AXSYS TECHNOLOGIES INC - 10-K Annual Report

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 (Address of principal executive offices)		06067 (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 per share

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the close of business June 28, 2002, $26,528,618.

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

Axsys Technologies, Inc. (together with its subsidiaries, unless the context suggests otherwise, "Axsys" or "we") is a leading designer and manufacturer of precision opto-mechanical components and subassemblies found in high performance aerospace, defense and commercial equipment and systems. In addition, we distribute precision ball bearings for use in a variety of industrial and commercial applications.

Axsys was incorporated in the State of Delaware in 1968. Our common stock is traded on the Nasdaq Stock Market under the symbol "AXYS."

We sell our components, subsystems and bearings to a variety of original equipment manufacturers ("OEM"s), serving the following markets:

The Aerospace and Defense Group designs, manufactures and sells high-end components such as precision position sensors, high-performance motors, precision metal optics, precision machined light-weight structures and opto-mechanical and electro-mechanical subassemblies. Our products enable OEMs to improve imaging, positional performance (accuracy, resolution, speed and power), and weight requirements in their systems. Principal markets for our products include OEMs serving the aerospace and defense markets. The Aerospace and Defense Group is comprised of:

The Commercial Products Group designs, manufactures and sells airbearing scanners, micro-positioning stages and laser-based distance measuring interferometers and autofocus. Our products are sold to OEMs enabling them to increase the accuracy and throughput of their systems. Principal markets for our products include OEMs serving the graphic arts and semiconductor capital equipment and recently, the medical imaging market. The Commercial Products Group is located in Rochester Hills, Michigan.

The Distributed Products Group distributes precision ball bearings, spherical plain bearings and bushings, acquired from various domestic and international sources, to OEMs and MRO distributors. The bearings and bushings are used in a variety of industrial automation and commercial markets. Additionally, our Distributed Products Group designs, manufactures and sells mechanical-bearing subassemblies for a variety of customers. The Distributed Products group is comprised of AST Bearings division located in Montville, New Jersey with a distribution center in Irvine, California.

Axsys' products are sold to OEMs in a variety of markets, which demand the precision and performance of our products and capabilities.

Aerospace and Defense. The aerospace and defense market principally consists of OEMs that manufacture weapon subsystems (for example, night vision and targeting pods and flight control systems) and complete systems (for example, aircraft air-to-air missiles and reconnaissance satellites). In general, these OEMs are designing leading-edge products, the performance of which is enhanced through the use of one or more of our capabilities:

The market for our products also includes direct sales to the U.S. and foreign defense agencies for spares requirements. In 2002, the market for Axsys products has been strong due to the increased spending by the Department of Defense generally, as well as the increased use of electro-optical systems within the US and foreign government arsenals. These electro-optical systems are used for thermal imaging, reconnaissance and weapons targeting. Defense applications include fixed- and rotary-winged aircraft, missile seeker heads, land and sea vehicles as well as reconnaissance satellites. In addition, these products are used on research satellites and newly developed biological detection systems being employed for homeland security. All of these programs incorporate high-performance components provided by suppliers like Axsys, such as precision metal optics, high performance motors and sensors and precision-machined structures.

High-performance graphic art and medical imaging capital equipment. The high-performance graphic art and medical imaging capital equipment market for our products consists of OEMs who manufacture sophisticated equipment used to electronically image photo-sensitive media for, among others, graphic arts, newspaper plate and medical radiography markets. Electronic imaging involves controlling the position of a modulated laser beam to expose photosensitive media. The position of this beam can be controlled by rotating a reflective optic by use of a high speed airbearing scanner under the laser beam or by precisely positioning the laser beam or the media under one another with an X-Y micro-positioning stage. In recent years, our customers have demanded increased resolution and throughput capabilities in these high-end systems. With a view to achieving these capabilities, we use reflective optics, high-speed motors, airbearings and sophisticated electronic controls.

