UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

		(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2004
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to .

Commission file number: 0-13875

LANCER CORPORATION

(Exact name of Registrant as specified in its charter)

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

6655 Lancer Blvd.,
San Antonio, Texas 78219

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number including area code:

(210) 310-7000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value
$0.01 per share

American Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

On June 30, 2004, (the last business day of the registrant’s most recently completed second fiscal quarter on which the common equity was traded) the aggregate market value of common stock held by non-affiliates (based on the closing market price) was $34,674,593. For purposes of this computation, all executive officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 5% beneficial owners are, in fact, affiliates of the registrant.

The number of shares of the registrant’s common stock outstanding as of March 11, 2005 was 9,465,428.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the definitive proxy statement for the Registrant’s 2005 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

PART I

ITEM 1. BUSINESS

General

We design, engineer, manufacture and market fountain soft drink, beer and citrus beverage dispensing systems, and other equipment for use in the food service and beverage industry. We also market frozen beverage dispensers manufactured by Lancer FBD Partnership, Ltd., a joint venture that is 50% owned by us. Our products are sold by our personnel and through independent distributors and agents principally to major soft drink companies (primarily The Coca-Cola Company), bottlers, equipment distributors, beer breweries, restaurants and convenience stores for use 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 substantial portion of the components used in our products. In addition, we are an innovator of new products in the beverage dispensing industry. We have a large technical staff supported by state-of-the-art engineering facilities to develop new products and to enhance our existing product lines in response to changing industry requirements and specific customer demands.

We were incorporated in Texas on December 18, 1967, and initially manufactured parts for beverage dispensing equipment. We designed, engineered, manufactured and marketed our first mechanically cooled soft drink dispensing system in 1971. Since that time, we have expanded our engineering and production facilities and have developed new products, including various configurations of our mechanically and ice cooled beverage dispensing systems, valves, syrup pumps, and other related equipment, accessories and parts.

The Beverage Dispensing Industry

The manufacture of fountain soft drink and other beverage dispensing systems is a rapidly changing industry. Technological changes and improvements continue to be reflected in the development, manufacture and introduction of new products and processes. Manufacturers of such beverage dispensing systems generally sell most of their products to a small number of major soft drink companies, licensed bottlers, large international breweries, equipment distributors and food service chains. In order to facilitate sales of their beverage products to end-users, soft drink companies and some breweries, and their respective affiliates, in turn sell or lease the dispensing systems to restaurants, convenience stores, concessionaires and other food and beverage operators. Soft drink companies generally recommend that their affiliates purchase beverage dispensing systems from approved manufacturers. Informal, long-term relationships between certain manufacturers and soft drink companies have become the norm in the industry.

Products

Our products can be divided into four major categories: (i) soft drink and citrus dispensing systems; (ii) post-mix dispensing valves; (iii) beer dispensing systems; and (iv) other products and services.

Soft Drink and Citrus Dispensing Systems

We manufacture and sell a broad range of mechanically cooled and ice cooled soft drink and citrus dispensing systems. These systems are non-coin operated. The type of equipment and configuration of each model varies according to intended use and specific customer needs. Our mechanically cooled dispensing systems chill beverages as they run through stainless steel tubing inside a self-contained refrigeration unit. In our ice cooled dispensing systems, the beverage is cooled as it runs through stainless steel tubing encased in an aluminum cold plate which serves as the heat transfer element when covered with ice. Several of the ice cooled systems also dispense ice. We manufacture both post-mix and pre-mix dispensing equipment for each of the mechanically cooled and ice cooled fountain systems.

We manufacture several models of mechanically cooled citrus dispensing systems for counter top use. The Coca-Cola Company is the primary customer for our citrus dispensing products.

Lancer FBD Partnership, Ltd., a joint venture in which we own a 50% interest, manufactures frozen beverage dispensers. The joint venture sells directly to most third party customers, and in certain situations, pays a commission to us in return for our marketing services.

