Form S-1 / Amendment #3
Table of Contents

As filed with the Securities and Exchange Commission on December 9, 2005

Registration No. 333-125113


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


Flow International Corporation

(Exact name of registrant as specified in its charter)

 

Washington   3569   91-1104842

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Stephen R. Light

President and Chief Executive Officer

23500 64th Avenue South

Kent, WA 98032

(253) 850-3500

(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)

 

PTSGE Corp.

925 Fourth Avenue, Suite 2900

Seattle, WA 98104

(206) 623-7580

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

Copies to:

 

Robert S. Jaffe

William Gleeson

Preston Gates & Ellis LLP

925 Fourth Avenue, Suite 2900

Seattle, WA 98104

(206) 623-7580


Approximate date of commencement of proposed sale to the public:

From time to time after the effective date of this registration statement,

as determined by market conditions and other factors.


If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box:  ¨

 

CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to Be Registered   Amount to Be
Registered(1)
  Proposed Maximum Offering
Price Per Security(4)
  Proposed Maximum Aggregate
Offering Price(4)
  Amount of
Registration Fee

Common Stock, $0.01 par value.

  17,473,116 Shares(2)   $6.76   $118,118,264.16   $13,902.52(5)

Common Stock, $0.01 par value.

  3,219,245(3)   $6.76   $21,762,096   $2,561.40(5)

(1) In accordance with Rule 416(a), the registrant is also registering hereunder an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
(2) Represents shares of the registrant’s common stock being registered for resale that have been issued to the selling shareholders named in this registration statement.
(3) Represents shares of the registrant’s common stock being registered for resale that have been or may be acquired upon the exercise of warrants issued to the selling shareholders named in this registration statement.
(4) Estimated pursuant to Rule 457(c) under the Securities Act of 1933, solely for the purposes of calculating the registration fee, upon the basis of the average high and low prices of our common stock as reported on the Nasdaq National Market on May 16, 2005.
(5) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

PRELIMINARY PROSPECTUS

 

20,692,359 Shares

 

LOGO

 

Common Stock

 


 

This prospectus relates to the offer and sale of up to 17,473,116 outstanding shares of the common stock of Flow International Corporation, a Washington corporation, and up to 3,219,245 shares that may be issued on the exercise of outstanding warrants. Such shares may be offered and sold from time to time by the persons described in this prospectus under the heading “Selling Shareholders” or by pledgees, donees, transferees, assignees or other successors-in-interest of such persons (collectively, the “Selling Shareholders”). As used in this prospectus, we, us, our and similar expressions refer to Flow International Corporation and its subsidiaries.

 

The Selling Shareholders may offer their shares from time to time through or to one or more underwriters, brokers or dealers, on the NASDAQ Stock National Market at market prices prevailing at the time of sale, in one or more negotiated transactions at prices acceptable to the Selling Shareholders or in private transactions. We will not receive any proceeds from the sale of shares by the Selling Shareholders. In connection with any sales, the Selling Shareholders and any underwriters, agents, brokers or dealers participating in such sales may be deemed to be “underwriters” within the meaning of the Securities Act.

 

We will pay the expenses related to the registration of the shares covered by this prospectus. The Selling Shareholders will pay commissions and selling expenses, if any, incurred by them.

 

Our common stock trades on the NASDAQ National Market under the symbol “FLOW.” On December 8, 2005, the closing price of one share of our common stock was $7.17.

 

Investing in our securities involves risks. See “ Risk Factors” beginning on page 6 of this prospectus.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this prospectus is                     , 2005.


Table of Contents

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. An offer to sell these securities is not being made in any state where the offer is not permitted. You should not assume that the information contained in this prospectus or any prospectus supplement is accurate as of any date other than the date of such documents. Our business, financial condition, results of operations and prospects may have changed since that date.

 

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

The Company

   1

The Offering

   2

Historical Stock Price

   3

Summary Financial Data

   4

Risk Factors

   6

Cautionary Note Regarding Forward-Looking Statements

   12

Use of Proceeds

   13

Dividend Policy

   13

Pro-Forma Information

   14

Selected Financial Data

   24

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26

Business

   62

Information Concerning Directors and Executive Officers

   67

Board Structure, Committees and Compensation and Composition

   70

Executive Compensation

   73

Market Information

   78

Stock Ownership of Management and Principal Shareholders

   79

Selling Shareholders

   82

Certain Relationships and Related Transactions

   85

Description of Capital Stock

   86

Plan of Distribution

   88

Legal Matters

   90

Experts

   90

Where You Can Find More Information

   90

Index to Consolidated Financial Statements

   91

 

ABOUT THIS PROSPECTUS

 

This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission using the SEC’s shelf registration rules. Under the shelf registration rules, using this prospectus and, if required, one or more prospectus supplements, the Selling Shareholders may sell from time to time, in one or more offerings, the shares of common stock covered by this prospectus. The shares covered by this prospectus include 17,473,116 outstanding shares of common stock and 3,219,245 shares of common stock issuable upon the exercise of warrants.

 

This prospectus also covers any shares of common stock that may become issuable pursuant to anti-dilution adjustment provisions that would increase the number of shares issuable upon exercise of the warrants as a result of stock splits, stock dividends or similar transactions.

 

A prospectus supplement may add, update or change information contained in this prospectus. We recommend that you read carefully this entire prospectus, especially the section entitled “Risk Factors” beginning on page 6, together with any supplements before making a decision to invest in our common stock.


Table of Contents

PROSPECTUS SUMMARY

 

This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 6, current events beginning on page 26 and our consolidated financial statements and the notes to those consolidated financial statements beginning on page F-1, before making an investment decision.

 

THE COMPANY

 

We design, develop, manufacture, market, install and service ultrahigh-pressure, or UHP, water pumps and UHP water management systems. Our core competency is the design and manufacture of UHP water pumps. Our UHP water pumps pressurize water from 40,000 to over 100,000 pounds per square inch (psi) and are integrated with water delivery systems so that water can be used to cut or clean material or pressurize food. Our products include standard and specialized waterjet cutting and cleaning systems. In addition to UHP water pumps and related systems, we provide non UHP automation and articulation systems, primarily to the automotive industry.

 

Our UHP technology has three broad applications: cutting, cleaning and food processing. In cutting and cleaning applications, the ultrahigh-pressure created by our pumps is released through a small orifice to create a jet of water. In food processing, we supply UHP pumps to Avure Technologies, Inc., a company we recently sold, which uses pressure to kill spoilage bacteria and pathogens in food products placed inside a pressure vessel.

 

On October 31, 2005, consistent with our strategy to divest operations that are not part of our core UHP water pump business, we sold our General Press operations and the non UHP portion of our Food reportable segment (the “Avure Disposition”). Included in the Avure Disposition were our Avure Technologies, Incorporated, Flow International FPS AB, Avure Technologies AB subsidiaries, and our 51% interest in Flow Autoclave Systems (together, the “Avure Business”). The Avure Business became a discontinued operation in accordance with FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets at the time it was sold and will be represented that way in future financial statements. In connection with the sale we agreed to continue to supply UHP pumps to the Avure Business.

 

The primary application of our UHP water pumps is cutting. In cutting applications, pressures from 50,000 to 87,000 psi create a thin stream of water traveling at three or more times the speed of sound which can cut both metallic and nonmetallic materials. UHP water pumps are used in aerospace, automotive, disposable products, food, glass, job shop, sign, metal cutting, marble, tile and other stone cutting, and paper slitting and trimming applications. Waterjet cutting is recognized as a more flexible alternative to traditional cutting methods such as lasers, saws or plasma. It is often faster, has greater versatility in the types of materials it can cut and eliminates the need for secondary processing operations. We also manufacture a waterjet product line used in cleaning, where pressures in the range of 40,000 to 55,000 psi are used in industrial cleaning, surface preparation, construction, and petro-chemical and oil field applications.

 

Our principal executive offices are at 23500 64th Avenue South, Kent, WA 98032 and our telephone number is (253) 850-3500. We maintain a website at www.flowcorp.com. The contents of our website are not incorporated into this prospectus.

 

1


Table of Contents

The Offering

 

Common Stock offered by the Selling Shareholders

20,692,359 Shares(1)

 

Offering

The Selling Shareholders may offer their shares from time to time through one or more underwriters, brokers or dealers, on the NASDAQ Stock National Market at market prices prevailing at the time of sale, in one or more negotiated transactions at prices acceptable to the Selling Shareholders or in private transactions.

 

Use of Proceeds

The proceeds from the sale of the shares covered by this prospectus will be received by the Selling Shareholders. We will not receive any of the proceeds from the sales by the Selling Shareholders of the shares covered by this prospectus.

 

Nasdaq National Market symbol

“FLOW”

 

Risk Factors

See “Risk Factors” beginning on page 6 for a discussion of factors that you should consider carefully before deciding to purchase our common stock.

 

Offering-related Information

On March 21, 2005, in a Private Investment in Public Equity Transaction (“PIPE Transaction”), we sold 17,473,116 equity units at $3.72 per unit for gross proceeds of $65 million, and net proceeds of $59.3 million. A unit consists of one share of our common stock and one warrant to buy 1/10th of a share of our common stock. Ten warrants give the holder the right to purchase one share of common stock for $4.07. The closing price of our stock on Nasdaq National Market on the day before the agreement between the Company and the Selling Shareholders relating to the PIPE Transaction was entered into $3.70 per share. On the day that the agreement was entered into, the closing price was $4.28 per share. The exercise price of the warrants is a negotiated price.

 

 

Proceeds of the PIPE were used to pay down existing debt of $59.3 million, including all of our subordinated debt. Under the terms of warrants previously issued to our senior and subordinated lenders, we are obligated to issue additional warrants if shares of our common stock are issued for prices less than market price. Because the issuance price of the common stock of the PIPE Transaction ($3.70) was less than market price ($4.28), we issued approximately 304,000 anti-dilution $0.01 warrants to our lenders. These warrants had a Black-Scholes value of approximately $1.7 million. The majority of the charges resulting from the issuance of the additional warrants, $1.5 million, were charged to interest expense in the fourth quarter of fiscal 2005 as the underlying debt associated with these warrants was retired in the fourth quarter of fiscal 2005. The remainder, $200,000, was capitalized and amortized to interest expense through August 1, 2005.

 


(1) Includes 3,219,245 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock.

 

2


Table of Contents
 

Under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19”), the fair value of the warrants sold to the PIPE investors will be reported initially as a liability due to liquidated damages of 1% of the gross proceeds per month ($650,000) which will be payable in the event that this Form S-1 is not be declared effective prior to December 31, 2005. Upon effectiveness of the Form S-1, the fair value of the warrants will be reclassified into Capital in Excess of Par in the Equity section of the Consolidated Balance Sheet. As of March 21, 2005, the warrants sold to the PIPE investors were valued at $6.4 million using the Black-Scholes method, and the shares have been recorded at $52.9 million, or the difference between the net proceeds and the value of the warrants. The warrants sold to the PIPE investors are considered a derivative financial instrument and will be marked to fair value quarterly until this Form S-1 is declared effective. Any changes in fair value of the warrants will be recorded through the Consolidated Statement of Operations.

 

Historical Stock Price

 

Our stock is traded on the NASDAQ National Market under the symbol “FLOW.” The range of high and low sales prices for our common stock for the first and second quarter of fiscal 2006 and the third quarter of fiscal 2006 through December 8, 2005 and the four quarters for fiscal 2005, 2004 and 2003 is set forth in the following table.

 

     Fiscal Year 2006

   Fiscal Year 2005

   Fiscal Year 2004

   Fiscal Year 2003

     High

   Low

   High

   Low

   High

   Low

   High

   Low

First Quarter

   $ 7.83    $ 5.87    $ 3.66    $ 2.15    $ 1.94    $ 1.13    $ 10.90    $ 5.05

Second Quarter

     9.39      7.43      3.55      2.70      3.11      1.36      5.60      2.12

Third Quarter(1)

     9.25      6.40      3.18      2.71      4.11      2.40      3.80      2.13

Fourth Quarter

                   6.60      2.85      3.74      2.20      3.28      1.08

(1) Prices for fiscal year 2006 reflect trading through December 8, 2005.

 

We have not paid dividends to common shareholders in the past. Our Board of Directors intends to retain future earnings, if any, to finance development and expansion of our business and reduce debt and does not expect to declare dividends to common shareholders in the near future. The credit agreement entered into on July 8, 2005 does permit us to pay dividends, however. Prior to this date however, our credit agreements contained restrictions on our ability to pay dividends to our shareholders.

 

3


Table of Contents

Summary Financial Data

 

The following table provides summary historical financial data for the periods indicated. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

The summary statement of operations data for each of the fiscal years ended April 30, 2003, 2004 and 2005 and the summary balance sheet data as of April 30, 2004 and 2005 are derived from our audited financial statements, which are included elsewhere in this prospectus. The summary statement of operation data for the fiscal year ended April 30, 2002 and the summary balance sheet data as of April 30, 2003 are derived from our audited financial statements which are not included in this prospectus. The summary statement of operation data for the fiscal year ended April 30, 2001 and the summary balance sheet data as of April 30, 2001 and 2002 are derived from our unaudited financial statements which are not included in this prospectus.

 

     Three
Months
Ended
July 31,
2005


   Year Ended April 30,

(In thousands, except per share amounts)      

2005

(restated)(4)


    2004

    2003(3)

    2002(2)

    2001(1)

     (unaudited)                            (unaudited)

Statement of Operations Data:

                                             

Sales

   $ 49,729    $ 219,365     $ 177,609     $ 144,115     $ 176,890     $ 204,854

(Loss) Income Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

     22      (20,616 )     (12,048 )     (69,464 )     (8,244 )     4,038

Net (Loss) Income

     22      (20,616 )     (11,522 )     (69,987 )     (7,853 )     1,630

Basic (Loss) Income Per Share Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

     0.00      (1.16 )     (0.78 )     (4.53 )     (0.54 )     0.27

Basic (Loss) Earnings Per Share

     0.00      (1.16 )     (0.75 )     (4.56 )     (0.52 )     0.11

Diluted (Loss) Income Per Share Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

     0.00      (1.16 )     (0.78 )     (4.53 )     (0.54 )     0.27

Diluted (Loss) Income Per Share

     0.00      (1.16 )     (0.75 )     (4.56 )     (0.52 )     0.11
    

July 31,

2005


   April 30,

       

2005

(restated)(4)


   

2004

(restated)(4)


   

2003

(restated)(5)


   

2002

(restated)(5)


   

2001

(restated)(5)


     (unaudited)                (unaudited)     (unaudited)     (unaudited)

Balance Sheet Data:

                                             

Working Capital

   $ 14,497    $ 6,233     $ (9,060 )   $ (6,709 )   $ 84,532     $ 91,750

Total Assets

     112,512      118,467       129,272       147,088       205,572       206,270

Short-Term Debt

     4,316      13,443       48,727       61,056       5,237       8,464

Long-Term Obligations, net

     13,301      5,704       38,081       29,023       83,453       85,652

Shareholders’ Equity (Deficit)

     28,178      28,710       (9,552 )     4,872       71,054       68,755

(1) The Statement of Operations for fiscal 2001 includes the adoption of SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB101A and 101B. We reflected this change in policy as a Cumulative Effect of Change in Accounting Principle.