Semiconductor and related electronic capital equipment. We sell products to OEMs in the semiconductor and related electronic capital equipment markets that produce fabricating and test equipment for integrated circuits, reticles, flat panel displays and electronic components including printed circuit boards. Our customers require accurate, precise and repeatable positioning of these devices for their equipment. We believe that as the density of circuits has increased, there has been increased requirement for the airbearing and direct drive positioning technology produced by Axsys. We also supply a variety of components and subassemblies to these markets, including:

Industrial Automation. We sell our products to a wide range of applications in industrial and commercial markets, including machine tools, motion control components and to OEMs for use in

many types of automation equipment. We also sell to MRO distributors who supply replacement parts for older equipment. Our OEM and MRO customers principally purchase precision bearings and assemblies that require short lead-times.

We are a vertically integrated supplier of precision components and subassemblies for high-technology applications. We design and manufacture components and subassemblies for OEMs of aerospace guidance, thermal imaging, graphic arts, medical imaging and semiconductor and related electronic capital equipment. Our products are designed to increase the accuracy and throughput of equipment produced by OEMs. A focus of our business strategy is to utilize our vertically integrated component manufacturing experience and resources and our electro-mechanical and opto-mechanical integration capabilities in the design of higher-level subassemblies that employ our micro-positioning and precision optical technologies. Other key elements of this business strategy include the following:

We plan to use our vertically integrated position to grow our subsystems business. Our strategy is to continue to develop subsystems by integrating our core component technologies with our electro-mechanical and opto-mechanical integration capabilities. This strategy is designed to enable us to provide our customers with high performance systems at competitive prices. We are currently investigating providing integration services for several of our OEM customers in other markets, including:

We also expect to enhance our market position through acquisitions and strategic alliances and divestures of non-core businesses. We have historically expanded our market presence and capabilities through acquisitions. We have also divested operations that were not part of our core businesses.

In early 2002, in response to the depressed market conditions that we anticipated would continue throughout the year, we began to evaluate our ongoing investment requirements in our data storage and photonics equipment businesses in light of their potential returns. This led to the divestiture of our data storage test equipment subsidiary, Teletrac, Inc. ("Teletrac") and our two photonic automation businesses ("Automation Group").

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

We will continue to focus on improving operating efficiencies. Our focus has been toward eliminating waste in all aspects of the organization, measured in reduced cycle time, material costs, scrap and rework. By implementing this process, we have reduced, and expect to continue to reduce, our design and manufacturing lead times as well as manufacturing costs in order to become more competitive in the marketplace.

We continue to evaluate new market and application opportunities to leverage our core capabilities. In order to grow our sales at a rate in excess of the markets we serve, we continually evaluate new markets and applications that can benefit from our core capabilities. Examples include our success in developing an airbearing laser scanner for use in a medical imaging application as well as the development of fast steering mirrors to serve the laser material marking and engraving market.

We utilize several key manufacturing technologies and have developed software and systems integration capabilities that enable us to design and manufacture a wide variety of high-performance precision optical and micro-positioning component systems. These core competencies include:

Magnetics. We design, manufacture and sell high-performance motors and precision resolvers using state-of-the-art magnetic technologies and materials. Applications for these high-performance components include precision micro-positioning systems for semiconductor processing and inspection equipment, pick and place robotic handlers, missile-seeker head systems, guidance systems and satellite actuators.

Precision Machining. Axsys manufactures precision-machined components made from beryllium, beryllium alloys and other specialty materials. Applications include precision optics, airbearings, heat sinks, structural housings and gimbals. Our airbearings provide high-speed precision positioning and are used in high-speed scanners for digital imaging and weapons guidance systems. Our heat sinks are used to dissipate heat in high-performance avionics and satellite electronics, and our gimbals are used in various applications, including positioning optical sensors in FLIR night vision systems. We also manufacture optical substrates used internally and by our customers in a variety of precision metal optical applications such as weapon fire control systems and space-borne instruments.