The prices of our dispensing systems vary depending on dispensing capacity, number of drink selections, speed of beverage flow and other customer requirements. Sales of soft drink and citrus dispensing systems for the years ended December 31, 2004, 2003 and 2002, accounted for approximately 36%, 37% and 45% of total net sales, respectively.

Post-Mix Dispensing Valves

We manufacture and sell post-mix dispensing valves which mix syrup and carbonated water at a preset ratio. The valves are designed to be interchangeable with existing post-mix valves used with Coca-Cola products. We manufacture accessories for the valves, including push-button activation, water-only dispensing mechanisms, portion controls and other automatically activated valve controls. Our primary valve, the LEV, has been designated by The Coca-Cola Company as the standard valve for the U.S. market. We use the LEV in many of our own dispensing systems, and also sell the valve to competing equipment makers. For the years ended December 31, 2004, 2003 and 2002, sales of valves and related accessories accounted for approximately 13%, 11% and 10% of total net sales, respectively.

Beer Dispensing Systems

We manufacture and market beer dispensing equipment and related accessories. Products include chillers, taps, fonts and dispensers. Our operations in Australia and New Zealand account for most of our sales of beer related equipment. Sales of beer equipment represented 12%, 10% and 6% of total net sales in the years ended December 31, 2004, 2003 and 2002, respectively.

Other Related Products and Services

We remanufacture various dispensing systems and sell replacement parts in connection with the remanufacturing process. Revenues from remanufacturing activities were 5%, 6% and 6% of net sales in the years ended December 31, 2004, 2003 and 2002.

We manufacture and/or market a variety of other products including syrup pumps, carbonators, stainless steel and brass fittings, carbon dioxide regulator components, water filtering systems, and a variety of other products, accessories, and spare parts for use with beverage dispensing systems. We have an operation in Brisbane, Australia that installs and services beverage equipment. Together, these parts and services constitute 34%, 36% and 33% of our total net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

We own a 50% interest in Moo Technologies, LLC, a development stage company that markets concentrated shelf-stable milk products. The investment is accounted for under the equity method.

Product Research and Development

In order to maintain our competitive position, we continuously seek to improve and enhance our line of existing beverage dispensing systems and equipment, and to develop new products to meet the demands of the food and beverage industry. Some projects are originated by our personnel while others are initiated by customers. We have, from time to time, entered into agreements with customers to design and develop new products. For the years ended December 31, 2004, 2003 and 2002, our total spending on product development and sustaining engineering was $4.8 million, $5.4 million and $5.2 million respectively. Of those amounts, research and development expenses were $1.2 million, $2.1 million and $2.3 million in 2004, 2003 and 2002, respectively.

Production, Inventory and Raw Materials

Our major products typically contain a number of metal and/or plastic parts that we manufacture. The production of these parts usually requires metal dies, fixtures, thermal plastic injection molds, and other tooling, some of which are produced in our tool and die and mold departments. Other manufacturing processes include welding, polishing, painting, tube bending, metal turning, stamping, and assembling of printed circuit boards and wire harnesses. We assemble the various parts and components into finished products, or sell them as spare parts.

Substantially all raw materials and parts not manufactured internally are readily available from other commercial sources. We have not experienced any significant shortages in the supply of raw materials and parts over the past several years. We do not stockpile large amounts of raw materials and parts, but attempt to control our inventory through extrapolation of historical production requirements and by using our specific knowledge of the market. In addition, we would likely be able to manufacture some purchased parts if shortages of these parts were to occur. If there were a major shortage of required raw

materials, or if there were a major shortage of purchased parts used in assembling our products and we were unable to manufacture such parts ourselves, we could be delayed, limited or prohibited from manufacturing and selling our products, thereby materially and adversely affecting our overall operations.

Backlog

Our manufacturing operations are driven by actual and forecasted customer demand. Our backlog of unfilled orders was approximately $5.2 million, $3.7 million and $5.2 million at December 31, 2004, 2003 and 2002, respectively. It is anticipated that 2004 backlog orders will be filled in 2005.

