**FORM 10-Q/A**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

**For the quarterly period ended September 30,2003**

**OR**

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

**For the transition periodfrom        to        **

 

**Commission File Number 1-6549**

 

**AmericanScience and Engineering, Inc.**

(Exact name of Registrant as specified in its charter)

 

| **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 whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes    ý    No    o

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct of 1934). Yes    ý    No    o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicable date

 

| **Class of  Common Stock** |   | **Outstanding  at  November 6, 2003** |
|----------------------------|--------|---------------------------------------|
| $.66 2/3 par value         |   | 7,288,049                             |

 

**EXPLANATORY NOTE**

This Form 10-Q/A of AmericanScience and Engineering, Inc. is being filed for the purpose of amending andrestating Items 1and 2 of our Form 10-Q for the quarter ended September 30,2003, filed November 13, 2003, to reflect the restatement of our CondensedConsolidated Statements of Operations for the quarter and six months endedSeptember 30, 2003.  During the quarter ending March 31, 2004, the Companydetermined that certain changes made to the method of allocating certainoverhead costs to inventory effective April 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.  Thisrestatement had no effect on net income (loss) previously reported. The informationin this Form 10-Q/A does not reflect any subsequent information or events orotherwise amend the Form 10-Q except as noted above.  Accordingly, theamendments set forth in this Form 10-Q/A relate solely to such restatement.

** **

 

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**PART I – FINANCIAL INFORMATION**

**Item 1 – Financial Statements**

 

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

 

Dollars inthousands

 
|                                                                                                                    |   | **September  30,  2003** |   | **March 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|---------------------|--------|
|                                                                                                                    |   | **(Unaudited)**          |   |                |   |
| **Assets**                                                                                                              |   |                     |   |                |   |
| Current assets:                                                                                                         |   |                     |   |                |   |
| Cash and cash equivalents                                                                                               |   | $                        | 11,116 |                | $      | 5,585 |   |
| Restricted cash                                                                                                         |   | 1,733                    |   | 1,895               |   |
| Short-term investments                                                                                                  |   | 4,606                    |   | 4,538               |   |
| Accounts receivable, net of allowances of  $226 and $246 at September 30, 2003 and March 31, 2003                       |   | 12,872                   |   | 10,499              |   |
| Unbilled costs and fees, net of allowances  of $437 at September 30, 2003 and March 31, 2003                            |   | 5,196                    |   | 4,343               |   |
| Inventories                                                                                                             |   | 13,878                   |   | 15,748              |   |
| Prepaid expenses and other current assets                                                                               |   | 1,241                    |   | 822                 |   |
| **Total current assets**                                                                                                |   | 50,642                   |   | 43,430              |   |
| Property and equipment, net of accumulated  depreciation of $11,382 at September 30, 2003 and $10,549 at March 31, 2003 |   | 3,216                    |   | 3,714               |   |
| Other assets                                                                                                            |   | 135                      |   | 172                 |   |
| **Total assets**                                                                                                        |   | **$**                    | 53,993 |                | $      | 47,316 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

2

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**AmericanScience and Engineering, Inc. and SubsidiaryCondensed Consolidated Balance Sheets(Continued)**

 

**Dollarsin thousands except per share amounts**

 
|                                                                                                                                                          |   | **September  30,  2003** |   | **March 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|---------------------|--------|
|                                                                                                                                                          |   | **(Unaudited)**          |   |                |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                 |   |                     |   |                |   |
| Current liabilities:                                                                                                                                          |   |                     |   |                |   |
| Accounts payable                                                                                                                                              |   | $                        | 4,774  |                | $      | 5,327 |   |
| Accrued salaries and benefits                                                                                                                                 |   | 1,940                    |   | 1,476               |   |
| Accrued warranty costs                                                                                                                                        |   | 549                      |   | 535                 |   |
| Deferred revenue                                                                                                                                              |   | 1,825                    |   | 1,928               |   |
| Customer deposits                                                                                                                                             |   | 5,673                    |   | 2,747               |   |
| Other current liabilities                                                                                                                                     |   | 1,913                    |   | 1,221               |   |
| **Total current liabilities**                                                                                                                                 |   | 16,674                   |   | 13,234              |   |
|                                                                                                                                                          |   |                     |   |                |   |
| Non-current liabilities:                                                                                                                                      |   |                     |   |                |   |
| Warrant liability                                                                                                                                             |   | 1,286                    |   | 820                 |   |
| Deferred revenue                                                                                                                                              |   | 346                      |   | 751                 |   |
| Other non-current liabilities                                                                                                                                 |   | 112                      |   | 153                 |   |
| **Total non-current liabilities**                                                                                                                             |   | 1,744                    |   | 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 7,254,013 shares at September 30, 2003  and 6,871,729 shares at March 31, 2003 |   | 4,835                    |   | 4,581               |   |
| Additional paid in capital                                                                                                                                    |   | 41,201                   |   | 38,780              |   |
| Cumulative translation adjustment                                                                                                                             |   | 9                        |   | —              |   |
| Accumulated deficit                                                                                                                                           |   | (10,470                  | )      | (11,003             | )      |
| **Total stockholders’ equity**                                                                                                                           |   | 35,575                   |   | 32,358              |   |
| **Total liabilities and stockholders’ equity**                                                                                                           |   | $                        | 53,993 |                | $      | 47,316 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

3

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**AmericanScience and Engineering, Inc. and Subsidiary**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 

