-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOlPzF+TMvke+oF2Wc/f3BJzEyx5lkCkBk9X9veJkJCqPhPvw3cPvnJSkkuZ0M5N cccEwdwTmBNQvu0+tRISag== 0001047469-03-027019.txt : 20030811 0001047469-03-027019.hdr.sgml : 20030811 20030811171524 ACCESSION NUMBER: 0001047469-03-027019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030628 FILED AS OF DATE: 20030811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXSYS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000206030 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 111962029 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16182 FILM NUMBER: 03835219 BUSINESS ADDRESS: STREET 1: 175 CAPITAL BLVD SUITE 103 CITY: ROCKY HILL STATE: CT ZIP: 06067 BUSINESS PHONE: 2018711500 MAIL ADDRESS: STREET 1: 175 CAPITAL BLVD SUITE 103 CITY: ROCKY HILL STATE: CT ZIP: 06067 FORMER COMPANY: FORMER CONFORMED NAME: VERNITRON CORP DATE OF NAME CHANGE: 19920703 10-Q 1 a2116155z10-q.htm FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
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 number 0-16182

AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		11-1962029 (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)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý

4,658,096 shares of Common Stock, $.01 par value, were outstanding as of August 6, 2003.

AXSYS TECHNOLOGIES, INC.
INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
Consolidated Balance Sheets— As of June 28, 2003 and December 31, 2002		3
Consolidated Statements of Operations— Three-Months and Six-Months Ended June 28, 2003 and June 29, 2002		4
Consolidated Statements of Cash Flow— Six-Months Ended June 28, 2003 and June 29, 2002		5
Consolidated Statements of Shareholders' Equity— Six-Months Ended June 28, 2003 and June 29, 2002		6
Notes to Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Control and Procedures	17
PART II.	OTHER INFORMATION
Item 5.	Submission of Matters to a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURES		19

PART I—FINANCIAL INFORMATION
AXSYS TECHNOLOGIES, INC.
Consolidated Balance Sheets
(Dollars in thousands, except share data)

			June 28, 2003			December 31, 2002
			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	9,109		$	9,920
	Accounts receivable—net			12,962			10,068
	Inventories—net			23,995			22,080
	Income taxes—deferred and current			2,555			4,077
	Other current assets			964			1,046

		TOTAL CURRENT ASSETS		49,585			47,191
	PROPERTY, PLANT AND EQUIPMENT—net			11,645			11,263
	EXCESS OF COST OVER NET ASSETS ACQUIRED			3,600			3,600
	OTHER ASSETS			319			318

		TOTAL ASSETS	$	65,149		$	62,372

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	5,037		$	3,108
	Accrued expenses and other liabilities			8,269			9,285
	Deferred income			3,501			3,115
	Current portion of capital lease obligation			781			1,055

		TOTAL CURRENT LIABILITIES		17,588			16,563
CAPITAL LEASES, less current portion				885			1,191
OTHER LONG-TERM LIABILITIES				5,243			5,525
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
	Common stock, authorized 30,000,000 shares, issued 4,792,674 shares at June 28, 2003 and December 31, 2002			47			47
	Capital in excess of par			39,585			39,587
	Retained Earnings			3,062			752
	Treasury stock, at cost, 135,478 shares at June 28, 2003 and 138,988 at December 31, 2002			(1,261	)		(1,293	)

		TOTAL SHAREHOLDERS' EQUITY		41,433			39,093

		TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	65,149		$	62,372

See accompanying notes to consolidated financial statements.

AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Dollars in thousands, except share data—Unaudited)

	For the Three-Months Ended						For the Six-Months Ended
	June 28, 2003			June 29, 2002			June 28, 2003			June 29, 2002
				(Restated)						(Restated)
Net sales	$	21,693		$	20,586		$	42,066		$	39,678
Cost of sales		15,707			15,328			30,633			30,023

Gross margin		5,986			5,258			11,433			9,655
Selling, general and administrative expenses		3,959			4,494			8,062			8,500
Research, development and engineering expenses		583			475			1,054			1,065
Restructuring and special charges		—			794			—			2,075

Operating income (loss)		1,444			(505	)		2,317			(1,985	)
Interest expense		(47	)		(50	)		(98	)		(105	)
Interest income		26			36			56			90
Other income (expense)		81			(178	)		144			(116	)

Income (loss) from continuing operations before tax and cumulative effect of change in accounting principle		1,504			(697	)		2,419			(2,116	)
Provision for income taxes		(68	)		(537	)		(109	)		(979	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		1,436			(1,234	)		2,310			(3,095	)
Loss from discontinued operations		—			(859	)		—			(1,758	)
Cumulative effect of change in accounting principle		—			—			—			535

Net income (loss)		1,436		$	(2,093	)	$	2,310			(4,318	)

BASIC INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before cumulative effect of change in accounting principle	$	0.31		$	(0.26	)	$	0.50		$	(0.66	)
Loss from discontinued operations		—			(0.19	)		—			(0.37	)
Cumulative effect of change in accounting principle		—			—			—			0.11

Total	$	0.31		$	(0.45	)	$	0.50		$	(0.92	)

Weighted average basic common shares outstanding		4,656			4,699			4,656			4,698
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations before cumulative effect of change in accounting principle	$	0.31		$	(0.26	)	$	0.49		$	(0.66	)
Loss from discontinued operations		—			(0.19	)		—			(0.37	)
Cumulative effect of change in accounting principle		—			—			—			0.11

Total	$	0.31		$	(0.45	)	$	0.49		$	(0.92	)

Weighted average dilutive common shares outstanding		4,693			4,699			4,680			4,698

See accompanying notes to consolidated financial statements.

AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Cash Flow
(Unaudited, dollars in thousands)

				Six-Months Ended
				June 28, 2003			June 29, 2002 (restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)				$	2,310		$	(4,318	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
	Impairment of assets				—			313
	Cumulative effect of change in accounting principle				—			(535	)
	Depreciation				1,478			1,341
	Restructuring and special charges				—			2,075
	Loss on disposal of capital assets				50			318
	Deferred income taxes, net				—			1,431
	Changes in operating assets and liabilities:
		Accounts receivable			(2,894	)		(465	)
		Inventory			(1,915	)		(552	)
		Current income tax receivable			1,522			1,601
		Other current assets			82			(167	)
		Accounts payable			1,929			1,855
		Accrued expenses and other liabilities			(504	)		(2,671	)
		Deferred income			386
		Other long-term liabilities			(282	)		424
		Other—net			29			516

Net cash provided by continuing operations					2,191			1,166
Net cash used in discontinued operations					(512	)		(118	)

			NET CASH PROVIDED BY OPERATING ACTIVITIES		1,679			1,048

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(1,910	)		(682	)

			NET CASH USED IN INVESTING ACTIVITIES		(1,910	)		(682	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations					(580	)		(269	)

			NET CASH USED IN FINANCING ACTIVITIES		(580	)		(269	)

NET (DECREASE) INCREASE IN CASH					(811	)		97
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					9,920			9,899

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	9,109		$	9,996

Supplemental cash flow information
	Cash (received) paid for:
		Interest received—net		$	4		$	17
		Income tax refund—net			(1,253	)		(3,163	)

See accompanying notes to consolidated financial statements.

AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Shareholders' Equity
For the Six-Months Ended June 28, 2003 and June 29, 2002
(Unaudited, dollars in thousands)

	Common Stock									Treasury
	Common Stock			Capital in Excess Of Par			Retained Earnings			Treasury
	Shares	Amount		Capital in Excess Of Par			Retained Earnings			Shares		Amount
Balance at December 31, 2002	4,792,674	$	47	$	39,587		$	752		(138,988	)	$	(1,293	)
Net loss	—		—		—			2,310		—			—
Contribution to 401(k) plan	—		—		(2	)		—		3,510			32

Balance at June 28, 2003	4,792,674	$	47	$	39,585		$	3,062		(135,478	)	$	(1,261	)

Balance at December 31, 2001	4,792,674	$	47	$	39,621		$	7,813		(96,876	)	$	(1,041	)
Net loss	—		—		—			(4,318	)	—			—
Contribution to 401(k) plan	—		—		(17	)		—		5,184			56

Balance at June 29, 2002	4,792,674	$	47	$	39,604		$	3,495		(91,692	)	$	(985	)

See accompanying notes to consolidated financial statements.

AXSYS TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data—Unaudited)

Note 1—Basis of Presentation

Axsys Technologies, Inc. ("Axsys", "we" or the "Company") prepared the Consolidated Financial Statements, as of and for the three-months and six-months ended June 28, 2003 and June 29, 2002, without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows for such periods have been made, and the interim accounting policies followed are in conformity with generally accepted accounting principles and are consistent with those applied for annual periods as described in Axsys' annual report for the year ended December 31, 2002, previously filed on Form 10-K with the Securities and Exchange Commission (the "Annual Report").

