Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K

GERBER SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (860) 644-1551
=================================================================================

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

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

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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.    X    .

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

At June 30, 2003, 22,179,348 shares of common stock of the registrant were outstanding. On such date the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $131,167,574.

2

3

This annual report on Form 10-K for the fiscal year ended April 30, 2003, contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials the Company releases to the public. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently believed to be valid. Forward-looking statements within (or incorporated by reference in) this annual report can be identified by the use of words such as "believe," "expects" or "expected to," "intends," "foresee," "may" or "should," "plans," "anticipate," and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements contained in this annual report relate to, among other things:

• prospective product developments (and the timing of introduction), product development focus, and new business opportunities;

• developments with respect to product development and product introductions by competitors;

• demand for certain of the Company's products and services;

• methods of and costs associated with potential geographic expansion;

• restructuring initiatives;

• efforts to enhance organization responsiveness operating performance;

• regulatory and market developments, and the impact of such developments on future operating results;

• expected levels of growth or the future size (typically stated in revenues) of market segments or geographic markets, or future market conditions;

• growth opportunities for certain of the Company's products or in certain geographic markets;

• the availability of raw materials;

• future earnings and other measurements of financial performance;

• cost saving initiatives, including efforts to reduce working capital and headcount;

• future cash flows and uses of cash; and

• the outcome of contingencies.

4

All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Certain risk factors that could cause actual results to differ from expectations are set forth in Item 1 of this annual report. We cannot assure you that our results of operations or financial condition will not be adversely affected by one or more of these risks.

5

As you read this annual report on Form 10-K, please understand that when we refer to the Company we are referring to Gerber Scientific, Inc. and, unless we indicate otherwise, its wholly-owned subsidiaries.

Gerber Scientific, Inc. was incorporated in Connecticut in 1948. Gerber Scientific, Inc. is a leading provider of innovative, end-to-end customer solutions to the world's sign making and specialty graphics, apparel and flexible materials, and ophthalmic lens processing industries. The Company conducts its business through three principal operating segments. Each operating segment and the principal subsidiaries within those segments are as follows:

These operating segments, their principal products and services, description of their principal methods of distribution, and other information relevant to an understanding of their businesses follows.

In response to lower demand for our capital equipment and aftermarket products in fiscal 2001 and 2002 (see disclosure under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"), we implemented a shared services initiative in October 2002, based partly on the successful restructuring program initiated in our Apparel and Flexible Materials business segment in fiscal year 2001. A separate organization, internally referred to as Gerber Scientific Operations (GSO), was created as part of the shared services initiative. To date, GSO has sought to optimize the supply chain across the entire Company by focusing on:

• inventory reduction;
• strategic purchasing;
• manufacturing and supply-chain optimization;
• real estate consolidation;
• continued implementation of an enterprise resource planning system, provided by SAP AG; and
• freight and logistics rationalization.

6

We are also seeking to improve third-party supplier delivery performance for both equipment and aftermarkets as part of the shared services initiative.

Through these efforts, we have made substantial progress in reducing the number of our vendors, consolidating shipping providers, moving inventory to shipping locations, reducing warehouse and office space by sharing facilities among our business segments, and rolling out SAP to various sites. These initiatives are expected to reduce costs, improve organizational responsiveness and customer satisfaction, and enhance operating performance.

With the creation of GSO and the pursuit of a company-wide shared services initiative to rationalize and optimize our operations, we have also changed our legal organizational structure as of April 30, 2003, the end of our fiscal year 2003. Specifically, we have merged Gerber Scientific Products, Inc., the U.S. arm of our Sign Making and Specialty Graphics business segment, with Gerber Technology, Inc., our Apparel and Flexible Materials business segment. The combined entity, a wholly-owned subsidiary of the Company, is now named Gerber Scientific International, Inc. Each of the component businesses continue to maintain its separate identity, using its former names - - Gerber Scientific Products (GSP) and Gerber Technology (GT), respectively - without the nomenclature that denoted its prior separate corporate/legal organizational status (i.e., "Inc.").

As permitted by applicable U.S. Securities and Exchange Commission (SEC) regulations, information regarding the Company's measurement of segment profit or loss and segment assets, factors used to identify reportable segments, and the financial information required by Item 1 of Form 10-K relating to the reportable segments and geographic areas are included in Part II of this annual report on Form 10-K. See Item 8 and, specifically, Note 16 ("Segment Reporting") of the "Notes to Consolidated Financial Statements."

*************

The Company is organized under the laws of the State of Connecticut. Our principal executive offices are located at 83 Gerber Road West, South Windsor, Connecticut 06074. Our telephone number is (860) 644-1551. Our website address is www.gerberscientific.com. On our website within the investors section, you can access, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with or furnished to the SEC, in accordance with Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. In addition, the SEC maintains a website, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers filing electronically, including the Company.

7

Gerber Scientific Products (GSP) and Spandex Ltd. (Spandex) comprise the Company's Sign Making and Specialty Graphics business segment. GSP develops and supplies computerized sign making and specialty graphics systems. Spandex, which the Company acquired in May 1998, is an international distributor of equipment and materials - - sourced from GSP and other vendors - to the sign making and specialty graphics industry.

GSP is a leading provider of integrated computerized design and manufacturing solutions for the sign making and specialty graphics industries, consisting of:

• software to design signs and graphics and to run imaging and cutting equipment;

• digital imaging systems;

• state-of-the-art aftermarket materials designed to maximize equipment performance and output;

• cutting systems (referred to in the industry as plotters or routers); and

• customer training, service, and other support.

GSP's products are characterized by easy-to-use, highly-reliable, highly-durable customized sign production in both process colors and the large palette of pure vibrant spot colors.

GSP's primary target market for its products and services is the small- to medium-size sign printing shops, typically operated by between 1-10 persons with yearly revenues in the range of $100,000 to $1,000,000. GSP's target end-use customers also include graphic arts professionals, printing chains/franchises (e.g., Kinko's, FASTSIGNS and Signs Now), major corporations and government agencies. GSP distributes its products through independent distributors and through Spandex. GSP offers the end-users of its products a combination of hardware and software engineering, materials, spare parts, an unparalleled distribution network and customer service that represents a distinct value proposition.

In the 1980s, GSP's thermal imaging and cutting systems revolutionized the sign making industry, which until then had been dominated by manual sign making systems. GSP's EDGE® thermal imaging system produces highly durable images (ideally suited for outdoor signage), intense or varied spot colors, and a high return on capital investment for sign shop owners who need an entry level system. The EDGE and the EDGE 2 (which was introduced five years ago) are extremely reliable pieces of equipment, as reflected by the degree to which they have historically held their value in the secondary market.

8

In recent years, thermal imaging has become a mature technology that has seen little technological advancement. In contrast, inkjet imaging systems have experienced significant technological advances. Until a few years ago, inkjet printing systems had been limited to either water-soluble ink-based systems, requiring a specially coated vinyl and over-lamination for protection, or higher priced, super-wide (in terms of printing width), solvent ink-based systems, primarily used by the larger commercial and screen printing shops. Today, with the price of lower-end inkjet systems being in the range of $15,000-$30,000 and with the advances made in inks and substrate materials, inkjet imaging systems are becoming more in demand. The past year has seen an increase of lower-priced solvent and slower drying eco-solvent inkjet systems with typical printing widths of 60 inches. The higher dots per inch (dpi) that inkjets are now capable of allow for the production of high quality and reasonab ly durable (with over-lamination) signage. In addition, on a per unit basis (critical for the typical low piece count sign shop order), the output is less expensive than thermal imaging. These developments, together with the lesser importance of durability for outdoor signage (reflected by the cycle for sign changes, down from approximately 5 years to 1-3 years), have contributed to a greatly accelerated rate of adoption of inkjet systems by the sign industry.

Notwithstanding the sign industry's transition to inkjet imaging systems, GSP believes that its end-use customers will continue to require both inkjet and thermal systems to serve the wide range of sign applications. GSP's current software strategy is to combine its "open architecture" software with its thermal imaging and inkjet printing systems, which will indirectly facilitate the sign shop owner's decision to own both types of digital imaging systems. GSP is also targeting small- to medium-size sign shops that are still not using any imaging system, which are estimated to be approximately 40 percent of the estimated 22,000 sign shops in the U.S. The retail printing chains and franchises represent another segment of the market for which there are opportunities for GSP's thermal imaging systems. These chains and franchises, which are accounting for an increasing percentage of GSP's revenues (particularly Kinko's), want outdoor durability and easy-to-use systems that do not involve the use of solvent inks.

