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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File No.: 0-16182
AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
910 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of principal executive offices) (Zip Code)
(201) 871-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of
the ACT:
Common Stock, par value $.01 per share
$1.20 Cumulative Exchangeable Redeemable Preferred Stock,
par value $.01 per share
Securities registered pursuant to Section 12(b) of the ACT: None
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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 __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 20, 1998, $67,513,000.
Common Stock outstanding at March 20, 1998: 4,118,190 shares.
Documents Incorporated by Reference
Document Form 10-K Reference
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Portion of Axsys Technologies, Inc. Notice of Annual
Meeting of Stockholders and Proxy Statement. Part III, Items 10-13
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<PAGE>
PART I
Item 1. BUSINESS
The Company designs, manufactures and sells custom micro-positioning and
precision optical components, subsystems and systems for high-performance
markets, such as defense, space, high-end digital imaging and electronics
capital equipment. The Company also designs, manufactures and sells interconnect
devices and distributes precision ball bearings for use in a variety of
industrial, commercial and consumer applications.
Through its Precision Systems Group ("PSG"), the Company offers its
capabilities in magnetics, electronics, optics, precision machining and systems
integration to high-performance Original Equipment Manufacturers ("OEMs") and
end-users, enabling them to design and utilize systems that meet leading-edge
performance requirements. The PSG designs, manufactures and sells high-end
components such as precision sensors, high-performance motors, precision metal
optics and airbearings. These products enable OEMs to improve measurement
precision, positioning performance (speed and power), inspection throughput and
manufacturing yields. The PSG also designs, manufactures and sells subsystems
which integrate several of the Company's components. For example, a rotary
positioning actuator, which is comprised of a direct drive motor and a resolver,
is a subsystem used in cluster tool robotics for positioning semiconductor
wafers. In addition, PSG designs, manufactures and sells systems, such as head
stack assembly ("HSA") testers used to dynamically test computer disk drive
magnetic heads.
Through its Industrial Components Group ("ICG"), the Company designs,
manufactures and sells interconnect products. It also distributes and services
precision ball bearings used by OEMs in a variety of commercial industries. The
interconnect products include safety agency (e.g. U.L.) approved barrier
terminal blocks and power connectors which are primarily used to interface
industrial or process control computers to sensors, motors, and other signal
level and power devices. The precision ball bearings distributed by the Company
are acquired from various domestic and international sources and are used in
machine tools, office automation, semiconductor manufacturing and other motion
control applications to provide for smooth and precise rotary motion.
The Company's current business reflects a strategic shift that commenced in
1995. In that year, the Company began to expand its PSG business to include not
only components for defense and military space applications but also value-added
subsystems and systems for a broad range of industrial and commercial markets.
This shift was timed to take advantage of the increased demand for
high-performance components, subsystems and systems in these markets as
commercial manufacturers began to seek new methods to increase throughput and
yield.
In furtherance of its shift in strategy, the Company acquired various
synergistic technologies and assets. In April 1996, the Company acquired
Precision Aerotech, Inc. ("PAI"). PAI's subsidiaries, Speedring Inc.
("Speedring") and Speedring Systems, Inc. ("Speedring Systems") are leading
manufacturers and suppliers of high-performance laser scanners and optics as
well as suppliers of precision-machined specialty materials, such as beryllium
and quartz, for space and other high-technology applications. In October 1996,
the Company acquired substantially all of the assets of Lockheed Martin
Beryllium Corporation ("LMBC"), a supplier of precision-machined beryllium.
Components made of beryllium are significant elements of space telescopes,
weather and direct broadcast satellites, and low-earth-orbit satellites used in
cellular communication. Most recently, in May 1997, the Company acquired
Teletrac, Inc. ("Teletrac") which designs, manufactures and sells laser-based
precision measurement systems as well as precision linear and rotary positioning
systems for use in the electronics capital equipment industry.
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<PAGE>
Market Overview
Historically, the principal markets for micro-positioning and precision
optical components were the defense and military space industries, whose
performance requirements justified the high cost of components and associated
electronic controls. In recent years, however, the Company believes that the
commercial manufacturers began to increase their requirements for throughput and
yield as a result of (i) the demand on manufacturers to produce smaller,
higher-performance products with precise tolerances, (ii) pressures imposed on
manufacturers to enhance productivity and quality, which in turn required
integration of process control technology directly into the manufacturing
process, and (iii) the lowering of costs associated with electronic controls.
Concurrently, OEMs increasingly began to rely on specialized manufacturers for
fully integrated systems and subsystems. The Company believes that such reliance
was caused by the general desire of OEMs to concentrate on their core
competencies, coupled with the increased complexity of manufacturing processes
and the desire of OEMs and end-users to reduce the number of vendors upon which
they rely.
Today, the Company addresses the following five markets:
Defense .The defense industry has historically been a large consumer of
high-performance components. Over the last several years, cutbacks in defense
spending by the U.S. Government have resulted in reductions in both troop levels
and production of new weapons systems platforms. At the same time, however,
spending has increased and the market has grown for the upgrading of existing
platforms, including the development of "smart" weapons. These upgrades include
state-of-the-art electronics, enhanced night vision systems, radar and guidance
systems, and missile seeker technologies, all of which incorporate
high-performance components such as precision metal optics, high performance
motors and sensors and precision-machined structures.
Space. As a result of the deployment of communications and navigational
satellite constellations, as well as the increased demand for weather and
scientific monitoring, the commercial space market has exhibited significant
growth in recent years. With that growth, there has been increased demand for
light weight and high-performance components, such as precision metal optics,
high-performance motors, sensors, actuation devices, inertial stabilization
components and beryllium components. These high-performance components are
capable of functioning within the extreme operating environment of space. In
particular, beryllium, the lightest metal, is highly effective at dissipating
heat and is able to maintain its structural stability over wide temperature
ranges.
High-End Digital Imaging. The high-end digital imaging market consists of
film recording systems, including pre-press, medical imaging and printed circuit
board layout film recorders, as well as laser projection systems. In these
products, laser light is modulated (pulsed), reflected off a mirror on a
rotating opto-mechanical scanner, and swept across a media such as film, to
create an image. In recent years, there has been a demand for increased
resolution and throughput capabilities in these high-end systems, requiring the
use of improved optics, higher speed motors, airbearings and more sophisticated
electronic controls. In 1994, the highest speed scanners used in the high-end
digital imaging market were rotating at approximately 20,000 revolutions per
minute ("RPM") with speed regulation to 10 parts per million ("ppm"). Today,
speeds approach 60,000 RPM and must be regulated to 2 ppm. Scanners which
operate at these high rotational speeds must be highly engineered so as to
manage the heat generated by the airbearing, minimize turbulence through the
design of an aerodynamic optical deflector, control optical deformation, and
provide a highly efficient electronic speed controller.
3
<PAGE>
Electronics Capital Equipment. The electronics capital equipment market
consists of equipment used to produce and test semiconductors, mass data storage
drives and flat panel displays. The market has expanded as a result of growth in
the sales of these products, as well as the rapid technological advances
relating to their manufacturing and testing. The Company believes that increased
demand for high-performance components and systems in this market has resulted
from: (i) the miniaturization of products, creating the need for smaller
components and precise tolerances, (ii) faster production cycles to meet product
demand, (iii) the need for higher production yields and (iv) increased
outsourcing of the design and manufacture of electro-mechanical and
electro-optical subsystems and systems. High-performance components and systems
provide electronics capital equipment manufacturers with more precise testing
and process control devices which are designed to detect minute manufacturing
deviations, to reduce manufacturing costs, and to increase throughput and yield
in the manufacturing process.
Industrial Automation. The industrial automation market consists of a wide
range of industrial and commercial products, including machine tools, process
controls and heating, ventilation and air conditioning ("HVAC") systems, which
the Company primarily serves through the ICG. OEMs in these markets typically
purchase commodity-type and standardized products which must be delivered on a
short lead-time basis.
Business Strategy
The Company's primary goal is to be a leading provider of components,
subsystems and systems that enhance throughput and yield to customers requiring
high-performance devices in their equipment and to end-users in their
manufacturing and quality assurance processes. The Company's strategy is to
leverage its resources and capabilities to develop higher-level subsystems and
systems, employing its micro-positioning and precision optical technologies,
while maintaining and continuing to grow the ICG. Key elements of this strategy
include:
Integrating Technologies. The Company intends to integrate the PSG's
recently acquired technologies to develop new subsystems and systems. While the
PSG's sales at the present time consist principally of components and
subsystems, the Company intends to increase the level of product integration it
offers, through the development and sale of electro-optical and
electro-mechanical systems. The Company believes that development of these
systems, which build on the Company's core component technologies, will, if
successful, provide customers with high-performance systems at competitive
prices and enhance the Company's sales opportunities. For example, Teletrac and
Speedring Systems have developed a low-cost HSA tester for the mass data storage
industry which will use Teletrac's X-Y positioning and systems integration
capabilities and Speedring System's airbearing technology. In addition, the
Company is seeking to develop a product which integrates the scanning technology
of Speeding Systems with the linear positioning capabilities of Teletrac for use
in high-end digital imaging applications.
Capitalizing on Cross-Selling Opportunities. Historically, the PSG has
organized its sales force along product lines, through four product-specific
direct sales organizations as well as through manufacturers' representatives. To
capitalize on existing relationships within these sales organizations, the
Company has begun training its personnel within each sales organization to
identify opportunities to sell all of the PSG's products and capabilities in
their respective core markets. The Company believes it can generate additional
net sales by cross-selling existing PSG products to existing customers and has
already identified a number of opportunities to cross-sell among the Company's
target customer base. For example, the direct drive motion control technologies
that the Company has been selling to the defense market are now also being sold
to customers in the electronics capital equipment industry for use in cluster
tool robotics. In addition, Speedring Systems is seeking to adapt its airbearing
technology, which has been used to serve the high-end digital imaging market, to
develop products for the mass data storage segment of the electronics capital
equipment market. The Company anticipates that this cross-selling effort will
result in increased customer awareness of the Company's capabilities and an
increased ability to sell systems integration. In addition, over the long term,
the Company, through use of the "Axsys" name, intends to develop a corporate
identity for its products, as opposed to stressing the individual identity of
the separate corporate entities, thereby seeking to capitalize on the trend to
reduce the number of vendors and becoming a recognized supplier of subsystems
and systems in a wide range of applications.
4
<PAGE>
Increasing Investment in Engineering and Manufacturing Infrastructure. The
Company offers a set of technologies which include precision metal optics,
precision machining, magnetics, electronics and electro-mechanical and
electro-optical systems integration. To maintain and expand on these
technologies and capabilities, the Company invests in optical, magnetic,
mechanical, electronic and software engineering resources. In addition, the
Company continues to invest in sophisticated test equipment and state-of-the-art
manufacturing equipment, such as computer numerically controlled ("CNC") mills
and lathes, electrical discharge machines, diamond turning and lapping machines.
Expanding Through Acquisitions. To expand and develop its product
offerings, technologies, sales channels and market presence, and to produce
integrated systems, the Company plans to continue to expand through strategic
acquisitions. For example, the Company acquired PAI for its presence in the
high-end digital imaging market and its optics and airbearing technologies and
Teletrac for its market presence in the electronics capital equipment market and
its systems integration capabilities. Although the Company reviews and considers
possible acquisitions on an ongoing basis, no specific acquisitions are being
negotiated or planned as of the date of this filing.
Expanding the Industrial Components Group. The Company intends to increase
the ICG's sales of interconnect devices and precision ball bearings to the
industrial and commercial automation markets through an increased focus on
direct sales to strategic accounts. As part of this focus, the ICG attempts to
work with major customers to develop new interconnect products which can be sold
generally in the market place.
Technologies, Products and Capabilities
Precision Systems Group. The key enabling technologies and capabilities
utilized in the custom design, manufacture and sale of the PSG's precision
optical and positioning components, subsystems and systems include:
Optics. Precision metal optics are used in applications where performance
requirements cannot be met with glass. The advantages of metal are its lighter
weight and ease of mechanical interface with housings and actuation devices. The
Company's metal optics are fabricated using CNC machines, lathes and diamond
turning and planetary lapping machines to machine and polish metal substrates,
such as beryllium and aluminum, to tolerances as precise as one millionth of an
inch. Precision metal optics sold by the PSG include monogon and polygon
mirrors, which the Company uses for high-speed electro-mechanical scanners, head
mirrors used in weapons fire control systems, fold and aspheric mirrors used in
forward looking infrared ("FLIR") night vision weapons systems, and
high-performance space-borne instruments used on weather, mapping and scientific
satellites.
Precision Machining. The Company's capabilities, which allow for very
precise and exacting measurements, are applied in the precision machining of
various metals for precision optics applications, airbearings, heat sinks,
housing and gimbals. The PSG machines beryllium, quartz, stainless steel and
other metals for various applications in the space, defense and selected
commercial markets. The Company's airbearings provide precise positioning and
high speeds, and are used in high-speed scanners, components for weapons
guidance systems, magnetic media disk test spindles and precision position
stages used in semiconductor processing and test equipment. Its heat sinks are
used to dissipate heat in high-performance avionics and satellite electronics.
Its gimbals are used, among other things, to position optical sensors in FLIR
night vision systems.
5
<PAGE>
Magnetics. The Company designs, manufactures and sells high-performance
motors and precision resolvers using state-of-the-art magnetic technologies and
materials. These motors include AC motors, brush and brushless DC torque and
servo motors. The Company's magnetic products are capable of rotational
positioning to an accuracy as precise as five arc-seconds. Applications for
these high-performance components include precision semiconductor processing and
inspection equipment, missile systems, satellite actuators and automated
industrial systems.
Electronics. The Company's electronics control the speed and position of
electro-mechanical systems, such as precision motors, actuators, X-Y stages, and
laser scanners. The Company designs, manufactures and sells opto-electronic
position sensors, including optical encoders and laser interferometers, as well
as electronic controllers and drives and continues to invest in its electronic
design capability to maintain its expertise. Optical encoders are used to sense
rotary position and speed in a variety of applications, including laser
scanners, industrial robots and defense systems. Laser interferometers, which
are designed to permit precise linear position sensing, are used principally in
the electronics capital equipment market. Electronic controllers coordinate the
positioning and speed of electro-mechanical systems by interfacing with other
motion control components. Drives provide power to a motor based on input from
the controller in order to achieve a designated position or to achieve a
specific speed.