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements included in Axsys' Annual Report for the year ended December 31, 2002. The results of operations for the six-months and three-months ended June 28, 2003 and June 29, 2002 are not necessarily indicative of the operating results for the full years.

Basic earnings per share have been computed by dividing net income (loss) by the weighted average number of common shares outstanding. The actual dilutive effect of stock options on the weighted average number of common shares outstanding was 37,025 shares for the quarter ended June 28, 2003 and 24,267 for the six-months ended June 28, 2003. When there is a loss from continuing operations, the computation of the dilutive net loss per share is based on the weighted average basic shares outstanding. The dilutive effect of stock options on the weighted average number of common shares would have been 5,924 shares for the quarter ended June 29, 2002 and 2,789 shares for the six-months ended June 29, 2002, if the effect were not anti-dilutive.

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 148, "Accounting for Stock-Based Compensation—Transition and Disclosure". SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The following table illustrates the effect on net income/(loss) and income/(loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

		Three-Months Ended						Six-Months Ended
		June 28, 2003			June 29, 2002			June 28, 2003			June 29, 2002
Reported net income (loss)		$	1,436		$	(2,093	)	$	2,310		$	(4,318	)
Stock option related employee compensation expense			(271	)		(317	)		(543	)		(634	)

Pro forma net (loss) income		$	1,165		$	(2,410	)	$	(1,767	)	$	(4,952	)

Pro forma basic income (loss) per share		$	0.25		$	(0.51	)	$	0.38		$	(1.05	)
	Weighted average basic common shares outstanding		4,656			4,699			4,656			4,698
Pro forma diluted (loss) income per share		$	0.25		$	(0.51	)	$	0.38		$	(1.05	)
	Weighted average diluted common shares outstanding		4,693			4,699			4,680			4,698

Other income and expenses include principal payments received from a fully reserved note received from the 1998 sale of Sensor Systems of $69 in the quarter ended June 28, 2003, $75 in the quarter ended June 29, 2002, $139 in the six-months ended June 28, 2003, and $138 in the six-months

ended June 29, 2002. In addition, a loss of $229 was recorded in the second quarter of 2002 from the disposal of fixed assets.

The financial statements for the three-months and six-months ended June 29, 2002 have been restated from the financial statements previously reported in the Company's Form 10-Q for that quarter. The restatement reflects the Automation Group as a discontinued operation, and a tax valuation allowance of $462 for the three-months ended June 29, 2002 has been recorded in the provision for income taxes from continuing operations.

Note 2—Discontinued Operations

During the third quarter of 2002, the Company decided to sell its Automation Group, which consisted of the Fiber Automation Division in Pittsburgh, Pennsylvania and its Automation Engineering, Inc. ("AEI") subsidiary in Wilmington, Massachusetts. On November 5, 2002, the Company sold the net assets of its Fiber Automation Division. On October 28, 2002, the Company sold the stock of AEI. The Automation Group was included in the Company's Commercial Products Group segment. The Automation Group generated an after-tax loss of $859 in the second quarter of 2002 and $1,758 during the first six months of 2002. The year to date loss included a $286 charge related to the termination of three salaried employees in the former Automation Group. Revenues from the Automation Group were $64 and $829 for the three months and six months ended June 29, 2002, respectively.

Note 3—Restructuring and Special Charges

Relocation of OEM Product Lines: During the second quarter of 2002, Axsys closed its Santa Barbara, California facility and relocated various Commercial Original Equipment Manufacturers ("OEM') product lines to Rochester Hills, Michigan. The total pre-tax cost of $1,302 associated with the relocation and facility closure included a charge of $544 for thirty terminated employees and a charge of $250 for the disposal of excess furniture and fixtures. A charge of $136 for the write-off of inventory was incurred as a result of the termination of some minor products. Other costs of $372 associated with the relocation included costs for the equipment relocation, employee training and recruitment and facility upgrades in Michigan were expensed as incurred.

Sale of Teletrac, Inc.: On April 5, 2002, Axsys sold all of the stock of its Teletrac, Inc. ("Teletrac") subsidiary to Storage Test Solutions ("STS") of Aurora, Colorado. In connection with the sale of Teletrac, the Company recorded in the first quarter of 2002 in restructuring and other special charges, a pretax charge of $1,015 associated with asset write-downs, severance payments and legal expenses.

Segment Reorganization: In March 2002, Axsys announced a reorganization of the Company's market segments into three major groups. The strategic realignment resulted in a change in the composition of Axsys' reportable segments. This plan resulted in a restructuring charge of $286 pre-tax for a workforce reduction of three people in the former Automation Group, which has been included in the loss from discontinued operations. In addition, as part of the segment reorganization, the Company incurred a charge of $266 in the first quarter of 2002 for the termination of the Company President.

During the first six-months of 2002, Axsys recorded the following amounts as restructuring and special charges in the Consolidated Statement of Operations:

	Cost of Goods Sold		Selling, General & Administrative Expense		Restructuring Charge		Total
Relocation of product lines	$	136	$	372	$	794	$	1,302
Sale of Teletrac		—		—		1,015		1,015
Segment Reorganization		—		—		266		266

Total	$	136	$	372	$	2,075	$	2,583

Cash Costs		—		372		1,196		1,568
Non-Cash Costs		136		—		879		1,015

Through June 28, 2003, the Company has spent all cash costs in connection with these 2002 restructuring and special charges.

Note 4—Inventories, net

Inventories, determined by lower of cost (first-in, first-out or average) or market, consist of:

	June 28, 2003		December 31, 2002
Raw materials	$	3,654	$	3,267
Work-in-process		12,887		11,315
Finished goods		7,454		7,498

	$	23,995	$	22,080

Note 5—Segment Data

Axsys classifies its businesses under three major groups, the Aerospace and Defense Group, Commercial Products Group and the Distributed Products Group.

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. These products are designed to enable Original Equipment Manufacturers ("OEMs") to improve imaging, positional performance (accuracy, resolution, speed and power), and weight requirements in their systems. Principal markets for these products include OEMs serving the aerospace and defense markets.

The Commercial Products Group designs, manufactures and sells airbearing scanners, micro-positioning stages and laser-based distance measuring interferometers and automatic focusing devises for inspection equipment. These products are sold to enable OEMs enabling them to increase the accuracy and throughput of their systems. Principal markets for these products include OEMs serving the graphic arts, semiconductor capital equipment and medical imaging markets.

The Distributed Products Group distributes precision ball bearings, acquired from various domestic and international sources, to OEMs and Maintenance Repair Operations ("MRO") distributors. The ball bearings are used in a variety of industrial automation and commercial markets. Additionally, the Distributed Products Group designs and manufactures mechanical-bearing subassemblies, which are sold to a variety of customers.

The following tables present the operating results for each of the Company's segments:

			Three-Months Ended:						Six-Months Ended:
			June 28, 2003			June 29, 2002			June 28, 2003			June 29, 2002
Net sales
	Aerospace and Defense Group		$	12,565		$	11,823		$	24,648		$	22,629
	Commercial Products Group			3,819			3,493			6,968			6,768
	Distributed Products Group			5,309			5,270			10,450			10,281

		Total sales		21,693			20,586			42,066			39,678

Pre-tax income (loss) before cumulative effect of change in accounting principle:
	Aerospace and Defense Group			922			1,016			1,909			1,525
	Commercial Products Group			1,017			457			1,676			377
	Distributed Products Group			465			397			770			771
	Restructuring and special charges			—			(1,302	)		—			(2,583	)
	Non-allocated expenses			(900	)		(1,265	)		(1,936	)		(2,206	)

Income (loss) from continuing operations before tax and cumulative effect of change in accounting principle:			$	1,504		$	(697	)	$	2,419		$	(2,116	)

The following table presents the details of the non-allocated expenses:

			Three-Months Ended:						Six-Months Ended:
			June 28, 2003			June 29, 2002			June 28, 2003			June 29, 2002
Non-allocated expenses
	Corporate expenses		$	(960	)	$	(1,073	)	$	(2,038	)	$	(2,075	)
	Capital lease expense			(31	)		(66	)		(66	)		(105	)
	Interest income			26			36			56			90
	Loss on disposal of property, plant and equipment			—			(229	)		—			(229	)
	Miscellaneous other income (expense)			65			67			112			113

		Total non-allocated expenses	$	(900	)	$	(1,265	)	$	(1,936	)	$	(2,206	)

