**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

| **(Mark One)** |
|----------------|
| **ý**     | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the Fiscal Year ended December 31,2001**

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from             to          **

 

**Commission File No.: 0-16182**

 

**AXSYS TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **11-1962029**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
| **175 Capital Boulevard, Suite 103**                            |   |                                    |
| **Rocky Hill, Connecticut**                                     |   | **06067**                               |
| (Address of principal executive  offices)                       |   | (Zip Code)                              |
|                                                            |   |                                    |
| **(860) 257-0200**                                              |
| (Registrant's telephone number,  including area code)           |

 

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

 

Common Stock, par value $.01 pershare

 

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

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K o.

 

Aggregate market value of the voting stock held by non-affiliates of theregistrant as of the close of business March 1, 2002, $22,411,414.

 

Common Stock outstanding at March 1, 2002: 4,698,498 shares.

 
|                                                                                               | **Documents Incorporated by Reference** |                    |
|----------------------------------------------------------------------------------------------------|-----------------------------------------|-------------------------|
| **Document**                                                                                       |                                    | **Form 10-K Reference** |
| Portion of Axsys Technologies, Inc. Notice of Annual  Meeting of Stockholders and Proxy Statement. |                                    | Part III, Items 10-13   |
|                                                                                                    |                                         |                         |  |  |

 

 

**PART I**

 

**Item 1.  BUSINESS**

 

Axsys Technologies, Inc. (together with itssubsidiaries, unless the context suggests otherwise, "Axsys" or"we") is a leading designer and manufacturer of high-performancecustom nano-positioning components, subsystems and systems.  We also design and manufacture precisionoptical components for internal consumption as well as for sales to thirdparties.  In addition, we distribute precisionball bearings for use in a variety of industrial and commercial applications.

 

Axsys is incorporated in Delaware, and our commonstock is traded on the NASDAQ Stock Market under the symbol "AXYS."

 

We sell our components, subsystems and bearings to avariety of original equipment manufacturers ("OEM"s), serving thefollowing markets:

 

**•**                  Aerospaceand defense

**•**                  Semiconductor,data storage, and related capital equipment

**•**                  High-performance graphic art capitalequipment

**•**                  Industrialautomation OEM and maintenance repair operations ("MRO")

 

We sell semi and fully automated development,inspection and production systems, utilizing our nano-positioning capabilitiesand proprietary software controls, integrated with other third party products.These are sold to end-users that manufacture semiconductor, photonic, and otherhigh technology components.

 

We are organized into three groups:

•                  Precision Components Group

•                  Automation Group

•                  Distributed Products Group

 

The Precision Components Group designs, manufacturesand sells high-end components such as precision position sensors, high-performancemotors, precision metal optics, and laser-based airbearing scanners andopto-mechanical and electro-mechanical subassemblies.  Our products enable OEMs to improve measurement precision,imaging, positional performance (accuracy, resolution, speed and power), andweight requirements in their systems. Principal markets for our products include OEMs serving the aerospace,defense, high-end graphic arts, semiconductor, photonic, and other relatedelectronics capital equipment markets. The Precision Components Group is comprised of:

 

•                  Axsys Technologies – Motion ControlDivision in San Diego, California

•                  Axsys Technologies – Precision MachinedProducts in Cullman, Alabama

•                  Axsys Technologies – Imaging Systems inRochester Hills, Michigan

 

The Automation Group designs, manufactures and sellsautomated production and test systems and nano-positioning subsystems to hightechnology customers that produce semiconductor, data storage and photoniccomponents and other high technology products. These production and test systems integrate the group's precisionoptical and positioning components and subsystems with vision systems, roboticsand electronic controls produced by third party companies.  This integration is accomplished using ourproprietary FlexAuto*TM*andControLight software. These tools are designed to enable our customers toaccurately and repeatedly produce their component products, thereby increasingthe yield and throughput of the inspection and production processes.  The Automation Group is comprised of:

 

•                  Axsys Technologies – Integrated Systems inSanta Barbara, California

•                  Axsys Technologies – Fiber Automation inPittsburgh, Pennsylvania

•                  Axsys Technologies – Axsys AutomationEngineering in Wilmington, Massachusetts

 

The Distributed Products Group distributes precisionball bearings, acquired from various domestic and international sources, toOEMs and MRO distributors.  The ballbearings are used in a variety of industrial automation and commercialmarkets.  Additionally, our DistributedProducts Group designs, manufactures and sells mechanical-bearing subassembliesfor a variety of customers.  TheDistributed Products group is comprised of AST Bearings division located inMontville, New Jersey with a distribution center in Irvine, California.

 

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**Market Overview**

 

Axsys' products are sold to OEM and end user customersin a variety of markets, which demand the precision and performance of ourproducts and capabilities.

 

*Aerospaceand defense*. The aerospace and defense market principallyconsists of OEMs that manufacture weapon subsystems (for example, night visionand targeting pods and flight control systems) and complete systems (forexample, aircraft air-to-air missiles and reconnaissance satellites).  In general, these OEMs are designingleading-edge products, the performance of which is enhanced through the use ofthree of our critical capabilities:

 

•                  precision positioning;

•                  highly accurate reflective optics; and

•                  light-weight,high strength structural components.

 

The market for our products also includes direct salesto the U.S. and foreign defense agencies for spares requirements. Despite adecline in overall defense spending over the past decade, the defense budgetfor upgrading existing platforms, including the development of  "smart weapons," as well asmissile defense programs, has grown substantially.  Upgrade programs include state-of-the-art electronics, enhancednight vision systems, radar and guidance systems, missile seeker technologiesand fly-by-wire systems.  All of theseprograms incorporate high-performance components provided by suppliers likeAxsys, such as precision metal optics, high performance motors and sensors andprecision-machined structures.  Ouradvanced capabilities are also utilized in certain missile defense programsthat are based on measuring and seeking the thermal signature of an incomingmissile.

 

*High-performancegraphic art capital equipment*.  The high-performance graphic art capital equipment market for ourproducts consists of OEMs who manufacture sophisticated equipment used toelectronically image photo-sensitive media for, among others, graphic arts andnewspaper plate markets.  Electronic imaging involves controlling theposition of a modulated laser beam to expose photosensitive media.  The position of this beam can be controlledby rotating a reflective optic by use of a high speed airbearing scanner underthe laser beam or by precisely positioning the laser beam or the media underone another with an X-Y micro-positioning stage. In recent years, ourcustomers have demanded increased resolution and throughput capabilities inthese high-end systems.  With a view toachieving these capabilities, we use reflective optics, high-speed motors, airbearingsand sophisticated electronic controls.

 

*Semiconductor,data storage and related capital equipment*.  We sell products to OEMs in thesemiconductor and related electronics capital equipment markets that producefabricating and test equipment for integrated circuits, reticles, flat paneldisplays and electronic components including printed circuit boards.  Our customers require accurate, precise andrepeatable positioning of these devices for their equipment.  We believe that as the density of circuitshas increased, there has been increased requirement for the airbearing anddirect drive positioning technology produced by Axsys.  We also supply a variety of criticalcomponents and subsystems to these markets, including:

 

•                  direct drive rotary motors;

•                  precisionoptics;

•                  high speed rotary airbearing scannersand imaging engines;

•                  laser interferometers; and

•                  integratednano-positioning stages.

 

In addition, Axsys designs, manufactures and sellsnano-positioning spin stands used for testing the electrical properties ofread/write heads used in the data storage industry.

 

*Photonicscomponent manufacturing*. We sell semi-automated and fully automated development, inspection andproduction equipment to manufacturers of photonics components.  This equipment is designed to assist thesemanufacturers to quickly and cost-effectively develop their products andmanufacturing processes and increase the yield and throughput of theirinspection and production processes.

 

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*IndustrialAutomation*.  We sellour products to a wide range of applications in industrial and commercialmarkets,including machine tools, motion control components and many types ofautomation equipment.  We also sell toMRO distributors who supply replacement parts for older equipment.  Our OEM and MRO customers principallypurchase precision bearings and assemblies that require short lead-times.

 

**Business Strategy**

 

*We area vertically integrated supplier of precision components, subsystems and systemsfor high-technology applications*. We design and manufacturecomponents and subassemblies for OEMs of aerospace guidance, thermal imaging,graphic arts electronic imaging and semiconductor and related capitalequipment.  Our products increase the accuracyand throughput of equipment produced by OEMs. We also provide sophisticated development, inspection and productionequipment that increases the yield and throughput of the semiconductor,photonics component and other high technology manufacturing processes.  A focus of our business strategy is toutilize our vertically integrated component manufacturing experience andresources, our systems integration capabilities and our process know-how in thedesign of higher-level subsystems as well as automation production and testsystems that employ our nano-positioning and precision opticaltechnologies.  Other key elements ofthis business strategy include the following:

 

*Weplan*to*use our vertically integrated position to grow oursubsystems business.* Our strategy is to continue to developsubsystems by integrating our core component technologies with ourelectro-mechanical and opto-mechanical integration capabilities.  This strategy is designed to enable us toprovide our customers with high performance systems at competitive prices.  We are currently investigating providingintegration services for several of our OEM customers in other markets,including:

 

•                  integration of our metal optics,motion control components and beryllium structures for next generation defenseforward looking infrared (FLIR)applications;

•                  integration of our metal optics,motors and sophisticated electronic controls for beam stabilization and controlin a telecommunications free spaceoptics applications;

•                  integrationof our direct drive motors, interferometers and precision-machined airbearingsfor various process equipment applications; and

•                  developmentof airbearing stages.

 

*Weplan to continue to develop our offerings in the photonics automated productionand inspection systems markets. *In 2000, we identified a new marketopportunity to produce automated production and test equipment to support thefiber optics components market.  InOctober 2000, we started up our Fiber Automation Division in Pittsburgh,Pennsylvania to develop ultra-compact mechanical nano-positioning stagesfocused on the fiber automation market. Also in October 2000, Axsys merged with Automation Engineering Inc.("AEI") to obtain know-how in designing fiber automation systems aswell as their advanced integration software – FlexAutoTM  Axsys continued to invest in newproduct and process development in 2001. These investments have enabled Axsys to develop technology in the fieldof fiber alignment and attachment as well as device inspection and characterization.  We have also invested in expanding our salesand marketing infrastructure in order to increase Axsys' brand recognition inthe marketplace.

 

*We willcontinue to**focus on improving operating efficiencies.* We are starting our third year on thecontinuous improvement process of implementing "Lean" techniquesthroughout the organization.  Theconcept of Lean is based on eliminating waste in all aspects of theorganization, measured in reduced cycle time, material costs, scrap and rework.By implementing this process, we have reduced, and expect to continue toreduce, our design and manufacturing lead times as well as manufacturing costsin order to become more competitive in the marketplace.

 

*Wecontinue to invest in information technologies to enhance our efficiency andresponsiveness in serving our markets**.*In order to increase our efficiency andmarket responsiveness, we continue to invest in information technology acrossall aspects of our organization.  In2001, we implemented customer relationship management (CRM) software in ourPrecision Components and Automation groups. This system has enabled us to improve the tracking of customeropportunities as well as measure the effectiveness of our organization.  We added video conferencing to our corporateoffices and largest manufacturing facilities. This investment has enabled us to dramatically reduce travel expenses,while increasing the frequency of inter-company interaction.  Lastly, we implemented enterprise resourceplanning (ERP) software in our Automation Group to enhance our managementreporting systems in this new group.

 

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*We expect to**e**nhance our market position throughacquisitions and strategic alliances and divestures of non-corebusinesses. *We have historically expanded ourmarket presence and capabilities through acquisitions.  We have also divested operations that werenot part of our core businesses.

 

•                  OnMarch 17, 2000, we sold substantially all of the assets of our BeauInterconnect division, a non-core business, to Molex Industrial Ventures Inc.,a subsidiary of Molex Incorporated, for $31.8 million.  Beau Interconnect designs and manufactureselectrical interconnect devices, barrier terminal blocks and connectors.

 

•                  OnOctober 4, 2000, we acquired the assets of Westlake Technology Corporation ofNewbury Park, California, a supplier of high speed electronics used to testmagnetic disk drive head gimbal assemblies (HGA) and head stack assemblies(HSA).  This followed our August 1997announcement that we had entered into a strategic alliance with Westlake.

 

•                  OnOctober 18, 2000, Axsys completed a merger with AEI to increase ourcapabilities and market position in the fiber automation market.  The merger with AEI provided us withextensive experience and know-how in automating fiber optic componentmanufacturing and testing, engineering capabilities in seamlessly integratingsophisticated motion control and vision systems into an automated tool andaccess to AEI's proprietary FlexAutoTM software, which is critical to theintegration process.

 

We review andconsider possible acquisitions on an ongoing basis; however, no specificacquisitions are being negotiated as of the date of this report.

 

**Technologies, Products, andCapabilities**

 

We utilize several key manufacturing technologies andhave acquired or developed software and systems integration capabilities thatenable us to design and manufacture a wide variety of high-performanceprecision optical and micro-positioning components, subsystems and automationsystems.  These core competenciesinclude:

 

*Magnetics.*We design, manufacture and sell high-performance motors and precision resolversusing state-of-the-art magnetic technologies and materials.  Applications for these high-performancecomponents include precision nano-positioning systems for semiconductorprocessing and inspection equipment, pick and place robotic handlers, missileseeker systems, guidance systems and satellite actuators.

 

*Precision Machining.*  Axsys manufactures precision-machinedcomponents made from beryllium, beryllium alloys and other specialtymaterials.  Applications includeprecision optics, airbearings, heat sinks, structural housings and gimbals.  Our airbearings provide high-speed precisionpositioning and are used in high-speed scanners for digital imaging and weaponsguidance systems.  Our heat sinks areused to dissipate heat in high-performance avionics and satellite electronics,and our gimbals are used in various applications, including positioning opticalsensors in FLIR night vision systems. We also manufacture optical substrates used internally and by ourcustomers in a variety of precision metal optical applications such as weaponfire control systems and space-borne instruments.

 

*Optics. *Wedesign and manufacture a broad range of precision metal opticalcomponents.  Our precision optics aregenerally made from beryllium or aluminum and are used in applications whereperformance requirements cannot be met with glass optics.  The advantages of our optics include lighterweight, thermal stability and ease of mechanical interface with housing andactuation devices.  We sell ourprecision metal optical components for use in high speed electro-mechanicalscanners, weapons fire control systems, FLIR night vision weapons systems andhigh-performance space-borne instruments used on weather, mapping andscientific satellites.

 

*Electronics.*  Axsys designs and manufactures several keyelectronic components for the electronics capital equipment and high-end digitalimaging markets including laser interferometers and electronic controllers anddrives. Our electronics components control the speed and position ofelectro-mechanical systems, such as precision motors, actuators, X-Ypositioning stages and laser scanners. Laser interferometers, which are designed to permit precise linearposition sensing, are sold to customers principally in the electronics capitalequipment market. Electronic controllers coordinate the positioning and speedof electro-mechanical systems by interfacing with other motion controlcomponents.  Drives provide power to amotor based on input from the controller in order to achieve a designatedposition or to achieve a specific speed.

 

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The followingtable summarizes the component products and services manufactured by Axsys, bythe technologies they incorporate:

 
| ***Core  Manufacturing Technologies***                                                                                                                                                                  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ***MAGNETICS***                                                                                                                                                                                         |   | ***PRECISION  MACHINING*** |   | ***PRECISION OPTICS*** |   | ***ELECTRONICS*** |   |
| •  AC  Motors 

•  Brush  and Brushless 

DC  Motors: 

– Torque  

– Servo  

– Limited Angle 

•  Resolvers  

•  Synchros |   | •  Airbearing  Components

•  Optical  Substrates

•  Structural  Housings

•  Gimbals  and Yokes  

•  Heat  Sinks |   | •  Scanning  Optics 

– Polygon Mirrors 

– Monogon Mirrors 

•  Flat  Optics 

– Head Mirrors 

– Fold Mirrors 

•  Aspherics  

– Telescopes

– Collimators |   | •  Laser  Interferometers 

•  AC  and DC motor speed controls 

•  Custom  DSP Motion Controllers

•  Motor  Drives |   |

 

*Integration Capabilities*. We have introduced products integrating ourcore technologies and integration capabilities to provide high-performanceelectro-mechanical and opto-mechanical subsystems for our customers.  Our precision subsystems include X-Ynano-positioning stages and rotary positioning subsystems such as actuators, opto-mechanicallaser scanners and imaging subsystems. We also produce laser tracking autofocus subsystems that employ ourmotion control or optics technologies. The X-Y nano-positioning stage subsystems are used in high-precision orhigh-performance applications, such as semiconductor alignment positioningsubsystems for use in manufacturing or inspection.  The rotary positioning subsystems are used in applications suchas night vision systems for defense contractors and cluster tool robotics inelectronics capital equipment.  Graphicart equipment manufacturers and semiconductor inspection equipmentmanufacturers use laser scanning and imaging subsystems.  The laser autofocus is used to automaticallyfocus a microscope, and is sold to OEMs that manufacture automated opticalinspection machines used in the electronics capital equipment market.

 

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The following table illustrates how our technologies,products and capabilities are integrated to develop subsystems and systems:

 
| **TECHNOLOGIES AND CAPABILITIES** |
|-----------------------------------|
|                              |
| **SUBSYSTEMS**                    |   | **OPTICS** |   | **PRECISION MACHINING** |   | **MAGNETICS** |   | **ELECTRONICS** |
| Laser Scanner                     |   | •  Scanning  Optics |   | •  Airbearing |   | •  Brushless  DC Servo Motor |   | •  Speed  Control 

•  Motor  Drive |
| Laser Imager                      |   | •  Scanning  and Flat Optics |   | •  Airbearing |   | •  Brushless  DC Servo Motor |   | •  Speed  Control

•  Motor  Drive |
| Laser Autofocus                   |   |   |   |   |   | •  Brushless  DC Servo Motor |   | •  Position  Controller

•  Motor  Drive |
| Rotary Positioning  Actuator      |   |   |   |   |   | •  Brushless  DC Servo Motor

•  Resolver |   | •  Position  Controller

•  Motor  Drive |
| Nano-Positioning 

X-Y Stage      |   | •  Flat  Optics |   | •  Airbearing |   |   |   | •  Laser  Interferometer 

•  Position  Controller

•  Motor  Drive |
| HGA/HSA Testers                   |   |   |   | •  Airbearing |   | •  Brushless  DC Limited Angle Motor |   | •  Laser  Interferometer

•  Position  Controller

•  Motor  Drive |

 

*Software.*Through our merger with AEI, we acquired advanced systemsintegration software called FlexAutoTM.  This software isdesigned to permit the integration of different motion platforms and machinevision technologies in automated production and test systems.  FlexAutoTM is open architecture by design andsupports a wide range of motion control and machine vision hardware.  The use of FlexAutoTM is designed to allowus, and our customers, to quickly and efficiently configure and deploy thesoftware necessary to control all aspects of an automation system.  We believe that automation systems designedwith FlexAutoTM can be developed in a shorter period of time than those fromcompetitors, and can be easily customized and modified for existing and newapplications.  In addition, as part ofour focus on the photonics market, we developed several software algorithmsincluding ControLight, a software package that permits alignment of fiberoptics to photonic devices for attach operations as well as for inspecting andcharacterizing the devices for use in both process development and production.

 

*Systems Integration.*  Wehave directed systems integration capabilities toward the development of semiand fully automated development, inspection and production systems.  These systems utilize our nano-positioningcapabilities and proprietary software controls, integrated with other thirdparty products, and are sold to end-users that manufacture semiconductor,photonic, and other high technology components.  During 2001, we developeda family of automation systems used in process development, low rate productionand high volume production to align and inspect photonic components.  These products include:

 

•                  FAST6 nano-positioning stage

 

•                  Lab60 process development tool

 

•                  Lab60 PLC and FA characterization and inspection tools

 

•                  FAST30/300 automated align and laser attach tool

 

•                  FAST60/600 automated align and epoxy attach tool

 

•                  FBG200 fiber Bragg grating writing system

 

•                  FAST 100 hybrid alignment and assembly tool

 

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*PrecisionBall Bearings*. We distribute a wide range of precision ballbearings varying in size, precision tolerance, lubrication and price. We alsoprovide certain value-added services, such as bearing subassemblies, bearingrelubrication, clean room handling of products and engineering consultation.

 

**Competition**

 

The markets for our products are competitive.  We compete primarily on the basis of ourability to design and engineer products to meet performance specifications setby our customers.  Most of our customersare OEMs that purchase component parts or subsystems which they incorporateinto their end products.  Productpricing, quality, customer support, experience, reputation and financialstability are also important competitive factors.  We compete for automation systems based on our ability to developproducts that meet our customers' performance requirements.  Our competitive position is enhanced by ourprocess know-how, use of our FlexAutoTM and ControLight software in automationapplications, and our ability to internally supply key micro-positioningcapabilities such as motors and mechanical and airbearing stages.

 

There are a limited number of competitors in each ofthe markets for the various types of precision optical and positioningcomponents and subsystems that we manufacture and sell.  Our competitors, especially those in theprecision optical and positioning product lines, typically sell a smallernumber of products than we do and are often well entrenched.  Some of these competitors have substantiallygreater resources than we do.  We believethat the breadth of our technologies and product offerings provides us with acompetitive advantage over certain manufacturers that supply only discretecomponents or are not vertically integrated with enabling technologies.