Precision Optics. We design and manufacture a broad range of precision metal optical components. Our precision optic products are generally made from beryllium or aluminum and are used in applications where performance requirements cannot be met with glass optics. The advantages of our optics include lighter weight, thermal stability and ease of mechanical interface with housing and actuation devices. We sell our precision metal optical components for use in high speed electro-mechanical scanners, weapons fire control systems, FLIR night vision weapons systems and high-performance space-borne instruments used on weather, mapping and scientific satellites.

Electronics. Axsys designs and manufactures several key electronic components for the electronics capital equipment and high-end digital imaging markets including laser interferometers and electronic controllers and drives. Our electronics components control the speed and position of electro-mechanical systems, such as precision motors, actuators, X-Y positioning stages and laser scanners. Laser interferometers, which are designed to permit precise linear position sensing, are sold to customers principally in the electronics capital equipment market. Electronic controllers coordinate the positioning and speed of electro-mechanical systems by interfacing with other motion control components. Drives provide power to a motor based on input from the controller in order to achieve a designated position or to achieve a specific speed.

The following table summarizes the component products manufactured and services provided by Axsys, by the technologies they incorporate:

Integration Capabilities. We have introduced products integrating our core technologies and integration capabilities to provide high-performance electro-mechanical and opto-mechanical subassemblies for our customers. Our precision subassemblies include X-Y micro-positioning stages and rotary positioning subassemblies such as actuators, opto-mechanical laser scanners and imaging subsystems. We also produce laser tracking autofocus subassemblies that employ motion control and optics technologies. The X-Y micro-positioning stage subassemblies are used in high-precision or high-performance applications, such as semiconductor alignment positioning subsystems for use in manufacturing or inspection. The rotary positioning subassemblies are used in applications such as night vision systems for defense contractors and cluster tool robotics in electronics capital equipment. Graphic art and medical imaging equipment manufacturers and semiconductor inspection equipment manufacturers use laser scanning and imaging subassemblies. The laser autofocus is used to automatically focus a microscope and is sold to OEMs that manufacture automated optical inspection machines used in the electronics capital equipment market.

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

Precision Ball Bearings. We distribute a wide range of precision ball bearings varying in size, precision tolerance, lubrication and price. We also provide certain value-added services, such as bearing subassemblies, bearing relubrication, clean room handling of products and engineering consultation.

The markets for our products are competitive. We compete primarily on the basis of our ability to design and engineer products to meet performance specifications set by our customers. Most of our customers are OEMs that purchase component parts or subassemblies, which they incorporate into their end products. Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.

There are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and subassemblies that we manufacture and sell. Our competitors, especially those in the precision optical product lines, typically sell a smaller number of products than we do and are often well entrenched. Some of these competitors have substantially greater resources than we do. We believe that the breadth of our technologies and product offerings provides us with a competitive advantage over certain manufacturers that supply only discrete components or are not vertically integrated with enabling technologies.

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

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

Our customers include OEMs and end-users that design or utilize high-precision, performance and throughput equipment. We sell our products primarily to OEM customers in the aerospace and defense, high-end graphic art and semiconductor capital equipment markets, and industrial automation markets.

There is no customer or group of affiliated customers for whom sales during 2002 were in the aggregate 10% or more of consolidated net sales, and, in our opinion, there is no customer, the loss of which would have a material adverse effect on our operations taken as a whole.

In 2002, 2001 and 2000, Axsys had aggregate sales, both military and non-military, directly to the U.S. Government, including its agencies and departments, of approximately $4.6 million, $3.0 million and $1.9 million, respectively. These sales accounted for approximately 5.7% of total net sales in 2002, 3.4% in 2001 and 2.0% in 2000. Approximately 36.7% of net sales in 2002, 31.7% in 2001 and 25.6% in 2000 were derived from subcontracts with U.S. Government contractors. The majority of these contracts may be subject to termination at the convenience of the U.S. Government, and certain contracts may also be subject to renegotiation. Currently, we are not aware of any proposed termination or renegotiation of such contracts that would have a material adverse effect on our business.

