**FORM 10-Q**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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

 

**Forthe quarterly period ended September 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(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 asspecified 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 whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements 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 of each of the issuer’sclasses of common stock, as of the latest practicable date

 
| **Class of Common Stock** | ** ** | **Outstanding at  October 22, 2004** |
|---------------------------|------------|-------------------------------------------|
| $.66 2/3 par  value       |       | 7,968,043                                 |

 

 

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**PART I – FINANCIAL INFORMATION**

**Item 1 – FinancialStatements**

** **

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

 

Dollars in thousands

 
| ** **                                                                                                      | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **(Unaudited)**              | ** ** | ** **               | ** ** |
| **Assets**                                                                                                      |       |                         |       |                     |       |
| Current  assets:                                                                                                |       |                         |       |                     |       |
| Cash and  cash equivalents                                                                                      |       | $                            | 6,583      |                     | $          | 18,232 |   |
| Restricted  cash                                                                                                |       | 630                          |       | 585                      |       |
| Short-term  investments                                                                                         |       | 17,733                       |       | 1,845                    |       |
| Accounts  receivable, net of allowances of $318 and $250 at September 30, 2004 and  March 31, 2004    |       | 16,228                       |       | 14,771                   |       |
| Unbilled  costs and fees, net of allowances of $56 and $394 at September 30, 2004  and March 31, 2004 |       | 4,218                        |       | 4,468                    |       |
| Inventories                                                                                                     |       | 15,637                       |       | 11,390                   |       |
| Prepaid  expenses and other current assets                                                                      |       | 1,542                        |       | 1,890                    |       |
| **Total  current assets**                                                                                       |       | 62,571                       |       | 53,181                   |       |
| Equipment  and leasehold improvements, net                                                                      |       | 3,199                        |       | 2,585                    |       |
| Other  assets, net                                                                                              |       | 36                           |       | 37                       |       |
| **Total  assets**                                                                                               | ** ** | $                            | 65,806     |                     | $          | 55,803 |   |

 

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

 

2

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**Dollars in thousands except per share amounts**

 
| ** **                                                                                                                                                              | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **(Unaudited)**              | ** ** | ** **               | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                           |       |                         |       |                     |       |
| Current liabilities:                                                                                                                                                    |       |                         |       |                     |       |
| Accounts  payable                                                                                                                                                       |       | $                            | 5,299      |                     | $          | 3,690 |   |
| Accrued  salaries and benefits                                                                                                                                          |       | 2,063                        |       | 1,954                    |       |
| Accrued  warranty costs                                                                                                                                                 |       | 1,243                        |       | 699                      |       |
| Deferred  revenue                                                                                                                                                       |       | 1,137                        |       | 2,020                    |       |
| Customer  deposits                                                                                                                                                      |       | 3,903                        |       | 4,419                    |       |
| Other  current liabilities                                                                                                                                              |       | 1,532                        |       | 1,875                    |       |
| **Total  current liabilities**                                                                                                                                          |       | 15,177                       |       | 14,657                   |       |
|                                                                                                                                                                    |       |                         |       |                     |       |
| Non-current  liabilities:                                                                                                                                               |       |                         |       |                     |       |
| Warrant  liability                                                                                                                                                      |       | 4,940                        |       | 2,093                    |       |
| Other  non-current liabilities                                                                                                                                          |       | 939                          |       | 620                      |       |
| **Total  liabilities**                                                                                                                                                  |       | 21,056                       |       | 17,370                   |       |
|                                                                                                                                                                    |       |                         |       |                     |       |
| 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 7,963,474  shares at September 30, 2004 and 7,415,660 shares at March 31, 2004 |       | 5,308                        |       | 4,943                    |       |
| Additional paid in capital                                                                                                                                              |       | 48,730                       |       | 42,683                   |       |
| Cumulative  translation adjustment                                                                                                                                      |       | 2                            |       | 14                       |       |
| Unearned  compensation                                                                                                                                                  |       | (50                          | )          | (115                     | )          |
| Unrealized  loss on available for sales securities                                                                                                                      |       | (7                           | )          | —                   |       |
| Accumulated  deficit                                                                                                                                                    |       | (9,233                       | )          | (9,092                   | )          |
| **Total  stockholders’ equity**                                                                                                                                    |       | 44,750                       |       | 38,433                   |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                    |       | $                            | 65,806     |                     | $          | 55,803 |   |

 

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

 

