-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H9e3tVEVKXkqqBZEDhK2WyaNd4SNbzSNX++7fsL1TyVWoYaylZDKpnrkWd5j3wtr 3HY8dauwyF9YjYufvDKPyQ== 0000950135-98-004246.txt : 19980720 0000950135-98-004246.hdr.sgml : 19980720 ACCESSION NUMBER: 0000950135-98-004246 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980714 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SCIENCE & ENGINEERING INC CENTRAL INDEX KEY: 0000005768 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 042240991 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06549 FILM NUMBER: 98665904 BUSINESS ADDRESS: STREET 1: 829 MIDDLESEX TURNPIKE STREET 2: 40 ERIE STREET CITY: BILLERICA STATE: MA ZIP: 01821 BUSINESS PHONE: 9782629700 MAIL ADDRESS: STREET 1: 40 ERIE STREET STREET 2: 829 MIDDLESEX TURNPIKE CITY: BILLERICA STATE: MA ZIP: 01821 10-K405 1 AMERICAN SCIENCE & ENGINEERING, INC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ 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, 1998 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. /X/ The aggregate market value of voting stock held by non-affiliates of the registrant on June 30, 1998 was $67,776,063 4,780,202 shares of Registrant's Common Stock were outstanding on June 30, 1998. The Exhibit Index is located on page 47 PAGE 1 OF 75 PAGES 2 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 and provides research and engineering 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 illegal drugs, terrorist explosives, and smuggled goods. 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 toward increasing use of terrorism for political purposes; the continued global proliferation of drug smuggling; and the continuing increase in global trade which creates greater incentives and opportunities to evade duties by misdeclaring manifests. The surge in cross border drug smuggling has created a requirement for cargo and vehicle inspection. With the assistance of the U.S. Department of Defense and U.S. Customs, the Company has developed the CargoSearch(TM) line of X-ray inspection equipment. Based on the success of the fixed-site CargoSearch(TM) prototype at Otay Mesa, CA, an additional four fixed-site systems are now on line for U.S. Customs to inspect trucks for hidden drugs on the Mexican border and three additional installations are expected to be completed along the border over the next 9 months. The CargoSearch(TM) product family includes fixed site inspection for trucks and containers; mobile equipment to inspect trucks, containers and cars; and a fixed pallet inspection system. This equipment has further application for the detection of weapons and explosives for border security and protection of high risk facilities. In addition, there is an emerging application for manifest verification for export and import cargoes at ports and other border crossings. The Company has announced the sale of several CargoSearch(TM) systems to be delivered over the next three years for a variety of applications overseas, including a South African port for manifest verification and drug smuggling; a border crossing in Abu Dhabi primarily for weapons detection; and several systems in Egypt for manifest verification and other anti-smuggling applications at ports. The Company offers high performance X-ray inspection systems 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 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 competitive advantage. 2 3 The Company's product line currently includes 12 models. These models can be broadly categorized into 4 groups including: the Model 101 series, the Model 66 series, the CargoSearch(TM) family and the BodySearch(TM) Personnel Inspection System. All of these systems utilize the Company's Z(R) 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, even when they are undetected by other competing systems. The Micro-Dose(R) 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(R) Trailer is a field deployable system for extended on site security details. The Models 101Z(R), 101ZZ(R), 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(R) handles small packages using the patented Z(R) Backscatter technology. This technology was validated by a study conducted by several U.S. government agencies involving the Model 66(R) and competitive systems in which the Model 66(R) 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 a number of Fortune 100 companies. The CargoSearch(TM) family of products includes the CargoSearch(TM) system, the relocatable IsoSearch(TM) system, 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(R) Backscatter technology. The fixed CargoSearch(TM) system sells for a turnkey price substantially lower than competing systems. The first CargoSearch(TM) system has been operating at the U.S. Customs facility in Otay Mesa, California, the busiest truck border crossing in the United States and was recently joined by four other systems in Texas and California. U.S. Customs has ordered three additional CargoSearch(TM) systems to be installed along the border with Mexico. 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 which 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 second system to the U.S. government and has received orders for a number of additional units from the U.S. government and two foreign governments. All of the units after the first include both Z(R) 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. 3 4 The BodySearch(TM) Personnel Inspection System offers a fast, safe, and non-intrusive way to screen individuals for the detection of concealed weapons, drugs, and illegal contraband. This system is used for drug detection and head of state security as well as for correctional facility security. The Company sold one unit during fiscal 1998 to a state prison. The Company has patents in the United States, Germany, Japan, and The United Kingdom, as well as five (5) patents pending under the Patent Cooperation Treaty, none of which have reached the national phase requiring the identification of specific countries in which patents will be sought. The Company has sold product in, or has sales activity in most major regions of the world including Africa, Asia, Europe, the Middle East and South America. Each U.S. patent issued prior to June 1995 has a duration of the longer of seventeen years from the date of issue or twenty years from the date of application; U.S. and virtually all foreign patents 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. The Company's X-ray products are marketed to private and governmental organizations through a sales force that contacts potential customers. 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(R) 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. 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 1998, the majority 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 U.S. Customs Service is a major customer (with sales of more than 36 percent of the Company's consolidated revenues in fiscal 1998). The loss of this customer would be likely to have a material adverse effect on the Company taken as a whole. The Company believes that it has a satisfactory relationship with the U.S. Customs Service. The Company has stated its intent to reduce its reliance on sales to the U.S. government, and during and after the end of fiscal 1998, the Company announced several sales to agencies of foreign governments totaling over $45 million for delivery over three years. 4 5 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 CargoSearch(TM), 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 on 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 $2,785,000 of government sponsored research primarily focused on technologies for the detection of illicit drugs, explosives, and other security issues in fiscal 1998. This compares to $2,278,000 and $2,750,000 of government sponsored research and development in fiscal 1997 and 1996, respectively. In addition, the Company spent approximately $2,856,000 of its own funds for research relating to the development of new products or services during fiscal 1998, compared to $1,602,000 and $533,000 in fiscal 1997 and 1996, respectively. A significant amount of the Company's 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. - - PERSONNEL As of March 31, 1998 the Company had 198 employees compared to 167 employees at the end of the prior year. All Company employees sign nondisclosure agreements as a condition of employment. 5 6 - - SALES BACKLOG The Company's firm sales backlog was $ 17,299,000 at March 31, 1998 and $15,584,000 at March 28, 1997. 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 $11,053,000 at the end of fiscal year 1998 and $11,220,000 at the end of fiscal year 1997. It is estimated that approximately 89% of the 1998 backlog will be filled within the fiscal year ending March 31, 1999. Subsequent to March 31, 1998, the Company received an order from the Customs Authority of the Arab Republic of Egypt for ten CargoSearch systems with a contract value of $35,000,000. The systems are to be delivered over the next 36 months. This order is not included in the Company's firm backlog reported at March 31, 1998. - - FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES All export sales are made in U.S. dollars, and many non-U.S. Government export sales are either secured by irrevocable letters of credit or paid in advance. Export sales are believed by the Company to have been 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, and does not 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)
1998 1997 1996 --------- --------- --------- Domestic $ 26,799 $ 23,703 $ 14,526 Export 5,900 4,776 3,289 Percent of Export Revenue by Major Region: Middle East and Africa 59.7% 22.2% 20.9% Pacific Rim 28.3 60.9 39.2 Europe 8.9 4.4 34.4 All Other 3.1 12.5 5.5
ITEM 2. PROPERTIES In March of 1995, the Company took advantage of substantial cost savings opportunities presented by a soft market for R&D space in the Greater Boston area and moved its operations to Billerica, Massachusetts, approximately 20 miles outside of Boston. The move has provided the Company with more efficient manufacturing and laboratory space and, in the first year, 6 7 saved the Company approximately $1,100,000 in occupancy costs as compared to the previous lease while providing room for future growth. The Company's executive offices and its research, manufacturing and warehouse facilities are now located in 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 one (1) ten year optional extension term. In January 1998, the Company leased 12,700 square feet of additional manufacturing and office space. This lease has a term of five years. The facilities are currently fully utilized on a one-shift basis. The Company can add additional capacity by adding second and third shifts if necessary. ITEM 3. LEGAL PROCEEDINGS In May 1996, Vivid Technologies, Inc., filed a civil action in the United States District Court for the District of Massachusetts against the Company, seeking inter alia a declaratory judgment that Vivid had not infringed upon certain of the Company's patents relating to backscatter. 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 two claims on AS&E United States Patent number 5,253,283, entitled "Inspection Method and Apparatus with Single Color Pixel Imaging." On January 28, 1998, the Court granted Vivid's request for a declaratory judgement. The Company has appealed the judgment and the case is proceeding in the United States Court of Appeals for the Federal Circuit. Due to certain rulings made by the District Court, the Company was unable to obtain certain discovery the Company believes is essential to determine whether Vivid is infringing on the '283 patent. Through the appeal process, the Company is pursuing its request for discovery, and, if successful, expects to pursue an infringement action against Vivid to the extent consistent with the evidence discovered. 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. 7 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 - ----------- ------------- ---- --- 1998 March 31, 1998 14 3/4 11 1/4 December 31, 1997 14 1/2 10 September 30, 1997 13 3/8 9 1/4 June 27, 1997 12 1/4 9 5/8 1997 March 28, 1997 14 7/8 12 1/8 December 27, 1996 16 3/4 9 7/8 September 27, 1996 18 3/4 9 3/8 June 28, 1996 12 1/4 8 3/4
As of June 30, 1998, there were approximately 1,478 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 1998 1997 1996 1995 1994 ------- ------- ------- -------- -------- Net sales and contract revenues $32,699 $28,479 $17,815 $ 12,997 $ 11,182 Net income (loss) 4,661 1,925 802 (967) (3,335) Income (loss) per share-diluted .95 .40 .18 (.23) (.83) Total assets 25,993 15,514 14,295 10,734 10,541 Obligations under capital leases 42 60 75 233 251 Stockholders' investment 16,084 10,150 7,501 5,592 6,294 Book value per share 3.39 2.21 1.67 1.31 1.52
8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - 1998 COMPARED TO 1997 - - OVERVIEW Net sales and contract revenues for fiscal 1998 improved by 15% to $32,699,000 versus fiscal 1997 net sales of $28,479,000. The Company's income before taxes of $2,698,000, an increase of 35% compared to a $2,003,000 income before taxes in the previous year. During fiscal 1998, the Company recorded a net tax benefit associated with net operating loss carryforwards and other tax items of $1,963,000. Net income for fiscal 1998 was $4,661,000 ($.95 per share, on a diluted basis) as compared to $1,925,000 ($.40 per share, on a diluted basis) in fiscal 1997. Backlog at March 31, 1998 was $17,299,000, an 11% increase over the backlog reported at previous fiscal year end. CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year end decreased by $912,000 to $2,290,000, compared to $3,202,000 in 1997. Accounts receivable and unbilled costs and fees increased by $2,070,000 and $2,409,000 respectively from the prior year due to the increased shipments made during 1998 and performance on several contracts. Inventories increased by $4,151,000 during 1998 to support the growth in X-ray equipment shipments and backlog. Customer deposits increased $1,151,000 due to the advanced payment from a certain long-term contract. Deferred income taxes increased $2,556,000 as a result of the Company recording a tax benefit associated with its net-operating loss carryforwards and other tax assets. RESULTS OF OPERATIONS - Net sales and contract revenues increased by $4,220,000 or 15% during fiscal year 1998. In 1998, security systems and field service revenues of $29,914,000 increased by $3,713,000 or 14%. Contract research and engineering revenues of $2,785,000 increased by $507,000 or 22%. Cost of sales and contracts in 1998 of $19,816,000 was $1,393,000 higher than the previous year primarily due to increased equipment sales and performance on several contracts. Cost of sales and contracts represented 61% of revenues during 1998, compared to 65% in 1997. This decline in the cost of sales ratio was due to a more profitable product mix and a larger revenue base over which to spread fixed costs in 1998. Selling, general and administrative expenses of $7,425,000 were $931,000 higher than the previous year and represented 23% of revenues, unchanged from 1997. 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. Company funded research and development spending increased to $2,856,000 in 1998, a 78% increase compared to the $1,602,000 in spending in 1997. Research and development spending in fiscal 1998 and fiscal 1997 was 9% and 6% of revenues, respectively. 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. In fiscal 1997, the Company recorded a provision for income taxes of 3.9%, of which the significant components included alternative minimum tax payable to the federal government and amounts for state income taxes. 9 10 The Company recorded net profits of $4,661,000 for fiscal year 1998, an improvement of $2,736,000, or 142%, over net income of $1,925,000 in the previous year. Using fiscal 1997 tax provision rates, fiscal 1998 net profits would have been $2,589,000, representing an increase of 34% over fiscal 1997. The Company was profitable in all quarters. LIQUIDITY AND CAPITAL RESOURCES - Net cash used for operating activities was $696,000, compared to $158,000 net cash provided by operating activities in 1997. During 1998, the Company received $884,000 from the exercise of stock options. Cash and cash equivalents at March 31, 1998 stood at $2,290,000, a decrease of $912,000 over the prior year end. Working capital at the end of 1998 increased 49% to $14,691,000. The Company's current ratio decreased to 2.6 as compared to 3.3 at the end of 1997. Fiscal 1998 capital expenditures totaled $1,082,000. This was an increase of 48%, or $352,000, from the prior year capital expenditures of $730,000. 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 1998, the Company had $8.0 million in approved bank lines of credit to be used either for short term cash borrowings to support working capital growth or standby letters of credit to support the bonding requirements of foreign contracts. At the end of fiscal 1998, no cash borrowings were outstanding and $1.2 million in standby letters of credit were in effect against this credit facility. During April 1998, the Company renegotiated the line of credit, from $8.0 million to $12.0 million in anticipation of the increased standby letter of credit capacity required to support the growth in international orders. The Company's credit facility restricts the payment of dividends, except in shares of the Company's stock, without consent of the bank. Given the Company's receipt of various international contract awards over the previous 90 days totaling $45 million, management believes that additional credit facilities will be necessary for expanded standby letter of credit capacity to support foreign equipment sales. Management is currently in the process of negotiating with two commercial banks and the U.S. Export Import Bank to increase its bank lines of credit and anticipates having a new credit facility in place during the second quarter of fiscal year 1999. MANAGEMENT ACTIONS - During fiscal 1998 AS&E achieved several milestones associated with receipt of new orders, further progress toward the commercialization of the Company's CargoSearch(TM) family of products, and continued expansion of the Company's domestic and international customer base. Examples include the following: - - During the third quarter of fiscal year 1998, the Company delivered its second MobileSearch(TM) system under a $2.7 million contract. Work began under a $3.8 million contract received from the U.S. Department of Defense-Counterdrug Technology Development Program for two additional enhanced MobileSearch(TM) systems. - - Throughout the fiscal year the Company improved its position significantly in the international market. In March 1998 the Company received an order from Portnet, the Port Authority in South Africa, for a new unique version of AS&E's CargoSearch(TM) system. The system, called IsoSearch(TM), combines features of both fixed-site and mobile systems currently sold by the Company and will allow Portnet to relocate the system within or between ports. 