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

 
|                                                                     |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|--------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                                     |   | **Sept. 30,  2003**     |   | **Sept. 30,  2002**   |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
|                                                                     |   | **(restated)**          |   |                  |   | **(restated)** |   |   |   |
| Revenues:                                                                |   |                    |   |                  |   |   |   |   |   |
| Net product sales and contract revenues                                  |   | $                       | 15,010 |                  | $      | 14,859 |   | $ | 29,088 |   | $ | 27,804 |   |
| Net service revenues                                                     |   | 3,169                   |   | 2,076                 |   | 6,479 |   | 4,049 |   |
| Total net revenues                                                       |   | 18,179                  |   | 16,935                |   | 35,567 |   | 31,853 |   |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Cost of sales and contracts:                                             |   |                    |   |                  |   |   |   |   |   |
| Cost of product sales and contracts                                      |   | 11,151                  |   | 11,757                |   | 22,095 |   | 21,106 |   |
| Cost of service revenues                                                 |   | 2,231                   |   | 1,816                 |   | 4,103 |   | 3,895 |   |
| Total cost of sales and contracts                                        |   | 13,382                  |   | 13,573                |   | 26,198 |   | 25,001 |   |
| Gross profit                                                             |   | 4,797                   |   | 3,362                 |   | 9,369 |   | 6,852 |   |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Expenses:                                                                |   |                    |   |                  |   |   |   |   |   |
| Selling, general and  administrative expenses                            |   | 2,856                   |   | 3,776                 |   | 5,908 |   | 6,948 |   |
| Research and development                                                 |   | 1,359                   |   | 1,657                 |   | 2,644 |   | 3,523 |   |
| Total expenses                                                           |   | 4,215                   |   | 5,433                 |   | 8,552 |   | 10,471 |   |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Operating income (loss)                                                  |   | 582                     |   | (2,071                | )      | 817 |   | (3,619 | ) |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Other income (expense):                                                  |   |                    |   |                  |   |   |   |   |   |
| Interest income                                                          |   | 20                      |   | 29                    |   | 48 |   | 53 |   |
| Interest expense                                                         |   | —                  |   | —                |   | — |   | (86 | ) |
| Other, net                                                               |   | (189                    | )      | 1,345                 |   | (332 | ) | 2,046 |   |
| Total other income (expense)                                             |   | (169                    | )      | 1,374                 |   | (284 | ) | 2,013 |   |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Income (loss) before income taxes                                        |   | 413                     |   | (697                  | )      | 533 |   | (1,606 | ) |
| Provision for (benefit from) income taxes                                |   | —                  |   | —                |   | — |   | — |   |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                                        |   | $                       | 413    |                  | $      | (697 | ) | $ | 533 |   | $ | (1,606 | ) |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Income (loss) per share       – Basic |   | $                       | 0.06   |                  | $      | (0.10 | ) | $ | 0.08 |   | $ | (0.25 | ) |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| – Diluted                                                           |   | $                       | 0.06   |                  | $      | (0.10 | ) | $ | 0.07 |   | $ | (0.25 | ) |
|                                                                     |   |                    |   |                  |   |   |   |   |   |
| Weighted average shares    – Basic                   |   | 7,073                   |   | 6,818                 |   | 6,978 |   | 6,395 |   |
| – Diluted                                                           |   | 7,226                   |   | 6,818                 |   | 7,119 |   | 6,395 |   |

 

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

 

4

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

Dollars in thousands

 
|                                                                                                  |   | **For the  Six Months Ended** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                  |   | **September  30,  2003**      |   | **September  30,  2002** |   |
| Cash flows from operating  activities:                                                                |   |                          |   |   |   |
| Net income (loss)                                                                                     |   | $                             | 533    |   | $ | (1,606 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used for)  operating activities: |   |                          |   |   |   |
| Depreciation and amortization                                                                         |   | 878                           |   | 1,098 |   |
| Provisions for contract, inventory,  accounts receivable and warranty reserves                        |   | 189                           |   | 896 |   |
| Mark to market adjustment for  short-term investments                                                 |   | (34                           | )      | — |   |
| Change in fair value of  warrants outstanding                                                         |   | 466                           |   | (2,087 | ) |
| Changes in assets and  liabilities:                                                                   |   |                          |   |   |   |
| Accounts receivable                                                                                   |   | (2,376                        | )      | (3,143 | ) |
| Unbilled costs and fees                                                                               |   | (853                          | )      | 718 |   |
| Inventories                                                                                           |   | 1,870                         |   | 609 |   |
| Prepaid expenses, deposits and other assets                                                           |   | (414                          | )      | 235 |   |
| Accounts payable                                                                                      |   | (553                          | )      | (2,406 | ) |
| Customer deposits                                                                                     |   | 2,926                         |   | 1,519 |   |
| Deferred revenue                                                                                      |   | (508                          | )      | 213 |   |
| Accrued expenses and other current  liabilities                                                       |   | 1,355                         |   | (291 | ) |
| Non-current liabilities                                                                               |   | (41                           | )      | (49 | ) |
| Total adjustments                                                                                     |   | 2,905                         |   | (2,688 | ) |
| Net cash provided by (used for) operating  activities                                                 |   | 3,438                         |   | (4,294 | ) |
|                                                                                                  |   |                          |   |   |   |
| Cash flows from investing activities:                                                                 |   |                          |   |   |   |
| Purchases of short-term investments                                                                   |   | (2,319                        | )      | — |   |
| Maturity of short-term investments                                                                    |   | 2,285                         |   | — |   |
| Purchase of property and equipment                                                                    |   | (348                          | )      | (246 | ) |
| Net cash used for investing activities                                                                |   | (382                          | )      | (246 | ) |
|                                                                                                  |   |                          |   |   |   |
| Cash flows from financing  activities:                                                                |   |                          |   |   |   |
| Increase in restricted cash                                                                           |   | 162                           |   | — |   |
| Repayment of line of credit                                                                           |   | —                        |   | (9,319 | ) |
| Proceeds from issuance of common stock and  warrants, net                                             |   | —                        |   | 18,423 |   |
| Proceeds from exercise of stock options                                                               |   | 2,304                         |   | 1,230 |   |
| Net cash provided by financing activities                                                             |   | 2,466                         |   | 10,334 |   |
| Effect of exchange rate changes on cash                                                               |   | 9                             |   | — |   |
| Net increase in cash and cash  equivalents                                                            |   | 5,531                         |   | 5,794 |   |
| Cash and cash equivalents at beginning of  period                                                     |   | 5,585                         |   | 7,591 |   |
| Cash and cash equivalents at end of period                                                            |   | $                             | 11,116 |   | $ | 13,385 |   |

 

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

 

5

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**AmericanScience and Engineering, Inc. and Subsidiary**

**Notesto Unaudited Condensed Consolidated Financial Statements**

 

1.   General

The condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary. All significant intercompany transactions and balanceshave been eliminated.

 

The unauditedcondensed consolidated financial statements have been prepared in accordancewith the requirements of Form 10-Q and consequently do not include alldisclosures required by Form 10-K. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s Annual Report onForm 10-K for the year ended March 31, 2003.

 

Theconsolidated financial statements, in the opinion of management, include alladjustments necessary, consisting solely of normal recurring adjustments, topresent fairly the Company’s financial position, results of operations and cashflows.  These results are notnecessarily indicative of the results to be expected for the entire year.

