DT INDUSTRIES INC - 10-K Annual Report

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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23400
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DT INDUSTRIES, INC.
[Exact name of registrant as specified in its charter]

DELAWARE 44-0537828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

907 WEST FIFTH STREET 45407
DAYTON, OH (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(937) 586-5600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.01 per share
Series A Cumulative Preferred Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of each class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

As of September 3, 2002, the aggregate market value of the voting common
stock held by non-affiliates of the registrant was $78,776,589 (based on the
closing sales price, on such date, of $3.39 per share).

As of September 3, 2002, there were 23,647,932 shares of common stock, $.01 par
value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE

None.
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DT INDUSTRIES, INC.

INDEX TO FORM 10-K

ii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information contained in this Annual Report, including, without
limitation, the information appearing under the captions "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," includes forward-looking statements made pursuant to
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. These statements comprising all statements herein that are not
historical reflect our current expectations and projections about our future
results, performance, liquidity, financial condition, prospects and
opportunities and are based upon information currently available to us and our
interpretation of what we believe to be significant factors affecting our
businesses, including many assumptions regarding future events. References to
the words "opportunities", "growth potential", "objectives", "goals", "will",
"anticipate", "believe", "intend", "estimate", "expect", "should", and similar
expressions used herein indicate such forward-looking statements. Our actual
results, performance, liquidity, financial condition, prospects and
opportunities could differ materially from those expressed in, or implied by,
these forward-looking statements as a result of various risks, uncertainties and
other factors, including the amount and availability of, and restrictions and
covenants relating to, our indebtedness under our senior credit facility, our
ability to achieve anticipated cost savings from our corporate restructuring,
our ability to upgrade and modify our financial, information and management
systems and controls to manage our operations on an integrated basis and report
our results, economic downturns in industries or markets served, delays or
cancellations of customer orders, delays in shipping dates of products,
significant cost overruns on projects, the loss of a key customer, excess
product warranty expenses, significant restructuring or other special
non-recurring charges, foreign currency exchange rate fluctuations, changes in
interest rates, increased inflation, collectibility of past due customer
receivables, and any adverse impact of restating our historical financial
statements, including any proceedings relating to the restatement. See
"Business -- Risks Related to Our Business" for a description of these and other
risks, uncertainties and factors.

You should not place undue reliance on any forward-looking statements.
Except as required by the federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason.

iii

PART I

ITEM 1. BUSINESS

GENERAL

DT Industries, Inc. is an engineering-driven designer, manufacturer and
integrator of automated production equipment and systems used to manufacture,
test or package a variety of industrial and consumer products. Our business
strategy is to develop, market and provide complementary technologies and
capabilities to supply customers with integrated processing, assembly, testing
and packaging systems for their products.

We are a Delaware corporation organized in January 1993 and the successor
to Peer Corporation, Detroit Tool Group, Inc. ("DTG") and Detroit Tool and
Engineering Company ("DTE"). Peer Corporation was organized in June 1992 to
acquire the Peer Division of Teledyne, Inc. and the stock of DTG, the sole
stockholder of DTE and Detroit Tool Metal Products Co. As used in this Annual
Report, unless the context indicates otherwise, the terms "we," "us," "our" and
"DTI" refer to DT Industries, Inc. and its consolidated subsidiaries.

Our principal executive offices are located at 907 West Fifth Street,
Dayton, Ohio 45407, and our telephone number is (937) 586-5600. Our website is
located at http://www.dtindustries.com. Information contained on our website is
not a part of this Annual Report.

RECENT RESTATEMENT OF HISTORICAL FINANCIAL RESULTS

As publicly announced on August 6, 2002 (prior to the public announcement
of our consolidated financial results for the fiscal year ended June 30, 2002),
we discovered that we were required to make accounting adjustments to our
previously reported audited consolidated financial results for the fiscal years
ended June 24, 2001, June 25, 2000 and June 27, 1999, as well as our previously
reported unaudited consolidated financial results for the first three fiscal
quarters of 2002, due to an overstatement of the balance sheet account entitled
costs and estimated earnings in excess of amounts billed on uncompleted
contracts ("CIE"). The CIE balance is comprised of estimated gross margins
recognized to date plus actual work-in-process costs incurred to date less
billings/deposits to date. The overstatement of CIE occurred at our Assembly
Machines, Inc. ("AMI") subsidiary, a small facility located in Erie,
Pennsylvania that has historically been part of our Automation segment. This CIE
overstatement resulted in a corresponding understatement of cost of sales
because CIE represents project costs that have been expended, but are still
available to be billed; therefore, the overstatement in CIE included available
to bill amounts that should have been expensed to cost of sales in prior
periods. The cumulative amount of the accounting adjustments increased the
aggregate pre-tax loss reported during the impacted periods by $6.5 million and
increased the aggregate net loss after taxes reported during the impacted
periods by $4.2 million. Our restated audited consolidated financial statements
as of, and for the fiscal year ended, June 24, 2001 and our restated audited
consolidated statement of operations, changes in stockholders' equity and cash
flows for the year ended June 25, 2000 are included on pages F-3 through F-6 and
Note 16 to the audited consolidated financial statements included herein.
Restated selected consolidated financial data for those two fiscal years, as
well as the fiscal year ended June 27, 1999, is included under "Item 6. Selected
Financial Data." Restated unaudited consolidated quarterly financial data for
the fiscal years ended June 30, 2002 and June 24, 2001 is included in Note 17 to
the audited consolidated financial statements included herein.

We discovered the accounting adjustments while beginning the transfer of
the sales and accounting functions at AMI to our DT Precision Assembly segment
headquarters in Buffalo Grove, Illinois in connection with the reorganization of
our operations described below. Our Board of Directors authorized the Audit and
Finance Committee to conduct an independent investigation, with the assistance
of special counsel retained by the Committee, to identify the causes of these
accounting adjustments. The Committee retained Katten Muchin Zavis Rosenman
("KMZR") as special counsel, and KMZR engaged an independent accounting firm to
assist in the investigation. In addition, we investigated whether similar issues
existed at any of our other subsidiaries. As a result of the investigations, we
believe that the accounting issues were confined to AMI and determined that the
misstatement of the CIE account at AMI was primarily the result of the former
controller of AMI, without instruction from, or the knowledge of, our
management, (1) failing to properly account for

1

manufacturing variances, (2) adding inappropriate costs to work-in-process
amounts, (3) understating amounts billed and/or customer deposits and (4)
failing to recognize certain losses, in each case on various projects during the
relevant time period. Using these miscalculations of CIE, the former AMI
controller made incorrect journal entries that were recorded in the books and
records of AMI.

BUSINESS SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND INTERNATIONAL SALES

Through the end of fiscal 2002, we primarily operated in two business
segments -- Automation and Packaging. The Automation segment accounted for
approximately 80%, 75% and 65% of our consolidated net sales for fiscal years
2002, 2001 and 2000, respectively, and the Packaging segment accounted for
approximately 20%, 17% and 27% of our consolidated net sales for fiscal years
2002, 2001 and 2000, respectively. Our non-core businesses, which we sold in
fiscal 2002, accounted for approximately 8% of our consolidated net sales in
each of fiscal 2001 and fiscal 2000. Our principal foreign operations consist of
manufacturing, sales and service operations in the United Kingdom and Germany.
Our Canadian subsidiary was closed in fiscal 2002. Sales from our foreign
operations were approximately 18% of our consolidated net sales for fiscal 2002,
14% of our consolidated net sales for fiscal 2001 and 19% of our consolidated
net sales for fiscal 2000. Sales to customers outside of the United States were
approximately 45% of our consolidated net sales for fiscal 2002, 37% of our
consolidated net sales in fiscal 2001 and 28% of our consolidated net sales in
fiscal 2000. For certain other financial information concerning our business
segments, foreign and domestic operations and international sales, see Note 15
to the audited consolidated financial statements included herein.

We announced in March 2002 that we are reorganizing our operations into
four business segments: Material Processing, Precision Assembly, Assembly and
Test and Packaging Systems. This new structure is designed to allow us to
streamline product offerings, capitalize on the combined strength of operating
units, reduce overlap in the marketplace and improve capacity utilization,
internal controls, financial reporting and disclosure controls. We are still
implementing this integration plan and completing the systems required to
provide, analyze, review and report results of operations for current and
historical periods for our newly-defined segments. We intend to begin reporting
financial results for these four new business segments in our Form 10-Q for the
fiscal quarter ended September 29, 2002. The four new business segments are
described below under "-- Markets and Products."

BUSINESS STRATEGY

Our long-term business strategy is to develop, market and provide
complementary technologies and capabilities to supply customers with integrated
assembly, testing and packaging systems for their products. Our goal is to
become the premier provider of engineered solutions for the markets we serve. We
expect to achieve this goal by designing and delivering on-time, innovative
solutions that meet or exceed our customers' expectations while continuously
improving quality, service and cost. Key elements of our strategy include the
following:

Operational Improvements. We are focused on improving operational
performance through greater use of risk assessment techniques, higher quality
and more detailed project proposals, a strengthening of the skill set in
applications, engineering and project management, and an increased focus on
working capital management. Management is also developing a more positive work
environment that emphasizes continuous operational improvement throughout the
organization. For example, management and employees are being evaluated on the
basis of the improvement of identified financial and operational benchmarks,
such as return on assets managed and operating cash flow.

