**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

 

**FORM 10-Q**

 

**Quarterly report pursuant to section 13 or 15 (d)**

**of the Securities Exchange Act of 1934**

 

| **For  the quarter ended March 31, 2003** | **Commission file number 0-13875** |
|-------------------------------------------|------------------------------------|

 

 

| **LANCER  CORPORATION**                                |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

** **

| **Texas**                                                        |   | **74-1591073**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS employer  identification no.) |
|                                                             |   |                               |
| **6655 Lancer Blvd., San Antonio,  Texas**                       |   | **78219**                          |
| (Address of principal  executive offices)                        |   | (Zip Code)                         |

 

Registrant’s telephonenumber, including area code: ** (210) 310-7000**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 14(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

| **YES   ****ý** |   | **NO   ****o** |
|-------------------------------------|--------|-------------------------------|

 

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

 

| **YES   ****o** |   | **NO   ****ý** |
|--------------------------------|--------|------------------------------------|

 

Indicate the number of shares outstanding of each of the issuers ofclasses of common stock, as of the latest practicable date.

 

| **Title**                               |   | **Shares  outstanding as of April 30, 2003** |
|-----------------------------------------|--------|----------------------------------------------|
|                                    |   |                                         |
| Common stock, par value  $.01 per share |   | 9,345,095                                    |

 

 

----

 

 

Part I - Financial Information

**Item 1 -Financial Statements**

 

**LANCER CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

(Amounts in thousands,except share data)

 

ASSETS

 
|                                                                  |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                  |   | **(Unaudited)**     |   |                    |   |
| Current assets:                                                       |   |                |   |                    |   |
| Cash                                                                  |   | $                   | 1,387  |                    | $      | 3,241 |   |
| Receivables:                                                          |   |                |   |                    |   |
| Trade accounts  and notes                                             |   | 15,487              |   | 17,265                  |   |
| Other                                                                 |   | 1,282               |   | 1,039                   |   |
|                                                                  |   | 16,769              |   | 18,304                  |   |
| Less allowance  for doubtful accounts                                 |   | (954                | )      | (979                    | )      |
|                                                                  |   |                |   |                    |   |
| Net receivables                                                       |   | 15,815              |   | 17,325                  |   |
|                                                                  |   |                |   |                    |   |
| Inventories                                                           |   | 29,392              |   | 29,094                  |   |
| Prepaid expenses                                                      |   | 1,023               |   | 264                     |   |
| Tax refund  receivable                                                |   | 1,444               |   | —                  |   |
| Deferred tax  asset                                                   |   | 209                 |   | 285                     |   |
|                                                                  |   |                |   |                    |   |
| Total current  assets                                                 |   | 49,270              |   | 50,209                  |   |
|                                                                  |   |                |   |                    |   |
| Property, plant  and equipment, at cost:                              |   |                |   |                    |   |
| Land                                                                  |   | 1,432               |   | 1,432                   |   |
| Buildings                                                             |   | 21,837              |   | 21,837                  |   |
| Machinery and  equipment                                              |   | 22,228              |   | 22,073                  |   |
| Tools and dies                                                        |   | 12,142              |   | 12,137                  |   |
| Leaseholds,  office equipment and vehicles                            |   | 10,367              |   | 10,165                  |   |
| Assets in  progress                                                   |   | 2,443               |   | 1,455                   |   |
|                                                                  |   | 70,449              |   | 69,099                  |   |
| Less accumulated  depreciation and amortization                       |   | (35,499             | )      | (34,224                 | )      |
|                                                                  |   |                |   |                    |   |
| Net property,  plant and equipment                                    |   | 34,950              |   | 34,875                  |   |
|                                                                  |   |                |   |                    |   |
| Long-term  receivables ($41 and $106 due from officers, respectively) |   | 59                  |   | 127                     |   |
| Long-term  investments                                                |   | 2,138               |   | 2,303                   |   |
| Intangibles and  other assets, at cost, less accumulated amortization |   | 5,511               |   | 5,241                   |   |
|                                                                  |   |                |   |                    |   |
|                                                                  |   | $                   | 91,928 |                    | $      | 92,755 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**LANCER CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS (continued)**

 

(Amounts in thousands,except share data)

 

