Exhibit 10.2

 

FLOW INTERNATIONAL CORPORATION

ANNUAL INCENTIVE PLAN FOR EXECUTIVES, SENIOR MANAGERS AND

SELECT ADMINISTRATIVE STAFF

For Fiscal Year 2006

 

A. Purpose. This Annual Incentive Plan for Executives, Senior Managers and
Select Administrative Staff (the “Plan”) is intended to provide cash and stock
incentives (“Incentive Awards”) for certain executives, senior managers and
select administrative staff who assist the Company in meeting the Company’s
annual financial goals and/or who meet their own individual performance goals.

 

B. Term. This plan is in effect for the Company’s 2006 fiscal year. Upon action
by the Compensation Committee of the Board of Directors (“Compensation
Committee”), the Plan may be extended on a yearly basis, subject to any
amendments that the Compensation Committee may adopt. If the Compensation
Committee extends the Plan for a new fiscal year, the Compensation Committee
will determine which executives, senior managers and administrative staff are
eligible to receive awards, the amount of each participant’s incentive awards,
and the performance criteria applicable to such fiscal year. This Plan and any
extension thereof shall be a subplan of, and subject to the applicable terms of,
the equity plan that is approved by the Company’s shareholders in September,
2005.

 

C. Eligibility criteria. Only executives, senior managers and select
administrative staff of the Company (“Eligible Employees”) will be eligible for
an award under this Plan. To be eligible for an award under this Plan, an
Eligible Employee must meet all of the following criteria. He or she must:

 

  •   Be notified in writing of the decision of the Compensation Committee to
include the Eligible Employee in the Plan for that fiscal year;

 

  •   Be continuously employed by the Company through the last day of the
Company’s fiscal year unless the Eligible Employee’s employment terminates due
to death or permanent total disability, as determined under the Company’s long
term disability policy;

 

  •   Be in full compliance with all of the Eligible Employee’s contractual
obligations to the Company;

 

  •   Sign and deliver all required documents and agreements related to
Incentive Awards under the Plan, including documents related to stock awards;
and be free of any significant disciplinary actions during that fiscal year.

 

An Eligible Employee does not have a right to be included in the Plan for any
particular performance period, but instead the Compensation Committee will
decide in its sole discretion whether an Eligible Employee will participate in
the Plan and have the potential to earn an award for a particular fiscal year.

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D. How awards are calculated and earned. Each participant will have an
opportunity to obtain an Incentive Award composed of cash and stock for the
fiscal year based on four criteria. Three of the criteria are based on
Company-wide financial goals for the fiscal year regarding return on invested
assets, revenue and operating profit that are determined by the Compensation
Committee. The fourth criterion is the participant’s achievement of objective
and subjective goals that the Company has assigned to the participant.

 

Individual factors. Both individual factors and factors common to all
participants will influence the amount of Incentive Awards achievable by
individual participants. Individual factors include:

 

  •   The amount of the individual’s base salary, as determined by the
Compensation Committee;

 

  •   The Incentive Target Percentage for the individual, as determined by the
Compensation Committee. This number represents the percentage of the
individual’s base salary that would be earned as a bonus if the Company fully
satisfies its financial goals at the level of Planned Results and the individual
achieves his or her individual performance goals. For example, if a participant
with an annual base salary of $100,000 were assigned an Incentive Target
Percentage of 25%, he or she would have the opportunity to obtain an Incentive
Award of $25,000 if actual performance for each of the four criteria was exactly
at the level of Planned Results, as described below (“Target Incentive
Opportunity”).

 

  •   For the fourth criterion for earning an Incentive Award —individual goals—
each participant will be assigned unique individual annual goals, both objective
and subjective. The Compensation Committee, with input from the CEO, will
determine whether and to what degree such goals are achieved. The Compensation
Committee is not required to follow any recommendation by the CEO with respect
to the achievement of the goals.

 

Factors common to all participants. The factors common to all participants in
the plan include (i) the four criteria for Incentive Awards and their respective
weights and (ii) the multiplier that is factored into the Incentive Award for
the three Company financial criteria based on actual Company financial results.
These are described below.

 

The four criteria. Each of the four criteria for Incentive Awards accounts for a
portion of the Target Incentive Opportunity for each participant, as follows:

 

  •   20% for the Company meeting its annual goal for return on invested assets,

 

  •   30% for the Company meeting its annual goal for revenue,

 

  •   30% for the Company meeting its annual goal for operating profit, and

 

  •   20% for the participant achieving his or her individual annual goals.