The following table presents the identifiable assets for each of the Company's segments:

		June 28, 2003		December 31, 2002
Identifiable assets:
	Aerospace and Defense Group	$	34,927	$	31,175
	Commercial Products Group		5,576		4,158
	Distributed Products Group		12,235		11,949
	Non-allocated assets		12,411		15,090

Total assets		$	65,149	$	62,372

The following table presents the non-allocated identifiable assets:

		June 28, 2003		December 31, 2002
Non-allocated assets:
	Cash and cash equivalents	$	9,109	$	9,920
	Income taxes—current and deferred income taxes		2,455		4,077
	Corporate property, plant and equipment		642		823
	Miscellaneous other corporate assets		205		270

Total assets		$	12,411	$	15,090

Note 6—Other Information

	June 28, 2003		December 31, 2002
Allowance for doubtful accounts	$	596	$	509

Accumulated depreciation and amortization of property, plant and equipment	$	14,418	$	12,977

Note 7—Income Taxes

The Company has a net operating loss carryforward of approximately $3.4 million, which expires in 2022. Axsys also has credit carryforwards of approximately $1.0 million, which expire at various times between 2018 and 2021. In accordance with the Statement of Financial Accounting Standards No. 109, the Company recognized a valuation allowance, which was $4,361 at December 31, 2002, to offset a portion of the recorded deferred tax asset. During the first six months of 2003, the Company generated net income and, therefore, reduced the valuation allowance by $847 and utilized $847 of the deferred tax asset. Available and prudent tax planning strategies support the deferred tax asset currently recorded on the books.

Note 8—Warranty Accruals

The Company issues warranties for approximately 43% of our products. The product warranty liability is generally based on volume, historical return percentages and the warranty period. The following table summarizes product warranty activity for the six-months ended:

		Balance at December 31, 2002			Provision, changes and other		Payments		Balance at June 28, 2003
Product warranty liability		$	672		145		(187	)	$	630

Note 9—Commitments and Contingencies

Axsys has various lawsuits, claims, commitments and contingent liabilities arising from the ordinary conduct of its business; however, they are not expected to have a material adverse effect on the business and financial condition. It is possible, however, that the results of operations for a particular fiscal period could be materially affected.

On May 30, 1997, an action was filed in the Court of Chancery in the State of Delaware against the Company and three of the directors on behalf of a purported class of persons who purchased the Company's preferred stock. The plaintiff has challenged the decision of the Company to redeem all of its outstanding shares of the preferred stock. The plaintiff claimed that the defendants (1) breached fiduciary duties in setting the redemption price too low and unfairly seeking to advantage holders of common stock and (2) breached contractual duties as set forth in the Certificate of Designation governing the preferred stock, as well as an implied covenant of good faith and fair dealing. In

March 1998, the Court dismissed the plaintiff's claim of breach of fiduciary duties but declined to dismiss the plaintiff's claims concerning the purported breach of contract and implied covenant of good faith and fair dealing. In January of 2001, the plaintiff filed an amended complaint asserting the same causes of action raised in the original complaint. The Company filed an answer, in January of 2001, denying the material substantive allegations of the amended complaint and asserting, as affirmative defenses, the failure to state a claim and the defense that plaintiff is not an adequate class representative. There have been no significant changes in the status of the complaint since January 2001. It is the Company's policy to accrue litigation costs when those costs are believed to be probable and can be reasonably estimated. The potential outcome is currently deemed to be immaterial to the consolidated financial statements taken as a whole.

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, the Company believes, based on currently available information, that costs associated with these sites will not have a material adverse effect on the business and financial condition. It is possible, however, that the 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, Axsys continues a process of investigating soils and groundwater at a site formerly owned by a division of Axsys, and has conducted certain remedial work at this site including soil removal. The Company has incurred costs of $41 in the first six months of 2003 and approximately $641 to date. The Company has 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 environmental consultants, Axsys believes that the Ohio EPA is likely to allow use of the proposed alternate plan. The Company anticipates receiving approval of the plan from the Ohio EPA in late-2003 and will reassess the estimated costs of remediation of the site upon approval. 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. The Company anticipates that actual expenditures will be incurred over a period of several years. As of June 28, 2003, the Company has accrued $413 for expenses related to this site.

During 1999, Axsys sold the land and building of a previously discontinued Sensor Systems division in St. Petersburg, Florida. The Company conducted investigations of soil and groundwater at the former facility and received approval of the remedial action plan from the Florida Department of Environmental Protection. During the second quarter of 2003, the Company installed the remediation systems and has begin the clean up of the site. During the first six-months of 2003, the Company spent $232 on the clean up of this facility and has incurred approximately $562 to date. As of June 28, 2003, the Company has accrued $464 for expenses related to this site.

On December 21, 2001, the Company received a letter from the United States Environmental Protection Agency ("EPA") notifying Axsys that they 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 in past response costs and unspecified future costs. Although Axsys may be obligated under CERCLA for contributions towards response costs incurred as a result of alleged releases of hazardous substances at the site, the Company is still investigating its responsibilities to the site. In addition, it is the Company's 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 Axsys has not determined if any liability exists, a meaningful range of exposure cannot be estimated. The Company has responded to the EPA's demand and is awaiting a response.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations:

The following tables set forth certain financial data for the three-months and six-months ended June 28, 2003 and June 29, 2002. The segment tables, shown below, exclude one-time charges, which are shown separately.

	Three-Months Ended:
	June 28, 2003					June 29, 2002
	(in thousands and as a percentage of sales)
Sales	$	21,693		100.0	%	$	20,586		100.0	%
Cost of sales		15,707		72.4			15,328		74.5
Gross margin		5,986		27.6			5,258		25.5
Selling, general and administrative expenses		3,959		18.2			4,494		21.8
Research, development and engineering expenses		583		2.7			475		2.3
Restructuring and special charges							794		3.9

Operating income (loss)		1,444		6.7			(505	)	(2.5	)
Interest expense—net		(21	)	(0.1	)		(14	)	—
Other income (expense)—net		81		0.3			(178	)	(0.9	)

Income (loss) from continuing operations before tax and change in accounting principle		1,504		6.9			(697	)	(3.4	)
Provision for income taxes		(68	)	(0.3	)		(537	)	(2.6	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		1,436		6.6			(1,234	)	(6.0	)
Loss from discontinued operations		—		—			(859	)	(4.2	)

Net income (loss)	$	1,436		6.6	%	$	(2,093	)	(10.2	)%

	Six-Months Ended:
	June 28, 2003					June 29, 2002
	(in thousands and as a percentage of sales)
Sales	$	42,066		100.0	%	$	39,678		100.0	%
Cost of sales		30,633		72.8			30,023		75.7

Gross margin		11,433		27.2			9,655		24.3
Selling, general and administrative expenses		8,062		19.2			8,500		21.4
Research, development and engineering expenses		1,054		2.5			1,065		2.7
Restructuring and special charges		—		—			2,075		5.2

Operating income (loss)		2,317		5.5			(1,985	)	(5.0	)
Interest expense—net		(42	)	(0.1	)		(15	)	—
Other income (expense)—net		144		0.3			(116	)	(0.3	)

Loss from continuing operations before tax and change in accounting principle		2,419		5.7			(2,116	)	(5.3	)
Provision for income taxes		(109	)	(0.2	)		(979	)	(2.5	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		2,310		5.5			(3,095	)	(7.8	)
Loss from discontinued operations		—		—			(1,758	)	(4.4	)
Cumulative effect of change in accounting principle		—		—			535		1.3

Net income (loss)	$	2,310		5.5	%	$	(4,318	)	(10.9	)%

Overview

Overall sales from continuing operations for the second quarter and first six-months of 2003 increased compared to the prior year by 5.4% and 6.0%, respectively.

Improvements in gross margin are primarily the result of an overall increase in revenue and in particular increased revenues from more profitable engineering and out of warranty repair work. The decrease in expenses is primarily the result of the absence of restructuring and special charges, which had impacted the first two quarters of 2002.

Aerospace and Defense Segment

	Three-Months Ended								Six-Months Ended
	June 28, 2003				June 29, 2002				June 28, 2003				June 29,2002
	(in thousands and as a percentage of sales)
Sales	$	12,565	100.0	%	$	11,823	100.0	%	$	24,648	100.0	%	$	22,629	100.0	%
Cost of sales		9,879	78.6			9,303	78.7			19,245	78.1			18,091	79.9

Gross margin	$	2,686	21.4	%	$	2,520	21.3	%	$	5,403	21.9	%	$	4,538	20.1	%

Sales in the Aerospace and Defense segment increased 6.3% and 8.9% for the three-months ended and six-months ended June 28, 2003 compared to the same periods in 2002. The increase in revenues is primarily due to increased sales of our beryllium-machined products to the aerospace and defense market.

