**FORM 10-Q/A**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2003**

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from              to              **

 

**CommissionFile Number 1-6549**

 

**American Science and Engineering, Inc.**

(Exact name of Registrant as specified in itscharter)

 

| **Massachusetts**                                                                   |   | **04-2240991**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **829 Middlesex Turnpike  Billerica, Massachusetts**                                |   | **01821**                             |
| (Address of principal executive offices)                                            |   | (Zip Code)                            |
|                                                                                |   |                                  |
| **(978) 262-8700**                                                                  |
| (Registrant’s telephone number, including  area code)                          |
|                                                                                |   |                                  |
|                                                                                |   |                                  |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of1934). Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date

 

| **Class of  Common Stock** |   | **Outstanding  at  August 8, 2003** |
|----------------------------|--------|------------------------------------------|
| $.66 2/3 par value         |   | 7,004,917                                |

 

**EXPLANATORY NOTE**

This Form 10-Q/A of American Science and Engineering, Inc. is beingfiled for the purpose of amending and restating Items 1 and 2 of our Form 10-Qfor the quarter ended June 30, 2003, filed August 13, 2003, toreflect the restatement of our Condensed Consolidated Statements of Operationsfor the quarter ended June 30, 2003. During the quarter ending March31, 2004, the Company determined that certain changes made to the method ofallocating certain overhead costs to inventory effective April 2003 should nothave been made.  As such, the Company has restated its cost of sales andcontracts, gross profit, selling, general and administrative expenses andresearch and development for offsetting amounts for the current fiscal year toreinstate this historical overhead allocation method.  This restatement had no effect on net income (loss) previouslyreported. The information in this Form 10-Q/A does not reflect any subsequentinformation or events or otherwise amend the Form 10-Q except as notedabove.  Accordingly, the amendments set forth in this Form 10-Q/A relatesolely to such restatement.

 

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**PART I – FINANCIAL INFORMATION**

**Item 1 – Financial Statements**

** **

**AmericanScience and Engineering, Inc. and SubsidiariesCondensed Consolidated Balance Sheets**

 

Dollars in thousands

 
|                                                                                                                           |   | **June 30,  2003** |   | **March 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                                                                                                           |   | **(Unaudited)**         |   |                     |   |
| **Assets**                                                                                                                     |   |                    |   |                     |   |
| Current assets:                                                                                                                |   |                    |   |                     |   |
| Cash and cash equivalents                                                                                                      |   | $                       | 7,938  |                     | $      | 5,585 |   |
| Restricted cash                                                                                                                |   | 2,139                   |   | 1,895                    |   |
| Short-term investments                                                                                                         |   | 4,594                   |   | 4,538                    |   |
| Accounts receivable, net of allowances of  $246 at June 30, 2003 and March 31, 2003                                  |   | 11,456                  |   | 10,499                   |   |
| Unbilled costs and fees, net of allowances  of $437 at June 30, 2003 and March 31, 2003                              |   | 3,274                   |   | 4,343                    |   |
| Inventories                                                                                                                    |   | 13,434                  |   | 15,748                   |   |
| Prepaid expenses and other current assets                                                                                      |   | 1,167                   |   | 822                      |   |
| **Total current assets**                                                                                                       |   | 44,002                  |   | 43,430                   |   |
| Other assets                                                                                                                   |   | 132                     |   | 138                      |   |
| Patents and other intangibles, net of  accumulated amortization of $426 at June 30, 2003 and $405 at  March 31, 2003 |   | 14                      |   | 34                       |   |
| Property and equipment, net of accumulated  depreciation of $11,009 at June 30, 2003 and $10,549 at March 31,  2003  |   | 3,410                   |   | 3,714                    |   |
| **Total assets**                                                                                                               |   | **$**                   | 47,558 |                     | $      | 47,316 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

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**AmericanScience and Engineering, Inc. and SubsidiariesCondensed Consolidated Balance Sheets**

 

**Dollars in thousands**

 
|                                                                                                                                                          |   | **June 30,  2003** |   | **March 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                                                                                                                                          |   | **(Unaudited)**         |   |                     |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                |   |                    |   |                     |   |
| Current  liabilities:                                                                                                                                         |   |                    |   |                     |   |
| Accounts payable                                                                                                                                              |   | $                       | 3,395  |                     | $      | 5,327 |   |
| Accrued salaries and benefits                                                                                                                                 |   | 1,714                   |   | 1,476                    |   |
| Accrued warranty costs                                                                                                                                        |   | 535                     |   | 535                      |   |
| Deferred revenue                                                                                                                                              |   | 1,746                   |   | 1,928                    |   |
| Customer deposits                                                                                                                                             |   | 4,346                   |   | 2,747                    |   |
| Other current liabilities                                                                                                                                     |   | 1,425                   |   | 1,221                    |   |
| **Total current  liabilities**                                                                                                                                |   | 13,161                  |   | 13,234                   |   |
|                                                                                                                                                          |   |                    |   |                     |   |
| Non-current liabilities:                                                                                                                                      |   |                    |   |                     |   |
| Warrant liability                                                                                                                                             |   | 1,094                   |   | 820                      |   |
| Deferred revenue                                                                                                                                              |   | 524                     |   | 751                      |   |
| Other non-current liabilities                                                                                                                                 |   | 133                     |   | 153                      |   |
| **Total non-current  liabilities**                                                                                                                            |   | 1,751                   |   | 1,724                    |   |
|                                                                                                                                                          |   |                    |   |                     |   |
| Stockholders’ equity:                                                                                                                                    |   |                    |   |                     |   |
| Preferred stock, no par value  Authorized  - 100,000 shares; Issued -  none                                                                              |   | —                  |   | —                   |   |
| Common stock, $0.66 2/3 par value Authorized  - 20,000,000 shares; Issued 6,894,323 shares at June 30, 2003 and  6,871,729 shares at March 31, 2003 |   | 4,596                   |   | 4,581                    |   |
| Additional  paid in capital                                                                                                                                   |   | 38,931                  |   | 38,780                   |   |
| Cumulative translation adjustment                                                                                                                             |   | 2                       |   | —                   |   |
| Accumulated deficit                                                                                                                                           |   | (10,883                 | )      | (11,003                  | )      |
| **Total stockholders’  equity**                                                                                                                          |   | 32,646                  |   | 32,358                   |   |
| **Total liabilities  and stockholders’ equity**                                                                                                          |   | $                       | 47,558 |                     | $      | 47,316 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**AmericanScience and Engineering, Inc. and SubsidiariesCondensed Consolidated Statements of Operations(Unaudited)**