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The application of the Multiplier. Additionally, all participants in the plan
will have the same multiplier used in the calculation of the Incentive Award
based on Company financial criteria (“Multiplier”). At the outset of the fiscal
year, the Compensation Committee, with input from the CEO and Audit Committee,
will select three reference points for each of the three Company financial
measurements:

 

  •   the Planned Result, which would result in an Incentive Award for that
criterion of 100% of the Target Incentive Opportunity allocated to that
financial criterion,

 

  •   the Lower Threshold Result, which would be less than the Planned Result
and the point below which no Incentive Award would be provided; and

 

  •   the Outstanding Performance Result, representing a financial result more
favorable than the Planned Result and which, if reached or exceeded, would
result in the award of as much as 200% of the Target Incentive Opportunity
allocated to that financial criterion for each individual.

 

The Compensation Committee is not required to follow any recommendations by the
CEO or Audit Committee with respect to the reference points. Thus, the
Multiplier for each of the three Company financial measurement criterion may
range from 0% to 200% based on the financial results for each of the financial
criteria, which individually are capped at 200%. When financial results for any
of these three financial measures fall between the three reference points, the
appropriate Multiplier will be determined by interpolation.1

 

E. How individual awards are calculated. The CFO, with review from the Audit
Committee of the Board of Directors, will determine whether and to what extent
the three Company financial goals have been achieved and the appropriate
Multiplier, if any, to be applied in determining individual Incentive Awards.

 

The CFO will present his/her calculations and determination to the Compensation
Committee. The Compensation Committee will consider the CFO’s calculations and
determinations, ask for additional information as it deems necessary, and make
the final determination of the Company’s financial performance with respect to
the three Company financial criteria and of the Multiplier, if any, that will
apply to the portion of the Incentive Award attributable to such Company
financial goals. Individual awards would be calculated as follows:

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1 The Multiplier applicable to results that fall between the three reference
points is calculated as follows:

 

  •   If the actual result is more than the Lower Threshold Result but less than
the Planned Result: Divide the difference between the Actual Result and the
Lower Threshold Result by the difference between the Planned Result and the
Lower Threshold result.

 

  •   If the actual result is more than the Planned Result : Divide the
difference between the Actual Result and the Planned Result by the difference
between the Outstanding Result and the Planned Result AND ADD 1.00, subject to a
maximum of 2.0.

 

If the actual result meets or exceeds the Outstanding Result, the Multiplier
applicable to that result will be 2.0.

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1. Determine amount of Incentive Award attributable to achievement of Company
financial goals. Each financial criterion would be reviewed to determine if the
results meet or exceed the Lower Threshold Result. If so, for each such
criterion, the individual Incentive Award would be calculated in view of the
weight of the criterion (20% or 30%), the Multiplier for the criterion and the
participant’s Target Incentive Opportunity.2

 

2. Determine the amount of Incentive Award attributable to individual goals. The
CEO will determine the degree to which the individual objectives had been
achieved for each participant on a case-by-case basis to determine an Individual
Goal Multiplier in the range of 0% to 200%. Determine the amount of Incentive
Award attributable to the achievement of individual goals in view of the weight
of the criterion (20%), the Multiplier for the criterion and the participant’s
Target Incentive Opportunity.3 The CEO will present his/her recommendations to
the Compensation Committee, and the Compensation Committee will review and
determine the individual Multiplier. The Compensation Committee is not required
to follow any recommendation by the CEO with respect to the Multiplier.

 

3. For each individual, the Compensation Committee will consider whether it is
aware of any information that would make an individual ineligible for an
Incentive Award in view of all eligibility factors. The Company will aggregate
the Incentive Awards attributable to the consolidated financial criteria and the
amount attributable to individual goals to determine the total Incentive Award
for that fiscal year. The aggregate amount of bonus that may be earned by and
awarded to any individual will be no higher than 200% of the participant’s
Target Incentive Opportunity for that individual.

 

An example of the calculation of an Incentive Award based on hypothetical
company results and individual factors is attached.