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,  2004**    | ** ** | **Sept. 30,  2003**  | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| ** **                                   | ** **    | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                    |          |                   |       |                 |       |   |   |   |   |
| Net product  sales and contract revenues     |          | $                      | 16,498     |                 | $          | 15,010 |   | $ | 29,320 |   | $ | 29,088 |   |
| Net service  revenues                        |          | 4,556                  |       | 3,169                |       | 8,546 |   | 6,479 |   |
| Total net  revenues                          |          | 21,054                 |       | 18,179               |       | 37,866 |   | 35,567 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Cost of  sales and contracts:                |          |                   |       |                 |       |   |   |   |   |
| Cost of  product sales and contracts         |          | 11,362                 |       | 11,151               |       | 20,884 |   | 22,095 |   |
| Cost of  service revenues                    |          | 2,695                  |       | 2,231                |       | 4,847 |   | 4,103 |   |
| Total cost  of sales and contracts           |          | 14,057                 |       | 13,382               |       | 25,731 |   | 26,198 |   |
| Gross profit                                 |          | 6,997                  |       | 4,797                |       | 12,135 |   | 9,369 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Expenses:                                    |          |                   |       |                 |       |   |   |   |   |
| Selling, general and administrative expenses |          | 3,448                  |       | 2,856                |       | 6,721 |   | 5,908 |   |
| Research and  development                    |          | 1,012                  |       | 1,359                |       | 2,467 |   | 2,644 |   |
| Total expenses                               |          | 4,460                  |       | 4,215                |       | 9,188 |   | 8,552 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Operating  income                            |          | 2,537                  |       | 582                  |       | 2,947 |   | 817 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Other income  (expense):                     |          |                   |       |                 |       |   |   |   |   |
| Interest  income                             |          | 73                     |       | 20                   |       | 114 |   | 48 |   |
| Other, net                                   |          | (2,146                 | )          | (189                 | )          | (3,137 | ) | (332 | ) |
| Total other  income (expense)                |          | (2,073                 | )          | (169                 | )          | (3,023 | ) | (284 | ) |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Income  (loss) before income taxes           |          | 464                    |       | 413                  |       | (76 | ) | 533 |   |
| Provision  for income taxes                  |          | 65                     |       | —               |       | 65 |   | — |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Net income  (loss)                           |          | $                      | 399        |                 | $          | 413 |   | $ | (141 | ) | $ | 533 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Income  (loss) per share                     | –Basic   |                   | $          | 0.05                 |       | $ | 0.06 |   | $ | (0.02 | ) | $ | 0.08 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
|                                         | –Diluted |                   | $          | 0.05                 |       | $ | 0.06 |   | $ | (0.02 | ) | $ | 0.07 |   |
|                                         |          |                   |       |                 |       |   |   |   |   |
| Weighted average shares                      | –Basic   |                   | 7,860      |                 | 7,073      |   | 7,709 |   | 6,978 |   |
|                                         | –Diluted |                   | 8,383      |                 | 7,226      |   | 7,709 |   | 7,119 |   |

 

The accompanying notes are an integral partof these condensed consolidated 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, 2004**  | ** ** | **September 30, 2003** | ** ** |
| Cash flows from operating activities:                                                                |       |                         |       |   |   |
| Net income  (loss)                                                                                   |       | $                            | (141       | ) | $ | 533 |   |
| Adjustments  to reconcile net (loss) income to net cash (used for) provided by operating activities: |       |                         |       |   |   |
| Depreciation  and amortization                                                                       |       | 684                          |       | 878 |   |
| Provisions  for contract, inventory, accounts receivable and warranty reserves                       |       | 1,723                        |       | 189 |   |
| Unrealized gains or losses on short-term investments                                                 |       | 1                            |       | (25 | ) |
| Stock compensation in lieu of fees                                                                   |       | 87                           |       | 100 |   |
| Change in fair value of warrants outstanding                                                         |       | 3,186                        |       | 466 |   |
| Changes in assets and liabilities:                                                                   |       |                         |       |   |   |
| Accounts receivable                                                                                  |       | (1,525                       | )          | (2,376 | ) |
| Unbilled costs and fees                                                                              |       | 250                          |       | (853 | ) |
| Inventories                                                                                          |       | (4,854                       | )          | 1,870 |   |
| Prepaid expenses,  deposits and other assets                                                         |       | 348                          |       | (414 | ) |
| Accounts  payable                                                                                    |       | 1,609                        |       | (553 | ) |
| Customer  deposits                                                                                   |       | (516                         | )          | 2,926 |   |
| Deferred  revenue                                                                                    |       | (603                         | )          | (508 | ) |
| Accrued  expenses and other current liabilities                                                      |       | (537                         | )          | 1,355 |   |
| Non-current  liabilities                                                                             |       | 39                           |       | (141 | ) |
| Total  adjustments                                                                                   |       | (108                         | )          | 2,914 |   |
| Net cash  (used for) provided by operating activities                                                |       | (249                         | )          | 3,447 |   |
|                                                                                                 |       |                         |       |   |   |
| Cash flows  from investing activities:                                                               |       |                         |       |   |   |
| Purchases of  short-term investments                                                                 |       | (15,889                      | )          | (2,325 | ) |
| Maturity of  short-term investments                                                                  |       | —                       |       | 2,285 |   |
| Purchases of  property and equipment                                                                 |       | (1,297                       | )          | (348 | ) |
| Net cash  used for investing activities                                                              |       | (17,186                      | )          | (388 | ) |
|                                                                                                 |       |                         |       |   |   |
| Cash flows from financing activities:                                                                |       |                         |       |   |   |
| Increase in  restricted cash                                                                         |       | (45                          | )          | 162 |   |
| Proceeds  from exercise of stock options and warrants                                                |       | 5,849                        |       | 2,304 |   |
| Net cash  provided by financing activities                                                           |       | 5,804                        |       | 2,466 |   |
| Foreign currency effect on cash                                                                      |       | (18                          | )          | 9 |   |
| Net (decrease) increase in cash and cash equivalents                                                 |       | (11,649                      | )          | 5,531 |   |
| Cash and  cash equivalents at beginning of period                                                    |       | 18,232                       |       | 5,585 |   |
| Cash and  cash equivalents at end of period                                                          |       | $                            | 6,583      |   | $ | 11,116 |   |

