GERBER SCIENTIFIC INC - 10-Q Quarterly Report

__________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended October 31, 2004 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________
Commission file number 1-5865 ___________________________ Gerber Scientific, Inc. (Exact name of registrant as specified in its charter) _____________________________
Connecticut		06-0640743
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

83 Gerber Road West, South Windsor, Connecticut (Address of principal executive offices)		06074 (Zip Code)
Registrant's telephone number, including area code:		(860) 644-1551

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes /X/. No / /.

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

Yes /X/. No / /.

At November 30, 2004, 22,280,350 shares of common stock of the registrant were outstanding.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONTENTS OF QUARTERLY REPORT ON FORM 10-Q Quarter Ended October 31, 2004
					Page
Part I - Financial Information

	Item 1.	Consolidated Financial Statements (Unaudited):

		Consolidated Statements of Operations for the three months ended October 31, 2004 and 2003			2

		Consolidated Statements of Operations for the six months ended October 31, 2004 and 2003			3

		Consolidated Balance Sheets at October 31, 2004 and April 30, 2004			4-5

		Consolidated Statements of Cash Flows for the six months ended October 31, 2004 and 2003			6

		Notes to Consolidated Financial Statements			7

		Report of Independent Registered Public Accounting Firm			18

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			33

	Item 4.	Controls and Procedures			33


Part II - Other Information

	Item 4.	Submission of Matters to a Vote of Security Holders			34

	Item 5.	Other Information			35

	Item 6.	Exhibits			37


Signature					39
1
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

			Three Months Ended October 31,
In thousands, except per share data			2004	2003
Revenue:
Product sales			$ 115,005	$ 115,747
Service sales			16,411	14,538
			131,416	130,285
Costs and Expenses:
Cost of products sold			78,420	77,701
Cost of services sold			9,629	7,820
Selling, general, and administrative			35,311	32,714
Research and development			6,108	6,435
Restructuring charges (Note 4)			351	486
			129,819	125,156
Operating income			1,597	5,129

Other expense, net			(1,238)	(1,137)
Interest expense			(1,673)	(3,212)

Earnings (loss) before income taxes			(1,314)	780
(Benefit) for income taxes			(226)	(1,982)
Net earnings (loss)			$ (1,088)	$ 2,762
			=======	=======

Earnings (loss) per share of common stock:
Basic			$ (.05)	$ .12
Diluted			$ (.05)	$ .12

Dividends			$ ---	$ ---

Average shares outstanding:
Basic			22,267	22,193
Diluted			22,267	22,455

See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Six Months Ended October 31,
In thousands, except share data	2004	2003
Revenue:
Product sales	$ 225,949	$ 230,436
Service sales	33,153	28,806
	259,102	259,242
Costs and Expenses:
Cost of products sold	152,379	155,336
Cost of services sold	19,345	15,314
Selling, general, and administrative	68,199	65,747
Research and development	12,221	12,626
Restructuring charges (Note 4)	2,245	486
	254,389	249,509
Operating income	4,713	9,733
Other expense, net	(1,436)	(2,153)
Interest expense	(3,750)	(6,315)

Earnings (loss) before income taxes	(473)	1,265
(Benefit) for income taxes	(82)	(1,860)
Net earnings (loss)	$ (391)	$ 3,125
	=======	=======
Earnings (loss) per share of common stock:
Basic	$ (.02)	$ .14
Diluted	$ (.02)	$ .14

