<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-16182
------------------------
AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
910 SYLVAN AVENUE
ENGLEWOOD CLIFFS, NEW JERSEY 07632
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 871-1500
------------------------
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
---- ----
4,077,587 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING AS OF JULY
28, 1999.
<PAGE>
AXSYS TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Operations -
Six Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................................... $ 88 $ 69
Accounts receivable - net............................................... 17,273 16,877
Inventories - net....................................................... 29,156 27,028
Other current assets.................................................... 2,993 2,838
-------------- ---------------
TOTAL CURRENT ASSETS.................................................. 49,510 46,812
PROPERTY, PLANT AND EQUIPMENT - net....................................... 15,374 15,080
EXCESS OF COST OVER NET ASSETS ACQUIRED - net............................. 12,002 12,216
OTHER ASSETS.............................................................. 2,448 2,103
-------------- ---------------
TOTAL ASSETS.......................................................... $ 79,334 $ 76,211
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 8,043 $ 7,867
Accrued expenses and other liabilities.................................. 6,884 7,050
Current portion of long-term debt and capital lease obligations......... 5,637 1,179
-------------- ---------------
TOTAL CURRENT LIABILITIES............................................. 20,564 16,096
LONG-TERM DEBT & CAPITAL LEASES, less current portion..................... 3,876 5,612
OTHER LONG-TERM LIABILITIES............................................... 2,214 2,375
SHAREHOLDERS' EQUITY:
Common Stock, issued 4,122,767 shares at June 30, 1999 and
December 31, 1998...................................................... 41 41
Capital in Excess of Par................................................ 39,843 40,761
Retained Earnings....................................................... 13,703 12,966
Treasury Stock, at cost, 72,318 shares at June 30, 1999 and
117,750 at December 31, 1998.......................................... (907) (1,640)
-------------- ---------------
TOTAL SHAREHOLDERS' EQUITY............................................ 52,680 52,128
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 79,334 $ 76,211
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
1999 1998
---------------- ------------------
<S> <C> <C>
NET SALES......................................................... $ 26,979 $ 31,774
Cost of sales..................................................... 19,030 21,918
Selling, general and administrative expenses...................... 5,311 5,545
Research and development expenses................................. 998 926
Amortization of intangible assets................................. 107 107
---------------- ------------------
OPERATING INCOME.................................................. 1,533 3,278
Interest expense.................................................. 222 288
Other expense..................................................... 2 25
---------------- ------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
TAXES............................................................. 1,309 2,965
Provision for income taxes........................................ 236 -
---------------- ------------------
INCOME FROM CONTINUING OPERATIONS................................. 1,073 2,965
DISCONTINUED OPERATIONS:
Income from operations, net of tax.............................. - 91
---------------- ------------------
NET INCOME........................................................ $ 1,073 $ 3,056
---------------- ------------------
---------------- ------------------
BASIC EARNINGS PER SHARE:
Income from continuing operations............................... $ 0.26 $ 0.70
Discontinued operations......................................... - 0.02
---------------- ------------------
TOTAL............................................................. $ 0.26 $ 0.72
---------------- ------------------
---------------- ------------------
Weighted average common shares outstanding........................ 4,103,854 4,222,591
--------------- ------------------
--------------- ------------------
DILUTED EARNINGS PER SHARE:
Income from continuing operations............................... $ 0.26 $ 0.70
Discontinued operations......................................... - 0.02
---------------- ------------------
TOTAL............................................................. $ 0.26 $ 0.72
---------------- ------------------
---------------- ------------------
Weighted average common shares outstanding........................