Because a substantial part of our business is derived directly from contracts with the U.S. Government, or its agencies or departments 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 number and diversity of our product applications and the strength of our engineering capabilities may lessen our exposure to such risk.

As of December 31, 2002, we employed 54 sales, marketing and customer support personnel throughout our organization, compared to 58 employees in similar functions at the end of 2001. We organize our sales staff by market segments with a view to building on existing customer relationships and improving cross-selling opportunities. We utilize two OEM components sales organizations, one focused on aerospace and defense customers and the other focused on high-performance commercial customers. We have a separate distributed products sales force that is focused on selling ball bearings, bushings and assemblies, principally to commercial and industrial oriented OEMs as well as MRO distributors.

As of December 31, 2002, our direct sales organization included 17 direct sales field personnel, most of whom have engineering backgrounds, with the remainder involved in inside sales, customer service, program management, contract administration and applications engineering. We believe that our sales effort is enhanced by having engineering-trained sales personnel available to meet with customers' engineering personnel. Our application and design engineers are also involved in the sales process.

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

For information concerning our domestic and foreign net sales and identifiable assets from continuing operations, see Note 9 to the Consolidated Financial Statements.

We seek to develop new component products and subsystems and improve existing products in order to keep pace with the increasing performance requirements of our customers. We devote significant resources, a portion of which is reimbursed by customers, to development programs directed at creating new products and product enhancements, as well as developing new applications for existing products. Because we believe that our ability to compete effectively depends in part on maintaining and enhancing our expertise in applying new technologies and developing new products, we dedicate substantial resources to engineering, research and development. At December 31, 2002, we employed 63 individuals in engineering, research and development functions. We cannot assure you that our product development efforts will be successful in producing products that respond to technological changes or new products introduced by others.

Our costs associated with research and development expenses were $1.0 million in 2002, $1.7 million in 2001, and $3.3 million in 2000. These amounts are net of cost reimbursements from our customers that were not material in relation to research and development expenditures in any period. We intend to direct our research and development activities toward integrating our various technologies and continuing to develop subsystems.

The raw materials and components that we purchase are generally available from multiple suppliers. However, beryllium, a material used extensively by the Precision Machined Products operation of our Aerospace & Defense Group, is only available from Brush Wellman, Inc. ("Brush Wellman"), the sole U.S. supplier. Historically, we have had an excellent relationship with Brush Wellman and have not encountered problems in obtaining our supply requirements. However, the partial or complete loss of Brush Wellman as a supplier of beryllium, or production shortfalls or interruptions that otherwise impair the supply of beryllium to Axsys, would have a material adverse effect on our business, financial condition and results of operations. If such conditions were to occur, it is uncertain whether alternative sources could be developed.

In addition, we purchase a substantial amount of ball bearings that we distribute from two foreign suppliers. While we believe that we could obtain alternate sources of supply, any interruption in the flow of products from these suppliers, or significant increases in the cost of these products, could have an adverse effect on our business, financial condition and results of operations.

We are not dependent upon any single patent or trademark. We have a combination of patents, trademarks and trade secrets, non-disclosure agreements and other forms of intellectual property protection covering our proprietary technology. Although we believe that our patents and trademarks may have value, we believe that our future success will depend primarily on the innovation, technical expertise, manufacturing and marketing abilities of our personnel. We cannot assure you as to the degree of protection offered by our patents. We cannot assure you that we will be able to maintain the

confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or other disclosure.

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

We believe that we are currently in compliance in all material respects with federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment and that any non-compliance with such laws will not have a material adverse effect upon our business, financial condition, results of operations, capital expenditures, earnings or competitive position. We cannot assure you, however, (a) that changes in federal, state or local laws, regulations or regulatory policy or the discovery of unknown problems or conditions will not in the future require substantial expenditures or (b) as to the extent of our liabilities, if any, for past failures, if any, to comply with applicable environmental laws, regulations and permits, any of which also could have a material adverse effect on our business, financial condition or results of operations.

