10-Q

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 March 30, 2002
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	11-1962029
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
175 Capital Boulevard, Suite 103
Rocky Hill, Connecticut	06067
(Address of principal executive offices)	(Zip Code)
(860) 257-0200
(Registrant’s telephone number, including area code)

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

4,698,498 shares of Common Stock, $.01 par value, were outstanding as of May 6, 2002.

AXSYS TECHNOLOGIES, INC.

INDEX

Item 1.  Financial Statements (Unaudited)

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PART I. FINANCIAL INFORMATION

AXSYS TECHNOLOGIES, INC.

Consolidated Balance Sheets

(Dollars in thousands, except share data )

	March 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,671		$	9,906
Accounts receivable – net	12,090			10,861
Inventories – net	21,139			22,610
Income tax receivable	5,033			3,633
Deferred tax asset	3,029			2,411
Other current assets	747			779
TOTAL CURRENT ASSETS	49,709			50,200
PROPERTY, PLANT AND EQUIPMENT – net	12,799			13,417
EXCESS OF COST OVER NET ASSETS ACQUIRED – net	3,600			3,065
OTHER ASSETS	573			599
TOTAL ASSETS	$	66,681		$	67,281
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,271		$	4,853
Accrued expenses and other liabilities	8,601			9,121
Current portion of capital lease obligation	853			847
TOTAL CURRENT LIABILITIES	14,725			14,821
CAPITAL LEASES, less current portion	1,179			1,392
OTHER LONG-TERM LIABILITIES	4,568			4,628
SHAREHOLDERS’ EQUITY:
Common stock, authorized 30,000,000 shares, issued 4,792,674 shares at March 30, 2002 and December 31, 2001	47			47
Capital in excess of par	39,611			39,621
Retained Earnings	7,563			7,813
Treasury stock, at cost 94,176 shares at March 30, 2002 and 96,876 at December 31, 2001	(1,012		)	(1,041		)
TOTAL SHAREHOLDERS’ EQUITY	46,209			46,440
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	66,681		$	67,281

See accompanying notes to consolidated financial statements

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Operations

(Dollars in thousands, except share data - Unaudited)

	Three-Months Ended
	March 30, 2002			March 31, 2001
NET SALES	$	19,857		$	24,202
Cost of sales	15,968			18,604
Selling, general and administrative expenses	4,755			5,482
Research and development expenses	431			778
Restructuring and special charges	1,567			—
Amortization of intangible assets	—			(1		)
OPERATING LOSS	(2,864		)	(661		)
Interest expense (income) – net	1			(87		)
Other income	62			20
LOSS BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	(2,803		)	(554		)
Benefit from income taxes	2,018			217
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCPLE	(785		)	(337		)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	535			—
NET LOSS	$	(250	)	$	(337	)
BASIC AND DILUTED  (LOSS) EARNINGS PER SHARE:
Loss before cumulative effect of change in accounting principle	$	(0.17	)	$	(0.07	)
Cumulative effect of change in accounting principle	0.11			—
TOTAL	$	(0.06	)	$	(0.07	)
Weighted average basic common shares outstanding	4,697			4,685

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Cash Flow

(Unaudited, dollars in thousands)

	Three-Months Ended
	March 30, 2002			March 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(250	)	$	(337	)
Adjustments to reconcile net income to cash used in operating activities:
Cumulative effect of change in accounting principle	(535		)	—
Change in deferred taxes	(618		)	—
Depreciation and amortization	824			724
Restructuring and special charges	625			—
Loss on disposal of capital assets	113			47
Changes in operating assets and liabilities:
Accounts receivable	(1,229		)	(534		)
Inventory	924			(1,971		)
Current income tax receivable	(1,400		)	—
Other current assets	20			(72		)
Accounts payable	418			1,308
Accrued liabilities	(481		)	(1,455		)
Other -net	(15		)	(114		)
NET CASH USED IN OPERATING ACTIVITIES	(1,604		)	(2,404		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(424		)	(1,413		)
NET CASH USED IN INVESTING ACTIVITIES	(424		)	(1,413		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of borrowings	(207		)	(259		)
NET CASH USED IN FINANCING ACTIVITIES	(207		)	(259		)
NET DECREASE IN CASH	(2,235		)	(4,076		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	9,906			14,850
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,671		$	10,774
Supplemental cash flow information
Cash (received) paid for:
Interest received - net	$	(19	)	$	(103	)
Income tax payment (refund)	267			(1,102		)

See accompanying notes to consolidated financial statements.