Cost Reductions. We have continued to pursue cost reduction measures
throughout our businesses with a goal of lowering or maintaining the current
level of selling, general and administrative expenses, lowering indirect
manufacturing expenses and increasing profitability.

Leverage Engineering and Manufacturing Capabilities. We intend to utilize
our versatile engineering expertise to satisfy the growing demand for small,
medium and large complex, integrated automation solutions. We also intend to
utilize our manufacturing capacity and engineering capabilities fully by
directing work to facilities with specific capabilities and manufacturing
strengths to best meet our customers' needs.

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Product Line and Customer Base Expansion. We are focused on providing
customers with integrated solutions and systems rather than single use
equipment. We are also using our engineering expertise and manufacturing
capability to develop new products and technologies for markets we currently
serve and to enter into new markets. As we continue to integrate operations and
develop existing product lines, we expect to expand our product offerings and
customer base. We anticipate renewed growth as a result of new opportunities
created through the expansion of our product offerings and customer base.

MARKETS AND PRODUCTS

The following disclosure describes the markets and products of the four
business segments into which we are in the process of reorganizing. Through the
end of fiscal 2002, we operated in the Automation and Packaging segments. The
Automation segment consisted of the markets and products of the new DT Precision
Assembly and DT Assembly and Test segments and the Detroit Tool and Engineering
("DTE") division of the new DT Material Processing segment. The Packaging
segment consisted of the markets and products of the new DT Packaging Systems
segment and the DT Converting Technologies division of the new DT Material
Processing segment.

DT MATERIAL PROCESSING SEGMENT. The DT Material Processing segment
manufactures special machines, automated systems, tooling and fixturing, the
Peer(TM) brand of automated welding equipment, high-speed rotary presses and
plastic processing machines and equipment for a wide variety of products, such
as appliances, electronics, building construction, hardware, cosmetics, food and
beverage, toys and automotive accessories. The DT Material Processing segment is
comprised of the DTE and DT Converting Technologies divisions.

DTE manufactures special automation assembly and processing equipment for a
wide variety of applications, precision tooling and dies, and welding systems.
DTE's special automation equipment incorporates engineering capabilities ranging
from refining and replicating existing equipment to designing and building new
equipment. DTE's special automation equipment typically handles part envelopes
cubes of three inches and larger, with cycle times of three to 30 parts per
minute. DTE provides systems integration and implements a wide range of
applications, including dials, power and free, synchronous, indexing processes,
metal forming, welding and robotics.

DTE possesses considerable expertise in the design, engineering and
production of precision tools and dies, including cam dies, progressive dies,
large single-hit dies and contoured form dies. In addition, personnel trained as
tool and die makers often apply their skill to the manufacture of production
machines.

DTE also manufactures and sells a line of standard resistance welding
equipment, as well as special automated welding systems, designed and built for
specific applications. Marketed under the brand name Peer(TM), these products
are used in the automotive, appliance and electrical industries to fabricate and
assemble components and subassemblies. Our resistance welding equipment is also
used in the manufacture of file cabinets, school and athletic lockers, store
display shelves, metal furniture and material storage products.

DT Converting Technologies manufactures high-speed rotary presses and
plastic processing machines and equipment. We design and manufacture rotary
presses used by customers in the airbag, candy, food supplement, ceramic,
ordnance, specialty chemical, and pharmaceutical industries to produce tablets.
Marketed under the brand name Stokes(TM), our line of rotary presses includes
machines capable of producing 17,000 tablets per minute and other machines
capable of applying up to 40 tons of pressure. Products produced on our rotary
presses include candy, breath mints, vitamins and inflation pellets for
automotive airbags.

The plastic processing equipment we manufacture includes thermoformers,
blister packaging systems and laboratory machines. A thermoformer heats plastic
material and uses pressure and/or a vacuum to mold it into a product. Marketed
under the brand names Sencorp(R) and Armac(TM), our thermoformers are used by
customers in North America, Europe and Asia to form a variety of products,
including specialized cups, plates and food containers, trays for food and
medical products and other plastics applications. Our thermoformers are sold
primarily to custom formers who use the machines to create thermoformed items
that are sold to a

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variety of end users. We also sell thermoformers directly to end users,
including large producers of electrical and healthcare products, cosmetics,
hardware, and other consumer products.

Blister packaging is a common method of displaying consumer products for
sale in hardware stores, convenience stores, warehouse stores, drug stores and
similar retail outlets. Batteries, cosmetics, hardware items, electrical
components, razor blades and toys are among the wide variety of products sold in
a clear plastic blister or two-sided package. We design and manufacture
machinery, marketed under the brand names Sencorp(R) and Armac(TM), that
performs blister packaging by heat-sealing a clear plastic bubble, or blister,
onto coated paperboard, or by sealing two-sided packages using heat or microwave
technology. Our blister packaging systems are primarily sold to manufacturers of
the end products. We also produce a line of small scale blister sealers and a
line of tablet pressing equipment used to test new materials and techniques, for
quality control, laboratory or other small run uses. In addition, we sell parts
and accessories for our proprietary machines and design and build special tools
and dies used in custom applications of our thermoforming systems and rotary
presses.

DT PRECISION ASSEMBLY SEGMENT. The DT Precision Assembly segment designs,
manufactures and integrates custom precision assembly systems, primarily for
customers in the medical, electronics, consumer, bioscience and automotive
markets. Integrated systems combine a wide variety of manufacturing technologies
into a complete automated manufacturing system. Utilizing advanced computers,
robotics, vision systems and other technologies, we provide a variety of
capabilities, including systems integration, medium/high speed indexing,
synchronous assembly, flexible/reconfigurable assembly, high speed precision
assembly and cell control/data collection. We offer this variety of integrated
systems for small or large and custom or standard applications. The standardized
automation applications utilize various machine platforms and proprietary
modular building blocks in carousel, in-line, rotary and robotic assembly
systems, all of which facilitate time-sensitive, concurrent engineering projects
where changes in tooling and processes can occur in an advanced stage of system
design.

DT ASSEMBLY AND TEST SEGMENT. The DT Assembly and Test segment designs and
builds custom non-synchronous assembly systems, rotary dial assembly systems,
electrified monorail material handling systems, fuel injection, engine and
transmission test systems, and lean assembly systems primarily for customers in
automotive-related and heavy equipment markets.

Our custom machine building capabilities include engineering, project
management, machining and fabrication of components, installation of electrical
controls, final assembly and testing. A customer will usually approach us with a
manufacturing objective, and we will work with the customer to design, engineer,
assemble, test and install a machine to meet the objective. The customer often
retains rights to the design after delivery of the machine because the purchase
contract typically includes the design of the machine; however, we often reapply
the engineering and manufacturing expertise gained in designing and building the
machine in projects for other customers.

We build an automated electrified monorail product offered in various
capacity ranges from lightweight systems to systems transporting products
weighing up to 8,800 pounds. This product can be applied to a variety of
material handling applications ranging from delivery systems for the food
industry to manufacturing processes involving manual and automation interfaces
for engine assembly and testing. The benefits of this product include providing
a clean, quiet, controlled transport with the flexibility to operate in a
variety of processes and production rates.

DT PACKAGING SYSTEMS SEGMENT. The DT Packaging Systems segment designs and
builds proprietary machines and integrated systems utilized for packaging,
liquid filling or tube filling applications that are marketed under individual
brand names and manufactured for specific industrial applications using designs
we own or license. Although these machines are generally cataloged as specific
models, they are usually modified for specific customer requirements and often
combined with other machines into integrated systems. Many customers also
request additional accessories and features that typically generate higher
revenues and enhanced profit opportunities. The equipment we manufacture
includes bottle unscramblers, electronic and slat tablet counters, liquid
fillers, cottoners, cappers and labelers, collators and cartoners, all of which
can be sold as an integrated system or individual units. These machines are
marketed under the brand names of
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Kalish(TM), Lakso(R), Merrill(R), and Swiftpack(TM) and are primarily provided
to customers in the pharmaceutical, nutritional, food, cosmetic, toy and
chemical industries. We believe this equipment maintains a strong reputation
among our customers for quality, reliability and ease of operation and
maintenance. We also sell replacement parts and accessories for our substantial
installed base of machines.

We benefit from a substantial installed base of Lakso(R) and Merrill(R)
slat counters in the aftermarket sale of slats. Slat counting machines use a set
of slats to meter the number of tablets or capsules to be inserted into bottles.
Each size or shape of tablet or capsule requires a different set of slats. In
addition, the practice in the pharmaceutical industry is to use a different set
of slats for each product, even if the tablets are the same size.

NON-CORE BUSINESSES. During fiscal 2002, we sold the assets used to
produce precision-stamped steel and aluminum components through stamping and
fabrication operations for the heavy trucking, agricultural equipment,
appliance, and electrical industries. These assets comprised our non-core
businesses in fiscal 2001 and fiscal 2000.

