Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended April 30, 2003

OR

For the transition period from              to             

Commission file number 0-12448

FLOW INTERNATIONAL CORPORATION

23500 - 64th Avenue South

Kent, Washington 98032

(253) 850-3500

Securities registered pursuant to Section 12(b) of the Act:  None

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

Common Stock $.01 Par Value

Preferred Stock Purchase Rights

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

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

The aggregate market value of the voting stock held by non affiliates of the registrant based upon the closing price reported by the National Association of Securities Dealers’ Automated Quotation System (“NASDAQ”) as of July 15, 2003 was $24,130,039. The number of shares of common stock outstanding as of July 15, 2003 was 15,358,759 shares.

Table of Contents

Documents Incorporated By Reference

2

Table of Contents

Safe Harbor Statement

Statements made in this Form 10-K 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 exposure to additional costs relating to our restructuring plan; risks related to a potential failure to realize anticipated benefits in connection with the liquidation of inventories and other assets of operations or product lines to be discontinued; our ability to control costs and expenses; relations with and performance of suppliers; our ability to successfully develop and sell products in the competitive markets that we serve; access to capital; maintaining satisfactory relationships with our lending partners; political and trade relations; the overall level of consumer spending on capital equipment; 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.

3

Table of Contents

PART I

Item 1.    Business

Flow International Corporation (“Flow” or the “Company”) designs, develops, manufactures, markets, installs and services ultrahigh-pressure (“UHP”) products including both standard and specialized waterjet cutting and cleaning systems together with the Fresher Under Pressure^® food safety technology and isostatic and flexform press systems. We provide technologically-advanced, environmentally-sound solutions to the manufacturing, industrial, marine cleaning and food markets. Our UHP systems pressurize water from 40,000 to over 100,000 pounds per square inch (psi). This high pressure water is the core of our product line. Based upon a change in reporting structure at the beginning of Fiscal 2003, the Company has redefined its two reportable segments, Flow Waterjet Systems (Waterjet Systems) and Avure Technologies, replacing the two previous reportable segments of UHP Systems and Fresher Under Pressure. Avure Technologies, Inc. (“Avure”) is a wholly owned subsidiary of Flow.

Waterjet cutting is recognized as a more flexible alternative to traditional cutting methods such as lasers, saws or plasma. It is faster, has greater versatility in the types of products it can cut and eliminates the need for secondary processing operations. Utilizing pressures from 50,000 to 87,000 psi, the thin stream of water traveling at three times the speed of sound or more, can cut both metallic and nonmetallic materials for many industries, including aerospace, automotive, disposable products, food, glass, job shop, sign, metal cutting, marble, tile and other stone cutting, and paper. While our primary product line is cutting, we also manufacture a product line, utilizing 40,000 to 55,000 psi, for use in industrial cleaning, surface preparation, construction, nuclear decontamination, and petro-chemical and oil field applications. We manufacture entire systems including pumps, as well as positioning equipment and may also include assembly, “pick and place” and load/unload operations.

Our Avure segment includes the Fresher Under Pressure technology, as well as the isostatic and flexform press (“General Press”) operations. The Fresher Under Pressure technology provides food safety and quality enhancement solutions for food producers, while the General Press business manufactures systems which produce and strengthen advanced materials for the aerospace, automotive and medical industries.

Flow is a Washington corporation founded in 1974, incorporated in 1980, and completed its initial public offering in March 1983. Over the past several years, we have completed a number of acquisitions which have added robotics and software capabilities, and opened new geographic markets and product technology. These acquisitions include Flow Automation; Flow Robotics; Flow Japan; Foracon Maschinen und Anlagenbau GmbH & CO.KG (“Foracon”); CIS Robotics Inc. (“CIS”), Robot Simulations Limited (“Flow Software Technologies Ltd.”), ABB Pressure Systems AB (“Avure AB”) along with a 50% economic interest in a related U.S. joint venture, Flow Autoclave Systems Inc. (“Flow Autoclave”) and Spearhead Automated Systems, Inc. (“Flow Robotic Systems”).