Gross margin as a percent of sales increased slightly during the second quarter and six months of 2003 compared to the prior year. This was primarily due to increased sales and increased non-recurring engineering revenues, which carry higher than average margins, offset by higher fixed costs due to increase capital investments and by increased indirect labor to support the higher production volume.

Commercial Products Segment

	Three-Months Ended								Six-Months Ended
	June 28, 2003				June 29, 2002				June 28, 2003				June 29, 2002
	(in thousands and as a percentage of sales)
Sales	$	3,819	100.0	%	$	3,493	100.0	%	$	6,968	100.0	%	$	6,768	100.0	%
Cost of sales		2,118	55.5			2,165	62.0			4,065	58.3			4,557	67.3

Gross margin	$	1,701	44.5	%	$	1,328	38.0	%	$	2,903	41.7	%	$	2,211	32.7	%

Sales in the Commercial Products segment increased 9.3% and 3.0% for the three-months and six-months ended June 28, 2003 as compared to the prior year. The increase in sales is a result of new orders in the medical imaging industry as well as the shipment of spare air bearing scanners used in older defense applications.

Gross margin as a percent of sales has increased as a result of high margin out-of-warranty repair revenues and operational improvements, which include the closure of the Santa Barbara, California facility. During April of 2002, we sold Teletrac, Inc., a wholly owned subsidiary, which included our data storage product line. As a result of the sale and with a view to improving our efficiency, we relocated the remaining product lines manufactured at our Santa Barbara facility to our Rochester Hills, Michigan facility during the second quarter of 2002.

Distributed Products Segment

	Three-Months Ended								Six-Months Ended
	June 28, 2003				June 29, 2002				June 28, 2003				June 29, 2002
	(in thousands and as a percentage of sales)
Sales	$	5,309	100.0	%	$	5,270	100.0	%	$	10,450	100.0	%	$	10,281	100.0	%
Cost of sales		3,710	69.9			3,724	70.7			7,323	70.1			7,239	70.4

Gross margin	$	1,599	30.1	%	$	1,546	29.3	%	$	3,127	29.9	%	$	3,042	29.6	%

Sales in the Distributed Products segment increased 0.7% and 1.6% for the three-months and six-months ended June 28, 2003 as compared to the prior year. However, conditions continue to be weak in the industrial automation and commercial markets for our precision ball bearings, which includes lower sales to electronic capital equipment markets.

Gross margin as a percent of sales increased slightly in the second quarter and first six months of 2003 as compared with the prior year, as we continued to manage our costs during these depressed market conditions.

Non-Allocated Charges Included in Cost of Sales

	Three-Months Ended								Six-Months Ended
	June 28, 2003				June 29, 2002				June 28, 2003				June 29, 2002
	(in thousands and as a percentage of sales)
Cost of sales	$	—	—	%	$	136	0.7	%	$	—	—	%	$	136	0.3	%

During the second quarter of 2002, we wrote off $136 thousand of inventory for the elimination of some small product lines resulting from the closure of the Santa Barbara, California facility. This charge is included in the cost of sales but is not allocated to a particular segment. This inventory was disposed of in 2002.

Operating Expenses

	Three-Months Ended								Six-Months Ended
	June 28, 2003				June 29, 2002				June 28, 2003				June 29, 2002
	(in thousands and as a percentage of sales)
Selling, general and administrative	$	3,959	18.2	%	$	4,494	21.8	%	$	8,062	19.2	%	$	8,500	21.4	%
Research, development and engineering		583	2.7			475	2.3			1,054	2.5			1,065	2.7
Restructuring and special charges		—	—			794	3.9			—	—			2,075	5.2

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $535 thousand in the second quarter 2003 compared to the prior year and $438 for the first six-months of 2003 compared to the prior year. During the second quarter of 2002, we recorded a one-time charge of $372 thousand associated with the closure of the Santa Barbara, California facility and subsequent relocation of the product lines to our Michigan facility. In addition, we realized cost savings of $141 thousand and $345 thousand for the three months ended and six months ended June 28, 2003, respectively, from the closure of the California facility. The benefits realized by the closure of this facility were partially offset by increased incentive costs primarily due to the increase in revenues.

Research, Development and Engineering Expenses. Research, development and engineering expenses increased $108 thousand in the second quarter of 2003 compared to the prior year, primarily due to increased spending for R&D and engineering infrastructure at our San Diego, California and Rochester Hills, Michigan facilities. Research, development and engineering expenses decreased $11 thousand for the first six-months of 2003 compared to the prior year, primarily due to the closure of the Santa Barbara, California facility in 2002, which resulted in reduced spending of $120 thousand, offset by increased spending on engineering infrastructure primarily in San Diego and Rochester Hills.

Restructuring and special charges. There were no restructuring and special charges for the six months of 2003 compared to charges of $2.1 million for the prior year. During the first six-months of 2002, restructuring charges included $0.3 million for termination expenses incurred in connection with the restructuring of the business and $1.0 million associated with asset write-downs and severance expenses resulting from the sale of Teletrac and $0.8 million of costs relating to the relocation of certain Commercial OEM product lines from Santa Barbara, California to Rochester Hill, Michigan.

	Accrued Restructuring and Special Charges
	(in thousands)
2002 Charges	$	2,075
2002 Non-cash usage		(1,141	)
2002 Cash usage		(878	)
2002 Additional accrual		14

Balance at December 31, 2002		70

2003 Cash usage		(70	)

Balance at June 28, 2003	$	—

The Company accrued an additional $14 thousand during the fourth quarter of 2002 associated with the 2002 restructuring of the business.

Other Income and Expenses

Interest income and expense, net. Net interest expense was $21 thousand and $42 thousand in the second quarter and first six-months of 2003, compared to net interest expense of $14 thousand and $15 thousand in the comparable periods of 2002. Interest income received from a note receivable from the 1998 sale of Sensor Systems was $4 thousand in the second quarter of 2003 compared to $11 thousand in the comparable period of 2002 and $9 thousand year to date compared to $23 thousand in 2002. The decline in interest received is a result of the lower principal balance. In addition, interest income from our investments has declined by $3 thousand during the second quarter of 2003 and by $20 thousand in the first six-months of 2003 compared to the prior year as a result of lower interest rates in 2003.

Other income and expense, net. Other income from a fully reserved note from the 1998 sale of Sensor Systems was $69 thousand in the second quarter of 2003 and $139 thousand for the first six months of 2003 compared to $75 and $138 thousand in the comparable periods of 2002.

Taxes. The consolidated effective tax rate, primarily for state taxes, was 4.5% for the three and six-months ended June 28, 2003 compared to 3.7% and 0.8% in the comparable periods of 2002. The effective tax benefit rate was 35% for discontinued operations during the second quarter of 2002 and the first six months of 2002. The tax provision rate for continuing operations for the second quarter of 2002 was 77.0% and 46.3% for the first six months of 2002. In accordance with the Statement of Financial Accounting Standards No. 109, during the first six months of 2002, we established a $829 thousand valuation allowance against the net deferred tax asset related to net operating losses carryforward. During the first two quarters of 2003, we recorded net income and therefore reduced this valuation allowance and utilized $847 thousand of the deferred tax asset. As, and if, we continue to record income and utilize the net operating loss carryforwards, we will further reduce the valuation allowance.

Discontinued Operations

During the third quarter of 2002, we decided to divest our automation business and disposed the Automation Group in the fourth quarter of 2002. The net loss from discontinued operations was $859 thousand in the second quarter of 2002 and $1.8 million the first six months of 2002.

Liquidity and Capital Resources

Axsys funds its operations primarily from cash flow generated by operations, cash on hand and, to a limited extent, capital lease financing. As of June 28, 2003, cash and cash equivalents totaled $9.1 million.

Net cash provided by operating activities for the six months ended June 28, 2003 was $1.7 million compared to net cash provided by operating activities of $1.0 million for the six months ended June 29, 2002. Axsys' net income for the first six months of 2003 was $2.3 million, which included $1.5 million of depreciation and $50 thousand of capital asset disposals. Net income and non-cash expenses were partially offset by cash outflows of $282 thousand for long-term liabilities primarily related to environmental remediation reserves, $512 thousand related to discontinued operations and the changes in working capital described below.

