business Byte

Mar 1, 2002 12:00 PM, By Jack Mallon

Ralph Sheridan is now a Beltway commuter.

He's not a Congressman or a lobbyist or a government bureaucrat, but a security executive whom the federal government is calling on as it faces implementation of a vast home defense program. Sheridan is the CEO of American Science & Technology (AMEX/ASE), a supplier of X-ray inspection equipment.

Over the past few months, Sheridan addressed a number of congressional subcommittees, appeared on national TV and made a presentation before the National Press Club. And then there were the numerous meetings with congressional staff, military officers and representatives of a host of government agencies including the Federal Aviation Administration.

Sheridan — and many others — see American Science & Engineering in the front line of the nation's home defense.

The company has an array of X-ray inspection equipment — using Z Back-scatter technology — that is currently being used at airports, ports, country borders and government and commercial buildings around the world.

Stopping in New York en route from company headquarters in Billerica, Mass., to Washington, D.C., the CEO took time out to discuss how he plans to sell even more of his equipment during the current worldwide mobilization of security defenses.

“First of all there should be a modification of the rules regarding the certification of baggage checking equipment by the FAA,” Sheridan said. “Our equipment is more effective than the currently certified equipment — and is significantly less expensive.”

Sherman explained that the problem in getting his baggage checking units certified is that AS&E's units are not automatic — they must be manned. However, he pointed out that his competitor's automatic units require manpower intervention because of false readings.

AS&E's patented parcel and baggage checking units, manufactured in Massachusetts, sell for approximately $145,000 a piece while each of a competitor's baggage screening units goes for approximately $1 million.

“If we are going to get 2,000 more units out to the nation's airports and have a total baggage checking system in place by Dec. 31, 2002, there will have to be changes in the certification requirements,” Sheridan said.

Right now AS&E is dominant in providing security protection at ports and borders around the world. Utilizing the company's CargoSearch, MobilSearch, PalletSearch and IsoSearch equipment, custom inspectors are confiscating drugs, weapons and other contraband at locations around the world — including Hong Kong, Egypt and South Africa.

The CEO points out that global trade fraud costs approximately $170 billion a year in lost tariffs and excise taxes. Many small countries derive from 40 to 80 per cent of their revenues from such duties.

Sheridan predicts that this segment of the business will grow dramatically, particularly with pressures from some quarters to have all cargo coming into the United States pre-screened at foreign ports before shipping.

Then there is the Bodysearch personnel X-ray inspection system that can detect weapons, drugs, explosives or other prohibited materials hidden under a person's garments.

“This system was originally developed as an alternative to a high-contact pat search, and utilized in high-threat environments such as prisons,” Sheridan said. “However, the events of Sept. 11 have changed the public debate of the threshold of modesty versus the public's requirements for security.”

In October, the company announced the receipt of an order for five Body Search units from the FAA — for testing for possible usage at U.S. airports.

Other X-ray products on the fast track are the units that screen mail, parcels and small cargo. Since the Sept. 11 tragedy, many government agencies and domestic corporations have purchased this equipment to bolster their mail room security.

This flurry of activity and media attention has not been missed by the investment community. The company's stock was selling at $5.75 on Sept. 10 and soared to $20.13 at year's end for a whopping 250 percent gain. At the end of February it had backed off somewhat and was trading at $15.25. Even at its lofty levels, it is now only selling at 3 times book and 1 times sales.

The 51-year-old Sheridan came to AS&E in 1993 as a turnaround specialist after senior management experience at Combustion Engineering and HEC Energy Corp. He also ran his own consulting and investing firm, Value Management. At the time he joined AS&E, the company was losing money with its low-energy, high-resolution Computed Tomography (CT) which scanned the human body.

The company generated sales of only $17.8 million in 1996 and hit $67.1 million for the year ended March 31, 2001. With its R&D expenses running in excess of $5 million a year, it reported only $660,000, or $0.13 per share, in net profit for the year. For the nine months ended Dec. 31, 2001, sales remained flat at $48.6 million. The company reported a loss of $2.5 million for the period due to lower operating margins and higher SG&A expenses.

With the country focused on home security in the aftermath of the terrorist attacks of Sept. 11, AS&E is now on the radar screen of the investment community. And with Sheridan at the controls, it appears to be the time to really take off with dramatic top and bottom line growth.

Jack Mallon is founder and principal of Mallon & Associates, an investment banking firm in New York that serves the global security/crime control industry. He also is editor and publisher of Mallon's Security Investing, a monthly financial newsletter on investing opportunities in the industry. For more information, contact Mallon & Associates, 555 Fifth Avenue, New York, NY 10017. Phone: (212) 697-0028. Fax: (212) 697-1576. Email: jmallon@mallonassociates.com.
Web sites: www.mallonassociates.com and www.securityinvesting.com.

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