In September 2002, Ronald W. Tarrant retired as the Chairman and CEO, having been in that position since 1991. In January 2003, Stephen R. Light was appointed President and Chief Executive Officer. Kathryn L. Munro, a director since 1996, assumed the position of Chairman.

Products and Services

We provide UHP systems and related products and services to our target markets: aerospace, automotive, food safety, job shops, pulp and paper and surface preparation. As described above, we divide our business into two reportable segments: Flow Waterjet Systems and Avure Technologies.

Flow Waterjet Systems:

Systems -

We offer a variety of UHP products, including both waterjet cutting and cleaning systems, as well as accessories and related robotic articulation equipment. UHP pumps, as well as pumps combined with pressure

4

Table of Contents

vessels, are the core components of our technology. An intensifier pump pressurizes water to in excess of 100,000 psi and forces it through a small orifice within a nozzle, generating a high-velocity stream of water traveling in excess of 3,000 feet per second to perform the cutting process. In order to cut metallic and other hard materials, an abrasive substance, usually garnet, is added to the waterjet stream creating an abrasivejet. Abrasivejets cut without heat, cause no metallurgical changes, and leave a high-quality edge that usually requires no secondary operation. Our unique and patented direct-drive pressure-compensated pumps pressurize water to in excess of 55,000 psi utilizing triplex piston technology.

A UHP system consists of an ultrahigh-pressure intensifier or direct drive pump and one or more waterjet cutting or cleaning heads with the necessary robotics, motion control and automation systems. We have placed UHP waterjet cutting systems in our target markets worldwide. These cutting systems may also combine waterjet applications with other processes such as conventional machining, pick and place handling, inspection, assembly, and other automated processes. Our waterjet systems are also used in industrial cleaning applications such as paint removal, surface preparation, factory and industrial cleaning, ship hull preparation, oil field services and heat exchanger cleaning.

Our products enhance productivity and, we believe, are cost justified over traditional methods. Our sales are affected by worldwide economic changes. However, the flexibility of our process and the diversity of our markets enable us to absorb cyclical downturns with less impact than conventional machine tool manufacturers and we are confident that we can continue to gain market share in the machine cutting tool market.

Consumable Parts and Services -

Consumables represent parts used by the pump and cutting head during operation, such as seals, orifices and garnet. Many of these consumable or spare parts are proprietary in nature and are patent protected. We also sell various tools and accessories which incorporate UHP technology, as well as aftermarket consumable parts and service for our products.

Avure Technologies:

Fresher Under Pressure -

Avure has two primary product lines, food safety and General Press. “Fresher Under Pressure” is our proprietary UHP pump and pressure vessel technology that addresses the growing demand in the U.S. for a post packaging, terminal pasteurization-like step for the food processing industry. This technology can provide benefits to a vast array of food products including fruits, vegetables, seafood, processed meats and ready-to-eat meals. The food industry is the single largest manufacturing industry in the world, of which $850 billion is in the U.S. Recent governmental regulations regarding pathogen reduction requirements as well as consumer demand for higher quality, wholesome, more natural, convenience foods offer a high growth opportunity. Marketed as Fresher Under Pressure since 1999, our UHP technology exposes foods to pressures from 50,000 to over 100,000 psi for a short time, reducing food-borne pathogens such as Camplyobacter, E. coli, Listeria monocytogenes, salmonella and Vibro vulnificus. While conventional thermal and chemical preservation methods can ensure safety and longevity, they have a negative impact on fresh foods’ sensory qualities such as nutrition, flavor, color and texture. Avure’s technology uses UHP to destroy bacteria and other microorganisms without using high temperatures or chemical additives with minimal effects on the nutrition, taste, texture, or color of food, while simultaneously extending shelf life.

General Presses -

Our isostatic press systems are large pressure vessels, ranging from 25 to 35 feet in height and weighing between 50 and 200 tons, that use a combination of heat and pressure to produce and strengthen advanced materials for the aerospace, automotive and medical industries. Examples of customary applications include jet

5

Table of Contents

engine components, automotive parts, high performance ceramics and hip joints. Our flexform presses are used to form sheet metal for flexible and cost-effective prototyping and low volume production of structural items, panels and engine components. Our General Presses offer several advantages over other methods for forming metal and composite parts. Isostatic presses produce lighter weight, higher strength parts that have a better metal consistency, density and uniformity as compared to a forged or cast part. Flexform presses allow for cost-effective production, lower tooling costs, flexibility and shorter lead times.