Dividends	$ ---	$ ---

Average shares outstanding:
Basic	22,251	22,183
Diluted	22,251	22,464

See accompanying notes to consolidated financial statements

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

In thousands, except share data	October 31, 2004	April 30, 2004
Assets:
Current Assets:
Cash and cash equivalents	$ 6,290	$ 6,371
Accounts receivable, net of allowance for doubtful accounts of $10,414 and $7,812, respectively	91,317	90,453
Inventories	52,934	49,696
Deferred income taxes	4,627	3,930
Prepaid expenses and other current assets	7,332	7,377
	162,500	157,827
Property, Plant and Equipment	128,823	124,385
Less accumulated depreciation	86,993	81,811
	41,830	42,574
Intangible Assets:
Goodwill	51,649	50,910
Prepaid pension cost	1,989	1,989
Patents and other intangible assets, net of accumulated amortization	5,789	6,111
	59,427	59,010
Deferred Income Taxes	22,183	19,738
Other Assets	6,947	7,737
	$ 292,887	$ 286,886
	=======	=======
Liabilities and Shareholders' Equity:
Current Liabilities:
Short-term line of credit	$ ---	$ 124
Current portion of long-term debt	21,180	12,509
Accounts payable	42,129	43,397
Accrued compensation and benefits	16,899	14,334
Other accrued liabilities	19,388	17,135
Deferred revenue	13,960	13,514
Advances on sales contracts	610	1,028
	114,166	102,041
Noncurrent Liabilities:
Accrued pension benefit liability	17,375	15,264
Other liabilities	5,358	5,467
Long-term debt	32,515	46,512
	55,248	67,243

Commitments and Contingencies (Note 10):
Shareholders' Equity:
Preferred stock, $0.01 and no par value, respectively; authorized 10,000,000 shares; no shares issued	- ---	- ---
Common stock, $0.01 and $1.00 par value, respectively; authorized 100,000,000 and 65,000,000 shares, respectively; issued 22,974,867 and 22,935,638 shares, respectively	230	22,936
Paid-in capital	65,990	43,408
Retained earnings	73,055	73,446
Treasury stock, at cost (695,517 and 713,853 shares, respectively)	(14,302)	(14,679)
Unamortized value of restricted stock grants	(119)	(81)
Accumulated other comprehensive loss	(1,381)	(7,428)
	123,473	117,602
	$ 292,887	$ 286,886
	=======	=======

See accompanying notes to consolidated financial statements.

4-5

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended October 31,
In thousands	2004	2003
Cash Provided by (Used for):
Operating Activities:
Net earnings (loss)	$ (391)	$ 3,125
Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities:
Depreciation and amortization	6,014	5,926
Restructuring charges	2,245	486
Deferred income taxes	(3,093)	(1,855)
Other non-cash items	1,288	1,370
Changes in operating accounts:
Receivables	2,978	1,101
Inventories	(2,106)	677
Prepaid expenses	296	(1,520)
Accounts payable and accrued liabilities	758	(9,671)
Provided by (Used for) Operating Activities	7,989	(361)
Investing Activities:
Additions to property, plant and equipment	(3,061)	(1,654)
Intangible and other assets	(238)	(567)
Proceeds from sale of promissory note	---	994
(Used for) Investing Activities	(3,299)	(1,227)
Financing Activities:
Borrowings under term loans	---	65,000
Repayments of borrowings under term loans	(13,997)	(1,296)
Net change in revolvers	8,671	(68,866)
Net short-term financing	(126)	---
Debt issue costs	---	(5,604)
Exercise of stock options	142	71
Other common stock activity	(119)	44
(Used for) Financing Activities	(5,429)	(10,651)
Effect of exchange rate changes on cash	658	1,222
(Decrease) in Cash and Cash Equivalents	(81)	(11,017)
Cash and Cash Equivalents, Beginning of Period	6,371	20,697
Cash and Cash Equivalents, End of Period	$ 6,290	$ 9,680
	======	======

See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Gerber Scientific, Inc. and its consolidated subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended October 31, 2004 are not necessarily indicative of the results that may be expected for the year ending April 30, 2005. The financial information included in this quarterly report on Form 10-Q should be read in conjunction with the consoli dated financial statements and notes in the Company's annual report on Form 10-K for the fiscal year ended April 30, 2004, filed with the Securities and Exchange Commission (the "SEC") on July 14, 2004. The consolidated balance sheet at April 30, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

Included in the results for the three- and six-month periods ended October 31, 2004 are adjustments related to prior periods of $0.6 million ($0.4 million after tax, or $0.02 per share). Of this amount, $0.4 million was attributable to incorrect accounting in fiscal 2001 for an intercompany transaction. The Company has concluded that the adjustments related to prior periods are not material and do not affect, either individually or in the aggregate, the trends of the financial statements for those periods affected or a fair presentation of the Company's results of operations and financial condition. Accordingly, results for prior periods have not been restated.