The differentiator for the thermal imaging products are their production of durable (without the need for lamination) outdoor spot and process colors, which are extremely well-defined on self-adhesive vinyl. This makes thermal images ideal for applications such as pictures on the sides of vehicles and four-color pictures. In addition, the current inkjet systems still require more distributor expertise than thermal imagers due to the greater complexity of calibrating inks and substrate materials. Further, the use of solvent inks makes inkjet systems susceptible to ambient conditions and noxious odors, as well as jet nozzle blockages if used only intermittently.

GSP's platform of fully integrated products allows end-users to seamlessly design and manufacture signs and specialty graphics. GSP's primary strengths are its:

• thermal imaging systems (i.e., the EDGE and EDGE 2), which are the leading imaging systems for small- and medium-size sign shops and the main driver of GSP's brand awareness; and

9

---

• its Matched Technology System™, which assures customers that GSP products (software, imaging systems, plotters, routers, and supplies) are all compatible. GSP's matched technology system involves the thorough testing of each of GSP's products for performance, accuracy, reliability, bonding, and durability to ensure seamless integration between GSP's software, imaging systems, plotters, and media products.

Software

GSP's software product offerings are used to design signs and specialty graphics and seamlessly manage every phase of the process from design to printing and cutting. GSP's software products are designed to drive its imaging and plotter products, to enhance imaging products' functionality and output, to improve production efficiency, to interface with other vendor imaging products, and to provide digital color matching when used with GSP's thermal and inkjet imaging products.

Thermal Imaging Systems

As disclosed above, one of GSP's primary strengths in the sign making and specialty graphics market today is its thermal transfer digital imaging systems, the EDGE and the EDGE 2, which are the leading thermal imaging systems for small- to medium-size sign shops. Both create continuous length, durable, professional quality text and graphics, including halftones, multiple colors and process four-color images directly onto sign vinyl. The EDGE delivers print resolution of 300 dpi and prints at 20 inches per minute, per color. The EDGE 2, an upgraded version of the EDGE, prints 300 or 600 dpi on material axis, 300 dpi on head axis, and prints up to 60 inches per minute, per color. GSP's large installed base of thermal imaging systems provides the opportunity to supply its end-use customer base with other equipment (plotters and routers), software, and aftermarket supplies.

In addition to GSP's EDGE products, GSP launched - in July 2002 (in Europe) and October 2002 (in the U.S.) -MAXX™ 2, a wide-format, thermal transfer digital imaging system that delivers print resolution of 300 dpi and can print on vinyls up to 34 inches wide. The MAXX 2 is a more technologically advanced version of the original MAXX, providing higher quality images and more reliable performance. It offers a robust, durable imaging solution without the use of hazardous solvents or over-laminates. Since its introduction, the MAXX 2 has been well-received by customers.  However, the MAXX 2 is a niche product designed for a limited number of applications.

Inkjet Imaging Systems

GSP has responded to the transition to inkjet imaging systems by selling, on an original equipment manufacturer (OEM) basis, an inkjet imaging system referred to as the Gerber Jetster™ under the terms of a distribution agreement with a leading manufacturer of inkjet imaging systems. The Jetster is designed to provide industry professionals with an extensive range of applications, accommodating media widths of 46 and 62 inches. The Jetster uses six colors, enabling the creation of a broad spectrum of colors and excellent spot simulation. The Jetster offers resolutions ranging from 180 dpi to 1440 dpi. It uses eco-solvent ink cartridges and does not require lamination for most applications to achieve customer desired point durability.

10

Plotters

GSP's plotters are used to cut the sign or graphic form from the vinyl substrate. GSP sells high speed plotters with automatic material loading and edge detection features (ODYSSEY™ XP), tabletop and sprocket fed plotters that can only be used with the EDGE and EDGE 2 (enVision™ plotters), and other plotters, one of which is sold on an OEM basis.

Routers are used to make 3-D cuts from materials such as wood or plastic. GSP's product offering includes both large and small formats to meet customer needs.

Aftermarket Supplies

GSP offers a wide range of aftermarket materials such as color foil cartridges and adhesive-backed vinyls, banner materials, and inkjet systems' inks.

GSP has a market leading position in thermal imaging foil cartridges. GSP's thermal imaging foils provide a wide variety of pure vibrant spot and process colors known for high durability and reliable performance. In April 2003, GSP introduced into all of its foil offerings the GerberGauge™ Foil, an innovative and proprietary measurement system for thermal transfer color foils designed to indicate the current levels of remaining foil inside the color cartridge.

GSP's foils are designed to produce durable, high-quality process color images on its thermal imaging products as well as to provide a wide range of colors that match popular vinyls, inks, and paint as one alternative to process color images. GSP has also designed foils that are compatible with specialty sign applications.

In vinyls, GSP has a modest total market share, consisting almost entirely of the higher quality cast vinyl products sourced from 3M.

In fiscal year 2003, GSP launched a new range of digital materials to support inkjet media and inks. These high-quality inkjet materials are being marketed under the ImagePerfect™ brand name.

Electronic Channel Lettering

GSP recently announced its first entry into the electrical signage market, which represents an estimated 50 percent of the sign market, with the launch of the Gerber NorthStar™ high efficiency lighting system in May 2003. The NorthStar, which was developed in collaboration with Teledyne Lighting and Display Products, a division of Teledyne Technologies, Inc., is a channel letter illumination system utilizing LED (light emitting diode) technology. The LED segment is estimated to represent only approximately 6 percent of the electric sign market today, but is expected to grow rapidly as the performance of LED systems improves. The NorthStar is designed to provide sign shops and their customers with a reliable, rugged, energy-efficient and safe indoor/outdoor alternative to neon. The NorthStar provides optimum letter brightness and longevity, with up to an 80 percent reduction in operating costs, lower maintenance costs, wider operating temperature range, high reli ability, improved safety, and reduced electric shock potential. GSP intends to develop a series of products to enhance the simplicity and reduce the cost of manufacturing channel letters using LED's.

11

GSP will look to enhance its market position by providing integrated and innovative products that optimize and facilitate the sign and specialty graphic design and manufacturing process and seamlessly follow through with superior service. The cornerstones of this strategy include acceleration of product development efforts to provide a complete product solution to the end-use customer, increased operational and distribution responsiveness and efficiency, and an expanded geographic sales reach.

Product Development

Enhance Core Thermal Imaging Franchise

GSP's initial wide-format thermal imaging system, the MAXX, was launched in 2000 but withdrawn from the market in 2001 due to unpredictable and unacceptably low production yields. GSP undertook a thorough technical review of the product in 2001 and 2002. This resulted in new component specifications (particularly printheads) and the development of production processes for improved manufacturability which were incorporated into the MAXX 2. The MAXX 2 completes GSP's thermal imaging product range, allowing GSP to focus a greater amount of resources on other product development efforts.

GSP continues in the development of advanced thermal imaging systems.

Increase the Range and Value of Aftermarket Supplies

Given the high-volume, highly consumable nature of thermal imaging foils, GSP intends to accelerate investment in new foils and promote the strengths of existing products. GSP has traditionally been a leader in the high-end cast vinyl market. Over the last few years, there has been a significant closing of the quality gap between high-performance cast vinyl material and lower-cost calendered vinyl. Going forward, GSP intends to focus on offering a more competitive vinyl range consisting of cast, calendered, digital (formulated for inkjet imaging systems), and specialty vinyl.

Increase Customer Satisfaction

GSP has made a renewed effort to improve operational performance and customer service. This has been evidenced by improvements in delivery of defect-free products and services, on-time delivery and response times to customer inquiries. The development of an online corrective action system for tracking and resolution of quality defects and complaints is also contributing to a greater level of customer service and responsiveness.

GSP's drive to lean manufacturing improvements, designed to eliminate waste in the production processes and lead to a substantial reduction in manufacturing space and enhanced manufacturing quality performance and defect reduction, continued in fiscal year 2003. In the third quarter of fiscal year 2003, GSP began to benefit from the Company's shared services initiative through GSO and on May 1, 2003, GSP's manufacturing operations were combined with GT's as planned.

12

In coordination with GSO, GSP is in the process of implementing a number of cost-reduction initiatives with respect to its sourcing, conversion (i.e., the process of cutting the jumbo rolls of cast and calendered vinyls sourced from third-party suppliers), and distribution of aftermarket materials.

With the integration of manufacturing operations across the Company's business segments, the risk of delays in the introduction of new products and heightened quality control issues may, at least in the short-term, be heightened. The GSO management team will endeavor to facilitate the product development efforts of each of the Company's three business segments, while seeking to enhance production capacity utilization, work flow process, and cost effectiveness.