 

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

 

5

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

**Notes toUnaudited Condensed Consolidated Financial Statements**

 

1.          General

 

The condensed consolidated financialstatements include the accounts of the Company and its wholly owned subsidiary.All significant intercompany transactions and balances have been eliminated.

 

The unaudited condensed consolidatedfinancial statements have been prepared in accordance with the requirements ofForm 10-Q and consequently do not include all disclosures required by Form10-K. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes includedin the Company’s Annual Report on Form 10-K for the year ended March 31,2004.

 

The consolidated financial statements, in theopinion of management, include all adjustments necessary, consisting solely ofnormal recurring adjustments, to present fairly the Company’s financialposition, 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 andmanufacture of sophisticated X-ray inspection systems for critical detectionand security screening solutions for sale primarily to U.S. and foreigngovernment agencies.  The Company hasonly one reporting segment, X-ray screening products.

 

Significant Accounting Policies

Revenues on cost reimbursable and long-termfixed price contracts are generally recorded as costs are incurred using the percentageof completion method.  For systems thatare produced in a standard manufacturing operation and have shorter order todelivery cycles, the Company recognizes sales at the time of shipment of thesystem to the customer and when other revenue recognition criteria are met.

 

Inventories consist of material, labor andmanufacturing overhead and are recorded at the lower of cost or net realizablevalue.  Excessive manufacturing overheadcosts attributable to idle facilities or abnormal production volumes areexcluded from inventory and recorded as an expense in the period incurred.

 

The Company’s Export and Security Agreementwith Silicon Valley Bank East requires certain cash balances to be restrictedas collateral against outstanding standby letters of credit; these areseparately presented as restricted cash. (see Note 4)

 

The significant accounting policies followedby the Company and its subsidiary in preparing its consolidated financialstatements are set forth in Note 1 to the consolidated financial statementsincluded in its Form 10-K for the year ended March 31, 2004.  The Company has made no changes to thesepolicies during this quarter.

 

Short-terminvestments consist of investments in money market funds, commercial paper andU.S government and government agency bonds. These investments are classified asavailable-for-sale securities and are recorded at their fair market values. Theunrealized holding gains or losses on these securities were immaterial for thesix months ended September 30, 2004 and September 30, 2003.

 

Comprehensiveincome encompasses all changes in stockholder’s equity (except those arisingfrom transactions with owners) and includes net income, net unrealized gains orlosses on available for sale securities and foreign currency translationadjustments. For the quarter and six months ended September 30, 2004 comprehensiveincome includes net income, unrealized loss of $7,000 and the cumulativetranslation adjustment of $2,000. For the quarter ended and the six monthsended September 30, 2003, the Company’s comprehensive net income (loss) isequal to the Company’s net income (loss).

 

Pro Forma Stock-Based Compensation Expense

As permitted by SFAS No. 123, “Accountingfor Stock-Based Compensation”, the Company has elected to continue to applyAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” to account for its stock-based compensation plans. Hadcompensation cost for awards under the Company’s stock-based compensation plansbeen determined 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** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In thousands except per share amounts)**                            | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**  | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Net income  (loss)                                                     |       |                   |       |                 |       |   |   |   |   |
| As reported                                                            |       | $                      | 399        |                 | $          | 413 |   | $ | (141 | ) | $ | 533 |   |
| Less: Stock  based compensation using fair value method for all awards |       | (1,309                 | )          | (896                 | )          | (1,421 | ) | (1,818 | ) |
| Pro forma  net loss                                                    |       | $                      | (910       | )                    | (483       | ) | $ | (1,562 | ) | $ | (1,285 | ) |
| Income  (loss) per share –Basic:                                  |       |                   |       |                 |       |   |   |   |   |
| As reported                                                            |       | $                      | 0.05       |                 | $          | 0.06 |   | $ | (0.02 | ) | $ | 0.08 |   |
| Pro forma                                                              |       | $                      | (0.12      | )                    | $          | (0.07 | ) | $ | (0.20 | ) | $ | (0.18 | ) |
| Income  (loss) per share –Diluted:                                |       |                   |       |                 |       |   |   |   |   |
| As reported                                                            |       | $                      | 0.05       |                 | $          | 0.06 |   | $ | (0.02 | ) | $ | 0.07 |   |
| Pro forma                                                              |       | $                      | (0.12      | )                    | $          | (0.07 | ) | $ | (0.20 | ) | $ | (0.18 | ) |

 

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 rateof 5.0%, expected volatility of 73%, an expected dividend yield of 0% andan expected life of 7 years for all periods.

