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 29, 2003

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 [X].

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

As of December 27, 2002, (the last business day of the Registrant's most
recently completed second fiscal quarter) the aggregate market value of the
voting and non-voting common stock held by non-affiliates of the registrant was
$46,756,483 (based on the closing sales price on December 27, 2002 of $2.01 per
share).

As of October 3, 2003, there were 23,667,932 shares of common stock, $.01 par
value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for its Annual Meeting
of Stockholders scheduled to be held on November 11, 2003 are incorporated by
reference into Part II (Item 5) and Part III of this Annual Report.
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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 which 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 our ability to
comply with restrictions and covenants relating to, our indebtedness under our
senior credit facility, our ability to obtain a waiver of our current credit
facility covenant defaults and therefore borrow additional funds, our ability to
refinance or further extend our senior credit facility in order to meet our
liquidity needs and continue as a going concern after July 2, 2004, our ability
to achieve anticipated cost savings from our corporate restructuring and cost
reduction initiatives, our ability to continue upgrading and modifying our
financial, information and management systems and controls to manage our
operations on an integrated basis and report our results, continued economic
downturns in industries or markets served, delays or cancellations of customer
orders, delays in shipping dates of products, significant cost overruns on
projects, customer demand for new products and applications, the loss of a key
customer, significant pre-tax charges, including for goodwill impairment, the
write-down of assets, warranty-related expenses and restructuring charges,
foreign currency exchange rate fluctuations, changes in interest rates,
increased inflation and collectibility of past due customer receivables. 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 expressly 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 1

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.

BUSINESS SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND INTERNATIONAL SALES

In fiscal 2002, we reorganized our operations into four business segments
(which also represent our reportable segments during fiscal 2002): Material
Processing, Precision Assembly, Assembly and Test and Packaging Systems. This
new structure was 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. The four business segments are described
below under "-- Markets and Products." In July 2003, we announced the closure of
our Precision Assembly segment manufacturing facility in Buffalo Grove, Illinois
and the transfer of its manufacturing operations to our Material Processing
segment's Lebanon, Missouri facility. An engineering, sales and service office
will remain in Illinois to serve Precision Assembly's customers. As a result of
this consolidation, we are consolidating the Precision Assembly segment into the
Material Processing segment for financial reporting purposes and expect to begin
reporting financial results for the three remaining business segments in our
Form 10-Q for the fiscal quarter ended September 28, 2003.

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 2003 and 2002 and 14% of our
consolidated net sales for fiscal 2001. Sales to customers outside of the United
States were approximately 40% of our consolidated net sales for fiscal 2003, 45%
of our consolidated net sales in fiscal 2002 and 37% of our consolidated net
sales in fiscal 2001. For financial information concerning our business
segments, foreign and domestic operations and international sales, see Note 16
to the audited consolidated financial statements included herein.

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

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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 our 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.

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 believe the expansion of our product offerings and customer
base represents an opportunity for net sales growth.

MARKETS AND PRODUCTS

The following disclosure describes the markets and products of the four
business segments within which we operated in fiscal 2003.

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

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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
which are sold to a 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 large 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.

In July 2003, we announced the closure of our Precision Assembly segment
manufacturing facility in Buffalo Grove, Illinois and the transfer of its
manufacturing operations to our Material Processing segment's Lebanon, Missouri
facility. An engineering, sales and service office will remain in Illinois to
serve Precision Assembly's customers. As a result of this consolidation, we are
consolidating the Precision Assembly segment into the Material Processing
segment for financial reporting purposes and expect to begin reporting financial
results for the three remaining business segments in our Form 10-Q for the
fiscal quarter ended September 28, 2003.

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.
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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 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 2002 and fiscal 2001.

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, Canada, 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.

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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 23%, 31% and 28% of our consolidated net sales
during fiscal 2003, fiscal 2002 and fiscal 2001, respectively, and approximately
29% and 83% of the Material Processing segment's and Precision Assembly
segment's net sales in fiscal 2003, respectively. Other customers whose sales
were 10% or more of an individual segment's net sales in fiscal 2003 were:
Maytag (20% of Material Processing), Visteon and DaimlerChrysler (19% and 13%,
respectively, of Assembly & Test). No other customer accounted for 10% or more
of our consolidated net sales or any of our four segment's net sales during
fiscal 2003.

