FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-6549
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American Science and Engineering, Inc.
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(Exact name of Registrant as specified in its charter)
Massachusetts 04-2240991
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
829 Middlesex Turnpike
Billerica, Massachusetts 01821
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(Address of principal executive offices) (Zip Code)
(978) 262-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Outstanding at
Class of Common Stock Sept. 30, 1998
--------------------- --------------
$.66 2/3 par value 4,811,810
Page 1 of 12 Pages
The Exhibit Index is Located at Page 12
AMERICAN SCIENCE AND ENGINEERING, INC.
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Dollars and shares in Thousands, except per share amounts
For The Three Months For The Six Months
Ended Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
NET SALES AND CONTRACT REVENUE $14,361 $ 8,705 $ 26,053 $ 16,237
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of sales and contracts 9,612 5,184 16,851 9,966
Selling, general and
administrative expenses 2,369 1,963 4,500 3,633
Research and development 1,458 881 2,866 1,345
------- ------- -------- --------
Total costs and expenses 13,439 8,028 24,217 14,944
------- ------- -------- --------
OPERATING INCOME 922 677 1,836 1,293
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest, net 21 43 31 70
Other, net (20) (8) (68) (11)
------- ------- -------- --------
Total other income (expense) 1 35 (37) 59
------- ------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 923 712 1,799 1,352
PROVISION FOR INCOME TAXES 369 27 719 57
------- ------- -------- --------
NET INCOME $ 554 $ 685 $ 1,080 $ 1,295
======= ======= ======== ========
INCOME PER SHARE - BASIC $ .12 $ .15 $ .23 $ .28
======= ======= ======== ========
- DILUTED $ .11 $ .14 $ .21 $ .27
======= ======= ======== ========
DIVIDENDS PAID PER SHARE NONE NONE NONE NONE
WEIGHTED AVERAGE SHARES - BASIC 4,802 4,626 4,775 4,594
======= ======= ======== ========
- DILUTED 5,083 4,953 5,097 4,881
======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN SCIENCE AND ENGINEERING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands
Sept. 30, 1998 Mar. 31, 1998
-------------- -------------
(Unaudited)
Assets Current assets:
Cash and cash equivalents $ 5,924 $ 2,290
Accounts receivable, net 7,564 6,955
Unbilled costs and fees, net 4,381 3,190
Inventories 10,254 8,737
Prepaid income taxes 1,857 2,351
Prepaid expenses and other current
assets 719 389
-------- ----------
Total current assets 30,699 23,912
-------- ----------
Noncurrent assets:
Non-current deferred income taxes 205 205
Deposits 19 24
Patents and other intangibles, net
of accumulated amortization of
$7 at Sept. 30, 1998 382 --
Property and equipment, net of
accumulated depreciation of
$9,276 at Sept. 30,1998 and
$9,394 at March 31,1998 3,529 1,852
-------- ----------
$ 34,834 $ 25,993
======== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN SCIENCE AND ENGINEERING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
Dollars in thousands
Sept. 30, 1998 Mar. 31, 1998
-------------- -------------
(Unaudited)
Liabilities & Current liabilities:
Stockholders' Current maturities of obligations
Investment under capital leases $ 28 $ 20
Accounts payable 5,435 4,360
Accrued salaries and benefits 1,286 831
Accrued warranty costs 372 497
Accrued income taxes 276 615
Deferred revenue 754 1,240
Customer deposits 7,760 1,151
Other current liabilities 397 507
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Total current liabilities 16,308 9,221
------- ---------
Noncurrent liabilities:
Obligations under capital leases,
net of current maturities 25 22
Deferred revenue 265 232
Deferred compensation 154 154
Deferred rent 290 280
------- ---------
Total noncurrent liabilities 734 688
------- ---------
Stockholders' investment:
Jr. preferred stock, no par value
Authorized - 10,000 shares
Issued - None
Preferred stock, no par value
Authorized - 100,000 shares
Issued - None
Common stock, $.66-2/3 par value
Authorized - 20,000,000 shares
Issued 4,811,810 shares at
Sept. 30, 1998 and 4,743,569
shares at Mar. 31, 1998 3,207 3,162
Capital in excess of par value 16,860 16,278
Accumulated deficit (1,624) (2,704)
------- ---------
18,443 16,736
Note receivable-Officer (640) (640)
Less: treasury stock
6,178 shares at Sept. 30, 1998 and
6,678 shares at Mar. 31, 1998, at
cost (11) (12)
------- ---------
Total stockholders' investment 17,792 16,084
------- ---------
$34,834 $ 25,993
======= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN SCIENCE AND ENGINEERING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands For the Six Months Ended
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Net income $ 1,080 $ 1,295