Working capital increased by $1.4 million during the first six months of 2003. Accounts receivable increased $2.9 million due to increased volume, the timing of shipments within the second quarter of 2003 and an increase in days sales outstanding from an unusually low level at the end of 2002. Inventory increased $1.9 million due to long-lead items for several aerospace and defense programs scheduled to ship in the second half of 2003. The increase in inventory was offset largely by a related $1.9 million increase in accounts payable. In the second quarter, Axsys received a federal income tax refund of $1.5 million that reduced current income taxes receivable. Other current assets also decreased $82 thousand as amortization of prepaid insurance exceeded new premiums paid. In addition, accrued expenses and other liabilities decreased by $504 thousand largely due to cash payments for special charges recorded in 2002 and state income tax payments. The impact of these payments was partially offset by an increase in deferred income.

Cash used in investing activities was $1.9 million and $682 thousand for the six months ended June 28, 2003 and June 29, 2002, respectively. These funds were utilized for capital expenditures.

Net cash used in financing activities was $580 thousand and $269 thousand for the six-month periods ended June 28, 2003 and June 29, 2002, respectively. These funds were used to repay capital leases.

Management believes that the Company has sufficient funds on hand to finance its operations, capital expenditures, and working capital requirements for the foreseeable future.

Backlog

A substantial portion of Axsys' business is of a build-to-order nature requiring various engineering, manufacturing, testing and other processes to be performed prior to shipment. As a result, Axsys generally has a significant backlog of orders to be shipped. We recorded new orders of $42.0 million in the first six-months of 2003, compared to orders of $39.6 million in the first six-months of 2002. Axsys ended the first six-months of 2003 with a backlog of $61.5 million, compared to a backlog of $48.7 million at June 29, 2002, an increase of $12.8 million or 26.3 percent. We believe that a substantial portion of our backlog of orders at June 28, 2003 will be shipped over the next twelve months. However, we estimate 12%-15% of our current backlog will be shipped in the later part of 2004. The majority of this backlog consists of firm contracts with prime contractors of the Unites States Government for our beryllium-machined products.

Forward-Looking Statements

This quarterly report on Form 10-Q includes certain forward-looking statements, including the statements with regard to the potential use of our deferred tax valuation allowance, our backlog and the sufficiency of funds to finance operations, capital expenditures and working capital requirements. The Company's business is subject to a variety of risks and uncertainties, including the effect of order backlog on operations, the impact of competition in the aerospace and defense industry, the effects of legal proceedings and regulatory matters on the business, and the impact of general economic conditions, as well as other factors discussed in filings that Axsys makes with the Securities and Exchange Commission. As a result, actual future results and developments may be materially different from those expressed or implied in any forward-looking statement. Disclosure regarding factors affecting the Company's future results and developments is contained in the Company's public filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risk sensitive instruments do not subject the Company to material risk exposures.

Item 4. CONTROL AND PROCEDURES

As of June 28, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of June 28, 2003. There have been no significant changes in the Company's internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting subsequent to June 28, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II—OTHER INFORMATION

Item 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders of the Company was held on May 13, 2003. The following matters were submitted to a vote of security holders. The results of the voting were as follows:

Election of Directors

The stockholders elected all five directors of the Company.

	Votes For	Votes Withheld
Stephen W. Bershad	3,284,025	951,502
Anthony J. Fiorelli, Jr.	4,122,062	113,465
Eliot M. Fried	4,122,062	113,465
Richard F. Hamm, Jr.	4,123,018	112,509
Robert G. Stevens	4,191,172	44,355

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits

		10.1		Severance Protection Agreement between the Company and Kenneth F. Stern dated as of May 13, 2003
		10.2		Severance Protection Agreement between the Company and David A. Almeida dated as of May 13, 2003
		31.1		Certification pursuant to rule 13a-14(a)—Chief Executive Officer
		31.2		Certification pursuant to rule 13a—14(a)—Chief Financial Officer
		32.1		Certification pursuant to 18 U.S.C. Section 1350—Chief Executive Officer
		32.2		Certification pursuant to 18 U.S.C. Section 1350—Chief Financial Officer

(b): Reports on 8-K

Report on Form 8-K filed on April 29, 2003 regarding the financial results for the first quarter ended March 29, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

Date: August 7, 2003	AXSYS TECHNOLOGIES, INC.
	By:	/s/ STEPHEN W. BERSHAD Stephen W. Bershad Chairman of the Board and Chief Executive Officer
		/s/ DAVID A. ALMEIDA David A. Almeida Vice President-Finance and Chief Financial Officer (Principal Financial Officer)

EXHIBITS INDEX

Exhibit Number		Description
10.1		Severance Protection Agreement between the Company and Kenneth F. Stern dated as of May 13, 2003
10.2		Severance Protection Agreement between the Company and David A. Almeida dated as of May 13, 2003
31.1		Certification pursuant to rule 13a-14(a)—Chief Executive Officer
31.2		Certification pursuant to rule 13a—14(a)—Chief Financial Officer
32.1		Certification pursuant to 18 U.S.C. Section 1350—Chief Executive Officer
32.2		Certification pursuant to 18 U.S.C. Section 1350—Chief Financial Officer

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AXSYS TECHNOLOGIES, INC. INDEX
PART I—FINANCIAL INFORMATION AXSYS TECHNOLOGIES, INC. Consolidated Balance Sheets (Dollars in thousands, except share data)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Operations (Dollars in thousands, except share data—Unaudited)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Cash Flow (Unaudited, dollars in thousands)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Shareholders' Equity For the Six-Months Ended June 28, 2003 and June 29, 2002 (Unaudited, dollars in thousands)
AXSYS TECHNOLOGIES, INC. Notes to Consolidated Financial Statements (Dollars in thousands, except share data—Unaudited)
PART II—OTHER INFORMATION
EXHIBITS INDEX
EX-10.1 3 a2116155zex-10_1.htm EXHIBIT 10.1
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Exhibit 10.1

AMENDED AND RESTATED
SEVERANCE PROTECTION AGREEMENT

THIS AGREEMENT made as of the May 13, 2003, by and between Axsys Technologies, Inc. (the "Company") and Kenneth F. Stern (the "Executive").

WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distraction of the Company's key management personnel because of the uncertainties inherent in such a situation;

WHEREAS, the Board has determined that it is essential and in the best interests of the Company and its stockholders for the Company to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure the Executive's continued dedication and efforts in such event without undue concern for the Executive's personal financial and employment security; and

WHEREAS, in order to induce the Executive to remain in the employ of the Company and/or one of its Affiliates (the entity or entities employing the Executive, the "Employing Affiliate"), particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event the Executive's employment is terminated as a result of, or in connection with, a Change in Control.

NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows:

1. Term of Agreement. This Agreement shall commence as of the date of this Agreement, and shall continue in effect until January 1, 2004 (the "Term"); provided, however, that on January 1, 2004, and on each January 1 thereafter, the Term shall automatically be extended for one year unless either the Executive or the Company shall have given written notice to the other at least ninety days prior thereto that the Term shall not be so extended; provided, further, however, that following the occurrence of a Change in Control, the Term shall not expire prior to the expiration of twenty-four months after such occurrence.

2. Termination of Employment. If, during the Term, the Executive's employment with the Company or an Employing Affiliate shall be terminated within twenty-four months following a Change in Control, the Executive shall be entitled to the following compensation and benefits:

(a) If the Executive's employment with the Company or an Employing Affiliate shall be terminated (1) by the Company for Cause or Disability, (2) by reason of the Executive's death, or (3) by the Executive other than for Good Reason or pursuant to a Window Period Termination, the Company shall pay to the Executive the Accrued Compensation.

(b) If the Executive's employment with the Company or an Employing Affiliate shall be terminated for any reason other than as specified in Section 2(a), or if the Executive terminates his employment with or without Good Reason during the one month period commencing six months following a Change in Control (a "Window Period Termination"), the Executive shall be entitled to the following:

(1) the Company shall pay the Executive the Accrued Compensation;

(2) the Company shall pay the Executive as severance pay an amount equal to 2.99 times the sum of (a) the highest annual base salary paid to the Executive during the 12-month period immediately prior to the Termination Date and (b) the average of the annual cash bonuses paid to the Executive during the 3 calendar years prior to the year in which the Termination Date occurs (prorated for any lesser period during which the Executive has been employed or for which bonuses have been determined, if applicable, and, in the case of each of (a) and (b), determined without reduction for any portion thereof that has been deferred

by the Executive); provided, however, that, if the Executive has been employed for less than a full year as of the Termination Date, the amount of clause (b) hereof shall be equal to the Executive's target bonus amount for such year, prorated for the period during which the Executive has been employed; and

(3) for twelve months following the Termination Date (the "Continuation Period"), the Company shall continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental, prescription drug and hospitalization coverages and benefits provided to the Executive immediately prior to a Change in Control (the "Benefits Continuation"), or, if greater, the coverages and benefits provided at any time thereafter; provided, however, that within five days following the Termination Date, the Executive may elect to receive from the Company in cash, in lieu of the Benefits Continuation, the value of the Benefits Continuation. The coverages and benefits (including deductibles and costs to the Executive) provided in this Section 2(b)(3) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits referred to above. The Company's obligation hereunder with respect to the foregoing coverages and benefits shall be reduced to the extent that the Executive obtains any such coverages and benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce any of the coverages or benefits it is required to provide the Executive hereunder so long as the aggregate coverages and benefits (including deductibles and costs to the Executive) of the combined benefit plans are no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including but not limited to retiree medical and life insurance benefits.

