**UNITED STATES**

**SECURITIES AND 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 March 31, 2005** |
|                                              |       |                                                   |
| **OR**                                            |
|                                              |       |                                                   |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)** |
| **OF THE SECURITIES EXCHANGE ACT OF 1934**        |

 

 

For the transition periodfrom                   to                   

 

Commission file number**0-13875**

 

**LANCER CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

 

**6655 LANCER BLVD.**

**SAN ANTONIO, TEXAS**

 (Address of principal executiveoffices)

 

**(210) 310-7000**

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe 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 of shares ofregistrant’s common stock outstanding as of April 29, 2005 was 9,486,028.

 

 

 

 

----

 

**PART I**

**FINANCIAL INFORMATION**

 

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

 

**LANCER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 

(Amounts in thousands,except share data)

 

ASSETS

** **
| ** **                                                            | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                            | ** ** | **2005**        | ** ** | **2004**         | ** ** |
|                                                                  |       | **(Unaudited)** |       |             |       |
|                                                                  |       |            |       |             |       |
| Current assets:                                                       |       |            |       |             |       |
| Cash                                                                  |       | $               | 5,136      |             | $          | 5,196 |   |
| Receivables:                                                          |       |            |       |             |       |
| Trade accounts  and notes                                             |       | 17,135          |       | 16,733           |       |
| Other                                                                 |       | 699             |       | 801              |       |
|                                                                  |       | 17,834          |       | 17,534           |       |
| Less allowance  for doubtful accounts                                 |       | (282            | )          | (420             | )          |
|                                                                  |       |            |       |             |       |
| Net receivables                                                       |       | 17,552          |       | 17,114           |       |
|                                                                  |       |            |       |             |       |
| Inventories, net                                                      |       | 26,008          |       | 24,495           |       |
| Prepaid expenses                                                      |       | 1,060           |       | 406              |       |
| Deferred tax  asset                                                   |       | 814             |       | 824              |       |
|                                                                  |       |            |       |             |       |
| Total current  assets                                                 |       | 50,570          |       | 48,035           |       |
|                                                                  |       |            |       |             |       |
| Net property,  plant and equipment                                    |       | 29,046          |       | 29,999           |       |
| Investment in  joint ventures                                         |       | 2,487           |       | 2,388            |       |
| Goodwill                                                              |       | 1,879           |       | 1,879            |       |
| Intangibles and  other assets, at cost, less accumulated amortization |       | 3,419           |       | 3,186            |       |
|                                                                  |       |            |       |             |       |
|                                                                  |       | $               | 87,401     |             | $          | 85,487 |   |
|                                                                  |       |            |       |             |       |

 

See accompanying notes toconsolidated financial statements.

 

2

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**LANCER CORPORATION**

**CONSOLIDATED BALANCE SHEETS(continued)**

 

(Amounts in thousands,except share data)

 

LIABILITIES ANDSHAREHOLDERS’ EQUITY

** **
| ** **                                                                                                                                 | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                 | ** ** | **2005**        | ** ** | **2004**         | ** ** |
|                                                                                                                                       |       | **(Unaudited)** |       |             |       |
|                                                                                                                                       |       |            |       |             |       |
| Current  liabilities:                                                                                                                      |       |            |       |             |       |
| Accounts payable                                                                                                                           |       | $               | 7,532      |             | $          | 7,555 |   |
| Current  maturities of long-term debt                                                                                                      |       | 1,348           |       | 1,345            |       |
| Deferred  licensing and maintenance fees                                                                                                   |       | 388             |       | 451              |       |
| Accrued expenses  and other liabilities                                                                                                    |       | 6,562           |       | 8,029            |       |
| Income taxes  payable                                                                                                                      |       | 1,499           |       | 286              |       |
| Total current  liabilities                                                                                                                 |       | 17,329          |       | 17,666           |       |
|                                                                                                                                       |       |            |       |             |       |
| Deferred tax  liability                                                                                                                    |       | 3,197           |       | 3,401            |       |
| Long-term debt,  excluding current maturities                                                                                              |       | 93              |       | 132              |       |
| Deferred  licensing and maintenance fees                                                                                                   |       | 1,300           |       | 1,273            |       |
|                                                                                                                                       |       |            |       |             |       |
| Total  liabilities                                                                                                                         |       | 21,919          |       | 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; 9,550,254 issued and 9,486,028 outstanding in 2005, and 9,522,054  issued and 9,457,828 outstanding in 2004 |       | 95              |       | 95               |       |
|                                                                                                                                       |       |            |       |             |       |
| Additional  paid-in capital                                                                                                                |       | 13,356          |       | 13,208           |       |
|                                                                                                                                       |       |            |       |             |       |
| Accumulated  other comprehensive income                                                                                                    |       | 280             |       | 523              |       |
|                                                                                                                                       |       |            |       |             |       |
| Deferred  compensation                                                                                                                     |       | (8              | )          | (18              | )          |
|                                                                                                                                       |       |            |       |             |       |
| Retained  earnings                                                                                                                         |       | 52,119          |       | 49,567           |       |
|                                                                                                                                       |       |            |       |             |       |
| Less common  stock in treasury, at cost; 64,227 shares in 2005 and 2004                                                                    |       | (360            | )          | (360             | )          |
|                                                                                                                                       |       |            |       |             |       |
| Total  shareholders’ equity                                                                                                           |       | 65,482          |       | 63,015           |       |
|                                                                                                                                       |       |            |       |             |       |
|                                                                                                                                       |       | $               | 87,401     |             | $          | 85,487 |   |

 

 

See accompanying notes toconsolidated financial statements.

 

 

 

3

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**LANCER CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

 

(Amounts in thousands,except share data)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                          |       |                   |       |   |   |
| Net sales                                     |       | $                      | 31,623     |   | $ | 29,507 |   |
| Cost of sales                                 |       | 21,443                 |       | 20,906 |   |
| Gross profit                                  |       | 10,180                 |       | 8,601 |   |
|                                          |       |                   |       |   |   |
| Selling, general  and administrative expenses |       | 6,947                  |       | 7,512 |   |
| Other operating  income                       |       | (257                   | )          | (327 | ) |
| Operating income                              |       | 3,490                  |       | 1,416 |   |
|                                          |       |                   |       |   |   |
| Other income  (expense):                      |       |                   |       |   |   |
| Interest expense                              |       | (29                    | )          | (109 | ) |
| Income from  joint ventures                   |       | 254                    |       | 153 |   |
| Other income,  net                            |       | 225                    |       | 26 |   |
|                                          |       | 450                    |       | 70 |   |
| Income before  income taxes                   |       | 3,940                  |       | 1,486 |   |
|                                          |       |                   |       |   |   |
| Income tax  expense (benefit):                |       |                   |       |   |   |
| Current                                       |       | 1,589                  |       | 604 |   |
| Deferred                                      |       | (203                   | )          | (63 | ) |
|                                          |       | 1,386                  |       | 541 |   |
|                                          |       |                   |       |   |   |
| Net income                                    |       | $                      | 2,554      |   | $ | 945 |   |
|                                          |       |                   |       |   |   |
| Common Shares  Outstanding:                   |       |                   |       |   |   |
| Basic                                         |       | 9,463,281              |       | 9,367,431 |   |
| Diluted                                       |       | 9,662,410              |       | 9,471,713 |   |
|                                          |       |                   |       |   |   |
| Earnings Per  Share:                          |       |                   |       |   |   |
| Basic earnings                                |       | $                      | 0.27       |   | $ | 0.10 |   |
| Diluted earnings                              |       | $                      | 0.26       |   | $ | 0.10 |   |

 

 

See accompanying notes toconsolidated financial statements.