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 390 304
Provisions for contract, inventory, accounts receivable and
warranty reserves 650 665
Changes in assets and liabilities:
Accounts receivable (609) (1,685)
Unbilled costs and fees (1,191) (988)
Inventories (1,625) (342)
Prepaid expenses, other assets, and deposits 169 --
Accounts payable 1,075 934
Customer deposits 6,609 --
Accrued expenses and other current liabilities (1,037) 1,161
Noncurrent liabilities 43 (104)
--------- --------
Total adjustments 4,474 (55)
--------- --------
Net cash provided by operating activities 5,554 1,240
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,378) (663)
Acquisition of business (1,100) --
Purchase of patents and intangibles (40) --
--------- --------
Cash used for investing activities (2,518) (663)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 611 577
Principal payments of capital lease obligations (13) (10)
--------- --------
Cash provided by financing activities 598 567
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,634 1,144
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,290 3,202
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,924 $ 4,346
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 25 $ 3
Income taxes paid $ 369 $ --
NON-CASH TRANSACTIONS
Issuance of stock in lieu of fees $ 16 $ 104
Capital lease obligation for equipment $ 24 $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN SCIENCE AND ENGINEERING, INC.
PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by American Science and Engineering, Inc. (the Company) pursuant to the
rules and regulations of the Securities and Exchange Commission, and the annual
condensed consolidated financial statements are subject to year end audit by
independent public accountants. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes, however, that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
The condensed consolidated financial statements, in the opinion of management,
include all adjustments necessary to present fairly the Company's financial
position and the results of operations. These results are not necessarily to be
considered indicative of the results for the entire year.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Nature of Operations and 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.
The significant accounting policies followed by the Company and its
subsidiary in preparing its consolidated financial statements are set
forth in Note 1 to the consolidated financial statements included in Form
10-K for the year ended March 31, 1998.
2. Inventories
(Dollars in thousands)
Inventories consisted of:
Sept. 30, 1998 Mar. 31, 1998
-------------- -------------
Raw materials and completed
sub-assemblies $ 5,060 $ 4,958
Work in process 5,069 3,654
Finished goods 125 125
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Total $ 10,254 $ 8,737
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3. Income per Common and Common Equivalent Share
In March 1997, the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which establishes standards for computing and presenting earnings
per share for entities with publicly held common stock or potential common
stock. The Company adopted SFAS 128 in fiscal 1998 and as required,
restated per share amounts for all prior periods presented to conform to
the new requirements. 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.
Earnings Per Share Three Months Ended Six Months Ended
------------------ ------------------ ----------------
(in thousands except per Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
share amounts) -------------- -------------- -------------- --------------
BASIC
Net income $ 554 $ 685 $ 1,080 $ 1,295
--------- -------- -------- --------
Weighted average shares 4,802 4,626 4,775 4,594
--------- -------- -------- --------
Basic earnings per share $ .12 $ .15 $ .23 $ .28
--------- -------- -------- --------
DILUTED
Net income $ 554 $ 685 $ 1,080 $ 1,295
--------- -------- -------- --------
Weighted average shares 4,802 4,626 4,775 4,594
--------- -------- -------- --------
Effect of stock options 281 327 322 287
--------- -------- -------- --------
Weighted average shares, as
adjusted 5,083 4,953 5,097 4,881
--------- -------- -------- --------
Diluted earnings per share $ .11 $ .14 $ .21 $ .27
========= ======== ======== ========
4. Income Taxes
------------
At March 31, 1998, the Company had approximately $3,286,000 of federal net
operating loss carryforwards. The carryforwards expire through the year
2010. The Company also has unused investment tax and other credits of
approximately $107,000 expiring through 2001. The effective tax rate of
40% exceeded the statutory federal income tax rate of 34% primarily due to
the impact of state income taxes.