4,116,773 4,264,699
---------------- ------------------
---------------- ------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------------ ----------
<S> <C> <C>
NET SALES ........................................ $ 52,114 $ 63,672
Cost of sales .................................... 37,318 43,848
Selling, general and administrative expenses ..... 10,406 11,558
Research and development expenses ................ 2,024 1,883
Amortization of intangible assets ................ 214 214
---------- ----------
OPERATING INCOME ................................. 2,152 6,169
Interest expense ................................. 412 546
Special charge ................................... 1,000 --
Other expense .................................... 3 32
---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
TAXES ............................................ 737 5,591
Provision for income taxes ....................... -- 1,063
---------- ----------
INCOME FROM CONTINUING OPERATIONS ................ 737 4,528
DISCONTINUED OPERATIONS:
Income from operations, net of tax ............. -- 65
---------- ----------
NET INCOME ....................................... $ 737 $ 4,593
---------- ----------
---------- ----------
BASIC EARNINGS PER SHARE:
Income from continuing operations .............. $ 0.18 $ 1.07
Discontinued operations ........................ -- 0.02
---------- ----------
TOTAL ............................................ $ 0.18 $ 1.09
---------- ----------
---------- ----------
Weighted average common shares outstanding ....... 4,105,051 4,219,284
---------- ----------
---------- ----------
DILUTED EARNINGS PER SHARE:
Income from continuing operations .............. $ 0.18 $ 1.06
Discontinued operations ........................ -- 0.02
---------- ----------
TOTAL ............................................ $ 0.18 $ 1.08
---------- ----------
---------- ----------
Weighted average common shares outstanding ....... 4,119,833 4,263,698
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 737 $ 4,593
Adjustments to reconcile net income to cash (used in) provided by
operating activities:
Deferred income taxes ........................................... (309) (933)
Depreciation and amortization ................................... 1,862 1,790
Change in net assets of discontinued operation .................. -- 152
Increase in current assets, other than cash ..................... (2,370) (1,922)
Increase (decrease) in current liabilities ...................... 76 (268)
Other-net ....................................................... (17) 147
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........... (21) 3,559
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (541) (2,876)
Advance to third party .......................................... (468) --
------- -------
NET CASH USED IN INVESTING ACTIVITIES ......................... (1,009) (2,876)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings .................................... 2,200 --
Net repayment of borrowings ..................................... (908) (754)
Purchases of Treasury Stock ..................................... (251) --
Other ........................................................... 8 44
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........... 1,049 (710)
------- -------
NET INCREASE (DECREASE) IN CASH ............................... 19 (27)
CASH AT BEGINNING OF PERIOD ....................................... 69 573
------- -------
CASH AT END OF PERIOD ............................................. $ 88 $ 546
------- -------
------- -------
Supplemental Cash Flow Information:
Cash paid for:
Interest ...................................................... $ 354 $ 468
Income Tax .................................................... 115 339
Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases ....................... $ 1,422 $ 75
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Axsys
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included.
Operating results for the three month and six month periods ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
Certain reclassifications have been made to previously reported financial
statements to conform to current classifications.
NOTE 2 - 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 stock options, if any.
NOTE 3 - DISCONTINUED OPERATIONS
On September 16, 1998, the Company sold its Sensor Systems business unit
("Sensor Systems") which manufactured position sensor devices such as
potentiometers, pressure transducers and encoders primarily for defense and
industrial automation applications, for $3,030, of which $1,030 was in the form
of a five year, 10% subordinated note. Sensor Systems' land and building, which
were not sold as part of this transaction, were sold during July 1999 for
approximately their book value of $750, net of retained liabilities.
The disposal of Sensor Systems has been accounted for as a discontinued
operation and, accordingly, the related net assets and operating results have
been reported separately from continuing operations in all periods presented.
Revenues applicable to the discontinued operation for the three month and six
month periods ended June 30, 1998 were $1,892 and $3,589, respectively.
NOTE 4 - ADVANCES TO THIRD PARTIES
On August 12, 1998, the Company entered into an agreement with Westlake
Technology Corporation ("WTC") whereby the Company has the exclusive right to
market and sell WTC's electronic and electromechanical test equipment. In return
for these exclusive rights, the Company has agreed to provide loans of up to a
maximum of $1,900 to WTC. Outstanding loans bear interest at 10.5% and mature on
August 12, 2001. As of June 30, 1999, the outstanding loan balance, which is
recorded under "Other Assets" in the Condensed Consolidated Balance Sheet, was
$1,520.