 

F. Timing and payment of awards. Estimated Incentive Awards based on preliminary
annual results, as determined by the Compensation Committee, will be provided to
participants within 30 after the end of the fiscal year, less a 10% cash
holdback pending the calculation of final Incentive Awards upon the closing of
the books for the fiscal year. The initial award based on the Estimated
Incentive Award will be composed of a cash payment in the amount of the 40% of
the Estimated Incentive Award and a stock award in the amount of 50% of the
Estimated Incentive Award. Final Incentive Awards are calculated after the
closing of the books for the fiscal year, after

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2 The following formula is used to calculate an individual Incentive Award for a
Company financial criterion:

 

(Multiplier) x (Participant’s Target Incentive Opportunity) x (20% or 30%, as
applicable)

 

3 The amount of Incentive Award attributable to individual goals is determined
by the following formula:

 

(Individual Goal Multiplier) x (Participant’s Target Incentive Opportunity) x
20%

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which the Company will provide cash awards that reflect the remainder of any
amounts due. In no event will Estimated Incentive Awards or Final Incentive
Awards be paid later than December 31 of the calendar year in which the
Company’s fiscal year (and the performance period) ends. For example, all bonus
amounts payable for FY 2006 will be paid no later than December 31, 2006. In the
event of a corporate transaction, payment will be made no later than December 31
of the calendar year in which the transaction closes.

 

All required tax withholdings will be withheld from the cash and stock portions
of the estimated and final Incentive Award, with the tax withholding owed with
respect to the stock portion being accomplished by the Company retaining shares
necessary to cover the withholding obligation and the participant receiving the
net shares. The number of shares of Company stock awarded shall be determined by
taking the amount of Incentive Award net of applicable tax withholdings and
multiplying the net by 50%, and then dividing that product by the average
closing price of the Company’s common stock during the final 20 trading days of
the measured fiscal year, rounding down for partial shares. Participants have no
rights regarding stock ownership until the date the shares are actually issued.

 

G. Termination of employment and other special circumstances. If employment of a
participant terminates for any reason before the award of an Incentive Award,
that participant will not be entitled to an Incentive Award for such year.
Nonetheless, if employment terminates due to total permanent disability, as
determined under the Company’s long term disability plan, or death, the Company
will provide the participant (or the participant’s estate, if applicable) a
prorated amount of Incentive Award for such year. The amount payable to the
disabled participant (or, in the event of a participant’s death, to his or her
estate) will be determined after the end of the annual performance period, and
will be determined by calculating the Incentive Award based on a full year’s
employment using the foregoing formula and then multiplying that amount by a
fraction whose numerator is the number of calendar days of the employee’s
employment during the fiscal year before death or disability and whose
denominator is 365.

 

In the event of a “corporate transaction” with respect to the Company during the
fiscal year that is the performance period, the Plan shall terminate as of the
date the corporate transaction closes. Any performance goal that is an amount
(not a percentage), such as operating profit or growth, shall be prorated to
reflect the fact that the entire fiscal year was not completed, and the amount
payable to each participant will be prorated to reflect the fact that the
participant was not required to complete the entire fiscal year in order to earn
the Incentive Award. Performance goals that are amounts shall be multiplied by a
fraction, the numerator of which is the number of days completed in the fiscal
year through the date the corporate transaction closes, and the denominator of
which is 365. Performance goals that are a percentage (such as return on
invested assets) shall not be prorated, but the percentage shall be determined
over the period between the start of the fiscal year and the closing of the
corporate transaction. The Company’s actual performance results as of the time
immediately

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preceding the closing of the corporate transaction shall be compared to the
annual goals for each such criteria (as prorated for goals that are amounts as
described above), and the amount of the bonus payable to a participant for each
criteria is determined. The final amount of the Incentive Award payable to a
participant is determined by multiplying the aggregated bonus amount for the
participant by a fraction, the numerator of which is the number of days
completed in the fiscal year through the date the corporate transaction closes,
and the denominator of which is 365. For the purposes of this provision,
“corporate transaction” means any of the following events:

 

(a) Approval by the holders of the Company’s common stock of any merger or
consolidation of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of common stock are converted
into cash, securities or other property, other than a merger of the Company in
which the holders of the common stock immediately prior to the merger have
substantially the same proportionate ownership of common stock of the surviving
corporation immediately after the merger;

 

(b) Approval by the holders of the common stock of any sale, lease, exchange or
other transfer in one transaction or a series of related transactions of all or
substantially all of the Company’s assets other than a transfer of the Company’s
assets to a majority-owned subsidiary of the Company; or

 

(c) Approval by the holders of the common stock of any plan or proposal for the
liquidation or dissolution of the Company.

