American Science & Engineering, Inc.

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American Science & Engineering, Inc.

829 Middlesex Turnpike
Billerica, Massachusetts 01821
U.S.A.
Telephone: (978) 262-8700
Toll Free: (800) 225-1608
Fax: (978) 262-8804
Web site: http://www.as-e.com

Public Company
Incorporated: 1958
Employees: 286
Sales: $163.6 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: ASEI
NAIC: 334517 Irradiation Apparatus Manufacturing

American Science & Engineering, Inc. (AS&E) is a Boston-area company that develops, manufactures, and markets X-ray inspection systems, as well as providing maintenance and training services. The systems are used around the world at border crossings, ports, airports, military bases, and corporate and government mailrooms to help combat terrorism, illegal immigration, and drug and weapon smuggling. AS&E's product lines include ParcelSearch, featuring a small tunnel system used to inspect mail and luggage, as well as larger, open-tunnel systems to screen larger bags and small cargo. The CargoSearch line is used to inspect palletized cargo, air and sea cargo containers, and vehicles. It can also be outfitted with Radioactive Threat Detection technology. The company's SmartCheck system is used to inspect people for both metal and nonmetal contraband, including drugs, weapons, and explosives. Key to AS&E systems is the company's patented Z Backscatter technology, which detects and highlights items that contain low atomic number elements, so-called "low Z" materials, such as carbon, hydrogen, oxygen, and nitrogen, found in plastic weapons, explosives, and drugs. Z Backscatter also detects "high Z" materials such as metal weapons. As a result, AS&E systems are able to simultaneously screen for both metal and nonmetal materials. A key element of Z Backscatter systems is the company's patented Flying Spot technology, which instead of the fanlike beam of traditional X-ray systems relies on a more narrow, focused beam. Separate detectors can then translate the information on a pair of television monitors, one showing low-Z materials and the other high-Z materials. It also produces photo-like images and emits low amounts of radiation. Major customers for AS&E include the Department of Homeland Security and the military. AS&E is a public company listed on the NASDAQ.

COMPANY'S FOUNDING IN 1958

AS&E was founded in Cambridge, Massachusetts, in 1958 by 36-year-old Dr. Martin Annis, who had earned a Ph.D. from the Massachusetts Institute of Technology seven years earlier. After teaching for four years, he became the head of physical science at Allied Research in Boston, doing Department of Defense contract research on the effects of nuclear explosions. Following a disagreement with management, he struck out on his own. With the help of MIT professor of physics George W. Clark, a friend and former graduate school colleague, who served as a consultant as well as an investor, Annis set up a private research firm he called American Science & Engineering. Other initial investors were chemist Carolus M. Cobb, accountant H. S. Richardson, Jr., and Sol Horwitz, general manager of Boston's West End Iron Works. Together they collected $100,000 in funds and set up operations in a three-room office located above a bank in Cambridge, Massachusetts. The company started out with a Department of Defense contract similar to what Annis had done at Allied Research, investigating the effects of a nuclear explosion above the atmosphere. The business had come through the Air Force Cambridge Research Laboratory (AFCRL), which had funded his previous work and had been pleased with his results.

Annis would soon convince Bruno Rossi, an MIT professor of physics who had once taught Annis, to serve as chairman and AS&E chief scientific adviser. Rossi had been one of the scientists involved in the Manhattan Project, which resulted in the world's first nuclear weapon. He was eager to steer the company away from defense contracts and suggested AS&E develop and produce high school physics kits to accompany the curriculum that was being developed at MIT at the time. Rossi himself had written part of the program's textbook. Through his influence, AS&E was able to secure a deal to produce the kits that would be distributed across the country by the McGraw-Hill Book Company. As a result, AS&E moved to larger accommodations.

Rossi would also have another idea for AS&E, one that would have longer term implications for the company and the field of physics in general. While flying home from a conference, Rossi received a major insight about the soft X-ray portion of the spectrum, which he became convinced could provide a window into the universe to reveal things never before known. Because MIT's Cosmic Ray Group was too busy to pursue this new avenue of inquiry, Rossi turned to Annis and convinced him to have AS&E conduct research on large-area X-ray detectors and pursue ways to focus soft X-rays, thus laying the foundation for X-ray astronomy. Annis was eager to find non-defense-related research projects and agreed to pursue Rossi's idea. He further suggested that the man to implement such an idea was Riccardo Giacconi, an Italian-born physicist.