7
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INVENTORIES
Inventories have been determined generally by lower of cost (first-in, first-out
or average) or market. Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials...................................... $ 10,840 $ 9,401
Work-in-process.................................... 9,930 8,665
Finished goods..................................... 12,356 12,642
----------------- -----------------
33,126 30,708
Less reserves...................................... (3,970) (3,680)
----------------- -----------------
$ 29,156 $ 27,028
----------------- -----------------
----------------- -----------------
</TABLE>
NOTE 6 - SHAREHOLDERS' EQUITY
TREASURY STOCK -
In August 1998, the Company's Board of Directors authorized the repurchase, from
time to time, on the open market or otherwise, of up to 200,000 shares of the
Company's Common Stock at prevailing market prices or at negotiated prices.
During July 1999, the Company's Board of Directors authorized an increase in the
share repurchase program from an aggregate of 200,000 shares of Common Stock to
an aggregate of 700,000 shares. The Company plans to use the repurchased shares
for general corporate purposes, including the satisfaction of commitments under
its employee benefit plans. As of June 30, 1999 the Company has repurchased
144,700 shares for an aggregate purchase price of $1,915, of which 72,382 shares
have been used by the Company to satisfy its obligation to issue shares under
certain employee benefit plans and in connection with the acquisition of its
Teletrac, Inc. subsidiary.
NOTE 7 - INCOME TAXES
The Company has determined, based upon the level of its current taxable income,
it is more likely than not that it will realize the benefit of a portion of its
deferred tax assets which previously had been fully reserved with a valuation
allowance. As such, beginning in the second quarter of 1998, the Company has
reversed a portion of its tax valuation allowance equal to the amount it would
have recorded as a tax provision on income from continuing operations before
taxes during the period. As a result, the Company reduced both its three month
and six month periods continuing operations tax provisions by $309 and $1,221 in
1999 and 1998, respectively. The tax provision recorded in the second quarter of
1999 represents the reversal of the tax benefit recorded in the first quarter.
As of June 30, 1999, the remaining tax valuation allowance is approximately
$600.
NOTE 8 - SEGMENT DATA
The Company classifies its businesses under two major groups, the Precision
Systems Group ("PSG") and the Industrial Components Group ("ICG"). The PSG
designs and manufactures micro-positioning and precision optical systems and
components for a variety of industries including defense, space, digital imaging
and electronics capital equipment. The ICG is comprised of the Precision Ball
Bearings segment, which distributes and services precision miniature ball
bearings, and the Electronic Interconnect Products segment, which designs and
manufactures interconnect devices, barrier terminal blocks, and connectors. The
products of both the ICG segments are used in a variety of industrial, consumer
and other commercial applications.
As discussed in Note 3, the company sold its Sensor Systems segment during the
third quarter of 1998. The disposal of Sensor Systems, which previously was part
of the PSG, has been accounted for as a discontinued operation and, accordingly,
its operating results have been reported separately from continuing operations
and the segment data below has been restated to exclude the Sensor Systems
segment.
8
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - SEGMENT DATA - CONT'D.
The following tables present financial data for each of the Company's segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales:
<S> <C> <C> <C> <C>
PSG ....................................................... $ 15,669 $ 20,451 $ 29,699 $ 39,858
-------- -------- -------- --------
Precision Ball Bearings ................................... 6,353 6,576 12,906 13,839
Electronic Interconnect Products .......................... 4,957 4,747 9,509 9,975
-------- -------- -------- --------
Total ICG ............................................. 11,310 11,323 22,415 23,814
-------- -------- -------- --------
Total Sales ....................................... $ 26,979 $ 31,774 $ 52,114 $ 63,672
-------- -------- -------- --------
-------- -------- -------- --------
Earnings before amortization, interest and taxes:
PSG ....................................................... $ 849 $ 2,605 $ 753 $ 4,679
-------- -------- -------- --------
Precision Ball Bearings ................................... 726 906 1,577 1,885
Electronic Interconnect Products .......................... 820 701 1,598 1,639
-------- -------- -------- --------
Total ICG ............................................. 1,546 1,607 3,175 3,524
Non-allocated expenses .................................... (1,086) (1,247) (3,191) (2,612)
-------- -------- -------- --------
Income from continuing operations
before taxes .......................................... $ 1,309 $ 2,965 $ 737 $ 5,591
-------- -------- -------- --------
-------- -------- -------- --------
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
Identifiable assets:
PSG ....................................................... $ 40,263 $ 38,585
-------- --------
Precision Ball Bearings ................................... 13,902 13,653
Electronic Interconnect Products .......................... 9,168 8,351
-------- --------
Total ICG ............................................. 23,070 22,004
Non-allocated assets ...................................... 16,001 15,622
-------- --------
Total assets .......................................... $ 79,334 $ 76,211
-------- --------
-------- --------
</TABLE>
Included in non-allocated expenses are the following: general corporate expense,
interest expense, amortization of goodwill, special charges and other income and
expense. Identifiable assets by segment consist of those assets that are used in
the segments' operations. Non-allocated assets are comprised primarily of
goodwill and net deferred tax assets.