5

AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Shareholders’ Equity

For the Three-Months Ended March 30, 2002 and March 31, 2002

(Unaudited, dollars in thousands)

	Common Stock			Capital in Excess Of Par			Retained Earnings			Treasury
	Shares	Amount								Shares		Amount
Balance at December 31, 2000	4,792,674	$	47	$	39,675		$	14,965		(108,553	)	$	(1,266	)
Net loss	—	—		—			(337		)	—		—
Contribution to 401(k) plan	—	—		(2		)	—			720		107
Balance at March 31, 2001	4,792,674	$	47	$	39,673		$	14,628		(107,833	)	$	(1,159	)
Balance at December 31, 2001	4,792,674	$	47	$	39,621		$	7,813		(96,876	)	$	(1,041	)
Net income	—	—					(250		)	—		—
Contribution to 401(k) plan	—	—		(10		)	—			2,700		29
Balance at March 30, 2002	4,792,674	$	47	$	39,611		$	7,563		(94,176	)	$	(1,012	)

See accompanying notes to consolidated financial statements.

6

AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data - Unaudited)

Note 1 – Basis of Presentation

Axsys Technologies, Inc. (“Axsys” or the “Company) prepared the consolidated financial statements, as of and for the three months ended March 30, 2002 and March 31, 2001, 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, 2001, previously filed on Form 10-K with the Securities and Exchange Commission (the “Annual Report”) except for the change in accounting for goodwill and other intangible assets as described below.

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, 2001.  The results of operations for the three months ended March 30, 2002 and March 31, 2001 are not necessarily indicative of the operating results for the full years.

Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” was issued in August 2001.  SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.  The Company adopted this new standard in the first quarter of 2002 and recorded an impairment charge on the net assets held for sale related to the Teletrac transaction.  (See Note 2.)

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

SFAS No. 142, “Goodwill and Other Intangible Assets”, was issued in June 2001.  It changes the accounting for goodwill by eliminating goodwill amortization beginning in 2002.  It will also require at least an annual assessment of goodwill impairment.  The initial test for impairment must be completed by June 30, 2002, but any impairment would be reflected as an accounting change recorded retroactively in the first quarter of 2002.  Goodwill amortization, which amounted to $140 offset by negative amortization of $143 in 2001, will no longer be an expense in 2002, thus increasing earnings, but with no impact on cash flow.  The Company has not completed impairment testing and therefore cannot quantify the statement’s impact on its consolidated financial statements.  It is possible that some goodwill will be required to be written off in 2002.   The Company’s negative goodwill of $535 was reversed as a cumulative effect of a change in accounting principle in the first quarter of 2002.

Basic earnings per share have been computed by dividing Net Loss by the weighted average number of common shares outstanding.  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 an increase of 508 in the first quarter of 2002 and 83,546 in the first quarter of 2001, if the effect were not anti-dilutive.

Other income includes principal payments of $62 in the quarter ended March 30, 2002, and $20 in the quarter ended March 31, 2001 for a fully reserved note received from the 1998 sale of Sensor Systems.

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Note 2 – Restructuring and Special Charges

Sale of Teletrac, Inc.

On April 5, 2002, Axsys sold all of the stock of its Teletrac, Inc. subsidiary to Storage Test Solutions (“STS”) of Aurora, Colorado.  Teletrac, which is based in Santa Barbara, California, designs and manufactures high-performance spin stands that are used in the test and certification of data storage recording heads found in magnetic disk drives.   Axsys sold the stock of Teletrac in exchange for an interest-bearing $850 thousand note, which provides for payments equal to ten percent of the revenues generated from the sales of spin stands by STS with the balance, if any, due in five years.  Because of the uncertain market conditions for data storage products and the terms of the note, Axsys has reserved the entire value of this note and will record any principal and interest payments as other income during the period received.

In connection with the sale of Teletrac, the Company recorded in restructuring and other special charges, a pretax charge of approximately $1.0 million associated with asset write-downs, severance payments and legal expenses.  Total cash costs associated with the sale of Teletrac are expected to be approximately $345.

As a result of net capital losses from the sale of Teletrac stock, the Company expects to receive a tax refund of approximately $1.0 million shortly after it files its 2002 tax return, with an additional deferred tax benefit of approximately $700 thousand beyond 2002.

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 $552 pre-tax for a workforce reduction of three people in the former Automation Group and the Company President.

As of March 30, 2002, the Company has expended $33 for severance costs.  Axsys expects all severance costs to be paid by April of 2003.

Cost Reduction Plan

During the second quarter of 2001, the Company adopted a major cost reduction program (the “Cost Reduction Plan”), which resulted in a pretax charge to earnings of approximately $9,208, or $5,801 after-tax.  The total cash cost of the plan is expected to be approximately $1,300 of which $1,170 has been spent through March 31, 2002.

The Company closed a small manufacturing facility in Manchester, Connecticut and consolidated its activities into the Imaging Systems unit in Rochester Hills, Michigan.  The Company closed a small, satellite facility in Newbury Park, California, and consolidated it into the Integrated Systems Division facility in Santa Barbara, California.  Pre-tax charges associated with these shutdowns were $118 for facility exit costs.  The Company reduced its workforce at five locations by 59 people or 9% of the total workforce. The Company has accrued $992 for all severance and outplacement costs.  The Company accrued $250 to cover any legal expenses related to the cost reduction program.