 

There are numerous competitors in markets to which wedistribute our precision ball bearings. These competitors vary in size and include other bearing manufacturersand distributors.  We believe that ourproduct breadth and availability, combined with the value-added services wesupply, provide competitive advantages.

 

We expect our competitors to continue to improve thedesign and performance of their products. We cannot assure you that our competitors will not develop enhancementsto, or future generations of, competitive products that will offer superiorprice or performance features or that new processes or technologies will notemerge that render our products less competitive or obsolete.  Increased competitive pressure could lead tolower prices for Axsys' products, thereby adversely affecting our business,financial condition and results of operations. We cannot assure you that wewill be able to compete successfully in the future.

 

**Customers**

 

Our customers includeOEMs and end-users that design or utilize high-precision, performance andthroughput equipment.  We sell ourproducts primarily to OEM customers in the aerospace and defense, high-endgraphic art and electronics capital equipment markets, and industrialautomation markets.  Our end usercustomers are primarily in the semiconductor, data storage and photonicscomponents markets.

 

There is no customer or group of affiliated customersfor whom sales during 2001 were in the aggregate 10% or more of consolidatednet sales, and, in our opinion, there is no customer, the loss of which wouldhave a material adverse effect on our operations taken as a whole.

 

In 2001 and 2000, Axsys had aggregate sales, bothmilitary and non-military, directly to the U.S. Government, including itsagencies and departments, of approximately $3.0 million and $1.9 million,respectively. These sales accounted for approximately 3.2% of total net salesin 2001 and 2.1% in 2000.  Approximately29.8% of net sales in 2001 and 25.1% in 2000 were derived from subcontractswith U.S. Government contractors.  Themajority of these contracts may be subject to termination at the convenience ofthe U.S. Government, and certain contracts may also be subject torenegotiation.  Currently, we are notaware of any proposed termination or renegotiation of such contracts that wouldhave a material adverse effect on our business.

 

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Because a substantial part of our business is deriveddirectly from contracts with the U.S. Government, or agencies or departmentsthereof, or indirectly through subcontracts with U.S. Government contractors,our results of operations could be materially affected by changes in U.S.Government expenditures for products using component parts that Axsys produces.  However, we believe that the broad numberand diversity of our product applications and the strength of our engineeringcapabilities may lessen our exposure to such risk.

 

**Sales,Marketing and Customer Support**

 

As of December 31, 2001, we employed 68 sales,marketing and customer support personnel throughout our organization, comparedto 67 employees in similar functions at the end of 2000.  We organize our sales staff by marketsegments with a view to building on existing customer relationships andimproving cross-selling opportunities. We utilize two OEM components sales organizations, one focused onaerospace and defense customers and the other focused on high-performancecommercial customers.  We have a separatedistributed products sales force that is focused on selling ball bearings andassemblies, principally to commercial and industrial oriented OEMs as well asMRO distributors.  Our newly createdAutomation Group sales force sells to manufacturers of semiconductor, datastorage and fiber optics/photonics components.

 

As of December 31, 2001, our direct sales organizationincluded 16 direct sales field personnel, most of whom have engineeringbackgrounds, with the remainder involved in inside sales, customer service,program management, contract administration and applications engineering.  We believe that our sales effort is enhancedby having engineering-trained sales personnel available to meet with customers'engineering personnel.  Our applicationand design engineers are also involved in the sales process.

 

We also sell our products through a significant numberof manufacturer's sales representatives and agents.  Although we believe that we have satisfactory relationships withthese sales representatives and agents, we cannot assure you that theserelationships will continue to be satisfactory or will continue at all.

 

**Domesticand Foreign Sales**

 

For information concerning our domestic and foreignnet sales and identifiable assets from continuing operations, see Note 9 to theConsolidated Financial Statements.

 

**Engineering,Research and Development**

 

We seek to developnew component products, subsystems and systems and improve existing products inorder to keep pace with the increasing performance requirements of ourcustomers.  We devote significantresources, a portion of which is reimbursed by customers, to developmentprograms directed at creating new products and product enhancements, as well asdeveloping new applications for existing products.  Because we believe that our ability to compete effectivelydepends in part on maintaining and enhancing our expertise in applying newtechnologies and developing new products, we dedicate substantial resources toengineering, research and development. At December 31, 2001, we employed 88 individuals in engineering,research and development functions.  Wecannot assure you that our product development efforts will be successful inproducing products that respond to technological changes or new productsintroduced by others.

 

Our costs associated with engineering, research anddevelopment were $6.3 million in 2001, $5.4 million in 2000, and $4.7 millionin 1999.  Research and developmentexpenses were $3.6 million in 2001, $3.5 million in 2000, and $3.3 million in1999.  These amounts are net of costreimbursements from our customers that were not material in relation toengineering, research and development expenditures in any period.  We intend to direct our research anddevelopment activities toward integrating our various technologies and continuingto develop subsystems and systems.

 

**RawMaterials; Suppliers**

 

The raw materials and components that we purchase aregenerally available from multiple suppliers. However, beryllium, a material used extensively by the PrecisionMachined Products operation of our Precision Components Group, is onlyavailable from Brush Wellman, Inc. ("Brush Wellman"), the sole U.S.supplier.  Historically, we have had anexcellent relationship with Brush Wellman and have not encountered problems inobtaining our supply requirements. However, the partial or complete loss of Brush Wellman as a supplier ofberyllium, or production shortfalls or interruptions that otherwise impair thesupply of beryllium to Axsys, would have a material adverse effect on ourbusiness, financial

 

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condition and results of operations. If such conditions were to occur, it is uncertain whether alternativesources could be developed.  Inaddition, we purchase a substantial amount of ball bearings that we distributefrom two foreign suppliers.  While webelieve that we could obtain alternate sources of supply, any interruption inthe flow of products from these suppliers, or significant increases in the costof these products, could have an adverse effect on our business, financialcondition and results of operations.

 

**Patentsand Trademarks**

 

We are not dependent upon any single patent ortrademark.  We have a combination ofpatents, trademarks and trade secrets, non-disclosure agreements and otherforms of intellectual property protection covering our proprietary technology,and we have patent applications pending or under evaluation.  Although we believe that our patents andtrademarks may have value, we believe that our future success will depend primarilyon the innovation, technical expertise, manufacturing and marketing abilitiesof our personnel. We cannot assure you as to the degree of protection offeredby our patents or as to the likelihood that patents will be issued for pendingapplications. We cannot assure you that we will be able to maintain theconfidentiality of our trade secrets or that our non-disclosure agreements willprovide meaningful protection of our trade secrets, know-how or otherproprietary information in the event of any unauthorized use, misappropriationor other disclosure.

 

Competitors in the United States and foreigncountries, many of which have substantially greater resources, may have appliedfor or obtained, or may in the future apply for and obtain, patents that willprevent, limit or interfere with our ability to make and sell some of ourproducts.  Although we believe that ourproducts do not infringe on the patents or other proprietary rights of thirdparties, we cannot assure you that third parties will not assert infringementclaims against us or that such claims will not be successful.

 

**EnvironmentalRegulation**

 

We believe that we are currently in compliance in allmaterial respects with federal, state and local laws and regulations governingthe discharge of materials into the environment or otherwise relating to theprotection of the environment, and that any non-compliance with such laws willnot have a material adverse effect upon our business, financial condition,results of operations, capital expenditures, earnings or competitive position.We cannot assure you, however, (i) that changes in federal, state or locallaws, regulations or regulatory policy, or the discovery of unknown problems orconditions will not in the future require substantial expenditures, or (ii) asto the extent of our liabilities, if any, for past failures, if any, to complywith applicable environmental laws, regulations and permits, any of which alsocould have a material adverse effect on our business, financial condition orresults of operations.

 

Axsys has been identifiedas a potentially responsible party ("PRP") under the ComprehensiveEnvironmental Response, Compensation and Liability Act ("CERCLA")with respect to three third-party waste disposal sites.  Although liability under CERCLA is joint andseveral, meaning that liability can exceed a PRP's *pro rata* share of cleanupcosts, based on currently available information, we believe that costsassociated with these sites will not have a material adverse effect on ourbusiness, financial condition or results of operations.

 

Pursuant to a remedialplan approved by the Ohio Environmental Protection Agency ("OhioEPA") in 1993, we are continuing a process of investigating soils andgroundwater at a site formerly owned by a division of Axsys, and we haveconducted certain remedial work at this site. Costs to date have not been material. We are pursuing an alternateclosure plan related to this site.  Thisplan is subject to the approval of the Ohio EPA.  Based on the advice of our consultants, we increased our accruedliabilities relating to this site to approximately $744,000, with a resultingcharge to discontinued operations in 2000 of $601,000, before a tax benefit of$235,000.  Based on the advice of ourenvironmental consultants, we believe that the Ohio EPA is likely to allow useof our proposed alternate plan.  Weanticipate receiving approval of the plan from the Ohio EPA in mid-2002 andwill reassess the estimated costs of remediation of the site upon suchapproval.  We cannot assure you that theOhio EPA will approve the alternate plan. If such approval were not received, costs to Axsys would increasesubstantially. In addition, even if approval is received, the costs actuallyincurred may exceed the accruals established. We anticipate that actual expenditures will be incurred over a period ofseveral years.

 

During 1999, we sold theland and building of our previously discontinued Sensor Systems division in St.Petersburg, Florida.  We have conductedinvestigations of soil and groundwater at the former facility and receivedapproval of our investigation plan from the Florida Department of EnvironmentalProtection.  We will continue to conductadditional soil and groundwater investigations at the site.  Based on the advice of our consultants, weincreased our accrued liabilities

 

10

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relating to this site to approximately $854,000, witha resulting charge to discontinued operations in 2000 of $657,000, before a taxbenefit of $257,000.

 

On December 21, 2001, we received a letter from theUnited States Environmental Protection Agency ("EPA") notifying usthat we are considered to be a potentially responsible party at a site locatedin Prospect, Connecticut, which until 1978 was owned by a former subsidiary.The letter also demands payment of approximately $25,000 in past response costsand unspecified future costs.  Althoughwe may be obligated under CERCLA for contributions towards response costsincurred as a result of alleged releases of hazardous substances at the site, weare still investigating our prior connection to the site.  In addition, it is our policy to accrueenvironmental cleanup related costs when those costs are believed to beprobable and can be reasonably estimated. The quantification of environmental exposure with respect to this site,if any, requires an assessment of many factors, including the quality ofinformation available, the assessment stage of each investigation, preliminaryfindings and the length of time involved in remediation. Currently, it is notpossible for us to estimate a meaningful range of exposure based on the limitedamount of information received.  We arein the process of deciding how we will respond to the EPA's demand.

 

We use or generatecertain hazardous substances in our manufacturing and engineeringfacilities.  We believe that ourhandling of such substances is in compliance with applicable local, state andfederal environmental, safety and health regulations at each operating location.  We invest in proper protective equipment,process controls and specialized training to minimize risks to employees,surrounding communities and the environment due to the presence and handling ofsuch hazardous substances.  Weperiodically conduct employee physical examinations and workplace airmonitoring regarding such substances. When exposure problems or potential have been indicated, correctiveactions have been implemented and re-occurrence has been minimal ornon-existent.  We do not carryenvironmental impairment insurance.

 

**Employees**

 

As of December 31, 2001, we employed 602 persons, including 383 inmanufacturing, 68 in sales, 88 in engineering and 63 in administration.  Axsys considers its relations with itsemployees to be satisfactory.  There hasbeen no significant interruption of operations due to labor disputes.

 

11

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**Item 2.  PROPERTIES**

 

Axsys leases its executive office, located at 175Capital Boulevard in Rocky Hill, Connecticut. The principal plants and other significant properties at February 1,2002 are:

 
| **Location**        |   | **Type of Facility**       |   | **Square Footage** |   | **Leased/Owned; Expiration** |   |
|---------------------|--------|----------------------------|--------|--------------------|--------|------------------------------|--------|
| Cullman, AL         |   | Manufacturing, Engineering |   | 100,000            |   | Owned                        |   |
| San Diego, CA       |   | Manufacturing, Engineering |   | 64,800             |   | Leased; 2010                 |   |
| Montville, NJ       |   | Distribution               |   | 34,400             |   | Leased; 2009                 |   |
| Rochester Hills, MI |   | Manufacturing, Engineering |   | 29,000             |   | Leased; 2003                 |   |
| Wilmington, MA      |   | Manufacturing, Engineering |   | 23,000             |   | Leased; 2006                 |   |
| Santa Barbara, CA   |   | Manufacturing, Engineering |   | 13,800             |   | Leased; 2002                 |   |
| Pittsburgh, PA      |   | Manufacturing, Engineering |   | 12,600             |   | Leased; 2006                 |   |
| Irvine, CA          |   | Distribution               |   | 7,800              |   | Leased; 2005                 |   |
| Manchester, CT      |   | Office space               |   | 7,000              |   | Leased; 2005                 |   |
| Dallas, TX          |   | Distribution               |   | 2,950              |   | Leased; 2002                 |   |

 

Management believes that Axsys' facilities aregenerally sufficient to meet its current and reasonably anticipatedmanufacturing, distribution and related requirements.  Management, however, periodically reviews space requirements toascertain whether Axsys' facilities are sufficient to meet its needs.

 

**Item 3.  LEGAL PROCEEDINGS**

 

Axsys is a defendant in various lawsuits, none ofwhich is expected to have a material adverse effect on Axsys' business,financial position, or results of operations. See "Business—Environmental Regulations."

 

**Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None during the quarter ended December 31, 2001.

 

**PART II**

 

**Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

Axsys' common stock trades on The NASDAQ Stock Marketunder the Symbol "AXYS". The following table sets forth the range ofhigh and low sales prices as reported by The NASDAQ Stock Market:

 
|                            |   | **2001** |   | **2000** |   |
|---------------------------------|--------|----------|--------|----------|--------|
|                            |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| Fiscal Years Ended December 31: |   |     |   |     |   |   |   |   |   |
| First Quarter                   |   | $        | 35.875 |     | $      | 15.938 |   | $ | 15.000 |   | $ | 11.750 |   |
| Second Quarter                  |   | 21.700   |   | 10.100   |   | 17.000 |   | 11.875 |   |
| Third Quarter                   |   | 12.750   |   | 8.880    |   | 36.500 |   | 17.000 |   |
| Fourth Quarter                  |   | 11.230   |   | 7.150    |   | 49.875 |   | 18.875 |   |
|                                 |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

On March 1, 2002, the high and low sales price were $6.95 and $6.76,respectively.

 

On March 1, 2002, the approximate number of holders of record of Axsys'common stock was 500.

 

**Dividend Policy**

 

Axsys has applied and currently intends to continue toapply its retained and current earnings toward the development of its businessand to finance its growth.  Axsys didnot pay dividends on its common stock during the three years ended December 31,2001, and does not anticipate paying cash dividends in the foreseeable future.

 

12

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**Item 6.  SELECTED FINANCIAL DATA**

 

The following selected financial data for the fivefiscal years presented below is derived from Axsys' audited ConsolidatedFinancial Statements as adjusted to reflect the discontinuance of the BeauInterconnect and Sensor Systems business segments in 1999 and 1998,respectively.  The data should be readin conjunction with the Consolidated Financial Statements and the related Notesthereto included elsewhere herein.

 
|                                                                                               |   | **Years Ended December 31, (3)**           |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                               |   | **2001**                                   |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                                                               |   |                                       |   | **(1) (2) (3)** |   | **(4)** |   |   |   | **(5)** |   |
|                                                                                               |   | **(In thousands, except per share  data)** |   |
| **Statement of Operations Data:**                                                                  |   |                                       |   |   |   |   |   |   |   |   |   |
| Net sales                                                                                          |   | $                                          | 89,210 |   | $ | 91,841 |   | $ | 85,418 |   | $ | 98,559 |   | $ | 99,793 |   |
| Gross profit                                                                                       |   | 14,073                                     |   | 19,663 |   | 21,005 |   | 28,977 |   | 30,191 |   |
| (Loss) income from continuing operations before  discontinued operations                           |   | (11,353                                    | )      | (4,304 | ) | (9,203 | ) | 6,311 |   | 3,892 |   |
| Net (loss) income                                                                                  |   | (11,353                                    | )      | 9,523 |   | (7,122 | ) | 6,099 |   | 5,134 |   |
| Preferred stock dividends                                                                          |   | –                                     |   | – |   | – |   | – |   | 102 |   |
| Net income (loss) applicable to common shareholders                                           |   | (11,353                                    | )      | 9,523 |   | (7,122 | ) | 6,099 |   | 5,032 |   |
| Basic net (loss) income per share from continuing operations before discontinued operations   |   | $                                          | (1.53  | ) | $ | (0.92 | ) | $ | (1.95 | ) | $ | 1.30 |   | $ | 0.93 |   |
| Basic net income (loss) per share applicable to common  shareholders                               |   | $                                          | (1.53  | ) | $ | 2.05 |   | $ | (1.51 | ) | $ | 1.26 |   | $ | 1.20 |   |
| Basic weighted average common shares outstanding                                                   |   | 4,688                                      |   | 4,657 |   | 4,715 |   | 4,848 |   | 4,176 |   |
| Diluted net (loss) income per share from continuing operations before discontinued operations |   | $                                          | (1.53  | ) | $ | (0.92 | ) | $ | (1.95 | ) | $ | 1.29 |   | $ | 0.92 |   |
| Diluted net (loss) income per share applicable to  common shareholders                             |   | $                                          | (1.53  | ) | $ | 2.05 |   | $ | (1.51 | ) | $ | 1.25 |   | $ | 1.19 |   |
| Diluted weighted average common shares outstanding                                                 |   | 4,688                                      |   | 4,715 |   | 4,715 |   | 4,888 |   | 4,236 |   |

 
|                                                       |   | **Years Ended December 31,** |       |
|------------------------------------------------------------|--------|------------------------------|------------|
|                                                       |   | **2001**                     |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                       |   | **(In thousands)**           |       |
| **Balance Sheet Data:**                                    |   |                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Working capital                                            |   | $                            | 35,379     |   | $ | 41,520 |   | $ | 31,395 |   | $ | 28,471 |   | $ | 2,869 |   |
| Total assets                                               |   | 67,281                       |       | 73,592 |   | 64,150 |   | 72,514 |   | 74,364 |   |
| Long-term capital lease obligations(less current  portion) |   | 1,392                        |       | 1,485 |   | 1,793 |   | 3,794 |   | 6,226 |   |
| Shareholders' equity                                       |   | 46,440                       |       | 53,421 |   | 43,299 |   | 52,128 |   | 47,317 |   |
|                                                            |        |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          In October 2000, Axsysmerged with Automation Engineering, Inc. This merger was accounted for under the pooling of interests method ofaccounting and, accordingly, the results of Axsys' Consolidated Statements ofOperations have been restated to include the accounts and operations ofAEI.  The operating results for AEI werenot material to the combined results of Axsys for periods prior to 2000, andtherefore, results for those periods have not been restated.

 

(2)          In September 2000, Axsysacquired the stock of Westlake Technology Corporation.  This acquisition was accounted for under thepurchase method of accounting and, accordingly, the results of Westlake'soperations have been included in Axsys' Consolidated Statements of Operationssince the date of acquisition.  See Note3 to the Consolidated Financial Statements.

 

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(3)          In March 2000, we sold the Beau Interconnect division. Accordingly,Beau has been accounted for as a discontinued operation and the related netassets and operating results have been reported separately from continuingoperations in all years presented. Revenues applicable to this discontinued operation were $846,000 during2000 and $19.3 million during 1999. The net assets of Beau at December 31, 1999have been included in current assets. All prior periods have been restated to reflect the divestiture.

 

(4)          Includes the effects ofa pre-tax special charge of $784,000 and an impairment of assets charge of$8,993,000 in 1999.

 

(5)          In May 1997, Axsys acquired the stock of Teletrac,Inc. This acquisition was accounted for under the purchase method of accountingand, accordingly, the results of Teletrac's operations have been included inAxsys' Consolidated Statements of Operations since the date ofacquisition.  See Note 3 to theConsolidated Financial Statements.

 

**Item 7.****           MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

On March 17, 2000, Axsys sold the net assets of theBeau Interconnect division for $31.8 million in cash and recorded an after-taxgain of approximately $14.1 million in the first quarter of 2000.  Beau designed and manufactured interconnectdevices, barrier terminal blocks and connectors.  Accordingly, Beau has been accounted for as a discontinuedoperation and the related net assets and operating results have been reportedseparately from continuing operations in all years presented.  Revenues applicable to this discontinuedoperation during 2000 and 1999 were $846,000 and $19.3 million, respectively.  The net assets of Beau at December 31, 1999have been included in current assets.

 

On September 30, 2000, we acquired Westlake Technology Corporation.  This acquisition has been accounted forusing the purchase accounting method. Accordingly, the results of Westlake have been included in Axsys'Consolidated Statement of Operations since the date of acquisition.

 

On October 18, 2000, Axsys merged with AEI.  Thismerger has been accounted for using the pooling of interests method ofaccounting.  Accordingly, the full year2000 results of operations of AEI have been included in the ConsolidatedStatements of Operations.  The operatingresults for AEI were not material to the combined results of Axsys for allperiods prior to 2000, and, therefore, the results for those periods have notbeen restated.