Marketing and Customers

Our products are marketed in the United States through a network of independent distributors and our employees. The principal purchasers of our products are major soft drink companies, bottlers, beer breweries, beverage equipment distributors, restaurants, convenience stores and other end users.

Substantially more than half of our sales are derived from, or influenced by, The Coca-Cola Company. We are a preferred supplier to The Coca-Cola Company. Direct sales to The Coca-Cola Company, our largest customer, accounted for approximately 23%, 28% and 35% of our total net sales for the years ended December 31, 2004, 2003 and 2002, respectively. None of our customers, including The Coca-Cola Company, are contractually obligated to purchase minimum quantities of our products. Consequently, The Coca-Cola Company has the ability to adversely affect, directly or indirectly, the volume and price of the products sold by us. We do not expect any significant, long-term volume or price reductions in our business with The Coca-Cola Company. If The Coca-Cola Company were to substantially reduce its purchase of our products or require significant price reductions, our sales and/or profit margins could significantly decrease, causing our results of operations to be materially and adversely impacted.

We have entered into a master development agreement with The Coca-Cola Company that governs development of various products. Products that are developed pursuant to this agreement may be sold only to The Coca-Cola Company or its designated agents. The agreement generally provides that The Coca-Cola Company will also retain the rights to any tooling it pays for and any resulting patents. We are obligated under the development agreement to make our manufacturing capabilities available for the benefit of The Coca-Cola Company as they relate to, and are required for, selected projects. We supply engineering and research and development personnel, design, develop and create prototypes, and obtain either an exclusive or a non-exclusive license to manufacture and market the resulting products. Generally, we warrant all such products for one year. The Coca-Cola Company may terminate the development agreement at any time, subject to certain conditions.

We have also entered into agreements with The Coca-Cola Company under which we remanufacture used products owned by The Coca-Cola Company.

International Sales

For the years ended December 31, 2004, 2003 and 2002, our sales to customers outside the United States were approximately 39%, 37% and 31% of total net sales, respectively. We have sales employees, distributors, and/or licensees in Latin America, Europe, Africa and Asia. We manufacture products in Australia and in Piedras Negras, Mexico, and operate warehouses in Australia, Belgium, Mexico, New Zealand and the United Kingdom.

We own subsidiaries with the following functional currencies: the United States dollar, the euro, the British pound, the Australian dollar, and the New Zealand dollar. Our foreign sales and operations could be adversely affected by unfavorable foreign currency fluctuations, exchange controls, tax policies, deterioration of foreign economies, the expropriation of our property, and other political actions and economic events. Although we attempt to limit such risks, there can be no assurance that these efforts will be successful.

Financial Information About Segments and Geographic Areas

We organize our business into the following geographical segments: the North America region, the Latin America region, the Asia/Pacific region, and the Europe region. The North America region consists of the United States and Canada, as well as our manufacturing facility in Piedras Negras, Mexico. The Latin America region consists of Mexico plus Central and South America. The Asia/Pacific region includes Asia, plus Australia, India and New Zealand. The Europe region consists of Europe, as well as the Middle East and Africa. The Brazil segment is reported as discontinued operations for 2003 and

2002 in the Consolidated Statement of Operations. See “Note 2 – Discontinued Operations” in the Notes to Consolidated Financial Statements. Corporate administrative and engineering expenses are included in the Corporate segment, rather than allocated among the geographic regions. Each of the geographical regions contains sales and distribution related operations. Additionally, the North America and Asia/Pacific regions include manufacturing operations. (We consider our manufacturing facility in Piedras Negras, Mexico to be part of our North America operations.) A large portion of the costs associated with our manufacturing operations is fixed, making gross margin in the North America and Asia/Pacific regions sensitive to changes in sales volume. Because most costs in our other regions are variable, gross margin in those regions is not as sensitive to changes in sales volume. Most of our sales and manufacturing activity occurs in the North America region. Additionally, our corporate headquarters are located in North America.