BACKLOG

Our backlog is based upon customer purchase orders that we believe are
firm. As of June 29, 2003, we had $88.9 million of orders in backlog, which
compares to a backlog of approximately $142.8 million as of June 30, 2002.
Backlog and orders by segment for the current and prior year period were as
follows:

Our backlog continues to decrease as a result of the softness in orders
across all segments. The decreases in backlog and orders for the Material
Processing and Precision Assembly segments primarily reflect the decrease in new
projects with Hewlett-Packard. The reduced backlog of the Material Processing
segment also reflects the cancellation in fiscal 2003 of $12.0 million of orders
from Green Packaging for biodegradable foam laminate packaging equipment. The
decrease in backlog and orders for the Packaging Systems segment primarily
reflects the decrease in projects with our larger pharmaceutical customers. The
Assembly & Test segment recorded the only increase in orders for fiscal 2003 as
compared to fiscal 2002. The increase was from automotive projects that resulted
from international customers and new technology projects. Regarding our order
outlook across business segments, we remain cautious about any increase in order
levels.

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 (e.g., Green Packaging's cancelled orders described above). 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 29, 2003 will be recognized as sales
during fiscal 2004.

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

5

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 $1.9 million, $3.4 million and $2.8 million
in fiscal 2003, 2002 and 2001, respectively.

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.

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 September 30, 2003, we had approximately 1,200 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.

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

As of October 3, 2003, 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 $81.7 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 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. Furthermore, we are obligated to make
quarterly cash distributions on these securities beginning on July 2, 2004;
provided, however, that if we make a cash distribution on these securities for
at least the first quarter, we can defer subsequent distributions after the
quarter ending September 30, 2004. If the cash flow from our operating
activities is not sufficient to meet our obligations under the senior credit
facility and the trust preferred securities (which it will not be with respect
to the lump sum payment due July 2, 2004), we will need to delay or reduce
capital expenditures, restructure or refinance our debt, sell assets and/or seek
additional equity capital. For example, we are actively engaged in negotiations
to refinance our senior credit facility and sell certain assets in order to
satisfy our obligations under the senior credit facility at or prior to its
maturity on July 2, 2004. 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
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. The report of our
independent auditors on our audited consolidated financial statements that are
included in this Annual Report states that our current defaults under the senior
credit facility, recurring losses and significant accumulated deficit raise
substantial doubt about our ability to continue as a going concern. If we do not
have sufficient funds to satisfy our obligations under our senior credit
facility and the trust preferred securities, we will not be able to continue our
operations as currently anticipated and may need to initiate bankruptcy
proceedings in order to continue our operations with minimal disruption and
preserve the value of our assets.

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, especially if we do not experience
improvement in capital spending in the markets we serve and in demand for our
product. For example, as a result of our financial performance in fiscal 2003
and the first quarter of fiscal 2004, we failed on several occasions to satisfy
the minimum trailing twelve-month

7

EBITDA and maximum funded debt to EBITDA financial covenants under the facility.
We obtained waivers from our lenders for the failures to comply with those
covenants for the first nine months of fiscal 2003 and are negotiating with our
lenders for a waiver for the failures to comply with these covenants in the
fourth quarter of fiscal 2003 and first quarter of fiscal 2004. If these
covenant defaults or any other failure to comply with the covenants in our
credit facility trigger an event of default that is not waived or cured, our
lenders will be entitled 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 are available under the
revolving portion of our senior credit facility if there is an event of default,
which is currently the case due to the current financial covenant defaults.
Limitations on our ability to access further borrowings under the credit
facility could materially adversely affect our ability to satisfy our liquidity
needs if we are not able to effectively manage our cash. The report of our
independent auditors on our audited consolidated financial statements that are
included in this Annual Report states that our current defaults under the senior
credit facility, recurring losses and significant accumulated deficit raise
substantial doubt about our ability to continue as a going concern. If our
indebtedness is accelerated, we will not have sufficient funds to satisfy our
obligations, will not be able to continue our operations as currently
anticipated and may need to initiate bankruptcy proceedings in order to continue
our operations with minimal disruption and preserve the value of our assets.

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.