Certain reclassifications have been made to the prior year amounts to conform to the fiscal 2005 presentation.

NOTE 2. Stock Option Plans

The Company has stock option plans authorizing grants to officers and employees. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock options. No stock-based compensation cost related to stock options is reflected in net earnings (loss) because all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation:"

	Three Months Ended October 31,		Six Months Ended October 31,
In thousands, except per share amounts	2004	2003	2004	2003
Net earnings (loss), as reported	$(1,088)	$ 2,762	$ (391)	$ 3,125
Less: Total stock-based employee compensation expense determined under Black-Scholes option pricing model, net of tax effects	(248)	(320)	(494)	(655)
Pro forma net earnings (loss)	$(1,336)	$ 2,442	$ (885)	$ 2,470
	======	======	======	=====
Earnings (loss) per share
Basic, as reported	$ (.05)	$ .12	$ (.02)	$ .14
Basic, pro forma	(.06)	.11	(.04)	.11

Diluted, as reported	$ (.05)	$ .12	$ (.02)	$ .14
Diluted, pro forma	(.06)	.11	(.04)	.11

The weighted-average assumptions used in estimating the fair value of stock options granted in the three and six months ended October 31, 2004 were as follows: risk-free interest rate of 3.7 percent, expected option life of 4.71 years, expected volatility of 74 percent, and no expected dividend yield. There were no stock options granted in the six months ended October 31, 2003.

NOTE 3. Inventories

The classification of inventories was as follows (in thousands):

	October 31, 2004	April 30, 2004
Raw materials and purchased parts	$41,936	$37,460
Work in process	1,334	1,096
Finished goods	9,664	11,140
	$52,934	$49,696
	======	======

NOTE 4. Restructuring Charges

For the six months ended October 31, 2004, the Company recorded restructuring charges of $2.2 million. The restructuring charges primarily consisted of employee separation costs of $1.5 million in the Ophthalmic Lens Processing segment and $0.3 million in the Spandex business unit within the Sign Making and Specialty Graphics segment. The restructuring charges also included an adjustment to the fiscal 2004 facility consolidation accrual of $0.4 million in the Sign Making and Specialty Graphics segment. The employee separation charges in the Ophthalmic Lens Processing segment were attributable to the relocation of its Oklahoma operations. The employee separation charges in the Sign Making and Specialty Graphics segment were associated with efforts to reduce Spandex's costs. The Company anticipates additional restructuring charges for the remainder of fiscal 2005 of approximately $0.3 million in connection with the Oklahoma facility relocation and approximately $1.7 million in connection with the S pandex restructuring.

In fiscal 2004 and 2003, the Company recorded restructuring charges, consisting of employee separation and facility consolidation costs, associated with efforts to reduce costs. Included in the facility consolidation charges was a provision for costs associated with a vacant facility through the remainder of its lease term. The charge was based on market assumptions when the provision was recorded. In June 2004, the Company sublet this facility and the fiscal 2005 first quarter charge of $0.4 million was recorded to adjust the original assumptions to the terms of the sublease agreement.

