Report of Independent Registered Public Accounting Firm
Plan Investment Committee
Axsys Technologies, Inc. 401(k) Retirement Plan
We have audited the accompanying statements of net assets available for plan benefits of Axsys Technologies, Inc. 401(k) Retirement Plan as of December 31, 2006 and 2005, and the related statement of changes in net assets available for plan benefits for the year ended December 31, 2006. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 net assets available for plan benefits of Axsys Technologies, Inc. 401(k) Retirement Plan at December 31, 2006 and 2005, and the changes in its net assets available for plan benefits for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedule of assets (held at end of year) as of December 31, 2006 is presented for purposes of additional analysis and is not a required part of the financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
/s/UHY LLP | |
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Hartford, Connecticut |
June 22, 2007 |
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AXSYS TECHNOLOGIES, INC.
401(k) RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 2006 and 2005
| | 2006 | | 2005 | |
ASSETS | | | | | |
Investments, at fair value: | | | | | |
Registered investment companies | | $ | 29,524,700 | | $ | 24,581,424 | |
Common/collective trust fund | | 4,494,834 | | 5,037,555 | |
Axsys Technologies, Inc. common stock | | 1,930,091 | | 2,107,107 | |
Loans to participants | | 1,677,172 | | 1,522,820 | |
| | 37,626,797 | | 33,248,906 | |
Contributions receivable: | | | | | |
Employees | | 106,964 | | 144,860 | |
Employer | | 304,286 | | 283,887 | |
| | 411,250 | | 428,747 | |
| | | | | |
Total Assets | | 38,038,047 | | 33,677,653 | |
| | | | | |
LIABILITIES | | | | | |
| | | | | |
Refundable excess contributions | | 95,174 | | — | |
| | | | | |
Net assets available for benefits at fair value | | 37,942,873 | | 33,677,653 | |
| | | | | |
Adjustment from fair value to contract value for fully benefit-responsive investment contracts | | 45,176 | | (8,709 | ) |
Net assets available for plan benefits | | $ | 37,988,049 | | $ | 33,668,944 | |
See accompanying notes.
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AXSYS TECHNOLOGIES, INC.
401(k) RETIREMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
For the Year Ended December 31, 2006
| | | |
Additions | | | |
Investment income: | | | |
Net appreciation in fair value of investments | | $ | 1,624,937 | |
Interest and dividends | | 1,636,085 | |
| | 3,261,022 | |
| | | |
Contributions: | | | |
Participants | | 2,547,525 | |
Employer: | | | |
Cash | | 1,142,558 | |
Axsys Technologies, Inc. common stock | | 72,438 | |
Rollovers | | 197,765 | |
| | 3,960,286 | |
Total additions | | 7,221,308 | |
| | | |
Deductions | | | |
Benefit payments | | 2,860,752 | |
Administrative expenses | | 41,451 | |
Total deductions | | 2,902,203 | |
Net increase | | 4,319,105 | |
| | | |
| | | |
Net assets available for benefits at beginning of year | | 33,668,944 | |
Net assets available for benefits at end of year | | $ | 37,988,049 | |
See accompanying notes.
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AXSYS TECHNOLOGIES, INC.
401 (k) RETIREMENT PLAN
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2006 and 2005
Note A – Plan Description
The following brief description of the Axsys Technologies, Inc. 401(k) Retirement Plan (the “Plan”) is provided for general information purposes only and reflects the Plan’s provisions as of the date of the financial statements. Participants should refer to the Plan documents for more complete information on the Plan’s provisions.
General
Axsys Technologies, Inc. (the “Company” and “Plan Sponsor”) has maintained the Plan, which qualifies under Sections 401(a) and 401(k) of the Internal Revenue Code (the “Code”), since April 1, 1985. The Plan is a defined contribution plan, established for the purpose of enabling eligible employees to enhance their long-range financial security through regular savings with the benefit of Company matching contributions.
