GERBER SCIENTIFIC INC - 10-Q Quarterly Report

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__________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 31, 2005

/ / 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 February 28, 2005, 22,293,528 shares of common stock of the registrant were outstanding.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONTENTS OF QUARTERLY REPORT ON FORM 10-Q Quarter Ended January 31, 2005
			Page
Part I - Financial Information

	Item 1.	Consolidated Financial Statements (Unaudited):

		Consolidated Statements of Operations for the three months ended January 31, 2005 and 2004	2

		Consolidated Statements of Operations for the nine months ended January 31, 2005 and 2004	3

		Consolidated Balance Sheets at January 31, 2005 and April 30, 2004	4-5

		Consolidated Statements of Cash Flows for the nine months ended January 31, 2005 and 2004	6

		Notes to Consolidated Financial Statements	7

		Report of Independent Registered Public Accounting Firm	19

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

	Item 4.	Controls and Procedures	34

Part II - Other Information

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 6.	Exhibits	35

Signature			36

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Three Months Ended January 31,
In thousands, except per share data	2005	2004
Revenue:
Product sales	$ 107,899	$ 104,518
Service sales	16,889	16,372
	124,788	120,890
Costs and Expenses:
Cost of products sold	75,378	70,631
Cost of services sold	9,289	9,606
Selling, general, and administrative	32,461	30,547
Research and development	6,509	6,021
Restructuring charges (Note 4)	349	1,996
	123,986	118,801
Operating income	802	2,089

Other expense, net	(1,164)	(1,355)
Interest expense	(1,576)	(3,013)

(Loss) before income taxes	(1,938)	(2,279)
(Benefit) for income taxes	(1,557)	(1,134)
Net (loss)	$ (381)	$ (1,145)
	=======	=======
(Loss) per share of common stock:
Basic	$ (.02)	$ (.05)
Diluted	(.02)	(.05)

Dividends	$ ---	$ ---

Average shares outstanding:
Basic	22,263	22,205
Diluted	22,263	22,205

See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Nine Months Ended January 31,
In thousands, except per share data	2005	2004
Revenue:
Product sales	$ 333,848	$ 334,954
Service sales	50,042	45,178
	383,890	380,132
Costs and Expenses:
Cost of products sold	227,757	225,967
Cost of services sold	28,634	24,920
Selling, general, and administrative	100,660	96,294
Research and development	18,730	18,647
Restructuring charges (Note 4)	2,594	2,482
	378,375	368,310
Operating income	5,515	11,822

Other expense, net	(2,600)	(3,508)
Interest expense	(5,326)	(9,328)

(Loss) before income taxes	(2,411)	(1,014)
(Benefit) for income taxes	(1,639)	(2,994)
Net (loss) earnings	$ (772)	$ 1,980
	=======	=======
(Loss) earnings per share of common stock:
Basic	$ (.03)	$ .09
Diluted	(.03)	.09
Dividends	$ ---	$ ---

Average shares outstanding:
Basic	22,255	22,190
Diluted	22,255	22,378


See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
In thousands, except share data	January 31, 2005	April 30, 2004
Assets:
Current Assets:
Cash and cash equivalents	$ 4,169	$ 6,371
Accounts receivable, net of allowance for doubtful accounts of $10,039 and $7,812, respectively	83,134	90,453
Inventories	54,965	49,696
Deferred income taxes	4,422	3,930
Prepaid expenses and other current assets	7,747	7,377
	154,437	157,827
Property, Plant and Equipment	130,504	124,385
Less accumulated depreciation	89,045	81,811
	41,459	42,574
Intangible Assets:
Goodwill	52,153	50,910
Prepaid pension cost	1,989	1,989
Patents and other intangible assets, net of accumulated amortization	5,667	6,111
	59,809	59,010
Deferred Income Taxes	22,005	19,738
Other Assets	6,481	7,737
	$ 284,191	$ 286,886
	========	========
Liabilities and Shareholders' Equity:
Current Liabilities:
Short-term line of credit	$ ---	$ 124
Current portion of long-term debt	20,704	12,509
Accounts payable	38,755	43,397
Accrued compensation and benefits	17,016	14,334
Other accrued liabilities	19,254	17,135
Deferred revenue	14,446	13,514
Advances on sales contracts	674	1,028
	110,849	102,041

Noncurrent Liabilities:
Accrued pension benefit liability	17,716	15,264
Other liabilities	5,624	5,467
Long-term debt	24,495	46,512
	47,835	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 22,981,320 and 22,935,638 shares, respectively	230	22,936
Paid-in capital	65,971	43,408
Retained earnings	72,674	73,446
Treasury stock, at cost (688,125 and 713,853 shares, respectively)	(14,150)	(14,679)
Unamortized value of restricted stock grants	(143)	(81)
Accumulated other comprehensive income (loss)	925	(7,428)
	125,507	117,602
	$ 284,191	$ 286,886
	========	=======


See accompanying notes to consolidated financial statements.

