**FORM 10-Q**

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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

 

**For thequarterly period ended June 30, 2003**

 

**OR**

 

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

 

**For thetransition periodfrom        to        **

 

**CommissionFile Number 1-6549**

 

**American Science and Engineering, Inc.**

(Exact name of Registrantas 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 telephonenumber, including area code)

 

 

(Former name, formeraddress 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 whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act 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  August 8, 2003** |   |
|---------------------------|--------|-------------------------------------|--------|
| $.66 2/3 par value        |   | 7,004,917                           |   |

 

 

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**PART I – FINANCIAL INFORMATION**

**Item1 – Financial Statements**

 

**American Science and Engineering, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

 

Dollars in thousands

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

 

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

 

2

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**American Science and Engineering, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(Continued)**

 

**Dollarsin thousands**

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

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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**American Science and Engineering, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 

##### **Dollarsand shares in thousands, except per share amounts**

 
|                                          |   | **For the  Three Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------|--------|
|                                          |   | **June 30,  2003**              |   | **June 30,  2002** |   |
| Revenues:                                     |   |                            |   |   |   |
| Net product  sales and contract revenues      |   | $                               | 14,078 |   | $ | 12,945 |   |
| Net service  revenues                         |   | 3,310                           |   | 1,973 |   |
| Total net  revenues                           |   | 17,388                          |   | 14,918 |   |
|                                          |   |                            |   |   |   |
| Cost of sales  and contracts:                 |   |                            |   |   |   |
| Cost of product  sales and contracts          |   | 10,642                          |   | 9,349 |   |
| Cost of service  revenues                     |   | 1,760                           |   | 2,079 |   |
| Total cost of  sales and contracts            |   | 12,402                          |   | 11,428 |   |
| Gross profit                                  |   | 4,986                           |   | 3,490 |   |
|                                          |   |                            |   |   |   |
| Expenses:                                     |   |                            |   |   |   |
| Selling, general  and administrative expenses |   | 3,563                           |   | 3,172 |   |
| Research and  development                     |   | 1,188                           |   | 1,866 |   |
| Total expenses                                |   | 4,751                           |   | 5,038 |   |
|                                          |   |                            |   |   |   |
| Operating income  (loss)                      |   | 235                             |   | (1,548 | ) |
|                                          |   |                            |   |   |   |
| Other income  (expense):                      |   |                            |   |   |   |
| Interest income                               |   | 28                              |   | 24 |   |
| Interest expense                              |   | —                          |   | (86 | ) |
| Other, net                                    |   | (143                            | )      | 701 |   |
| Total other  income (expense)                 |   | (115                            | )      | 639 |   |
|                                          |   |                            |   |   |   |
| Income (loss)  before income taxes            |   | 120                             |   | (909 | ) |
| Provision for  (benefit from) income taxes    |   | —                          |   | — |   |
|                                          |   |                            |   |   |   |
| Net income  (loss)                            |   | $                               | 120    |   | $ | (909 | ) |
|                                          |   |                            |   |   |   |
| Income (loss)  per share – Basic         |   | $                               | 0.02   |   | $ | (0.15 | ) |
| – Diluted                                |   | $                               | 0.02   |   | $ | (0.15 | ) |
|                                          |   |                            |   |   |   |
| Weighted average  shares – Basic         |   | 6,883                           |   | 5,975 |   |
| – Diluted                                |   | 7,011                           |   | 5,975 |   |

 

The accompanying notes arean integral part of these condensed consolidated financial statements.

 

4

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**American Science and Engineering, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited**)

Dollars in thousands

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

 

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

 

5

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**American Science and Engineering, Inc. and Subsidiaries**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

 

1.               General

The condensed consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany transactions and balances have been eliminated.

 

The unaudited condensed consolidated financialstatements have been prepared in accordance with the requirements of Form 10-Qand consequently do not include all disclosures required by Form 10-K. Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended March 31, 2003.

 

The consolidated financial statements, in the opinion of management,include all adjustments necessary, consisting solely of normal recurringadjustments, to present fairly the Company’s financial position, results ofoperations and cash flows.  These resultsare not necessarily indicative of the results to be expected for the entireyear.