 

4


Table of Contents
(2) The Statement of Operations for fiscal 2002 includes the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). See Note 1 to the Consolidated Financial Statements for the year ended April 30, 2005 for further discussion of the impact of this adoption.
(3) The Statement of Operations for fiscal 2003 includes the impact of management’s launch of its restructuring program and resulting focus on cash generation. See the ‘Fiscal 2003 Comprehensive Financial Review’ at the end of the ‘Fiscal 2004 Compared to Fiscal 2003’ financial analysis in the Management’s Discussion and Analysis section for further discussion of the impact on our financial results.
(4) As described in Note 2 to the April 30, 2005 Consolidated Financial Statements, we have restated our consolidated financial statements for the year ended April 30, 2005 to reflect additional charges in the Consolidated Statement of Operations associated with 1) the impairment of goodwill, 2) the revised valuation of anti-dilution warrants issued to our senior and subordinated lenders, 3) the revision of estimated losses on long-term contracts, 4) the correction of compensation expense for performance based equity awards and stock awards for services and 5) straight-line rent expense for leases with escalating rents. In addition, we restated certain balances for incorrect classification on our Consolidated Balance Sheet as of April 30, 2005 and 2004 and Consolidated Statement of Operations for the year ended April 30, 2005.
(5) As reported in the Company’s April 30, 2005 Form 10-K/A, the Company has identified errors in the Consolidated Financial Statements related to the presentation of percentage-of-completion related balances on the Consolidated Balance Sheet. Specifically, the Company noted inconsistencies between its divisions in the balance sheet presentation of accounts receivable and cash receipts relating to contracts accounted for using the percentage-of-completion method. The Company has, therefore, adjusted its financial statements to reflect a consistent presentation and comply with the provisions of SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” as of April 30, 2003, 2002 and 2001.

 

Pro forma financial information is included in this prospectus to reflect the sale of the Avure Business, which took place on October 31, 2005, and the closing of the PIPE transaction on March 21, 2005. The unaudited pro forma balance sheet data assumes the disposition occurred on July 31, 2005. Such pro forma information is based upon the historical balance sheet data of the Company as of that date. The unaudited pro forma statement of operations data give effect to the treatment of the Avure Business as a discontinued operation for the three months ended July 31, 2005 and for the year ended April 30, 2005. The following pro forma financial information is excerpted from the detailed presentation found on pages 14-21.

 

(In thousands, except per share amounts)    Three Months
Ended
July 31, 2005


   

Year
Ended
April 30,

2005


     (unaudited)     (unaudited)

Pro forma Statement of Operations Data:

              

Sales

   $ 41,986     $ 172,966

(Loss) Income from Continuing Operations

     (1,327 )     3,126

Basic (Loss) Income Share from Continuing Operations

     (0.04 )     0.09

Diluted (Loss) Income from Continuing Operations

     (0.04 )     0.09
     July 31,
2005


    
     (unaudited)

Pro forma Balance Sheet Data:

      

Working Capital

   $ 22,241

Total Assets

     91,607

Short-Term Debt

     2,816

Long-Term Obligations

     13,301

Shareholders’ Equity

     27,043

 

5


Table of Contents

RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before making a decision to buy our common stock from the Selling Shareholder. If any of the following risks actually occur, our business, financial condition and results of operations could suffer. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.

 

We have incurred losses in recent years and we may be unable to achieve profitability.

 

While we had net income of $22,000 for the three months ended July 31, 2005, our net losses for each of the fiscal years ended April 30, 2003, 2004 and 2005 were $70.0 million, $11.5 million and $20.6 million, respectively. We believe our recently completed restructuring and related cost-cutting initiatives will reduce overall spending. If our restructuring efforts fail to adequately reduce costs, or if our sales are less than we project, we will continue to incur losses in future periods. Economic weakness in our served markets may adversely affect our ability to meet our sales projections.

 

Economic weakness in our served markets may adversely affect our financial results.

 

The products we sell are capital goods with individual system prices ranging from $150,000 to several million dollars. Many of our customers depend on long term financing from a financial institution to purchase our equipment. Economic weakness in the capital goods market and or a credit tightening by the banking industry would reduce our sales and accordingly affect our financial results.

 

If we fail to comply with our financing arrangements, our ability to continue operations would be impaired.

 

Under the Current Senior Credit Agreement (entered into on July 11, 2005), we are operating under a credit agreement with our senior lenders which expires July 8, 2008 and sets forth specific financial covenants to be attained on a quarterly basis. In addition, our agreement includes subjective acceleration clauses which permit the lenders to demand payment on the determination of a material adverse change in the business. In the event of default, the senior lenders may limit our access to borrow funds as needed. Our ability to continue operating is dependent on the senior lenders’ willingness to grant access to funds. If we are unable to obtain the necessary funds, our ability to continue operations would be seriously impaired unless we are able to obtain alternative financing from another source. In the event of a default, obtaining alternative financing may be difficult and may be at less favorable terms. We may be unable to achieve our projected operating results and maintain compliance with the loan covenants which would trigger an event of default with our Lenders. In an event of default, the Lenders would be in the position to exercise default remedies which include applying a default interest rate and acceleration of payment schedules for our outstanding debt. Our Lenders may pursue any number of plans to reduce the outstanding debt, including, in certain circumstances, a liquidation of some or all of our assets.

 

If the registration statement of which this prospectus is a part does not become effective by December 31, 2005, or becomes ineffective for more than 40 days, after having gone effective, we may be subject to significant financial penalties.

 

Under terms of the Registration Rights Agreement entered into on March 20, 2005, as part of a Private Investment in Public Equity transaction (“PIPE Transaction”), we were required to have the Form S-1, which registers the shares sold in the PIPE Transaction and the related warrants, become effective no later than September 17, 2005. We have amended the Registration Rights Agreement to grant an extension until December 31, 2005 for the effective date of the registration of the shares and warrants issued in the PIPE Transaction. In addition, the registration statement cannot become ineffective for more than 40 days (not necessarily consecutive). If either of these events occur, then we will be subject to a cash penalty of up to $650,000 per month for each month the registration statement is not effective. Certain factors that could cause the registration statement to become or remain ineffective are not within our control.

 

6


Table of Contents

If we are unable to retain the current members of our senior management team and other key personnel, our future success may be negatively impacted.

 

We may lose key management personnel and encounter difficulties replacing these positions. We may have to incur greater costs to attract replacement personnel.

 

Our inability to protect our intellectual property rights, or our possible infringement on the proprietary rights of others, and related litigation could be time consuming and costly.

 

We defend our intellectual property rights because unauthorized copying and sale of our proprietary equipment and consumables represents a loss of revenue to us. From time to time we also receive notices from others claiming we infringe their intellectual property rights. The number of these claims may grow in the future, and responding to these claims may require us to stop selling or to redesign affected products, or to pay damages. On November 18, 2004, Omax Corporation (“Omax”) filed suit against us alleging that our products infringe on Omax’s patents. The suit also seeks to have a specific patent we hold declared invalid. Although the suit seeks damages of over $100 million, we believe Omax’s claims are without merit and we intend not only to contest Omax’s allegations of infringement but also to vigorously pursue our claims against Omax with regard to our own patent. See Note 15 to Consolidated Financial Statements for further discussion of contingencies.

 

Fluctuations in our quarterly operating results may cause our stock price to decline and limit our shareholders’ ability to sell our common stock in the public market.

 

In the past, our operating results have fluctuated significantly from quarter to quarter, and we expect them to continue to do so in the future due to a variety of factors, many of which are outside of our control. Our operating results may in some future quarter fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could decline significantly. In addition to the risks disclosed elsewhere in this prospectus, factors outside of our control that have caused our quarterly operating results to fluctuate in the past and that may affect us in the future include:

 

    fluctuations in general economic conditions;

 

    demand for UHP pumps and UHP water management systems generally;

 

    fluctuations in the capital budgets of customers; and

 

    development of superior products and services by our competitors.

 

In addition, factors within our control, such as our ability to deliver equipment in a timely fashion, have caused our operating results to fluctuate in the past and may affect us similarly in the future.

 

The factors listed above may affect both our quarter-to-quarter operating results as well as our long-term success. Given the fluctuations in our operating results, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance or to determine any trend in our performance. Fluctuations in our quarterly operating results could cause the market price of and demand for our common stock to fluctuate substantially, which may limit your ability to sell our common stock on the public market.

 

We do business in industries that are cyclical, which may result in weakness in demand for our products.

 

Our products are sold in many industries, including machine tool, automotive and aerospace, that are highly cyclical. The machine tool industry, in particular from 1998 through 2003, experienced a significant decline in global demand. Cyclical weaknesses in the industries that we serve could lead to a reduced demand for our products.

 

7


Table of Contents

We may be affected by rising costs or lack of availability of materials, which could negatively impact our operations.

 

We have experienced and may continue to experience significant increases in the costs of materials we use in the manufacture of our products, such as steel, and we may not be able to either achieve corresponding increases in the prices of our products or reduce manufacturing costs to offset these increases, or if we do increase prices, we may experience lower sales. Any of the foregoing may adversely affect our financial results.

 

If we cannot develop technological improvements to our products through continued research and engineering, our financial results may be adversely affected.

 

In order to maintain our position in the market, we need to continue to invest in research and engineering to improve our products and technologies and introduce new products and technologies. If we are unable to make such investment, if our research and development does not lead to new and/or improved products or technologies, or if we experience delays in the development or acceptance of new and/or improved products, our financial results will be adversely affected.

 

We have received notice of material weaknesses in internal controls. Consequently, there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in the current or any future period. Additionally we may conclude that our system of internal controls under Section 404 of Sarbanes-Oxley is not effective.

 

In December 2004, in connection with the restatement of our fiscal 2004, 2003 and 2002 financial statements, and in November 2005, in connection with the restatement of our fiscal 2005 and 2004 financial statements, our independent registered public accounting firm reported to management and to the Audit Committee material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management agrees with and has responded to the Audit Committee with our plans to remediate the material weaknesses communicated by our independent registered public accounting firm. Remediation of these material weaknesses is ongoing.

 

The material weaknesses in our internal control over financial reporting are as follows:

 

    The Company did not maintain effective controls over the financial reporting process due to an insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with its financial reporting requirements and the complexity of the Company’s operations and transactions. Specifically, the Company incorrectly applied generally accepted accounting principles for (i) the impairment of goodwill, (ii) the classification of deferred tax balances, (iii) the valuation of anti-dilution warrants, (iv) the accrual of costs on contracts accounted for using the percentage-of-completion method and (v) leases with rent escalation clauses, affecting goodwill, capital in excess of par, minority interest, deferred income taxes, prepaid expenses, cost of sales, interest expense and other accrued liabilities. This material weakness contributed to the material weakness discussed below.

 

   

The Company did not maintain effective controls to ensure there is adequate (i) analysis, documentation, reconciliation and review of accounting records, and supporting data, and (ii) monitoring and oversight of the work performed by accounting and financial reporting personnel to ensure the accuracy and completeness of the consolidated financial statements in accordance with generally accepted accounting principles. Specifically, the Company did not have effective controls designed and in place over the consolidation of the financial statements of subsidiaries, the reconciliation of inter-company accounts, the valuation of anti-dilution warrants, the accrual of costs on contracts accounted for using the percentage-of-completion method and the accounting for performance

 

8


Table of Contents
 

based equity awards, affecting goodwill, capital in excess of par, minority interest, general and administrative expense, interest expense, prepaid expenses, cost of sales, accounts receivables and customer deposits.

 

An in-depth review of the remediation process to date, as well as the steps remaining, can be found on page 22.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to assess the design and effectiveness of our internal control systems effective April 30, 2006. Our independent registered public accounting firm is required to render an attestation report on managements’ assessment and the effectiveness of our system of internal control over financial reporting. We must complete the documentation, evaluation and remediation of our systems of internal control. The costs associated with such compliance are likely to be substantial and will negatively impact our financial results. In addition, there is no assurance that we will be able to conclude that our systems are appropriately designed or effective, which could result in noncompliance with Section 404 and a decline in the stock price.

 

We have outstanding options and warrants that have the potential to dilute the return of our existing common shareholders and cause the price of our common stock to decline.

 

We grant stock options to our employees and other individuals. At July 31, 2005, we had options outstanding to purchase 1,962,380 shares of our common stock, at exercise prices ranging from $2.00 to $12.25 per share of which 1,849,587 are fully vested. In addition, we currently have outstanding 2,309,764 fully vested warrants, for which we are registering the resale of the underlying shares hereby. The exercise price of the warrants range from $.008 to $4.07 per share.

 

As a result of accounting regulations, which become applicable to us on May 1, 2006, requiring companies to expense stock options, our expenses will increase and our stock price may decline.

 

A number of publicly traded companies have recently announced that they will begin expensing stock option grants to employees. In addition, the Financial Accounting Standards Board (FASB) has adopted rule changes with an effective date as of the beginning of fiscal years beginning after June 15, 2005 requiring expensing of stock options. Currently we include such expenses on a pro forma basis in the notes to our financial statements in accordance with accounting principles generally accepted in the United States, but do not include stock option expense for employee options in our reported financial statements. This change in accounting standards will require us to expense stock options, and as a result our reported expenses may increase significantly.

 

Washington law and our charter documents may make an acquisition of us more difficult.

 

Provisions in Washington law and in our articles of incorporation, bylaws, and rights plan could make it more difficult for a third-party to acquire us, even if doing so would benefit our shareholders. These provisions:

 

    Establish a classified board of directors so that not all members of our board are elected at one time;

 

    Authorize the issuance of “blank check” preferred stock that could be issued by our board of directors (without shareholder approval) to increase the number of outstanding shares (including shares with special voting rights), each of which could hinder a takeover attempt;

 

    Provide for a Preferred Share Rights Purchase Plan or “poison pill;”

 

    Impose restrictions on certain transactions between a corporation and certain significant shareholders.

 

    Provide that directors may be removed only at a special meeting of shareholders and provide that only directors may call a special meeting;

 

    Require the affirmative approval of a merger, share exchange or sale of substantially all of the Corporation’s assets by 2/3 of the Corporation’s shares entitled to vote; and

 

9


Table of Contents
    Provide for 60 day advance notification for shareholder proposals and nominations at shareholder meetings.

 

Market risk exists in our operations from potential adverse changes in foreign exchange rates relative to the U.S. dollar in our foreign operations.

 

A significant portion of our sales take place outside of the United States, and we transact business in various foreign currencies, primarily the Canadian dollar, the Eurodollar, the Japanese yen, and the New Taiwan dollar. In addition, our foreign divisions may have customer receivables and vendor obligations in currencies other than their local currency which exposes us to near-term and longer term currency fluctuation risks. The assets and liabilities of our foreign operations, with functional currencies other than the U.S. dollar, are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Aggregate net foreign exchange gains included in the determination of net loss amounted to $531,000 for the year ended April 30, 2005. Based on our results for the year ended April 30, 2005 for our foreign subsidiaries, and based on the net position of foreign assets less liabilities, a near-term 10% appreciation or depreciation of the U.S. dollar in all currencies we operate could impact operating income by $1.2 million and other income (expense) by $3.7 million. Our financial position and cash flows could be similarly impacted.