WE REPORTED AN OPERATING LOSS FOR OUR 2001, 2002 AND 2003 FISCAL YEARS, HAVE
RECEIVED A GOING CONCERN OPINION AND MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY IN
THE NEAR FUTURE.

We reported operating losses of approximately $66.8 million, $4.0 million
and $64.8 million for the fiscal years ended June 24, 2001, June 30, 2002 and
June 29, 2003, respectively. The operating losses included non-cash
goodwill/asset impairment charges of $51.9 million in fiscal 2003 and $38.2
million in fiscal 2001. We have restructured our business by consolidating
manufacturing and fabrication operations, establishing three business segments
as of the first quarter of fiscal 2004 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,
the report of our independent auditors on our audited consolidated financial
statements that are included in this Annual Report states that our current
defaults under the senior credit facility, recurring losses and significant
accumulated deficit raise substantial doubt about our ability to continue as a
going concern. Even if we are able to continue our operations as currently
anticipated and achieve profitability in the near future, we may not be able to
sustain such operating performance.

8

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

We have five operating divisions with 10 manufacturing facilities within
three business segments, after giving effect to the consolidation of the
Material Processing and Precision Assembly segments in the first quarter of
fiscal 2004 following the announcement in July 2003 of the closure of the
remaining manufacturing facility of the Precision Assembly segment. Some of our
operating facilities have different systems and procedures in various
operational and financial areas that we are in the process of rationalizing and
integrating. We continue to upgrade and modify our financial, information and
management systems and procedures 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 manufacturing
and/or sales facilities in the United Kingdom, Germany and five different states
in the United States. If we are unable to fully integrate our operations and
continue improving our systems and procedures smoothly, quickly, successfully,
or at all, we will not achieve the efficiency, results and capabilities that the
rationalization and consolidation of our operations were designed to accomplish.

A DOWNTURN IN GENERAL ECONOMIC CONDITIONS OR 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 economic
uncertainty throughout the world have resulted in restrained customer capital
spending for the past several years, which has adversely affected sales of our
equipment to the pharmaceutical and nutritional, electronics, plastics
packaging, automotive, heavy trucks and other industries. Continued economic
sluggishness or 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 $88.9 million as of June 29, 2003. 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. 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. For example, Green Packaging, a customer of our
Material Processing segment, cancelled approximately $12.0 million of orders
during fiscal 2003. See "Legal Proceedings" for a description of the dispute we
have with Green Packaging with respect to these cancelled orders. Although we
have historically recognized as sales almost all of the orders in our backlog,
our ability to recognize as sales in fiscal 2004 the orders in our backlog as of
June 29, 2003 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 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.

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;

9

- 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 expenses 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 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 one or more 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.

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 23%, 31% and 28% of our consolidated net sales
during fiscal 2003, 2002 and 2001, respectively. We expect that purchase orders
from Hewlett-Packard will decline in fiscal 2004. 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 fiscal
period. Our reliance on a limited number of customers also magnifies the risk of
not being able to collect accounts receivable from any one customer.

10

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 former
Chief Operating Officer and current President of our combined Detroit Tool and
Engineering and Precision Assembly operations, are no longer employed by, and
fulfilling their then 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 and consolidated our Swiftpack and C.E. King operations. In fiscal
2003, we closed our facility in Erie, Pennsylvania and in July 2003 we announced
the closure of our manufacturing facility in Buffalo Grove, Illinois. We are
exploring opportunities to sell other businesses to generate cash to help us
meet our debt obligations and might further consolidate our operations if we
believe such actions would further improve our operational efficiency or if we
decide to change the focus of our business strategy. 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

11

in Hyannis, Massachusetts in 2002. The sale of a business and discontinuing or
consolidating operations involves 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 restructuring charges, such for severance, asset
write-offs and future facility lease costs, or a net loss on the disposal
of assets.

If we sell any of our businesses or discontinue or consolidate 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 2003, AND IF WE INCUR SIMILAR SIGNIFICANT
CHARGES IN THE FUTURE, OUR OPERATING RESULTS MAY BE MATERIALLY ADVERSELY
AFFECTED.

During fiscal 2003, we recorded an impairment charge of approximately $51.9
million after determining that the goodwill associated with two of our segments
had been impaired. As of June 29, 2003, our goodwill balance of approximately
$75.3 million represented approximately 36% 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 further
impaired. If we are required to further 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.