The Company reviewed its inventory and other assets. The Company recorded a charge of $2,943 to cover expected losses on two long-term defense contracts.  The earnings charge also includes an increase in reserves for excess and obsolete inventories of approximately $4,425.  The Company disposed of approximately $5,278 of inventory by March 30, 2002.

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

8

In the last six-months of 2001, Axsys recorded the following amounts in the Consolidated Statement of Operations in connection with the Cost Reduction Plan:

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

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

The following table shows the balance sheet activity for the reserve and accrual accounts as of March 30, 2002:

	Inventory Reserves			Loss Contract Reserve			Restructuring Accrual
Q2 2001 Charges	$	4,425		$	2,943		$	1,738
Q3 2001 Activity	(1,420		)	(58		)	(642		)
Q4 2001 Activity	(2,663		)	(60		)	(438		)
Q1 2002 Activity	(184		)	(93		)	(392		)
Balance at March 30, 2002	$	158		$	2,732		$	266
Cash expenditures	$	—		$	—		$	1,212

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

Note 3 – Inventories, net

Inventories have been determined generally by lower of cost (first-in, first-out or average) or market.  Inventories consist of (in thousands):

	March 30, 2002		December 31, 2001
Raw materials	$	3,531	$	4,035
Work-in-process	8,150		8,389
Finished goods	9,458		10,186
	$	21,139	$	22,610

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Note 4 – Segment Data

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 and, accordingly, all periods reported have been restated.  Axsys classifies its businesses under three major groups, the Aerospace and Defense Group, Commercial Products Group and the Distributed Products Group.

Products categorized under the Aerospace and Defense Group include precision machined structures and metal optics, fabricated principally from beryllium and beryllium alloys, high-performance motion control components including motors and resolvers, and electromechanical and opto-mechanical subassemblies including actuators, thermal imaging scanners and telescopes.  These products are incorporated into guidance, weapons targeting and night vision systems of various current and next generation missile, aircraft, satellite and armored vehicle platforms.

The Commercial Products Group sells to original equipment manufacturers ("OEMs") of graphic arts and semiconductor capital equipment as well as to manufacturers of photonic devices.  Products sold to these manufacturers include high-performance airbearing-based laser scanners and micro-positioning stages, distance measuring interferometers and autofocus devices.  Sales to photonic device manufacturers include development, characterization and test, and semi-automated production tools that are designed to increase yield and throughput in the manufacture of photonic devices.

The Distributed Products Group consists of AST Bearings, a supplier of precision bearings and subassemblies, which sells to OEMs serving a variety of industrial and commercial applications as well as to maintenance repair operations distributors.

The following tables present financial data for each of the Company’s segments (in thousands).

	Three Months Ended
	March 30, 2002			March 31, 2001
Net sales
Aerospace and Defense Group	$	10,806		$	10,332
Commercial Products Group	4,040			7,119
Distributed Products Group	5,011			6,751
Total sales	19,857			24,202
Pre-tax income (loss) before cumulative effect of change in accounting principle:
Aerospace and Defense Group	509			(256		)
Commercial Products Group	(1,178		)	(231		)
Distributed Products Group	374			894
Restructuring and special charges	(1,567		)	—
Non-allocated expenses	(941		)	(961		)
Pre-tax loss before cumulative effect of change in accounting principle	$	(2,803	)	$	(554	)

	March 30, 2002		December 31, 2001
Identifiable assets:
Aerospace and Defense Group	$	25,279	$	25,116
Commercial Products Group	8,345		8,423
Distributed Products Group	12,812		13,886
Non-allocated assets	20,245		19,856
Total assets	$	66,681	$	67,281

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Included in non-allocated expenses are the following: general corporate expense, interest expense, amortization of goodwill, special charges and other income and expense.  Identifiable assets by segment consist of those assets that are used in the segments’ operations.  Non-allocated assets are comprised primarily of cash and cash equivalents, goodwill and net deferred tax assets.

Note 5 – Other Information (in thousands)

	March 30, 2002		December 31, 2001
Allowance for doubtful accounts	$	633	$	663
Accumulated depreciation and amortization of property, plant and equipment	$	12,206	$	12,908
Accumulated amortization of excess of cost over net assets acquired	$	1,314	$	1,136

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

Results of Operations

The following table sets forth certain financial data as a percentage of net sales for the three-month periods and the three-month periods ended March 30, 2002 and March 31, 2001.