LIABILITIESAND SHAREHOLDERS’ EQUITY

 
|                                                                                                                                                                      |   | **March 31,  2003** |   | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                                                                                                                      |   | **(Unaudited)**     |   |                    |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Current liabilities:                                                                                                                                                      |   |                |   |                    |   |
| Accounts payable                                                                                                                                                          |   | $                   | 8,606  |                    | $      | 10,141 |   |
| Current installments of long-term debt                                                                                                                                    |   | 2,729               |   | 2,726                   |   |
| Line of credit with bank                                                                                                                                                  |   | 7,000               |   | 5,000                   |   |
| Deferred licensing and maintenance fees                                                                                                                                   |   | 1,463               |   | 1,449                   |   |
| Accrued expenses and other liabilities                                                                                                                                    |   | 6,944               |   | 7,977                   |   |
| Taxes payable                                                                                                                                                             |   | —              |   | 182                     |   |
| Total current liabilities                                                                                                                                                 |   | 26,742              |   | 27,475                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Deferred tax liability                                                                                                                                                    |   | 2,289               |   | 2,342                   |   |
| Long-term debt, excluding current  installments                                                                                                                           |   | 9,424               |   | 9,808                   |   |
| Deferred licensing and maintenance fees                                                                                                                                   |   | 2,642               |   | 2,686                   |   |
| Other long-term liabilities                                                                                                                                               |   | 257                 |   | 293                     |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Total liabilities                                                                                                                                                         |   | 41,354              |   | 42,604                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Commitments and contingencies                                                                                                                                             |   | —              |   | —                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Minority interest                                                                                                                                                         |   | —              |   | —                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Shareholders’ equity:                                                                                                                                                |   |                |   |                    |   |
| Preferred stock, without par value  5,000,000 shares authorized; none issued                                                                                              |   | —              |   | —                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Common stock, $.01 par value:   50,000,000 shares authorized; 9,409,319 issued and 9,346,709 outstanding in  2003, and 9,396,119 issued and 9,338,545 outstanding in 2002 |   | 93                  |   | 93                      |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Additional paid-in capital                                                                                                                                                |   | 12,781              |   | 12,710                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Accumulated other comprehensive loss                                                                                                                                      |   | (1,716              | )      | (2,389                  | )      |
|                                                                                                                                                                      |   |                |   |                    |   |
| Deferred compensation                                                                                                                                                     |   | (141                | )      | (169                    | )      |
|                                                                                                                                                                      |   |                |   |                    |   |
| Retained earnings                                                                                                                                                         |   | 39,917              |   | 40,234                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
| Less common stock in treasury, at cost;  62,610 shares in 2003 and 57,574 shares in 2002                                                                                  |   | (360                | )      | (328                    | )      |
|                                                                                                                                                                      |   |                |   |                    |   |
| Total shareholders’ equity                                                                                                                                           |   | 50,574              |   | 50,151                  |   |
|                                                                                                                                                                      |   |                |   |                    |   |
|                                                                                                                                                                      |   | $                   | 91,928 |                    | $      | 92,755 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

**LANCER CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

 

(Amounts in thousands,except share data)