NOTE 9 - OTHER INFORMATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
Allowance for doubtful accounts ............................... $ 381 $ 507
------- -------
------- -------
Accumulated depreciation and amortization
of property, plant and equipment ............................. $13,133 $11,531
------- -------
------- -------
Accumulated amortization of excess of cost
over net assets acquired .................................... $ 1,804 $ 1,590
------- -------
------- -------
</TABLE>
9
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 - SPECIAL CHARGE
On November 20, 1998, the Company's Chairman and CEO and the owner of
approximately 31% of the Company's common stock ("the Chairman"), submitted an
offer to purchase all of the common stock not owned by him for $15.00 per share
in cash (the "Chairman's Proposal"). Shortly thereafter, the Company's Board of
Directors formed a Special Committee to evaluate the Chairman's Proposal. On
January 11, 1999, the Company received an unsolicited offer to purchase the
Company for $20.00 per share in cash. In response to this unsolicited offer, the
Chairman withdrew his proposal, and on January 13, 1999, the Company's Board of
Directors dissolved the Special Committee. On January 14, 1999, the Company
engaged investment bankers to explore various strategic alternatives, including
the potential sale of the Company. On January 29, 1999, the Company publicly
announced that the Board of Directors had instructed its investment bankers to
explore the potential sale of the Company. During the first quarter of 1999, the
Company recorded a pre-tax special charge of $1,000 for expenses related to a
process of exploring the potential sale of the Company. On June 15, 1999, the
Company publicly announced that its Board of Directors had determined not to
pursue a sale of the Company at that time.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the three month and six month periods ended June 30, 1999 and 1998. On
September 16, 1998 the Company sold certain assets related to its Sensor Systems
segment. The divestiture, which was previously part of the PSG, has been
accounted for as a discontinued operation. Accordingly, the results of the
operations of Sensor Systems through the date of the sale and the loss from the
disposal are reflected in discontinued operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
PSG.................................................. 58.1 % 64.4 % 57.0 % 62.6 %
------------ ------------ ------------ ------------
Precision Ball Bearings.............................. 23.5 20.7 24.8 21.7
Electronic Interconnect Products..................... 18.4 14.9 18.2 15.7
------------ ------------ ------------ ------------
Total ICG........................................ 41.9 35.6 43.0 37.4
------------ ------------ ------------ ------------
Total Company................................ 100.0 100.0 100.0 100.0
------------ ------------ ------------ ------------
Cost of sales............................................ 70.5 69.0 71.6 68.9
------------ ------------ ------------ ------------
Gross profit............................................. 29.5 31.0 28.4 31.1
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses......... 19.7 17.5 20.0 18.1
Research and development expenses.................... 3.7 2.9 3.9 3.0
Amortization of intangible assets..................... 0.4 0.3 0.4 0.3
------------ ------------ ------------ ------------
23.8 20.7 24.3 21.4
------------ ------------ ------------ ------------
Operating income......................................... 5.7 10.3 4.1 9.7
Interest expense..................................... 0.8 0.9 0.8 0.9
Special charge....................................... - - 1.9 -
Other expense........................................ - 0.1 - -
------------ ------------ ------------ ------------
Income from continuing operations before taxes........... 4.9 9.3 1.4 8.8
Provision for income taxes............................. 0.9 - - 1.7
------------ ------------ ------------ ------------
Income from continuing operations........................ 4.0 9.3 1.4 7.1