 

##### **Dollars and shares in thousands,except per share amounts**

 
|                                          |   | **For the  Three Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------|--------|
|                                          |   | **June 30,  2003**         |   | **June 30,  2002** |   |
|                                          |   | **(restated)**                  |   |   |   |
| Revenues:                                     |   |                            |   |   |   |
| Net product sales and contract revenues       |   | $                               | 14,078 |   | $ | 12,945 |   |
| Net service revenues                          |   | 3,310                           |   | 1,973 |   |
| Total net revenues                            |   | 17,388                          |   | 14,918 |   |
|                                          |   |                            |   |   |   |
| Cost of sales and contracts:                  |   |                            |   |   |   |
| Cost of product sales and contracts           |   | 10,944                          |   | 9,349 |   |
| Cost of service revenues                      |   | 1,872                           |   | 2,079 |   |
| Total cost of sales and contracts             |   | 12,816                          |   | 11,428 |   |
| Gross profit                                  |   | 4,572                           |   | 3,490 |   |
|                                          |   |                            |   |   |   |
| Expenses:                                     |   |                            |   |   |   |
| Selling,  general and administrative expenses |   | 3,052                           |   | 3,172 |   |
| Research and development                      |   | 1,285                           |   | 1,866 |   |
| Total expenses                                |   | 4,337                           |   | 5,038 |   |
|                                          |   |                            |   |   |   |
| Operating income (loss)                       |   | 235                             |   | (1,548 | ) |
|                                          |   |                            |   |   |   |
| Other income (expense):                       |   |                            |   |   |   |
| Interest income                               |   | 28                              |   | 24 |   |
| Interest expense                              |   | —                          |   | (86 | ) |
| Other, net                                    |   | (143                            | )      | 701 |   |
| Total other income (expense)                  |   | (115                            | )      | 639 |   |
|                                          |   |                            |   |   |   |
| Income (loss) before income taxes             |   | 120                             |   | (909 | ) |
| Provision for (benefit from) income taxes     |   | —                          |   | — |   |
|                                          |   |                            |   |   |   |
| Net income (loss)                             |   | $                               | 120    |   | $ | (909 | ) |
|                                          |   |                            |   |   |   |
| Income (loss) per share – Basic          |   | $                               | 0.02   |   | $ | (0.15 | ) |
| – Diluted                                |   | $                               | 0.02   |   | $ | (0.15 | ) |
|                                          |   |                            |   |   |   |
| Weighted  average shares – Basic         |   | 6,883                           |   | 5,975 |   |
| – Diluted                                |   | 7,011                           |   | 5,975 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**AmericanScience and Engineering, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited**)

 

Dollars in thousands

 
|                                                                                                  |   | **For the  Three Months Ended** |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                  |   | **June 30,  2003**         |   | **June 30,  2002** |   |
| Cash flows  from operating activities:                                                                |   |                            |   |   |   |
| Net income (loss)                                                                                     |   | $                               | 120    |   | $ | (909 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used for)  operating activities: |   |                            |   |   |   |
| Depreciation and amortization                                                                         |   | 481                             |   | 557 |   |
| Provisions for contract, inventory,  accounts receivable and warranty reserves                        |   | 82                              |   | 350 |   |
| Mark to market  adjustment for short-term investments                                                 |   | (21                             | )      | — |   |
| Change in fair  value of warrants issued                                                              |   | 274                             |   | (723 | ) |
| Changes in  assets and liabilities:                                                                   |   |                            |   |   |   |
| Accounts  receivable                                                                                  |   | (957                            | )      | (1,603 | ) |
| Unbilled costs  and fees                                                                              |   | 1,069                           |   | 495 |   |
| Inventories                                                                                           |   | 2,314                           |   | (1,445 | ) |
| Prepaid expenses, deposits and other assets                                                           |   | (339                            | )      | 87 |   |
| Accounts payable                                                                                      |   | (1,932                          | )      | (1,880 | ) |
| Customer deposits                                                                                     |   | 1,599                           |   | 908 |   |
| Deferred revenue                                                                                      |   | (409                            | )      | 99 |   |
| Accrued expenses and other current  liabilities                                                       |   | 462                             |   | — |   |
| Non-current liabilities                                                                               |   | (20                             | )      | (29 | ) |
| Total adjustments                                                                                     |   | 2,603                           |   | (3,184 | ) |
| Net cash provided by (used for) operating  activities                                                 |   | 2,723                           |   | (4,093 | ) |
|                                                                                                  |   |                            |   |   |   |
| Cash flows from investing activities:                                                                 |   |                            |   |   |   |
| Purchases of short-term investments                                                                   |   | (1,406                          | )      | — |   |
| Maturity of short-term investments                                                                    |   | 1,371                           |   | — |   |
| Purchase of property and equipment                                                                    |   | (157                            | )      | (107 | ) |
| Net cash used for investing activities                                                                |   | (192                            | )      | (107 | ) |
|                                                                                                  |   |                            |   |   |   |
| Cash flows  from financing activities:                                                                |   |                            |   |   |   |
| Increase in restricted cash                                                                           |   | (244                            | )      | — |   |
| Repayment of line of credit                                                                           |   | —                          |   | (9,319 | ) |
| Proceeds from issuance of common stock and  warrants, net                                             |   | —                          |   | 18,423 |   |
| Proceeds from exercise of stock options                                                               |   | 64                              |   | 1,183 |   |
| Net cash provided by financing activities                                                             |   | (180                            | )      | 10,287 |   |
| Effect of exchange rate changes on cash                                                               |   | 2                               |   | — |   |
| Net increase  in cash and cash equivalents                                                            |   | 2,353                           |   | 6,087 |   |
| Cash and cash equivalents at beginning of  period                                                     |   | 5,585                           |   | 7,591 |   |
| Cash and cash equivalents at end of period                                                            |   | $                               | 7,938  |   | $ | 13,678 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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**AmericanScience and Engineering, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements**