10 11 - - Subsequent to year end the Company received a MobileSearch(TM) order from a Middle Eastern customer for counter terrorism; as well as an $8.8 million dollar order from the Abu Dhabi United Arab Emirates Customs Department for a fixed-site CargoSearch(TM) for truck inspection on the border with Saudi Arabia. The Company also received a $35 million order from the Customs Authority of the Arab Republic of Egypt for ten of the Company's CargoSearch(TM) family of products, including multiple units of each of the fixed-site CargoSearch(TM), MobileSearch(TM) and PalletSearch(TM) systems. The Company has developed a plan to ensure its systems are compliant with the requirements to process transactions in the year 2000. The Company is currently in the process of testing the compliance of the internal information systems. The Company has also commenced the process of assessing its external systems and software, by sending vendor notifications and questionnaires, to determine whether or not they are year 2000 compliant. Spending for compliance maintenance and modifications has been expensed as incurred. Management does not expect remediation costs of year 2000 to be material. Any new hardware and software has been capitalized, and will be depreciated or amortized over the useful life of the asset acquired. Management does not believe these changes will have any material effect on ongoing results of operations. - - 1997 COMPARED TO 1996 - - OVERVIEW Net sales and contract revenues for fiscal 1997 improved by 60% to $28,479,000 versus fiscal 1996 net sales of $17,815,000. The Company earned operating profits of $1,925,000 (.40 per share, on a diluted basis), an increase of 140% compared to a $802,000 profit (.18 per share, on a diluted basis) in the previous year. Backlog at March 28, 1997 was $15,584,000, a 28% increase over the backlog reported at previous fiscal year end. CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year end decreased by $175,000 to $3,202,000, compared to $3,377,000 in 1996. However, in contrast with the previous year end, almost no customer deposits were held at the end of fiscal year 1997 that would serve to offset the reported cash and cash equivalent position. Accounts receivable increased by $1,323,000 from the prior year due to the increased shipments made during 1997. Inventories increased by $422,000 during 1997 to support the growth in X-ray equipment shipments and backlog. Customer deposits decreased $2,670,000 due to the attainment of milestones against certain long-term contracts. Current and noncurrent deferred revenue, in total, increased by $811,000 from the previous year as a result of advanced payments for extended warranty and service contracts. RESULTS OF OPERATIONS - Net sales and contract revenues increased by $10,664,000 or 60% during fiscal year 1997. In 1997, security systems and field service revenues of $26,201,000 increased by $11,136,000 or 74%. Contract research and engineering revenues of $2,278,000 decreased by $472,000 or 17%. Cost of sales and contracts in 1997 of $18,423,000 was higher than the previous year primarily due to increased equipment sales. Cost of sales and contracts represented 65% of revenues during 1997, compared to 66% in 1996. This decline in the cost of sales ratio was due to a larger revenue base over which to spread fixed costs in 1997. Selling, general and administrative expenses of $6,494,000 were $1,906,000 higher than the previous year and represented 23% of revenues, compared to 26% in 1996. The increased spending level was primarily due to expanded sales and marketing activities, costs associated with the Company's policy of aggressively defending its intellectual property rights, and the costs associated with recruiting for the 11 12 Company's expanded management and staff requirements. The improvement in the ratio of SG&A expenses to revenues is a result of the increased sales volume. Company funded research and development spending increased to $1,602,000 in 1997, a 200% increase compared to the $533,000 in spending in 1996. In accordance with accounting conventions, development costs in excess of contract amounts are included in the cost of sales for certain customer funded research contracts. The Company's net profit of $1,925,000 for fiscal year 1997 represents an improvement of $1,123,000, or 140%, over net income of $802,000 in the previous year. The Company was profitable in all quarters, and profits increased in each quarter during fiscal year 1997. LIQUIDITY AND CAPITAL RESOURCES - Corporate liquidity and capital resources improved during fiscal year 1997. Net cash provided by operating activities was $158,000, compared to $1,966,000 net cash provided by operating activities in 1996. Additionally, during 1997, the Company received $412,000 from the exercise of stock options. Cash and cash equivalents at March 28, 1997 stood at $3,202,000, a decrease of $175,000 over the prior year end. Customer deposits decreased by $2,670,000 compared to 1996, resulting in an improvement in liquidity despite the Company's slightly lower cash and investments. Working capital at the end of 1997 increased 45% to $9,856,000. The Company's current ratio also increased to 3.3 as compared to 2.0 at the end of 1996. At the end of fiscal 1997, the Company had $2.5 million in approved bank lines of credit against which there were no borrowings. Given the Company's current cash position and access to unused borrowing capacity, management believes that sufficient capital resources are in place to support the Company's operations over the next several quarters. MANAGEMENT ACTIONS - During fiscal 1997 AS&E achieved several milestones associated with receipt of new orders, further progress toward the commercialization of the Company's CargoSearch(TM) family of products, and continued expansion of the Company's domestic and international customer base. Examples include the following: - - In March 1997 the Company received orders totaling $8.5 million from U.S. Customs for the installation of four fixed-site CargoSearch(TM) systems for truck inspection along the Southwest border, bringing the total of such orders to eight. Two systems have been successfully installed and are currently operational. - - The first PalletSearch(TM) system for inspection of high security freight and cargo was successfully installed in September 1996 at an ultra-secure U.S. agency in Washington, D.C. - - The Company's first MobileSearch(TM) system, delivered in January 1996, has demonstrated its value as an enforcement tool and is now patrolling a 500 mile stretch of the Mexican border. In July 1996 the Company received a $2.7 million order from the department of Defense Advanced Research Projects Agency (DARPA) for a second MobileSearch(TM) system with enhanced operating and detection capabilities. Delivery is anticipated for the second quarter of fiscal 1998. - - The Company's core security market has expanded as more government agencies, both U.S. and international, have ordered AS&E's Backscatter detection systems for protection against sophisticated terrorist threats. Orders totaling $6.2 million were received during fiscal 1997 for 12 13 X-ray systems to protect the U.S. offices of two prestigious Federal agencies. International revenues increased 45% to $4.8 million in fiscal 1997 from $3.3 million in fiscal 1996. - - Throughout the fiscal year the Company improved its position in both the domestic and international marketplace, adding fourteen new government sector and corporate customers to its base. The Company's improved sales volume, profitability and liquidity has permitted increased investments in professional staff, internal technology and Company-funded research and development in order to support future business expansion. 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 28 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. 13 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AS OF JUNE 30, 1998.
Positions and Offices of Date Assumed Name Age Company Held Each Position - ---- --- ------------ ------------- DIRECTORS Herman Feshbach 81 Director September 1975 Chairman July 1993 Al Gladen 60 Director September 1995 Hamilton W. Helmer 51 Director February 1993 Donald J. McCarren 58 Director February 1993 William E. Odom 65 Director September 1996 Carl W. Vogt 62 Director June, 1997 Ralph S. Sheridan 48 Director January 1994 President & CEO September 1993
EXECUTIVE OFFICERS (Who are not also Directors) Jeffrey A. Bernfeld 41 Vice President, General February 1996 Counsel & Clerk Joseph Callerame 48 Vice President, Technology June 1998 Chief Technology Officer Peter W. Harris 44 Vice President, Sales March 1994 Alan H. Rutan 57 Vice President, Engineering July 1996 Lee C. Steele 49 Vice President, Finance September 1994 Treasurer & CFO
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. 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 Fellow of both those Organizations and of the American 14 15 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. Mr. Al Gladen is President of Dabster, Inc., a technology consulting firm specializing in engineering and technology management assistance, with offices in Kent, Washington. Mr. Gladen's consulting activities have included strategic technology planning, new product development, project management and acquisition review. Mr. Gladen has acted as a technology and engineering consultant to the Company since 1993, and it is expected that he will continue to provide such assistance on a part-time basis. Mr. Gladen holds four U.S. patents and is a director of four other privately held corporations. 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 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 President and Chief Executive Officer 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 bio-tech research and development company located in Cambridge, Massachusetts. Prior to that, he was 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 Australian 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, Massachusetts. Prior to that, Mr. Sheridan was President and CEO (1988-1989) and Vice President of Marketing and Operations (1987-1988) of HEC Energy 15 16 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. Mr. Jeffrey A. Bernfeld joined AS&E as Vice President, General Counsel and Clerk in February 1996. Prior to that time, he was Vice President and General Counsel of Spire Corporation in Bedford, Massachusetts for three and one-half years; a founder and Managing Director of Global Solutions, Inc. in Wellesley, Massachusetts for one year; Vice President and General Counsel of The Mediplex Group in Wellesley, Massachusetts for two years; and a partner at Goldstein & Manello, a law firm in Boston, Massachusetts, where he began his career as an Associate in 1981. Mr. Bernfeld received his B.A. from Brandeis University and his J.D. from New York University School of Law. Mr. Bernfeld is a director of Summit Technology, Inc. of Waltham, Massachusetts. 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. Peter W. Harris joined the Company in February 1994 as Vice President, Sales and Marketing. Prior to joining the Company, Mr. Harris was Manager of External Affairs for Stone & Webster, an architectural engineering firm in Boston, Massachusetts, where he held a number of positions beginning in 1988. During his time at Stone & Webster, Mr. Harris concentrated on Federal government and international sales. Mr. Harris, a graduate of the U.S. Naval Academy, holds the rank of Captain in the U.S. Naval Reserve and commanded several units during his twelve years of active duty and seven years in the Naval Reserve. In addition, Mr. Harris holds a Master's degree in National Security Studies from Georgetown University. Mr. Alan H. Rutan joined the Company in July 1996 as Vice President of Engineering. Prior to that time, Mr. Rutan spent 11 years at Raytheon Company, most recently as Manager of the Air Defense Systems Department, where his work focused on radar systems engineering and signal processing. Prior to his Raytheon experience, Mr. Rutan spent seven years at GTE Laboratories as a Senior Member of the Technical Staff. From 1974 to 1978, Mr. Rutan ran his own consulting firm, Signal Processing Associates, Inc., which specialized in image processing 16 17 applications for various government security organizations. Mr. Rutan received his B.A. in Physics from Harvard University. 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 an M.B.A. from Harvard Business School and an engineering degree from Case Western Reserve University. ITEM 11. EXECUTIVE COMPENSATION - - THE FOLLOWING CHART PROVIDES INFORMATION CONCERNING COMPENSATION PAID BY THE COMPANY DURING THE YEAR ENDED MARCH 31, 1998 TO THE CHIEF EXECUTIVE OFFICER AND EACH OF THE FOUR MOST HIGHLY COMPENSATED EXECUTIVE OFFICERS OF THE COMPANY WHOSE AGGREGATE COMPENSATION EXCEEDED $100,000. SUMMARY COMPENSATION
Annual Long-Term Compensation Compen- ------------------------------- sation All Name and Principal Fiscal Option OtherCompen- Position Year Salary ($) Bonus ($) Awards (#) sation ($) (1) - ---------------------------- ------ ----------- --------- ---------- -------------- Ralph S. Sheridan 1998 240,000 230,000 0 7,729 President and CEO 1997 222,213 270,385(3) 225,000 4,479 1996 200,000 202,168(3) 0 2,486 Jeffrey A. Bernfeld 1998 130,000 30,000 20,000 408 Vice President, General 1997 120,408 19,000 16,000 408 Counsel 1996(2) 7,846 N.A. 24,000 408 Peter W. Harris 1998 120,192 45,000 0 403 Vice President, 1997 111,941 45,000 30,000 403 Sales / Marketing 1996 110,000 40,000 0 403 Alan H. Rutan 1998 115,112 12,000 16,000 1,748 Vice President 1997(2) 87,132 -- 24,000 1,748 Engineering Lee C. Steele 1998 125,077 29,750 30,000 752 Vice President and 1997 120,560 27,000 0 752 CFO 1996 110,752 27,000 0 1,344
17 18 (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. 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 1999, at an annual salary of $240,000, subject to annual review, plus performance bonuses tied to specific accomplishments. This contract replaces Mr. Sheridan's original contract with the Company, which expired in September 1996. Under the contract, Mr. Sheridan is eligible to receive an annual bonus of up to $230,000 in each contract year, based on his accomplishment of goals established by the Compensation Committee. Under the previous contract, but not under the current contract, Mr. Sheridan also received a bonus of up to 10,000 shares of common stock and an amount calculated to compensate him for the taxes due on the stock portion of this bonus. In addition, in October 1996 the Company granted Mr. Sheridan options to purchase 225,000 shares of the Company's Common Stock at an exercise price of $14.00 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. Mr. Bernfeld has an agreement with the Company which provides for a minimum base salary of $120,000, adjustable at the discretion of the President, and a bonus of up to $20,000 subject to the 18 19 achievement of individual and corporate goals; and 24,000 stock options granted at market price, which vest according to a schedule. The agreement is for a three year term ending in February, 1999, and grants Mr. Bernfeld severance payments equal to one year's salary if he is terminated in connection with a change of the control of the Company as defined in the agreement. The agreement also provides that if Mr. Bernfeld is terminated for any reason other than "Cause" as defined in the agreement, he will be entitled to receive an amount equal to at least six months salary. Dr. Callerame and Messrs. Rutan and Steele have agreements with the Company granting each of them severance payments equal to one year's salary if he is terminated in connection with a change of control of the Company as defined in the agreement. The agreement also provides that if each of them is terminated for any reason other than "Cause" as defined in the agreement, he will be entitled to receive an amount equal to at least six months salary. - - THE FOLLOWING TABLES PROVIDE INFORMATION CONCERNING THE GRANT OF OPTIONS IN FISCAL YEAR 1998 TO EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION TABLE AND OPTIONS EXERCISED BY THOSE OFFICERS. OPTION GRANTS IN THE LAST FISCAL YEAR
Individual Grants Potential Realizable Value -------------------------------------------------------------- at Assumed Annual Rates of Stock Price Appreciation for Option Term ($) ---------------------------------- % of Total Options Granted to Options All Exercise Expiration Granted Employees Price ($) Date 5%/year 10%/year ------- ---------- --------- ------------- -------- -------- Ralph S. Sheridan 0 N/A N/A N/A N/A N/A Jeffrey A. Bernfeld 20,000 6.98 11.125 11/20/07 221,374 484,295 Peter W. Harris 0 N/A N/A N/A N/A N/A Alan H. Rutan 16,000 5.58 11.125 11/20/07 177,099 387,436 Lee C. Steele 30,000 10.47 11.125 11/20/07 332,061 726,442