Discontinued operations:
Income from operations, net of tax..................... - 0.3 - 0.1
------------ ------------ ------------ ------------
Net income............................................... 4.0 % 9.6 % 1.4 % 7.2%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Gross profit (as a percentage of related net sales):
PSG...................................................... 28.3 % 31.4 % 26.3 % 31.3%
ICG...................................................... 30.9 30.4 31.0 30.9
</TABLE>
11
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
NET SALES. Net sales decreased by 15.1%, or $4.8 million, from $31.8 million in
the three month period ended June 30, 1998 to $27.0 million in the same period
of 1999. The PSG's sales decreased by 23.4%, or $4.8 million, from $20.5 million
in 1998 to $15.7 million in 1999. This decrease was primarily the result of
lower sales to the electronics capital equipment, digital imaging and space
markets, partially offset by an increase in sales to the defense market. In the
electronics capital equipment market, overall soft market conditions, especially
in the data storage segment, continue to impact sales volume. Lower sales to the
digital imaging market were due to a combination of soft market conditions and
technical problems which are delaying shipments on certain product offerings. In
the space market, lower sales were primarily due to the timing of major
satellite programs. Partially offsetting these negative variances was an
increase in sales to the defense market primarily due to shipments under a large
space-based defense program. The ICG recorded sales of $11.3 million in the
second quarter of 1999, which were substantially the same as sales in the second
quarter of the prior year. Sales of electronic interconnect products were up
4.4% over the prior year, primarily due to new product introductions. This
increase was offset by a 3.4% decline in sales of precision ball bearings.
GROSS PROFIT. The Company's gross profit decreased by 19.3%, or approximately
$1.9 million, from $9.9 million in 1998 to $7.9 million in 1999. Gross profit
margin decreased from 31.0% of net sales in 1998 to 29.5% in 1999. The gross
margin for the PSG decreased from 31.4% of net sales in 1998 to 28.3% in 1999
and, for the ICG, increased from 30.4% of net sales in 1998 to 30.9% in 1999.
The decline in the PSG gross profit margin was primarily due to the spreading of
fixed costs over a lower sales volume. The improved margins in the ICG were
primarily due to a favorable sales mix in both of its business segments and,
favorable purchase price variances and sales volume related efficiencies in the
electronic interconnect products segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by 4.2%,
or $0.2 million, from $5.5 million in 1998 to $5.3 million in 1999. As a
percentage of net sales, however, SG&A increased from 17.5% in 1998 to 19.7% in
1999. The decrease in SG&A expenses was primarily due to lower incentive expense
partially offset by increased spending on employment related costs, travel,
advertising and promotions.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses of $1.0 million in 1999 were
substantially the same as 1998.
INTEREST EXPENSE. Interest expense decreased by 22.9%, or $0.1 million, from
$0.3 million in 1998 to $0.2 million in 1999. The decrease in interest expense
was primarily due to a combination of lower average borrowings and a lower
average borrowing rate during 1999.
TAXES. The Company's effective tax rate increased from none in 1998 to 18.0% in
1999. As discussed in Note 7 to the Condensed Consolidated Financial Statements,
the Company offset its normal second quarter continuing operations tax provision
in both 1999 and 1998 by the reversal of a portion of its tax valuation
allowance. The tax provision recorded in the second quarter of 1999 represents
the reversal of the tax benefit recorded in the first quarter. As of June 30,
1999, the remaining tax valuation allowance is approximately $0.6 million. The
Company will continue to assess the realizability of its deferred tax assets in
future periods.