 

Current year foreign sales have benefited from a weak U.S. dollar. If the dollar were to strengthen against certain foreign currencies, such as the euro and yen, our margins may be negatively affected.

 

A significant portion of our products sold outside the United States are manufactured domestically. The weaker U.S. dollar, relative to the local currency of many of the countries we sell into, has made our products less expensive, on a relative basis, when compared to locally manufactured products and products manufactured in certain other countries. As the U.S. dollar gains in value relative to these foreign currencies, our products will increase in cost to the customer relative to locally produced product and products manufactured in certain other countries, which could negatively impact sales.

 

Sales of registered stock could exert downward pressure on the market price of our stock and could encourage short selling that could exert further downward pressure.

 

To the extent the Selling Stockholders acquired their shares (whether such shares were acquired in the PIPE transaction or on the exercise of warrants, which are exercisable at $0.01 per share) at prices less than the then current trading price of our common stock, they may have an incentive to immediately resell material amounts of such shares in the market which may, in turn, cause the trading price of our common stock to decline. Significant downward pressure on our stock price caused by the sale of stock registered in this offering could encourage short sales by the Selling Stockholders (and in particular short sales by warrant holders in anticipation of exercising their warrants) or third parties that would place further downward pressure on our stock price. In an ordinary or “uncovered” short sale, a seller causes his or her executing broker to borrow the shares to be delivered at the completion of the sale from another broker, subject to an agreement to return them upon request, thereby avoiding the need to deliver any shares actually owned by the seller stockholder on the settlement date for the sale. Since the seller does not own the shares that are sold, the seller must subsequently purchase an equivalent number of shares in the market to complete or “cover” the transaction. The seller stockholder will realize a profit if the market price of the shares declines after the time of the short sale, but will incur a loss if the market price rises and he or she is forced to buy the replacement shares at a higher price. Accordingly, a declining trend in the market price of our common stock may stimulate short sales.

 

The Company has advised each Selling Shareholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission. See “Selling Shareholders” on page 67.

 

10


Table of Contents

Under the terms of certain outstanding warrants, we could be required to make antidilution adjustments.

 

Certain of the Selling Shareholders hold warrants to purchase Company Common Stock at a price of $.01 per share. Such warrants were originally issued to the Company’s lenders (“Lender Warrants”). While such Lender Warrants are outstanding anti-dilution adjustments will be made in the Lender Warrants, if the Company issues Common Stock (other than pursuant to the exercise of warrants or other rights or convertible securities) at a price less than then current market price or the Company issues warrants or other rights or convertible securities to purchase or acquire Common Stock exercisable or convertible, at a price less than then current market price when the warrants, rights or convertible securities are issued. The anti-dilution adjustments will be made in the purchase price of the Common Stock under the Lender Warrants (multiplying the exercise price before the issuance by a fraction in which the numerator is the number of shares outstanding prior to the issuance and the denominator is the number of shares outstanding after the issuance) and the number of shares of common stock issuable in exercise of the Lender Warrants (multiplying the current number of shares subject to the warrants by a fraction in which the numerator is the purchase price before the issuance and the denominator is the purchase price after the issuance). The exercise of any currently outstanding warrants will not trigger any adjustments in the Lender Warrants because adjustments were made to the extent required on the issuance of such warrants. The Company has no additional plans to issue any additional Common Stock, or warrants to purchase Common Stock exercisable, at a price below the then current market price, except to the extent it may be required to issue Common Stock under currently outstanding warrants.

 

11


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

SAFE HARBOR STATEMENT:

 

Statements made in this prospectus that are not historical facts are forward-looking statements that involve risks and uncertainties. Forward-looking statements typically are identified by the use of such terms as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “plan” and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in any forward-looking statement due to a number of factors, which include, but are not limited to the following: the special risk factors and uncertainties set forth in this document; our striving to continue to improve our customer’s profitability through investment in the development of innovative products and services; our ability to absorb cyclical downturns through the flexibility of our UHP technology and market diversity; our confidence that we can continue to gain market share; our conclusion that waterjet technology is in the early adoption phase of its product life cycle; our ability to retain a technical lead over our competitors through non-patented proprietary trade secrets and know-how in UHP applications; the ability of our patents to act as a barrier to entry for competitors in the UHP technology field; increased market acceptance of waterjet cutting systems by the aerospace, automotive, and machine (Jobshop) industries will encourage other manufacturers, including those in other industries, to adopt waterjet solutions; our intent to contest Omax’s allegations; our belief that the estimated cost of probable legal claims resolutions will not have an adverse effect on our consolidated financial position; our belief that the appropriate actions to remedy our material weakness are to implement new control policies and procedures and to hire additional accounting staff with appropriate levels of experience in order to improve the reconciliation process; our belief that our restructuring activities and related cost-cutting initiatives will reduce overall spending; our belief that the benefits of our restructuring activities will continue into fiscal 2006; spare parts sales will continue to increase as more systems are put into operation; expected severance and relocation costs; our belief that our existing cash and credit facilities at July 31, 2005 are adequate to fund our operations through April 30, 2006; our belief that compliance with covenants in the current senior credit agreement is achievable; our expectation that the funds necessary for capital expenditures will be generated internally and through available credit facilities; the strengthening of global economies; and global economic conditions and additional threatened terrorist attacks and responses thereto, including war. Additional information on these and other factors that could affect our financial results is set forth below. Finally, there may be other factors not mentioned above or included in our SEC filings that may cause our actual results to differ materially from those in any forward-looking statement. You should not place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.

 

All references to fiscal years are references to our fiscal year end of April 30.

 

12


Table of Contents

USE OF PROCEEDS

 

The proceeds from the sale of the shares covered by this prospectus will be received by the Selling Shareholders. We will not receive any of the proceeds from the sales by the Selling Shareholders of the shares covered by this prospectus.

 

We originally received gross proceeds of $65 million and net proceeds of $59.3 million on March 21, 2005 when we sold 17,473,116 equity units at $3.72 per unit in the PIPE Transaction. A unit consists of one share of our common stock and one warrant to buy 1/10th of a share of our common stock. Ten warrants give the holder the right to purchase one share of common stock for $4.07. We will receive an aggregate of up to $7.1 million if the selling shareholders who participated in the PIPE Transaction, exercise all of their warrants to purchase common stock.

 

We used the gross proceeds to pay the entire balance of our subordinated debt and accrued interest totaling $42.3 million in April 2005. The remaining proceeds were used to repay borrowings on our senior credit facility.

 

1,471,933 shares are issuable on the exercise of warrants issued to lenders, including approximately 304,000 warrants issued for anti-dilution. The exercise price of such warrants is $0.008 per share.

 

We would expect to use any such proceeds for general corporate purposes.

 

DIVIDEND POLICY

 

We have not paid dividends to common shareholders in the past. Our Board of Directors intends to retain future earnings, if any, to finance development and expansion of our business and reduce debt and does not expect to declare dividends to common shareholders in the near future. The credit agreement entered into on July 11, 2005 does permit us to pay dividends however. Prior to this date however, our credit agreements contained restrictions on our ability to pay dividends to our shareholders.

 

13


Table of Contents

PRO FORMA INFORMATION

 

During the second quarter of fiscal 2006, the Board of Directors approved the sale of the Company’s Avure Business consistent with the Company’s strategy to divest itself of operations that are not part of its core ultrahigh-pressure water pump business. On September 30, 2005, the Company entered into an agreement to sell the Avure Business. The business was acquired by Quintus Holdings, LLC, an affiliate of the Gores Technology Group, LLC (“Gores”), a Los Angeles-based private equity firm. On October 31, 2005, the Company and Gores consummated the purchase and sale transaction. The consideration includes cash of $6 million at closing, a promissory note of $8 million due 90 days after closing at a simple interest rate of 10% per annum, and a promissory note of $2 million due 3 years after closing at a simple interest rate of 6% per annum. The net proceeds received by the Company will be subject to adjustment for changes in the net working capital, pension balance and excess cash at time of the closing.

 

The Avure Business became a discontinued operation as of October 31, 2005 in accordance with FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. It is, therefore, not presented as a discontinued operation in the historical financial statements presented elsewhere in this prospectus. Beginning with the second quarter of fiscal 2006, however, we will present the Avure Business as discontinued operations and will reclassify all historical financial periods to reflect this treatment.

 

The following unaudited pro forma financial statements give effect to the disposition of the Avure Business to be accounted for as a discontinued operation in accordance the FAS 144. The unaudited pro forma consolidated balance sheet assumes the disposition occurred on July 31, 2005. Such pro forma information is based upon the historical balance sheet data of the Company as of that date. The unaudited pro forma consolidated statements of operations give effect to the treatment of the Avure Business as a discontinued operation for the three months ended July 31, 2005 and for each of the three years ended April 30, 2005.

 

The unaudited pro forma consolidated statement of operations for the fiscal year ended April 30, 2005 also gives effect to the PIPE Transaction. The PIPE Transaction, as described on page 2, was completed in March 2005, and the transaction was reported in the Company’s financial statements for the year ended April 30, 2005 and in the Company’s Form 10-Q for the quarter ended July 31, 2005. There is, therefore, no impact on our pro forma balance sheet at of July 31, 2005 or our pro forma statement of operations for the quarter ended July 31, 2005. In addition, the effects of this transaction are not reflected in the pro forma statement of operations for the fiscal years ended April 30, 2004 and 2003 as this is not allowed by Article 11 of Regulation S-X.

 

In the PIPE Transaction, as described on page 2, we sold 17,473,116 shares of common stock and warrants to purchase 1,747,312 shares of common stock. The PIPE Transaction gross proceeds of $65 million, less investment banking fees of $5.1 million and other costs of $626,000 resulted in net cash proceeds of $59.3 million. As further described below, the pro forma presentation reflects application of all of the net proceeds to pay down debt. Our subordinated debt and related accrued interest was paid off in its entirety and the remaining net proceeds were used to pay down our Senior debt. In addition, the pro forma presentation includes the issuance of approximately 304,000 anti-dilution warrants. The warrants were issued to our senior and subordinated lenders. The fair value of these warrants was $1.7 million.

 

The pro forma does not purport to be indicative of the results which would actually have been reported if the Avure disposition had occurred on such dates or which may be reported in the future. For example, the net working capital adjustment as of the actual closing date may be materially different from the pro forma adjustments as of July 31, 2005. These unaudited pro forma financial statements should be read in conjunction with the accompanying notes to unaudited pro forma financial statements, our historical financial statements and related notes, the sections of this prospectus entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

14


Table of Contents

Unaudited Pro Forma Consolidated Balance Sheet as of July 31, 2005

(In thousands)

 

     Historical
Consolidated


    Adjustments for the
Avure Disposition


    Pro Forma
Consolidated


 

ASSETS:

                        

Current Assets:

                        

Cash & Cash Equivalent

   $ 15,219     $ (642 )(b)   $ 15,384  
               6,000  (a)        
               (1,241 )(c)        
               (3,952 )(a)        

Restricted Cash

     2,527       (1,500 )(b)     1,027  

Receivables, Net

     28,047       (6,142 )(b)     29,905  
               8,000  (a)        

Inventories, Net

     26,034       (8,156 )(b)     17,878  

Prepaid Expenses

     6,487       (502 )(b)     5,985  

Other Current Assets

     2,052       —         2,052  
    


 


 


Total Current Assets

     80,366       (8,135 )     72,231  

Property, Plant & Equipment, Net

     12,227       (1,403 )(b)     10,824  

Intangible Assets, Net

     13,600       (10,723 )(b)     2,877  

Goodwill

     2,764       —         2,764  

Deferred income tax

     1,527       (625 )(b)     902  

Other Assets

     2,028       (1,269 )(b)     2,009  
              
 
2,000
(750
 (a)
)(a)
       
    


 


 


     $ 112,512     $ (20,905 )   $ 91,607  
    


 


 


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT):

                        

Current Liabilities:

                        

Notes Payable

   $ 3,841     $ (1,500 )(b)   $ 2,341  

Current Portion of Long-Term Obligations

     475       —         475  

Accounts Payable

     14,606       (2,141 )(b)     12,465  

Accrued Payroll and Related Liabilities

     7,265       (1,904 )(b)     5,361  

Taxes Payable and Other Accrued Taxes

     2,452      
 
(91
(441
)(b)
)(b)
    1,920  

Deferred Income Taxes

     839       —         839  

Deferred Revenue

     2,995       (250 )(b)     2,745  

Customer Deposits

     14,509       (3,017 )(b)     11,492  

Warrant Obligation

     7,374       —         7,374  

Other Accrued Liabilities

     11,513       (6,535 )(b)     4,978  
    


 


 


Total Current Liabilities

     65,869       (15,879 )     49,990  

Long-Term Obligations

     13,301       —         13,301  

Other Long-Term Liabilities

     2,986       (1,713 )(b)     1,273  
    


 


 


Total Liabilities

     82,156       (17,592 )     64,564  

Commitments and Contingencies

                        

Minority Interest

     2,178       (2,178 )(b)     —    

Shareholders' Equity:

                        

Common Stock

     346       —         346  

Capital in Excess of Par

     114,022       —         114,022  

Accumulated Deficit

     (80,559 )     353  (d)     (80,206 )

Accumulated Other Comprehensive Loss:

                        

Cumulative Translation Adjustment

     (5,194 )     (1,925 )(b)     (7,119 )

Unrealized Loss on Cash Flow Hedges

     (437 )     437  (b)     —    
    


 


 


Total Shareholders’ Equity

     28,178       (1,135 )     27,043  
    


 


 


     $ 112,512     $ (20,905 )   $ 91,607  
    


 


 


 

15


Table of Contents

Notes to Unaudited Pro Forma Consolidated Balance Sheet as of July 31, 2005

 

(a) To record proceeds of the sale of the Avure Business.

 

In accordance with purchase and sale agreement, the proceeds consist of cash of $6 million at closing, a promissory note of $8 million due 90 days after closing at a simple interest rate of 10% per annum, and a promissory note of $2 million due 3 years after closing at a simple interest rate of 6% per annum. Cash proceeds received by the Company at closing will be subject to adjustment for changes in net working capital and excess cash at time of closing. The $2 million promissory note is also subject to an adjustment related to a pension obligation balance at closing. The Pro Forma Consolidated Balance Sheet reflects the adjustments for the items based on the balances at July 31, 2005. The actual adjustments upon closing at October 31, 2005 will be different based on balance sheet as of that date.

 

(b) To record the elimination of the assets and liabilities and certain other comprehensive income balances of the Avure Business sold.
(c) To record the estimated transaction costs incurred from the sale.
(d) To record loss on the disposition (in thousands):

 

Total Proceeds:

        

Cash at closing

   $ 6,000  

Promissory note due 90 days after closing

     8,000  

Promissory note due 3 years after closing

     2,000  
    


       16,000  
    


Less: Transaction costs

     (1,241 )

Less: Adjustment for net working capital and pension balance

     (4,702 )
    


Net Proceeds

     10,057  

Less: Net book value of Avure Business sold

     (9,704 )
    


Pro forma gain, net of income tax $0

   $ 353  
    


 

Because we have provided for full valuation allowances for our deferred tax assets in the United States, the pro forma gain would not trigger an income tax expense. Therefore we have not adjusted the impact of this pro forma item to reflect any tax effect.