 

 

4

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**LANCER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Unaudited)

 

(Amounts in thousands)
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                                                                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Cash flow from  operating activities:                                                         |       |                   |       |   |   |
| Net income                                                                                    |       | $                      | 2,554      |   | $ | 945 |   |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating activities |       |                   |       |   |   |
| Depreciation and  amortization                                                                |       | 933                    |       | 1,192 |   |
| Deferred  licensing and maintenance fees                                                      |       | (37                    | )          | (201 | ) |
| Inventory and  receivable reserves                                                            |       | (372                   | )          | (144 | ) |
| Deferred income  taxes                                                                        |       | (200                   | )          | (61 | ) |
| Loss (gain) on  sale and disposal of assets                                                   |       | (257                   | )          | (327 | ) |
| (Income) loss  from joint ventures                                                            |       | (254                   | )          | (153 | ) |
| Stock-based  compensation expense                                                             |       | 10                     |       | 25 |   |
| Changes in  assets and liabilities:                                                           |       |                   |       |   |   |
| Receivables                                                                                   |       | (377                   | )          | (2,082 | ) |
| Prepaid expenses                                                                              |       | (656                   | )          | (840 | ) |
| Inventories                                                                                   |       | (1,392                 | )          | 1,863 |   |
| Other assets                                                                                  |       | 169                    |       | (12 | ) |
| Accounts payable                                                                              |       | (268                   | )          | 722 |   |
| Accrued expenses                                                                              |       | (1,303                 | )          | (55 | ) |
| Income taxes  payable                                                                         |       | 1,201                  |       | 554 |   |
| Net cash  provided by (used in) operating activities                                          |       | (249                   | )          | 1,426 |   |
| Cash flow from  investing activities:                                                         |       |                   |       |   |   |
| Proceeds from  sale of assets                                                                 |       | 725                    |       | 359 |   |
| Acquisition of  property, plant and equipment                                                 |       | (716                   | )          | (526 | ) |
| Proceeds from  sale of long-term investments                                                  |       | —                 |       | (49 | ) |
| Investment in joint  ventures                                                                 |       | (496                   | )          | — |   |
| Distributions  from joint ventures                                                            |       | 650                    |       | — |   |
| Net cash  provided by (used in) investing activities                                          |       | 163                    |       | (216 | ) |
| Cash flow from  financing activities:                                                         |       |                   |       |   |   |
| Borrowings under  line of credit                                                              |       | —                 |       | 3,300 |   |
| Repayments under  line of credit                                                              |       | —                 |       | (2,300 | ) |
| Retirement of  long-term debt                                                                 |       | (36                    | )          | (384 | ) |
| Net proceeds  from exercise of stock options                                                  |       | 149                    |       | 30 |   |
| Net cash  provided by financing activities                                                    |       | 113                    |       | 646 |   |
| Effect of  exchange rate changes on cash                                                      |       | (87                    | )          | (140 | ) |
| Net increase  (decrease) in cash                                                              |       | (60                    | )          | 1,716 |   |
| Cash at  beginning of period                                                                  |       | 5,196                  |       | 1,129 |   |
| Cash at end of  period                                                                        |       | $                      | 5,136      |   | $ | 2,845 |   |
|                                                                                          |       |                   |       |   |   |
| Supplemental  cash flow informaton:                                                           |       |                   |       |   |   |
| Cash paid for  interest                                                                       |       | $                      | 45         |   | $ | 104 |   |
| Cash paid  (refunded) for income taxes                                                        |       | —                 |       | — |   |

 

 

See accompanying notes toconsolidated financial statements.

 

 

5

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LANCER CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

We design, engineer, manufacture and market fountain soft drink, beerand citrus beverage dispensing systems, and other equipment for use in the foodservice and beverage industry.  We also market frozen beverage dispensersmanufactured by Lancer FBD Partnership, Ltd., a partnership in which we own a50% partnership interest.  Our products are sold by our personnel andthrough independent distributors and agents principally to major soft drinkcompanies (primarily The Coca-Cola Company), bottlers, equipment distributors,beer breweries, restaurants and convenience stores for use in various food andbeverage operations.  We are a vertically integrated manufacturer withtooling, production, assembly and testing capabilities that enable us tofabricate a substantial portion of the components used in our products. In addition, we are an innovator of new products in the beverage dispensingindustry.  We have a large technicalstaff supported by state-of-the-art engineering facilities to develop new productsand to enhance our existing product lines in response to changing industryrequirements and specific customer demands.

 

Our accompanyingunaudited consolidated financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of America forinterim 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 of Americafor complete financial statements.  Inour opinion, these financial statements contain all adjustments, consisting ofnormal recurring accruals unless otherwise disclosed, necessary to presentfairly the financial position, results of operations and cash flows for theperiods indicated.  Our significantaccounting policies were disclosed in the notes to the consolidated financialstatements included in our Annual Report on Form 10-K for the year endedDecember 31, 2004, and no material changes have occurred with respect tothese 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 the consolidated financial statements for priorperiods have been reclassified to conform to the current year’s presentation. We have revised our previously reported resultsof operations for the three months ended March 31, 2004 to reclassify one itemfrom non-operating to operating expense. This item consists of a $327,000 gain on the sale and disposal ofassets.  Previously, this item waspresented as non-operating expenses in “Other Income (Expense)”.  As noted in the following reconciliation, thereclassification increased the amount of our previously reported operatingincome for the three months ended March 31, 2004, but did not affect ourpreviously reported net earnings, earnings per share, financial position, orcash flows.

 

| ** **                                | ** ** | **March 31** | ** ** |
|-------------------------------------------|------------|--------------|------------|
| **(Amounts  in 000s)**                    | ** ** | **2004**     | ** ** |
| Operating income  as previously reported  |       | $            | 1,089      |   |
| Gain on sale and  disposal of assets      |       | 327          |       |
| Operating income  after reclassifications |       | $            | 1,416      |   |
|                                      |       |         |       |

 

**2.****             ****New Accounting Pronouncements.**

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “InventoryCosts”, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No.151 clarify that abnormal amounts of idle facility expense, freight, handlingcosts and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities. The pronouncement iseffective for inventory costs incurred during fiscal years beginning after June15, 2005.  Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 23, 2004. We currently recognize as period costs any abnormal amountsof idle facility expense, freight, handling costs and wasted materials, andallocate fixed production overhead to inventory based on the normal capacity ofthe production facilities. We do not believe that 

 

6

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the adoption of this pronouncement will have a significant impact onour results of operations or financial position. We will adopt thispronouncement beginning January 1, 2006.