In 1959, Giacconi joined AS&E and created an X-ray astronomy team. For the next 14 years, Giacconi's team made a succession of pioneering discoveries and developments in the field of X-ray technology. Giacconi left AS&E in 1973

Even without Giacconi, AS&E continued to make key scientific advances. In 1978 it launched the NASA-funded Einstein Observatory, the largest X-ray telescope in the world. A year later the company designed a special X-ray telescope for NASA, used to study the sun and planets. During the 1980s, AS&E was also looking for the commercial success that came from applied research activities. In 1973 the company patented its Flying Spot technology, which was then employed to develop precursors to the company's present-day line of X-ray screening systems. During the 1970s AS&E became involved in electric utility loan management research. The latter resulted in the 1976 introduction of ASEP, a system that allowed utilities to automatically conduct remote meter reading. ASEP would become a major source of revenues for AS&E through the 1980s. The first personnel X-ray inspection system, called MICRO-DOSE, was introduced in 1977. A year later the company received funding from Pfizer Medical Systems to develop a Medical Micro-Dose system.

GOING PUBLIC IN 1975

AS&E also became a public company in 1975 and gained a listing on the American Stock Exchange. Filings with the Securities and Exchange Commission indicate that AS&E was involved in some ventures that did not pan out. In 1970, for example, it acquired Package House, Inc. of Clifton, New Jersey, a business that was discontinued ten years later. In 1975 American Science & Engineering International Inc. was formed, only to be dissolved in 1986. Furthermore, the filings indicate that AS&E sold an Education Division in 1979.

AS&E introduced the MICRO-DOSE X-Ray System Model 130, used to screen carry-on luggage at airports, and the multipurpose Model 122, used to inspect luggage and parcels. Other versions of the system soon followed, the Model 50 to inspect letters and small parcels, and the Model 100 for large parcels and baggage inspection. In 1985 revenues totaled $22.5 million.

COMPANY PERSPECTIVES

AS&E specializes in detection technologies that can uncover dangerous and elusive threats, including explosives, plastic and metal weapons, and radioactive devices, such as dirty bombs and nuclear WMD. These X-ray systems are deployed worldwide at ports and borders, and military and high-threat facilities.

In 1986 AS&E unveiled its Z series of X-ray systems using flying spot technology, receiving a good deal of attention. Fortune magazine, for example, profiled the $55,000 Z system, which it said could detect the Glock 17 pistol, mostly constructed of plastic and "the latest terrorist weapon to menace air travelers around the world." Explaining how the new system worked, Fortune 's Eleanor Johnson Tracy wrote that as the flying spot "beam strikes the suitcase, separate detectors display different images simultaneously on two television monitors. One screen shows the high-density materials—for example, a radio and a traveling case. The other reveals the plastic handle of a Glock 17 hidden beside the radio."

AS&E continued to conduct aerospace research in the 1980s. In 1983 it won a contract to build an inspection system for the Trident D-5 solid rocket motors, and in 1984 it teamed up with the Harvard Smithsonian Center for Astrophysics to develop a high-resolution X-ray image detector, which NASA would choose as its contribution to the ROSAT, a German X-ray astronomy satellite. However, with reductions in NASA's budget and the end of the Cold War, which resulted in defense department cutbacks, AS&E became increasingly dependent on its commercial X-ray screening products, used to fight smuggling and terrorism. Despite having the Federal Aviation Administration ordering 40 airports to install AS&E systems to screen luggage, AS&E was struggling at the start of the 1990s. In May 1990 the company was forced to implement a number of cost containment measures, including a 10 percent reduction in staff.

AS&E experienced mixed results in the first half of the 1990s. On the one hand, it achieved a number of successes. In 1990 the company unveiled the predecessor to the CargoSearch product line with the "TOSI" X-ray Inspection System, first used by the U.S. government to ensure the Soviet Union was in compliance with the Intermediate-Range Nuclear Forces (INF) Treaty by screen missiles loaded on Russian railcars. A narcotics-detection system was introduced in 1992 and was purchased by U.S. Customs, and a year later several new products were put on the market, including Cargo-Search, BodySearch, MailSearch, and LobbySearch. Moreover, in 1994 AS&E won a contract from the Advanced Research Projects Agency to develop the MobileSearch systems, which would be used at the Mexico border to detect both narcotics and illegal immigrants. However, this period would also bring financial difficulties, due to a struggling economy, and controversy involving its founder.