(c) The cash amounts provided for in Sections 2(a) and 2(b) shall be paid in a single lump sum cash payment within ten days after the Termination Date (or earlier, if required by applicable law).

(d) The severance pay and benefits provided for in this Section 2 shall be in lieu of any other severance pay to which the Executive may be entitled under any severance or employment agreement with the Company or any other plan, agreement or arrangement of the Company or any other Affiliate of the Company. The Executive's entitlement to any compensation or benefits other than as provided herein shall be determined in accordance with the employee benefit plans of the Company and any of its Affiliates and other applicable agreements, programs and practices as in effect from time to time.

(e) If the Executive's employment is terminated by the Company or an Employing Affiliate without Cause prior to the date of a Change in Control but the Executive reasonably demonstrates that such termination (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party") and who effectuates a Change in Control or (2) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed and which actually occurs, such termination shall be deemed to have occurred after a Change in Control, it being agreed that any such action taken following shareholder approval of a transaction which if consummated would constitute a Change in Control, shall be deemed to be in anticipation of a Change in Control provided such transaction is actually consummated.

3. Effect of Section 280G of the Internal Revenue Code.

(a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that the payments and benefits provided under this Agreement and benefits provided to, or for the benefit of,

the Executive under any other Company plan or agreement (such payments or benefits collectively referred to herein as the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no Payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Payments by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation.

(b) The determination of whether the Payments shall be reduced to the Limited Payment Amount pursuant to this Agreement and the amount of such Limited Payment Amount shall be made, at the Company's expense, by an accounting firm selected by the Company and reasonably acceptable to the Executive which is one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten days of the Termination Date, if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to the Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Payments. The Determination shall be binding, final and conclusive upon the Company and the Executive.

4. Notice of Termination. Following a Change in Control, any intended termination of the Executive's employment by the Company or an Employing Affiliate shall be communicated by a Notice of Termination from the Company to the Executive, and any intended termination of the Executive's employment by the Executive for Good Reason shall be communicated by a Notice of Termination from the Executive to the Company.

5. Fees and Expenses. The Company shall pay, as incurred, all legal fees and related expenses (including the costs of experts, evidence and counsel) that the Executive may reasonably incur following a Change in Control as a result of or in connection with (a) the Executive's contesting, defending or disputing the basis for the termination of the Executive's employment, (b) the Executive's hearing before the Board of Directors of the Company as contemplated in Section 16.4 or (c) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company or one of its Affiliates under which the Executive is or may be entitled to receive benefits.

6. Unauthorized Disclosure.

(a) The Executive agrees and understands that during the Executive's employment with the Company or an Employing Affiliate, the Executive has been and will be exposed to and receive information relating to the affairs of the Company considered by the Company to be confidential and in the nature of trade secrets (including but not limited to procedures, memoranda, notes, records and customer lists, whether such information has been or is made, developed or compiled by the Executive or otherwise has been or is made available to him) (any and all such information, the "Confidential Information"). The Executive agrees that, during the Term and thereafter, he shall keep such Confidential Information confidential and will not disclose such Confidential Information, either directly or indirectly, to any third person or entity without the prior written consent of the Company; provided, however, that (i) the Executive shall have no such obligation to the extent such Confidential

Information is or becomes publicly known other than as a result of the Executive's breach of his obligations hereunder or is received by the Executive following the Termination Date and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such Confidential Information to the extent required by applicable laws or governmental regulations or judicial or regulatory process.

(b) The Executive agrees that all Confidential Information is and will remain the property of the Company. The Executive further agrees that, during the Term and thereafter, he shall hold in the strictest confidence all Confidential Information, and shall not, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person or entity, other than the Company and its authorized employees, to use or otherwise gain access to any Confidential Information.

(c) All memoranda, notes, records, customer lists and other documents made or compiled by the Executive or otherwise made available to him concerning the business of the Company or its subsidiaries or Affiliates shall be the Company's property and shall be delivered to the Company upon the termination of the Executive's employment with the Company or an Employing Affiliate or at any other time upon request by the Company, and the Executive shall retain no copies of those documents. The Executive shall never at any time have or claim any right, title or interest in any material, invention or matter of any sort created, prepared or used in connection with the business of the Company or its subsidiaries or Affiliates.

7. Non-competition.

(a) By and in consideration of the Company's entering into this Agreement and the payments to be made and benefits to be provided by the Company hereunder and further in consideration of the Executive's exposure to the proprietary information of the Company, the Executive agrees that the Executive will not, during the Term, and thereafter during the Non-competition Term (as hereinafter defined), directly or indirectly, own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of, or be connected in any manner with, including but not limited to holding any position as a shareholder, director, officer, consultant, independent contractor, employee, partner, or investor in, any Restricted Enterprise (as defined below); provided, however, that in no event shall ownership of less than one percent of the outstanding equity securities of any issuer whose securities are registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), standing alone, be prohibited by this Section 7. For purposes of this paragraph, the term "Restricted Enterprise" shall mean any person, corporation, partnership or other entity that is engaged in the precision systems or industrial components business or otherwise competes, directly or indirectly, with any business or activity conducted or proposed to be conducted by the Company or any of its subsidiaries or Affiliates as of the date of the Executive's termination of employment. Following termination of employment, upon request of the Company, the Executive shall notify the Company of the Executive's then current employment status. For purposes of this Agreement, the "Non-competition Term" shall mean the period beginning on the Termination Date and ending on the first anniversary of such date. Any material breach of the terms of this paragraph shall be considered Cause under Section 16.4.

(b) The Executive agrees that any breach of the terms of this Section 7 would result in irreparable injury and damage to the Company and/or its subsidiaries or Affiliates for which the Company and/or its subsidiaries or Affiliates would have no adequate remedy at law; the Executive therefore also agrees that in the event of said breach or any threat of breach, the Company and/or its subsidiaries or Affiliates, as applicable, shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all persons and/or entities acting for and/or with the Executive, without having to prove damages, in addition to any other remedies to which the Company and/or its subsidiaries or Affiliates

may be entitled at law or in equity. The terms of this paragraph shall not prevent the Company and/or its subsidiaries or Affiliates from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Executive. The Executive and the Company further agree that the provisions of the covenants contained in this Section 7 are reasonable and necessary to protect the businesses of the Company and its subsidiaries or Affiliates because of the Executive's access to Confidential Information and his material participation in the operation of such businesses. Should a court or arbitrator determine, however, that any provision of the covenants contained in this Section 7 is not reasonable or valid, either in period of time, geographical area, or otherwise, the parties hereto agree that such covenants should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable or valid.

The existence of any claim or cause of action by the Executive against the Company and/or its subsidiaries or Affiliates, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants contained in this Section 7.

8. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement (including any Notice of Termination) shall be in writing, shall be signed by the Executive if to the Company or by a duly authorized officer of the Company if to the Executive, and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof (whichever is earlier), except that notice of change of address shall be effective only upon receipt.

9. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any other Affiliate of the Company for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any other Affiliate of the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any other Affiliate of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement.

10. (a) Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including but not limited to any set-off, counterclaim, defense, recoupment, or other claim, right or action which the Company may have against the Executive or others.

(b) No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 2(b)(3).

11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not expressly set forth in this Agreement.

12. Successors; Binding Agreement.

(a) This Agreement shall be binding upon and shall inure to the benefit of the Company and its Successors and Assigns. The Company shall require its Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place.

(b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative.

13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in the State of Delaware.

14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto, with respect to the subject matter hereof. Without limiting the generality of the foregoing sentence, this Agreement shall upon its execution and delivery supersede and replace in its entirety the Severance Agreement, dated as of February 11, 1999, to which the Executive and the Company are parties.