 

2.          Inventories

 
| **(Dollars in thousands)**                  | ** ** | **Sept. 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| Inventories  consisted of:                  |       |               |       |                    |       |
| Raw  materials and completed sub-assemblies |       | $                  | 7,409      |                    | $          | 7,089 |   |
| Work-in-process                             |       | 7,293              |       | 4,168                   |       |
| Finished  goods                             |       | 935                |       | 133                     |       |
| Total                                       |       | $                  | 15,637     |                    | $          | 11,390 |   |

 

3.          Income (Loss) per Common and CommonEquivalent Share

 

Basic earnings (loss) per common share iscomputed by dividing net income (loss) by the weighted average number of sharesof common stock outstanding during the period. Diluted earnings (loss) per share include the dilutive impact of optionsand warrants using the average share price of the Company’s common stock forthe period. For the quarters and six months ended September 30, 2004 and September 30,2003, common stock equivalents of 304,000, 806,000, 835,000 and 1,150,000,respectively, are excluded from diluted earnings per share, as their effect isanti-dilutive.

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In thousands except per share amounts)**                                              | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**  | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| **Earnings  (Loss) Per Share**                                                           |       |                   |       |                 |       |   |   |   |   |
| **Basic:**                                                                               |       |                   |       |                 |       |   |   |   |   |
| Net income  (loss)                                                                       |       | $                      | 399        |                 | $          | 413 |   | $ | (141 | ) | $ | 533 |   |
| Weighted  average number of common shares outstanding –basic                        |       | 7,860                  |       | 7,073                |       | 7,709 |   | 6,978 |   |
| Net income  (loss) per share –basic                                                 |       | $                      | 0.05       |                 | $          | 0.06 |   | $ | (0.02 | ) | $ | 0.08 |   |
| **Diluted:**                                                                             |       |                   |       |                 |       |   |   |   |   |
| Net income  (loss)                                                                       |       | $                      | 399        |                 | $          | 413 |   | $ | (141 | ) | $ | 533 |   |
| Weighted  average number of common shares outstanding                                    |       | 7,860                  |       | 7,073                |       | 7,709 |   | 6,978 |   |
| Assumed  exercise of stock options and warrants, using the treasury stock method         |       | 523                    |       | 153                  |       | — |   | 141 |   |
| Weighted  average number of common and potential common shares outstanding –diluted |       | 8,383                  |       | 7,226                |       | 7,709 |   | 7,119 |   |
| Net income  (loss) per share –diluted                                               |       | $                      | 0.05       |                 | $          | 0.06 |   | $ | (0.02 | ) | $ | 0.07 |   |

 

4.          Borrowings

 

On August 11, 2003, the Company enteredinto two new credit agreements with Silicon Valley Bank East replacing its HSBCBank USA credit agreements that expired on July 31, 2003.  The first agreement is a $5.0 milliondomestic loan and security agreement to support the Company’s routine workingcapital needs.

 

Maximum borrowings for this line are set atthe 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 the UnitedStates to support the Company’s overseas contract, trade finance and workingcapital needs.

 

The credit facilities bear an interest rateof the greater of 4.25% or the Silicon Valley Bank prime rate (4.75% at September 30,2004) and have an expiration date of November 30, 2004.** **The creditagreements are collateralized by certain assets of the Company and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, the disposition or encumbrances of assets, and requirethe maintenance of certain financial covenants. As of September 30, 2004, the Company was in compliance with thesecovenants.  The Company is in the processof renewing both the domestic and export loan and security agreement facilitieswith Silicon Valley Bank for an additional two years.  The new credit facility, which will reducethe export loan and security agreement from $20.0 million to $10.0 million, isexpected to be in place on December 1, 2004.

 

7

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At September 30, 2004, there were noborrowings outstanding and $156,000 in standby letters of credit were in effectagainst this credit facility, guaranteeing performance on certain largeinternational cargo projects.  Inaddition, the Company had outstanding $365,000 in standby letters of creditwith HSBC Bank USA, which have been collateralized with restricted cash.  No amounts have been drawn against theseletters of credit.

 

5.          Private Placement Offering

 

On May 28, 2002, the Company closed on aprivate placement offering of common stock and warrants.  A total of 1,115,000 shares were sold toaccredited investors at a price of $17.64 each. In addition, warrants topurchase an additional 295,475 shares of common stock at a price of $23.52 wereissued.  Proceeds to the Companyapproximated $18.4 million, 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 atender offer or exchange offer of shares of the Company’s stock, a liabilityequal to the Black-Scholes valuation of the warrants at the deal closing datewas recorded on the Company’s balance sheet. The “mark to market” change in the warrants value of $(2,266,000), $(3,187,000),$(192,000) and $(466,000), was recorded as other income (expense) for the threeand six months ended September 30, 2004 and September 30, 2003,respectively.  The liability of $4,940,000and $2,093,000 associated with the warrants is recorded as a non-currentliability on the September 30, 2004 and March 31, 2004 balancesheets, respectively.  The fair marketvalue of the warrants was determined using the Black- Scholes pricing model andan assumed volatility of 73% and interest rate of 5%. During the quarter ended September 30,2004, 36,000 of the above warrants were exercised.  Total proceeds from this exercise amounted to$847,000.