 

1.          General

The condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries. All significant intercompanytransactions and balances have been eliminated.

 

The unaudited condensed consolidated financial statements have beenprepared in accordance with the requirements of Form 10-Q and consequently donot include all disclosures required by Form 10-K. These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended March 31, 2003.

 

The consolidated financial statements, in the opinionof management, include all adjustments necessary, consisting solely of normalrecurring adjustments, to present fairly the Company’s financial position,results of operations and cash flows. These results are not necessarily indicative of the results to beexpected for the entire year.

 

Nature of Operations 

The Company is engaged in the development and manufacture of sophisticatedX-ray inspection systems for critical detection and security screeningsolutions for sale primarily to U.S. and foreign government agencies.  The Company has only one reporting segment,X-ray screening products.

 

Restatement

During the quarter ending March 31, 2004, the Company determined thatcertain changes made to the method of allocating certain overhead costs toinventory effective April 2003 should not have been made.  As such, the Company has restated the costof sales and contracts, gross profit, selling, general and administrativeexpenses and research and development for the current fiscal period toreinstate this historical overhead allocation method. This restatement had thefollowing effect:

 
|                                          |   | **For the  Three Months Ended June 30, 2003** |   |
|-----------------------------------------------|--------|----------------------------------------------------|--------|
|                                          |   | **As  Reported**                                   |   | **Restated** |   |
| Cost of product sales and contracts           |   | $                                                  | 10,642 |   | $ | 10,944 |   |
| Cost of service revenues                      |   |                                               | 1,760  |   |   | 1,872 |   |
| Total cost of sales and contracts             |   | $                                                  | 12,402 |   | $ | 12,816 |   |
|                                          |   |                                               |   |   |   |
| Selling, general and administrative  expenses |   | $                                                  | 3,563  |   | $ | 3,052 |   |
| Research and development                      |   | $                                                  | 1,188  |   | $ | 1,285 |   |

 

This restatement had no impact on the operating income or income (loss)per share for the quarter ended June 30, 2003 as the Company consideredthe incremental costs allocated to production to be excessive and as suchexpensed them as incurred in accordance with the inventory capitalizationpolicy described below.

 

Significant Accounting Policies

Revenues on cost reimbursable and long-term fixed price contracts aregenerally recorded as costs are incurred using the percentage of completionmethod.  The Company recognizes salesfor its systems that are produced in a standard manufacturing operation andhave shorter order to deliver cycles at the time of shipment of the system tothe customer and when other revenue recognition criteria is met.  Service revenues exceeded 10% of totalrevenues and as such have been separately presented.

 

Inventories consist of material, labor and manufacturing overhead andare recorded at the lower of cost or net realizable value.  Excessive overhead manufacturing costsattributable to idle facilities or abnormal production volumes are excludedfrom inventory and recorded as an expense in the period incurred.

 

The Company’s Export and Security Agreement with HSBC Bank USA requirescertain cash balances to be restricted as collateral against outstandingstandby letters of credit. (see Note 4)

 

The significant accounting policies followed by the Company and itsSubsidiaries in preparing its consolidated financial statements are set forthin Note 1 to the consolidated financial statements included in its Form 10-Kfor the year ended March 31, 2003. The Company has made no changes to these policies during this quarter.

 

Pro Forma Stock-Based Compensation Expense

As permitted by SFAS No. 123, “Accounting for Stock-BasedCompensation”, the Company has elected to continue to apply AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” to account for its stock-based compensation plans. Had compensationcost for awards under the Company’s stock-based compensation plans beendetermined based on the fair value at the grant dates consistent with themethod set forth under SFAS No. 123, the effect on the Company’s netincome (loss) and income (loss) per share would have been as follows:

 
|                                                                         |   | **Three  months ended** |   |
|------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                         |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Net income (loss):                                                           |   |                    |   |   |   |
| As reported                                                                  |   | $                       | 120    |   | $ | (909 | ) |
| Less:   Stock based compensation using fair value method for all awards |   | (919                    | )      | (721 | ) |
| Pro forma net loss                                                           |   | $                       | (799   | ) | $ | (1,630 | ) |
| Income (loss) per share—Basic:                                          |   |                    |   |   |   |
| As reported                                                                  |   | $                       | 0.02   |   | $ | (0.15 | ) |
| Pro forma                                                                    |   | $                       | (0.12  | ) | $ | (0.27 | ) |
| Income (loss) per share—Diluted:                                        |   |                    |   |   |   |
| As reported                                                                  |   | $                       | 0.02   |   | $ | (0.15 | ) |
| Pro forma                                                                    |   | $                       | (0.12  | ) | $ | (0.27 | ) |

 

6

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The fair value of each option granted wasestimated on the grant date using the Black-Scholes option pricing model withthe following weighted average assumptions: risk-free interest rates of  5.0%, 5.0%, and 4.53% to 5.13% for fiscal2004, 2003 and 2002, respectively, expected volatility of 73%, 73%, and 68% for2004, 2003 and 2002, respectively, an expected dividend yield of 0% and anexpected life of 7 years for all periods.