 

Nature of Operations 

The Company isengaged in the development and manufacture of sophisticated X-ray inspectionsystems for critical detection and security screening solutions for saleprimarily to U.S. and foreign government agencies.  The Company has only one reporting segment, X-ray screeningproducts.

 

Restatement

During thequarter ending March 31, 2004, the Company determined that certain changes madeto the method of allocating certain overhead costs to inventory effective April2003 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 forthe current fiscal period to reinstate this historical overhead allocationmethod. This restatement has the following effect:

 
|                                          |   | **For the  Three Months Ended  September 30, 2003** |   | **For the Six  Months Ended  September 30, 2003** |   |
|-----------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                          |   | **As  Reported**                                    |   | **Restated**                                      |   | **As  Reported** |   | **Restated** |   |
| Cost of product sales and contracts           |   | $                                                   | 10,833 |                                              | $      | 11,151 |   | $ | 21,475 |   | $ | 22,095 |   |
| Cost of service revenues                      |   | 2,118                                               |   | 2,231                                             |   | 3,878 |   | 4,103 |   |
| Total cost of sales and contracts             |   | $                                                   | 12,951 |                                              | $      | 13,382 |   | $ | 25,353 |   | $ | 26,198 |   |
|                                          |   |                                                |   |                                              |   |   |   |   |   |
| Selling, general and administrative  expenses |   | $                                                   | 3,370  |                                              | $      | 2,856 |   | $ | 6,933 |   | $ | 5,908 |   |
| Research and development                      |   | $                                                   | 1,276  |                                              | $      | 1,359 |   | $ | 2,464 |   | $ | 2,644 |   |

 

Thisrestatement had no impact on operating income or income (loss) per share forthe quarter and six months ended September 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 oncost reimbursable and long-term fixed price contracts are generally recorded ascosts are incurred using the percentage of completion method.  The Company recognizes sales for its systemsthat are produced in a standard manufacturing operation and have shorter orderto delivery cycles at the time of shipment of the system to the customer andwhen other revenue recognition criteria is met.

 

Inventoriesconsist of material, labor and manufacturing overhead and are recorded at thelower of cost or net realizable value. Excessive manufacturing overhead costs attributable to idle facilitiesor abnormal production volumes are excluded from inventory and recorded as anexpense in the period incurred.

 

Certain cashbalances have been restricted as collateral against outstanding standby lettersof credit and are separately presented as restricted cash. (see Note 4)

 

Thesignificant accounting policies followed by the Company and its subsidiary inpreparing its consolidated financial statements are set forth in Note 1 to theconsolidated financial statements included in its Form 10-K for the yearended March 31, 2003.  The Company hasmade no changes to these policies during this fiscal year.

 

Pro Forma Stock-Based CompensationExpense

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 to Employees,”to account for its stock-based compensation plans. Had compensation costfor 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:

 

6

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|                                                                   |   | **Three months ended** |   | **Six months ended** |   |
|------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
| (In thousands except per share amounts)                                |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**  |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
| Net income  (loss)                                                     |   |                   |   |                 |   |   |   |   |   |
| As reported                                                            |   | $                      | 413    |                 | $      | (697 | ) | $ | 533 |   | $ | (1,606 | ) |
| Less: Stock  based compensation using fair value method for all awards |   | (896                   | )      | (763                 | )      | (1,818 | ) | (1,485 | ) |
| Pro forma net  loss                                                    |   | $                      | (483   | )                    | (1,460 | ) | $ | (1,285 | ) | $ | (3,091 | ) |
| Income (loss)  per share – Basic:                                 |   |                   |   |                 |   |   |   |   |   |
| As reported                                                            |   | $                      | 0.06   |                 | $      | (0.10 | ) | $ | 0.08 |   | $ | (0.25 | ) |
| Pro forma                                                              |   | $                      | (0.07  | )                    | $      | (0.21 | ) | $ | (0.18 | ) | $ | (0.48 | ) |
| Income (loss)  per share – Diluted:                               |   |                   |   |                 |   |   |   |   |   |
| As reported                                                            |   | $                      | 0.06   |                 | $      | (0.10 | ) | $ | 0.07 |   | $ | (0.25 | ) |
| Pro forma                                                              |   | $                      | (0.07  | )                    | $      | (0.21 | ) | $ | (0.18 | ) | $ | (0.48 | ) |

 

The fair value of each option granted was estimated on the grant dateusing the Black-Scholes option pricing model with the following weightedaverage assumptions: risk-free interest rates of 5.0%, expected volatility of73%, an expected dividend yield of 0% and an expected life of 7 years.

 

New Accounting Pronouncements  

In February 2003, the FASB issued Emerging Issues Task Force Issue00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF00-21). EITF 00-21 provides guidance for the accounting by a vendor forarrangements involving multiple revenue-generating activities. The Companyadopted EITF 00-21 on July 1, 2003 and such adoption will not have a significanteffect on the consolidated financial statements.

 

In January 2003, the FASB issued FASB Interpretation No. 46,Consolidation of Variable Interest Entities and Interpretation of ARB 51 (FIN46), which requires the consolidation of certain entities considered to bevariable interest entities (“VIEs”).  Anentity is considered to be a VIE when it has equity investors which lack thecharacteristics of a controlling financial interest, or its capital is insufficientto permit it to finance its activities without additional subordinatedfinancial support.  Consolidation of aVIE by an investor is required when it is determined that the investor willabsorb a majority of the VIE’s expected losses or residual returns if theyoccur.  The consolidation requirementsof FIN 46 apply immediately to VIEs created after January 31, 2003. Theconsolidation requirements apply to older entities in the first fiscal year orinterim period beginning after June 15, 2003. On October 9, 2003, the FASB deferred the implementation of FIN 46 untilDecember 31, 2003.  Certain disclosurerequirements apply to all financial statements issued after January 31,2003.  The Company does not believe the adoptionof this pronouncement will have a material effect on the consolidated financialstatements.

 

In April 2003, the FASBissued Statement of Financial Accounting Standard No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities,” (“FAS 149”)which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under FAS 133.  FAS 149 is effectivefor contracts entered into or modified after June 30, 2003 except for theprovisions that were cleared by the FASB in prior pronouncements. The Companydoes not expect the provision of this statement to have a significant impact onthe statement of financial position.