 

16


Table of Contents

Unaudited Pro Forma Consolidated Statements of Operations for the Three Months Ended July 31, 2005

(In thousands, except in share amounts)

 

     Historical
Consolidated


    Adjustments for the
Avure Disposition


    Pro Forma
Consolidated


 

Sales

   $ 49,729     $ (7,743 )(a)   $ 41,986  

Cost of Sales

     29,106       (4,854 )(a)     24,252  
    


 


 


Gross Margin

     20,623       (2,889 )     17,734  

Operating Expenses:

                        

Marketing

     8,545       (969 )(a)     7,576  

Research and Engineering

     2,691       (813 )(a)     1,878  

General and Administrative

     7,366       (1,151 )(a)     6,215  

Restructuring Charges

     98       —    (a)     98  
       —         —    (a)     —    
    


 


 


       18,700       (2,933 )     15,767  
    


 


 


Operating Income

     1,923       44       1,967  

Interest Expense

     (798 )     (128 )(a)     (926 )

Other Expense, net

     (226 )     (1,559 )(a)     (1,785 )
    


 


 


Income (Loss) from Continuing Operations Before Income Taxes

     899       (1,643 )     (744 )

Provision for Income Taxes

     (877 )     294  (a)     (583 )
    


 


 


Income (Loss) from Continuing Operations

   $ 22     $ (1,349 )   $ (1,327 )
    


 


 


Income (Loss) Per Share from Continuing Operations

                        

Basic

   $ 0.00             $ (0.04 )
    


         


Diluted

   $ 0.00             $ (0.04 )
    


         


Weighted Average Shares Used in Computing Basic and Diluted Income (Loss) per Share from Continuing Operations

                        

Basic

     34,299               34,299  

Diluted

     36,010               34,299  

 

Note to Unaudited Pro Forma Consolidated Statements of Operations

 

(a) To reclassify the results of operations for the Avure Business as a discontinued operation for the three months ended July 31, 2005.

 

17


Table of Contents

Unaudited Pro Forma Consolidated Statements of Operations for the Year Ended April 30, 2005

(In thousands, except share amounts)

 

     Historical
Consolidated


    Adjustments for the
Avure Disposition


    Subtotal

    PIPE
Transaction


    Pro Forma
Consolidated


 

Sales

   $ 219,365     $ (46,399 )(a)   $ 172,966             $ 172,966  

Cost of Sales

     138,905       (31,161 )(a)     107,744               107,744  
    


 


 


 


 


Gross Margin

     80,460       (15,238 )     65,222       —         65,222  

Operating Expenses:

                                        

Marketing

     32,657       (4,286 )(a)     28,371               28,371  

Research and Engineering

     9,067       (3,178 )(a)     5,889               5,889  

General and Administrative

     26,988       (4,139 )(a)     22,849               22,849  

Restructuring Charges

     239       (239 )(a)     —                 —    

Financial Consulting Charges

     623       —         623               623  

Impairment Charges

     9,064       (9,064 )(a)     —                 —    
    


 


 


 


 


       78,638       (20,906 )     57,732       —         57,732  
    


 


 


 


 


Operating Income

     1,822       5,668       7,490       —         7,490  

Interest Expense

     (20,559 )     217  (a)     (20,342 )     16,048 (b)     (4,294 )

Interest Income

     157       (51 )(a)     106               106  

Other Income, net

     302       1,403  (a)     1,705               1,705  
    


 


 


 


 


(Loss) Income from Continuing Operations Before Income Taxes

     (18,278 )     7,237       (11,041 )     16,048       5,007  

Provision for Income Taxes

     (2,338 )     457  (a)     (1,881 )     —   (c)     (1,881 )
    


 


 


 


 


(Loss) Income from Continuing Operations

   $ (20,616 )   $ 7,694     $ (12,922 )   $ 16,048     $ 3,126  
    


 


 


 


 


(Loss) Income Per Share from Continuing Operations

                                        

Basic

   $ (1.16 )           $ (0.73 )           $ 0.09  
    


         


         


Diluted

   $ (1.16 )           $ (0.73 )           $ 0.09  
    


         


         


Weighted Average Shares Used in Computing (Loss) Income per Share from Continuing Operations

                                        

Basic

     17,748               17,748               33,402  

Diluted

     17,748               17,748               35,427  (d)

 

Notes to Unaudited Pro Forma Consolidated Statements of Operations

 

(a) To reclassify the results of operations for the Avure Business as a discontinued operation for the year ended April 30, 2005.

 

(b) To record the interest expenses reduced due to the PIPE Transaction.

 

The subordinated debt and accrued interest at May 1, 2004 (the beginning of fiscal 2005) was $42.3 million. The pro forma interest expense, net income and earnings per share information assumes the proceeds of the PIPE Transaction were used first to pay off the balance of the subordinated debt and accrued interest and the remaining net proceeds were used to pay-down Senior Credit Facility borrowings. The reduction between the “Actual” and ‘Pro Forma’ amounts of interest expense is attributable to the reduced levels of senior and subordinated borrowings. Because the interest expense on the subordinated borrowings was all accrued and did not require cash payments, the pro forma proceeds applied to reduce senior borrowings are the full difference between net proceeds of $59.3 million and $42.3 million of subordinated borrowing and accrued

 

18


Table of Contents

interest or $17.0 million. In addition, the pro-forma amounts exclude the amortization of the Debt Discount on the Subordinated debt of approximately $1.1 million per year. No pro forma impact was ascribed to the antidilution warrants issued in conjunction with the PIPE Transaction as such impact is not determinable. The pro-forma interest expense includes the following adjustments:

 

In Thousands    Year Ended
April 30,
2005


Reduced interest expense on subordinated debt

   $ 7,724

Reduced interest expense on senior debt

     1,509

Exclude write-off of capitalized fees and debt discount

     5,281

Exclude charges for the antidilution warrants

     1,534
    

Total pro forma adjustment to interest expense

   $ 16,048
    

 

The pro forma presentation also excludes the write off of unamortized debt discount, write-off of any capitalized fees. These fees were expensed in the fourth quarter of fiscal 2005 when the underlying debt was retired. They amounted to $5.3 million in additional charges. Charges taken in the fourth quarter of fiscal 2005 for the portion of the warrants ($1,534,000) issued to our subordinated lender and those senior lenders who did not participate in an ongoing senior credit agreement are excluded from the pro forma results.

 

(c) Because we have provided for full valuation allowances for our deferred tax assets in the United States, the reductions to our interest expense would not effect our income tax provision. Therefore we have not adjusted the impact of these pro forma items to reflect any tax effect.

 

(d) The pro forma weighted average number of shares outstanding includes the following adjustments:

 

     Year Ended
April 30, 2005


In Thousands    Basic

   Diluted

Common shares issued in PIPE Transaction

   15,654    15,654

Dilutive potential common shares from warrants and options

   —      2,025
    
  

Total additional shares included in weighted average shares outstanding

   15,654    17,679
    
  

 

The weighted average shares are adjusted for the additional shares issued in the PIPE Transaction, as if they were issued May 1, 2004. Diluted income (loss) per share takes into consideration the warrants issued to purchasers of stock in the PIPE Transaction, as well as the anti-dilution warrants issued to then current warrant holders prior to the PIPE Transaction where their inclusion would be dilutive.

 

The Company’s potential common stock equivalents were:

 

     April 30,
2005


In Thousands    Actual

Common stock options

   2,030

Warrants

   3,219
    

Total

   5,249
    

 

1,982,046 options are excluded from dilutive potential common shares because they are out-of-the-money.

 

19


Table of Contents

Unaudited Pro Forma Consolidated Statements of Operations for the Year Ended April 30, 2004

(In thousands, except share amounts)

 

     Historical
Consolidated


    Adjustments for the
Source Disposition


    Pro Forma
Consolidated


 

Sales

   $ 177,609     $ (44,748 )(a)   $ 132,861  

Cost of Sales

     112,382       (28,778 )(a)     83,604  
    


 


 


Gross Margin

     65,227       (15,970 )     49,257  

Operating Expenses:

                        

Marketing

     28,422       (5,579 )(a)     22,843  

Research and Engineering

     10,651       (4,778 )(a)     5,873  

General and Administrative

     23,261       (4,230 )(a)     19,031  

Restructuring Charges

     3,256       (788 )(a)     2,468  

Financial Consulting Charges

     1,520       —    (a)     1,520  
    


 


 


       67,110       (15,375 )     51,735  
    


 


 


Operating Loss

     (1,883 )     (595 )     (2,478 )

Interest Expense

     (13,171 )     412  (a)     (12,759 )

Interest Income

     386       (249 )(a)     137  

Other Income, net

     7,817       304  (a)     8,121  
    


 


 


Loss from Continuing Operations Before Income Taxes

     (6,851 )     (128 )     (6,979 )

Provision for Income Taxes

     (5,197 )     (392 )(a)     (5,589 )
    


 


 


Loss from Continuing Operations

   $ (12,048 )   $ (520 )   $ (12,568 )
    


 


 


Loss Per Share from Continuing Operations—Basic and Diluted

   $ (0.78 )           $ (0.82 )
    


         


Weighted Average Shares Used in Computing Basic and Diluted Loss per Share from Continuing Operations—Basic and Diluted

     15,415               15,415  

 

Note to Unaudited Pro Forma Consolidated Statements of Operations

 

(a) To reclassify the results of operations for the Avure Business as a discontinued operation for the year ended April 30, 2004.

 

20


Table of Contents

Unaudited Pro Forma Consolidated Statements of Operations for the Year Ended April 30, 2003

(In thousands, except share amounts)

 

     Historical
Consolidated


    Adjustments for the
Source Disposition


    Pro Forma
Consolidated


 

Sales

   $ 144,115     $ (22,282 )(a)   $ 121,833  

Cost of Sales

     108,074       (19,815 )(a)     88,259  
    


 


 


Gross Margin

     36,041       (2,467 )     33,574  

Operating Expenses:

                        

Marketing

     37,398       (7,966 )(a)     29,432  

Research and Engineering

     13,501       (6,830 )(a)     6,671  

General and Administrative

     23,026       (4,242 )(a)     18,784  

Impairment Charges

     10,815       (3,670 )     7,145  
    


 


 


       84,740       (22,708 )     62,032  
    


 


 


Operating Loss

     (48,699 )     20,241       (28,458 )

Interest Expense

     (11,848 )     488  (a)     (11,360 )

Interest Income

     686       (606 )(a)     80  

Other Income, net

     3,000       2,947  (a)     5,947  
    


 


 


Loss from Continuing Operations Before Income Taxes

     (56,861 )     23,070       (33,791 )

Provision for Income Taxes

     (12,603 )     2,518  (a)     (10,085 )
    


 


 


Loss from Continuing Operations

   $ (69,464 )   $ 25,588     $ (43,876 )
    


 


 


Loss Per Share from Continuing Operations—Basic and Diluted

   $ (4.53 )           $ (2.86 )
    


         


Weighted Average Shares Used in Computing Loss per Share from Continuing Operations—Basic and Diluted

     15,348               15,348  

 

Note to Unaudited Pro Forma Consolidated Statements of Operations

 

(a) To reclassify the results of operations for the Avure Business as a discontinued operation for the year ended April 30, 2003.

 

21


Table of Contents

Controls and Procedures

 

In December 2004, in connection with the restatement of our fiscal 2004, 2003 and 2002 financial statements, and in November 2005, in connection with our restatement of our fiscal 2005 and 2004 financial statements, our independent registered public accounting firm reported to management and to the Audit Committee material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management agrees with and has responded to the Audit Committee with our plans to remediate the material weaknesses communicated by our independent registered public accounting firm. Remediation of these material weaknesses is ongoing.

 

The material weaknesses in our internal control over financial reporting are as follows:

 

    The Company did not maintain effective controls over the financial reporting process due to an insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with its financial reporting requirements and the complexity of the Company’s operations and transactions. Specifically, the Company incorrectly applied generally accepted accounting principles for (i) the impairment of goodwill, (ii) the classification of deferred tax balances, (iii) the valuation of anti-dilution warrants, (iv) the accrual of costs on contracts and balance sheet presentation of accounts receivable and cash receipts relating to contracts accounted for using the percentage-of-completion method and (v) leases with rent escalation clauses, affecting receivables, deferred income taxes, prepaid expenses, goodwill, other accrued liabilities, other long-term liabilities, customer deposits, minority interest, capital in excess of par, cost of sales, general and administrative expenses, impairment charge, interest expense and other (expense) income. This material weakness contributed to the material weakness discussed below.

 

    The Company did not maintain effective controls to ensure there is adequate (i) analysis, documentation, reconciliation and review of accounting records, and supporting data, and (ii) monitoring and oversight of the work performed by accounting and financial reporting personnel to ensure the accuracy and completeness of the consolidated financial statements in accordance with generally accepted accounting principles. Specifically, the Company did not have effective controls designed and in place over the consolidation of the financial statements of subsidiaries, the reconciliation of inter-company accounts, the valuation of anti-dilution warrants, the accrual of costs on contracts and balance sheet presentation of accounts receivable and cash receipts relating to contracts accounted for using the percentage-of-completion method, the classification of technical service expenses and the accounting for performance based equity awards, affecting receivables, prepaid expenses, other accrued liabilities, customer deposits, capital in excess of par, cost of sales, marketing expense, research and engineering, general and administrative expense and interest expense.

 

These control deficiencies resulted in the restatement of the Company’s consolidated financial statements for the years ended April 30, 2005, 2004 and 2003, each of the quarters in 2004 and 2003 and the fourth quarter of 2005. Additionally, each of these control deficiencies could result in a material misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that each of the above control deficiencies represents a material weakness.

 

Remediation of Material Weakness

 

Our management and Audit Committee have dedicated significant resources to assessing the underlying internal control deficiencies giving rise to the restatements and to ensure that proper steps have been and are being taken to improve our internal control over financial reporting. We have assigned the highest priority to the correction of these deficiencies and have taken and will continue to take action to fully correct them.

 

22


Table of Contents

Management is committed to instilling strong control policies and procedures and ensuring that the ‘tone at the top’ is committed to accuracy and completeness in all financial reporting. The remedial measures include the following:

 

    Insufficient compliment of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles.

 

We have filled several positions in the corporate accounting and finance department with newly hired staff, including a financial planner, assistant controller and senior accountant. We have not completed the hiring process at corporate as we continue to assess our staffing needs. During August 2005, we hired a technical accounting manager to ensure compliance with all current and future accounting rules. Prior to that date the existing staff was addressing our application of technical accounting literature. We will continue to assess staffing needs at both corporate and our subsidiaries, and have identified the need for additional staff in the areas of accounting supervision and financial analysis. We have applied additional resources and time to improve the appropriateness and documentation of our conclusions on technical accounting issues. This will be enhanced with the addition of our technical accounting manager and other planned additions.

