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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 1-6549
AMERICAN SCIENCE AND ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2240991
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
829 MIDDLESEX TURNPIKE, BILLERICA, MASSACHUSETTS 01821
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 262-8700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
- ------------------- -----------------------------------------
Common Stock ($.66 2/3 par value) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 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.
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 16, 2000 was $28,884,000.
4,968,874 shares of Registrant's Common Stock were outstanding on June 16, 2000.
The Exhibit Index is located on page 48
NOTICE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements contained in this Report and in the documents
incorporated by reference are forward-looking made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
essence, forward-looking statements are predictions of future events.
Although we would not make forward-looking statements unless we believe we
have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a
number of uncertainties, many of which we are not aware. You should
understand also that we have no plans to update our forward-looking
statements. Our forward-looking statements are accurate only as of the date
of this Report, or in the case of forward-looking statements in documents
incorporated by reference, as of the date of those documents. Certain risk
factors which might cause actual results to differ materially from those
projected are more fully set forth under the caption "Risk Factors" in the
Company's Registration Statement on Form S-3 (SEC File No. 333-9151).
1
PART I
ITEM 1. BUSINESS
American Science and Engineering, Inc., a Massachusetts corporation formed in
1958 (together with its subsidiary, the "Company"), develops, produces, markets,
sells, maintains and provides research, engineering and training services with
respect to X-ray inspection systems.
|_| X-RAY PRODUCTS
The Company provides a full line of X-ray detection and imaging products used
primarily for the detection of smuggled goods, including illegal drugs, and
terrorist explosives. This equipment is purchased by sophisticated government
and commercial clients who place a premium on the detection of organic material
in complex backgrounds and the ability to see the contents of containers with
precision. The Company utilizes proprietary transmission and backscatter X-ray
detection to provide differentiation of bombs, drugs and contraband in
camouflaged environments. The range of application includes border control and
manifest verification, protection of high risk government offices, mail and
parcel screening, correctional facility security, military security, executive
security, aviation security, and special event security (e.g. Olympics, UN 50th
Anniversary and World Cup Soccer). The Company's market is driven by domestic
and global trends in terrorism; the continued global proliferation of drug
smuggling; and the continuing increase in global trade which creates greater
incentives and opportunities to evade duties or perpetrate trade fraud by
misdeclaring cargo shipping manifests.
The Company believes that market demand for cargo and vehicle inspection
equipment is growing in many parts of the world. Originally fueled by the desire
of the U.S. Government to interdict drug traffic, the market has now expanded
into other applications of broader interest to a wider range of countries. The
Company's CargoSearch-TM- family of products, originally developed with the
assistance of the U.S. Department of Defense and the U.S. Customs Service,
provides the Company with a range of products to serve this market. Based on the
original success of the Company's fixed-site CargoSearch-TM- installation at
Otay Mesa, CA for inspecting trucks and containers, the Company has installed
seven additional fixed sites for the U.S. Customs Service on the southwestern
border, with one more system on order. In addition, the Company has installed a
fixed site system in Abu Dhabi and has added IsoSearch-TM- and Marine
CargoSearch alternatives to the product line in order to provide clients with
more flexibility and customized solutions to their inspection needs. The first
IsoSearch-TM- system was installed in South Africa in the spring of 1999 and the
first Marine CargoSearch was installed in Egypt in the spring of 2000. In
general, the U.S. Government is primarily interested in cargo inspection systems
to interdict illicit drug shipments while other governments are primarily
motivated by a desire to increase revenues by verifying cargo manifests or to
deter the transport of terrorist weapons or bombs.
The Company's MobileSearch-TM- system adds flexibility, mobility and the ability
to inspect cars to the basic CargoSearch concept. MobileSearch also allows
clients to engage in surprise searches. In addition to performing the kinds of
contraband searches performed by CargoSearch, the Company believes that
MobileSearch will have applications in the force protection area as military
personnel are increasingly exposed to guerilla-style or low intensity conflicts
which leave their mobile, advanced forces exposed to the potential for terrorist
attack. MobileSearch systems are deployed in five countries.
2
The Company offers high performance X-ray systems for inspecting parcels at
prices that have generally been higher than those of competing, less capable
systems. However, in recent years, the Company has brought to the marketplace
several new products for inspecting cargo that are priced significantly lower
than competing systems. Across the entire range of its X-ray inspection systems,
the Company has focused on selling products with unique features that create
strong product differentiation and offer distinct performance advantages.
The Company's product line currently includes 12 models. These models can be
broadly categorized into 4 groups including the CargoSearch-TM- family, the
Model 101 series, the Model 66 series, and the BodySearch-TM- Personnel
Inspection System. All of these systems utilize the Company's Z-Registered
Trademark- Backscatter technology (aspects of which are covered by issued and
pending U.S. patents), which detects organic materials, such as illegal drugs,
plastic explosives, and plastic weapons, which often go undetected by competing
systems.
The CargoSearch-TM- family of products includes the CargoSearch-TM- system, the
relocatable IsoSearch-TM- system, MarineSearch-TM- , designed specifically for
port applications, the MobileSearch-TM- system, and the PalletSearch-TM- system.
The CargoSearch-TM- system is a non-intrusive inspection technology for the
X-ray scanning of trucks, cars, cargo containers, pallets, and air cargo using
the Company's unique and patented Z-Registered Trademark- Backscatter
technology. The fixed CargoSearch-TM- system sells for a turnkey price generally
lower than competing systems. The U.S. Customs Service presently operates eight
CargoSearch-TM- systems along the southwestern border, with one more on order.
The first MobileSearch-TM- system was delivered under a $1.8 million contract
with the Defense Advanced Research Project Agency (DARPA). This mobile version
of a CargoSearch-TM- system is a self-contained unit inside a conventional truck
that is deployable within minutes and provides the transport mechanism via a
hydraulic drive. The Company is marketing the MobileSearch-TM- system to
agencies of the U.S. Government and to foreign security and customs agencies.
The Company has delivered a total of eight systems to the U.S. Government, has
delivered twelve systems to three foreign governments and has orders for
additional systems. All of the units after the first include both Z-Registered
Trademark- Backscatter and transmission X-ray capabilities.
PalletSearch-TM- was designed for the inspection of pallets for the detection of
contraband, weapons and explosives for high security facilities where high
confidence inspection is a requirement. The first PalletSearch-TM- system was
delivered during fiscal 1997 to an ultra-secure agency of the U.S. Government,
and additional units have been ordered by a foreign government for customs
inspection applications, one of which was installed during the summer of 1999.
The Micro-Dose-Registered Trademark- Model 101 Series consists of 6 models. The
mobile Model 101VAN-TM- is a sophisticated, vehicle mounted inspection system
designed and built to the rigorous specifications of the U.S. Customs Service.
The Model 101ZZ-Registered Trademark- Trailer is a field deployable system for
extended on site security details. The Models 101Z-Registered Trademark-,
101ZZ-Registered Trademark-, 101GT-TM-, and 101XL-TM- are moveable (but not
mobile), conveyor based systems allowing rapid inspection of high volumes of
luggage and other packages.
The Model 66-Registered Trademark- handles small packages using the patented
Z-Registered Trademark- Backscatter technology. This technology was validated by
a study conducted by several U.S. government agencies involving the Model
66-Registered Trademark- and competitive systems in which the Model
66-Registered Trademark- was determined to have superior detection capability
for terrorist devices hidden in complex backgrounds. This test resulted in
increased order demand from both government and commercial clients, including
Fortune 100 companies.
3
The BodySearch-TM- Personnel Inspection System offers a fast, safe, and
non-intrusive way to screen individuals for weapons, drugs, and illegal
contraband concealed under clothing, providing a viable alternative to pat or
strip searches. This system is used for drug detection and head of state
security as well as for correctional facility security. Through the end of
fiscal 2000, the Company has sold a total of 14 BodySearch-TM- units, including
five units to the U.S. Customs Service.
AS&E's High Energy Systems Division (HES), acquired in 1998 and located in Santa
Clara, California focuses on the design, fabrication of high energy, compact
linear accelerators for a customer base that includes medical, materials
processing, non-destructive testing, radiation testing, security and special
uses.
The Company has patents in the United States, Germany, Japan, and the United
Kingdom, as well as patents pending in the United States and under the Patent
Cooperation Treaty. The Company has sold product in, or has marketing activity
in most major regions of the world including Africa, Asia, Europe, the Middle
East, Australia and South America. Each U.S. patent issued after May 1995 will
have a duration of twenty years from the date of application. The Company relies
on certain proprietary technology and know-how, as well as certain of these
patents, to establish and maintain its competitive position. The Company
believes that its patents, proprietary technology and know-how provide
substantial protection for the Company's competitive position and the Company
has publicly stated its intent to aggressively protect its intellectual property
assets, by litigation or other means, as appropriate. During fiscal 1999 the
Company instituted litigation against the U.S. Customs and EG&G Astrophysics
Research Corp. in order to protect its intellectual property (See item 3 -"Legal
Proceedings").
The Company's X-ray products are marketed to private and governmental
organizations through a sales force that contacts potential customers and
responds to public tenders and other expressions of interest. This sales force
includes Company personnel based in the United States as well as representatives
under contracts to sell in foreign countries who are generally on a commission
basis.
Most Micro-Dose-Registered Trademark-Systems are built for existing orders, and
the Company maintains an inventory of common parts and sub-assemblies for the
systems in order to meet expected customer delivery requirements.
The Company is heavily dependent upon sales to agencies of the U.S. Government,
and reductions or delays in procurements of the Company's systems by these
agencies may have a material adverse effect on the Company. The Company's
strategy includes reducing this dependence by emphasizing sales to foreign
governments, which accounted for more than half of sales in fiscal 2000. Sales
to U.S. Government agencies, in general, are generated by responding to a
"Request for Quote" and are subject to standard and routine U.S. Government pre
and post contract award audit as well as review of the Company's compliance with
the Federal Acquisition Regulations. During fiscal 2000, less than half of sales
of X-ray products were under (i) direct contracts with the U.S. Government, and
(ii) subcontracts with prime contractors working under direct contracts with the
U.S. Government. Some of the Company's contracts with the government are on a
cost reimbursement basis, including provisions preventing final billing until
completion of the contract, and virtually all are cancelable at the government's
discretion. The Company has not experienced any material losses as the result of
such contractual provisions.
The governments of Egypt and Mexico were major customers of the Company with
sales to each country of 20 percent and 21 percent, respectively, of the
Company's consolidated revenues in fiscal 2000.
4
While the Company's emphasis on international sales has had the desired effect
of reducing the Company's dependence on the U.S. Government, it has increased
the Company's exposure to the very long sales cycles and project financing
requirements often associated with such sales. The Company manages these risks
in a number of ways including actively increasing the number of opportunities it
is pursuing at any one time and by working with international funding sources to
help clients finance these projects.
The Company has many competitors in the X-ray product market, including several
large and well-established manufacturers of security X-ray equipment with
financial and other resources greater than those of the Company. Certain X-ray
security system customers select such systems based largely on price. Other
customers, notably the U.S. Government and users in countries with high levels
of concern over security, tend to select systems based largely on performance
and detection capability. The Company's systems offer premium performance and
have in the past, with the exception of the CargoSearch-TM- family, generally
been priced higher than many competing systems. The Company believes that its
patented and proprietary technology give it a strong competitive position in the
sale of security systems to customers concerned with performance and detection.
The Company also believes that its strategy of concentrating on products with
unique features and/or competitive pricing will give it a strong position to
increase its sales of X-ray systems.
The Company has not experienced during the last year, and does not currently
anticipate, any hardware delivery delays due to raw material shortages. Most
procured material is from U.S. sources. However, the Company is dependent upon
certain overseas sole source providers of important components. No rare or
exotic materials are utilized.
The Company complies with applicable Health and Human Services regulations
outlined under the "Regulations for the Administration and Enforcement of the
Radiation Control for Health and Safety Act of 1968" (21CFR 1020.40), published
by the U.S. Department of Health and Human Services. All X-ray products of the
Company comply with all applicable U.S. Government regulatory standards.
|_| RESEARCH AND DEVELOPMENT
The Company conducted approximately $416,000 of government sponsored research
primarily focused on technologies for the detection of illicit drugs,
explosives, and other security issues in fiscal 2000. This compares to
$2,664,000 and $2,785,000 of government sponsored research and development in
fiscal 1999 and 1998, respectively. In addition, the Company spent approximately
$5,902,000 of its own funds for research relating to the development of new
products or services during fiscal 2000, compared to $6,380,000 and $2,856,000
in fiscal 1999 and 1998, respectively.