 

In December 2004, the FASB issued SFAS No. 123(R) —*Share-BasedPayment,* which replaces SFAS No. 123 —*Accountingfor Stock-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) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements. With limited exceptions, the amount ofcompensation cost is measured based on the grant-date fair value of the equityor liability instruments issued. SFAS No. 123(R) requires liability awards tobe remeasured each reporting period and compensation costs to be recognizedover the period that an employee provides service in exchange for the award. InApril 2005, the SEC delayed the effective date of SFAS No. 123(R) to thebeginning of the annual reporting period that begins after June 15, 2005. Weare currently evaluating the effect that adoption of this statement will haveon our financial position and results of operations.

 

On December 21, 2004, the FASB issued “Application of FASB StatementNo. 109, **Accounting for Income Taxes,**to the Tax Deduction on Qualified Production Activities Provided by theAmerican Jobs Creation Act of 2004”, a FASB Staff Position (FSP) that providesguidance on the application of SFAS No. 109 to the tax deduction on qualifiedproduction activities provided by the American Jobs Creation Act of 2004. FSPFAS 109-1 states that the qualified production activities deduction should beaccounted for as a special deduction in accordance with SFAS No. 109, wherebythe deduction is contingent upon the future performance of specific activities,including wage levels. The FASB also concluded that the special deductionsshould be considered with measuring deferred taxes and assessing a valuationallowance. The impact on our results of operations or financial position of FSPFAS 109-1 has not yet been determined, however, the impact, if any, will bereported in the period in which the deduction is claimed on our tax returns.

 

 

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

 

*Balance Sheet Information*:

 

**Inventory:** We state inventories at the lower of cost (on a first-in, first-outbasis for finished goods and work in process, and an average cost basis for rawmaterials and supplies) or market.  Ourinventory components consist of the following items (amounts in thousands):

 

| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|---------------|------------|------------------|------------|
| ** **                 | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| Finished goods             |       | $             | 11,620     |             | $          | 11,143 |   |
| Work in process            |       | 5,891         |       | 5,593            |       |
| Raw material and  supplies |       | 8,497         |       | 7,759            |       |
|                       |       | $             | 26,008     |             | $          | 24,495 |   |
|                       |       |          |       |             |       |

 

7

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

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                 | ** ** | **2005**      | ** ** | **2004**         | ** ** |
|                                       |       |          |       |             |       |
| Land                                       |       | $             | 1,082      |             | $          | 1,082 |   |
| Buildings                                  |       | 22,070        |       | 22,056           |       |
| Machinery and  equipment                   |       | 19,255        |       | 19,633           |       |
| Tools and dies                             |       | 10,794        |       | 10,775           |       |
| Leaseholds,  office equipment and vehicles |       | 8,820         |       | 8,542            |       |
| Assets in  progress                        |       | 1,469         |       | 1,365            |       |
| Assets available  for sale                 |       | —        |       | 780              |       |
|                                       |       | 63,490        |       | 64,233           |       |
| Less accumulated  depreciation             |       | (34,444       | )          | (34,234          | )          |
| Net property,  plant and equipment         |       | $             | 29,046     |             | $          | 29,999 |   |
|                                       |       |          |       |             |       |

 

**Intangibles and Other Assets:** Our net intangibles and other assets consist of the following items(amounts in thousands):

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                           | ** ** | **2005**      | ** ** | **2004**         | ** ** |
|                                 |       |          |       |             |       |
| Patents                              |       | $             | 4,130      |             | $          | 3,848 |   |
| Accumulated  amortization of patents |       | (819          | )          | (774             | )          |
| Net intangibles                      |       | 3,311         |       | 3,074            |       |
| Deposits                             |       | 108           |       | 112              |       |
| Net intangibles and  other assets    |       | $             | 3,419      |             | $          | 3,186 |   |
|                                 |       |          |       |             |       |

 

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

* *
| ** **                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                             | ** ** | **2005**      | ** ** | **2004**         | ** ** |
|                                   |       |          |       |             |       |
| Payroll and  related expenses          |       | $             | 3,034      |             | $          | 4,159 |   |
| Commissions                            |       | 611           |       | 328              |       |
| Health and  workers’ compensation |       | 267           |       | 303              |       |
| Property taxes                         |       | 291           |       | 226              |       |
| Interest                               |       | 164           |       | 189              |       |
| Warranty                               |       | 1,207         |       | 1,257            |       |
| Other taxes                            |       | 325           |       | 505              |       |
| Other accrued  expenses                |       | 663           |       | 1,062            |       |
|                                   |       | $             | 6,562      |             | $          | 8,029 |   |
|                                   |       |          |       |             |       |

 

8

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*Income Statement Information.*

 

**Other Operating Income:** Our other operating income consists of the following items (amounts inthousands):

** **
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** ** | ** ** |
| (Gain) loss on  sale and disposal of assets |       | $                      | (257       | ) | $ | (327 | ) |
|                                        |       | $                      | (257       | ) | $ | (327 | ) |
|                                        |       |                   |       |   |   |

 

 

**OtherIncome (Expense):**  Our other income (expenses) consist of thefollowing items (amounts in thousands):

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                               |       |                   |       |   |   |
| Interest income                                    |       | $                      | 28         |   | $ | — |   |
| Bank charges                                       |       | (38                    | )          | (40 | ) |
| Royalties income  - net                            |       | 42                     |       | 52 |   |
| Exchange gains                                     |       | 35                     |       | 21 |   |
| Gain from sale  of non operating asset             |       | 72                     |       | — |   |
| Extinguishment  of guarantee of joint venture debt |       | 33                     |       | — |   |
| Miscellaneous                                      |       | 53                     |       | (7 | ) |
| Total                                              |       | $                      | 225        |   | $ | 26 |   |
|                                               |       |                   |       |   |   |

 

 

**4.  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.  The dilutive effect of stock optionsapproximated 184,401 and 104,282 shares for the three months ended March 31,2005 and 2004, respectively.

 

 

**5.   StockCompensation Plans.**

 

We utilize the intrinsicvalue method, as permitted under provisions of APB Opinion No. 25 and relatedinterpretations, in measuring stock-based compensation for employees.  If we had elected to recognize compensationcost based on the fair value of the options granted at grant date as prescribedby SFAS No. 123, net earnings and net earnings per share would have beenadjusted to the pro forma amounts indicated in the table below (amounts inthousands, except share data):

 

9

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| ** **                                                                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                           | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                                                                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net earnings -  as reported                                                                                          |       | $                      | 2,554      |   | $ | 945 |   |
| Add: Total  stock-based compensation expense determined under the intrinsic value method,  net of tax                |       | 7                      |       | 17 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of tax |       | (242                   | )          | (30 | ) |
| Net earnings -  pro forma                                                                                            |       | $                      | 2,319      |   | $ | 932 |   |
| Net earnings per  basic share-as reported                                                                            |       | $                      | 0.27       |   | $ | 0.10 |   |
| Net earnings per  basic share-pro forma                                                                              |       | $                      | 0.25       |   | $ | 0.10 |   |
|                                                                                                                 |       |                   |       |   |   |
| Net earnings per  diluted share-as reported                                                                          |       | $                      | 0.26       |   | $ | 0.10 |   |
| Net earnings per  diluted share-pro forma                                                                            |       | $                      | 0.24       |   | $ | 0.10 |   |
|                                                                                                                 |       |                   |       |   |   |
| Weighted-average  fair value of options, granted during the period                                                   |       | $                      | —     | (1) | $ | — |  (1) |

 

 

The fair value of each option granted in the three months ended March31, 2005 and 2004, respectively, is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **             | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                   |       |                   |       |   |   |
| Expected life  (years) |       | —                 | (1)        | — | (1) |
| Interest rate          |       | —                 | (1)        | — | (1) |
| Volatility             |       | —                 | (1)        | — | (1) |
| Dividend yield         |       | None                   |       | None |   |

 

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(1)                 Nooptions were granted during the three months ended March 31, 2005 and 2004,respectively.