	Three-Months Ended
	March 30, 2002		March 31, 2001
Net sales:
Aerospace and Defense Group	54.4	%	42.7	%
Commercial Products Group	20.3		29.4
Distributed Products Group	25.3		27.9
Total Company	100.0		100.0
Cost of sales	80.4		76.9
Gross profit	19.6		23.1
Operating expenses:
Selling, general and administrative expenses	23.9		22.7
Research and development expenses	2.2		3.2
Restructuring charge	7.9		—
Amortization of intangible assets	—		—
Operating loss	-14.4		-2.8
Interest income, net	0.0		0.4
Other income	0.3		0.1
Loss before taxes and change in accounting principle	-14.1		-2.3
Benefit from income taxes	10.2		0.9
Loss before change in accounting principle	-3.9		-1.4
Cumulative effect of change in accounting principle	2.7		—
Net loss	-1.2	%	-1.4	%
Gross profit (as a percentage of related net sales, excluding non-recurring charges):
Aerospace and Defense Group	17.6	%	12.1	%
Commercial Products Group	12.2		30.0
Distributed Products Group	29.8		32.7

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Comparison of the Three Months Ended March 30, 2002 and March 31, 2001

Net sales.  Sales totaled $19.9 million in the quarter ended March 30, 2002, compared to $24.2 million in the first quarter of 2001, a decrease of $4.3 million, or 18 percent.  Sales of the Company’s Aerospace and Defense Group totaled $10.8 million in the quarter ended March 30, 2002, compared to $10.3 million in the quarter ended March 31, 2001.  Commercial Products Group sales were $4.0 million in the first quarter of 2002, compared to $7.1 million in 2001, a decrease of $3.1 million or 44 percent.  Sales of digital scanners and micro-positioning subsystems declined due to weaknesses in the graphic arts and semiconductor markets, as well as continuing softness in the photonics and electronics markets. Sales of the Distributed Products Group were $5.0 million in the quarter ended March 30, 2002, compared to $6.8 million in the comparable prior year period, a decrease of $1.8 million, or 26 percent. Revenues within this group appear to be stabilizing, as first quarter sales were slightly higher than the fourth quarter sales of 2001.

Gross profit.  Gross margins for the first quarter of 2002 were 19.6% down 3.6% from the first quarter of 2001.  Lower margins quarter over quarter were the result of lower overall sales volumes primarily in the Commercial and Distributed Products Groups that traditionally carry higher margins.  In addition, increased investment within the Automation business contributed to the overall decrease in margins quarter over quarter.  Gross margins within the Aerospace and Defense Group in the first quarter 2002 were 17.7% as compared to 12.1% in the first quarter of last year, primarily due to increased shipments of higher margin metal optic products and operational efficiencies realized in 2002.  Gross margins within the Commercial Products Group for the first quarter of 2002 were 12.2% compared to 30.0% in the first quarter of 2001. The lower margins were attributable to a decrease in higher margin scanner and micro-positioning sales, significantly lower sales of spin stands and the increase in expenditures within the automation business.   Gross margins within the Distributed Products Group for the first quarter 2002 were 29.8% down from 32.6% in the comparable prior year period as a direct result of the decreased volume.

Selling, general and administrative expenses.  SG&A expenses were $4.7 million in the first quarter of 2002, a decrease of $0.7 million, or 13 percent, compared to $5.4 million in the same period last year.    Compensation and incentive expenses in the first quarter of 2002 were $340 thousand lower as a result of the Cost Reduction Plan of June 2001.   General cost savings of $600 thousand were the result of the 2001 Cost Reduction Plan (see Note 2).    Included in 2002 first quarter expenses are $190 thousand of incremental selling, general, and administrative costs for the two Automation Group operations and infrastructure that were acquired or started up late in 2000.

Research and development expenses.  R&D expenses were $431 thousand in the quarter ended March 30, 2002, a decrease of $347 thousand, or 45 percent, from expenses of $778 thousand in the comparable quarter of 2001.    The decrease is a result of the shift in the Automation Group from primarily R&D efforts in 2001 to manufacturing support of production.    Additionally, R&D spending was reduced in low growth product lines, primarily data storage, and within the scanner business as a result of declining volume.

Restructuring and special charges.  Pre-tax costs categorized as restructuring and special charges were $1.6 million in the first quarter of 2002.  These costs included $552 thousand 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.  The Company also expects to incur additional transition expenses in the second quarter of 2002 resulting from the closing of the Santa Barbara facility.  These costs are discussed in more detail in Note 2 to the Consolidated Financial Statements.

Interest income and expense, net.  Net interest expense in the first quarter of 2002 was $1 thousand, compared to net interest income of $87 thousand in 2001.   Investment income in 2001 was higher due to higher levels of cash on hand and substantially higher interest rates on short-term investments last year.