 

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 AccountingPolicies

Revenues on cost reimbursable and long-term fixedprice contracts are generally recorded as costs are incurred using thepercentage of completion method.  TheCompany recognizes sales for its systems that are produced in a standardmanufacturing operation and have shorter order to deliver cycles at the time ofshipment of the system to the customer and when other revenue recognitioncriteria is met.  Service revenuesexceeded 10% of total revenues and as such have been separately presented.

 

The Company’s Export and Security Agreement with HSBCBank USA requires certain cash balances to be restricted as collateral againstoutstanding standby letters of credit. (see Note 4)

 

The significant accounting policies followed by theCompany and its Subsidiaries in preparing its consolidated financial statementsare set forth in Note 1 to the consolidated financial statements included inits Form 10-K for the year ended March 31, 2003.  The Company has made no changes to thesepolicies during this quarter.

 

ProForma Stock-Based Compensation Expense

As permitted by SFASNo. 123, “Accounting for Stock-Based Compensation”, the Company haselected to continue to apply Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” to account for its stock-basedcompensation plans. Had compensation cost for awards under the Company’s stock-basedcompensation plans been determined based on the fair value at the grant datesconsistent with the method set forth under SFAS No. 123, the effect on theCompany’s net income (loss) and income (loss) per share would have been asfollows: 

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

 

6

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

 

New AccountingPronouncements

 

In November 2002, the Task Force reached a consensuson Emerging Issues Task Force Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables”.  This issue addresses how todetermine whether an arrangement involving multiple deliverables contains morethan one unit of accounting and how arrangement consideration should be measuredand allocated to the separate units of accounting.  This guidance iseffective for the Company on July 1, 2003.  The Company is currentlyevaluating the impact of this guidance on its revenue recognition policies andwill adopt this guidance prospectively.

 

In December 2002, the FASB issued SFAS No. 148“Accounting for Stock- Based Compensation- Transition and Disclosure- anamendment of FASB Statement No. 123” (FAS 148).  This statement amends SFAS No. 123 “Accounting for Stock BasedCompensation” (FAS 123) to provide alternative methods of voluntarilytransitioning to the fair value based method of accounting for stock-basedemployee compensation.  FAS 148 alsoamends the disclosure requirements of FAS 123 to require disclosure of themethod used to account for stock-based employee compensation and the effect ofthe method on reported results in both annual and interim financialstatements.  The amended disclosureprovisions are effective for the fiscal years ending after December 31, 2002and the Company has adopted the amended disclosure provisions as of March 31,2003.  The Company has not decidedwhether it will voluntarily change to the fair value based method of accountingfor stock-based employee compensation at this time.

 

In May 2003, the FASBissued FAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.” FAS No. 150 establishedstandards for how to classify and measure certain financial instruments withcharacteristics of both liabilities and equity. The provisions of FAS No. 150are effective immediately for all financial instruments entered into ormodified after May 31, 2003.  TheCompany adopted these provisions as of June 1, 2003 with no material impact onthe Company’s financial position or results of operations.  For all other instruments, the Standard goesinto effect as of July 1, 2003, except for mandatory redeemable financialinstruments of a non-public entity, which is effective for existing or newcontracts as of January 1, 2004.  TheCompany does not expect these provisions to have an impact on its financialposition or results of operations.

 

2.               Inventories

Inventories consisted of:

(Dollars in thousands)

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

 

3.               Income perCommon and Common Equivalent Share

Basic earnings per common share is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings per share includes the dilutive impact of options and warrants usingthe average share price of the Company’s common stock for the period. For thequarters ended June 30, 2003 and June 30, 2002, common stock equivalents of1,448,072 and 627,000, respectively, are excluded from diluted earnings pershare, as their effect is anti-dilutive.

 

7

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

 

4.               Borrowings

On November 30, 2000, the Company signed twocredit agreements with HSBC Bank USA (“HSBC”). The first agreement was for a$10.0 million domestic revolving credit facility to support the Company’sroutine working capital and standby letter of credit needs. The second was a$30.0 million export credit and security agreement, guaranteed by theExport-Import Bank of the United States to support the Company’s overseascontract, trade finance and working capital needs.