 

New Accounting Pronouncements

 

In November 2002, the Task Force reached a consensus on EmergingIssues Task Force Issue No. 00-21, “Accounting for Revenue Arrangements withMultiple Deliverables”.  This issue addresses how to determine whether anarrangement involving multiple deliverables contains more than one unit ofaccounting and how arrangement consideration should be measured and allocatedto the separate units of accounting.  This guidance is effective for theCompany on July 1, 2003.  The Company is currently evaluating theimpact of this guidance on its revenue recognition policies and will adopt thisguidance prospectively.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting forStock- Based Compensation- Transition and Disclosure- an amendment of FASBStatement No. 123” (FAS 148).  This statementamends SFAS No. 123 “Accounting for Stock Based Compensation” (FAS 123) toprovide alternative methods of voluntarily transitioning to the fair valuebased method of accounting for stock-based employee compensation.  FAS 148 also amends the disclosurerequirements of FAS 123 to require disclosure of the method used to account forstock-based employee compensation and the effect of the method on reportedresults in both annual and interim financial statements.   The amended disclosure provisions areeffective for the fiscal years ending after December 31, 2002 and theCompany has adopted the amended disclosure provisions as of March 31,2003.  The Company has not decidedwhether it will voluntarily change to the fair value based method of accountingfor stock-based employee compensation at this time.

 

In May 2003, the FASB issued FAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” FAS No. 150 established standards for how to classifyand measure certain financial instruments with characteristics of bothliabilities and equity. The provisions of FAS No. 150 are effective immediatelyfor all financial instruments entered into or modified after May 31, 2003.  The Company adopted these provisions as ofJune 1, 2003 with no material impact on the Company’s financial positionor results of operations.  For all otherinstruments, the Standard goes into effect as of July 1, 2003, except formandatory redeemable financial instruments of a non-public entity, which iseffective for existing or new contracts as of January 1, 2004.   The Company does not expect theseprovisions to have an impact on its financial position or results ofoperations.

 

2.          Inventories

 
| **Inventories consisted of:  (Dollars in thousands)** |   | **June 30,  2003** |   | **March 31,  2003** |   |
|-------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                                  |   |                    |   |                     |   |
| Raw materials and completed sub-assemblies            |   | $                       | 8,668  |                     | $      | 8,119 |   |
| Work-in-process                                       |   | 3,353                   |   | 3,783                    |   |
| Finished goods                                        |   | 1,413                   |   | 3,846                    |   |
| Total                                                 |   | $                       | 13,434 |                     | $      | 15,748 |   |

 

3.          Incomeper Common and Common Equivalent Share

Basic earnings per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theperiod.  Diluted earnings per shareincludes the dilutive impact of options and warrants using the average shareprice of the Company’s common stock for the period. For the quarters endedJune 30, 2003 and June 30, 2002, common stock equivalents of1,448,072 and 944,159, respectively, are excluded from diluted earnings pershare, as their effect is anti-dilutive.

 

7

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| **Earnings Per Share****(in thousands except per share amounts)**                         |                    | **Three  Months Ended** |                    |
|-------------------------------------------------------------------------------------------|-------------------------|-------------------------|-------------------------|
|                                                                                      | **June 30,  2003** |                    | **June 30,  2002** |   |
|                                                                                      |                    |                    |                    |   |   |
| **Basic**                                                                                 |                    |                    |                    |   |   |
| Net income (loss)                                                                         |                    | $                       | 120                     |   | $ | (909 | ) |
| Weighted  average number of common shares outstanding – basic                        |                    | 6,883                   |                    | 5,975 |   |
| Net income (loss) per share – basic                                                  |                    | $                       | 0.02                    |   | $ | (0.15 | ) |
| **Diluted**                                                                               |                    |                    |                    |   |   |
| Net income (loss)                                                                         |                    | $                       | 120                     |   | $ | (909 | ) |
| Weighted average number of common shares  outstanding                                     |                    | 6,883                   |                    | 5,975 |   |
| Effect of stock options                                                                   |                    | 128                     |                    | — |   |
| Weighted average number of common and  potential common shares outstanding – diluted |                    | 7,011                   |                    | 5,975 |   |
| Net income (loss) per share – diluted                                                |                    | $                       | 0.02                    |   | $ | (0.15 | ) |

 

4.          Borrowings

 

On November 30, 2000, the Company signed two credit agreementswith HSBC Bank USA (“HSBC”). The first agreement was for a $10.0 milliondomestic revolving credit facility to support the Company’s routine workingcapital and standby letter of credit needs. The second was a $30.0 millionexport credit and security agreement, guaranteed by the Export-Import Bank ofthe United States to support the Company’s overseas contract, trade finance andworking capital needs.

 

On February 14, 2002, these credit agreements were amended toincrease the domestic revolving credit facility to $20.0 million and to reducethe export credit facility to $20.0 million in anticipation of higher domesticdemand.  These agreements were furtheramended on November 28, 2002 to reduce the domestic revolving creditfacility to $5 million, with maximum borrowings set at the lower of:  (a) the sum of 85% of eligible domesticaccounts receivable plus the lower of: (i) 40% of eligible raw materials andwork–in–process inventory; or; (ii) $2 million, or; (b) $5 million.  In addition, the interest rate and certainfinancial covenants were amended and the expiration date of the facility wasextended to February 28, 2003. In February 2003 and May 2003, theseagreements were further amended to extend expiration to July 31, 2003.  The credit facility, as amended, bears aninterest rate at the HSBC Bank USA prime rate plus 1/4%or LIBOR plus 2.0% at the Company’s option (4.25% at June 30, 2003). AtJune 30, 2003, there were no borrowings outstanding and $4.3 millionin standby letters of credit, guaranteeing performance on certain largeinternational cargo projects, were in effect against this credit facility. Noamounts have been drawn against these letters of credit.