12

ANY FURTHER RESTATEMENTS OF FINANCIAL RESULTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR LIQUIDITY, ABILITY TO OPERATE AND COMMON STOCK PRICE AND RESULT IN
MATERIAL LIABILITIES.

Recent historical 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. Although we have
improved our internal controls and accounting staff at our divisions, we could
still 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 retain competent, trustworthy
accounting staff at our divisions and continue to upgrade and modify our
internal controls when necessary so as to avoid these accounting issues and
similar restatements in the future, our access to, and ability to refinance or
restructure, our senior credit facility, 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 also face securities class
action lawsuits and the Securities and Exchange Commission may impose
significant penalties against us if further accounting issues should occur in
the future.

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 that rank senior in right of payment to our common
stock. Therefore, upon the bankruptcy, liquidation or winding up of our
operations, 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 interests of our 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 information with respect to our manufacturing facilities as
of the date of this Annual Report.

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

(1) This property secures our senior credit facility.

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

(3) We announced the closure of this manufacturing facility in July 2003.
Manufacturing of Precision Assembly segment orders are being transferred to
the Lebanon, Missouri facility of the Material Processing segment.

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

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 our AMI subsidiary 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

14

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 little discovery in these actions to
date. 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.

In July 2003, Green Packaging SDN BHD and Green Earth Packaging Corp.
(collectively, "Green Packaging") filed a complaint against Detroit Tool &
Engineering Company ("DTE"), a wholly-owned subsidiary of DTI, in the Superior
Court of the State of California, County of Santa Barbara. As causes of action,
the complaint alleges breach of contract, misappropriation of trade secrets,
breach of confidence, unfair business practices, conversion and similar claims
arising out of a purchase order pursuant to which DTE was to manufacture for
Green Packaging four lines of equipment for the purpose of producing
biodegradable food packaging using technology and processes licensed by Green
Packaging from EarthShell Corporation. In its complaint, Green Packaging seeks
damages "believed to be in excess of $3.3 million," punitive damages and
injunctive relief. Prior to the filing of the complaint, Green Packaging had
notified DTE that it was canceling its purchase order for the equipment, and DTE
had invoiced Green Packaging for cancellation charges in excess of $6.4 million,
which amount has not been paid. DTE filed a motion to quash service of the
summons and complaint for lack of personal jurisdiction. Rather than responding
to the motion, on September 29, 2003 Green Earth amended its complaint and added
DTI as a defendant in that action. The causes of action in the amended complaint
are the same as those asserted in the original complaint, with the addition of a
breach of guarantee and breach of an additional agreement claims. We intend to
file a motion to quash service of the summons and complaint for lack of personal
jurisdiction. In addition, we intend to vigorously defend Green Packaging's
action and to vigorously pursue our claim against Green Packaging for the
above-referenced cancellation charges.

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 seven 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. Except as described above, 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.

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

None.

15

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 19, 2003, the number of record holders of common stock
was 90. 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 1,300.

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, 2002 or 2003. 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.

EQUITY COMPENSATION TABLE

The Equity Compensation Table required by this item will be set forth under
the caption "Securities Authorized for Issuance Under Equity Compensation Plans"
in the definitive proxy statement, which information is incorporated by
reference herein.

16

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.

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

(1) The previously reported statement of operations for the year ended June 30,
2002 has been adjusted to record curtailment and settlement losses of $2,221
on the U.K. pension plan of Assembly Technology & Test, Ltd. The curtailment
and settlement losses, though disclosed in the notes to our fiscal 2002
financial

17

statements, were not previously recorded as part of the restructuring and
related items charge on the statement of operations for the fiscal year
ended June 30, 2002. The losses have been reflected as an increase in the
restructuring and related items charge for the year ended June 30, 2002. The
previously reported balance sheets since the acquisition of Assembly
Technology & Test, Ltd. in fiscal 1998 have also been adjusted to properly
reflect the status of the U.K. pension plan, including the recording of a
prepaid pension asset at the acquisition date of $3,518, the reduction in
goodwill due to the additional prepaid pension asset and a related reduction
in goodwill amortization and adjustments to stockholders' equity -- other
comprehensive income to reflect the minimum pension liability in subsequent
years to the acquisition. We also made an adjustment to beginning retained
earnings for the reversal of certain opening balance sheet reserves of
$2,160 related to the acquisitions of Hansford and Assembly Technology and
Test (in fiscal 1997 and 1998, respectively), which were established to
cover certain contingencies at the date of acquisition and were included in
costs and earnings in excess of amounts billed on uncompleted projects. In
subsequent years, we did not charge the contingent losses against the
reserve nor reverse the reserves when the contingencies were resolved.