 

In May 2003, the FASB issuedStatement of Financial Accounting Standards No. 150, “Accounting for CertainFinancial Instruments withCharacteristics of Both Liabilities and Equity”, (“FAS 150”).  Thisstatement establishes standards for how an issuer classifies and measures inits statement of financial position certain financial instruments withcharacteristics of both liabilities and equity.  In accordance with thestandard, financial instruments that embody obligations for the issuer arerequired to be classified as liabilities. This Statement shall be effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise shall be effective at the beginning of the first interim periodbeginning after June 15, 2003.  On November 5, 2003, the FASB deferred theimplementation of certain provision of FAS 150 until and indefiniteperiod.  The

 

7

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Company does not expect theprovision of this statement to have a significant impact on the statement offinancial position.

 

2.   Inventories

 
| (Dollars in  thousands)                    |   | **Sept. 30, 2003** |   | **March 31, 2003** |   |
|--------------------------------------------|--------|--------------------|--------|--------------------|--------|
| Inventories consisted of:                  |   |               |   |               |   |
| Raw materials and completed sub-assemblies |   | $                  | 9,369  |               | $      | 8,119 |   |
| Work-in-process                            |   | 2,936              |   | 3,783              |   |
| Finished goods                             |   | 1,573              |   | 3,846              |   |
| Total                                      |   | $                  | 13,878 |               | $      | 15,748 |   |

 

3.   Income (Loss) per Common and Common Equivalent Share

Basic earnings (loss)per common share is computed by dividing net income (loss) by the weightedaverage number of shares of common stock outstanding during the period.  Diluted earnings (loss) per share includethe dilutive impact of options and warrants using the average share price ofthe Company’s common stock for the period. For the quarters and six monthsended September 30, 2003 and September 30, 2002, common stock equivalents of835,000, 1,150,000, 1,337,344 and 835,482, respectively, are excluded fromdiluted earnings per share, as their effect is anti-dilutive.

 
|                                                                                      |   | **Three Months Ended** |   | **Six Months Ended** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
| (in  thousands except per share amounts)                                                  |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**  |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
| **Earnings (Loss) Per Share**                                                             |   |                   |   |                 |   |   |   |   |   |
| **Basic:**                                                                                |   |                   |   |                 |   |   |   |   |   |
| Net income (loss)                                                                         |   | $                      | 413    |                 | $      | (697 | ) | $ | 533 |   | $ | (1,606 | ) |
| Weighted average number of common  shares outstanding – basic                   |   | 7,073                  |   | 6,818                |   | 6,978 |   | 6,395 |   |
| Net income (loss) per share – basic                                                  |   | $                      | 0.06   |                 | $      | (0.10 | ) | $ | 0.08 |   | $ | (0.25 | ) |
| **Diluted:**                                                                              |   |                   |   |                 |   |   |   |   |   |
| Net income (loss)                                                                         |   | $                      | 413    |                 | $      | (697 | ) | $ | 533 |   | $ | (1,606 | ) |
| Weighted average number of common shares  outstanding                                     |   | 7,073                  |   | 6,818                |   | 6,978 |   | 6,395 |   |
| Assumed exercise of stock options, using  the treasury stock method                       |   | 153                    |   | —               |   | 141 |   | — |   |
| Weighted average number of common and  potential common shares outstanding – diluted |   | 7,226                  |   | 6,818                |   | 7,119 |   | 6,395 |   |
| Net income (loss) per share – diluted                                                |   | $                      | 0.06   |                 | $      | (0.10 | ) | $ | 0.07 |   | $ | (0.25 | ) |

 

4.  Borrowings

On August 11, 2003,the Company entered into two new credit agreements with Silicon Valley BankEast replacing its HSBC Bank USA credit agreements that expired on July 31,2003.  The first agreement is a$5.0 million domestic loan and security agreement to support the Company’sroutine working capital needs.   Maximumborrowings for this line are set at the lower of  (a) the sum of 80% of eligible domestic accounts receivable plus10% of finished goods inventory up to $750,000, or; (b) $5 million.  The second is a $20.0 million exportloan and security agreement, guaranteed by the Export-Import Bank of theUnited States to support the Company’s overseas contract, trade finance andworking capital needs.

 

The creditfacilities bear an interest rate of the greater of 4.25% or the Silicon ValleyBank prime rate (4.25% at September 30, 2003) and have an expiration date ofNovember 30, 2004.** **Thecredit agreements are collateralized by certain assets of the

 

8

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Company and containcertain restrictions, including limitations on the amount of distributions thatcan be made to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants.  As of September 30, 2003, the Company was incompliance with these covenants.

 

At September 30, 2003, there were noborrowings outstanding and $187,000 in standby letters of credit were in effectagainst this credit facility, guaranteeing performance on certain largeinternational cargo projects.  In addition,the Company had outstanding $1.5 million in standby letters of credit with HSBCBank USA, which have been collateralized with cash.  No amounts have been drawn against these letters of credit.

 

5.   Private Placement Offering

On May 28,2002, the Company closed on a private placement offering of common stock andwarrants.  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.  Proceeds to theCompany approximated $18.4 million, net of approximately $1.3 million ofissuance cost.   The warrants wereimmediately vested and have a five-year life expiring in May of 2007.  Due to certain conversion features of thesewarrants that provide that the holder may opt for a cash settlement in certaininstances, including a merger, a sale of all or substantially all of theCompany’s assets, or a tender offer or exchange offer of shares of theCompany’s stock, a liability equal to the Black-Scholes valuation of thewarrants at the deal closing date was recorded on the Company’s balancesheet.  The “mark to market” change inthe warrants value of $(192,000), $(466,000), $1,364,000 and $2,088,000, wasrecorded as other income (expense) for the three and six months ended September30, 2003 and September 30, 2002, respectively. The liability of $1,286,000 and $820,000 associated with the warrants isrecorded as a non-current liability on the September 30, 2003 and March 31,2003 balance sheets, respectively.  Thefair market value of the warrants was determined using the Black Scholespricing model and an assumed volatility of 73% and interest rate of 5%.

 

 

6.  Guarantees

At September30, 2003, the Company had $1.7 million of letters of credit outstandingguaranteeing performance on certain large international cargo projects.  These letters of credit were issued throughthe Company’s current and former export loan and security agreements (see Note4) and have expiration dates through March of 2005.