 
|                                                          |   | **Three  Months Ended** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|
|                                                          |   | **March 31,2003**       |   | **March 31,2002** |   |
| Net sales                                                     |   | $                       | 26,874 |   | $ | 30,250 |   |
| Cost of sales                                                 |   | 21,080                  |   | 23,041 |   |
| Gross profit                                                  |   | 5,794                   |   | 7,209 |   |
|                                                          |   |                    |   |   |   |
| Selling, general  and administrative expenses                 |   | 6,582                   |   | 5,867 |   |
| Operating (loss)  income                                      |   | (788                    | )      | 1,342 |   |
| Other (income)  expense:                                      |   |                    |   |   |   |
| Interest expense                                              |   | 168                     |   | 431 |   |
| Loss from joint  ventures                                     |   | 226                     |   | 92 |   |
| Minority  interest                                            |   | —                  |   | (44 | ) |
| Other income,  net                                            |   | (201                    | )      | (53 | ) |
|                                                          |   | 193                     |   | 426 |   |
| (Loss) income  from continuing operations before income taxes |   | (981                    | )      | 916 |   |
| Income tax  (benefit) expense:                                |   |                    |   |   |   |
| Current                                                       |   | (861                    | )      | 331 |   |
| Deferred                                                      |   | 168                     |   | 4 |   |
|                                                          |   | (693                    | )      | 335 |   |
| (Loss) income  from continuing operations                     |   | (288                    | )      | 581 |   |
|                                                          |   |                    |   |   |   |
| Discontinued  operations                                      |   |                    |   |   |   |
| Loss from  operations of discontinued Brazilian subsidiary    |   | 44                      |   | 118 |   |
| Income tax  benefit                                           |   | (15                     | )      | (40 | ) |
| Loss from  discontinued operations                            |   | 29                      |   | 78 |   |
| Net (loss)  earnings                                          |   | $                       | (317   | ) | $ | 503 |   |
|                                                          |   |                    |   |   |   |
| Common Shares  Outstanding:                                   |   |                    |   |   |   |
| Basic                                                         |   | 9,345,331               |   | 9,303,771 |   |
| Diluted                                                       |   | 9,345,331               |   | 9,338,797 |   |
|                                                          |   |                    |   |   |   |
| Earnings Per  Share:                                          |   |                    |   |   |   |
| Basic                                                         |   |                    |   |   |   |
| Earnings from  continuing operations                          |   | $                       | (0.03  | ) | $ | 0.06 |   |
| Loss from  discontinued operations                            |   | $                       | (0.00  | ) | $ | (0.01 | ) |
| Net (loss)  earnings                                          |   | $                       | (0.03  | ) | $ | 0.05 |   |
|                                                          |   |                    |   |   |   |
| Diluted                                                       |   |                    |   |   |   |
| Earnings from  continuing operations                          |   | $                       | (0.03  | ) | $ | 0.06 |   |
| Loss from  discontinued operations                            |   | $                       | (0.00  | ) | $ | (0.01 | ) |
| Net (loss)  earnings                                          |   | $                       | (0.03  | ) | $ | 0.05 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**LANCER CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 

(Amounts in thousands)

 
|                                                                                          |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                          |   | **March 31,  2003**     |   | **March 31,  2002** |   |
| Cash flow from  operating activities:                                                         |   |                    |   |   |   |
| Net (loss)  earnings                                                                          |   | $                       | (317   | ) | $ | 503 |   |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating activities |   |                    |   |   |   |
| Depreciation and  amortization                                                                |   | 1,286                   |   | 1,173 |   |
| Deferred  licensing and maintenance fees                                                      |   | (30                     | )      | (208 | ) |
| Deferred income  taxes                                                                        |   | 10                      |   | 4 |   |
| (Gain) loss on  sale and disposal of assets                                                   |   | (11                     | )      | 3 |   |
| Minority  interest                                                                            |   | —                  |   | (44 | ) |
| Loss from joint  ventures                                                                     |   | 226                     |   | 92 |   |
| Stock-based  compensation expense                                                             |   | 28                      |   | — |   |
| Changes in  assets and liabilities:                                                           |   |                    |   |   |   |
| Receivables                                                                                   |   | 1,851                   |   | (2,556 | ) |
| Prepaid expenses                                                                              |   | (759                    | )      | (262 | ) |
| Income taxes  receivable                                                                      |   | (1,444                  | )      | — |   |
| Inventories                                                                                   |   | (19                     | )      | (443 | ) |
| Other assets                                                                                  |   | (128                    | )      | (162 | ) |
| Accounts payable                                                                              |   | (1,818                  | )      | 2,690 |   |
| Accrued expenses                                                                              |   | (1,112                  | )      | 362 |   |
| Income taxes  payable                                                                         |   | (182                    | )      | 78 |   |
|                                                                                          |   |                    |   |   |   |
| Net cash (used  in) provided by operating activities                                          |   | (2,419                  | )      | 1,230 |   |
|                                                                                          |   |                    |   |   |   |
| Cash flow from  investing activities:                                                         |   |                    |   |   |   |
| Proceeds from  sale of assets                                                                 |   | 11                      |   | 2 |   |
| Acquisition of  property, plant and equipment                                                 |   | (1,214                  | )      | (467 | ) |
| Proceed from  (purchase of) long-term investments                                             |   | 7                       |   | (370 | ) |
|                                                                                          |   |                    |   |   |   |
| Net cash used in  investing activities                                                        |   | (1,196                  | )      | (835 | ) |
|                                                                                          |   |                    |   |   |   |
| Cash flow from  financing activities:                                                         |   |                    |   |   |   |
| Net borrowings  under line of credit agreements                                               |   | 2,000                   |   | 200 |   |
| Retirement of  long-term debt, net of proceeds                                                |   | (381                    | )      | (377 | ) |
| Net proceeds  from exercise of stock options                                                  |   | 69                      |   | 14 |   |
|                                                                                          |   |                    |   |   |   |
| Net cash  provided by (used in) financing activities                                          |   | 1,688                   |   | (163 | ) |
|                                                                                          |   |                    |   |   |   |
| Effect of  exchange rate changes on cash                                                      |   | 73                      |   | 62 |   |
| Net (decrease)  increase in cash                                                              |   | (1,854                  | )      | 294 |   |
| Cash at  beginning of period                                                                  |   | 3,241                   |   | 1,849 |   |
| Cash at end of  period                                                                        |   | $                       | 1,387  |   | $ | 2,143 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**LANCER CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  Basis of Presentation**