4-5

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine Months Ended January 31,
In thousands	2005	2004
Cash Provided by (Used for):
Operating Activities:
Net (loss) earnings	$ (772)	$ 1,980
Adjustments to reconcile net (loss) earnings to cash provided by operating activities:
Depreciation and amortization	8,575	8,803
Restructuring charges	2,594	2,482
Deferred income taxes	(2,742)	(6,129)
Other non-cash items	1,679	2,111
Changes in operating accounts:
Receivables	12,180	6,899
Inventories	(3,764)	1,027
Prepaid expenses	316	1,029
Accounts payable and accrued liabilities	(2,527)	(9,644)
Provided by Operating Activities:	15,539	8,558
Investing Activities:
Additions to property, plant and equipment	(4,322)	(3,056)
Intangible and other assets	(369)	(864)
Proceeds from sale of promissory note	---	994
(Used for) Investing Activities:	(4,691)	(2,926)
Financing Activities:
Borrowings under term loans	---	65,000
Repayments of borrowings under term loans	(22,017)	(8,790)
Net change in revolvers	8,195	(72,195)
Net short-term financing	(126)	---
Debt issue costs	---	(5,604)
Exercise of stock options	150	114
Other common stock activity	(88)	(5)
(Used for) Financing Activities:	(13,886)	(21,480)

Effect of exchange rate changes on cash	836	2,375

Decrease in Cash and Cash Equivalents	(2,202)	(13,473)
Cash and Cash Equivalents, Beginning of Period	6,371	20,697
Cash and Cash Equivalents, End of Period	$ 4,169	$ 7,224
	=======	=======


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 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 nine-month periods ended January 31, 2005 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 consolidated financ ial 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 nine-month period ended January 31, 2005 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 period amounts to conform to the current year presentation.

NOTE 2. Stock Option Plans

The Company has stock option plans authorizing grants to employees and officers. The Company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock options. No significant stock-based compensation cost related to stock options is reflected in net (loss) earnings 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.

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for all interim periods beginning after June 15, 2005 and will be adopted by the Company on May 1, 2005 using the modified prospective method. The Company is currently evaluating the impact of SFAS 123R on its consolidated financial position and results of operations.

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

	Three Months Ended January 31,		Nine Months Ended January 31,
In thousands, except per share amounts	2005	2004	2005	2004
Net (loss) earnings, as reported	$ (381)	$(1,145)	$ (772)	$ 1,980
Less: Total stock-based employee com- pensation expense determined under Black-Scholes option pricing model, net of tax effects	(128)	(233)	(622)	(888)
Pro forma net (loss) earnings	$ (509)	$(1,378)	$(1,394)	$ 1,092
	======	======	======	======
(Loss) earnings per share
Basic, as reported	$ (.02)	$ (.05)	$ (.03)	$ .09
Basic, pro forma	(.02)	(.06)	(.06)	.05

Diluted, as reported	$ (.02)	$ (.05)	$ (.03)	$ .09
Diluted, pro forma	(.02)	(.06)	(.06)	.05

The weighted-average assumptions used in estimating the fair value of stock options granted in the three and nine months ended January 31, 2005 were as follows: risk-free interest rate of 3.5 percent and 3.7 percent, respectively; expected option life of 4.7 years; expected volatility of 74 percent; and no expected dividend yield.

The weighted-average assumptions used in estimating the fair value of stock options granted in the three and nine months ended January 31, 2004 were as follows: risk-free interest rate of 3.1 percent; expected option life of 4.7 years; expected volatility of 74 percent; and no expected dividend yield.

NOTE 3. Inventories

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

	January 31, 2005	April 30, 2004
Raw materials and purchased parts	$ 43,792	$ 37,460
Work in process	1,284	1,096
Finished goods	9,889	11,140
	$ 54,965	$ 49,696
	======	======

NOTE 4. Restructuring Charges

For the nine months ended January 31, 2005, the Company recorded restructuring charges of $2.6 million. The restructuring charges primarily consisted of employee separation costs of $1.5 million in the Ophthalmic Lens Processing segment, $0.6 million in the Sign Making and Specialty Graphics segment, and $0.1 million in the Apparel and Flexible Materials 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 manufacturing operations. The employee separation charges in the Sign Making and Specialty Graphics segment were primarily associated with efforts to reduce Spandex's costs.