A significant amount of the Company's government sponsored research and
development work is obtained via contracts or subcontracts that typically
provide for reimbursement of allowable costs plus a fixed fee. The Company's
contracts in these areas are obtained by submitting research and development
proposals to various organizations, sometimes in response to requests for such
proposals. The Company's contract research ranges from advances in X-ray systems
and image analysis to integrated system development for niche security
inspection problems.
5
|_| PERSONNEL
As of March 31, 2000 the Company had 323 employees compared to 301 employees at
the end of the prior year. All Company employees sign nondisclosure agreements
as a condition of employment.
|_| SALES BACKLOG
The Company's firm (under signed contracts) sales backlog was $25,420,000 at
March 31, 2000 and $38,723,000 at March 31, 1999.
A majority of the Company's contracts with the U.S. Government contain clauses
permitting the government to terminate the contract for convenience upon certain
terms and conditions, including payment to the Company of an appropriate fee or
profit on work performed. The total of such contracts in the backlog was
$5,976,000 at the end of fiscal year 2000 and $3,563,000 at the end of fiscal
year 1999. It is estimated that approximately 71% of the 2000 backlog will be
filled within the fiscal year ending March 31, 2001.
6
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
All export sales are made in U.S. dollars, and virtually all export sales are
either secured by irrevocable letters of credit or paid in advance. Export sales
are believed by the Company to be at least as profitable as similar domestic
sales. All of the Company's assets and operations are maintained in the United
States. The Company has not encountered, nor does it anticipate encountering,
risks attendant to export sales that are greater than risks attendant to
domestic sales. The following chart provides information about the breakdown
between domestic and export sales for the indicated fiscal years.
Net Sales and Contract Revenues (Dollars in thousands)
2000 1999 1998
------------- --------------- --------------
Domestic $ 27,360 $ 26,274 $ 26,799
Export $ 33,314 $ 31,021 $ 5,900
Percent of Export Revenue by Major Region:
Middle East & Africa 48.7 % 54.2 % 59.7 %
Mexico 38.1 29.6 --
Europe 5.7 5.0 8.9
Pacific Rim 4.1 10.5 28.3
All Other 3.4 0.7 3.1
ITEM 2. PROPERTIES
The Company's executive offices and its research, manufacturing and warehouse
facilities are located in Billerica, Massachusetts and Santa Clara, California.
In Billerica, the Company occupies 118,300 square feet of space in a 160,000
square foot single-story; concrete and brick building owned by an unaffiliated
real estate limited partnership. The remaining space in the building is
currently leased by the owner to an unaffiliated manufacturing company. The
Company occupies the space under a long-term lease with a ten-year initial term
that commenced March 1, 1995, and its one (1) ten-year optional extension term.
In October 1999, the Company leased an additional 56,000 square feet of
manufacturing and office space in an office park near the main office. This
lease has a term of five years. In May 2000, the Company sub-leased 12,700
square feet of separate manufacturing and office space to an unaffiliated
company. The facilities are currently utilized on a one-shift basis. The Company
can add additional capacity by adding second and third shifts if necessary.
In August 1998, the Company established the High Energy Systems Division.
Located in Santa Clara, California, the Division leases 11,700 square feet of
manufacturing, research and office space. The lease has a term of three years
that commenced on August 18, 1998. The lease has two three-year optional
extension terms. The facilities are currently utilized on a one-shift basis. The
Company can add additional capacity by adding second and third shifts if
necessary.
7
ITEM 3. LEGAL PROCEEDINGS
The United States Court of Appeals for the Federal Circuit in Washington, D.C.,
in a decision issued December 29, 1999, ruled that American Science &
Engineering may pursue a patent infringement claim against Vivid Technologies
which produces x-ray detection devices used in baggage scanning equipment.
The Appeals Court overturned a 1998 decision in Vivid's favor by the
Massachusetts Federal District Court. The lawsuit, filed by Vivid Technologies
in May 1996, concerns whether Vivid's x-ray detection devices infringed on
AS&E's patent. The District Court had ruled that AS&E could not assert a claim
that Vivid's devices infringed on AS&E's patent. The Appeals Court also reversed
the district court's finding on summary judgment that Vivid did not infringe on
AS&E's patent, as well as the district court's denial of AS&E's request for
discovery to oppose Vivid's summary judgment motion.
In September 1998, the Company filed suit against EG&G Astrophysics Research
Corp. (EG&G) in U.S. District Court in Boston, Massachusetts alleging that EG&G
is infringing on at least two patents owned by the Company and that EG&G has
misappropriated certain trade secrets of the Company. In February 1999, the
Company filed a related action in the same court against the U.S. Customs
Service ("Customs") alleging that Customs had either misappropriated the
Company's trade secrets or facilitated their misappropriation by EG&G and that
Customs had improperly entered into a contract with EG&G for the acquisition of
a product functionally equivalent to the Company's MobileSearch -TM- X-ray
inspection system. In May 1999, the Court held a hearing on the Company's motion
for a preliminary injunction against both Customs and EG&G prohibiting further
performance of the contested contract and preventing EG&G from utilizing the
Company's' trade secrets. In August 1999, the Court issued a ruling denying the
request for the preliminary injunction. In December 1999, EG&G filed a Motion
for Summary Judgment that EG&G did not misappropriate the Company's trade
secrets and in March 2000 EG&G filed a Motion for Summary Judgment that EG&G did
not infringe the Company's patents. The Company has filed opposition to EG&G's
motions and the Court has not yet ruled on these motions. The Company is
continuing to pursue its claims against EG&G, but has filed a motion to dismiss
the suit against U.S. Customs.
In a related matter, EG&G has filed a request with the U.S. Patent and Trademark
Office for reexamination of the two patents that currently are at issue in the
patent infringement action described above. The Company filed oppositions to the
reexamination requests and believes that significant claims of its patents,
covering activities by EG&G, will be upheld.
In February 2000, Heimann Systems GmBH filed a civil action in U.S. District
Court in Boston, Massachusetts against the Company alleging that the Company
infringed a Heimann patent relating to a mobile vehicle and x-ray examining
device. The Company denies Heimann's assertions and believes that Heimann's
claims are without merit. The Company does not expect the outcome of this
litigation to have a material impact to its financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
8
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange (ticker
symbol: ASE). The market price range for the Common Stock for the last two
fiscal years follows:
FISCAL YEAR QUARTER ENDED HIGH LOW
----------- ------------- ---- ---
2000 March 31, 2000 7 3/4 6 1/8
December 31, 1999 8 1/2 6 5/8
September 30, 1999 7 7/8 6
June 30, 1999 9 5/8 8 3/16
1999 March 31, 1999 11 1/16 7 1/8
December 31, 1998 12 1/4 9 3/8
September 30, 1998 13 1/16 11 5/16
June 30, 1998 16 7/16 13 1/2
As of June 16, 2000, there were approximately 1,196 holders of record of the
Company's Common Stock.
No cash dividends have been declared in the two most recent fiscal years and the
Board of Directors does not contemplate paying any dividends in the immediate
future.
The Company's credit facility restricts the payment of dividends (except in
shares of the Company's stock) without consent of the bank.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Year 2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
Net sales and contract
revenues $ 60,674 $ 57,295 $ 32,699 $ 28,479 $ 17,815
Net income (loss) 1,459 2,045 4,661 1,925 802
Income (loss) per
share-diluted .29 .40 .95 .40 .18
Total assets 38,205 30,204 25,993 15,514 14,295
Obligations under
capital leases 16 40 42 60 75
Stockholders' investment 21,375 19,347 16,084 10,150 7,501
Book value per share 4.31 3.97 3.39 2.21 1.67
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|_| 2000 COMPARED TO 1999
|_| OVERVIEW
Net sales and contract revenues for fiscal 2000 improved by 6% to $60,674,000
versus fiscal 1999 net sales and contract revenues of $57,295,000. The Company
had income before taxes of $466,000, a decrease of 86% compared to $3,409,000
income before taxes in the previous year. During fiscal 2000, the Company
recorded a net tax benefit of $993,000 consisting principally of a substantial,
non-recurring research and development tax credit as well as tax benefits
associated with the Company's foreign sales corporation. Net income for fiscal
2000 was $1,459,000 ($.29 per share, on a diluted basis) as compared to
$2,045,000 ($.40 per share, on a diluted basis) in fiscal 1999. Backlog at March
31, 2000 was $25,420,000, a 34% decrease from the backlog reported at previous
fiscal year end.
CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year-end increased
by $880,000 to $1,246,000, compared to $366,000 in 1999. Accounts receivable
decreased by $1,682,000 from the prior year due to the decreased shipments made
during the fourth quarter of fiscal 2000. Unbilled Receivables increased by
$6,743,000 due to performance achieved on several contracts. Deferred income
taxes increased $1,325,000 as a result of the Company recording tax benefits
associated with the above mentioned research and development tax credits and tax
benefits associated with the Company's foreign sales corporation. The Company's
borrowings under its Line of Credit increased by $3,000,000 due to additional
borrowings to primarily support working capital needs. Customer deposits
increased $928,000 due to advances on certain long-term contracts. Deferred
revenue increased $1,046,000 due to advances for extended warranty and service
contracts.
RESULTS OF OPERATIONS - Net sales and contract revenues increased by $3,379,000
or 6% during fiscal year 2000. In fiscal 2000, security systems revenues of
$60,258,000 represented an increase of $5,627,000 or 10% over 1999. Contract
research and engineering revenues of $416,000 decreased by $2,248,000 or 84%
below 1999.
Cost of sales and contracts in fiscal 2000 of $43,494,000 was $5,138,000 higher
than the previous year primarily due to increased equipment sales and
performance on several contracts. Cost of sales and contracts represented 72% of
revenues during fiscal 2000, compared to 67% in fiscal 1999. This increase in
the cost of sales ratio was due to a shift in product mix as well as continued
investments made in operations infrastructure, global technical support
capability and the introduction of new or enhanced products in response to
growing domestic and international demand.
Selling, general and administrative expenses of $10,480,000 were $1,397,000
higher than the previous year and represented 17% of revenues, compared to 16%
in 1999. The increased spending level was primarily due to the inclusion of the
Company's High Energy Systems division for a full year as well as outside legal
costs associated with the Company's protection of its intellectual property
rights.
Company funded research and development spending decreased to $5,902,000 in
fiscal 2000, a 7% decrease compared to the $6,380,000 in spending in fiscal
1999. Research and development spending in fiscal 2000 and fiscal 1999 was 10%
and 11% of revenues, respectively.
In the fourth quarter of fiscal 2000, the Company recorded a tax benefit of
$1,675,000 consisting principally of a nonrecurring research and development tax
credit as well as a benefit related to the fourth quarter loss. This resulted in
a net tax benefit of $933,000 for the full fiscal year. In fiscal 1999, the
Company recorded a provision for income taxes of 40%, of which the significant
components included federal and state income taxes.
The Company recorded net income of $1,459,000 for fiscal year 2000, a decrease
of $586,000, or 29% below net income of $2,045,000 in the previous year. On a
comparative basis, using fiscal 1999 tax provision rate of 40%, fiscal 2000 net
profits would have been $280 resulting in an decrease in fiscal 2000 net profits
of 86% below fiscal 2000. The Company was profitable in all quarters.
10
LIQUIDITY AND CAPITAL RESOURCES - Net cash provided by operating activities was
$681,000, compared to $785,000 net cash used for operating activities in 1999.
During 2000, the Company received $91,000 from the exercise of stock options.
Cash and cash equivalents at March 31, 2000 stood at $1,246,000, an increase of
$880,000 over the prior year-end. Working capital at the end of fiscal 2000
increased 6.1% to $14,906,000. The Company's current ratio decreased to 2.0 as
compared to 2.4 at the end of fiscal 1999.
Fiscal 2000 capital expenditures totaled $2,858,000. This was an decrease of
15%, or $500,000, from the prior year capital expenditures of $3,358,000.
Capital expenditures were comprised primarily of investments in information
technology, leasehold improvements, and furniture and fixtures. Capital
expenditures are funded by cash generated by operations or from the lines of
credit available to the Company.
