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 JUNE 30, 1999 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 June 30, 1999 --------------------- -------------- $.66 2/3 par value 4,891,370 Page 1 of 10 Pages The Exhibit Index is Located at Page 10 AMERICAN SCIENCE AND ENGINEERING, INC. PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Three Months Ended -------------------------------- Dollars and shares in thousands, except per share amounts June 30, 1999 June 30, 1998 ------------- ------------- NET SALES AND CONTRACT REVENUE $ 14,316 $ 11,692 COSTS AND EXPENSES: -------- -------- Cost of sales and contracts 9,871 7,239 Selling, general and administrative expenses 2,700 2,131 Research and development 1,399 1,408 -------- -------- Total costs and expenses 13,970 10,778 -------- -------- OPERATING INCOME 346 914 -------- -------- OTHER INCOME (EXPENSE): Interest, net (2) 10 Other, net (35) (48) -------- -------- Total other income (expense) (37) (38) -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 309 876 PROVISION FOR INCOME TAXES 117 350 -------- -------- NET INCOME $ 192 $ 526 -------- -------- -------- -------- INCOME PER SHARE -BASIC $ .04 $ .11 -------- -------- -------- -------- -DILUTED $ .04 $ .10 -------- -------- -------- -------- DIVIDENDS PAID PER SHARE None None -------- -------- -------- -------- WEIGHTED AVERAGE SHARES -BASIC 4,891 4,749 -------- -------- -------- -------- -DILUTED 5,018 5,111 -------- -------- -------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements. -2- AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS Dollars in thousands ASSETS June 30, March 31, 1999 1999 ------- ------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 752 $ 366 Accounts receivable, net of allowances of $259 in June 30, and March 31,1999 10,640 7,958 Unbilled costs and fees, net of allowances of $447 in June 30, and March 31,1999 3,862 2,374 Inventories 11,065 11,083 Deferred income taxes 1,370 1,370 Prepaid expenses and other current assets 1,901 1,224 ------- ------- TOTAL CURRENT ASSETS 29,590 24,375 ------- ------- Non-current deferred income taxes 254 254 Deposits 17 17 Other Assets 115 115 Patents and other intangibles, net of accumulated amortization of $86 in June 30, 1999 and $55 in March 31, 1999 380 401 Property, equipment and leasehold improvements, net of accumulated depreciation of $10,030 in June 30, 1999 and $9,677 in March 31, 1999 5,004 5,042 ------ ------ $35,360 $30,204 ------- ------- ------- ------- The accompanying notes are an integral part of these consolidated financial statements. -3- AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) Dollars in thousands June 30, March 31, LIABILITIES & STOCKHOLDERS' INVESTMENT 1999 1999 CURRENT LIABILITIES: ----------- --------- (Unaudited) Line of Credit $ 4,000 $ 1,000 Current maturities of obligations under capital leases 20 20 Accounts payable 5,047 4,456 Accrued salaries and benefits 1,585 868 Accrued warranty costs 435 374 Accrued income taxes 394 350 Deferred revenue 646 756 Customer deposits 2,485 1,281 Other current liabilities 499 1,224 -------- -------- TOTAL CURRENT LIABILITIES 15,111 10,329 -------- -------- NON-CURRENT LIABILITIES: Obligations under capital leases, net of current maturities 16 20 Deferred revenue 162 67 Deferred compensation 148 149 Deferred rent 307 292 -------- -------- TOTAL NON-CURRENT LIABILITIES 633 528 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Preferred stock, no par value Authorized - 100,000 shares Issued - None Common stock, $.66-2/3 par value Authorized - 20,000,000 shares Issued 4,891,370 shares in June 30, 1999 and 4,877,767 shares in March 31, 1999 3,261 3,252 Capital in excess of par value 17,462 17,394 Accumulated deficit (467) (659) -------- -------- 20,256 19,987 Note receivable-Officer (640) (640) -------- -------- TOTAL STOCKHOLDERS' INVESTMENT 19,616 19,347 -------- -------- $ 35,360 $ 30,204 -------- -------- The accompanying notes are an integral part of these consolidated financial statements. -4- AMERICAN SCIENCE AND ENGINEERING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Dollars in thousands For the Three Months Ended ---------------------------- June 30, 1999 June 30, 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 192 $ 526 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization 384 184 Provisions for contract, inventory and warranty reserves 143 257 Changes in assets and liabilities: Accounts receivable (2,682) (805) Unbilled costs and fees (1,488) (1,765) Inventories 18 (659) Prepaid expenses, other current assets, and deposits (677) (367) Accounts payable 591 27 Customer deposits 1,204 1,380 Accrued expenses and other current liabilities (156) (374) Noncurrent liabilities 109 12 ------- ------- Total adjustments (2,554) (2,110) ------- ------- Net cash used for operating activities (2,362) (1,584) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (325) (550) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 77 250 Net borrowings Line of credit 3,000 1,000 Principal payments of capital lease obligations (4) (5) ------- ------- Cash provided by financing activities 3,073 1,245 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 386 (889) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 366 2,290 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 752 $ 1,401 ------- ------- ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 17 $ 9 Income taxes paid $ 220 $ 324 The accompanying notes are an integral part of these condensed consolidated financial statements. -5- AMERICAN SCIENCE AND ENGINEERING, INC. 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 Company has only one operating segment, the x-ray product. 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, 1999. The Company has made no change in these policies during this quarter. 