SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

For the Fiscal Year ended December 31, 2001

OR

 

 

For the transition period from              to          

 

Commission File No.: 0-16182

 

AXSYS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

Common Stock, par value $.01 per share

 

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 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  o

 

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.

 

Aggregate market value of the voting stock held by non-affiliates of the registrant 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 its subsidiaries, unless the context suggests otherwise, "Axsys" or "we") is a leading designer and manufacturer of high-performance custom nano-positioning components, subsystems and systems.  We also design and manufacture precision optical components for internal consumption as well as for sales to third parties.  In addition, we distribute precision ball bearings for use in a variety of industrial and commercial applications.

 

Axsys is incorporated in Delaware, and 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:

 

•                  Aerospace and defense

•                  Semiconductor, data storage, and related capital equipment

•                  High-performance graphic art capital equipment

•                  Industrial automation OEM and maintenance repair operations ("MRO")

 

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

 

We are organized into three groups:

•                  Precision Components Group

•                  Automation Group

•                  Distributed Products Group

 

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

 

•                  Axsys Technologies – Motion Control Division in San Diego, California

•                  Axsys Technologies – Precision Machined Products in Cullman, Alabama

•                  Axsys Technologies – Imaging Systems in Rochester Hills, Michigan

 

The Automation Group designs, manufactures and sells automated production and test systems and nano-positioning subsystems to high technology customers that produce semiconductor, data storage and photonic components and other high technology products.  These production and test systems integrate the group's precision optical and positioning components and subsystems with vision systems, robotics and electronic controls produced by third party companies.  This integration is accomplished using our proprietary FlexAuto^TM and ControLight software. These tools are designed to enable our customers to accurately and repeatedly produce their component products, thereby increasing the yield and throughput of the inspection and production processes.  The Automation Group is comprised of:

 

•                  Axsys Technologies – Integrated Systems in Santa Barbara, California

•                  Axsys Technologies – Fiber Automation in Pittsburgh, Pennsylvania

•                  Axsys Technologies – Axsys Automation Engineering in Wilmington, Massachusetts

 

The Distributed Products Group distributes precision ball bearings, acquired from various domestic and international sources, to OEMs and MRO distributors.  The ball bearings 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.

 

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Market Overview

 

Axsys' products are sold to OEM and end user customers 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 three 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 sales to the U.S. and foreign defense agencies for spares requirements. Despite a decline in overall defense spending over the past decade, the defense budget for upgrading existing platforms, including the development of  "smart weapons," as well as missile defense programs, has grown substantially.  Upgrade programs include state-of-the-art electronics, enhanced night vision systems, radar and guidance systems, missile seeker technologies and fly-by-wire systems.  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.  Our advanced capabilities are also utilized in certain missile defense programs that are based on measuring and seeking the thermal signature of an incoming missile.

 

High-performance graphic art capital equipment.  The high-performance graphic art 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 and newspaper plate 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, data storage and related capital equipment.  We sell products to OEMs in the semiconductor and related electronics 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 critical components and subsystems to these markets, including:

 

•                  direct drive rotary motors;

•                  precision optics;

•                  high speed rotary airbearing scanners and imaging engines;

•                  laser interferometers; and

•                  integrated nano-positioning stages.

 

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

 

Photonics component manufacturing.  We sell semi-automated and fully automated development, inspection and production equipment to manufacturers of photonics components.  This equipment is designed to assist these manufacturers to quickly and cost-effectively develop their products and manufacturing processes and increase the yield and throughput of their inspection and production processes.

 

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

 

Business Strategy

 

We are a vertically integrated supplier of precision components, subsystems and systems for high-technology applications. We design and manufacture components and subassemblies for OEMs of aerospace guidance, thermal imaging, graphic arts electronic imaging and semiconductor and related capital equipment.  Our products increase the accuracy and throughput of equipment produced by OEMs.  We also provide sophisticated development, inspection and production equipment that increases the yield and throughput of the semiconductor, photonics component and other high technology manufacturing processes.  A focus of our business strategy is to utilize our vertically integrated component manufacturing experience and resources, our systems integration capabilities and our process know-how in the design of higher-level subsystems as well as automation production and test systems that employ our nano-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:

 

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

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

•                  integration of our direct drive motors, interferometers and precision-machined airbearings for various process equipment applications; and

•                  development of airbearing stages.

