LANCER CORP /TX/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934

For the quarter ended June 30, 2002

Commission file number 0-13875

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

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

Registrant's telephone number, including area code: (210) 310-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 14(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

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

Title

Common stock, par value $.01 per share

Shares outstanding as of
July 31, 2002
9,331,501

Part I—Financial Information
Item 1—Financial Statements

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

ASSETS

					June 30, 2002			December 31, 2001
					(Unaudited)
Current assets:
	Cash				$	1,895		$	1,849
	Receivables:
			Trade accounts and notes			23,320			17,477
			Other			928			850

						24,248			18,327
			Less allowance for doubtful accounts			(504	)		(467	)

				Net receivables		23,744			17,860

	Inventories					29,528			32,160
	Prepaid expenses					794			655
	Deferred tax asset					201			211

				Total current assets		56,162			52,735

Property, plant and equipment, at cost:
	Land					1,432			1,260
	Buildings					21,902			21,906
	Machinery and equipment					23,312			23,028
	Tools and dies					13,494			12,884
	Leaseholds, office equipment and vehicles					10,919			10,402
	Assets in progress					1,251			1,194

						72,310			70,674
	Less accumulated depreciation and amortization					(36,991	)		(34,673	)

		Net property, plant and equipment				35,319			36,001

Long-term receivables ($373 and $407 due from officers, respectively)						619			612
Long-term investments						2,495			2,278
Intangibles and other assets, at cost, less accumulated amortization						5,169			4,674

					$	99,764		$	96,300

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)

(Amounts in thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

			June 30, 2002			December 31, 2001
			(Unaudited)
Current liabilities:
	Accounts payable		$	11,472		$	7,911
	Current installments of long-term debt			2,721			2,718
	Line of credit with bank			13,200			15,600
	Deferred licensing and maintenance fees			1,624			1,295
	Accrued expenses and other liabilities			6,663			4,754
	Taxes payable			1,426			896

		Total current liabilities		37,106			33,174

Deferred tax liability				1,539			2,032
Long-term debt, excluding current installments				10,575			11,872
Deferred licensing and maintenance fees				3,251			4,478
Other long-term liabilities				367			403

		Total liabilities		52,838			51,959

Commitments and contingencies				—			—
Minority interest				—			55
Shareholders' equity:
	Preferred stock, without par value 5,000,000 shares authorized; none issued			—			—
	Common stock, $.01 par value: 50,000,000 shares authorized; 9,389,319 issued and 9,333,115 outstanding in 2002, and 9,127,757 issued and outstanding in 2001			94			91
	Additional paid-in capital			12,292			11,943
	Accumulated other comprehensive loss			(2,453	)		(3,976	)
	Retained earnings			37,311			36,228
Less common stock in treasury, at cost; 56,204 shares in 2002				(318	)		—

		Total shareholders' equity		46,926			44,286

			$	99,764		$	96,300

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(Amounts in thousands, except share data)

			Three Months Ended						Six Months Ended
			June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Net sales			$	37,306		$	31,207		$	67,556		$	60,877
Cost of sales				27,574			23,875			50,616			46,519

	Gross profit			9,732			7,332			16,940			14,358
Selling, general and administrative expenses				6,585			5,641			12,454			11,337

	Operating income			3,147			1,691			4,486			3,021

Other (income) expense:
	Interest expense			382			811			842			1,916
	Loss from joint venture			46			116			138			55
	Minority interest			(11	)		(61	)		(55	)		(120	)
	Other income, net			(224	)		(57	)		(307	)		(1,176	)

				193			809			618			675

		Income from continuing operations before income taxes		2,954			882			3,868			2,346
Income tax expense:
	Current			938			356			1,269			921
	Deferred			101			18			105			17

				1,039			374			1,374			938

		Income from continuing operations		1,915			508			2,494			1,408
Discontinued operations
	Loss from operations of discontinued Brazilian subsidiary (including loss on disposal of $1,760)			2,020			39			2,138			83
	Income tax benefit			(687	)		(13	)		(727	)		(28	)

Loss from discontinued operations				1,333			26			1,411			55

		Net earnings	$	582		$	482		$	1,083		$	1,353

Common Shares Outstanding:
Basic				9,332,135			9,126,218			9,318,031			9,126,397
Diluted				9,408,263			9,333,577			9,398,304			9,326,762
Earnings Per Share:
Basic
	Earnings from continuing operations		$	0.20		$	0.05		$	0.27		$	0.15
	Loss from discontinued operations		$	(0.14	)	$	0.00		$	(0.15	)	$	0.00