At the end of fiscal 2000, the Company had $35.5 million in approved bank lines
of credit to be used either for short term cash borrowings to support working
capital growth or for standby letters of credit to support the bonding
requirements of foreign contracts. At the end of fiscal 2000, $4.0 million in
borrowings were outstanding and $2.2 million in standby letters of credit were
in effect against this credit facility. The Company's credit facility restricts
the payment of dividends, except in shares of the Company's stock, without
consent of the bank. The existing line of credit expires on August 31, 2000. The
Company anticipates either an extension of the existing line of credit or a new
credit facility will be in place by August 31, 2000.
|_| YEAR 2000
The Company has experienced no major impact due to Year 2000 issues. The
Company's year 2000 initiatives included (i) testing and upgrading internal
business systems and facilities; (ii) testing and developing necessary upgrades
for the Company's current products and certain discontinued products; (iii)
contacting key suppliers, vendors, and customers to determine their year 2000
compliance status; and (iv) developing contingency plans.
THE COMPANY'S STATE OF READINESS
The Company has completed the process of upgrading or replacing its
non-compliant systems. In most cases, such upgrades or replacements were made in
the ordinary course of business. The Company's material information technology
systems were year 2000 compliant in time for the Year 2000 transition. All major
information systems were tested before January 1, 2000 on a separate network to
ensure the overall information systems architecture was Year 2000 compliant.
The Company has had no major issues with the products that it manufactures and
sells. The Company has had no Year 2000 issues with suppliers, and vendors
significant to the Company's business operations.
CONTINGENCY PLANS
The Company's contingency plans included standby generators and computer
systems. None of these systems were needed.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company believes it has an effective Year 2000 program and the major risks
have been averted. However, since it is not possible to anticipate all possible
future outcomes there could be "worst case scenarios" in which the Company would
be unable to conduct its business. Possible "worst case scenarios" include
problems that do not surface immediately. These problems could cause delays or
11
disruptions in the Company's business. If any of the Company's material
suppliers, vendors or customers experience business disruptions due to similar
latent problems, the Company might also be materially adversely affected.
There can be no assurance that the Company will not incur material costs in
defending or bringing lawsuits related to the Year 2000 issue. Any unexpected
costs or delays arising from the year 2000 issue could have an adverse impact on
the Company's business, operations, and financial condition.
12
|-| 1999 COMPARED TO 1998
|_| OVERVIEW
Net sales and contract revenues for fiscal 1999 improved by 75% to $57,295,000
versus fiscal 1998 net sales of $32,699,000. The Company had income before taxes
of $3,409,000, an increase of 26% compared to $2,698,000 of income before taxes
in the previous year. Net income for fiscal 1999 was $2,045,000 ($.40 per share,
on a diluted basis) as compared to $4,661,000 ($.95 per share, on a diluted
basis) in fiscal 1998. Backlog at March 31, 1999 was $38,723,000, a 124%
increase over the backlog reported at previous fiscal year end. During fiscal
1998, the Company recorded a net tax benefit associated with net operating loss
carryforwards and other tax items of $1,963,000, or $.40 per share.
CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year-end decreased
by $1,924,000 to $366,000, compared to $2,290,000 in 1998. Accounts receivable
increased by $1,232,000 from the prior year due to the increased shipments made
during 1999. Inventories increased by $2,513,000 during 1999 to support the
growth in X-ray equipment shipments and backlog. Prepaid expenses and other
current assets increased $943,000 due to advances for certain long lead
inventory. Deferred income taxes decreased $932,000 as a result of the Company
utilizing a tax benefit associated with its net operating loss carryforwards.
RESULTS OF OPERATIONS - Net sales and contract revenues increased by $24,596,000
or 75% during fiscal year 1999. In 1999, security systems revenues of
$54,631,000 represented an increase of $24,717,000 or 83% over 1998. Contract
research and engineering revenues of $2,664,000 decreased by $121,000 or 4% over
1998.
Cost of sales and contracts in 1999 of $38,356,000 was $18,540,000 higher than
the previous year primarily due to increased equipment sales and performance on
several contracts. Cost of sales and contracts represented 67% of revenues
during 1999, compared to 61% in 1998. This increase in the cost of sales ratio
was due to an expected shift in product mix, investments made in operations
infrastructure, and introduction of new or enhanced products in response to
growing domestic and international demand.
Selling, general and administrative expenses of $9,083,000 were $1,658,000
higher than the previous year and represented 16% of revenues, compared to 23%
in 1998. The increased spending level was primarily due to expanded
international sales and marketing activities and costs associated with
recruiting for the Company's expanded staff requirements. The decreased ratio of
selling, general and administrative expenses to sales is due to the larger
revenue base over which to spread these costs.
Company funded research and development spending increased to $6,380,000 in
1999, a 123% increase compared to the $2,856,000 in spending in 1998. Research
and development spending in fiscal 1999 and fiscal 1998 was 11% and 9% of
revenues, respectively.
In fiscal 1999, the Company recorded a provision for income taxes of 40%, of
which the significant components included federal and state income taxes. In
fiscal 1999, the effective tax rate exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes and non-deductible
expenses. In the fourth quarter of fiscal 1998, the Company recorded a tax
benefit associated with net operating loss carryforwards and other tax assets as
explained in Footnote 5 to the Financial Statements. The aggregate tax benefit
recognized was $2,072,000, which resulted in a net tax benefit for the year of
$1,963,000.
The Company recorded net profits of $2,045,000 for fiscal year 1999, a decrease
of $2,616,000, or 56% below net income of $4,661,000 in the previous year. On a
comparative basis, using fiscal 1999 tax provision rate of 40%, fiscal 1998 net
profits would have been $1,619,000 resulting in an increase in fiscal 1999 net
profits of 26% over fiscal 1998. The Company was profitable in all quarters.
LIQUIDITY AND CAPITAL RESOURCES - Net cash provided by operating activities was
$785,000, compared to $696,000 net cash used for operating activities in 1998.
During 1999, the Company received
13
$815,000 from the exercise of stock options. Cash and cash equivalents at March
31, 1999 stood at $366,000, a decrease of $1,924,000 over the prior year-end.
Working capital at the end of 1999 decreased 3.6% to $14,046,000. The Company's
current ratio decreased to 2.4 as compared to 2.6 at the end of 1998.
Fiscal 1999 capital expenditures totaled $3,358,000. This was an increase of
210%, or $2,276,000, from the prior year capital expenditures of $1,082,000.
Capital expenditures were comprised primarily of investments in information
technology, leasehold improvements, and furniture and fixtures. Capital
expenditures are funded by cash generated by operations or from the lines of
credit available to the Company.
At the end of fiscal 1999, the Company had $23.3 million in approved bank lines
of credit to be used either for short term cash borrowings to support working
capital growth or for standby letters of credit to support the bonding
requirements of foreign contracts. At the end of fiscal 1999, $1.0 million in
borrowings were outstanding and $12.1 million in standby letters of credit were
in effect against this credit facility. The Company's credit facility restricts
the payment of dividends, except in shares of the Company's stock, without
consent of the bank. After the end of the fiscal year, the Company had applied
for a $5 million expansion of the credit line.
|_| YEAR 2000
The Company has assessed the potential impact of the year 2000 on the Company's
internal business systems, products and operations. The Company's year 2000
initiatives include (i) testing and upgrading internal business systems and
facilities; (ii) testing and developing necessary upgrades for the Company's
current products and certain discontinued products; (iii) contacting key
suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
THE COMPANY'S STATE OF READINESS
The Company has evaluated its critical information technology systems for year
2000 compliance, including its significant computer systems, software
applications, and related equipment. The Company is currently in the process of
testing its non-compliant systems in order to determine the need for upgrade or
replacement. The Company expects that its information technology systems will be
year 2000 compliant before October, 1999. All identified problems will be
remediated. The Company will continue testing of its critical internal business
systems as the upgrades are placed in production. The Company believes that all
of the products that it currently manufactures and sells are year 2000
compliant.
The Company has identified and contacted suppliers, vendors, and customers that
are believed to be significant to the Company's business operations in order to
assess their year 2000 readiness. As part of this effort, the Company
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. It is developing a more detailed follow-up to ensure its
most critical suppliers and vendors have adequate year 2000 plans in place.
CONTINGENCY PLANS
The Company is developing a contingency plan that will allow its primary
business operations to continue despite possible disruptions due to year 2000
problems. These plans include emergency power for information technology in case
of a general power failure and redundant data in similar computer systems to be
used in case of a failure of the existing IT system. As the Company continues to
evaluate the year 2000 readiness of its business systems and facilities,
products and significant suppliers, vendors, and customers, it will modify and
adjust its contingency plan as may be required.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
14
The primary costs of the year 2000 program relate to existing internal
resources. These additional costs will not be material. However, since there is
no uniform definition of year 2000 "compliance" and there is no way to
anticipate all possible situations, there can be no assurance that the Company
will not encounter unexpected costs or delays in achieving year 2000 compliance.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The company believes it has an effective program in place to resolve the year
2000 issue. However, since it is not possible to anticipate all possible future
outcomes there could be "worst case scenarios" in which the company would be
unable to conduct its business. While the Company anticipates completion of
testing and upgrades on a timely basis, possible "worst case scenarios" include
delays in upgrading mission critical IT systems and unexpected costs and delays
or disruptions in the Company's business. If any of the Company's material
suppliers, vendors or customers experience business disruptions due to year 2000
issues, the Company might also be adversely affected. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
initiating lawsuits. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition.
|_| ACQUISITION OF BUSINESS
On August 18, 1998, the Company established its High Energy Systems Division by
purchasing certain assets relating to the industrial linear accelerator business
of Schonberg Research Corporation of Santa Clara, California for $1,100,000. The
components of the purchase price consisted of the following:
Fixed assets $ 658
Raw material inventory 26
Patents and other intangible assets 416
-----------
Total $ 1,100
===========
This acquisition has been accounted for under the purchase method of accounting,
and its results are included with the Company's results from the date of
acquisition.
15
ITEM 7(A). QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information listed in the
Index to Consolidated Financial Statements and Schedule on page 26 are filed as
part of this Annual Report on Form 10-K and are incorporated into this Item by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
|_| DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AS OF MAY 31, 2000.
Positions Offices Date Assumed
Name Age of Company Held Each Position
- ---- --- ------------ -------------
DIRECTORS
- ---------
William E. Odom 67 Director September 1996
Chairman September 1998
Hamilton W. Helmer 53 Director February 1993
Donald J. McCarren 60 Director February 1993
Herman Feshbach 83 Director September 1975
Carl W. Vogt 64 Director June 1997
Roger P. Heinisch 62 Director August 1999
Ralph S. Sheridan 50 Director January 1994
President & CEO September 1993
EXECUTIVE OFFICERS (Who are not also Directors)
William L. Adams 67 Vice President, Chief September 1998
Engineer
Joseph Callerame 50 Vice President, Technology June 1998
Chief Technology Officer
Ralph G. Foose 56 Vice President, Operations September 1999
Edwin L. Lewis 54 Vice President, General March 2000
Counsel and Clerk
Lee C. Steele 50 Vice President, Finance September 1994
Treasurer & CFO
Robert J. Peters 39 Vice President, Business November 1997
and Commercial
Development
All Directors and Executive Officers hold office until the next annual meeting
of Stockholders and until their successors are duly elected and qualified. No
family relationship exists between any of the listed Directors and Executive
Officers.
16
Dr. Herman Feshbach is an Institute Professor Emeritus at the Massachusetts
Institute of Technology, a position he has held for more than five years, and
has previously served as Chairman of the Physics Department at MIT and Director
of the MIT Center for Theoretical Physics. He is a past President of the
American Physical Society and the American Academy of Arts and Sciences and is a
Fellow of both those Organizations and of the American Association for the
Advancement of Sciences. He is on the Board of Governors for Tel Aviv University
and the Weizmann Institute of Science, is on the Board of Editors for Daedalus
and Editor of the Annals of Physics, and has served as Chairman or Member on
numerous committees for the Department of Energy, the National Science
Foundation, the National Academy of Sciences, and the American Physical Society.
He was awarded the National Medal of Science by President Reagan in 1986. Dr.
Feshbach received his Ph.D. from MIT.
Dr. Roger P. Heinisch joined the Honeywell Corporation in 1968 where he served
in various scientific and engineering positions before becoming Director of
Research in 1978. In 1980, Dr. Heinisch became the Director of the Systems and
Research Center and was named Vice President of the Center in 1982. He became
Vice President of Honeywell's Flight Systems Operations in 1985. In 1988, Dr.