The following table presents a rollforward of the accruals established in fiscal 2005 by segment (in thousands):

	Employee Separation Accrual
Sign Making and Specialty Graphics
Fiscal 2005 charge	$ 293
Utilization	(42)
Ending balance at October 31, 2004	251
Apparel and Flexible Materials
Fiscal 2005 charge	42
Utilization	(42)
Ending balance at October 31, 2004	---
Ophthalmic Lens Processing
Fiscal 2005 charge	1,482
Utilization	(59)
Ending balance at October 31, 2004	1,423
	$ 1,674

The remaining balance at October 31, 2004 of $1.7 million is expected to be paid through fiscal 2006.

Fiscal Year 2004 Restructuring Update

The following table presents a rollforward of the accruals established in fiscal 2004 by segment (in thousands):

	Employee Separation Accrual	Facility Consolidation Accrual	Total
Sign Making and Specialty Graphics
Balance at April 30, 2004	$ ---	$ 1,754	$ 1,754
Fiscal 2005 adjustment	---	428	428
Utilization	---	(197)	(197)
Ending balance at October 31, 2004	---	1,985	1,985

Ophthalmic Lens Processing
Balance at April 30, 2004	9	133	142
Utilization	(9)	(30)	(39)
Ending balance at October 31, 2004	---	103	103

	$ ---	$ 2,088	$ 2,088
	======	======	======

Of the remaining balance at October 31, 2004, $0.3 million is expected to be paid in fiscal 2005, $0.4 million in fiscal 2006, $0.3 million in fiscal 2007, $0.1 million in fiscal 2008, and $1.0 million thereafter.

Fiscal Year 2003 Restructuring Update

Of the remaining accrual of $0.2 million at April 30, 2004 related to a fiscal 2003 facility consolidation charge, a minimal amount was paid during the six months ended October 31, 2004, resulting in an ending balance at October 31, 2004 of $0.2 million. Of the remaining balance at October 31, 2004, $0.1 million is expected to be paid in the balance of fiscal 2005 and $0.1 million in fiscal 2006.

Fiscal Year 2002 Restructuring Update

As of April 30, 2004, an accrual of approximately $0.3 million for severance costs remained, all of which represented severance and other amounts payable to the former Chief Executive Officer. No cash payments were charged against this accrual during the six months ended October 31, 2004. These amounts are expected to be paid later in fiscal 2005.

NOTE 5. Goodwill and Other Intangible Assets

Goodwill and other intangible assets include (in thousands):

	As of October 31, 2004			As of April 30, 2004
	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Patents	$ 8,496	$ 3,210	$ 9,042		$ 3,460
Other	719	216	691		162
	9,215	3,426	9,733		3,622
Unamortized intangible assets:
Goodwill	51,649	---	50,910		---
Prepaid pension cost	1,989	---	1,989		---
	53,638	---	52,899		---
	$ 62,853	$ 3,426	$ 62,632		$ 3,622
	======	=====	======		=====

Intangible amortization expense was $0.1 million and $0.3 million for the three and six months ended October 31, 2004, respectively, and $0.2 million and $0.5 million for the three and six months ended October 31, 2003, respectively. Intangible amortization expense is estimated to be approximately $0.5 million annually for fiscal years 2005 through 2010.

The following table presents the changes in the carrying amount of goodwill by operating segment for the six months ended October 31, 2004 (in thousands):

	Sign Making and Specialty Graphics	Apparel and Flexible Materials	Ophthalmic Lens Processing	Total
Balance as of April 30, 2004	$21,211	$12,703	$16,996	$50,910
Effects of currency translation	666	73	---	739
Balance as of October 31, 2004	$21,877	$12,776	$16,996	$51,649
	======	======	======	======

During the six months ended October 31, 2004, the Company reviewed its goodwill for impairment in the Sign Making and Specialty Graphics and Ophthalmic Lens Processing segments in accordance with its annual goodwill impairment review schedule. Based on this review, the Company was not required to record any additional goodwill impairment.