 

The Company’sparcel product line carries a one-year warranty, the costs of which are accruedfor at time of shipment.  Accrual ratesare based upon historical experience over the preceding twelve months and theadequacy of the warranty reserve is evaluated monthly.  Warranty experience for the three and sixmonths ended September 30, 2003 and September 30, 2002 is as follows:

 
|                                             |   | **Three  months ended** |   | **Six months  ended** |   |
|--------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(In  thousands)**                              |   | **Sept. 30,  2003**     |   | **Sept. 30,  2002**   |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
|                                             |   |                    |   |                  |   |   |   |   |   |
| Warranty accrual beginning of period             |   | $                       | 535    |                  | $      | 350 |   | $ | 535 |   | $ | 196 |   |
| Accruals for warranties issued during the period |   | 104                     |   | 151                   |   | 186 |   | 371 |   |
| Accruals related to pre-existing warranties      |   | —                  |   | 123                   |   | — |   | 153 |   |
| Warranty costs incurred during period            |   | (90                     | )      | (39                   | )      | (172 | ) | (135 | ) |
| Balance at end of period                         |   | $                       | 549    |                  | $      | 585 |   | $ | 549 |   | $ | 585 |   |

 

7.  Commitments andContingencies

A provision of$735,000, of which $635,000 was recorded in the second quarter, has been madefor anticipated losses on a CargoSearch contract that is recognized on thepercentage of completion method. Management believes that the current estimates of total contract costsexceed contract revenues for this contract and as such has provided for theanticipated losses in the periods in which such losses became evident.

 

9

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

 

Restatement

During the quarter endingMarch 31, 2004, the Company determined that certain changes made to the methodof allocating certain overhead costs to inventory effective April 2003 shouldnot have been made. As such, the Company has restated 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 noimpact on operating income or income (loss) per share for the quarter and sixmonths ended September 30, 2003.

 

Results ofOperations 

Total net revenuesfor the quarter ended September 30, 2003 increased by $1,244,000 to $18,179,000compared to the corresponding period a year ago.  This increase is attributable primarily to an increase of $1.8million in CargoSearch systems revenues as the Company has four CargoSearchprograms ongoing in the second quarter of fiscal 2004 as compared to one in thesecond quarter of fiscal 2003.  Inaddition, revenues from the Company’s High Energy Systems division increasedby  $1.3 million to $2.3 million in thesecond quarter of fiscal 2004 due to expanded contracts with its largestcustomer. These increases were partially offset by a $ 2.7 million decrease inParcelSearch system and after-market parts revenues as compared to the prioryear.  The second quarter of fiscal 2003had significant ParcelSearch deliveries under orders received immediately postSeptember 11th.  Bookings forthese systems have now normalized to levels slightly above the pre-September 11thdemand.  Service revenues increased by$1.1 million compared to the second quarter of fiscal 2003 as the Company hasentered into service contracts for equipment that had been under warranty inthe second quarter of fiscal 2003.

 

Net revenues for the six months ended September 30, 2003 increased by$3,714,000 to $35,567,000 compared to the corresponding period a year ago.  This increase is attributable primarily toan increase of $8.0 million in CargoSearch and MobileSearch systems revenues asthe Company delivered six MobileSearch trucks and had four CargoSearch programsongoing in the first six months of fiscal 2004 as compared to two truckdeliveries and one CargoSearch program ongoing in the first six months offiscal 2003.  In addition, revenues fromthe Company’s High Energy Systems division increased by $1.5 million to $3.4million in the first six months of fiscal 2004 due to expanded contracts withits largest customer.   Service revenuesincreased by $2.4 million compared to the second quarter of fiscal 2003 as theCompany has entered into service contracts for equipment that had been underwarranty in the second quarter offiscal 2003. These increases were offset by a $ 8.0 million decrease inParcelSearch system and after-market parts revenues as compared to the prioryear.

 

Total cost ofsales and contracts for the second quarter of fiscal 2004 decreased by $191,000to $13,382,000 compared to the corresponding period a year ago. Cost of salesand contracts represented 74% of revenues versus 80% for the correspondingperiod last year.  This marginimprovement is due in part to improved manufacturing utilization, and improvedservice margins as the Company entered into several large service contracts duringthe last six months of fiscal 2003 as warranties expired and replaced certainunprofitable service contracts and time and material service arrangements.   These margin improvements were offsetsomewhat by a $635,000 accrual made in the second quarter of fiscal 2004 forlosses projected on one CargoSearch program recognized on a percentage ofcompletion basis.

 

Total cost ofsales and contracts for the first six months of fiscal 2004 increased by$1,197,000 to $26,198,000 compared to the corresponding period a year ago. Costof sales and contracts represented 74% of revenues versus 78% for thecorresponding period last year.  Thismargin improvement is due in part to increased sales of higher marginMobileSearch trucks in fiscal 2004, reduced manufacturing and service overheadcosts, improved manufacturing utilization, and improved service margins as theCompany entered into several large service contracts during the last six monthsof fiscal 2003 as warranties expired and replaced certain unprofitable servicecontracts and time and material service arrangements.   The margin improvements on cost of product sales and contractswere offset by a $735,000 accrual made for losses projected on one CargoSearchprogram recognized on a percentage of completion basis

 

Selling, generaland administrative expenses for the second quarter of fiscal 2004 decreased by$920,000 to $2,856,000 compared to the corresponding period a year ago.  Selling, general and administrative expensesrepresented 16% of revenues in the current period compared to 22% for the correspondingperiod last year.  The cost reductionsfrom the prior year relate to lower consulting costs and reduced road showexpenditures.  In the summer of 2002,the Company had an expanded road show with a MobileSearch truck that was notrepeated in the current year.

 

Selling, generaland administrative expenses for the first six months of fiscal 2004 decreasedby $1,040,000 to $5,908,000 compared to the corresponding period a yearago.  Selling, general andadministrative expenses represented 17% of revenues in the current periodcompared to 22% for the corresponding period last year.  During the first quarter of fiscal 2004, the

 

10

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Company incurredapproximately $400,000 in severance and other costs related to the terminationof the Company’s Chief Executive Officer. This increase was offset by lower consulting costs and reduced road showexpenditures.  In the summer of 2002,the Company had an expanded road show with a MobileSearch truck that was not repeatedin the current year.

 

Company fundedresearch and development expenses for the second quarter of fiscal 2004decreased by $298,000 to $1,359,000 compared to the corresponding period a yearago. Research and development expenses represented 7% of revenues in thecurrent quarter compared to 10% for the corresponding period last year. Currentquarter expenditures decreased comparatively as the Company limited researchand development initiatives in order to control costs and focused engineeringefforts on revenue producing programs during the quarter.