 

The credit agreements are collateralized by certain assets of theCompany, and contain certain restrictions, including limitations on the amountof distributions that can be made to stockholders, encumbrances of assets, andloans that can be made to officers, and requires the maintenance of certainfinancial covenants. As of June 30, 2003, the Company was not incompliance with its tangible net worth and earnings covenants, but hasrenegotiated a new credit line with a new bank which contains revised covenantsunder which the Company would have been in compliance at June 30, 2003.

 

On August 11, 2003, the Company entered into two new creditagreements with Silicon Valley Bank East replacing its HSBC credit agreementsthat expired on July 31, 2003.  Thefirst agreement is a $5.0 million domestic revolving credit facility tosupport the Company’s routine working capital needs.   Maximum borrowings for this line are set at the lower of  (a) the sum of 80% of eligible domesticaccounts receivable plus 10% of finished goods inventory up to $750,000, or;(b) $5 million.  The second was a$20.0 million export credit and security agreement, guaranteed by theExport-Import Bank of the United States to support the Company’s overseascontract, trade finance and working capital needs.

 

The credit facilities bear an interest rate of the greater of 4.25% orthe Silicon Valley Bank prime rate (4.25% at June 30, 2003) and has anexpiration date of November 30, 2004.** **The credit agreements arecollateralized by certain assets of the

 

8

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Company, and contain certain restrictions, including limitations on theamount of distributions that can be made to stockholders, and the dispositionor encumbrances of assets, and requires the maintenance of certain financialcovenants.

 

5.          PrivatePlacement Offering

On May 28, 2002, the Company closed on a privateplacement offering of common stock and warrants.  A total of 1,115,000 shares were sold to accredited investors ata price of $17.64 each. In addition, warrants to purchase an additional 295,475shares of common stock at a price of $23.52 were issued.  Proceeds to the Company approximated $18.4million, net of approximately $1.3 million of issuance cost.   The warrants were immediately vested andhave a five-year life expiring in May of 2007. Due to certain conversion features of these warrants, that provide thatthe holder may opt for a cash settlement in certain instances, including amerger, a sale of all or substantially all of the Company’s assets, or a tenderoffer or exchange offer of shares of the Company’s stock, a liability equal tothe Black-Scholes valuation of the warrants at the deal closing date wasrecorded on the Company’s balance sheet. The “mark to market” change in the warrants value of $(274,000) and$724,000, was recorded as other income (expense) for the three months endedJune 30, 2003 and June 30, 2002, respectively.  The liability of $1,094,000 and $820,000associated with the warrants is recorded as a non-current liability on theJune 30, 2003 and March 31, 2003 balance sheets, respectively.  The fair market value of the warrants wasdetermined using the Black Scholes pricing model and an assumed volatility of73% and interest rate of 5%.

 

6.          Guarantees

At June 30, 2003, the Company had $4.3 million ofletters of credit outstanding guaranteeing performance on certain largeinternational cargo projects.  Theseletters of credit are issued through the Company’s export credit and securityagreement (see Note 4) and have expiration dates through June of 2004.

 

The Company’s parcel product line carries a one-yearwarranty, the costs of which are accrued for at time of shipment.  Accrual rates are based upon historicalexperience over the preceding twelve months and the adequacy of the warrantyreserve is evaluated monthly.  Warrantyexperience for the three months ended June 30, 2003 and June 30, 2002is as follows:

 
| **(in thousands)**                               |   | **Three  months  ended June 30,  2003** |   | **Three  months  ended June 30,  2002** |   |
|--------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
| Warranty accrual beginning of period             |   | $                                            | 535    |                                         | $      | 196 |   |
| Accruals for warranties issued during the period |   | 82                                           |   | 220                                          |   |
| Accruals related to pre-existing warranties      |   | —                                       |   | 30                                           |   |
| Warranty costs incurred during period            |   | (82                                          | )      | (96                                          | )      |
| Balance at end of period                         |   | $                                            | 535    |                                         | $      | 350 |   |

 

9

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**Item 2 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

Restatement

Duringthe quarter ending March 31, 2004, the Company determined that certain changesmade to the method of allocating certain overhead costs to inventory effectiveApril 2003 should not have been made.  Assuch, the Company has restated cost of sales and contracts, gross profit,selling, general and administrative expenses and research and development foroffsetting amounts for the current fiscal year to reinstate this historicaloverhead allocation method. This restatement had no impact on operating incomeor income (loss) per share for the quarter ended June 30, 2003.

 

Results of Operations 

Total net revenues for the first quarter of fiscal2004 increased by $2,470,000 to $17,388,000 compared to the correspondingperiod a year ago.  This increase isattributable primarily to increased MobileSearch systems revenues ($6,216,000)due to deliveries of four systems sold under new contracts with the Departmentof Defense during the quarter.  Thisincrease is partially offset by decreased ParcelSearch and other CargoSearchsystem revenues as compared to the prior year. The first quarter of fiscal 2003 had significant ParcelSearch deliveriesunder orders received immediately post September 11th.  Bookings for these systems have nownormalized to levels slightly above the pre-September 11thdemand.   Service revenues increased by$1,337,000 compared to the first quarter of fiscal 2003 as the Company hasentered into service contracts for equipment that had been under warranty inthe first quarter of fiscal 2003.