 

6.          Guarantees

 

At September 30, 2004, the Company had $521,000of letters of credit outstanding guaranteeing performance on certain largeinternational cargo projects.  Theseletters of credit were issued through the Company’s current and former export loanand security agreements (see Note 4) and have expiration dates through June of2005.

 

Certain of the Company’s product lines carry aone-year warranty, 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 and six months ended September 30, 2004 and September 30,2003 is as follows:

 
| ** **                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In thousands)**                                | ** ** | **Sept. 30, 2004**     | ** ** | **Sept. 30, 2003**   | ** ** | **Sept. 30, 2004** | ** ** | **Sept. 30, 2003** | ** ** |
|                                              |       |                   |       |                 |       |   |   |   |   |
| Warranty  accrual beginning of period             |       | $                      | 900        |                 | $          | 535 |   | $ | 699 |   | $ | 535 |   |
| Accruals for  warranties issued during the period |       | 642                    |       | 104                  |       | 1,048 |   | 186 |   |
| Warranty  costs incurred during period            |       | (299                   | )          | (90                  | )          | (504 | ) | (172 | ) |
| Balance at  end of period                         |       | $                      | 1,243      |                 | $          | 549 |   | $ | 1,243 |   | $ | 549 |   |

 

7.          Commitments and Contingencies

 

In the second quarter ended September 30,2003, an accrual of $535,000 was recorded for the anticipated losses on aCargoSearch contract that was recognized on the percentage of completion method.

 

**Item 2 –Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Results ofoperations

Total net revenues for the quarter ended September 30,2004 increased by $2,875,000 to $21,054,000 compared to the corresponding perioda year ago.  This increase isattributable primarily to ZBV product line revenues increasing by $8.2 millionas the Company delivered thirteen units during the quarter and increasedafter-market parts revenue of $2.4 million. These increases were partially offset by a decrease in the CargoSearchproduct line revenues of $3.6 million as the Company had four programs ongoingin the second quarter of fiscal 2004 as compared to two in the second quarterof fiscal 2005 and a $3.5 million decrease in MobileSearch revenues as theCompany had no shipments during the quarter compared to two shipments in thesecond quarter of fiscal 2004.

 

Net revenues for the sixmonths ended September 30, 2004 increased by $2,299,000 to $37,866,000compared to the correspondingperiod a year ago.  This increase isattributable primarily to an increase of $12.0 million in ZBV revenue as thecompany delivered twenty-one ZBV’s in the first six months of fiscal 2005.  In addition, after-market parts revenueincreased by $2.7 million and service revenues increased by $2.1 million as theCompany has entered into service contracts for equipment that had previouslybeen covered under warranty.   Theseincreases were offset by an overall decline in MobileSearch revenues of $10million as the Company had no shipments during the first six months of fiscal2005 compared to the shipment of six trucks during the first six months offiscal 2004 and a decline in CargoSearch revenues of $4.1 million due to the completionof three major projects.

 

Total cost of sales and contracts for the secondquarter of fiscal 2005 increased by $675,000 to $14,057,000 compared to thecorresponding period a year ago. Cost of sales and contracts represented 67% ofrevenues versus 74% for the corresponding period

 

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last year.  Thismargin improvement is due in part to improved service margins as the Companyentered into several large service contracts during fiscal 2005 as warrantiesexpired and due to the low claim experience rate associated with CargoSearchand MobileSearch warranty.  This marginimprovement is also attributable to a $535,000 accrual made in the first sixmonths of fiscal 2003, for losses projected on one CargoSearch programrecognized on a percentage of completion basis.

 

Total cost of sales and contracts for the first sixmonths of fiscal 2005 decreased by $467,000 to $25,731,000 compared to thecorresponding period a year ago. Cost of sales and contracts represented 68% ofrevenues versus 74% for the corresponding period last year.  This margin improvement is due in part toimproved service margins as the Company entered into several large servicecontracts during fiscal 2004 as warranties expired and due to the low claimexperience rate associated with CargoSearch and MobileSearch warranties.  This margin improvement is also attributable toa $635,000 accrual made in the first six months of fiscal 2003, for lossesprojected on one CargoSearch program recognized on a percentage of completionbasis.

 

Selling, general and administrative expenses for thesecond quarter of fiscal 2005 increased by $592,000 to $3,448,000 compared tothe corresponding period a year ago. Selling, general and administrative expenses represented 16% of revenuesin the current period and for the corresponding period last year.  The cost increases from the prior year relateto an increase in facility relocation expense for the HES division, increased auditfees related to Sarbanes-Oxley Section 404 compliance, fees associated withthe transfer to the NASDAQ stock exchange, and increased incentive compensationcosts.