NOTE 6. Derivative Instruments and Hedging Activities

The Company is exposed to fluctuations in foreign currency exchange rates because of its global presence and international sales and purchase activities. These foreign currency exposures are identified and managed at the operating unit level. To manage some of these risks, the Company uses forward exchange contracts. These contracts are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. Counterparties to forward exchange contracts are major international commercial banks. The Company does not anticipate non-performance by the counterparties.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. In this documentation, the Company identifies the forecasted transactions that have been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to that item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; when the derivative expires or is sold, terminated or exercised; when it is probable that the forecasted transaction will not occur; or when management determines that designation of the derivative as a hedge instrument is not appropriate.

The Company's forward exchange contracts are designated as a hedge of the cash flow variability arising from forecasted foreign currency denominated purchases. Accordingly, changes in the cash flows of these contracts must be highly correlated with changes in the cash flows of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Gains and losses on these derivatives are recorded in shareholders' equity to the extent they are effective as hedges and reclassified into earnings in the period in which the hedged transaction settles. To the extent that the derivatives are not effective as hedges, gains and losses on these derivatives are recorded immediately into current earnings in other expense, net.

As of October 31, 2004, the Company was party to forward exchange contracts providing for the delivery of various currencies in exchange for approximately $9.8 million over the succeeding six months. The fair value of the contracts outstanding at October 31, 2004 was a $0.4 million net liability.

Year to Date Activity

The changes in shareholders' equity associated with hedging activity for the six months ended October 31, 2004 and 2003 were as follows:

	Six Months Ended October 31,
In thousands	2004	2003
Balance -- April 30, 2004 and 2003	$ (149)	$(1,420)
Cash flow hedging loss, net of tax	(436)	(608)
Net loss reclassified to earnings	355	1,215
Balance -- October 31, 2004 and 2003	$ (230)	$ (813)
	======	======

The balance recorded in shareholders' equity at October 31, 2004 is expected to be reclassified into earnings in fiscal 2005.

NOTE 7. Segment Information

The Company's operations are classified into three operating segments: Sign Making and Specialty Graphics; Apparel and Flexible Materials; and Ophthalmic Lens Processing. Those segments are determined based on management's evaluation of the Company's businesses. Financial data for the three- and six-month periods ended October 31, 2004 and 2003 are shown in the following tables.

	Three Months Ended October 31,		Six Months Ended October 31,
In thousands	2004	2003	2004	2003

Segment revenue:
Sign Making and Specialty Graphics	$ 69,418	$ 71,472	$138,143	$144,313
Apparel and Flexible Materials	43,933	38,378	83,697	75,985
Ophthalmic Lens Processing	18,065	20,435	37,262	38,944
	$131,416	$130,285	$259,102	$259,242
	=======	======	=======	======

Segment profit (loss):
Sign Making and Specialty Graphics	$ (979)	$ 4,509	$ 1,481	$ 9,578
Apparel and Flexible Materials	6,176	4,178	10,737	7,151
Ophthalmic Lens Processing	(809)	392	(1,402)	351
	$ 4,388	$ 9,079	$ 10,816	$ 17,080
	=======	======	=======	======

12 A reconciliation of total segment profit to consolidated earnings (loss) before income taxes follows:
	Three Months Ended October 31,		Six Months Ended October 31,
In thousands	2004	2003	2004	2003

Segment profit	$ 4,388	$ 9,079	$ 10,816	$17,080
Corporate expenses, net of other income	(4,029)	(5,087)	(7,539)	(9,500)
Earnings before interest and taxes	359	3,992	3,277	7,580
Interest expense	(1,673)	(3,212)	(3,750)	(6,315)
Earnings (loss) before income taxes	$(1,314)	$ 780	$ (473)	$ 1,265
	======	======	======	======

There were no material changes in the measure of segment profit or differences in the basis of segmentation since the Company's most recent annual report on Form 10-K, filed with the SEC on July 14, 2004.