Marketing and Sales

We market and sell our products worldwide through our headquarters in Kent, Washington (a suburb of Seattle) and through subsidiaries, divisions and joint ventures located in Columbus, Ohio; Wixom, Michigan; Jeffersonville, Indiana; Lafayette, Louisiana; Birmingham, England; Bretten, Germany; Burlington and Windsor, Canada; Hsinchu, Taiwan; Shanghai and Beijing, China; Incheon, Korea; Sao Paulo, Brazil; Buenos Aires, Argentina; Milan, Italy; Madrid, Spain; Yokohama, Nagoya and Tokyo, Japan and Västerås, Sweden. We sell directly to customers in North and South America, Europe, and Asia, and have distributors or agents in most other countries. No customer accounted for 10% or more of our revenues during any of the three years ended April 30, 2003.

We focus our marketing efforts on specific target industries, applications and markets. To enhance the effectiveness of sales efforts, our marketing staff and sales force gather detailed information on the applications and requirements in targeted market segments. This information is used to develop standardized and customized solutions using UHP and robotics technologies. We provide turnkey systems, including system design, specification, hardware and software integration, equipment testing and simulation, installation, start-up services, technical training and service.

Our marketing techniques employ telemarketing and the internet, to identify and qualify sales leads, thus increasing the efficiency of the direct sales staff. Responses to these activities are carefully screened to identify new areas of interest and applications in our target markets. We also attend trade shows for targeted market segments and advertise in selected industry publications.

Patents

We hold a large number of UHP technology and related systems patents. While we believe the patents we hold are valid, we do not consider our business dependent on patent protection. In addition, we have over the years developed non-patented proprietary expertise and know-how in UHP applications, and in the manufacture of these systems, which we believe allows us to remain in the technological forefront of our competitors.

We believe the patents we hold and have in process, along with the proprietary application and manufacturing know-how, act as a barrier to entry into many of the markets we serve.

Backlog

At April 30, 2003, our backlog was $36.3 million compared to the prior year-end backlog of $32.8 million. Generally, our products, exclusive of the aerospace and Avure product line of General Presses and Fresher Under Pressure products, can be shipped within a four to ten week period. These products typically have lead times of six to 18 months. The changes in our backlog are not necessarily indicative of comparable variations in sales or earnings. The April 30, 2003, backlog represented 25% of fiscal 2003 sales. The unit sales price for most of our products and services is relatively high (typically ranging from tens of thousands to millions of dollars) and individual orders can involve the delivery of several hundred thousand dollars of products or services at one time. Furthermore, some items in backlog can be shipped more quickly than others, some have higher profit margins than others, and some may be cancelled by customers.

6

Table of Contents

Competition—Flow Waterjet Systems

The major competitors for UHP waterjet cutting and cleaning systems are conventional cutting and cleaning methods. These methods include lasers, saws, knives, shears, plasma, routers, drills and abrasive blasting techniques. A UHP waterjet cutting system has many advantages over conventional cutting systems, including no generation of heat or airborne dust, easy adaptability to complex cutting programs, insensitivity to the different types of materials, faster cutting speed and the ability to produce ready to use finished edges. These factors, in addition to elimination of secondary processing in most circumstances, enhance the manufacturing productivity of our systems.

Waterjet cleaning offers many advantages over other cleaning methods, such as the ability to remove difficult coatings or deposits from a surface without damaging underlying material or adding potentially hazardous chemicals to the cleaning process. A UHP waterjet system is an environmentally-friendly answer to many difficult cleaning applications and can often be justified solely on the basis of hazardous material containment or reduction of secondary operations in the cleaning process.

The advantages of waterjet technology listed above have positioned us in the market as a leading alternative to traditional cutting and cleaning methods.