5. Acquisition of Business
-----------------------
On August 18, 1998, the Company purchased 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 92
Patents and other intangible assets 350
--------
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.
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AMERICAN SCIENCE AND ENGINEERING, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In the second quarter of fiscal 1999 net sales and contract revenues grew
to $14,361,000, a 65% increase from the comparable period a year ago and a
23% increase from the previous quarter. The company earned net profits of
$554,000 in the current quarter, compared to a net profit of $685,000 in
the corresponding period a year ago and a net profit of $526,000 in the
previous quarter. This decline in profitability from the corresponding
period a year ago is due to an increase in the effective tax rate to 40%
in the current quarter from approximately 4% in fiscal 1998.
Results of Operations
Net sales and contract revenues in the second quarter increased by
$5,656,000 (65%) in comparison to the corresponding year ago period and
$2,669,000 (23%) compared to the first quarter of fiscal 1999. Compared to
the previous quarter, security systems and related field service revenues
increased by $2,488,000 (23%) and research and engineering revenues
improved by $108,000 (10%). The increase in security equipment and related
field service revenues is primarily due to increased sales of X-ray
equipment.
For the second quarter, costs of sales and contracts increased to
$9,612,000 from $5,184,000 in the corresponding period a year ago due
primarily to increased sales volume. Costs of sales and contracts
represented 67% of revenues versus 60% for the corresponding period last
year and 62% for the first quarter of fiscal year 1999. The costs of sales
percentage of revenues in the current quarter increased from the previous
quarter primarily due to sales mix.
Selling, general and administrative expenses of $2,369,000 for the second
quarter were higher by 21% compared to the corresponding year-ago period
and higher by 11% compared to the first quarter of fiscal 1999. As a
percent of sales, selling, general and administrative expenses were 17% of
revenues in the current quarter compared to 23% of revenues for the
corresponding year-ago period and 18% for the first quarter of fiscal year
1999. The decrease as a percentage of sales is due primarily to an
increased sales base over which overhead costs are spread.
Company-funded research and development expenses of $1,458,000 for the
second quarter were higher by $577,000 (65%) compared to the year-ago
quarter and higher by $50,000 (4%) compared to the first quarter of fiscal
year 1999. The increase is an intentional result of the Company's
commitment to research and development.
The Company produced a net profit of $554,000 during the second quarter.
This is a decline of $131,000 (19%) over net profit in the year-ago
quarter and an increase of $28,000 (5%) from the first quarter of fiscal
1999. The decline in after-tax profits from the year-ago quarter is due to
a change in the effective tax rate from approximately 4% in fiscal 1998 to
40% in fiscal 1999.
-8-
AMERICAN SCIENCE AND ENGINEERING, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Year 2000
The Company continues to assess 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 Readiness
The Company has tested and 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
upgrading or replacing its noncompliant systems. In most cases, such upgrades or
replacements are being made in the ordinary course of business. The Company
expects that all of its material information technology systems will be year
2000 compliant by the end of 1999. Any problems that are identified will be
prioritized and remediated based on their assigned priority. The Company will
continue periodic testing of its critical internal business systems in an effort
to minimize operating disruptions due to year 2000 issues. The Company believes
that all of the products that it currently manufactures and sells are year 2000
compliant.
The Company is in the process of identifying and contacting 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 has developed and is distributing questionnaires relating to year
2000 compliance to its significant suppliers, vendors, and customers that
indicate that they are not year 2000 compliant or that do not respond to the
Company's questionnaires.
