Willner Capital Expresses Extreme Disappointment With ASEI Board's Failure to Respond to Concerns Raised in Letter to Chairman

KING OF PRUSSIA, Pa., Oct. 15, 2014 /PRNewswire/ -- Willner Capital, Inc., who together with its affiliates ("Willner Capital" or "we"), is one of the largest stockholders of American Science and Engineering, Inc. ("ASEI" or the "Company") (NASDAQ: ASEI), today announced its extreme disappointment with the failure of the Board of Directors (the "Board") of ASEI to respond to its letter delivered to Denis R. Brown, Chairman of the Board, on September 26, 2014 (the "September 26^th Letter").  In the September 26^th Letter, the full text of which is included below, Willner Capital outlined its serious concerns with the Company's abysmal stock price and operating performance and poor corporate governance practices under the stewardship of the current Board and management, including the Company's ineffective use of excess cash.  Willner Capital also identified opportunities to unlock significant value at ASEI in the September 26^th Letter, including a spin-off of the Company's newly released MINI Z technology.  Willner Capital's concerns were further heightened in light of the Company's recent announcement on September 30, 2014 that it anticipates a net loss in the second quarter of fiscal year 2015 and a work force reduction of approximately 10%.

Michael Willner, President of Willner Capital, stated, "I am extremely disappointed with the Board's failure to respond to our serious concerns outlined in the September 26^th Letter, particularly in light of the Company's anticipated net loss for Q2 FY15'.  In fact, over the past year, we have privately reached out to Charles P. Dougherty, the Company's CEO, and most recently, Mr. Brown, to discuss our serious concerns.  Unfortunately, our concerns have fallen, and continue to fall, on deaf ears.  This merely confirms the Company's extremely poor investor relations and stockholder communications policies, which we believe contributes to ASEI's stock price underperformance.  The Company's announced anticipated loss for Q2 FY15' only heightens our concerns regarding the direction of ASEI.  We believe the Board should hire an investment banking firm to explore all strategic opportunities to maximize value for the benefit of all ASEI stockholders, including a sale or merger of the Company."

Mr. Willner concluded, "We had hoped that through the September 26^th Letter, the Board would more fully understand our strong desire to work constructively with the Board and management to implement meaningful steps to enhance stockholder value at ASEI.  While we had intended to keep our dialogue private, we were left with no choice but to publicize our substantial concerns.  As the former Vice Chairman of the Board of Directors of a large publicly traded company and Chair of its Strategic Planning Committee, I understand the importance of engaging in active dialogue with stockholders and exploring opportunities to maximize value for the benefit of all.  We urge the Company to take our concerns seriously and immediately engage in constructive dialogue so that we can explore opportunities to maximize value for the benefit of all stockholders.  However, we remain ready, willing and able to take any and all action required to protect the interest of all ASEI stockholders."

The full text of the September 26^th Letter follows:

September 26, 2014

Board of Directors
American Science and Engineering, Inc.
829 Middlesex Turnpike
Billerica, Massachusetts 01821
Attention: Denis R. Brown, Chairman

Dear Mr. Brown:

I am writing this letter on behalf of Willner Capital, Inc., who together with its affiliates ("Willner Capital" or "we"), is one of the largest stockholders of American Science and Engineering, Inc. ("ASEI" or the "Company").  We invested in the Company because of its unique and compelling technology and strategic opportunities for growth; however, we are disappointed with the Company's abysmal performance and poor corporate governance practices under the direction of the current management team and Board of Directors (the "Board").  Having been a stockholder of the Company for over ten years, we have a profound understanding of the Company's business, prospects and operations and believe there are significant opportunities to increase value for the benefit of all stockholders.

Over the past year, we have privately reached out to the Company's CEO, Charles P. Dougherty, and most recently, you, to discuss our concerns.  Unfortunately, our concerns have fallen on deaf ears.  We hope that through this letter, you will take our concerns seriously and more fully understand our strong desire to work constructively with you, the other members of the Board and management to implement meaningful steps to enhance stockholder value at ASEI.  

Abysmal Stock Price and Operating Performance

We have grown increasingly alarmed with the direction of ASEI as it has delivered dismal total shareholder returns over the past five years.  In fact, the Company's stock price has significantly unperformed the broader U.S. equity indices during the last five, three and one year periods. 

The Company's operating performance has likewise been abysmal.  Despite the increasing strength of the current market, ASEI's earnings per share, net income and EBITDA have decreased for each of the last three fiscal years. 