 

 

**6.   OtherComprehensive Income.**

 

The line item, “Accumulated other comprehensive income” on theaccompanying consolidated balance sheets includes foreign currency gains andunrealized gain (loss) on investment.

 

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

 
| ** **                    | ** ** | **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        |       | (243                                    | )          |                                |       | (243      | )          |
| Balance at March  31, 2005    |       | $                                       | 280        |                                | $          | —    |       | $ | 280 |   |
|                          |       |                                    |       |                                |       |      |       |

 

 

10

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**Disclosureof related tax effects allocated to each component of Accumulated OtherComprehensive 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            |       | $                      | 280        |                       | $          | —                 |       | $ | 280 |   |
| Total Other  Comprehensive income              |       | $                      | 280        |                       | $          | —                 |       | $ | 280 |   |
|                                           |       |                   |       |                       |       |                   |       |

 

**7. Investment in Joint Ventures**

 

At March 31, 2005 our long-term investments consisted of the following:

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                 | ** ** | **2005**      | ** ** | **2004**         | ** ** |
|                                       |       |          |       |             |       |
| Investment in  Lancer FBD Partnership Ltd. |       | $             | 1,762      |             | $          | 2,046 |   |
| Investment in  Moo Technologies, LLC       |       | 725           |       | 342              |       |
| Total long-term  investments               |       | $             | 2,487      |             | $          | 2,388 |   |
|                                       |       |          |       |             |       |

 

 

Our 50% share of net earnings from both joint ventures, afterelimination of profit in ending inventory, is included in other income.

 

We own 50% of Lancer FBD Partnership, Ltd., a manufacturer of frozenbeverage equipment.  Lancer FBD pays us acommission on sales of Lancer FBD products that we generate through our salesforce.  Lancer FBD paid us salescommissions of $0.1 million for each of the three-month periods endedMarch 31, 2005 and 2004.  Our portion of Lancer FBD’s income was $0.4million and $0.2 million for the three months ended March 31, 2005 and 2004,respectively.  Lancer FBD’s purchasesfrom us were $0.3 million and $0.2 million for the three months endedMarch 31, 2005 and 2004, respectively. Lancer FBD had a balance due to us of $0.3 million on March 31, 2005,and $0.2 million on December 31, 2004.

 

We own 50% of Moo Technologies, a developmental stage limited liabilitycompany engaged in the commercialization of concentrated shelf-stable milkproducts. Our portion of Moo Technology’s loss was $0.1 million for each of thethree months ended March 31, 2005, and 2004. We have invested $1.3 million in Moo Technologies, LLC since itsinception, including $0.5 million during the first quarter of 2005, bringingour investment net of losses in the company to $0.7 million as of March 31,2005.  We expect Moo Technologies to beunprofitable through at least 2005, and we expect to continue to fund MooTechnologies in a manner consistent with what we have done in the past.

11

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**8.   Segmentand Geographic Information.**

 

We are engaged in themanufacture and distribution of beverage dispensing equipment and related partsand components.  We manage our operationsgeographically.  Sales are attributed toa region based on the ordering location of the customer.

 

 
| ** **                         | ** ** | **North**   | ** ** | **Latin**   | ** ** | **Asia/**   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
|------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|---------------|------------|------------|------------|
| **(amounts  in thousands)**        | ** ** | **America** | ** ** | **America** | ** ** | **Pacific** | ** ** | **Europe** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| Three months  ended March 31, 2005 |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total revenues                     |       | $           | 20,395     |        | $          | 1,819       |       | $          | 5,711      |          | $          | 3,698      |       | $ | — |   | $ | 31,623 |   |
| Depreciation and  amortization     |       | 756         |       | 61          |       | 106         |       | 10         |       | —        |       | 933        |       |
| Operating income  (loss)           |       | 5,714       |       | 438         |       | 117         |       | 579        |       | (3,358        | )          | 3,490      |       |
| Long-lived  assets                 |       | 26,118      |       | 3,474       |       | 1,860       |       | 188        |       | —        |       | 31,640     |       |
| Goodwill (net)                     |       | —      |       | —      |       | 1,879       |       | —     |       | —        |       | 1,879      |       |
| Capital  expenditures              |       | 505         |       | —      |       | 159         |       | 52         |       | —        |       | 716        |       |
| ** **                         | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three months  ended March 31, 2004 |       |        |       |        |       |        |       |       |       |          |       |       |       |
| Total revenues                     |       | $           | 18,336     |        | $          | 1,094       |       | $          | 6,620      |          | $          | 3,457      |       | $ | — |   | $ | 29,507 |   |
| Depreciation and  amortization     |       | 1,022       |       | 48          |       | 111         |       | 11         |       | —        |       | 1,192      |       |
| Operating income  (loss)           |       | 3,972       |       | (78         | )          | 714         |       | 699        |       | (3,891        | )          | 1,416      |       |
| Long-lived  assets                 |       | 29,372      |       | 4,312       |       | 1,778       |       | 138        |       | —        |       | 35,600     |       |
| Goodwill (net)                     |       | —      |       | 50          |       | 1,879       |       | —     |       | —        |       | 1,929      |       |
| Capital  expenditures              |       | 349         |       | 107         |       | 62          |       | 8          |       | —        |       | 526        |       |

 

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

 

 

**9.****             ****Product Warranties.**

 

We generally warrant our products against certain manufacturing andother defects.  These product warrantiesare provided for specific periods of time from the date of sale.  As of March 31, 2005 and December 31, 2004,we had accrued $1.2 million and $1.3 million, respectively, for estimatedproduct warranty claims.  The accruedproduct warranty costs are based primarily on actual warranty claims as well ascurrent information on repair costs.  Warrantyclaims expense for the three months ended March 31, 2005 and 2004 was $0.07million and $0.16 million, respectively.