(2) 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.

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 2004 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.

Our current executive management team, appointed in fiscal 2001, has been
aggressively reviewing our business practices and procedures and implementing
needed changes to position us for stability and profitability. We made progress
in fiscal 2002 and fiscal 2003 with respect to improving our 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, in fiscal 2003,
we implemented 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 11 manufacturing facilities as of the end of fiscal
2003. This restructuring included management changes at under-performing units,
reductions in work force throughout our organization, the closing of facilities
in Camberly, England, Montreal, Canada, Rochester, New York, Bristol,
Pennsylvania and Erie, Pennsylvania. Also as part of this restructuring plan, we
reorganized our operations into four business segments: Material Processing,
Precision Assembly, Assembly and Test and Packaging Systems. This new structure
was 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.

18

In July 2003, we announced the closure of our Precision Assembly segment
manufacturing facility in Buffalo Grove, Illinois and the transfer of its
manufacturing operation to our Material Processing segment's Lebanon, Missouri
facility. We will maintain an engineering sales and service office in Illinois
to serve Precision Assembly's customers. As a result of this consolidation, we
are consolidating the Precision Assembly segment into the Material Processing
segment for financial reporting purposes and expect to begin reporting financial
results for the three remaining business segments in our Form 10-Q for the
fiscal quarter ended September 28, 2003.

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.

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 SEC Staff Accounting
Bulletin No. 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
customization 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 call for transfer of
title at time of shipment after factory acceptance tests with the customer. If
installation of the product 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. In fiscal 2001, selling, general and
administrative expenses also included goodwill amortization of $4.7 million.

The report of our independent auditors on our audited consolidated
financial statements that are included in this Annual Report states that the
current defaults under our senior credit facility, recurring losses and
significant accumulated deficit raise substantial doubt about our ability to
continue as a going concern. See "Liquidity and Capital Resources -- Cash Flow
Activity" for additional information.

ADJUSTMENT TO HISTORICAL FINANCIAL RESULTS

In connection with the acquisition of Assembly Technology and Test in
fiscal 1998, we assumed defined benefit plans for the United Kingdom and Germany
divisions. On the opening balance sheet, we did not record a prepaid pension
asset nor did we subsequently adjust the prepaid pension asset in following
years. The U.K. pension plan was overfunded by $3,518 at the acquisition date.
Due to stock market declines and additional
19

changes, the U.K. plan became underfunded in fiscal 2002 and required a charge
to stockholders' equity to establish a minimum pension liability. Also, it was
determined that a curtailment and a settlement loss occurred in fiscal 2002 due
to enhanced pension benefits provided to 18 individuals terminated between April
and June of fiscal 2002. The curtailment and settlement losses, though disclosed
in the notes to our fiscal 2002 financial statements, were not previously
recorded as part of the restructuring and related items charge on the statement
of operations for the fiscal year ended June 30, 2002. The statement of
operations impact in fiscal 2002 was an increase in the restructuring and
related items charge of $2.2 million. The previously reported balance sheets
since the acquisition of Assembly Technology & Test, Ltd. in fiscal 1998 have
also been adjusted to properly reflect the status of the U.K. pension plan,
including the recording of a prepaid pension asset at the acquisition date of
$3.5 million, the reduction in goodwill due to the additional prepaid pension
asset and a related reduction in goodwill amortization, and adjustments to
stockholders' equity -- other comprehensive income to reflect the minimum
pension liability in fiscal 2002.

We also made an adjustment to beginning retained earnings for the reversal
of certain opening balance sheet reserves of $2.2 million related to the
acquisitions of Hansford and Assembly Technology and Test (in fiscal 1997 and
1998 , respectively), which were established to cover certain contingencies at
the date of acquisition and were included in costs and earnings in excess of
amounts billed on uncompleted projects. In subsequent years, we did not charge
the actual losses against the reserve nor reverse the reserves when the
contingencies were resolved.