The Company's Q1 FY15' results were equally as troubling as ASEI reported significantly weaker than expected results.  The Company reported Q1 revenue and EPS of $35.5 million and $0.18, respectively, versus consensus estimates of $40 million and $0.32.  Bookings were also disappointingly low at $22.3 million.  We find these poor results particularly concerning in light of the Company's upbeat comments during its Q4 FY14' conference call and Mr. Dougherty's remarks during the Q1 FY15' conference call that low shipment and bookings were clearly attributable to the turmoil in the Middle East, despite the fact that the Middle Eastern region had been highlighted by ASEI as a positive catalyst for sales in light of the turmoil and terrorism there.  The Company's failure to hold itself accountable for weaker than expected results is alarming.

Poor Investor Communications and Lack of Transparency

Perhaps even more concerning is the Company's failure to provide any guidance regarding its underperformance.  Stockholder value will not be achieved without transparent communications detailing the reasons for any earnings shortfalls, providing specific evidence regarding how problems will be solved, and providing clear, accurate and concise guidelines for future results.  By failing to adequately address the underlying causes for ASEI's underperformance, we believe the Company is missing the significant opportunities to participate in an improving economy. 

Further, management's and your lack of response to my requests for a constructive dialogue only underscores how much improvement is needed in this regard.  ASEI's investor communications appear weak, disorganized and inefficient.  The Company's stockholders, the true owners of the Company, are entitled to transparency and disclosure of material information.  We believe the Company's failure to communicate effectively with its stockholders is one of the reasons for its dismal stock performance.  This practice of disseminating minimal and ambiguous disclosure has likely caused the stock to underperform by increasing uncertainty and making it extremely difficult for potential new investors to understand the business.  ASEI should adopt a formal policy of transparent and timely disclosure to all its stockholders.

Ineffective Use of Excess Cash

The Company has over $19 per share in cash and cash equivalents.  We see no conceivable business justification for holding this much cash.  Further, the Company's stock repurchases have not been the most efficient use of its cash due to the Company's relatively small float, which precludes larger investors from becoming meaningful owners in the Company.  The cornerstone of disciplined capital allocation is using a risk-adjusted, fact-based business plan to determine the fair value of a company's stock.  We believe that ASEI's stock repurchases may have been an attempt to placate the stockholder base, rather than a carefully evaluated effort to create long-term stockholder value. 

This is not to say that stock repurchases are never in the best interests of a company's stockholders. The time to execute a repurchase is when the stock is trading at a significant discount to fair value, which is calculated based on the present value of the Company's long-term plan.  The value of the repurchase is not realized upon the completion of the buy-back, but rather when the stock price accretes towards fair value as the long-term plan is executed. 

There are better opportunities to utilize ASEI's excess cash.  We strongly believe ASEI should pay a special dividend to shareholders equal to $15 per share.  We find it hard to believe that outside of ASEI's newly released MINI Z technology ("MINI Z"), the Company has not been able to identify opportunities for organic growth leveraging its existing customer relationships and reputation in the industry.  

Spin-Off of MINI Z

ASEI could use a portion of its excess cash to spin-off MINI Z.  We believe the new product launch of MINI Z would be afforded a higher multiple and accordingly, should be spun off from the legacy Company and its technology.  We think this would result in the creation of substantial stockholder value as there may be applications for the new technology beyond the contemplated public safety market.  The low ASP will not result in meaningful growth for the Company – as a standalone, we believe it would be afforded a higher multiple, will have greater growth potential and will hopefully lead to higher and less irregular earnings.

Lack of Meaningful Stock Ownership

We believe a culture focused on long-term value creation and stockholder accountability requires placing stockholder representatives on the Board who have a significant financial commitment to the Company along with relevant experience.  This requirement ensures the proper alignment of interests between the Board and stockholders.  According to the Company's proxy statement (the "2014 Proxy Statement") for its 2014 annual meeting of stockholders (the "2014 Annual Meeting"), each director and executive officer of the Company owns less than 1% of ASEI's outstanding shares of common stock and collectively, they own a mere 3.1%, which ownership is largely comprised of stock options and similar compensatory awards.  

Perhaps even more concerning is the general lack of open market purchases by such individuals.  In fact, according to the Company's public filings, you made the last open market purchase on February 10, 2006.  It seems apparent to us that with so little "skin in the game" and not enough confidence in the Company to engage in meaningful share acquisitions in the open market, the Board does not have the same commitment to stockholder value as we do.   

By contrast, we have invested approximately $8.5 million to accumulate our current ownership position in the Company, making us one of the largest investors.  We believe our substantial "skin in the game" results in optimal long-term alignment of interests with stockholders and demonstrates our motivation to maximize value of ASEI for the benefit of all stakeholders.

We are beginning to doubt whether the Board and management's interests are aligned closely enough with those of other stockholders.  We are concerned that the lack of significant actual equity ownership and the minimal real investment dollars at risk may contribute to a lack of commitment to maximizing stockholder value. 