** **

The followingchart sets forth our product warranty costs for the periods ending March 31,2005 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 |       | 66       |       | 161      |       |
| Warranty claims  paid during the period                      |       | (116     | )          | (60      | )          |
| Accrued product  warranty costs as of March 31               |       | $        | 1,207      |     | $          | 687 |   |
|                                                         |       |     |       |     |       |
|                                                              |            |          |            |          |            |  |  |  |

 

**10.  OtherGuaranties.**

 

During 2003, Lancer FBD obtained a $1.5 millionrevolving credit facility from a bank.  We entered into a ContinuingGuarantee Agreement with the lender pursuant to which we guaranteed therepayment of the partnership’s debt, which expired annually.  Inaccordance with FASB Interpretation (“FIN”) No. 45, we recorded a liability of$22,500, which represents the estimated value of the guaranty.  See “Item2, Management’s Discussion 

 

12

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and Analysis of Financial Condition and Results ofOperations — 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, Moo Technologies obtained a $0.75million revolving credit facility from a bank. We entered into a Commercial Guarantee with the lender pursuant to whichwe guaranteed the repayment of the Moo Technologies, LLC debt.  We recorded a liability of $11,250 in 2003,which represents the estimated value of the guaranty.  See “Item 2, Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Critical AccountingPolicies — Guaranties”.  During the firstquarter of 2005, Moo Technologies repaid all amounts due under its revolvingcredit facility and terminated the facility, and the lender released us fromour guaranty of the facility.  Wereversed the liability associated with the guaranty, resulting in income of$11,250 during the first quarter of 2005.

 

 

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

 

*Audit Committee 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 the investigation,we were unable to file our quarterly reports for the second and third quartersof 2003 with the Securities and Exchange Securities and Exchange Commission. OnDecember 5, 2003, we provided financial information for the second and thirdquarters of 2003 in exhibits to a Form 8-K, in order to provide information tothe investing public while the investigation continued.

 

Our inability to file ourquarterly report for the second quarter of 2003 with the SEC on a timely basisviolated the American Stock Exchange (AMEX) continued listing standards,specifically Section 1003(d) of the AMEX Company Guide. We submitted a formalaction plan to regain compliance with AMEX on September 30, 2003 and AMEXaccepted the plan on October 8, 2003. After the initial acceptance, we revisedthe plan with the approval of AMEX in order to accommodate new developments,including our inability to file our annual report on Form 10-K for 2003 and ourquarterly report on Form 10-Q for the first quarter 2004.

 

On January 30, 2004, weannounced that the Audit Committee investigation had concluded and the AuditCommittee had released a general summary of the investigation findings. On July1, 2004, we filed all past due and current periodic reports with the Securitiesand Exchange Commission and regained compliance with the AMEX listingstandards.

 

*US Attorney and Securities andExchange Commission Investigations*. In August 2003, the USAttorney’s Office informed us that it was conducting an investigation arisingfrom allegations raised in a lawsuit against The Coca-Cola Company by a formerCoca-Cola employee, 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, TheCoca-Cola Company announced that the Justice Department had closed itsinvestigation of allegations raised in the Matthew Whitley lawsuit and thatthey had reached a settlement with the Securities and Exchange Commissionregarding their investigation relating to certain allegations set forth in theMatthew Whitley lawsuit. The settlement between The Coca-Cola Company and theSecurities and Exchange Commission, as described in the Security and ExchangeCommission’s Order Instituting Cease-and-Desist Proceedings, Making Findingsand Imposing a Cease-and-Desist Order Pursuant to Section 8A of the SecuritiesAct of 1933 and Section 21C of the Securities Exchange Act of 1934, In theMatter of The Coca-Cola Company, dated April 28, 2005, did not

13

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relate to the businessdealings between Lancer and The Coca-Cola Company or any of the allegationsfrom the Matthew Whitley lawsuit that involved Lancer.

Wehave not been advised by the US Attorney’s Office that their investigation ofmatters relating to Lancer has been closed, nor have we been advised by theSecurities and Exchange Commission of the status of their investigation ofLancer as described under their formal order of investigation or what, if any,effect The Coca-Cola Company’s settlement with the Securities and ExchangeCommission had or will have on either investigation. Therefore, we are unableat this point to predict the scope or outcome of any ongoing Justice Departmentor Securities and Exchange Commission investigations, and note that, if theinvestigations are in fact continuing, they could still result in theinstitution of administrative, civil injunctive or criminal proceedings, theimposition of fines and penalties, and/or other remedies and sanctions.

 

**Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

This report containscertain “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. We desire to take advantage of the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995 and we areincluding this statement for the expressed purpose of availing ourselves of theprotection of the safe harbor with respect to all of such forward-lookingstatements. These forward-looking statements describe future plans orstrategies and include our expectations of future financial results and ofteninclude words such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,”“believe,” “predict,” “plan,” “potential,” and “continue,” and the negatives ofthese terms and variations of them or similar terminology. Theseforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance or achievements tobe materially different from results expressed or implied by theforward-looking statements.  Factors thatcould 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 industry in which wecompete;

•                  changes in our labor conditions;

•                  our capital expenditure requirements;

•                  technological changes and innovations;

•                  legislative or regulatory requirements;

•                  operating changes and product needs of our maincustomer, The Coca-Cola Company;

•                  losses from litigation; and

•                  all other factors described herein under “RiskFactors.”

 

These and other factorsshould be considered in evaluating the forward-looking statements, and unduereliance should not be placed on such statements.

 

We do not undertake andspecifically disclaims any obligation to update any forward-looking statementsto reflect occurrence of anticipated or unanticipated events or circumstancesafter the date of such statements.

 

Thefollowing discussion should be read in connection with our Consolidated FinancialStatements, related notes and other financial information included elsewhere inthis document.

 

 

**Overview**

 

***General****.*  We design, engineer, manufacture and marketfountain soft drink, beer and citrus beverage dispensing systems, and otherequipment for use in the food service and beverage industry.  We also market frozen beverage dispensersmanufactured by Lancer FBD, a partnership in which we own a 50% partnershipinterest.  Our products 

 

14

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are sold by our employees and through independent distributors andagents predominantly to major soft drink companies (primarily The Coca-ColaCompany, 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 be divided intofour major categories: (i) fountain soft drink, citrus, and frozen beveragedispensers, which includes a broad range of mechanically cooled and ice cooledsoft drink and citrus dispensing systems; (ii) post-mix dispensing valves,which mix syrup and carbonated water at a preset ratio; (iii) beer dispensingsystems and related accessories; and (iv) other products and services, whichincludes various dispensing systems and replacement parts in connection withthe remanufacturing process.

 

**Critical Accounting Policies**

The Consolidated Financial Statements and Notes toConsolidated Financial Statements contain information that is important tomanagement’s discussion and analysis.  The preparation of financialstatements in conformity with generally accepted accounting principles in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities.

Critical accounting policies are those that reflectsignificant judgments and uncertainties and may result in materially differentresults under different assumptions and conditions.  We believe that ourcritical accounting policies are limited to those described below.  For adetailed discussion on the application of these and other accounting policies,see “Note 1 - Summary of Significant Accounting Policies” in the Notes toConsolidated Financial Statements.

*Revenue Recognition*

We recognize revenue in accordance with the followingmethods:

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

### **(b)**         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.

### **(c)**          Prior to 2003, we had agreed toprovide exclusive rights for use of certain tools to The Coca-ColaCompany.  These tools are included in fixed assets and are depreciatedover the life of the asset.  The corresponding license and maintenancefees are recorded as deferred income and recognized over the life of theagreement, which approximates the life of the corresponding asset. After 2002,the Company has agreed to maintain certain tools that are the property of TheCoca-Cola Company. The corresponding maintenance fees are recorded as deferredincome and recognized over the life of the corresponding tool.