MARKETING AND DISTRIBUTION

Our machines and systems are sold primarily through our direct sales force.
We have sales and service offices in the United States, England and Germany.
Sales of machines and integrated systems require our sales personnel to have a
high degree of technical expertise and extensive knowledge of the industry
served. Our sales force consists of specialists in each primary market in which
our machines and systems are sold. Each division has a sales force experienced
in the marketing of the equipment and systems historically produced by its
business. We believe that integration of proprietary technology and custom
equipment into total production automation systems for selected industries
provides us with expanded sales opportunities. Our machines and systems are also
sold throughout the world to a lesser extent by manufacturers' representatives
and sales agents.

RAW MATERIALS

The principal raw materials and components used in the manufacturing of our
machines and systems include carbon steel, stainless steel, aluminum, electronic
components, pumps and compressors, programmable logic controls, hydraulic
components, conveyor systems, visual and mechanical sensors, precision bearings
and lasers. We are not dependent upon any one supplier for raw materials or
components used in the manufacture of machines and systems. Certain customers
specify sole source suppliers for components of custom machines or systems. We
believe there are adequate alternative sources of raw materials and components
of sufficient quantity and quality.

CUSTOMERS

The majority of our sales are attributable to repeat customers, some of
which have been our customers (including our acquired businesses) for over
twenty years. We believe this repeat business is indicative of our engineering
capabilities, the quality of our products and overall customer satisfaction. We
have historically generated a substantial portion of our net sales from a
relatively small number of customers. For example, Hewlett-Packard Company
accounted for approximately 31% and 28% of our consolidated net sales during
fiscal 2002 and fiscal 2001, respectively, and approximately 38% and 37% of our
Automation segment's net sales during fiscal 2002 and fiscal 2001, respectively.
No other customer accounted for 10% or more of our consolidated net sales or of
our Automation or Packaging segment's net sales during fiscal 2002.

BACKLOG

Our backlog is based upon customer purchase orders we believe are firm. As
of June 30, 2002, we had $142.8 million of orders in backlog, which compares to
a backlog of approximately $217.6 million as of June 24, 2001.

Automation segment backlog was $119.8 million as of June 30, 2002, a
decrease of $65.0 million, or 35.2%, from the prior year. The decrease in
backlog reflects the high backlog of orders of automation systems

5

at June 24, 2001 for a key customer in the electronics market. We have not been
able to replace this work because the soft economy has adversely affected
capital spending in most of our other markets. The lower backlog also reflects
some trends in the industry, including shorter lead times and the placement of
smaller customer orders. Backlog for the Packaging segment decreased $3.6
million, or 13.6%, to $23.0 million primarily due to softness across several
packaging product lines.

The level of backlog at any particular time is not necessarily indicative
of our future operating performance for any particular report period because we
may not be able to recognize as sales the orders in our backlog when expected or
at all due to various contingencies, many of which are beyond our control. For
example, many purchase orders are subject to cancellation by the customer upon
notification. Certain orders are also subject to delays in completion and
shipment at the request of the customer. However, our contracts normally provide
for cancellation and/or delay charges that require the customer to reimburse us
for costs actually incurred and a portion of quoted profit margin on the
project. We believe most of the orders in our backlog as of June 30, 2002 will
be recognized as sales during fiscal 2003.

COMPETITION

The market for our machines and systems is highly competitive, with a large
number of companies advertising the sale of production machines. However, the
market for machinery and systems is fragmented and characterized by a number of
industry niches in which few manufacturers compete. Our competitors vary in size
and resources; most are smaller privately-held companies or subsidiaries of
larger companies, some of which are larger than us, and none of which compete
with us in all product lines. In addition, we may encounter competition from new
market entrants. We believe that the principal competitive factors in the sale
of our equipment and systems are quality, technology, on-time delivery, price
and service. We believe that we compete favorably with respect to each of these
factors.

ENGINEERING; RESEARCH AND DEVELOPMENT

We maintain engineering departments at all of our manufacturing locations.
In addition to design work relating to specific customer projects, our engineers
develop new products and product improvements designed to address the needs of
our target market niches and to enhance the reliability, efficiency, ease of
operation and safety of our proprietary machines. We incurred research and
development costs of approximately $3.4 million, $2.8 million and $4.9 million
in fiscal 2002, 2001 and 2000, respectively. We expect our research and
development costs to increase in fiscal 2003.

INTELLECTUAL PROPERTY RIGHTS

We use a combination of trade secrets, trademarks, patents, employee and
third party nondisclosure agreements, copyright laws and contractual rights to
establish and protect proprietary rights in our technology, manufacturing
process and products. In the United States, we own and maintain the registered
trademarks ATT(R), AMI 1(R), AMI 2(R), AssemblyFlex(R), Cord-Lock(R),
Fabspec(R), Fillit(R), Force-Flo Feeder(R), Lakso(R), Merrill(R), Micro-Scan(R),
Mid-West(R), Mid-West Automation(R), MWA(R) and design, Oscar(R) and design,
Pacer(R), Pharmaveyor(R), Reformer(R), Sencorp(R), Slat-Scan(R), TMC(R),
Vali-Tab(R) and Versa-Press(R). We also own and maintain registrations for our
trademarks in countries where the applicable products are sold and such
registrations are considered necessary to preserve our proprietary rights
therein. We also have the rights to use the unregistered trademarks AMI(TM),
Armac(TM), F.A.S.T.(TM), Hartridge(TM), Kalish(TM), Peer(TM), Stokes(TM) and
Swiftpack(TM). All of the trademarks listed above are used in connection with
the marketing of our machines and systems.

We apply for and maintain United States and foreign patents when we believe
they are necessary to maintain our interest in inventions, designs and
improvements. We do not believe that any single patent or group of patents is
material to our business, nor do we believe that the expiration of any one or a
group of our patents would have a material adverse effect upon our business or
ability to compete in our business. We believe that our existing patent and
trademark protection, however, provides us with a modest competitive advantage
in the marketing and sale of our proprietary products.

6

ENVIRONMENTAL AND SAFETY REGULATION

We are subject to environmental laws and regulations that impose
limitations on the discharge of pollutants into the environment and establish
standards for the treatment, storage and disposal of toxic and hazardous wastes.
We are also subject to the federal Occupational Safety and Health Act and state
safety and health statutes. Costs of compliance with environmental, health and
safety requirements have not been material to date, and we believe we are in
material compliance with all such applicable laws and regulations.

EMPLOYEES

As of June 30, 2002, we had approximately 1,700 employees. None of our
employees are covered under collective bargaining agreements. We consider our
relations with employees to be good.

RISKS RELATED TO OUR BUSINESS

The following risks, uncertainties and other factors could have a material
adverse affect on our business, financial condition, operating results and
growth prospects.

OUR INDEBTEDNESS AND OBLIGATIONS UNDER THE PREFERRED SECURITIES OF OUR
WHOLLY-OWNED SUBSIDIARY TRUST COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.

As of August 31, 2002, our total indebtedness, plus our obligations under
the preferred securities of our wholly-owned subsidiary trust (the sole asset of
which is our junior subordinated debentures), was approximately $79.3 million.
We expect to incur additional indebtedness in the future to fund our operations
and capital expenditures. Our indebtedness and obligations under the trust
preferred securities could adversely affect our financial health by:

- limiting our ability to obtain additional financing that we may need to
operate and develop our business;

- requiring us to dedicate or reserve a substantial portion of our cash
flow from operations to service our debt and other obligations, which
reduces the funds available for operations and future business
opportunities;

- increasing our vulnerability to a downturn in general economic conditions
or other adverse events in our business;

- increasing our vulnerability to increases in interest rates because our
borrowings under our senior credit facility are at variable interest
rates; and

- making us more leveraged than certain competitors in our industry, which
could place us at a competitive disadvantage.

Our senior credit facility matures on July 2, 2004 and we have periodic
commitment reductions of $1.5 million per quarter commencing September 30, 2002
while the senior credit facility is outstanding. In addition, the preferred
securities of our wholly-owned subsidiary trust and our related junior
subordinated debentures are scheduled to mature on May 31, 2008 and, although
they may be deferred until such maturity date, we are obligated to make cash
distributions on these securities beginning on July 2, 2004 for at least one
quarter to qualify to defer subsequent distributions after the quarter ending
September 30, 2004. If the cash flow from our operating activities is
insufficient to meet our obligations under the senior credit facility and the
trust preferred securities, we may need to delay or reduce capital expenditures,
restructure or refinance our debt, sell assets or seek additional equity
capital. For example, if we had not consummated our financial recapitalization
transaction on June 20, 2002, whereby we extended the maturity of our senior
credit facility and used proceeds from a private placement of common stock to
repay outstanding indebtedness of approximately $18.5 million under our senior
credit facility, we would not have been able to make the approximately $48.8
million lump sum payment that would otherwise have been due on July 2, 2002. In
addition, the sale of assets for approximately $24.4 million in fiscal 2002,
coupled with the cash provided by operations of approximately $55.4 million in
fiscal 2002 that reflected our working capital management
7

program, enabled us to make scheduled reductions of approximately $58.5 million
and cash interest payments of approximately $9.0 million under our senior credit
facility in fiscal 2002. Delaying or reducing capital expenditures,
restructuring or refinancing our debt, selling assets and/or raising additional
equity capital, however, may not be sufficient to allow us to service our debt
and other obligations in the future. Further, we may be unable to take any of
these actions on satisfactory terms, in a timely manner, or at all. If we do not
have sufficient funds to satisfy our obligations under our senior credit
facility and the trust preferred securities, we may not be able to continue our
operations as currently anticipated.