Participation
All employees who are not members of collective bargaining groups and who are 21 years of age or older are eligible to participate in the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
Background
The Company has adopted The CORPORATE plan for Retirement Prototype Basic Plan Document (the “Fidelity Plan”), sponsored by Fidelity Management Trust Company (“Fidelity”) and has appointed Fidelity as trustee of a separate trust established pursuant to the Fidelity Plan. Fidelity is the trustee of all Plan assets other than the guaranteed interest accounts under the New England Life Insurance Company annuity contracts (the “Insurance Contracts”), which comprised part of the Axsys Stable Value Fund along with certain other investments held in the Trust. On June 30, 2006, the Insurance Contracts reached maturity and were transferred from the Axsys Stable Value Fund to the Fidelity Managed Income Portfolio Fund. Once all assets attributable to the Insurance Contracts were transferred to the Fidelity Trust, Stephen W. Bershad and David A. Almeida no longer served as co-trustees of the Insurance Contract Trust making Fidelity the sole trustee of all Plan assets.
Although the Plan assets were held in two separate trusts, prior to June 30, 2006, the Plan is a “single plan” as described in Treasury Regulation Section 1.414(1)-1(b)(1) and all assets, including those that were formerly held in the Insurance Contract Trust and the Fidelity Trust were available to pay benefits to participants and beneficiaries of the Plan.
On May 2, 2005, the Company acquired all of the outstanding capital stock of Diversified Optical Products, Inc., a New York corporation (“DiOP”). The Company approved an amendment to the Plan to give DiOP employees who were employees as of May 2, 2005 credit for their prior service with DiOP for purposes of determining vesting and eligibility in the Plan. The directors of the Company also approved an amendment to the Plan to provide DiOP employees who had satisfied the Plan’s requirements participation in the Plan as of May 2, 2005.
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Contributions
Participating employees may elect to defer a portion of their eligible compensation and contribute it to the Plan on a pre-tax basis. Allowable contributions under the Plan may range from 1% to 60% of eligible compensation, subject to IRS contribution limits. The maximum contribution to the Plan was $15,000 in 2006 and $14,000 in 2005. The Company matched 100% of the first 3% and 50% of the next 2% of eligible compensation that a participant contributes on a pre-tax basis, for a maximum of 4% during 2006 and 2005. Employer contributions include 4,456 shares of the Company’s common stock in 2006, with a fair value of $72,438.
Participant Accounts
All participant contributions and Company matching contributions are invested at the participant’s direction in the investment funds offered by the Plan and selected by the participant. However, the Company stock may only be obtained by the participant through the Company match. At their discretion participants may elect to have all or a portion of their total Company match contributions funded in Company stock. Plan earnings are allocated based on participant earnings or account balances, as defined by the Plan document. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
Payment of Benefits
Employees participating in the Plan are eligible to receive a benefit upon their normal retirement date, early retirement date, or disability retirement date equal to the vested amount in their individual accounts. Participant contributions and related investment returns are 100% vested. Employer matching contributions and related investment returns vest as follows:
Completed Years of Service | | Percentage Vested | |
Less than 1 | | 0 | % |
1 | | 25 | % |
2 | | 50 | % |
3 | | 75 | % |
4 | | 100 | % |
Participant Loans
Participants are eligible to borrow from their vested accounts in accordance with the Plan provisions. The maximum amount of any loan is the lesser of (a) $50,000 or (b) one-half of the participant’s vested balance. Loans are not made for less than $1,000. Only one loan can be received per plan year and no more than two loans may be outstanding at any one time. All loans must be repaid by payroll deductions within five years, except those loans used for the purchase of a principal residence, which must be repaid within ten years. Participant loans are charged interest at the prime rate.
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Forfeited Accounts
Any forfeiture of nonvested portions of the Company’s contribution account balance is first utilized to offset administrative expenses, with any remaining amounts to be used to reduce future employer contributions to the Plan.
Forfeitures totaling approximately $8,000 at December 31, 2006 and $9,000 at December 31, 2005 were available to reduce employer administrative expenses and future employer contributions. In addition, approximately $18,000 in forfeitures was credited to the Plan during 2006 and approximately $19,000 of total available forfeitures was used to reduce employer administrative expenses and employer contributions during 2006.