*Reserve for Slow Moving and Obsolete Inventory*

We provide for slow moving inventory based on ananalysis of the aging and utility of the inventory. Obsolete inventory is 100%reserved at the time the product is deemed obsolete due to technological advancesand discontinuation of products. In addition, management’s evaluation of thespecific items also influences the reserve.  We believe that the reserveas of March 31, 2005 is adequate to provide for expected losses.

*Medical Costs and Worker’s Compensation Accrual*

We maintain a self-insurance program for major medicaland hospitalization coverage for employees in the United States and theirdependents, which is partially funded by payroll deductions.  The estimateof the accrual necessary for claims is based on our estimate of claims incurredas of the end of the quarter. We use detail lag reports provided 

15

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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 March 31, 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. Weinclude compensation, warehousing expenses, office expenses, and other costsrelating to maintaining our distribution subsidiaries in selling, general andadministrative expenses.  These expensesfrom distributor subsidiaries included in selling, general and administrativeexpenses were $1.3 million and $1.4 million in the three-month periods endedMarch 31, 2005 and 2004, respectively. Corporate expenses relating to product development, accounting, humanresources, and information technology are included in selling, general andadministrative expenses.

 

*Goodwill*

We account for goodwill and other intangible assets inaccordance with Statement of Financial Accounting Standards SFAS No. 142, “Goodwilland Other Intangible Assets,” which requires that goodwill and certainindefinite-lived assets no longer be amortized, but instead be evaluated atleast annually for impairment.   Weadopted the provisions of SFAS 142 on January 1, 2002.

The determination of the value of goodwill and otherintangibles requires us to make estimates and assumptions about future businesstrends and growth.  If an event occurs which would cause us to revise ourestimates and assumptions used in analyzing the value of our goodwill or otherintangibles, such revision could result in an impairment charge that could havea material adverse impact on our results of operations for the period in whichthe impairment is recognized.

Goodwill is tested for impairment annually as of September30 or whenever an event occurs or circumstances change that may reduce the fairvalue of the reporting unit below its book value.  The impairment test isconducted for each reporting unit in which goodwill is recorded by comparingthe fair value of the reporting unit with its carrying value.  Fair valueis determined primarily by computing the future discounted cash flows expectedto be generated by the reporting unit.  If the carrying value exceeds thefair value, goodwill may be impaired. If this occurs, the fair value of thereporting unit is then allocated to its assets and liabilities in a mannersimilar to a purchase price allocation in order to determine the implied fairvalue of the goodwill of the reporting unit.  The implied fair value isthen compared with the carrying amount of the goodwill of the reporting unit,and, if it is less, we would then recognize an impairment loss.

Other intangible assets with definite useful lives arerecorded on the basis of cost in accordance with SFAS No. 142 and are amortizedon a straight-line basis over their estimated useful lives, which range fromeighteen months to fifteen years.  Inaccordance with SFAS No. 142, we subjected these assets to tests of impairmentand we determined that certain patents we hold no longer have value due to technologicalchanges and obsolescence.

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*Allowance for Doubtful Accounts*

We maintain our allowance for doubtful accounts at abalance adequate to reduce accounts receivable to the amount of cash expectedto be realized on collection. The methodology used to determine the allowanceis based on our prior collection experience. Specific customers’ financialstrength and circumstance also influence the balance of our allowance fordoubtful accounts. Accounts that are determined to be uncollectible arewritten-off in the period in which they are determined to be 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.

 

 

***Segments. ***We manage our business by geographicregion, 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.

 

 

**Resultsof Operations**

 

***Comparison of the Three-Month Periods Ended March 31, 2005 and 2004***

 

*Revenues.*

 

Revenues by Geographic Segment

(Amounts in thousands)

 
| ** **            | ** ** | ** **                  | ** ** | ** **        | ** ** | **% Change**     | ** ** |
|-----------------------|------------|-----------------------------|------------|-------------------|------------|------------------|------------|
| ** **            | ** ** | **Quarter Ended March 31,** | ** ** | **First Quarter** | ** ** |
| ** **            | ** ** | **2005**                    | ** ** | **2004**          | ** ** | **2005 vs 2004** | ** ** |
| North America  region |       | $                           | 20,395     |              | $          | 18,336           |       | 11 | % |
| Latin America  region |       | 1,819                       |       | 1,094             |       | 66               | %          |
| Asia/Pacific  region  |       | 5,711                       |       | 6,620             |       | -14              | %          |
| Europe region         |       | 3,698                       |       | 3,457             |       | 7                | %          |
|                  |       | $                           | 31,623     |              | $          | 29,507           |       | 7 | % |
|                  |       |                        |       |              |       |             |       |
|                       |            |                             |            |                   |            |                  |            |  |  |  |

 

Netsales for the three months ended March 31, 2005 were $31.6 million, up 7% from$29.5 million in the same period of 2004. Currency exchange rate fluctuations had a positive impact of 1% on 2005first quarter sales.  In the NorthAmerica region, quarterly sales rose 11% on improved sales to chain accountcustomers.  Sales improved by 66% in theLatin America region.  Of the $0.7 millionof sales growth in the region, $0.4 million came from the sale of equipmentthat we had previously rented to our customers. Sales declined 14% in the Asia/Pacific region, despite the positiveeffect of 2% from exchange rate fluctuations. We experienced lower demand for fountain and beer systems in Australia,our largest market in the region.  A 7%sales increase in the Europe region was primarily due to the positive impactfrom currency exchange rate fluctuations.

 

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*GrossMargin*.

 

Gross Margin by Geographic Segment

(Amounts in thousands)

 

| ** **            | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| North America  region |       | 34.9                        | %          | 28.5 | % |
| Latin America  region |       | 31.9                        | %          | 24.9 | % |
| Asia/Pacific  region  |       | 22.5                        | %          | 30.4 | % |
| Europe region         |       | 32.5                        | %          | 31.8 | % |
|                  |       | 32.2                        | %          | 29.2 | % |
|                  |       |                        |       |   |   |

 

Grossmargin was 32.2% in the first quarter of 2005, compared to 29.2% in the firstquarter of 2004.  Much of the improvementcame in the North America region, where higher factory output to supportincreased sales levels aided gross margin. Higher manufacturing volume tends to have a positive impact on grossmargin because a significant portion of our manufacturing costs is fixed.  Gross margin increased in the Latin Americaregion due largely to margin associated with the sale of equipment that we hadpreviously rented to our customers.  Inthe Asia/Pacific region, gross margin declined in the first quarter of 2005because of lower factory output at our manufacturing facility in Australia, and$0.2 million of factory relocation expense.

 

*OperatingExpenses*.