 

All adjustments (consisting of normal recurring adjustments) have beenmade which are necessary for a fair presentation of financial position andresults of operations.  All intercompanybalances and transactions have been eliminated in consolidation.  It is suggested that the consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and notes thereto included in the December 31, 2002 Annual Report onForm 10-K.

 

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

 

**2.  New Accounting Pronouncements**

 

SFAS No. 143, “Accounting for Asset Retirement Obligations,” issued inJune 2001 establishes financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The standardapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and (or)normal use of the asset.  The Companyadopted the provisions of SFAS No. 143 for the quarter ended March 31,2003.  The adoption of SFAS No. 143 didnot have a material impact on the Company’s financial statements.

 

SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities,” issued in July 2002, addresses financialaccounting and reporting for costs associated with exit or disposalactivities.  It nullifies EITF Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  SFAS No. 146 requiresthat a liability be recognized for the cost associated with an exit or disposalactivity only when the liability is incurred, that is, when it meets thedefinition of a liability in the FASB conceptual framework. SFAS No. 146 alsoestablishes fair value as the objective for initial measurement of liabilitiesrelated to exit or disposal activities. The Statement is effective for exit ordisposal activities that are initiated after December 31, 2002. The adoption ofSFAS No. 146 did not have a material impact on the Company’s financialstatements.

 

In November 2002, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.” This Interpretation elaborates on the disclosures tobe made by a guarantor in its financial statements about its obligations underguarantees issued.  The Interpretationalso clarifies that a guarantor is required to recognize, at inception of aguarantee, a liability for the fair value of the obligation undertaken. Theinitial recognition and measurement provisions of the Interpretation areapplicable to guarantees issued or modified after December 31, 2002.  The disclosure requirements are effectivefor financial statements of periods ending after December 15, 2002.  The adoption of Interpretation No. 45 didnot have a material impact on the Company’s financial statements.

 

SFAS No. 148, “Accounting for Stock-Based Compensation– Transition and Disclosure,” issued in December 2002, amends SFAS No. 123“Accounting for Stock-Based Compensation” to provide alternative methods oftransition for a voluntary change to the fair-value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  The interimdisclosure provisions are effective for financial statements for interimperiods beginning after December 15, 2002. The Company will continue to account for stock-based compensation usingthe intrinsic value method under APB Opinion No. 25.  The disclosure modifications required for interim periods endingafter December 15, 2002 are included in the notes to these financialstatements.

 

Interpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51,” issued in January 2003,addresses the consolidation by business enterprises of variable interestentities as defined in the Interpretation. Interpretation No. 46 applies immediately to variable interests invariable interest entities created 

 

6

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and/or obtained after January 31, 2003.  The application of this Interpretation didnot have a material impact on the Company’s financial statements.

 

 

**3.  Discontinued Operations**

 

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

 

Certain information with respect to the discontinuedBrazilian operation for the three months ended March 31, 2003 and 2002 is asfollows (amounts in thousands):

 
|                                      |   | **Three  Months Ended** |   |
|-------------------------------------------|--------|-------------------------|--------|
|                                      |   | **March 31,  2003**     |   | **March 31,  2002** |   |
| Net sales                                 |   | $                       | — |   | $ | 130 |   |
|                                      |   |                    |   |   |   |
| Pretax loss from  discontinued operations |   | 44                      |   | 118 |   |
| Income tax  benefit                       |   | (15                     | )      | (40 | ) |
| Net loss from  discontinued operations    |   | $                       | 29     |   | $ | 78 |   |

 