Axsys has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to three third-party waste disposal sites. Although liability under CERCLA is joint and several, meaning that liability can exceed a PRP's pro rata share of cleanup costs, we believe, based on currently available information, that costs associated with these sites will not have a material adverse effect on our business and financial condition. It is possible, however, that our results of operations for a particular fiscal period could be materially affected.

Pursuant to a remedial plan approved by the Ohio Environmental Protection Agency ("Ohio EPA") in 1993, we are continuing a process of investigating soils and groundwater at a site formerly owned by a division of Axsys, and we have conducted certain remedial work at this site including soil removal. We have incurred approximately $600,000 to date. We have been pursuing an alternate closure plan related to this site. This plan is subject to the approval of the Ohio EPA. Based on the advice of our consultants, we increased our accrued liabilities relating to this site to approximately $744,000, with a resulting charge to discontinued operations in 2000 of $601,000, before a tax benefit of $235,000. Based on the advice of our environmental consultants, we believe that the Ohio EPA is likely to allow use of our proposed alternate plan. We anticipate receiving approval of the plan from the Ohio EPA in mid-2003 and will reassess the estimated costs of remediation of the site upon approval. We cannot assure you that the Ohio EPA will approve the alternate plan. If approval were not received, costs to Axsys could increase substantially. In addition, even if approval is received, the costs actually incurred may exceed the accruals established. We anticipate that actual expenditures will be incurred over a period of several years.

During 1999, we sold the land and building of our previously discontinued Sensor Systems division in St. Petersburg, Florida. We have conducted investigations of soil and groundwater at the former facility and received approval of our investigation plan from the Florida Department of Environmental Protection. We will continue to conduct additional soil and groundwater investigations at the site. Based on the advice of our consultants, we increased our accrued liabilities relating to this site to approximately $854,000, with a resulting charge to discontinued operations in 2000 of $657,000, before a tax benefit of $257,000. We have incurred approximately $280,000 to date.

On December 21, 2001, we received a letter from the United States Environmental Protection Agency ("EPA") notifying us that we are considered to be a potentially responsible party at a site located in Prospect, Connecticut, which until 1978 was owned by a former subsidiary. The letter also demanded payment of approximately $25,000 in past response costs and unspecified future costs. Although we may be obligated under CERCLA for contributions towards response costs incurred as a result of alleged releases of hazardous substances at the site, we are still investigating our responsibilities to the site. In addition, it is our policy to accrue environmental cleanup related costs when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposure, if any, with respect to this site requires an assessment of many factors, including the quality of information available, the assessment stage of each investigation, preliminary findings and the length of time involved in remediation. As we have not determined if any liability exists, we cannot estimate a meaningful range of exposure. We have responded to the EPA's demand and are awaiting a response.

We use or generate certain hazardous substances in our manufacturing and engineering facilities. We believe that our handling of these substances is in compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. We invest in protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment due to the presence and handling of these hazardous substances. We periodically conduct employee physical examinations and workplace air monitoring regarding these substances. When exposure problems or potential have been indicated, we implement corrective actions. In general, re-occurrence has been minimal or non-existent. We do not carry environmental impairment insurance.

As of December 31, 2002, we employed 557 persons, including 391 in manufacturing, 54 in sales, 63 in engineering and 49 in administration. Axsys considers its relations with its employees to be satisfactory. There has been no significant interruption of operations due to labor disputes.

Axsys leases its executive office, located at 175 Capital Boulevard in Rocky Hill, Connecticut. The principal plants and other significant properties at February 1, 2003 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; 2006
Irvine, CA	Distribution	7,800	Leased; 2005

Management believes that Axsys' facilities are generally sufficient to meet its current and reasonably anticipated manufacturing, distribution and related requirements. Management, however, periodically reviews space requirements to ascertain whether Axsys' facilities are sufficient to meet its needs.

Axsys is a defendant in various lawsuits, none of which is expected to have a material adverse effect on Axsys' business or financial position. It is possible, however, that our results of operations for a particular fiscal period could be materially affected. See "Business—Environmental Regulations."