 

Company fundedresearch and development expenses for the first six months of fiscal 2004decreased by $879,000 to $2,644,000 compared to the corresponding period lastyear. Research and development expenses represented 7% of revenues in thecurrent period compared to 11% for the corresponding period last year.  Year to date expenditures continued todecrease compared to the same period in the prior year as the Companymaintained cost control initiatives and continued to focus on engineeringefforts on revenue producing programs.

 

Other income(expense) was $169,000 in expense for the second quarter of fiscal 2004 ascompared to $1,374,000 in other income for the corresponding period a yearago.   As part of the private equityplacement during the first quarter of 2003, the Company issued 295,475warrants.  Due to certain conversionfeatures of these warrants that provide that the holder may opt for a cashsettlement in certain instances, including a merger, a sale of all orsubstantially all of the Company’s assets, or a tender offer or exchange offerof shares of the Company’s stock, a liability equal to the Black-Scholesvaluation of the warrants at the deal closing date was recorded on theCompany’s balance sheet.  At September30, 2003, these warrants were “marked to market” using Black-Scholes and thechange in the valuation of the warrants of $192,000 was recorded as otherexpense in the quarter. During the three months ended September 30, 2002, thismark to market adjustment resulted in  $1,364,000 in other income.

 

 Other income (expense) was $284,000 inexpense for the first six months of fiscal 2004 as compared to $2,013,000 inother income for the corresponding period a year ago due primarily to the markto market of outstanding warrants as noted above.

 

The potential taxbenefits on losses incurred in fiscal 2003 were fully reserved due to theuncertainty as to whether the additional loss carryforwards would ultimately berealized. In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The Company has not made a provisionfor taxes in the quarter or six months ended September 30, 2003 as the Companywill not have to pay taxes for the income earned in these periods due to itsnet operating loss carryforwards.

 

The Company earnednet income of $413,000 during the second quarter of fiscal 2004 as compared toa net loss of $697,000 in the second quarter of fiscal 2003.   The Company earned net income of $533,000in the first six months of fiscal 2004 as compared to a net loss of $1,606,000in the first six months of fiscal 2003. The significant factors contributing to these results are noted in theabove sections.

 

Liquidity andCapital Resources 

 

On May 28,2002, the Company closed on a private placement offering of common stock andwarrants. A total of 1,115,000 shares were sold to accredited investors at aprice of $17.64 each. In addition, warrants to purchase an additional 295,475shares of common stock at a price of $23.52 were issued. These warrants have afive-year life expiring in May of 2007. Proceeds to the Company approximated $18.4 million. The proceedsfrom this private placement offering have been and are being utilized forgeneral corporate purposes including debt repayment, capital expenditures, andinvestments in product development and working capital needs.

 

Cash and cash equivalentsincreased by $5,531,000 to $11,116,000 at September 30, 2003 compared to$5,585,000 at March 31, 2003. This increase in cash and cash equivalents isprimarily due to cash generated from operations as MobileSearch trucks ininventory at March 31, 2003 were delivered to customers in the current year andfrom $2.3 million in cash proceeds

 

11

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from the exerciseof stock options during the year. Working capital increased by $3,772,000 (12%)since March 31, 2003, increasing from $30,196,000 to $33,968,000 at September30, 2003.

 

On August 11, 2003, the Company entered into two new credit agreementswith Silicon Valley Bank East replacing its HSBC Bank USA credit agreementsthat expired on July 31, 2003.  Thefirst agreement is a $5.0 million domestic loan and security agreement 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 is a$20.0 million export loan and security agreement, guaranteed by the Export-ImportBank of the United States to support the Company’s overseas contract, tradefinance 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 September 30, 2003) and have anexpiration date of November 30, 2004.** **Thecredit agreements are collateralized by certain assets of the Company and containcertain restrictions, including limitations on the amount of distributions thatcan be made to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants. As of September 30,2003, the Company was in compliance with these covenants.

 

At September 30, 2003, there were no borrowings outstanding and$187,000 in standby letters of credit were in effect against this creditfacility guaranteeing performance on certain large international cargo projects.   In addition, the Company had outstanding$1.5 million in standby letters of credit with HSBC Bank USA, which have beencollateralized with cash.  No amountshave been drawn against these letters of credit.

 

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.

 

New Accounting Pronouncements:

In February 2003, the FASBissued Emerging Issues Task Force Issue 00-21, Accounting for RevenueArrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 providesguidance for the accounting by a vendor for arrangements involving multiplerevenue-generating activities. The Company adopted EITF 00-21 on July 1, 2003and such adoption will not have a significant effect on the consolidatedfinancial statements.

 

In January 2003, the FASBissued FASB Interpretation No. 46, Consolidation of Variable Interest Entitiesand Interpretation of ARB 51 (FIN 46), which requires the consolidation ofcertain entities considered to be variable interest entities (“VIEs”).  An entity is considered to be a VIE when ithas equity investors which lack the characteristics of a controlling financialinterest, or its capital is insufficient to permit it to finance its activitieswithout additional subordinated financial support.  Consolidation of a VIE by an investor is required when it isdetermined that the investor will absorb a majority of the VIE’s expected lossesor residual returns if they occur.  Theconsolidation requirements of FIN 46 apply immediately to VIEs created afterJanuary 31, 2003. The consolidation requirements apply to older entities in thefirst fiscal year or interim period beginning after June 15, 2003.  On October 9, 2003, the FASB deferred theimplementation of FIN 46 until December 31, 2003.  Certain disclosure requirements apply to all financial statementsissued after January 31, 2003.  TheCompany does not believe the adoption of this pronouncement will have amaterial effect on the consolidated financial statements.

 

In April 2003, the FASB issued Statement ofFinancial Accounting Standard No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities,” (“FAS 149”) which amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under FAS 133.  FAS 149 is effective for contractsentered into or modified after June 30, 2003 except for the provisions thatwere cleared by the FASB in prior pronouncements. The Company does not expectthe provision of this statement to have a significant impact on the statementof financial position.

 

In May 2003, the FASB issued Statement ofFinancial Accounting Standards No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity”, (“FAS 150”). This statement establishes standards for how an issuer classifies andmeasures in its statement of financial position certain financial instrumentswith characteristics of both

 

12

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liabilities and equity.  In accordancewith the standard, financial instruments that embody obligations for the issuerare required to be classified as liabilities. This Statement shall be effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise shall be effective at the beginning of the first interim periodbeginning after June 15, 2003.  On November 5, 2003, the FASB deferred theimplementation of certain provision of FAS 150 until and indefiniteperiod.  The Company does not expect theprovision of this statement to have a significant impact on the statement offinancial position.