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

 
|                                       |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Current assets                             |   | $                   | 145    |                    | $      | 293 |   |
| Property, plant  and equipment, net        |   | —              |   | 29                      |   |
| Current  liabilities                       |   | (1,369              | )      | (1,499                  | )      |
| Net liabilities  of discontinued operation |   | $                   | (1,224 | )                       | $      | (1,177 | ) |

 

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

 

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

 
|                       |   | **March 31,  2003** |   | **December  31,  2002** |   |
|----------------------------|--------|---------------------|--------|-------------------------|--------|
| Finished goods             |   | $                   | 11,139 |                    | $      | 10,893 |   |
| Work in process            |   | 8,434               |   | 7,647                   |   |
| Raw material and  supplies |   | 9,819               |   | 10,554                  |   |
|                       |   | $                   | 29,392 |                    | $      | 29,094 |   |

 

7

----

 

 

**5.   Earnings Per Share**

 

Basic earnings per share is calculated using the weighted averagenumber of common shares outstanding and diluted earnings per share iscalculated assuming the issuance of common shares for all potential dilutivecommon shares outstanding during the reporting period.  Basic and diluted earnings per share are thesame for the three months ended March 31, 2003.  The dilutive effect of stock options approximated 85,026 sharesfor the three months ended March 31, 2002.

 

**6.   Stock Compensation Plans**

 

The Company utilizes the intrinsic value method required underprovisions of APB Opinion No. 25 and related interpretations in measuringstock-based compensation for employees. If the Company had elected to recognizecompensation cost based on the fair value of the options granted at grant dateas prescribed by SFAS No. 123, net earnings and net earnings per share wouldhave been adjusted to the pro forma amounts indicated in the table below(amounts in thousands, except share data):

 
|                                                                                                                 |   | **March 31,  2003** |   | **March 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| Net (loss)  earnings-as reported                                                                                     |   | $                   | (317   | )                   | $      | 503 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of tax |   | (28                 | )      | (24                 | )      |
| Net (loss)  earnings-pro forma                                                                                       |   | $                   | (345   | )                   | $      | 479 |   |
| Net (loss)  earnings per basic share-as reported                                                                     |   | $                   | (0.03  | )                   | $      | 0.05 |   |
| Net (loss)  earnings per basic share-pro forma                                                                       |   | $                   | (0.04  | )                   | $      | 0.05 |   |
|                                                                                                                 |   |                |   |                |   |
| Net (loss)  earnings per diluted share-as reported                                                                   |   | $                   | (0.03  | )                   | $      | 0.05 |   |
| Net (loss)  earnings per diluted share-pro forma                                                                     |   | $                   | (0.04  | )                   | $      | 0.05 |   |
|                                                                                                                 |   |                |   |                |   |
| Weighted-average  fair value of options, granted during the period                                                   |   | $                   | 5.15   |                | $      | 2.09 |   |

 

The fair value of each option granted in the threemonths ended March 31, 2003 and 2002, respectively, is estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingassumptions:

 
|                   |   | **Three  Months Ended** |   |
|------------------------|--------|-------------------------|--------|
|                   |   | **March 31,  2003**     |   | **March 31,  2002** |   |
| Expected life  (years) |   | 7                       |   | 5 |   |
| Interest rate          |   | 3.3                     | %      | 3.0 | % |
| Volatility             |   | 47.5                    | %      | 42.9 | % |
| Dividend yield         |   | None                    |   | None |   |

 

8

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**7.   Comprehensive Income**

 

The following are the components of comprehensive income (amounts inthousands):

 
|                                                               |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|
|                                                               |   | **March 31,  2003**     |   | **March 31,  2002** |   |
|                                                               |   |                    |   |   |   |
| Net (loss)  earnings                                               |   | $                       | (317   | ) | $ | 503 |   |
| Foreign currency  gain arising during the period                   |   | 633                     |   | 309 |   |
|                                                               |   |                    |   |   |   |
| Unrealized gain  (loss) on investment (net of tax)                 |   | 40                      |   | (14 | ) |
|                                                               |   |                    |   |   |   |
| Unrealized loss  on derivative instruments:                        |   |                    |   |   |   |
| Reclassification  adjustment for loss included in interest expense |   | —                  |   | 5 |   |
| Comprehensive  income                                              |   | $                       | 356    |   | $ | 803 |   |

 

Accumulated other comprehensive loss on theaccompanying consolidated balance sheets includes foreign currency gains,unrealized (gain) loss on investment and unrealized loss on derivativeinstruments.

