 

Movements inprices of equity securities in general may also affect the market price of ourcommon stock.

 

***Wehave no history of paying dividends on our common stock.***

 

Since our inception, we have notpaid, and we have no current plan to pay, cash dividends on our common stock.We currently intend to retain all earnings to support our operations and futuregrowth. The payment of any future dividends will be determined by the Boardbased upon our earnings, financial condition and cash requirements,restrictions in financing agreements, business conditions and other factors theBoard may deem relevant.

 

# **Item 3 - Quantitative and Qualitative DisclosuresAbout Market Risk**

 

There have been nosignificant changes in the Company’s market risk factors since December 31,2004.

 

**Item 4 – Controls and Procedures**

 

TheCompany’s principal executive and financial officers have concluded, based ontheir evaluation as of the end of the period covered by this Form 10-Q, thatLancer’s disclosure controls and procedures, as defined underRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, areeffective to ensure that information the Company is required to disclose in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and include controls and procedures designed to ensure thatinformation we are required to disclose in such reports is accumulated andcommunicated to management, including our principal executive and financialofficers, as appropriate, to allow timely decisions regarding requireddisclosure.

 

There has been no changein the Company’s internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) that occurred during Lancer’s last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, Lancer’s internal control over financial reporting.

 

**PART II**

**OTHERINFORMATION**

 

**Item 1 - Legal Proceedings**

 

In August 2003, the US Attorney’s Office informed usthat it was conducting an investigation arising from allegations raised in alawsuit against The Coca-Cola Company by a former Coca-Cola employee, MatthewWhitley, and requested certain information, which we supplied. On January 13,2004, we received written notice that the Securities and Exchange Commissionhad issued a formal order of investigation, dated December 2, 2003, thatappeared to concern matters which were the subject of our prior Audit Committeeinvestigation (which concluded in January 2004) including certain allegations relatingto us that were contained in the Whitley lawsuit against The Coca-Cola Company.We have cooperated, and intend to cooperate in any continuing investigations ofthe US Attorney’s Office or the Securities and Exchange Commission.  We have not had substantive contact relatingto these investigations with either the US Attorney’s Office or the Securitiesand Exchange Commission since July 2004.

 

27

----

 

On April 18, 2005, The Coca-Cola Company announcedthat the Justice Department had closed its investigation of allegations raisedin the Matthew Whitley lawsuit and that they had reached a settlement with theSecurities and Exchange Commission regarding their investigation relating tocertain allegations set forth in the Matthew Whitley lawsuit. The settlementbetween The Coca-Cola Company and the Securities and Exchange Commission, asdescribed in the Security and Exchange Commission’s Order InstitutingCease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-DesistOrder Pursuant to Section 8A of the Securities Act of 1933 and Section 21C ofthe Securities Exchange Act of 1934, In the Matter of The Coca-Cola Company,dated April 18, 2005, did not relate to the business dealings between Lancerand The Coca-Cola Company or any of the allegations from the Matthew Whitleylawsuit that involved Lancer.

 

We have not beenadvised by the US Attorney’s Office that their investigation of mattersrelating to Lancer has been closed, nor have we been advised by the Securitiesand Exchange Commission of the status of their investigation of Lancer asdescribed under their formal order of investigation or what, if any, effect TheCoca-Cola Company’s settlement with the Securities and Exchange Commission hador will have on either investigation. Therefore, we are unable at this point topredict the scope or outcome of any ongoing Justice Department or Securitiesand Exchange Commission investigations, and note that, if the investigationsare in fact continuing, they could still result in the institution ofadministrative, civil injunctive or criminal proceedings, the imposition offines and penalties, and/or other remedies and sanctions.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

Not Applicable

 

**Item 3.  Defaults Upon Senior Securities.**

 

Not Applicable

 

**Item 4 - Submission of Matters toa Vote of Security Holders**

 

Not Applicable

 

**Item 5.  Other Information**

 

Not Applicable

 

**Item 6.  Exhibits**

 

Exhibits:  See Exhibit Index on Page 30.

 

28

----

 

**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.

 

 
| **Date:**       | **LANCER CORPORATION** |
|-----------------|------------------------|
| ** **      | **(Registrant)**       |
| ** **      | ** **             |
| ** **      | ** **             |
| August 12, 2005 | By:                    | /s/  CHRISTOPHER D. HUGHES | ** ** |
|            |                   | Christopher D. Hughes |
|            |                   | Chief Executive Officer |
|            |                   |   |
| August 12, 2005 | By:                    | /s/  MARK L. FREITAS |   |
|            |                   | Mark L. Freitas |
|            |                   | Chief Financial Officer |

 

29

----

 

**INDEX TOEXHIBITS**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                           |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                      |
| 31.1        |       | Certification of Chief  Executive Officer of Lancer Corporation pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended.                        |
|        |       |                                                                                                                                                                      |
| 31.2        |       | Certification of Chief  Financial Officer of Lancer Corporation pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended.                        |
|        |       |                                                                                                                                                                      |
| 32.1        |       | Certification of Chief  Executive Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                                                      |
| 32.2        |       | Certification of Chief  Financial Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

30

----