At present, GSP sales are primarily to North America and Europe, which represented 89 percent and 9 percent of GSP's revenues in fiscal year 2003, respectively. High product prices and cost of output have been and remain issues outside of these geographic markets. However, as the Asian and Latin American markets increase their signage usage levels, there is an opportunity to further penetrate these markets if GSP can develop and introduce products at the right price points. If GSP decides to move ahead with an expansion of its geographic reach, GSP expects that it can be achieved through Spandex establishing a local presence.

GSP distributes all of its products, supplies, and services through 66 independent U.S., distributors, 20 independent international distributors, and Spandex. GSP's U.S. distributors cover 165 locations in the U.S. in 45 states and represent 35 percent of all distribution outlets for small- and medium-size sign shops. GSP's top 15 U.S. distributors generated 79 percent of fiscal year 2003 total U.S. revenues.  GSP has long-standing relationships (10 - 20 years) with over 60 percent of these distributors. These relationships demonstrate a strong commitment to GSP's existing and future product lines. However, because of the transition to inkjet imaging systems and lower-cost calendered vinyls, GSP's products have represented a declining percentage of key distributors' sales in recent years. The agreements with GSP's U.S. distributors are subject to renewal on an annual basis.

GSP sources critical materials from three primary suppliers. Cast vinyl is sourced from 3M, with whom GSP has a long-standing relationship. Thermal transfer foils are supplied by Kurz, a leading German provider of hot and cold roll foils for a wide range of industries. The thermal transfer printheads used in GSP's imaging systems are supplied by Kyocera, a Japanese company and worldwide leader in the manufacture of thermal heads for fax and bar code applications. No other supplier is significant.

13

There is no competitor in GSP's industry offering the comprehensive range of products and services offered by GSP. Nonetheless, GSP faces strong competition in almost all sub-segments of its business, particularly with respect to the sale of aftermarket materials.

The backlog of orders considered firm within the Sign Making and Specialty Graphics business segment (which includes GSP and Spandex) at April 30, 2003 and 2002 was $249,000 and $1,089,000, respectively. Substantially all of the backlog at April 30, 2003, is scheduled for delivery in fiscal year 2004.

GSP owns and has applications for a large number of patents in the United States and other countries, which expire from time to time, and cover many of its products and systems. While GSP considers such patents and patent applications as a group to be important to its operations, it does not consider that any patent or group of patents related to a specific product or system to be of such importance that the loss or expiration of any one or more patents would have a materially adverse effect on its overall business.

GSP's sales of equipment and aftermarket materials are impacted by seasonality in the sign industry, which historically slows in cold weather months.

As of April 30, 2003, GSP had 321 full-time employees including 166 in manufacturing and service, 57 in marketing and sales, 66 in research and development, and 32 in corporate operations and administration. GSP is not subject to any collective bargaining agreements. GSP believes its relationship with its employees is good. GSP's success depends to a significant extent on the performance of its management and other key personnel.

Spandex, based in Bristol, England, is the largest international distributor of equipment and aftermarket materials (sourced from GSP and other vendors) and value-added services to the sign making and specialty graphics industry. In fact, Spandex is the only international distributor of a comprehensive suite of design and manufacturing equipment and supplies; other distributors tend to specialize in either one or the other. Spandex's distribution network extends to 15 countries within Europe, as well as Canada, Australia, and New Zealand. It serves over 31,000 customers.

14

Spandex has come to be perceived by its customers as the premier provider of high-quality products supported by outstanding and responsive customer service. However, the end-use market has been evolving - - largely as a function of the transition toward inkjet imaging systems and lower-cost aftermarket consumables. Accordingly, Spandex must lower its cost structure to enhance its profitability, yet maintain the high level of customer service and responsiveness for which it is known.

During fiscal 2003, Spandex increased sourcing of equipment products from other manufacturers, which are sold on an original equipment manufacturer (OEM) basis. This was the result of the European market being ahead of the U.S. market in the transition to inkjet printers and digital materials and the lesser importance placed on sign durability in the European market.

Lower the Cost Platform

Spandex perceives that fundamental changes in the sign making and specialty graphics industry require it to lower its cost platform. In recent years, the softening of the European economy has tempered demand for capital equipment and associated aftermarket consumables. As disclosed above, there has been a steady transition to lower-priced aftermarket supplies. In light of these market conditions, Spandex's current focus is on achieving efficiencies in internal operations rather than seeking to achieve significant revenue growth.

Spandex is in the process of implementing the SAP enterprise resource planning system to optimize its supply chain, consolidate warehouses, optimize inventory, modernize operations and logistics, centralize purchasing, and leverage the company-wide shared services opportunities. The backbone of this strategy is the rollout of SAP at all of its locations and its full integration into the company-wide system. Implementation of SAP should streamline operating costs and allow for a further consolidation of warehouses beyond that already effected, such as the recently completed movement of all warehouse stock in France to Germany. The warehouse consolidation effort is part of a larger strategy to shift from a country-based to company-oriented warehouse system. Spandex is also working with GSO to coordinate Spandex's purchases of equipment and aftermarket supplies from major suppliers.

At the beginning of fiscal year 2003, Spandex had eighteen locations in Europe, seven facilities in Australia, two in New Zealand, and nine in Canada. During the past fiscal year, Spandex closed a number of low-return operations and consolidated some offices with the Company's Apparel and Flexible Materials business segment.

The above-described actions are intended to enhance Spandex's customer service and organizational responsiveness, which remains its highest priority. However, there are risks associated with these measures. The SAP implementation will involve a major investment of time by key personnel, which may contribute to a loss of sufficient focus on marketplace developments and customer service levels.

15

Introduce New Products

Spandex is aggressively pursuing strategic OEM agreements with influential equipment manufacturers to continue to provide the latest technology to its customers (which traditionally have been early adopters), to increase its product offerings and to increase its penetration of new and existing market segments. Product failures or less-than-promised performance from OEM sourced products represents a significant risk to Spandex's reputation and operating results.

Spandex believes that there will be a greater need for consultative selling as the increased pace of technology makes it difficult for end-users to keep abreast of the latest products and as the competitive landscape changes. Spandex is in the process of implementing internal processes (referred to as "Colour to the Core") to ensure that all staff who interact with customers receive appropriate and effective knowledge-based training to ensure new and existing products and services are sold and supported effectively. Spandex can add value through its product knowledge, particularly through calibration expertise - - that is, ensuring a proper matching of equipment, software, and aftermarket materials, which is a larger issue with inkjet imaging systems.

Capture Additional Aftermarket Materials Market Share

In conjunction with the appetite its customers have for new equipment, Spandex is aggressively pursuing a strategy to grow its market share of the associated aftermarket consumables stream, including digital materials. In fiscal year 2003, 84 percent of Spandex's revenues were derived from the sale of aftermarket materials and value-added services. As of the beginning of fiscal year 2004, Spandex intends to augment its new line of digital materials with self-adhesive vinyls of Ultramark, a wholly-owned manufacturer of calendered vinyl materials.

Spandex acts as a distributor, in some instances on an exclusive basis in certain territories, for a number of different equipment and aftermarket consumables suppliers. These suppliers place a high value on the reach of Spandex's distribution network and its "go to market" ability.

Many of these suppliers also employ direct sales forces which can lead to intense competitive situations. Spandex strives to maintain open lines of communication with its major suppliers, providing input to enable the delivery of best value to the end-use customer.

As the only provider of a comprehensive suite of equipment, materials, and services, Spandex's direct competition has historically been minimal. With vinyl materials having become more of a commodity product, and as price and delivery times are considered key purchase criteria, the competitive landscape has changed.  Spandex competes head-on with very large commodity distributors, including Buhrmann (of Holland), Igepa (of Germany) and Antalis (of France).

16

As of April 30, 2003, Spandex had 640 full-time employees (plus 60 part-time/temporary staff), including 304 in sales and marketing, 297 in manufacturing and service, and 99 in corporate operations and administration. Spandex is not subject to any collective bargaining agreements with its employees and believes that its relationship with employees is good. Spandex's success depends to a significant degree on the performance of its management and other key personnel.

Gerber Technology (GT), the Company's Apparel and Flexible Materials business segment, is a leading global developer of advanced computer-aided design (CAD) and computer-aided manufacturing (CAM) systems used in the design and production of apparel, furniture, transportation interiors, and technical textiles and composites. GT offers a comprehensive suite of products that can be used in an integrated platform throughout the entire design and manufacturing process, including:

• product data management (PDM) software, used to facilitate communication of measurement specifications, construction details, costing and bill of material information among apparel and other flexible materials' designers, raw materials suppliers, the makers of the materials, and retailers;

• conceptual design, CAD pattern-making and marking/nesting software;

• pattern design digitizers and plotters, used to draw designs on industrial width paper, to be placed on fabric or other materials in preparation for cutting;

• CAM material spreading and single- and multi-ply cutting systems;

• spare parts; and

• comprehensive support and maintenance services for its software and equipment.