The following table summarizes the Company's component products and
services by the technologies they incorporate:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PSG Technologies
- ----------------------------------------------------------------------------------------------
OPTICS PRECISION MACHINING MAGNETICS ELECTRONICS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Polygon Mirrors o Airbearings o AC Motors o Optical Encoders
o Monogon Mirrors o Custom Machining o Brush and o Laser Interferometers
o Head Mirrors of Specialty Brushless DC o Speed Controls for AC
o Fold Mirrors Materials: Motors: and DC Motors
o Aspheric Mirrors --Beryllium --Torque Motors o Position Controllers
o Plane Mirrors --Beryllium- --Servo Motors o Motor Drives
aluminum --Limited Angle
--Quartz Motors
--Titanium o Resolvers
--Ceramics o Synchros
- ----------------------------------------------------------------------------------------------
</TABLE>
Systems Integration. The Company combines various components and
capabilities to offer subsystems and systems to its customers. The PSG's
precision subsystems include X-Y stages and rotary positioning subsystems,
including actuators, opto-mechanical laser scanners and imaging subsystems, as
well as laser tracking autofocus subsystems. These subsystems employ motion
control or optics technology available within the PSG. The X-Y positioning
subsystems are used in high-precision or high-performance applications, such as
semiconductor and flat panel display positioning subsystems for use in
processing or testing. The rotary positioning subsystems are used in
applications such as night vision systems for defense contractors and cluster
tool robotics in electronics capital equipment. The laser scanning and imaging
subsystems are used by pre-press equipment manufacturers and semiconductor
inspection equipment manufacturers. The laser autofocus, which is used to
automatically focus a microscope, is sold to OEMs who manufacture automated
optical inspection machines within the electronics equipment market.
The PSG's systems are electro-mechanical systems, with application specific
software designed by the Company for the end-user. Historically, the Company has
sold these systems only to the electronics capital equipment industry, where it
sells head gimbal assembly ("HGA") and head stack assembly ("HSA") testers for
disk drive manufacturers.
6
<PAGE>
The following table illustrates how the PSG's technologies, products and
capabilities are integrated to develop subsystems and systems:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PSG TECHNOLOGIES AND CAPABILITIES
- ---------------------------------------------------------------------------------------------------------------
SUBSYSTEMS
& PRECISION
SYSTEMS OPTICS MACHINING MAGNETICS ELECTRONICS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o Polygon or o Airbearing o Brushless DC o Optical Encoder
Laser Scanner Monogon Mirror Servo Motor o Speed Control
o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
o Polygon or o Airbearing o Brushless DC o Optical Encoder
Monogon Mirror Servo Motor o Speed Control
Laser Imager o Fold Mirror o Motor Drive
o Aspheric Mirror
- ---------------------------------------------------------------------------------------------------------------
Laser Autofocus o Brushless DC o Position
Servo Motor Controller
o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
o Brushless DC o Position
Rotary Positioning Servo Motor Controller
Actuator Resolver o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
o Plane Mirror(a) o Airbearing(a) o Linear Motor(a) o Laser
Interferometer
X-Y Stage o Position
Controller
o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
o Airbearing(a) o Brushless DC o Laser
HGA/HSA Limited Angle Interferometer
Testers Motor(a) o Position
Controller
o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
o Airbearing(a) o Brushless DC o Optical Encoder
Disk Test Spindle Servo Motor(a) o Speed Control
o Motor Drive
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Currently purchased from external sources but are in various stages of
development by the Company.
Industrial Components Group. The ICG designs, manufactures and sells a full
line of barrier terminal blocks, connectors and interconnect devices, and also
distributes a broad array of precision ball bearings.
Terminal Blocks and Connectors. The terminal blocks and connectors market
is directly related to the use of computer controls in a variety of industrial
and commercial applications, such as machine controllers, motor regulation or
security controls. The terminal blocks provide a simple method for point of use
installation and/or interchangeability of electronic components between the
computer control's printed circuit board and the device that the computer is
sensing (input) or driving (output).
The ICG provides a broad array of terminal blocks. The core product line is
based on "U.S.-Style" terminal blocks, which have been the mainstay of controls
made by OEMs in the United States for several decades. The ICG also has
developed a broad line of "Euro-Style" terminal blocks. These devices were
introduced by European manufacturers who began to enter the U.S. market in the
mid 1980's. In addition, the ICG has applied attributes associated with
"Euro-Style" connectors to the "U.S.-Style" and vice versa.
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<PAGE>
Precision Ball Bearings. The ICG distributes an array of precision ball
bearings varying in size, precision tolerance, lubrication and price. Through
its distribution arrangements with several foreign bearing manufacturers, the
ICG has developed a broad product offering. The ICG also provides certain
value-added services, such as bearing relubrication, white room handling of
products, and engineering consultation.
Competition
The markets for the Company's products are competitive. In the PSG, the
Company competes primarily on the basis of its ability to design and engineer
its products to meet performance specifications set by its customers, most of
whom are OEMs who purchase component parts or subsystems for inclusion in their
end-products. Product pricing and quality, customer support, experience,
reputation and financial stability are also important competitive factors.
There is a limited number of competitors in each of the markets for the
various types of precision optical and positioning components and subsystems,
and electrical/electronic terminal block and connector devices manufactured and
sold by the Company. These competitors, especially those in the precision
optical and positioning product lines, are typically focused on a smaller number
of product offerings than the Company, and are often well entrenched. Some of
these competitors have substantially greater resources than the Company. The
Company believes, however, that the breadth of its technologies and product
offerings provide it with a competitive advantage over certain manufacturers
which supply only discrete components or are not vertically integrated with
enabling technologies.
There are numerous competitors in markets to which the Company distributes
precision ball bearings. These competitors vary in size and include other
bearing manufacturers and distributors. In the Company's opinion, the ICG's
breadth and product availability, combined with the value-added services it
supplies, provide competitive advantages for the ICG.
The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features or
that new processes or technologies will not emerge that render the Company's
products less competitive or obsolete. Increased competitive pressure could lead
to lower prices for the Company's products, thereby adversely affecting the
Company's business, financial condition or results of operations. There can be
no assurance that the Company will be able to compete successfully in the
future.
Customers
The Company's customers include OEMs and end-users who design or utilize
high-precision, performance and throughput equipment. The PSG's customers are
primarily in the defense, space, high-end digital imaging and electronics
capital equipment markets. The ICG's customers are primarily in the industrial
automation market. The Company has an extensive customer list which includes
many of the major participants in each of the market segments it addresses.
There is no customer or group of affiliated customers for which sales
during 1997 were in the aggregate 10% or more of the Company's consolidated net
sales, and, in the Company's opinion, there is no customer, the loss of which
would have a material adverse effect on the Company's operations taken as a
whole.
In 1997 and 1996, the Company had aggregate sales, both military and
non-military, directly to the U.S. Government, including its agencies and
departments, of approximately $4.6 million and $5.1 million, respectively. These
sales accounted for approximately 3.7% and 5.6% of total net sales in 1997 and
1996, respectively. Approximately 24.3% of net sales in 1997 and 22% in 1996
were derived from subcontracts with U.S. Government contractors. The majority of
these contracts may be subject to termination at the convenience of the U.S.
Government, and certain contracts may also be subject to renegotiation.
Currently, the Company is not aware of any termination or renegotiation of such
contracts which would have a material adverse effect on its business.
8
<PAGE>
Because a substantial part of the Company's business is derived directly from
contracts with the U.S. Government, or agencies or departments thereof, or
indirectly through subcontracts with U.S. Government contractors, the Company's
results of operations could be materially affected by changes in U.S. Government
expenditures for products using component parts which the Company produces.
However, the Company believes that its exposure to such risk may be lessened by
the broad number and diversity of its product applications and the strength of
its engineering capabilities.
Sales, Marketing and Customer Support
As of December 31, 1997, the Company employed 72 sales, marketing and
customer support personnel of whom 42 were involved with the PSG's product
offerings and 30 were involved with the ICG's product offerings. Historically,
the Company's sales organization has been organized along product lines with
four product-specific direct sales organizations in the PSG and two direct sales
organizations in the ICG. As part of its integration strategy, the Company is in
the process of increasing its expenditures for sales and customer support and
realigning the sales organizations in the PSG along market segments: defense,
space, high-end digital imaging and electronics capital equipment. To date, this
realignment has been limited to training of sales personnel in each of the PSG's
sales organizations to identify opportunities to sell all of the PSG's
capabilities in its own core market and to making joint sales calls. There can
be no assurance that these efforts will be successful and lead to increases in
the Company's sales or that the Company will recover its additional costs in
implementing this strategy.
Also as of December 31, 1997, the PSG's direct sales organization included
10 direct sales field personnel, most of whom have engineering backgrounds, with
the remainder involved in inside sales, customer service, program management,
contract administration and applications engineering. The ICG's direct sales
organization included 13 direct sales field personnel, with the remainder
involved in inside sales, customer service, product management, contract
administration and applications engineering. The Company believes that its sales
effort is enhanced by having engineering-trained sales personnel available to
meet with customers' engineering personnel. In addition, the Company's
application and design engineers are used to enhance the sales process.
The PSG and the ICG also sell their products through over 200
manufacturer's sales representatives and agents. Although the Company believes
it has good relationships with these sales representatives and agents, there can
be no assurance that these relationships will continue to be satisfactory or
will continue at all.
Engineering, Research and Development
The Company seeks to develop new component products, subsystems and systems
and improve existing products in order to keep pace with customers' increasing
performance requirements. The Company devotes significant resources, a portion
of which is reimbursed by customers, to development programs directed at
creating new products and product enhancements, as well as developing new
applications for existing products. Because the Company believes that its
ability to compete effectively depends in part on maintaining and enhancing its
expertise in applying new technologies and developing new products, the Company
dedicates substantial resources to engineering, research and development. At
December 31, 1997, the Company employed 88 individuals in its engineering,
research and development functions. There can be no assurance that the Company's
product development efforts will be successful in producing products that
respond to technological changes or new products introduced by others.
The Company's cost associated with engineering and research and development
were $5.2 million, $4.1 million and $3.4 million in 1997, 1996 and 1995,
respectively. During such periods, $2.9 million, $2.2 million and $1.2 million,
respectively, were incurred in research and development. Of these amounts, the
Company recovered from customers approximately 10.7%, 17.0% and 38.3%,
respectively. The Company intends to direct its research and development
activities to integrating its newly acquired technologies with its existing
capabilities, and continuing to develop subsystems and systems.
9
<PAGE>
Raw Materials; Suppliers
Raw materials and purchased components are generally available from
multiple suppliers. However, beryllium, a material used extensively by the PSG,
is only available from Brush Wellman, Inc. ("Brush Wellman") the sole U.S.
supplier. Historically, the Company and, to the Company's knowledge, its
predecessors' beryllium operations have had an excellent relationship with Brush
Wellman and have not encountered problems in obtaining their requirements.
However, the partial or complete loss of Brush Wellman as a supplier of
beryllium, or production shortfalls or interruptions that otherwise impair the
supply of beryllium to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations. If such
conditions were to occur, it is uncertain whether alternative sources could be
developed. In addition, the Company purchases a substantial part of the ball
bearings it distributes from a single foreign supplier. While the Company
believes that it could obtain alternate sources of supply, any interruption in
the flow of products from this supplier, or increases in the cost of these
products, could have an adverse effect on the Company's business, financial
condition or results of operations.
Patents and Trademarks
The Company is not dependent upon any single patent or trademark. The
Company has a combination of patents, trademarks and trade secrets,
non-disclosure agreements and other forms of intellectual property protection to
protect certain of its proprietary technology and has patent applications
pending or under evaluation. Although it believes that its patents and
trademarks may have value, the Company believes that its future success will
depend primarily on the innovation, technical expertise, manufacturing and
marketing abilities of its personnel. There can be no assurance as to the degree
of protection offered by these patents or as to the likelihood that patents will
be issued for pending applications. There also can be no assurance that the
Company will be able to maintain the confidentiality of its trade secrets or
that its non-disclosure agreements will provide meaningful protection of the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information.
Competitors in the United States and foreign countries, many of which have
substantially greater resources, may have applied for or obtained, or may in the
future apply for and obtain, patents that will prevent, limit or interfere with
the Company's ability to make and sell some of its products. Although the
Company believes that its products do not infringe on the patents or other
proprietary rights of third parties, there can be no assurance that other third
parties will not assert infringement claims against the Company or that such
claims will not be successful.
Environmental Regulation
The Company believes that it is in compliance with federal, state and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to the protection of the environment in all material
respects, and that any non-compliance with such laws will not have a material
adverse effect upon its business, financial condition or results of operations,
capital expenditures, earnings or competitive position. There can be no
assurance, however, (i) that changes in federal, state or local laws,
regulations or regulatory policy, or the discovery of unknown problems or
conditions will not in the future require substantial expenditures, or (ii) as
to the extent of the Company's liabilities, if any, for past failures, if any,
to comply with applicable environmental laws, regulations and permits, any of
which also could have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company 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. In 1996, the
Company entered into a settlement agreement and paid approximately $1,000 with
respect to one of these sites. Although liability under CERCLA is joint and
several, meaning that liability can exceed a PRP's pro rata share of cleanup
costs, based on currently available information, the Company believes that costs
associated with the two remaining sites will not have a material adverse effect
on the Company.
10
<PAGE>
The Company, pursuant to a remedial plan approved by the Ohio Environmental
Protection Agency ("Ohio EPA") in 1993, is in the process of investigating soils
and groundwater at a site formerly owned by a division of the Company, and has
conducted certain remedial work at this site. Costs to date have not been
material to the Company, and until recently, the Company believed that future
costs similarly would not be material. In September 1997, however, the Company
was advised by its environmental consultants that the costs now anticipated to
carry out the 1993 plan would be substantially greater than previously expected,
but that the Company could pursue alternate plans which would involve additional
costs in the range of approximately $600,000 to $1.5 million. However, any such
alternate plans would be subject to the approval of the Ohio EPA. Based on the
advice of its consultants, the Company has increased its reserves relating to
this site to approximately $600,000, with a resulting charge to discontinued
operations in the third quarter of 1997 of $400,000, before a tax benefit of
$156,000. Based on the advice of its consultants, the Company believes that the
Ohio EPA is likely to allow use of an alternate plan. There can be no assurance
that an alternate remedial plan will be approved by the Ohio EPA. If such
approval is not received, costs to the Company would increase substantially. In
addition, even if approval is received, the costs actually incurred may exceed
the reserves established. The Company anticipates that actual expenditures will
be incurred over a period of several years.
In addition, the current owner of a site formerly owned by a subsidiary of
PAI has asserted that the subsidiary is responsible for investigation and
remediation costs with respect to this site. No litigation has been brought
against the Company, and the Company has received no correspondence or other
communication for several years with respect to this site. At this time the
Company is unable to assess the extent of its potential liability, if any, with
respect to this site or to form a judgment as to the likelihood of an
unfavorable outcome in the event litigation were to be commenced.
The Company uses or generates certain hazardous substances in its
manufacturing and engineering facilities. The Company believes that its handling
of such substances is in material compliance with applicable local, state and
federal environmental, safety and health regulations at each operating location.