Note B – Summary of Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared using the accrual method of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that can affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Investments are made as directed by the Plan’s participants. Investments in collective trust funds are valued at the net asset value as determined using the estimated fair value of the investments in the respective funds on the last day of the Plan year. The estimated fair value of the investment in the Fidelity Managed Income Portfolio Fund is then adjusted to contract value in the adjustment from fair value to contract value line item on the Statement of Net Assets Available for Plan Benefits. All other investments are valued at fair value, which equals the quoted market price on December 31, 2006 and 2005 using share values of the funds as reported by Fidelity Investments Institutional Services, Inc., the custodian of the Plan.
Participant loans are valued at their outstanding balances, which approximate fair value.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis.
Adoption of New Accounting Standard
Effective January 1, 2006, the Plan adopted the provisions of FASB Staff Position (“FSP”) AAG INV-1 and Statement of Position 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans, with respect to fully benefit-responsive investment contracts held by the Fidelity Managed Income Portfolio Fund (the “Fund”), which is provided as a core investment option to participants in the Plan.
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As provided in the FSP, an investment contract is generally permitted to be valued at contract value, rather than fair value, to the extent it is fully benefit-responsive. As also provided for by the FSP, the fully benefit-responsive investment contracts are included at fair value in the investments of the Plan and are adjusted to contract value in the statements of net assets available for Plan benefits. The provisions of the FSP have been retroactively adopted for the year ended December 31, 2005, for comparative purposes.
Payment of Benefits
Benefits are recorded when paid.
Reclassifications
Certain 2005 financial statement amounts have been reclassified to conform to the 2006 financial statement presentation.
Note C - Investments
The following investments represent 5% or more of the Plan’s net assets:
| | December 31, | |
| | 2006 | | 2005 | |
| | | | | |
Fidelity Managed Income Portfolio | | $ | 4,494,834 | | $ | — | |
Fidelity Blue Chip Growth Fund | | 4,393,617 | | 4,225,053 | |
Fidelity Balanced Fund | | 4,284,269 | | 3,869,272 | |
Fidelity Diversified International Fund | | 4,106,978 | | 2,674,274 | |
Fidelity Growth Company Fund | | 3,284,662 | | 2,793,095 | |
Fidelity Freedom 2020 Fund | | 2,222,882 | | 1,928,704 | |
Axsys Technologies, Inc. Common Stock | | 1,930,091 | | 2,107,107 | |
Axsys Stable Value Fund | | — | | 5,028,846 | |
Fidelity Investment Grade Bond Fund | | — | | 1,715,209 | |
Spartan US Equity Index Fund | | — | | 1,683,233 | |
| | | | | | | |
The Plan’s investments (including investments bought, sold, as well as held during the year) appreciated/ (depreciated) in fair value for the year ended December 31, 2006 as follows:
| | | |
Investment in registered investment companies (Mutual Funds) | | $ | 1,680,234 | |
Axsys Technologies, Inc. common stock | | (55,297 | ) |
| | $ | 1,624,937 | |
The investment objectives of the funds which comprise the common/collective trust are to preserve principal investment while earning interest income. These funds pursues this investment objective by investing primarily in a diversified portfolio that may include investment contracts issued by insurance companies and other financial institutions, fixed income securities and money market funds to provide daily liquidity. Other investment contracts are purchased in conjunction with an
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investment by the portfolio in fixed income securities, which may include, but are not limited to, U.S. Treasury and agency bonds, corporate bonds, mortgage-backed securities, asset-backed securities and bond funds. The Axsys Stable Value Fund had investments in guaranteed investment contracts. No valuation reserves were established to adjust contract amounts since there was no concern with the credit worthiness of the contract issuer, New England Life Insurance Company. The guaranteed investment contracts expired on June 30, 2006 and the balances were transferred to the Fidelity Managed Income Portfolio Fund. The fund is exposed to credit risk in the event of nonperformance by the entities with whom the contracts are placed; however, Fidelity seeks to minimize credit risk through diversification among an approved group of issuers. For the Plan year ended December 31, 2006, the average yield was 4.84% and the credit interest rate to the fund was 4.27%.