Heinisch was appointed Corporate Vice President of Advanced Technology. In 1990,
he became Vice President of Materials and Manufacturing for the Defense Systems
Group. When Alliant Techsystems was spun off from Honeywell in 1991, he assumed
the position of Vice President, Engineering with the new Company. From 1995
until April of 1997 he also assumed responsibility for Information Systems and
Technology at Alliant. Dr. Heinisch holds a B.S. in Nuclear Engineering from
Marquette University, a M.S. in Nuclear Engineering from Marquette University
and a Ph.D. in Engineering Science from Purdue University. Dr. Heinisch is a
former member of the Army Science Board and has been a member of various
Department of Defense review panels and technical boards. Currently, Dr.
Heinisch serves on the boards of Nichols Research Corp., Nonvolatile
Electronics, Inc., Theseus Logic Inc., Third Wave Systems, Point Cloud and
Superior Vocabulary.
Dr. Hamilton W. Helmer has, for the last 15 years, been Managing Partner of
Helmer & Associates, a strategic consulting firm located in Los Altos,
California. Prior to that, Dr. Helmer worked for Bain & Co. Dr. Helmer holds a
Ph.D. in Economics from Yale University.
Dr. Donald J. McCarren is President of an early stage, privately held,
functional genomics research organization, Alpha Gene, Inc. Previously, Dr.
McCarren served as President of the National Center for Genome Resources, a
non-profit corporation located in Santa Fe, New Mexico, which supports genome
projects and related research by providing resources such as expertise in
bioinformatics. Prior to assuming that position in 1997, Dr. McCarren was the
founder of Tacora Corporation, a medical technology company located in Seattle,
Washington. From July 1992 to June 1994, he was President and Chief Operating
Officer of ImmunoGen, Inc., a small molecule cancer research and development
company located in Cambridge, Massachusetts. Prior to that, Dr. McCarren spent
almost 9 years in Erbamont N.V. serving as President (1990 to 1992) of the Adria
Laboratories Division of Erbamont N.V. in Columbus, Ohio, and Corporate Vice
President of Worldwide Marketing and Business Development (1989 to 1990) and
Vice President of Far East and Austral-Asian Operations (1986 to 1989) of
Erbamont, N.V. Dr. McCarren holds a Ph.D. in Developmental Economics.
General William E. Odom is the Director of National Security Studies for the
Hudson Institute in Washington, D.C. and an adjunct Professor in the Department
of Political Science at Yale University. Prior to joining the Hudson Institute
in 1988, General Odom spent 34 years as an officer in the United States Army,
retiring with the rank of Lieutenant General. While on active duty, General Odom
served as Director of the National Security Agency for three years, Assistant
Chief of Staff for Intelligence for the Department of the Army for four years
and Military Assistant to the President's National Security Advisor for four
years. General Odom received his B.S. degree from West Point and Masters and
Ph.D. degrees from Columbia University. General Odom is on the Board of
Directors of Nichols Research Corporation of Huntsville, Alabama, V-ONE
Corporation of Rockville, Maryland, Middlebury College, from which he received
an honorary doctorate, and the Institute for the Study of Diplomacy at
Georgetown University. General Odom is the author of five books and numerous
articles.
Mr. Ralph S. Sheridan was elected President and Chief Executive Officer of the
Company in September 1993, and in January of 1994, he was elected a Director.
Prior to joining the Company, Mr. Sheridan ran his own consulting and investment
firm, Value Management Corporation, in Waltham,
17
Massachusetts. Prior to that, Mr. Sheridan was President and CEO (1988-1989) and
Vice President of Marketing and Operations (1987-1988) of HEC Energy Corp., in
Boston, Massachusetts. Before joining HEC, Mr. Sheridan held the position of
Vice President of Operations for the Engineered Systems and Controls Group
(1984-1986) and Vice President of Corporate Business Development (1981-1984) at
Combustion Engineering, Inc. in Stamford, Connecticut. Mr. Sheridan holds a B.S.
in Chemistry and an M.B.A., both from Ohio State University.
Mr. Carl W. Vogt was elected to the Board in June, 1997. He is a partner in the
Washington, D.C. office of the national law firm of Fulbright & Jaworski. Mr.
Vogt has been with that firm since 1966, with various periods away from the firm
to perform government service. In 1992, he was appointed by President Bush as
the Chairman of the National Transportation Safety Board, where he served until
1994. Mr. Vogt earned his bachelor's degree from Williams College and his law
degree from the University of Texas Law School.
Dr. Joseph Callerame joined American Science & Engineering in June 1998 as Vice
President, Technology, and Chief Technology Officer. Prior to joining AS&E, Dr.
Callerame spent over twenty years at Raytheon Company, most recently as Manager,
Engineering and Technology Development and Consulting Scientist, at Raytheon
Electronic Systems. Prior to that appointment, Dr. Callerame was Deputy General
Manager of Raytheon's Corporate Research Division. Dr. Callerame received his
B.A. in Physics from Columbia College, and his M.A. and Ph.D., also in Physics,
from Harvard University. After receiving his Ph.D. and prior to his employment
at Raytheon, Dr. Callerame served as a Post-Doctoral Fellow in Nuclear Physics
at M.I.T.
Mr. Lee C. Steele joined the Company in September 1994 as Vice President of
Finance and Chief Financial Officer. From 1991 until he joined the Company, Mr.
Steele was a principal of Asset Management Corporation, a Waltham, Massachusetts
consulting firm specializing in the analysis and resolution of complex financial
and operational challenges for small and medium size businesses. Until 1991, Mr.
Steele was a Partner at Deloitte & Touche, specializing in profit planning,
corporate finance and troubled company situations. He holds a M.B.A. from
Harvard Business School and an engineering degree from Case Western Reserve
University.
Dr. William Adams is President of Adtech Consulting, Inc., a technology and
management consulting firm located in Columbus, Ohio. Dr. Adams joined AS&E in
July 1997 as acting Chief Technology Officer. In August 1998 he became the
acting Vice President of Operations and he now serves as Chief Engineer. Prior
to joining AS&E Dr. Adams spent over thirty years in engineering and general
management in process automation firms including AccuRay, Combustion
Engineering, and ABB. During this period he held positions as Vice President of
Field Service, VP of Engineering, Senior Vice President of Engineering,
Manufacturing, and Marketing, and Vice President of Quality. In 1987 Dr. Adams
established a process automation joint venture in Russia for Combustion
Engineering. Dr. Adams and his wife moved to Moscow in 1991 where he managed the
joint venture for ABB after Combustion Engineering was acquired by ABB. Dr.
Adams retired from ABB in 1994 and established Adtech Consulting, Inc. Dr. Adams
holds a B.S. in Electrical Engineering from Michigan Technological University, a
SM in Electrical Engineering from MIT, and a Ph.D. from Purdue University.
Mr. Robert J. Peters joined the Company in November of 1997 as the Director
of Product Development Engineering, and was promoted to his current position
in March of 1998. He is responsible for all of the marketing, application and
sales engineering, as well as communications. Prior to joining AS&E, Mr.
Peters spent 14 years in the Defense industry, working for General Dynamics,
Lockhead Martin, General Electric and RCA. Through various positions in
engineering, program management and sales and marketing, Mr. Peters has led
new product development of combat vehicles, stabilization systems, diagnostic
systems and paperless documentation environments. He has developed joint
ventures in the U.K. and worked extensively throughout Asia and Europe. Mr.
Peters earned a B.S. in Electrical Engineering and an M.E. in Biomedical
Engineering from Worcester Polytechnic Institute and an M.S. in Electrical
Engineering from Northeastern University in Boston, MA.
Mr. Ralph Foose joined AS&E as Vice President of Operations in September, 1999
after three years as President and Chief Financial Officer of Sight in Systems,
a software manufacturing company. Prior to
18
his work at Sight in Systems, Mr. Foose was President of IRD Mechanalysis where
he led a company turnaround. In 1986 Mr. Foose joined Combustion Engineering as
President of Taylor Instrument Systems. During his six year tenure, the company
split into two divisions and grew from $20 million in annual sales to $150
million. Early on in his career, Mr. Foose held various technical consulting and
managerial positions with Booz-Allen Hamilton, AccuRay Corporation and NASA. Mr.
Foose holds a B.S. in Electrical Engineering from Florida Institute of
Technology and an M.S. in Computer Science from Ohio State University.
Mr. Edwin L. Lewis joined the Company in March 2000 after over two years as
President of the Atlantic Legal Foundation, a public interest law firm in New
York City. From 1995 to 1997, Mr. Lewis was Vice President, General Counsel and
Corporate Secretary of Borg-Warner Corporation and from 1983 to 1995 was general
counsel for its subsidiaries, Burns International and Wells Fargo Alarm
Services. Prior to that, Mr. Lewis was senior attorney for Atlantic Richfield
Company. Mr. Lewis holds a Juris Doctor Degree from Temple University School of
Law and a Bachelor of Arts Degree in International Affairs from Lafayette
College. Mr. Lewis is a member of the Legal Advisory Board of the National
Federation of Independent Business Legal Foundation.
|_| SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires certain persons,
including the Company's Directors and Executive Officers, to file initial
reports of beneficial ownership of the Company's securities and reports of
changes in beneficial ownership with the Securities and Exchange Commission. For
fiscal year 2000, the Company filed a late report for Lee C. Steele for one
transaction and a late report for Ralph S. Sheridan for one transaction.
19
ITEM 11. EXECUTIVE COMPENSATION
|_| THE FOLLOWING CHART PROVIDES INFORMATION CONCERNING COMPENSATION PAID BY
THE COMPANY DURING THE YEAR ENDED MARCH 31, 2000 TO THE CHIEF EXECUTIVE
OFFICER AND EACH OF THE FOUR MOST HIGHLY COMPENSATED EXECUTIVE OFFICERS OF
THE COMPANY WHOSE AGGREGATE COMPENSATION EXCEEDED $100,000.
SUMMARY COMPENSATION
LONG-TERM
COMPEN-
ANNUAL SATION ALL
COMPENSATION ---------- OTHER
NAME AND PRINCIPAL FISCAL ---------------------------- OPTION COMPEN-
POSITION YEAR SALARY ($) BONUS ($) AWARDS (#) SATION ($) (1)
-------- ---- ---------- --------- ---------- --------------
Ralph S. Sheridan 2000 267,120 172,500 225,000 4,058
President and CEO 1999 245,495 230,000 -- 5,658
1998 240,000 230,000 -- 7,729
William L. Adams 2000 213,000 --(4) -- --
Vice President, Chief 1999 174,500 -- 10,000 --
Engineer 1998 112,800 -- -- --
Joseph Callerame 2000 211,964 58,500(5) -- 2,719
Vice President 1999 160,828 -- 50,000 2,212
CTO 1998 -- -- -- --
Lee C. Steele 2000 201,357 133,200(5) -- 2,194
Vice President and 1999 135,664 -- 10,000 774
CFO 1998 125,077 29,750 30,000 752
Robert J. Peters 2000 141,081 --(4) 3,000 290
Vice President, 1999 126,568 16,500 15,000 224
Business and 1998 35,260(2) -- 5,000 --
Commercial
Development
(1) All Other Compensation includes imputed income from taxable life
insurance premiums paid by the Company, and, for Mr. Sheridan, a leased
automobile.
(2) The indicated years were years of partial employment with the Company
for the named executive.
(3) Mr. Sheridan's bonus is paid in respect of "contract years" ending
September 30th in each year and is paid in cash, except in fiscal years
1996 and 1997 when the bonus also included Company stock and payments
made to him to alleviate the tax impact of the stock bonus.
(4) The bonus amount for these officers has not been determined for fiscal
year 2000.
(5) Represents bonus earned in fiscal 1999 and fiscal 2000.
20
Mr. Sheridan has an employment contract with the Company that provides for his
employment as President and Chief Executive Officer, and as a Director, through
September 2002, at an annual salary of $270,000, subject to annual review, plus
performance bonuses tied to specific accomplishments. This contract replaces Mr.
Sheridan's prior contract with the Company, which expired in September 1999.
Under the contract, Mr. Sheridan is eligible to receive an annual bonus of up to
$270,000 in each contract year, based on his accomplishment of goals established
by the Compensation Committee. In addition, the Company granted Mr. Sheridan
options to purchase 225,000 shares of the Company's Common Stock at an exercise
price of $7.44 per share, the fair market value of the Company's Common Stock on
the date of grant. The options become exercisable at the rate of 75,000 options
per year on the first three anniversaries of the grant.