Excessive Executive Compensation

We are likewise concerned with the Company's executive compensation practices.  While we applaud the Board's efforts to better align ASEI's compensation practices with the Company's performance, we believe the compensation awarded to executives is significantly high given the Company's abysmal stock price and operating performance.  We are particularly concerned with the compensation package awarded to Mr. Dougherty in light of the Company's significant underperformance, which amounted to a staggering $1.91 million for fiscal 2014.   According to the 2014 Proxy Statement, ASEI and Mr. Dougherty entered into an employment agreement that entitled him to $550,000 in base salary, a target bonus equal to 100 percent of his base salary, which was guaranteed for the fiscal year 2014, and a target long-term incentive award of 200 percent of base salary.  We find it extremely troubling that Mr. Dougherty was guaranteed a bonus for fiscal 2014 without having to meet rigorous performance conditions.

We are likewise concerned with the Company's 2014 Equity and Incentive Plan (the "Equity Plan"), which was approved by a very slim margin (3,278,648 votes "For" vs. 3,028,250 votes "Against") at the 2014 Annual Meeting.  In fact, Institutional Shareholders Services ("ISS"), a leady proxy advisory firm, advised that shareholders vote "AGAINST" approval of the Equity Plan because the estimated shareholder value transfer of nine percent (9%) is greater than the company-specific allowable cap of eight percent (8%).

ISS further highlighted concerns regarding the lack of transparency of the Company's long-term incentive program, advising stockholders to closely monitor compensation decisions of ASEI moving forward.  Specifically, ISS noted that while payout under the program is based on pre-determined performance metrics, the specific goals and the specific performance periods for each individual goal were not disclosed.  Accordingly, stockholders cannot assess the rigor of the incentive program.  Based on the vesting of the fiscal 2014 award, it is also possible for a portion of an award to vest less than one year after the grant date, which raises concerns about the long-term nature of the award.  Similar to ISS, we believe stockholders prefer awards that vest "based on achievement of multi-year performance goals to promote long-term alignment between pay and performance."  Further, given that half of the awards associated with unmet performance goals cliff vest after five years, the link between pay and performance is significantly diminished.

We believe that the Company's poor executive compensation practices have contributed to a management and Board culture that seem indifferent to poor operational results.  We call for the Board and its Compensation Committee to take action to develop new compensation arrangements and target minimum stock ownership levels for the management team.

A Need for Change

For the reasons set forth above, we lack confidence in management's and the Board's ability to unlock value for ASEI stockholders, including their ability to engage in strategic acquisitions at an appropriate price.  While we appreciate Mr. Dougherty's enthusiasm and experience in the public safety sector, we are concerned with the Company's abysmal performance under his direction, particularly given the strength of the current market.  We nevertheless believe ASEI has a solid long-term foundation and exciting growth prospects.  With the right tools in place, we believe Mr. Dougherty can make ASEI a stronger and more profitable Company.

We are ready, willing and able to work constructively with Mr. Dougherty as well as the other members of ASEI's management team and Board, to help drive performance.  As described above, we believe the path to increasing value and restoring the market's confidence in ASEI requires the following actions, among others: (i) improve IR policies to promote transparency and stockholder communications; (ii) utilize excess cash to (a) issue a special dividend to stockholders and (b) spin-off of MINI Z; and (iii) improve compensation practices and implement stronger stock ownership guidelines.  We are committed to exchanging our views and meeting with you, the other members of the Board and management in an effort to help unlock value for all ASEI stockholders.

We are professional investors who take corporate governance very seriously.  Our priority is to work with the Company – not against it – in doing what is best for all stockholders.  As the former Vice Chairman of the board of directors of a publicly traded company much larger than ASEI, I understand the importance of engaging in active dialogue with stockholders in a professional and constructive manner.  Further, being one of the largest shareholders of ASEI, we have significant "skin in the game" and have a substantial interest in seeing that management and the Board are committed to maximizing value for the benefit of all stockholders.

We remind you that the Board's duties are to stockholders of ASEI.  As always, we stand ready to meet with you at your earliest convenience and are willing to discuss our views in more detail.  While we intend to keep our dialogue private, we must reserve all rights to take any and all action required to protect the interest of stockholders.  We hope such action will be unnecessary, however, and look forward to working constructively with you to unlock significant value for all.  

Sincerely,

Michael Willner
Willner Capital, Inc.

About Willner Capital, Inc.
Willner Capital, Inc. invests in companies undergoing change and focuses on event-driven, value-oriented investment opportunities.

Investor contact:
Michael J. Willner
[email protected]

SOURCE Willner Capital, Inc.