The table below indicates the percentage of GT's fiscal year 2003 orders for new equipment and software derived from each of the principal industry segments which make use of GT's products:

Segment	% of FY 2003 Orders
Apparel	75%
Furniture	7%
Transportation interiors	7%
Technical textiles and composites	11%

GT has over 14,000 customers worldwide, including the market leaders in each of the four key industry segments it serves. GT's ten largest customers average less than 10 percent of sales in a given year; no single customer accounts for greater than 2 percent of GT's revenues.

17

In the last decade, the most significant development of relevance to GT's business has been the migration of flexible materials making/manufacturing operations from the U.S. to lower labor cost areas, such as China, India, Vietnam, Sri Lanka, Bangladesh, Mexico, Guatemala, and El Salvador. Western Europe has also experienced a dramatic shift of its apparel production to Eastern Europe, Asian, and Middle Eastern markets. Although technological developments have dramatically reduced design times and other aspects of the apparel and flexible materials production process, there have been no revolutionary improvements in sewing systems to join fabrics. As a result, the manufacture of garments, a labor intensive process, has shifted to lower labor cost locations. According to industry analysts, U.S. manufacturers now produce less than 30 percent of apparel sold in the U.S. In 2002, the U.S. imported over $68 billion in apparel products; U.S. production was roughly $28 billion, including production intended for export. The expectation is that over the next few years the remaining flexible materials manufacturers in the U.S. will limit their production to items requiring specialized fabric or shorter runs for just-in-time delivery to accommodate niche markets.

To date, there has been a slower rate of automation in the lower labor cost countries to which apparel and flexible materials production has migrated. There have been a number of reasons for this, the most important of which is the relatively large initial investment required. Another cost-related factor is the interruption of the production process necessitated by taking factory workers off-line to learn how to use automated systems. In addition, there has been a lack of integrated systems in these markets that address all aspects of apparel and flexible materials production.

The slower rate of automation has had a negative effect on GT's operating results over the past several years. This has been exacerbated by the weak economic conditions in developed markets, particularly the U.S., Europe, and Japan. At the same time, these markets have been characterized by discount retailers taking market share from traditional distribution channels, such as department stores and the specialty retailers, resulting in pricing and margin pressure on apparel manufacturers.

However, there are a number of developments that are expected to contribute positively to the adoption of automation in the next several years, including:

• the accession of China into the World Trade Organization (WTO);

• the agreement by members of the WTO to eliminate trade quota restrictions on textile and apparel imports as of January 1, 2005;

• the increasing degree to which apparel retailers are insisting on working with offshore contractors that have computerized pattern-making capabilities;

• a burgeoning "full package" phenomenon in the garment industry (i.e., offshore garment manufacturers handling more front-end design work); and

• the increase in domestic apparel consumption and production in emerging market countries.

These developments are expected to hasten manufacturing outsourcing, lead to consolidation among garment makers, and increase the demand for automated equipment as manufacturers seek to capture the savings in the cost of production (estimated at between 10-15 percent, including savings in fabric of 5-7 percent) to survive in an increasingly cost-competitive global market. GT is well-positioned to address these industry trends.

18

GT's products assist in and accelerate the coordination of product development, design, costing, manufacturing and merchandising, and reduce staffing needs and time-to-market.

Software

Product Data Management Software

Product data management (referred to in the industry as "PDM") software systems enable the communication of product details (such as measurement specifications and construction details) among suppliers, contractors and retailers; timely transmission of product information and raw materials; and the documentation of the product development process, production and quality requirements, manufacturing sources, prices and lead times. In light of the greater extent to which design and manufacturing processes are occurring at geographically separate locations (as well as the periodic disruption of international travel as a result of international conflicts, the SARS virus, etc.), PDM software offers what are expected to be increasingly important advantages: a reduction in the margin of contractor error and in delivery delays, increased product quality, and, perhaps most importantly, getting products to market more quickly - - of critical importance in the apparel industry with its relatively short fashion cycles.

Conceptual Design Software

GT's conceptual design software allows a designer to design and create apparel and other flexible materials products on a computer screen.

Fashion Studio, a leading conceptual design software system provides significant enhancements over the Artworks Studio products it replaces. Fashion Studio became part of GERBERsuite™ (GT's comprehensive, integrated suite of hardware and software products) in March 2003. Fashion Studio enables the designer to sketch or scan styles, and conceptualize potential designs using an array of electronic tools and color palettes. The software also enables the design of custom fabrics, with the designer seeing progress on a real-time basis. Prints can also be scanned into a computer and reworked easily. Fashion Studio allows users to create catalogues and perform other merchandising functions.

CAD Pattern-Making and Marking/Nesting Software

GT's pattern-making and marking/nesting software automates the design, pattern-making, pattern-grading (sizing), and marker-making functions. Pattern makers can use GT's AccuMark™ pattern design and grading software to draft and digitize new patterns and replicate existing garments. In addition, the software enables the automatic generation of markers that maximize the efficiency of material utilization, prior to the cutting process. AccuMark V8, GT's latest release of this software introduced in May 2003, enhances productivity, simplifies data conversion operations, and improves data reliability across networks. AccuMark V8 includes a new problem report and enhancement utility, making it easier for the user to suggest improvements, ask technical questions, or report software issues directly via the Internet. Currently more than 10,000 of GT's customers utilize the AccuMark software, with a total of 23,000 licenses across multiple industries. The degree of CAD system penetration is key in GT's industry, as historically over 95 percent of customers who buy a CAD system eventually buy material cutters from the same manufacturer.

19

Plotters

Once a design is complete, GT's plotters are used to draw designs on industrial width paper, to be placed on fabric or other materials in preparation for cutting. GT currently markets the Infinity™ family of thermal inkjet printers, designed in coordination with Hewlett-Packard, and a range of pen plotter systems.

CAM Material Spreading and Cutting Systems

GT's spreading and cutting products are designed to reduce previously labor intensive functions, material wasting, and assembly error.

GT's GERBERspreaders™ deliver tension-free spreading of materials at speeds of up to 100 meters per minute (110 yards per minute). Its GERBERsaver™ Flaw Management System is available as an option to help maximize material utilization during the spreading process.

GT's cutting systems enhance cutting room efficiency by accurately cutting parts out of single and multiple layers of flexible materials, such as textiles, leathers, vinyls, plastics, fiberglass, and advanced composites, quickly, efficiently, and with more precision than the traditional methods of hand or die cutting. Its single-ply GERBERcutters®, which are generally used in industrial applications, can quickly and accurately cut a wide variety of materials. Its medium- and high-ply GERBERcutters are designed to cut up to 7.2 centimeters (3 inches) of compressed fabric height. All of GT's GERBERcutters have "Cut Path Intelligence" to control cutting speed for maximum quality and output and "Zoned Vacuum Intelligence" to hold material firmly in place to improve cut quality and reduce overall power consumption. GT also markets its Taurus™ Leather Cutter, automated computer numerically controlled (CNC) cutting equipment with color hide scanning, flaw capture, and multiple nesting packages.

Virtually all of GT's business strategy, including its product development focus and efforts to increase internal operating efficiencies, has been and will continue to be influenced by the trend represented by the migration of flexible materials making and manufacturing operations to lower labor cost areas. GT views the emerging market countries in Asia, Latin America, and Eastern Europe as key growth drivers of its business. The manufacturing that has moved overseas still tends to be manual in nature. Moreover, as these countries become wealthier, their populations are expected to consume more apparel and automotive products.

20

Invest in Key Growth Markets

GT will continue to invest in areas of growing garment production such as China, India, Turkey, Eastern Europe, and Mexico. GT's management believes these markets will be the primary source of incremental revenue for the foreseeable future. Despite the growth in manufacturing outsourcing to emerging market countries and the continued increase in domestic apparel consumption and production, there has been a significant lag in the adoption of automation in these markets. This represents an opportunity for GT, particularly as competition intensifies within and among the lower labor cost garment manufacturing countries. Even in low labor cost areas, the ease with which garment manufacturing operations can be relocated from country to country contributes to the inevitability of automation, with its savings in fabric, elimination of production bottlenecks, and improvement in quality, to compete in a quota-free, global market.