Net earnings				0.06			0.05			0.12			0.15

Diluted
	Earnings from continuing operations		$	0.20		$	0.05		$	0.27		$	0.15
	Loss from discontinued operations		$	(0.14	)	$	0.00		$	(0.15	)	$	0.00

Net earnings				0.06			0.05			0.12			0.15

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(Amounts in thousands)

				Six Months Ended
				June 30, 2002			June 30, 2001
Cash flow from operating activities:
	Net earnings			$	1,083		$	1,353
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
		Depreciation and amortization			2,480			2,286
		Deferred licensing and maintenance fees			(898	)		771
		Deferred income taxes			105			17
		Gain on sale and disposal of assets			(11	)		(12	)
		Minority interest			(55	)		(120	)
		Loss from joint venture			138			55
		Loss on disposal of discontinued Brazilian subsidiary, net of taxes			1,162			—
		Changes in assets and liabilities:
			Receivables		(5,657	)		(1,460	)
			Prepaid expenses		(139	)		(57	)
			Inventories		2,373			(1,100	)
			Other assets		(387	)		(358	)
			Accounts payable		3,583			1,870
			Accrued expenses		1,500			391
			Income taxes payable		503			389

	Net cash provided by operating activities				5,780			4,025

Cash flow from investing activities:
		Proceeds from sale of assets			18			49
		Acquisition of property, plant and equipment			(1,507	)		(1,921	)
		Acquisition of subsidiary company			(252	)		—
		Acquisition of long-term investments, net			(360	)		—

	Net cash used in investing activities				(2,101	)		(1,872	)

Cash flow from financing activities:
		Net payments under line of credit agreements			(2,400	)		(900	)
		Retirement of long-term debt			(1,294	)		(790	)
		Proceeds from exercise of stock options			34			6

	Net cash used in financing activities				(3,660	)		(1,684	)

Effect of exchange rate changes on cash					27			(207	)

Net increase in cash					46			262
Cash at beginning of period					1,849			771

Cash at end of period				$	1,895		$	1,033

See accompanying notes to consolidated financial statements.

LANCER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

All adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair presentation of financial position and results of operations. All intercompany balances and transactions have been eliminated in consolidation. It is suggested that the consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the December 31, 2001 Annual Report on Form 10-K.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current year's presentation.

2. New Accounting Pronouncements

Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and other Intangible Assets." SFAS No. 142 provides guidance on how goodwill and other intangible assets that are acquired or have already been recognized in the financial statements should be accounted for. Under SFAS No. 142 goodwill and certain other intangible assets will no longer be amortized, but will be required to be reviewed periodically for impairment of value. The Company tested goodwill for impairment using the two-step process described in SFAS. 142. The first step is to screen for potential impairment, if any, while the second step measures the amount of impairment, if any. The Company has performed an impairment analysis and concluded that the value of its goodwill is not impaired. With the adoption of SFAS No. 142, the Company ceased the amortization of goodwill with a book value of $1.6 million as of January 1, 2002. Had amortization of goodwill not been recorded during the quarter ended June 30, 2001, the net earnings would have been increased by approximately $26,000, net of taxes, basic earning per share would have increased to $.06 and diluted earnings per share would have remained unchanged. For the six months ended June 30, 2001, the net earnings would have been increased by approximately $54,000, net of taxes; basic and diluted earnings per share would remain unchanged.

SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June 2001, establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. The Company is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The Company believes the adoption of SFAS No. 143 will not have a material impact on the Company's financial statements.

Effective January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed of." However, it retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical

Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to lease-back transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for transactions occurring after May 15, 2002. The Company adopted SFAS No. 145 on May 16, 2002 with no material impact on the Company's financial statements.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," issued in July 2002, addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability be recognized for the cost associated with an exit or disposal activity only when the liability is incurred, that is, when it meets the definition of a liability in the FASB conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes the adoption of SFAS No. 146 will not have a material impact on the Company's financial statements.