 

Selling, general and administrative expenses for thefirst six months of fiscal 2005 increased by $813,000 to $6,721,000 compared tothe corresponding period a year ago. Selling, general and administrative expenses represented 18% of revenuesin the current period compared to 17% for the corresponding period last year.The increase in selling, general and administrative was a result of the increasein facility expenses due to the relocation of the HES division, increase in auditfees due to Sarbanes-Oxley Section 404 compliance, fees associated withthe transfer to the NASDAQ stock exchange, and increased incentive compensationcosts, offset somewhat by decreases in severance accruals.

 

Company funded research and development expenses forthe second quarter of fiscal 2005 decreased by $347,000 to $1,012,000 comparedto the corresponding period a year ago. Research and development expensesrepresented 5% of revenues in the current quarter compared to 7% for thecorresponding period last year. Current quarter expenditures decreasedcomparatively as the Company focused engineering efforts on revenue producingprograms during the quarter.

 

Company funded research and development expenses forthe first six months of fiscal 2005 decreased by $177,000 to $2,467,000compared to the corresponding period last year. Research and developmentexpenses represented 7% of revenues in the current period compared to 7% forthe corresponding period last year.  Yearto date expenditures continued to decrease compared to the same period in theprior year as the Company maintained cost control initiatives and focusedengineering efforts on revenue producing programs.

 

Other expense was $2,073,000 for the second quarter offiscal 2005 as compared to $169,000 in expense for the corresponding period ayear ago.   As part of the private equityplacement during the first quarter of fiscal 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 the Company’sbalance sheet.  At September 30,2004, these warrants were “marked-to-market” using Black-Scholes and the changein the valuation of the warrants of $2,266,000 was recorded as other expense inthe quarter. During the three months ended September 30, 2003, this “mark-to-market”adjustment resulted in $192,000 in expense.

 

Other expense was increased to $3,023,000 for thefirst six months of fiscal 2005 as compared to $284,000 in expense for thecorresponding period a year ago. Of these amounts $3,187,000 and $466,000,respectively, of expense related to the “mark-to-market” of outstandingwarrants noted above.

 

The potential tax benefits on losses incurred infiscal 2004 were fully reserved due to the uncertainty as to whether theadditional 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 berealized. The Company, however, has made a provision for the alternativeminimum tax and state taxes due on the current quarter and year to date 2005 earnings.

 

The Company earned net income of $399,000 during thesecond quarter of fiscal 2005 as compared to net income of $413,000 in thesecond quarter of fiscal 2004.   TheCompany recognized a net loss of $76,000 in the first six months of fiscal 2005as compared to net income of $533,000 in the first six months of fiscal2004.  The significant factorscontributing to these results are noted in the above sections.

 

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 Company 

 

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approximated $18.4 million. The proceeds fromthis private placement offering have been and are being utilized for generalcorporate purposes including debt repayment, capital expenditures, andinvestments in product development and working capital needs.  During the quarter ended September 30,2004, 36,000 of the above warrants were exercised.  Total proceeds from this exercise amounted to$847,000.

 

Cash, cash equivalents and short term investments increasedby $4,284,000 to $24,946,000 at September 30, 2004 compared to $20,662,000at March 31, 2004. This increase is primarily due to proceeds receivedfrom the exercise of employee stock options and warrants, somewhat offset bythe investment of a new ERP system. Working capital increased by $8,870,000 (23%)since March 31, 2004, increasing from $38,524,000 to $47,394,000 at September 30,2004. This increase is primarily due to the increase in cash from the exerciseof options and warrants over the last six months, the increase in accountsreceivable due to a large milestone billing, and the increase in inventory requiredto meet future orders.

 

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 atthe 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 the UnitedStates to support the Company’s overseas contract, trade finance and workingcapital needs. At September 30, 2004, the Company had available a $5.0million domestic line of credit, as well as $20.0 million export line ofcredit.

 

The credit facilities bear an interest rate of the greater of 4.25% orthe Silicon Valley Bank prime rate (4.75 % at September 30, 2004) and havean expiration 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, andrequire the maintenance of certain financial covenants. As of September 30,2004, the Company was in compliance with these covenants. The Company is in theprocess of renewing both the domestic and export and security agreementfacilities with Silicon Valley Bank for an additional two years.  The new credit facility, which will reducethe export loan and security agreement from $20.0 million to $10.0 million, isexpected to be in place on December 1, 2004.

 

At September 30, 2004, there were no borrowings outstanding and $156,000in standby letters of credit were in effect against this credit facilityguaranteeing performance on certain large international cargo projects.   In addition, the Company had outstanding $365,000in standby letters of credit with HSBC Bank USA, which have been collateralizedwith cash.  No amounts have been drawnagainst these letters of credit.

 

The Company believes that its existing cash and short-term investments combinedwith cash generated from operations and amounts available under its creditfacilities are adequate to finance its operating and capital requirements forfiscal 2005.