China is the world's largest apparel producing nation and the fastest growing market. Estimates of current production approach $100 billion, with the expectation that this will exceed $150 billion by 2010. There are roughly 30,000 sizeable garment makers in China. In February 2003, GT announced the opening of a sales and service office in Ningbo, China. The opening of this office brings the total number of GT locations in China to 15 (including four independent agents), the most of any producer of CAD/CAM apparel manufacturing products. Ningbo is a key city for apparel manufacturing, where GT currently serves many prominent customers.  GT has more than 1,250 customers operating nearly 5,000 systems and workstations in Greater China.

GT has identified India, where it has approximately 300 customers, as another important growth market. The government of India recently removed all quantitative restraints on the export of apparel and textiles, and announced additional concessions to help these industries compete globally. A $6 billion industry today, India's garment exports are expected to grow to $25 billion by 2010. For the past 12 years, GT has had a presence in India through its agent, India Industrial Garment Machines Pvt Ltd., which has nine sales and service offices around the county. In January 2003, GT opened a regional headquarters in Bangalore, India, to provide sales, consulting, and technical support operations in Sri Lanka, Bangladesh, Pakistan, the United Arab Emirates, Kenya, Mauritius, Madagascar, and South Africa. Apparel exports from South West Asia, the Middle East, and sub-Saharan Africa currently exceed $20 billion. This figure is expected to double over the next few years, fueled by the el imination of quotas on textile and apparel imports as of January 1, 2005.

In Mexico, GT increased its total number of offices to seven (including five independent agents) in the past fiscal year. It also expanded its customer service operations in Central America with the opening of a full-service center in Honduras. GT provides approximately 60 percent of all CAD/CAM systems installed in Mexico and more than 60 percent of the systems in Central America.

GT's management perceives that the opportunities in the emerging market countries are not limited to the developments in their apparel industries. The manufacture of transportation interiors is becoming more significant in these markets, as automobile companies, in particular, establish local manufacturing operations to address domestic growth opportunities. Upholstered fabric and leather furniture are indicating a trend to cut-and-sewn kits being produced in these markets for export to the developed countries for final assembly. Composites and technical textiles also show growth in emerging markets as companies license foreign manufacturers to comply with local content requirements. Smaller companies in these market segments in the developed countries are increasingly able to afford automation.

21

Optimize the Product Portfolio

GT continues to focus on providing leading edge technology as an integral part of providing automation solutions to its customers. While the majority of products offered within GERBERsuite have been designed and developed by GT, integration, marketing, and distribution alliances with other world-class suppliers allow the delivery of what, for GT, are niche products that complement GT's core offerings and enhance its provision of complete end-to-end solutions to GT's customers.

In line with GT's strategy of investing in key growth markets, GT is developing a number of products for specific regional markets, complementing those of a more globally-oriented nature. Early in the past fiscal year, GT launched several new products, including Accumark AE (a new edition of GT's AccuMark software designed and launched specifically for the Chinese and Indian markets and now available worldwide) and GT 1000 (a new GERBERcutter for the Japanese made-to-measure tailored apparel market). GT's strategy is to pursue development of simpler, more intuitive products with lower price points targeted for the emerging market countries. This is critical given the observed growth of low-end competitive products in China, India, and Eastern Europe, particularly CAD systems. At present, these low-end products tend to be local in their distribution, but are expected to have a wider geographic distribution in the foreseeable future.

With the acceleration in the pace of introduction of new products and upgrades in GT's industry, GT is turning to Internet-based and other solutions to enhance the provisions of customer training for its new products.

Enhance Internal Operating Efficiency

GT has essentially completed the restructuring and re-engineering of its business, which began in fiscal year 2001. To date, GT has focused on streamlining its operations along functional lines to deliver better value to customers. As part of this process, GT has consolidated its manufacturing operations, centralized backroom functions, consolidated its sales management team and repositioned its sales resources worldwide (to grow its presence in emerging markets), and created a global product management function.

In fiscal year 2001, GT combined its pre- and post-sale customer support requirements into a single business unit responsible for top and bottom line growth. This served as the foundation for GT's comprehensive customer support initiative, referred to as "Customer First," implemented in fiscal year 2002. This initiative now includes, as of fiscal year 2003, GERBERnet™. GERBERnet is a new customer service portal which provides Internet-based tools to improve productivity. GERBERnet includes software updates and downloads, online parts ordering, a technical information library, and previously-owned equipment auction site.

In fiscal year 2003, GT made significant operational improvements by integrating manufacturing, customer service and information technology operations into GSO, as part of the company-wide shared services initiative.

22

GT's products are sold through its worldwide direct distribution and service network (which accounted for roughly 80 percent of fiscal year 2003 revenues) and through offices, independent agents, and distributors in over 115 countries. GT's management is aware that employing a direct sales model in certain regions would likely increase its overall direct revenue, but believes that GT's long-standing agent and distributor network, staffed with knowledgeable individuals who speak the local language and understand the particular challenges and opportunities of their markets, represents an asset, from the perspective of GT and its customers.

GT purchases materials, such as computers, computer peripherals, electronic parts, and equipment from numerous suppliers. Many of these materials are incorporated directly into GT's manufactured products, while others require additional processing. In some cases, GT uses only one source of supply for certain materials, but to date GT has not experienced significant difficulties in obtaining timely deliveries. Increased demand for these materials or future unavailability could result in production delays that might adversely affect GT's business. GT's management believes that, if required, it could develop alternative sources of supply for the materials it uses. In the near term, GT's management does not foresee that the unavailability of materials, components, or supplies from any particular supplier would have any material adverse effect on its overall business.

GT is the leading worldwide supplier to the apparel and flexible materials industries of computer-controlled material cutting systems, PDM and pattern-making software, and grading and nesting software.  There is competition in each of these markets and certain competing companies from Europe and Japan are significant suppliers in their respective regions. However, only one European company approaches GT's range of products and breadth of distribution network such as to be able to compete on a truly worldwide basis and support key global accounts as they migrate production and sourcing around the world.

The backlog of orders considered firm within the Apparel and Flexible Materials business segment at April 30, 2003 and 2002 was $26,205,000 and $27,284,000, respectively. Substantially all of the backlog at April 30, 2003 (the majority of which stems from service contracts) is scheduled for delivery in fiscal year 2004.

GT owns and has applications pending for a large number of patents in the United States and other countries, which expire from time to time, and cover many of its products and systems. While GT considers such patents and patent applications as a group to be important to its operations, it does not consider that any patent or group of patents related to a specific product or system to be of such importance that the loss or expiration of any one or more patents would have a materially adverse effect on its overall business.

23

GT is not directly subject to government regulation that is material to its business. However, its business has been and will continue to be affected by trade laws and regulations pertaining to the apparel and textile industries.

As noted above, members of the World Trade Organization (WTO) have agreed to eliminate quota restrictions on textile and apparel imports as of January 1, 2005. However, a special textile safeguard was included as part of China's accession to the WTO which allows other WTO members to re-impose quotas on Chinese imports through 2008. The U.S. Department of Commerce recently published procedures the U.S. will use to implement this safeguard. These procedures differ from other major U.S. trade remedies in that they will allow component producers (i.e., textile companies) to file petitions requesting quota restrictions on a finished product (such as apparel). Other major trade remedies allow only the producer of a "like product" to petition for relief. Therefore, it is likely that the textile companies will petition for import relief even if new quota restrictions are not supported by the apparel producers, which have been increasingly moving their operations offshore. The major trade association representing textile companies, the American Textiles Manufacturers Institute, has indicated that it will seek quotas on a number of apparel and luggage products for which quotas have already been phased out.

U.S. textile and apparel companies have focused in recent years on structuring the quota and tariff benefits of regional trade arrangements (such as the North American Free Trade Agreement and the Caribbean Basin Initiative) to favor production using U.S. components. For much of the past decade, these arrangements resulted in Mexico and the Caribbean nations being the top apparel suppliers to the U.S. market, despite lower labor costs in Asia. However, as the quota restrictions are eliminated, Asian countries (and China in particular) can be expected to take away market share from the Western Hemisphere. In the short term, this has resulted in an increased number of trade cases against Chinese imports. In the longer term, a level of support may be built within the WTO for negotiation of some sort of quota regime to replace the current regime. It is not possible to predict what effect, if any, these regulatory developments may have on GT's business.

GT operates through 15 wholly-owned subsidiaries and more than 70 long-standing independent representatives, agents, and distributors. As of April 30, 2003, GT had approximately 800 full-time employees. With the exception of its Ikast, Denmark facility, GT is not subject to any collective bargaining agreements and believes that its relationship with employees is good. GT's success depends to a considerable degree on the performance of its management and other key personnel.