NOTE 8. Comprehensive Income

The Company's total comprehensive income was as follows:

	Three Months Ended October 31,		Six Months Ended October 31,
In thousands	2004	2003	2004	2003
Net earnings (loss)	$ (1,088)	$ 2,762	$ (391)	$ 3,125
Other comprehensive income:
Foreign currency translation adjustments	5,442	5,800	6,128	6,679
Cash flow hedging gain (loss), net	(159)	275	(81)	607
Total comprehensive income	$ 4,195	$ 8,837	$ 5,656	$10,411
	======	======	======	======

NOTE 9. Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share:

	Three Months Ended October 31,		Six Months Ended October 31,
In thousands, except per share amounts	2004	2003	2004	2003
Numerator:
Net earnings (loss)	$ (1,088)	$ 2,762	$ (391)	$ 3,125
Denominators:
Denominator for basic earnings (loss) per share - weighted-average shares outstanding	22,267	22,193	22,251	22,183
Effect of dilutive securities:
Stock options	---	262	---	281
Denominator for diluted earnings (loss) per share - adjusted weighted-average shares outstanding	22,267	22,455	22,251	22,464
	======	=====	======	=====
Basic earnings (loss) per share	$ (.05)	$ .12	$ (.02)	$ .14
	======	=====	======	=====
Diluted earnings (loss) per share	$ (.05)	$ .12	$ (.02)	$ .14
	======	=====	======	=====

For the three- and six-month periods ended October 31, 2004, stock options exercisable for 2.8 million and 2.9 million shares of common stock, respectively, were excluded from the calculation of diluted earnings (loss) per share because the exercise price of the stock options exceeded the average market price of the Company's common stock and, therefore, would have been antidilutive.

For both the three- and six-month periods ended October 31, 2004, stock options exercisable for an additional 0.2 million shares of common stock were excluded from the calculation of diluted earnings (loss) per share because the Company reported a net loss.

For both the three- and six-month periods ended October 31, 2003, stock options exercisable for 2.4 million shares of common stock were excluded from the calculation of diluted earnings per share because the exercise price of the stock options exceeded the average market price of the Company's common stock and, therefore, would have been antidilutive.

NOTE 10. Commitments and Contingencies

There were no significant changes to commitments and contingencies reported as of April 30, 2004 during the six months ended October 31, 2004. The following summarizes matters previously disclosed in Note 16 of the "Notes to Consolidated Financial Statements" in the Company's annual report on Form 10-K for the year ended April 30, 2004, filed with the SEC on July 14, 2004.

Product Liability Litigation

The Company is the defendant in a legal action alleging that one of its machines caused a fire on the claimant's premises. The Company believes that it has substantial legal defense, but there can be no assurance that the Company will be successful in asserting defense against this claim. As of October 31, 2004, the maximum potential exposure for an unfavorable outcome is estimated to be $0.2 million. The consolidated financial statements do not include an accrual for this contingency because the Company does not believe that an unfavorable settlement is probable.

Other

The Company currently has lawsuits and claims pending. The Company's management believes that the ultimate resolution of these other lawsuits and claims will not have a material effect on its consolidated financial condition or results of operations.

NOTE 11. Guarantees

The Company extends financial and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since April 30, 2004.

The changes in the carrying amount of product warranties for the six months ended October 31, 2004 and 2003 are as follows:

	Six Months Ended October 31,

In thousands	2004	2003
Beginning balance	$ 4,970	$ 4,372
Reductions for payments made	(2,712)	(2,581)
Changes in accruals related to warranties issued in the current period	3,170	2,473
Changes in accruals related to pre- existing warranties	(109)	---
Ending balance	$ 5,319	$ 4,264
	======	======

NOTE 12. Employee Benefit Plans

Components of net periodic benefit cost for the three and six months ended October 31 are presented below.