3. Discontinued Operations

During the quarter ended June 30, 2002, the Company decided to close its Brazilian subsidiary. The Company expects the closure will be completed by December 31, 2002, through liquidation. In connection with the closure of the Brazilian subsidiary, the Company recorded an estimated loss from disposal of discontinued operations of $1.8 million in the quarter ended June 30, 2002 related to the write-down of the Brazilian subsidiary assets net of expected proceeds, foreign currency translation losses, and an accrual for estimated exit costs. Accordingly, the Company has reported the results of operations of the Brazilian subsidiary as discontinued operations for the three and six months ended June 30, 2002 and 2001 in the Consolidated Statements of Operations. For business segment reporting purposes, the Brazil operation was previously classified as the segment "Brazil."

Certain information with respect to the discontinued Brazilian operation for the three and six month ended June 30, 2002 and 2001 is as follows (amounts in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Net sales	$	87		$	234		$	216		$	579

Pretax loss from discontinued operations		260			39			378			83
Pretax loss on disposal of discontinued operations, net of tax		1,760			—			1,760			—
Income tax benefit		(687	)		(13	)		(727	)		(28	)

Net loss from discontinued operations	$	1,333		$	26		$	1,411		$	55

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

		June 30, 2002			December 31, 2001
Current assets		$	525		$	1,436
Property, plant and equipment, net			483			363
Current liabilities			(1,771	)		(1,649	)

	Net (liabilities) assets of discontinued operation	$	(763	)	$	150

4. Inventory Components

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

	June 30, 2002		December 31, 2001
Finished goods	$	12,055	$	14,350
Work in process		7,652		8,199
Raw material and supplies		9,821		9,611

	$	29,528	$	32,160

5. Earnings Per Share

Basic earnings per share is calculated using the weighted average number of common shares outstanding and diluted earnings per share is calculated assuming the issuance of common shares for all potential dilutive common shares outstanding during the reporting period. The dilutive effect of stock options approximated 76,128 and 207,359 for the three months ended June 30, 2002 and 2001, and 80,273 and 200,365 for the six months ended June 30, 2002 and 2001, respectively.

6. Comprehensive Income

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

			Three Months Ended				Six Months Ended
			June 30, 2002		June 30, 2001		June 30, 2002			June 30, 2001
Net earnings			$	582	$	482	$	1,083		$	1,353
Foreign currency translation gain (loss):
	Foreign currency gain (loss) arising during the period			314		103		624			(827	)
	Reclassification adjustment for losses included in discontinued operations			892		—		892			—

		Net foreign currency translation gain (loss)		1,206		103		1,516			(827	)
Unrealized gain (loss) on investment, net of tax				11		28		(3	)		40
Unrealized loss on derivative instruments:
	Initial loss upon adoption of SFAS No. 133			—		—		—			(51	)
	Reclassification adjustment for loss included in interest expense			5		10		10			20

Comprehensive income			$	1,804	$	623	$	2,606		$	535

Accumulated other comprehensive loss on the accompanying consolidated balance sheet includes foreign currency gains (losses), unrealized gain (loss) on investment and unrealized loss on derivative instruments.

7. Income Taxes

The Company elected to treat the Brazilian subsidiary as a partnership for U.S. tax purposes for the year ended December 31, 1999. This election has enabled the Company to recognize for U.S. income tax purposes a loss of $7.7 million on its investment in the Brazilian operation. The Internal Revenue Service (the "Service") is examining the Company's U.S. income tax return for 1999 including the deduction of the loss on its investment in the Brazilian operation, and has proposed the disallowance of the deduction. The Company believes that the Service's proposal is without merit, and intends to vigorously defend its position. The Company does not believe that any significant adjustments will be required as a result of this examination.

8. Segment and Geographic Information

The Company and its subsidiaries are engaged in the manufacture and distribution of beverage dispensing equipment and related parts and components. The Company manages its operations geographically. Sales are attributed to a region based on the ordering location of the customer.

The Brazil segment is reported as discontinued operations for the three and six months ended June 30, 2002 and 2001 in the Consolidated Statement of Operations. See footnote 3 for further discussion of discontinued operations.