We compete with other waterjet cutting and cleaning equipment manufacturers in the United States, Europe and Asia. Our robotics technology provides a competitive advantage as the only total solution supplier of complete waterjet cutting and cleaning systems. Although independent market information is not generally available, based upon data assembled from internal and external sources, we believe we are the largest manufacturer of UHP waterjet cutting systems in the world.

Competition—Avure Technologies

Pasteurization is the primary method used to help ensure that fresh food is safe to eat. Avure’s Fresher Under Pressure represents a break-through technology which destroys harmful pathogens increasing shelf life while ensuring a safe, healthy product. There are other companies trying to develop a similar UHP processing technology. To date, these companies have had little commercial success, and we believe our patents and know- how make us the world leader in this technology. Currently our equipment is the only equipment being used in any significant commercial applications. There are also other technologies being developed for food safety, including irradiation and ultra-violet light. Of the alternative technologies, irradiation is the most developed. The primary target market for irradiation is the raw meat industry, while Avure is targeting the ready-to-eat meat market, i.e., sliced deli meats, etc., as well as the premium food market, such as fresh fruits and vegetables.

Our General Presses represent a niche segment of the industrial press market that use UHP technology for specialized applications, primarily to produce high strength and precision or low volume parts. We compete in this market against forging and casting methods of production which currently represent a significantly larger market than our technology. However, our press technology is necessary to produce high quality parts with high material density, no internal voids or cracks and beneficial isotropic properties.

Overall, we believe that Flow’s consolidated competitive position is enhanced by:

7

Table of Contents

Research and Engineering

We have devoted between 8% and 9% of revenues in research and engineering during each of the three years ended April 30, 2003. Research and engineering expenses were $13.5 million, $14.9 million, and $16.5 million in fiscal 2003, 2002 and 2001, respectively. We will continue a robust research and engineering program to maintain our technological leadership position through development of new products and applications, as well as enhancement of our current product lines.

Employees

As of April 30, 2003, we employed 835 full time and 18 part time personnel. We are not a party to any material collective bargaining agreements.

Foreign and Domestic Operations

See Note 18 of Notes to Consolidated Financial Statements for information regarding foreign and domestic operations.

Available Information

Our Internet website address is www.flowcorp.com. We make available at this address, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information available on our website is not incorporated by reference in and is not deemed a part of this Form 10-K.

Item 2.    Properties

Our headquarters and primary manufacturing facilities are located in two leased facilities in Kent, Washington. We also manufacture product in Wixom, Michigan; Jeffersonville, Indiana; Columbus, Ohio; Bretten, Germany; Burlington, Canada; Hsinchu, Taiwan and Västerås, Sweden. We sell products through all of these locations, in addition to sales offices located in Lafayette, Louisiana; Birmingham, England; Milan, Italy; Madrid, Spain; Lyon, France; Yokohama, Nagoya and Tokyo, Japan; Shanghai and Beijing, China; Incheon, Korea; Sao Paulo, Brazil; Buenos Aires, Argentina and Windsor, Canada.

All of our facilities are leased with the exception of our manufacturing facility in Jeffersonville, Indiana.

We believe that our facilities are suitable for our current operations and any increase in production in the near term will not require additional space.

Effective January 1, 2003, we negotiated a new 10-year lease with the owner for our existing Kent manufacturing facility. The new lease provides a monthly cost reduction in lease expense of approximately $30,000 with an early termination option at the end of five years.

Item 3.    Legal Proceedings

We are party to various legal actions incident to the normal operation of our business, none of which is believed to be material to our financial position, results of operations and cash flows. See Notes 1 and 14 of Notes to Consolidated Financial Statements for a description of our product liability claims and product liability insurance coverage.

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

None

8

Table of Contents

PART II

Item 5.    Market for the Registrant’s Common Stock and Related Stockholder Matters.

See page 10

Item 6.    Selected Financial Data.

See page 10

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See pages 11 through 27

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk.

See page 27

Item 8.    Financial Statements and Supplementary Data.