24

Gerber Coburn Optical, Inc. (GC), the Company's Ophthalmic Lens Processing operating segment, is a global market leader in its roughly $600 million industry. GC's equipment, software, consumables, systems, and accessories are utilized in all aspects of processing both single- and multi-vision prescription eyewear. GC's product offerings include the components required to process an entire prescription, including computerized prescription entry, lens blocking and surfacing, lens fining and polishing, lens cleaning and scratch-resistant coating, lens edging, and lens inspection equipment. The individual systems can be used with other manufacturers' equipment or can be combined in a complete system managed by GC's processing software. GC also provides maintenance services for a substantial portion of the systems it sells and derives additional revenues from the sale and distribution of spare parts and aftermarket consumables such as surfacing and fining pads, tinting chemicals, scratc h-resistant coatings, and miscellaneous tools. GC sources consumables from third-party suppliers and performs certain value-added operations prior to sale.

The worldwide market for eyewear and eye care goods is estimated to be more than $50 billion currently, with the U.S. representing the largest market at more than $20 billion. The percentage of eyeglass-wearers differs markedly in the various geographic areas. In the U.S., it is roughly 60 percent; in Europe (including Central and Eastern Europe), 37 percent; and in other areas of the world, 17 percent. Historically, outside of North America, Europe, and Japan there has been little demand for GC's products due to the absence of sufficient eye care infrastructure, including eye care practitioners prescribing complex lenses. Lenses that need only one correction, for nearsightedness or farsightedness, typically do not need to be processed on equipment such as that offered by GC, with the exception of GC's edging equipment. However, as worldwide eye care infrastructure improves, these other geographic markets represent a growing base of consumers who are expected to increasingly purch ase more sophisticated eyewear.

GC's customer base consists of:

• wholesale optical lens production laboratories;

• retail eyewear chains and central processing laboratories; and

• independent eye care practitioners - ophthalmologists, optometrists, and opticians (the 3 Os) who perform their own in-office lens processing.

The composition of GC's customer base varies in the different geographic markets. The European and Japanese markets are similar to the U.S. in that there is a combination of optical retailers (although not as prevalent as in the U.S.), wholesale laboratories, and independent eye doctors. However, the central processing laboratories in these markets are primarily large laboratories owned by the lens manufacturers. In recent years, the U.S. ophthalmic lens industry has been characterized by acquisition and consolidation of independent wholesale laboratories. Leading lens manufacturers such as Essilor International, Hoya, and SOLA International, seeking to enhance their distribution systems to eye care professionals, have been acquiring previously independent wholesale laboratories. GC's historic strength has been with the 3 Os and the smaller independent wholesale laboratories.

25

According to Essilor International, the worldwide ophthalmic lens market has a long-term growth rate of about 4 percent per year, comprised of both volume growth and product-mix growth. The volume growth is being fueled by the aging of the population, unfulfilled needs (particularly outside the U.S. and Western Europe) and rising living standards. The over-45 population is expected to represent 31 percent of the total population by the year 2025. At 45, presbyopia (a visual condition characterized by loss of elasticity of the lens of the eye causing defective accommodation and inability to focus sharply for near vision) is inevitable. Indeed, nearly 95 percent of people over the age of 45 require some form of corrective eyewear. The product-mix growth reflects an increased consumer interest in premium lenses, such as polycarbonate (shatter resistant) lenses and high-index materials for making thinner, even lighter and more transparent lenses, with greater ultraviolet (UV) protecti on, shock and anti-scratch resistance, and progressive lenses (i.e., no line bifocals).

To date, advances in corrective laser surgery have not dampened the demand for eyeglasses. The number of LASIK (Laser in-situ keratomileusis) procedures is reported to have soared in the 1990's (peaking in 2000 at 1.4 million), but contracted by 8 percent in the 2001-2002 period due to consumer fear and evidence of side effects. The number of vision correction surgery patients in 2001 represented 0.8 percent of the 169 million people with refractive vision conditions in the U.S. Wavefront technology, a powerful diagnostic technology, offers the promise of giving eye care professionals a new window into the imperfections of the human eye, enabling the customization of laser treatments to yield unparalleled results. However, GC's management does not believe LASIK surgery presently poses a threat to its business for several reasons:

An estimated 90 percent of the current world market for corrective lenses is a replacement market, with an average 3-year frequency cycle. However, this cycle is very much dependent on overall economic conditions. When general economic conditions are weak, eyeglass wearers tend to postpone visits to their eye care professionals. This can adversely affect prescription volumes for spectacle lens eyewear and, in turn, sales of GC's capital equipment products and aftermarket consumables.

26

GC's products reduce the time and steps needed to process complex lens prescriptions. The benefits of GC's comprehensive solutions include:

• a reduction of production steps;
• lower manufacturing costs per square foot;
• a reduction in staffing needs;
• minimal optical knowledge required by laboratory staff;
• a clean work environment;
• a reduction in lens and equipment breakage;
• improved lens quality;
• a reduction in staff training cycles;
• a reduction in operating errors; and
• elimination of toxic metals and coolants.

Software

GC's software is the backbone of GC's comprehensive solutions, especially for small laboratories. From simple remote tracing with GC's Innovations™ Lite software to a more comprehensive software package such as its Innovations Lab software, GC can provide any level of software necessary to run an optical laboratory. GC provides on-site software installation, training, and support.

Prescription lenses are generally processed in two ways. One method entails the use of a "stock lens," with the patient's prescription already existing on the lens, that is finish "blocked." Blocking is a process that orients the lens curve to match the prescription. A block, a tool that is used to hold the lens during processing, is then attached to the lens. This blocked lens is then "finished" or edged to match the shape of the frames. The shape of the frame has been "traced" in a tracer which digitizes the measurements and then communicates them to an edger.

The other method starts with a semi-finished stock lens. The lens is surface blocked and has a curve "generated" on the backside to match the desired prescription. This curve is cut into the lens by a generator. A generator is a computer numerically controlled (CNC) machine that uses logarithms to calculate the tool path required to generate the curve. This process can create single vision or multi-focal lenses. The lens generating process creates a lens that is not optically clear. This "cut" lens is put through a fining and polishing process. The fining and polishing process uses abrasive pads and polish to smooth cutting marks out of the lens. The lens is then de-blocked and ready for coating or finishing.

GC's equipment offerings consist of surfacing equipment (i.e., blockers and generators), finers and polishers, finishing equipment (i.e., tracers and edgers), cleaning and coating equipment, and lens inspection equipment.

Surfacing Equipment

GC offers a range of surfacing equipment which uses computer control to create precise curves on the lenses. GC's lens surface generator offerings include products for high-, mid-, and low-volume manufacturing environments as well as a generator for glass and other lens materials. GC also offers blocking products designed for high throughput manufacturing environments. In addition, GC sells its Gemini™ lens processing system, comprised of two primary components, the Hexapod and the Clarifyer.  Gemini eliminates hard laps and polish from the lens surfacing process and produces a more exact patient prescription.

27

Finers and Polishers

The fining process involves the use of abrasive pads to smooth cutting marks out of the lens; polishing involves the use of a liquid slurry to polish the lens to an optically clear finish. Through the use of microprocessor programming, GC's systems automatically select the best processing times and pressures for all lens materials including CR39, polycarbonate, high-index, and glass. The degree of precision is supported by a mechanical design providing optimized fining and polishing orbits, and durability for a long production life. GC's current product offerings address the needs of customers in each of its market segments.

GC's environmentally-friendly, scratch-resistant coating process eliminates waste and reduces operator exposure to coating materials.

GC sources most of its lens finishing technology from Essilor International. GC's finishing products are designed to meet the needs of ophthalmic laboratories of all sizes and production levels. GC offers a wide range of finishing equipment.

Lens inspection equipment is used to test the quality and accuracy of the lenses produce.

Full Service Laboratory Equipment

GC also sells a complete ophthalmic lens processing system, Premier Lab™. Premier Lab is a compact, full service laboratory for processing CR39, high-index, and polycarbonate lenses. A Premier Lab includes a frame tracer, a blocking system, a surface generator, a finer/polisher, a coating system, and a finishing system.

GC's current business strategy reflects an awareness of the need to continuously update its product offerings to keep up with technological advances that further streamline ophthalmic lens processing (e.g., advanced surfacing technologies such as cut-and-coat and cut-and-edge, new forms of lens casting and laminating) and ensure that its products are aligned with evolving market needs. This is absolutely critical to GC in maintaining its brand name and reputation for delivering innovative, high-quality products in a timely manner. GC also plans to continue to develop strategic alliances. In addition, certain elements of its business strategy and planning are prompted by key industry trends and developments briefly described in the "Overview" above. The principal components of GC's strategy are as follows:

28

Strengthen/Broaden Product Offerings

GC has identified market opportunities in a number of areas (including larger optical laboratories which have become increasingly important as a result of industry consolidation) and is moving quickly to capitalize on these through a combination of internal product development, strategic alliances, and distribution arrangements with third party suppliers and manufacturers to supplement GC's offerings.