 

14

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The following table sets forth certain financial dataas a percentage of net sales for each of the past three years in the periodended December 31, 2001.

 
|                                                                 |   | **Years  Ended December 31,** |       |
|----------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                 |   | **2001**                      |       | **2000** |   | **1999** |   |
| Net sales:                                                           |   |                          | ** ** |   | ** ** |   | ** ** |
| Precision  Components Group                                          |   | 62.7                          | %          | 54.4 | % | 60.3 | % |
| Automation Group                                                     |   | 11.5                          |       | 11.6 |   | 9.1 |   |
| Distributed  Products Group                                          |   | 25.8                          |       | 34.0 |   | 30.6 |   |
|                                                                 |   | 100.0                         |       | 100.0 |   | 100.0 |   |
| Cost of sales                                                        |   | 84.2                          |       | 78.6 |   | 75.4 |   |
|                                                                 |   |                          |       |   |   |   |   |
| Gross profit                                                         |   | 15.8                          |       | 21.4 |   | 24.6 |   |
|                                                                 |   |                          |       |   |   |   |   |
| Operating  expenses:                                                 |   |                          |       |   |   |   |   |
| Selling, general  and administrative expenses                        |   | 23.4                          |       | 23.8 |   | 20.1 |   |
| Research and  development expenses                                   |   | 4.0                           |       | 3.8 |   | 3.9 |   |
| Restructuring  charges                                               |   | 1.5                           |       | 1.8 |   | – |   |
| Nonrecurring  merger-related charges                                 |   | –                        |       | 0.5 |   | – |   |
| Impairment of  assets                                                |   | –                        |       | – |   | 10.5 |   |
| Amortization of  intangible assets                                   |   | –                        |       | 0.1 |   | 0.5 |   |
| Operating (loss)                                                     |   | (13.1                         | )          | (8.6 | ) | (10.4 | ) |
| Interest income  (expense), net                                      |   | 0.2                           |       | 0.5 |   | (0.5 | ) |
| Special charge                                                       |   | –                        |       | – |   | (0.9 | ) |
| Other income                                                         |   | 0.2                           |       | 0.4 |   | – |   |
|                                                                 |   | 0.4                           |       | 0.9 |   | (1.4 | ) |
| Loss from  continuing operations before taxes and discontinued items |   | (12.7                         | )          | (7.7 | ) | (11.8 | ) |
| Benefit for  taxes                                                   |   | 4.7                           |       | 3.0 |   | 1.0 |   |
| Loss from  continuing operations before discontinued items           |   | (8.0                          | )          | (4.7 | ) | (10.8 | ) |
| Income/(loss) on  discontinued operations, net of tax                |   | –                        |       | 15.1 |   | 2.5 |   |
|                                                                 |   |                          |       |   |   |   |   |
| Net  income/(loss)                                                   |   | (8.0                          | )%         | 10.4 | % | (8.3 | )% |
|                                                                 |   |                          |       |   |   |   |   |
| Gross profit (as  a percentage of related net sales) (1):            |   |                          |       |   |   |   |   |
| Precision  Components Group                                          |   | 22.5                          | %          | 17.6 | % | 20.3 | % |
| Automation Group                                                     |   | 19.1                          |       | 31.8 |   | 31.1 |   |
| Distributed  Products Group                                          |   | 31.3                          |       | 32.2 |   | 31.1 |   |

 

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(1)          Gross profit by segment is beforerestructuring charges of $7.7 million in 2001 and $2.6 million in 2000.

 

15

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**Comparisonof Years Ended December 31, 2001 and December 31, 2000**

 

*Netsales*.  Net sales in2001 were $89.2 million, a decrease of 3 percent, or $2.6 million, from salesof $91.8 million in 2000. Sales of the Precision Components Group were $55.9million in 2001 compared to $49.9 million in 2000. The 12 percent increase insales was largely due to improved sales of motion control components andprecision machined products to aerospace and defense markets.  Aerospace and defense sales increased overthe prior year due to a strong backlog of orders gained in the second half of2000, which were shipped in 2001.  Salesto the electronic capital equipment market and the graphic arts market werelower by 55 percent and 11 percent, respectively in 2001 compared to2000. The Distributed Products Group reported sales of $23.0 million in 2001compared to sales of $31.3 million in 2000, a decrease of 26 percent or $8.3million. Conditions were very weak in the industrial automation and commercialmarkets for our precision ball bearings, including lower sales to electronicscapital equipment markets, which were particularly strong in 2000. Sales of theAutomation Group were $10.3 million in 2001 compared to $10.6 million in2000.  The $0.3 million, or 3 percentdecrease was due to substantially lower sales of precision measurement and testequipment sold to semiconductor and data storage markets, offset by increasedshipments of automation products for photonics applications and othercommercial markets.

 

*Grossprofit*.  Our grossprofit was $14.1 million in 2001 compared to $19.7 million in 2000.  Included in both periods are restructuringcharges (See Note 2 to the Consolidated Financial Statements) related to areduction in facilities and personnel, as well as charges to inventoryobsolescence reserves. These charges amounted to $7.7 million in 2001 and $2.6million in 2000. Excluding these charges, gross margin as a percent of saleswas 24.4 percent in 2001, compared to 24.2 percent in 2000.  Margins in 2001 were positively impacted bythe implementation of a cost reduction plan adopted in the second quarter of2001 ("Cost Reduction Plan"), which reduced manufacturing costs by anestimated $650 thousand.**(SeeNote 2 to the Consolidated Financial Statements.)

 

*Selling,general and administrative expenses*.  Selling, general and administrative("SG&A") expenses were $20.9 million in 2001 compared to $21.8million in 2000, a net decrease of $0.9 million. Net costs associated withrestructuring of operations were $1.0 million lower in 2001 than in 2000 as weabsorbed  $0.2 million of SG&Aexpenses directly attributable to the Cost Reduction Plan in 2001, compared toexpenses of $1.2 million in 2000 related to the Strategic Realignment of ourbusiness.  (See Note 2 to theConsolidated Financial Statements.)  Aresult of the Cost Reduction Plan was lower overall spending.  A savings of $0.6 million in 2001 wasdirectly attributable to the efforts of this plan.  Additionally, incentive payments were lower by $0.9 millionmainly as a result of lower sales volume. Travel expenses were reduced by $0.3 million in 2001 due to theincreased usage of videoconferencing equipment.  These favorable savings were partially offset by $1.9 million ofspending for our Automation Group infrastructure during 2001.

 

*Researchand development expenses*. Research and development ("R&D") expenses were $3.6million in 2001 compared to $3.5 million in 2000.  Expenses in the Automation Group increased by $0.8 million to$1.5 million largely related to the development of new product offerings forprecision automation applications, primarily for the photonics markets. NetR&D spending in the Precision Components Group declined by $0.7 million in2001 compared to 2000 as a result of the Cost Reduction Plan, which reducedR&D spending for products targeted at lower growth markets.

 

*Restructuringcharges*.  Costscategorized as restructuring charges were $1.4 million in 2001 and $1.6 millionin 2000 including severance costs and costs to close certain facilities.  We discuss these costs in more detail inNote 2 to the Consolidated Financial Statements.

 

*Nonrecurringmerger-related charges*. We recorded $0.5 million of professional fees and expenses related tothe merger with AEI in the fourth quarter of 2000.  We expensed these costs according to generally acceptedaccounting principles for a pooling of interests merger.

 

*Operatingloss. *We recorded apre-tax operating loss of  $11.7 millionin 2001, a decrease of $3.8 million, from an operating loss of $7.9 million in2000.  The Precision Components Grouprecorded a profit of $3.0 million in 2001 compared to a loss of $2.5 million in2000, as a result of improved sales to the aerospace and defense market and theimplementation of lean manufacturing and cost reductions.  The Automation Group recorded losses of $3.8million in 2001 a decline of $4.0 million from a profit of $0.2 million in2000.  Despite slight growth inrevenues, our increased investment in developing the photonic assembly and testequipment business had a significant impact on earnings.  Our Distributed Products Group had adramatic reduction in sales that resulted in lowering our operating profit fromthe group to $2.6 million in 2001 from $4.8 million in 2000.   Non-allocated charges for corporate supportwere $4.3 million in 2001 compared to $4.6 million in 2000. The reduction incorporate overhead is a result of savings from the Cost Reduction Plan

 

16

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offset by increaseddepreciation and professional fees.  TheCost Reduction Plan resulted in non-recurring charges of $9.2 million comparedto $5.8 million of non-recurring charges in 2000 from the Strategic Realignmentand the acquisition of Automation Engineering, Inc.

 

*Interestincome, net*.  Netinterest income was $0.2 million in 2001 compared to net interest income of$0.5 million in 2000*.*Interestincome declined in 2001 from the previous year due to lower prevailing interestrates and a lower average investment balance for the year.  In addition, interest income of $64 thousandin 2001 compared to $92 thousand was recorded on a note received from the 1998sale of Sensor Systems.

 

*Taxes*.  Our effective rate for federal and stateincome taxes was 37.0 percent in 2001 compared to 39.1 percent in 2000. The reductionin the income tax benefit rate was made after a review of our overall businessand tax exposures early in 2001.

 

*Discontinuedoperations.*  In March2000, we sold the Beau Interconnect division. Results of operations from the discontinued business have been reportedseparately from continuing operations in all periods presented.  The sale of Beau resulted in a gain of $22.5million before a tax provision of $8.4 million.  We also recorded a charge of $1.3 million, before a tax benefitof $0.5 million, to increase environmental accruals for the remediation of twoformer operating sites.  During 2000,our environmental consultants advised us to increase these accruals to betterreflect the ongoing costs to complete the remediation of these sites.  (See Note 4 to the Consolidated FinancialStatements).

 

**Comparison of Years Ended December 31, 2000 andDecember 31, 1999**

 

*Netsales*.  Net sales in2000 were $91.8 million, an increase of 7.5 percent, or $6.4 million, oversales of $85.4 million in 1999. Sales of the Precision Components Group were$49.9 million in 2000 compared to $51.5 million in 1999. The 3 percent decreasein sales was caused by a combination of lower sales to aerospace and defensemarkets offset by improved markets for digital imaging scanners and printengines.  Aerospace and defense saleswere lower primarily due to relatively weak bookings during mid-1999. Therecovery in aerospace and defense bookings that began late in 1999 andcontinued throughout 2000 resulted in a gradual increase in revenues over thecourse of 2000, although total year over year sales ended up modestly lower.Sales to worldwide digital imaging markets increased by 20 percent in 2000versus 1999, as product introductions and general market conditions bothimproved.  The Distributed ProductsGroup reported record sales of $31.3 million in 2000 compared to $26.2 millionin 1999, an increase of 19.4 percent or $5.1 million.  Business conditions were very strong for precision ball bearingsand assemblies sold to industrial automation and electronics capital equipmentmarkets.  Sales of the Automation Groupwere $10.6 million in 2000 compared to $7.7 million in 1999.  The $2.9 million, or 37.7 percent increase,was due to internal growth in sales of precision components for semiconductorproduction and inspection applications and the merger with AEI, accounted foras a pooling of interests, which increased sales by $1.4 million in 2000.

 

*Grossprofit*.  Our grossprofit was $19.7 million in 2000 compared to $21.0 million in 1999.  As a percent of sales, gross margin was 21.4percent in 2000, compared to 24.6 percent in 1999.  Margins in 2000 showed steady improvement over the full year,rising from a low of 4 percent in the first quarter to 29.3 percent in thefourth quarter.  One-time costs recordedin the first quarter related to the Strategic Realignment reduced gross marginsby $2.5 million as we evaluated slow-moving and potentially obsoleteinventories. Beginning in the second quarter in 2000, margins increased due tohigher sales volume and improved operating efficiencies, includingsubstantially reduced product returns and warranty claims.  We began the implementation of Leaninitiatives in 2000.  When we introducedthis program, initially there were incremental costs to reconfigure productionprocesses and train employees.  Thesecosts began to be offset by improvements in throughput and lower scrap rateslater in the year.  In addition to benefitsfrom Lean, gross margins in the fourth quarter in 2000 were unusually high dueto a very favorable product mix.

 

*Selling,general and administrative expenses*.  SG&A expenses were $21.8 million in 2000compared to $17.2 million in 1999. The $4.6 million increase in 2000 includes$1.2 million of costs directly attributable to the Strategic Realignment andthe one-time costs to implement that program. Selling expenses increased by $1.2 million as we invested in marketingand sales personnel supporting commercial markets.  Administrative costs rose by $2.3 million including $0.9 millionof salaries and expenses to support the initial training and implementation oflean initiatives and a substantial investment in telecommunicationsinfrastructure.  Incremental expenses inthe Automation Group were $0.4 million to support the operations of AEI and theFiber Automation Division.  The balanceof the increase in SG&A expenses was due to increased salaries, recruitingcosts, incentive compensation expenses and legal expenses.

 

17

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*Researchand development expenses*. R&D expenses were $3.5 million in 2000 compared to $3.3 million in1999.  For the first three quarters ofthe year, a higher allocation of development engineering resources were chargedto cost of sales for production programs. In the fourth quarter alone, R&D investment increased byapproximately $0.3 million to $1.0 million, versus $0.7 million in thecomparable quarter of 1999.  The changewas substantially due to increased expenses in the Automation Group.

 

*Impairmentof assets*.  Late in1999, we evaluated our strategic direction and long-range planning, includingthe recoverability of long-lived assets. In 1999, Axsys recorded a $7.1 million charge to write down the carryingvalue of goodwill related to the Teletrac acquisition and $1.9 million towrite-off a note from Westlake Technology Corporation.  (See Note 14 to the Consolidated FinancialStatements).

 

*Restructuringcharges*.  Costscategorized as restructuring charges were $1.6 million in 2000 includingseverance costs and costs to close certain facilities.  We discuss these costs in more detail inNote 2 to the Consolidated Financial Statements.

 

*Nonrecurringmerger-related charges*. We recorded $0.5 million of professional fees and expenses related tothe merger with AEI in the fourth quarter of 2000.  We expensed these costs according to generally acceptedaccounting principles for a pooling of interests merger.

 

*Operatingloss. *We recorded apre-tax operating loss of  $7.9 millionin 2000, an improvement of $1.0 million, from an operating loss of $8.9 millionin 1999.  The Precision Components Grouprecorded a loss of $2.5 million in 2000 compared to a loss of $0.1 million in1999, as a result of decreased sales and our investment in lean manufacturingprocesses.  The Automation Grouprecorded profit of $0.3 million in 2000, a slight increase from a profit of$0.1 million in 1999 as a result of increased revenues and the acquisition ofAEI.  Our Distributed Products Group hada significant increase in sales that resulted in higher operating profits of$4.8 million in 2000 from $3.7 million in 1999.  Non-allocated charges for corporate support were $4.7 million in2000 compared to $3.6 million in 1999. The increase in corporate overhead is aresult of our investment in lean manufacturing and office relocation expenses.The Strategic Realignment resulted in non-recurring charges of $5.8 millioncompared to $9.0 million of non-recurring charges in 2000 from the impairmentof goodwill in connection with the acquisition of Teletrac and the note fromWestlake Technology Corporation.

 

*Interestincome, net*.  Netinterest income was $0.5 million in 2000 compared to net interest expense of$0.4 million in 1999.  The proceeds fromthe divestment of the Beau Interconnect division in March 2000, after repayingoutstanding bank debt and income taxes, provided investment income for most ofthe year.  In addition, interest incomeof $92 thousand was recorded on a note received from the 1998 sale of SensorSystems.

 

*Specialcharge*.  In 1999, werecorded a pre-tax special charge of $0.8 million for expenses related to theprocess of exploring the potential sale of the Company.  We discontinued this process during thesecond quarter of 1999.  (See Note 14 tothe Consolidated Financial Statements).

 

*Taxes*.  Our effective rate for federal and stateincome taxes was 39.1 percent in 2000 compared to 8.4 percent in 1999. In 1999,we reversed $0.2 million of the tax valuation allowance against thediscontinued operations of the Beau Interconnect division.  As of December 31, 1999, the tax valuationallowance was $0.7 million.  Thedecrease in the effective tax benefit rate in 1999 was primarily due to thenon-deductibility of the goodwill that was carried on the balance sheet relatedto Teletrac and written down in the fourth quarter of 1999.

 

*Discontinuedoperations.*  In March2000, we sold the Beau Interconnect division. Results of operations from the discontinued business have been reportedseparately from continuing operations in all periods presented.  The sale of Beau resulted in a gain of $22.5million before a tax provision of $8.4 million.  We also recorded a charge of $1.3 million, before a tax benefitof $0.5 million, to increase environmental accruals for the remediation of twoformer operating sites.  During 2000,our environmental consultants advised us to increase these accruals to betterreflect the ongoing costs to complete the remediation of these sites.  (See Note 4 to the Consolidated FinancialStatements).

 

***Liquidity and Capital Resources***

 

Axsys funds its operationsprimarily from cash flow generated by operations and cash on hand as a resultof the divestment of Beau in the first quarter of 2000.

 

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Net cash used inoperations was $1.2 million for the year ended December 31, 2001, and $8.8million for the year ended December 31, 2000. In 2001, Axsys' net loss of $7.2 million was offset by depreciation andamortization of $3.1 million as well as working capital changes.  Accounts receivable declined by $3.1million, reflecting lower fourth quarter sales in 2001 compared to 2000, aswell as lower days of sales outstanding, which were at 50 days at year endcompared to 55 days at the end of 2000. Inventory levels declined by $2.8 million, including the effects ofinventory write-downs taken with the Cost Reduction Plan.  Other current assets increased by $3.7million, due to a significant tax asset expected to be realized in 2002 for netoperating losses generated in 2001. Trade accounts payable declined by $2.2 million in response to lowerproduction volume and reduced year-end capital spending compared to the prioryear.  Net cash used in operations forthe year ended December 31, 2000 exclude the non-operating gain on thedivestment of Beau of $13.8 million. Included in that year's increase in current liabilities are income taxpayments of $4.9 million caused by the Beau gain.  Excluding income tax payments on the Beau gain, cash used inoperating activities in 2000 was $3.9 million.  The decrease in cash was largely caused by the $4.3 million lossfrom continuing operations, including the effects of restructuring chargesrecorded and paid through the end of the year. Accounts receivable balances increased due to higher billings at the endof the fourth quarter in 2000.  Thiseffect was offset by a decrease in inventories and other assets, and theeffects of non-cash depreciation and amortization charges.

 

Net cash (used in) orprovided by investing activities was ($3.7) million for the year ended December31, 2001 and $27.4 for the year ended December 31, 2000.  Investing activities in 2001 wereprincipally related to capital spending of $3.9 million, which was equal tospending levels in 2000.  Significantinvestments in 2001 were focused on upgrading precision machining capabilities,test and measurement equipment for imaging and motion control products, as wellas design and testing equipment for photonics products**. **In2000, the major source of funds was the $31.2 million in gross proceeds fromthe divestment of Beau in March 2000. Capital spending in 2000 included an investment of $1.3 million toexpand the Motion Control manufacturing facility as well as investments intelecommunications infrastructure.

 

Net cash (used in) financing activities was ($25)thousand for the year ended December 31, 2001 and ($4.1 million) for the yearended December 31, 2000.  In 2000, Axsysrepaid the outstanding balance of $4.6 million on borrowings under an $11.0million senior secured revolving credit facility in conjunction with the saleof Beau on March 17, 2000. The credit facility was subsequently terminated.

 

As of December 31, 2001, Axsys had no significantobligations or commitments for capital expenditures other than those arising inthe ordinary course of business.  Webelieve that cash on hand, cash generated from operations, proceeds from a $3.0million capital lease facility expiring in September 2002 with $2.2 million ofunused capacity remaining at December 31, 2001, and an expected refund offederal income taxes caused by 2001 tax net operating losses, will besufficient to finance capital expenditures, working capital requirements andoperations for the next year.  There areno business acquisitions planned as of March 14, 2002.

 

The following table reflects a summary of ourcontractual cash obligations and other commercial commitments as of December31, 2001:

 
|                             |   | **PAYMENTS DUE BY PERIOD** |   |
|----------------------------------|--------|----------------------------|--------|
| **CONTRACTUAL CASH OBLIGATIONS** |   | **TOTAL**                  |   | **LESS THAN 1 YEAR** |   | **1 to 3 YEARS** |   | **4 to 5 YEARS** |   | **AFTER 5 YEARS** |   |
| **(Amounts in thousands)**       |   |
| Operating leases  (1)            |   | $                          | 8,524  |   | $ | 1,423 |   | $ | 2,745 |   | $ | 2,145 |   | $ | 2,211 |   |
| Capital leases                   |   | 2,239                      |   | 847 |   | 1,210 |   | 182 |   | – |   |
|                             |   |                       |   |   |   |   |   |   |   |   |   |
| Total                            |   | $                          | 10,763 |   | $ | 2,270 |   | $ | 3,955 |   | $ | 2,327 |   | $ | 2,211 |   |

 

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(1)     Included are two security deposits in theform of letters of credit for two facility leases which are renewed annuallyfor the term of the lease.  One in theamount of $217,000 and relates to the building lease in Wilmington,Massachusetts. The other is in the amount of $14,000 and relates to thebuilding lease in Pittsburgh, Pennsylvania. Both building leases expire in 2006.

 

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***Backlog***

 

A substantial portion of our business is of abuild-to-order nature requiring various engineering, manufacturing, testing andother processes to be performed prior to shipment.  As a result, we generally have a significant backlog of orders tobe shipped.  Our backlog of ordersdecreased by 22 percent or $14.5 million, to $50.3 million at December 31, 2001from $64.9 million at December 31, 2000. This decrease was caused by lowerbookings in each operating segment and shipment of overdue backlog in thePrecision Components Group.  The largestdecrease was recorded in the digital imaging market, which management believeswas driven more by the timing of long-term volume purchase agreements than byany fundamental change in the market for our products.  We believe that a substantial portion of ourbacklog of orders at December 31, 2001 will be shipped over the next twelvemonths.