See pages 28 through 57

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

The following information relates solely to Flow International Corporation Voluntary Pension and Salary Deferral Plan (the “Pension and Salary Deferral Plan”). On June 6, 2003, the Audit Committee of Flow International Corporation approved the appointment of BDO Seidman LLP to serve as the Pension and Salary Deferral Plan’s independent public accountants for the fiscal year ended December 31, 2002, and dismissed PricewaterhouseCoopers LLP as the Pension and Salary Deferral Plan’s independent public accountants. On July 2, 2003, a Form 8-K was filed disclosing such change. Contained within such 8-K was a letter from PricewaterhouseCoopers LLP agreeing with the disclosure contained therein.

9

Table of Contents

Item 5.    Market for the Registrant’s Common Stock and Related Stockholder Matters

The principal market for Flow’s common stock is the over-the-counter market. 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 last two fiscal years is set forth in the following table.

There were 995 shareholders of record as of July 15, 2003.

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 following table presents the number of stock options and warrants that were and were not approved by our shareholders as of April 30, 2003.

Item 6.    Selected Financial Data

10

Table of Contents

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Risk Factors and Uncertainties

Our business has been adversely affected by our overall financial position.    Following our announcement of our loss for the third quarter and continued losses for the fourth quarter of fiscal 2003, we experienced some reluctance from certain customers to buy from us. We believe that this may be indicative of fears by customers that we will become unreliable in supplying our products or that our brand image will be harmed. If our customers lose confidence in our ability to supply quality products reliably, our business may be materially harmed. In addition, the willingness of suppliers to do business with us or changes in our trade terms with suppliers could negatively impact future margins and costs.

We had a substantial loss in fiscal 2002 and fiscal 2003 and may continue to incur losses in future periods.    Our net loss for the fiscal year ended April 30, 2002 and 2003 was $6.0 million and $70.0 million, respectively. As described in this section and the notes to the financial statements, we have begun to significantly restructure our operations. We believe these restructuring and 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 may continue to incur losses in future periods. Continued economic weakness in our served markets may adversely affect our ability to meet our sales projections.

We may default on our loan covenants.    We are operating under a new credit agreement with our senior lenders and an amended note agreement with our subordinated lender. The agreement with our senior lenders expires August 1, 2004 and sets forth specific financial covenants and debt commitment levels to be attained on a quarterly basis. Our subordinated lender has amended the subordinated note agreement to mirror the covenants agreed to by the senior lenders. In the event of default, the senior and subordinated lenders (together, the “Lenders”) may limit our access to borrow funds as needed. Our ability to continue operating is dependent on the Lenders’ willingness to grant access to funds (so long as we are in compliance with our existing loan covenants). 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. Given our current financial position, obtaining alternative financing is unlikely, especially in the short term. 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. If the debt were called in such a manner, it is unlikely we would be able to pay off our Lenders and we would be subject to the authority of our Lenders as provided in the new credit agreement and also in the amended subordinated note agreement. 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.

We may be unsuccessful in the implementation of our restructuring plan.    Our comprehensive two-year restructuring plan includes reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. The plan affects roughly half of our locations and reduces the total square footage occupied by nearly half. We anticipate that headcount will be reduced by more than a quarter. We have begun consolidating the production of our shapecutting products from our European facilities to our North

11

Table of Contents

American facilities and standardizing shapecutting products between the European, North American and Asian markets. As with any restructuring, there are numerous risks that could affect the success of the restructuring, including those mentioned below.

During the period that we are restructuring and perhaps for a period thereafter, we will be subject to risks that companies are exposed to during periods of restructuring. These risks result from the uncertainties, workforce reductions, facility closings, divestitures of operations, and rapid changes that accompany restructurings. As a result, one or more of the following adverse consequences could occur to at least some degree: the hiring and/or retaining of employees may be more difficult; customer and vendor relationships may be damaged; there may be disruptions in the delivery and servicing of product; there may be manufacturing cost overruns; and competitors may try to attract customers by suggesting that we may not be able to successfully restructure.

We may be unable to retain and attract key management positions.    Given our current financial position and substantial losses, we may lose key management personnel and encounter difficulties replacing these positions. We may have to incur greater costs to attract replacement personnel.

We may be unable to satisfy our subordinated obligations through operations.    Our subordinated notes mature in two installments of $17.5 million each on April 30, 2007 and 2008. Our subordinated lender has also agreed to capitalize the semi-annual interest remittances due through April 30, 2004, which total $6.9 million. This unpaid interest accrues interest at the rate of 15% and will increase the obligation to the subordinated lender. In order to satisfy these obligations, we may be required to enter into transactions which could be highly dilutive to current shareholders.