THE COVENANTS AND RESTRICTIONS UNDER OUR SENIOR CREDIT FACILITY COULD LIMIT OUR
OPERATING AND FINANCIAL FLEXIBILITY.

Under the terms of our senior credit facility, we must maintain minimum
levels of EBITDA (earnings before interest, taxes, depreciation and
amortization) and quarterly net worth, not exceed annual capital expenditure
limitations and comply with various financial performance ratios. We may not be
able to comply with these covenants. For example, as a result of our financial
performance in fiscal 2002, we failed to satisfy the minimum trailing
twelve-month EBITDA and maximum funded debt to EBITDA financial covenants under
the facility. In connection with our recapitalization transaction completed on
June 20, 2002, we obtained waivers from our lenders for the failure to comply
with those covenants, and our lenders established new covenants commencing with
the first quarter of fiscal 2003. We also exceeded our capital expenditure
limitation under the facility for the fourth quarter of fiscal 2002. We obtained
a waiver from our lenders for our failure to comply with this provision. Any
other failure to comply with the covenants in our credit facility could trigger
an event of default that, if not waived or cured, would entitle our lenders to,
among other things, accelerate the maturity of the debt outstanding under our
senior credit facility so that it is immediately due and payable. In addition,
no further borrowings would be available under the revolving portion of our
senior credit facility. If our indebtedness is accelerated, we may not have
sufficient funds to satisfy our obligations and we may not be able to continue
our operations as currently anticipated.

In addition, our senior credit facility contains restrictive covenants that
could limit our ability to engage in transactions that we believe are in our
long-term best interest, including the following:

- certain types of mergers or consolidations;

- paying dividends or other distributions to our securityholders;

- making investments;

- selling or encumbering assets;

- changing lines of business;

- borrowing additional money; and

- engaging in transactions with affiliates.

These restrictions could limit our ability to react to changes in our operating
environment or take advantage of business opportunities.

OUR BORROWING BASE OF ASSETS MAY NOT BE SUFFICIENT TO PERMIT US TO BORROW
SUFFICIENT FUNDS UNDER OUR SENIOR CREDIT FACILITY TO OPERATE OUR BUSINESS.

All advances and letters of credit in excess of $53.0 million made under
the revolver portion of our senior credit facility and letters of credit are
subject to a monthly asset coverage test based on eligible accounts receivable
and eligible inventory. Under this test, we may not always have the ability to
borrow up to the amount by which the credit facility's commitment exceeds $53.0
million. Furthermore, our borrowing base of assets may not be sufficient in the
future to permit us to borrow sufficient funds to operate our business and meet
our capital resources needs, including as a result of our periodic commitment
reduction obligations under the credit facility being applied against our
borrowing base of assets.

8

WE REPORTED AN OPERATING LOSS FOR OUR 2001 AND 2002 FISCAL YEARS AND MAY NOT
ACHIEVE OR SUSTAIN PROFITABILITY IN THE NEAR FUTURE.

We reported a restated operating loss of approximately $66.8 million for
the fiscal year ended June 24, 2001 and an operating loss of approximately $1.8
million for the fiscal year ended June 30, 2002. We are implementing a plan to
restructure our business by consolidating manufacturing and fabrication
operations, establishing four business segments and reducing our workforce. We
are focused on improving operational performance through greater use of risk
assessment techniques, higher quality and more detailed project proposals, a
strengthening of the skill set in applications, engineering and project
management, and an increased focus on working capital management. To the extent
that our corporate restructuring and focus on operational improvements do not
generate the cost savings or net sales that we anticipate, we may continue to
incur losses and may not achieve profitability in the near future. Furthermore,
if we achieve profitability in the near future, we may not be able to sustain
it.

WE HAVE A NUMBER OF DIFFERENT OPERATING DIVISIONS AND MANUFACTURING FACILITIES
AND MAY HAVE DIFFICULTY ESTABLISHING EFFECTIVE INTERNAL AND DISCLOSURE CONTROLS
AND CONDUCTING OUR OPERATIONS ON AN INTEGRATED BASIS.

Upon completion of our corporate restructuring, we will have six operating
divisions with 12 manufacturing facilities within four business segments. Some
of our operating facilities have different systems, internal and disclosure
controls and procedures in various operational and financial areas that we are
in the process of rationalizing and integrating. We will need to continue to
upgrade and modify our financial, information and management systems and
controls to ensure uniform compliance with corporate procedures and policies and
accurate and timely reporting of financial data and required company disclosure.
This may be difficult because we have facilities in the United Kingdom, Germany
and six different states in the United States. If we are unable to fully
integrate our operations and improve our internal and disclosure controls
smoothly, quickly, successfully, or at all, we will not achieve the efficiency,
results and capabilities that the rationalization and consolidation of our
operations are designed to accomplish.

A DOWNTURN IN GENERAL ECONOMIC CONDITIONS AND THE ECONOMIC CONDITION OF THE
MARKETS THAT WE SERVE HAS MATERIALLY ADVERSELY AFFECTED, AND MAY FURTHER
MATERIALLY ADVERSELY AFFECT, OUR REVENUES.

Our revenues and results of operations are susceptible to negative trends
in the general economy and the markets that we serve that affect capital
spending. For example, the slowing of the U.S. economy and the effects of the
events of September 11, 2001 have resulted in restrained customer capital
spending, which has adversely affected sales of our equipment to the
pharmaceutical and nutritional, plastics packaging, automotive, heavy trucks and
other industries. A prolonged economic slowdown or continued economic
uncertainty could cause our customers to further reduce or delay orders for our
products or delay payment for our delivered products. If this occurs, our
revenues and cash flows could be further materially adversely affected.

WE MAY NOT RECOGNIZE AS SALES A MATERIAL AMOUNT OF THE ORDERS IN OUR BACKLOG,
WHICH WOULD MATERIALLY HARM OUR BUSINESS.

Our backlog was $142.8 million as of June 30, 2002. Our backlog is based
upon customer purchase orders that we believe are firm. The level of our backlog
at any current time, however, is not necessarily indicative of our future
operating performance for any particular reporting period because we may not be
able to recognize as sales the orders in our backlog when expected or at all due
to various contingencies, many of which are beyond our control. For example,
many of our purchase orders are subject to cancellation by the customer upon
notification and certain purchase orders are subject to delays in completion and
shipment at the request of the customer. Although we have historically
recognized as sales almost all of the orders in our backlog, our ability to
recognize as sales in fiscal 2003 the orders in our backlog as of June 30, 2002
could be adversely affected if a continued downturn or continued uncertainty in
the economic condition of the markets we serve causes our customers in those
markets to cancel purchase orders due to poor demand for their products and
their need to restrain capital spending. If we fail to recognize a material
amount of our backlog, our net sales would be materially harmed.
9

OUR OVERALL PERFORMANCE AND QUARTERLY OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY AND COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

Our net sales and results of operations have varied significantly from
quarter to quarter. We expect large fluctuations in our future quarterly
operating results due to a number of factors, including:

- the level of product and price competition;

- the length of our sales cycle and manufacturing processes;

- the size and timing of individual projects;

- the timing of satisfying milestones in order to recognize revenue for
percentage of completion projects;

- the mix of customized projects, which tend to have lower gross margins
due to the difficulty in estimating the cost and pricing of less proven
concepts, and repeat and standard projects, which tend to have higher
margins, due to experience in estimating the cost and price of proven
concepts;

- the size and timing of significant pre-tax charges, including for
goodwill impairment, the write-down of assets, such as for excess and
obsolete inventories and doubtful account receivables, warranty-related
costs and restructuring charges, such as costs for severance, idle
facilities and personnel relocation;

- defects and other product quality problems;

- the timing of new product introductions and enhancements by us and our
competitors;

- customers' fiscal constraints and related demand for our equipment and
systems;

- changes in foreign currency exchange rates, including for the Euro and
the British Pound; and

- general economic conditions.

As a result of these and other factors, many of which are beyond our control,
our results of operations for any particular quarter are not necessarily
indicative of results that may be expected for any subsequent quarter or related
fiscal year. These fluctuations in our quarterly results could cause our
quarterly earnings to fall below market expectations, which in turn could
adversely affect the market price of our common stock.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ACCURATELY ESTIMATE THE
MATERIAL AND LABOR COSTS OR DURATION OF A PROJECT OR FAIL TO COMMUNICATE CHANGES
TO THESE SPECIFICATIONS TO OUR CUSTOMERS.