Taxes.  The effective rate of the tax benefit was 72.0 percent in the first quarter of 2002 and 39.1 percent in the comparable period in 2001.  The increase in the effective rate is a result of net capital losses from the sale of Teletrac stock, which Axsys believes it is entitled to carry back to prior years. Axsys expects to receive a tax refund of approximately $1.0 million shortly after it files its 2002 tax return as a result of the sale.  The actual refund may differ based on the overall operating results of the Company.  There will be an additional deferred tax benefit of approximately $700 thousand beyond 2002 as a result of the sale.

13

Liquidity and Capital Resources

Axsys funds its operations primarily from cash flow generated by operations and cash on hand. As of March 30, 2002, cash and cash equivalents totaled $7.7 million.

Net cash used in operating activities for the quarter ending March 30, 2002 was $1.6 million, compared with net cash used of $2.4 million for the quarter ended March 31, 2001. Cash used in operating activities during the quarter ended March 30, 2002 was primarily due to a pre-tax net loss from operations of $2.8 million partially offset by depreciation and amortization charges of $824 thousand and non-cash losses on disposals of capital assets of $113 thousand.

Net cash used in investing activities of $424 thousand for the quarter ended March 30, 2002 resulted from capital expenditures. Net cash used in investing activities of $1.4 million for the quarter ended March 31, 2001 resulted primarily from capital expenditures.

Net cash used in financing activities of $207 thousand for the quarter ended March 30, 2002, was associated exclusively to repayment of capital lease obligations. Net cash used in financing activities of $259 thousand for the quarter ended March 31, 2001 was also associated with the repayment of capital lease obligations.

Axsys funded its operations primarily from cash on hand and, to a certain extent, through capital lease transactions.  The Company believes that its current cash and cash equivalent balances will be sufficient to finance its operations, capital expenditures, and working capital requirements for the foreseeable future.

Backlog

A substantial portion of the 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.  The Company recorded new orders of $20.1 million in the first three-months of 2002, compared to orders of $20.0 million in the first three-months of 2001.  The Company ended the first quarter of 2002 with a backlog of $50.6 million, compared to a backlog of $60.6 million at March 31, 2001, a decrease of  $10.0 million or 16.5 percent.  Axsys believes that a substantial portion of its backlog of orders at March 31, 2002 will be shipped over the next twelve months.

Recently Issued Accounting Standards

Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” was issued in August 2001.  SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.  The Company adopted this new standard in the first quarter of 2002 and recorded an impairment charge on the net assets held for sale related to the Teletrac transaction.  (See Note 2.)

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

SFAS No. 142, “Goodwill and Other Intangible Assets”, was issued in June 2001.  It changes the accounting for goodwill by eliminating goodwill amortization beginning in 2002.  It requires at least an annual assessment of goodwill impairment.  The initial test for impairment must be completed by December 31, 2002, but any impairment would be reflected as an accounting change recorded retroactively in the first quarter of 2002.  Goodwill amortization, which amounted to $140 thousand offset by negative amortization of $143 thousand in 2001, will no longer be recorded in 2002, thus increasing earnings, but with no impact on cash flow.  The Company has not completed impairment testing and therefore cannot quantify the statement’s impact on its consolidated financial statements.  It is possible that some goodwill will be required to be written off in 2002.   The Company’s negative goodwill of $535 thousand as of December 31, 2001 was reversed as a cumulative effect of a change in accounting principle in the first quarter of 2002.

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Forward-Looking Statements

This quarterly report on Form 10-Q includes certain forward-looking statements, including estimates of expected losses on two defense contracts and other statements regarding the 2001 cost reduction plan and the statement with regard to the sufficiency of cash and cash equivalents 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, 2001.

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.

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PART II.  OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit Number	Description
10(19)	Severance Agreement between the Company and John E. Hanley dated January 30, 2002
10(19)	Severance Agreement between the Company and Mark J. Bonney dated March 20, 2002

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: May 10, 2002	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)

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EXHIBITS INDEX

Exhibit  Number	Description
10(19)	Severance Agreement between the Company and John E. Hanley dated January 30, 2002
10(20)	Severance Agreement between the Company and Mark J. Bonney dated March 20, 2002.

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EX-10.19

Exhibit 10.19

TERMINATION AGREEMENT AND GENERAL RELEASE

This Termination Agreement and General Release (“Agreement”) is entered into by and between Axsys Technologies, Inc. a Delaware corporation (“Axsys”), and John Hanley, an individual residing at 34 Joel Drive, Hebron, CT 06238 (“Employee”), as of January 10, 2002, for the purpose of amicably concluding their employment relationship.

1.Termination Arrangements.

(a)

(i)Effective the close of business on January 31, 2002, Employee’s employment with Axsys will terminate.  Employee acknowledges and agrees that during his employment by Axsys, he was employed as an “at will” employee.