19 20 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Number of Value of Unexercised In- Unexercised Options The-Money Options at Shares at Fiscal Year End - Fiscal Year End - Acquired March 31, 1998 (#) March 31, 1998 ($) on Value ----------------------- ----------------------------- Exercise Realized Exerc- Unexerc- Exerc- Unexerc- (#) ($) isable isable isable isable - --------------------------------------------------------------------------------------------------------------------------------- Ralph S. Sheridan 0 0 195,000 150,000 2,176,875 0 Jeffrey A. Bernfeld 0 0 30,000 30,000 107,250 85,750 Peter W. Harris 0 0 40,000 20,000 318,250 75,000 Alan H. Rutan 0 0 12,000 28,000 43,500 83,500 Lee C. Steele 0 0 50,000 30,000 409,375 75,000
- - 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. The Chairman 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, the Company's Chairman, 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. The Company accrues the current cost of the plan, which amounted to $10,000 in fiscal 1998. - - COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND SECTION 16 REPORTING During the fiscal year ended March 31, 1998, the Company's Compensation Committee consisted of Dr. Herman Feshbach, Dr. Hamilton W. Helmer and Dr. Donald J. McCarren. No reportable relationship existed with respect to any member of the Compensation Committee. 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 1998, the Company believes that all required reports were filed on time. - - BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (consisting of the three outside Directors whose names appear below this Report) has sole responsibility for compensation issues relating to the Chief 20 21 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 1996 (effective as of September 1996). 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 provides for annual cash compensation of $240,000, plus annual incentive bonuses of up to $230,000 tied to specific, agreed upon 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 1997, the Committee awarded Mr. Sheridan a cash bonus of $230,000, representing 100% of the potential award under his contract. This award represents the Committee's determination that Mr. Sheridan had done an excellent job over the preceding twelve months and had met all of the goals and objectives jointly established by the Committee and Mr. Sheridan. 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: Dr. Herman Feshbach, Dr. Hamilton W. Helmer and Dr. Donald J. McCarren. 21 22 - - 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. [TOTAL SHAREHOLDER RETURNS] INDEXED RETURNS Years Ending
BASE PERIOD COMPANY/INDEX MAR 93 MAR 94 MAR 95 MAR 96 MAR 97 MAR 98 - ------------------------------------------------------------------------------------------------ AMERICAN SCIENCE ENGINEERING 100 46.97 75.76 119.70 146.97 165.15 S&P 500 INDEX 100 101.48 117.25 154.77 185.40 274.39 TECHNOLOGY-500 100 117.62 148.84 200.95 271.66 410.57
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. 22 23 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 30, 1998. 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 Percent Beneficial Owner Beneficial Ownership(1) of Class - ---------------- ----------------------- -------- Jeffrey A. Bernfeld 32,591 (2) Joseph Callerame 15,000 (2) Herman Feshbach 16,540 (2) Al Gladen 53,055 1.12 Peter W. Harris 43,177 (2) Hamilton W. Helmer 46,781 (2) Donald J. McCarren 54,581 1.14 William E. Odom 12,000 (2) Alan H. Rutan 35,140 (2) Ralph S. Sheridan 401,743 8.13 Lee C. Steele 59,096 Carl W. Vogt 14,166 Directors and Officers as a Group (12 persons) 783,870 15.1
(1) Includes shares that may be acquired under stock options and warrants exercisable within sixty days after the date of this table, as follows: Mr. Bernfeld - 30,000; Dr. Callerame - 12,500; Dr. Feshbach - 2,500; Mr. Gladen - 14,000; Mr. Harris - 40,000; Dr. Helmer - 39,000; Dr. McCarren - 40,000; Mr. Odom - 7,000; Mr. Rutan -18,000; Mr. Sheridan - 195,000; Mr. Steele - 50,000; Mr. Vogt - 0; and all Directors and Officers as a group - 448,000. 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 In April, 1995 a group that included three of the Company's Officers and one Company Director made a loan to the Company in the total amount of $650,000. The proceeds of the loan were used for general working capital purposes. The loan was paid off in full on a timely basis. The Board of Directors determined that the loan was necessary and the terms appropriate. The Company had been seeking short-term financing from several banks, but conclusion of a conventional line of credit arrangement was delayed pending resolution of the lawsuit brought by the Company's founder, in which the Company has now received a favorable jury verdict. In addition, portions of the Company's working capital had been tied up in slow-paying foreign accounts receivable and as collateral for letters of credit supporting certain international sales. These factors justified a form of short-term "bridge loan" while the Company worked on a more permanent financing alternative. The loan terminated on August 15, 1995, and bore interest at the prime rate plus two percent. The Company granted a security interest in all of its assets to the lending group during the pendency of the 23 24 loan. As additional consideration, the Company issued a total of 6,500 shares of its Common Stock and warrants to purchase 65,000 shares of its Common Stock proportionally to the lenders. The warrant exercise price is the lowest trading price of the stock on the American Stock Exchange during the term of the loan. The Company has registered these shares. Ralph S. Sheridan, the Company's President and CEO, provided $200,000 of the loan funds. Al Gladen, who subsequently became a Director of, and remains a Consultant to, the Company, provided $300,000. Lee C. Steele, the Company's Vice President of Finance and CFO, provided $75,000. Donald J. McCarren, a Director of the Company, provided $50,000. Peter W. Harris, the Company's Vice President of Sales and Marketing, provided $25,000. Mr. Gladen provides engineering and management services to the Company on a regular basis. In fiscal year 1998, the compensation paid to Dabster, Inc., a corporation of which Mr. Gladen is the President, for such services was $256,750. All other information required for by this Item appears in Items 10 and 11 of this Annual Report on Form 10-K, and is incorporated herein by reference. 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 28 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 47-48 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. 24 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 26 Consolidated Balance Sheets - March 31, 1998 and March 28, 1997 27-28 Consolidated Statements of Operations 29 For the Years Ended March 31, 1998 March 28, 1997, and March 29, 1996 Consolidated Statements of Stockholders' Investment 30 For the Years Ended March 31, 1998 March 28, 1997, and March 29, 1996 Consolidated Statements of Cash Flows 31 For the Years Ended March 31, 1998 March 28, 1997, and March 29, 1996 Notes to Consolidated Financial Statements - March 31, 1998 32-43 CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION Unaudited quarterly consolidated financial data for the years ended March 31, 1998, and March 28, 1997 44 (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 45
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. 25 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, 1998 and March 28, 1997 and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended March 31, 1998. 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 generally accepted auditing standards. 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, 1998 and March 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998 in conformity with generally accepted accounting principles. 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. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts May 14, 1998 26 27 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND MARCH 28, 1997 Dollars in thousands
ASSETS 1998 1997 ------- ------- CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 2,290 $ 3,202 Accounts receivable, net of allowances of $116 in 1998 and $148 in 1997 (Note 1) 6,955 4,885 Unbilled costs and fees, net of allowances of $549 in 1998 and $462 in 1997 (Note 1) 3,190 981 Inventories (Note 1) 8,737 4,736 Deferred income taxes (Notes 1 and 5) 2,351 -- Prepaid expenses and other current assets 389 291 ------- ------- TOTAL CURRENT ASSETS 23,912 14,095 ------- ------- Non-current deferred income taxes (Note 1 and 5) 205 -- Deposits 24 115 Property, equipment and leasehold improvements, net of accumulated depreciation of $9,394 in 1998 and $8,860 in 1997 (Notes 1 and 3) 1,852 1,304 ------- ------- $25,993 $15,514 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 27 28 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) MARCH 31, 1998 AND MARCH 28, 1997 Dollars in thousands
Liabilities & Stockholders' Investment 1998 1997 -------- -------- Current liabilities: Current maturities of obligations under capital leases (Note 3) $ 20 $ 18 Accounts payable 4,360 2,253 Accrued salaries and benefits 831 573 Accrued warranty costs (Note 1) 497 292 Accrued income taxes (Notes 1 and 5) 615 90 Deferred revenue (Note 1) 1,240 526 Customer deposit (Note 1) 1,151 -- Other current liabilities 507 487 -------- -------- TOTAL CURRENT LIABILITIES 9,221 4,239 -------- -------- NON-CURRENT LIABILITIES: Obligations under capital leases, net of current maturities (Note 3) 22 42 Deferred revenue (Note 1) 232 660 Deferred compensation (Note 11) 154 174 Deferred rent (Note 1) 280 249 -------- -------- TOTAL NON-CURRENT LIABILITIES 688 1,125 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 11) 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 4,743,569 shares in 1998 and 4,585,209 shares in 1997 3,162 3,058 Capital in excess of par value 16,278 15,273 Accumulated deficit (2,704) (7,365) -------- -------- 16,736 10,966 Note receivable-Officer (Note 8) (640) (640) Less: treasury stock - 6,678 and 62,841 shares in 1998 and in 1997, at cost, respectively (12) (176) -------- -------- TOTAL STOCKHOLDERS' INVESTMENT 16,084 10,150 -------- -------- $ 25,993 $ 15,514 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 28 29 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998, MARCH 28, 1997, AND MARCH 29, 1996 Dollars in thousands, except per share amounts
1998 1997 1996 ---- ---- ---- NET SALES AND CONTRACT REVENUES (Notes 1 and 10) $ 32,699 $ 28,479 $ 17,815 Cost of sales and contracts (Note 1) 19,816 18,423 11,823 ----------- ----------- ------------ GROSS PROFIT 12,883 10,056 5,992 EXPENSES: Selling, general and administrative 7,425 6,494 4,588 Research and development (Note 1) 2,856 1,602 533 ----------- ----------- ------------ TOTAL EXPENSES 10,281 8,096 5,121 ----------- ----------- ------------ OPERATING INCOME 2,602 1,960 871 ----------- ----------- ------------ OTHER INCOME/(EXPENSE): Interest, net 118 111 52 Other, net (22) (68) (91) ----------- ----------- ------------ TOTAL OTHER INCOME (EXPENSE) 96 43 (39) ----------- ----------- ------------ INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,698 2,003 832 PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 5) (1,963) 78 30 ----------- ----------- ------------ NET INCOME $ 4,661 $ 1,925 $ 802 =========== =========== ============ INCOME PER SHARE - BASIC $ 1.00 $ .43 $ .18 =========== =========== ============ - DILUTED $ .95 $ .40 $ .18 =========== =========== ============ WEIGHTED AVERAGE SHARES - BASIC 4,646 4,491 4,387 =========== =========== ============ - DILUTED 4,917 4,826 4,541 =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. 29 30 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED MARCH 31, 1998, MARCH 28, 1997, AND MARCH 29, 1996 Amounts in thousands, except share amounts
CAPITAL IN ACCU- NOTE COMMON STOCK EXCESS OF MULATED RECEIVABLE TREASURY STOCK SHARES AMOUNT PAR VALUE DEFICIT OFFICER SHARES AMOUNT TOTAL --------- ------ ------- -------- ----- ------- ----- ------- BALANCE, MARCH 31, 1995 4,257,120 $2,838 $13,612 $(10,092) $(640) 67,377 $(126) $ 5,592 Net income -- -- -- 802 -- -- -- 802 Exercise of stock options (Note 6) 18,868 13 40 -- -- -- -- 53 Issuance of stock (Note 7) 224,639 150 904 -- -- -- -- 1,054 --------- ------ ------- -------- ----- ------- ----- ------- BALANCE, MARCH 29, 1996 4,500,627 3,001 14,556 (9,290) (640) 67,377 (126) 7,501 Net income -- -- -- 1,925 -- -- -- 1,925 Exercise of stock options (Note 6) 68,723 46 396 -- -- 5,464 (69) 373 Issuance of stock 15,859 11 321 -- -- (10,000) 19 351 --------- ------ ------- -------- ----- ------- ----- ------- 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 ========= ====== ======= ======== ===== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements. 30 31 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1998, MARCH 28, 1997, AND MARCH 29, 1996 Dollars in thousands
1998 1997 1996 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,661 $ 1,925 $ 802 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 534 352 205 Provisions for contract, inventory, accounts receivable and warranty reserves 896 795 510 Deferred income tax benefit (2,556) -- -- Change in assets and liabilities: Accounts receivable (2,070) (1,322) (1,244) Unbilled costs and fees (2,409) (7) 725 Inventories (4,151) (422) (442) Prepaid expenses, other assets, and deposits (7) 273 (257) Accounts payable 2,107 232 (148) Accrued income taxes 525 90 -- Customer deposits 1,151 (2,670) 2,622 Deferred revenue 714 151 181 Accrued expenses and other current liabilities 326 111 (1,209) Noncurrent liabilities (417) 650 221 ------- ------- ------- Total adjustments (5,357) (1,767) 1,164 ------- ------- ------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (696) 158 1,966 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (1,082) (730) (250) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 884 412 53 Principal payments of capital lease obligations (18) (15) (158) Proceeds from borrowings (Note 11) -- -- 650 Repayment of officer note (Note 11) -- -- (650) Proceeds from issuance of stock -- -- 897 ------- ------- ------- Cash provided by financing activities 866 397 792 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (912) (175) 2,508 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,202 3,377 869 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,290 $ 3,202 $ 3,377 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 6 $ 10 $ 79 Income taxes paid 40 30 -- NON-CASH TRANSACTIONS: Issuance of stock in lieu of fees $ 225 $ 332 $ 157 Issuance of treasury stock in lieu of fees 164 -- -- Stock option exercises -- 30 -- Common stock received to treasury for stock option exercises -- (69) -- Stock bonus issued to Officer from treasury -- 19 --
The accompanying notes are an integral part of these consolidated financial statements. 31 32 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 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. Effective the quarter ended September 30, 1997, the Company has elected to change financial reporting from a fiscal month end to a calendar month end. The year end reporting period ended on March 31, 1998. This change in year end has no material effect on the results of operations for the year ended March 31, 1998. The Company's fiscal years ended on March 31, 1998, March 28, 1997, and March 29, 1996. 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, 1998 and March 28, 1997 were as follows (dollars in thousands):
1998 1997 ------ ------ Raw materials and completed subassemblies $4,958 $3,106 Work-in-process 3,654 1,334 Finished goods 125 296 ------ ------ $8,737 $4,736 ====== ======
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. 32 33 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 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 $856,000 in 1998 and $339,000 in 1997) 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, 1998 and March 28, 1997 are $8,098,000 and $3,694,000, respectively, attributable to both prime and subcontracts with the U.S. Government. WARRANTY COSTS AND DEFERRED REVENUE In general, the Company 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 sale and is captioned as a balance sheet liability, Accrued Warranty. 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. Substantially all of the deferred revenue included in the accompanying 1998 balance sheet will be recognized within 2 years. CUSTOMER DEPOSITS For most international orders, the Company attempts to include, 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, 1998 and March 28, 1997, total customer deposits amounted to $1,151,000 and $0, 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 1998 consolidated balance sheet. 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. 33 34 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 INCOME PER COMMON AND COMMON EQUIVALENT SHARES 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. 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 February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure", which establishes standards for disclosing information about an entity's capital structure. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which establishes standards for reporting and disclosure of information about operating segments as well as disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997 and require certain additional disclosures. In April 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities", which is effective for fiscal years beginning after December 15, 1998. Early adoption is encouraged. SOP 98-5 requires that costs of start-up activities and organization costs be expensed as incurred. The impact of adopting SOP 98-5 will be accounted for as the cumulative effect of a change in accounting principle as described in Accounting Principles Board Opinion No. 20, "Accounting Changes". The Company does not anticipate any impact from adopting SOP 98-5 as the Company currently expenses start-up and organization costs as incurred. PRESENTATION Certain amounts in 1997 and 1996 have been reclassified to conform to the 1998 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 1998 and 1997. 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. 34 35 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 3. OPERATING AND CAPITAL LEASE AGREEMENTS In January 1995, the Company entered into a lease agreement for its new office and manufacturing facilities in Billerica, Massachusetts. This lease has a term of 10 years which started March 1, 1995, with an option to extend for 10 additional 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 lease has a term of five years. The Company incurred $541,000, $501,000, and $513,000 of rent expense in 1998, 1997, and 1996 respectively. The security deposits on these leases amount to $106,000. 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, --------------------- 1999 $ 590 2000 597 2001 681 2002 681 2003 662 Thereafter 1,159 ------ $4,370 ======