 

***Significant Accounting Policies***

 

Our significant accounting policies and methods usedin the preparation of our Consolidated Financial Statements are described inNote 1 to the Consolidated Financial Statements.  The following is a brief discussion of the more significantaccounting policies and methods used by us.

 

*General.*The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting periods.  The most significant estimates andassumptions related to inventories and the adequacy of allowances forwarranties and doubtful accounts. Actual amounts could differ significantly from these estimates.

 

*RevenueRecognition*.  Werecognize revenue in accordance with SEC Staff Accounting Bulletin No.101.  SAB 101 requires that four basiccriteria must be met before revenue can be recognized:  (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured.  Determination of criteria (3) and (4) arebased on management's judgments regarding the fixed nature of the fee chargedfor products delivered and the collectibility of those fees.  Should changes in conditions causemanagement to determine these criteria are not met for future transactions,revenue recognized for any reporting period could be adversely affected.

 

Two long-term contracts are covered by a loss contractreserve.  We accrued for these contractsbased on the contract price and the current cost structure.  To the extent future costs to manufacturethese products change, our loss contract reserves will be impacted**.**

 

*Inventories*.  We value our inventory at thelower of the actual cost to purchase and/or manufacture the inventory or thecurrent estimated market value of the inventory.  We regularly review inventory quantities on hand and record aprovision for excess or obsolete inventory. As demonstrated during 2001, demand for our products can fluctuate.  A significant increase in the demand for ourproducts could result in a short-term increase in the cost of inventorypurchases while a significant decrease in demand could result in an increase inthe amount of excess or obsolete inventory quantities on hand.  In addition, some of our industries arecharacterized by rapid technological change or frequent new product developmentthat could result in an increase in the amount of obsolete inventory on hand.  Additionally, our estimates of futureproduct demand may prove to be inaccurate, in which case we may haveunderstated or overstated the provision required for excess or obsoleteinventory.  In the future, if ourinventory were determined to be overvalued, we would be required to recognizesuch costs in our cost of goods sold at the time of such determination.  Likewise, if our inventory is undervalued,we may have over-reported our costs of goods sold in previous periods and wouldbe required to recognize such additional operating income at the time of sale.  Therefore, although we make every effort toensure the accuracy of our forecasts of future product demand, any significantunanticipated changes in demand or technological developments could have asignificant impact on the value of our inventory and our reported operatingresults.

 

*Environmental contingencies*.  Weare currently involved in several environmental remediation projects.  We accrue for environmental contingencieswhen (1) responsibility for clean-up is determined and (2) costs are probableand reasonably estimable.  When costsare not probable and reasonably estimable, no accrual is made.  As discussed in Note 4 to the ConsolidatedFinancial Statements, we have accrued our estimate of the probable costs forthe resolution of these claims.  Theseestimates have been developed in consultation with outside environmentalconsultants handling these matters and are based upon an analysis of theanticipated remediation plans.  We donot anticipate these projects will have a material adverse effect on our

 

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consolidated financial position. It ispossible, however, that future results of operations could be materiallyaffected by changes in our assumptions.

 

***Recently Issued Accounting Standards***

 

Statement of Financial Accounting Standards ("SFAS") No. 144, "Accountingfor the Impairment or Disposal of Long-Lived Assets", was issued in August2001.  SFAS No. 144 is effective forfiscal years beginning after December 15, 2001. The Company has not yet determinedthe impact, if any, this new standard will have on its reported results ofoperations and cash flows.

 

SFAS No. 143, "Accounting for Asset RetirementObligations", was issued in August 2001. SFAS No. 143 is effective in 2003. It requires the recording of an assetand a liability equal to the present value of the estimated costs associatedwith the retirement of long-lived assets where a legal or contractualobligation exists.  The asset isrequired to be depreciated over the life of the related equipment or facility,and the liability accreted each year based on a present value interestrate.  Axsys has not yet evaluated theimpact of adopting SFAS No. 143 on its consolidated position or results ofoperations.

 

SFAS No. 142, "Goodwill and Other IntangibleAssets", was issued in June 2001. It changes the accounting for goodwill by eliminating goodwillamortization beginning in 2002.  It willalso require at least an annual assessment of goodwill impairment.  The initial test for impairment must be completedby December 31, 2002, but any impairment would be reflected as an accountingchange recorded retroactively in the first quarter of 2002.  The Company is currently evaluating theimpact of adopting SFAS No. 142. Goodwill amortization, which amounted to $140 thousand offset bynegative amortization of $143 thousand in 2001, will no longer be recorded in2002, thus increasing earnings, but with no impact on cash flow.  The Company has not completed impairmenttesting and therefore cannot quantify the statement's impact on itsconsolidated financial statements.  Itis possible that some goodwill will be required to be written off in 2002. TheCompany's negative goodwill of $535 thousand as of December 31, 2001 will bereversed as a cumulative effect of a change in accounting principle in thefirst quarter of 2002.

 

SFAS No. 141, "Business Combinations", wasissued on June 30, 2001.  The statementrequires that all business combinations initiated after June 30, 2001 beaccounted for using the purchase accounting method, eliminating the use of thepooling-of-interest method.  It alsospecifies that the purchase price must first be allocated to specific tangibleand intangible assets before determination.

 

SFAS No. 133, "Accounting for DerivativeInstruments and Hedging Activities", was issued in June 1998.  SFAS No. 133, as amended by SFAS No. 138,was effective for fiscal years beginning after June 15, 2000.  The Company did not use derivativeinstruments during 2001.  As a result,the implementation of the Statement did not have a material impact on theconsolidated financial position or consolidated results of the Company.  Axsys adopted the standard on January 1,2001.

 

***Cautionary Factors That May Affect FutureResults***

 

This filing contains forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, as amended,including, without limitation, statements regarding our ability to reducedesign and manufacturing lead times and manufacturing costs, our ability to integrateexisting technologies, our ability to implement our strategy to develop andsell, among other things, higher level subsystems and automation production andtest systems, the ability to sell to new customers and markets and to increasethe level of value added we provide to customers, the receipt and shipment oforders by Axsys, the changes to be achieved from our Cost Reduction Plan, ourobjective to grow through strategic acquisitions and anticipated expendituresfor environmental remediation.  One canidentify these forward-looking statements by the use of the words such as"expect," "anticipate," "plan," "may,""will," "estimate" or other similar expressions.  Discussion containing such forward-lookingstatements is found in the material set forth under "Business" and"Management's Discussion and Analysis of Financial Condition and Resultsof Operations," as well as within the filing generally.  One should understand that many factorscould cause actual results to differ from those expressed or implied in theforward-looking statements.  Thesefactors include those discussed below as well as inaccurate assumptions.  Axsys cautions the reader, however, thatthis list of factors may not be exhaustive.

 

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***Risk Factors***

 

The following risk factors should be consideredcarefully in addition to the other information contained in this filing.

 

*Ouroperating results may vary substantially due to factors that are difficult toforecast. *Factorssuch as announcements of technological innovations or new products by Axsys orour competitors, domestic and foreign general economic conditions and thecyclical nature of the industries that we serve could cause substantialvariations in our operating results. The defense, aerospace, high-end digital imaging, electronics capitalequipment, semi-conductor and photonics markets, each of which represents asignificant market for our products, have historically been subject tosubstantial economic fluctuations due to changing demands for their productsand services, introduction of new products and product obsolescence. Any futurefluctuations arising from these or other conditions could have an adverseimpact on our business, financial condition or results of operations.  We have experienced, and expect to continueto experience, significant fluctuations in our quarterly and annual operatingresults due to a variety of factors, including:

 

•                                          marketacceptance of new and enhanced versions of our products

•                                          timingand shipment of significant orders

•                                          mixof products sold

•                                          lengthof sales cycles

•                                          plantopenings and closings

•                                          thetiming of acquisitions or dispositions

•                                          delaysin raw materials shipments, as well as other manufacturing delays anddisruptions;

•                                          completionof large projects

•                                          thelevel of backlog of orders

•                                          domesticand foreign general economic conditions, and

•                                          demandin the markets that we serve.

 

To some extent, our netsales and operating results for a specific quarter will depend upon generatingorders to be shipped in the same quarter in which the order is received.  The failure to receive anticipated orders ordelays in shipments near the end of a particular quarter, due, for example, tounanticipated rescheduling or cancellations of shipments by our customers orunexpected manufacturing difficulties, may cause our net sales in a particularquarter to fall significantly below expectations, which could have a materialadverse effect on our business, financial condition and results of operationsfor such quarter.

 

*The rapid pace of technological change will requirecontinuous new product development. *Our success will continue to depend insubstantial part upon our ability to introduce new products that keep pace withtechnological developments and evolving industry standards and to applyappropriate levels of engineering, research and development resources necessaryto keep pace with such developments.  Inaddition, our success will depend on how well we respond to changes in customerrequirements and achieve market acceptance for our products andcapabilities.  Any failure by Axsys toanticipate or respond adequately to technological developments and customerrequirements could have a material adverse effect on our business, financialcondition and results of operations.  Inorder to develop new products successfully, we are dependent upon closerelationships with our customers and their willingness to share proprietaryinformation about their requirements and participate in collaborative effortswith us.  We cannot assure you that ourcustomers will continue to provide us with timely access to such information orthat we will be successful in developing and marketing new products andservices or their enhancements.  In addition,we cannot assure you that the new products and services or their enhancements,if any, that we develop, will achieve market acceptance.

 

*Ourbusiness is concentrated in two major industries that are subject to economiccycles*.  A significantportion of our business and business development efforts is concentrated in thedefense and, to a lesser extent, electronics capital equipment industries.  Our business depends, in significant part,upon the U.S. Government's continued demand in the area of defense forhigh-end, high performance components and subsystems of the type that wemanufacture.  Approximately 33.0% of ournet sales in 2001 and 27.2% of net sales in 2000 were derived directly fromcontracts with the U.S. Government, or agencies or departments thereof, orindirectly from subcontracts with U.S. Government contractors.  The majority of these Government contractsare subject to termination and renegotiation. As a result, our business, financial condition and results of operationsmay be materially affected by changes in U.S. Government expenditures fordefense.

 

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Additionally, we currently intend to continue todevelop the portion of our business dependent upon manufacturers in theelectronics capital equipment industry that provide equipment used in thesemiconductor, mass data storage and flat panel display industries.  This business development will depend, inpart, upon capital expenditures by manufacturers of electronics capitalequipment, which in turn depend upon the current and anticipated market demandfor semiconductor, mass data storage and flat panel display devices.  The semiconductor, mass data storage andflat panel display industries have been highly volatile and historically haveexperienced periods of oversupply, resulting in significantly reduced demandfor capital equipment.  This volatilitycould have a material adverse effect on our business in the electronics capitalequipment industry.

 

*Our markets are extremely competitive. *We compete primarily on the basis of our ability to design and engineerour products to meet performance specifications set by our customers, most ofwhom are OEMs who purchase component parts or subsystems for inclusion in theirend products.  Product pricing andquality, customer support, experience, reputation and financial stability arealso important competitive factors.

 

There are a limited number of competitors in each ofthe markets for the various types of precision optical and positioningcomponents and subsystems that we sell. Our competitors, especially those in the precision optical andpositioning product lines, are typically focused on a smaller number of productofferings than we are, and they are often well entrenched.  Some of our competitors have substantiallygreater resources than we do.  Ourcompetitors could develop enhancements to or future generations of competitiveproducts that will offer superior price or performance features to ours.  In addition, new processes or technologiescould emerge that render our products less competitive or obsolete.

 

In addition, a substantial investment is required byan existing or potential customer to integrate capital equipment into aproduction line, or to integrate components and subsystems into their productdesign.  We believe that once a customerhas selected certain capital equipment or certain components or subsystems froma particular vendor, the customer generally relies upon that vendor to provideequipment for the specific production line or product application and may seekto rely upon that vendor to meet other capital equipment or component orsubsystem requirements.  Accordingly,Axsys may be at a competitive disadvantage with respect to a prospectivecustomer that chooses to utilize a competitor's manufacturing equipment orcomponents or subsystems.

 

Further, there are numerous competitors in markets towhich we distribute precision ball bearings. Our competitors, who vary in size, include other ball bearingsdistributors as well as ball bearing manufacturers.

 

The bases of competition in the industries in which wecompete could shift and we may not be able to compete successfully.

 

*Salesof our products are dependent on capital spending patterns by our customers,which are cyclical.* Our products can range in price from several hundred dollars percomponent to upwards of one million dollars or more for an integratedsystem.  These products can representsignificant capital expenditures for our customers and are subject to theircapital budgeting and approval processes. Our customer's capital budgets may be subject to fluctuations due togeneral economic conditions domestically and overseas, industry economic cyclesand customer specific circumstances. Semiconductor, data storage, and related capital equipment markets can besubjected to sudden and extreme variations in supply and demand for products,including our own.  Any of these factorscould have a material adverse effect on our business, financial condition, andresults of operations.

 

*We aredeveloping advanced automation systems for the photonics industry and ourproducts may not achieve broad market acceptance*.  Our engineered subsystems and automatedproduction and test systems are sold to end-users that manufacture fiberoptics/photonic components.  Theseproduction and test systems integrate many of our precision optical andpositioning components and subsystems with vision systems, robotics andelectronic controls produced by third party companies.  We may not be able to successfully integrateall of these technologies into the advanced systems that we believe that thismarket will eventually demand.  We alsomay not be able to accurately assess the requirements of our customers anddesign effective solutions.  Axsys plansto continue to invest in engineering resources and manufacturing capacity forthis market.  Our ability to recoverthis investment and the potential demand for our products is largely dependentupon photonics companies deciding to adopt advanced, automated systems.  We have no control over those decisions. Anyof these factors could have a material adverse effect on our business,financial condition, and results of operations.

 

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*Ourlevels of international sales and purchases could pose risks to our operatingresults*.  Ourinternational sales from continuing operations accounted for approximately20.3% of net sales in 2001, 19.4% in 2000, and 15.0% in 1999.  In addition, certain of our products aresold to domestic customers who use them in products they sell to internationalmarkets. Also, we purchase a substantial portion of our ball bearing productsfrom two foreign suppliers and certain other products from other foreignsuppliers.  Our international sales andpurchases are subject to a number of risks generally associated withinternational operations, including general economic conditions, import andexport duties and restrictions, currency fluctuations, changes in regulatoryrequirements, tariffs and other barriers, political and economic instabilityand potentially adverse tax consequences. Any of these factors could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

*We maynot be able to successfully manage expanded operations and acquisitions*.  Over the years, we have made severalacquisitions of complementary businesses, which we continue to integrate.  This integration strategy includes combiningsales channels and customer service operations of these companies as well asintegrating their engineering and manufacturing resources to developvalue-added systems incorporating our technological capabilities.  We cannot assure you that we will besuccessful in the integration process.

 

In addition, as part of our business developmentstrategy, we plan to pursue further acquisitions in order to expand our productofferings, add to or enhance our base of technical and sales personnel orprovide desirable customer relationships. This growth could result in a significant strain on our managerial,financial, engineering and other resources. The rate of our future expansion, if any, in combination with thecomplexity of the technologies involved in our businesses, may demand anunusually high level of managerial effectiveness in anticipating, planning,coordinating and meeting our operational needs as well as the needs of ourcustomers.  Additionally, we cannotassure you that Axsys will be able to acquire complementary businesses on acost-effective basis, integrate acquired operations into our organizationeffectively, retain and motivate key personnel, or retain customers of acquiredfirms.  We compete for attractiveacquisition candidates with other companies or investors, and that competitioncould increase the cost of pursuing our acquisition strategy or reduce thenumber of attractive candidates to be acquired. Although Axsys reviews andconsiders possible acquisitions on an on-going basis, no specific acquisitionsare being negotiated or planned as of the date of this report.

 

*Manykey product components come from single source suppliers*.  A significant portion of our precisionmachining business depends on the adequate supply of specialty metals, such asberyllium, at competitive prices and on reasonable terms. We currently procureall of our beryllium from Brush Wellman, the sole U.S. supplier, and expect tocontinue to rely on Brush Wellman for beryllium for the foreseeablefuture.  Although we have notexperienced significant problems with our supplier in the past, we cannotassure you that such relationship will continue or that we will continue toobtain such supplies at cost levels that would not adversely affect our grossmargins.  The partial or complete lossof Brush Wellman as a supplier of beryllium, or production shortfalls orinterruptions that otherwise impair our supply of beryllium, would have amaterial adverse effect on our business, financial condition and results ofoperations.  It is uncertain whetheralternative sources of supply could be developed without a material disruptionin our ability to provide beryllium products to our customers.

 

Although we have not experienced significant problemswith our other suppliers in the past, we cannot assure you that suchrelationships will continue or that, in the event of a termination of our relationshipswith those other suppliers, we would be able to obtain alternative sources ofsupply without a material disruption in our ability to provide products to ourcustomers.  In addition, we purchase asubstantial amount of ball bearings that we distribute from two foreignsuppliers.  Any material disruption inour supply of products would have a material adverse effect on our business,financial condition or results of operations.

 

*Ourfuture success depends on our ability to retain key personnel*. Axsys' success depends to a significantextent on the continued services of our key executive officers and seniormanagement personnel.  The loss of theservices of one or more of these individuals may have a material adverse effecton our business, financial condition and results of operations.  We do not maintain key man life insurance onour executive officers.  In addition,since our continued success is largely dependent upon our ability to design,manufacture and sell high-performance components and subsystems for thehigh-performance technology market, we are particularly dependent upon ourability to identify, attract, motivate and retain qualified technicalpersonnel, including engineers and skilled machinists, with the requisiteeducational background and industry experience.  Our employees may voluntarily terminate their employment with usat any time, and competition for personnel is intense.  Accordingly, we cannot assure that we willbe successful in retaining our existing personnel.  The loss of the services of a significant number of our technicalor skilled personnel, or the future inability to attract technical or skilledpersonnel, could have a material adverse effect on our business, financialcondition and results of operations.

 

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*We mustprotect our intellectual property rights*.  The patents of competitors could impact ourbusiness.  Our ability to competeeffectively with other companies will depend, in part, on our ability tomaintain the proprietary nature of our technology.  We rely upon a combination of patents, trademarks and tradesecrets, non-disclosure agreements and other forms of intellectual propertyprotection to safeguard our proprietary technology.  We cannot assure you as to the degree of protection offered bythese patents or as to the likelihood that patents will be issued for pendingapplications.  We also cannot assure youthat we will be able to maintain the confidentiality of our trade secrets orthat our non-disclosure agreements will provide meaningful protection of ourtrade secrets, know-how or other proprietary information in the event of anyunauthorized use, misappropriation or disclosure of such trade secrets,know-how or other proprietary information.

 

Competitors in the United States and foreigncountries, many of which have substantially greater resources than we do andhave made substantial investments in competing technologies, may have appliedfor or obtained, or may in the future apply for and obtain, patents that willprevent, limit or interfere with our ability to make and sell some of ourproducts.  Although we believe that ourexisting products do not infringe on the patents or other proprietary rights ofthird parties, third parties could assert infringement claims against us andsuch claims could be successful.

 

*We mustcomply with strict environmental regulations; both compliance andnon-compliance could result in material liabilities or costs.*  We are subject to a variety of federal,state and local laws, rules and regulations relating to the use, storage,discharge and disposal of hazardous chemicals used during our engineering,research and development and manufacturing activities.  Failure to comply with applicableenvironmental requirements could result in substantial liability to Axsys,suspension or cessation of our operations, restrictions on our ability toexpand our operations or requirements for the acquisition of additionalequipment or other significant expense, any of which could have a materialadverse effect on our business, financial condition and results ofoperations.  In addition, we cannotassure you  (a) that changes in federal,state or local laws, regulations or regulatory policy, or the discovery ofunknown problems or conditions, will not in the future require substantialexpenditures, or (b) as to the extent of our liabilities, if any, for pastfailures, if any, to comply with applicable environmental laws, regulations andpermits, any of which also could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

During 2000, Axsys recorded a charge to discontinuedoperations of $1.3 million, before a tax benefit of $0.5 million, relating toincreases in reserves for certain environmental costs associated with formerlyowned properties.  The current accrualsof $1.6 million associated with these sites assume that certain approvals willbe received from state regulatory authorities. However, we cannot assure youthat we will receive these approvals. If these approvals are not received, our costs could increasesubstantially.  In addition, even ifsuch approvals are received, the costs actually incurred may exceed thereserves established.

 

During December 2001, we received a letter from theUnited States Environmental Protection Agency ("EPA") notifying usthat we are considered to be a potentially responsible party at a site locatedin Prospect, Connecticut, which until 1978 was owned by a former subsidiary.  It is our policy to accrue environmentalcleanup related costs only when those costs are believed to be probable and canbe reasonably estimated.  Thequantification of environmental exposure with respect to this site, if any,requires an assessment of many factors, including the quality of informationavailable, the assessment stage of each investigation, preliminary findings andthe length of time involved in remediation. Currently, it is not possible forus to estimate a meaningful range of exposure based on the limited amount ofinformation received.