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

Axsys' common stock trades on the Nasdaq National Market ("Nasdaq") under the Symbol "AXYS". The following table sets forth the range of high and low sales prices as reported by Nasdaq:

On March 14, 2003, the high and low sales price were $7.25 and $7.05, respectively.

On March 14, 2003, the approximate number of holders of record of Axsys' common stock was 539.

Axsys has applied and currently intends to continue to apply its retained and current earnings toward the development of its business and to finance its growth. Axsys did not pay dividends on its common stock during the three years ended December 31, 2002, and does not anticipate paying cash dividends in the foreseeable future.

The following selected financial data for the five fiscal years presented below is derived from Axsys' audited Consolidated Financial Statements as adjusted to reflect the discontinuance of the Fiber Automation Division and Automation Engineering, Inc. in 2002 and Beau Interconnect and Sensor Systems business segments in 1999 and 1998, respectively. The data should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere herein.

	Years Ended December 31,
	2002(1)		2001(1)		2000 (1) (2)(3)		1999(4)		1998
	(In thousands, except per share data)
Statement of Operations Data:
Net sales	$	79,586		$	86,131		$	90,421		$	85,418		$	98,559
Gross margin		19,086			12,843			19,213			21,005			28,977
(Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle		(3,014	)		(5,266	)		(3,932	)		(9,203	)		6,311
Net (loss) income		(7,061	)		(7,152	)		9,523			(7,122	)		6,099
Basic net (loss) earnings per share from continuing operations before discontinuing operations and cumulative effect of change in accounting principle	$	(0.64	)	$	(1.12	)	$	(0.84	)	$	(1.95	)	$	1.30
Basic (loss) earnings per share	$	(1.50	)	$	(1.53	)	$	2.05		$	(1.51	)	$	1.26
Weighted average basic common shares outstanding		4,692			4,688			4,657			4,715			4,848
Diluted (loss) earnings per share from continuing operations before discontinued operations and cumulative effect of change in accounting principle	$	(0.64	)	$	(1.12	)	$	(0.84	)	$	(1.95	)	$	1.29
Diluted (loss) earnings per share	$	(1.50	)	$	(1.53	)	$	2.05		$	(1.51	)	$	1.25
Weighted average diluted common shares outstanding		4,692			4,688			4,657			4,715			4,888

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

During the fourth quarter of 2002, we sold our Automation Group, comprised of the Fiber Automation Division ("FAD") and Automation Engineering, Inc. ("AEI").

On November 5, 2002, we sold the net assets of FAD to Palomar Technologies, Inc. FAD designed and manufactured nano-positioning stages and fiber alignment test tools. FAD has been accounted for as a discontinued operation and the related net assets and operating results have been reported separately from continuing operations in all years presented. Revenues applicable to this discontinued operation were $0.4 million in 2002 and $0.6 million in 2001. There were no revenues in 2000.

On October 28, 2002, we sold all of the stock of AEI, a wholly owned subsidiary, to an investor group. AEI designed and manufactured flexible automation systems for the photonics market. AEI has been accounted for as a discontinued operation and the related net assets and operating results have been reported separately from continuing operations in all years presented. Revenues applicable to this discontinued operation were $0.7 million in 2002, $2.5 million in 2001 and $1.4 million in 2000. AEI was merged with Axsys on October 18, 2000.

On April 5, 2002, we sold all of the stock of our Teletrac, Inc. subsidiary to Storage Test Solutions ("STS") of Aurora, Colorado. Teletrac, which was based in Santa Barbara, California, designed and manufactured high-performance spin stands that are used in the test and certification of data storage recording heads found in magnetic disk drives. As a result of the sale, we closed our Santa Barbara manufacturing facility and relocated our micro-positioning stage, laser interferometer and autofocus product lines to our Imaging Systems division located in Rochester Hills, Michigan. Axsys sold the stock of Teletrac in exchange for an interest-bearing $850,000 note, which provides for payments equal to ten percent of the revenues generated from the sales of spin stands by STS with the balance, if any, due in five years. Because of the uncertain market conditions for data storage products and the terms of the note, Axsys has reserved the entire value of this note and will record any principal and interest payments as ordinary income during the period received. As a result of this sale, an asset impairment and cost of sale charge of $1.0 million has been included in Axsys' Consolidated Statement of Operations. Under applicable accounting principles, Teletrac has not been treated as a discontinued operation.