The Company invests in protective equipment, process controls and specialized
training to minimize risks to employees, surrounding communities and the
environment due to the presence and handling of such hazardous substances. The
Company periodically conducts employee physical examinations and workplace air
monitoring regarding such substances. When exposure problems or potential have
been indicated, corrective actions have been implemented and reoccurrence has
been minimal or non-existent. The Company does not carry environmental
impairment insurance.
Employees
As of December 31, 1997, the Company employed 980 persons in the United
States, including 745 in manufacturing, 72 in sales, 88 in engineering and 75 in
administration. Approximately 74 employees at the St. Petersburg, Florida
facility are subject to a collective bargaining agreement. The Company considers
its relations with its employees to be satisfactory. There has been no
significant interruption of operations due to labor disputes.
11
<PAGE>
Item 2. PROPERTIES
The Company leases its executive office, located at 910 Sylvan Avenue,
Englewood Cliffs, New Jersey. The principal plants and other materially
important properties at December 31, 1997 are:
<TABLE>
<CAPTION>
Type of Square Leased;
Location Facility Footage Expiration
- -------- -------- ------- ----------
<S> <C> <C> <C>
Cullman, AL Manufacturing, Engineering 110,000 Owned
Gilford, NH Manufacturing, Engineering 84,250 Owned
Montville, NJ Distribution 76,200 Leased; 1999
San Diego, CA Manufacturing, Engineering 63,100 Leased; 2000
St. Petersburg, FL Manufacturing, Engineering 52,500 Owned
Rochester Hills, MI Manufacturing, Engineering 35,000 Leased; 1999
Santa Barbara, CA Manufacturing, Engineering 13,800 Leased; 1999
Irvine, CA Distribution 7,800 Leased; 2000
Dallas, TX Distribution 2,950 Leased; 2002
</TABLE>
All of the facilities owned by the Company are subject to mortgages or
security interests which secure the Company's obligations under its revolving
credit facility or industrial development bonds (see Note 4 to the Financial
Statements).
Management believes that the Company's facilities are generally sufficient
to meet its current and reasonably anticipated manufacturing, distribution and
related requirements. The Company, however, periodically reviews its space
requirements to ascertain whether its facilities are sufficient to meet its
needs.
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits, none of which is expected
to have a material adverse effect on the Company's business, financial position,
or results of operations. See "Business--Environmental Regulations."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 14, 1997 the Company held a Special Meeting of Stockholders (the
"Meeting") of Axsys Technologies, Inc. The purpose of the Meeting was to amend
the Certificate of Incorporation of the Company to increase the number of shares
of authorized Common Stock to 30,000,000 shares; to amend the Certificate of
Incorporation of the Company to delete a provision limiting ownership of the
Company's Common Stock for tax reasons no longer applicable; and to amend the
Vernitron Corporation Long-Term Stock Incentive Plan.
The number of votes cast for the proposal to amend the authorized number of
shares of Common Stock to 30,000,000 shares was approximately 2,792,000.
Approximately 36,000 votes were cast against and 2,000 abstained from the vote.
The number of votes cast for the proposal to amend the Certificate of
Incorporation of the Company to delete a provision limiting ownership of the
Company's Common Stock was approximately 2,711,000. Approximately 3,000 votes
were cast against and 3,000 abstained. The number of votes cast for the proposal
to amend the Vernitron Corporation Long-Term Stock Incentive Plan was
approximately 2,287,000. Approximately 9,000 votes were cast against and 4,000
abstained.
12
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market under the
Symbol "AXYS" since December 11, 1996. Prior to that time, it was traded on the
Nasdaq SmallCap Market. The following table sets forth the range of high and low
sales prices as reported by the Nasdaq SmallCap Market from January 1, 1996 to
December 10, 1996, and as reported on the Nasdaq National Market from December
11, 1996:
1997 1996
------------------ ------------------
High Low High Low
------- ------- ------- -------
Fiscal Years Ended December 31:
First Quarter $17 1/2 $10 $ 5 5/8 $ 4 3/8
Second Quarter 25 1/4 12 11 7/8 4 3/8
Third Quarter 37 22 1/4 11 1/4 6 1/4
Fourth Quarter 38 16 7/8 11 1/2 9
The prices shown above represent quotations among securities dealers, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
The information presented above has been adjusted to reflect the July 1996
one-for-five reverse stock split (see Note 3 to the Financial Statements).
On March 20, 1998, the high and low sales prices were $27 1/4 and 25 3/4,
respectively.
On March 20, 1998, the approximate number of holders of record of the
Common Stock was 560.
Dividend Policy
The Company has applied and currently intends to continue to apply its
retained and current earnings toward the development of its business and to
finance the growth of the Company. The Company did not pay dividends on its
Common Stock during the three years ended December 31, 1997, and does not
anticipate paying cash dividends in the foreseeable future. The Company's credit
facility prohibits the payment of cash dividends.
13
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the five fiscal years presented
below is derived from the audited Consolidated Financial Statements of the
Company as adjusted to reflect the discontinuance of the Electronic Components
group in 1994. The data should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997(1) 1996(2) 1995 1994 1993
--------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales............................................... $ 123,816 $ 91,301 $ 65,213 $ 62,132 $ 58,649
Gross profit............................................ 33,997 23,818 17,240 17,229 15,311
Income (loss) from continuing operations before
extraordinary items................................... 5,487 2,855 884 27 (3,856)
Net income (loss)....................................... 5,134 2,682 884 3,681 (4,526)
Preferred stock dividends............................... 102 847 574 355 375
Net income (loss) applicable to
common shareholders................................... 5,032 1,835 310 3,326 (4,901)
Diluted net income (loss) per share from continuing
operations before extraordinary items................. $ 1.53 $ 0.74 $ 0.12 $ (0.20) $ (4.08)
Diluted net income (loss) per share applicable to
common shareholders................................... $ 1.43 $ 0.68 $ 0.12 $ 1.95 $ (4.75)
Weighted average common shares outstanding.............. 3,513 2,688 2,511 1,702 1,037
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................................... $ 29,039 $ 24,794 $ 14,334 $ 11,538 $ 15,473
Total assets............................................ 78,999 62,171 40,485 42,197 47,261
Long-term debt and capital lease obligations
(less current portion) (3).......................... 8,629 23,324 11,047 11,921 25,270
Shareholders' equity (3)................................ 47,317 19,165 14,745 13,269 5,076
</TABLE>
- ----------
(1) In May 1997, the Company acquired the stock of Teletrac. This acquisition
was accounted for under the purchase method of accounting and, accordingly,
the results of Teletrac's operations have been included in the Company's
Consolidated Statement of Operations since the date of acquisition. See
Note 2 to the Consolidated Financial Statements.
(2) In April 1996, the Company acquired the stock of PAI and, in October 1996,
purchased substantially all of the assets of LMBC. These acquisitions have
been accounted for under the purchase method of accounting and,
accordingly, the results of the continuing operations of PAI and LMBC have
been included in the Company's Consolidated Statement of Operations since
their respective dates of acquisition. See Note 2 to the Consolidated
Financial Statements.
(3) On July 20, 1994, the Company purchased its senior bank debt at a discount
and recorded a pretax gain of $9.6 million.
14
<PAGE>
Item 7. 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 each of the past three years in the period ended December 31, 1997.
The Company acquired the stock of Teletrac on May 30, 1997, the stock of PAI on
April 25, 1996, and substantially all of the assets of LMBC on October 2, 1996.
These acquisitions, which are all part of the PSG, have been accounted for under
the purchase method of accounting. Accordingly, the results of the continuing
operations of Teletrac, PAI and LMBC have been included in the Company's
Consolidated Statement of Operations since their respective dates of acquisition
(see Note 2 to the Consolidated Fancial Statements).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales:
PSG ............................................. 63.7% 53.2% 38.0%
ICG ............................................. 36.3 46.8 62.0
------ ------ ------
100.0 100.0 100.0
Cost of sales ..................................... 72.5 73.9 73.6
------ ------ ------
Gross Profit ...................................... 27.5 26.1 26.4
------ ------ ------
Operating expenses:
Selling, general and administrative expenses .... 17.6 18.1 20.4
Amortization of intangible assets ............... 0.3 0.2 0.3
------ ------ ------
17.9 18.3 20.7
------ ------ ------
Operating income .................................. 9.6 7.8 5.7
Interest expense ................................ 2.2 2.6 3.1
Other expense ................................... -- -- 0.4
------ ------ ------
Income from continuing operations before
taxes and extraordinary items ................... 7.4 5.2 2.2
Provision for taxes ............................. 3.0 2.1 0.8
------ ------ ------
Income from continuing operations before
extraordinary items ............................. 4.4 3.1 1.4
Loss on discontinued operations, net of tax .... (0.2) -- --
------ ------ ------
Income before extraordinary items ................. 4.2 3.1 1.4
Extraordinary charges, net of tax ............... (0.1) (0.2) --
------ ------ ------
Net income ........................................ 4.1% 2.9% 1.4%
====== ====== ======
Gross profit (as a percentage of related net sales):
PSG ............................................. 25.4% 21.9% 20.3%
ICG ............................................. 31.0 30.8 30.2
</TABLE>
15
<PAGE>
Comparison of Years Ended December 31, 1997 and December 31, 1996
Net Sales. Net Sales increased by 35.6%, or $32.5 million, from $91.3
million in 1996 to $123.8 million in 1997. The PSG's sales increased by 62.3%,
or $30.3 million, from $48.6 million in 1996 to $78.9 million in 1997. Of this
$30.3 million increase, approximately $20.3 million was attributable to the
acquisitions of Teletrac, PAI, and LMBC. The remaining $10.0 million increase
was the result of internal growth primarily in the space, electronics capital
equipment and digital imaging markets. The ICG's sales increased by 5.2%, or
$2.2 million, from $42.7 million in 1996 to $44.9 million in 1997. This increase
was primarily due to higher sales of electronic connectors resulting from new
product introductions to the industrial automation market.
Gross Profit. The Company's gross profit increased by 42.7%, or $10.2
million, from $23.8 million in 1996 to $34.0 million in 1997. Gross profit
margin increased from 26.1% of net sales in 1996 to 27.5% in 1997. The gross
margin for the PSG increased from 21.9% of net sales in 1996 to 25.4% in 1997
and, for the ICG, increased from 30.8% of net sales in 1996 to 31.0% in 1997.
The improvement in the PSG's gross margin was primarily due to the addition of
higher margin revenue from the acquisitions of Teletrac and PAI, as well as from
sales volume related operating efficiencies.
Selling, general and administrative expenses. SG&A expenses increased by
31.8%, or $5.2 million, from $16.5 million in 1996 to $21.7 million in 1997. As
a percentage of net sales, however, SG&A decreased from 18.1% in 1996 to 17.6%
in 1997. The increase in SG&A expenses in absolute dollars was primarily due to
the acquisitions of Teletrac, PAI, and LMBC. The decrease as a percentage of net
sales was primarily attributable to the absorption of lower corporate overhead
expense, due to the elimination of certain costs related to the former PAI
corporate office, over a larger sales base. This favorable variance was
partially offset by higher incentive expense related to a three year performance
plan established for the former owners, and now employee managers, of Teletrac.
Interest Expense. Interest expense increased by 12.4%, or $290,000, from
$2.3 million in 1996 to $2.6 million in 1997. The increase in interest expense
was primarily due to higher average borrowings resulting from the acquisitions
of Teletrac during 1997 and, PAI and LMBC during 1996. This increase was
substantially offset by reductions of debt during 1997 from the Company's stock
offering in late October and cash generated from operations.
Taxes. The Company's effective tax rate increased from 39.8% in 1996 to
40.5% in 1997, primarily due to a higher effective state tax rate.
Preferred Stock Dividends. Preferred Stock dividends decreased by 88.0%, or
$745,000, from $847,000 in 1996 to $102,000 in 1997. The decrease in Preferred
Stock dividends was due to the Company's exchange of Preferred Stock for Common
Stock and subsequent redemption of remaining Preferred Stock (see Note 3 to the
Consolidated Financial Statements). As a result of such redemption, there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.
Comparison of Years Ended December 31, 1996 December 31, 1995
Net Sales. Net Sales increased by 40.0%, or $26.1 million, from $65.2
million in 1995 to $91.3 million in 1996. The PSG's sales increased by 96.0%, or
$23.8 million, from $24.8 million in 1995 to $48.6 million in 1996. The
acquisition of PAI accounted for $23.1 million of the increase in the PSG's
sales. The ICG's sales increased by 5.7%, or $2.3 million, from $40.4 million in
1995 to $42.7 million in 1996. In 1996, sales of precision ball bearings
increased by 9.0% due to increased sales to both original equipment
manufacturers and distributors for use in a variety of industries.
Gross Profit. The Company's gross profit increased by 38.2%, or $6.6
million, from $17.2 million in 1995 to $23.8 million in 1996. Gross profit
margin decreased from 26.4% of net sales in 1995 to 26.1% in 1996. This decrease
was primarily due to the increase in sales by PSG. Historically, sales by the
PSG have resulted in lower margins than sales by the ICG. PSG's sales increased
16
<PAGE>
primarily as a result of the Company's acquisition of PAI. Gross profit margin
attributable to the PSG increased from 20.3% in 1995 to 21.9% in 1996. The
increase in the PSG's gross profit margin was primarily due to the increase in
sales resulting from the acquisition of PAI. The gross profit margin on the PAI
sales, while lower than the consolidated gross profit margin, was higher than
the gross profit margin on PSG sales prior to the PAI acquisition. Gross profit
margin attributable to the ICG increased from 30.2% in 1995 to 30.8% in 1996.
The increase in the ICG gross profit margin was primarily due to favorable
overhead spending and material purchase price variances partially offset by an
unfavorable sales mix of lower margin products.
Selling, general and administrative expenses. SG&A expenses increased by
23.7%, or $3.2 million, from $13.3 million in 1995 to $16.5 million in 1996, but
decreased from 20.4% to 18.1% of net sales, respectively. The increase in SG&A
expenses in absolute dollars was primarily due to the acquisitions of PAI and
LMBC. The decrease in SG&A expenses as a percentage of net sales was
attributable, in part, to the absorption of corporate overhead over a larger
sales base.
Interest Expense. Interest expense increased by 17.5%, or $349,000, from
$2.0 million in 1995 to $2.3 million in 1996. The increase in interest expense
was primarily due to higher average borrowings resulting from the acquisitions
of PAI and LMBC. This increase was substantially offset by the reduction of
interest expense attributable to net assets held for disposal (see Note 2 to the
Consolidated Financial Statements), the effect of lower interest rates resulting
from a lower prime rate and, more favorable terms under the Company's credit
agreement entered into on April 25, 1996.