 

Total cost of sales and contracts for the firstquarter of fiscal 2004 increased by $1,388,000 to $12,816,000 compared to thecorresponding period a year ago. Cost of sales and contracts represented 74% ofrevenues versus 77% for the corresponding period last year.  This margin improvement is due to thesignificantly improved service margins as the Company entered into severallarge service contracts during fiscal 2003 as warranties expired and replacedcertain unprofitable service contracts and time and material servicearrangements offset somewhat by reduced margins on product and contractrevenues attributable to reduced volumes in ParcelSearch and the Company's HESdivision.

 

Selling, general and administrative expenses for thefirst quarter of fiscal 2004 of $3,052,000 were $120,000 lower than thecorresponding period a year ago. Selling, general and administrative expenses represented 18% of revenuesin the current period compared to 21% for the corresponding period lastyear.  This decrease in expenses was dueto decreased consulting and financing charges as compared to the correspondingperiod a year ago.  This was offset inpart by  severance and other costsincurred in the period related to the termination of the Company’s ChiefExecutive Officer of approximately $400,000.

 

Company funded research and development expenses of$1,285,000 for the first quarter of fiscal 2004 decreased by $581,000 comparedto the corresponding period last year. Research and development expensesrepresented 7% of revenues in the current period compared to 13% for thecorresponding period last year. Current period expenditures decreasedcomparatively as the Company limited research and development initiatives inorder to control costs and focused engineering efforts on revenue producingprograms during the quarter.

 

Other income (expense) was $115,000 in expense for thefirst quarter of fiscal 2004 as compared to $639,000 in other income for thecorresponding period a year ago.   Aspart of the private equity placement during the first quarter of 2003, theCompany issued 295,475 warrants.  Due tocertain conversion features of these warrants that provide that the holder mayopt for a cash settlement in certain instances, including a merger, a sale ofall or substantially all of the Company’s assets, or a tender offer or exchangeoffer of shares of the Company’s stock, a liability equal to the Black-Scholesvaluation of the warrants at the deal closing date was recorded on the Company’sbalance sheet.  At June 30, 2003,these warrants were “marked to market” using Black-Scholes and the change inthe valuation of the warrants of $274,000 was recorded as other expense in thequarter. During the three months ended June 30, 2002, this calculationgenerated  $723,000 in other income.

 

The potential tax benefits on losses incurred infiscal 2003 were fully reserved against due to the uncertainty as to whetherthe additional loss carryforwards would ultimately be realized. In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The Company has not provided a provision for taxes in the quarterended June 30, 2003 as the Company will not have to pay taxes for theincome earned in the quarter due to its net operating loss carryforwards.

 

The Company earned net income of $120,000 during thefirst quarter of fiscal 2004 as compared to a net loss of $909,000 in the firstquarter of fiscal 2003.  The significantfactors contributing to these results are noted in the above sections.

 

10

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Liquidity and Capital Resources 

On May 28, 2002, the Company closed on a privateplacement offering of common stock and warrants. A total of 1,115,000 shareswere sold to accredited investors at a price of $17.64 each. In addition,warrants to purchase an additional 295,475 shares of common stock at a price of$23.52 were issued. These warrants have a five-year life expiring in May of2007.  Proceeds to the Companyapproximated $18.4 million. The proceeds from this private placementoffering have been and are being utilized for general corporate purposesincluding debt repayment, capital expenditures, and investments in productdevelopment and working capital needs.

 

Cash and cash equivalents increased by $2,353,000 to$7,938,000 at June 30, 2003 compared to $5,585,000 at March 31, 2003.This increase in cash and cash equivalents is primarily due to cash generatedfrom operations as MobileSearch trucks in inventory at March 31, 2003 weredelivered to customers in the current quarter. Working capital increased by$645,000 (2%) since March 31, 2003, increasing from $30,196,000 to $30,841,000at June 30, 2003.

 

On November 30, 2000, the Company signed two credit agreementswith HSBC Bank USA (“HSBC”). The first agreement was for a $10.0 milliondomestic revolving credit facility to support the Company’s routine workingcapital and standby letter of credit needs. The second was a $30.0 millionexport credit and security agreement, guaranteed by the Export-Import Bank ofthe United States to support the Company’s overseas contract, trade finance andworking capital needs.

 

On February 14, 2002, these credit agreements were amended toincrease the domestic revolving credit facility to $20.0 million and to reducethe export credit facility to $20.0 million in anticipation of higher domesticdemand.  These agreements were furtheramended on November 28, 2002 to reduce the domestic revolving creditfacility to $5 million, with maximum borrowings set at the lower of:  (a) the sum of 85% of eligible domesticaccounts receivable plus the lower of: (i) 40% of eligible raw materials andwork-in-process inventory; or; (ii) $2 million, or; (b) $5 million.  In addition, the interest rate and certainfinancial covenants were amended and the expiration date of the facility wasextended to February 28, 2003. In February 2003 and May 2003, theseagreements were further amended to extend expiration to July 31,2003.  The credit facility, as amended,bears an interest rate at the HSBC Bank USA prime rate plus 1⁄4% or LIBOR plus2.0% at the Company’s option (4.25% at June 30, 2003). At June 30,2003, there were no borrowings outstanding and $4.3 million in standbyletters of credit, guaranteeing performance on certain large internationalcargo projects, were in effect against this credit facility. No amounts havebeen drawn against these letters of credit.

 

The credit agreements are collateralized by certain assets of theCompany, and contain certain restrictions, including limitations on the amountof distributions that can be made to stockholders, encumbrances of assets, andloans that can be made to officers, and requires the maintenance of certainfinancial covenants. As of June 30, 2003, the Company was not incompliance with its tangible net worth and earnings covenants, but hasrenegotiated a new credit line with a new bank which contains revised covenantsunder which the Company would have been in compliance at June 30, 2003.