 

**8.   Income Taxes**

 

The actual tax benefit for the three months ended March 31, 2003differs from the “expected” tax benefit (computed by applying U.S. Federalcorporate rate of 34% to earnings before income taxes) primarily as a result oftwo offsetting factors as described below.

 

In accordance with SFAS No. 109, no federal income taxes had beenprovided for the accumulated undistributed earnings of the DISC as of December31, 1992.  On December 31, 1992, theaccumulated undistributed earnings of the DISC totaled $2.4 million. In thequarter ended March 31, 2003 the Company decided to terminate the DISC electionand recorded $0.8 million in income tax expense for the taxes due prior toDecember 31, 1992.

 

The Company elected to treat the Brazilian subsidiary as a partnershipfor U.S. tax purposes for the year ended December 31, 1999. This election hasenabled the Company to recognize for U.S. income tax purposes a loss of $7.7million on its investment in the Brazilian operation. The Internal RevenueService (the “Service”) and the Company have resolved the Services’ challengeof the Company’s deduction of its investment in Brazil.  As a result, the Company reversed certaintax accruals, resulting in an income tax benefit of $1.1 million.

 

9

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**9.   Segment and Geographic Information**

 

The Company andits subsidiaries are engaged in the manufacture and distribution of beverage dispensingequipment and related parts and components. The Company manages its operations geographically.  Sales are attributed to a region based onthe ordering location of the customer. (Amounts in thousands).

 
|                               |   | **North  America** |   | **Latin  America** |   | **Asia /  Pacific** |   | **Europe** |   | **Corporate** |   | **Total** |   |
|------------------------------------|--------|--------------------|--------|--------------------|--------|---------------------|--------|------------|--------|---------------|--------|-----------|--------|
|                               |   |               |   |               |   |                |   |       |   |          |   |      |   |
| Three months  ended March 31, 2003 |   |               |   |               |   |                |   |       |   |          |   |      |   |
| Total revenues                     |   | $                  | 18,509 |               | $      | 1,938               |   | $          | 4,919  |          | $      | 1,508     |   | $ | — |   | $ | 26,874 |   |
| Operating income  (loss)           |   | 1,281              |   | 473                |   | 567                 |   | 8          |   | (3,117        | )      | (788      | )      |
|                               |   |               |   |               |   |                |   |       |   |          |   |      |   |
| Three months  ended March 31, 2002 |   |               |   |               |   |                |   |       |   |          |   |      |   |
| Total revenues                     |   | $                  | 22,225 |               | $      | 1,641               |   | $          | 3,805  |          | $      | 2,579     |   | $ | — |   | $ | 30,250 |   |
| Operating income  (loss)           |   | 2,930              |   | (8                 | )      | 494                 |   | 731        |   | (2,805        | )      | 1,342     |   |

 

All intercompany revenues are eliminated in computing revenues andoperating income.  The corporatecomponent of operating income represents corporate general and administrativeexpenses.

 

**10.  Product Warranties**

 

The Company generally warrants its products againstcertain manufacturing and other defects. These product warranties are provided for specific periods of time fromthe date of sale.  For both of theperiods ending March 31, 2003 and December 31, 2002, the Company has accrued $0.3 million for estimated productwarranty claims.  The accrued productwarranty costs are based primarily on actual warranty claims as well as currentinformation on repair costs.  Warrantyclaims expense for the three months ended March 31, 2003 was $0.12 million.  Warranty settlements resulted in a reductionof expenses of $0.02 million for the three months ended March 31, 2002.

 

**11.  Other Guaranties**

 

During the first quarter of 2003, Lancer FBDPartnership, Ltd., of which the Company owns 50%, obtained a $1,500,000revolving credit facility from a bank. The Company guaranteed the repayment of the debt.  In accordance with FIN 45, the Company hasrecorded a liability of $22,500, which represents the estimated cost of theguaranty.

 

10

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**Item2 - Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

This document contains certain “forward-looking” statements as suchterm is defined in the Private Securities Litigation Reform Act of 1995 andinformation relating to the Company and its subsidiaries that are based on thebeliefs of the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,”“expect,” “forecast,” “plan,” and “intend” and words or phrases of similarimport, as they relate to the Company or its subsidiaries or Companymanagement, are intended to identify forward-looking statements.  Such statements reflect the current risks,uncertainties and assumptions which exist or must be made as a result of certainfactors including, without limitation, competitive factors, general economicconditions, customer relations, relationships with vendors, the interest rateenvironment, governmental regulation and supervision, seasonality, distributionnetworks, product introductions and acceptance, one-time events and otherfactors described herein and in other filings made by the Company with theSecurities and Exchange Commission. Based upon changing conditions, should any one or more of these risks oruncertainties materialize, or should any underlying assumptions proveincorrect, actual results may vary materially from those described herein asanticipated, believed, estimated, expected, forecast, planned or intended.  The Company does not intend to update theseforward-looking statements.