(ii)Axsys will provide the Employee with severance pay and certain other benefits for a period of six (6) months beginning on February 1, 2002 through July 31, 2002. Specifically, Axsys will continue to pay the Employee once every two weeks during the 26-week period (February 1, 2002 through July 31, 2002) an amount determined by dividing his annual base salary immediately prior to his termination by twenty-six (26). During the period February 1, 2002 through July 31, 2002, Axsys will continue at its expense, the medical and dental, and 401 (k) benefits that were being provided on the Employee’s behalf at the time of the termination of his employment. Axsys may withhold from the Severance Payments and all other payments hereunder such amounts as may be required to be withheld under applicable law and any benefits plans in which employee is a participant.

(iii)Axsys agrees to pay the Employee a prorated amount of his earned Management Incentive Plan bonus equal to $35,035.00 immediately following the Board of Directors Compensation Committee approval of the 2001 bonus payments.

(iv)The Employee may exercise outstanding vested options (as of January 31, 2002) issued pursuant to Axsys Technologies, Inc. Long-Term Incentive Stock Plan through the period ending ninety (90) days from the end of the severance period (through October 31, 2002).

(v)The Company will provide the Employee with outplacement services through Drake, Beam & Morin’s standard executive 3-month package at a total cost to the Company of  $5500.00.

(b)Employee agrees that this Agreement has been executed knowingly and of Employee’s own free will.  Further, Employee acknowledges that he has the right to review this document at least 21 days before executing it.  Either Employee or Axsys may revoke and cancel this Agreement at any time within seven (7) days after Employee’s execution of this Agreement by providing written notice to the other party to this Agreement.  If either party does so revoke, this Agreement will be void and Axsys will not have any obligations to provide the payments specified in section 1(a) above.  If no party revokes this Agreement, then Axsys will commence paying Employee the payments provided above in accordance with Axsys’ payroll practices when and as required.

2.             Release.  In consideration for the severance arrangements to be made hereunder to Employee and other good and valuable consideration, Employee does hereby unconditionally, irrevocably and absolutely release and discharge Axsys and their respective directors, officers, employees, agents, successors and assigns, as well as each of their affiliates and each affiliate’s officers, employees, directors, partners, agents, shareholders, successors and assigns (collectively the “Released Parties”), from any and all loss (including, without limitation, attorneys’ fees), liability, claim, demand, cause action, or suit of any type, whether known or unknown, related directly or indirectly or in any way connected with any transactions, affairs, occurrences between them to date (collectively “Claims”), including, but not limited to, (i) all Claims whether arising directly or indirectly out of or in any way connected with Employee’s employment at or termination of employment from Axsys, (ii) all Claims arising under the Age Discrimination in Employment Act, 29 U.S.C.

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626 et. seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. 2000(a) et. seq., Executive Order 11246 et. seq., and the civil rights, human rights, employment and labor laws of the United States, Connecticut and any other jurisdiction and (iii) all Claims whatsoever arising under the statutory or decisional law contract, tort or otherwise, of the United States, Connecticut or any other jurisdiction.

In further consideration thereof, Employee hereby irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on her behalf, in any administrative agency, whether federal or state, or in any court, whether federal or state, or before any arbitrator, any claim, demand, complaint, petition, or grievance of any type related to the matters released and discharged above, it being the intention of the parties that with the execution by Employee of this Agreement, each of the Released Parties will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of Employee.

Employee acknowledges and agrees that all wages and accrued vacation and other compensation due him from Axsys for all hours of work he has performed have been paid timely and unconditionally and in full, and have not been paid on the condition that Employee sign this Agreement or do or not do anything else.  The execution of the Agreement shall not in any way be considered an admission of any liability on the part of Axsys.

Employee hereby expressly waives all of the benefits and rights granted to him pursuant to Civil Code Section 1542, which provides as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the Agreement, which if known by him must have materially affected his settlement with the debtor.”

Employee certifies that he has read all of this Agreement, including, but not limited to, the above quoted Civil Code Section, and that he fully understands all of the same.  Employee understands that he may consult an attorney prior to executing this Agreement and that he has hereby been advised to review the terms of this Agreement with an attorney.

3.             No Employment Relationship.  On and after the close of business on January 31, 2002, Employee shall have no duties as an employee of Axsys, and nothing in this Agreement (including any required payment pursuant to Section 1 hereof) or otherwise shall establish an agency, partnership, joint venture or employee relationship between the Employee and Axsys.

4.             Entire Agreement.  Employee expressly declares and represents that no promise, inducement or agreement not herein expressed in writing has been made to him, that this Agreement contains the entire agreement between the parties, and that the terms of this Agreement are contractual and not a mere recital. This Agreement supersedes and replaces any and all agreements, arrangements, understandings and promises between Employee and Axsys of any kind whatsoever, whether written or oral, express or implied.

The parties agree that this Agreement cannot be changed or modified in any manner except by writing, and signed by both Employee and Axsys.