 

We plan to continue to develop our offerings in the photonics automated production and inspection systems markets.  In 2000, we identified a new market opportunity to produce automated production and test equipment to support the fiber optics components market.  In October 2000, we started up our Fiber Automation Division in Pittsburgh, Pennsylvania to develop ultra-compact mechanical nano-positioning stages focused 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 as well as their advanced integration software – FlexAuto™  Axsys continued to invest in new product and process development in 2001.  These investments have enabled Axsys to develop technology in the field of fiber alignment and attachment as well as device inspection and characterization.  We have also invested in expanding our sales and marketing infrastructure in order to increase Axsys' brand recognition in the marketplace.

 

We will continue to focus on improving operating efficiencies.  We are starting our third year on the continuous improvement process of implementing "Lean" techniques throughout the organization.  The concept of Lean is based on 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 invest in information technologies to enhance our efficiency and responsiveness in serving our markets. In order to increase our efficiency and market responsiveness, we continue to invest in information technology across all aspects of our organization.  In 2001, we implemented customer relationship management (CRM) software in our Precision Components and Automation groups.  This system has enabled us to improve the tracking of customer opportunities as well as measure the effectiveness of our organization.  We added video conferencing to our corporate offices 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 resource planning (ERP) software in our Automation Group to enhance our management reporting systems in this new group.

 

4

 

We 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.

 

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

 

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

 

•                  On October 18, 2000, Axsys completed a merger with AEI to increase our capabilities and market position in the fiber automation market.  The merger with AEI provided us with extensive experience and know-how in automating fiber optic component manufacturing and testing, engineering capabilities in seamlessly integrating sophisticated motion control and vision systems into an automated tool and access to AEI's proprietary FlexAuto™ software, which is critical to the integration process.

 

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

 

Technologies, Products, and Capabilities

 

We utilize several key manufacturing technologies and have acquired or developed software and systems integration capabilities that enable us to design and manufacture a wide variety of high-performance precision optical and micro-positioning components, subsystems and automation 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 nano-positioning systems for semiconductor processing and inspection equipment, pick and place robotic handlers, missile seeker 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.

 

Optics.  We design and manufacture a broad range of precision metal optical components.  Our precision optics 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.

 

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The following table summarizes the component products and services manufactured by Axsys, by the 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 our core technologies and integration capabilities to provide high-performance electro-mechanical and opto-mechanical subsystems for our customers.  Our precision subsystems include X-Y nano-positioning stages and rotary positioning subsystems such as actuators, opto-mechanical laser scanners and imaging subsystems.  We also produce laser tracking autofocus subsystems that employ our motion control or optics technologies.  The X-Y nano-positioning stage subsystems are used in high-precision or high-performance applications, such as semiconductor alignment positioning subsystems for use in manufacturing or inspection.  The rotary positioning subsystems are used in applications such as night vision systems for defense contractors and cluster tool robotics in electronics capital equipment.  Graphic art equipment manufacturers and semiconductor inspection equipment manufacturers use laser scanning and imaging subsystems.  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.

 

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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 systems integration software called FlexAuto™.  This software is designed to permit the integration of different motion platforms and machine vision technologies in automated production and test systems.  FlexAuto™ is open architecture by design and supports a wide range of motion control and machine vision hardware.  The use of FlexAuto™ is designed to allow us, and our customers, to quickly and efficiently configure and deploy the software necessary to control all aspects of an automation system.  We believe that automation systems designed with FlexAuto™ can be developed in a shorter period of time than those from competitors, and can be easily customized and modified for existing and new applications.  In addition, as part of our focus on the photonics market, we developed several software algorithms including ControLight, a software package that permits alignment of fiber optics to photonic devices for attach operations as well as for inspecting and characterizing the devices for use in both process development and production.