 

On August 11, 2003, the Company entered into two new creditagreements with Silicon Valley Bank East replacing its HSBC credit agreementsthat expired on July 31, 2003.** **The first agreement is a $5.0 milliondomestic revolving credit facility to support the Company’s routine workingcapital and standby letter of credit needs.  Maximum borrowings for this line are set at the lower of  (a) the sum of 80% of eligible domesticaccounts receivable plus 10% of finished goods inventory up to $750,000, or;(b) $5 million.  The second was a$20.0 million export credit and security agreement, guaranteed by theExport-Import Bank of the United States to support the Company’s overseascontract, trade finance and working capital needs.

 

The credit facilities bear an interest rate of the greater of 4.25% orthe Silicon Valley Bank prime rate (4.25% at June 30, 2003) and has anexpiration date of November 30, 2004.** **The credit agreements arecollateralized by certain assets of the Company, and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.

 

The Company believes that its existing cash and investments plus cashgenerated from operations and amounts available under its credit facilities areadequate to finance its operating and capital requirements for fiscal 2004.

 

11

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 New Accounting Pronouncements:

In November 2002, the Task Force reached a consensus on EmergingIssues Task Force Issue No. 00-21, “Accounting for Revenue Arrangements withMultiple Deliverables”.  This issue addresses how to determine whether anarrangement involving multiple deliverables contains more than one unit ofaccounting and how arrangement consideration should be measured and allocatedto the separate units of accounting.  This guidance is effective for theCompany on July 1, 2003.  The Company is currently evaluating theimpact of this guidance on its revenue recognition policies and will adopt thisguidance prospectively.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting forStock- Based Compensation- Transition and Disclosure- an amendment of FASBStatement No. 123” (FAS 148).  Thisstatement amends SFAS No. 123 “Accounting for Stock Based Compensation” (FAS123) to provide alternative methods of voluntarily transitioning to the fairvalue based method of accounting for stock-based employee compensation.  FAS 148 also amends the disclosurerequirements of FAS 123 to require disclosure of the method used to account forstock-based employee compensation and the effect of the method on reportedresults in both annual and interim financial statements.   The amended disclosure provisions areeffective for the fiscal years ending after December 31, 2002 and theCompany has adopted the amended disclosure provisions as of March 31,2003.  The Company has not decided whetherit will voluntarily change to the fair value based method of accounting forstock-based employee compensation at this time.

 

In May 2003, the FASB issued FAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” FAS No. 150 established standards for how to classifyand measure certain financial instruments with characteristics of bothliabilities and equity. The provisions of FAS No. 150 are effective immediatelyfor all financial instruments entered into or modified after May 31, 2003.  The Company adopted these provisions as ofJune 1, 2003 with no material impact on the Company’s financial positionor results of operations.  For all otherinstruments, the Standard goes into effect as of July 1, 2003, except formandatory redeemable financial instruments of a non-public entity, which iseffective for existing or new contracts as of January 1, 2004.   The Company does not expect theseprovisions to have an impact on its financial position or results ofoperations.

 

**Item 3 - Quantitative and QualitativeDisclosures About Market Risk**

 

The Company is subject to interest rate riskon its credit facilities which have variable interest rates tied to the PrimeRate or LIBOR.  As of June 30,2003, the Company had no variable interest rate debt outstanding.

 

The cash accounts for the Company’soperations in Singapore, Hong Kong, England, and Abu Dhabi are maintained inSingapore dollars, Hong Kong dollars, pounds sterling and dirhams,respectively.  Foreign currency accountsare marked to market at current rates that resulted in immaterial translationadjustments to stockholders equity.  Thegains and losses from foreign currency transactions are included in thestatement of operations for the period and were also immaterial.  A hypothetical 10% change in foreigncurrency rates would not have a material impact on the Company’s results ofoperations or financial position.

 

As of June 30, 2003, the Company holdsshort-term investments consisting of money market funds and U.S. government andgovernment agency bonds.  The Company’sprimary objective with its investment portfolio is to invest available cashwhile preserving principal and meeting liquidity needs. These investments havean average interest rate of approximately 1.7% and are subject to interest raterisk. As a result of the average maturity and conservative nature of theinvestment portfolio, a sudden change in interest rates would not have amaterial effect on the value of these investments.

 

In fiscal 2003, the Company issued 295,475warrants in connection with a private placement offering of common stock.  These warrants can be exchanged for cashunder certain circumstances including a merger, sale or tender offer of theCompany and as such a liability equal to Black-Scholes value of the warrants isrecorded on the balance sheet.  Changesin the fair value of the warrants are recorded as other income (expense).  The Black-Scholes value of these warrantscan fluctuate significantly based on the current fair market value of theCompany’s common stock.  A 10% change inthe fair market value of the Company’s common stock, holding other assumptionsconstant, would have approximately a $135,000 impact on earnings.

 

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**Item 4 - Controls and Procedures**

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our management,including our Interim Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities ExchangeAct of 1934. Based upon that evaluation, our Interim Chief Executive Officerand our Chief Financial Officer concluded that our disclosure controls andprocedures are effective for gathering, analyzing and disclosing theinformation we are required to disclose in reports filed under such Act.

 

There have been no changes in our internal controls or in otherfactors, which could affect internal controls subsequent to the date that theCompany carried out its evaluation.