 

    Lack of effective controls to ensure adequate analysis, documentation, reconciliation and review of accounting records. Lack of effective controls to ensure adequate monitoring and oversight of work period by accounting and financial reporting personnel.

 

We engaged a financial consulting firm to assist in both detail reconciliation work, as well as reviewing current processes and controls and assistance in the development of prospective processes and controls over the inter-company reconciliation process. We created a standardized template used in the reconciliation of all our inter-company accounts. These reconciliations are reviewed for accuracy and completeness by our Chief Financial Officer. Additionally, we have created a new template for use in generation of our Statement of Cash Flows. We have modified our monthly divisional close checklist to ensure all required reconciliations are completed, as well as help ensure adherence to corporate policies and procedures. We have begun to improve the documentation of our accounting policies and procedures to ensure that all transactions are recorded consistently and with the appropriate level of documentation. As is described in the above paragraph, we still need to hire additional experienced staff to provide enhanced review, analysis and documentation of accounting transactions and of the consolidated financial statements.

 

The implementation of the initiatives described above, are among our highest priorities. Our Audit Committee will continually assess the progress and sufficiency of these initiatives and make adjustments as and when necessary. As of the date of this report, management believes that the plan outlined above, when completed, will eliminate the material weaknesses in internal control over financial reporting as described above.

 

23


Table of Contents

SELECTED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, which are included elsewhere in this prospectus. The selected consolidated statement of operations data for each of the fiscal years ended April 30, 2003, 2004 and 2005 and the selected consolidated balance sheet data as of April 30, 2004 and 2005 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated statement of operations data of each of the fiscal years ended April 30, 2002 and 2001 and the balance sheet as of April 30, 2003, 2002 and 2001 are derived from our unaudited financial statements that are not included in this prospectus. The selected consolidated statement of operations data for the three months ended July 31, 2005 and the selected consolidated balance sheet data as of July 31, 2005 are derived from our unaudited consolidated financial statements which are included in this prospectus. Our unaudited financial statements have been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of our management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly our financial position and results of operations as of and for those periods.

 

(In thousands, except per share amounts)   Three Months
Ended
July 31, 2005


  Year Ended April 30,

   

2005

(restated)(4)


    2004

    2003(3)

    2002(2)

    2001(1)

    (unaudited)                           (unaudited)

Statement of Operations Data:

                                           

Sales

  $ 49,279   $ 219,365     $ 177,609     $ 144,115     $ 176,890     $ 204,854

(Loss) Income Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

    22     (20,616 )     (12,048 )     (69,464 )     (8,244 )     4,038

Net (Loss) Income

    22     (20,616 )     (11,522 )     (69,987 )     (7,853 )     1,630

Basic (Loss) Income Per Share Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

    0.00     (1.16 )     (0.78 )     (4.53 )     (0.54 )     0.27

Basic (Loss) Earnings Per Share

    0.00     (1.16 )     (0.75 )     (4.56 )     (0.52 )     0.11

Diluted (Loss) Income Per Share Before Cumulative Effect of Change in Accounting Principles and Discontinued Operations

    0.00     (1.16 )     (0.78 )     (4.53 )     (0.54 )     0.27

Diluted (Loss) Income Per Share

    0.00     (1.16 )     (0.75 )     (4.56 )     (0.52 )     0.11
    July 31, 2005

  April 30,

(In thousands)    

2005

(restated)(4)


   

2004

(restated)(4)


   

2003

(restated)(5)


   

2002

(restated)(5)


   

2001

(restated)(5)


    (unaudited)               (unaudited)     (unaudited)     (unaudited)

Balance Sheet Data:

                                           

Working Capital

  $ 14,497   $ 6,233     $ (9,060 )   $ (6,709 )   $ 84,532     $ 91,750

Total Assets

    112,512     118,417       129,272       147,088       205,572       206,270

Short-Term Debt

    4,316     13,443       48,727       61,056       5,237       8,464

Long-Term Obligations, net

    13,301     5,704       38,081       29,023       83,453       85,652

Shareholders’ Equity (Deficit)

    28,178     28,710       (9,552 )     4,872       71,054       68,755

 

24


Table of Contents

(1) The Statement of Operations for fiscal 2001 includes the adoption of SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB101A and 101B. We reflected this change in policy as a Cumulative Effect of Change in Accounting Principle.
(2) The Statement of Operations for fiscal 2002 includes the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). See Note 1 to the Consolidated Financial Statements for the year ended April 30, 2005 for further discussion of the impact of this adoption.
(3) The Statement of Operations for fiscal 2003 includes the impact of management’s launch of its restructuring program and resulting focus on cash generation. See the ‘Fiscal 2003 Comprehensive Financial Review’ at the end of the ‘Fiscal 2004 Compared to Fiscal 2003’ financial analysis in the Management’s Discussion and Analysis section for further discussion of the impact on our financial results.
(4) As described in Note 2 to the April 30, 2005 Consolidated Financial Statements included elsewhere in this prospectus, we have restated our consolidated financial statements for the year ended April 30, 2005 to reflect additional charges in the Consolidated Statement of Operations associated with 1) the impairment of goodwill, 2) the revised valuation of anti-dilution warrants issued to our senior and subordinated lenders, 3) the revision of estimated losses on long-term contracts, 4) the correction of compensation expense for performance based equity awards and stock awards for services and 5) straight-line rent expense for leases with escalating rents. In addition, we restated certain balances for incorrect classification on our Consolidated Balance Sheet as of April 30, 2005 and 2004 and Consolidated Statement of Operations for the year ended April 30, 2005.
(5) As reported in the Company’s April 30, 2005 Form 10-K/A, the Company has identified errors in the Consolidated Financial Statements related to the presentation of percentage-of-completion related balances on the Consolidated Balance Sheet. Specifically, the Company noted inconsistencies between its divisions in the balance sheet presentation of accounts receivable and cash receipts relating to contracts accounted for using the percentage-of-completion method. The Company has, therefore, adjusted its financial statements to reflect a consistent presentation and comply with the provisions of SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” as of April 30, 2003, 2002, and 2001.

 

25


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Current Events

 

Avure Disposition –

 

On October 31, 2005, consistent with our strategy to divest operations that are not part of our core UHP water pump business, we sold our General Press operations and the non UHP portion of our Food reportable segment (the “Avure Disposition”). Included in the Avure Disposition were our Avure Technologies, Incorporated, Flow International FPS AB, Avure Technologies AB subsidiaries, and our 51% interest in Flow Autoclave Systems (together, the “Avure Business”). The Avure Business became a discontinued operation in accordance with FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets at the time it was sold and will be represented that way in future financial statements. In connection with the sale we agreed to continue to supply UHP pumps to the Avure Business.

 

Current Senior Credit Agreement –

 

Until April 28, 2005, our long-term financing consisted of a senior credit agreement (originally entered into on July 28, 2004) whose maturity date was August 1, 2005 (“Senior Credit Agreement”) and a subordinated debt agreement (“Subordinated Debt Agreement”). On April 28, 2005, we entered into a new senior debt agreement (“April Senior Credit Agreement”) for the purpose of being able to pay off the Subordinated Debt Agreement, which was done. The April Senior Credit Agreement also had a maturity date of August 1, 2005. On July 8, 2005, we entered into a new senior credit agreement, with a maturity date of July 8, 2008 (“Current Senior Credit Agreement”). At certain places in this report, we refer to “Senior Credit Arrangements” referring to one or more of the senior credit agreements when identification of a particular agreement is not important. The Current Senior Credit Agreement is a $30 million, three year agreement with Bank of America N.A. and U.S. Bank N.A. It bears interest at Bank of America’s prime rate (5.75% at April 30, 2005) or is linked to LIBOR plus a percentage depending on our leverage ratios, at our option. The agreement sets forth specific financial covenants to be attained on a quarterly basis, which we believe, based on our financial forecasts, are achievable. The financial covenants in the Current Senior Credit Agreement are less restrictive than in the earlier Senior Credit Arrangements.

 

Restructuring –

 

In fiscal 2005, we completed a plan intended to return us to profitability through reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. We evaluated the workforce and skill levels necessary to satisfy the expected future requirements of the business. As a result, we implemented plans to eliminate redundant positions and realign and modify certain roles based on skill assessments. We recorded restructuring charges of $3.3 million and $239,000 for the years ended April 30, 2004 and 2005, respectively, which are shown in the table below (in thousands):

 

     Year Ended
April 30, 2005


  

Year Ended

April 30, 2004


Severance benefits

   $ 120    $ 652

Facility exit costs

     119      1,058

Inventory write-down

     —        1,546
    

  

     $ 239    $ 3,256
    

  

 

These charges included employee severance related costs for approximately 50 individuals. The fiscal 2004 reductions in the global workforce were made across manufacturing, engineering and general and administrative functions. We have also recorded facility exit costs for the year ended April 30, 2004 primarily as a result of consolidating our two Kent facilities into one facility, vacating the manufacturing warehouse portion of our Flow

 

26


Table of Contents

Europe facility and reducing the space utilized in our Swedish manufacturing facility. In addition, we scrapped some obsolete parts, returned surplus parts to vendors and sold parts to third parties, in conjunction with the shutdown of our manufacturing operation in Europe and standardization of our product line. The fiscal 2005 restructuring related to employee reductions in the Food segment as well as closure of our Memphis sales office. See restructuring accrual information in Note 16 to Consolidated Financial Statements.

 

During the year ended April 30, 2005 and 2004, we incurred $.6 million and $1.5 million, respectively, of professional fees associated with the restructuring of our debt in July 2004 and July 2003, respectively. These costs were evaluated under EITF 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”, and as they were either expenses related to potential Senior Credit Arrangement with lenders that did not occur, or they related to expenses associated with our subordinated debt and did not result in an increase in the facility and accordingly they were expensed.

 

Robotics Division –

 

In an effort to control costs and to focus on our core UHP waterjet systems, on June 2, 2005, we announced that we had expanded our strategic relationship with Motoman Inc., to deliver standard, pre-engineered robotic waterjet cutting solutions to the automotive industry. The relationship means that Motoman, Inc. will be the primary sales contact with the end user for standard systems and we will sell UHP pumps and parts to Motoman, Inc. to be integrated into the pre-engineered robotic cutting system. At the same time we announced that, in order to re-align our resources with this new strategic direction, our custom robotic waterjet cutting system manufacturing would be relocated from Wixom, Michigan to Burlington, Ontario. This closure is expected to be completed by the second quarter of fiscal 2006 with restructuring expenses of approximately $1,000,000. These expenses include severance payments for employees, exit expenses for the facility as well as logistical expenses for moving and disposing of equipment and assets.

 

Other –

 

We have also retained a broker to assist us in evaluating various opportunities for the Applications Group, our “Other” segment.

 

Three Months Ended July 31, 2005 Compared to Three Months Ended July 31, 2004

 

Changes in Financial Condition

 

We generated $5.8 million of cash from operating activities during the three months ended July 31, 2005 compared to $1.2 million of cash generated for the three months ended July 31, 2004. The current year’s operating cash flow includes $9.7 million of reduction in trade receivables from improved collections as well as cash collections on a number of percentage-of-completion projects, during the three months ended July 31, 2005. Trade receivables accounted for cash generation of $2.5 million in the year ago comparable period. Additionally, customer deposits increased $4.1 million. These deposits provide the funding for the manufacturing of our systems and primarily relate to large aerospace contracts that we have been awarded. The revenue associated with these deposits is expected to be recognized in the next twelve months. Increases in inventory of $2.2 million and decreases in accounts payable of $5.9 million from settlement of amounts outstanding during the three months ended July 31, 2005 offset the cash generated by receivables.

 

Net receivables are comprised of trade accounts and unbilled revenues. At July 31, 2005, the net receivables balance decreased $10.3 million or 27% from April 30, 2005. The decrease in net receivables stemmed from the reduction in trade receivables of $8.1 million or 22% from $37.2 million at April 30, 2005 to $29.0 million at July 31, 2005 on collection of standard waterjet system sales from the three months ended April 30, 2005. Receivables days sales outstanding (including unbilled revenues) decreased to 51 days at July 31, 2005 from 53 as of April 30, 2005. This decrease was compounded by a reduction in unbilled revenues from $5.0 million at April 30, 2005 to $2.7 million at July 31, 2005, a $2.3 million or 46% decrease. A significant portion of unbilled receivables relates to equipment and systems sales accounted for on a percentage of completion basis. Unbilled

 

27


Table of Contents

revenues fluctuate due to the scheduling of production and achievement of certain billing milestones. In general, receivables can be negatively affected by the traditionally longer payment cycle outside the United States and the timing of billings and payments on large special system orders. We do not believe these timing issues will present a material adverse impact on our short-term liquidity requirements. Because of the lead-time to build and deliver such equipment, ultimate collection of such accounts can be subject to changing customer business and economic conditions.

 

Inventories, net at July 31, 2005 increased $1.8 million or 7% from April 30, 2005 driven by increase in work in process from shipments of completed food units in-transit for delivery to customers in North America. Gross inventories increased $1.7 million or 6% while the obsolescence reserve decreased slightly to $2.8 million. The inventory increase at July 31, 2005 and reduced cost of goods sold in the quarter contributed to lower inventory turns of 4.5 turns compared with the quarter ended April 30, 2005 turns of 6.5 times.

 

Customer deposits remain high, increasing $3.9 million to $14.5 million at July 31, 2005, versus the $10.6 million balance at April 30, 2005. The increase stems from milestone advances due under the significant aerospace contracts which we were awarded in fiscal 2005.

 

Liquidity and Capital Resources

 

Approximately $14.7 million of our cash and restricted cash is held by divisions outside the United States. The repatriation of offshore cash balances from certain divisions will trigger tax liabilities. In fiscal 2004, we recorded a $1.9 million liability for withholding taxes on future repatriation of historical foreign earnings. In fiscal 2005, we repatriated $4.8 million from certain foreign subsidiaries. During the three months ended July 31, 2005, we repatriated $1.4 million from a foreign subsidiary and we plan to continue repatriating additional funds in the future.

 

On March 21, 2005, in a Private Investment in Public Equity Transaction (“PIPE Transaction”), we sold 17,473,116 equity units at $3.72 per unit for gross proceeds of $65 million, and net proceeds of more than $59 million. A unit consists of one share of our common stock and one warrant to buy 1/10th of a share of our common stock. Ten warrants give the holder the right to purchase one share of common stock for $4.07. If all the warrant holders opted to exercise their warrants, we would receive $7.1 million in cash proceeds.

 

Under terms of the PIPE Transaction, we were required to file an initial Form S-1 registration of the shares issued and issuable in the PIPE Transaction on or before May 20, 2005 (which we did) and were required to cause the Form S-1 to become effective on or before September 17, 2005. We have amended the Registration Rights Agreement to grant us an extension until December 31, 2005 for the effective date of the registration of the shares and warrants issued in the PIPE Transaction. We are subject to liquidated damages of $650,000 per month, if we fail to meet the December 31, 2005 deadline. Because the market price of the common stock was greater than $3.70, we issued approximately 304,000 anti-dilution warrants to current warrant holders prior to the PIPE Transaction which have a Black-Scholes value of approximately $1.7 million. Approximately $1.5 million of this amount relates to warrants issued under subordinated debt agreements and $0.2 million relates to warrants issued under senior debt agreements. Proceeds of the PIPE were used to pay down existing debt, including all of the subordinated debt.