GC's internal product development process is a multi-phase process involving consultation with lens manufacturers, end-users, and the engagement of outside consultants. Information from this process and market intelligence is used for purposes of better assessing market opportunities and product risks and to project the cost of production feasibility studies. It is not uncommon for certain new product development initiatives to be discontinued at various stages of the product development process. In addition, there is the ever-present risk of the introduction of new products by competitors that cause existing products or products under development to be less attractive in the market.

Although GC's historic focus has been on the smaller optical laboratories and the 3 Os, GC is moving aggressively to make further inroads with the large laboratory and high volume leading lens companies in light of the consolidation that is occurring in the industry and the increase in market share captured by the larger retail chains. Critical to GC's success in this area will be enhancing its product line with new products geared towards these segments of the market. GC's current product development efforts targeted toward the large laboratories and high volume production facilities include a full range of products for surfacing and coating lenses.

GC's greater focus on the larger laboratories comes at a time when the major lens manufacturers are implementing centralized purchasing initiatives and dealing with fewer third-party equipment and aftermarket materials suppliers in an effort to ensure quality control and consistency. For GC, this represents both a challenge and an opportunity. GC has focused on a leading lens company as a key to increasing its market share in the larger wholesale laboratory market segment. This relationship is intended to enable GC to become a major supplier and to leverage GC's current relationship as a distributor for this leading lens company.

GC is also renewing its commitment to the 3 Os and smaller laboratories by supplementing and strengthening its core product lines to incorporate or introduce the latest technological innovations into products to be sold at attractive price points.

Expand Geographically into Emerging Markets

The emerging market countries in Eastern Europe, Asia, and Latin America represent an important opportunity for GC. These markets are only beginning to develop the infrastructure to perform sophisticated eye exams of a mature middle class market. As such, doctors typically dispense single vision glasses that utilize a glass lens rather than the more advanced multi-focal polycarbonate and high-index plastic lenses. As these markets develop, GC believes that doctors will begin to prescribe complex prescriptions that will require processing and that eyeglass wearers will demand more sophisticated amenities such as polycarbonate lenses and anti-reflective coatings, as well as multi-focal lenses that require surfacing.

29

GC is currently working on developing lower cost products for emerging markets. Because GC's equipment employs sophisticated software that automates and integrates the lens processing process, it can be operated by laboratory staff having relatively minimal optical knowledge compared to the training required to operate the less sophisticated equipment traditionally used. GC believes that if it can successfully develop less costly products, it will be well-positioned to make significant inroads into growing and increasingly sophisticated emerging markets in Eastern Europe, Asia, and Latin America.

Grow GC's Consumables and Finishing Businesses

GC offers a wide range of lens processing supplies for every aspect of lens manufacturing (estimated by GC as an $100 million business worldwide), including surfacing pads, fining pads, cutters, and blocks. Given GC's large installed base of products (over 7,000 customers in roughly 75 countries), GC believes there is a significant opportunity to grow its aftermarket consumables business through expanded product offerings.

GC is also seeking to capture greater market share with its emerging finishing business through expanded product offerings and increased geographic reach. The estimated $260 million finishing sector is the largest segment of the $600 million ophthalmic lens processing industry. The Espirit edger was added to the line in fiscal year 2003 and GC has acquired worldwide rights from Essilor for distribution of this product.

Enhance Internal Operating Efficiency

GC is leveraging its freight, logistics, and supply chain by participating in the company-wide shared services initiative. GC is also in the process of implementing the Company's SAP enterprise resource planning system, targeting completion of this process by November 2003. These efforts will help GC in its goal of reducing its cost structure. These efforts should result in working capital and headcount reductions.

GC has implemented a quality control initiative, with the primary objectives being to achieve higher levels of customer satisfaction and more clearly establish GC as the market leader in both the design and delivery of high quality lens processing systems. GC recognizes that the two factors of quality and on-time delivery are critical to customer satisfaction. In an effort to continuously make product improvements, GC increased the volume of post-installation calls to customers during the past fiscal year and relayed the feedback to its manufacturing plants. GC's management was also instrumental in the development of a company-wide focus on the "3 Cs" - caring, competence, and commitment - as part of it's and the Company's efforts to enhance the level of customer service. For GC, caring means anticipating customer needs, whether or not known by the customer. Competence means that GC's sales and other representatives who have direct customer contact know GC's products and can provide existing and prospective customers with insight into product selection and use. Commitment means completing what is started, delivering the best value and otherwise doing the things necessary to earn customers' loyalty. GC's management is passionate about ensuring that not a single customer has a bad experience with GC's products.

30

GC primarily distributes products directly and through independent agents in South America. GC participates in industry tradeshows in the U.S. and Europe, which are a significant source of new sales.

GC is the largest worldwide supplier of ophthalmic lens processing systems. GC believes that the combination of its technological leadership and strategic alliances and distribution arrangements has enabled it to become the largest supplier of computerized surface blocking and lens generating systems to the smaller laboratory segment. Loh and Schneider are believed to be the largest suppliers to the larger laboratory segment. GC also has a number two market share in fining and polishing equipment, coating equipment, and aftermarket materials, with different competitors having leading market shares in each of these sub-segments of the market.

The backlog of orders considered firm within the Ophthalmic Lens Processing business segment at April 30, 2003 and 2002 was $3,258,000 and $4,276,000, respectively. Substantially all of the backlog at April 30, 2003, is scheduled for delivery in fiscal year 2004.

GC owns and has applications pending for a large number of patents in the United States and other countries, which expire from time to time, and cover many of its products and systems. In fiscal year 2003, GC patented a highly innovative new approach to lens blocking, which has applications in both surfacing and finishing applications. While GC considers such patents and patent applications to collectively be important to its operations, it does not consider that any patent or group of them related to a specific product or system to be of such importance that the loss or expiration of any one or more of them would have a materially adverse effect on its overall business.

As of April 30, 2003, GC had 337 full-time employees, including 206 in manufacturing, 54 in marketing and sales, 37 in research and development, and 40 in corporate operations and administration. GC is not subject to any collective bargaining agreements and believes that its relationship with employees is good. GC's success depends to a significant extent upon the performance of its management and other key personnel.

31

Each of our business segments operate in highly competitive industries that are subject to significant and rapid technological change. Our management believes that the Company's ability to develop or acquire new technologies is crucial to our success. Each of our business segments is continually engaged in product development and improvement programs to maintain and improve their competitive positions. We cannot guarantee that we will be successful in enhancing existing products or developing or acquiring new products and technologies that will receive desired or expected levels of market acceptance. In addition, new products must respond to technological changes and evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, or if such products do not achieve market acceptance, our operating results could be adversely affected.

New product introductions in future periods may also impact the sales of existing products. As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers' ordering patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet customers' demands.

Our efforts to lower the cost platform of each of our business segments may, at least in the short-term, create a greater risk of delays in product development and introduction. One of the primary challenges for the GSO organization will be responding to the needs of our businesses - - and their distinct product development efforts, as influenced by changing market developments - - in a manner that is essentially invisible to each of the segments' customers.

For Gerber Scientific Products (GSP), delays in product development and introduction could be quite damaging to its business. GSP is currently endeavoring to respond, with a fairly high level of urgency, to the continuing transition of sign shops to lower-cost inkjet imaging systems, calendered vinyls, and digital media systems. GSP is also currently seeking to shorten its product development cycle to match that of a number of its principal competitors. Delays in product introductions during the 12-18 months that we anticipate it may take to achieve GSO's objectives may lead to GSP's loss of one or more key U.S. distributors and a loss of market share that may be difficult to recapture.

For Spandex, warehouse consolidation initiatives represent a significant risk. Warehouse consolidations reduce Spandex's number of operations in order to obtain operating efficiencies. Loss of market focus, product availability, or shipping delays caused by fewer warehouses, particularly during the transition period, could negatively impact revenues. Additionally, the implementation of SAP will involve a major investment of time by key personnel. This may result in a loss of market focus which could, in turn, lead to a drop-off in revenues. As a distributor, speed of delivery to end-use customers is critical.  Loss in Spandex's organizational responsiveness could result in damaged relationships with suppliers and end-use customers, along with declining operating results.