During June of 2001, we closed a manufacturing support facility located in Manchester, Connecticut. The costs associated with closing the California and Connecticut operations are included in continuing operations.

On September 30, 2000, Teletrac acquired Westlake Technology Corporation ("Westlake"). This acquisition has been accounted for using the purchase accounting method. Accordingly, the results of

Westlake have been included in Axsys' Consolidated Statement of Operations since the date of acquisition.

On March 17, 2000, Axsys sold the net assets of the Beau Interconnect division for $31.8 million in cash and recorded an after-tax gain of approximately $14.1 million in the first quarter of 2000. Beau designed and manufactured interconnect-devices, barrier terminal blocks and connectors. Beau has been accounted for as a discontinued operation and the related net assets and operating results have been reported separately from continuing operations. Revenues applicable to this discontinued operation during 2000 were $846,000.

The following tables set forth selected financial data from continuing operations on a consolidated and segment basis for the years ended December 31, 2002, 2001, and 2000. The segment tables, shown below, exclude one-time charges, which are shown separately.

Overall sales from continuing operations for the year ended December 31, 2002 decreased compared to 2001 and 2000. As indicated below, the Aerospace and Defense segment has seen modest growth over the prior two years while depressed markets have impacted the Commercial Products and Distributed Products segments.

Sales in the Aerospace and Defense segment increased 6.9% for the year ended December 31, 2002 compared to 2001. In addition, sales in this segment increased 20.2% for the year ended December 31, 2001 compared to 2000. The increases in revenue are primarily due to increased sales of our beryllium machined products and increased sales of our optical components to the aerospace and defense market.

Gross margin as a percent of sales for the year ended December 31, 2002 increased compared to the prior year. Operational improvements, including improved quality, material procurement and facility management, have contributed to improved margins compared to 2001. Significant

improvements in gross margin for the year ended December 31, 2001 compared to 2000 were primarily the result of a Cost Reduction Program implemented in June of 2001. (See Note 2 of the Consolidated Financial Statements.)

Sales in the Commercial Products segment declined 32.8% for the year ended December 31, 2002 as compared to 2001, while sales in 2001 were down 13.9% compared to 2000. On April 5, 2002, we sold our data storage business in Santa Barbara, California, which had sales of $2.1 million in 2001 and $3.6 million in 2000. These sales are included in the above table. Additionally, the decline in shipments is partially a result of a general downturn in the market for air bearing scanners, which began in the second quarter of 2001.

Gross margin, as a percent of sales, increased during 2002 as compared to 2001, reflecting operational improvements including the closure of the Santa Barbara facility during the second quarter of 2002 and the closure of a manufacturing support facility in Connecticut during the second quarter of 2001. (See Note 2 of the Consolidated Financial Statements.) The 3.3% decline in gross margin from fiscal year 2001 compared to 2000 was primarily the result of a decline in data storage sales.

Sales in the Distributed Products segment declined 12.5% for the year ended December 31, 2002 as compared to 2001, while sales in fiscal year 2001 declined by 26.3% compared to fiscal year 2000. The decline in revenue is driven primarily by the overall weakness in the U.S. economy. In 2001 and 2002, conditions were very weak in the industrial automation and commercial markets for our precision ball bearings, including lower sales to electronic capital equipment markets, which had been particularly strong in 2000.