2. INVENTORIES Inventories consisted of: (dollars in thousands) June 30, 1999 March 31,1999 ------------- ------------- Raw materials and completed sub-assemblies $ 5,521 $ 5,570 Work in process 5,544 5,513 ------- ------- Total $11,065 $11,083 ------- ------- ------- ------- -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 - ------------------ ------------------ In thousands except per share amounts June 30, 1999 June 30, 1998 ------------- ------------- BASIC Net income $ 192 $ 526 ------------- ------------- Weighted average shares 4,891 4,749 ------------- ------------- Basic earnings per share $ .04 $ .11 ------------- ------------- DILUTED Net income $ 192 $ 526 ------------- ------------- Weighted average shares 4,891 4,749 Effect of stock options 127 362 ------------- ------------- Weighted average shares, as adjusted 5,018 5,111 ------------- ------------- Diluted earnings per share $ .04 $ .10 ------------- ------------- ------------- ------------- 4. INCOME TAXES At March 31, 1999, the Company had approximately $67,000 of unused investment tax and other credits which expire through 2001. -7- AMERICAN SCIENCE AND ENGINEERING, INC. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In the first quarter of fiscal 2000 net sales and contract revenues grew to $14,316,000, a 22% increase from the comparable period a year ago and a 5% decrease from the previous quarter. The company earned net profits of $192,000 in the current quarter, a 64% decline compared to a net profit of $526,000 in the corresponding period a year ago and 45% less than the net profit of $348,000 in the previous quarter. This decline in profitability is principally due to the significant legal costs associated with the two related lawsuits the Company has filed against a competitor and a customer to prevent their improper use of our valuable intellectual property. RESULTS OF OPERATIONS Net sales and contract revenues in the first quarter increased by $2,624,000 (22%) in comparison to the corresponding year ago period and decreased by $712,000 (5%) compared to the fourth quarter of fiscal 1999. This decrease in revenues from the previous quarter is due to decreased sales of x-ray equipment. For the first quarter, costs of sales and contracts increased to $9,871,000 from $7,239,000 in the corresponding period a year ago due primarily to increased sales volume. Costs of sales and contracts represented 69% of revenues versus 62% for the corresponding period last year and 68% for the fourth 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 $2,700,000 for the first quarter were higher by 27% compared to the corresponding year-ago period and higher by 12% compared to the fourth quarter of fiscal 1999. As a percent of sales, selling, general and administrative expenses were 19% of revenues in the current quarter compared to 18% of revenues for the corresponding year-ago period and 16% for the fourth quarter of fiscal year 1999. The increase is due primarily to an increased amount of legal expenditures incurred, as well as an increased sales base. Company-funded research and development expenses of $1,399,000 (10% of revenues) for the first quarter were lower by $9,000 (1%) compared to the year-ago quarter and lower by $358,000 (20%) compared to the fourth quarter of fiscal year 1999. This is essentially on budget. -8- LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $386,000 to $752,000 at June 30, 1999 compared to $366,000 on March 31, 1999. This increase was primarily due to an increase in customer deposits, borrowings against the line of credit, partially offset by an increase in accounts receivable and unbilled costs and fees. Working capital increased by $433,000 (3%) since March 31, 1999, growing from $14,046,000 to $14,479,000 at the end of the first quarter. During June 1999, the Company renegotiated the revolving line of credit, from $15.0 million to $20.0 million in anticipation of the increased standby letter of credit capacity required to support the growth in international orders. The Company's existing $8.25 million Export-Import Bank guaranteed export line of credit remained unchanged. The Company's credit facilities restrict the payment of dividends, except in shares of the Company's stock, without the consent of the bank. At June 30, 1999, the company had external borrowings, with a local bank, in the amount of $4,000,000. Interest is payable monthly at the bank's prime rate of interest. 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 has identified 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 and tested. 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 -9- 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 The primary costs of the year 2000 program relate to existing internal resources. These additional costs have not been and 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. -10- AMERICAN SCIENCE AND ENGINEERING, INC. Part II - Other Information Item 1. LEGAL PROCEEDINGS During the first quarter, a hearing on the Company's motions for preliminary injunctions against the U.S. Customs Service and EG&G Astrophysics, Inc. was heard in the U.S. District Court for the District of Massachusetts. These related lawsuits have been described in greater detail in previous filings. As of the date of this filing, no decision has been rendered on the preliminary injunction motions and the Company cannot predict when such decision will be forthcoming. Additionally, EG&G's requests for reexamination of the two patents at issue in the Federal Court suit remains pending before the U.S. Patent and Trademark Office. The Company has filed its oppositions to the requests and cannot predict when the Patent Office will rule on the requested reexaminations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) REPORTS ON FORM 8-K A report on Form 8-K was filed on April 7, 1999 concerning the Company's litigation against the U.S. Customs Service and EG&G Astrophysics, Inc. 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: 11 August 1999 - ---------------------------------------- Lee C. Steele Vice President and Chief Financial Officer -11-