DISCONTINUED OPERATIONS. In September 1998, the Company sold its Sensor Systems
business unit. Results of operations from the discontinued business have been
reported separately from continuing operations in 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
NET SALES. Net sales decreased by 18.2%, or $11.6 million, from $63.7 million in
the six month period ended June 30, 1998 to $52.1 million in the same period of
1999. The PSG's sales decreased by 25.5%, or $10.2 million, from $39.9 million
in 1998 to $29.7 million in 1999. This decrease was primarily the result of
lower sales to the electronics capital equipment, digital imaging and space
markets, partially offset by an increase in sales to the defense market. In the
electronics capital equipment market, the lower sales volume was due to soft
market conditions, especially in the data storage segment. Lower sales to the
digital imaging market were due to a combination of soft market conditions and
technical problems which are delaying shipments on certain product offerings. In
the space market, lower sales were primarily due to the timing of major
satellite programs. Partially offsetting these negative variances was an
increase in sales to the defense market primarily due to shipments under a large
space based defense program. The ICG's sales decreased 5.9%, or $1.4 million,
from $23.8 million in 1998, which included record high sales in the first
quarter of the year, to $22.4 million in 1999. Sales of the electronic
interconnect products and precision ball bearings were 6.7% and 4.7% below the
prior year, respectively. Beginning in the second half of 1998, the ICG has felt
the impact that the economic difficulties in Asia and the soft manufacturing
segment in general were having on its customers. However, these soft market
conditions appear to be improving, as the ICG's sales during the first half of
1999 are approximately 16% higher than sales for the second half of 1998.
12
<PAGE>
GROSS PROFIT. The Company's gross profit decreased by 25.4%, or $5.0 million,
from $19.8 million in 1998 to $14.8 million in 1999. Gross profit margin
decreased from 31.1% of net sales in 1998 to 28.4% in 1999. The gross margin for
the PSG decreased from 31.3% of net sales in 1998 to 26.3% in 1999 and, for the
ICG, increased slightly from 30.9% of net sales in 1998 to 31.0% in 1999. The
decline in the PSG gross profit margins were primarily due to the spreading of
fixed costs over a lower sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by 10.0%,
or $1.2 million, from $11.6 million in 1998 to $10.4 million in 1999. As a
percentage of net sales, however, SG&A increased from 18.1% in 1998 to 20.0% in
1999. The decrease in SG&A expenses was primarily due to lower incentive
expense.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses of $2.0 million in 1999 were
slightly higher than the $1.9 million incurred in 1998 primarily due to higher
spending on new product development for the digital imaging market.
INTEREST EXPENSE. Interest expense decreased by 24.5%, or $0.1 million, from
$0.5 million in 1998 to $0.4 million in 1999. The decrease in interest expense
was primarily due to a combination of lower average borrowings and a lower
average borrowing rate during 1999.
SPECIAL CHARGE. During the first quarter of 1999, the Company recorded a pre-tax
special charge of $1.0 million for expenses related to the process of exploring
the potential sale of the Company, which was discontinued during the second
quarter of 1999 (See Note 10 to the Condensed Consolidated Financial
Statements).
TAXES. The Company's effective tax rate decreased from 19.0% in 1998 to none in
1999. Commencing in the second quarter of 1998, the Company began to offset its
normal continuing operations tax provision by the reversal of a portion of its
tax valuation allowance. (See Note 7 to the Condensed Consolidated Financial
Statements).
DISCONTINUED OPERATIONS. See discussion in "Comparison of the Three Months Ended
June 30, 1999 and June 30, 1998".
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
increased by 4.5% or $2.2 million, from $49.0 million at December 31, 1998 to
$51.2 million at June 30, 1999 reflecting increases in most of the Company's
major market segments. The Company believes that a substantial portion of the
backlog of orders at June 30, 1999 will be shipped over the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operations for the six months ended June 30, 1999
and 1998 was ($21,000) and $3.6 million, respectively. The decrease in cash
provided from operations in 1999 was primarily due to reduced earnings. The
Company's working capital was $28.9 million and $30.7 million on June 30, 1999
and December 31, 1998, respectively.
Net cash used in investing activities for the six months ended June 30, 1999 and
1998 was $1.0 million and $2.9 million, respectively. This reduction in use of
cash was primarily due to lower capital expenditures and an increase in the use
of capital lease financing. The Company had no material commitments for capital
expenditures as of June 30, 1999.