Preferred Stock Dividends. Preferred Stock dividends increased by 47.6%, or
$273,000, from $574,000 in 1995 to $847,000 in 1996. The increase in Preferred
Stock dividends was due primarily to the expiration, on February 22, 1996, of
the period during which the Company paid dividends in additional shares of
Preferred Stock at an annual rate of 15% of the average bid and ask price of the
Preferred Stock. Subsequent to that date, while it did not declare or pay any
dividends, the Company accrued dividends at $1.20 per share.
Backlog
A substantial portion of the Company's 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, the Company generally has a
significant backlog of orders to be shipped.
The Company's backlog of orders decreased by 1.8%, or $1.0 million, from
$56.4 million at December 31, 1996 to $55.4 million at December 31, 1997. The
decrease in backlog was due primarily to the timing of orders which can be
uneven and comprised of multiple delivery dates over a period of time, a
reduction of past due orders in our precision machining business and customer
program cancellations of $1.3 million. These decreases were partially offset by
the addition of backlog from the acquisition of Teletrac. Backlog as of March 6,
1998 was $59.0 million.
The Company believes that a substantial portion of the backlog orders at
December 31, 1997 will be shipped over the next twelve months.
Liquidity and Capital Resources
The Company funds its operations primarily from cash flow generated by
operations and, to a lesser extent, from borrowings under its credit facility
and through capital lease transactions.
Net cash provided by (used in) operations for the years ended December 31,
1997, 1996 and 1995 was $9.1 million, $2.0 million and $(1.0) million,
respectively. The improvement in cash provided from operations in both 1997 and
1996 was due primarily to increases in net income, non-cash amortization and
depreciation and the amount of prior year net operating losses carried forward
to offset current taxes. At December 31, 1997, the Company had approximately
17
<PAGE>
$1.3 million of net operating losses and $0.5 million of tax credits available
to reduce future taxable income.
The Company's working capital was $29.0 million and $24.8 million on
December 31, 1997 and 1996, respectively.
Net cash (used in) provided by investing activities for the years ended
1997, 1996 and 1995 was $(10.5) million, $2.0 million and $1.9 million,
respectively. During the second quarter of 1997, the Company acquired the stock
of Teletrac. The cash portion of the total purchase price for Teletrac was $7.3
million. The cash provided by investing activities in 1996 was generated
primarily from the sale of a subsidiary of PAI for cash consideration of $11.3
million. This cash source was partially offset by the acquisitions of PAI and
LMBC for cash consideration of $4.7 million and $2.9 million, respectively (see
Note 2 to the Consolidated Financial Statements).
The Company had no material commitments for capital expenditures as of
December 31, 1997. It is anticipated that capital expenditures in 1998 could
range from $5.0 million to $7.0 million as compared to the $4.9 million expended
in 1997, including assets acquired under capital leases of $1.7 million. Based
on an evaluation of available lease terms and other factors, the Company may
continue to finance a portion of these capital expenditures through capital
leases.
The Company has an $11.0 million senior secured credit facility comprised
of a revolving debt commitment expiring on April 25, 2000 (the "Credit
Facility"), of which $5.1 million was outstanding as of December 31, 1997. The
Credit Facility contains restrictive covenants which, among other things, impose
limitations with respect to the incurrence of additional liens and indebtedness,
mergers, consolidations and specified sale of assets and requires the Company to
meet certain financial tests including minimum levels of earnings and net worth
and various other financial ratios. In addition, the Credit Facility prohibits
the payment of cash dividends. The Company believes that the remaining
availability under the Credit Facility and cash generated from operations will
be sufficient to meet its future capital expenditure and working capital
requirements for at least the next 12 months.
Year 2000
The date change in the Year 2000 may present potential computer issues in
that certain early programming used 2 digits rather than 4 to designate a year.
As the century date change occurs, date-sensitive systems may experience system
failure or miscalculations leading to disruptions in a company's operations. The
Company has taken actions to address this potential problem. Each business unit
has either reviewed or is in the process of reviewing and identifying all
systems which may be impacted at the start of the next millennium. Internal
systems and software with non-compliant codes are expected to be either upgraded
or replaced with systems or software that will acknowledge the change of the
millennium. Additionally, a review of our critical suppliers and customers is
being made to assure that they are working toward Year 2000 compliance.
The Company estimates that the total amount that will be spent to remediate
its Year 2000 issues is not expected to be material to its business, operations,
or financial condition.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" was issued in June
1997. The new statement establishes standards for the way that business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for periods beginning after December 15,
1997 and requires restatement of all prior periods presented. Management does
not believe that the implementation of the statement will have a material impact
on the consolidated financial position or consolidated results of operations of
the Company, but may require additional disclosures to be made.
18
<PAGE>
Risk Factors
This filing contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the increasing performance demands in
the defense, space, high-end digital imaging, electronics capital equipment and
other markets served by the Company, the Company's ability to integrate its
existing technologies and realign its direct sales organizations, the Company's
ability to implement its strategy to develop and sell value-added systems, the
continuation of trends favoring outsourcing of the design and manufacturing of
subsystems and systems by customers, the receipt and shipment of orders by the
Company, the Company's objective to grow through strategic acquisitions and
anticipated expenditures for environmental remediation. Discussion containing
such forward-looking statements is found in the material set forth under
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as within the filing generally. The factors
discussed below could cause actual results and developments to be materially
different from those expressed in or implied in such statements. The Company
cautions the reader, however, that this list of factors may not be exhaustive.
The following risk factors should be considered carefully in addition to the
other information contained in this filing.
Management of Expanded Operations; Acquisitions
In recent years, the Company has made several acquisitions of complementary
businesses which the Company is seeking to integrate. This integration strategy
includes the development and sale of value-added systems incorporating the
Company's various technological capabilities. The development of such systems is
in its early stages. There can be no assurance that the Company will be
successful in developing and selling such systems.
In addition, as part of the Company's business development strategy, the
Company plans to pursue further acquisitions in order to expand the Company's
product offerings, add to or enhance its base of technical or sales personnel,
or provide desirable customer relationships. Such growth could result in a
significant strain on the Company's managerial, financial, engineering and other
resources. The rate of the Company's future expansion, if any, in combination
with the complexity of the technologies involved in the Company's business, may
demand an unusually high level of managerial effectiveness in anticipating,
planning, coordinating and meeting the operational needs of the Company as well
as the needs of its customers. Additionally, there can be no assurance that the
Company will be able to acquire complementary businesses on a cost-effective
basis, or integrate acquired operations into its organization effectively,
retain and motivate key personnel, or retain customers of acquired firms. The
Company competes for attractive acquisition candidates with other companies or
investors, and such competition could have the effect of increasing the cost to
the Company of pursuing its acquisition strategy or reducing the number of
attractive candidates to be acquired. Although the Company reviews and considers
possible acquisitions on an on-going basis, no specific acquisitions are being
negotiated or planned as of the date of this filing. See "Business--Business
Strategy."
Technological Change and New Product Development
The Company's success will continue to depend in substantial part upon its
ability to introduce new products that keep pace with technological developments
and evolving industry standards and to apply appropriate levels of engineering,
research and development resources necessary to keep pace with such
developments. In addition, the Company's success will depend on how well the
Company responds to changes in customer requirements and achieves market
acceptance for its products and capabilities. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. In order to develop new products
successfully, the Company is dependent upon close relationships with its
customers and their willingness to share proprietary information about their
requirements and participate in collaborative efforts with the Company. There
can be no assurance that the Company's customers will continue to provide it
with timely access to such information or that the Company will be successful in
developing and marketing new products and services or their enhancements. In
19
<PAGE>
addition, there can be no assurance that the new products and services or their
enhancements, if any, developed by the Company, will achieve market acceptance.
See "Business--Business Strategy" and "Business--Engineering, Research and
Development."
Substantial Variability of Quarterly Results of Operations
Factors such as announcements of technological innovations or new products
by the Company or its competitors, and the cynical nature of the industries
served by the Company could cause substantial variations in the Company's
operating results. The defense, space, high-end digital imaging, electronics
capital equipment and industrial automation markets, each of which represents a
significant market for the Company's products, have historically been subject to
substantial economic fluctuations due to changing demands for their products and
services, introduction of new products and product obsolescence. There can be no
assurance that such fluctuations will not reoccur and have an adverse impact on
the Company's business, financial condition or results of operations. The
Company has experienced and expects to continue to experience significant
fluctuations in its quarterly and annual operating results due to a variety of
factors, including market acceptance of new and enhanced versions of the
Company's products, timing and shipment of significant orders, mix of products
sold, length of sales cycles, plant openings and closings, the timing of
acquisitions or dispositions by the Company, delays in raw materials shipments,
completion of large projects, other manufacturing delays and disruptions, the
level of backlog of orders, and cyclically in the markets the Company serves. To
some extent, the Company's net sales and operating results for a quarter will
depend upon the Company generating orders to be shipped in the same quarter in
which the order is received. The failure to receive anticipated orders or delays
in shipments near the end of a particular quarter, due, for example, to
unanticipated rescheduling or cancellations of shipments by customers or
unexpected manufacturing difficulties, may cause net sales in a particular
quarter to fall significantly below the Company's expectations, which would have
a material adverse effect on the Company's business, financial condition or
results of operations for such quarter. See "Business--Market Overview."
Industry Concentration
A significant portion of the Company's business and business development
efforts are concentrated in the defense and, to a lesser extent, electronics
capital equipment industries. The Company's business depends, in significant
part, upon the U.S. Government's continued demand in the area of defense for
high-end, high performance components and subsystems of the type manufactured by
the Company. Approximately 28% of net sales in 1997 and 27.6% of net sales in
1996 were derived directly from contracts with the U.S. Government, or agencies
or departments thereof, or indirectly from subcontracts with U.S. Government
contractors. The majority of these Government contracts are subject to
termination and renegotiation. As a result, the Company's business, financial
condition or results of operations may be materially affected by changes in U.S.
Government expenditures for defense. Additionally, the Company currently intends
to continue to develop the portion of its business dependent upon manufacturers
in the electronics capital equipment industry which provides equipment used in
the semiconductor, mass data storage and flat panel display industries. Such
business development will depend, in part, upon capital expenditures by
manufacturers of electronics capital equipment, which in turn depend upon the
current and anticipated market demand for semiconductor, mass data storage and
flat panel display devices. The semiconductor, mass data storage and flat panel
display industries have been highly volatile and historically have experienced
periods of oversupply, resulting in significantly reduced demand for capital
equipment. There can be no assurance that this volatility will not have a
material adverse effect on the Company's business in the electronics capital
equipment industry. See "Business--Market Overview" and "Business--Customers."
Competition
The markets for the Company's products are competitive. The Company
competes primarily on the basis of its ability to design and engineer its
products to meet performance specifications set by its customers, most of whom
are OEMs who purchase component parts or subsystems for inclusion in their
end-products. Product pricing and quality, customer support, experience,
reputation and financial stability are also important competitive factors. There
is a limited number of competitors in each of the markets for the various types
of precision optical and positioning components and subsystems and
electrical/electronic interconnect devices manufactured and sold by the Company.
20
<PAGE>
These competitors, especially those in the precision optical and positioning
product lines, are typically focused on a smaller number of product offerings
than the Company, and are often well entrenched. Some of these competitors have
substantially greater resources than the Company. There can be no assurance that
the Company's competitors will not develop enhancements to or future generations
of competitive products that will offer superior price or performance features,
or that new processes or technologies will not emerge that render the Company's
products less competitive or obsolete. In addition, as a result of the
substantial investment required by a customer to integrate capital equipment
into a production line, or to integrate components and subsystems into a product
design, the Company believes that once a customer has selected certain capital
equipment or certain components or subsystems from a particular vendor, the
customer generally relies upon that vendor to provide equipment for the specific
production line or product application and may seek to rely upon that vendor to
meet other capital equipment or component or subsystem requirements.
Accordingly, the Company may be at a competitive disadvantage with respect to a
prospective customer if that customer utilizes a competitor's manufacturing
equipment or components or subsystems. Further, there are numerous competitors
in markets to which the Company distributes precision ball bearings. These
competitors, who vary in size, include other ball bearings distributors as well
as ball bearing manufacturers. There can be no assurance that the bases of
competition in the industries in which the Company competes will not shift or
that the Company will continue to compete successfully. See
"Business--Competition."
Dependence on Key Suppliers
A significant portion of the Company's precision machining business related
to the commercial space market depends on the adequate supply of specialty
metals, such as beryllium, at competitive prices and on reasonable terms. The
Company currently procures all of its beryllium from Brush Wellman, the sole
U.S. supplier, and the Company expects to continue to rely on Brush Wellman for
beryllium for the foreseeable future. Although the Company has not experienced
significant problems with this supplier in the past, there can be no assurance
that such relationship will continue or that the Company will continue to obtain
such supplies at cost levels that would not adversely affect the Company's gross
margins. The partial or complete loss of Brush Wellman as a supplier of
beryllium, or production shortfalls or interruptions that otherwise impair the
supply of beryllium to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations. It is
uncertain whether alternative sources of supply could be developed without a
material disruption in the Company's ability to provide beryllium products to
its customers.
Although the Company has not experienced significant problems with its
other suppliers in the past, there can be no assurance that such relationships
will continue or that, in the event of a termination of its relationships with
such other suppliers, it would be able to obtain alternative sources of supply
without a material disruption in the Company's ability to provide products to
its customers. In addition, the Company purchases a substantial part of the ball
bearings it distributes from a single foreign supplier. Any material disruption
in the Company's supply of products would have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Raw Materials; Suppliers."
Risks of International Sales and Purchases
The Company's international sales accounted for approximately 11.2%, 11.4%,
and 12.0% of the Company's net sales for 1997, 1996 and 1995, respectively.
Also, the Company purchases a substantial portion of its ball bearings products
from a single foreign supplier and certain other products from other foreign
suppliers. The Company's international sales and purchases are subject to a
number of risks generally associated with international operations, including
import and export duties and restrictions, currency fluctuations, changes in
regulatory requirements, tariffs and other barriers, political and economic
instability and potentially adverse tax consequences. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, financial condition or results of operations.
21
<PAGE>
Dependence on Key Personnel
The Company's success depends to a significant extent on the continued
services of its key executive officers, including its Chairman of the Board and
Chief Executive Officer, and other senior management personnel. The loss of the
services of one or more of these individuals may have a material adverse effect
on the Company's business, financial condition or results of operations. The
Company maintains, and is the beneficiary of, a life insurance policy on the
life of its Chairman of the Board and Chief Executive Officer. The face amount
of such policy is $5.0 million. The Company does not maintain key man life
insurance on its other executive officers. In addition, since the continued
success of the Company is largely dependent upon its ability to design,
manufacture and sell high-performance components and subsystems for the
high-performance technology market, the Company is particularly dependent upon
its ability to identify, attract, motivate and retain qualified technical
personnel, including engineers, with the requisite educational background and
industry experience, as well as skilled precision machining personnel. The
Company's employees may voluntarily terminate their employment with the Company
at any time, and competition for such personnel is intense. Accordingly, there
can be no assurance that the Company will be successful in retaining its
existing personnel. The loss of the services of a significant number of the
Company's technical or skilled personnel, or the future inability to attract
such personnel, could have a material adverse effect on the Company's business,
financial condition or results of operations.