During fiscal 1995 the Company entered into a lease agreement for the purchase of certain office equipment. This lease is classified as a capital lease under generally accepted accounting principles and is payable in monthly installments over a period of 60 months with interest of 11.5%. Future minimum lease payments are as follows (in thousands):
Year Ending March 31, --------------------- 1999 $ 24 Thereafter 23 -------- Total minimum lease payments 47 Less: Amounts representing interest (5) -------- Present value of net minimum lease payments $ 42 ========
35 36 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 4. LINE OF CREDIT In August 1997, the Company renewed its domestic line with a regional bank, increasing it from $2.5 million to $8.0 million. The renewed line of credit, which is secured by accounts receivable from ongoing customers as well as inventory, has two components. The first component is up to $4.0 million of base borrowing capacity for either short term working capital borrowing or issuance of standby letters of credit; the second component is an additional $4.0 million in excess standby letters of credit capacity to support foreign equipment sales. 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, 1998 and March 28, 1997, there were no borrowings against the line of credit, however, there were $1.2 million of outstanding letters of credit in effect against this credit facility at March 31, 1998. During April 1998, the Company renegotiated the line of credit, dated August 1997, from $8 million to $12 million. The $12 million line of credit expires on August 31, 1998, at which time a formal credit renewal agreement is expected to be in place. The Company's credit facility restricts the payment of dividends, except in shares of the Company's stock, without consent of the bank. 5. INCOME TAXES The provision (benefit) for income taxes for the years ended March 31, 1998, March 28, 1997, and March 29, 1996 consisted of the following (in thousands):
1998 1997 1996 ------- ----- ----- Current: Federal $ 51 $ 40 $ 17 State 353 38 13 ------- ----- ----- 404 78 30 Deferred: Federal 1,244 590 245 State (49) 112 49 ------- ----- ----- 1,195 702 294 ------- ----- ----- Change in valuation allowance (3,562) (702) (294) ------- ----- ----- Total $(1,963) $ 78 $ 30 ======= ===== =====
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, 1998 follows (in thousands):
1998 1997 1996 ------- ----- ----- Provision for income taxes at statutory rate $ 917 $ 681 $ 283 State tax provision net of federal benefit 233 99 41 Permanent non-deductible expenses 17 17 17 Expiration of tax credits 190 -- -- Change in valuation allowance (3,562) (702) (294) Alternative minimum tax -- 40 17 Other 242 (57) (34) ------- ----- ----- $(1,963) $ 78 $ 30 ======= ===== =====
36 37 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 The significant components of the net deferred tax asset at March 31, 1998 and March 28, 1997 follow (in thousands):
1998 1997 ---------------------------- ---------------------------- Current Non-current Current Non-current ---------------------------- ---------------------------- ASSETS: Net operating loss carryforwards $ 1,117 $ -- $ -- $ 2,375 Accounts receivable and unbilled costs and fees 259 -- 238 -- Inventory 175 -- 239 -- Deferred revenue 259 -- -- -- Accrued vacation 136 -- -- -- Accrued warranty costs 194 -- 114 -- Tax credits and other 211 205 333 263 ----------- ----------- ----------- ----------- 2,351 205 924 2,638 LESS: Valuation allowance -- -- (924) (2,638) ----------- ----------- ----------- ----------- Net deferred income tax assets $ 2,351 $ 205 $ -- $ -- =========== =========== =========== ===========
The change in the valuation allowance for the years ended March 31, 1998 and March 28, 1997 follows (in thousands):
1998 1997 ---- ---- Valuation allowance, beginning of year $ 3,562 $ 3,878 Decrease due to change in estimate of future taxable earnings (3,562) (316) -------- ---------- Valuation allowance, end of year $ -- $ 3,562 ======== ==========
A valuation allowance is provided when it is more likely than not that some portion of the net deferred tax asset will not be realized. All available evidence, both positive and negative, is considered by management in forming a conclusion regarding the need for a valuation allowance. Prior to 1998, the Company maintained a full valuation allowance for net operating loss carryforwards and other deferred tax amounts as a result of numerous negative factors including the Company's history of recurring losses, the Company's reliance on U.S. government agencies for sales, uncertainties related to the cost of new business initiatives and ongoing litigation. In the fourth quarter of 1998, management concluded that positive factors - consistent profitability, revenue growth, improved competitive position and stable business operations - outweighed negative factors. Based on these positive factors and the Company's expected taxable income, the valuation allowance was reduced to zero with a corresponding benefit recorded in the provision for income taxes for 1998. 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. 37 38 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 6. COMMON STOCK STOCK OPTION PLANS The Company has various stock option plans for directors, officers, and employees. During the year ended March 31, 1998, the Company instituted two new common stock option plans, the 1998 and 1997 Non-Qualified Stock Option Plans. These plans allow for grants of options in amounts determined by a committee of the Board of Directors. The Company has the following stock option plans outstanding as of March 31, 1998: 1966, 1968, 1970, 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; and 1994-95 Stock Option Plan for New Employees. As of March 31, 1998, 1,318,154 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, 1998, no shares have been reserved or granted under this plan. During the year ended March 28, 1997, the Company instituted two new 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. 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. PRO FORMA STOCK-BASED COMPENSATION EXPENSE In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, 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 1998, 1997 and 1996 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 1998 1997 1996 --------- ---------- ----------- Net income: As reported $ 4,661 $ 1,925 $ 802 Pro forma 3,200 591 486 Income per share - Basic: As reported $ 1.00 $ .43 $ .18 Pro forma .69 .13 .11 Income per share - Diluted: As reported $ .95 $ .40 $ .18 Pro forma .65 .12 .11
38 39 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 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 5.42% to 6.57%, 5.97% to 6.64%, 5.38% to 6.24% for 1998, 1997, and 1996, respectively, and expected life of 5 years, expected volatility of 38%, 30%, and 30% for 1998, 1997, and 1996, 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:
1998 1997 1996 ------------------------ ------------------------- ----------------------- 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 1,001,141 $ 10.16 557,404 $ 5.72 506,194 $ 5.07 Options granted 286,608 11.47 537,610 12.56 204,000 6.79 Options exercised (152,735) 5.79 (68,723) 5.32 (18,868) 4.67 Options expired (18,984) 10.99 (25,150) 8.06 (133,922) 5.93 -------- -------- --------- Options outstanding, end of year 1,116,030 9.59 1,001,141 10.16 557,404 5.72 ========= ========= ======= Options exercisable 652,830 7.90 529,241 6.21 412,404 5.16 ======= ======= ======= Options available for grant 1,318,154 681,538 577,404 ========= ======= ======= Weighted average fair value per share of options granted during the year 4.33 4.24 2.57
39 40 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 The following summarizes certain data for options outstanding at March 31, 1998:
Weighted Weighted Average Average Remaining Number of Range of Exercise Contractual Shares Exercise Prices Price Life ------ --------------- ----- ---- Options outstanding, end of year: 156,182 $2.88 - $ 5.38 $ 4.04 5.70 236,609 5.38 - 7.88 6.02 6.40 404,831 7.88 - 12.88 10.45 8.90 318,408 12.88 - 16.25 13.86 8.70 --------- 1,116,030 9.59 7.80 --------- Options Exercisable: 156,182 $2.88 - $ 5.38 $ 4.04 235,609 5.38 - 7.88 6.02 136,631 7.88 - 12.88 9.99 124,408 12.88 - 16.25 13.98 --------- 652,830 $ 7.90 =========
7. PRIVATE EQUITY PLACEMENT During fiscal 1996 the Company, in a private placement, sold 203,044 shares of common stock to a foreign investor for total consideration of $937,500. The Company received net proceeds of $856,250. The Company utilized the services of a financial services firm. As compensation, the financial services firm received a fee of $81,250 as well as stock purchase warrants allowing the firm to purchase up to 29,167 shares of the Company's stock at $6.25 per share. No expense was recognized related to the issued warrants as the exercise price of the warrants approximated fair value at the date of grant. 8. EMPLOYMENT AGREEMENT AND NOTE RECEIVABLE FROM OFFICER On January 12, 1994, the Company entered into an Employment Agreement with the Company's President and Chief Executive Officer. On September 29, 1994, the stockholders approved the issuance of non-qualified stock options for 80,000 shares (at $4.00 per share) to be exercised to varying extents at various times through its expiration on December 16, 2003. The excess of the quoted market price of the stock at the date of the award ($5.50) over the price stipulated by the Agreement ($4.00) has been recognized by the Company as compensation expense. This total amount has been amortized on a straight line basis over the length of a vesting period of three years, through September 1997. In addition, 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, 1998 no interest has been received or paid against this note. 40 41 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 9. RELATED PARTY TRANSACTIONS The Company receives engineering and management consulting services from a member of the Company's Board of Directors on a regular basis. In fiscal year 1998, 1997 and 1996 the Company paid approximately $256,750, $218,550, and $160,800, for services rendered, respectively. 10. BUSINESS SEGMENT INFORMATION Certain financial information by business segment for the fiscal years 1998, 1997, and 1996 is presented below (dollars in thousands):
Depreciation Net Sales Income/ Total Capital and and Contract (Loss) Business Segment Assets Expenditures Amortization Revenues Before Tax - ---------------- ------ ------------ ------------ -------- ---------- 1998 X-ray Products $ 19,894 $ 445 $ 165 $ 32,699 $ 7,201 Corporate 6,099 637 369 -- (4,599) Interest income -- -- -- -- 124 Interest expense -- -- -- -- (6) Other expense, net -- -- -- -- (22) ----------- --------- ------- --------------- ------------ $ 25,993 $ 1,082 $ 534 $ 32,699 $ 2,698 =========== ========= ======= =============== ============ 1997 X-ray Products $ 11,915 $ 298 $ 108 $ 28,479 $ 6,411 Corporate 3,599 432 244 -- (4,451) Interest income -- -- -- -- 121 Interest expense -- -- -- -- (10) Other expense, net -- -- -- -- (68) ----------- --------- ------- --------------- ------------ $ 15,514 $ 730 $ 352 $ 28,479 $ 2,003 =========== ========= ======= =============== ============ 1996 X-ray Products $ 10,081 $ 163 $ 50 $ 17,815 $ 4,385 Corporate 4,214 87 155 -- (3,514) Interest income -- -- -- -- 131 Interest expense -- -- -- -- (79) Other expense, net -- -- -- -- (91) ----------- --------- ------- --------------- ------------ $ 14,295 $ 250 $ 205 $ 17,815 $ 832 =========== ========= ======= =============== ============
Corporate assets consist primarily of cash and cash equivalents, prepaid expenses and fixed assets. 41 42 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 Approximately less than 1% of total revenues in 1998, 1997 and 1996, respectively, were not related to X-ray products. Approximately 77% in 1998, 78% in 1997, and 69% in 1996 of consolidated revenues were derived from prime and subcontracts with, or sales to, various United States federal and state governmental agencies. Sales to major customers (representing in excess of 10% of consolidated sales) consisted of X-ray Products segment sales of $11,670,000 to one customer in 1998, $11,531,000 and $3,463,000 to two customers, respectively, in 1997, and $2,854,000 to one customer in 1996. 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):
1998 1997 1996 ---- ---- ---- Domestic $ 26,799 $ 23,703 $ 14,526 Export 5,900 4,776 3,289 Percent of Export Revenue by Major Region: Middle East and Africa 59.7% 22.2% 20.9% Pacific Rim 28.3 60.9 39.2 Europe 8.9 4.4 24.4 All Other 3.1 12.5 5.5
11. 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 $21,000 in 1998, $10,000 in 1997, and $21,000 in 1996 under this deferred compensation plan. LITIGATION In June 1997, the Company settled a suit and countersuit against the Company's former Chief Executive Officer (the former CEO). As a result of the settlement, the Company's ownership rights in certain technology were affirmed, the Company gained rights to certain continuing developments made by the former CEO's current company (Annistech), and the Company agreed to license that technology back to Annistech. 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 42 43 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 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 does not expect the outcome of this litigation to have a material impact to its financial position or results of operations. 12. SUBSEQUENT EVENT 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. 43 44 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 28, 1997 Dollars in thousands, except per share amounts
1998 BY QUARTER 1997 BY QUARTER --------------- --------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th --- --- --- --- --- --- --- --- Net sales and contract revenues $ 7,532 $ 8,705 $ 7,900 $ 8,562 $ 6,699 $ 6,685 $ 7,127 $ 7,968 Gross profit 2,750 3,521 3,208 3,404 2,091 2,356 2,832 2,777 Operating income 616 677 756 553 398 463 515 584 Net income $ 610 $ 685 $ 751 $ 2,615(A) $ 406 $ 451 $ 503 $ 565 Net income per share - Basic (Note 1) $ .13 $ .15 $ .16 $ .55 $ .09 $ .10 $ .11 $ .12 - Diluted (Note 1) .13 .14 .15 .52 .09 .09 .10 .12
(A) Includes an adjustment of approximately $2.1 million recorded in the fourth quarter of 1998 (Note 5) to recognize the tax benefit associated with federal net operating loss carryforwards, and certain other deferred tax assets. 44 45 SCHEDULE II AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED MARCH 31, 1998, MARCH 28, 1997, AND MARCH 29, 1996 DESCRIPTION - ACCOUNTS RECEIVABLE Dollars in thousands
Balance at Charged to Deductions Balance Beginning Costs and from at End of Year Expenses Reserves of Year ------- -------- -------- ------- 1998 $ 148 $ 0 $ 32 $ 116 1997 $ 179 $ 178 $ 209 $ 148 1996 $ 96 $ 200 $ 117 $ 179
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 ------- -------- -------- ------- 1998 $ 462 $ 200 $ 113 $ 549 1997 $ 97 $ 384 $ 19 $ 462 1996 $ 72 $ 25 $ -- $ 97
45 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: July 1998 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 13 July 1998 Chief Financial Officer, Treasurer and /s/ Lee C. Steele Vice President, Finance 13 July 1998 - ------------------------------------- (Principal Financial Officer) Lee C. Steele 13 July 1998 /s/ Joseph Moffa Controller - ------------------------------------- (Principal Accounting Officer) Joseph Moffa /s/ Herman Feshbach Chairman of the Board - ------------------------------------- of Directors Herman Feshbach 13 July 1998 /s/ Al Gladen Director 13 July 1998 - ------------------------------------- Al Gladen Director 13 July 1998 - ------------------------------------- Hamilton W. Helmer /s/ Donald J. McCarren Director 13 July 1998 - ------------------------------------- Donald J. McCarren /s/ William E. Odom Director 13 July 1998 - ------------------------------------- William E. Odom /s/ Carl W. Vogt Director 13 July 1998 - ------------------------------------- Carl W. Vogt
46 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) (10)(b)(vii) Employment Agreement between the Company and Ralph S. Sheridan (dated as of September 26, 1996 filed herewith) 49-55
47 48
Exhibit Description of Exhibit (and Statement Page Number Number of Incorporation by Reference, If Applicable) (If Filed) - ------ --------------------------------------------- ---------- (10)(b)(viii) Loan and Security Agreement between the Company and Alfred Gladen as Agent (with forms of Promissory Note and Stock Purchase Warrants) (filed) as Exhibit 10(b)(vi) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by reference) (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 herewith 56-61 (10)(b)(xiv) Employment Agreement between the Company and Jeffrey A. Bernfeld dated January 31, 1996, filed herewith 62-65 (10)(b)(xv) Employment Agreement between the Company and Dr. Joseph Callerame dated May 6, 1998, filed herewith 66-68 (10)(b)(xvi) Employment Agreement between the Company and Alan H. Rutan dated June 4, 1996, filed herewith 69-71 (10)(b)(xvii) Employment Agreement between the Company and Lee C. Steele dated September 29, 1997, filed herewith 72-74 (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 75