 

Our domestic senior credit agreement (“Credit Agreement”) is our primary source of external funding. Effective July 8, 2005, we executed a new $30 million, three year senior credit agreement with Bank of America N.A. and U.S. Bank N.A. This credit agreement expires July 8, 2008 and bears interest at the bank’s prime rate (6.25% at July 31, 2005) or is linked to LIBOR plus a percentage depending on our leverage ratios, at our option. The agreement sets forth specific financial covenants to be attained on a quarterly basis, which we believe, based on our financial forecasts, are achievable. At July 31, 2005, the balance outstanding on the Credit Agreement was $8.0 million against a maximum borrowing of $30 million. Our available credit at July 31, 2005, net of $6.4 million in outstanding letters of credit, was $15.6 million.

 

28


Table of Contents

We believe that our existing cash, cash from operations, and credit facilities at July 31, 2005 are adequate to fund our operations through April 30, 2006. If we fail to achieve our planned revenues, costs and working capital objectives, management believes it has the ability to curtail capital expenditures and reduce costs to levels that will be sufficient to enable us to meet our cash requirements and debt covenants through April 30, 2006.

 

On August 26, 2005, we received $2.5 million for giving the exclusive right to Barton Mines Company to sell abrasive to our customers. Under a Purchase Agreement, we are also entitled to future annual payments of $250,000 for the next three years based on achievement of system sales targets and royalty payments for systems sold over the next 10 years.

 

On October 31, 2005, we completed the sale of the North America Press and International Press segments, as well as the non ultrahigh-pressure portion of the Food segment with the Gores Technology Group, LLC (“Gores”) for estimated net proceeds of $14.0 million, comprised of cash and notes. At closing, we also entered into a Supply Agreement with Gores whereby we have agreed to supply certain high pressure pump products on an exclusive basis to Gores. These segments do not meet the accounting criteria to be considered assets held for sale as of July 31, 2005 and accordingly the results of operations are shown as continuing operations and the related assets have not been reported as held for sale in our financial statements.

 

Off-Balance Sheet Arrangements

 

We do not have any special purpose entities or off-balance sheet financing arrangements.

 

Contractual Obligations

 

During the quarter ended July 31, 2005, there were no material changes outside the ordinary course of business in our contractual obligations and minimum commercial commitments as reported on page 59 for the year ended April 30, 2005.

 

Critical Accounting Policies and Judgments and New Accounting Pronouncements

 

There are no material changes in our critical accounting policies as disclosed on pages 59-61 for the year ended April 30, 2005. New accounting pronouncements are disclosed in Note 15 to the July 31, 2005 Condensed Consolidated Financial Statements.

 

Results of Operations

 

We analyze our business based on the utilization of ultrahigh-pressure (“UHP”), either as released pressure or contained pressure. The released pressure portion of our UHP business which we call Waterjet, is comprised of the following segments: North America Waterjet, Asia Waterjet, Other International Waterjet and Other. The contained pressure operation which is what we call Avure is made up of the Food, North America Press and International Press segments.

 

Operational Overview:

 

Dollars in thousands, except per share data

 

     Three months ended July 31, 2005

   Three months ended July 31, 2004

     Waterjet

   Avure

    Consolidated

   Waterjet

   Avure

   Consolidated

Sales

   $ 41,986    $ 7,743     $ 49,729    $ 38,299    $ 10,683    $ 48,982

Cost of Sales

     24,252      4,854       29,106      24,326      6,761      31,087
    

  


 

  

  

  

Gross Margin

     17,734      2,889       20,623      13,973      3,922      17,895

Operating Expenses

     15,568      3,132       18,700      12,940      3,324      16,264
    

  


 

  

  

  

Operating Income

   $ 2,166    $ (243 )   $ 1,923    $ 1,033    $ 598    $ 1,631
    

  


 

  

  

  

 

29


Table of Contents

Sales Summary:

 

Dollars in thousands

 

     Three months ended July 31,

 
     2005

   2004

   % Change

 

Operational breakdown:

                    

Waterjet:

                    

Systems

   $ 28,721    $ 25,900    11 %

Consumable parts and services

     13,265      12,399    7 %
    

  

      

Total

     41,986      38,299    10 %

Avure:

                    

Fresher Under Pressure

     2,337      3,868    (40 )%

General Press

     5,406      6,815    (21 )%
    

  

      

Total

     7,743      10,683    (28 )%
    

  

      
     $ 49,729    $ 48,982    2 %
    

  

      

Geographic breakdown:

                    

United States

   $ 28,954    $ 26,979    7 %

Rest of Americas

     4,181      4,895    (15 )%

Europe

     10,826      10,757    1 %

Asia

     5,768      6,351    (9 )%
    

  

      
     $ 49,729    $ 48,982    2 %
    

  

      

 

Three Months Ended July 31, 2005 Compared to Three Months Ended July 31, 2004

(Tabular amounts in thousands)

 

Sales.

 

Our sales by segment for the periods noted below is summarized as follows:

 

     Three Months Ended July 31,

 
     2005

   2004

   Difference

    %

 

Sales

                            

Waterjet:

                            

North America

   $ 22,927    $ 15,900    $ 7,027     44 %

Asia

     5,768      6,351      (583 )   (9 )%

Other International

     8,453      7,136      1,317     18 %

Other

     4,838      8,912      (4,074 )   (46 )%
    

  

  


     

Waterjet Total

     41,986      38,299      3,687     10 %

Avure:

                            

Food

     2,337      3,868      (1,531 )   (40 )%

North America Press

     2,117      2,593      (476 )   (18 )%

International Press

     3,289      4,222      (933 )   (22 )%
    

  

  


     

Avure Total

     7,743      10,683      (2,940 )   (28 )%
    

  

  


     

Consolidated Total

   $ 49,729    $ 48,982    $ 747     2 %
    

  

  


     

 

Waterjet. The Waterjet operation includes cutting and cleaning operations, which are focused on providing total solutions for the aerospace, automotive, job shop, surface preparation (cleaning) and paper industries. It is comprised of four reporting segments: North America Waterjet, Asia Waterjet, Other International Waterjet and

 

30


Table of Contents

Other. The North America, Asia and Other International Waterjet segments primarily represent sales of our standard cutting and cleaning systems throughout the world, as well as sales of our custom designed systems into the Aerospace industry. The ‘Other’ segment represents sales of our automation and robotic waterjet cutting sells which are sold primarily into the North American automotive industry. For the three months ended July 31, 2005, total Waterjet sales of $42.0 million increased $3.7 million or 10% as compared to the prior year same period. $7.0 million of increase was recognized in our North America Waterjet segment. Last year we believed the market awareness of waterjet technology was low and addressed this through an increase in marketing and tradeshow activity, including attendance at the bi-annual International Manufacturing Technology Show in early September 2004, as well as increasing the number of domestic waterjet cutting direct sales staff from 10 to 15, adding of two machine tool distributors and increasing domestic technical services staff from 12 to 24 persons. The growth in revenue in North America is a result of an increase in unit sales stemming from our increased sales and marketing activity. There were no significant price increases year over year; however, a price increase of 4% on selected systems was instituted on February 1, 2005. Aerospace sales, which are also included in the North America segment, were $2.1 million for the three months ended July 31, 2005, up $1.7 million from the prior year same period from work completed on aerospace contracts awarded in fiscal 2005. Growth in the Other International Waterjet segment represents primarily sales into Europe and South America. Revenues from our European operations have improved by $1.0 million for the three months ended July 31, 2005 to $7.5 million. Market specific pricing including some price reductions, standardization of system offerings, improved delivery and a recovering European marketplace have helped to increase our European sales. Sales into South America of $0.9 million for the three months ended July 31, 2005 improved $0.3 million over the respective prior year periods. We typically sell our products at higher prices outside the U.S. due to the costs of servicing these markets. As much of our product is manufactured in the U.S., the weakness of the U.S. dollar also has helped strengthen our foreign revenues.

 

The growth in our North America and Other International Waterjet segments were offset by declines in the Asia Waterjet and ‘Other’ segments. Asia Waterjet sales were negatively impacted by sluggish Japanese consumption of machine tools yielding a decrease of 9% versus the prior year same quarter. The ‘Other’ segment recorded a $4.1 million decline from the prior year comparable quarter from a downturn in the domestic automotive industry as well as from the closing and relocation of our Wixom, Michigan facility to our Burlington, Ontario facility.

 

We also analyze our Waterjet revenues by looking at system sales and consumable sales. Systems sales were $28.7 million, up $2.8 million or 11%, for the three months ended July 31, 2005 due to strong domestic and European shapecutting sales as well as increased aerospace revenue. Consumables revenues recorded an increase of $866,000 or 7% to $13.3 million for the three months ended July 31, 2005, respectively. The majority of the increase in spares sales for the three months ended July 31, 2005 is domestic and is the result of the increasing number of systems in service and by our proprietary productivity enhancing kits and improved parts availability as well as the use of Flowparts.com, our easy-to-use internet order entry system. We believe that spare parts sales should continue to increase as more systems are put into service.

 

Avure. The Avure operation includes the Fresher Under Pressure™ technology (“Food segment”) as well as General Press operations (North America Press and International Press segments). Revenue in the Avure operations is recorded on the percentage of completion basis. Fresher Under Pressure meets the increasing demand in the U.S. for a post packaging, terminal pasteurization-like step (e.g. packaged ready-to-eat meats); the demand for high quality, minimally processed foods (e.g. fresh guacamole and salsas); and the demand to utilize the productivity enhancing capabilities of UHP in food processing (e.g. shellfish), while the General Press business manufactures systems which produce and strengthen advanced materials for the aerospace, automotive and medical industries. For the three months ended July 31, 2005, sales for the Food segment decreased $1.5 million or 40%. The reduction in revenue recognized during the first quarter relates to the timing of production of the food systems.

 

31


Table of Contents

As outlined in the table above, both North America Press and International Press sales have declined in the three months ended July 31, 2005 as compared to the prior year same period. These decreases of $476,000 and $933,000, respectively, are the result of timing of both contract awards and performance of work under our percentage of completion accounting. General Press sales are almost exclusively large contract sales in excess of $2 million per contract and accordingly revenue will vary depending on the number and stage of manufacture of these contracts. The sales and production cycle on a General Press can range from one to four years in length.

 

Cost of Sales and Gross Margins. Our gross margin by segment for the periods noted below is summarized as follows:

 

     Three Months Ended July 31,

 
     2005

   2004

   Difference

    %

 

Gross Margin

                            

Waterjet:

                            

North America

   $ 10,788    $ 7,771    $ 3,017     39 %

Asia

     2,810      2,855      (45 )   (2 )%

Other International

     3,261      2,380      881     37 %

Other

     875      967      (92 )   (10 )%
    

  

  


     

Waterjet Total

     17,734      13,973      3,761     27 %

Avure:

                            

Food

     1,249      1,015      234     23 %

North America Press

     370      323      47     15 %

International Press

     1,270      2,584      (1,314 )   (51 )%
    

  

  


     

Avure Total

     2,889      3,922      (1,033 )   (26 )%
    

  

  


     

Consolidated Total

   $ 20,623    $ 17,895    $ 2,728     15 %
    

  

  


     

 

Our gross margin as a percent of sales by segment for the periods noted below is summarized as follows:

 

     Three Months Ended July 31,

 
     2005

    2004

 

Gross Margin Percentage

            

Waterjet:

            

North America

   47 %   49 %

Asia

   49 %   45 %

Other International

   39 %   33 %

Other

   18 %   11 %

Waterjet Total

   42 %   36 %

Avure:

            

Food

   53 %   26 %

North America Press

   17 %   12 %

International Press

   39 %   61 %

Avure Total

   37 %   37 %

Consolidated Total

   41 %   37 %

 

Gross margin for the three months ended July 31, 2005 amounted to $20.6 million or 41% of sales, as compared to gross margin of $17.9 million or 37% of sales in the prior year same period. Generally, comparison of gross margin rates will vary period over period depending on the mix of sales, which includes special system, standard system and consumables sales. Gross margin rates on our systems sales are typically less than 45% as opposed to consumables sales which are in excess of 50%. On average, standard systems which are included in the North America, Asia and Other International Waterjet segments carry higher margins than the custom

 

32


Table of Contents

engineered systems, which are represented by the Other, Food, North America Press and International Press segments. In addition, gross margin as a percent of sales will vary amongst segments due to inter-company sales and the related inter-company transfer pricing.

 

Waterjet margins represented $17.7 million of the overall consolidated margin or 42% of Waterjet sales for the three months ended July 31, 2005. For the first quarter of fiscal 2006, we experienced increased margin dollars in three of the four waterjet segments, and margin percentages improved over the prior year first quarter except in the North America Waterjet segment, where the margin percentage decreased from 49% in the prior year to 47%. The reduction in margin percentage is driven by the change in mix of systems and consumables toward more systems in the three months ended July 31, 2005 of 70% versus 61% for the three months ended July 31, 2004.

 

Avure margins amounted to $2.9 million of the overall consolidated margin or 37% of Avure sales for the three months ended July 31, 2005. Food segment margin percentages improved for the first quarter of fiscal 2006 as sales of consumables increased 64% and we recognized revenue on a repossessed unit for which the receivable had been previously fully reserved. The North America Press segment margin dollars and percentage have increased for the three months ended July 31, 2005 compared to the prior year period. This is the result of a shift in product mix in fiscal 2006 towards less equipment manufactured by the International Press segment, for which the margins recognized by North America Press are lower due to our inter-company transfer pricing policies. International Press segment margins decreased to 39% in the quarter ended July 31, 2005 compared to the prior year. The International Press margin is the result of gross profit on external sales and gross profit on inter-company sales. Our segment reporting excludes inter-company sales, but not the related margins. The decrease in International margin in the quarter ended July 31, 2005 is a result of the decrease in external sales, plus the impact of the net decrease in inter-company production for both Food and North America Press.

 

Marketing Expenses. Our marketing expenses by segment for the periods noted below are summarized as follows:

 

     Three Months Ended July 31,

 
     2005

   2004

   Difference

    %

 

Marketing

                            

Waterjet:

                            

North America

   $ 4,014    $ 2,994    $ 1,020     34 %

Asia

     961      841      120     14 %

Other International

     2,264      1,972      292     15 %

Other

     325      417      (92 )   (22 )%
    

  

  


     

Waterjet Total

     7,564      6,224      1,340     22 %

Avure:

                            

Food

     267      381      (114 )   (30 )%

North America Press

     154      147      7     5 %

International Press

     560      557      3     1 %
    

  

  


     

Avure Total

     981      1,085      (104 )   (10 )%
    

  

  


     

Consolidated Total

   $ 8,545    $ 7,309    $ 1,236     17 %
    

  

  


     

 

Marketing expenses increased $1.2 million or 17% to $8.5 million for the three months ended July 31, 2005, as compared to the prior year same period. The majority of this increase in the first quarter of fiscal 2006 was recorded in the North America Waterjet segment, which amounted to $1.0 million. This is due to increased expenses such as commissions, on higher sales, as well as increased marketing and advertising costs directed at increasing waterjet technology awareness. The increase in Other International Waterjet is commensurate with the percentage increase in sales, while the entities in our Other segment were able to hold dollar costs constant.