Mr. Sheridan recognized no income upon the issuance of the options. When the
options are exercised, Mr. Sheridan will recognize ordinary income in an amount
equal to the difference between the fair market value of the Common Stock
received upon the exercise of the option and the amount paid for the Common
Stock. At that time, the Company will be allowed a deduction equal to the amount
recognized as ordinary income by Mr. Sheridan. The options provide that to the
extent that exercise of an option would give rise to compensation expense that
the Company reasonably expects will not be deductible for tax purposes in any
given taxable year pursuant to Section 162(m) of the Internal Revenue Code of
1986, as amended, the number of shares as to which the options may be exercised
during that taxable year shall be limited.
Under his initial employment contract, Mr. Sheridan purchased 160,000 treasury
shares of the Company's Common Stock payable by promissory note. The note is due
on the earlier of September 15, 2003 or the termination of Mr. Sheridan's
employment. The Company has agreed to reimburse Mr. Sheridan for the interest
payable under the note in most circumstances.
Mr. Sheridan is entitled to receive the same benefits as other senior executives
of the company, as well as to the use of a car.
In the event that Mr. Sheridan's employment with the Company is terminated
without "Cause", or by him for Good Reason (as defined in the employment
contract), he will receive twelve months' pay and any previously earned bonuses.
In the event that Mr. Sheridan's employment with the Company is terminated for
"Cause", or by him other than for Good Reason (as defined in the employment
contract), or by his death or disability, he will not be entitled to receive any
salary beyond the date of termination, and he will only be entitled to receive
previously earned bonuses if the termination is caused by death or disability.
Dr. Callerame and Mr. Steele each have agreements with the Company granting each
of them severance payments equal to one year's salary if he is terminated in
connection with a change of control of the Company as defined in the agreement.
The agreement also provides that if each of them is terminated for any reason
other than "Cause" as defined in the agreement, he will be entitled to receive
an amount equal to at least six months salary.
21
|_| THE FOLLOWING TABLES PROVIDE INFORMATION CONCERNING THE GRANT OF OPTIONS IN
FISCAL YEAR 2000 TO EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION
TABLE AND OPTIONS EXERCISED BY THOSE OFFICERS.
OPTION GRANTS IN THE LAST FISCAL YEAR
Individual Grants Potential Realizable
-------------------------------------------- Value at Assumed Annual
% of Total Rates of Stock Price
Options Appreciation for Option
Granted to Term ($)
Options All Exercise Expiration ------------------------
Granted Employees Price ($) Date 5%/year 10%/year
-----------------------------------------------------------------------------------------
Ralph S. Sheridan 225,000 33.4% 7.44 9/25/09 983,134 2,557,042
William L. Adams 0 N/A N/A N/A N/A N/A
Joseph Callerame 0 N/A N/A N/A N/A N/A
Lee C. Steele 0 N/A N/A N/A N/A N/A
Robert J. Peters 3,000 (1) 7.50 9/23/09 13,108 34,094
(1) Less than 1%
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Number of Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End - at Fiscal Year End -
Shares MARCH 31, 2000 (#) MARCH 31, 2000 ($)
Acquired on Value --------------------- -----------------------
Exercise Realized Exerc- Unexerc- Exerc- Unexerc-
(#) ($) isable isable isable isable
--------------------------------------------------------------------------------------------
Ralph S. Sheridan 0 0 345,000 225,000 480,000 --
William L. Adams 0 0 10,000 -- -- --
Joseph Callerame 0 0 25,000 25,000 -- --
Lee C. Steele 0 0 76,600 13,400 271,875 --
Robert J. Peters 0 0 10,000 13,000 -- --
22
|_| COMPENSATION OF DIRECTORS
Directors who are also employees of the Company do not receive additional
compensation as Directors. Non-Employee Directors (other than the Chairman)
receive annual compensation of 2,000 shares of Company Common Stock issuable on
January 10th in each year, and options to purchase 7,000 shares of Common Stock
at the closing price on the date of the Annual Meeting in each year. Dr.
Feshbach, a former chairman of the board of directors, receives 2,500 shares of
Common Stock on January 10th in each year and continues to receive deferred
compensation under a now discontinued plan described below. No meeting fees or
other fees are payable to any Director. See Item 13 - Certain Relationships and
Related Transactions for additional information concerning certain Directors.
Dr. Feshbach is covered by a nonfunded deferred compensation plan (adopted in
1976 and amended in 1977, 1980, 1986, 1990 and 1992) that provides for periodic
payments beginning at age 65, based on length of service. During the year, Dr.
Feshbach received $4,752 under the Plan.
|_| COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND SECTION 16
REPORTING
During the fiscal year ended March 31, 2000, the Company's Compensation
Committee consisted of General William Odom and Mr. Carl Vogt. No reportable
relationship existed with respect to any member of the Compensation Committee.
|_| BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (consisting of the two
outside Directors whose names appear below this Report) has sole responsibility
for compensation issues relating to the Chief Executive Officer. Compensation
practices and policies for the other executive officers are set by the Chief
Executive Officer with the advice of the Compensation Committee.
The Compensation Committee has formulated an approach to all executive
compensation that emphasizes the establishment of goals and objectives for each
executive and for the Company as a whole and ties a substantial portion of
executive compensation to the performance of the executive and the Company with
respect to these goals and objectives. Base compensation for executive officers
(and many other Company employees) is established on the basis of an analysis of
salaries received by comparable employees of high-tech and manufacturing
companies in the Greater Boston area, company financial results and prospects,
and individual contributions relative to the job description and past
performance of each officer.
In line with this approach, the Company entered into a new employment agreement
with its President and Chief Executive Officer, Mr. Ralph S. Sheridan, in 1999
(effective as of September 1999). This Agreement was based, in part, on an
independent consultant's analysis of compensation arrangements for chief
executives of comparable companies, and was also based on a careful review of
the most important goals and objectives for the Company. The Agreement provided
for initial annual cash compensation of $270,000, subject to annual adjustment
in the Committee's discretion, plus annual incentive bonuses of up to $270,000
tied to specific, agreed upon annual performance criteria. In addition, in order
to provide for long-term incentives, the Company has issued to Mr. Sheridan
nonstatutory stock options to purchase 225,000 shares of Common Stock which vest
ratably over three years.
For the contract year ended in September 1999, the Committee awarded Mr.
Sheridan a cash bonus of $172,500, representing 74% of the potential award under
his contract.
Also in keeping with its performance-based compensation philosophy, in the
spring of 1994, the Company implemented an incentive compensation program for
all executives who report directly to the Office of the President. Under this
new policy, these executives receive a specified portion of their total
compensation (ranging from 10% to 50%) based upon two factors: their completion
of agreed upon goals and objectives, and the performance of the entire Company.
Report Submitted By: William Odom and Carl Vogt.
23
STOCK PERFORMANCE CHART
The following chart graphs the performance of the cumulative total return to
shareholders (stock price appreciation plus dividends) during the previous five
years in comparison to the returns of the Standard & Poor's 500 Composite Stock
Price Index and the Standard & Poor's 500 High-Tech Composite Stock Price Index.
[GRAPHIC]
INDEXED RETURNS
Base
Period Years Ending
- -----------------------------------------------------------------------------------------------------------------------
COMPANY / INDEX Mar95 Mar96 Mar97 Mar98 Mar99 Mar00
- -----------------------------------------------------------------------------------------------------------------------
AMERICAN SCIENCE ENGINEERING 100 158 194 218 114 116
- -----------------------------------------------------------------------------------------------------------------------
S&P 500 COMP-LTD 100 132 158 234 278 327
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY-500 100 135 183 276 442 783
- ----------------------------------------------------------------------------------------------------------------------
Note: Assumes $100 invested at the close of trading on the last trading day
preceding the first day of the fifth preceding fiscal year (and
reinvestment of dividends) in the Company's Common Stock, Standard &
Poor's 500 Composite Stock Price Index and the Standard & Poor's 500
High-Tech Composite Stock Price Index.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|_| THE FOLLOWING CHART SHOWS THE COMPANY COMMON STOCK BENEFICIALLY OWNED BY
OFFICERS AND DIRECTORS OF THE COMPANY ON JUNE 16, 2000. BASED ON
INFORMATION AVAILABLE TO IT, THE COMPANY BELIEVES THAT NO OTHER PERSON OR
ENTITY OWNED 5 PERCENT OR MORE OF THE COMPANY'S COMMON STOCK ON THAT DATE.
------------------------------------------ ------------------------------------- ----------------------
NAME OF AMOUNT AND NATURE OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
------------------------------------------ -------------------------- ---------- ----------------------
William L. Adams 20,000 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Joseph Callerame 47,928 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Herman Feshbach 21,540 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Ralph G. Foose 12,500 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Hamilton W. Helmer 64,781 1.29%
------------------------------------------ -------------------------- ---------- ----------------------
Edwin L. Lewis 0 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Donald J. McCarren 72,581 1.45%
------------------------------------------ -------------------------- ---------- ----------------------
William E. Odom 35,000 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Robert J. Peters 15,000 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Ralph S. Sheridan 551,936 10.39%
------------------------------------------ -------------------------- ---------- ----------------------
Lee C. Steele 89,223 1.77%
------------------------------------------ -------------------------- ---------- ----------------------
Carl W. Vogt 38,916 (2)
------------------------------------------ -------------------------- ---------- ----------------------
Directors and Officers
as a Group (13 persons) 1,024,178 18.14%
------------------------------------------ -------------------------- ---------- ----------------------
(1) Includes shares that may be acquired under stock options and warrants
exercisable within sixty days after the date of this table, as follows:
Dr. Adams - 10,000; Dr. Callerame - 37,500; Dr. Feshbach - 2,500; Mr.
Foose - 12,500; Dr. Helmer - 53,000; Dr. McCarren - 54,000; Mr. Odom -
21,000; Mr. Peters - 15,000; Mr. Rutan -34,667; Mr. Sheridan - 345,000;
Mr. Steele - 76,600; Mr. Vogt - 15,750; and all Directors and Officers
as a group - 677,517. All ownership reported herein includes sole
voting and investment power.
(2) Amount owned constitutes less than one percent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Al Gladen, a director of the Company until June, 1999, provides engineering
and management services to the Company. The compensation paid
to Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal
years 2000, 1999 and 1998 was approximately $20,600, $212,000 and $256,750, for
services rendered, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements and schedules listed in the Index to
Consolidated Financial Statements and Schedule on page 26 are filed as
part of this report, and such Index is incorporated in this Item by
reference.
The exhibits listed in the Exhibit Index on page 48-50 are filed as
part of this report, and such Index is incorporated in this Item by
reference.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the
fourth quarter of the fiscal year covered by this report.
25
AMERICAN SCIENCE AND ENGINEERING, INC., AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(Submitted in answer to Item 8 and Item 14 of Form 10-K, Securities and Exchange
Commission)
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
Report of Independent Public Accountants 27
Consolidated Balance Sheets - March 31, 2000 and March 31, 1999 28-29
Consolidated Statements of Operations 30
For the Years Ended March 31, 2000, March 31, 1999, and March 31, 1998
Consolidated Statements of Stockholders' Investment 31
For the Years Ended March 31, 2000, March 31, 1999,
and March 31, 1998
Consolidated Statements of Cash Flows 32
For the Years Ended March 31, 2000, March 31, 1999 and March 31, 1998
Notes to Consolidated Financial Statements - March 31, 2000 33-44
CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION
Unaudited quarterly consolidated financial data for
the years ended March 31, 2000 and March 31, 1999 45
(Separate Financial Statements of the Company have been omitted since the net
assets of its wholly owned subsidiary are not so restricted with respect to
payment of loans, advances and cash dividends to the Company as to require such
disclosure.)
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves 46
Other schedules have been omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Science and Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of American Science
and Engineering, Inc. (a Massachusetts corporation) and subsidiary as of March
31, 2000 and March 31, 1999 and the related consolidated statements of
operations, stockholders' investment and cash flows for each of the three years
in the period ended March 31, 2000. These consolidated 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 consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Science and Engineering, Inc. and subsidiary as of March 31, 2000 and
March 31, 1999 and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2000 in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements and schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated 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 consolidated financial statements taken as a whole.