Note D – Administrative Expenses
Costs of establishing and administrating the Plan, such as legal fees, consulting fees, audit fees, and salaries and fringe benefits of Company personnel, have been paid by the Company and, accordingly, are not included as administrative expenses of the Plan. Expenses that are included in the financial statements represent participant account maintenance fees, loan setup and maintenance fees charged against accounts of participants with outstanding loan balances and account withdrawal fees charged against accounts of participants who receive a distribution from the Plan.
Note E – Reconciliation between Financial Statements and Form 5500
The following is a reconciliation of the net assets available for plan benefits per the financial statements at December 31, 2006 and 2005 to the Plan’s Form 5500:
| | December 31, | |
| | 2006 | | 2005 | |
| | | | | |
Net assets available for plan benefits per the financial statements | | $ | 37,988,049 | | $ | 33,668,944 | |
| | | | | |
Amounts allocated to withdrawing participants | | (160,889 | ) | (45,981 | ) |
| | | | | |
Refundable excess contributions | | 95,174 | | — | |
| | | | | |
Adjustment to contract value for fully benefit-responsive investment contracts | | (45,176 | ) | — | |
Net assets available for plan benefits per the Form 5500 | | $ | 37,877,158 | | $ | 33,622,963 | |
The following is a reconciliation of the net increase in net assets available for benefits per the financial statements for the year ended December 31, 2006, to Form 5500:
Net increase in net assets available for benefits | | $ | 4,319,105 | |
| | | |
Change in amounts allocated to withdrawing participants from beginning of year to end of year | | (114,908 | ) |
| | | |
Refundable excess contributions | | 95,174 | |
| | | |
Adjustment from fair value to contract value | | (45,176 | ) |
Net increase in net assets per Form 5500 | | $ | 4,254,195 | |
Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment prior to year end, but not yet paid as of that date. In addition, for those plan years ending after December 15, 2006, Form 5500 requires investment contracts to be reported at fair value. Refundable excess contributions were made by employees during 2006 and refunded in 2007.
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Note F – Related Party Transactions
Certain Plan investments are shares in registered investment companies managed by Fidelity. Fidelity is the Trustee as defined by the Plan and, therefore, these transactions qualified as party-in-interest transactions.
Note G – Income Tax Status
The underlying non-standardized prototype plan has received an opinion letter from the Internal Revenue Service dated October 9, 2003 stating that the form of the plan is qualified under Section 401 of the Code, and therefore, the related trust is tax exempt. In accordance with Revenue Procedure 2002-6 and Announcement 2001-77, the Plan Sponsor has determined that it is eligible and has chosen to rely on the current IRS prototype plan opinion letter. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan has been amended since receiving the opinion letter. However, the plan administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trust is tax exempt.
Note H - Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for plan benefits.
Note I - Plan Termination
While the Company has not expressed any intention to discontinue the Plan, it is free to do so subject to the provisions of ERISA. No such termination, however, shall permit the Plan’s assets to be used for any purpose other than the exclusive benefit of the participating employees. In the event of Plan termination, participants will become 100% vested in their accounts.
Note J – Subsequent Events
On April 13, 2007, the Company purchased substantially all of the assets of Cineflex, LLC (“Cineflex”). Cineflex is a privately held manufacturer of high-precision gyro-stabilized aerial camera systems. The Company approved an amendment to the Plan to give Cineflex employees who were employees as of April 13, 2007 credit for their prior service with Cineflex for purposes of determining vesting and eligibility in the Plan. The directors of the Company also approved an amendment to the Plan to provide Cineflex employees who had satisfied the Plan’s requirements participation in the Plan as of April 13, 2007.
Effective January 1, 2007, participants are eligible to diversify all or a portion of their account balances in Axsys Technologies, Inc. common stock, subject to normal Plan provisions regarding asset diversification.
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