We derive almost all of our net sales from the sale and installation of
equipment and systems pursuant to fixed-price contracts. Because of the
complexity or customized nature of many of our projects, accurately estimating
the material and labor costs of a particular project can be a difficult task. If
we fail to accurately estimate the costs of projects during the bidding process,
we could be forced to devote additional materials and labor hours to these
projects for which we will not receive additional compensation. To the extent
that an expenditure of additional resources is required on a project, this could
reduce the profitability of, or result in a loss on, the project. In the past,
we have, on occasion, engaged in significant negotiations with customers
regarding changes to the costs or duration of specific projects. To the extent
we do not sufficiently communicate to our customers, or our customers fail to
adequately appreciate, the nature and extent of any of these changes to a
project, our reputation may be harmed and we may suffer losses on the project.
In addition, many contracts are subject to certain completion schedule
requirements with liquidated damages in the event schedules are not met as the
result of circumstances that are within our control. Our business could be
materially adversely affected if we incur significant liquidated damages due to
not satisfying projects' schedules.

10

THE LOSS OF, OR REDUCED PURCHASE ORDERS FROM, A KEY CUSTOMER COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS BECAUSE WE DEPEND ON A RELATIVELY LIMITED
NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR NET SALES.

We have historically generated a substantial portion of our net sales from
a relatively small number of customers. For example, Hewlett-Packard Company
accounted for approximately 31% and 28% of our consolidated net sales during
fiscal 2002 and fiscal 2001, respectively. The loss of, or reduced orders for
products from, one or more of our significant customers, including
Hewlett-Packard, could have a material adverse impact on our future operating
results. In addition, a delay in purchase orders from, or completion of projects
for, one or more of our significant customers, including Hewlett-Packard, could
have a material adverse impact on our operating results in a particular
quarterly period. Our reliance on a limited number of customers also magnifies
the risks of not being able to collect accounts receivable from any one
customer.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE EXPERIENCE EXCESS PRODUCT
WARRANTY OR LIABILITY CLAIMS.

We are subject to warranty claims in the ordinary course of our business.
Although we maintain reserves for such claims, the warranty expense levels may
not remain at current levels or our reserves may not be adequate. A large number
of warranty claims exceeding our current warranty expense levels could
materially harm our business. In addition, we are subject to product liability
claims from time to time for various injuries alleged to have resulted from
defects in the manufacture and/or design of our products. Any resolution of
these claims in a manner adverse to us could have an adverse effect on our
business, financial condition and results of operations. These claims may also
be costly to defend against and may divert the attention of our management and
resources in general.

INTENSE COMPETITION IN OUR INDUSTRY COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVE
PROFITABILITY.

The market for our automation and packaging machines and systems is highly
competitive. Our competitors vary in size and resources, some of which are
larger than we are and have access to greater resources than we do. As a result,
our competitors may be in a stronger position to respond more quickly to changes
in customer needs and may be able to devote more resources to the development,
marketing and sale of their products than we can. We may also encounter
competition from new market entrants. We may not be able to compete effectively
with current or future competitors, which could impair our ability to grow and
achieve profitability.

OUR FAILURE TO RETAIN KEY PERSONNEL MAY NEGATIVELY AFFECT OUR BUSINESS.

Our success depends on our ability to retain senior executives and other
key employees who are critical to our continued development and support of our
products, the management of our diverse operations and our ongoing sales and
marketing efforts. The loss of key personnel could cause disruptions in our
operations, the loss of existing customers, the loss of key information,
expertise and know-how, and unanticipated additional recruitment and training
costs. Furthermore, our amended senior credit facility provides that an event of
default will exist under the facility if any two of Stephen J. Perkins, our
President and Chief Executive Officer, John M. Casper, our Senior Vice
President -- Finance and Chief Financial Officer, and John F. Schott, our Chief
Operating Officer, are no longer employed by, and fulfilling their current
positions with, us, other than as a result of their death, disability or our
board of directors exercising its fiduciary duty. Thus, under these
circumstances, if we lose any two of these senior executives, our lenders could
accelerate the maturity of the debt outstanding under our senior credit facility
unless we obtain satisfactory replacement executives.

IF WE DECIDE TO SELL ANY OF OUR BUSINESSES OR DISCONTINUE ANY OF OUR OPERATIONS
AND DO NOT SUCCESSFULLY ADDRESS THE ASSOCIATED RISKS, OUR ABILITY TO COMPETE,
OPERATE EFFICIENTLY AND OTHERWISE REALIZE THE EXPECTED BENEFITS OF SUCH A
TRANSACTION MAY BE IMPAIRED.

In connection with our corporate integration plan and to generate cash to
help us meet our debt obligations, in fiscal 2002 we disposed of our Detroit
Tool Metal Products, Scheu & Kniss and Hansford Parts and Products businesses,
closed facilities in Montreal, Quebec, Rochester New York and Bristol,
Pennsylvania

11

and consolidated our Swiftpack and C.E. King operations. Although we currently
do not expect to sell any of our other businesses or discontinue any of our
other operations in the near future, we may decide to do so if we believe such
actions would further improve our operational efficiency, decide to change the
focus of our business strategy or need to generate cash. In the case of the
disposition of a business, we may not be able to identify buyers who are willing
to pay acceptable prices or agree to acceptable terms. For example, we pursued
the sale of our Stokes business in 2001, but were unable to consummate the
disposition due to adverse market conditions and instead closed the facility in
Bristol, Pennsylvania and combined Stokes' manufacturing operations with our DT
Converting Technologies facility in Hyannis, Massachusetts in 2002. The sale of
a business and discontinuing operations involve a number of special risks and
challenges, including:

- diversion of management's attention;

- expenses incurred to effect the transactions;

- difficulties in implementing a new business strategy with which we may
have little experience;

- employees' uncertainty about their role with the continuing operations of
the business and a lack of employee focus due to distractions of a
transaction;

- a reduction of recurring costs that may not exceed the reduction of
recurring revenues; and

- incurring substantial non-recurring charges, such as for severance, asset
write-offs and future facility lease costs, or a net loss on the disposal
of assets.

If we decide to sell any of our businesses or discontinue any of our operations
and do not successfully address the associated risks, our ability to compete,
operate efficiently and otherwise realize the expected benefits of such a
transaction may be impaired.

WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL AND EMPLOYEE SAFETY AND HEALTH
REGULATIONS, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITIES AND COMPLIANCE
EXPENDITURES.

We are subject to various federal, state and local environmental laws and
regulations concerning air emissions, wastewater discharges, storage tanks and
solid and hazardous waste disposal at our facilities. Our operations are also
subject to various employee safety and health laws and regulations, including
those concerning occupational injury and illness, employee exposure to hazardous
materials and employee complaints. Environmental and employee safety and health
regulations are comprehensive, complex and frequently changing. We may be
subject from time to time to administrative and/or judicial proceedings or
investigations brought by private parties or governmental agencies with respect
to environmental matters and employee safety and health issues. These
proceedings and investigations could result in substantial costs to us, divert
our management's attention and, if it is determined we are not in compliance
with applicable laws and regulations, result in significant liabilities, fines
or the suspension or interruption of our manufacturing activities. Future
events, such as changes in existing laws and regulations, new laws and
regulation or the discovery of conditions not currently known to us, could
create substantial compliance or remedial liabilities and costs.

WE INCURRED SIGNIFICANT PRE-TAX CHARGES RELATED TO GOODWILL IMPAIRMENT AND THE
WRITE-DOWN OF ASSETS DURING FISCAL 2001, AND IF WE INCUR SIMILAR SIGNIFICANT
CHARGES IN THE FUTURE OUR OPERATING RESULTS AND BORROWING BASE MAY BE MATERIALLY
ADVERSELY AFFECTED.

During fiscal 2001, we recorded an impairment charge of approximately $38.2
million after determining that the goodwill associated with five of our
divisions had been impaired and wrote down approximately $21.8 million of assets
primarily due to excess and obsolete inventory and accounts receivable
write-offs. As of June 30, 2002, our goodwill balance of approximately $125.5
million represented approximately 41% of our total assets. In July 2001, the
Financial Accounting Standards Board issued Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142), which we early adopted in the first quarter
of fiscal 2002. SFAS 142 requires, among other things, the discontinuance of the
amortization of goodwill and the introduction of, at a minimum, annual
impairment testing in its place. In connection with such impairment testing in
the future, we may determine that the carrying value of our goodwill is
impaired. If we are required

12

to significantly write-down the carrying value of goodwill in accordance with
SFAS 142 in the future, or write-down significant assets in the future due to
unsalable inventory or difficulties in collecting accounts receivable, our
operating results may be materially adversely affected and the borrowing base
under our senior credit facility may be significantly reduced.

THE RESTATEMENTS OF OUR HISTORICAL FINANCIAL RESULTS DURING FISCAL 2002 AND
FISCAL 2000 HAVE ADVERSELY AFFECTED OUR MANAGEMENT'S ABILITY TO FOCUS ON
OPERATING THE COMPANY AND OUR REPUTATION AND RESULTED IN AN SEC INVESTIGATION;
ANY FURTHER RESTATEMENTS IN THE FUTURE COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR LIQUIDITY, ABILITY TO OPERATE AND COMMON STOCK PRICE AND RESULT IN MATERIAL
LIABILITIES.