48 EX-10.B(VII) 2 EMPLOYMENT AGREEMENT 9/26/96 RALPH S. SHERIDAN 1 EXHIBIT (10)(b)(vii) EMPLOYMENT AGREEMENT This Agreement is made as of September 26, 1996 by and between American Science and Engineering, Inc. (the "Company"), a Massachusetts corporation having its principal place of business in Billerica, Massachusetts, and Ralph S. Sheridan (the "Executive"). The Company desires to retain the services of the Executive, and the Executive is willing to render such services in accordance with the terms hereinafter set forth. The Board of Directors of the Company (the "Board") has by appropriate resolutions authorized the employment of the Executive as provided for in this Agreement. Accordingly, the Company and the Executive agree: ARTICLE I 1.1 Term. The term of this Agreement shall begin as of September 25, 1996 (the "Effective Date") and shall extend until September 25, 1999, unless earlier terminated pursuant to Article V (the "Term"). The Executive's employment under this Agreement may be extended or renewed solely by means of a written agreement signed by the Executive and a representative of the Company expressly authorized by the Board. ARTICLE II 2.1 President and Chief Executive Officer. The Executive shall be the President and the Chief Executive Officer of the Company, shall report solely and directly to the Board on all matters relating to the Executive's performance of his duties, and shall perform such duties and responsibilities on behalf of the Company and its subsidiaries as may be designated from time to time by the Board. The Executive shall devote his full business time and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and its subsidiaries and to the discharge of his duties and responsibilities hereunder. The Executive will use his best judgment not to accept any outside responsibilities that will jeopardize his ability to fulfill his responsibilities as President and Chief Executive Officer of the Company. One or more members of the Compensation Committee of the Board shall meet with the Executive at least annually during the Term, shall review with him the Company's performance to date, shall discuss his management accomplishments as well as any areas requiring improvement, and shall review his base compensation as provided in Section 3.1. 2.2 Director. Subject to the vote of the stockholders at subsequent annual meetings, the Executive shall continue to serve as a Director of the Company during the term of this Agreement. 49 2 ARTICLE III 3.1 Base Salary. For services rendered by the Executive under this Agreement during the Term, the Company shall pay or cause to be paid to the Executive, in accordance with the Company's normal payroll practices for senior executives of the Company, base salary ("Base Salary") for the initial year of employment at the annual rate of $240,000. The Base Salary will be formally reviewed on an annual basis by the Compensation Committee and increased in the ensuing years if the Committee determines that an increase is warranted. 3.2 Bonuses. In addition to Base Salary, the Executive shall be paid an annual bonus not to exceed $230,000 annually, which bonus will be established by the Compensation Committee (the "Bonus"). Promptly following the execution of this Employment Agreement, the Company and the Executive will meet to establish the performance goals upon which the award of the Bonus for the first year of employment pursuant to this Employment Agreement (the "First Bonus Period") will be determined. Seventy-five percent of the Bonus will be based upon an agreed-upon pre-tax income goal plus the amount expended by the Company in such year for research and development ("Target Income"). Target Income will be adjusted each year by the mutual consent of the Compensation Committee and the Executive. Twenty-five percent of the Bonus will be based on personal performance goals which will be established annually by the Compensation Committee and the Executive promptly after the execution of this Employment Agreement and revised on an annual basis in each subsequent year of this Employment Agreement. During each subsequent year of employment pursuant to the terms of this Employment Agreement ("Subsequent Bonus Periods"), the Chairman of the Board and the Executive shall meet periodically to discuss the Executive's progress concerning these goals. Promptly after the end of each such Subsequent Bonus Period, the Compensation Committee shall meet to discuss the Executive's performance with regard to such goals and shall, in its discretion, determine the amount, if any, of the Bonus to be paid to the Executive for such Subsequent Bonus Period. For the purpose of this determination, the goals shall be laddered so that attainment of some, but not all, goals will give rise to the payment of a partial Bonus. 3.3 Stock Options. Grant of Unconditional Option. The Company grants to the Executive a non-statutory stock option (the "Unconditional Option"), in the form of the stock option agreement attached hereto as Exhibit B, to purchase in the aggregate 225,000 shares of the Company's Common Stock. The purchase price per share of the 225,000 shares covered by the Unconditional Option shall be the fair market value of the stock as of the date of the execution of the stock option agreement granting the Unconditional Option. The option to acquire the first seventy five thousand shares will vest on the first anniversary date of the commencement of this Employment Agreement. The option to acquire an additional 75,000 shares will vest on the second anniversary and a final option to acquire 75,000 shares will vest on the third anniversary of this Employment Agreement. The stock options shall be subject to termination only if employment is terminated by the Company for Cause or if the Executive voluntarily requests termination prior to September 25, 1999 for reasons other than for Good Reason. All stock options will immediately vest if the Executive terminates employment for Good Reason as defined in Article V 5.1(b) 50 3 herein or if the Company or all or substantially all of its assets or stock are acquired by a third party or by merger, consolidation or otherwise. 3.4 Securities Act of 1933. The Company agrees to register the shares subject to the stock options referred to in this Article III pursuant to the Securities Act of 1933, as promptly as practicable. ARTICLE IV 4.1 Benefits During the Term. During the Term, the Executive will be covered by and receive benefits not specifically dealt with in this Agreement (such as the payment provisions set forth in Article V in the event of termination of employment, which are intended to be exclusive) under the benefit plans and programs maintained by the Company from time to time for its senior executives. The Executives shall also be entitled to such other perquisites of office as are generally provided from time to time by the Company to its senior executive officers. The Executive shall be reimbursed for all reasonable out-of-pocket expenses reasonably incurred by him in the performance of his duties hereunder, upon submission of appropriate documentation in accordance with the Company's written policies. 4.2 Automobile. The Company shall provide the Executive, at his request, with an automobile for his use during the Term. The Company will pay for all expenses associated with the Executive's business use of the automobile. At the end of the Term, the Executive shall return the automobile to the Company in substantially the same condition as on the date he first received it, reasonable wear and tear excepted. ARTICLE V 5.1 Termination by the Company without Cause or by the Executive for Good Reason. (a) The Company may, upon written notice to the Executive, immediately terminate the Executive's employment hereunder without Cause. For purposes of this Article V, "Cause" shall mean: (i) the Executive's willful and continuing failure to perform his duties in the course of his employment under this Agreement, which failure is not cured by the Executive within 30 days after notice specifically describing such failure is provided in writing by the Company to the Executive; or (ii) the conviction of the Executive for, or his plea of nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude. (b) The Executive may, upon 15 days' written notice to the Company, terminate his employment hereunder for Good Reason. For purposes of this Article V, "Good Reason" shall mean: 51 4 (i) the assignment of the Executive of any duties, inconsistent in any respect with the Executive's position as the President and Chief Executive Officer of the Company or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company within 30 days after receipt of written notice thereof given by the Executive, provided, however, that any change or diminution of the business of the Company or of any subsidiary or subsidiaries of the Company, including without limitation the sale or transfer of such subsidiaries, or any or all of their assets, shall not constitute "Good Reason"; (ii) any failure of the Company to comply with any of the provisions of the Employment Agreement, other than an insubstantial failure not occurring in bad faith and which is remedied by the Company within 30 days after receipt of written notice thereof given by the Executive; (iii) failure of the Company and the Executive, bargaining in good faith, to agree upon performance goals pursuant to Section 3.2(b) and an annual Base Salary for the second and third year of this contract; (iv) any failure of the Company to obtain a satisfactory agreement from any successor to all or substantially all of the business or assets of the Company to assume and agree to perform this Agreement; or (v) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by the Employment Agreement. (c) In case of any termination of the Executive's employment hereunder without Cause or for Good Reason (as defined above), the Company shall pay to the Executive (or in the event of his death, his designated beneficiary or his estate, as the case may be): (1) a sum equal to the Executive's then annual Base Salary in cash payable at the times such sum would have been paid to the Executive if he had remained in the employ of the Company and was entitled to receive such sum in the form of Base Salary during the 12-month period following his termination of employment, and (2) the amount the Executive earned in Bonus payments and, if such termination occurs prior to September 25, 1997, the value of any stock received in the year previous to such termination, payable at such time such Bonus would have been paid had the Executive remained in the employ of the Company. In addition, any unvested stock options outstanding on the date of the Executive's termination of employment shall become vested and exercisable in accordance with their terms. The failure of the Company to extend the term of this Employment Agreement or any extension of this Employment Agreement for an additional term of not less than one year on terms no less favorable to the Company than those contained herein and if requested by the Executive shall be deemed a termination for Good Reason requiring the Company to make the severance and benefits to the Executive as described in this Section 5.1(c). 5.2 Termination by the Company for Cause or by the Executive Other Than for Good Reason. During the Term, the Company, by action of the board, may terminate the Executive's 52 5 employment hereunder for Cause by written notice to the Executive stating in detail the reasons for such termination. During the Term, the Executive may, by written notice to the Board, terminate his employment hereunder other than for Good Reason. In the event of any such termination for Cause or other than for Good Reason (and other than by reason of his death or disability), the Executive shall not be entitled to any unpaid bonus that may have been earned through such date, nor shall he be entitled to exercise the Unconditional Option which have not been vested. 5.3 Termination for Disability. (a) The Company may terminate the Executive's employment hereunder, upon notice to him, in the event that he becomes disabled through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder for any consecutive 60 day period. (b) If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of his duties hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician mutually acceptable to the Company and the Executive or his guardian to determine whether the Executive is so disabled, and such determination shall for the purposes of this Agreement be conclusive of the issue. In the event that a physician cannot be selected by mutual agreement, a physician shall be appointed by the Massachusetts Medical Society. (c) If the Executive's employment hereunder is terminated as the result of his disability, the Executive will receive his Base Salary through the date of termination, together with any unpaid Bonus that may have been earned through such date, but shall otherwise look solely to the Company's disability insurance policy or policies for compensation (except that any waiting period for eligibility purposes shall be waived by the Company). 5.4 Termination in the Event of Death. In the event of the Executive's death during the Term, his employment hereunder shall be deemed to have terminated for all purposes of this Agreement on his date of death and neither his designated beneficiary nor his estate shall be entitled to any of the compensation or benefits provided for herein, other than the Executive's Base Salary, and any unpaid Bonus earned by the Executive, through his date of death (it being understood that his designated beneficiary or estate, as the case may be, shall be entitled to receive the life insurance benefits available under the Company's executive life insurance policies), and to exercise the Unconditional Option to the extent exercisable on his date of death, within one year of his date of death, but not later than the expiration date of such Option. ARTICLE VI 6.1 Designation of a Beneficiary or Beneficiaries. The Executive may designate in a writing filed with the Company one or more persons (including his estate) as the beneficiary or beneficiaries of the benefits provided for under the Agreement after the Executive's death. The Executive may change his designation of beneficiary or beneficiaries from time to time, and the 53 6 last designation in writing filed with the Company prior to his death will control. If the Executive has failed to file a designation of beneficiary at the time of the Executive's death, or if all designated beneficiaries have predeceased him, the amounts payable under this Agreement shall be paid to the Executive's estate. ARTICLE VII 7.1 Notices. All notices required by this Agreement shall be in writing and delivered by hand, by overnight courier against receipt, by registered or certified mail, postage prepaid, or by telephonic facsimile transmission duly acknowledged, and, in the case of the Executive, addressed to the Executive at 79 Byron Road, Weston, MA 02193, or, in the case of the Company, to its principal office, addressed to the attention of the Clerk. Either party may from time to time designate a new address by notice given in accordance with this Paragraph 7.1. 7.2 Assignment. The Company may not assign all or any part of its obligation under this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, unless the context requires otherwise, the "Company" shall mean the Company as defined above or any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law, or otherwise. This Agreement shall inure to the benefit of and be enforceable by and binding upon (i) any such successor and (ii) the Executive's personal or legal representatives, executors, administrators and designated beneficiaries. 7.3 Entire Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior oral and written agreements, understandings and commitments between the parties relating to this Agreement. No amendment to this Agreement shall be made except by a written instrument signed by both parties. 7.4 Proprietary Information and Non Competition. The Executive acknowledges and stipulates that, in the performance of his duties hereunder, the Executive is entrusted by the Company and its subsidiaries with confidential and secret information of a proprietary nature, including, but not limited to scientific data, financial and statistical information regarding affairs of the Company and its subsidiaries, supplier and subcontractor lists, price and cost information, business plans and programs, expansion plans, data, methods, techniques, marketing data, designs and know-how, developed or obtained by the Company or its subsidiaries (collectively, "Proprietary Information"). The Executive may not at any time use, or cause or permit others to use, the Proprietary Information except in the performance of his duties for the Company and shall not directly or indirectly disclose at any time either during the Term or for a period of two years thereafter any such Proprietary Information to any third party other than in the course of the performance of his duties for the Company. "Proprietary Information" shall not include any (i) information which is part of the public domain (other than by act of the Executive), or (ii) any information required to be disclosed by law. 54 7 Executive agrees that, subsequent to the termination of this Employment Agreement, unless terminated by the Company without Cause or by the Executive for Good Reason, Executive shall not: (i) request, cause or encourage any person or entity to cancel, terminate or refuse to enter into any business relationship with the Company; (ii) during the one-year period following such termination solicit or encourage, directly or indirectly, any employee of the Company to leave the employment of the Company; or (iii) during the one-year period following such termination either engage in any business or undertake employment or consulting services in the area of x-ray detection devices which would directly compete with devices then manufactured and/or marketed by the Company. The provisions of this Section 7.4 shall continue in effect after the Term. 7.5 Partial Invalidity. If for any reason any provision of this Agreement shall be held invalid in whole or in part, such invalidity shall not affect such provision to the extent not so held invalid, nor any other provisions of this Agreement not held so invalid, and such provisions and all other such provisions shall to the full extent be consistent with law continue in full force and effect. 