16. Definitions.

16.1. Accrued Compensation. For purposes of this Agreement, "Accrued Compensation" shall mean all amounts of compensation for services rendered to the Company or an Employing Affiliate that have been earned or accrued through the Termination Date but that have not been paid as of the Termination Date, including (a) base salary, (b) reimbursement for reasonable and necessary business expenses incurred by the Executive on behalf of the Company or an Employing Affiliate during the period ending on the Termination Date and (c) vacation pay; provided, however, that Accrued Compensation shall not include any amounts described in clause (a) that have been deferred pursuant to any salary reduction or deferred compensation elections made by the Executive.

16.2. Affiliate. For purposes of this Agreement, "Affiliate," means, with respect to any Person, any entity, directly or indirectly, controlled by, controlling or under common control with such Person.

16.3. [Intentionally Omitted.]

16.4. Cause. For purposes of this Agreement, a termination of employment is for "Cause" if the Executive

(a) has been convicted of a felony (including a plea of nolo contendere);

(b) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company or an Employing Affiliate (other than a failure resulting from the Executive's incapacity due to physical or mental illness or from the assignment to the Executive of duties that would constitute Good Reason) which failure continued for a period of at least thirty days after a written notice of demand for substantial performance, signed by a duly authorized officer of the Company, has been delivered to the Executive specifying the manner in which the Executive has failed substantially to perform such duties; or

(c) intentionally engaged in illegal conduct or willful misconduct, which is demonstrably and materially injurious to the Company or an Employing Affiliate.

For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be considered "intentional" unless the Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Executive's action or failure to act was in the best interest of the Company or an Employing Affiliate. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Company's Chairman of the Board, Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company or an Employing Affiliate. The termination of employment of the Executive shall not be deemed to be for Cause pursuant to subparagraph (b) or (c) above unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (b) or (c) above, and specifying the particulars thereof in detail. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a Notice of Termination is given to the Company by the Executive shall constitute Cause for purposes of this Agreement.

16.5. Change in Control. A "Change in Control" shall mean the occurrence during the Term of:

(a) An acquisition (other than directly from the Company) of any common stock of the Company ("Common Stock") or other voting securities of the Company entitled to vote generally for the election of directors (the "Voting Securities") by any "Person" (as the term "person" is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent or more of the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Common Stock or Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (a "Subsidiary"), (ii) the Company or its Subsidiaries, (iii) any Person in connection with a Non-Control Transaction (as hereinafter defined) or (iv) an Affiliate;

(b) The individuals who, as of the date of this Agreement, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the election, or nomination for election by the Company's shareholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or

(1) A merger, consolidation, reorganization or other business combination with or into the Company or in which securities of the Company are issued, unless such merger, consolidation, reorganization or other business combination is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation, reorganization or other business combination with or into the Company or in which securities of the Company are issued where:

(A) the shareholders of the Company, immediately before such merger, consolidation, reorganization or other business combination own directly or indirectly immediately following such merger, consolidation, reorganization or other business combination, at least fifty percent of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation, reorganization or other business combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, reorganization, or other business combination,

(B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation, reorganization or other business combination constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the combined voting power of the outstanding voting securities of the Surviving Corporation, and

(C) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to such merger, consolidation, reorganization or other business combination was maintained by the Company, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation, reorganization or other business combination had Beneficial Ownership of fifty percent or more of the then outstanding Voting Securities or common stock of the Company, has Beneficial Ownership of fifty percent or more of the combined voting power of the Surviving Corporation's then outstanding voting securities or its common stock.

(2) A complete liquidation or dissolution of the Company; or

(3) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than (i) any such sale or disposition that results in at least fifty percent of the Company's assets being owned by a Subsidiary or Subsidiaries or (ii) a distribution to the Company's stockholders of the stock of a Subsidiary or any other assets);

provided, however, that no transaction or series of transactions by which Stephen W. Bershad, or any Person in which Stephen W. Bershad has Beneficial Ownership, directly or indirectly, of 25 percent of the outstanding ownership interests or voting power, acquires fifty percent or more of the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding Voting Securities shall constitute a Change in Control for purposes of this Agreement (regardless of the form of transaction or series of transactions by which such acquisition occurs (including, without limitation, any acquisition described in clause (a) hereof or any merger or other transaction described in clause (c) hereof)).

of shares of Common Stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of shares of Common Stock or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional shares of Common Stock or Voting Securities which increase the percentage of the then outstanding shares of Common Stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

16.6. Company. For purposes of this Agreement, all references to the Company shall include its Successors and Assigns.

16.7. Disability. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with the Company or an Employing Affiliate for six consecutive months, and within the time period set forth in a Notice of Termination given to the Executive (which time period shall not be less than thirty days), the Executive shall not have returned to full-time performance of his duties; provided, however, that if the Company's Long Term Disability Plan, or any successor plan (the "Disability Plan"), is then in effect, the Executive shall not be deemed disabled for purposes of this Agreement unless the Executive is also eligible for long-term disability benefits under the Disability Plan (or similar benefits in the event of a successor plan).

16.8. Good Reason.

(a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the following events or conditions:

(1) a material adverse change in the Executive's duties or responsibilities (including reporting responsibilities), except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason;

(2) a reduction in the Executive's annual base salary;

(3) the relocation of the offices of the Company or an Employing Affiliate at which the Executive is principally employed to a location more than 25 miles from the location of such offices immediately prior to a Change in Control, or the requirement that the Executive be based anywhere other than at such offices, except to the extent the Executive was not previously assigned to a principal location and except for required travel on the business of the Company or an Employing Affiliate to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control; or

(4) the failure by the Company or an Employing Affiliate to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company or an Employing Affiliate in which the Executive participated, within seven days of the date such compensation is due.

(b) Any event or condition described in Section 16.8(a)(1) through (4) which occurs prior to a Change in Control but which the Executive reasonably demonstrates (i) was at the request of a Third Party who effectuates a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control which has been threatened or proposed and which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to a Change in Control, it being agreed that any such action taken following shareholder approval of a transaction which if consummated would constitute a Change in Control, shall be deemed to be in anticipation of a Change in Control provided such transaction is actually consummated.

16.9. Notice of Termination. For purposes of this Agreement, following a Change in Control, "Notice of Termination" shall mean a written notice of termination of the Executive's employment, signed by the Executive if to the Company or by a duly authorized officer of the Company if to the Executive, which indicates the specific termination provision in this Agreement, if any, relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Disability or Cause shall not serve to waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.

16.10. Successors and Assigns. For purposes of this Agreement, "Successors and Assigns" shall mean, with respect to the Company, a corporation or other entity acquiring all or substantially all the assets and business of the Company, as the case may be, whether by operation of law or otherwise.

16.11. Termination Date. For purposes of this Agreement, "Termination Date" shall mean (a) in the case of the Executive's death, his date of death, (b) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty day period) and (c) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty days, and in the case of a termination for Good Reason shall not be more than sixty days, from the date such Notice of

Termination is given); provided, however, that if within thirty days after any Notice of Termination is given the party receiving such Notice of Termination in good faith notifies the other party that a dispute exists concerning the basis for the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by the final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been taken). Notwithstanding the pendency of any such dispute, the Company or an Employing Affiliate shall continue to pay the Executive his base salary and continue the Executive as a participant (at or above the level provided prior to the date of such dispute) in all compensation, incentive, bonus, pension, profit sharing, medical, hospitalization, prescription drug, dental, life insurance and disability benefit plans in which he was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved whether or not the dispute is resolved in favor of the Company, and the Executive shall not be obligated to repay to the Company or an Employing Affiliate any amounts paid or benefits provided pursuant to this sentence.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers and the Executive has executed this Agreement as of the day and year first above written.

		AXSYS TECHNOLOGIES, INC.
		/s/ STEPHEN W. BERSHAD By: Stephen W. Bershad Its: Chief Executive Officer
		EXECUTIVE
		/s/ KENNETH F. STERN Kenneth F. Stern

ATTEST
/s/ KATHERINE BOWNES
By:		Katherine Bownes

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AMENDED AND RESTATED SEVERANCE PROTECTION AGREEMENT
EX-10.2 4 a2116155zex-10_2.htm EXHIBIT 10.2
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Exhibit 10.2

SEVERANCE PROTECTION AGREEMENT

THIS AGREEMENT made as of May 13, 2003, by and between Axsys Technologies, Inc. (the "Company") and David A. Almeida (the "Executive").

NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows:

1. Term of Agreement. This Agreement shall commence as of the date of this agreement, and shall continue in effect until January 1, 2005 (the "Term"); provided, however, that on January 1, 2004, and on each January 1 thereafter, the Term shall automatically be extended for one year unless either the Executive or the Company shall have given written notice to the other at least ninety days prior thereto that the Term shall not be so extended; provided, further, however, that following the occurrence of a Change in Control, the Term shall not expire prior to the expiration of twenty-four months after such occurrence.