Intellectual Property Rights
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to maintain the proprietary nature of its
technology. The Company relies upon a combination of patents, trademarks and
trade secrets, non-disclosure agreements and other forms of intellectual
property protection to safeguard certain of its proprietary technology. There
can be no assurance as to the degree of protection offered by these patents or
as to the likelihood that patents will be issued for pending applications. There
also can be no assurance that the Company will be able to maintain the
confidentiality of its trade secrets or that its non-disclosure agreements will
provide meaningful protection of the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell some of its products. Although the Company
believes that its existing products do not infringe on the patents or other
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or that such
claims will not be successful. See "Business--Patents and Trademarks."
Environmental Regulation
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its engineering, research and development and
manufacturing activities. Failure to comply with applicable environmental
requirements could result in substantial liability to the Company, suspension or
cessation of the Company's operations, restrictions on the Company's ability to
expand its operations or requirements for the acquisition of additional
equipment or other significant expense, any of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, there can be no assurance (i) that changes in federal,
state or local laws, regulations or regulatory policy, or the discovery of
unknown problems or conditions, will not in the future require substantial
expenditures, or (ii) as to the extent of the Company's liabilities, if any, for
past failures, if any, to comply with applicable environmental laws, regulations
and permits, any of which also could have a material adverse effect on the
Company's business, financial condition or results of operations.
22
<PAGE>
In the third quarter of 1997, the Company recorded a charge to discontinued
operations of $400,000, before a tax benefit of $156,000, relating to increases
in reserves for certain environmental costs associated with a formerly-owned
property. The reserve established assumes that certain approvals will be
received from state regulatory authorities. However, there can be no assurance
that such approvals will be received. If such approvals are not received, costs
would increase substantially. In addition, even if such approvals are received,
the costs actually incurred may exceed the reserves established. See
"Business--Environmental Regulation."
The Company has made and continues to make investments in protective
equipment, process controls, manufacturing procedures and training in order to
minimize the risks to employees, surrounding communities and the environment due
to the presence and handling of hazardous materials. The failure to properly
handle such materials could lead to harmful exposure to employees or to the
discharge of certain hazardous waste materials, and, since the Company does not
carry environmental impairment insurance, to a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that environmental problems will not develop in the future which
would have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business---Environmental Regulation."
Continued Investment Required to Maintain Manufacturing Capabilities
The Company has invested, and intends to continue to invest, in
state-of-the-art equipment in order to increase, expand, update or relocate its
manufacturing capabilities and facilities. Changes in technology or sales growth
beyond currently established manufacturing capabilities will require further
investment. There can be no assurance that the Company will generate sufficient
funds from operations to finance any required investment or that other sources
of funding will be available on terms acceptable to the Company, if at all.
Furthermore, there can be no assurance that any further expansion will not
negatively impact the Company's business, financial condition or results of
operations. See "Business--Facilities and Manufacturing."
Control of Company by Existing Shareholder
The Chairman of the Board and Chief Executive Officer of the Company owns
approximately 30% of the outstanding Common Stock as of December 31, 1997. As a
result, he will have the ability to exert significant influence with respect to
the election of all of the members of the Company's Board of Directors and other
corporate actions.
Possible Volatility of Share Price
The price of the Common Stock may be subject to significant fluctuations.
That price volatility may be attributable, at least in part, to the limited
number of shares generally available for sale in the public market. In addition,
factors such as actual or anticipated quarterly fluctuations in financial
results, changes in recommendations or earnings estimates by securities
analysts, announcements of technological innovations or new commercial products
or services and the timing of announcements of acquisitions or dispositions by
the Company or its competitors, as well as conditions in the Company's markets
generally, may have a significant adverse effect on the market price of the
Common Stock. Furthermore, the stock market historically has experienced
volatility which has particularly affected the market prices of securities of
many technology companies and which sometimes has been unrelated to the
operating performances of such companies.
Effect of Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), the Company's By-Laws (the "By-Laws") and the Delaware General
Corporation Law ("DGCL") contain certain provisions which could delay or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving the Company, even if such a transaction
would be beneficial to the interests of the shareholders, or could discourage a
third party from attempting to acquire control of the Company. The Company
23
<PAGE>
has authorized 4,000,000 shares of its Preferred Stock, none of which are
currently outstanding, and which the Company could issue without further
shareholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The Company
has no current plans to issue any Preferred Stock. The By-Laws include
provisions establishing advance notice procedures with respect to shareholder
proposals and director nominations, and permitting the calling of special
shareholder meetings only by the written consent of three-quarters of the Board
of Directors or the Chairman of the Board. The Certificate of Incorporation
provides that in lieu of a meeting, action may be taken by written consent of
the Company's shareholders only by unanimous consent. These provisions could
have the effect of delaying, deterring or preventing a change in control of the
Company, and may adversely affect the voting and other rights of holders of
Common Stock. In addition, the Company is subject to section 203 of the DGCL
which, subject to certain exceptions, restricts certain transactions and
outstanding voting stock (an "interested shareholder") for a period of three
years from the date the shareholder becomes an interested shareholder. These
provisions may have the effect of delaying or preventing a change of control of
the Company without action by the shareholders and, therefore, could adversely
affect the price of the Company's Common Stock. In the event of a change of
control of the Company, the vesting of outstanding options issued under the
Company's Long-Term Stock Incentive Plan may be accelerated at the discretion of
the Committee or may be required to be accelerated under certain circumstances
provided for in each incentive agreement.
Absence of Dividends on Common Stock
The Company does not anticipate paying dividends on its Common Stock in the
foreseeable future. The Company's Credit Facility prohibits it from paying cash
dividends on its Common Stock.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of December 31, 1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is included in Item 14(a) of this Report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. See Item 14(b) of this Report.
24
<PAGE>
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its 1998 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days following the end of the Company's fiscal year ended December 31, 1997.
If such proxy statement is not so filed, such information will be filed as an
amendment to this Form 10-K within 120 days following the end of the Company's
fiscal year ended December 31, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements
See accompanying index to consolidated financial statements and schedule.
(a)(3) Exhibits
See accompanying index to Exhibits.
(b) Reports on Form 8-K
None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1998 AXSYS TECHNOLOGIES, INC.
(Registrant)
By /s/ STEPHEN W. BERSHAD
----------------------------------
Stephen W. Bershad
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 27th day of March, 1998.
/s/ Stephen W. Bershad Chairman of the Board of
-------------------------------- Directors and Chief Executive
Stephen W. Bershad Officer
/s/ Raymond F. Kunzmann Vice President - Finance, Controller
-------------------------------- and Chief Financial Officer
Raymond F. Kunzmann
/s/ Anthony J. Fiorelli, Jr. Director
--------------------------------
Anthony J. Fiorelli, Jr.
/s/ Eliot M. Fried Director
--------------------------------
Eliot M. Fried
/s/ Richard V. Howitt Director
--------------------------------
Richard V. Howitt
26
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
AXSYS TECHNOLOGIES, INC.
<PAGE>
FORM 10-K -- ITEM 14(a)(1) and (2) and Item 14(d)
AXSYS TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Axsys Technologies, Inc.,
are included in Item 8:
Consolidated Balance Sheets -- December 31, 1997 and 1996.................F-4
Consolidated Statements of Operations -- For the years ended
December 31, 1997, 1996 and 1995........................................F-6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1997, 1996 and 1995........................................F-7
Consolidated Statements of Shareholders' Equity -- For the years
ended December 31, 1997, 1996 and 1995..................................F-8
Notes to consolidated financial statements................................F-9
The following consolidated financial statement schedule of Axsys
Technologies, Inc., is included in Item 14(d):
Schedule II -- Valuation and qualifying accounts..........................F-20
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Axsys Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Axsys
Technologies, Inc., a Delaware corporation, and its subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Axsys Technologies, Inc. and
subsidiaries, as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 1998
F-3
<PAGE>
AXSYS TECHNOLOGIES, INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- -------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 575 $ 2,691
Accounts receivable, net of allowance for doubtful accounts of
$345 in 1997 and $385 in 1996 ................................ 18,643 13,801
Inventories, net ............................................. 29,324 24,454
Other current assets ......................................... 1,011 850
------- -------
TOTAL CURRENT ASSETS ................................... 49,553 41,796
NET PROPERTY, PLANT AND EQUIPMENT .............................. 15,074 13,456
EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated
amortization of $1,408 in 1997 and $1,045 in 1996 ............ 13,942 6,415
OTHER ASSETS ................................................... 430 504
------- -------
TOTAL ASSETS ............................................ $78,999 $62,171
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AXSYS TECHNOLOGIES, INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable .............................................. $ 9,631 $ 6,881
Accrued expenses and other liabilities ........................ 9,979 7,290
Current portion of long-term debt and capital lease obligations 904 2,831
------- -------
TOTAL CURRENT LIABILITIES .................................. 20,514 17,002
LONG-TERM DEBT AND CAPITAL LEASES, less current portion ......... 8,629 23,324
OTHER LONG-TERM LIABILITIES ..................................... 2,284 2,293
DEFERRED INCOME ................................................. 255 387
SHAREHOLDERS' EQUITY:
$1.20 CUMULATIVE EXCHANGEABLE REDEEMABLE
PREFERRED STOCK, $.01 PAR VALUE: authorized 4,000,000
shares, issued and outstanding none and 738,881 shares at
at December 31, 1997 and 1996 ................................. -- 7
COMMON STOCK, $.01 PAR VALUE:
authorized 30,000,000 shares, issued and outstanding
4,113,190 and 2,568,940 shares at December 31, 1997 and 1996 .. 41 26
CAPITAL IN EXCESS OF PAR ........................................ 40,409 17,297
RETAINED EARNINGS ............................................... 6,867 1,835
------- -------
TOTAL SHAREHOLDERS' EQUITY ................................. 47,317 19,165
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $78,999 $62,171
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES ............................................ $ 123,816 $ 91,301 $ 65,213
Cost of sales ........................................ 89,819 67,483 47,973
Selling, general and administrative expenses ......... 21,749 16,501 13,336
Amortization of intangible assets .................... 363 210 209
----------- ----------- -----------
OPERATING INCOME ..................................... 11,885 7,107 3,695
Interest expense ..................................... 2,633 2,343 1,994
Other expense ........................................ 25 18 252
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
TAXES AND EXTRAORDINARY ITEMS ....................... 9,227 4,746 1,449
Provision for income taxes ........................... 3,740 1,891 565
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS ................................. 5,487 2,855 884
Loss on discontinued operations, net of taxes of $156 (244) -- --
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEMS .................... 5,243 2,855 884
Extraordinary charges, net of taxes of $70 and $111 in
1997 and 1996 ...................................... (109) (173) --
----------- ----------- -----------
NET INCOME ........................................... 5,134 2,682 884
Preferred stock dividends ............................ 102 847 574
----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS ........................................ $ 5,032 $ 1,835 $ 310
=========== =========== ===========
BASIC EARNINGS PER SHARE:
Income from continuing operations .................. $ 1.64 $ 0.79 $ 0.12
Discontinued operations ............................ (0.08) -- --
Extraordinary item ................................. (0.03) (0.07) --
----------- ----------- -----------
Total .............................................. $ 1.53 $ 0.72 $ 0.12
=========== =========== ===========
Weighted average common shares outstanding ........... 3,281,092 2,547,329 2,511,074
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income from continuing operations .................. $ 1.53 $ 0.74 $ 0.12
Discontinued operations ............................ (0.07) -- --
Extraordinary item ................................. (0.03) (0.06) --
----------- ----------- -----------
Total .............................................. $ 1.43 $ 0.68 $ 0.12
=========== =========== ===========
Weighted average common shares outstanding ........... 3,513,302 2,688,270 2,511,074
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 5,134 $ 2,682 $ 884
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Extraordinary items, net of taxes ............................................. 109 173 --
Loss on disposal of discontinued operations, net of taxes ..................... 244 -- --
Realization of net operating loss carryforward ................................ 3,093 1,435 519
Depreciation and amortization ................................................. 3,494 2,722 1,622
(Increase) decrease in accounts receivable .................................... (3,400) 13 768
Increase in inventories ....................................................... (3,631) (831) (2,017)
Decrease (increase) in other current assets ................................... 119 166 (183)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 4,159 (2,564) (1,324)
Decrease in other long-term liabilities ....................................... (409) (404) (882)
Other-net ..................................................................... 139 (1,411) (343)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................................................... 9,051 1,981 (956)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................................. (3,192) (1,878) (1,026)
Proceeds from sale of assets ...................................................... -- 11,532 2,896
Acquisition of businesses, net of cash acquired ................................... (7,335) (7,611) --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES .................................................... (10,527) 2,043 1,870
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .......................................................... 7,000 31,300 --
Net repayment of borrowings ....................................................... (25,522) (32,304) (850)
Net proceeds from common stock offering ........................................... 19,521 -- --
Other ............................................................................. (1,639) (420) --
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES ..................................... (640) (1,424) (850)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH .......................................... (2,116) 2,600 64
CASH AT BEGINNING OF YEAR ........................................................... 2,691 91 27
-------- -------- --------
CASH AT END OF YEAR ................................................................. $ 575 $ 2,691 $ 91
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AXSYS TECHNOLOGIES, INC.