As discussed in "Business -- Recent Restatement of Historical Financial
Results," we have restated our previously reported audited consolidated
financial results for the fiscal years ended June 24, 2001, June 25, 2000 and
June 27, 1999, as well as our previously reported unaudited consolidated
financial results for the first three fiscal quarters of 2002. As discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," in fiscal 2000, we were also required to restate our
audited consolidated financial results for the fiscal years 1997, 1998 and 1999,
as well as our unaudited consolidated financial results for the first three
quarters of fiscal 2000. The restatements were the result of improper accounting
entries made by controllers at three of our divisions. These restatements have
diverted management's attention from our ongoing operations, generated
significant accounting and legal expenses and harmed our reputation with
investors and possibly customers. In addition, the restatement in fiscal 2000
harmed our relationship with our lenders and led to a class action lawsuit that
has since been dismissed. As discussed in "Legal Proceedings," the Securities
and Exchange Commission (the "Commission") is currently conducting an
investigation into the accounting practices that led to these restatements. We
cannot predict the length or outcome of the investigation at this time.

Although we continue to improve our internal controls and accounting staff
at our divisions, we may experience accounting and financial reporting problems
at our subsidiaries in the future, which could have a material adverse impact on
our consolidated financial statements. If we are not able to hire competent,
trustworthy accounting staff at our divisions and continue to upgrade and modify
our internal controls so as to avoid these accounting issues and similar
restatements in the future, our access to our senior credit facility and ability
to obtain other financing, as well the price of our common stock and our ability
to maintain the listing of our common stock on the Nasdaq Stock Market, may be
materially adversely affected, we may face securities class action lawsuits and
the Commission may impose significant penalties against us.

HOLDERS OF OUR COMMON STOCK ARE SUBORDINATED TO THE HOLDERS OF PREFERRED
SECURITIES OF OUR WHOLLY-OWNED SUBSIDIARY TRUST AND WOULD BE DILUTED UPON
CONVERSION OF THE TRUST PREFERRED SECURITIES INTO COMMON STOCK.

Our wholly-owned subsidiary trust currently has issued and outstanding
$35.0 million of preferred securities. These trust preferred securities
represent undivided beneficial ownership interests in the trust, the sole assets
of which are a related aggregate principal amount of our junior subordinated
debentures. We have guaranteed the payment of distributions and payments on
liquidation of the trust or the redemption of the trust preferred securities.
Through this guarantee, our junior subordinated debentures, the debentures'
indenture and the trust's declaration of trust, taken together, we have fully,
irrevocably and unconditionally guaranteed all of the trust's obligations under
the trust preferred securities. Thus, while the trust preferred securities are
not included in liabilities for financial reporting purposes and instead appear
on our consolidated balance sheet between liabilities and stockholders' equity,
they represent obligations of DTI that rank senior in right of payment to our
common stock. Therefore, upon the bankruptcy, liquidation or winding up of the
operations of DTI, holders of the trust preferred securities would be paid
before holders of our common stock. In addition to having a preference senior to
our common stock, the trust preferred securities are convertible into an
aggregate of 2,500,000 shares of common stock. The issuance of these shares of
common stock would dilute the ownership and voting interest in DTI of existing
stockholders.

13

ITEM 2. PROPERTIES

Our administrative headquarters are located in Dayton, Ohio where we lease
approximately 27,000 square feet of space. This lease expires on August 1, 2016.
Set forth below is certain information with respect to our manufacturing
facilities as of the date of this Annual Report.

- ---------------

(1) This facility was part of our Automation segment through fiscal 2002.

(2) This property secures our senior credit facility.

(3) This facility was part of our Packaging segment through fiscal 2002.

(4) We have an option to renew this lease for two additional five-year terms.

(5) We have an option to renew this lease for one additional five-year term.

(6) We have negotiated a sale/leaseback of this property and are in the process
of consummating this transaction.

We do not anticipate any significant difficulty in leasing alternate space
at reasonable rates in the event of the expiration, cancellation or termination
of a lease relating to any of our leased properties. We believe that our
principal owned and leased manufacturing facilities have sufficient capacity to
accommodate future internal growth without major capital improvements.

ITEM 3. LEGAL PROCEEDINGS

Following our announcements in August and September 2000 of the
restatements of previously reported financial statements, DTI, our Kalish
subsidiary and certain of their directors and officers were named as defendants
in five complaints in putative class action lawsuits. During fiscal 2001, these
actions were consolidated into a single class action styled In re DT Industries,
Inc. Securities Litigation and an amended complaint was filed (the "Securities
Action") adding our Sencorp subsidiary and certain additional officers and
directors as defendants. As of the end of fiscal 2002, the Securities Action was
pending in the United States District Court for the Western District of Missouri
(the "Court"). The Consolidated Amended Complaint asserted causes of action
under Section 10(b), and Rule 10b-5 promulgated thereunder, and Section 20(a) of
the Securities Exchange Act of 1934, and alleged, among other things, that the
accounting adjustments caused our previously issued financial statements to be
materially false and misleading. The

14

Consolidated Amended Complaint also sought damages in an unspecified amount and
was purported to be brought on behalf of purchasers of our common stock during
various periods, all of which fall between September 29, 1997 and August 23,
2000.

On October 4, 2001, the Court granted our motion to dismiss the Securities
Action, without prejudice. Pursuant to the Court's dismissal order, all
defendants were dismissed, but the plaintiffs were granted the right to amend
their complaint. The plaintiffs filed their Second Amended Consolidated Class
Action Complaint on January 25, 2002 (the "Second Complaint"), thereby reviving
the Securities Action. On March 11, 2002, DTI and the other defendants filed a
motion to dismiss the Second Complaint.

The Court granted our motion to dismiss the Second Complaint, with
prejudice, on July 16, 2002. Pursuant to the Court's dismissal order, all
defendants were dismissed and a judgment was entered in favor of the defendants.
The plaintiffs did not appeal the Court's decision, so the Court's dismissal
order is final and non-appealable, and the plaintiffs can neither further amend
their complaint nor submit a new complaint in connection with the
above-referenced restatements.

The staff of the Securities and Exchange Commission (the "Commission") is
conducting an investigation of the accounting practices at our Kalish and
Sencorp subsidiaries that led to the restatements of our consolidated financial
statements for fiscal years 1997, 1998 and 1999 and the first three quarters of
fiscal 2000, as well as the issues at AMI that led to the accounting adjustments
to our previously reported audited consolidated financial results for the fiscal
years ended June 24, 2001, June 25, 2000 and June 27, 1999 and to our previously
reported unaudited consolidated financial results for the first three fiscal
quarters of 2002. We are cooperating fully with the Commission in connection
with its investigation and cannot currently predict the duration or outcome of
the investigation.

In November 1998, pursuant to the agreement by which we acquired Kalish,
Mr. Graham L. Lewis, a former executive officer and director of DTI, received an
additional payment based on Kalish's earnings for each of the three years after
the closing. As a result of the prior restatement due to accounting practices at
Kalish, we believe that the additional payment should not have been made. During
fiscal 2001, we commenced legal action against Mr. Lewis in Superior Court,
Civil Division in Montreal, Quebec to recover this payment and certain bonuses
paid to Mr. Lewis. Mr. Lewis has counter-sued for wrongful termination and is
seeking to recover monetary damages, including severance, loss of future income,
emotional distress and harm to reputation, equal to $2.8 million Canadian
dollars. There has been no discovery in these actions. Management believes that
our suit against Mr. Lewis has merit. Management further believes that Mr.
Lewis' counter-suit is without merit. We intend to pursue vigorously our claims
against Mr. Lewis and defend against his counter-suit.

Product liability claims are asserted against us from time to time for
various injuries alleged to have resulted from defects in the manufacture and/or
design of our products. There are currently 10 such claims either pending or, to
our knowledge, that may be asserted against us. We do not believe that the
resolution of these claims, either individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations or
cash flow. Product liability claims are covered by our comprehensive general
liability insurance policies, subject to certain deductible amounts. We have
established reserves for these deductible amounts, which we believe to be
adequate based on our previous claims experience. However, there can be no
assurance that resolution of product liability claims in the future will not
have a material adverse effect on our financial condition, results of operations
or cash flow.

In addition to product liability claims, from time to time we are the
subject of legal proceedings, including involving employee, commercial, general
liability and similar claims, that are incidental to the ordinary course of our
business. There are no such material claims currently pending. We maintain
comprehensive general liability insurance that we believe to be adequate for the
continued operation of our business.

15

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

We held a Special Meeting of Stockholders on June 19, 2002 at which the
following matters were voted upon:

1. Proposal to approve our sale of 7,000,000 shares of common stock at
a purchase price of $3.20 per share in a private placement (the "Private
Placement"). The vote to approve the Private Placement was 6,653,314 for,
813,405 against, and an aggregate of 563,053 abstentions and broker
non-votes.