7.6 Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 7.7 Governing Law. This Agreement shall be construed and enforced under and be governed in all respects by the law of the Commonwealth of Massachusetts, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the Company has caused this instrument to be executed on its behalf by a duly authorized officer and the Executive has executed this instrument, all as of the date set forth above. AMERICAN SCIENCE AND ENGINEERING, INC. By: /s/ Jeffrey Bernfeld ---------------------------------- Jeffrey Bernfeld, Vice President /s/ Ralph S. Sheridan ---------------------------------- Ralph S. Sheridan 55 8 EXHIBIT B AMERICAN SCIENCE AND ENGINEERING, INC. NON-STATUTORY STOCK OPTION AGREEMENT Covering 225,000 Shares of Common Stock AGREEMENT made as of this 24th day of October, 1996, by and between AMERICAN SCIENCE AND ENGINEERING, INC., a corporation duly organized under the laws of The Commonwealth of Massachusetts (the "Company"), and Ralph S. Sheridan, the President and Chief Executive Officer of the Company (the "Optionee"). WITNESSETH THAT: WHEREAS, the Company and the Optionee have entered into an Employment Agreement dated as of September 25, 1996 (the "Employment Agreement"), providing among other things for the employment of the Optionee as President and Chief Executive Officer of the Company and the grant of non-statutory stock options to the Optionee; and WHEREAS, the Board of Directors of the Company has appointed the Compensation Committee to administer this Agreement (the Board of Directors, such committee or any successor to such committee being hereinafter referred to as the "Board"); NOW, THEREFORE, for and in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, it is agreed as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee a non-statutory stock option (the "Option") to purchase 225,000 shares of its common stock at $14.00 per share, being 100% of the fair market value of such stock on the date hereof. The Optionee's right to purchase said stock shall be exercised in the manner and subject to the terms and conditions hereinafter provided. The Company shall, at all times while the Option is in force, reserve such number of shares of common stock as will be sufficient to satisfy the requirements of this Agreement. 2. TIME OF EXERCISE OF THE OPTION. (a) Subject always to the provisions of Sections 2(b) and 3 and the terms and conditions of the Employment Agreement: (i) the Option may not be exercised prior to September 25, 1997; and (ii) on and after September 25, 1997, the Option may be exercised as to seventy-five thousand shares covered thereby. On and after September 25, 1998, the Option may be exercised as to an additional seventy-five thousand shares covered thereby. On and after September 25, 1999, the Option may be exercised as to the remaining seventy-five thousand shares covered thereby. B-1 9 (b) Notwithstanding Section 2(a), the Option may be exercised as to all of the shares covered thereby upon the occurrence of a Change in Control of the Company. For the purposes of this subsection 2(b), a "Change in Control" of the Company shall be deemed to have occurred if: (i) any person (as defined in Section 13(d) or 14(d)(2) of the 1934 Act) shall have become the beneficial owner of 50 percent or more of the combined voting power of the Company's voting securities; (ii) the Continuing Directors and the Optionee shall have ceased for any reason to constitute a majority of the Board of Directors of the Company. For this purpose, a "Continuing Director" shall include member of the Board of Directors of the Company as of September 26, 1996 and any person nominated for election to the Board of Directors of the Company by a vote of a majority of the then Continuing Directors; (iii) the stockholders approve the complete liquidation or dissolution of the Company, or (iv) the stockholders approve by the requisite vote any of the following transactions: (x) a merger or consolidation of the Company (except for a merger in respect of which no vote of the stockholders of the Company is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary or the Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting stock of the Company. (c) Notwithstanding Section 2(a) and subject to Section 4 hereof, the Option may be exercised as to all of the shares covered thereby in the event that the Optionee's employment shall have been terminated without Cause or for Good Reason as provided by Section 5.1 of the Employment Agreement. (d) Notwithstanding any of the foregoing, the Option shall not be exercisable after the expiration of 10 years from the date hereof. 3. METHOD OF EXERCISE. (a) Stock purchased under the Option shall at the time of exercise be paid in full. The Option may be exercised from time to time by written notice to the Company stating the number of shares with respect to which the Option is being exercised, and the time of the delivery thereof, which time shall be at least five business days after the giving of such notice unless an earlier B-2 10 date shall have been mutually agreed upon. At the time specified in such notice, the Company shall, without transfer or issue tax to the Optionee (or other person entitled to exercise the Option), deliver to the Optionee (or other person entitled to exercise the Option) at the main office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such shares (as the number of such shares may be reduced subject to subsection (c) below) out of theretofore authorized but unissued shares or reacquired shares of its common stock, as the Company may elect, against payment of the Option price in full for the number of shares to be delivered by certified or bank cashier's check or the equivalent thereof acceptable to the Company (including, but not limited to, shares of capital stock of the Company); provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable listing requirements of any national securities exchange. If the Optionee (or other person entitled to exercise the Option) fails to accept delivery of and pay for all or any part of the number of shares specified in such notice upon tender of delivery thereof, his right to exercise the Option with respect to such undelivered shares may be terminated by the Board. (b) Promptly upon receipt of the written notice provided for in subsection (a) above, the Board shall, with the assistance of appropriate employees of the Company, determine if any portion of such intended exercise (the "Disallowance Portion") may reasonably be expected to result in receipt of compensation by the Optionee as to which the Company will not be allowed to claim a deduction in respect of the Company's taxable year during which such exercise occurs, when the amount of remuneration attributable to such exercise is taken together with the Optionee's base salary and the reasonably likely cash and stock bonuses payable to him in respect of such taxable year, pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. (c) The Board shall promptly notify the Optionee of its determination as to the Disallowance Portion, and, subject to subsection (d) below, the exercise contemplated by the written notice in subsection (a) shall be deemed to be reduced by the number of shares in the Disallowance Portion. (d) Notwithstanding the foregoing, in the event of a Change in Control (as defined in Section 2(b), the Disallowance Portion shall be deemed to be zero (0) shares. 4. TERMINATION OF EMPLOYMENT. The Optionee may, at any time within three months after the date of termination of his employment with the Company or any of its subsidiaries for any reason except death, but not later than the date of expiration of the Option, exercise the Option to the extent he was entitled to do so on the date of termination; provided that the Optionee shall not be deemed to be so entitled on the date of termination of his employment if he shall have been terminated for Cause or other than for Good Reason as provided by Section 5.2 of the Employment Agreement. If the Option or any portion of the Option is not so exercised, or if the Optionee shall be deemed not to be entitled to exercise it or any portion thereof, the Option or portion thereof shall terminate. However, the Option shall not be affected by any change in the duties or position of the Optionee (including transfer to or from B-3 11 a subsidiary) so long as the Optionee continues in the employ of the Company or one of its subsidiaries. Nothing in this Agreement shall confer on the Optionee any right to continue in the employ of the Company or its subsidiaries; affect the right of the Company or its subsidiaries to terminate the Optionee's employment at any time; or be deemed a waiver or modification of any provision contained in the Employment Agreement of any other agreement between the Optionee and the Company or any such subsidiary. 5. EXERCISE BY REPRESENTATIVE, ETC. If the Optionee dies while in the employ of the Company or its subsidiaries or within three months after termination of employment (except termination for Cause or other than for Good Reason, as provided by Section 5.2 of the Employment Agreement), the person or persons to whom the Option is transferred by will or the laws of descent and distribution may, at any time within one year after the date of death but not later than the date of expiration of the Option, exercise the Option to the extent the Optionee was entitled to do so on the date of his death. If the Option or any portion of the Option of the deceased Optionee is not so exercised, it shall terminate. 6. NON-TRANSFERABILITY OF OPTION. The Option may not be transferred except by will or by the laws of the descent and distribution nor may it be otherwise assigned, transferred, pledged, hypothecated or disposed of in any way (by operation of law or otherwise) and it shall not be subject to execution, attachment or similar process. During the lifetime of the Optionee, the Option may be exercised only by the Optionee or the Optionee's duly appointed guardian or personal representative. 7. CHANGES IN COMMON STOCK. In the event of any reorganization, recapitalization, stock split, stock dividend, merger, consolidation, combination of shares or other change affecting the Company's common stock, the Board shall make adjustments in the number and kind of securities to be subject to the Option, such adjustments to be consistent with adjustments made with respect to options held by other employees and directors of the Company. Any such adjustment made by the Board shall be conclusive. This Agreement shall not affect the right of the Company or any of its subsidiaries to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, or liquidate, wind up or otherwise reorganize. 8. RESTRICTION ON ISSUANCE OF SHARES. The Company shall not be obligated to sell or issue any shares pursuant to the Option unless the shares with respect to which the Option is being exercised are at that time effectively registered or exempt from registration under the Securities Act of 1933, as amended. 9. RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of issuance of a stock certificate to the Optionee for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. B-4 12 10. WITHHOLDING. The Company or any subsidiary that employs the Optionee shall have the right to deduct any sums that federal, state or local tax law requires to be withheld with respect to the exercise of the Option. In the alternative, the Optionee or other person exercising the Option may elect to pay such sums to the employer corporation either by check or with capital stock of the Company by delivering written notice of that election to the Clerk of the Company no less than 30 days nor more than 60 days prior to exercise. There is no obligation hereunder that the Optionee be advised of the amount which the employer corporation or the Company will be required to withhold. 11. INTERPRETATION OF PLAN AND OPTION. As used herein the term "subsidiary of the Company" shall mean a subsidiary corporation as defined in Section 425 of the Internal Revenue Code of 1986. In all other respects, questions of interpretation and application of this Agreement shall be determined by a majority of the Board, and the determinations of such majority shall be final and binding upon all persons. EXECUTED as a sealed instrument at Cambridge, Massachusetts, as of the date appearing in the first paragraph of this Agreement. AMERICAN SCIENCE AND ENGINEERING, INC. By: /s/ Jeffrey Bernfeld -------------------------------- Jeffrey Bernfeld Vice President & General Counsel /s/ Ralph S. Sheridan -------------------------------- Ralph S. Sheridan B-5 EX-10.B(VIII) 3 1998 NON-QUALIFIED STOCK OPTION PLAN 1 EXHIBIT (10)(b)(xiii) AMERICAN SCIENCE AND ENGINEERING, INC. 1998 NON-QUALIFIED STOCK OPTION PLAN SECTION I. PURPOSE OF THE PLAN. The purposes of this American Science and Engineering, Inc. 1998 Non-Qualified Stock Option Plan (the "1998 Plan") are (i) to provide long-term incentives and rewards to those key employees (the "Employee Participants") of American Science and Engineering, Inc. (the "Corporation") and its subsidiaries (if any), and any other persons (the "Non-employee Participants") who are in a position to contribute to the long-term success and growth of the Corporation and its subsidiaries, (ii) to assist the Corporation in retaining and attracting executives and key employees with requisite experience and ability, and (iii) to associate more closely the interests of such executives and key employees with those of the Corporation's stockholders. SECTION II. DEFINITIONS. "Common Stock" is the $.66 2/3 par value common stock of the Corporation. "Committee" is defined in Section III, paragraph (a). "Corporation" is defined in Section I. "Employee Participants" is defined in Section I. "Fair Market Value" of any property is the value of the property as reasonably determined by the Committee. "1998 Plan" is defined in Section I. "Non-employee Participants" is defined in Section I. "Non-qualified Option" is a Stock Option which does not qualify as an Incentive Stock Option or for which the Committee provides, in the terms of such option and at the time such option is granted, that the option shall not be treated as an Incentive Stock Option. "Parent Corporation" has the meaning provided in Section 424(e) of the Code. 56 2 "Participants" are all persons who are either Employee Participants or Non-employee Participants. "Permanent and Total Disability" has the meaning provided in Section 22(e)(3) of the Code. "Rule 16b-3" means Securities and Exchange Commission Rule 16b-3. "Section 16" means Section 16 of the Securities Exchange Act of 1934, as amended, or any similar or successor statute, and any rules, regulations, or policies adopted or applied thereunder. "Stock Options" are rights granted pursuant to this 1998 Plan to purchase shares of Common Stock at a fixed price. "Subsidiary Corporation" has the meaning provided in Section 424(f) of the Code. SECTION III. ADMINISTRATION. (a) The Committee. This 1998 Plan shall be administered by the Board of Directors or by a compensation committee consisting solely of two or more "non-employee directors", as defined in Rule 16b-3, who shall be designated by the Board of Directors of the Corporation (the administering body is hereafter referred to as the "Committee"). The Committee shall serve at the pleasure of the Board of Directors, which may from time to time, and in its sole discretion, discharge any member, appoint additional new members in substitution for those previously appointed and/or fill vacancies however caused. A majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. No person shall be eligible to be a member of the Committee if that person's membership would prevent the plan from complying with Section 16, if applicable to the Corporation. (b) Authority and Discretion of the Committee. Subject to the express provisions of this 1998 Plan and provided that all actions taken shall be consistent with the purposes of this 1998 Plan, and subject to ratification by the Board of Directors only if required by applicable law, the Committee shall have full and complete authority and the sole discretion to: (i) determine those persons who shall constitute key employees eligible to be Employee Participants; (ii) select the Participants to whom Stock Options shall be granted under this 1998 Plan; (iii) determine the size and the form of the Stock Options, if any, to be granted to any Participant; (iv) determine the time or times such Stock Options shall be granted including the grant of Stock Options in connection with other awards made, or compensation paid, to the Participant; (v) estab- -57- 3 lish the terms and conditions upon which such Stock Options may be exercised and/or transferred, including the exercise of Stock Options in connection with other awards made, or compensation paid, to the Participant; (vi) make or alter any restrictions and conditions upon such Stock Options and the Stock received on exercise thereof, including, but not limited to, providing for limitations on the Participant's right to keep any Stock received on termination of employment; (vii) determine whether the Participant or the Corporation has achieved any goals or otherwise satisfied any conditions or requirements that may be imposed on or related to the exercise of Stock Options; and (viii) adopt such rules