Current Events

On January 3, 2003, Stephen R. Light assumed the role of President and CEO. Upon commencement of his employment, Mr. Light faced several challenges, including the following:

These factors prompted Mr. Light to meet with our Lenders to discuss strategic alternatives directed toward reducing the current debt levels and improving our operating results. Mr. Light, using the knowledge and previous efforts of his executive team, then developed a comprehensive plan aimed at improving cash flow and profitability by redefining and refocusing our strategy. This plan is comprised of three primary objectives: a) obtaining support from our Lenders to ensure continued borrowing capability, b) conducting a comprehensive financial review of our assets and obligations and c) restructuring to reduce structural expenses and resolve current operational issues within the core business.

Lender Update.    Effective April 30, 2003, we entered into a new credit agreement with our senior lenders which was signed on July 28, 2003. This senior credit facility expires August 1, 2004 and bears interest at the bank’s prime rate in effect from time to time plus 4% (currently 8.25%). The agreement sets forth specific

12

Table of Contents

financial covenants and debt commitment levels to be attained on a quarterly basis. The covenants and commitment levels are based on our management’s forecast of fiscal 2004 and the first quarter of fiscal 2005 operating results and cash flows.

On July 28, 2003, our subordinated lender has amended the subordinated note agreement, effective April 30, 2003, to mirror those covenants agreed to by the senior lenders and has agreed to capitalize required semi-annual interest payments, beginning with April 30, 2003, until April 30, 2004 which total $6.9 million. Any unpaid interest accrues further charges at the rate of 15%.

Comprehensive Financial Review.    Beginning with the third quarter of fiscal 2003, we revised our approach to receivable collection, inventory reduction and investigated other cash-generating initiatives in response to the continued declined in the economy and our highly leveraged position. We reviewed the carrying values of those assets that we expected to convert to cash in the short-term, as well as long-lived tangible and intangible assets and adjusted the carrying value of such assets to reflect their estimated current net realizable value. In addition, we conducted a review of potential liabilities. The total adjustments for the year ended April 30, 2003 are included in the Consolidated Statement of Operations. These adjustments, which are summarized below, were highly influenced by the economic environment our customers and we are facing.

13

Table of Contents

Restructuring.    On February 19, 2003, we announced a comprehensive two-year restructuring plan intended to return the Company to profitability through reductions in headcount, consolidation of facilities and operations, and closure or divestiture of selected operations. We expect to invest cash of between $11 million and $13 million in the restructuring program, which will affect roughly half of our locations and will reduce the total square footage occupied by nearly half. We anticipate that headcount will be reduced by more than one quarter. We have begun consolidating the production of our shapecutting systems from our European facilities to our North American facilities and standardizing shapecutting systems between the European, North American and Asian markets. We believe that these actions will achieve significant cost savings. We anticipate being able to fund the restructuring program within our new credit facility, as well as our foreign notes payable. In addition, we expect to incur significant non-cash expenses associated with the implementation of the restructuring program. Under current accounting rules, the associated restructuring expenses will generally be recognized in the period they are incurred. To date, we have incurred cash expenses of nearly $1.0 million.

At April 30, 2003, we were considering alternative strategies for the Avure segment. As of that date, we were unsure of the ultimate disposition for Avure, but had been considering a wide range of alternatives including continuation of operations in the present form, operations on a diminished scale, suspension of operations, shutdown, or divestiture. Subsequent to year-end, we received several offers from potential buyers, however no binding offer has been accepted as of the filing date of this Form 10-K.

If a sale were consummated, we would recognize a loss on unrealized foreign currency translation adjustments included in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. The debit balance of the Avure unrealized foreign currency translation adjustments at April 30, 2003 was $4.5 million. The ultimate loss on disposal would be determined at the time of sale and would be based on the then carrying value of Avure, as well as the amount of unrealized foreign currency translation adjustments.

14

Table of Contents

Operational Data as a Percentage of Sales