(Amounts in Thousands)		North America		Latin America		Pacific		Europe		Asia			Corporate			Total
Three months ended June 30, 2002
	Total revenues	$	27,452	$	3,132	$	3,085	$	3,020	$	617		$	—		$	37,306
	Operating income (loss)		5,185		376		8		755		99			(3,276	)		3,147
Three months ended June 30, 2001
	Total revenues	$	22,007	$	3,045	$	3,203	$	2,691	$	261		$	—		$	31,207
	Operating income (loss)		3,004		302		293		747		(85	)		(2,570	)		1,691
Six months ended June 30, 2002
	Total revenues	$	49,677	$	4,773	$	6,580	$	5,599	$	927		$	—		$	67,556
	Operating income (loss)		8,115		368		458		1,486		143			(6,084	)		4,486
Six months ended June 30, 2001
	Total revenues	$	42,689	$	5,499	$	6,241	$	5,419	$	1,029		$	—		$	60,877
	Operating income (loss)		6,032		556		509		1,386		(4	)		(5,458	)		3,021

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

LANCER CORPORATION AND SUBSIDIARIES

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

This document contains certain "forward-looking" statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect," "forecast," "plan," and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions which exist or must be made as a result of certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, forecast, planned or intended. The Company does not intend to update these forward-looking statements.

Results of Operations

Comparison of the Three-Month Periods Ended June 30, 2002 and 2001

Continuing Operations

Net sales for the three months ended June 30, 2002 were $37.3 million, up 20% from sales in the same period of 2001. Revenue in the Company's North America region increased 25% primarily because of improved sales of the Company's core fountain equipment. Sales rose 12% in Europe and 136% in Asia, which had a particularly weak second quarter in 2001. Sales rose slightly in Latin America (excluding Brazil), and fell slightly in the Pacific region.

Effective May 1, 2002, the Company's joint venture that manufactures frozen beverage equipment will sell directly to third party customers, and will pay a commission to the Company. Prior to May 1, 2002, the joint venture sold substantially all of its production to the Company, and the Company distributed the equipment to third party customers. The change will tend to reduce the Company's reported revenues because the joint venture's operations are not consolidated with those of the Company for reporting purposes.

Gross margin was 26.1% in the second quarter of 2002, up from 23.5% in the second quarter of 2001. Favorable shifts in product mix combined with the benefits of higher throughput drove much of the improvement.

Second quarter selling, general and administrative expenses were $6.6 million in 2002, up from $5.6 million in 2001. Higher compensation expense and professional fees caused most of the increase. SFAS No. 142, which the Company adopted on January 1, 2002, eliminates the amortization of goodwill. Goodwill amortization expense was $40 thousand in the second quarter of 2001.

Interest expense was $0.4 million in the second quarter of 2002, down from $0.8 million in the same period last year. $0.1 million of the decrease in interest expense was caused by the required mark-to-market adjustments of the Company's interest rate swap agreements. Lower average interest rates, combined with lower average borrowings, caused the remainder of the decline. The effective tax

rate was 35.2% in the second quarter of 2002, compared to 42.4% in the 2001 period. The lower rate in 2002 reflects the fact that a larger proportion of the Company's income was earned in lower tax jurisdictions. Income from continuing operations was $1.9 million in the second quarter of 2002, compared to $0.5 million in the same period of 2001.

Discontinued Operations

During the second quarter of 2002, the Company decided to close its Brazilian subsidiary. The Brazilian subsidiary's results are classified as discontinued operations.

Revenues from discontinued operations were $0.1 million in the second quarter of 2002, versus $0.2 million in the second quarter of 2001. In the second quarter of 2002, the Company recognized $1.8 million for the estimated loss from disposal of discontinued operations, and incurred a $0.3 million operating loss from discontinued operations. The Company's loss (net of tax) from discontinued operations was $1.3 million in the second quarter of 2002, and $26 thousand in the second quarter of 2001.

Comparison of the Six-Month Periods Ended June 30, 2002 and 2001

Continuing Operations

Net sales for the six months ended June 30, 2002 were $67.6 million, up 11% from $60.9 million in the first half of 2001. Revenues rose 16% in the North America region, primarily because of improved sales of the Company's core fountain equipment. Sales increased moderately in Europe and the Pacific region. Sales declined 13% in Latin America (excluding Brazil) and 10% in Asia.

Gross margin was 25.1% in the first six months of 2002, up from 23.6% in the same period of 2001. Favorable shifts in product mix combined with the benefits of higher throughput drove much of the improvement.

Selling, general and administrative expenses were $12.5 million in the first half of 2002, up from $11.3 million in the first half of 2001. Higher compensation expense and professional fees caused most of the increase. SFAS No. 142, which the Company adopted on January 1, 2002, eliminates the amortization of goodwill. Goodwill amortization expense was $82 thousand in the first half of 2001.