and regulations, establish, define and/or interpret these and any other terms and conditions, and make all determinations (which may be on a case-by-case basis) deemed necessary or desirable for the administration of this 1998 Plan. (c) Applicable Law. This 1998 Plan and all Stock Options shall be governed by the law of the state in which the Corporation is incorporated. SECTION IV. TERMS OF STOCK OPTIONS. (a) Agreements. Stock Options shall be evidenced by a written agreement between the Corporation and the Participant awarded the Stock Option. This agreement shall be in such form, and contain such terms and conditions (not inconsistent with this 1998 Plan) as the Committee may determine. The agreement shall include the following or a similar statement: "This stock option is not intended to be an Incentive Stock Option, as that term is described in Section 422 of the Internal Revenue Code of 1986, as amended." (b) Term. Stock Options shall be for such periods as may be determined by the Committee. (c) Purchase Price. The purchase price of shares purchased pursuant to any Stock Option shall be determined by the Committee, and shall be paid by the Participant or other person permitted to exercise the Stock Option in full upon exercise, (i) in cash, (ii) by delivery of shares of Common Stock (valued at their Fair Market Value on the date of such exercise), (iii) any other property (valued at its Fair Market Value on the date of such exercise), or (iv) any combination of cash, stock and other property, with any payment made pursuant to subparagraphs (ii), (iii) or (iv) only as permitted by the Committee, in its sole discretion. In no event will the purchase price of Common Stock be less than the par value of the Common Stock. (d) Restrictions. At the discretion of the Committee, the Common Stock issued pursuant to the Stock Options granted hereunder may be subject to restrictions on vesting or transferability. For the purposes of this limitation, options shall be taken into account in the order granted. -58- 4 (e) Withholding of Taxes. Pursuant to applicable federal, state, local or foreign laws, the Corporation may be required to collect income or other taxes upon the grant of a Stock Option to, or exercise of a Stock Option by, a holder. The Corporation may require, as a condition to the exercise of a Stock Option, or demand, at such other time as it may consider appropriate, that the Participant pay the Corporation the amount of any taxes which the Corporation may determine is required to be withheld or collected, and the Participant shall comply with the requirement or demand of the Corporation. In its discretion, the Corporation may withhold shares to be received upon exercise of a Stock Option if it deems this an appropriate method for withholding or collecting taxes. (f) Securities Law Compliance. Upon exercise (or partial exercise) of a Stock Option, the Participant or other holder of the Stock Option shall make such representations and furnish such information as may, in the opinion of counsel for the Corporation, be appropriate to permit the Corporation to issue or transfer Stock in compliance with the provisions of applicable federal or state securities laws. The Corporation, in its discretion, may postpone the issuance and delivery of Stock upon any exercise of this Option until completion of such registration or other qualification of such shares under any federal or state laws, or stock exchange listing, as the Corporation may consider appropriate. Furthermore, the Corporation is not obligated to register or qualify the shares of Common Stock to be issued upon exercise of a Stock Option under federal or state securities laws (or to register or qualify them at any time thereafter), and it may refuse to issue such shares if, in its sole discretion, registration or exemption from registration is not practical or available. The Corporation may require that prior to the issuance or transfer of Stock upon exercise of a Stock Option, the Participant enter into a written agreement to comply with any restrictions on subsequent disposition that the Corporation deems necessary or advisable under any applicable federal and state securities laws. Certificates of Stock issued hereunder shall bear a legend reflecting such restrictions. (g) Right to Stock Option. No employee of the Corporation or any other person shall have any claim or right to be a participant in this 1998 Plan or to be granted a Stock Option hereunder. Neither this 1998 Plan nor any action taken hereunder shall be construed as giving any person any right to be retained in the employ of the Corporation. Nothing contained hereunder shall be construed as giving any person any equity or interest of any kind in any assets of the Corporation or creating a trust of any kind or a fiduciary relationship of any kind between the Corporation and any such person. As to any claim for any unpaid amounts under this 1998 Plan, any person having a claim for payments shall be an unsecured creditor. (h) Indemnity. Neither the Board of Directors nor the Committee, nor any members of either, nor any employees of the Corporation or any parent, subsidiary, or other affiliate, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with their responsibilities with respect to this 1998 Plan, and the Corporation hereby -59- 5 agrees to indemnify the members of the Board of Directors, the members of the Committee, and the employees of the Corporation and its parent or subsidiaries in respect of any claim, loss, damage, or expense (including reasonable counsel fees) arising from any such act, omission, interpretation, construction or determination to the full extent permitted by law. (i) Participation by Foreigners. Without amending this 1998 Plan, the Committee may modify grants made to participants who are foreign nationals or employed outside the United States so as to recognize differences in local law, tax policy, or custom. SECTION V. AMENDMENT AND TERMINATION: ADJUSTMENTS UPON CHANGES IN STOCK. The Board of Directors of the Corporation may at any time, and from time to time, amend, suspend or terminate this 1998 Plan or any portion thereof, provided that no amendment shall be made without approval of the Corporation's stockholders if such approval is necessary to comply with any applicable rules or regulations of the Securities and Exchange Commission, including Rule 16b-3 (or any successor rule thereunder), or the rules and regulations of any exchange or stock market on which the Corporation's securities are listed or quoted. Except as provided herein, no amendment, suspension or termination of this 1998 Plan may affect the rights of a Participant to whom a Stock Option has been granted without such Participant's consent. If there shall be any change in the Common Stock or to any Stock Option granted under this 1998 Plan through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Corporation, appropriate adjustments may be made by the Committee (or if the Corporation is not the surviving corporation in any such transaction, the Board of Directors of the surviving corporation, or its designee) in the aggregate number and kind of shares subject to this 1998 Plan, and the number and kind of shares and the price per share subject to outstanding options. In connection with the foregoing, the Committee may issue new Stock Options in exchange for outstanding Stock Options. SECTION VI. SHARES OF STOCK SUBJECT TO THE PLAN. The number of shares of Common Stock that may be the subject of awards under this 1998 Plan shall not exceed an aggregate of 300,000 shares. Shares to be delivered under this 1998 Plan may be either authorized but unissued shares of Common Stock or treasury shares. Any shares subject to an option hereunder which for any reason terminates, is cancelled or otherwise expires unexercised, and any shares reacquired by the Corporation due to restrictions imposed on the shares, shares returned because payment is made hereunder in stock of equivalent value rather than in cash, and/or shares reacquired from a recipient for any other reason shall, at such time, no longer count towards the aggregate number of shares which have been the subject of Stock Options issued hereunder, and such number of shares shall be subject to further awards under this 1998 Plan, provided, first, that the total number of shares then eligible for award under -60- 6 this 1998 Plan may not exceed the total specified in the first sentence of this Section VI, and second, that the number of shares subject to further awards shall not be increased in any way that would cause this 1998 Plan or any Stock Option to not comply with Section 16, if applicable to the Corporation. SECTION VII. EFFECTIVE DATE AND TERM OF THIS PLAN. The effective date of this 1998 Plan is 1998 (the "Effective Date") and awards under this 1998 Plan may be made for a period of ten years commencing on the Effective Date. The period during which a Stock Option may be exercised may extend beyond that time as provided herein. DATE OF APPROVAL BY STOCKHOLDERS: N/A DATE OF APPROVAL BY BOARD OF DIRECTORS: , 1998 -61- EX-10.B(XIV) 4 EMPLOYMENT AGREEMENT 1/31/98 JEFFREY A. BERNFIELD 1 Exhibit (10)(b)(xiv) EMPLOYMENT AGREEMENT This Agreement is made as of January 31, 1996 by and between American Science and Engineering, Inc. (the "Company"), a Massachusetts corporation having its principal place of business in Billerica, Massachusetts, and Jeffrey A. Bernfeld (the "Executive"). The Company desires to retain the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: 1. The Company agrees to hire the Executive as, and the Executive agrees to accept and perform the duties of, Vice President, General Counsel and Clerk of the Company. Management will recommend to the Board of Directors of the Company that Executive be elected to the positions at the next meeting of the Board. 2. The Executive will initially receive a Base Salary at the annual rate of $120,000, payable not less frequently than monthly. The Executive's Base Salary may be increased at the discretion of the President. 3. The Executive will participate in the Company's Compensation Plan for Senior Management and will initially be eligible for an annual cash bonus of up to $20,000, assuming that the Executive achieves his individual goals and the Company achieves its target for pre-tax earnings. The President of the Company, in consultation with the Executive, will establish individual goals for the Executive promptly after the initiation of his employment at the Company. Goals will relate to accomplishments during the first six months, and new goals will be established every six months thereafter. This bonus will be distributed on an annual basis. If the Company exceeds its pre-established target(s) by a defined amount, the Executive's bonus may be up to 33% higher. 4. The Company hereby agrees to grant the Executive stock options entitling him to purchase up to 24,000 shares of the company's stock. These will be non-qualified stock options, vesting at the rate of 6,000 shares on the Executive's first day as an employee of the Company and then 6,000 shares at the end of each of the first three years of employment. The price of the options will be the market close price on the American Stock Exchange on the Executive's first day of employment. 5. The Executive will be eligible to participate in the Company's full corporate officer benefit package, including reduced-contribution full medical and dental coverage and company-paid life insurance at four times his base salary. 6. The Executive will be eligible for company-paid vacation according to established policy at the rate of not less than three weeks per year. 62 2 7. (a) The term of the Executive's employment shall be from March 1, 1996, through February 28, 1999. The Company may terminate the Executive prior to February 28, 1999 only for Cause (as defined below). (b) For the purposes of this Agreement, "Cause" shall mean: (i) the determination by the President of the Company, in agreement with the Board of Directors, that the Executive has failed to perform his duties in the course of his employment under this Agreement as expressly instructed by the President/CEO; or (ii) the final conviction of the Executive for, or his plea of nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude. 8. (a) Notwithstanding the provisions hereof permitting termination of the Executive in certain circumstances, the Company shall pay to the Executive the "Severance Payment" in the event that the Executive is terminated by the Company within thirty (30) days prior to or twelve (12) months after the occurrence of a "Change of Control," as defined below. The Severance Payment shall be made at the time of such termination. (b) The "Severance Payment" shall be a one-time payment equal to the higher of: (i) the annual rate of the Executive's base salary in effect one month prior to the occurrence of the Change of Control, or (ii) the annual rate of the Executive's base salary in effect at the time of such termination. The Severance Payment shall also include the continuation of all benefits received by the Executive prior to termination for a period equal to the lesser of one year or the start of employment by the Executive, in which he receives substantially similar benefits. (c) A "Change of Control" shall be deemed to have occurred if: (i) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall have become the beneficial owner of 50 percent or more of the combined voting power of the Company's voting securities; (ii) the Continuing Directors shall have ceased for any reason to constitute a majority of the Board of Directors of the Company. For this purpose, a "Continuing Director" shall include member of the Board of Directors of the Company as of the date of this Agreement and any person nominated for election to the Board of Directors of the Company by a vote of the majority of the then Continuing Directors; (iii) the stockholders approve the complete liquidation or dissolution of the Company, or (iv) the stockholders approve by the requisite vote any of the following transactions: (A) a merger or consolidation of the Company (except for a merger in respect of which no vote of the stockholders of the Company is required); (B) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary or the Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the 63 3 assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company immediately prior to the transaction; or (C) a tender or exchange offer for 50% or more of the outstanding voting stock of the Company. 9. If the Executive is terminated for any reason other than Cause or in connection with a Change of Control ("Termination for Convenience") the Executive shall receive an amount equal to the greater of the amount that would be due under the Company's then-current severance policy, if any, or six months of his then-current Base Pay, payable on the last date of his employment. In case of Termination for Convenience, the Executive shall be entitled to a continuation of all benefits for the lesser of six (6) months from the date of termination, or until the date in which the Executive begins employment in which he receives substantially similar benefits. If the Executive is Terminated for Convenience within twelve (12) months of a change in the Company's President/CEO, the Executive shall be entitled to receive the severance Payment described in Paragraph 8(b). 10. The Company may not assign all or any part of its obligations under this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, unless the context requires otherwise, the "Company" shall mean the Company as defined above or any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law, or otherwise. This Agreement shall inure to the benefit of and be enforceable by and binding upon (i) any such successor and (ii) the Executive's personal or legal representatives, executors, administrators and designated beneficiaries. 11. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior oral and written agreements, understandings and commitments between the parties relating to this Agreement. Notwithstanding the foregoing, the Executive shall at all times remain subject to all policies and procedures of the Company that relate to employees of the Company, except to the extent that this Agreement contains terms or provisions that are contrary to such policies and procedures. No amendment to this Agreement shall be made except by a written instrument signed by both parties. 12. This Agreement shall be construed and enforced under and be governed in all respects by the law of The Commonwealth of Massachusetts, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the Company has caused this instrument to be executed on its behalf by a duly authorized officer and the Executive has executed this instrument, all as of the date set forth above. 64 4 By: -------------------------------------- Ralph S. Sheridan, President -------------------------------------- Jeffrey A. Bernfeld 65 EX-10.B(XV) 5 EMPLOYMENT AGREEMENT 5/6/98 DR. JOSEPH CALLERAME 1 Exhibit (10)(b)(xv) EMPLOYMENT AGREEMENT This Agreement is made as of ---, 1998 by and between American Science and Engineering, Inc. (the "Company"), a Massachusetts corporation having its principal place of business in Billerica, Massachusetts, and Joseph Callerame, of Lexington, MA (the "Executive"). The Company desires to retain the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: 1. The Company agrees to hire the Executive as, and the Executive agrees to accept and perform the duties of, Vice President, Technology and Chief Technical Officer of the Company. Management will recommend to the Board of Directors of the Company that Executive be elected to the positions at the next meeting of the Board. 