	For the three months ended October 31,
	Qualified Pension Plan		Non-Qualified Pension Plan
In thousands	2004	2003	2004	2003
Service cost	$ 654	$ 854	$ 41	$ 45
Interest cost	1,337	1,334	123	113
Expected return on plan assets	(1,331)	(1,084)	(111)	(98)
Amortization of prior service cost	74	256	(1)	40
Amortization of net loss	232	430	41	60
Net periodic benefit cost	$ 966	$ 1,790	$ 93	$ 160
	======	======	======	======

	For the six months ended October 31,
	Qualified Pension Plan		Non-Qualified Pension Plan
In thousands	2004	2003	2004	2003
Service cost	$ 1,308	$ 1,709	$ 81	$ 90
Interest cost	2,674	2,671	246	226
Expected return on plan assets	(2,663)	(2,170)	(222)	(196)
Amortization of prior service cost	148	513	(2)	81
Amortization of net loss	465	861	83	120
Net periodic benefit cost	$ 1,932	$ 3,584	$ 186	$ 321
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Employer Contributions

For the six months ended October 31, 2004, minimal cash contributions were made to the Gerber Scientific, Inc. and Participating Subsidiaries Pension Plan. The Company expects to contribute $1.6 million to this plan later in fiscal 2005.

NOTE 13. Long-Term Debt

At October 31, 2004, the Company had $53.7 million of total debt outstanding, which was comprised of outstanding revolver borrowings of $21.2 million, term loan borrowings of $26.5 million, and industrial revenue bonds outstanding of $6.0 million. The revolver and term loan borrowings mature on May 9, 2007, with no principal repayments required prior to that date. Voluntary prepayments of principal under the term loans that do not result in the termination of the term loans agreement are permitted without penalty or premium as long as the Company maintains minimum liquidity levels as defined in the revolver agreement. At October 31, 2004, the Company had excess availability of $14.6 million under its revolver.

Effective July 9, 2004, the Company entered into amendments of its current credit facilities that, among other changes, reduced the interest rates accruing on its outstanding term loans and modified certain operating and financial covenants. The weighted-average interest rates under the credit facility debt, inclusive of deferred debt issuance costs amortized, were 12.5 percent and 13.7 percent for the three- and six-month periods ended October 31, 2004 and 15.4 percent for both the three- and six-month periods ended October 31, 2003. At October 31, 2004, the Company was in compliance with all covenants under its credit facilities.

The July 9, 2004 amendments reduced the annual interest rates under both term loans by eliminating the 2.0 percent annual payment-in-kind interest rate, reducing the annual fee to 1.0 percent from 1.75 percent of average monthly balances, reducing the minimum prime or base rate to 4.0 percent from 4.25 percent, and fixing the annual interest rate at 6.0 percent over the prime rate. The effect of these changes as of July 9, 2004 was to reduce by 2.75 percent the annual rate of interest accruing on Term Loan A, which had an outstanding principal balance of $20.1 million, and to reduce by 4.25 percent the annual rate of interest accruing on Term Loan B, which had an outstanding principal balance of $20.1 million.

The amendments modified operating covenants to permit the Company, within specified limits, to prepay the term loans more frequently, make business acquisitions, pay dividends, and repurchase its common stock.

The amendments also eliminated, beginning with the fiscal quarter ended July 31, 2004, the financial covenant requiring the Company to maintain minimum levels of EBITDA (as defined) as of the end of each fiscal quarter. In addition, the amendments increased the maximum total funded debt (as defined) the Company may have as of the end of each fiscal quarter compared to EBITDA, by increasing the maximum total funded debt to EBITDA ratio from 2:1 to 2.5:1 for the fiscal quarters ending July 31, 2004, October 31, 2004, and January 31, 2005; from 1.5:1 to 2:1 for the fiscal quarter ending April 30, 2005 and for the first three quarters of fiscal 2006; and from 1.5:1 to 1.75:1 for the fiscal quarter ending April 30, 2006 and for each fiscal quarter thereafter.

The Term Loans amendment added a premium for the prepayment in full of the loans that result in the termination of the Term Loans agreement. This premium is subject to reduction over the life of the loans and was initially 1.375 percent of the principal balance based on the $