 

**CriticalAccounting Policies**

 

Refer to the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002 for a discussion of the Company’s CriticalAccounting Policies.

 

**Resultsof Operations**

 

Comparison of the Three-Month Periods Ended March 31,2003 and 2002

 

# **Continuing Operations**

Net sales for the three months ended March 31, 2003 were $26.9 million,down 11% from $30.3 million in the same period of 2002.  Sales declined 17% in the North Americaregion.  During the first quarter,certain of the Company’s major customers were engaged in organizationalchanges.  Those activities had anegative effect on the Company’s sales. The Company expects sales to the major customer to improve graduallyduring the second quarter of 2003. Sales declined 42% in the Europe region, due to production problems withone of the Company’s valve products, and a generally weak market forequipment.  The Company expects theproduction issues to be resolved during the second quarter.  Sales in the Asia/Pacific region rose29%.  Incremental business from theBrisbane, Australia service operation acquired by the Company in the secondquarter of 2002, and a large project in Australia contributed to the salesstrength.  Latin America sales rose 18%on improved sales in Mexico.

 

Gross margin for the first quarter was 21.6% in 2003, compared to 23.8%in 2002.  Lower factory output causedmost of the decline in gross margin, as a significant portion of the Company’smanufacturing costs is fixed.

 

Selling, general and administrative expenses were $6.6 million in thethree months ended March 31, 2003, up from $5.9 million in the same period lastyear.  Higher employee benefit costs,plus incremental costs associated with the Australian service operationacquired in the second quarter of 2002, caused most of the increase.

 

Interest expense was $0.2 million in the first quarter of 2003, downfrom $0.4 million in the 2002 period. The decline was caused by lower average borrowings combined with loweraverage interest rates.  Loss from jointventures rose to $0.2 million in the first quarter of 2003 from $0.1 million inthe same quarter of 2002.  The Company’sLancer FBD Partnership (“Lancer FBD”) which manufactures frozen beverageequipment accounted for most of the loss. Soft sales and product development expenses contributed to the loss atLancer FBD.  Demand for Lancer FBD’sproducts improved significantly late in the first quarter of 2003, andmanagement believes that the entity will contribute to Lancer’s profitabilityin coming quarters.  Several itemsaffected Lancer’s income tax expense during the first quarter of 2003.  First, the Company recorded a $0.8 millioncharge to income tax expense stemming from the decision to terminate the DISCelection for the Company’s subsidiary that exports from the United States.  Additionally, the Company and the InternalRevenue Service resolved the Service’s challenge of the Company’s deduction ofits investment in Brazil.  As a result,Lancer reversed certain tax accruals, resulting in an income tax benefit of$1.1 million.  The Company’s net loss inthe first quarter of 2003 was $0.3 million, compared to a net profit of $0.5million in the first quarter of 2002.

 

11

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**Discontinued Operations**

 

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

 

Revenue from discontinued operations was nil in the first three monthsof 2003, and $0.1 million in the same period of 2002.  The first quarter loss (net of tax) from discontinued operationswas $29 thousand in 2003, and $78 thousand in 2002.

 

Liquidity and Capital Resources

 

The Company’s principal sources of liquidity are cash flows fromoperations and amounts available under the Company’s existing lines ofcredit.  The Company has met, andcurrently expects that it will continue to meet, substantially all of itsworking capital and capital expenditure requirements, as well as its debtservice requirements, with funds provided by operations and borrowings underits credit facilities.  The Company isin compliance with the financial covenants contained in the credit agreementthat governs the Company’s primary credit facilities.

 

Cash used in operating activities was $2.4 million in the first threemonths of 2003, compared to $1.2 million of cash provided by operatingactivities in the same period last year. The Company made capital expenditures of $1.2 million in the 2003period, primarily for the expansion of a production facility in Piedras Negras,Mexico, and for equipment and tooling. The capital spending was financed with bank borrowings.