 

Systems Integration.  We have directed systems integration capabilities toward the development of semi and fully automated development, inspection and production systems.  These systems utilize our nano-positioning capabilities and proprietary software controls, integrated with other third party products, and are sold to end-users that manufacture semiconductor, photonic, and other high technology components.  During 2001, we developed a family of automation systems used in process development, low rate production and high volume production to align and inspect photonic components.  These products include:

 

•                  FAST 6 nano-positioning stage

 

•                  Lab 60 process development tool

 

•                  Lab 60 PLC and FA characterization and inspection tools

 

•                  FAST 30/300 automated align and laser attach tool

 

•                  FAST 60/600 automated align and epoxy attach tool

 

•                  FBG 200 fiber Bragg grating writing system

 

•                  FAST 100 hybrid alignment and assembly tool

 

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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.

 

Competition

 

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 subsystems which they incorporate into their end products.  Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.  We compete for automation systems based on our ability to develop products that meet our customers' performance requirements.  Our competitive position is enhanced by our process know-how, use of our FlexAuto™ and ControLight software in automation applications, and our ability to internally supply key micro-positioning capabilities such as motors and mechanical and airbearing stages.

 

There are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and subsystems that we manufacture and sell.  Our competitors, especially those in the precision optical and positioning 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.

 

Customers

 

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 electronics capital equipment markets, and industrial automation markets.  Our end user customers are primarily in the semiconductor, data storage and photonics components markets.

 

There is no customer or group of affiliated customers for whom sales during 2001 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 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 $3.0 million and $1.9 million, respectively. These sales accounted for approximately 3.2% of total net sales in 2001 and 2.1% in 2000.  Approximately 29.8% of net sales in 2001 and 25.1% 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.

 

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Because a substantial part of our business is derived directly from contracts with the U.S. Government, or agencies or departments thereof, 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.

 

Sales, Marketing and Customer Support

 

As of December 31, 2001, we employed 68 sales, marketing and customer support personnel throughout our organization, compared to 67 employees in similar functions at the end of 2000.  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 and assemblies, principally to commercial and industrial oriented OEMs as well as MRO distributors.  Our newly created Automation Group sales force sells to manufacturers of semiconductor, data storage and fiber optics/photonics components.

 

As of December 31, 2001, our direct sales organization included 16 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.

 

Domestic and Foreign Sales

 

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

 

Engineering, Research and Development

 

We seek to develop new component products, subsystems and systems 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, 2001, we employed 88 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 engineering, research and development were $6.3 million in 2001, $5.4 million in 2000, and $4.7 million in 1999.  Research and development expenses were $3.6 million in 2001, $3.5 million in 2000, and $3.3 million in 1999.  These amounts are net of cost reimbursements from our customers that were not material in relation to engineering, 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 and systems.

 

Raw Materials; Suppliers

 

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 Precision Components 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

 

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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.

 

Patents and Trademarks

 

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, and we have patent applications pending or under evaluation.  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 or as to the likelihood that patents will be issued for pending applications. 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.

 

Environmental Regulation

 

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, (i) 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 (ii) 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, based on currently available information, we believe that costs associated with these sites will not have a material adverse effect on our business, financial condition or results of operations.

 

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.  Costs to date have not been material. We are 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-2002 and will reassess the estimated costs of remediation of the site upon such approval.  We cannot assure you that the Ohio EPA will approve the alternate plan.  If such approval were not received, costs to Axsys would 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

 

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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.

 

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 demands 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 prior connection 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 with respect to this site, if any, 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. Currently, it is not possible for us to estimate a meaningful range of exposure based on the limited amount of information received.  We are in the process of deciding how we will respond to the EPA's demand.

 

We use or generate certain hazardous substances in our manufacturing and engineering facilities.  We believe that our handling of such substances is in compliance with applicable local, state and federal 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 of such hazardous substances.  We periodically conduct employee physical examinations and workplace air monitoring regarding such substances.  When exposure problems or potential have been indicated, corrective actions have been implemented and re-occurrence has been minimal or non-existent.  We do not carry environmental impairment insurance.

 

Employees

 

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

 

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