Our net sales and operating income for 2004, 2003 and 2002 follow (amounts in thousands):

	North America		Latin America		Asia/Pacific		Europe		Corporate
Net Sales:
2004	$	79,528	$	5,814	$	27,969	$	10,938	$	—
2003	75,924		7,690		21,645		8,241		—
2002	97,575		13,351		18,555		9,534		—

Operating Income:
2004	$	18,002	$	92	$	2,803	$	1,089	$	(14,377	)
2003	9,385		117		3,660		27		(13,835		)
2002	17,434		1,979		1,785		1,360		(12,999		)

Additional financial information about segments and geographic areas is set forth in “Note 13 - Segment and Geographic Information” in the Notes to Consolidated Financial Statements.

Competition

The business of manufacturing and marketing beverage dispensing systems and related equipment is highly competitive and is characterized by rapidly changing technology. Competition is primarily based upon product suitability, reliability, technological development and expertise, price, product warranty and delivery time. We believe our competitive position is strong because of our strong customer relationships and our ability to tailor quality products and services to fit the needs of our customers. We frequently compete with other companies that have substantially greater financial resources than we do, which can be a disadvantage. We have been able to compete with these companies successfully in the past, however, and believe that, by maintaining our strong customer relationships and continuing to tailor our quality products and services to our customers, we will be able to continue to compete successfully.

Employees

As of December 31, 2004, we had 1,188 full-time employees of whom 57 were engaged in engineering and technical support, 967 in manufacturing, 74 in marketing and sales and 90 in general management and administrative positions. We have 435 employees located in the United States, primarily at our facilities in San Antonio, Texas. We have 605 employees that work at our facility in Piedras Negras, Mexico, and a total of 117 people are employed by our subsidiaries in Australia and New Zealand. Certain sales representatives are located in various parts of the United States, Latin America, Europe and Asia. None of our U.S. employees are represented by a union or are subject to collective bargaining agreements. A majority of our employees in Piedras Negras, Mexico are represented by a union and work under a collective bargaining agreement that expires annually. Substantially all full-time United States employees are eligible to participate in our employee profit sharing plan and various other benefit programs.

Intellectual Property

We presently hold 108 United States patents and numerous corresponding foreign patents. Additionally, we have 32 pending U.S. patent applications and corresponding foreign patent applications. Our products covered by patents or pending patent applications include food, beverage and ice beverage dispensing equipment and components. These patents have a remaining life ranging from 1 to 18 years. Our management does not believe the expiration of any one of these patents will have a significant adverse impact on continuing operations.

We seek to improve our products and to obtain patents on these improvements. As a result, we believe our patent portfolio will expand, thereby lessening our reliance on any one particular patent. We also believe our competitive position is enhanced by our existing patents and that any future patents will continue to enhance this position. If a competitor were to successfully provide competing products which do not infringe on our patents, or if new technologies lessened the need for our protected ideas, the enhanced competitive position we receive from our patent portfolio would be reduced or even completely eliminated.

In addition to our patent ownership, we have assigned certain patents to our customers, primarily The Coca-Cola Company. These patents are the result of special development projects between us and the particular customer. These projects are typically paid for by the customer, and we either retain licenses to manufacture the products covered by these patents for the customer, or grant such licenses to the customer. We occasionally acquire patent protection for products that are complimentary to products whose patents are controlled by third parties.

The name “Lancer” is our federally registered trademark. It is also registered in many foreign countries. In certain instances, we grant a non-exclusive license to our distributors, primarily foreign, to use the trademark subject to certain requirements and limitations.

Environmental Matters

Our operations are subject to increasingly stringent federal, state, local, and foreign laws and regulations relating to the protection of the environment. In the United States, these environmental laws and regulations, which are implemented by the Environmental Protection Agency and comparable state agencies, govern the management of hazardous waste, the discharge of pollutants into the air and into surface and ground water, and the manufacture and disposal of certain substances.

There are no material environmental claims pending or, to our knowledge, threatened against us. We also believe that our operations are in material compliance with current U.S., state, and foreign environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with current laws and regulations will not have a material effect on our earnings or capital expenditures. The enactment, however, of environmental laws or regulations that affect our manufacturing operations and are more stringent than current laws, or a stricter interpretation of already existing environmental laws or regulations may cause a disruption in our operations or require additional expenditures by us, some of which could be material. We may incur material costs and liabilities in order to comply with any such laws and regulations and such costs and liabilities may have a material adverse effect on our business, financial condition or results of operations.