 

**PART II – OTHER INFORMATION**

 

**Item 1 – Legal Proceedings**

*In adecision issued December 29, 1999, the United States Court of Appeals forthe Federal Circuit in Washington, D.C. ruled that the Company may pursue apatent infringement claim against Vivid Technologies (“Vivid”), which producesX-ray detection devices used in baggage scanning equipment. The Appeals Courtoverturned a 1998 decision in Vivid’s favor by the Massachusetts FederalDistrict Court. The lawsuit, filed by Vivid in May 1996, concerned whetherVivid’s X-ray detection devices infringed on AS&E’s patent. The DistrictCourt had ruled that AS&E could not assert a claim that Vivid’s devicesinfringed on AS&E’s patent. The Appeals Court reversed the district court’sfinding on summary judgment that Vivid did not infringe on AS&E’s patent,as well as the district court’s denial of AS&E’s request for discovery tooppose Vivid’s summary judgment motion.  Vivid was acquired by PerkinElmer in 2000.*

* *

*InSeptember 1998, the Company filed suit against EG&G AstrophysicsResearch Corp. (“EG&G”) in U.S. District Court in Boston, Massachusettsalleging that EG&G infringed upon at least two patents owned by the Companyand that EG&G had misappropriated certain trade secrets of the Company. InDecember 1999, EG&G filed a Motion for Summary Judgment that EG&Gdid not misappropriate the Company’s trade secrets and in March 2000EG&G filed a Motion for Summary Judgment that EG&G did not infringe theCompany’s patents. In February 2001 the Court denied EG&G’s and theCompany’s motions for Summary Judgment.*

* *

*In arelated matter, EG&G filed a request with the U.S. Patent and TrademarkOffice (“USPTO”) for reexamination of the two patents that were at issue in thepatent infringement action described above. The Company filed oppositions tothe re-examination requests and the Company was advised by the USPTO that bothits MobileSearch X-ray inspection and its Z® Backscatter X-ray inspectiontechnology patents were upheld in all material respects on January 30,2001.*

* *

*InMarch 2003, the Company entered into a Partial Settlement Agreement andRelease with PerkinElmer, the parent of EG&G, with respect to theabove-referenced litigation.  ThePartial Settlement Agreement and Release covers claims and counter-claims inthe EG&G and Vivid actions up to June 14, 2002, the date of closing onthe sale of EG&G by PerkinElmer to L-3 Communications.  Certain aspects of the EG&G litigationremain pending in the District Court at this time.*

* *

*TheCompany is also subject to various legal proceedings and claims that arise inthe ordinary course of business. The Company currently believes that resolvingthese matters will not have a material adverse impact on its financialcondition or results of operations.*

 

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**Item 6 - Exhibits and Reports on Form 8-K**

 
| (a) | Exhibits |
|-----|----------|

 
| 10(c)(xv) | Lease of Mountain View, CA facility for High Energy Systems Division                                                                                          |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                          |
| 10(d)(ix) | Amendment No. 4 to the Export Credit and Security Agreement between  American Science and Engineering, Inc. and HSBC Bank dated May 31, 2003                  |
|      |                                                                                                                                                          |
| 10(d)(x)  | Amendment No. 4 to the Revolving Loan and Security Agreement between  American Science and Engineering, Inc. and HSBC Bank dated May 31, 2003                 |
|      |                                                                                                                                                          |
| 31.1      | Certification by Principal Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|      |                                                                                                                                                          |
| 31.2      | Certification by Principal Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|      |                                                                                                                                                          |
| 32.1      | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|      |                                                                                                                                                          |
| 32.2      | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|      |                                                                                                                                                          |
| (b)       | Reports on Form 8-K                                                                                                                                           |
|      |
| Form 8-K  | Dated April 30, 2003 in connection with the announcement of  earnings expectations for the quarter ended March 31, 2003.                            |
| Form 8-K  | Dated May 20, 2003 announcing the replacement of Ralph S. Sheridan as  President and Chief Executive Officer                                                  |
| Form 8-K  | Dated May 29, 2003 in connection with the announcement of the fourth  quarter and fiscal 2003 financial results                                               |
|           |                                                                                                                                                               |  |

 

The information required by Exhibit Item 11 (Statement re: Computationof Income per Common and Common Equivalent Share) may be found in Footnote No.3 on Page 8.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned hereunto duly authorized.

 

 
|                          | AMERICAN SCIENCE AND ENGINEERING, INC.                |
|-------------------------------|-------------------------------------------------------|
| (Registrant)                  |                                                  |
|                          |                                                  |
| Date  June 14, 2004 | /s/ Paul Theodore Owens                               |   |
|                          | Paul Theodore Owens                                   |
|                          | Vice President, Treasurer and Chief Financial Officer |

 

*Safe Harbor Statement*

*The foregoing 10-Q/A contains statements concerningthe Company’s financial performance and business operations, which may beconsidered “forward-looking” under applicable securities laws.*

* *

*The Company wishes to caution readers of this Form 10-Q/A that actualresults might differ materially from those projected*

 

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*in any forward-looking statements.*

 

*Factors which might cause actual results todiffer materially from those projected in the forward-looking statementscontained herein include the following: significant reductions or delays inprocurements of the Company’s systems by the United States and othergovernments; disruption in the supply of any source component incorporated intoAS&E’s products; litigation seeking to restrict the use of intellectualproperty used by the Company; potential product liability claims against theCompany; global political trends and events which affect public perception ofthe threat presented by drugs, explosives and other contraband; global economicdevelopments and the ability of governments and private organizations to fundpurchases of the Company’s products to address such threats; and the potentialinsufficiency of Company resources, including human resources, capital, plantand equipment and management systems, to accommodate any future growth, ourability to find a replacement for our Chief Executive Officer and future delaysin federal funding.**These and certain other factors whichmight cause actual results to differ materially from those projected are morefully set forth under the caption “Forward-Looking Information and FactorsAffecting Future Performance” in the Company’s Registration Statement on Form10-K.*

 

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