 

We have made and continue to make investments inprotective equipment, process controls, manufacturing procedures and trainingin order to minimize the risks to our employees, surrounding communities andthe environment due to the presence and handling of hazardous materials.  The failure to properly handle thesematerials could lead to harmful exposure for employees or to the discharge ofcertain hazardous waste materials. Since Axsys does not carry environmentalimpairment insurance, such a failure could lead to a material adverse effect onour business, financial condition and results of operations. Also,environmental problems could develop in the future which would have a materialadverse effect on our business, financial condition and results of operations.

 

*We mustcontinue to invest significant resources to maintain and upgrade ourmanufacturing capabilities*. We have invested, and intend to continue to invest, in state-of-the-artequipment in order to increase, expand, update or relocate our manufacturingcapabilities and facilities.  Changes intechnology or sales growth beyond currently established manufacturingcapabilities would require that we make further investment.  We cannot assure you that we will generatesufficient funds from operations to finance any required investment or thatother sources of funding will be available on

 

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** **

terms acceptable to us, if at all. Furthermore, any further expansion could negatively impact our business,financial condition or results and operations.

 

*Oneshareholder controls a significant block of Axsys stock and this concentrationcould affect important operating decisions*.  The Chairman of the Board and ChiefExecutive Officer of Axsys owns approximately 27% of the outstanding commonstock as of December 31, 2001.  As aresult, he will have the ability to exert influence with respect to corporateactions, including the election of directors and certain sales or mergers andacquisitions.

 

*Our stockprice has been volatile and may continue to fluctuate substantially*.  The price of our common stock may be subjectto significant fluctuations.  That pricevolatility may be attributable, at least in part, to the limited number ofshares generally available for sale in the public market.  In addition, factors, such as, actual oranticipated quarterly fluctuations in our financial results, changes inrecommendations or earnings estimates by securities analysts, announcements oftechnological innovations or new commercial products or services and the timingof announcements of acquisitions or dispositions by Axsys or our competitors,as well as conditions in our markets generally, may have a significant adverseeffect on the market price of our common stock.  Furthermore, the stock market historically has experiencedvolatility which has particularly affected the market prices of securities ofmany technology companies and which sometimes has been unrelated to the operatingperformances of such companies.

 

*Certainanti-takeover provisions could cause harm to our shareholders*.  Our Certificate of Incorporation, as amended(the "Certificate of Incorporation"), our By-Laws (the"By-Laws") and the Delaware General Corporation Law("DGCL") contain certain provisions which could delay or impede theremoval of incumbent directors and could make a merger, tender offer or proxycontest involving Axsys more difficult, even if such a transaction would bebeneficial to the interests of the shareholders, or could discourage a thirdparty from attempting to acquire control of Axsys.

 

We have authorized 4,000,000 shares of our preferredstock, none of which is currently outstanding, and which we could issue withoutfurther shareholder approval and upon terms and conditions, and having rights,privileges and preferences, as the Board of Directors may determine.  We have no current plans to issue anypreferred stock.

 

The By-Laws include provisions establishing advancenotice procedures with respect to shareholder proposals and directornominations, and permitting the calling of special shareholder meetings only bythe written consent of three-quarters of the Board of Directors or the Chairmanof the Board.  The Certificate ofIncorporation provides that in lieu of a meeting, action may be taken bywritten consent of our shareholders only by unanimous consent.  These provisions could have the effect ofdelaying, deterring or preventing a change in control of Axsys, and mayadversely affect the voting and other rights of holders of common stock.

 

In addition, we are subject to section 203 of theDGCL, which, among other things and subject to certain exceptions, restrictscertain business transactions between a corporation and a shareholder owning15% or more of the corporation's outstanding voting stock (an "interestedshareholder") for a period of three years from the date the shareholderbecomes an interested shareholder. These provisions may have the effect of delaying or preventing a changeof control of Axsys without action by the shareholders and, therefore, couldadversely affect the price of our common stock.  In the event of a change of control of Axsys, the vesting ofoutstanding options issued under our long-term stock incentive plan may beaccelerated at the discretion of the committee administering the plan or may berequired to be accelerated under certain circumstances provided for in eachincentive agreement.

 

*Absenceof Dividends on Common Stock.*  Axsys does not anticipate paying dividends on its common stock inthe foreseeable future.

 

**Item7a.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Axsys' market risksensitive instruments do not subject Axsys to material market risk exposures.

 

 

26

----

**Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The response to this Item is included in Item 14(a) ofthis Report.

 

**Item 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

**PART III**

 

The information required by Part III is incorporatedby reference to Axsys' definitive proxy statement for its 2002 Annual Meetingof Stockholders to be filed with the Securities and Exchange Commission within120 days following the end of Axsys' fiscal year ended December 31, 2001.  If such proxy statement is not so filed,such information will be filed as an amendment to this Form 10-K within 120days following the end of Axsys' fiscal year ended December 31, 2001.

 

27

----

 

**PART IV**

 

**Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

 

**(a)(1) and (2)and (d) Financial Statements**

 

See accompanying index to consolidated financialstatements and schedule.

 

**(a)(3) Exhibits**

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                        |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 3(1)               |   | Restated  Certificate of Incorporation of the Company (filed as Exhibit 3(4) to the  Company’s Amendment No. 2 to Registration Statement on Form S-1, dated  October 17, 1997 (File No. 333-36027) (the “Form S-1”) and incorporated  herein by reference).                                             |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 3(2)               |   | By-Laws  of the Company (filed as Exhibit 2 to the Form 8-A dated August 8, 1991 and  incorporated herein by reference).                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(1)              |   | Severance  Agreement between the Company and Kenneth F. Stern dated as of June 10, 1996  (filed as Exhibit 10(16) to the Form S-1 and incorporated herein by  reference).                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(2)              |   | Form  of Stock Option Agreement, dated as of September 30, 1991 (filed as Exhibit  10(17) to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 30, 1991 and incorporated herein by reference).                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(3)              |   | Summary  of Annual Incentive Plan (filed as Exhibit 10(22) to the Form S-1 and  incorporated herein by reference).                                                                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(4)              |   | Supplemental  Revenue Growth Incentive Plan (filed as Exhibit 10(23) to the Form S-1 and  incorporated herein by reference).                                                                                                                                                                                           |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(5)              |   | Axsys  Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit C to the  Company’s Proxy Statement dated September 23, 1997 and incorporated herein by  reference).                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10(6)              |   | Resolution  approved on November 8, 1999 amending Section 2(l) of the Long Term Stock  Incentive Plan.  (filed as Exhibit  10(12) to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1999 and incorporated herein by reference.)                                            |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (7)            |   | Severance  Protection Agreement between the Company and Stephen W. Bershad dated as of  February 11, 1999 (filed as Exhibit 10(1) to the Company’s Form 10-Q, dated  May 11, 1999, for the fiscal quarter ended March 31, 1999 (the “March 31,  1999 Form 10-Q”) and incorporated herein by reference). |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (8)            |   | Severance  Protection Agreement between the Company and Kenneth F. Stern dated as of  February 11, 1999 (filed as Exhibit 10(4) to the March 31, 1999 Form 10-Q and  incorporated herein by reference).                                                                                                                |
| 10  (9)            |   | Letter  Agreement between Mark J. Bonney and the Company dated as of August 1, 1999  (filed as Exhibit 10(4) to the September 30, 1999 Form 10-Q and incorporated  herein by reference).                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (10)           |   | Severance  Protection Agreement between the Company and Mark J. Bonney dated as of  August 30, 1999 (filed as Exhibit 10(5) to the September 30, 1999 Form 10-Q  and incorporated herein by reference).                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (11)           |   | Amendment  to Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit  A to the Company’s Proxy Statement dated April 24, 2000 and incorporated  herein by reference).                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (12)           |   | Asset  Purchase Agreement, dated as of September 30, 2000, between the Company, and  Westlake Technology Company.                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (13)           |   | Asset  Purchase Agreement, dated as of October 18, 2000, between the Company, and  Automation Engineering, Inc.                                                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (14)           |   | Compensation  Agreement, dated as of October 18, 2000, between the Company, and Stephen W.  Bershad.                                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (15)           |   | Letter  Agreement between John E. Hanley and the Company dated as of March 8, 2000  (filed as Exhibit 10(28) to the March 31, 2001 Form 10-Q and incorporated  herein by reference).                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (16)           |   | Letter  Agreement between Stephen W. Bershad and the Company dated October 4, 2001,  extending term of initial period of the Employment Agreement.                                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (17)           |   | Form  of Indemnification Agreement for all Directors and Officers of the Company.                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 10  (18)           |   | Letter  Agreement between David A. Almeida and the Company dates as of November 14,  2001.                                                                                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 21                 |   | Subsidiaries  of the Registrant                                                                                                                                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 22                 |   | Consent  of Arthur Andersen LLP                                                                                                                                                                                                                                                                                        |

 

**(b)      Reports on Form 8-K**

 

None during the quarter ended December 31,2001.

 

28

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| Dated: | March 18, 2002                                                      |                    | AXSYS  TECHNOLOGIES, INC. |
|--------|---------------------------------------------------------------------|-------------------------|---------------------------|
|   | **(Registrant)**                                                    |
|   |                                                                |
|   | By                                                                  | /s/  STEPHEN W. BERSHAD |                      |
|   | **Stephen W. Bershad**                                              |
|   | **Chairman of the Board of Directors and  Chief Executive Officer** |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities indicated this the 18th day ofMarch 2002.

 
|   | /s/  Stephen W. Bershad       |   | Chairman  of the Board of Directors and Chief Executive Officer     |
|--------|-------------------------------|--------|---------------------------------------------------------------------|
|   | **Stephen W. Bershad**        |   |
|   |                          |   |
|   | /s/  Mark J. Bonney           |   | President,  Chief Operating Officer & Director                  |
|   | **Mark J. Bonney**            |   |
|   |                          |   |
|   | /s/  David A. Almeida         |   | Vice  President, Chief Financial Officer, Treasurer & Secretary |
|   | **David A. Almeida**          |   |
|   |                          |   |
|   | /s/  Anthony J. Fiorelli, Jr. |   | Director                                                            |
|   | **Anthony J. Fiorelli, Jr.**  |   |
|   |                          |   |
|   | /s/  Eliot M. Fried           |   | Director                                                            |
|   | **Eliot M. Fried**            |   |
|   |                          |   |
|   | /s/  Richard F. Hamm, Jr.     |   | Director                                                            |
|   | **Richard F. Hamm, Jr.**      |   |
|   |                          |   |
|   | /s/  Robert G. McConnell      |   | Director                                                            |
|   | **Robert G. McConnell**       |   |
|        |                               |        |                                                                     |  |  |

 

29

----

 

**ANNUAL REPORT ON FORM 10-K**

 

**ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIALSTATEMENT SCHEDULE**

 

**FINANCIAL STATEMENTS**

 

**YEAR ENDED DECEMBER 31, 2001**

 

**AXSYS TECHNOLOGIES, INC.**

** **

----

 

**FORM 10-K — ITEM14(a)(1) and (2) and Item 14(d)**

 

**AXSYS TECHNOLOGIES, INC.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIALSTATEMENT SCHEDULE**

 

The following consolidated financial statements of Axsys Technologies,Inc. are included in Item 8:

 
| Report of  Independent Public Accountants                                                                          |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |
| Consolidated Balance Sheets  — December 31, 2001 and 2000                                                     |
|                                                                                                               |
| Consolidated  Statements of Operations — For the years ended December 31, 2001, 2000 and  1999                |
|                                                                                                               |
| Consolidated  Statements of Cash Flows — For the years ended December 31, 2001, 2000 and  1999                |
|                                                                                                               |
| Consolidated  Statements of Shareholders’ Equity — For the years ended December 31, 2001,  2000 and 1999 |
|                                                                                                               |
| Notes to  consolidated financial statements                                                                        |
|                                                                                                               |
| The following consolidated financial statement schedule  of Axsys Technologies, Inc., is included in Item 14(d):   |
|                                                                                                               |
| Schedule  II — Valuation and qualifying accounts                                                              |

 

All other schedules for which provision is made in the applicableaccounting regulation of the Securities and Exchange Commission are notrequired under the related instructions or are inapplicable and, therefore,have been omitted.

 

F-2

----

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To the Shareholders of

Axsys Technologies, Inc.:

 

We have audited the accompanying consolidated balance sheets of AxsysTechnologies, Inc., a Delaware corporation, and its subsidiaries as of December31, 2001 and 2000, and the related consolidated statements of operations,shareholders’ equity and cash flows for each of the three years in the periodended December 31, 2001.  Thesefinancial statements and the schedule referred to below are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Axsys Technologies,Inc. and subsidiaries, as of December 31, 2001 and 2000, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2001 in conformity with accounting principles generallyaccepted in the United States.

 

Our audits were made for the purpose of forming anopinion on the basic financial statements taken as a whole.  The schedule listed in the index tofinancial statements and financial statement schedule is presented for purposesof complying with the Securities and Exchange Commission’s rules and is notpart of the basic financial statements. This schedule has been subjected to the auditing procedures applied inour audits of the basic financial statements and, in our opinion, fairly statesin all material respects the financial data required to be set forth therein inrelation to the basic financial statements taken as a whole.

 

**ARTHUR ANDERSENLLP**

 

New York, New York

February 8, 2002

 

F-3

----

 

**AXSYSTECHNOLOGIES, INC.**

**Consolidated Balance Sheets**

(Dollars in thousands, except per share data)

 
|                                                                                                           |   | **December 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                           |   | **2001**         |   | **2000** |   |
| ASSETS                                                                                                         |   |             |   |   |   |
|                                                                                                           |   |             |   |   |   |
| CURRENT ASSETS:                                                                                                |   |             |   |   |   |
| Cash and cash equivalents                                                                                      |   | $                | 9,906  |   | $ | 14,850 |   |
| Accounts receivable, net of allowance for doubtful  accounts of$663 in 2001 and $527  in 2000                  |   | 10,861           |   | 13,937 |   |
| Inventories                                                                                                    |   | 22,610           |   | 25,435 |   |
| Income tax receivable                                                                                          |   | 3,633            |   | — |   |
| Deferred tax asset                                                                                             |   | 2,411            |   | 2,581 |   |
| Other current assets                                                                                           |   | 779              |   | 712 |   |
| TOTAL CURRENT ASSETS                                                                                           |   | 50,200           |   | 57,515 |   |
|                                                                                                           |   |             |   |   |   |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                             |   | 13,417           |   | 12,816 |   |
|                                                                                                           |   |             |   |   |   |
| EXCESS OF COST OVER NET ASSETS ACQUIRED, net of  accumulatedamortization of $1,135  in 2001 and $1,138 in 2000 |   | 3,065            |   | 3,062 |   |
|                                                                                                           |   |             |   |   |   |
| OTHER ASSETS                                                                                                   |   | 599              |   | 199 |   |
|                                                                                                           |   |             |   |   |   |
| TOTAL ASSETS                                                                                                   |   | $                | 67,281 |   | $ | 73,592 |   |
|                                                                                                           |   |             |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                      |   |             |   |   |   |
|                                                                                                           |   |             |   |   |   |
| CURRENT LIABILITIES                                                                                            |   |             |   |   |   |
| Accounts payable                                                                                               |   | $                | 4,853  |   | $ | 7,009 |   |
| Accrued expenses and other liabilities                                                                         |   | 9,121            |   | 8,172 |   |
| Current portion of long-term capital lease obligations                                                         |   | 847              |   | 814 |   |
| TOTAL CURRENT LIABILITIES                                                                                      |   | 14,821           |   | 15,995 |   |
|                                                                                                           |   |             |   |   |   |
| CAPITAL LEASES, less current portion                                                                           |   | 1,392            |   | 1,485 |   |
|                                                                                                           |   |             |   |   |   |
| OTHER LONG-TERM LIABILITIES                                                                                    |   | 4,628            |   | 2,691 |   |
|                                                                                                           |   |             |   |   |   |
| SHAREHOLDERS’ EQUITY                                                                                      |   |             |   |   |   |
|                                                                                                           |   |             |   |   |   |
| COMMON STOCK, $.01 PAR VALUE: authorized 30,000,000  shares, issued 4,792,674 at December 31, 2001 and 2000    |   | 47               |   | 47 |   |
|                                                                                                           |   |             |   |   |   |
| CAPITAL IN EXCESS OF PAR                                                                                       |   | 39,621           |   | 39,675 |   |
|                                                                                                           |   |             |   |   |   |
| RETAINED EARNINGS                                                                                              |   | 7,813            |   | 14,965 |   |
|                                                                                                           |   |             |   |   |   |
| TREASURY STOCK, at cost, 96,876 at December 31, 2001  and 108,553 shares atDecember 31,  2000                  |   | (1,041           | )      | (1,266 | ) |
|                                                                                                           |   |             |   |   |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                |   | 46,440           |   | 53,421 |   |
|                                                                                                           |   |             |   |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                |   | $                | 67,281 |   | $ | 73,592 |   |

 

See accompanying notes to consolidated financial statements.

 

F-4

----

 

**AXSYSTECHNOLOGIES, INC.**

**Consolidated Statements of Operations**

 

(Dollars in thousands, except per share data)

 
|                                                                         |   | **Years Ended December 31,** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                         |   | **2001**                     |   | **2000** |   | **1999** |   |
| NET SALES                                                                    |   | $                            | 89,210 |   | $ | 91,841 |   | $ | 85,418 |   |
|                                                                         |   |                         |   |   |   |   |   |
| Cost of sales                                                                |   | 75,137                       |   | 72,178 |   | 64,413 |   |
| Selling, general and administrative expenses                                 |   | 20,878                       |   | 21,847 |   | 17,188 |   |
| Research and development expenses                                            |   | 3,551                        |   | 3,484 |   | 3,350 |   |
| Restructuring charges                                                        |   | 1,360                        |   | 1,655 |   | — |   |
| Nonrecurring merger-related charges                                          |   | —                       |   | 460 |   | — |   |
| Impairment of assets                                                         |   | —                       |   | — |   | 8,993 |   |
| Amortization of intangible assets                                            |   | (3                           | )      | 105 |   | 400 |   |
|                                                                         |   |                         |   |   |   |   |   |
| OPERATING LOSS                                                               |   | (11,713                      | )      | (7,888 | ) | (8,926 | ) |
|                                                                         |   |                         |   |   |   |   |   |
| Interest income/(expense), net                                               |   | 153                          |   | 496 |   | (376 | ) |
| Special charge                                                               |   | —                       |   | — |   | (784 | ) |
| Other income                                                                 |   | 207                          |   | 324 |   | 29 |   |
|                                                                         |   |                         |   |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS BEFORE                                       |   |                         |   |   |   |   |   |
| TAXES AND DISCONTINUED  OPERATIONS                                           |   | (11,353                      | )      | (7,068 | ) | (10,057 | ) |
| Benefit from income taxes                                                    |   | 4,201                        |   | 2,764 |   | 854 |   |
|                                                                         |   |                         |   |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS BEFORE                                       |   |                         |   |   |   |   |   |
| DISCONTINUED OPERATIONS                                                      |   | (7,152                       | )      | (4,304 | ) | (9,203 | ) |
|                                                                         |   |                         |   |   |   |   |   |
| Discontinued Operations:                                                     |   |                         |   |   |   |   |   |
| Income from operations, net of  tax expense of $333 in 2000 and $866 in 1999 |   | —                       |   | 513 |   | 2,081 |   |
| Gain on disposal, net of tax provision of $7,947 in 2000                     |   | —                       |   | 13,314 |   | — |   |
|                                                                         |   |                         |   |   |   |   |   |
| INCOME FROM DISCONTINUED OPERATIONS, net of tax                              |   | —                       |   | 13,827 |   | 2,081 |   |
|                                                                         |   |                         |   |   |   |   |   |
| NET (LOSS)/INCOME                                                            |   | $                            | (7,152 | ) | $ | 9,523 |   | $ | (7,122 | ) |
|                                                                         |   |                         |   |   |   |   |   |
| BASIC (LOSS)/EARNINGS PER SHARE:                                             |   |                         |   |   |   |   |   |
| Loss from continuing operations                                              |   | $                            | (1.53  | ) | $ | (0.92 | ) | $ | (1.95 | ) |
| Income from discontinued  operations                                         |   | —                       |   | 2.97 |   | 0.44 |   |
|                                                                         |   | $                            | (1.53  | )  | $ | 2.05 |   | $ | (1.51 | ) |
|                                                                         |   |                         |   |   |   |   |   |
| Weighted average basic common shares outstanding                             |   | 4,688,307                    |   | 4,656,581 |   | 4,714,997 |   |
|                                                                         |   |                         |   |   |   |   |   |
| DILUTED (LOSS)/EARNINGS PER SHARE:                                           |   |                         |   |   |   |   |   |
| Loss from continuing operations                                              |   | $                            | (1.53  | ) | $ | (0.92 | ) | (1.95 | ) |
| Income from discontinued  operations                                         |   | —                       |   | 2.97 |   | 0.44 |   |
| Total                                                                        |   | $                            | (1.53  | ) | $ | 2.05 |   | $ | (1.51 | ) |
|                                                                         |   |                         |   |   |   |   |   |
| Weighted average diluted common  shares outstanding                          |   | 4,688,307                    |   | 4,656,581 |   | 4,714,997 |   |

 

See accompanying notes to consolidated financial statements.

