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 DECEMBER 31, 1998 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 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 incorporation or organization) Identification No.) 829 Middlesex Turnpike BILLERICA, MASSACHUSETTS 01821 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (978) 262-8700 ---------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (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 DEC. 31, 1998 --------------------- ------------- $.66 2/3 par value 4,830,631 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) For Three Months Ended For Nine Months Ended Dollars and shares in Thousands, except per share ------------------------------ ------------------------------ amounts Dec.31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 ------------ ------------- ------------- ------------- NET SALES AND CONTRACT REVENUE $ 16,214 $ 7,900 $ 42,267 $ 24,137 ----------- ---------- ----------- --------- COSTS AND EXPENSES: Cost of sales and contracts 11,247 4,692 28,098 14,658 Selling, general and administrative expenses 2,168 1,883 6,668 5,516 Research and development 1,757 569 4,623 1,914 ----------- ---------- ----------- --------- Total costs and expenses 15,172 7,144 39,389 22,088 ----------- ---------- ----------- --------- OPERATING INCOME 1,042 756 2,878 2,049 ----------- ---------- ----------- --------- OTHER INCOME (EXPENSE): Interest, net 40 30 71 100 Other expenses, net (54) (5) (122) (16) ----------- ---------- ----------- --------- Total other income (14) 25 (51) 84 ----------- ---------- ----------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,028 781 2,827 2,133 PROVISION FOR INCOME TAXES 411 30 1,130 87 ----------- ---------- ----------- --------- NET INCOME $ 617 $ 751 $ 1,697 $ 2,046 ----------- ---------- ----------- --------- INCOME PER SHARE - BASIC $ .13 $ .16 $ .35 $ .44 ----------- ---------- ----------- --------- - DILUTED $ .12 $ .15 $ .33 $ .42 ----------- ---------- ----------- --------- DIVIDENDS PAID PER SHARE NONE NONE NONE NONE ----------- ---------- ----------- --------- ----------- ---------- ----------- --------- WEIGHTED AVERAGE SHARES - BASIC 4,824 4,660 4,792 4,616 ----------- ---------- ----------- --------- - DILUTED 5,051 4,930 5,081 4,925 ----------- ---------- ----------- --------- The accompanying notes are an integral part of these condensed consolidated financial statements. 2 AMERICAN SCIENCE AND ENGINEERING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS Dollars in thousands Dec. 31, 1998 Mar. 31, 1998 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,514 $ 2,290 Accounts receivable, net 7,918 6,955 Unbilled costs and fees, net 3,135 3,190 Inventories 9,474 8,737 Prepaid income taxes 1,452 2,351 Prepaid expenses and other current assets 703 389 ------- ------- TOTAL CURRENT ASSETS 24,196 23,912 ------- ------- NONCURRENT ASSETS: Non-current deferred income taxes 205 205 Deposits 19 24 Patents and other intangibles, net of accumulated amortization of $31 at Dec. 31, 1998 359 -- Property and equipment, net of accumulated depreciation of $9,447 at Dec. 31,1998 and $9,394 at March 31,1998 4,768 1,852 ------- ------- $ 29,547 $ 25,993 ------- ------- ------- ------- The accompanying notes are an integral part of these condensed consolidated financial statements. 3 AMERICAN SCIENCE AND ENGINEERING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) Dollars in thousands Dec. 31, 1998 Mar. 31, 1998 ------------- ------------- (Unaudited) LIABILITIES & CURRENT LIABILITIES: STOCKHOLDERS' Line of credit $ 1,000 $ -- INVESTMENT Current maturities of obligations under capital leases 25 20 Accounts payable 4,902 4,360 Accrued salaries and benefits 893 831 Accrued income taxes 250 615 Deferred revenue 833 1,240 Customer deposits 2,040 1,151 Other current liabilities 557 1,004 ------- ------ TOTAL CURRENT LIABILITIES 10,500 9,221 ------- ------ NONCURRENT LIABILITIES: Obligations under capital leases, net of current maturities 25 22 Deferred revenue 62 232 Deferred compensation 154 154 Deferred rent 292 280 ------- ------ TOTAL NONCURRENT LIABILITIES 533 688 ------- ------ 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 4,830,631 shares at Dec. 31, 1998 and 4,743,569 shares at Mar. 31, 1998 3,220 3,162 Capital in excess of par value 16,953 16,278 Accumulated deficit (1,007) (2,704) ------- ------ 19,166 16,736 Note receivable-Officer (640) (640) Less: treasury stock 6,178 shares at Dec. 31, 1998 and 6,678 shares at Mar. 31, 1998, at cost (12) (12) ------- ------ TOTAL STOCKHOLDERS' INVESTMENT 18,514 16,084 ------- ------ $ 29,547 $ 25,993 ------- ------ ------- ------ The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AMERICAN SCIENCE AND ENGINEERING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Dollars in Thousands For the Nine Months Ended -------------------------------------- Dec. 31, 1998 Dec. 31, 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,697 $ 2,046 Adjustments to reconcile net income to net cash (used for) operating activities: Depreciation and amortization 585 446 Provisions for contract, inventory, accounts receivable and warranty reserves 827 777 Changes in assets and liabilities: Accounts receivable (1,063) (2,253) Unbilled costs and fees 155 (1,375) Inventories (845) (1,761) Prepaid income taxes 899 -- Prepaid expenses and other assets (309) 158 Accounts payable 542 460 Customer deposits 889 -- Accrued expenses and other current liabilities (1,768) 852 Noncurrent liabilities (158) (218) -------- ------- Total adjustments (246) (2,914) -------- ------- Net cash provided by used for operating activities 1,451 (868) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,788) (911) Acquisition of business assets (Note 5) (1,100) -- Purchase of patents and intangibles (40) -- -------- ------- Net cash used by investing activities (3,928) (911) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit 1,000 -- Proceeds from exercise of stock options 717 739 Principal payments of capital lease obligations (16) (14) -------- ------- Cash provided by financing activities 1,701 725 -------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (776) (1,054) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,290 3,202 -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,514 $ 2,148 -------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 25 $ 5 Income taxes paid $ 565 $ 53 NON-CASH TRANSACTIONS: Issuance of stock in lieu of fees $ 16 $ 133 Capital lease obligations for equipment $ 24 $ -- The accompanying notes are an integral part of these condensed consolidated financial statements. 