 

Selling, General and Administrative Expenses bySegment

(Amounts in thousands)

 

| ** **            | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| North America  region |       | $                           | 1,408      |   | $ | 1,421 |   |
| Latin America  region |       | 143                         |       | 435 |   |
| Asia/Pacific  region  |       | 1,158                       |       | 1,294 |   |
| Europe region         |       | 623                         |       | 510 |   |
| Corporate             |       | 3,615                       |       | 3,852 |   |
|                  |       | $                           | 6,947      |   | $ | 7,512 |   |
|                  |       |                        |       |   |   |

 

Selling,general and administrative expenses were $6.9 million in the first quarter of2005, compared to $7.5 million in the same period of 2004.  Spending declined in the Latin America regiondue to the closure of some of our sales offices and a reduction inemployment.  Additionally, we reversed$0.1 million of bad debt reserve due to the improved credit quality of ouraccounts receivable in the Latin America region.  In the Europe region, most of the increase inspending was caused by personnel related expense.  In the Corporate segment, compliance costsassociated with the requirements of Section 404 of the Sarbanes-Oxley Act of2002 were $0.3 million in the first quarter of 2005.  Although we are unable to predict the exactcost of continuing compliance with the Sarbanes-Oxley Act with any certainty,we currently expect to spend an additional $0.6 million during the remainingthree quarters of 2005.  During the firstquarter of 2004, we incurred $0.9 million of audit-related expenses and costsassociated with the investigations conducted by our Audit Committee, theSecurities and Exchange Commission and the US Attorney’s Office.  These costs did not recur in the 2005 period.

 

Otheroperating income in the first quarter of 2005 consisted primarily of a $0.3million gain on the sale of land and improvements located in Bee County,Texas.  See “Liquidity and CapitalResources — Cash Provided by Operations 

 

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andCapital Expenditures” below.  In the 2004period, other operating income consisted primarily of a $0.4 million gainrelating to insurance proceeds from a claim of damages from a fire thatoccurred in 2003.

 

*Non-OperatingIncome/Expenses.*  The following information relates to certainof our non-operating income and expenses during the three-month periods endedMarch 31, 2005 and 2004:

 

•                  Income from joint ventures was $0.3 million in the firstquarter of 2005, compared to $0.2 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 quarter of both 2005 and2004.  We expect Moo Technologies to beunprofitable for the remainder of 2005.

•                  The effective tax rate in the first quarter of 2005was 35.2%, compared to 36.4% in the first quarter of 2004.  Our lower level of profitability in the firstquarter of 2004 enhanced the impact of nondeductible expenses on the tax rate.

 

*NetEarnings/Loss*.  Net earnings were $2.6 million in the firstquarter of 2005, compared to $0.9 million in the first quarter of 2004.  Higher sales and gross margin, plus loweroperating expenses, caused most of the improvement in profitability.

 

**Liquidityand 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.

 

*CashProvided by Operations and Capital Expenditures.*

Cashused in operating activities was $0.2 million in the first quarter of 2005,compared to $1.4 million of cash provided by operating activities in the firstquarter last year.  During the 2005period, inventory growth and lower accrued expenses more than offset higher netearnings, causing the negative comparison to the prior year.  We made capital expenditures of $0.7 millionand $0.5 million during the first three months of 2005 and 2004,respectively.  Most of the capital spendingin both periods was for production equipment and tooling.  During the first quarter of 2005, we placedan order for $1.2 million as part of a project for approximately $1.7 millionto acquire new manufacturing equipment. We expect to pay for the full amount of the project during the remainderof 2005.

 

During the first quarter of 2005, we completed the sale of 546.65 acresof land and improvements, located in Bee and Karnes Counties, Texas, toSchroeder Land and Cattle Company, Incorporated (SLCC). The purchase price of$0.7 million approximates the average of two independent third party appraisalson the property.  SLCC is owned by thechildren of Alfred A. Schroeder and George F. Schroeder.  Both Alfred A. Schroeder and George F.Schroeder are our employees, members of our Board, and significant shareholdersof our stock.  Lance M. Schroeder, son ofAlfred A. Schroeder, is our Vice President of Corporate Development and is a25% owner of SLCC.  We had previouslyused the property, commonly known as the Monteola Ranch, for entertainingcustomers and other business associates. We realized a gain of $257 thousand on the transaction in the firstquarter of 2005.

 

*Credit Facility.*  As of March31, 2005, there were no amounts outstanding under our $15.0 million revolvingcredit facility, and $15.0 million was available for borrowing.   Also as of March 31, 2005, we were incompliance with all of the covenants of the credit facility.

 

*Disputed Debt*.  We have a$1.196 million principal amount of disputed debt payable in relation to ourdiscontinued Brazilian operations that was due on December 31, 2001.  We have recorded the balance of the disputeddebt plus interest in the amount of $0.15 million accrued through March 31,2005 in our financial statements. During the second quarter of 2003, the payeedemanded payment of the debt, and we made a settlement offer. We have had nodiscussions with the payee since 2003. We may not be successful in negotiatinga settlement of this disputed debt, in which case the total amount would remaindue and payable.  If that were to occur,we would have to determine what other options are available to us, includinglitigation. If we determined that the debt should simply be paid at that 

 

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time, we believe that we would likely have sufficient fundingavailable, through our cash reserves and/or our available capacity under ourcredit facility, to pay the disputed debt.

 

At March 31, 2005 and December 31, 2004, long-term obligationsconsisted of the following:

 
| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|---------------|------------|------------------|------------|
| **(amounts  in thousands)**  | ** ** | **2005**      | ** ** | **2004**         | ** ** |
|                         |       |          |       |             |       |
| Credit facility              |       | $             | —     |             | $          | — |   |
| Disputed debt                |       | 1,196         |       | 1,196            |       |
| Capital lease  obligation    |       | 245           |       | 281              |       |
| Total long-term  obligations |       | 1,441         |       | 1,477            |       |
| Less: Current  maturities    |       | 1,348         |       | 1,345            |       |
| Long-term  obligations, net  |       | $             | 93         |             | $          | 132 |   |
|                         |       |          |       |             |       |

 

**Off-BalanceSheet Arrangements**

 

We own50% of Lancer FBD, a manufacturer of frozen beverage dispensing equipment. Weguaranteed repayment of Lancer FBD’s $1.5 million credit facility with a bankuntil the facility’s expiration on March 3, 2005.  After the expiration of the facility, thebank released our guarantee. Accordingly, we reversed an accrual for the value of the guaranty,resulting in income of $22,500 during the first quarter of 2005.  Lancer’s portion of Lancer FBD’s net incomein 2004 was $1.4 million, and its share of Lancer FBD’s net income in the threemonths ended March 31, 2005 was $0.4 million.

 

We own 50% of Moo Technologies, a developmental stagelimited liability company engaged in the commercialization of concentratedshelf-stable milk products.  Untilrecently, we guaranteed Moo Technologies’ $0.75 million revolving creditfacility with a bank.  During the firstquarter of 2005, Moo Technologies repaid all amounts outstanding under therevolving credit facility and terminated the facility, and the lender releasedus from our guaranty.   Our portion ofMoo Technology’s loss was $0.3 million in 2004, and $0.1 million during thefirst quarter of 2005.  We have invested$1.3 million in Moo Technologies since its inception, including $0.5 millionduring the first quarter of 2005, bringing our net investment in the company to$0.7 million as of March 31, 2005.  Weexpect Moo Technologies to be unprofitable through at least 2005, and we expectto continue to fund Moo Technologies in a manner consistent with what we havedone 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 orindirectly, the volume and price of the products sold by us. While we do notanticipate the loss or reduction in this business or the imposition ofsignificant price constraints based upon our past experience and currentrelations with The Coca Cola Company, any such occurrence would have a materialadverse effect on us and 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 

 

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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 competitorsmay be afforded an opportunity to provide their products to our customers andbegin to 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 theSecurities and Exchange Commission had issued a formal order of investigationthat appeared to concern matters which were the subject of the Investigation.We have fully cooperated, and intend to fully cooperate with any continuinginvestigation by the US Attorney’s Office or the Securities and ExchangeCommission. See Note 12 to the “Notes to the Consolidated Financial Statements”for more information relating to these investigations. Although we are unableat this point to predict the scope or outcome of these investigations, it ispossible that they could result in the institution of administrative, civilinjunctive or criminal proceedings, the imposition of fines and penalties,and/or other remedies and sanctions. The conduct of these type of proceedingscould adversely affect our business. We may incur further expenses associatedwith responding to these agencies, regardless of the outcome, and the effortsand attention of our management team may be diverted from normal businessoperations which could, in turn adversely affect our business, financialcondition, operating results, and cash flow.