OUSTING THE FOUNDER IN 1993

Annis, who had served as president since the beginning added a new title, chief executive officer, in April 1993. The board over which he presided as chairman also was increased in size to seven, and just four months later, in July 1993, that board terminated his employment. According to a Securities and Exchange Commission (SEC) filing, this action was taken "on the basis of information received indicating that [Annis] had been engaging in activities that were incompatible with his status as an officer and employee of the Company." Annis sued the company and its directors, alleging wrongful termination of employment. A trial was held and when it was concluded in April 1995 a jury determined that Annis had materially breached his fiduciary duty to AS&E. As a result, the company was found to be justified in terminating his employment. Annis continued to feud with his former company, however. In addition to unsuccessfully appealing the 1995 decision, he would be accused of passing along trade secrets to AS&E rival EG&G Inc. He also formed a new X-ray technology company, Annistech, and he and AS&E engaged in litigation over the ownership rights of certain technology. This matter was settled in June 1997. AS&E's rights were affirmed and it also gained rights to some ongoing developments by Annis, although it agreed to license back the technology to Annistech.

KEY DATES

1958:: The company is founded by Martin Annis.
1959:: Dr. Riccardo Giacconi heads the Ex-ray astronomy team.
1973:: Giacconi leaves the company.
1975:: The company is taken public.
1986:: Z Backscatter technology is introduced.
1993:: Annis is ousted as CEO and chairman.
2002:: Giacconi wins the Nobel Prize.
2005:: The company gains a NASDAQ listing.

Replacing Annis at AS&E in September 1993 was Ralph S. Sheridan, who for the past four years had been operating his own Massachusetts consulting and investment firm. A graduate of Ohio State University, he held a bachelor's degree in chemistry and an M.B.A., and had executive experience at Combustion Engineering, Inc. and HEC Energy Corp. He initiated a turnaround strategy that caused pain in the short run. Sales dropped from $19 million in 1993 to $11.2 million in 1994, but rebounded to $17.8 million in 1996 when the company returned to profitability. Sheridan took over a company that was a contract research house and a parcel X-ray company. Under his leadership, AS&E focused exclusively on providing X-ray imaging solutions, mostly catering to government agencies dealing with security, smuggling, and trade crime.

Further restructuring occurred in the second half of the 1990s, as the company increased its focus on dealing with the problems of drugs and weapons smuggling, terrorism, and trade fraud. Sales reached $28.5 million in 1997 and grew steadily over the next few years, due in large measure to overseas sales. In 1998 the company sold its first system to an international customer, located in the Middle East. Domestically, concern over illegal immigration spurred business as well, and the company's new back-scatter technology proved adept at the job. Sales increased to $57.3 million in 1999 and $60.7 million in 2000, as the company's international client base continued to expand, with systems sold in Abu Dhabi, Bahrain, Egypt, and South Africa.

The terrorist attacks on the United States on September 11, 2001, raised the profile of AS&E, as demand for security products increased dramatically. But, according to Business Week, "AS&E was left in the dust. The company's sky-high production costs forced it to price products at premiums many customers refused to pay. And AS&E had only one salesperson." Although sales increased to $67.1 million in 2001, AS&E recorded a profit of only $660,000. To make matters worse, at a time when the company should have been thriving, revenues dipped to $65.4 million in 2002 and $62 million in 2003, and the company lost about $12.5 million during that time.

In May 2003 Sheridan, after a decade at the helm, was removed as CEO. With the company on the verge of being sold, a new CEO was hired, Anthony Fabiano, the former president and chief operating officer at Minnesota-based Dispatch Industries, designer of industrial ovens and furnaces. He also served three years as a vice-president at another Minnesota company, aerospace and defense company Alliant TechSystems. He quickly assessed the problem at AS&E, telling Business Week, "We had these gee-whiz products and no way to get them into the marketplace." While building up the sales and marketing staff, he also brought in lean manufacturing practices that cut the production time on some systems from three months to as little as three weeks. Costs came down and the company was able to competitively price its advanced systems. Moreover, AS&E was now better able to market its products more aggressively to target customers: law enforcement and the military. The company's stock was moved from the American Stock Exchange to the NASDAQ, providing greater visibility with investors. Revenues improved to $76.3 million in 2004 and the company turned a profit of more than $1.9 million. The following year, sales increased to $88.3 million and net income to $11.2 million, although $5.4 million of that total was the result of AS&E selling off its High Energy Systems division. Sales almost doubled in 2006 to $163.6 million and net income soared to $29.8 million. Lean and focused, the company appeared to be well positioned to enjoy even stronger growth in the years to come.