2. Proposal to approve our issuance of 6,260,658 shares of common
stock in exchange for $35,000,000 of outstanding preferred securities of
our subsidiary trust, plus $15,085,254 of accrued and unpaid cash
distributions, at an exchange price of $8.00 per share (the "TIDES
Exchange"). The vote to approve the TIDES Exchange was 8,001,960 for,
22,462 against, and an aggregate of 5,350 abstentions and broker non-votes.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION AND HOLDERS

Our common stock is quoted on the Nasdaq National Market under the symbol
"DTII". As of September 20, 2002, the number of record holders of common stock
was 97. Such record holders include several holders who are nominees for an
undetermined number of beneficial owners. We believe that the number of
beneficial owners of the shares of common stock issued and outstanding at such
date was approximately 1,100.

The following table sets forth, for the quarters indicated, the high and
low sales prices for our common stock as reported by The Nasdaq Stock Market.

DIVIDENDS

We did not pay or declare any cash dividends on our common stock in fiscal
2001 or 2002. Our senior credit facility and the indenture governing our
convertible junior subordinated debentures currently prohibit us from declaring
or paying a cash dividend on our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

On June 20, 2002, we sold 7,000,000 shares of common stock for an aggregate
cash purchase price of $22,400,000 in a private offering to 25 institutional
purchasers, each of which was an existing stockholder or affiliate of an
existing stockholder and each of which is an accredited investor as defined in
Rule 501(a) under the Securities Act of 1933, as amended (the "Securities Act").
These shares were sold in reliance on the exemption from registration provided
in Rule 506 under the Securities Act. We paid a placement agent fee of $675,000
to William Blair & Company in connection with this offering.

On June 20, 2002, we issued 6,260,658 shares of common stock to the holders
of preferred securities of our subsidiary trust. Each of these holders is an
accredited investor. These shares were issued in exchange for $35,000,000 of
outstanding trust preferred securities, plus $15,085,254 of accrued and unpaid
cash distributions thereon, at an exchange price of $8.00 per share. These
shares were issued in reliance on the exemption from registration provided in
Rule 506 under the Securities Act.

On June 20, 2002, we amended the terms of the remaining $35,000,000 of
trust preferred securities by reducing their conversion price from $38.75 per
share to $14.00 per share, shortening their maturity from May 31, 2012 to May
31, 2008 and providing that interest does not accrue during the period from
March 31, 2002 until July 2, 2004. These remaining trust preferred securities
are held by accredited investors. To the extent these amendments are deemed to
constitute the issuance of new securities, this transaction was also completed
in reliance on the exemption from registration provided in Rule 506 under the
Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected consolidated financial data along
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes thereto
included in this Annual Report. For fiscal years 2001, 2000 and 1999, we have
presented a comparison of previously reported and restated selected financial
data due to the accounting adjustments at AMI described under
"Business -- Recent Restatement of Historical Financial Results." The pro forma
consolidated statement of operations data for the fiscal year ended June 30,
2002 reflects the impact of the financial recapitalization transaction that we
completed on June 20, 2002 and is described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Recapitalization" on our consolidated statement of
operations data for the fiscal year ended June 30, 2002, as if the financial
recapitalization transaction had occurred at the beginning of the fiscal year.
Because we completed the financial recapitalization transaction on June 20,
2002, the impact of the transaction is reflected in our consolidated balance
sheet data as of June 30, 2002.

- ---------------

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(1) Our senior credit facility and the indenture governing our convertible
junior subordinated debentures currently prohibit us from declaring or
paying a cash dividend on our common stock.

(2) Represents the reduction of interest expense resulting from using proceeds
from the Private Placement to repay indebtedness of approximately $18.5
million under our senior credit facility. This amount has been calculated
using the approximate average interest rate under the senior credit facility
during fiscal 2002, which was 9%.

(3) Represents the reduction of trust preferred securities dividends resulting
from the exchange of $35.0 million of outstanding trust preferred securities
and approximately $15.1 million of accrued and unpaid distributions for
common stock and the impact of the "distribution holiday" pursuant to which
distributions on the remaining trust preferred securities will not accrue
from April 1, 2002 through July 2, 2004. Annual dividend expense of $1,604
on the remaining trust preferred securities will be recorded reflecting an
approximate effective yield of 4.6% over the life of the remaining trust
preferred securities.

(4) Represents the reduction in income tax benefit resulting from the lower
expenses explained in (2) and (3) above. The reduction in income tax benefit
was calculated using our effective tax rate of 38% for fiscal 2002.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

For a better understanding of the significant factors that influenced our
performance during the past three fiscal years, the following discussion should
be read in conjunction with our audited consolidated financial statements and
notes thereto appearing elsewhere in this Annual Report. The following
discussion contains forward-looking statements that are subject to risks,
uncertainties and other factors, including those discussed under
"Business -- Risk Factors," that could cause our actual results, performance,
financial condition, liquidity, prospects and opportunities in fiscal 2003 and
beyond to differ materially from those expressed in, or implied by, these
forward-looking statements. See "Cautionary Note Regarding Forward-Looking
Statements."

OVERVIEW

We were formed through a series of acquisitions beginning with the initial
acquisitions of Detroit Tool Group, Inc. and the Peer Division of Teledyne, Inc.
in 1992. Subsequent to those transactions, we acquired a number of companies
with proprietary products and manufacturing capabilities that had strong market
and technological positions in the niche markets they served and furthered our
goal of providing customers with a full range of integrated automated systems.
These acquisitions expanded our base of customers and markets, creating greater
opportunities for cross-selling among our various divisions.

We primarily operated in two business segments through fiscal
2002 -- Automation and Packaging. Our Automation segment designed and built
integrated systems for the assembly, test and handling of discrete products. Our
Packaging segment manufactured tablet processing, counting and liquid filling
systems and plastics processing equipment, including thermoforming, blister
packaging and heat sealing. In the first and second quarters of fiscal 2002, we
sold the assets comprising our non-core businesses that produced precision-
stamped steel and aluminum components through our stamping and fabrication
operations.

At the end of fiscal year 2000, we discovered certain accounting errors at
our Kalish, Inc. and Sencorp Systems, Inc. subsidiaries. As a result of these
errors, we were required to restate our previously reported audited consolidated
financial statements for fiscal years 1997, 1998 and 1999, as well as the
previously reported unaudited consolidated financial information for the first
three quarters of fiscal year 2000. In response to the accounting errors
detected at Kalish and Sencorp, we appointed a new executive management team in
2001. Our new management team has been aggressively reviewing our business
practices and procedures and implementing needed changes to position us for
stability and profitability. We made significant progress in fiscal 2002 to
return to financial health by engaging in asset sales to generate cash for debt
reduction, modifying our operations in an effort to improve productivity and
margins and, as part of a major financial recapitalization transaction described
under "Liquidity and Capital Resources -- Recapitalization," negotiating an
extension of our senior credit facility from July 2, 2002 to July 2, 2004.
Furthermore, we began implementing the final steps of our corporate
restructuring plan to contain costs and improve profitability by reducing our
operations from 17 autonomous divisions with 22 manufacturing facilities as of
January 1, 2001 to six operating divisions with 12 manufacturing facilities.
This restructuring has included management changes at under-performing
divisions, reductions in work force throughout our organization, the closing of
facilities in Montreal, Quebec, Rochester, New York and Bristol, Pennsylvania,
and the consolidation of our
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Swiftpack and C.E. King operations. Also as part of this restructuring plan, we
are reorganizing our operations into four business segments: Material
Processing, Precision Assembly, Assembly and Test and Packaging Systems. This
new structure is designed to allow us to streamline product offerings,
capitalize on the combined strength of operating units, reduce overlap in the
marketplace and improve capacity utilization, internal controls, financial
reporting and disclosure controls. We are still implementing this integration
plan and completing the systems required to provide, analyze, review and report
results of operations for current and historical periods for our newly defined
segments. We intend to begin reporting financial results for these four new
business segments in our Form 10-Q for the fiscal quarter ended September 29,
2002.

Almost all of our net sales are derived from the sale and installation of
equipment and systems primarily under fixed-price contracts. We also derive net
sales from the sale of spare and replacement parts and servicing installed
equipment and systems. We recognize revenue under the percentage of completion
method or upon delivery and acceptance in accordance with SAB 101.

We principally utilize the percentage of completion method of accounting to
recognize revenues and related costs for the sale and installation of equipment
and systems pursuant to customer contracts. These contracts are typically
engineering-driven design and build contracts of automated production equipment
and systems used to manufacture, test or package a variety of industrial and
consumer products. These contracts are generally for large dollar amounts and
require a significant amount of labor hours with durations ranging from three
months to over a year. Under the percentage of completion method, revenues and
related costs are measured based on the ratio of engineering and manufacturing
hours incurred to date compared to total estimated engineering and manufacturing
labor hours. Any revisions in the estimated total costs of the contracts during
the course of the work are reflected when the facts that require the revisions
become known. The percentage of completion method of accounting is described
below under "Critical Accounting Policies and Estimates -- Revenue
Recognition -- Percentage of Completion Method."

For those contracts accounted for in accordance with SAB 101, we recognize
revenue upon shipment (FOB shipping point). We utilize this method of revenue
recognition for products produced in a standard manufacturing operation whereby
the product is built according to pre-existing bills of materials, with some
customisation occurring. These contracts are typically of shorter duration (one
to three months) and have smaller contract values. The revenue recognition for
these products follows the terms of the contracts, which calls for transfer of
title at time of shipment after factory acceptance tests with the customer. If
installation of the products is included in the contracts, revenue for the
installation portion of the contract is recognized when installation is
complete.