 

On February 14, 2002, these credit agreementswere amended to increase the domestic revolving credit facility to $20.0million and to reduce the export credit facility to $20.0 million inanticipation of higher domestic demand. These agreements were further amended on November 28, 2002 to reduce thedomestic revolving credit facility to $5 million, with maximum borrowings setat the lower of:  (a) the sum of 85% ofeligible domestic accounts receivable plus the lower of: (i) 40% of eligibleraw materials and work–in–process inventory; or; (ii) $2 million, or; (b) $5million.  In addition, the interest rateand certain financial covenants were amended and the expiration date of thefacility was extended to February 28, 2003. In February 2003 and May 2003,these agreements were further amended to extend expiration to July 31,2003.  The credit facility, as amended,bears an interest rate at the HSBC Bank USA prime rate plus 1⁄4% or LIBOR plus2.0% at the Company’s option (4.25% at June 30, 2003). At June 30, 2003, therewere no borrowings outstanding and $4.3 million in standby letters ofcredit, guaranteeing performance on certain large international cargo projects,were in effect against this credit facility. No amounts have been drawn againstthese letters of credit.

 

The credit agreements are collateralized by certainassets of the Company, and contain certain restrictions, including limitationson the amount of distributions that can be made to stockholders, encumbrancesof assets, and loans that can be made to officers, and requires the maintenanceof certain financial covenants. As of June 30, 2003, the Company was not incompliance with its tangible net worth and earnings covenants, but hasrenegotiated a new credit line with a new bank which contains revised covenantsunder which the Company would have been in compliance at June 30, 2003.

 

On August 11, 2003, the Company entered into two newcredit agreements with Silicon Valley Bank East replacing its HSBC creditagreements that expired on July 31, 2003. The first agreement is a $5.0 million domestic revolving creditfacility to support the Company’s routine working capital needs.  Maximum borrowings for this line are set atthe lower of  (a) the sum of 80% ofeligible domestic accounts receivable plus 10% of finished goods inventory upto $750,000, or; (b) $5 million.  Thesecond was a $20.0 million export credit and security agreement,guaranteed by the Export-Import Bank of the United States to support theCompany’s overseas contract, trade finance and working capital needs.

 

The credit facilities bear an interest rate of thegreater of 4.25% or the Silicon Valley Bank prime rate (4.25% at June 30, 2003)and has an expiration date of November 30, 2004.** **The credit agreementsare collateralized by certain assets of the

 

8

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Company, and contain certain restrictions, includinglimitations on the amount of distributions that can be made to stockholders,and the disposition or encumbrances of assets, and requires the maintenance ofcertain financial covenants.

 

5.               PrivatePlacement Offering

On May 28, 2002, the Company closed on a private placement offering ofcommon stock and warrants.  A total of1,115,000 shares were sold to accredited investors at a price of $17.64 each.In addition, warrants to purchase an additional 295,475 shares of common stockat a price of $23.52 were issued. Proceeds to the Company approximated $18.4 million, net of approximately$1.3 million of issuance cost.  Thewarrants were immediately vested and have a five-year life expiring in May of2007.  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.  The “mark tomarket” change in the warrants value of $(274,000) and $724,000, was recordedas other income (expense) for the three months ended June 30, 2003 and June 30,2002, respectively.  The liability of$1,094,000 and $820,000 associated with the warrants is recorded as anon-current liability on the June 30, 2003 and March 31, 2003 balance sheets,respectively.  The fair market value ofthe warrants was determined using the Black Scholes pricing model and anassumed volatility of 73% and interest rate of 5%.

 

6.     Guarantees

At June 30, 2003, the Company had $4.3 million of letters of creditoutstanding guaranteeing performance on certain large international cargoprojects.  These letters of credit areissued through the Company’s export credit and security agreement (see Note 4)and have expiration dates through June of 2004.

 

The Company’s parcel product line carries a one-year warranty, thecosts of which are accrued for at time of shipment.  Accrual rates are based upon historical experience over thepreceding twelve months and the adequacy of the warranty reserve is evaluatedmonthly.  Warranty experience for thethree months ended June 30, 2003 and June 30, 2002 is as follows:

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

 

9

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**Item 2 –Management’s Discussion and Analysis of Financial Condition and Results ofOperation**

 

Results of Operations 

Total net revenues for the first quarter of fiscal 2004 increased by$2,470,000 to $17,388,000 compared to the corresponding period a year ago.  This increase is attributable primarily toincreased MobileSearch systems revenues ($6,216,000) due to deliveries of foursystems sold under new contracts with the Department of Defense during thequarter.  This increase is partiallyoffset by decreased ParcelSearch and other CargoSearch system revenues ascompared to the prior year.  The firstquarter of fiscal 2003 had significant ParcelSearch deliveries under ordersreceived immediately post September 11th.  Bookings for these systems have now normalized to levels slightlyabove the pre-September 11th demand.  Service revenues increased by $1,337,000 compared to the firstquarter of fiscal 2003 as the Company has entered into service contracts forequipment that had been under warranty in the first quarter of fiscal 2003.