 

33


Table of Contents

Avure in total recorded a slight decrease in marketing expenses for the first quarter, with the primary reduction in the Food segment as a result of the closure of the sales office in January 2005. Expressed as a percentage of revenue, consolidated marketing expenses were 17% for the three months ended July 31, 2005. This compares to 15% of sales for the prior year same period.

 

Research and Engineering Expenses. Our research and engineering expenses by segment for the periods noted below are summarized as follows:

 

     Three Months Ended July 31,

 
     2005

   2004

   Difference

    %

 

Research and Engineering

                            

Waterjet:

                            

North America

   $ 1,509    $ 1,213    $ 296     24 %

Asia

     106      78      28     36 %

Other International

     139      170      (31 )   (18 )%

Other

     19      56      (37 )   (66 )%
    

  

  


     

Waterjet Total

     1,773      1,517      256     17 %

Avure:

                            

Food

     415      387      28     7 %

North America Press

     —        —        —       —    

International Press

     503      700      (197 )   (28 )%
    

  

  


     

Avure Total

     918      1,087      (169 )   (16 )%
    

  

  


     

Consolidated Total

   $ 2,691    $ 2,604    $ 87     3 %
    

  

  


     

 

Research and engineering expenses increased $87,000 or 3% for the three months ended July 31, 2005, as compared to the prior year same period. A $296,000 increase was recorded in the North America Waterjet segment and is attributable to the addition of key engineering personnel related to our core UHP technology. This increase was offset by a $197,000 decrease in the International Press segment, related to the timing of research and development work and continued cost cutting. Expressed as a percentage of revenue, research and engineering expenses were 5% for both the three months ended July 31, 2005 and 2004.

 

General and Administrative Expenses. Our general and administrative expenses by segment for the periods noted below are summarized as follows:

 

     Three Months Ended July 31,

 
     2005

   2004

   Difference

    %

 

General and Administrative

                            

Waterjet:

                            

North America

   $ 4,798    $ 3,276    $ 1,522     46 %

Asia

     398      272      126     46 %

Other International

     575      635      (60 )   (9 )%

Other

     362      393      (31 )   (8 )%
    

  

  


     

Waterjet Total

     6,133      4,576      1,557     34 %

Avure:

                            

Food

     247      284      (37 )   (13 )%

North America Press

     178      179      (1 )   (1 )%

International Press

     808      689      119     17 %
    

  

  


     

Avure Total

     1,233      1,152      81     7 %
    

  

  


     

Consolidated Total

   $ 7,366    $ 5,728    $ 1,638     29 %
    

  

  


     

 

34


Table of Contents

General and administrative expenses increased $1.6 million or 29% for the three months ended July 31, 2005, as compared to the prior year same period. The first quarter of fiscal 2006 increase was experienced primarily in the North America Waterjet segment which includes all of our corporate overhead costs. These costs were driven higher by patent litigation costs and costs associated with our disposition of Avure of $825,000 and public company-related costs such as Sarbanes-Oxley consulting fees and Board fees of $571,000. Expressed as a percentage of revenue, consolidated general and administrative expenses were 15% for the three months ended July 31, 2005, as compared to 12% for the three months ended July 31, 2004.

 

Restructuring Expenses. During the three months ended July 31, 2005, we incurred $98,000 of severance benefits and other costs in the Other segment related to the closing and relocation of our Wixom, Michigan facility. No restructuring costs were incurred during the three months ended July 31, 2004.

 

Financial Consulting Expenses. No financial consulting costs were incurred for the three months ended July 31, 2005. For the three months ended July 31, 2004 we incurred $623,000 of financial consulting costs associated with our efforts to refinance our subordinated debt. Because no new financing was obtained, these costs were charged to expense.

 

Operating Income (Loss). Our operating income (loss) by segment for the periods noted below are summarized as follows:

 

     Three Months Ended July 31,

 
     2005

    2004

    Difference

    %

 

Operating Income (Loss)

                              

Waterjet:

                              

North America

   $ 467     $ (335 )   $ 802     NM  

Asia

     1,345       1,664       (319 )   (19 )%

Other International

     283       (397 )     680     NM  

Other

     71       101       (30 )   30 %
    


 


 


     

Waterjet Total

     2,166       1,033       1,133     110 %

Avure:

                              

Food

     320       (37 )     357     NM  

North America Press

     38       (3 )     41     NM  

International Press

     (601 )     638       (1,239 )   NM  
    


 


 


     

Avure Total

     (243 )     598       (841 )   NM  
    


 


 


     

Consolidated Total

   $ 1,923     $ 1,631     $ 292     18 %
    


 


 


     

NM = Not Meaningful

 

Our operating income for the three months ended July 31, 2005 was $1.9 million versus a $1.6 million in the prior year period. The reasons for the changes in operating profit or loss by segment have been described in the paragraphs above addressing changes in sales, gross margin and operating expenses.

 

Interest and Other Expense, net. Current interest expense, net decreased to $798,000 for the three months ended July 31, 2005. This net amount includes $212,000 of interest income for the three months ended July 31, 2005. This decrease results from lower interest rates and lower average debt balance outstanding with the paydown of the subordinated debt in April 2005. During the three months ended July 31, 2005, we recorded Other Expense, net of $238,000 compared to Other Expense, net of $170,000 in the prior year three month period. This slight increase is the result of changes in realized and unrealized foreign exchange gains and losses as described in the table below, offset by the $678,000 expense associated with the warrants used in the previously described PIPE transaction. The terms of these warrants require them to be marked-to-market at each reporting period with corresponding gains and losses reported on the Consolidated Statement of Operations.

 

35


Table of Contents

The following table shows the detail of Other Expense, net, in the accompanying Consolidated Statements of Operations:

 

(in thousands)   

Three Months Ended

July 31,


 
     2005

     2004

 

Realized Foreign Exchange Gains, Net

   $ 129      $ 527  

Unrealized Foreign Exchange Gains (Losses), Net

     372        (660 )

Minority Interest

     (26 )      (6 )

Fair Value Adjustment on Warrants Issued

     (678 )      —    

Other

     (35 )      (31 )
    


  


     $ (238 )    $ (170 )
    


  


 

Income Taxes. For the three months ended July 31, 2005 and 2004, the tax provision consists of current expense related to operations in foreign jurisdictions which are profitable primarily in Taiwan, Japan and Sweden. In addition, operations in certain jurisdictions (principally Germany) reported net operating losses for which no tax benefit was recognized as it is more likely than not that such benefit will not be realized. During the fourth quarter of fiscal 2004, as a result of foreign asset collateral requirements and our amended credit agreements, we were no longer able to permanently defer foreign earnings and recorded a $1.9 million liability for withholding taxes payable on future repatriation of foreign earnings. We also recorded a U.S. tax liability of $6.7 million on foreign earnings which we have decided to no longer permanently defer. The total $6.7 million tax liability was offset by a reduction of the valuation allowance. In addition, we continue to assess our ability to realize our net deferred tax assets. Recognizing the cumulative losses generated during the quarter ended July 31, 2005 and in prior periods, we have determined it appropriate to continue to maintain a valuation allowance on our domestic net operating losses, certain foreign net operating losses and certain other deferred tax assets based on the expected reversal of both deferred tax assets and liabilities. The domestic net operating losses can be carried forward 20 years to offset domestic profits in future periods and expire from fiscal 2022 through fiscal 2024 if not used. Our foreign net operating losses currently do not have an expiration date. We provided a full valuation allowance against the deferred tax assets associated with the losses recorded during the quarter ended July 31, 2005.

 

Net Income (Loss). Our consolidated net income in the three months ended July 31, 2005 amounted to $22,000, or $.00 per basic and diluted income per share as compared to a net loss of $2.3 million, or $.15 basic and diluted loss per share in the prior year same period.

 

36


Table of Contents

Operational and Financial

 

Operational Data as a Percentage of Sales

 

     Year Ended April 30,

 
    

  2005  

(restated)


      2004  

      2003  

 

Sales

   100 %   100 %   100 %

Cost of Sales

   63 %   63 %   75 %
    

 

 

Gross Margin

   37 %   37 %   25 %
    

 

 

Expenses:

                  

Marketing

   15 %   16 %   26 %

Research & Engineering

   4 %   6 %   9 %

General & Administrative

   12 %   13 %   16 %

Restructuring Charges

   —   %   2 %   —   %

Financial Consulting Charges

   —   %   1 %   —   %

Impairment Charges

   5 %   —   %   8 %
    

 

 

     36 %   38 %   59 %
    

 

 

Operating Income (Loss)

   1 %   (1 )%   (34 )%

Interest Expense

   (9 )%   (7 )%   (8 )%

Interest Income

   —   %   —   %   1 %

Other Income (Expense), net

   —   %   4 %   2 %
    

 

 

Loss Before Provision for Income Taxes

   (8 )%   (4 )%   (39 )%

Provision for Income Taxes

   (1 )%   (3 )%   (9 )%
    

 

 

Loss Before Discontinued Operations

   (9 )%   (7 )%   (48 )%

Discontinued Operations, Net of Tax

   —   %   1 %   (1 )%
    

 

 

Net Loss

   (9 )%   (6 )%   (49 )%
    

 

 

 

Operational Overview:

 

    Year ended April 30, 2005

  Year ended April 30, 2004

    Year ended April 30, 2003

 
Dollars in thousands  

Waterjet

(restated)


 

Avure

(restated)


   

Consolidated

(restated)


  Waterjet

    Avure

    Consolidated

    Waterjet

    Avure

    Consolidated

 

Sales

  $ 172,966   $ 46,399     $ 219,365   $ 132,861     $ 44,748     $ 177,609     $ 121,833     $ 22,282     $ 144,115  

Cost of Sales

    107,693     31,212       138,905     83,604       28,778       112,382       88,620       19,454       108,074  
   

 


 

 


 


 


 


 


 


Gross Margin

    65,273     15,187       80,460     49,257       15,970       65,227       33,213       2,828       36,041  

Operating Expenses

    56,931     21,707       78,638     50,934       16,176       67,110       60,335       24,405       84,740  
   

 


 

 


 


 


 


 


 


Operating (Loss) Income

  $ 8,342   $ (6,520 )   $ 1,822   $ (1,677 )   $ (206 )   $ (1,883 )   $ (27,122 )   $ (21,577 )   $ (48,699 )
   

 


 

 


 


 


 


 


 


 

37


Table of Contents

Sales Summary:

 

Dollars in thousands   Year ended April 30,

    Year ended April 30,

 
  2005

  2004

  % Change

    2004

  2003

  % Change

 

Operational breakdown:

                                   

Waterjet:

                                   

Systems

  $ 122,129   $ 85,015   44 %   $ 85,015   $ 76,346   11 %

Consumable parts and services

    50,837     47,846   6 %     47,846     45,487   5 %
   

 

       

 

     

Total

    172,966     132,861   30 %     132,861     121,833   9 %

Avure:

                                   

Fresher Under Pressure

    15,072     15,296   (1 )%     15,296     4,851   215 %

General Press

    31,327     29,452   6 %     29,452     17,431   69 %
   

 

       

 

     

Total

    46,399     44,748   4 %     44,748     22,282   101 %
   

 

       

 

     
    $ 219,365   $ 177,609   24 %   $ 177,609   $ 144,115   23 %
   

 

       

 

     

Geographic breakdown:

                                   

United States

  $ 128,975   $ 92,799   39 %   $ 92,799   $ 79,450   17 %

Rest of Americas

    19,468     17,751   10 %     17,751     15,673   13 %

Europe

    45,417     46,557   (2 )%     46,557     31,326   49 %

Asia

    25,505     20,502   24 %     20,502     17,666   16 %
   

 

       

 

     
    $ 219,365   $ 177,609   24 %   $ 177,609   $ 144,115   23 %
   

 

       

 

     

 

Results of Operations

 

We analyze our business based on the utilization of ultrahigh-pressure, either as released pressure or contained pressure. The released pressure portion of our UHP business which we call Waterjet, is comprised of the following segments: North America Waterjet, Asia Waterjet, Other International Waterjet and Other. The contained pressure operation which is what we call Avure, is made up of the Food, North America Press and International Press segments.

 

Fiscal 2005 Compared to Fiscal 2004

(Tabular amount in thousands)

 

Sales.

 

Our sales by segment for the periods noted below is summarized as follows:

 

     2005

   2004

   Difference

    %

 

Sales

                            

Waterjet:

                            

North America

   $ 82,381    $ 59,044    $ 23,337     40 %

Asia

     25,505      20,502      5,003     24 %

Other International

     34,530      28,160      6,370     23 %

Other

     30,550      25,155      5,395     21 %
    

  

  


 

Waterjet Total

     172,966      132,861      40,105     30 %

Avure:

                            

Food

     15,072      15,296      (224 )   (1 )%

North America Press

     16,617      7,445      9,172     123 %

International Press

     14,710      22,007      (7,297 )   (33 )%
    

  

  


 

Avure Total

     46,399      44,748      1,651     4 %
    

  

  


 

Consolidated Total

   $ 219,365    $ 177,609    $ 41,756     24 %
    

  

  


 

 

38


Table of Contents

Waterjet. The Waterjet operation includes cutting and cleaning operations, which are focused on providing total solutions for the aerospace, automotive, job shop, surface preparation (cleaning) and paper industries. It is comprised of four reporting segments: North America Waterjet, Asia Waterjet, Other International Waterjet and Other. The North America, Asia and Other International Waterjet segments primarily represent sales of our standard cutting and cleaning systems throughout the world, as well as sales of our custom designed systems into the aerospace industry. The ‘Other’ segment represents sales of our automation and robotic waterjet cutting cells, as well as non-waterjet systems, which are sold primarily into the North American automotive industry. For the fiscal year ended April 30, 2005, we reported a $40.1 million, or 30%, increase in revenue to $173.0 million versus the prior year comparative period. All four segments reported an increase in revenue; however $23.3 million of the $40.1 million increase was recognized in our North America Waterjet segment. At the end of fiscal 2004, we believed the market awareness of waterjet technology was low and addressed this through an increase in marketing and tradeshow activity, including attendance at the bi-annual International Manufacturing Technology Show in early September 2004, as well as increasing the number of domestic waterjet cutting direct sales staff from 10 to 15, adding two machine tool distributors, acting as agents, and increasing domestic technical services staff from 12 to 24 persons. The growth in revenue in North America is a result of an increase in unit sales stemming from our increased sales and marketing activity. There were no significant price increases year over year, however a price increase of 4% on selected systems was implemented on February 1, 2005. Aerospace sales, which are also included in the North America segment, were $5.5 million, up $1.4 million (33%) from the prior year. The growth in our ‘Other’ segment results from improved non-waterjet automated robotic system demand in the domestic automotive industry. We have not increased our marketing and sales staff in this segment year over year. Our waterjets are experiencing growing acceptance in the marketplace because of their flexibility and superior machine performance.