 

F-5

----

 

**AXSYS TECHNOLOGIES, INC.**

**Consolidated Statements of Cash Flows**

 

(Dollarsin thousands)

 
|                                                                                            |   | **Years Ended December 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                            |   | **2001**                     |   | **2000** |   | **1999** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |   |                         |   |   |   |   |   |
| Net income/(loss)                                                                               |   | $                            | (7,152 | ) | $ | 9,523 |   | $ | (7,122 | ) |
| Adjustments to reconcile net (loss)/income to cash (used in)/provided  by operating activities: |   |                         |   |   |   |   |   |
| Gain on disposal of discontinued operations, net of taxes                                       |   | —                       |   | (13,776 | ) | — |   |
| Impairment of assets                                                                            |   | —                       |   | — |   | 8,993 |   |
| Deferred income taxes – net                                                                |   | (740                         | )      | 585 |   | (568 | ) |
| Depreciation and amortization                                                                   |   | 3,083                        |   | 3,108 |   | 2,992 |   |
| Change in net assets of discontinued operations                                                 |   | —                       |   | (9,915 | ) | (1,829 | ) |
| Decrease (increase) in accounts receivable                                                      |   | 3,076                        |   | (2,386 | ) | 3,300 |   |
| Decrease (increase) in inventories                                                              |   | 2,825                        |   | 889 |   | (819 | ) |
| Increase in current income tax receivable                                                       |   | (3,633                       | )      | — |   | — |   |
| (Increase) decrease in other current assets                                                     |   | (67                          | )      | (264 | ) | 275 |   |
| (Decrease) increase in accounts payable                                                         |   | (2,156                       | )      | 802 |   | (1,040 | ) |
| Increase (decrease) current accrued liabilities                                                 |   | (411                         | )      | 1,089 |   | (964 | ) |
| Increase (decrease) in long-term liabilities                                                    |   | 2,371                        |   | (492 | ) | (333 | ) |
| Restructuring charge                                                                            |   | 1,360                        |   | 1,655 |   | — |   |
| Other-net                                                                                       |   | 212                          |   | 365 |   | 66 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES                                             |   | (1,232                       | )      | (8,817 | ) | 2,951 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |   |                         |   |   |   |   |   |
| Capital expenditures                                                                            |   | (3,948                       | )      | (3,947 | ) | (3,659 | ) |
| Disposal of capital equipment                                                                   |   | 261                          |   | 76 |   | — |   |
| Net proceeds from sale of discontinued operations                                               |   | —                       |   | 31,223 |   | 975 |   |
| Advance to third party                                                                          |   | —                       |   | — |   | (804 | ) |
|                                                                                            |   |                         |   |   |   |   |   |
| NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES                                             |   | (3,687                       | )      | 27,352 |   | (3,488 | ) |
|                                                                                            |   |                         |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |   |                         |   |   |   |   |   |
| Proceeds from borrowings                                                                        |   | 762                          |   | 490 |   | 3,276 |   |
| Repayment of borrowings                                                                         |   | (822                         | )      | (5,109 | ) | (1,008 | ) |
| Purchases of treasury stock                                                                     |   | —                       |   | — |   | (1,434 | ) |
| Other                                                                                           |   | 35                           |   | 549 |   | 19 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES                                             |   | (25                          | )      | (4,070 | ) | 853 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            |   | (4,944                       | )      | 14,465 |   | 316 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                  |   | 14,850                       |   | 385 |   | 69 |   |
|                                                                                            |   |                         |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                                        |   | $                            | 9,906  |   | $ | 14,850 |   | $ | 385 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-6

----

 

**AXSYS TECHNOLOGIES, INC.**

**Consolidated Statements of Shareholders’ Equity**

 

(Dollars in thousands)

 
|                         |   | **Common Stock** |   | **Capital in** |   | **Retained**      |   | **Treasury** |   |
|------------------------------|--------|------------------|--------|----------------|--------|-------------------|--------|--------------|--------|
|                         |   | **Shares**       |   | **Amount**     |   | **Excess Of Par** |   | **Earnings** |   | **Shares** |   | **Amount** |   |
| Balance at December 31, 1998 |   | 4,789,434        |   | $              | 47     |              | $      | 40,755       |   | $ | 12,564 |   | (117,750 | ) | $ | (1,640 | ) |
|                         |   |             |   |           |   |              |   |         |   |   |   |   |   |
| Net loss                     |   | —           |   | —         |   | —            |   | (7,122       | )      | — |   | — |   |
| Treasury stock acquired      |   | —           |   | —         |   | —            |   | —       |   | (142,700 | ) | (1,434 | ) |
| Contribution to 401(k) plan  |   | —           |   | —         |   | 7                 |   | —       |   | 8,419 |   | 105 |   |
| Common stock issued for      |   |             |   |           |   |              |   |         |   |   |   |   |   |
| Teletrac 1997 acquisition    |   | —           |   | —         |   | (1,286            | )      | —       |   | 95,493 |   | 1,286 |   |
| Other                        |   | —           |   | —         |   | (28               | )      | —       |   | 4,200 |   | 45 |   |
| Balance at December 31, 1999 |   | 4,789,434        |   | $              | 47     |              | $      | 39,448       |   | $ | 5,442 |   | (152,338 | ) | $ | (1,638 | ) |
|                         |   |             |   |           |   |              |   |         |   |   |   |   |   |
| Net income                   |   | —           |   | —         |   | —            |   | 9,523        |   | — |   | — |   |
| Treasury stock issued        |   | —           |   | —         |   | 227               |   | —       |   | 39,086 |   | 322 |   |
| Common stock issued          |   | 3,240            |   | —         |   | —            |   | —       |   | — |   | — |   |
| Contribution to 401(k) plan  |   | —           |   | —         |   | —            |   | —       |   | 4,699 |   | 50 |   |
| Balance at December 31, 2000 |   | 4,792,674        |   | $              | 47     |              | $      | 39,675       |   | $ | 14,965 |   | (108,553 | ) | $ | (1,266 | ) |
|                         |   |             |   |           |   |              |   |         |   |   |   |   |   |
| Net loss                     |   | —           |   | —         |   | —            |   | (7,152       | )      | — |   | — |   |
| Treasury stock issued        |   | —           |   | —         |   | (54               | )      | —       |   | 8,400 |   | 189 |   |
| Treasury stock repurchased   |   | —           |   | —         |   | —            |   | —       |   | (3,304 | ) | (35 | ) |
| Contribution to 401(k) plan  |   | —           |   | —         |   | —            |   | —       |   | 6,581 |   | 71 |   |
| Balance at December 31, 2001 |   | 4,792,674        |   | $              | 47     |              | $      | 39,621       |   | $ | 7,813 |   | (96,876 | ) | $ | (1,041 | ) |

 

See accompanying notes toconsolidated financial statements.

 

F-7

----

 

**AXSYSTECHNOLOGIES, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollarsin thousands)**

 

**December 31, 2001**

 

**Note 1 - Summaryof Significant Accounting Policies**

 

The accompanying consolidated financial statements include the accountsof Axsys Technologies, Inc. and its wholly owned subsidiaries (collectively“Axsys” or the “Company”).  All materialinter-company transactions and balances have been eliminated in consolidation.

 

Axsys is a leading designer and manufacturer ofhigh-performance custom nano-positioning components, subsystems andsystems.  The Company also designs andmanufactures precision optical components for internal consumption as well asfor sales to third parties.  Inaddition, Axsys distributes precision ball bearings for use in a variety ofindustrial and commercial applications. The components, subsystems and bearingsare sold to a variety of original equipment manufacturers (“OEM”s), serving thefollowing markets:

 

•      Aerospace and defense

•      Semiconductor, data storage, and related capitalequipment

•      High-performance graphic art capitalequipment

•      Industrial automation OEM and maintenancerepair operations (“MRO”)

 

Axsys sells semi and fully automated development,inspection and production systems, utilizing its nano-positioning capabilitiesand proprietary software controls, integrated with other third party products.These are sold to end-users that manufacture semiconductor, photonic, and otherhigh technology components.

 

Revenue is recognized in accordance with SEC StaffAccounting Bulleting No. 101.  SAB 101requires that four basic criteria must be met before revenue can berecognized:  (1) persuasive evidence ofan arrangement exists; (2) delivery has occurred or services rendered; (3) thefee is fixed and determinable; and (4) collectibility is reasonablyassured.  Shipping & handling costs,such as freight to customers, are classified in cost of sales.  These costs, when included in the salesprice charged for products, are recognized in net sales.

 

Revenue under most government long-term fixed-pricecontracts is recognized as deliveries are made.  Provisions for estimated losses on contracts are recorded whenlosses become evident.

 

Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” wasissued in August 2001.  SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001.  The Company has not yet determined theimpact, if any, this new standard will have on its reported results of operationsand cash flows.

 

SFAS No. 143, “Accounting for Asset RetirementObligations”, was issued in August 2001. SFAS No. 143 is effective in 2003. It requires the recording of an asset and a liability equal to thepresent value of the estimated costs associated with the retirement oflong-lived assets where a legal or contractual obligation exists.  The asset is required to be depreciated overthe life of the related equipment or facility, and the liability accreted eachyear based on a present value interest rate. Axsys has not yet evaluated the impact of adopting SFAS No. 143 on itsconsolidated position or results of operations.

 

F-8

----

 

SFAS No. 142, “Goodwill and Other Intangible Assets”,was issued in June 2001.  It changes theaccounting for goodwill by eliminating goodwill amortization beginning in2002.  It will also require at least anannual assessment of goodwill impairment. The initial test for impairment must be completed by December 31, 2002,but any impairment would be reflected as an accounting change recordedretroactively in the first quarter of 2002. The Company is currently evaluating the impact of adopting SFAS No. 142.  Goodwill amortization, which amounted to$140 offset by negative amortization of $143 in 2001, will no longer be anexpense in 2002, thus increasing earnings, but with no impact on cashflow.  The Company has not completedimpairment testing and therefore cannot quantify the statement’s impact on itsconsolidated financial statements.  Itis possible that some goodwill will be required to be written off in 2002.  The Company’s negative goodwill of $535 asof December 31, 2001 will be reversed as a cumulative effect of a change inaccounting principle in the first quarter of 2002.

 

SFAS No. 141, “Business Combinations”, was issued onJune 30, 2001.  The Statement requiresthat all business combinations initiated after June 30, 2001 be accounted forusing the purchase accounting method, eliminating the use of the pooling-of-interestmethod.  It also specifies that thepurchase price must first be allocated to specific tangible and intangibleassets before determination.

 

SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”, was issued in June 1998.  SFAS No. 133, as amended by SFAS No. 138, was effective forfiscal years beginning after June 15, 2000. The Company did not use derivative instruments during 2001.  As a result, the implementation of theStatement did not have a material impact on the consolidated financial positionor consolidated results of the Company. Axsys adopted the standard on January 1, 2001.

 

The excess of cost over net assets acquired is beingamortized over a periods ranging from 5 to 35 years using the straight-linemethod.  Axsys continually reviewsgoodwill to assess recoverability from future operations using undiscountedcash flows.  Impairments are recognizedin operating results when a permanent diminution in value occurs.

 

Cash and cash equivalents include highly liquid investmentswith an original maturity of three months or less at the date of purchase.

 

Significant costs are incurred each year in connectionwith research, development, and engineering (“RD&E”) programs that areexpected to contribute to future earnings. Such costs are charged to income as incurred.

 

Inventory values include all costs directly associatedwith manufacturing products: materials, labor and manufacturing overhead.  These values are stated at the lower of costor market and are generally determined using the first-in, first-out method.

 

Property, plant and equipment are stated at cost, lessaccumulated depreciation.  Depreciationis provided primarily by the straight-line method using estimated lives forbuildings and improvements of 20 to 25 years and using estimated useful livesranging from 3 to 8 years for machinery and equipment.

 

Environmental contingencies are accrued for whenresponsibility for cleanup is determined and when costs are probable andreasonably estimable. When costs are not reasonably estimated, no accrual ismade.

 

Basic earnings per share have been computed bydividing Net Income/(Loss) by the weighted average number of common sharesoutstanding.  When there is a loss fromcontinuing operations, the computation of the dilutive net loss per share isbased on the weighted average basic shares outstanding.  The dilutive effect of stock options on theweighted average number of common shares would have been 36,364 in 2001, 84,499in 2000 and 13,451 in 1999 if the effect were not anti-dilutive.

 

Other income includesprincipal payments of $232 in 2001, $233 in 2000 and $34 in 1999 for a fullyreserved note received from the 1998 sale of Sensor Systems.

 

F-9

----

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

**Note 2 –Restructuring Charge and Special Charge**

 

Cost Reduction Plan

 

During the second quarter of 2001, the Company adopteda major cost reduction program (the “Cost Reduction Plan”), which resulted in apretax charge to earnings of approximately $9,208, or $5,801 after-tax.  The total cash cost of the plan is expectedto be approximately $1,300 of which $1,000 has been spent through December 31,2001.

 

The Cost Reduction Plan reduced expenses byapproximately $2,000 in the second half of 2001, with cost reductions reachingan annualized rate of approximately $4,300.

 

The Company closed a small manufacturing facility inManchester, Connecticut and consolidated its activities into the ImagingSystems unit in Rochester Hills, Michigan. The Company closed a small, satellite facility in Newbury Park,California, and consolidated it into the Integrated Systems Division facilityin Santa Barbara, California.  Pre-taxcharges associated with these shutdowns were $118 for facility exit costs.  The Company reduced its workforce at five locationsby 59 people or 9% of the total workforce. The Company has accrued $992 for allseverance and outplacement costs.  TheCompany accrued $250 to cover any legal expenses related to the cost reductionprogram.

 

The Company reviewed its inventory and other assets.The Company recorded a charge of $2,943 to cover expected losses on twolong-term defense contracts.  Theearnings charge also includes an increase in reserves for excess and obsoleteinventories of approximately $4,425. The Company disposed of approximately $5,094 of inventory by December31, 2001.

 

Other costs associated with the Cost Reduction Planinclude the write-off of $293 in tooling and $85 in software costs.

 

Through December 31, 2001, Axsys recorded thefollowing amounts in the Consolidated Statement of Operations in connectionwith the Cost Reduction Plan:

 
|                    |   | **Cost of  Goods Sold** |   | **Selling,  General & Administrative Expense** |   | **Restructuring  Charge** |   | **Total** |   |
|-------------------------|--------|-------------------------|--------|----------------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Inventory write-downs   |   | $                       | 4,425  |                                               | $      | —                    |   | $         | — |   | $ | 4,425 |   |
| Loss contract  reserves |   | 2,943                   |   | —                                             |   | —                    |   | 2,943     |   |
| Work force  reductions  |   | —                  |   | —                                             |   | 1,242                     |   | 1,242     |   |
| Fixed asset write-downs |   | 293                     |   | 85                                                 |   | —                    |   | 378       |   |
| Facilities              |   | —                  |   | —                                             |   | 118                       |   | 118       |   |
| Other                   |   | —                  |   | 102                                                |   | —                    |   | 102       |   |
| Total                   |   | $                       | 7,661  |                                               | $      | 187                       |   | $         | 1,360  |   | $ | 9,208 |   |

 

F-10

----

 

Other costs directly related to the Cost ReductionPlan, which are not eligible for recognition at the commitment date, such asrelocation and other integration costs, are expensed as incurred.  The Company incurred $102 of these coststhrough December 31, 2001.

 

The following table shows the balance sheet activityfor the reserve and accrual accounts as of December 31, 2001:

 
|                          |   | **Inventory  Reserves** |   | **Loss  Contract Reserve** |   | **Restructuring  Accrual** |   |
|-------------------------------|--------|-------------------------|--------|----------------------------|--------|----------------------------|--------|
| Q2 2001 Charges               |   | $                       | 4,425  |                       | $      | 2,943                      |   | $ | 1,738 |   |
| Q3 2001 Activity              |   | (1,420                  | )      | (58                        | )      | (642                       | )      |
| Q4 2001 Activity              |   | (2,663                  | )      | (60                        | )      | (438                       | )      |
| Balance at  December 31, 2001 |   | $                       | 342    |                       | $      | 2,825                      |   | $ | 658 |   |
|                          |   |                    |   |                       |   |                       |   |
| Cash  expenditures            |   | $                       | — |                       | $      | —                     |   | $ | 1,042 |   |

 

The Company anticipates the majority of cash costs forthe plan will be completed by April 2002.

 

Strategic Realignment

 

On February 11, 2000, Axsys announced a restructuringplan to improve efficiency and enhance competitiveness under two new majorgroups to better serve its markets and customers (the “StrategicRealignment”).  This plan resulted in anon-recurring charge of $5,398, pre-tax, a workforce reduction of 50 employeesfrom various locations, relocation or consolidation of two of its facilities,and the write down of fixed assets and potentially obsolete inventory.

 

Through December 31, 2000, Axsys recorded thefollowing amounts in the Consolidated Statement of Operations in connectionwith the Strategic Realignment:

 
|                     |   | **Cost of  Goods Sold** |   | **Selling,  General & Administrative Expense** |   | **Restructuring  Charge** |   | **Total** |   |
|--------------------------|--------|-------------------------|--------|----------------------------------------------------|--------|---------------------------|--------|-----------|--------|
| Work force reductions    |   | $                       | — |                                               | $      | —                    |   | $         | 915    |   | $ | 915 |   |
| Facilities               |   | 260                     |   | 392                                                |   | 740                       |   | 1,392     |   |
| Inventory  write-downs   |   | 2,301                   |   | —                                             |   | —                    |   | 2,301     |   |
| Fixed asset  write-downs |   | —                  |   | 504                                                |   | —                    |   | 504       |   |
| Other costs              |   | —                  |   | 286                                                |   | —                    |   | 286       |   |
| Total                    |   | $                       | 2,561  |                                               | $      | 1,182                     |   | $         | 1,655  |   | $ | 5,398 |   |

 

During the first quarter 2000, the Company charged$2,520 to cost of goods sold, $688 to selling, general and administrativeexpenses and $1,407 to restructuring costs. During the second quarter of 2000, the Company charged $43 to cost ofgoods sold, $210 to selling, general and administrative expenses and $297 torestructuring costs.  During the thirdand fourth quarters of 2000, the Company charged $281 and $3, respectively, toselling, general and administrative expenses.

 

F-11

----

 

Below is a reconciliation of accrued charges to thetiming of cash expended:

 

|                          |   | **Restructuring  Accrual** |   |
|-------------------------------|--------|----------------------------|--------|
| Q1 2000 charges               |   | $                          | 1,862  |   |
| Q2 2000 charges               |   | 297                        |   |
| Total accrued  charges        |   | 2,159                      |   |
| Cash expended in  2000        |   | (1,407                     | )      |
| Balance at  December 31, 2000 |   | $                          | 752    |   |
|                          |   |                       |   |
| Cash expended in  2001        |   | (752                       | )      |
| Balance at  December 31, 2001 |   | $                          | – |   |

 

Other costs directly related to the StrategicRealignment, which are not eligible for recognition at the commitment date,such as relocation and other integration costs, are expensed as incurred.  During 2000, Axsys incurred $941 of theseother costs.

 

The Strategic Realignment was completed during thefourth quarter of 2001.  During 2001,the Company disposed of $1,000 of obsolete inventory and $70 of obsoletetooling related to the Strategic Realignment.

 

For the Strategic Realignment, total cash expended was$3,100, of which approximately $2,159 had been accrued for during the firsthalf of 2000 and $941 was expensed as incurred.

 

**Note 3 -Acquisitions and Divestiture**

 

On September 30, 2000, Axsys acquired WestlakeTechnology Corporation (“Westlake”). Westlake designs, manufactures and distributes micro-positioningand precision optical products. Thisacquisition was accounted for under the purchase accounting methodology.  The fair value of assets acquired in the Westlaketransaction over the purchase price resulted in negative goodwill of $713,which will be amortized over five years. On August 12, 1998, Axsys entered into an agreement with Westlakewhereby Axsys was granted the exclusive right to market and sell Westlake’selectronic and electromechanical test equipment.  In return for these exclusive rights, the Company had agreed toprovide loans of up to a maximum of $1,900 to Westlake.  During the fourth quarter of 1999, Axsysrecorded a $1,864 charge to write-down the carrying value of the note.  (See Note 14).

 

On October 18, 2000, Axsys merged withAutomation Engineering, Inc in exchange for 666,667 shares of Axsys’ restrictedcommon stock.  AEI designs,manufactures and distributes micro-positioning and precision opticalproducts.  This merger was accounted for under the pooling of interests method ofaccounting and, accordingly, the results of Axsys’ Consolidated Statements ofOperations have been restated to include the accounts and operations ofAutomation Engineering, Inc.  Theoperating results for AEI were not material to the combined results of Axsysfor all periods prior to 2000, and therefore, results for those periods havenot been restated.  The Companyincurred $460 of merger-related costs during 2000.

 

F-12

----

 

**Note 4 -Discontinued Operations**

 

On March 17, 2000, Axsys sold the net assets of itsBeau Interconnect division (“Beau”) for $31,800 in cash and recorded anafter-tax gain of approximately $14,080 in the first quarter of 2000.  Beau designs and manufactures interconnectdevices, barrier terminal blocks and connectors.  Accordingly, Beau has been accounted for as a discontinuedoperation and the related net assets and operating results have been reportedseparately from continuing operations in all years presented.  Revenues applicable to this discontinuedoperation were $846 during 2000 and $19,341 during 1999.  Proceeds from the sale were utilized to payoff a credit facility of $4,200 at December 31, 1999 which liabilities havebeen included in current liabilities.