2. (a) The Company shall pay to the Executive the "Severance Payment" in the event that the Executive is terminated by the Company within sixty (60) days prior to or twelve (12) months after the occurrence of a "Change of Control," as defined below. The Severance Payment shall be made at the time of such termination. (b) The "Severance Payment" shall be a one-time payment equal to the higher of: (I) the annual rate of the Executive's base salary in effect one month prior to the occurrence of the Change of Control, or (ii) the annual rate of the Executive's base salary in effect at the time of such termination. The Severance Payment shall also include the continuation of all benefits received by the Executive prior to termination for a period equal to the lesser of one year or the start of new employment by the Executive in which he receives substantially similar benefits. (c) A "Change of Control" shall be deemed to have occurred if: (I) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall have become the beneficial owner of 50 percent or more of the combined voting power of the Company's voting securities; (ii) the Continuing Directors shall have ceased for any reason to constitute a majority of the Board of Directors of the Company. For this purpose, a "Continuing Director" shall include members of the Board of Directors of the Company as of the date of this Agreement and any person nominated for election to the Board of Directors of the Company by a vote of the majority of the then Continuing Directors; (iii) the stockholders approve the complete liquidation or dissolution of the Company, or 66 2 (iv) the stockholders approve by the requisite vote any of the following transactions: (A) a merger or consolidation of the Company (except for a merger in respect of which no vote of the stockholders of the Company is required); (B) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary or the Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company immediately prior to the transaction; or (C) a tender or exchange offer for 50% or more of the outstanding voting stock of the Company. 3. (a) If the Executive is terminated for any reason other than (I) Cause (as defined below); or (ii) pursuant to Paragraph 2 ("Termination for Convenience") the Executive shall receive an amount equal to the greater of the amount that would be due under the Company's then-current severance policy, if any, or six months of his then-current Base Pay, payable, at the Company's option, on the last date of his employment or in weekly installments. In case of Termination for Convenience, the Executive shall be entitled to a continuation of all benefits being received by him at the time of termination for the lesser of six (6) months from the date of termination, or until the date in which the Executive begins new employment in which he receives substantially similar benefits. If the Executive is Terminated for Convenience within twelve (12) months of a change in the Company's President/CEO, the Executive shall be entitled to receive the Severance Payment described in Paragraph 2(b) in place of the benefits described in this Paragraph 3. (b) For the purposes of this Agreement, "Cause" shall mean: (I) the determination by the President of the Company, in agreement with the Board of Directors, that the Executive has willfully failed to perform his duties in the course of his employment under this Agreement consistent with those of a Vice President of Technology and Chief Technical Officer as expressly instructed by the President/CEO; or (ii) the final conviction of the Executive for, or his plea of nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude. 4. The Company may not assign all or any part of its obligations under this Agreement, except to a successor as provided for in this paragraph. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, unless the context requires otherwise, the "Company" shall mean the Company as defined above or any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law, or otherwise. This Agreement shall inure to the benefit of and be enforceable by and binding upon (I) any such successor and (ii) the Executive's personal or legal representatives, executors, administrators and designated beneficiaries. 67 3 5. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior oral and written agreements, understandings and commitments between the parties relating to this Agreement. Notwithstanding the foregoing, the Executive shall at all times remain subject to all policies and procedures of the Company that relate to employees of the Company, except to the extent that this Agreement contains terms or provisions that are contrary to or provides greater benefits than such policies and procedures, in which case this Agreement shall control. No amendment to this Agreement shall be made except by a written instrument signed by both parties. 6. This Agreement shall be construed and enforced under and be governed in all respects by the law of The Commonwealth of Massachusetts, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the Company has caused this instrument to be executed on its behalf by a duly authorized officer and the Executive has executed this instrument, all as of the date set forth above. AMERICAN SCIENCE AND ENGINEERING, INC. By: --------------------------------------- Ralph S. Sheridan, President --------------------------------------- Joseph Callerame 68 EX-10.B(XVI) 6 EMPLOYMENT AGREEMENT 6/4/96 ALAN H. RUTAN 1 Exhibit (10)(b)(xvi) EMPLOYMENT AGREEMENT This Agreement is made as of June 4, 1996 by and between American Science and Engineering, Inc. (the "Company"), a Massachusetts corporation having its principal place of business in Billerica, Massachusetts, and Alan H. Rutan, of Westwood, MA (the "Executive"). The Company desires to retain the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: 1. The Company agrees to hire the Executive as, and the Executive agrees to accept and perform the duties of, Vice President, Engineering of the Company. Management will recommend to the Board of Directors of the Company that Executive be elected to the positions at the next meeting of the Board. 2. (a) The Company shall pay to the Executive the "Severance Payment" in the event that the Executive is terminated by the Company within sixty (60) days prior to or twelve (12) months after the occurrence of a "Change of Control," as defined below. The Severance Payment shall be made at the time of such termination. (b) The "Severance Payment" shall be a one-time payment equal to the higher of: (i) the annual rate of the Executive's base salary in effect one month prior to the occurrence of the Change of Control, or (ii) the annual rate of the Executive's base salary in effect at the time of such termination. The Severance Payment shall also include the continuation of all benefits received by the Executive prior to termination for a period equal to the lesser of one year or the start of new employment by the Executive in which he receives substantially similar benefits. (c) A "Change of Control" shall be deemed to have occurred if: (i) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall have become the beneficial owner of 50 percent or more of the combined voting power of the Company's voting securities; (ii) the Continuing Directors shall have ceased for any reason to constitute a majority of the Board of Directors of the Company. For this purpose, a "Continuing Director" shall include member of the Board of Directors of the Company as of the date of this Agreement and any person nominated for election to the Board of Directors of the Company by a vote of the majority of the then Continuing Directors; (iii) the stockholders approve the complete liquidation or dissolution of the Company, or 69 2 (iv) the stockholders approve by the requisite vote any of the following transactions: (A) a merger or consolidation of the Company (except for a merger in respect of which no vote of the stockholders of the Company is required); (B) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary or the Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company immediately prior to the transaction; or (C) a tender or exchange offer for 50% or more of the outstanding voting stock of the Company. 3. (a) If the Executive is terminated for any reason other than (i) Cause (as defined below); or (ii) pursuant to Paragraph 2 ("Termination for Convenience") the Executive shall receive an amount equal to the greater of the amount that would be due under the Company's then-current severance policy, if any, or six months of his then-current Base Pay, payable on the last date of his employment. In case of Termination for Convenience, the Executive shall be entitled to a continuation of all benefits being received by him at the time of termination for the lesser of six (6) months from the date of termination, or until the date in which the Executive begins new employment in which he receives substantially similar benefits. If the Executive is Terminated for Convenience within twelve (12) months of a change in the Company's President/CEO, the Executive shall be entitled to receive the Severance Payment described in Paragraph 2(b) in place of the benefits described in this Paragraph 3. (b) For the purposes of this Agreement, "Cause" shall mean: (i) the determination by the President of the Company, in agreement with the Board of Directors, that the Executive has willfully failed to perform his duties in the course of his employment under this Agreement consistent with those of a Vice President of Engineering as expressly instructed by the President/CEO; or (ii) the final conviction of the Executive for, or his plea of nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude. 4. The Company may not assign all or any part of its obligations under this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, unless the context requires otherwise, the "Company" shall mean the Company as defined above or any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law, or otherwise. This Agreement shall inure to the benefit of and be enforceable by and binding upon (i) any such successor and (ii) the Executive's personal or legal representatives, executors, administrators and designated beneficiaries. 5. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior oral and written agreements, understandings and commitments between the parties relating to this Agreement. Notwithstanding the foregoing, the Executive shall at all times remain subject to all policies and procedures of the Company that 70 3 relate to employees of the Company, except to the extent that this Agreement contains terms or provisions that are contrary to or provides greater benefits than such policies and procedures, in which case this Agreement shall control. No amendment to this Agreement shall be made except by a written instrument signed by both parties. 6. This Agreement shall be construed and enforced under and be governed in all respects by the law of The Commonwealth of Massachusetts, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the Company has caused this instrument to be executed on its behalf by a duly authorized officer and the Executive has executed this instrument, all as of the date set forth above. AMERICAN SCIENCE AND ENGINEERING, INC. By: -------------------------------------- Ralph S. Sheridan, President -------------------------------------- Alan H. Rutan 71 EX-10.B(XVII) 7 EMPLOYMENT AGREEMENT 9/24/97 LEE C. STEEK 1 Exhibit (10)(b)(xvii) EMPLOYMENT AGREEMENT This Agreement is made as of July 10, 1998 by and between American Science and Engineering, Inc. (the "Company"), a Massachusetts corporation having its principal place of business in Billerica, Massachusetts, and Lee C. Steele, of Boston, Massachusetts (the "Executive"). The Company desires to retain the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: 1. The Company agrees to continue the employment of the Executive as, and the Executive agrees to continue to perform the duties of, Vice President, Finance and Chief Financial Officer of the Company. 2. (a) The Company shall pay to the Executive the "Severance Payment" in the event that the Executive is terminated by the Company within sixty (60) days prior to or twelve (12) months after the occurrence of a "Change of Control," as defined below. The Severance Payment shall be made at the time of such termination. (b) The "Severance Payment" shall be a one-time payment equal to the higher of: (i) the annual rate of the Executive's base salary in effect one month prior to the occurrence of the Change of Control, or (ii) the annual rate of the Executive's base salary in effect at the time of such termination. The Severance Payment shall also include the continuation of all benefits received by the Executive prior to termination for a period equal to the lesser of one year or the start of new employment by the Executive in which he receives substantially similar benefits. (c) A "Change of Control" shall be deemed to have occurred if: (i) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall have become the beneficial owner of 50 percent or more of the combined voting power of the Company's voting securities; (ii) the Continuing Directors shall have ceased for any reason to constitute a majority of the Board of Directors of the Company. For this purpose, a "Continuing Director" shall include member of the Board of Directors of the Company as of the date of this Agreement and any person nominated for election to the Board of Directors of the Company by a vote of the majority of the then Continuing Directors; (iii) the stockholders approve the complete liquidation or dissolution of the Company, or (iv) the stockholders approve by the requisite vote any of the following transactions: (A) a merger or consolidation of the Company (except for a merger in respect of which no vote of the stockholders of the Company is required); (B) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary or the Company (other than to 72 2 any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company immediately prior to the transaction; or (C) a tender or exchange offer for 50% or more of the outstanding voting stock of the Company. 3. (a) If the Executive is terminated for any reason other than (i) Cause (as defined below); or (ii) pursuant to Paragraph 2 ("Termination for Convenience") the Executive shall receive an amount equal to the greater of the amount that would be due under the Company's then-current severance policy, if any, or six months of his then-current Base Pay, payable at the Company's option, on the last date of his employment or in weekly installments. In case of Termination for Convenience, the Executive shall be entitled to a continuation of all benefits being received by him at the time of termination for the lesser of six (6) months from the date of termination, or until the date in which the Executive begins new employment in which he receives substantially similar benefits. If the Executive is Terminated for Convenience within twelve (12) months of a change in the Company's President/CEO, the Executive shall be entitled to receive the Severance Payment described in Paragraph 2(b) in place of the benefits described in this Paragraph 3. (b) For the purposes of this Agreement, "Cause" shall mean: (i) the determination by the President of the Company, in agreement with the Board of Directors, that the Executive has willfully failed to perform his duties in the course of his employment under this Agreement consistent with those of a Vice President of Finance and Chief Financial Officer as expressly instructed by the President/CEO; or (ii) the final conviction of the Executive for, or his plea of nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude. 4. The Company may not assign all or any part of its obligations under this Agreement except to a successor as provided for in this paragraph. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, unless the context requires otherwise, the "Company" shall mean the Company as defined above or any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law, or otherwise. This Agreement shall inure to the benefit of and be enforceable by and binding upon (i) any such successor and (ii) the Executive's personal or legal representatives, executors, administrators and designated beneficiaries. 5. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior oral and written agreements, understandings and commitments between the parties relating to this Agreement. Notwithstanding the foregoing, the Executive shall at all times remain subject to all policies and procedures of the Company that relate to employees of the Company, except to the extent that this Agreement contains terms or provisions that are contrary to or provides greater benefits than such policies and procedures, in 73 3 which case this Agreement shall control. No amendment to this Agreement shall be made except by a written instrument signed by both parties. 6. This Agreement shall be construed and enforced under and be governed in all respects by the law of The Commonwealth of Massachusetts, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the Company has caused this instrument to be executed on its behalf by a duly authorized officer and the Executive has executed this instrument, all as of the date set forth above. AMERICAN SCIENCE AND ENGINEERING, INC. By: ------------------------------------- Ralph S. Sheridan, President ------------------------------------ Lee C. Steele 74 EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 As independent public accountants, we hereby consent to the incorporation by reference in Registration Statement Nos. 33-61903, 333-05795, 333-05797, 333-09257, 333-13259, 333-27927, and 333-27929 of our report dated May 14, 1998 included in this Form 10-K for the year ended March 31, 1998. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts July 13, 1998 75 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF AMERICAN SCIENCE AND ENGINEERING, INC. FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US$ 12-MOS MAR-31-1998 JAN-01-1998 MAR-31-1998 1 2,290 0 6,955 0 8,737 23,912 1,852 9,394 25,993 9,221 0 0 0 3,162 12,922 25,993 32,699 32,699 19,816 30,097 96 0 0 2,698 (1,963) 4,661 0 0 0 4,661 1.00 0.95
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