5.             Successors; Binding Effects.  This Agreement shall be binding upon and shall inure to the benefit Axsys and its Successors and Assigns. Axsys shall require its Successors and Assigns to expressly assume and agree to perform the Agreement in the same manner and to the same extent that Axsys would be required to perform it if no such succession or assignment had taken place.

6.             Confidentiality and Professionalism.  Employee represents and agrees that Employee will keep the terms, amount, value and nature of consideration paid to Employee completely confidential, and that Employee will not hereafter disclose any information concerning this Agreement to anyone other than Employee’s immediate family and professional representative who will be informed of and bound by this confidentiality clause.  The obligation of professionalism includes, without limitations, any discussion by Employee about Axsys or any of Axsys’ employees, which shall be limited to respectful, non-derogatory and non-damaging references by Employee.

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7.             Return of Axsys Materials and Property.  Employee understands and agrees that Employee has turned over to Axsys all files, memoranda, records, and other documents, physical or personal property (except the Dell Laptop used by the Employee while employed) which Employee received from the Axsys and/or which Employee used in the course of Employee’s employment with Axsys and which are the property of the Axsys.  Employee acknowledges, warrants and agrees the Employee has returned all such items and any copies or extras thereof and any other property, files or documents obtained as a result of Employee’s employment with the Axsys and Employee has held such information in trust and in strict confidence and will continue to do so.

This Agreement shall be governed by and construed and enforced in accordance with the laws of Connecticut without giving effect to the conflicts of laws principles thereof.

IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date shown below.

/s/:  John E. Hanley

John E. Hanley

January 31, 2002

AXSYS TECHNOLOGIES, INC.

/s/:  Mark J. Bonney

Mark J. Bonney, President & COO

January 31, 2002

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EX-10.20

Exhibit 10.20

SETTLEMENT AND RELEASE AGREEMENT

This Settlement and Release Agreement (the “Agreement”) is entered into this 27th day of March, 2002 (the “Effective Date”) between Axsys Technologies, Inc. (the “Company”) and Mark J. Bonney (the “Employee”).

NOW, THEREFORE, in consideration of the promises and covenants contained herein, the Company and the Employee, hereby agree as follows:

1.             Termination of Employment.  The Employee’s employment with the Company and its Affiliates (as hereinafter defined) was terminated on March 18th, 2002 (the “Termination Date”).  The Employee hereby resigns, as applicable, from all of his positions as an employee, officer and director of the Company and/or its Affiliates.

2.Payments and Benefits.

(a)           On the Effective Date, the Company shall pay to the Employee his accrued but unpaid base salary as well as any unpaid incentive payment due for the calendar year 2001. The Company shall also make a payment to the Employee in lieu of his unused vacation accrued as of the Termination Date, if any.

(b)           During the period commencing on the Termination Date and ending on the earlier of (i) the first anniversary of the Termination Date and (ii) the Employee’s commencement of full-time employment with a subsequent employer (the “Continuation Period”), the Company shall continue to pay the Employee his base salary at the rate in effect on the Termination Date.  Such base salary will be paid in accordance with the Company’s normal payroll practice. The Company shall also continue to provide medical, dental and life insurance benefits during the Continuation Period.  At the end of the Continuation Period, the Company shall pay to the Employee an amount in cash equal to the matching contributions the Company would have made on the employee’s behalf to the Company’s 401k Plan had the Employee participated in the Plan during the Continuation Period at the same rate of the Employee’s participation as in effect immediately prior to the Termination Date.  The Employee shall promptly notify the Company upon his commencement of any subsequent employment.

(c)           The Company shall amend the Employee’s outstanding stock options in respect of 155,000 shares of the Company’s common stock to extend the exercise period of such options (to the extent such options are vested and exercisable on the Termination Date) to the end of business on the date 90 days following the expiration of the Continuation Period.

(d)           The Company will provide the Employee with outplacement services through a firm selected by the Employee, provided that the Company’s cost of providing such services shall not exceed $7,500.00.

All applicable withholdings will be made for the payments provided for in this Section 2.