 

New Accounting Pronouncements: 

On March 31, 2004, the FASB issued an exposure draft No. 1102-100,Proposed Statement of Financial Accounting Standards-Share-Based Payment,effective for fiscal 2006. This exposure draft outlines a methodology for theaccounting treatment of stock options and certain other share-based payments.It requires these payments to be recorded as an operating expense. The exposuredraft is proposed to supercede SFAS 123, which allowed for footnote disclosureof this expense. Currently, the Company uses the Black-Scholes model for optionexpense calculation for footnote disclosure. The Company’s proforma expensecalculated for this disclosure was $1,309,000 and $1,421,000 for the period endedSeptember 30, 2004, and 2003, respectively. The Company is currently evaluatingthe impact of this proposed pronouncement on its consolidated financialstatements.

 

In March 2004, the Emerging Issues Task Force (EITF) reached aconsensus on EITF Issue No. 03-6, Participating Securities and the Two-ClassMethod under FASB Statement No. 128, Earnings per Share.  EITF Issue No. 03-6 clarifies whatconstitutes a participating security and provides further guidance in applyingthe two-class method of calculating earnings per share. The consensuses reachedby the Task Force on EITF Issue No. 03-6 were ratified by the FASB on March 31,2004, and are effective for reporting periods beginning after March 31,2004. The Company has reviewed the issue and concluded that it has noparticipating securities as defined by EITF Issue No. 03-6.

 

In March 2004, the Emerging Issues Task Force (EITF) reached aconsensus on the remaining portions of EITF 03-01, The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments withan effective date of June 15, 2004. EITF 03-01 provides new disclosurerequirements for other-than-temporary impairments on debt and equityinvestments. Investors are required to disclose quantitative information about:(i) the aggregate amount of unrealized losses, and (ii) the aggregate relatedfair values of investments with unrealized losses, segregated into time periodsduring which the investment has been in an unrealized loss position of lessthan 12 months and greater than 12 months. In addition, investors are requiredto disclose the qualitative information that supports their conclusion that theimpairments noted in the qualitative disclosure are not other-than temporary.The adoption of this statement did not have an impact on the Company’sconsolidated financial statements.

 

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

 

The Company is subject to interest rate risk on its credit facilitiesthat have variable interest rates tied to the Prime Rate.  As of September 30, 2004, the Companyhad no variable interest rate debt outstanding.

 

The cash accounts for the Company’s operations in Singapore, Hong Kong,England, and Abu Dhabi are maintained in Singapore dollars, Hong Kong dollars,pounds sterling and dirhams, respectively. Foreign currency accounts are marked to market at current rates thatresulted in immaterial translation adjustments to stockholders’ equity.  The gains and losses from foreign currencytransactions are included in the statement of operations for the period andwere also immaterial.  A hypothetical 10%change in foreign currency rates would not have a material impact on theCompany’s results of operations, financial position or cash flows.

 

As of September 30, 2004, the Company held short-term investmentsconsisting of money market funds, commercial paper 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 1.6% and are subject to interest rate risk. As aresult of the average maturity and conservative nature of the investmentportfolio, a sudden decline in interest rates would not have a material effecton the value of these investments.

 

In fiscal 2003, the Company issued 295,475 warrants in connection witha private placement 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 balance sheet.  During the period ended September 30,2004, 36,000 of these warrants were exercised. Total remaining warrants left to be exercised as of September 30,2004 are 259,475. Changes in the fair value of the warrants are recorded asother income (expense).  TheBlack-Scholes value of these warrants can fluctuate significantly based on thecurrent fair market value of the Company’s common stock.  A 10% change in the fair market value of theCompany’s common stock, holding other assumptions constant, would haveapproximately a $718,000 effect on earnings.

 

**Item 4 - Controls and Procedures**

 

There have been no changes in our internal controls or in other factorsthat could affect internal controls for the quarter ended September 30,2004.

 

**PART II – OTHER INFORMATION**

 

**Item 1 – Legal Proceedings**

 

In September 1998, the Company filed suitagainst EG&G Astrophysics Research Corp. (“EG&G”) in the U.S. DistrictCourt for the District of Massachusetts in Boston, alleging that EG&Ginfringed upon at least two patents owned by the Company and that EG&G hadmisappropriated certain trade secrets of the Company. EG&G denied theseallegations and filed counterclaims alleging that the patents-in-suit were notinfringed and/or were invalid. In May 2003, the Company andPerkinElmer, Inc. (the former parent of EG&G) completed a settlementagreement which resolved all of the Company’s claims against EG&G through June 14,2002, the date that PerkinElmer sold EG&G to its new corporate parent, L-3Communications, Inc, (“L-3”). Counterclaims as to any liability through thesame date also were released. After completing this settlement, the litigationcontinued against EG&G’s successor-in-interest, L-3, concerning anyliability accrued after that date. Upon a determination that L-3 was notcontinuing the accused infringement, the Company moved to dismiss the case. In February 2004,the District Court entered an order dismissing the Company’s claims withprejudice and L-3’s counterclaims without prejudice. The Company covenanted notto sue L-3 for infringement by any current products of the two above-referencedpatents.