 

Outside the U.S., Waterjet revenue growth was positively influenced by growth in Asia Waterjet sales which were $25.5 million, up $5.0 million or 24% for the year ended April 30, 2005. This increase was driven largely by sales in China where we experienced strong demand for shapecutting and cutting cell systems from a strengthening automotive industry.

 

Our Other International Waterjet segment represents primarily sales in Europe and South America. Revenues from our European operations have improved by $6.2 million (25%) for the year ended April 30, 2005 to $30.7 million. Market specific pricing including some price reductions, standardization of system offerings, improved delivery and a recovering European marketplace have helped to increase our European sales. Sales in South America of $3.8 million for the year ended April 30, 2005 were comparable to the respective prior year period. The economic conditions in the South America region make it difficult to increase sales. We are typically able to sell our products at higher prices outside the U.S. due to the costs of servicing these markets. As much of our product is manufactured in the U.S., the weakness of the U.S. dollar also has helped strengthen our foreign revenues.

 

We also analyze our Waterjet revenues by looking at system sales and consumable sales. Systems revenues for the year ended April 30, 2005 were $122.1 million, an increase of $37.1 million or 44%, compared to the prior year same period due to both strong domestic and global sales from recovering economic conditions. The majority, $21.4 million, of the increase was generated domestically. Consumables revenues recorded an increase of $3.0 million or 6% to $50.8 million for the year ended April 30, 2005. The majority of the increase in spares sales is domestic and is the result of the increasing number of operating systems, increasing sales of our proprietary productivity enhancing kits, improved parts availability, as well as increased customer acceptance of Flowparts.com, our easy-to-use internet order entry system. We believe that spare parts sales should continue to increase as more systems are put into operation.

 

Avure. The Avure operation includes the Fresher Under Pressure technology (Food segment) as well as General Press operations (North America Press and International Press segments). These segments have been eliminated because we have sold Avure, as described earlier. Revenue in the Avure operations is recorded on the percentage of completion basis. Fresher Under Pressure meets the increasing demand in the U.S. for a post

 

39


Table of Contents

packaging, terminal pasteurization-like step (e.g. packaged ready-to-eat meats); the demand for high quality, minimally processed foods (e.g. fresh guacamole and salsas); and the demand to utilize the productivity enhancing capabilities of UHP in food processing (e.g. shellfish shucking), while the General Press business manufactures systems that produce and strengthen advanced materials for the aerospace, automotive and medical industries. For the year ended April 30, 2005, sales for the Food segment decreased $.2 million or 1%.

 

General Press revenues vary from year to year due to the nature of its sales and production cycle. The sales and production cycle on a General Press can range from one to four years. As outlined in the table above, North American Press sales grew significantly in the year ended April 30, 2005 to $16.6 million as compared to the prior year period. This growth is the result of revenue recognized under two large contracts obtained in fiscal 2004 and manufactured in fiscal 2005.

 

International Press sales for the year ended April 30, 2005 decreased $7.3 million as compared to the prior year. The International Press sales are almost exclusively large contract sales in excess of $2 million per contract and accordingly revenue will vary depending on the number and stage of manufacture of these contracts.

 

Cost of Sales and Gross Margins. Our gross margin by segment for the periods noted below is summarized as follows:

 

    

2005

(restated)


   2004

   Difference

    %

 

Gross Margin

                            

Waterjet:

                            

North America

   $ 38,018    $ 25,170    $ 12,848     51 %

Asia

     11,682      9,762      1,920     20 %

Other International

     12,034      9,890      2,144     22 %

Other

     3,539      4,435      (896 )   (20 )%
    

  

  


     

Waterjet Total

     65,273      49,257      16,016     33 %

Avure:

                            

Food

     2,185      1,788      397     22 %

North America Press

     2,124      1,109      1,015     92 %

International Press

     10,878      13,073      (2,195 )   (17 )%
    

  

  


     

Avure Total

     15,187      15,970      (783 )   (5 )%
    

  

  


     

Consolidated Total

   $ 80,460    $ 65,227    $ 15,233     23 %
    

  

  


     

 

Our gross margin as a percent of sales by segment for the periods noted below is summarized as follows:

 

    

  2005  

(restated)


      2004  

 

Gross Margin Percentage

            

Waterjet:

            

North America

   46 %   43 %

Asia

   46 %   48 %

Other International

   35 %   35 %

Other

   12 %   18 %

Waterjet Total

   38 %   37 %

Avure:

            

Food

   14 %   12 %

North America Press

   13 %   15 %

International Press

   74 %   59 %

Avure Total

   33 %   36 %

Consolidated Total

   37 %   37 %

 

40


Table of Contents

Gross margin for the year ended April 30, 2005 amounted to $80.5 million or 37% of sales as compared to gross margin of $65.2 million or 37% of sales in the prior year period. Generally, gross margin rates will vary period over period depending on the mix of sales, which includes special system, standard system and consumables sales. Gross margin rates on our systems sales are typically less than 45% as opposed to consumables sales which are in excess of 50%. On average, standard systems which are included in the North America, Asia and Other International Waterjet segments carry higher margins than the custom engineered systems, which are represented by the Other, Food, North America Press and International Press segments. In addition, gross margin as a percent of sales will vary amongst segments due to inter-company sales and the related inter-company transfer pricing.

 

For the year ended April 30, 2005, waterjet margins represented $65.3 million of the overall consolidated margin or 38% of Waterjet sales. The waterjet operations gross margin percentage increased one percentage point from 37% of sales in fiscal 2004. The increase in North American waterjet margins were offset in part by the decrease of five percentage points in the Other segment in fiscal 2005. This weakness stems from a number of very low margin contracts built in fiscal 2005, including several loss contracts which totaled $1.2 million in losses. All loss contracts were non-waterjet related systems. We have consolidated the management of this division within the Other segment and current contracts appear to be in line with historical gross margins in the automotive industry, between 15% and 25%.

 

Avure margins amounted to $15.2 million of the overall consolidated margin or 33% of Avure sales. Food segment margin percentages improved in the current year as the prior year included several strategic sales at almost a zero margin. These sales represented the initial sale of equipment into the Ready-to Eat meat industry made in an effort to try and accelerate market adoption and the sale of a development project into the seafood industry that has other industry applications. The North America Press segment margin dollars have increased; however, the margin percentage has decreased for the year ended April 30, 2005 compared to the prior year period. This is the result of a shift in product mix in fiscal 2005 towards equipment manufactured by the International Press segment, for which the margins recognized by North America Press are lower due to our inter-company transfer pricing policies. The International Press margin is the result of gross profit on external sales and gross profit on inter-company sales. Our segment reporting excludes inter-company sales, but not the related margins. For fiscal 2005, inter-company production is up which has resulted in an increase in the International Press margin percentage to 74%. Gross margin percentages on similar type projects remain the same year over year.

 

Marketing Expenses. Our marketing expenses by segment for the periods noted below are summarized as follows:

 

    

2005

(restated)


   2004

   Difference

    %

 

Marketing

                            

Waterjet:

                            

North America

   $ 14,667    $ 10,109    $ 4,558     45 %

Asia

     3,704      3,022      682     23 %

Other International

     8,161      7,750      411     5 %

Other

     1,789      1,822      (33 )   (2 )%
    

  

  


     

Waterjet Total

     28,321      22,703      5,618     25 %

Avure:

                            

Food

     1,324      1,658      (334 )   (20 )%

North America Press

     602      499      103     21 %

International Press

     2,410      3,562      (1,152 )   (32 )%
    

  

  


     

Avure Total

     4,336      5,719      (1,383 )   (24 )%
    

  

  


     

Consolidated Total

   $ 32,657    $ 28,422    $ 4,235     15 %
    

  

  


     

 

41


Table of Contents

Marketing expenses increased $4.2 million or 15% to $32.7 million for the year ended April 30, 2005 as compared to the prior year period. Waterjet increased $5.6 million or 25% and Avure decreased $1.4 million or 24% as compared to the prior year period. The Waterjet increase in North America was the result of improved sales and the market awareness programs. Fiscal 2005 also includes over $.5 million in costs associated with the bi-annual International Manufacturing Technology Show held during the second quarter ended October 31, 2004. Asia and Other International Waterjet recorded cost increases in line with changes in sales and the Other segment held marketing costs constant. Within Avure, the majority of the decrease is attributable to International Press, due to both cost cutting and lower sales. Expressed as a percentage of sales, consolidated marketing expenses were 15% for fiscal 2005, as compares to 16% of sales for fiscal 2004.

 

Research and Engineering Expenses. Our research and engineering expenses by segment for the periods noted below are summarized as follows:

 

    

2005

(restated)


   2004

   Difference

    %

 

Research and Engineering

                            

Waterjet:

                            

North America

   $ 4,183    $ 4,082    $ 101     2 %

Asia

     348      295      53     18 %

Other International

     712      737      (25 )   (3 )%

Other

     224      337      (113 )   (34 )%
    

  

  


     

Waterjet Total

     5,467      5,451      16     —   %

Avure:

                            

Food

     1,685      1,583      102     6 %

North America Press

     —        —        —       —   %

International Press

     1,915      3,617      (1,702 )   (47 )%
    

  

  


     

Avure Total

     3,600      5,200      (1,600 )   (31 )%
    

  

  


     

Consolidated Total

   $ 9,067    $ 10,651    $ (1,584 )   (15 )%
    

  

  


     

 

Research and engineering expenses decreased $1.6 million or 15% for fiscal 2005 as compared to fiscal 2004. Waterjet expenses were up slightly associated with our aerospace programs, while Avure decreased $1.6 million. The overall decreases were related to the timing of research and development work, the increased use of engineers on revenue generating projects and continued cost cutting across most segments. Expressed as a percentage of revenue, research and engineering expenses were 4% in fiscal 2005, as compared to 6% in fiscal 2004.

 

42


Table of Contents

General and Administrative Expenses. Our general and administrative expenses by segment for the periods noted below are summarized as follows:

 

     2005

   2004

   Difference

    %

 

General and Administrative

                            

Waterjet:

                            

North America

   $ 16,620    $ 12,767    $ 3,853     30 %

Asia

     1,381      1,146      235     21 %

Other International

     2,653      3,064      (411 )   (13 )%

Other

     1,866      1,842      24     1 %
    

  

  


 

Waterjet Total

     22,520      18,819      3,701     20 %

Avure:

                            

Food

     1,075      1,245      (170 )   (14 )%

North America Press

     716      601      115     19 %

International Press

     2,677      2,596      81     3 %
    

  

  


 

Avure Total

     4,468      4,442      26     1 %
    

  

  


 

Consolidated Total

   $ 26,988    $ 23,261    $ 3,727     16 %
    

  

  


 

 

General and administrative expenses increased $3.7 million or 16% for the year ended April 30, 2005, as compared to the prior year. The North America Waterjet segment increased $3.9 million. This includes increased professional fees of $900,000 associated with patent litigation, $600,000 for increased audit fees and Sarbanes Oxley consulting fees, increased incentive compensation of $1.5 million and increased labor and miscellaneous other costs associated with strengthening key corporate functions of $900,000. As a percent of sales, however, North America Waterjet general and administrative expenses decreased from 22% to 20% in fiscal 2005. Expressed as a percentage of revenue, consolidated general and administrative expenses were 12% in fiscal 2004 as compared to 13% for the prior year period.

 

43


Table of Contents

Restructuring Charges. During fiscal 2005, we incurred $.2 million of severance benefits and facility exit costs in the Food segment. During fiscal 2004, we incurred $3.3 million of restructuring-related costs, including severance, lease termination and inventory related charges, primarily in the U.S., Germany and Sweden. The most significant parts of this total being incurred in the North America Waterjet segment, $1.1 million, Other International Waterjet, $1.4 million and International Press, $.8 million.

 

The following table summarizes accrued restructuring activity for fiscal 2004 and 2005 (in thousands):

 

    North America
Waterjet


    Other International
Waterjet


    Other
Waterjet


    Food

    International
Press


    Consolidated

 
    Facility
Exit
Costs


    Other

    Severance
Benefits


    Facility
Exit
Costs


    Other

    Severance
Benefits


    Severance
Benefits


    Facility
Exit
Costs


    Severance
Benefits


    Facility
Exit
Costs


    Severance
Benefits


    Facility
Exit
Costs


    Other

    Total

 

Q1 restructuring charge

  $ —       $ —       $ 248     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 248     $ —       $ —       $ 248  

Q1 cash payments

    —         —         (128 )     —         —         —         —         —         —         —         (128 )     —         —         (128 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, July 31, 2003

    —         —         120       —         —         —         —         —         —         —         120       —         —         120  

Q2 restructuring charge

    —         178       (120 )     105       302       —         —         —         201       191       81       296       480       857  

Q2 cash payments

    —         (178 )     —         —         (47 )     —         —         —         —         —         —         —         (225 )     (225 )

Q2 charge-offs

    —         —         —         —         (255 )     —         —         —         —         —         —         —         (255 )     (255 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, October 31, 2003

    —         —         —         105       —         —         —         —         201       191       201       296       —         497  

Q3 restructuring charge

    407       170       —         85       484       89       —         —         —         —         89       492       654       1,235  

Q3 cash payments

    (270 )     (160 )     —         (14 )     —         —         —         —         (121 )     —         (121 )     (284 )     (160 )     (565 )

Q3 charge-offs

    —         (10 )     —         (85 )     (484 )     —         —         —         —         —         —         (85 )     (494 )     (579 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, January 31, 2004

    137       —         —         91       —         89       —         —         80       191       169       419       —         588  

Q4 restructuring charge

    15       412       —         255       —         —         —         —         234       —         234       270       412       916  

Q4 cash payments

    (13 )     (126 )     —         (13 )     —         (89 )     —         —         (70 )     —         (159 )     (26 )     (126 )     (311 )

Q4 charge-offs

    —         (286 )     —         —         —         —         —         —         —         —         —         —         (286 )     (286 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, April 30, 2004

    139       —         —         333       —         —         —         —         244       191       244       663       —         907  

Q1 restructuring charge

    —         —         —         —         —         —         —         —         —         —         —         —         —         —    

Q1 cash payments

    (9 )     —         —         (4 )     —         —         —         —         (68 )     (3 )     (68 )     (16 )     —         (84 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, July 31, 2004

    130       —         —         329       —         —         —         —         176       188       176       647       —         823  

Q2 restructuring charge

    —         —         —         —         —         —         —         —         —         —         —         —         —         —    

Q2 cash payments

    (9 )     —         —         (4 )     —         —         —         —         (64 )     (3 )     (64 )     (16 )     —         (80 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, October 31, 2004

    121       —         —         325       —         —         —         —         112       185       112       631       —         743  

Q3 restructuring charge

    —         —         —         —         —         —         120       119       —         —         120       119       —         239  

Q3 cash payments

    (9 )     —         —         (10 )     —         —         (17 )     (39 )     (39 )     (3 )     (56 )     (61 )     —         (117 )
   


 


 


 


 


 


 


 


 


 


 


 


 


 


Balance, January 31, 2005

    112       —         —         315       —         —         103       80       73       182       176       689       —         865  

Q4 restructuring charge

    —         —         —         —         —         —