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 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

20

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.

Inventory Valuation

We value our inventories at the lower of cost, which approximates the
first-in, first-out (FIFO) method, or market. With regard 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 regard to
finished goods inventories, we record market value reserves based on estimated
forecasts of future product demand.

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 consider
important that could trigger an impairment review include, among others, 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 fair values for
our reporting units that represent the various components of our operating
segments and compare such fair values to the carrying values of each of our
reporting units to determine if there is any indication of goodwill impairment.
For purposes of deriving the fair values 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 values of the goodwill balances for the reporting units are 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.

Deferred Income Tax Assets

We provide for estimated income taxes payable or refundable on current year
income tax returns as well as the estimated future tax effects attributable to
temporary differences and carryforwards, in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 also requires that a valuation allowance be recorded against any
deferred tax assets that are not likely to be realized in the future. This
requires considerable judgment to determine such realizability. The
determination is based on our ability to generate future taxable income and, at
times, is dependent on our

21

ability to implement strategic tax initiatives to ensure full utilization of
recorded deferred tax assets. We have experienced tax losses for the past four
fiscal years and, therefore, have provided a full valuation allowance against
our deferred tax assets, including net operating losses. To the extent that we
are able to generate taxable income in the future, these valuation allowances
may be reversed.

Long-Lived Assets

We review long-lived assets, including property, plant and equipment, and
intangible assets other than goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying amount of any asset may not be
recoverable. Factors that we consider important that could trigger an impairment
review include, among others, the following:

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

- significant changes in the use of the assets of a segment or division or
the strategy for the segment or division; and

- significant negative industry or economic trends.

Our impairment test is based on a comparison of undiscounted cash flows to
the recorded value of the asset. The estimate of cash flow is based upon, among
other things, certain assumptions about expected future operating performance.
Our estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value, we
recognize an impairment loss, measured as the amount by which the carrying value
exceeds the fair value of the asset.

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.

22

SEGMENT FINANCIAL DATA

Set forth below is certain financial data relating to each business
segment.

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

(1) Fiscal 2003 and fiscal 2001 operating loss includes $51,880 and $38,219,
respectively, of goodwill/asset impairment charges.

(2) Operating income was adjusted from that previously reported due to the
recording of an additional restructuring and related items charge of $2,221
related to the curtailment/settlement loss on the U.K. pension plan at
Assembly Technology & Test, Ltd.

(3) Assets have been adjusted from previously reported to properly reflect the
status of the U.K. pension plan, including the reduction in goodwill due to
the recording of an additional prepaid pension asset of $3,518 at the
acquisition date of Assembly Technology & Test, Ltd. We also made an
adjustment to beginning retained earnings for the reversal of certain
opening balance sheet reserves of $2,160 related to the acquisitions of
Hansford and Assembly Technology and Test, which were included in costs and
earnings in excess of amounts billed on uncompleted projects.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in our consolidated
statement of operations. The data presented below was derived from our audited
consolidated financial statements included in this Annual Report.

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

(1) Percentages were adjusted from previously reported percentages due to the
recording of an additional restructuring and related items charge of $2.2
million related to the curtailment/settlement loss on the U.K. pension plan
at Assembly Technology & Test, Ltd.

Fiscal 2003 Compared to Fiscal 2002 (As Adjusted)

Our consolidated net sales for the fiscal year ended June 29, 2003 were
$241.1 million, a decrease of $85.2 million, or 26.1%, from $326.3 million for
the fiscal year ended June 30, 2002. Sales to Hewlett-Packard

24

were $54.4 million in fiscal 2003, down $45.2 million, or 45.4%, from fiscal
year 2002. We expect to see continued softness in our core electronics market in
fiscal 2004.

Material Processing segment net sales decreased $12.8 million, or 13.5%, to
$82.5 million for the fiscal year ended June 29, 2003 from fiscal 2002. The
decrease in net sales was across multiple industries, including automotive
tires, electronics and consumer products. These decreases were partially offset
by increased sales to the appliance industry. Sales to Hewlett-Packard were
$23.9 million in fiscal 2003, down $4.3 million, or 15.1%, from fiscal 2002.