In fiscal 2004 and 2003, the Company recorded restructuring charges, consisting of employee separation and facility consolidation costs, associated with efforts to reduce costs. A provision for costs associated with a vacant facility through the remainder of its lease term was included in the facility consolidation charge. The charge was based on market assumptions when the provision was recorded. In June 2004, the Company sublet this facility and a fiscal 2005 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	$ 555
Cash payments	(42)
Ending balance at January 31, 2005	513
Apparel and Flexible Materials
Fiscal 2005 charge	108
Cash payments	(108)
Ending balance at January 31, 2005	---
Ophthalmic Lens Processing
Fiscal 2005 charge	1,503
Cash payments	(291)
Ending balance at January 31, 2005	1,212
	$ 1,725
	======

The remaining balance at January 31, 2005 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
Cash payments	---	(287)	(287)
Ending balance at January 31, 2005	---	1,895	1,895

Ophthalmic Lens Processing
Balance at April 30, 2004	9	133	142
Cash payments	(9)	(48)	(57)
Ending balance at January 31, 2005	---	85	85
	$ ---	$ 1,980	$ 1,980
	======	======	======

Of the remaining balance at January 31, 2005, $0.2 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

An accrual related to a fiscal 2003 facility consolidation charge of $0.2 million remained at April 30, 2004. Of this amount, $0.1 million was paid during the nine months ended January 31, 2005, resulting in an ending balance at January 31, 2005 of $0.1 million.

Of the remaining balance at January 31, 2005, a minimal amount 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, there remained an accrual of approximately $0.3 million for severance and other amounts payable to a former Chief Executive Officer. No cash payments were charged against this accrual during the nine months ended January 31, 2005. These amounts are expected to be paid within the next 12 months.

NOTE 5. Goodwill and Other Intangible Assets

Goodwill and other intangible assets include (in thousands):

	As of January 31, 2005			As of April 30, 2004
	Gross Carrying Amount	Accumulated Amortization	Net Intangible Assets	Gross Carrying Amount	Accumulated Amortization	Net Intangible Assets
Amortized intangible assets:
Patents	$ 8,444	$ 3,262	$ 5,182	$ 9,042	$ 3,460	$ 5,582
Other	750	265	485	691	162	529
	9,194	3,527	5,667	9,733	3,622	6,111
Unamortized intangible assets:
Goodwill	52,153	---	52,153	50,910	---	50,910
Prepaid pension cost	1,989	---	1,989	1,989	---	1,989
	54,142	---	54,142	52,899	---	52,899
	$ 63,336	$ 3,527	$ 59,809	$ 62,632	$ 3,622	$ 59,010
	======	======	======	======	======	======

Intangible amortization expense was $0.1 million and $0.4 million for the three and nine months ended January 31, 2005, respectively, and was $0.2 million and $0.7 million for the three and nine months ended January 31, 2004, respectively. Intangible amortization expense is estimated to be approximately $0.6 million annually for fiscal 2005 through 2010.

The following table presents the changes in the carrying amount of goodwill by operating segment for the nine months ended January 31, 2005 (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	1,170	73	---	1,243
Balance as of January 31, 2005	$ 22,381	$ 12,776	$ 16,996	$ 52,153
	======	======	======	======

During the nine months ended January 31, 2005, the Company reviewed its goodwill for impairment in all segments in accordance with its annual goodwill impairment review schedule. Based on this review, the Company was not required to record any additional goodwill impairments.

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 January 31, 2005, the Company was party to forward exchange contracts providing for the delivery of various currencies in exchange for approximately $4.9 million over the succeeding three months. The fair value of the contracts outstanding at January 31, 2005 was a $0.3 million net liability.

Year to Date Activity

The changes in shareholders' equity associated with hedging activity for the nine months ended January 31, 2005 and 2004 were as follows:

(in thousands)	2005	2004
Balance at April 30, 2004 and 2003	$ (149)	$ (1,420)
Cash flow hedging loss, net of tax	(642)	(1,585)
Net loss reclassified to (loss) earnings	616	1,990
Balance at January 31, 2005 and 2004	$ (175)	$ (1,015)
	======	======

The balance recorded in shareholders' equity at January 31, 2005 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. Segment financial data for the three and nine months ended January 31, 2005 and 2004 are shown in the following tables.