5 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: Dec. 31, 1998 Mar. 31, 1998 ------------- ------------- Raw materials and completed sub-assemblies $ 5,316 $ 4,958 Work in process 3,887 3,654 Finished goods 271 125 ------------- ----------- Total $ 9,474 $ 8,737 ------------- ----------- ------------- ----------- 6 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 NINE MONTHS ENDED --------------------- -------------------- (in thousands except per share DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1998 DEC. 31, 1997 amounts) ------------- ------------- ------------- ------------- BASIC Net income $ 617 $ 751 $ 1,697 $ 2,046 --------------- ----------------- -------------- --------------- Weighted average shares 4,824 4,660 4,792 4,616 --------------- ----------------- -------------- --------------- Basic earnings per share $ .13 $ .16 $ .35 $ .44 --------------- ----------------- -------------- --------------- DILUTED Net income $ 617 $ 751 $ 1,697 $ 2,046 --------------- ----------------- -------------- --------------- Weighted average shares 4,824 4,660 4,792 4,616 --------------- ----------------- -------------- --------------- Effect of stock options 227 270 289 309 --------------- ----------------- -------------- --------------- Weighted average shares, as adjusted 5,051 4,930 5,081 4,925 --------------- ----------------- -------------- --------------- Diluted earnings per share $ .12 $ .15 $ .33 $ .42 --------------- ----------------- -------------- --------------- --------------- ----------------- -------------- --------------- 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. 7 AMERICAN SCIENCE AND ENGINEERING, INC. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In the third quarter of fiscal 1999 net sales and contract revenues grew to $16,214,000, a 105% increase from the comparable period a year ago and a 13% increase from the previous quarter. The company earned net profits of $617,000 in the current quarter, compared to a net profit of $751,000 in the corresponding period a year ago and a net profit of $554,000 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. The Company recognized the benefit of its net operating losses at the end of FY 1998 and results since then include no related tax benefits. RESULTS OF OPERATIONS Net sales and contract revenues in the third quarter increased by $8,314,000 (105%) in comparison to the corresponding year ago period and $1,853,000 (13%) compared to the second quarter of fiscal 1999. This increase is primarily due to the increase in CargoSearch(TM) revenue. For the third quarter, costs of sales and contracts increased to $11,247,000 from $4,692,000 in the corresponding period a year ago due primarily to increased sales volume. Costs of sales and contracts represented 69% of revenues versus 59% for the corresponding period last year and 67% for the second 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 $2,168,000 for the third quarter were higher by 15% compared to the corresponding year-ago period and lower by 8% compared to the second quarter of fiscal 1999. As a percent of sales, selling, general and administrative expenses were 13% of revenues in the current quarter compared to 24% of revenues for the corresponding year-ago period and 17% for the second quarter of fiscal year 1999. The decrease as a percentage of sales is due primarily to an increased sales base over which costs are spread. Company-funded research and development expenses of $1,757,000 for the third quarter were higher by $1,188,000 (209%) compared to the year-ago quarter and higher by $299,000 (21%) compared to the second quarter of fiscal year 1999. The increase is an intentional result of the Company's increased commitment to research and development. The Company produced a net profit of $617,000 during the third quarter. This is a decline of $134,000 (18%) over net profit in the year-ago quarter and an increase of $63,000 (11%) from the second 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. The Company recognized the benefit of its net operating losses at the end of FY 1998 and results since then include no related tax benefits. 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 of 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. Contingency Plans The Company intends to develop a contingency plan that will allow its primary business operations to continue despite disruptions, if any, 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 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. 9 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $776,000 to $1,514,000 at Dec. 31, 1998 compared to $2,290,000 on March 31, 1998. This decrease in cash and cash equivalents was primarily due to an increase in accounts receivable and inventories as well as a decrease in accrued expenses and other current liabilities, partially offset by a decrease in prepaid taxes and an increase in customer deposits. Working capital decreased by $995,000 (7%) since March 31, 1998, decreasing from $14,691,000 to $13,696,000 at the end of the third 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. As of December 31, 1998, the Company had $1,000,000 outstanding against the line of credit. 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 There were no material developments during the quarter in the Company's previously reported lawsuit against EG&G Astrophysics Research Corp. 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: February 1999 ------------------------------------------ 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). 12