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. The Company has an $11.0 million senior
secured revolving credit facility which expires on April 25, 2000 (the "Credit
Facility"), of which $4.3 million was outstanding as of June 30, 1999. 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 it will be able to
extend its current Credit Facility beyond April 25, 2000 or enter into a credit
agreement with a new group of lenders with terms and covenants which are at
least as favorable as those existing under the current facility. The Company
further believes that its borrowing capacity under an extended Credit Facility
or a new credit arrangement and cash generated from operations will be
sufficient to finance its future capital expenditures, working capital
requirements and the purchase of additional Company Common Stock for at least
the next 12 months.
13
<PAGE>
YEAR 2000
The Company is continuously monitoring Year 2000 compliance issues affecting its
information technology ("IT") and non-IT systems. No significant non-IT system
Year 2000 compliance issues have been identified.
As related to IT systems, the Company has completed the implementation of new
management information systems at three of its business units. While the
implementation of these new systems does address Year 2000 concerns, Year 2000
compliance was not the predominant justification supporting such investments.
These new IT systems are also expected to enhance future operations through
improved operating management and efficiencies. The cost of these new systems
was approximately $1.2 million, of which $1.0 million has been capitalized and
will be depreciated over future periods. Of the total $1.2 million Year 2000
spending, approximately $0.9 million and $0.3 million was spent in 1998 and
1997, respectively. With the implementation of these new management information
systems, the Company believes it has addressed the potential Year 2000 hardware
or software problems which it has identified. As such, no further contingency
plans have been formulated.
The Company is continuing the process of surveying material third parties such
as customers, vendors, banks and others to determine their Year 2000 readiness.
While it is not possible to fully assess the actual readiness of these third
parties, a majority of their responses indicate that they are or will be Year
2000 compliant. For those vendors who have not responded satisfactorily,
alternative sources will be identified.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133, as amended by SFAS No. 137, is effective for fiscal years beginning after
June 15, 2000. 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.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q provides certain forward-looking statements.
The Company's business is subject to a variety of risks and uncertainties. As a
result, actual future results and developments may be materially different from
those expressed or implied in any forward-looking statement. Disclosure
regarding factors affecting the Company's future results and developments is
contained in the Company's public filings with the Securities and Exchange
Commission, including the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk sensitive instruments do not subject the Company to
material risk exposures.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on July 29, 1999.
The following matters were submitted to a vote of security holders. The results
of the voting were as follows:
(1) Election of Directors
All four directors of the Company were elected by the stockholders.
<TABLE>
<CAPTION>
Votes Votes
FOR WITHHELD
--- --------
<S> <C> <C>
Stephen W. Bershad 3,293,784 6,583
Anthony J. Fiorelli, Jr. 3,294,079 6,288
Eliot M. Fried 3,294,279 6,088
Richard V. Howitt 3,292,188 8,179
</TABLE>
(2) Appointment of Independent Auditors
The stockholders were asked to ratify the appointment of Arthur
Andersen LLP as independent auditors for the Company for 1999. This
matter was approved by the stockholders with 3,296,210 votes cast
for, 2,776 votes opposed, and 1,381 votes abstained.
ITEM 5. OTHER INFORMATION
Not applicable during the quarter ended June 30, 1999.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 10(1): Amendment, Consent and Waiver to the Credit
Agreement, dated April 25, 1996, between the
Company, various banks named therein and
Banque Paribas, as Agent.
Exhibit 27 (1): Financial Data Schedule (For SEC use only).
Exhibit 27 (2): Restated Financial Data Schedule (For SEC use only).
b) Reports on Form 8-K
None during the quarter ended June 30, 1999.
SIGNATURES
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 11th day of August, 1999.
Date: August 11, 1999 AXSYS TECHNOLOGIES, INC.