 

.

 

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

 

The Company is subject to interest rate riskon its credit facilities that have variable interest rates tied to the PrimeRate.  As of September 30, 2003, theCompany 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 ofSeptember 30, 2003, the Company holds short-term investments consisting ofmoney market funds and U.S. government and government agency bonds.  The Company’s primary objective with itsinvestment portfolio is to invest available cash while preserving principal andmeeting liquidity needs. These investments have an average interest rate of 1.4%and are subject to interest rate risk. As a result of the average maturity andconservative nature of the investment portfolio, a sudden change in interestrates would not have a material effect on the value of these investments.

 

In fiscal2003, the Company issued 295,475 warrants in connection with a privateplacement offering of common stock. These warrants can be exchanged for cash under certain circumstancesincluding a merger, sale or tender offer of the Company and as such a liabilityequal to Black-Scholes value of the warrants is recorded on the balancesheet.  Changes in the fair value of thewarrants are recorded as other income (expense).  The Black-Scholes value of these warrants can fluctuatesignificantly based on the current fair market value of the Company’s commonstock.  A 10% change in the fair marketvalue of the Company’s common stock, holding other assumptions constant, wouldhave approximately a $200,000 effect on earnings.

 

**Item 4 - Controls and Procedures**

 

As of the endof the period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant to Rule13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon thatevaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that our disclosure controls and procedures are effective forgathering, analyzing and disclosing the information we are required to disclosein reports filed under such Act.

 

There have been no changes in our internalcontrols or in other factors, which could affect internal controls subsequentto the date that the Company carried out its evaluation.

 

**PARTII – OTHER INFORMATION**

 

**Item1 – Legal Proceedings**

* *

In a decision issued December29, 1999, the United States Court of Appeals for the Federal Circuit inWashington, D.C. ruled that the Company may pursue a patent infringement claimagainst Vivid Technologies (“Vivid”), which produces X-ray

 

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detection devices used inbaggage scanning equipment. The Appeals Court overturned a 1998 decision inVivid’s favor by the Massachusetts Federal District Court. The lawsuit, filedby Vivid in May 1996, concerned whether Vivid’s X-ray detection devicesinfringed on AS&E’s patent. The District Court had ruled that AS&Ecould not assert a claim that Vivid’s devices infringed on AS&E’s patent.The Appeals Court reversed the District Court’s finding on summary judgmentthat Vivid did not infringe on AS&E’s patent, as well as the DistrictCourt’s denial of AS&E’s request for discovery to oppose Vivid’s summaryjudgment motion.   Vivid was acquired byPerkinElmer in 2000.

* *

*In September 1998, the Company filed suit againstEG&G Astrophysics Research Corp. (“EG&G”) in U.S. District Court inBoston, Massachusetts alleging that EG&G infringed upon at least twopatents owned by the Company and that EG&G had misappropriated certaintrade secrets of the Company. In December 1999, EG&G filed a Motionfor Summary Judgment that EG&G did not misappropriate the Company’s tradesecrets and in March 2000 EG&G filed a Motion for Summary Judgmentthat EG&G did not infringe the Company’s patents. In February 2001 theCourt denied EG&G’s and the Company’s motions for Summary Judgment.*

* *

*In a related matter, EG&G filed a request with the U.S.Patent and Trademark Office (“USPTO”) for reexamination of the two patents thatwere at issue in the patent infringement action described above. The Companyfiled oppositions to the re-examination requests and the Company was advised bythe USPTO that both its MobileSearch X-ray inspection and its Z® BackscatterX-ray inspection technology patents were upheld in all material respects onJanuary 30, 2001.*

* *

*In March 2003, the Company entered into a Partial SettlementAgreement and Release with PerkinElmer, the parent of EG&G, with respect tothe above-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 on thesale of EG&G by PerkinElmer to L-3 Communications.  Certain aspects of the EG&G litigationremain pending in the District Court at this time.*

* *

*The Company is also subject to various legal proceedings andclaims that arise in the ordinary course of business. The Company currentlybelieves that resolving these matters will not have a material adverse impacton its financial condition or results of operations.*

* *

**Item4 - Submission of Matters to a Vote of Security Holders**

 

At the special meeting inlieu of the annual meeting of Stockholders of the Company held on September 25,2003, the stockholders of the Company (1) elected William E. Odom, Roger P.Heinisch, Hamilton W. Helmer, Donald J. McCarren, Ernest J. Moniz and Carl W.Vogt as directors of the Company to hold office for a one-year term and noother nominations were made; (2) approved an amendment to increase the sharesavailable for grant under the Company’s 2002 Combination Stock Option Plan by400,000 shares; (3) approved the adoption of the Company’s 2003 Non-EmployeeDirector Stock Plan; (4) approved an amendment to the By-Laws to extend theability to amend the By-Laws to a majority vote of the Board of Directors and(5) ratified the appointment of PricewaterhouseCoopers LLP as ourindependent auditors for the fiscal year ending March 31, 2004.  Thevotes were as follows:

 
|                                                                                      |   | **Votes For** |   | **Votes  Withheld or  Opposed** |   | **Abstentions** |   |
|-------------------------------------------------------------------------------------------|--------|---------------|--------|---------------------------------|--------|-----------------|--------|
|                                                                                      |   |          |   |                            |   |            |   |
| (1) Election of Directors:                                                                |   |          |   |                            |   |            |   |
| William E. Odom                                                                           |   | 5,988,712     |   | 407,849                         |   |            |   |
| Roger P. Heinisch                                                                         |   | 5,793,832     |   | 602,729                         |   |            |   |
| Hamilton W. Helmer                                                                        |   | 6,223,512     |   | 173,049                         |   |            |   |
| Donald J. McCarren                                                                        |   | 6,223,566     |   | 172,995                         |   |            |   |
| Ernest  J. Moniz                                                                          |   | 6,223,566     |   | 172,995                         |   |            |   |
| Carl W. Vogt                                                                              |   | 6,223,566     |   | 172,995                         |   |            |   |
|                                                                                      |   |          |   |                            |   |            |   |
| 2)  Approval of the increase in shares under  the 2002 Combination Stock Option Plan |   | 2,162,862     |   | 1,029,532                       |   | 25,669          |   |
|                                                                                      |   |          |   |                            |   |            |   |
| 3)  Approval of the adoption of the 2003  Non-Employee Director Stock Plan           |   | 1,983,579     |   | 1,187,787                       |   | 46,697          |   |
|                                                                                      |   |          |   |                            |   |            |   |
| 4)  Approval of amendment to the By-Laws                                             |   | 2,382,529     |   | 740,405                         |   | 95,129          |   |
|                                                                                      |   |          |   |                            |   |            |   |
| 5)  Ratification of PricewaterhouseCoopers LLP  as independent auditors.             |   | 6,360,095     |   | 28,984                          |   | 7,482           |   |