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital Retained
----------------------- ---------------------- In Excess Earnings
Shares Amount Shares Amount of Par (Deficit)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. 672,344 $ 7 2,507,602 $ 25 $ 14,082 $ (845)
--------- --------- --------- --------- --------- ---------
Net Income ............................. -- -- -- -- -- 884
Dividends .............................. 109,298 1 -- -- 573 (574)
Transfer to Capital in Excess of Par (a) -- -- -- -- (535) 535
Contribution to 401(k) plan ............ -- -- 11,619 -- 67 --
Realization of net operating loss
carryforward ........................... -- -- -- -- 519 --
Other .................................. -- -- 1,600 -- 6 --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 ............. 781,642 8 2,520,821 25 14,712 --
--------- --------- --------- --------- --------- ---------
Net Income ............................. -- -- -- -- -- 2,682
Dividends .............................. 27,611 -- -- -- 847 (847)
Contribution to 401(k) plan ............ -- -- 47,671 1 311 --
Realization of net operating loss
carryforward ........................... -- -- -- -- 1,345 --
Odd-lot redemption ..................... (70,372) (1) -- -- (420) --
Issuance of warrants to purchase
Common Stock ........................... -- -- -- -- 500 --
Other .................................. -- -- 448 -- 2 --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ............. 738,881 7 2,568,940 26 17,297 1,835
--------- --------- --------- --------- --------- ---------
Net Income ............................. -- -- -- -- -- 5,134
Dividends .............................. -- -- -- -- 102 (102)
Contribution to 401(k) plan ............ -- -- 13,981 -- 150 --
Preferred stock exchange ............... (538,008) (5) 403,460 4 (66) --
Preferred stock redemption ............. (200,873) (2) -- -- (1,651) --
Realization of net operating loss
carryforward ........................... -- -- -- -- 2,867 --
Common stock issued for acquisition .... -- -- 53,000 -- 2,166 --
Common stock offering .................. -- -- 1,064,809 11 26,386 --
Purchase of warrants ................... -- -- -- -- (6,876) --
Other .................................. -- -- 9,000 -- 34 --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ............. -- $ -- 4,113,190 $ 41 $ 40,409 $ 6,867
========= ========= ========= ========= ========= =========
</TABLE>
(a) Represents transfer of the excess of Preferred Stock dividends over
Retained Earnings.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Dollars in thousands, except per share data)
Note 1 -- Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Axsys Technologies, Inc. and its wholly-owned subsidiaries (collectively the
"Company"). All material intercompany transactions and balances have been
eliminated in consolidation.
Revenue is recognized upon the shipment of product or when services are
rendered.
Inventories are priced at the lower of cost (principally first-in,
first-out, or average) or market.
Deferred financing costs are amortized ratably over the life of the
corresponding debt or commitment.
The excess of cost over net assets acquired is being amortized over periods
ranging from 30 to 35 years using the straight-line method. The Company
continually reviews goodwill to assess recoverability from future operations
using undiscounted cash flows. Impairments would be recognized in operating
results if a permanent diminution in value occurred.
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided primarily by the straight-line method
using estimated lives for buildings and improvements of 20 years and for
machinery and equipment using estimated useful lives ranging from 3 to 8 years.
Certain items in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" which requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
has been computed by dividing Net Income Applicable to Common Shareholders by
the weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing Net Income Applicable to Common Shareholders
by the weighted average number of common shares outstanding including the
dilutive effects of warrants and stock options of 232,210, 140,941 and none in
1997, 1996 and 1995, respectively. Diluted earnings per share for 1996 and 1995,
as calculated under SFAS No. 128, are the same as previously reported fully
diluted earnings per share.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 -- Acquisitions and Divestiture
On May 30, 1997, the Company acquired Teletrac, Inc. ("Teletrac") for
$9,926, including the issuance of 153,000 shares of Axsys Common Stock, 53,000
of which shares were issued at closing and 100,000 of which shares will be
issued pursuant to a Stockholder Agreement entered into as of May 30, 1997 with
certain selling shareholders and employees of Teletrac. Teletrac designs and
manufactures laser-based precision measurement systems and state-of-the-art
precision linear and rotary positioning servo systems for use in the electronics
capital equipment market.
On April 25, 1996, the Company acquired all of the outstanding shares of
Precision Aerotech, Inc. ("PAI") for $4,728, net of cash acquired. In addition,
the Company repaid $12,000 of borrowings under PAI term loans. PAI designs,
manufactures and markets laser scanners, precision metal optics, high
performance air bearings and precision machined parts sold predominantly in
commercial markets.
The acquisitions of Teletrac and PAI were accounted for under the purchase
method of accounting and, accordingly, the results of operations of Teletrac and
PAI have been included in the accompanying consolidated financial statements
since the dates of their respective acquisition. The costs of the acquisitions
were allocated on the basis of the fair market value of the assets acquired and
liabilities assumed. The purchase price allocations for Teletrac have been
completed on a preliminary basis. Management does not believe that changes in
the allocation will be material. During the PAI acquisition process, the Company
determined that L&S Machine Company, Inc. ("L&S"), a wholly-owned subsidiary of
PAI which manufactures structural components for the aerospace industry, did not
fit its long-term strategy and would be subsequently sold. As a result, L&S was
accounted for as a net asset held for disposal as of the PAI acquisition date.
The portion of the PAI acquisition cost allocated to this asset represented the
net proceeds realized upon sale. In December 1996, the Company completed the
sale of L&S for an aggregate purchase price of approximately $13,000. The price
included the assumption of approximately $1,800 in long-term capitalized leases.
Summarized below are the unaudited pro forma results of operations of the
Company as if Teletrac and PAI had been acquired on January 1, 1996:
Pro Forma
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
Net sales ................................ $ 128,127 $ 108,759
Income from continuing operations before
extraordinary items .................... 5,576 3,322
Net income ............................. 5,223 3,149
Basic earnings per share:
Income from continuing operations before
extraordinary items .................... 1.64 0.92
Net income ............................. 1.53 0.85
Diluted earnings per share:
Income from continuing operations before
extraordinary items .................... 1.53 0.87
Net income ............................. 1.43 0.81
F-10
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 -- Acquisitions and Divestiture (cont'd)
The pro forma financial information presented is not necessarily indicative
of either the results of operations that would have occurred had the
acquisitions of Teletrac and PAI taken place at the beginning of fiscal 1996 or
the future operating results of the combined companies.
On October 2, 1996, the Company acquired substantially all of the assets of
Lockheed Martin Beryllium Corporation ("LMBC") for $2,883. LMBC's operations
consisted primarily of precision machining of beryllium and other exotic
material components. This acquisition has also been accounted for under the
purchase method of accounting and, accordingly, the results of operations of
LMBC have been included in the accompanying consolidated financial statements
since the date of acquisition. The cost of the acquisition was allocated on the
basis of the fair market value of the assets acquired and liabilities assumed.
Note 3 -- Shareholders' Equity
Common Stock --
On October 15, 1997, the Company amended its Certificate of Incorporation
to increase the authorized number of shares of Common Stock to 30,000,000.
On October 21, 1997, the Company completed an underwritten public offering
of 1,064,809 shares of its Common Stock at a public offering price of $27.00 per
share (the "offering"). Of the approximately $26,400 of net proceeds from the
offering, approximately $6,900 was used to repurchase outstanding warrants to
purchase the Company's Common Stock and the remaining net proceeds to prepay a
portion of the Company's outstanding bank debt.
On July 25, 1996, the Company completed a one-for-five reverse stock split
of its $0.01 par value Common Stock. The stated par value of each share was not
changed from $0.01. All share and per share data presented in this report has
been restated to reflect the reverse stock split.
Preferred Stock --
The Company paid quarterly dividends on its $1.20 Cumulative Exchangeable
Redeemable Preferred Stock in additional shares at an annual rate of 15% based
on the shares outstanding from August 1991 through February 22, 1996. On
February 22, 1996, the Company's right to pay dividends in additional shares of
Preferred Stock expired. From February 22, 1996 to June 4, 1997, the Company did
not declare or pay any dividends on the Preferred Stock, although they continued
to accumulate.
On February 14, 1997, the Company commenced an offer to exchange 0.75
shares of its Common Stock for each outstanding share of its Preferred Stock. On
March 17, 1997, the Exchange Offer terminated and the Company accepted for
exchange all shares of Preferred Stock validly tendered as of that time.
Approximately 538,000 shares of Preferred Stock were exchanged for approximately
403,500 shares of Common Stock. Holders of shares of Preferred Stock accepted
for exchange did not receive any separate payment in respect of dividends not
paid subsequent to February 22, 1996, the last date on which dividends were paid
on the Preferred Stock.
On June 4, 1997, the Company redeemed all the remaining approximately
200,900 outstanding shares of its Preferred Stock. The redemption price was
$7.70 per share, including accrued and unpaid dividends of $1.54 per share
through the redemption date.
F-11
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 -- Long-Term Debt
1997 1996
------- --------
Credit Facility........................... $ 5,067 $ 22,285
Industrial Revenue Bonds.................. 1,620 1,870
Capital Lease Obligations................. 2,846 2,000
------- --------
9,533 26,155
Less current portion...................... 904 2,831
------- --------
$ 8,629 $ 23,324
======= ========
As of December 31, 1997, the Company had an $11,000 Credit Facility which
was comprised of a revolving debt commitment expiring on April 25, 2000.
Borrowings under the Credit Facility through December 31, 1997 bore interest at
a fluctuating rate per annum equal to the rate of interest publicly announced by
Chase Manhattan Bank, N.A. as its prime rate (the prime rate was 8.5% at
December 31, 1997), plus a margin ranging from 1.75% to 2.25%, or the London
Interbank Offered Rate ("LIBOR"), plus a margin ranging from 3.25% to 3.75%. A
commitment fee of 0.5% is payable on any unused amount of the Credit Facility.
The Credit Facility contains certain restrictive covenants which, among other
things, impose limitations with respect to the incurrence of additional liens
and indebtedness, mergers, consolidations and specified sale of assets and
requires the Company to meet certain financial tests including minimum levels of
earnings and net worth and various other financial ratios. In addition, the
Credit Facility prohibits the payment of cash dividends. Borrowings under the
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries. Effective January 1, 1998, the Credit Facility was amended
to, among other changes, reduce the Company's borrowing rates to prime, or LIBOR
plus a margin ranging from 0.75% to 1.50%, based on the Company's level of
indebtedness. Had this amendment been effective as of December 31, 1997, the
LIBOR margin would have been 1.0%.
The Company had outstanding at December 31, 1997, industrial revenue bonds
(the "Bonds") in the amount of $1,620 secured by its Gilford, NH manufacturing
facility which has a net carrying amount of approximately $2,100. The Bonds,
which bear interest at a fixed rate of 13%, are payable in 2005. The Bonds are
redeemable in whole in 1998, 1999, 2000 and 2001 at a premium to the principal
value of 106%, 103%, 102% and 101%, respectively. On and after December 1, 2002,
the bonds are redeemable at principal value. In addition, the Company may make
optional prepayments of $250 annually at principal value.
The Company has financed the acquisition of certain machinery and equipment
with capital lease obligations. As of December 31, 1997, outstanding capital
lease obligations bear interest ranging from 7.75% to 12.25%.
The Company recorded extraordinary non-cash charges, net of tax benefits,
of $109 and $173 in 1997 and 1996, respectively, in connection with prepayments
of indebtedness.
Scheduled debt maturities of long-term debt obligations are $904 (1998),
$948 (1999), $5,765 (2000), $296 (2001), and $1,620 (2005).
F-12
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 -- Balance Sheet Information
The details of certain balance sheet accounts are as follows:
1997 1996
-------- --------
Inventories:
Raw materials.................................... $ 10,799 $ 8,033
Work-in-process.................................. 12,455 12,942
Finished goods................................... 11,425 10,118
-------- --------
34,679 31,093
Less reserves.................................... 5,355 6,639
-------- --------
$ 29,324 $ 24,454
======== ========
Work-in-process inventory at December 31, 1997 and 1996 is recorded net of
progress payments received from customers on uncompleted contracts of $1,064 and
$1,576, respectively.
Net property, plant and equipment:
Land............................................. $ 891 $ 891
Buildings and improvements....................... 6,721 5,994
Machinery and equipment.......................... 17,868 14,029
-------- --------
25,480 20,914
Less accumulated depreciation and amortization... 10,406 7,458
-------- --------
$ 15,074 $ 13,456
======== ========
Accrued expenses and other liabilities:
Compensation and related benefits................ $ 5,504 $ 3,741
Other............................................ 4,475 3,549
-------- --------
$ 9,979 $ 7,290
======== ========
Note 6 -- Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $1,300 which expire in the years 2006 through 2009 and alternative
minimum tax credit carryforwards of approximately $500. In addition, the Company
had approximately $9,200 of previously unrecognized tax benefits, principally
related to inventories. As the portion of the loss carryforwards and deferred
tax benefits originating prior to the Company's 1991 quasi-reorganization are
realized, the corresponding tax effect will be credited to Capital in Excess of
Par under quasi-reorganization accounting principles rather than reducing the
Provision for Income Taxes. In 1997 and 1996, $2,867 and $1,345, respectively,
were credited to Capital in Excess of Par representing the utilization of such
pre quasi-reorganization tax benefits to offset current year tax expense. As of
December 31, 1997, $300 of the pre quasi-reorganization tax effected benefits
remain unutilized. The utilization and realization of the carryforwards and
future tax benefits will reduce the amount of cash taxes payable on taxable
income in the future.
F-13
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 -- Income Taxes (cont'd)
The provision for taxes on income from continuing operations before
extraordinary items consists of:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current taxes - charge in lieu of taxes and taxes:
Federal ......................................... $3,014 $1,579 $ 454
State and local ................................. 726 312 111
------ ------ ------
3,740 1,891 565
------ ------ ------
Deferred taxes:
Federal ......................................... -- -- --
------ ------ ------
$3,740 $1,891 $ 565
====== ====== ======
</TABLE>
The reasons for the difference between the provision for taxes and the
amount computed by applying the statutory federal income tax rate to Income from
Continuing Operations Before Taxes and Extraordinary Items are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate ............................ 34% 34% 34%
Computed expected tax provision ................... $3,137 $1,614 $ 493
Increase (decrease) in taxes resulting from:
State and local taxes, net of federal tax benefit 479 206 72
Amortization of goodwill ........................ 124 71 71
Other ........................................... -- -- (71)
------ ------ ------
Actual tax provision .............................. $3,740 $1,891 $ 565
====== ====== ======
</TABLE>
Deferred income taxes reflect the net federal and state tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
-----------------
1997 1996
------ ------
Tax net operating loss carryforwards............... $1,007 $4,240
Inventory valuation differences.................... 2,503 2,296
Percentage of completion method.................... 914 543
Other, net......................................... 171 125
------ ------
4,595 7,204
Valuation allowance................................ (4,595) (7,204)
------ ------
Total deferred taxes............................... $ -- $ --
====== ======
The net change in the valuation allowance in 1997 and 1996 was a decrease
of $2,609 and $1,917, respectively.
F-14
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Loss on Discontinued Operations
In September 1997, the Company was advised by its environmental consultants
that the costs associated with the remediation of a previously discontinued
operation site are now estimated to be higher than originally anticipated. The
current estimates to remediate this site now range from approximately $600 to
$1,500. Actual costs may be different than the current estimates. Based on this
information, the Company increased its reserve relating to this site to
approximately $600 by recording a discontinued operation charge of $400, before
a tax benefit of $156.
Note 8 -- Pension Arrangements
The Company has two pension plans for which benefits and participation have
been frozen. Pension benefits under these plans are generally based upon years
of service and compensation. The Company's funding policy is to contribute
amounts to these plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time.