3.             Release.  In consideration of the benefits set forth in Section 2 of this Agreement, the sufficiency of which is hereby acknowledged by the Employee, the Employee, with the intention of binding himself and his heirs, executors, administrators and assigns, does hereby release, remise, acquit and forever discharge the Company, its Affiliates and their respective present and former officers, directors, executives, shareholders, agents, attorneys and employees, (collectively the “Released Parties”), of and from any and all claims, actions, causes of action, demands, rights, damages, debts, sums of money, accounts, financial obligations, suits, expenses, attorneys’ fees and liabilities of whatever kind or nature in law, equity or otherwise, including, without limitation, arising under the laws of any jurisdiction, whether accrued, absolute, contingent, unliquidated or otherwise and whether now known or unknown, suspected or unsuspected, which the Employee, individually or as a member of a class, now has, owns or holds, may hereafter have, own or hold or has at any time heretofore had, owned or held, against any Released Party arising out of any act or omission occurring, or state of facts existing, on or prior to the time of execution of this Agreement including, without limitation, (i) any claims in any way connected with the Employee’s employment relationship with the Company and/or its Affiliates, or the termination thereof, and (ii) any claims for severance or vacation or other benefits, unpaid wages, salary or incentive payment, breach of contract, wrongful discharge, impairment of economic opportunity, defamation, intentional infliction of emotional harm or other tort, or employment discrimination under any applicable federal, state or local statute, provision, order, rule, regulation or other law of any jurisdiction, excepting only those obligations of the Company to the Employee set forth in Section 2 of this Agreement.  For purposes of this Agreement, “Affiliates” shall mean the Company’s subsidiaries and any other entity, directly or indirectly, controlled by, controlling or under common control with the Company.

This release is for any relief no matter how called, including but not limited to, wages, back pay, front pay, compensatory damages, liquidated damages, punitive damages, damages for pain or suffering, costs, attorneys fees and expenses and claims to be reinstated to employment with the Company.

The Employee acknowledges and agrees that this Agreement is not to be construed in any way as an admission of any liability whatsoever by any Released Party under any federal or state statute or the principals of common law or any other law, rule or regulation of any jurisdiction, any such liability having been expressly denied.

The Employee acknowledges and agrees that he has not, with respect to any act or omission occurring, or state of facts existing, on or prior to the time of execution of this Agreement, filed any complaints, charges or lawsuits, or taken similar action, against any of the Released Parties with any governmental agency or any court or tribunal or similar body or authority.

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4.             Voluntary Agreement; Attorney Consultation; Revocation.

The Employee represents that he has carefully read this Agreement, that he has been advised to consult with an attorney, that he knows and understands the contents of this Agreement, that he executes this Agreement knowingly and voluntarily as his own free act and deed, that the terms of this Agreement including, but not limited to, those of Section 3 are totally satisfactory and thoroughly understood by him, and that this Agreement was entered into without fraud, duress or coercion.

5.             Confidentiality; Return of Company Property.  The Employee agrees and understands that in the Employee’s position with the Company and performance of his responsibilities, duties and services for the Company and/or its Affiliates, the Employee has been exposed to and received information relating to the confidential affairs of the Company and/or its Affiliates, including but not limited to technical information, intellectual property, business and marketing plans, strategies, customer information, other information concerning the products, promotions, development, financing, expansion plans, business policies and practices of the Company and/or its Affiliates, and other forms of confidential information, trade secrets and/or confidential information in the nature of trade secrets of the Company and/or its Affiliates (“Confidential Information”).  The Employee acknowledges and represents that as of the time of execution of this Agreement the Employee has not disclosed, and agrees that at any time thereafter the Employee will not disclose, Confidential Information, either directly or indirectly, to any third person or entity without the prior written consent of the Company and/or its Affiliates, as appropriate.  This confidentiality covenant has no temporal, geographical or territorial restriction.  Except for his cell phone and computer which the Employee will be permitted to retain until the end of the Continuation Period, the employee has returned to the Company and/or its Affiliates, as appropriate, all property, keys, mobile phones, computer equipment, software data files, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data and any other tangible product or document which has been produced by, received by or otherwise submitted to the Employee during or prior to his employment with the Company and, as applicable, all copies, in whatever medium, thereof.  Any such data or property (including copies thereof) stored on computer, software data files or other equipment belonging to the Employee (or to which the Employee otherwise has lawful access after the date hereof) shall be deleted by the Employee immediately following execution of this Agreement.

6.             Non-Disparagement.  The Employee agrees not to make any written or oral statement that could disparage the goods, products, services, employees, officers, directors, shareholders or reputation, of the Company or its Affiliates.  The Company agrees that it shall use its best efforts to cause its officers and directors not to make any written or oral statement that could disparage the Employee.

7.             Successors.  This Agreement shall be binding upon and shall inure to the benefit of each of the parties hereto and their respective heirs, personal representatives, successors and assigns.

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8.             Entire Agreement; Waiver; and Severability.  This instrument contains the entire agreement of the parties relating to the subject matter hereof, and it replaces and supersedes any prior agreements, written or oral, between the parties relating to said subject matter.  No modifications or amendments of this Agreement shall be valid unless made in writing and signed by the parties hereto.  The waiver of the breach of any term or of any condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition.  If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances.

9.             Governing Law.  This Agreement shall be governed by the laws of the state of Connecticut, without regard to the choice of law principles thereof.

AXSYS TECHNOLOGIES, INC.
By:	/s/:  Stephen W. Bershad
	Name: Stephen W. Bershad
	Title: CEO
	/s/:  Mark J. Bonney
	Mark J. Bonney

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