 

In addition, under the terms of our new creditfacility, certain governmentally imposed fines or cease and desist orders arean event of default and could result in the termination of the loan commitmentsand acceleration of the outstanding debt thereunder. If we did not havesufficient cash to pay the accelerated amount, we would need to find alternatefunding sources, sell assets, or find other ways to raise the cash, none ofwhich we can guarantee we would be able to do on commercially reasonable termsor 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 target of securities class actionlitigation in the past. Securities class action litigation is often broughtagainst a company following a decline in the market price of its securities.Certain factors, including the uncertainty of the Securities and ExchangeCommission and US Attorney’s Office investigations could lead to morevolatility in our stock price, which could in turn cause us to be the target offuture securities class action claims. If we were to become a target of futureclass action claims, it would likely require significant commitment of ourfinancial and management resources and time, subverting resources and time awayfrom our other business needs, which may materially and adversely affect ourbusiness, financial condition and results of operations.

 

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

 

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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 offers may also have the ability to delay orprevent 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 $0.7million at March 31, 2005, including $0.5 million that we invested in the firstquarter of 2005. Moo Technologies’ inability to generate revenues and/orprofits in the future could lead to the impairment of some or all of ourinvestment and such investment could be permanently lost.

 

***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:

 

•        exposureto local economic conditions;

•        potentialadverse changes in the diplomatic relations of foreign countries with theUnited States;

•        hostilityfrom local populations;

•        theadverse effect of currency exchange controls;

•        restrictionson the withdrawal of foreign investment and earnings;

•        governmentpolicies against businesses owned by foreigners;

•        investmentrestrictions or requirements;

•        expropriationsof property;

•        thepotential instability of foreign governments;

•        the riskof insurrections;

•        foreignexchange restrictions;

•        withholdingand other taxes on remittances and other payments by subsidiaries; and

•        changesin 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 couldadversely affect the price of our common stock.***

 

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.

 

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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. The tradingprice of our common stock has been and is likely to continue to be volatile dueto such factors as:

 

•                  variations in quarterly results of our operations;

•                  announcements of new products or acquisitions by ourcompetitors;

•                  governmental regulatory action;

•                  resolution of pending or unasserted litigation;

•                  final resolution of the Securities and ExchangeCommission or US Attorney investigations of which we are a subject; and

•                  general trends in our industry and overall marketconditions.

 

Movements in pricesof equity securities in general may also affect the market price of our commonstock.

 

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

 

Sinceour inception, we have not paid, and we have no current plan to pay, cashdividends on our common stock. We currently intend to retain all earnings tosupport our operations and future growth. The payment of any future dividendswill be determined by the Board based upon our earnings, financial conditionand cash requirements, restrictions in financing agreements, businessconditions and other factors the Board may deem relevant.

 

 

# **Item 3 -Quantitative and Qualitative Disclosures About Market Risk**

 

There have been no significant changes in the Company’s market riskfactors since December 31, 2004.

 

 

**Item 4 — Controls and Procedures**

 

The Company’s principalexecutive and financial officers have concluded, based on their evaluation asof the end of the period covered by this Form 10-Q, that Lancer’s disclosurecontrols and procedures, as defined under Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, are effective to ensure that informationthe Company is required to disclose in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and include controlsand procedures designed to ensure that information we are required to disclosein such reports is accumulated and communicated to management, including ourprincipal executive and financial officers, as appropriate, to allow timelydecisions regarding required disclosure.

 

There has been no change in the Company’s internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Exchange Act) thatoccurred during Lancer’s last fiscal quarter that has materially affected, oris reasonably likely to materially affect, Lancer’s internal control overfinancial reporting.

 

 

 

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**PART II**

**OTHER INFORMATION**

 

 

**Item 1 - Legal Proceedings**

 

In August 2003, the USAttorney’s Office informed us that it was conducting an investigation arisingfrom allegations raised in a lawsuit against The Coca-Cola Company by a formerCoca-Cola employee, 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 of ourprior 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, TheCoca-Cola Company announced that the Justice Department had closed itsinvestigation of allegations raised in the Matthew Whitley lawsuit and thatthey had reached a settlement with the Securities and Exchange Commissionregarding their investigation relating to certain allegations set forth in theMatthew Whitley lawsuit. The settlement between The Coca-Cola Company and theSecurities and Exchange Commission, as described in the Security and ExchangeCommission’s Order Instituting Cease-and-Desist Proceedings.  Making Findings and Imposing aCease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 andSection 21C of the Securities Exchange Act of 1934, In the Matter of TheCoca-Cola Company, dated April 18, 2005, did not relate to the businessdealings between Lancer and The Coca-Cola Company or any of the allegationsfrom the Matthew Whitley lawsuit that involved Lancer.

Wehave not been advised by the US Attorney’s Office that their investigation ofmatters relating to Lancer has been closed, nor have we been advised by theSecurities and Exchange Commission of the status of their investigation ofLancer as described under their formal order of investigation or what, if any,effect The Coca-Cola Company’s settlement with the Securities and ExchangeCommission had or will have on either investigation. Therefore, we are unableat this point to predict the scope or outcome of any ongoing Justice Departmentor Securities and Exchange Commission investigations, and note that, if theinvestigations are in fact continuing, they could still result in theinstitution of administrative, civil injunctive or criminal proceedings, theimposition of fines and penalties, and/or other remedies and sanctions.

 

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

Not Applicable

 

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

 

Not Applicable

 

**Item 4 - Submission of Matters to a Vote ofSecurity Holders**

 

Not Applicable

 

**Item 5. Other Information**

 

Not Applicable

 

**Item 6. Exhibits**

 

Exhibits:  See Exhibit Index onPage 26.

 

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**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.

 

**                                                                           **
| **Date:**    | **LANCER CORPORATION** **(Registrant)** |
|--------------|----------------------------------------------|
| ** **   | ** **                                   | ** ** |
| ** **   | By:                                          |  /s/  CHRISTOPHER D. HUGHES |
| May 10, 2005 |                                         | Christopher D. Hughes  Chief Executive Officer |
|         |                                         |   |
| May 10, 2005 | By:                                          |  /s/ MARK L.  FREITAS |
|         |                                         | Mark L. Freitas  Chief Financial Officer |
|         |                                         |   |
|         |                                         |   |

 

 

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**INDEX TO EXHIBITS**

 

 

 

| **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. |

 

 

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