 

Total cost of sales and contracts for the first quarter of fiscal 2004increased by $974,000 to $12,402,000 compared to the corresponding period ayear ago. Cost of sales and contracts represented 71% of revenues versus 77%for the corresponding period last year. This margin improvement is due in part to the increased revenues fromhigher margin MobileSearch trucks, improved manufacturing overhead absorption,and significantly improved service margins as the Company entered into severallarge service contracts during fiscal 2003 as warranties expired and replacedcertain unprofitable service contracts and time and material servicearrangements.

 

Selling, general and administrative expenses for the first quarter offiscal 2004 of $3,563,000 were $391,000 higher than the corresponding period ayear ago.  Selling, general andadministrative expenses represented 20% of revenues in the current quartercompared to 21% for the corresponding period last year.  In the first quarter of fiscal 2003, theCompany recorded severance and other costs related to the termination of theCompany’s Chief Executive Officer of approximately $400,000.

 

Company funded research and development expenses of $1,188,000 for thefirst quarter of fiscal 2004 decreased by $678,000 (36%) compared to thecorresponding period last year. Research and development expenses represented7% of revenues in the current quarter compared to 13% for the correspondingperiod last year. Current quarter expenditures decreased comparatively as theCompany limited research and development initiatives in order to control costsand focused engineering efforts on revenue producing programs during thequarter.

 

Other income (expense) was $115,000 in expense for the first quarter offiscal 2004 as compared to $639,000 in other income for the correspondingperiod a year ago.  As part of theprivate equity placement during the first quarter of 2003, the Company issued295,475 warrants.  Due to certainconversion features of these warrants that provide that the holder may opt fora cash settlement 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 June 30,2003, these warrants were “marked to market” using Black-Scholes and the changein the valuation of the warrants of $274,000 was recorded as other expense inthe quarter. During the three months ended June 30, 2002, this calculationgenerated  $723,000 in other income.

 

The potential tax benefits on losses incurred in fiscal 2003 were fullyreserved against due to the uncertainty as to whether the additional losscarryforwards would ultimately be realized. In assessing the realizability ofdeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. TheCompany has not provided a provision for taxes in the quarter ended June 30,2003 as the Company will not have to pay taxes for the income earned in thequarter due to its net operating loss carryforwards.

 

The Company earned net income of $120,000 during the first quarter offiscal 2004 as compared to a net loss of $909,000 in the first quarter offiscal 2003.  The significant factorscontributing to these results are noted in the above sections.

 

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Liquidity and Capital Resources 

 

On May 28, 2002, the Company closed on a private placementoffering 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. These warrants have a five-year life expiring in May of 2007.  Proceeds to the Company approximated$18.4 million. The proceeds from this private placement offering have beenand are being utilized for general corporate purposes including debt repayment,capital expenditures, and investments in product development and working capitalneeds.

 

Cash and cash equivalents increased by $2,353,000 to $7,938,000 at June30, 2003 compared to $5,585,000 at March 31, 2003. This increase in cash andcash equivalents is primarily due to cash generated from operations asMobileSearch trucks in inventory at March 31, 2003 were delivered to customersin the current quarter. Working capital increased by $645,000 (2%) since March31, 2003, increasing from $30,196,000 to $30,841,000 at June 30, 2003.

 

On November 30,2000, the Company signed two credit agreements with HSBC Bank USA (“HSBC”). Thefirst agreement was for a $10.0 million domestic revolving credit facilityto support the Company’s routine working capital and standby letter of creditneeds. The second was a $30.0 million export credit and securityagreement, guaranteed by the Export-Import Bank of the United States tosupport the Company’s overseas contract, trade finance and working capitalneeds.