 

H. Other terms and conditions. This document contains guidelines relating to
compensation of certain employees of the Company. This document is not intended
and shall not be read to create any express or implied promise or contract for
employment, for any benefit, or for specific treatment in specific situations.
Except to the extent modified by individual written agreements, the employment
relationship between participants in this Plan with the Company is at-will,
meaning employment is not for any minimum or set period, it is subject to the
mutual consent of the employee and the Company, and either the employee or the
Company can terminate the employment relationship at any time, for any reason or
no reason, with or without cause, notice or any kind of pre- or post-termination
warning, discipline or procedure. All Incentive Awards under this Plan are
subject to withholding of applicable taxes. For purposes of this Plan, the terms
“return on invested assets”, “operating profit” and “revenue” shall be given the
same meaning as they are used in the Company’s normal accounting practices
provided, however, that when calculating the Company’s return on invested
assets, operating profit and revenue during the one year performance period for
purposes of this Plan, the Company and Compensation Committee shall not consider
any of the following to the extent appropriate to assure a consistent
measurement of the Company’s financial performance for Plan purposes over the
one year performance evaluation period:

 

1. Gains or losses on sales or dispositions of assets outside of normal business

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2. Asset impairments and write-downs

 

3. Litigation costs or claims judgments or settlements

 

4. Historic environmental obligations

 

5. Changes in tax law or rate, including the impact on deferred tax liabilities

 

6. Uninsured catastrophic property losses

 

7. The cumulative effect of changes in accounting principles

 

8. Extraordinary items described in Accounting Principles Board Opinion No. 30.

 

9. Acquisitions occurring during the one year performance period or unbudgeted
costs incurred related to future acquisitions

 

10. Operations discontinued, divested or restructured during the one year
performance period, including severance and related costs

 

11. Gains or losses on, or charges related to, refinancing or extinguishment of
debt

 

12. Recognition of deferred tax assets or loss carry forwards

 

13. Unbudgeted non-cash compensation expense, including stock option changes

 

14. Realized or unrealized foreign exchange gain or loss in other expenses

 

15. Impact of an unanticipated accounting changes

 

Any adjustments will be applied in a consistent manner. The Compensation
Committee may interpret the terms of the Plan. The Company may, in its sole
discretion, amend or terminate this Plan at any time without prior notice
provided that any such amendment or termination shall apply only prospectively
and shall not apply to awards with respect to performance periods in progress at
the time the amendment or termination is adopted.

 

FLOW INTERNATIONAL CORPORATION

Flow Annual Incentive Plan Approved By:

   

 Date 

   

Dr. J. Michael Ribaudo, Chairman

Compensation and Plan Administrator Committee

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ATTACHMENT A

 

Hypothetical Example of Calculation of Incentive Award

 

This example illustrates the calculation of an Incentive Award and assumes that
all eligibility requirements are satisfied. The numbers are used for
illustrative purposes only and do not reflect a promise or prediction of any
particular results.

 

  •   At the start of the fiscal year, the Compensation Committee sets the
following Company financial goals:

 

Criterion

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   Lower Threshold
Result

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   Planned Result

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   Outstanding Performance
Result

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Return on Invested

Assets (20%)

               Revenues (30%)                Operating Profit (30%)             
 

 

  •   At the start of the fiscal year, the Compensation Committee assigns the
following factors to participant Joe Dokes:

 

  •   Salary: $100,000

 

  •   Incentive Target Percentage: 25%

 

  •   Individual goals:

 

  •   Complete product testing for Project A

 

  •   Recruit and hire three qualified industrial engineers for Project B

 

  •   Complete training of business unit in workplace respect and diversity

 

  •   Satisfactorily complete capital improvements in laboratory

 

  •   Within 30 after the end of the fiscal year, the Compensation Committee
determines the following Company financial results and based on the goals set
earlier, their respective Multipliers:

 

  •   Return on invested assets: $                                             %

 

  •   Revenues:           $                                             %

 

  •   Operating profit: $                                             %

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The Compensation Committee also determines, after consideration of the
recommendations from the CEO, that Joe successfully completed all of the
personal goals except for part of the capital improvements project and assigns
him an Individual Goal Multiplier of 1.25.

 

Based on these results, the Compensation Committee determines the following
estimated Incentive Award for each of the four criteria:

 

Return on invested assets:         (            ) x (            ) x (.20) =
_______________ Revenues:   (            ) x (            ) x (.30)   =   
_______________ Operating profit:   (            ) x (            ) x (.30)   =
   _______________ Personal goals:   (            ) x (1.25) x (.20)   =   
_______________

 

Estimated Incentive Award:        $_________________

 

The Compensation Committee will reduce the Estimated Incentive Award by the
required tax withholding, giving rise to a Net Estimated Incentive Award of
$                    . Joe will receive half of the Net Estimated Incentive
Award in stock and 40% of the Net Estimated Incentive Award in cash, rounding
down for partial shares. After the closing of the books, the final Incentive
Award will be calculated and any further amounts owed, if any, will be awarded
in cash, net of taxes.