Boston, Massachusetts
May 24, 2000
27
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND MARCH 31, 1999
Dollars in thousands
ASSETS 2000 1999
---- ----
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $1,246 $366
Accounts receivable, net of allowances of
$250 in 2000 and $259 in 1999 (Note 1) 6,276 7,958
Unbilled costs and fees, net of allowances of
$447 in 2000 and 1999 (Note 1) 9,117 2,374
Inventories (Note 1) 10,446 11,083
Deferred income taxes (Notes 1 and 5) 1,911 1,370
Prepaid expenses and other current assets 1,118 1,224
--------- ---------
TOTAL CURRENT ASSETS 30,114 24,375
--------- ---------
Non-current deferred income taxes (Notes 1 and 5) 1,038 254
Deposits 44 17
Other Assets 132 115
Patents and other intangibles, net of accumulated
amortization of $165 in 2000 and $55 in 1999
(Notes 1 and 3) 300 401
Property, equipment and leasehold
Improvements, net of accumulated depreciation of
$11,000 in 2000 and $9,677 in 1999
(Notes 1 and 3) 6,577 5,042
----------- ---------
$38,205 $30,204
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, 2000 AND MARCH 31, 1999
Dollars in thousands
LIABILITIES & STOCKHOLDERS' INVESTMENT 2000 1999
---- ----
CURRENT LIABILITIES:
Line of Credit $4,000 $1,000
Current maturities of obligations
under capital leases (Note 3) 16 20
Accounts payable 5,714 4,456
Accrued salaries and benefits 1,136 868
Accrued warranty costs (Note 1) 698 374
Accrued income taxes (Notes 1 and 5) -- 350
Deferred revenue (Note 1) 756 756
Customer deposits (Note 1) 2,209 1,281
Other current liabilities 679 1,224
-------------- ---------------
TOTAL CURRENT LIABILITIES 15,208 10,329
-------------- ---------------
NON-CURRENT LIABILITIES:
Obligations under capital leases, net
of current maturities (Note 3) -- 20
Deferred revenue (Note 1) 1,113 67
Deferred compensation (Note 10) 146 149
Deferred rent (Note 1) 363 292
-------------- ---------------
TOTAL NON-CURRENT LIABILITIES 1,622 528
-------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 10)
STOCKHOLDERS' INVESTMENT: (Notes 6 and 7)
Preferred stock, no par value
Authorized - 100,000 shares
Issued - None
Common stock, $.66-2/3 par value
Authorized - 20,000,000 shares
Issued 4,961,874 shares in 2000
and 4,877,767 shares in 1999 3,308 3,252
Capital in excess of par value 17,907 17,394
Retained Earnings/Accumulated deficit 800 (659)
-------------- ---------------
22,015 19,987
Note receivable-Officer (Note 7) (640) (640)
-------------- ---------------
TOTAL STOCKHOLDERS' INVESTMENT 21,375 19,347
-------------- ---------------
$38,205 $30,204
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
29
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31, 1998
Dollars in thousands, except per share amounts
2000 1999 1998
---- ---- ----
NET SALES AND CONTRACT REVENUES
(Notes 1 and 9) $60,674 $57,295 $32,699
Cost of sales and contracts (Note 1) 43,494 38,356 19,816
------- ------- -------
GROSS PROFIT 17,180 18,939 12,883
EXPENSES:
Selling, general and administrative 10,480 9,083 7,425
Research and development (Note 1) 5,902 6,380 2,856
------- ------- -------
TOTAL EXPENSES 16,382 15,463 10,281
------- ------- -------
OPERATING INCOME 798 3,476 2,602
------- ------- -------
OTHER INCOME/(EXPENSE):
Interest, net (257) 83 118
Other, net (75) (150) (22)
------- ------- -------
TOTAL OTHER INCOME (EXPENSE) (332) (67) 96
------- ------- -------
INCOME BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES 466 3,409 2,698
PROVISION FOR (BENEFIT FROM) INCOME TAXES
(NOTE 5) (993) 1,364 (1,963)
------- ------- -------
NET INCOME $ 1,459 $ 2,045 $ 4,661
======= ======= =======
INCOME PER SHARE - BASIC $ .30 $ .43 $ 1.00
======= ======= =======
- DILUTED $ .29 $ .40 $ .95
======= ======= =======
WEIGHTED AVERAGE SHARES - BASIC 4,925 4,813 4,646
======= ======= =======
- DILUTED 5,021 5,071 4,917
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
30
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31, 1998
Amounts in thousands, except share amounts
RETAINED
EARNINGS/
COMMON STOCK CAPITAL IN ACCU- NOTE
-------------------- EXCESS OF MULATED RECEIVABLE TREASURY STOCK
SHARES AMOUNT PAR VALUE DEFICIT OFFICER SHARES AMOUNT TOTAL
------ ------ --------- ------- ------- ------ ------ -----
BALANCE,
MARCH 28, 1997 4,585,209 $ 3,058 $ 15,273 $ (7,365) $ (640) 62,841 $(176) $ 10,150
Net income -- -- -- 4,661 -- -- -- 4,661
Exercise of stock
Options (Note 6) 152,735 101 783 -- -- -- -- 884
Issuance of stock 5,625 3 222 -- -- (56,163) 164 389
--------- -------- --------- -------- ------- -------- ----- -------
BALANCE,
MARCH 31, 1998 4,743,569 3,162 16,278 (2,704) (640) 6,678 (12) 16,084
Net income -- -- -- 2,045 -- -- -- 2,045
Exercise of stock
Options (Note 6) 108,485 72 743 -- -- -- -- 815
Retirement of Treasury
stock (6,178) (4) (8) -- -- (6,678) 12 --
Issuance of stock 31,891 22 381 -- -- -- -- 403
--------- -------- --------- -------- ------- -------- ----- -------
BALANCE,
MARCH 31, 1999 4,877,767 $ 3,252 $ 17,394 $ (659) $ (640) -- $ -- $ 19,347
Net income -- -- -- 1,459 -- -- -- 1,459
Exercise of stock
Options (Note 6) 18,308 12 79 -- -- -- -- 91
Issuance of stock 65,799 44 434 -- -- -- -- 478
--------- -------- --------- -------- ------- -------- ----- -------
BALANCE,
MARCH 31, 2000 4,961,874 $ 3,308 $ 17,907 $ 800 $ (640) -- $ -- $ 21,375
--------- -------- --------- -------- ------- -------- ----- -------
--------- -------- --------- -------- ------- -------- ----- -------
The accompanying notes are an integral part of these consolidated financial statements
31
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999 AND MARCH 31, 1998
Dollars in thousands
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,459 $ 2,045 $ 4,661
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,434 905 534
Provisions for contract, inventory, accounts
receivable and warranty reserves 572 1,135 896
Deferred income tax (1,325) 932 (2,556)
Change in assets and liabilities:
Accounts receivable 1,532 (1,232) (2,070)
Unbilled costs and fees (6,743) 816 (2,409)
Inventories 637 (2,513) (4,151)
Prepaid expenses, other assets,
and deposits 64 (943) (7)
Accounts payable 1,258 96 2,107
Accrued income taxes (350) (265) 525
Customer deposits 928 130 1,151
Deferred revenue 1,046 (649) 286
Accrued expenses and other
current liabilities 101 321 326
Noncurrent liabilities 68 7 11
------- ------- --------
Total adjustments (778) (1,260) (5,357)
------- ------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 681 785 (696)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,858) (3,358) (1,082)
Acquisition of business assets -- (1,100) --
Purchase of patents and intangibles (10) (40) --
------- ------- --------
Cash used in investing activities (2,868) (4,498) (1,082)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings (Note 11) 3,000 1,000 --
Proceeds from exercise of stock options 91 815 884
Principal payments of capital lease obligations (24) (26) (18)
------- ------- --------
Cash provided by financing activities 3,067 1,789 866
------- ------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 880 (1,924) (912)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 366 2,290 3,202
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,246 $ 366 $ 2,290
------- ------- --------
------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 346 $ 43 $ 6
Income taxes paid 791 667 40
NON-CASH TRANSACTIONS:
Issuance of stock in lieu of fees $ 478 $ 403 $ 225
Capital lease obligation for equipment -- 24 --
Issuance of treasury stock in lieu of fees -- -- 164
The accompanying notes are an integral part of these consolidated financial
statements.
32
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Science and Engineering, Inc., is engaged in the development and
manufacture of sophisticated X-ray inspection systems for critical detection and
security screening solutions for sale primarily to U.S. and foreign government
agencies.
USE OF ESTIMATES 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.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation
INVENTORIES Inventories are stated at the lower of cost, computed on a first-in,
first-out basis, or market and generally include material, labor and factory
overhead.
The components of inventories at March 31, 2000 and 1999 were as follows
(dollars in thousands):
2000 1999
---- ----
Raw materials and completed
Subassemblies $ 6,416 $ 5,570
Work-in-process 4,030 5,513
----------- ----------
$10,446 $11,083
----------- ----------
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS The Company provides for
depreciation and amortization of its fixed assets, principally equipment, using
straight-line and accelerated methods over estimated useful lives of 3-10 years.
Expenditures for normal maintenance and repairs are charged to expense as
incurred. Significant additions, renewals or betterments that extend the useful
lives of the assets are capitalized. The cost and accumulated depreciation
applicable to equipment and leasehold improvements sold or otherwise disposed of
are removed from the accounts, and any resulting gain or loss is included in the
consolidated statements of operations.
WARRANTY COSTS The Company provides currently for estimated future warranty and
installation costs on units sold covering the estimated replacement and
installation costs related to parts and labor.
METHODS OF RECORDING PROFITS ON CONTRACTS Revenues and profits are generally
recorded on cost reimbursement and long-term fixed-price contracts as costs are
incurred using the percentage-of-completion method. Percentages-of-completion
are determined by relating the actual cost of work performed to date for each
contract to its estimated final cost.
33
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
Revenues and profits are recorded on other fixed price contracts as shipments
are made. Profit on fixed price contracts is determined by applying the
estimated average profit rate to the contract value of the items shipped. If a
loss is anticipated on a contract, provision is made at that time for the full
amount of the estimated loss without reference to the percentage of completion
or to performance milestones.
The types of milestones contained in contracts vary based on negotiations with
each customer, but may include acceptance of equipment prior to shipment,
shipment of equipment, arrival of equipment in the country, installation of
equipment and final customer acceptance. Individual customer deposits are
reduced by the amount of revenue recognized on the contract until a zero balance
is reached. Additional revenues earned in excess of a customer's deposit are
included in accounts receivable or unbilled costs and fees until paid or billed,
respectively.
Under the terms of most of its cost-reimbursement contracts, the Company is not
permitted to bill customers a specified portion of the contract value until
completion. Such retainages (approximately $253,000 in 2000 and $424,000 in
1999) result from both commercial contract retentions and government contract
withholdings generally for 15% of fees, as well as differences between the
actual and provisional indirect cost billing rates. Retainages are included in
the accompanying consolidated balance sheets as components of unbilled costs and
fees.
Included in accounts receivable and unbilled costs and fees at March 31, 2000
and 1999 are $4,084,000 and $8,257,000, respectively, attributable to both prime
and subcontracts with the U.S. Government.
WARRANTY COSTS AND DEFERRED REVENUE The Company generally provides a one-year
parts and labor warranty with the purchase of equipment. The anticipated cost
for this one-year warranty is accrued for at time of the sale and is
captioned as a balance sheet liability, Accrued Warranty or included in
contract costs for contracts accounted for using the percentage of completion
method. The Company also offers to its customers extended warranty and
service contracts beyond the initial year of warranty. The coverage period of
these contracts will typically range from one to five years, with payment in
advance recorded as Deferred Revenue. Approximately 65% of the deferred
revenue included in the accompanying 2000 balance sheet will be recognized
within 2 years.
CUSTOMER DEPOSITS For most international orders, the Company generally includes,
as part of its terms and conditions, an advance deposit with order acceptance.
For long-term international contracts, the Company will generally include
milestone payments tied to a specific event and/or passage of time. These
deposit amounts are recorded as a liability under "Customer Deposit" until
reduced by revenue recognized against the specific contract. As of March 31,
2000 and 1999, total customer deposits amounted to $2,209,000 and $1,281,000,
respectively.
DEFERRED RENT The Company entered into a lease for its office and manufacturing
facilities. This lease has escalation clauses. Generally accepted accounting
principles require normalization of the rental expense over the life of the
lease, resulting in deferred rent being reflected in the accompanying
consolidated balance sheets.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist
primarily of cash and cash equivalents, accounts receivable and accounts
payable. The carrying amounts of the Company's cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to their
short-term nature.
34
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
INCOME PER COMMON AND COMMON EQUIVALENT SHARES Basic earnings per common
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. No dilution for any
potentially dilutive securities is included. Diluted earnings per share
includes the dilutive impact of options and warrants using the average share
price of the Company's common stock for the period.
INCOME TAXES The Company accounts for incomes taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." Accordingly, the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in which
the differences are expected to be reflected in the tax return. The Company
records a valuation allowance against any net deferred tax assets if it is more
likely than not that they will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts and for hedging activities) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company does not anticipate any impact on its financial
statements from the adoption of SFAS 133.