 

On February 14,2002, these credit agreements were amended to increase the domestic revolving creditfacility to $20.0 million and to reduce the export credit facility to $20.0million in anticipation of higher domestic demand.  These agreements were further amended on November 28, 2002 toreduce the domestic revolving credit facility to $5 million, with maximumborrowings set at the lower of:  (a) thesum of 85% of eligible domestic accounts receivable plus the lower of: (i) 40%of eligible raw materials and work-in-process inventory; or; (ii) $2 million,or; (b) $5 million.  In addition, theinterest rate and certain financial covenants were amended and the expirationdate of the facility was extended to February 28, 2003. In February 2003 andMay 2003, these agreements were further amended to extend expiration to July31, 2003.  The credit facility, asamended, bears an interest rate at the HSBC Bank USA prime rate plus 1⁄4% orLIBOR plus 2.0% at the Company’s option (4.25% at June 30, 2003). At June 30,2003, there were no borrowings outstanding and $4.3 million in standbyletters of credit, guaranteeing performance on certain large internationalcargo projects, were in effect against this credit facility. No amounts havebeen drawn against these letters of credit.

 

The credit agreements arecollateralized by certain assets of the Company, and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, encumbrances of assets, and loans that can be made toofficers, and requires the maintenance of certain financial covenants. As ofJune 30, 2003, the Company was not in compliance with its tangible net worthand earnings covenants, but has renegotiated a new credit line with a new bankwhich contains revised covenants under which the Company would have been incompliance at June 30, 2003.

 

On August 11, 2003, theCompany entered into two new credit agreements with Silicon Valley Bank Eastreplacing its HSBC credit agreements that expired on July 31, 2003.** **Thefirst agreement is a $5.0 million domestic revolving credit facility tosupport the Company’s routine working capital and standby letter of creditneeds.  Maximum borrowings for this lineare set at the lower of  (a) the sum of80% of eligible domestic accounts receivable plus 10% of finished goodsinventory up to $750,000, or; (b) $5 million. The second was a $20.0 million export credit and securityagreement, guaranteed by the Export-Import Bank of the United States tosupport the Company’s overseas contract, trade finance and working capitalneeds.

 

The credit facilitiesbear an interest rate of the greater of 4.25% or the Silicon Valley Bank primerate (4.25% at June 30, 2003) and has an expiration date of November 30, 2004.** **Thecredit agreements are collateralized by certain assets of the Company, andcontain certain restrictions, including limitations on the amount ofdistributions that can be made to stockholders and the disposition orencumbrances of assets, and requires the maintenance of certain financialcovenants.

 

The Company believes thatits existing cash and investments plus cash generated from operations andamounts available under its credit facilities are adequate to finance itsoperating and capital requirements for fiscal 2004.

 

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New Accounting Pronouncements:

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

 

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

 

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

 

**Item 3 - Quantitative and Qualitative Disclosures About MarketRisk**

 

The Company is subject to interest rate risk on its credit facilitieswhich have variable interest rates tied to the Prime Rate or LIBOR.  As of June 30, 2003, the Company had novariable 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 hypothetical10% change in foreign currency rates would not have a material impact on theCompany’s results of operations or financial position.

 

As of June 30, 2003, the Company holds short-terminvestments consisting of money market funds and U.S. government and governmentagency bonds.  The Company’s primaryobjective with its investment portfolio is to invest available cash whilepreserving principal and meeting liquidity needs. These investments have anaverage interest rate of approximately 1.7% and are subject to interest raterisk. As a result of the average maturity and conservative nature of theinvestment portfolio, a sudden change in interest rates would not have amaterial effect on the value of these investments.

 

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

 

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**Item 4 - Controls and Procedures**

 

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

 

There have been no significant changes in our internal controls or inother factors, which could significantly affect internal controls subsequent tothe date that the Company carried out its evaluation.

 

**PART II – OTHER INFORMATION**

 

# **Item 1 – Legal Proceedings**

*In a decision issued December 29, 1999, the UnitedStates Court of Appeals for the Federal Circuit in Washington, D.C. ruled thatthe Company may pursue a patent infringement claim against Vivid Technologies(“Vivid”), which produces X-ray detection devices used in baggage scanningequipment. The Appeals Court overturned a 1998 decision in Vivid’s favor by theMassachusetts Federal District Court. The lawsuit, filed by Vivid inMay 1996, concerned whether Vivid’s X-ray detection devices infringed onAS&E’s patent. The District Court had ruled that AS&E could not asserta claim that Vivid’s devices infringed on AS&E’s patent. The Appeals Courtreversed the district court’s finding on summary judgment that Vivid did notinfringe on AS&E’s patent, as well as the district court’s denial ofAS&E’s request for discovery to oppose Vivid’s summary judgment motion.  Vivid was acquired by PerkinElmer in 2000.*