 

During 2000, Axsys’ environmental consultants advised that the costsassociated with the remediation of two previously discontinued operation siteswere estimated to be higher than originally anticipated.  The estimates to remediate these sitesranged from approximately $1,200 to $1,900. Actual costs may be different than these estimates.  Based on this information, Axsys increasedits accrual relating to these sites in fiscal 2000 to approximately $1,598 byrecording a discontinued operation charge of $1,258, before a tax benefit of$492.

 

On December 21,2001, Axsys received a letter from the United States Environmental ProtectionAgency ("EPA") notifying the Company that they are considered to be apotentially responsible party for a site located in Prospect, Connecticut,which until 1978 was owned by a former subsidiary.  The letter also demands payment of approximately $25,000 in pastresponse costs and unspecified future costs. Although the Company may be obligated under CERCLA for contributionstowards response costs incurred as a result of alleged releases of hazardoussubstances at the site, the Company is still investigating the prior connectionto the site.  Currently, it is notpossible to estimate a meaningful range of exposure based on the limited amountof information received. The Company has not recorded any accrual for thisexposure.

 

**Note 5 -Shareholders’ Equity**

 

**Common Stock -**

 

On October 18, 2000, Axsys issued 666,667 shares ofrestricted common stock in connection with the merger of AutomationEngineering, Inc.

 

**Treasury Stock -**

 

In August 1998, Axsys’ Board of Directors authorized the repurchase,from time to time, on the open market or otherwise, of up to 200,000 shares ofcommon stock at prevailing market prices or at negotiated prices.  During July 1999, the Board of Directorsauthorized an increase in the share repurchase program from an aggregate of200,000 shares of common stock to an aggregate of 700,000 shares. As ofDecember 31, 1999, Axsys had repurchased 262,200 shares for an aggregatepurchase price of $3,098.  There were norepurchases of stock during 2000. During 2001, Axsys accepted 3,304 shares ofstock in lieu of cash for the exercise of a stock option grant. Axsys used aportion of the repurchased shares in connection with the acquisition ofTeletrac and plans to use the balance for general corporate purposes, includingthe satisfaction of commitments under its employee benefit plans.

 

**Note 6 - Long-Term Debt and Capital Leases**

 
|                      |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Capital lease obligations |   | 2,239    |   | 2,299    |   |
| Less current portion      |   | 847      |   | 814      |   |
|                      |   |     | $      | 1,392    |   | $ | 1,485 |   |
|                           |        |          |        |          |        |  |  |  |

 

Axsys has financed the acquisition of certainmachinery and equipment with capital lease obligations.  During 2001, the Company established a$3,000 capital lease facility expiring in September 2002 with $2,208 of unusedcapacity remaining at December 31, 2001. As of December 31, 2001, outstanding capital lease obligations bearinterest at annual rates ranging from 5.7% to 8.0%.  All capital lease obligations mature between 2004 and 2005.

 

Scheduled principal payments under capital leases are$847 (2002), $822 (2003), $388 (2004) and $182 (2005).

 

F-13

----

 

Axsys had an $11,000 credit facility, which expired on April 25,2000.  Borrowings under the creditfacility through December 31, 1999 bore interest at a fluctuating rate perannum equal to the rate of interest publicly announced by Chase Manhattan Bank,N.A. as the lower of its prime rate (the prime rate was 8.50% at December 31,1999), or the London Interbank Offered Rate (“LIBOR”), plus a margin rangingfrom 0.75% to 1.50%.  A commitment feeof 0.375% was payable on any unused amount of the credit facility.  In conjunction with the sale of Beau onMarch 17, 2000 (see Note 4), Axsys used part of the proceeds to pay down theoutstanding balance of the credit facility. The credit facility was terminated upon payment of the outstandingbalance. Interest expense incurred was $141 in 2000 and $393 in 1999.

 

**Note 7 – Balance Sheet Information**

 

The details of certain balance sheet accounts are as follows:

 
|            |   | **2001** |       | **2000** |       |
|-----------------|--------|----------|------------|----------|------------|
| Inventories:    |   |     | ** ** |     | ** ** |
| Raw materials   |   | $        | 4,035      |     | $          | 7,492 |   |
| Work-in-process |   | 8,389    |       | 7,890    |       |
| Finished goods  |   | 10,186   |       | 10,053   |       |
|            |   | $        | 22,610     |     | $          | 25,435 |   |

 

Work-in-process inventory atDecember 31, 2001 and 2000 is recorded net of progress payments received fromcustomers on uncompleted contracts of $841 and $822, respectively.

 
|                                           |   | **2001** |       | **2000** |       |
|------------------------------------------------|--------|----------|------------|----------|------------|
| Property, plant and equipment, net:            |   |     | ** ** |     | ** ** |
| Land                                           |   | $        | 291        |     | $          | 291 |   |
| Buildings and improvements                     |   | 4,353    |       | 4,226    |       |
| Machinery and equipment                        |   | 21,681   |       | 20,100   |       |
|                                           |   | 26,325   |       | 24,617   |       |
| Less accumulated depreciation and amortization |   | (12,908  | )          | (11,801  | )          |
|                                           |   | $        | 13,417     |     | $          | 12,816 |   |
|                                           |   |     |       |     |       |
| Accrued expenses and other liabilities:        |   |     |       |     |       |
| Compensation and related benefits              |   | $        | 3,099      |     | $          | 3,682 |   |
| Accrued income taxes                           |   | 1,019    |       | (663     | )          |
| Customer deposits                              |   | 840      |       | 822      |       |
| Environmental reserve - short-term             |   | 791      |       | 854      |       |
| Restructuring accrual                          |   | 658      |       | 751      |       |
| Stock redemption accrual                       |   | 498      |       | 536      |       |
| Warranty reserve                               |   | 441      |       | 497      |       |
| Loss contract reserve - short-term             |   | 225      |       | —   |       |
| Other                                          |   | 1,550    |       | 1,693    |       |
|                                           |   | $        | 9,121      |     | $          | 8,172 |   |

 

F-14

----

 

**Note 8 – Income Taxes**

** **

The (benefit from)/provision for taxes on income from continuingoperations before discontinued operations consists of:

 
|               |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
| Current taxes:     |   |     |   |     |   |     |   |
| U.S. Federal       |   | $        | (3,591 | )        | $      | (3,030   | )      | $ | (519 | ) |
| State and local    |   | 130      |   | 80       |   | 65       |   |
|               |   | (3,461   | )      | (2,950   | )      | (454     | )      |
| Deferred taxes:    |   |     |   |     |   |     |   |
| U.S. Federal       |   | (683     | )      | 124      |   | (348     | )      |
| State and local    |   | (57      | )      | 62       |   | (52      | )      |
|               |   |     | (740   | )        |   | 186      |   |   | (400 | ) |
| Total tax benefit: |   | $        | (4,201 | )        | $      | (2,764   | )      | $ | (854 | ) |

 

The reasons for the difference between the provisionfor taxes and the amount computed by applying the statutory federal income taxrate to Loss from Continuing Operations Before Taxes and DiscontinuedOperations are as follows:

 
| **Years Ended  December 31,**                      |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal statutory rate                             |   | 35       | %      | 35       | %      | 34       | %      |
| Computed expected tax benefit                      |   | $        | (3,974 | )        | $      | (2,474   | )      | $ | (3,419 | ) |
| Increase (decrease) in taxes resulting from:       |   |     |   |     |   |     |   |
| State and local taxes, net of federal tax  benefit |   | 28       |   | 114      |   | (9       | )      |
| Amortization of goodwill                           |   | (1       | )      | 36       |   | 136      |   |
| Impairment of assets                               |   | —   |   | —   |   | 2,424    |   |
| Tax exempt interest                                |   | (55      | )      | (144     | )      | —   |   |
| Other                                              |   | (199     | )      | (296     | )      | 14       |   |
| Actual tax benefit                                 |   | $        | (4,201 | )        | $      | (2,764   | )      | $ | (854 | ) |

 

Deferred income taxes reflect the net federal and state tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  Axsys reversed $169 of itsvaluation allowance related to net deferred tax assets of discontinuedoperations with the corresponding tax benefit included in the results ofdiscontinued operations during 1999.  In2000, Axsys reversed $728 of its valuation allowance related to net deferredtax assets of discontinued operations with the corresponding tax benefit includedin the results of discontinued operations.

 

Significant components of the Axsys’ deferred taxes are as follows:

 
|                             |   | **December 31** |   |
|----------------------------------|--------|-----------------|--------|
|                             |   | **2001**        |   | **2000** |   |
| Valuation differences for:       |   |            |   |   |   |
| Inventories                      |   | $               | 1,944  |   | $ | 1,785 |   |
| Property, plant and equipment    |   | (1,355          | )      | (1,295 | ) |
| Loss contract reserve            |   | 1,101           |   | — |   |
| Note receivable - sensor systems |   | 515             |   | 630 |   |
| Restructuring accrual            |   | 257             |   | 293 |   |
| Allowance for doubtful accounts  |   | 251             |   | 179 |   |
| Other, net                       |   | 174             |   | 555 |   |
| Net deferred taxes               |   | $               | 2,887  |   | $ | 2,147 |   |

 

Axsys plans to carry-back the net operating loss generated in thecurrent year to the December 31, 2000 income tax year and has recorded acorresponding current receivable of $3,600.

 

F-15

----

 

**Note 9 – SegmentData**

 

In February 2001, Axsysannounced a strategic realignment whereby the Company is organized by marketsegment in three major groups.  Thestrategic realignment has resulted in a change in the composition of Axsys’reportable segments and, accordingly, all periods reported have beenrestated.  Axsys classifies itsbusinesses under three major groups, the Precision Components Group,Distributed Products Group and Automation Group.

 

The Precision Components Group designs, manufacturesand sells high-end components such as precision position sensors, high-performancemotors, precision metal optics, and laser-based airbearing scanners andoptomechanical and electro-mechanical subassemblies.  Axsys’ products enable original equipment manufacturers (“OEM”s)to improve measurement precision, imaging, positional performance (accuracy,resolution, speed and power), and weight requirements in their systems.  Principal markets for these products includeOEMs serving the aerospace, defense, high-end graphic arts, semiconductor, datastorage, photonic, and other related electronics capital equipment markets.

 

The AutomationGroup designs, manufactures and sells automated production and test systems andnano-positioning subsystems to high technology customers that producesemiconductor, data storage, fiber optics/photonics component products andother high technology products.  Theseproduction and test systems integrate many of the precision optical andpositioning components and subsystems produced by the Precision ComponentsGroup with vision systems, robotics and electronic controls produced by thirdparty companies.  Axsys integrates theseproducts into automation systems using its proprietary FlexAuto**and Control Light software. Thesetools are designed to enable customers to more accurately and repeatedlyproduce their component products, thereby increasing the yield and throughputof their production and test processes.

 

The Distributed Products Group distributes precisionball bearings, acquired from various domestic and international sources, toOEMs and Maintenance Repair Operation (“MRO”) distributors.  The ball bearings are used in a variety ofindustrial automation and commercial markets. Additionally, the Distributed Products Group designs, manufactures andsells mechanical bearing subassemblies for a variety of customers.

 

As discussed in Note 4, Axsyssold its Beau and Sensor Systems divisions. The disposal of these businesses has been accounted for as discontinuedoperations and, accordingly, their related operating results have been reportedseparately from continuing operations. The segment data below excludes their results.

 

The following tables present financial data for each Axsyssegment:

 
|                                                                          |   | **Years Ended December 31,** |       |
|-------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                          |   | **2001**                     | ** ** | **2000** | ** ** | **1999** | ** ** |
| Net sales from continuing operations:                                         |   |                         |       |   |   |   |   |
| Precision Components Group                                                    |   | $                            | 55,916     |   | $ | 49,921 |   | $ | 51,489 |   |
| Automation Group                                                              |   | 10,269                       |       | 10,670 |   | 7,772 |   |
| Distributed Products Group                                                    |   | 23,025                       |       | 31,250 |   | 26,157 |   |
| Total Sales                                                                   |   | $                            | 89,210     |   | $ | 91,841 |   | $ | 85,418 |   |
|                                                                          |   |                         |       |   |   |   |   |
| Earnings from continuing operations before amortization,  interest and taxes: |   |                         |       |   |   |   |   |
| Precision Components Group                                                    |   | $                            | 2,999      |   | $ | (2,510 | ) | $ | (130 | ) |
| Automation Group                                                              |   | (3,815                       | )          | 250 |   | 104 |   |
| Distributed Products Group                                                    |   | 2,639                        |       | 4,894 |   | 3,674 |   |
| Impairment of assets                                                          |   | —                       |       | — |   | (8,993 | ) |
| Special charge                                                                |   | —                       |       | — |   | (784 | ) |
| Non-allocated expenses                                                        |   | (13,176                      | )          | (9,702 | ) | (3,928 | ) |
| Loss from continuing operations before taxes                                  |   | $                            | (11,353    | ) | $ | (7,068 | ) | $ | (10,057 | ) |

 

F-16

----

 
|                                                       |   | **Years Ended December 31,** |       |
|------------------------------------------------------------|--------|------------------------------|------------|
|                                                       |   | **2001**                     | ** ** | **2000** | ** ** | **1999** | ** ** |
| Capital expenditures from continuing operations:           |   |                         |       |   |   |   |   |
| Precision Components Group                                 |   | $                            | 2,088      |   | $ | 2,421 |   | $ | 3,128 |   |
| Automation Group                                           |   | 1,189                        |       | 392 |   | 191 |   |
| Distributed Products Group                                 |   | 130                          |       | 303 |   | 324 |   |
| Corporate                                                  |   | 541                          |       | 831 |   | 16 |   |
| Total capital expenditures                                 |   | $                            | 3,948      |   | $ | 3,947 |   | $ | 3,659 |   |
|                                                       |   |                         |       |   |   |   |   |
| Depreciation and amortization from continuing  operations: |   |                         |       |   |   |   |   |
| Precision Components Group                                 |   | $                            | 2,297      |   | $ | 2,546 |   | $ | 2,272 |   |
| Automation Group                                           |   | 308                          |       | 178 |   | 131 |   |
| Distributed Products Group                                 |   | 222                          |       | 193 |   | 157 |   |
| Corporate                                                  |   | 259                          |       | 86 |   | 32 |   |
| Total depreciation                                         |   | 3,086                        |       | 3,003 |   | 2,592 |   |
|                                                       |   |                         |       |   |   |   |   |
| Amortization of goodwill                                   |   | (3                           | )          | 105 |   | 400 |   |
|                                                       |   |                         |       |   |   |   |   |
| Total depreciation and amortization                        |   | $                            | 3,083      |   | $ | 3,108 |   | $ | 2,992 |   |

 
|                       |   | **December  31,** |       |
|----------------------------|--------|-------------------|------------|
|                       |   | **2001**          | ** ** | **2000** | ** ** |
| Identifiable  assets:      |   |              |       |   |   |
| Precision Components Group |   | $                 | 29,262     |   | $ | 31,608 |   |
| Automation Group           |   | 5,288             |       | 6,491 |   |
| Distributed Products Group |   | 12,875            |       | 14,540 |   |
| Non-allocated  assets      |   | 19,856            |       | 20,953 |   |
| Total assets               |   | $                 | 67,281     |   | $ | 73,592 |   |

 

Included in non-allocated expenses are the following:general corporate expense, interest expense, amortization of goodwill and otherincome and expense.  Identifiable assetsby segment consist of those assets that are used in the segments’operations.  Non-allocated assets are comprisedprimarily of cash and cash equivalents, goodwill and net deferred tax assets.

 

The following table presents sales from continuingoperations by geographic region. Substantially all of the Company’s assets were located within the UnitedStates.

 
|          |   | **Years  Ended December 31,** |   |
|---------------|--------|-------------------------------|--------|
|          |   | **2001**                      |   | **2000** |   | **1999** | ** ** |
| United States |   | $                             | 71,115 |   | $ | 74,035 |   | $ | 72,582 |   |
| Europe        |   | 14,178                        |   | 13,558 |   | 8,931 |   |
| Other foreign |   | 3,917                         |   | 4,248 |   | 3,905 |   |
| Total Sales   |   | $                             | 89,210 |   | $ | 91,841 |   | $ | 85,418 |   |

 

F-17

----

 

**Note 10****– Pension Arrangements**

 

Axsys has two pension plans for which benefits andparticipation have been frozen.  Pensionbenefits under these plans are generally based upon years of service andcompensation. There is a non-funded plan with an annual payout of approximately$100. The funding policy for the other plan is to contribute amounts sufficientto meet the minimum funding requirements set forth in the Employee RetirementIncome Security Act of 1974, plus such additional amounts as may be determinedto be appropriate from time to time.

 

The followingtable summarizes the components of net periodic pension cost for the definedbenefit plans:

 
|                                          |   | **Years Ended December 31,** |   |
|-----------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2001**                     |   | **2000** |   | **1999** | ** ** |
| Interest cost on projected benefit obligation |   | $                            | 82     |   | $ | 80 |   | $ | 78 |   |
| Expected return on plan assets                |   | (43                          | )      | (41 | ) | (39 | ) |
| Recognized net actuarial loss                 |   | 52                           |   | 49 |   | 45 |   |
|                                          |   |                         |   |   |   |   |   |
| Total pension expense                         |   | $                            | 91     |   | $ | 88 |   | $ | 84 |   |

 

Assumptions used in accounting for the defined benefit plans as of theplans’ measurement dates were:

 
|                                        |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Weighted-average discount rate              |   | 7.5      | %      | 7.5      | %      | 7.5      | %      |
| Expected long-term rate of return on assets |   | 6.0      | %      | 6.0      | %      | 6.0      | %      |

 

The following table sets forththe change in benefit obligation, change in plan assets and the funded statusrecognized in the consolidated balance sheets for the Axsys’ defined benefitpension plans:
|                                           |   | **2001** |   | **2000** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
| Change in benefit obligation:                  |   |     |   |     |   |
| Benefit obligation at beginning of year        |   | $        | 1,151  |     | $      | 1,117 |   |
| Interest cost                                  |   | 82       |   | 80       |   |
| Actuarial loss                                 |   | 49       |   | 65       |   |
| Benefits paid                                  |   | (103     | )      | (111     | )      |
| Benefit obligation at end of year              |   | $        | 1,179  |     | $      | 1,151 |   |
|                                           |   |     |   |     |   |
| Change in plan assets:                         |   |     |   |     |   |
| Fair value of plan assets at beginning of year |   | $        | 713    |     | $      | 697 |   |
| Actual return                                  |   | 258      |   | 54       |   |
| Employer contribution                          |   | 122      |   | 73       |   |
| Benefits paid                                  |   | (104     | )      | (111     | )      |
| Fair value of plan assets at end of year       |   | $        | 989    |     | $      | 713 |   |
|                                           |   |     |   |     |   |
| Funded status                                  |   | $        | 190    |     | $      | 438 |   |
| Unrecognized net actuarial gain                |   | 383      |   | 166      |   |
| Accrued benefit cost at December 31            |   | $        | 574    |     | $      | 604 |   |

 

Unrecognized net gains and losses are amortized overthe average future service lives of participants.  Plan assets for the fully funded plan are invested in a managedportfolio consisting primarily of equity securities, real estate and bonds.

 

Axsys also sponsors 401(k) plans under which eligibleemployees may elect to contribute a percentage of their earnings.  The Company matched employee contributionsto these plans in amounts ranging from 3% to 5% of the employees’ grossearnings over the three years ended December 31, 2001.  Company matching contributions fromcontinuing operations were $865 in 2001, $880 in 2000 and $828 in 1999.

 

F-18

----

 

**Note 11 -Supplemental Cash Flow Information**

 

Supplemental cash flow information from continuingoperations for the years ended December 31, 2001, 2000 and 1999 is summarizedas follows:

 
|                                                 |   | **2001** |   | **2000** |   | **1999** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash (received)/paid during the year for:            |   |     |   |     |   |     |   |
| Interest                                             |   | $        | (341   | )        | $      | (386     | )      | $ | 427 |   |
| Income tax payments                                  |   | 454      |   | 5,897    |   | 728      |   |
|                                                 |   |     |   |     |   |     |   |
| Non-cash investing activities:                       |   |     |   |     |   |     |   |
| Equipment acquired under capital leases              |   | $        | 762    |     | $      | 490      |   | $ | 1,226 |   |
| Common stock issued for AEI                          |   | —   |   | 667      |   | —   |   |
| Purchase of assets from an acquisition               |   | —   |   | (685     | )      | —   |   |
| Treasury stock issued for defined contribution plans |   | 71       |   | 34       |   | 104      |   |

 

**Note 12 - StockOptions**

 

In 1991 Axsys shareholders approved the Axsys’Long-Term Stock Incentive Plan (the “Plan”). Shareholders approved amendmentsto and restatement of the Plan in May 2000 and May 2001, which, among otherthings, increased the number of shares of common stock authorized for issuanceunder the Plan by 200,000 each year.  Asof December 31, 2001, the total number of shares of common stock authorized forissuance under the Plan was 800,000 shares, of which Axsys had 195,885 sharesof common stock available for grant under the Plan.  The Stock Incentive Plan Committee of the Board of Directors (the“Committee”) administers the Plan.  TheCommittee selects participants from among those executives and other employeesof Axsys and its subsidiaries who materially contribute to the success of theCompany and determines the amounts, times, forms, terms and conditions ofgrants. Grants may be in the form of options to purchase shares of common stock,stock appreciation rights, restricted stock and performance units(collectively, “Stock Incentives”). Each Stock Incentive is exercisable upon vesting.