 

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**Item 6 - Exhibits andReports on Form 8-K**

 

(a)               Exhibits 

 
| 10(c)(xv)  |   | Employment  Offer Letter between the Company and Anthony R. Fabiano dated August 21, 2003                                                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                |
| 10(d)(xi)  |   | Loan and  Security Agreement between American Science and Engineering, Inc. and Silicon  Valley Bank East dated August 11, 2003                     |
|       |   |                                                                                                                                                |
| 10(d)(xii) |   | Export  Import Bank Loan and Security Agreement between American Science and  Engineering, Inc. and Silicon Valley Bank East dated August 11, 2003  |
|       |   |                                                                                                                                                |
| 31.1       |   | Certification  by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                            |
|       |   |                                                                                                                                                |
| 31.2       |   | Certification  by Principal Financial 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  September 15, 2003 announcing the naming of Anthony R. Fabiano as President  and Chief Executive Officer. |
|----------|--------|--------|------------------------------------------------------------------------------------------------------------------|

 

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

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned hereunto duly authorized.

 

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|         |           | AMERICAN  SCIENCE AND ENGINEERING, INC.                          |
|--------------|----------------|------------------------------------------------------------------|
| (Registrant) |           |                                                             |   |
|         |           |                                                             |   |
| Date         | June 14,  2004 |                                                             |   |   | /s/ Paul  Theodore Owens |   |   |
|         |           | Paul  Theodore Owens                                             |   |
|         |           | Executive  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 in any forward-lookingstatements.*

 

*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 system, to accommodate any future growth, andfuture delays in federal funding. These and certain other factors which mightcause actual results to differ materially from those projected are more fullyset forth under the caption “Forward-Looking Information and Factors AffectingFuture Performance” in the Company’s Registration Statement on Form 10-K.*

 

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Exhibit 10(c)(xv)

 

August 21, 2003

 

 

Mr. Anthony R. Fabiano

4285 Quinwood Lane North

Plymouth, MN 55442

 

Dear Anthony:

 

I am pleased to offeryou the position of President and Chief Executive Officer of American Scienceand Engineering, Inc., at a weekly salary of $5,400.00, beginning Monday,September 8, 2003.  This offer iscontingent upon the satisfactory completion of background and reference checks.

 

As a full-time employee, you will beimmediately eligible for medical, dental, short-term and long-term disability,and life insurance benefits.  We haveenclosed a schedule of benefits and employee costs.  You are also eligible to accrue 20 days of vacation per year.

 

After six months of employment, you will beautomatically enrolled in AS&E’s 401(k) plan with Putnam Investments whichalso includes a quarterly AS&E stock match based upon your quarterlycontribution level and the company’s profitability.  Unless you opt out of the 401(k) program, or unless you specify adifferent contribution amount, three percent (3%) of your weekly earnings willbe deducted from your pay, pre-tax, and deferred into the Putnam Income Fund onyour behalf.

 

In addition to your base cash compensation,you will be immediately eligible to participate in a cash bonus program.  The Board of Directors has determined thatyour maximum bonus for FY 2004 will be $240,000, pro rated for your period ofservice, assuming at-plan performance on your part.  “At-plan” performance will be based upon specific goals that willbe established by the Board of Directors at or near the commencement of youremployment with AS&E.

 

You will be granted an incentive stockoption entitling you to purchase up to 75,000 shares of the company’s commonstock subject to the terms and conditions of AS&E’s Stock Option Plan uponapproval of the grant by the Board of Directors at its next meeting. Thevesting will occur in equal increments on each of the first three anniversariesof the grant date. The strike price for this option will be at the market closeprice on the American Stock Exchange on the grant date.

 

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You will be nominated for election to aseat on the Board of Directors following the annual meeting on September 25,2003.

 

The Board will provide you with aninterim performance review in January 2004, after the results of the thirdquarter (ending December 31, 2003) are released. This review will cover thefour months from September 2003 through December 2003.

 

The Board will provide you with an annualperformance review and salary review at the conclusion of FY 2004, after theresults of the fourth quarter (ending March 31, 2004) are released.  This review will cover the seven months fromSeptember 2003 through March 2004. Thereafter, the Board will provide you with an annual performance reviewand salary review at the conclusion of each fiscal year covering the full 12months of each fiscal year.  Any salaryadjustments approved by the Board will take effect on the first Monday in July.

 

AS&E will reimburse you forreasonable relocation expenses up to a maximum of $50,000.  In addition to this, you will be reimbursedfor reasonable travel and living expenses in the period prior to yourrelocation, not to exceed fifteen (15) months.

 

If you are terminated on or before March31, 2004, you will be entitled to severance of six (6) months of salarycontinuation and twelve (12) months of health insurance continuation.  If you are terminated after March 31, 2004,you will be entitled to twelve (12) months of salary continuation and twelve(12) months of health insurance continuation. AS&E also will provide youwith an agreement which protects you in the event of a change of control.

 

AS&E is an Equal Opportunity andAffirmative Action Employer.  If you arean Individual with a Disability or a Veteran and would like us to know aboutit, you can fill out the enclosed invitation and return to AS&E or come tothe Human Resources Department at any time during your employment.

 

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If you have any questions concerning theposition or our company policies, please do not hesitate to call Ted Owens orme at 978-262-8600.

 

 
| Sincerely  yours,      |
|------------------------|
|                   |
| /s/ Roger P.  Heinisch |   |
|                   |
| Roger P.  Heinisch     |
|                   |
|                   |
| Enclosures             |

 

 

**ACCEPTED AND AGREED:**

 
| /s/ Anthony  R. Fabiano |   | DATE:  |   | 8/25/03 |   |
|-------------------------|--------|--------|--------|---------|--------|
| Anthony R.  Fabiano     |   |   |

 

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