* *

*In September 1998, the Company filed suitagainst EG&G Astrophysics Research Corp. (“EG&G”) in U.S. DistrictCourt in Boston, Massachusetts alleging that EG&G infringed upon at leasttwo patents 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 withthe U.S. Patent and Trademark Office (“USPTO”) for reexamination of the twopatents that were at issue in the patent infringement action described above.The Company filed oppositions to the re-examination requests and the Companywas advised by the USPTO that both its MobileSearch X-ray inspection and itsZ® Backscatter X-ray inspection technology patents were upheld in allmaterial respects on January 30, 2001.*

* *

*In March 2003, the Company entered into a PartialSettlement Agreement and Release with PerkinElmer, the parent of EG&G, withrespect to the above-referenced litigation. The Partial Settlement Agreement and Release covers claims andcounter-claims in the EG&G and Vivid actions up to June 14, 2002, the dateof closing on the sale of EG&G by PerkinElmer to L-3 Communications.  Certain aspects of the EG&G litigationremain pending in the District Court at this time.*

* *

*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 6 - Exhibits and Reports on Form8-K**

 

(a)             Exhibits

 
| 10(c)(xv) |   | Lease of Mountain View, CA facility for High Energy  Systems Division |
|-----------|--------|-----------------------------------------------------------------------|

 

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| 10(d)(ix) |   | Amendment No. 4 to the Export Credit and Security  Agreement between American Science and Engineering, Inc. and HSBC Bank dated  May 31, 2003       |
|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                |
| 10(d)(x)  |   | Amendment No. 4 to the Revolving Loan and Security  Agreement between American Science and Engineering, Inc. and HSBC Bank dated  May 31, 2003      |
|      |   |                                                                                                                                                |
| 31.1      |   | Certification by Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|      |   |                                                                                                                                                |
| 31.2      |   | Certification by Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|      |   |                                                                                                                                                |
| 32.1      |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|      |   |                                                                                                                                                |
| 32.2      |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

(b)                Reports on Form 8-K

 
| Form 8-K | Dated April 30, 2003 in  connection with the announcement of earnings expectations for the quarter  ended March 31, 2003. |
|----------|---------------------------------------------------------------------------------------------------------------------------|
| Form 8-K | Dated May 20, 2003  announcing the replacement of Ralph S. Sheridan as President and Chief  Executive Officer             |
| Form 8-K | Dated May 29, 2003 in  connection with the announcement of the fourth quarter and fiscal 2003  financial results          |

 

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

 

**SIGNATURES**

 

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

 

 
|                            | AMERICAN SCIENCE AND ENGINEERING, INC.                 |
|---------------------------------|--------------------------------------------------------|
| (Registrant)                    |                                                   |   |
|                            |                                                   |   |
|                            |                                                   |   |
| Date  August 13, 2003 |      /s/ Paul Theodore  Owens |   |
|                            | Paul Theodore Owens                                    |
|                            | Vice President, Treasurer and Chief Financial  Officer |
|                            |                                                   |   |
|                                 |                                                        |  |  |  |

 

*Safe HarborStatement*

*The foregoing 10-Qcontains statements concerning the Company’s financial performance and businessoperations, which may be considered “forward-looking” under applicablesecurities laws.*

 

*TheCompany wishes to caution readers of this Form 10-Q that actual results mightdiffer materially from those projected in any forward-looking statements.*

 

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*Factors which might cause actualresults to differ materially from those projected in the forward-lookingstatements contained herein include the following: significant reductions ordelays in procurements of the Company’s systems by the United States and othergovernments; disruption in the supply of any source component incorporated intoAS&E’s products; litigation seeking to restrict the use of intellectualproperty used by the Company; potential product liability claims against theCompany; global political trends and events which affect public perception ofthe threat presented by drugs, explosives and other contraband; global economicdevelopments and the ability of governments and private organizations to fundpurchases of the Company’s products to address such threats; and the potentialinsufficiency of Company resources, including human resources, capital, plantand equipment and management systems, to accommodate any future growth, ourability to find a replacement for our Chief Executive Officer and future delaysin federal funding.**These and certain other factors 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 Registration Statement on Form 10-K.*

 

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