 

Accounting Matters

 

In accordance with SFAS No. 109, no federal income taxes had beenprovided for the accumulated undistributed earnings of the DISC as of December31, 1992.  On December 31, 1992, theaccumulated undistributed earnings of the DISC totaled $2.4 million. In thequarter ended March 31, 2003 the Company decided to terminate the DISC electionand recorded $0.8 million in income tax expense for the taxes due prior toDecember 31, 1992.

 

The Company elected to treat the Brazilian subsidiaryas a partnership for U.S. tax purposes for the year ended December 31, 1999.This election has enabled the Company to recognize for U.S. income tax purposesa loss of $7.7 million on its investment in the Brazilian operation. TheInternal Revenue Service (the “Service”) and the Company have resolved theServices’ challenge of the Company’s deduction of its investment in Brazil.  As a result, the Company reversed certaintax accruals, resulting in an income tax benefit of $1.1 million.

 

**Item 3 – Quantitative and QualitativeDisclosures About Market Risk**

 

There have been no significant changes in the Company’s market risk factorssince December 31, 2002.

 

Part II – Other Information

##### **Item 4 – Controlsand Procedures**

 
| (a) | Within the 90 days prior to the date of filing this  Form 10-Q, the Company carried out an evaluation, under the supervision of  the Chief Executive Officer and the Chief Financial Officer, of the  effectiveness of the design and operation of the Company’s disclosure  controls and procedures pursuant to Exchange Act Rule 13a – 14.  Based upon that evaluation, the Company’s  Chief Executive Officer and its Chief Financial Officer concluded that the  Company’s disclosure controls and procedures are effective in timely alerting  them to material information relating to the Company (including its  consolidated subsidiaries) required to be included in the Company’s periodic  SEC filings. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | There have been no significant changes in the  Company’s internal controls or in other factors which could significantly  affect internal controls subsequent to the date the Company carried out its  evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

12

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**Item 6 -Exhibits and Reports on Form 8-K**

 
|   | (a)    | Exhibits:                                                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                        |   |
|   |   | 99.1                                                                                                                                                                        | Certification of Chief Executive Officer of Lancer Corporation  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                        |   |
|   |   | 99.2                                                                                                                                                                        | Certification of Chief Financial Officer of Lancer  Corporation Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                        |   |
|   | (b)    | Reports on Form 8-K:                                                                                                                                                        |
|   |   |                                                                                                                                                                        |   |
|   |   | The Company filed a report on Form 8-K dated April  29, 2003.  The report incorporated the  Company’s earnings release for the period ended March 31, 2003.       |
|   |   |                                                                                                                                                                        |   |
|   |   | The Company filed a report on Form 8-K dated May 7,  2003.  The report incorporated the  Company’s news release announcing a frozen beverage equipment agreement. |

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

**LANCERCORPORATION**

**(Registrant)**

 

 
|         |   |                    |
|--------------|--------|-------------------------|
| May 13, 2003 | By:    | /s/ GEORGE F. SCHROEDER |   |
|         |   | George F. Schroeder     |
|         |   | Chief Executive Officer |
|         |   |                    |
|         |   |                    |
| May 13, 2003 | By:    | /s/ MARK L. FREITAS     |   |
|         |   | Mark L. Freitas         |
|         |   | Chief Financial Officer |

 

13

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###### CERTIFICATIONS

I, George F. Schroeder,certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Lancer Corporation;                                                                                                                                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| a)     | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is being  prepared;                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| b)     | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| c)     | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date;                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| a)     | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weakness in internal  controls; and                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| b)     | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 6.     | The registrant’s other certifying officers and I  have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 

| Date:  May  13, 2003 |
|---------------------------|
|                      |
|                      |
| /s/ GEORGE F. SCHROEDER   |   |
| George F. Schroeder       |
| Chief Executive Officer   |
|                      |

14

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CERTIFICATIONS

I, Mark L. Freitas,certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Lancer Corporation;                                                                                                                                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| a)     | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being  prepared;                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| b)     | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| c)     | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date;                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 5.     | The registrant’s other certifying officers and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| a)     | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weakness in internal  controls; and                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| b)     | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 6.     | The registrant’s other certifying officers and I  have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 
| Date:  May  13, 2003 |
|---------------------------|
|                      |
|                      |
| /s/ MARK L. FREITAS       |   |
| Mark L. Freitas           |
| Chief Financial Officer   |

 

15

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