	Three Months Ended January 31,		Nine Months Ended January 31,
In thousands	2005	2004	2005	2004

Segment revenue:
Sign Making and Specialty Graphics	$ 65,290	$ 61,291	$ 203,433	$ 205,604
Apparel and Flexible Materials	42,629	40,829	126,326	116,814
Ophthalmic Lens Processing	16,869	18,770	54,131	57,714
	$ 124,788	$ 120,890	$ 383,890	$ 380,132
	=======	=======	=======	=======

Segment (loss) profit:
Sign Making and Specialty Graphics	$ (432)	$ (2,306)	$ 1,049	$ 7,272
Apparel and Flexible Materials	4,555	5,832	15,292	12,983
Ophthalmic Lens Processing	(690)	364	(2,092)	715
	$ 3,433	$ 3,890	$ 14,249	$ 20,970
	=======	=======	=======	=======

A reconciliation of total segment profit to consolidated loss before income taxes follows:
	Three Months Ended January 31,		Nine Months Ended January 31,
In thousands	2005	2004	2005	2004

Segment profit	$ 3,433	$ 3,890	$ 14,249	$ 20,970
Corporate expenses, net of other income	(3,795)	(3,156)	(11,334)	(12,656)
(Loss) earnings before interest and taxes	(362)	734	2,915	8,314
Interest expense	(1,576)	(3,013)	(5,326)	(9,328)
(Loss) before income taxes	$ (1,938)	$ (2,279)	$ (2,411)	$ (1,014)
	======	======	======	=======

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 January 31,		Nine Months Ended January 31,
In thousands	2005	2004	2005	2004
Net (loss) earnings	$ (381)	$ (1,145)	$ (772)	$ 1,980
Other comprehensive income:
Foreign currency translation adjustments	2,251	7,709	8,379	14,389
Minimum pension liability, net	---	4,833	---	4,833
Cash flow hedging gain (loss), net	55	(201)	(26)	405
Total comprehensive income	$ 1,925	$ 11,196	$ 7,581	$ 21,607
	======	======	======	======

NOTE 9. (Loss) Earnings Per Share

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

	Three Months Ended January 31,		Nine Months Ended January 31,
In thousands, except per share amounts	2005	2004	2005	2004
Numerator:
Net (loss) earnings	$ (381)	$ (1,145)	$ (772)	$ 1,980

Denominators:
Denominator for basic (loss) earnings per share - weighted-average shares outstanding	22,263	22,205	22,255	22,190
Effect of dilutive securities:
Stock options	---	---	---	188
Denominator for diluted (loss) earnings per share - adjusted weighted- average shares outstanding	22,263	22,205	22,255	22,378
	======	======	======	======
Basic (loss) earnings per share	$ (.02)	$ (.05)	$ (.03)	$ .09
	======	======	======	======
Diluted (loss) earnings per share	$ (.02)	$ (.05)	$ (.03)	$ .09
	======	======	======	======

For the three and nine months ended January 31, 2005, stock options exercisable for 2.2 million and 2.6 million shares of common stock, respectively, were excluded from the calculation of diluted (loss) 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.

For the three and nine months ended January 31, 2005, stock options exercisable for an additional 0.2 million and 0.1 million shares, respectively, of common stock were excluded from the calculation of diluted (loss) earnings per share because the Company reported a net loss.

For the three and nine months ended January 31, 2004, stock options exercisable for 2.3 million and 2.4 million shares of common stock, respectively, were excluded from the calculation of diluted (loss) 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.

For the three months ended January 31, 2004, stock options exercisable for an additional 0.3 million shares of common stock were excluded from the calculation of diluted (loss) earnings per share because the Company reported a net loss.

NOTE 10. Commitments and Contingencies

During the three months ended January 31, 2005, the Company settled a legal action alleging that one of its machines caused a fire on the claimant's premises. The Company incurred an expense of $0.2 million in connection with the settlement.

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 nine months ended January 31, 2005 and 2004 are as follows:

In thousands	Nine Months Ended January 31,
	2005	2004
Beginning balance	$ 4,970	$ 4,372
Reductions for payments made	(4,095)	(4,125)
Changes in accruals related to warranties issued in the current period	4,608	4,529
Changes in accruals related to pre-existing warranties	(109)	---
Ending balance	$ 5,374	$ 4,776
	======	======

NOTE 12. Employee Benefit Plans

Components of net periodic benefit cost for the three and nine months ended January 31, 2005 are presented below.

	Three Months Ended January 31,
	Qualified Pension Plan		Non-Qualified Pension Plan
In thousands	2005	2004	2005	2004
Service cost	$ 653	$ 714	$ 39	$ 58
Interest cost	1,337	1,188	123	161
Expected return on plan assets	(1,331)	(1,112)	(111)	(118)
Amortization of prior service cost	74	121	---	16
Amortization of net loss	233	298	42	53
Net periodic benefit cost	$ 966	$ 1,209	$ 93	$ 170
	======	======	======	======

	Nine Months Ended January 31,
	Qualified Pension Plan		Non-Qualified Pension Plan
In thousands	2005	2004	2005	2004
Service cost	$ 1,961	$ 2,423	$ 120	$ 148
Interest cost	4,011	3,859	369	387
Expected return on plan assets	(3,994)	(3,282)	(333)	(314)
Amortization of prior service cost	222	634	(2)	97
Amortization of net loss	698	1,159