Gross margin as a percent of sales decreased 2.6% in 2002 compared to 2001, primarily due to additional excess inventory reserves taken in 2002 as a result of lower sales volumes. Gross margin, as a percentage of sales, decreased by 0.9% in fiscal year 2001 compared to fiscal year 2000, which was the result of decreased revenues. Adjusting for the inventory reserve adjustments in 2002, gross margin

percentages have remained relatively stable despite decreased revenues, as we have reacted to the depressed market conditions by lowering overhead and reducing spending.

During 2002, we recorded a one-time charge of $136 thousand for the elimination of some small product lines resulting from the closure of the California facility. During the second quarter of 2001, in conjunction with the Cost Reduction Plan, we recorded a one-time charge of $7.7 million, which primarily included a $4.4 million charge for excess and obsolete inventory disposals and $2.9 million charge for loss contract reserves for two long-term government contracts. During the first quarter of 2000, we recorded a one-time charge of $2.6 million when we re-evaluated slow moving and potentially obsolete inventory as part of the Strategic

(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, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

MAGNETICS		PRECISION MACHINING	PRECISION OPTICS	ELECTRONICS
• AC Motors		• Airbearing Components	• Scanning Optics	• Laser Interferometers
• Brush and Brushless DC Motors:		• Optical Substrates	• Polygon Mirrors	• AC and DC motor speed controls
	• Torque	• Structural Housings	• Monogon Mirrors	• Custom DSP Motion Controllers
	• Servo	• Gimbals and Yokes	• Fast Steering Mirrors	• Motor Drives
	• Limited Angle	• Heat Sinks	• Flat Optics
• Resolvers			• Head Mirrors
• Synchros			• Fold Mirrors
			• Aspherics • Telescopes • Collimators

SUBSYSTEMS	OPTICS	PRECISION MACHINING	MAGNETICS	ELECTRONICS
Laser Scanner	• Scanning Optics	• Airbearing	• Brushless DC Servo Motor	• Speed Control • Motor Drive

Laser Imaging	• 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	• Position Controller
			• Resolver	• Motor Drive

Micro-Positioning X-Y Stage		• Airbearing		• Laser Inteferometer • Position Controller • Motor Drive

		2002				2001
		High		Low		High		Low
Fiscal Years Ended December 31:
	First Quarter	$	10.000	$	6.470	$	35.875	$	15.938
	Second Quarter		9.000		6.890		21.700		10.100
	Third Quarter		8.889		7.600		12.750		8.880
	Fourth Quarter		8.030		6.600		11.230		7.150

	At December 31,
	2002		2001		2000		1999		1998
	(In thousands)
Balance Sheet Data:
Working capital	$	30,628	$	37,334	$	41,465	$	31,395	$	28,471
Total assets		62,372		68,636		73,592		64,150		72,514
Long-term capital lease obligations
(less current portion)		1,191		1,392		1,485		1,793		3,794
Shareholders' equity		39,093		46,440		53,421		43,299		52,128

	Years Ended December 31,
	2002				2001				2000
Sales	$	45,869	100.0	%	$	42,914	100.0	%	$	35,695	100.0	%
Cost of sales		36,994	80.7	%		35,174	82.0	%		31,201	87.4	%

Gross margin	$	8,875	19.3	%	$	7,740	18.0	%	$	4,494	12.6	%

	Years Ended December 31,
	2002				2001				2000
Sales	$	13,569	100.0	%	$	20,192	100.0	%	$	23,476	100.0	%
Cost of sales		9,003	66.3	%		14,638	72.5	%		16,254	69.2	%

Gross margin	$	4,566	33.7	%	$	5,554	27.5	%	$	7,222	30.8	%

	Years Ended December 31,
	2002				2001				2000
Sales	$	20,148	100.0	%	$	23,025	100.0	%	$	31,250	100.0	%
Cost of sales		14,367	71.3	%		15,815	68.7	%		21,191	67.8	%

Gross margin	$	5,781	28.7	%	$	7,210	31.3	%	$	10,059	32.2	%

	Years Ended December 31,
	2002				2001				2000
One-time charges	$	136	0.2	%	$	7,661	8.9	%	$	2,562	2.8	%