A summary of components of net periodic pension cost for the defined
benefit plans and the total contribution charged to pension expense for the
multi-employer plans follows:
1997 1996 1995
----- ----- -----
Defined benefit plans:
Service cost-benefits earned during the period.. $-- $-- $--
Interest cost on projected benefit obligation... 76 71 74
Actual return on plan assets ................... (99) (46) (25)
Net amortization and deferral .................. 107 26 17
----- ----- -----
Total pension expense........................... $ 84 $ 51 $ 66
===== ===== =====
Assumptions used in accounting for the defined benefit plans as of the
plans' measurement dates were:
1997 1996 1995
----- ----- -----
Weighted-average discount rate ................. 7.5% 7.5% 7.5%
Expected long-term rate of return on assets .. 6.0% 6.0% 6.0%
F-15
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 -- Pension Arrangements, (cont'd)
The following table sets forth the funded status and amount recognized in
the consolidated balance sheets for the Company's defined benefit pension plans:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................. $1,090 $1,053 $1,116
====== ====== ======
Accumulated benefit obligation ........................ $1,090 $1,053 $1,116
====== ====== ======
Projected benefit obligation .......................... $1,090 $1,053 $1,116
Less plan assets at fair market value ................. 674 451 231
------ ------ ------
Projected benefit obligation in excess of plan assets.. 416 602 885
Unrecognized net gain ................................. 215 151 98
------ ------ ------
Net pension liability recognized in the balance sheet.. $ 631 $ 753 $ 983
====== ====== ======
</TABLE>
Unrecognized net gains and losses are amortized over the average future
service lives of participants. Plan assets are invested in a managed portfolio
consisting primarily of equity securities.
The Company also sponsors 401(k) plans under which eligible employees may
elect to contribute a percentage of their earnings. The Company has matched
employee contributions to these plans in amounts ranging from 3% up to 5% of the
employees' gross earnings over the three years ended December 31, 1997. Company
matching contributions were $984 in 1997, $709 in 1996 and $325 in 1995.
Note 9 -- Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31, 1997,
1996 and 1995 is summarized as follows:
1997 1996 1995
------ ------ ------
Cash paid during the year for:
Interest......................................... $2,554 $2,586 $1,989
Income tax payments.............................. 315 441 52
Noncash investing activities:
Equipment acquired under capital leases.......... $1,726 $ 786 $ --
Common stock issued for acquisition ............. 2,166 -- --
F-16
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- Stock Options and Warrants
Stock Options-
The Company's Long-Term Stock Incentive Plan (the "Plan") was approved by
shareholders in 1991. Shareholders approved an amendment to and restatement of
the Plan in October 1997, which, among other things, increased the number of
shares of Common Stock authorized for grant from 79,400 to 400,000. The Plan is
administered by the Stock Incentive Plan Committee of the Board of Directors
(the "Committee"). The Committee selects participants from among those
executives and other employees of the Company and its subsidiaries who
materially contribute to the success of the Company and determines the amounts,
times, forms, terms and conditions of grants. Grants may be in the form of
options to purchase shares of Common Stock, stock appreciation rights,
restricted stock and performance units (collectively, "Stock Incentives"). Each
Stock Incentive is exercisable upon vesting.
A summary of Plan transactions are presented in the table below:
Weighted
Stock Average
Options Exercise Price
-------- ------
Outstanding at December 31, 1995 .......... 38,600 $ 3.88
-------- ------
Outstanding at December 31, 1996 .......... 38,600 $ 3.88
-------- ------
Granted ............................... 169,000 25.59
Forfeited ............................. (3,500) 13.71
Exercised ............................. (9,000) 3.75
-------- ------
Outstanding at December 31, 1997 .......... 195,100 $22.52
======== ======
Exercisable at December 31, 1997 .......... 26,560 $ 5.56
======== ======
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 3.75 to $ 4.15 27,600 3 Years $ 3.93 22,560 $ 3.88
$15.00 to $17.75 21,000 7 Years 15.67 4,000 15.00
$27.00 146,500 10 Years 27.00 -- --
- -------------------------------------------------------------------------------------------------------------
$ 3.75 to $27.00 195,100 9 Years $22.52 26,560 $ 5.56
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- Stock Options and Warrants (cont'd)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for grants under the Plan. Pro forma information regarding net
income and net income per share is required by SFAS No. 123 for awards granted
in fiscal years beginning after December 15, 1994 as if the Company had
accounted for such awards under the fair value method. Had compensation cost for
the Company's Stock-Incentive grants in 1997 been determined using the fair
value method, the Company would have reported the following results:
1997
-------
Pro forma income from continuing operations before
extraordinary items .................................... $ 5,359
Pro forma net income ................................... 5,006
Pro forma basic earnings per share:
Income from continuing operations before
extraordinary items .................................. 1.60
Net Income ........................................... 1.49
Pro forma diluted earnings per share:
Income from continuing operations before
extraordinary items .................................. 1.50
Net Income ........................................... 1.40
There were no Stock Incentives granted to employees in 1996 and 1995 and,
accordingly, no pro forma disclosure is provided. The fair value of each option
granted in 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected volatility of 50%;
risk-free interest rate of 5.8%; expected lives of 6 years; and, no dividend
yield. Using this model, the weighted average fair value of options granted
during 1997 is $13.11. For pro forma purposes, the estimated fair value of the
Company's Stock Incentive awards to employees is amortized over the options'
vesting period which, for the 1997 awards, is generally five years. Because the
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its Stock Incentive awards to employees.
Warrants--
At December 31, 1996, a warrant to acquire up to 133,263 shares of Common
Stock at an exercise price of $.05 per share and warrants to acquire up to
175,278 shares of Common Stock at an exercise price of $6.25 per share, were
outstanding. These warrants were purchased in conjunction with the Company's
public offering on October 21, 1997 (see Note 3). At December 31, 1997, there
were no warrants outstanding.
F-18
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 -- Commitments and Contingencies
Future minimum payments under noncancellable operating leases (exclusive of
property expenses and net of sublease rental income), as of December 31, 1997,
are as follows:
1998...................................................... $1,759
1999 ..................................................... 1,567
2000 ..................................................... 324
2001 ..................................................... 172
2002 ..................................................... 159
2003 and thereafter ...................................... 246
------
$4,227
======
Rent expense under such leases, net of sublease rental income, amounted to
$1,721, $1,589 and, $1,539 in 1997, 1996 and 1995, respectively.
In February 1990, the Company sold and leased back its San Diego,
California facility under an operating lease. The Company has a deferred gain as
of December 31, 1997 on this transaction of $255, which is being amortized to
income over the ten year lease term as a reduction of annual rent expense.
The Company 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 Company's financial
position or results of operations.
F-19
<PAGE>
AXSYS TECHNOLOGIES, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Classification of Period Expenses Accounts Deductions End of Period
-------------- ---------- ---------- ---------- ---------- -------------
Allowance for doubtful accounts
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997: $385 $166 $ 4(a) $210(b) $345
Year ended December 31, 1996: $233 $ 93 $100(a) $ 41(b) $385
Year ended December 31, 1995: $345 $106 $218(b) $233
</TABLE>
- ----------
(a) Includes $4, in 1997, and $100, in 1996, associated with the acquisition of
businesses.
(b) Uncollectible accounts written off, net of recoveries.
F-20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3(1) Certificate of Incorporation of the Company (filed as Exhibit 1 to the
Company's Form 8-A, dated August 8, 1991 (the "Form 8-A") and
incorporated herein by reference).
3(2) Amendment to Certificate of Incorporation (filed as Exhibit 3 to the
Company's Form 10-QA-1, dated December 20, 1996, for the fiscal
quarter ended September 30, 1996 (the "September 30, 1996 Form 10-Q")
and incorporated herein by reference).
3(3) Amendment to Certificate of Incorporation (filed as Exhibit 3(i) to
the Company's Form 8-K, dated December 23, 1996 (the "December 23,
1996 Form 8-K") and incorporated herein by reference).
3(4) Restated Certificate of Incorporation of the Company (filed as Exhibit
3(4) to the Company's Form S-1/A, dated October 17, 1997 (the "Form
S-1") and incorporated herein by reference).
3(5) By-Laws of the Company (filed as Exhibit 2 to the Form 8-A and
incorporated herein by reference).
4(1) Stockholder Agreement, (filed as Exhibit 4(6) to the Form S-1 and
incorporated herein by reference) dated as of May 30, 1997, by and
between the Company and David Barker, Richard Howitt, William Hurst,
William Kingsbury and Barton Norton.
10(1) Indenture of Trust by and between the Industrial Development Authority
of the State of New Hampshire and Laconia Peoples National Bank and
Trust Company for $3,000,000 principal amount of Industrial
Development Authority of the State of New Hampshire Floating Rate
Monthly Demand Industry Facility Bonds (filed as Exhibit 10(18) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1985, (the "1985 Form 10-K") and incorporated herein by
reference).
10(2) Loan Agreement by and among the Industrial Development Authority of
the State of New Hampshire, the Company and V Land Corporation for
$3,000,000 principal amount of Industrial Development Authority of the
State of New Hampshire Floating Rate Monthly Demand Industry Facility
Bonds (filed as Exhibit 10(19) to the 1985 Form 10-K and incorporated
herein by reference).
E-1
<PAGE>
Exhibit
Number Description
------ -----------
10(3) Credit Agreement, dated April 25, 1996, between the Company, various
banks named therein and Banque Paribas, as Agent (filed as Exhibit
10(1) to the Company's Form 8-K, dated May 7, 1996 (the "May 7, 1996
Form 8-K") and incorporated herein by reference).
10(4) Security Agreement, dated April 25, 1996, between the Company, various
subsidiaries of the Company and Banque Paribas, as Collateral Agent
(filed as Exhibit 10.2 to the May 7, 1996 Form 8-K and incorporated
herein by reference).
10(5) Pledge Agreement, dated April 25, 1996, between the Company, various
subsidiaries of the Company and Banque Paribas as Collateral Agent
(filed as Exhibit 10.3 to the May 7, 1996 Form 8-K and incorporated
herein by reference).
10(6) Subsidiaries Guaranty, dated April 25, 1996, by various subsidiaries
of the Company (filed as Exhibit 10.4 to the May 7, 1996 Form 8-K and
incorporated herein by reference).
10(7) First Amendment to Credit Agreement (filed as Exhibit 10 to the
September 30, 1996 Form 10-Q and incorporated herein by reference).
10(8) Second Amendment to Credit Agreement (filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997 (the "June 30, 1997 Form 10-Q") and incorporated herein
by reference).
10(9) Third Amendment to Credit Agreement (filed as Exhibit 10 to the June
30, 1997 Form 10-Q and incorporated herein by reference).
10(10) Fourth Amendment to Credit Agreement (filed as Exhibit 10(10) to the
Form S-1 and incorporated herein by reference).
10(11) Stock Purchase Agreement by and between the Company, Teletrac, Inc.
and David Barker, Richard Howitt, William Hurst, William Kingsbury,
Barton Norton, John Van Dyke and Mary Erdahl (filed as Exhibit 2 to
the Company's Form 8-K, dated May 30, 1997 and incorporated herein by
reference).
10(12) Agreement and Plan of Merger, dated as of February 16, 1996, between
the Company, PA Acquisition Corporation and Precision Aerotech, Inc.
(filed as Exhibit 10(40) to Company's Form 10-K for the fiscal
year-ended December 31, 1995 and incorporated herein by reference).
E-2
<PAGE>
Exhibit
Number Description
------ -----------
10(13) Stock Purchase Agreement, dated as of November 26, 1996, as amended
December 11, 1996, between the Company, Precision Aerotech, Inc., Tru-
Circle Corporation and Tru-Circle Manufacturing, Inc. (filed as
Exhibit 2 to the December 23, 1996 Form 8-K and incorporated herein by
reference).
10(14) Form of Indemnification Agreement (filed as Exhibit 10(16) to the
Company's Form 10-K for the fiscal year ended December 30, 1990 (the
"1990 Form 10-K") and incorporated herein by reference).
10(15) Severance Agreement between the Company and Mr. Kunzmann dated as of
June 10, 1996 (filed as Exhibit 10(15) to the Form S-1 and
incorporated herein by reference).
10(16) Severance Agreement between the Company and Mr. Stern dated as of June
10, 1996 (filed as Exhibit 10(16) to the Form S-1 and incorporated
herein by reference).
10(17) Vernitron Corporation Long-Term Stock Incentive Plan (superseded by
Exhibit 10(26) (filed as Exhibit 10(17) to the Form S-1 and
incorporated herein by reference).
10(18) Employment Agreement between Richard Howitt and Teletrac, dated as of
May 30, 1997 (filed as Exhibit 10(18) to the Form S-1and incorporated
herein by reference).
10(19) Non-Competition Agreement between Richard Howitt and the Company,
dated as of May 30, 1997 (filed as Exhibit 10(19) to the Form S-1 and
incorporated herein by reference).
10(20) Form of Stock Option Agreement, dated as of September 30, 1991 (filed
as Exhibit 10(17) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1991 and incorporated herein by
reference).
10(21) Teletrac, Inc. Management Incentive Compensation Plan (filed as
Exhibit 10(21) to the Form S-1 and incorporated herein by reference).
10(22) Summary of Annual Incentive Plan (filed as Exhibit 10(22) to the Form
S-1 and incorporated herein by reference).
10(23) Supplemental Revenue Growth Incentive Plan (filed as Exhibit 10(23) to
the Form S-1 and incorporated herein by reference).
10(24) Assumption Agreement, dated as of May 30, 1997, made by Teletrac, Inc.
(filed as Exhibit 10(24) to the Form S-1 and incorporated herein by
reference).
E-3
<PAGE>
Exhibit
Number Description
------ -----------
10(25) Fifth Amendment to Credit Agreement (filed as Exhibit 10(25) to the
Form S-1 and incorporated herein by reference).
10(26) Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as
Exhibit C to the Company's Proxy Statement dated September 23, 1997
and incorporated herein by reference).
10(27) Sixth Amendment to Credit Agreement.
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
E-4
Exhibit 10(27)
SIXTH AMENDMENT TO CREDIT AGREEMENT
SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Sixth Amendment"), dated as of
January 1, 1998, among AXSYS TECHNOLOGIES, INC. (f/k/a VERNITRON CORPORATION), a
corporation organized and existing under the laws of the State of Delaware (the
"Borrower"), the financial institutions party to the Credit Agreement referred
to below (each a "Bank" and, collectively, the "Banks"), and BANQUE PARIBAS, as
agent (the "Agent"). All capitalized terms used herein and not otherwise defined
shall have the respective meanings provided such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of April 25, 1996 (as amended, modified or supplemented to
the date hereof, the "Credit Agreement");
WHEREAS, the Banks are willing to amend certain provisions of the Credit
Agreement, subject to and on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
I. Section 3.01(a) of the Credit Agreement is hereby amended by (i)
deleting the reference to "1/2" contained therein and (ii) inserting a reference
to "3/8" in lieu thereof.