Costs and related expenses to manufacture products, primarily labor,
materials and overhead, are recorded as cost of sales when the related revenue
is recognized. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.

Selling, general and administrative expenses primarily consist of salary
and wages for employees, research and development costs, sales commissions and
marketing and professional expenses. Prior to fiscal 2002, selling, general and
administrative expenses also included goodwill amortization.

RECENT RESTATEMENT OF HISTORICAL FINANCIAL RESULTS

As publicly announced on August 6, 2002 (prior to the public announcement
of our consolidated financial results for the fiscal year ended June 30, 2002),
we discovered that we were required to make accounting adjustments to our
previously reported audited consolidated financial results for the fiscal years
ended June 24, 2001, June 25, 2000 and June 27, 1999, as well as our previously
reported unaudited consolidated financial results for the first three fiscal
quarters of 2002, due to an overstatement of the balance sheet account entitled
costs and estimated earnings in excess of amounts billed on uncompleted
contracts ("CIE"). The CIE balance is comprised of estimated gross margins
recognized to date plus actual work-in-process costs incurred to date less
billings/deposits to date. The overstatement of CIE occurred at our Assembly
Machines, Inc. ("AMI") subsidiary, a small facility located in Erie,
Pennsylvania that has historically been part of our Automation segment. This CIE
overstatement resulted in a corresponding understatement of cost of sales
because CIE represents project costs that have been expended, but are still
available to be billed; therefore, the overstatement in CIE included available
to bill amounts that should have been expensed to cost of sales in

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prior periods. The cumulative amount of the accounting adjustments increased the
aggregate pre-tax loss reported during the impacted periods by $6.5 million and
increased the aggregate net loss after taxes reported during the impacted
periods by $4.2 million. Our restated audited consolidated financial statements
as of, and for the fiscal year ended, June 24, 2001 and our restated audited
consolidated statement of operations, changes in stockholders' equity and cash
flows for the year ended June 25, 2000 are included on pages F-3 through F-6 and
Note 16 to the audited consolidated financial statements included herein.
Restated selected consolidated financial data for those two fiscal years, as
well as the fiscal year ended June 27, 1999, is included under "Item 6. Selected
Financial Data." Restated unaudited consolidated quarterly financial data for
the fiscal years ended June 30, 2002 and June 24, 2001 is included in Note 17 to
the audited consolidated financial statements included herein.

We discovered the accounting adjustments while beginning the transfer of
the sales and accounting functions at AMI to our DT Precision Assembly segment
headquarters in Buffalo Grove, Illinois in connection with the reorganization of
our operations described in "Business -- Markets and Products." Our Board of
Directors authorized the Audit and Finance Committee to conduct an independent
investigation, with the assistance of special counsel retained by the Committee,
to identify the causes of these accounting adjustments. The Committee retained
Katten Muchin Zavis Rosenman ("KMZR") as special counsel, and KMZR engaged an
independent accounting firm to assist in the investigation. In addition, we
investigated whether similar issues existed at any of our other subsidiaries. As
a result of the investigations, we believe that the accounting issues were
confined to AMI and determined that the misstatement of the CIE account at AMI
was primarily the result of the former controller of AMI, without instruction
from, or the knowledge of, our management, (1) failing to properly account for
manufacturing variances, (2) adding inappropriate costs to work-in-process
amounts, (3) understating amounts billed and/or customer deposits and (4)
failing to recognize certain losses, in each case on various projects during the
relevant time period. Using these miscalculations of CIE, the former AMI
controller made incorrect journal entries that were recorded in the books and
records of AMI.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management has prepared the consolidated financial statements included
herein in conformity with U.S. generally accepted accounting principles.
Accordingly, management is required to make certain estimates, judgments and
assumptions that it believes to be reasonable based upon the information
available. These estimates, judgments and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of net sales and expenses during the periods presented. The
following accounting policies comprise those that management believes involve
estimates, judgments and assumptions that are the most critical to aid in fully
understanding and evaluating our reported financial results. Because of the
uncertainty inherent in these matters, actual results could differ from
estimates, judgments and assumptions we use in applying the critical accounting
policies.

Revenue Recognition -- Percentage of Completion Method

We recognize a significant portion of our revenues and profits as contracts
progress using the percentage of completion method of accounting, which relies
on estimates of total expected contract revenues and costs. Under this method,
estimated contract revenues and resulting gross profit are recognized based on
labor hours incurred to date as a percentage of total estimated labor hours to
complete the contract. We follow this method because we believe reasonably
dependable estimates of the revenues and costs applicable to various elements of
a contract can be made. Because the financial reporting of these contracts
depends on estimates, which are assessed continually during the term of these
contracts, recognized revenues and profit are subject to revisions as the
contract progresses to completion. Total estimated costs, and thus contract
profitability, are impacted by changes in productivity, scheduling, and the unit
cost of labor, subcontracts, materials and purchased equipment. Additionally,
external factors, such as customer needs and customer delays in providing
approvals, may also affect the progress and estimated cost of a project's
completion and thus the timing of profit and revenue recognition. Revisions in
profit estimates are reflected in the period in which the facts that give rise
to the revision become known. Accordingly, favorable changes in estimates result
in additional revenues and profit recognition, and unfavorable changes in
estimates result in a reduction of recognized

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revenues and profits. When current estimates of total contract costs indicate
that the contract will result in a loss, the projected loss is recognized in
full in the period in which the loss becomes evident.

Many of our contracts provide for termination of the contract at the
convenience of the customer. In the event a contract is terminated at the
convenience of the customer prior to completion, we will typically be
compensated for progress up to the time of termination and any termination
costs. In addition, many contracts are subject to certain completion schedule
requirements with liquidated damages in the event schedules are not met as the
result of circumstances that are within our control. Losses on terminated
contracts and liquidated damages have historically not been significant.

Inventory Valuation

We value our inventories at the lower of the actual cost to purchase or
manufacture, which approximates the first-in, first-out (FIFO) method, or the
current estimated market value. With regards to stock inventories, we regularly
count quantities on hand and record a provision for excess and obsolete
inventory based primarily on historical usage rates. With regards to finished
goods inventories, we record market value reserves based on estimated forecasts
of future product demand. A significant decrease in demand could result in an
increase in the amount of excess inventory quantities on hand. In addition,
estimates of future product demand involve inherent uncertainties, which may
result in additional charges related to excess and obsolete inventory.
Therefore, any significant unanticipated changes in demand could have a
significant impact on our level of inventory reserves and reported operating
results.

Accounts Receivable

We perform ongoing credit evaluations of new and existing customers and
constantly monitor customer payments via accounts receivable aging reports. We
maintain an estimated allowance for doubtful accounts resulting from the
inability of our customers to make required payments based upon historical
experience and known customer collection issues. The allowance for doubtful
accounts is reevaluated at each balance sheet date and adjusted based on
information that impacts the estimates of uncollectible amounts. Because we
cannot predict future changes in the financial stability of our customers,
actual future losses from uncollectible accounts may differ from our estimates.

Goodwill Impairment

Under Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142), we assess recoverability of goodwill on an
annual basis or when events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. Factors that we would
consider important that could trigger an impairment review include the
following:

- significant underperformance of a segment or division relative to
expected historical or projected future operating results;

- significant negative industry or economic trends; and

- significant changes in the strategy for a segment or division.

In accordance with the provisions of SFAS 142, we derive a fair value for
our reporting units, which represent the various components of our operating
segments, and compare such fair value to the carrying value of the reporting
unit to determine if there is any indication of goodwill impairment. For
purposes of deriving the fair value of our reporting units, we utilize a
discounted cash flow analysis based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
discounted cash flows may differ from actual cash flow due to, among other
things, changes in economic conditions, changes to our business models, changes
in our weighted average cost of capital, or changes in our operating
performance. We will recognize an impairment charge to the extent that the
implied fair value of the goodwill balances for the reporting units is less than
the carrying value of such goodwill balances.

Given that this impairment analysis is performed at the reporting unit
level for which discrete financial information is available, it is possible for
a segment of our business, which represents an aggregation of reporting units,
to show increased levels of sales and operating results but at the same time
have impairment within such segment.

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Warranty Accruals

We routinely incur costs after projects are installed and closed. We record
these costs as warranty charges within cost of sales. Warranty costs are
estimated at the time a project is closed based on our historical warranty
experience and consideration of any known warranty issues. The fluctuation in
our warranty costs depends on the nature and timing of our projects. Increases
in warranty costs coincide with our incurring increased costs associated with
projects that have performance issues. Our estimate of warranty expense may
differ from actual warranty expense incurred due to, among other things, our
inability to satisfactorily debug all customer projects or our inability to meet
all specifications of customer projects.

SEGMENT FINANCIAL DATA

Set forth below is certain financial data relating to each business
segment. For fiscal 2001 and 2000, we have presented a comparison of previously
reported and restated amounts due to the accounting adjustments at AMI discussed
above in "Recent Restatement of Historical Financial Results."