The Securities and Exchange Commission released Staff Accounting Bulletin (SAB)
No. 101 "Revenue Recognition in Financial Statements" on December 3, 1999. This
SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions, as well as certain industry
specific guidance. The new guidance that is most likely to have a potential
impact on the Company concerns customer acceptance and installation terms. The
Company is in the process of quantifying the potential impact of the new
guidance, which is effective for the fourth quarter of fiscal 2001, with
retroactive application to April 1, 2000.
35
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
PRESENTATION Certain amounts in 1999 and 1998 have been reclassified to conform
to the 2000 financial statement presentation.
2. CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of 90 days or
less to be cash equivalents. Cash and cash equivalents are carried at cost,
which approximates fair market value at year end 2000 and 1999. The Company has
repurchase agreements with a regional bank. The repurchase agreements are
collateralized by investments principally consisting of U.S. Government Agency
securities in the amount of at least 100% of such obligation.
3. OPERATING AND CAPITAL LEASE AGREEMENTS
The Company leases its office and manufacturing facilities in Billerica,
Massachusetts under a 10 year lease which began on March, 1 1995 with an
option to extend for an additional 10 years. During fiscal year 1998 the
Company leased additional space in the current building and amended the
lease. Escalation clauses provide for rent increases after the first and
fifth year of the rental term. In January 1998, the Company leased additional
manufacturing and office space at a nearby location; this space is under a
sublease agreement as of May 2000 to an unrelated party. In October 1999, the
Company leased additional manufacturing space in another nearby location. The
term of this lease is 5 years with an option to extend for 5 additional
years. During August 1998, the Company entered into a three-year lease
agreement for a facility located in Santa Clara, CA. The lease has two
three-year optional extension terms. The Company incurred $901,000, $649,000,
and $541,000 of rent expense in 2000, 1999, and 1998 respectively. The
security deposits on these leases amount to $142,000.
Future minimum rental payments under the Company's operating leases, excluding
real estate taxes, insurance and operating costs paid by the Company required
over the initial terms of the leases are as follows (in thousands):
------------------------------
YEAR ENDING MARCH 31,
2001 $ 1,147
2002 1,066
2003 987
2004 928
2005 797
Thereafter --
----------
$ 4,925
==========
36
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
Future minimum rental receivables under the Company's operating sub-lease,
excluding real estate taxes, insurance and operating costs paid by the Company
required over the terms of the lease is as follows (in thousands):
YEAR ENDING MARCH 31,
------------------------------
2001 $ 67
2002 76
2003 60
2004 --
2005 --
Thereafter --
----------
$ 203
==========
The Company leases certain equipment under capital leases which expire in 2001
and have interest rates ranging from 7.0% to 11.5%.
YEAR ENDING MARCH 31
---------------------
2001 $ 16
----------
$ 16
==========
37
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
4. LINE OF CREDIT
In November 1999, the Company expanded its domestic credit facilities with
State Street Bank and Trust Company, Fleet National Bank, and the Export Import
Bank of the United States (ExIm). The expanded line of credit, which is
secured by accounts receivable from ongoing customers as well as inventory,
has two components. The first component includes a $20,000,000 revolving line
of credit to support working capital and the issuance of standby letters of
credit; the second component includes a $15,500,000 ExIm guaranteed export
credit agreement to support foreign export contracts. Monthly interest
payments on this line of credit are at the prime interest rate. There is a
quarter percent (.25%) commitment fee on the unused portion of the line. As
of March 31, 2000 and 1999, there was $4,000,000 and $1,000,000 of borrowings
against the line, respectively. As of March 31, 2000 there were $2.2 million
of outstanding letters of credit in effect against the credit facilities. The
Company's credit facility restricts the payment of dividends, except in
shares of the Company's stock, without consent of the bank. The credit
facility requires the Company to meet certain financial covenants. As of
March 31, 2000, the Company was in compliance with all of the financial
covenants. The existing line of credit expires on August 31, 2000. The
Company anticipates either an extension of the existing line of credit or a
new credit facility will be in place by August 31, 2000.
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31, 2000,
March 31, 1999, and March 31, 1998 consisted of the following (in thousands):
2000 1999 1998
---- ---- ----
Current:
Federal $ 238 $ 83 $ 51
State 94 349 353
-------------- ------------ ------------
332 432 404
Deferred/(Prepaid):
Federal (1,223) 975 1,244
State (102) (43) (49)
-------------- ------------ ------------
(1,325) 932 1,195
-------------- ------------ ------------
Change in valuation allowance -- -- (3,562)
-------------- ------------ ------------
Total $ (993) $ 1,364 $ (1,963)
============== ============ ============
The difference between the total expected provision (benefit) for income taxes
computed by applying the statutory federal income tax rate to income before
provision (benefit) for income taxes and the recorded provision (benefit) for
income taxes for the three years in the period ended March 31, 2000 follows (in
thousands):
2000 1999 1998
---- ---- ----
Provision for income taxes at statutory rate $ 174 $ 1,159 $ 917
State tax provision (benefit) net of federal effect (5) 202 233
Permanent non-deductible expenses 32 30 17
Expiration of tax credits -- -- 190
Change in valuation allowance -- -- (3,562)
Effect of FSC exclusion (430) (19) --
R&D tax credit (700) -- --
Other (64) (8) 242
------------- ------------ ------------
$ (993) $ 1,364 $ (1,963)
============= ============ ============
38
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
The significant components of the net deferred tax asset at March 31, 2000 and
1999 follow (in thousands):
2000 1999
----------------------------- ----------------------------
Current Non-current Current Non-current
----------------------------- ----------------------------
ASSETS:
Net operating loss carryforwards $ 8 $ -- $ -- $ --
Accounts receivable
And unbilled costs and fees 234 -- 275 --
Inventory 222 -- 232 --
Deferred revenue -- 551 233 --
Accrued vacation 261 -- 195 --
Accrued warranty costs 256 -- 146 --
Research & Development 855 -- 67 --
And other tax Credits
Other 75 487 222 254
---------- ------ ------- -------
Net deferred income tax assets $ 1,911 $ 1,038 $ 1,370 $ 254
---------- ------ ------- -------
---------- ------ ------- -------
The Company has available general business and other credits of approximately
$855,000 expiring at various times through 2018.
39
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
6. COMMON STOCK
STOCK OPTION PLANS The Company has various stock option plans for directors,
officers, and employees. The Company has the following stock option plans
outstanding as of March 31, 2000: 1981, 1984, 1985, and 1987 Stock Option Plans;
1993, 1994-1995 and 1996 Stock Option Plan for Non-employee Directors; two CEO
Employment Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified
Option Plan; 1994-95 Stock Option Plan for New Employees and a 1999 Combination
Plan. As of March 31, 2000, 469,183 shares have been reserved and are available
for future grant. Vesting periods on these plans range from immediate vesting to
four years. Options under these plans are granted at fair market value and
generally become exercisable within one to two years of the grant date and
terminate ten years from the date of grant. In addition, the Company has a
common stock installment purchase plan under which the Board of Directors may
grant to key personnel the right to purchase shares of the Company's common
stock at fair market value and to pay the purchase price in twelve equal monthly
installments. As of March 31, 2000, no shares have been reserved or granted
under this plan.
The Company has instituted two common stock purchase plans. The Executive Equity
Incentive Plan allows an executive officer of the Company to buy original issue
Company common stock in any dollar amount up to the gross amount of the annual
bonus granted to the Officer and to receive half the number of shares purchased
in restricted stock which vests after 3 years. If the employee leaves the
Company prior to 3 years then the shares revert back to the Company. The Reload
Option Plan allows any eligible employee designated by the Board of Directors to
receive new stock options (at an exercise price equal to the fair market value
of the common stock on the date of sale of the stock) for every share of Company
common stock sold or used to exercise stock options. As of March 31, 2000 and
1999, 2,251 and 0 shares have been reserved and restricted under this plan.
PRO FORMA STOCK-BASED COMPENSATION EXPENSE As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company has elected to continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for its stock-based compensation plans. Had
compensation cost for awards in 2000, 1999 and 1998 under the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method set forth under SFAS No. 123, the effect
on the Company's net income and earnings per share would have been as follows:
In thousands except per share amounts 2000 1999 1998
--------- ---------- -----------
Net income:
As reported $ 1,459 $ 2,045 $ 4,661
Pro forma 186 86 3,200
Income per share - Basic:
As reported $ .30 $ .43 $ 1.00
Pro forma .04 .02 .69
Income per share - Diluted:
As reported $ .29 $ .40 $ .95
Pro forma .04 .02 .65
40
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation expense may
not be representative of the amount to be expensed in future years. Pro forma
compensation expense for options granted is reflected over the vesting period;
therefore, future pro forma compensation expense may be greater as additional
options are granted.
The fair value of each option granted was estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 5.97% to 6.83%, 4.38% to 5.79%, and
5.42% to 6.57% for 2000, 1999, and 1998, respectively, and expected life of 5
years, expected volatility of 55%, 47%, and 38% for 2000, 1999, and 1998,
respectively, and an expected dividend yield of 0% for all three years.
STOCK OPTION ACTIVITY A summary of the Company's stock option activity is as
follows:
2000 1999 1998
----------------- ----------------- ---------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Options outstanding,
beginning of year 1,338,798 $ 10.60 1,116,030 $ 9.59 1,001,141 $ 10.16
Options granted 672,917 7.75 395,850 12.58 286,608 11.47
Options exercised (18,308) 5.99 (108,485) 7.39 (152,735) 5.79
Options expired (209,008) 11.60 (64,597) 10.74 (18,984) 10.99
--------- -------- --------
Options outstanding,
end of year 1,784,399 9.45 1,338,798 10.60 1,116,030 9.59
========= ========= =========
Options exercisable 1,056,785 10.45 857,283 9.54 652,830 7.90
========= ======= =======
Options available
For grant 469,183 333,292 580,042
======= ======= =======
Weighted average fair
value per share of
options granted
during the year 2.83 5.86 4.33
41
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
The following summarizes certain data for options outstanding at March 31, 2000:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF RANGE OF EXERCISE CONTRACTUAL
SHARES EXERCISE PRICES PRICE LIFE
------ --------------- ----- ----
Options outstanding,
End of year: 123,640 $ 3.25 - $5.25 $ 4.00 3.80
808,900 5.25 - 8.25 7.14 8.60
342,209 8.25 - 11.38 10.66 7.50
509,650 11.38 - 16.25 13.68 7.30
----------
1,784,399 9.53 7.70
----------
----------
Options Exercisable: 123,640 $ 3.25 - $ 5.25 $ 4.00
200,850 5.25 - 8.25 6.20
296,376 8.25 - 11.38 10.67
435,919 11.38 - 16.25 13.70
----------
1,056,785 $ 10.45
----------
----------
On April 15, 1998, the Company announced that its Board of Directors adopted a
Shareholders' Rights Plan (the Plan) and declared a dividend of one preferred
stock purchase right for each outstanding share of common stock. The dividend is
payable to all holders of record of shares of common stock as of the close of
business on April 17, 1998. The rights become exercisable ten days after a
person or group acquires 15% or more of the Company's common stock, and in
certain other situations described in the Plan. As of March 31, 2000, no
options have been granted or exercised under this plan.
7. NOTE RECEIVABLE FROM OFFICER
In January 1994, the Company's Chief Executive Officer purchased 160,000 shares
of common stock at a price of $4.00 per share (the fair market value) financed
under a note agreement for $640,000 from the Company. This note accrues interest
at a rate of 6.26% and will be payable on or before September 15, 2003 or 90
days after termination, as defined. As of March 31, 2000, no interest has been
received or paid against this note.
42
8. RELATED PARTY TRANSACTIONS
Mr. Al Gladen, a director of the Company until June, 1999, provides
engineering and management services to the Company. The compensation paid to
Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal
years 2000, 1999 and 1998 was approximately $20,600, $212,000 and $256,750,
for services rendered, respectively.
9. BUSINESS SEGMENT INFORMATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related
Information", the Company has determined that it has only one operating segment,
the X-ray product segment. This includes X-ray detection and imaging products
used primarily for the detection of illegal drugs, terrorist explosives, and
smuggled goods. The equipment is purchased by sophisticated government and
commercial clients who place a premium on the detection of organic material in
complex backgrounds and the ability to see the contents of containers with
precision.