Seasonality

Our net sales in the fourth quarter of our fiscal years have frequently been lower than in other quarters because of seasonality in the capital spending budgets of many of our customers, although sales in the fourth quarter of 2004 did not exhibit this seasonality. See “Note 12 – Quarterly Financial Information (Unaudited)” in the Notes to Consolidated Financial Statements.

ITEM 2. PROPERTIES

Our primary manufacturing and administrative facility consists of a 346,000 square foot building on a 40-acre tract of land in San Antonio, Texas. This facility is pledged as collateral to our primary lender under the terms of our new credit facility. See “Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – New Credit Facility.” In Piedras Negras, Mexico, we own two buildings with a combined 195,000 square feet of manufacturing, warehouse and office space, and lease an additional 30,000 square foot warehouse facility. We also lease small facilities in Eagle Pass, Texas and Auckland, New Zealand, a 42,846 square foot plant in Beverley, South Australia, a suburb of Adelaide, and small facilities in Brisbane, Melbourne, and Sydney, Australia; Brussels, Belgium; Cheshire, England; and Monterrey, Mexico. We lease approximately 176,000 square feet of space throughout the world, and we believe that our current facilities are generally sufficient for our operations.

Our total net rent expense for real estate was $1.0 million, $1.1 million and $1.0 million in 2004, 2003 and 2002, respectively. Total rent expense includes $52,000 in 2004, and $89,000 in 2003 and 2002, for certain properties leased from a partnership controlled by certain shareholders. The Company vacated the properties in July 2004. See “Note 11 – Commitments and Contingencies” and “Note 14 – Related Transactions” in the Notes to Consolidated Financial Statements for more information.

ITEM 3. LEGAL PROCEEDINGS

In August 2003, the US Attorney’s Office informed us that it was conducting an investigation arising from allegations raised in a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley, and requested certain information, which we supplied. On January 13, 2004, we received written notice that the Securities and Exchange Commission had issued a formal order of investigation, dated December 2, 2003, that appeared to concern matters which were the subject of our prior Audit Committee investigation (which concluded in January 2004) including certain allegations relating to us that were contained in the Whitley lawsuit against The Coca-Cola Company. We are unable at this point to predict the scope or outcome of the Securities and Exchange Commission or US Attorney’s Office investigations. We have cooperated, and intend to continue to cooperate, with both the US Attorney’s Office and the Securities and Exchange Commission investigations. We have not had substantive contact relating to these investigations with either the US Attorney’s Office or the Securities and Exchange Commission since July 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to our security holders for a vote by proxy or otherwise during the fourth quarter of the year ended December 31, 2004.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is currently traded on the American Stock Exchange (“AMEX”) under the symbol “LAN.” The following table sets forth the range of high and low market price as reported by the AMEX for the periods indicated.

Market Price For Common Stock

	2004				2003
Quarter	High		Low		High		Low
First *	$	7.65	$	5.95	$	10.13	$	5.80
Second *	6.60		5.00		7.35		5.95
Third	11.40		6.10		6.90		3.71
Fourth	16.75		10.25		7.00		4.52

* The AMEX halted trading in shares of our common stock from February 3, 2004 until May 20, 2004.

On February 28, 2005, the closing price of our common stock, as reported by the AMEX, was $15.55 per share. On that date, there were 210 holders of record of our common stock, not including shares held by brokers and nominees. We believe that there are approximately 2,000 beneficial owners of our common stock. We have not declared a cash dividend on our common stock to date. It has been our general policy to retain earnings to support future growth.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance (excluding securities reflected in column (a)
	(a)	(b)		(c)
Equity compensation plan approved by security holders	365,683	$	8.54	345,584
Equity compensation plan not approved by security holders	136,800	$	10.40	63,200
Total	502,483	$	9.05	408,784