 

A summary of all outstanding stock options are presented in the tablebelow:

 

 
|                              |   | **Stock Options** |   | **Weighted Average****Ex****ercise Price** |    |
|-----------------------------------|--------|-------------------|--------|--------------------------------------------|---------|
| Outstanding at December 31,  1999 |   | 316,650           |   | 18.96                                      |    |
|                              |   |              |   |                                       |    |
| Granted                           |   | 183,340           |   | 22.33                                      |    |
| Forfeited                         |   | (99,750           | )      | (21.66                                     | )  |
| Exercised                         |   | (33,950           | )      | (15.23                                     | )       |
| Outstanding at December 31, 2000  |   | 366,290           |   | $                                          | 20.12   |   |
|                              |   |              |   |                                       |    |
| Granted                           |   | 233,825           |   | 15.47                                      |    |
| Forfeited/Cancelled               |   | (53,750           | )      | (16.85                                     | )  |
| Exercised                         |   | (8,400            | )      | (4.15                                      | )  |
|                              |   |              |   |                                       |    |
| Outstanding at December 31, 2001  |   | 537,965           |   | $                                          | 18.84   |   |
| Exercisable at December 31, 2001  |   | 128,758           |   | $                                          | 20.86   |   |

 

F-19

----

 

The following table summarizes information about stockoptions outstanding at December 31, 2001:

** **
|                          |   | **Options Outstanding** |   | **Options Exercisable**                |   |
|-------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| **Range of Exercise Prices**  |   | **Number of Options**   |   | **Weighted****Average Remaining Life** |   | **Weighted Average****ExercisePrice** |   | **Number of Options** |   | **Weighted Average Exercise****Price** |   |
| $   0.00 to  $10.00 |   | 30,000                  |   | 9.9                                    |   | $ | 9.70 |   | 0 |   | $ | 0.00 |   |
| $ 10.01 to $15.00             |   | 200,375                 |   | 8.0                                    |   | 12.30 |   | 39,730 |   | 12.32 |   |
| $ 15.01 to $20.00             |   | 124,890                 |   | 8.3                                    |   | 17.96 |   | 14,238 |   | 17.78 |   |
| $ 20.01 to $25.00             |   | 18,250                  |   | 4.5                                    |   | 20.65 |   | 2,100 |   | 20.11 |   |
| $ 25.01 to $30.00             |   | 98,100                  |   | 5.4                                    |   | 26.70 |   | 60,920 |   | 26.73 |   |
| $ 30.01 to $41.00             |   | 66,350                  |   | 8.8                                    |   | 37.29 |   | 11,770 |   | 37.62 |   |
|                          |   |                    |   |                                   |   |   |   |   |   |   |   |
| $   8.65  to $41.00 |   | 537,965                 |   | 7.7                                    |   | $ | 18.84 |   | 128,758 |   | $ | 20.86 |   |

 

Axsys has adopted the disclosure-only provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation.”  Accordingly,no compensation cost has been recognized for grants under the Plan.  Pro forma information regarding net incomeand net income per share is required by SFAS No. 123 for awards granted infiscal years beginning after December 15, 1994 as if Axsys had accounted forsuch awards under the fair value method. Had compensation costs for the Stock Incentive grants in 2001, 2000 and1999 been determined using the fair value method, Axsys would have reported thefollowing results:

 
|                                                                      |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Pro forma loss from continuing operations before discontinued  operations |   | $        | (1,519 | )        | $      | (5,040   | )      | $ | (9,668 | ) |
| Pro forma net income/(loss)                                               |   | (1,519   | )      | 8,787    |   | (7,587   | )      |
|                                                                      |   |     |   |     |   |     |   |
| Pro forma basic (loss)/earnings per share:                                |   |     |   |     |   |     |   |
| Loss from continuing operations before discontinued operations            |   | (0.32    | )      | (1.08    | )      | (2.05    | )      |
| Net income/(loss)                                                         |   | (0.32    | )      | 1.89     |   | (1.61    | )      |
|                                                                      |   |     |   |     |   |     |   |
| Pro forma diluted (loss)/earnings per share:                              |   |     |   |     |   |     |   |
| Loss from continuing operations before discontinued operations            |   | (0.32    | )      | (1.08    | )      | (2.05    | )      |
| Net income/(loss)                                                         |   | (0.32    | )      | 1.89     |   | (1.61    | )      |
|                                                                           |        |          |        |          |        |          |        |  |  |  |

 

The fair value of each option granted in 2001, 2000and 1999 was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions: expected volatility of 71%in 2001, 70% in 2000 and 65% in 1999; risk-free interest rate of 5.0% in 2001,5.1% in 2000 and 5.9% in 1999; expected lives of 6 years; and no dividendyield.  Using this model, the weightedaverage fair value of options granted was $9.95 during 2001, $15.12 during2000, and $8.17 during 1999.  For proforma purposes, the estimated fair value of the Axsys’ Stock Incentive awardsto employees is amortized over the options’ vesting period, which is generallyfive years.  Because the SFAS No. 123method of accounting has not been applied to options granted prior to January1, 1995, the resulting pro forma compensation cost may not be representative ofthat to be expected in future years. The Black-Scholes option valuation modelwas developed for use in estimating the fair value of traded options, whichhave no vesting restrictions and are fully transferable.  In addition, the Black-Scholes modelrequires the input of highly subjective assumptions including the expectedstock price volatility.  Becausestock-based awards to Axsys employees have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management’sopinion, the existing model does not necessarily provide a reliable singlemeasure of the fair value of its Stock Incentive awards to employees.

 

F-20

----

 

**Note 13 -Commitments and Contingencies**

 

Future minimum payments under non-cancelable operatingleases (exclusive of property expenses and net of sublease rental income), asof December 31, 2001, are as follows:

 
| 2002                |   | $1,423 |   |
|---------------------|--------|--------|--------|
| 2003                |   | 1,389  |   |
| 2004                |   | 1,356  |   |
| 2005                |   | 1,248  |   |
| 2006                |   | 897    |   |
| 2007 and thereafter |   | 2,211  |   |
|                |   | $8,524 |   |

 

Rent expense under such leases, net of sublease rentalincome, amounted to $1,575 in 2001, $1,251 in 2000 and $1,699 in 1999.  Axsys has two letters of credit totaling$231 opened in 2001 as security deposits on building leases in Wilmington,Massachusetts and Pittsburgh, Pennsylvania. These letters of credit are renewed annually for the term of the lease.

 

Axsys has various lawsuits, claims, commitments andcontingent liabilities arising from the ordinary conduct of its business;however, they are not expected to have a material adverse effect on thebusiness, financial condition and results of operations of the Company.

 

**Note 14 – Impairment of Assets and Special Charge**

 

In late 1999, in connection with the annual evaluationof strategic direction and long-range planning and due to indications ofimpairment, Axsys evaluated the recoverability of certain long-lived assets, primarilygoodwill in connection with the acquisition of Teletrac and the note fromWestlake.  In arriving at the fair valueof these assets, which serve the data storage market, Axsys considered a numberof factors including: (i) weakness in the data storage market since the secondhalf of 1998, (ii) structural changes to data storage products such as thenumber of read-write heads in a hard disk drive, and (iii) price pressure onthe hard disk drive manufacturers.  Axsysbelieves that the demand for test products from its served market has beenpermanently reduced.  In determining theamount of the impairment, Axsys compared the net book value to the estimatedfair values of those assets.  Based onbest estimates of discounted future cash flows, Axsys recorded a $7,129 chargeto write-down the carrying value of goodwill related to Teletrac.  In addition, the Company recorded a $1,864charge to write off the note from Westlake serving the same data storage testequipment market.

 

On November 20, 1998, Axsys’ Chairman and CEO (“theChairman”) and the owner at that date of approximately 31%  of Axsys’ common stock submitted an offer topurchase all of the common stock not owned by him for $15.00 per share in cash(the “Chairman’s Proposal”).  Shortlythereafter, the Board of Directors formed a Special Committee to evaluate theChairman’s Proposal.  On January 11,1999, Axsys received an unsolicited offer to purchase the Company for $20.00per share in cash.  In response to thisunsolicited offer, the Chairman withdrew his proposal, and on January 13, 1999,Axsys publicly announced that the Board of Directors had dissolved the SpecialCommittee and had authorized the retention of investment bankers to explorevarious strategic alternatives, including the potential sale of theCompany.  On January 29, 1999, Axsyspublicly announced that the Board of Directors had instructed its investmentbankers to explore the potential sale of the company.  During 1999, Axsys recorded a pre-tax special charge of $784 forexpenses related to a process of exploring the potential sale of thecompany.  On June 15, 1999, Axsyspublicly announced that its Board of Directors had determined not to pursue asale of the Company at that time.

 

F-21

----

 

**Note 15 – Selected Quarterly Financial Data**

 

Selected quarterly financial data for the years endedDecember 31, 2001 and 2000 is summarized as follows:

** **
|                                                                                  |   | **Quarters Ended (Unaudited):**            |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                  |   | **March****2001**                          |       | **June****2001** |   | **September 2001** |   | **December 2001** |   |
|                                                                                  |   | **(In thousands, except per share  data)** | ** ** |
| **Statement of Operations Data:**                                                     |   |                                       |       |   |   |   |   |   |   |
| Net sales                                                                             |   | $                                          | 24,202     |   | $ | 23,404 |   | $ | 21,603 |   | $ | 20,001 |   |
| Gross profit                                                                          |   | 6,081                                      |       | (1,874 | ) | 5,300 |   | 4,566 |   |
|                                                                                  |   |                                       |       |   |   |   |   |   |   |
| Loss from continuing operations before discontinued  operations                       |   | (337                                       | )          | (6,425 | ) | (72 | ) | (318 | ) |
| Net loss                                                                              |   | (337                                       | )          | (6,425 | ) | (72 | ) | (318 | ) |
| Diluted net loss per share from continuing operations  before discontinued operations |   | $                                          | (0.07      | ) | $ | (1.37 | ) | $ | (0.02 | ) | $ | (0.07 | ) |
|                                                                                  |   |                                       |       |   |   |   |   |   |   |
| Diluted net loss per share applicable to common  shareholders                         |   | $                                          | (0.07      | ) | $ | (1.37 | ) | $ | (0.02 | ) | $ | (0.07 | ) |
| Diluted weighted average common shares outstanding                                    |   | 4,685                                      |       | 4,686 |   | 4,688 |   | 4,695 |   |

 
|                                                                                           |   | **Quarters Ended (Unaudited) (1) (2) (3):** |       |
|------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|
|                                                                                           |   | **March****2000**                           |       | **June****2000** |   | **September 2000** |   | **December 2000** |   |
|                                                                                           |   | **(In thousands, except per share  data)**  | ** ** |
| **Statement of Operations Data:**                                                              |   |                                        |       |   |   |   |   |   |   |
| Net sales                                                                                      |   | $                                           | 19,645     |   | $ | 23,882 |   | $ | 24,245 |   | $ | 24,069 |   |
| Gross profit                                                                                   |   | 914                                         |       | 5,539 |   | 6,163 |   | 7,047 |   |
| (Loss) income from continuing operations before  discontinued operations                       |   | (4,132                                      | )          | (270 | ) | 91 |   | 7 |   |
| Net income (loss)                                                                              |   | 10,157                                      |       | (270 | ) | 91 |   | (455 | ) |
| Diluted net (loss) income per share from continuing  operations before discontinued operations |   | $                                           | (0.89      | ) | $ | (0.06 | ) | $ | 0.02 |   | $ | 0.00 |   |
|                                                                                           |   |                                        |       |   |   |   |   |   |   |
| Diluted net income (loss) per share applicable to  common shareholders                         |   | $                                           | 2.19       |   | $ | (0.06 | ) | $ | 0.02 |   | $ | (0.09 | ) |
| Diluted weighted average common shares outstanding                                             |   | 4,643                                       |       | 4,650 |   | 4,754 |   | 4,833 |   |

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(1)          In the fourth quarter of2000, Axsys merged with Automation Engineering, Inc. This merger was accountedfor under the pooling of interests method of accounting and, accordingly, theresults of Axsys’ Consolidated Statements of Operations have been restated toinclude the accounts and operations of AEI. The operating results for AEI were not material to the combined resultsof Axsys for all periods prior to 2000, and therefore, results for thoseperiods have not been restated.

 

(2)          In the third quarter of2000, Axsys acquired the stock of Westlake Technologies Corporation.  This acquisition was accounted for under thepurchase method of accounting and, accordingly, the results of Westlake’soperations have been included in Axsys’ Consolidated Statements of Operationssince the date of acquisition.  See Note3 to the Consolidated Financial Statements.

 

(3)          In the first quarter of 2000, Axsys sold the BeauInterconnect division. Accordingly, Beau has been accounted for as adiscontinued operation and the related net assets and operating results havebeen reported separately from continuing operations in all yearspresented.  Revenues applicable to thisdiscontinued operation were $846 during the first quarter of 2000 and $19,300during 1999.  The net assets of Beau atDecember 31, 1999 have been included in current assets.  All prior periods have been restated toreflect the divestiture.

 

F-22

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**AXSYSTECHNOLOGIES, INC**

**SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS**

 

**(Dollars inthousands)**

 
| **COL. A**                      |   | **COL.B**                          |   | **COL.C**                         |   | **COL.D**                    |   | **COL.E**      |   | **COL.F**                    |   |
|---------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|------------------------------|--------|----------------|--------|------------------------------|--------|
|                            |   | **Additions**                      |   |                              |   |                         |   |
| **Classification**              |   | **Balance at Beginning of Period** |   | **Charged to Costs and Expenses** |   | **Charge to Other Accounts** |   | **Deductions** |   | **Balance at End of Period** |   |
| Year ended December 31, 2001:   |   |                               |   |                              |   |                         |   |           |   |                         |   |
| Allowance for Doubtful Accounts |   | $                                  | 527    |                              | $      | 227                          |   | $              | — |                         | $      | 91 | (a) | $ | 663 |   |
| Cost Reduction Program Accrual  |   | $                                  | — |                              | $      | 1,738                        |   | $              |   |                         | $      | 1,080 |   | 658 |   |
| Strategic Realignment Accrual   |   | $                                  | 752    |                              | $      | —                       |   |           |   | $                            | 752    |   | $ | — |   |
| Environmental Accrual           |   | $                                  | 1,598  |                              | $      | —                       |   | $              | — |                         | $      | 149 |   | $ | 1,449 |   |
|                            |   |                               |   |                              |   |                         |   |           |   |                         |   |
| Year ended December 31, 2000:   |   |                               |   |                              |   |                         |   |           |   |                         |   |
| Allowance for Doubtful Accounts |   | $                                  | 503    |                              | $      | 286                          |   | $              | — |                         | $      | 262 | (a) | $ | 527 |   |
| Strategic Realignment Accrual   |   | $                                  | — |                              | $      | 1,862                        |   | $              | — |                         | $      | 1,110 |   | $ | 752 |   |
| Environmental Accrual           |   | $                                  | 712    |                              | $      | 1,258                        |   | $              | — |                         | $      | 372 |   | $ | 1,598 |   |
|                            |   |                               |   |                              |   |                         |   |           |   |                         |   |
| Year ended December 31, 1999:   |   |                               |   |                              |   |                         |   |           |   |                         |   |
| Allowance for Doubtful Accounts |   | $                                  | 445    |                              | $      | 331                          |   | $              | — |                         | $      | 273 | (a) | $ | 503 |   |
| Environmental Accrual           |   | $                                  | 494    |                              | $      | 308                          |   | $              | — |                         | $      | 90 |   | $ | 712 |   |

 

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(a) Uncollectible accounts written off, net of recoveries.

 

F-23

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**EXHIBIT INDEX**

 
| **Exhibit****Number** |            |                                                                                                                                                                                                                                                                      |
|-----------------------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  | **Description** |
| 3(1)                  |            | Restated Certificate of Incorporation of the Company (filed as Exhibit  3(4) to the Company’s Amendment No. 2 to Registration Statement on Form S-1,  dated October 17, 1997 (File No. 333-36027) (the “Form S-1”) and incorporated  herein by reference). |
|                  |            |                                                                                                                                                                                                                                                                      |
| 3(2)                  |            | By-Laws of the Company (filed as Exhibit 2 to the Form 8-A dated  August 8, 1991 and incorporated herein by reference).                                                                                                                                                   |
|                  |            |                                                                                                                                                                                                                                                                      |
| 10(1)                 |            | Severance  Agreement between the Company and Kenneth F. Stern dated as of June 10, 1996  (filed as Exhibit 10(16) to the Form S-1 and incorporated herein by  reference).                                                                                                 |
|                  |            |                                                                                                                                                                                                                                                                      |
| 10(2)                 |            | Form  of Stock Option Agreement, dated as of September 30, 1991 (filed as Exhibit  10(17) to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 30, 1991 and incorporated herein by reference).                                            |
|                  |            |                                                                                                                                                                                                                                                                      |
| 10(3)                 |            | Summary  of Annual Incentive Plan (filed as Exhibit 10(22) to the Form S-1 and  incorporated herein by reference).                                                                                                                                                        |
|                  |            |                                                                                                                                                                                                                                                                      |
| 10(4)                 |            | Supplemental  Revenue Growth Incentive Plan (filed as Exhibit 10(23) to the Form S-1 and  incorporated herein by reference).                                                                                                                                              |

 

 

F-24

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| **Exhibit****Number** |            |                                                                                                                                                                                                                                                                                                                   |
|-----------------------|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  | **Description** |
| 10(5)                 |            | Axsys  Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit C to the  Company’s Proxy Statement dated September 23, 1997 and incorporated herein by  reference).                                                                                                                                   |
|                  |            |                                                                                                                                                                                                                                                                                                                   |
| 10(6)                 |            | Resolution  approved on November 8, 1999 amending Section 2(l) of the Long Term Stock  Incentive Plan.  (filed as Exhibit  10(12) to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1999 and incorporated herein by reference.)                                            |
|                  |            |                                                                                                                                                                                                                                                                                                                   |
| 10 (7)                |            | Severance Protection Agreement between the Company  and Stephen W. Bershad dated as of February 11, 1999 (filed as Exhibit 10(1)  to the Company’s Form 10-Q, dated May 11, 1999, for the fiscal quarter ended  March 31, 1999 (the “March 31, 1999 Form 10-Q”) and incorporated herein by  reference). |
|                  |            |                                                                                                                                                                                                                                                                                                                   |
| 10  (8)               |            | Severance  Protection Agreement between the Company and Kenneth F. Stern dated as of  February 11, 1999 (filed as Exhibit 10(4) to the March 31, 1999 Form 10-Q and  incorporated herein by reference).                                                                                                                |
|                  |            |                                                                                                                                                                                                                                                                                                                   |
| 10  (9)               |            | Letter  Agreement between Mark J. Bonney and the Company dated as of August 1, 1999  (filed as Exhibit 10(4) to the September 30, 1999 Form 10-Q and incorporated  herein by reference).                                                                                                                               |
|                  |            |                                                                                                                                                                                                                                                                                                                   |
| 10  (10)              |            | Severance  Protection Agreement between the Company and Mark J. Bonney dated as of  August 30, 1999 (filed as Exhibit 10(5) to the September 30, 1999 Form 10-Q  and incorporated herein by reference).                                                                                                                |

 

 

F-25

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| **Exhibit****Number** |            |                                                                                                                                                                                                                                                                            |
|-----------------------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  | **Description** |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10(11)                |            | Amendment  to Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit  A to the Company’s Proxy Statement dated April 24, 2000 and incorporated  herein by reference).                                                                                   |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (12)              |            | Asset  Purchase Agreement, dated as of September 30, 2000, between the Company, and  Westlake Technology Company (filed as Exhibit 10(25) to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2000 and  incorporated herein by reference.) |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (13)              |            | Asset  Purchase Agreement, dated as of October 18, 2000, between the Company, and  Automation Engineering, Inc. (filed as Exhibit 10(26) to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2000 and  incorporated herein by reference.)  |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (14)              |            | Compensation Agreement, dated as of October 18, 2000, between the  Company, and Stephen W. Bershad. (filed as Exhibit 10(27) to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and  incorporated herein by reference.)              |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (15)              |            | Letter Agreement between John E. Hanley and the Company dated as of  March 8, 2000 (filed as Exhibit 10(28) to the Company’s Quarterly Report on  Form 10-Q for the quarter year ended March 31, 2001 and incorporated herein  by reference).                              |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (16)              |            | Letter Agreement between Stephen W. Bershad and the Company dated  October 4, 2001 extending term of initial period of Employment Agreement.                                                                                                                                    |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (17)              |            | Form of Indemnification Agreement for all Directors and Officers of  the Company.                                                                                                                                                                                               |
|                  |            |                                                                                                                                                                                                                                                                            |
| 10  (18)              |            | Letter Agreement between David A. Almeida and the Company dated as of  November 14, 2001.                                                                                                                                                                                       |
|                  |            |                                                                                                                                                                                                                                                                            |
| 21                    |            | Subsidiaries of the Registrant                                                                                                                                                                                                                                                  |
|                  |            |                                                                                                                                                                                                                                                                            |
| 22                    |            | Consent of Arthur Andersen LLP                                                                                                                                                                                                                                                  |
|                  |            |                                                                                                                                                                                                                                                                            |

 

 

F-26

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