2. Section 9.08 of the Credit Agreement is hereby amended by (i) deleting
Section 9.08(a) in its entirety and (ii) inserting the following new Section
9.08(a) in lieu thereof:
"9.08 Capital Expenditures. (a) The Borrower will not and will not
permit any of its Subsidiaries to, make any expenditure which should be
capitalized in accordance with generally accepted accounting principles,
including all such expenditures with respect to fixed or capital assets
(including, without limitation, expenditures for maintenance and repairs
which should be capitalized in accordance with generally accepted
accounting principles and including Capitalized Lease Obligations)
(collectively, "Capital Expenditures"), except that (x) during the period
(taken as one accounting period) commencing on the Initial Borrowing Date
and ending on December 31, 1996, the Borrower and its Subsidiaries may make
Capital Expenditures so long as the aggregate amount thereof does not
exceed $2,900,000 during such period and (y) during any calendar year
thereafter the Borrower and its Subsidiaries may make Capital Expenditures
<PAGE>
so long as the aggregate amount thereof does not exceed the amount set
forth opposite such fiscal year below:
Fiscal Year Amount
----------- ------
1997 $5,000,000
1998 and each
fiscal year
thereafter $7,500,000
For purposes of this Section 9.08, asset purchases made in accordance with
Section 9.02(viii) shall not constitute Capital Expenditures for purposes
of this Section 9.08 and refinancings of existing Capitalized Lease
Obligations effected in accordance with Section 9.05(v) shall not
constitute Capital Expenditures for purposes of this Section 9.08."
3. Section 9.09 of the Credit Agreement is hereby amended by (i) deleting
Section 9.09 in its entirety and (ii) inserting the following new Section 9.09
in lieu thereof:
"9.09 Fixed Charge Coverage Ratio. The Borrower will not permit the
Fixed Charge Coverage Ratio for any Test Period ended on the last day of
any fiscal quarter to be less than the ratio set forth below opposite such
date:
Fiscal Quarter Ended Ratio
-------------------- -----
June 30, 1996 1.15 : 1.00
September 30, 1996 1.15 : 1.00
December 31, 1996 1.15 : 1.00
March 31, 1997 1.15 : 1.00
June 30, 1997 1.15 : 1.00
September 30, 1997
and each fiscal
quarter thereafter 1.20 : 1.00"
4. Section 9.10 of the Credit Agreement is hereby amended by (i) deleting
Section 9.10 in its entirety and (ii) inserting the following new Section 9.10
in lieu thereof:
-2-
<PAGE>
"9.10 Interest Coverage Ratio. The Borrower will not permit the ratio
of its Consolidated EBITDA to its Consolidated Cash Interest Expense for
any Test Period ended on the last day of any fiscal quarter set forth below
to be less than the ratio set forth below opposite such date:
Fiscal Quarter Ended Ratio
-------------------- -----
June 30, 1996 2.85 : 1.00
September 30, 1996 2.85 : 1.00
December 31, 1996 3.25 : 1.00
March 31, 1997 3.10 : 1.00
June 30, 1997 3.30 : 1.00
September 30, 1997 3.65 : 1.00
December 31, 1997
and each fiscal
quarter thereafter 3.50 : 1.00"
5. Section 9.11 of the Credit Agreement is hereby amended by (i) deleting
Section 9.11 in its entirety and (ii) inserting the following new Section 9.11
in lieu thereof:
"9.11 Consolidated Indebtedness to Consolidated EBITDA. The Borrower
will not permit on any date set forth below the ratio of (x) Consolidated
Indebtedness at such time to (y) its Consolidated EBITDA for the Test
Period then ended to be greater than the ratio set forth below opposite
such date:
Fiscal Quarter Ended Ratio
June 30, 1996 3.50 : 1:00
September 30, 1996 3.50 : 1.00
December 31, 1996 3.00 : 1.00
March 31, 1997 3.20 : 1.00
June 30, 1997 3.00 : 1.00
September 30, 1997 2.75 : 1.00
December 31, 1997
and each fiscal
quarter thereafter 2.00 : 1.00"
6. Section 9.12 of the Credit Agreement is hereby amended by (i) deleting
Section 9.12 in its entirety and (ii) inserting the following new Section 9.12
in lieu
-3-
<PAGE>
thereof:
"9.12 Minimum Consolidated EBITDA. The Borrower will not permit its
Consolidated EBITDA for any Test Period ended on the last day of any fiscal
quarter set forth below to be less than the amount set forth below opposite
such date:
Fiscal Quarter Ended Minimum Amount
-------------------- --------------
June 30, 1996 $ 1,700,000
September 30, 1996 $ 4,250,000
December 31, 1996 $ 7,800,000
March 31, 1997 $ 9,600,000
June 30, 1997 $10,900,000
September 30, 1997 $11,500,000
December 31, 1997
and each fiscal
quarter thereafter $12,500,000"
7. Section 9.13 of the Credit Agreement is hereby amended by (i) deleting
Section 9.13 in its entirety and (ii) inserting the following new Section 9.13
in lieu thereof:
"9.13 Minimum Consolidated Net Worth. The Borrower will not permit its
Consolidated Net Worth for any Test Period ended on the last day of any
fiscal quarter set forth below to be less than the amount opposite such
date:
Minimum Consolidated
Period Ended Net Worth
------------ ---------
June 30, 1996 $14,800,000
September 30, 1996 $15,250,000
December 31, 1996 $16,250,000
March 31, 1997 $16,750,000
June 30, 1997 $17,750,000
September 30, 1997 $18,750,000
December 31, 1997
and each fiscal
quarter thereafter $30,000,000"
8. Section 9.14 of the Credit Agreement is hereby amended by (i) deleting
Section 9.14 in its entirety and (ii) inserting the following in lieu thereof:
-4-
<PAGE>
"9.14 Maximum Leverage. [Intentionally Omitted]."
9. Section 9.22 of the Credit Agreement is hereby amended by (i) deleting
the reference to "55" contained therein and (ii) inserting a reference to "60"
in lieu thereof.
10. The definition of "Applicable Margin" contained in Section 11 of the
Credit Agreement is hereby amended by (i) deleting the definition of "Applicable
Margin" in its entirety and (ii) inserting the following new definition of
"Applicable Margin" in lieu thereof:
"Applicable Margin" shall mean a percentage per annum equal to (A) in the
case of Eurodollar Loans, (i) if the ratio of (x) the Consolidated Indebtedness
to (y) Consolidated EBITDA is less than .50:1.00, then the Applicable Margin
equals 0.75%, (ii) if the ratio of (x) the Consolidated Indebtedness to (y)
Consolidated EBITDA is greater than or equal to .50:1.00 but less than
1.00:1.00, then the Applicable Margin equals 1.00%; (iii) if the ratio of (x)
the Consolidated Indebtedness to (y) Consolidated EBITDA is greater than or
equal to 1.00:1.00 but less than 1.50:1.00, then the Applicable Margin equals
1.25%; and (iv) if the ratio of (x) the Consolidated Indebtedness to (y)
Consolidated EBITDA is greater than or equal to 1.50:1.00 but less than
2.00:1.00, then the Applicable Margin equals 1.50% and (B) in the case of Base
Rate Loans, then the Applicable Margin equals 0%; the ratio of Consolidated
Indebtedness to Consolidated EBITDA shall be determined by delivery of an
officer's certificate of the Borrower to the Banks pursuant to Section 8.01(f),
which certificate shall set forth the calculation of the ratio of Consolidated
Indebtedness to Consolidated EBITDA for the applicable period. The ratio so
determined shall apply, except as set forth below, from the date on which such
officer's certificate is delivered to the Agent to the earlier of (x) the date
on which the next certificate is delivered to the Agent pursuant to Section
8.01(f) and (y) the 45th day following the first day of the fiscal quarter
immediately following the delivery of such certificate to the Agent.
Notwithstanding anything to the contrary contained above, the Applicable Margin
shall be 1.50% in the case of Eurodollar Loans (and will remain 0% in the case
of Base Rate Loans) (a) if no officer's certificate has been delivered to the
Banks pursuant to Section 8.01(f) or the financial statements upon which any
such calculations are based have not been delivered, until such a certificate
and/or financial statements are delivered and (b) at all times when there shall
exist a Default or Event of Default".
11. The definition of "Change in Control" contained in Section 11 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following new definition:
-5-
<PAGE>
"Change of Control" shall mean (i) the direct or indirect acquisition
by any Person or group (as such term is defined in Section 13(d)(3) of the
Securities Exchange Act) of the beneficial ownership (as such term is
defined in Rule 13D-3 promulgated under the Securities Exchange Act) of 20%
or more of the outstanding shares of the common stock of the Borrower or
(ii) the Board of Directors of the Borrower shall cease to consist of a
majority of Continuing Directors.
12. Notwithstanding anything to the contrary contained in the Credit
Agreement (including Section 9.06) but only so long as there exists no Default
or Event of Default, the Borrower shall be permitted to purchase up to
$2,000,000, in the aggregate, of Common Stock of the Company in open market
transactions during the period beginning on the Sixth Amendment Effective Date.
13. Schedule I to the Credit Agreement is hereby amended by (i) deleting
Schedule I in its entirety and (ii) inserting in lieu thereof a new Schedule I
thereto the Schedule I attached hereto which reflects the existing commitments
of the Banks as of the Sixth Amendment Effective Date.
14. In order to induce the Banks to enter into this Sixth Amendment, the
Borrower hereby represents and warrants that on the Sixth Amendment Effective
Date, both before and after giving effect to this Sixth Amendment and the
transactions contemplated hereby, (i) no Default or Event of Default shall
exist, (ii) all of the representations and warranties contained in the Credit
Documents shall be true and correct in all material respects, with the same
effect as though such representations and warranties had been made on and as of
the Sixth Amendment Effective Date (it being understood that any representation
or warranty made as of a specific date shall be true and correct in all
materials respects as of such specified date) and (iii) the Borrower shall have
paid to the Agent all unpaid costs and expenses (including legal fees and
expenses) of the Agent.
15. This Sixth Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
16. This Sixth Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
-6-
<PAGE>
17. THIS SIXTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
18. This Sixth Amendment shall become effective as of the date hereof (the
"Sixth Amendment Effective Date") when each Credit Party, the Required Banks and
the Collateral Agent shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of telecopier) the
same to the Agent.
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Sixth Amendment to be duly executed and delivered as of the date first
above written.
AXSYS TECHNOLOGIES, INC.
as Borrower
By /s/ Louis D. Mattielli
-----------------------------------
Name: Louis D. Mattielli
Title: Vice President-General Counsel
and Secretary
PRECISION AEROTECH, INC.,
as Subsidiary Guarantor
By /s/ Louis D. Mattielli
-----------------------------------
Name: Louis D. Mattielli
Title: Vice President-General Counsel
and Secretary
SPEEDRING, INC.
as Subsidiary Guarantor
By /s/ Louis D. Mattielli
-----------------------------------
Name: Louis D. Mattielli
Title: Vice President-General Counsel
and Secretary
SPEEDRING SYSTEMS, INC.,
as Subsidiary Guarantor
By /s/ Louis D. Mattielli
-----------------------------------
Name: Louis D. Mattielli
Title: Vice President-General Counsel
and Secretary
-8-
<PAGE>
TELETRAC, INC.,
as Subsidiary Guarantor
By /s/ Louis D. Mattielli
-----------------------------------
Name: Louis D. Mattielli
Title: Vice President-General Counsel
and Secretary
BANQUE PARIBAS, individually, as
Agent and as Collateral Agent
By /s/ Donald J. Ercole
-----------------------------------
Name: Donald J. Ercole
Title: Managing Director
By /s/ Edward Irwin
-----------------------------------
Name: Edward Irwin
Title: Director
PARIBAS CAPITAL FUNDING LLC
By /s/ Jeffrey J. Youle
-----------------------------------
Name: Jeffrey J. Youle
Title: Director
IBJ SCHRODER BANK & TRUST COMPANY
By /s/ Mark H. Minter
-----------------------------------
Name: Mark Minter
Title: Director
-9-
<PAGE>
FLEET BANK, N.A.
By /s/ Robert Isaksen
-----------------------------------
Name: Robert Isaksen
Title: Vice President
-10-
<PAGE>
SCHEDULE I
COMMITMENTS
================================================================================
Revolving
Bank Loan Commitment
---- ---------------
- --------------------------------------------------------------------------------
Banque Paribas $ 2,444,444.45
- --------------------------------------------------------------------------------
Paribas Capital Funding LLC $ 1,855,333.33
- --------------------------------------------------------------------------------
First Source Financial LLP $ 2,499,444.44
- --------------------------------------------------------------------------------
IBJ Schroder Bank & Trust Company $ 2,100,388.89
- --------------------------------------------------------------------------------
Fleet Bank, N.A. $ 2,100,388.89
--------------
- --------------------------------------------------------------------------------
Total $11,000,000.00
================================================================================
Exhibit 21
Subsidiaries
Name State of Incorporation
---- ----------------------
Precision Aerotech, Inc. Delaware
Speedring, Inc. Delaware
Speedring Systems, Inc. Delaware
Teletrac Inc. California
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 20, 1998 included in this Annual Report on
Form 10-K, into the Company's previously filed Registration Statements on Form
S-8 (No. 333-43389, 33-09559 and 033-79996).
/s/ Arthur Andersen
- ------------------------------
(Arthur Andersen LLP)
New York, New York
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AXSYS TECHNOLOGIES, INC. AS OF DECEMBER 31,
1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 575
<SECURITIES> 0
<RECEIVABLES> 18,988
<ALLOWANCES> 345
<INVENTORY> 29,324
<CURRENT-ASSETS> 49,553
<PP&E> 25,480
<DEPRECIATION> 10,406
<TOTAL-ASSETS> 78,999
<CURRENT-LIABILITIES> 20,514
<BONDS> 8,629
0
0
<COMMON> 41
<OTHER-SE> 47,276
<TOTAL-LIABILITY-AND-EQUITY> 78,999
<SALES> 123,816
<TOTAL-REVENUES> 123,816
<CGS> 89,819
<TOTAL-COSTS> 89,819
<OTHER-EXPENSES> 21,971
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 2,633
<INCOME-PRETAX> 9,227
<INCOME-TAX> 3,740
<INCOME-CONTINUING> 5,487
<DISCONTINUED> (244)
<EXTRAORDINARY> (109)
<CHANGES> 0
<NET-INCOME> 5,134
<EPS-PRIMARY> 1.53<F1>
<EPS-DILUTED> 1.43<F1>
<FN>
<F1> Earnings per share has been prepared in accordance with SFAS No. 128. Basic
and diluted EPS have been entered in place of primary and fully diluted,
respectively.
</FN>
</TABLE>