Precision Assembly segment net sales decreased $32.8 million, or 47.0%, to
$36.9 million for the fiscal year ended June 29, 2003 from fiscal 2002. Sales to
Hewlett-Packard has accounted for over 75% of the Precision Assembly segment's
sales in each of fiscal years 2003 and 2002. In fiscal 2003, sales to Hewlett-
Packard were $30.5 million, down $24.4 million, or 44.5%. The decrease in sales
can be attributed to the completion of several capital spending programs with
this customer being recognized in fiscal 2002 and not being replaced by other
orders from this customer or other customers in fiscal 2003. In July 2003, we
announced the decision to shut down the remaining manufacturing operations in
Buffalo Grove, Illinois of the Precision Assembly segment. Future projects will
be manufactured in Lebanon, Missouri as part of the Material Processing segment.
As a result of this consolidation, we are consolidating the Precision Assembly
segment into the Material Processing segment for financial reporting purposes
and expect to begin reporting financial results for the three remaining business
segments in our Form 10-Q for the fiscal quarter ended September 28, 2003. The
decision to shut down operations in Buffalo Grove was based on the outlook for
future electronics projects and excess capacity issues. We expect to see
continued softness in our core electronics market, including sales from
Hewlett-Packard, in fiscal 2004.

Packaging Systems segment net sales decreased $6.6 million, or 16.1%, to
$34.4 million for the fiscal year ended June 29, 2003 from fiscal 2002. This
business segment primarily serves the pharmaceutical and nutritional markets.
The lower sales can be attributed to the softness in capital spending by large
pharmaceutical companies.

Assembly & Test segment net sales decreased $32.2 million, or 27.0%, to
$87.2 million for the fiscal year ended June 29, 2003 from fiscal 2002. Our
Assembly & Test segment primarily serves the automotive market. This segment's
automotive-related sales decreased due to the general softness in the economy
that has restrained customer capital spending in the automotive market. Sales
were also down due to the decrease in revenues from a diesel engine assembly and
test project. This project contributed $6.8 million in revenues in fiscal 2003
versus $12.1 million in fiscal 2002. Our Assembly & Test segment has not been
able to replace the reductions in this project with new orders.

Gross profit decreased $23.7 million, or 36.3%, to $41.6 million for the
fiscal year ended June 29, 2003 from $65.3 million for the fiscal year ended
June 30, 2002. The decrease in our gross profits reflects the effect of the
$85.2 million, or 26.1%, decrease in net sales. Our gross margin decreased to
17.2% in fiscal 2003 from 20.0% in fiscal 2002. The decrease in our gross margin
primarily reflects the process and equipment development costs of $1.9 million
for Earthshell's biodegradable foam laminate packaging equipment in the Material
Processing segment and the manufacturing inefficiencies within the Precision
Assembly segment resulting from the decrease in manufacturing activity.

Selling, general and administrative (SG&A) expenses were $51.3 million for
the fiscal year ended June 29, 2003, a decrease of $4.3 million, or 7.7%, from
the $55.6 million for the year ended June 30, 2002. The decrease is primarily
attributed to the cost reduction program that we implemented in fiscal 2003,
which achieved savings of $1.0 million a month beginning in April 2003. The
program included the discontinuance of 401-K matching and discretionary
contributions and salary and wage reductions of 5% to 10% across several
divisions and our corporate office.

In the fourth quarter of fiscal 2003, we recorded a $51.9 million
goodwill/asset impairment charge related to several businesses in both the
Precision Assembly and Packaging Systems segments. We recorded an additional
$12.0 million goodwill/asset impairment charge from the $39.9 million
goodwill/asset impairment charge previously disclosed in our earnings press
release issued September 5, 2003. The additional charge

25

related to a revised assessment of the fair value of the assets and liabilities
of the Packaging Systems segment. The write-down of goodwill was primarily the
result of the continued decline in the operating results of certain reporting
units and management's assumptions regarding future performance based on the
overall economic recession and reduction in capital spending levels. We
calculated the present value of expected cash flows using a discount rate of
11%, which represented the weighted average cost of capital adjusted for risk
factors relative to our reporting units.

On December 13, 2002, we announced t