2. Termination of Employment. If, during the Term, the Executive's employment with the Company or an Employing Affiliate shall be terminated within twenty-four months following a Change in Control, the Executive shall be entitled to the following compensation and benefits:

(1) the Company shall pay the Executive the Accrued Compensation;

full year as of the Termination Date, the amount of clause (b) hereof shall be equal to the Executive's target bonus amount for such year, prorated for the period during which the Executive has been employed; and

(c) The cash amounts provided for in Sections 2(a) and 2(b) shall be paid in a single lump sum cash payment within ten days after the Termination Date (or earlier, if required by applicable law).

3. Effect of Section 280G of the Internal Revenue Code.

(a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that the payments and benefits provided under this Agreement and benefits provided to, or for the benefit of, the Executive under any other Company plan or agreement (such payments or benefits collectively

referred to herein as the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no Payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Payments by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation.

4. Notice of Termination. Following a Change in Control, any intended termination of the Executive's employment by the Company or an Employing Affiliate shall be communicated by a Notice of Termination from the Company to the Executive, and any intended termination of the Executive's employment by the Executive for Good Reason shall be communicated by a Notice of Termination from the Executive to the Company.

5. Fees and Expenses. The Company shall pay, as incurred, all legal fees and related expenses (including the costs of experts, evidence and counsel) that the Executive may reasonably incur following a Change in Control as a result of or in connection with (a) the Executive's contesting, defending or disputing the basis for the termination of the Executive's employment, (b) the Executive's hearing before the Board of Directors of the Company as contemplated in Section 16.4 or (c) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company or one of its Affiliates under which the Executive is or may be entitled to receive benefits.

6. Unauthorized Disclosure.

7. Non-competition.

addition to any other remedies to which the Company and/or its subsidiaries or Affiliates may be entitled at law or in equity. The terms of this paragraph shall not prevent the Company and/or its subsidiaries or Affiliates from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Executive. The Executive and the Company further agree that the provisions of the covenants contained in this Section 7 are reasonable and necessary to protect the businesses of the Company and its subsidiaries or Affiliates because of the Executive's access to Confidential Information and his material participation in the operation of such businesses. Should a court or arbitrator determine, however, that any provision of the covenants contained in this Section 7 is not reasonable or valid, either in period of time, geographical area, or otherwise, the parties hereto agree that such covenants should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable or valid.

8. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement (including any Notice of Termination) shall be in writing, shall be signed by the Executive if to the Company or by a duly authorized officer of the Company if to the Executive, and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof (whichever is earlier), except that notice of change of address shall be effective only upon receipt.

9. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any other Affiliate of the Company for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any other Affiliate of the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any other Affiliate of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement.

11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not expressly set forth in this Agreement.

12. Successors; Binding Agreement.

13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in the State of Delaware.

14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto, with respect to the subject matter hereof.

16. Definitions.

16.2. Affiliate. For purposes of this Agreement, "Affiliate," means, with respect to any Person, any entity, directly or indirectly, controlled by, controlling or under common control with such Person.

16.3. [Intentionally Omitted.]

16.4. Cause. For purposes of this Agreement, a termination of employment is for "Cause" if the Executive

(a) has been convicted of a felony (including a plea of nolo contendere);

(c) intentionally engaged in illegal conduct or willful misconduct, which is demonstrably and materially injurious to the Company or an Employing Affiliate.

16.5. Change in Control. A "Change in Control" shall mean the occurrence during the Term of:

(b) The individuals who, as of the date of this agreement, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the election, or nomination for election by the Company's shareholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the

Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or

(2) A complete liquidation or dissolution of the Company; or

limitation, any acquisition described in clause (a) hereof or any merger or other transaction described in clause (c) hereof)).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Common Stock or Voting Securities as a result of the acquisition of Common Stock or Voting Securities by the Company which, by reducing the number of shares of Common Stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of shares of Common Stock or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional shares of Common Stock or Voting Securities which increase the percentage of the then outstanding shares of Common Stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

16.6. Company. For purposes of this Agreement, all references to the Company shall include its Successors and Assigns.

16.7. Disability. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with the Company or an Employing Affiliate for six consecutive months, and within the time period set forth in a Notice of Termination given to the Executive (which time period shall not be less than thirty days), the Executive shall not have returned to full-time performance of his duties; provided, however, that if the Company's Long Term Disability Plan, or any successor plan (the "Disability Plan"), is then in effect, the Executive shall not be deemed disabled for purposes of this Agreement unless the Executive is also eligible for long-term disability benefits under the Disability Plan (or similar benefits in the event of a successor plan).

16.8. Good Reason.

(a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the following events or conditions:

(2) a reduction in the Executive's annual base salary;

anticipation of a Change in Control which has been threatened or proposed and which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to a Change in Control, it being agreed that any such action taken following shareholder approval of a transaction which if consummated would constitute a Change in Control, shall be deemed to be in anticipation of a Change in Control provided such transaction is actually consummated.

16.9. Notice of Termination. For purposes of this Agreement, following a Change in Control, "Notice of Termination" shall mean a written notice of termination of the Executive's employment, signed by the Executive if to the Company or by a duly authorized officer of the Company if to the Executive, which indicates the specific termination provision in this Agreement, if any, relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Disability or Cause shall not serve to waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.

16.10. Successors and Assigns. For purposes of this Agreement, "Successors and Assigns" shall mean, with respect to the Company, a corporation or other entity acquiring all or substantially all the assets and business of the Company, as the case may be, whether by operation of law or otherwise.

16.11. Termination Date. For purposes of this Agreement, "Termination Date" shall mean (a) in the case of the Executive's death, his date of death, (b) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty day period) and (c) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty days, and in the case of a termination for Good Reason shall not be more than sixty days, from the date such Notice of Termination is given); provided, however, that if within thirty days after any Notice of Termination is given the party receiving such Notice of Termination in good faith notifies the other party that a dispute exists concerning the basis for the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by the final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been taken). Notwithstanding the pendency of any such dispute, the Company or an Employing Affiliate shall continue to pay the Executive his base salary and continue the Executive as a participant (at or above the level provided prior to the date of such dispute) in all compensation, incentive, bonus, pension, profit sharing, medical, hospitalization, prescription drug, dental, life insurance and disability benefit plans in which he was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved whether or not the dispute is resolved in favor of the Company, and the Executive shall not be obligated to repay to the Company or an Employing Affiliate any amounts paid or benefits provided pursuant to this sentence.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers and the Executive has executed this Agreement as of the day and year first above written.

		AXSYS TECHNOLOGIES, INC.
		/s/ STEPHEN W. BERSHAD By: Stephen W. Bershad Its: Chief Executive Officer
		EXECUTIVE
		/s/ DAVID A. ALMEIDA David A. Almeida
ATTEST
/s/ KATHERINE BOWNES By: Katherine Bownes

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SEVERANCE PROTECTION AGREEMENT
EX-31.1 5 a2116155zex-31_1.htm EXHIBIT 31.1
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Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a—14(a)

I, Stephen W. Bershad, certify that:

1.

I have reviewed quarterly report on Form 10-Q of Axsys Technologies, Inc.

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

a.: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.: Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.: Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a.: All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are responsibly likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.: Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 7, 2003

/s/ STEPHEN W. BERSHAD

Stephen W. Bershad
Chief Executive Officer

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CERTIFICATION PURSUANT TO RULE 13a—14(a)
EX-31.2 6 a2116155zex-31_2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a—14(a)

I, David A. Almeida, certify that:

1.

I have reviewed quarterly report on Form 10-Q of Axsys Technologies, Inc.

2.

3.

4.

a.: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.: Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.: Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

a.: All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.: Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 7, 2003

/s/ DAVID A. ALMEIDA

David A. Almeida
Chief Financial Officer

EX-32.1 7 a2116155zex-32_1.htm EXHIBIT 32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,

In connection with the Quarterly Report of Axsys Technologies, Inc (the "Company") on Form 10-Q for the period ended June 28, 2003 (the "Report"), I, Stephen W. Bershad, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1): The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 7, 2003

/s/ STEPHEN W. BERSHAD

Stephen W. Bershad
Chief Executive Officer

EX-32.2 8 a2116155zex-32_2.htm EXHIBIT 32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,

In connection with the Quarterly Report of Axsys Technologies, Inc (the "Company") on Form 10-Q for the period ended June 28, 2003 (the "Report"), I, David A. Almeida, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1): The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 7, 2003

/s/ DAVID A. ALMEIDA

David A. Almeida
Chief Financial Officer

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