First half interest expense was $0.8 million in 2002, down from $1.9 million in 2001. $0.5 million of the decrease in interest expense was caused by the required mark-to-market adjustments of the Company's interest rate swap agreements. Lower average interest rates, combined with lower average borrowings, caused the remainder of the decline. Other income of $1.2 million in the first half of 2001 includes a $1.0 million gain relating to the cancellation of a project. The effective tax rate was 35.5% in the first half of 2002, compared to 40.0% in the same period last year. The lower rate in 2002 reflects the fact that a larger proportion of the Company's income was earned in lower tax jurisdictions. Income from continuing operations was $2.5 million in the first six months of 2002, and $1.4 million in the same period of 2001.

Discontinued Operations

During the second quarter of 2002, the Company decided to close its Brazilian subsidiary. The Brazilian subsidiary's results are classified as discontinued operations.

Revenues from discontinued operations were $0.2 million in the first half of 2002, down from $0.6 million in the first half of 2001. During the first half of 2002, the Company recognized $1.8 million for the estimated loss from disposal of discontinued operations, and incurred a $0.4 million operating loss from discontinued operations. The Company's loss (net of tax) from discontinued operations was $1.4 million in the first six months of 2002, and $0.1 million in the same period of 2001.

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash flows from operations and amounts available under the Company's existing lines of credit. The Company has met, and currently expects that it will continue to meet, substantially all of its working capital and capital expenditure requirements, as well as its debt service requirements, with funds provided by operations and borrowings under its credit facilities. The Company is in compliance with, or has obtained waivers of, the financial covenants contained in the credit agreement that governs the Company's primary credit facilities.

Cash provided by operating activities was $5.8 million in the first half of 2002, up from $4.0 million in the first half of 2001. The Company made capital expenditures of $1.5 million in the first six months of 2002, primarily for production tooling and equipment. Additionally, the Company bought the assets of a service company in Australia for $0.3 million. The primary assets acquired were equipment and inventory. The capital spending and the assets acquired in Australia were financed with cash from operations. Additionally, pursuant to a relocation agreement, the Company bought the home of an officer for $0.4 million. The Company sold the home in July 2002.

Accounting Matters

The Company maintains a DISC in order to defer income taxes on its foreign sales. At the same time, the Code was amended to permit the creation of a Foreign Sales Corporation ("FSC"). Under the current Code, the FSC is no longer a separate foreign sales entity. A new category of income—extraterritorial income has been created. Under the Code, as amended, a portion of the extraterritorial income is subject to federal income taxes, while a portion is permanently exempt from federal income taxes. Current tax regulations prevent the Company from maintaining the DISC and have qualifying foreign trade income concurrently. At the time of liquidation of the DISC, the Company would be required to provide for federal income taxes on the $2.4 million of undistributed earnings of the DISC, for which federal income taxes have not previously been provided. The Company would be able to pay such federal income taxes over a ten-year period.

Item 3—Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the Company's market risk factors since December 31, 2001.

Item 4—Submission of Matters to a Vote of Security Holders

At the annual meeting of shareholders of the Company held on May 15, 2002, the shareholders elected seven members of the Board of Directors of the Company to serve until the next annual meeting of shareholders.

The vote for nominated directors was as follows:

Nominee	For	Authority Withheld
Walter J. Beigler	8,725,302	153,475
Jean M. Braley	8,725,302	153,475
Norborne P. Cole	8,726,902	151,875
Olivia F. Kirtley	8,838,102	40,675
Richard C. Osborne	8,839,702	39,075
Alfred A. Schroeder	8,695,286	183,491
George F. Schroeder	8,695,286	183,491

Item 6—Exhibits and Reports on Form 8-K

(a)	Exhibits:
	99.1	Certification of Chief Executive Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.2	Certification of Chief Financial Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Reports on Form 8-K:
	The Company filed a report on Form 8-K dated July 29, 2002. The report incorporated the Company's earnings release for the period ended June 30, 2002.

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 the undersigned thereunto duly authorized.

LANCER CORPORATION
(Registrant)

August 12, 2002		By:		/s/ GEORGE F. SCHROEDER George F. Schroeder Chief Executive Officer
August 12, 2002		By:		/s/ RICHARD N. WINTER Richard N. Winter Chief Financial Officer

INDEX TO EXHIBITS

EXHIBIT NUMBER		DESCRIPTION

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

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

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LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
LANCER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
LANCER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LANCER CORPORATION AND SUBSIDIARIES