32

For Gerber Technology (GT), delays in the development of low cost products designed for markets to which apparel and furniture production is migrating, particularly China, India, and Eastern Europe, may make it difficult to penetrate these markets profitably. Local competitors have developed products for these markets and a delay in GT's ability to respond by introducing products of its own may result in a loss of market share or affect GT's ability to penetrate these markets in accordance with its strategy.

For Gerber Coburn (GC), delays in product development could disrupt the segment's current plans to capture increased business from the higher-volume wholesale optical lens production laboratories and make it more difficult to respond on a timely basis to competitors' product introductions. In terms of quality control issues, GC is currently considering the outsourcing of certain of its machine shop operations. GC would endeavor to utilize the resources and experience of the GSO organization to mitigate the risks associated with outsourcing operations, including a possible disruption in the flow of parts.

• Our product development efforts generally have longer-term timetables, on occasion necessitating entering into original equipment manufacturer (OEM) arrangements to augment our product lines.

We are continually in the process of developing new and enhanced products in an effort to develop incremental sales and improve gross margins. The apparel and flexible materials, sign making and specialty graphics, and ophthalmic lens processing industries are highly competitive and are subject to significant and rapid technological change. There are periods of time when revenue growth depends on outsourcing arrangements with original equipment manufacturers (OEM) to augment product lines. Occasionally, we take on responsibility for additional manufacturing and supply chain management when we distribute products on an OEM basis. If OEMs decide to perform these functions internally or use other providers for these services, our revenue growth may be limited. Further, the gross margins associated with sales of OEM products tend to be lower than those associated with internally developed products.

• Our businesses could suffer as a result of a manufacturer's or supplier's inability to supply us with parts or aftermarket consumables on time and to our specifications.

Certain components of our hardware products, as well as certain aftermarket consumables, are manufactured to our specifications by both domestic and international manufacturers or suppliers. The inability of a manufacturer or supplier to ship orders of such components and supplies in a timely manner or to meet our quality standards could cause us to miss delivery date requirements of our customers for those items, which could result in the cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have an adverse effect on our operating results and financial condition.

33

• Fluctuations in currency exchange rates may cause our financial results to decline.

Our export sales have generally been made in U.S. dollars, except for certain products and territories (principally Western Europe), where our sales are in local currencies. The table below reflects the proportion of our revenues generated by the international operations of each of our principal business segments in fiscal 2003 and 2002:

Business Segment	% of Revenues International Operations Fiscal Year 2003	% of Revenues International Operations Fiscal Year 2002
Sign Making and Specialty Graphics	74.3%	71.5%
Apparel and Flexible Materials	68.1%	74.2%
Ophthalmic Lens Processing	28.8%	29.0%

An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. We have a program to hedge our currency exposure associated with anticipated foreign currency cash flows. There can be no assurance that such hedging strategy will be successful or that currency exchange rate fluctuations will not have a material adverse effect on our operating results.

• We are subject to risks as a result of international operations.

Operations outside the U.S. represent a significant portion of our businesses, as reflected in the tabular breakdown of fiscal year 2003 and 2002 revenues in the immediately preceding risk factor. We expect revenue from international markets will continue to represent a significant portion of our total revenues. It is costly to maintain international facilities and operations, promote our brand names internationally, and develop localized systems and support centers. Some of the risks that we face as a result of our international presence include:

• general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships;
• imposition of or increases in currency exchange controls;
• potential inflation in the applicable foreign economies;
• imposition of or increases in import duties and other tariffs on our products; and
• imposition of or increases in foreign taxation of our earnings and withholding on payments received by us from our subsidiaries.

34

Part of our strategy over the last few years has been to expand our worldwide market share and decrease costs through strengthening our international distribution network and, to some extent, sourcing materials locally. We continue to consider the location of production facilities closer to end-use customers in international markets. This strategy may heighten the potential impact of certain of the above-cited risks.

• Our businesses are subject to fluctuations in operating results due to general economic conditions, specific economic conditions in our industries, and other external forces.

Our businesses and operations are affected by:

• changes in general economic conditions and specific conditions in our industries (which can result in the deferral or reduction of purchases by end-use customers);
• changes in the level of global corporate spending on our technologies related to such economic conditions;
• the effects of terrorist activity and international conflicts, which have led (and could in the future lead) to business interruptions and difficulty in forecasting;
• the size, timing, and cancellation of significant orders (which can be non-recurring);
• product configuration and mix;
• market acceptance of new products and product enhancements;
• announcements, introductions, and transitions of new products by us or our competitors;
• deferrals of customer orders in anticipation of new products or product enhancements introduced by us or our competitors;
• changes in pricing in response to competitive pricing actions;
• supply constraints;
• the level of expenditures on research and development and sales and marketing programs;
• our ability to achieve targeted cost reductions; and
• excess facilities.

At various times in recent years, including fiscal years 2001-2003, markets for one or more of our main products have been characterized by falling prices, unstable exchange rates, weaker global demand, rising inventory, and shifting production bases. In this type of environment, our ability to maintain historic levels of profitability may depend to a great degree on our ability to reduce costs (including the costs of sourced materials) and manage the supply chain, increase productivity levels, reposition ourselves within higher value-added market segments, and establish a production presence in geographic areas outside the U.S.

35

Management believes that diversification of our businesses across multiple industries and geographically has helped, and should continue to help, limit the effect of adverse market conditions in any one industry or the economy of any one country or region on our consolidated results. Nonetheless, there can be no assurance that the effect of adverse conditions in one or more industries or regions will be limited or offset in the future.

• Our results are subject to fluctuations in costs of purchased finished goods, components, and aftermarket consumables.

We depend on finished equipment, component parts, and other materials from our suppliers to manufacture and distribute the systems we sell. Each of our business segments also relies on suppliers for process consumables and other materials it sells directly to its distribution networks. Fluctuations in the prices of such equipment, components, and materials, whether caused by market demand, shortages, currency exchange rates, or other factors, could adversely affect our cost basis for the production, delivery and/or maintenance of its products and, in turn, have an adverse effect on our operating results and financial condition.

• Our current and future strategic alliances may not produce the sales or profit expectations projected by management.

Each of our business segments is currently engaged in and/or seeking strategic partnerships and business alliances with various entities in related industries. These alliances may not yield the sales or profits projected by management or recoup the costs and resources expended to develop them.  Further, if we fail to maintain these strategic alliances or if alliance members engage in activity detrimental to us (such as competing directly with us in our target markets), our reputation, market share, and operating results may suffer.

• The terms of our primary credit facilities include financial and operating covenants with which we need to maintain compliance.

We entered into new primary credit facilities in May 2003, consisting of a $45 million asset-based, multi-currency revolving credit facility and two $32.5 million term loans. These credit facilities contain financial and operating covenants. These covenants include, among others, restrictions on our ability to:

• declare or pay dividends or any other distributions to our shareholders;
• redeem or repurchase capital stock;
• incur certain additional debt;
• grant liens on our assets;
• make certain payments and investments;
• sell or otherwise dispose of assets;
• acquire or be acquired by other entities;
• modify our organizational documents; and
• change our lines of business.

36

If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share and our operating results may suffer. This could have a material adverse effect on the market value and marketability of our common stock.

We must also meet certain financial ratios and tests under these credit facilities. If we do not comply with the obligations under the credit facilities, this may trigger an event of default which, if not waived or cured, could result in borrowed amounts becoming due and payable. In addition, our indebtedness and obligations under the credit facilities are secured by substantially all of the assets of the Company and its principal subsidiaries. An event of default would permit the lenders to proceed directly against those assets. While we are currently in compliance with these financial covenants, operating results below that internally forecasted may impact our future compliance with the covenants and could adversely affect our business.

• We face intense competition in each of our principal business segments.

Although we are a pioneer and/or a leading player in each of our principal business segments, competition has grown in recent years in each market segment in which we operate. Unless our business units can effectively implement their respective strategies to lower the cost platform, enhance the rate of product development, stimulate revenue growth, expand the geographic reach of operations, and leverage their brand name and distribution networks, we may experience a decline in operating results and a deterioration of our financial condition.

• The SEC's Enforcement Division continues to conduct an investigation of the Company, the outcome of which is uncertain.

In September 2000, the Division of Enforcement of the Securities and Exchange Commission initiated an investigation relating to possible insider trading activity with respect to the Company's securities. In October 2001, the SEC expanded its investigation to encompass the Company's inventory and reserve accounting practices and related disclosures. The Enforcement staff has since asked for information and documents relating to various accounting and other matters (including matters that have been addressed through the restatement of our prior annual financial statements for fiscal years 2001 and 2002). In addition, the staff has taken the testimony of current