By: /s/STEPHEN W. BERSHAD
---------------------
Stephen W. Bershad
Chairman of the Board and Chief Executive Officer
By: /s/RAYMOND F. KUNZMANN
----------------------
Raymond F. Kunzmann
Vice President-Finance and Chief Financial Officer
16
<PAGE>
Exhibit 10(1)
AMENDMENT, CONSENT AND WAIVER
AMENDMENT, CONSENT AND WAIVER (this "Amendment"), dated as of June 4,
1999 among AXSYS TECHNOLOGIES, INC. (formerly, Vernitron Corporation) (the
"borrower"), the various financial institutions party to the Credit Agreement
referred to below (the "Banks"), and PARIBAS (formerly, Banque Paribas), as
agent (the "Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provides 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
through the date hereof, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
1. The undersigned Banks hereby consent to the waiving of compliance by
the Borrower with the requirements of Section 9.12 of the Credit Agreement with
respect to and limited to the fiscal quarter ending on March 31, 1999.
2. Section 9.12 of the Credit Agreement is hereby amended by deleting
the amount opposite the date June 30, 1999 and inserting in lieu thereof the
amount "$8,250,000".
3. In order to induce the Banks to enter into this Amendment, the
Borrower hereby represents and warrants that on the Amendment Effective Date,
after giving effect to this Amendment and the transactions contemplated
hereby, (i) no Default or Event of Default shall exist and (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 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).
4. This Amendment shall become effective on the date (the "Amendment
Effective Date") when (i) the Borrower and the Required Banks shall have
signed a counterpart hereof (whether the same or different counterparts) and
shall have delivered (including by way of facsimile) the same to the Agent
and (ii) all fees, costs and expenses owing to the Banks, including without
limitations, the fees of White & Case LLP, shall have been paid.
5. This Amendment is limited as specified and shall not constitute a
modification, acceptance, consent or waiver of any other provision of the
Credit Agreement or any other Credit Document.
<PAGE>
6. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterpart 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.
7. THIS 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.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
AXSYS TECHNOLOGIES, INC.
By: /s/Raymond F. Kunzmann
----------------------
Title: Vice President
PRECISION AEROTECH, INC.
By: /s/Raymond F. Kunzmann
----------------------
Title: Vice President
SPEEDRING SYSTEMS, INC.
By: /s/Raymond F. Kunzmann
----------------------
Title: Vice President
TELETRAC, INC.
By: /s/Raymond F. Kunzmann
----------------------
Title: Vice President
<PAGE>
PARIBAS,
Individually and as Agent
By: /s/Darryl M. Monasebian
-----------------------
Title: Director
By: /s/Walter L. Bellingham
-----------------------
Title: Vice President
IBJ WHITEHALL BANK & TRUST
COMPANY
By: /s/David Thalmann
-----------------------
Title: Director
FLEET BANK, N.A.
By: /s/Thomas G. Carley
-----------------------
Title: Vice President
PARIBAS CAPITAL FUNDING LLC
By:
-----------------------
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AXSYS TECHNOLOGIES, INC. AS OF JUNE 30, 1999 AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> $88
<SECURITIES> 0
<RECEIVABLES> 17,654
<ALLOWANCES> 381
<INVENTORY> 29,156
<CURRENT-ASSETS> 49,510
<PP&E> 28,507
<DEPRECIATION> 13,133
<TOTAL-ASSETS> 79,334
<CURRENT-LIABILITIES> 20,564
<BONDS> 3,876
0
0
<COMMON> 41
<OTHER-SE> 52,639
<TOTAL-LIABILITY-AND-EQUITY> 79,334
<SALES> 52,114
<TOTAL-REVENUES> 52,114
<CGS> 37,318
<TOTAL-COSTS> 37,318
<OTHER-EXPENSES> 13,588
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> 737
<INCOME-TAX> 0
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AXSYS TECNOLOGIES INC., AS OF JUNE 30, 1998 AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> $0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> $63,672
<TOTAL-REVENUES> 63,672
<CGS> 43,848
<TOTAL-COSTS> 43,848
<OTHER-EXPENSES> 13,637
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 546
<INCOME-PRETAX> 5,591
<INCOME-TAX> 1,063
<INCOME-CONTINUING> 4,528
<DISCONTINUED> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,593
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.08
</TABLE>