GEOGRAPHICAL DATA All of the Company's export sales originate from the U.S. No
assets or operations are maintained in any foreign country. The following table
shows the breakdown of Net Sales and Contract revenues to foreign and domestic
customers and the major region(s) of export activity (dollars in thousands):
2000 1999 1998
-------------- ------------- -------------
Domestic $ 27,360 $ 26,274 $ 26,799
Export $ 33,314 $ 31,021 $ 5,900
Percent of Export Revenue by Major Region:
Middle East & Africa 48.7 % 54.2% 59.7 %
Mexico 38.1 29.6 --
Europe 5.7 5.0 8.9
Pacific Rim 4.1 10.5 28.3
All Other 3.4 0.7 3.1
MAJOR CUSTOMERS Sales to major customers (representing in excess of 10%
of consolidated revenues) consisted of X-ray product sales of the following:
FISCAL 2000: $12,644,000 and $11,779,000 to two customers.
FISCAL 1999: $13,306,000, $9,168,000, $6,853,000 and $6,027,000 to four
customers.
FISCAL 1998: $11,670,000 to one customer.
43
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
10. COMMITMENTS AND CONTINGENCIES
DEFERRED COMPENSATION The Company has an unfunded deferred compensation plan,
originally adopted in 1976 and amended at various times, for certain current and
former directors. This plan provides for periodic payments beginning at age 65,
the amount of which depends on their length of service. The Company paid $4,752
in 2000, $4,752 in 1999, and $21,000 in 1998 under this deferred compensation
plan.
LITIGATION In May, 1996, Vivid Technologies, Inc., filed a civil action
against the Company, seeking INTER ALIA a declaratory judgment that Vivid had
not infringed upon certain of the Company patents relating to its backscatter
technology. The Company responded to Vivid's claim denying their allegations
and counter-claiming that Vivid infringed upon one or more of the Company's
patents. On May 12, 1997, Vivid filed a proposed Amended Complaint narrowing
its claim and seeking INTER ALIA a declaratory judgment that Vivid had not
infringed on AS&E United States Patent number 5,253,283, entitled "Inspection
Method and Apparatus with Single Color Pixel Imaging" The Company denies
Vivid's assertions, and contends that Vivid's claims are without merit and
that Vivid is not entitled to the relief sought. The Company served Vivid
with discovery requests to which Vivid failed to respond. In September 1997,
Vivid filed a motion seeking a stay of discovery and a motion for a summary
judgement. The Company responded by seeking a denial or stay of Vivid's
motion for summary judgement until discovery could be completed. The Court
denied the Company's motion and declared that Vivid is not infringing on the
patent. The Company is currently appealing the Court's award of summary
judgement and its denial of discovery. The Company appealed and the Court of
Appeals overturned the District Court's decision ruling that the District
Court's refusal to accept AS&E's claim that Vivid was infringing on AS&E's
patent "exceeded the district court's discretionary authority." The Court of
Appeals also reversed the district court's finding on summary judgment that
Vivid did not infringe on AS&E's patent, as well as the district court's
denial of AS&E's request for discovery to oppose Vivid's summary judgment
motion. The Company does not expect the outcome of this litigation to have a
material impact to its financial position or results of operations.
In February 2000, Heimann Systems GmBH filed a civil action in U.S. District
Court against the Company alleging that the Company infringed a Heimann patent
relating to a mobile vehicle and x-ray examining device. The Company denies
Heimann's assertions and believes that Heimann's claims are without merit. The
Company does not expect the outcome of this litigation to have a material impact
to its financial position or results of operations.
44
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Dollars in thousands, except per share amounts
2000 BY QUARTER 1999 BY QUARTER
--------------- ---------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--- --- --- --- --- --- --- ---
Net sales and contract
revenues $14,316 $15,459 $17,217 $ 13,682 $11,692 $14,361 $16,214 $ 15,028
Gross profit 4,445 4,534 4,945 3,256 4,453 4,749 4,967 4,770
Operating
Income 346 657 1,111 (1,316)(1) 914 922 1,042 598
Net income $ 192 $ 390 $ 601 $ 276 (2) $ 526 $ 554 $ 617 $ 348
Net income per share
- Basic (Note 1) $ .04 $ .08 $ .12 $ .06 $ .11 $ .12 $ .13 $ .07
- Diluted (Note 1) .04 .08 .12 .05 .10 .11 .12 .07
(1) The fourth quarter operating loss is due primarily to three factors (a)
lower revenues due to delays in planned awards by government clients,
(b) continuance of significant R & D investments on new product development
and product enhancements, and (c) continued recruiting, training and
infrastructure investment in a global technical support capability.
(2) Fourth quarter net income includes a substantial, non-recurring research
and development tax credit, as well as the tax benefit relating to the
fourth quarter operating loss.
45
SCHEDULE II
AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31,1998
DESCRIPTION - ACCOUNTS RECEIVABLE
DOLLARS IN THOUSANDS
BALANCE
AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END
OF YEAR EXPENSES RESERVES OF YEAR
---------- ------------ ------------- -------------
2000 $ 259 $ 150 $ 159 $ 250
1999 $ 116 $ 228 $ 85 $ 259
1998 $ 148 $ -- $ 32 $ 116
DESCRIPTION - ALLOWANCES FOR UNBILLED COST AND FEES
DOLLARS IN THOUSANDS
Balance
at CHARGED TO DEDUCTIONS BALANCE
Beginning COSTS AND FROM AT END
of Year EXPENSES RESERVES OF YEAR
---------- ------------ ------------- -------------
2000 $ 447 $ -- $ -- $ 447
1999 $ 549 $ -- $ 102 $ 447
1998 $ 462 $ 200 $ 113 $ 549
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN SCIENCE AND ENGINEERING, INC.
DATED: 16 June 2000
By /S/ RALPH S. SHERIDAN
-----------------------------
Ralph S. Sheridan, President
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 Company and in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
President
/S/ RALPH S. SHERIDAN and Director (Principal
- ------------------------------------------ Executive Officer)
Ralph S. Sheridan 16 June 2000
Chief Financial Officer,
Treasurer and
Vice President, Finance
/S/ LEE C. STEELE (Principal Financial Officer) 16 June 2000
- ------------------------------------------
Lee C. Steele
Vice President, Financial Operations
/S/ JOSEPH MOFFA and Corporate Controller 16 June 2000
- ------------------------------------------
Joseph Moffa
/S/ HERMAN FESHBACH Director 16 June 2000
- ------------------------------------------
Herman Feshbach
/S/ ROGER P. HEINISCH Director 16 June 2000
- ------------------------------------------
Roger P. Heinisch
/S/ HAMILTON W. HELMER Director 16 June 2000
- ------------------------------------------
Hamilton W. Helmer
/S/ DONALD J. MCCARREN Director 16 June 2000
- ------------------------------------------
Donald J. McCarren
/S/ WILLIAM E. ODOM Chairman of the Board 16 June 2000
- ------------------------------------------ Director
William E. Odom
/S/ CARL W. VOGT Director 16 June 2000
- ------------------------------------------
Carl W. Vogt
47
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER
NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED)
- ------ --------------------------------------------- -----------
(3)(a) Restated Articles of Organization of the Company (filed as an
Exhibit to Company's Annual Report on Form 10-K for the year
ended September 30,1967, and incorporated herein by reference)
(3)(b) Articles of Amendment to Restated Articles of Organization of
Company (filed as Exhibit 2(a)(ii)(B) to the Company's
Registration Statement on Form S-7, No. 2-56452, filed May 25,
1976, and incorporated herein by reference)
(3)(c) Articles of Amendment to Restated Articles of Organization of
Company (filed as Exhibit 12 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1976, and incorporated
herein by reference)
(3)(d) By-laws of Company, as amended (filed as Exhibit 2(a)(iii) to
Company's Registration Statement on Form S-7, No. 2-56452, filed
May 25, 1976, and incorporated herein by reference)
(4) Shareholders Rights Plan (filed as Exhibit to the Company's
filing on Form dated , 1992 and incorporated herein by
references)
(10)(a)(ii) Deferred Compensation Plan for Herman Feshbach (filed as Exhibit
20 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1976, and incorporated herein by reference)
(10)(a)(iv) Amendment to Deferred Compensation Plans for Ismael Escobar and
Herman Feshbach (filed as Exhibit 7 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1980, and
incorporated herein by reference)
(10)(a)(v) Deferred Compensation Plan for Marie Spaulding (filed as Exhibit
(10)(a)(v) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988, and incorporated herein by reference)
(10)(b)(I) 1981 Incentive Stock Option Plan (filed as Exhibit (10)(b)(I) to
the Company's Annual Report on Form 10-K for the year ended March
31, 1988, and incorporated herein by reference)
(10)(b)(iii) 1984 Incentive Stock Option Plan (filed as Exhibit (10)-3 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1985, and incorporated herein by reference)
(10)(b)(iv) Amendment 1 to 1981 Incentive Stock Option Plan (filed as Exhibit
(10)(b)(iv) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988, and incorporated herein by reference)
(10)(b)(v) Amendment 1 to 1984 Incentive Stock Option Plan (filed as Exhibit
(10)(b)(v) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988, and incorporated herein by reference)
(10)(b)(vi) 1987 General Stock Option Plan (filed as an exhibit to the
Company's current report on Form 8-K for the month of October
1987, and incorporated herein by reference)
48
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER
NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED)
- ------ --------------------------------------------- -----------
(10)(b)(ix) 1996 Stock Plan For Non-Employee Directors (filed as Exhibit 99
to the Company's Registration Statement on Form S-8, File No.
333-09257, filed on July 31, 1996, and incorporated herein by
reference)
(10)(b)(x) Executive Equity Incentive Plan (filed as Exhibit 99 to the
Company's Registration Statement on Form S-8, File No. 333-27929,
filed on May 28, 1997 and incorporated herein by reference)
(10)(b)(xi) Reload Option Plan (filed as Exhibit (10)(b)(xi) to the Company's
Annual Report on Form 10-K for the year ended March 28, 1997 and
incorporated herein by reference)
(10)(b)(xii) 1997 Non-Qualified Stock Option Plan (filed as Exhibit 99 to the
Company's Registration Statement on Form S-8, File No. 333-27927,
filed on May 28, 1997 and incorporated herein by reference)
(10)(b)(xiii) 1998 Non-Qualified Stock Option Plan (filed as Exhibit (10) (b)
(xiii) to the Annual Report on Form 10-K for the year ended March
31, 1998, and incorporated herein by reference)
(10)(b)(xv) Employment Agreement between the Company and Dr. Joseph Callerame
dated May 6, 1998, (filed as Exhibit (10) (b) (xv) to the Annual
Report on Form 10-K for the year ended March 31, 1998, and
incorporated herein by reference)
(10)(b)(xvii) Employment Agreement between the Company and Lee C. Steele dated
September 29, 1997, (filed as Exhibit (10) (b) (xvii) to the
Annual Report on Form 10-K for the year ended March 31, 1998, and
incorporated herein by reference)
(10)(c)(i) Lease of Billerica property (filed as Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended March 31,
1995 and incorporated herein by reference)
(10)(c)(ii) Amendment to Lease of Billerica property (filed as to the
Company's Annual Report on Form 10-K for the year ended March 28,
1997 and incorporated herein by reference)
(22) Identification of Company's subsidiary, AS&E Radiography, Inc.,
incorporated in Massachusetts (filed as Exhibit (22) to Company's
Annual Report on Form 10-K for the year ended March 31, 1988, and
incorporated herein by reference)
(23) Consent of Independent Public Accountants
(10)(c)(iii) Lease of 33 Manning Road, Billerica, MA
(10)(c)(iv) 1999 Combination Stock Option Plan (filed as Exhibit 99 to the
Company's Registration Statement on Form S-8, File No 333-91801,
filed on November 30, 1999 and incorporated herein by reference).
(10)(c)(v)* Employment Agreement between the Company and Ralph S. Sheridan
dated September 25, 1999.
(10)(c)(vi)* Employment Agreement between the Company and Ralph G. Foose dated
September 1, 1999.
49
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER
NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED)
- ------ --------------------------------------------- -----------
(10)(c)(vii)* Employment Agreement between the Company and Edwin L. Lewis dated
February 3, 2000.
(10)(c)(viii) Sub-lease from the Company of 30 Manning Road, Billerica,
Massachusetts (filed as Exhibit (10)(c)(viii) to the Annual
Report on Form 10-K for the year ended March 31, 2000, and
incorporated herein by reference).
(27) Financial Data Schedule.
*Contract with Management
50