 

On or about February 19, 2004, L-3 filed alawsuit against the Company in the United States District Court for theDistrict of Massachusetts, in Boston, seeking declaratory judgments ofnon-infringement and/or invalidity of two of the Company’s patents—UnitedStates Pat. No. 6,292,533 and No. 5,903,623. The Company filed amotion to dismiss the litigation for lack of subject matter jurisdiction, butwas denied. The Company has answered L-3’s underlying complaint, vigorouslyopposing the plaintiff’s non-infringement and invalidity claims, and has begunrelevant discovery.

 

The Company is also subject to various legalproceedings and claims that arise in the ordinary course of business. TheCompany currently believes that resolving these matters will not have amaterial adverse impact on its financial condition or results of operations.

 

**Item 4 - Submission ofMatters to a Vote of Security Holders**

** **

At the special meeting inlieu of the annual meeting of Stockholders of the Company held on September 16,2004, the stockholders of the Company (1) elected William E. Odom, Denis R.Brown, Roger P. Heinisch, Hamilton W. Helmer, Donald J. McCarren, Ernest J.Moniz, Carl W. Vogt  and Anthony R.Fabiano as directors of the Company to hold office for a one-year term and noother nominations were made; (2) ratified the appointment of PricewaterhouseCoopersLLP as our independent auditors for the fiscal year 

 

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ending March 31,2005.  The votes were as follows:

 
| ** **                                                              | ** ** | **Votes For** | ** ** | **Votes  Withheld or  Opposed** | ** ** | **Abstentions** | ** ** |
|-------------------------------------------------------------------------|------------|---------------|------------|---------------------------------|------------|-----------------|------------|
|                                                                    |       |          |       |                            |       |            |       |
| (1) Election of Directors:                                              |       |          |       |                            |       |            |       |
| William E. Odom                                                         |       | 7,358,947     |       | 77,049                          |       |            |       |
| Denis R. Brown                                                          |       | 7,421,239     |       | 14,757                          |       |            |       |
| Roger P. Heinisch                                                       |       | 6,810,370     |       | 625,626                         |       |            |       |
| Hamilton W. Helmer                                                      |       | 7,402,916     |       | 33,080                          |       |            |       |
| Donald J. McCarren                                                      |       | 7,159,187     |       | 276,809                         |       |            |       |
| Ernest J.  Moniz                                                        |       | 7,407,439     |       | 28,557                          |       |            |       |
| Carl W. Vogt                                                            |       | 7,379,511     |       | 56,485                          |       |            |       |
| Anthony R. Fabiano                                                      |       | 7,417,790     |       | 18,206                          |       |            |       |
|                                                                    |       |          |       |                            |       |            |       |
| 5) Ratification of PricewaterhouseCoopers  LLP as independent auditors. |       | 7,410,176     |       | 12,858                          |       | 12,962          |       |

 

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

 

(a)                                  Exhibits

 
| 31.1 |   | Certification by Principal Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|------|--------|--------------------------------------------------------------------------------------------------------------|

 

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| 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)                                 Reportson Form 8-K

 
| Form 8-K |   | Dated September 29, 2004 announcing  that the Company had initiated action to transfer the listing of its  securities from the American Stock Exchange to the NASDAQ Stock Exchange. |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                      |
| Form 8-K |   | Dated September 21, 2004 regarding the  entrance into a material definitive agreement.                                                                                               |
|     |   |                                                                                                                                                                                      |
| Form 8-K |   | Dated September 17, 2004 regarding the  entrance into a material definitive agreement.                                                                                               |
|     |   |                                                                                                                                                                                      |
| Form 8-K |   | Dated September 1, 2004 regarding the  entrance into a material definitive agreement.                                                                                                |
|     |   |                                                                                                                                                                                      |
| Form 8-K |   | Dated September 1, 2004 regarding the  entrance into a material definitive agreement.                                                                                                |
|     |   |                                                                                                                                                                                      |
| Form 8-K |   | Dated August 2, 2004 in connection  with the announcement of the first quarter 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 7.

 

**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         | November 3, 2004 |                                                                        |   |     /s/ Kenneth J.  Galaznik |   |   |
|         |                  | Kenneth J. Galaznik                                                         |   |
|         |                  |  Vice President Finance, Treasurer and  Acting Chief Financial Officer |   |
|              |                       |                                                                             |  |  |  |  |

 

*Safe Harbor Statement*

*The foregoing 10-Q  contains statements concerning the Company’sfinancial performance and business operations, which may be considered “forward-looking”under applicable securities laws.*

* *

*The Company wishes to caution readers of thisForm 10-Q that actual results might differ materially from those projected inany 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 system, to accommodate any future growth, and futuredelays in federal funding. These and certain other factors which might causeactual results to differ materially from those projected are more fully setforth under the caption “Forward-Looking Information and Factors AffectingFuture Performance” in the Company’s Annual Report on Form 10-Kfor the yearended March 31, 2004.*

 

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