Contingency Plans
The Company intends to develop a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. 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
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
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that the year 2000 problems
will not have a material adverse impact on the Company's business, operations,
or financial condition. While the Company expects that upgrades to
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its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs and delays.
If any of the Company's material suppliers, vendors, or customers experience
business disruptions due to year 2000 issues, the Company might also be
materially 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 bringing 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.
Liquidity and Capital Resources
Cash and cash equivalents increased by $3,634,000 to $5,924,000 at Sept. 30,
1998 compared to $2,290,000 on March 31, 1998. This increase in cash and cash
equivalents was primarily due to an increase in customer deposits partially
offset by an increase in unbilled costs and fees, accounts receivable, and
inventories. Working capital decreased by $300,000 (2%) since March 31, 1998,
decreasing from $14,691,000 to $14,391,000 at the end of the second quarter.
During August 1998, the Company increased its revolving line of credit, raising
it from $12.0 million to $15.0 million in anticipation of the increased standby
letter of credit capacity required to support the growth of international
orders.
Also during August 1998, the Company negotiated a new export line of credit in
the amount of $8.25 million. This line of credit is guaranteed by the
Export-Import Bank of the United States. This line of credit is solely for the
standby letters of credit associated with a large international order.
-10-
AMERICAN SCIENCE AND ENGINEERING, INC.
Part II - Other Information
Item 1 - Legal Proceedings
In September 1998, the Company filed a lawsuit against EG&G Astrophysics
Research Corp. ("EG&G") in the U.S District Court for the District of
Massachusetts. The suit alleges that EG&G is infringing two of AS&E's
patents and misappropriating certain of the Company's trade secrets. The
Company is seeking (a) permanent injunctive relief to enjoin EG&G from
continuing its infringing and misappropriating activities and (b)
appropriate monetary damages. The lawsuit is in the very early stages, and
EG&G has not yet filed its answer to the complaint.
Item 4 - Submission of Matters to a Vote of Security Holders
The Special Meeting in Lieu of Annual Meeting of the Company was held on
September 24, 1998. At the meeting, all seven of management's nominees to
the Board of Directors were elected to a one-year term according to the
following votes:
Votes
Nominee Votes For Withheld
------- --------- --------
Herman Feshbach 4,445,524 24,132
Al Gladen 4,458,236 11,420
Hamilton W. Helmer 4,458,337 11,319
Donald S. McCarren 4,240,832 228,824
William E. Odom 4,458,337 11,319
Ralph S. Sheridan 4,458,336 11,320
Carl W. Vogt 4,458,450 11,373
-11-
Item 6 - Exhibits and Reports on Form 8-K
(a) No exhibits are included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
The information required by Exhibit Item 11 (Statement re: Computation of
Income per Common and Common Equivalent Share) may be found in Footnote
No. 3 on Page 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN SCIENCE AND ENGINEERING, INC.
(Registrant)
Date: November 1998
/s/ Lee C. Steele
------------------------------------------
Lee C. Steele
Vice President and Chief Financial Officer
Safe Harbor Statement
The foregoing 10-Q contains statements concerning the Company's financial
performance and business operations which may be considered "forward-looking"
under applicable securities laws.
The Company wishes to caution readers of this Form 10-Q that actual results
might differ materially from those projected in any forward-looking statements.
Factors which might cause actual results to differ materially from those
projected in the forward-looking statements contained herein include the
following: Significant reductions or delays in procurements of the Company's
systems by the United States Government; disruption in the supply of any
sole-source component incorporated into the Company's products (of which there
are several); litigation seeking to restrict the use of intellectual property
used by the Company; potential product liability claims against the Company;
global political trends and events which affect public perception of the threat
presented by drugs, explosives and other contraband; the ability of governments
and private organizations to fund purchases of the Company's products to address
such threats; and the potential insufficiency of Company resources, including
human resources, capital, plant and equipment and management systems, to
accommodate any future growth. These and certain other 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).
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