**FORM10-Q**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

 

**For the quarterly period ended June 30,2004**

 

**OR**

 

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

 

**For the transition period from              to              **

 

**Commission File Number 1-6549**

 

**AmericanScience and Engineering, Inc.**

(Exact name of Registrant as specified in its charter)

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor 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 sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date

 
| **Class of Common Stock** | ** ** | **Outstanding at  July, 30, 2004** |
|---------------------------|------------|------------------------------------|
| $.66 2/3 par value        |       | 7,822,312                          |

 

 

----

 

**PART I – FINANCIAL INFORMATION**

**Item 1 – Financial Statements**

 

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

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

 

Dollars in thousands

 
| ** **                                                                                                               | ** ** | **June 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                                                                     |       |                   |       |                    |       |
| **Assets**                                                                                                               |       |                   |       |                    |       |
| Current assets:                                                                                                          |       |                   |       |                    |       |
| Cash and cash equivalents                                                                                                |       | $                      | 24,264     |                    | $          | 18,232 |   |
| Restricted cash                                                                                                          |       | 629                    |       | 585                     |       |
| Short-term investments                                                                                                   |       | 921                    |       | 1,845                   |       |
| Accounts receivable, net of allowances of  $275 and $250 at June 30, 2004 and March 31,2004, respectively      |       | 12,121                 |       | 14,771                  |       |
| Unbilled costs and fees, net of allowances  of $352 and $394 at June 30, 2004 and March 31, 2004, respectively |       | 4,366                  |       | 4,468                   |       |
| Inventories                                                                                                              |       | 12,611                 |       | 11,390                  |       |
| Prepaid expenses and other current assets                                                                                |       | 1,925                  |       | 1,890                   |       |
|                                                                                                                     |       |                   |       |                    |       |
| **Total current assets**                                                                                                 |       | 56,837                 |       | 53,181                  |       |
| Equipment and Leasehold Improvements, net                                                                                |       | 2,926                  |       | 2,585                   |       |
| Other assets, net                                                                                                        |       | 36                     |       | 37                      |       |
|                                                                                                                     |       |                   |       |                    |       |
| **Total assets**                                                                                                         |       | $                      | 59,799     |                    | $          | 55,803 |   |

 
| **Liabilities and Stockholders’ Equity**                                                                                                                                |   |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Current liabilities:                                                                                                                                                         |   |   |   |   |   |
| Accounts payable                                                                                                                                                             |   | $      | 4,218  |   | $      | 3,690 |   |
| Accrued salaries and benefits                                                                                                                                                |   | 2,222  |   | 1,954  |   |
| Accrued warranty costs                                                                                                                                                       |   | 900    |   | 699    |   |
| Deferred revenue                                                                                                                                                             |   | 1,597  |   | 2,020  |   |
| Customer deposits                                                                                                                                                            |   | 3,892  |   | 4,419  |   |
| Other current liabilities                                                                                                                                                    |   | 1,291  |   | 1,875  |   |
|                                                                                                                                                                         |   |   |   |   |   |
| **Total current liabilities**                                                                                                                                                |   | 14,120 |   | 14,657 |   |
| Warrant liability                                                                                                                                                            |   | 3,013  |   | 2,093  |   |
| Other long-term liabilities                                                                                                                                                  |   | 643    |   | 620    |   |
|                                                                                                                                                                         |   |   |   |   |   |
| **Total liabilities**                                                                                                                                                        |   | 17,776 |   | 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 and Outstanding 7,822,312 shares at  June 30, 2004 and 7,415,660 shares at March 31, 2004 |   | 5,214  |   | 4,943  |   |
| Capital in excess of par value                                                                                                                                               |   | 46,515 |   | 42,683 |   |
| Cumulative translation adjustment                                                                                                                                            |   | 4      |   | 14     |   |
| Unearned compensation                                                                                                                                                        |   | (77    | )      | (115   | )      |
| Accumulated deficit                                                                                                                                                          |   | (9,633 | )      | (9,092 | )      |
|                                                                                                                                                                         |   |   |   |   |   |
| **Total stockholders’ equity**                                                                                                                                          |   | 42,023 |   | 38,433 |   |
|                                                                                                                                                                         |   |   |   |   |   |
| **Total liabilities and stockholders’ equity**                                                                                                                          |   | $      | 59,799 |   | $      | 55,803 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

2

----

 

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

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 

Dollars and shares inthousands, except per share amounts

 
| ** **                                       | ** **     | **For the Three Months Ended** | ** ** |
|--------------------------------------------------|----------------|--------------------------------|------------|
| ** **                                       | ** **     | **June 30, 2004**         | ** ** | **June 30, 2003** | ** ** |
|                                             |           |                           |       |   |   |
| **Net sales and contract revenues:**             |           |                           |       |   |   |
| Net product sales and contract revenues          |           | $                              | 12,822     |   | $ | 14,078 |   |
| Net service revenues                             |           | 3,990                          |       | 3,310 |   |
| Total net revenues and contract revenues         |           | 16,812                         |       | 17,388 |   |
|                                             |           |                           |       |   |   |
| **Cost of sales and contracts:**                 |           |                           |       |   |   |
| Cost of product sales and contracts              |           | 9,522                          |       | 10,944 |   |
| Cost of service revenues                         |           | 2,152                          |       | 1,872 |   |
| Total cost of sales and contracts                |           | 11,674                         |       | 12,816 |   |
| **Gross profit**                                 |           | 5,138                          |       | 4,572 |   |
|                                             |           |                           |       |   |   |
| **Expenses:**                                    |           |                           |       |   |   |
| Selling, general and administrative              |           | 3,274                          |       | 3,052 |   |
| Research and development                         |           | 1,455                          |       | 1,285 |   |
| Total expenses                                   |           | 4,729                          |       | 4,337 |   |
|                                             |           |                           |       |   |   |
| Operating income                                 |           | 409                            |       | 235 |   |
|                                             |           |                           |       |   |   |
| Other income (expense):                          |           |                           |       |   |   |
| Interest income                                  |           | 41                             |       | 28 |   |
| Other, net                                       |           | (991                           | )          | (143 | ) |
| Total other expense                              |           | (950                           | )          | (115 | ) |
|                                             |           |                           |       |   |   |
| Income (loss) before provision for income  taxes |           | (541                           | )          | 120 |   |
| Provision for (benefit from) income taxes        |           | —                         |       | — |   |
|                                             |           |                           |       |   |   |
| Net income (loss)                                |           | $                              | (541       | ) | $ | 120 |   |
|                                             |           |                           |       |   |   |
| Income (loss) per share                          | – Basic   |                           | $          | (0.07 | ) | $ | 0.02 |   |
|                                             | – Diluted |                           | $          | (0.07 | ) | $ | 0.02 |   |
|                                             |           |                           |       |   |   |
| Weighted average shares                          | – Basic   |                           | 7,558      |   | 6,883 |   |
|                                             | – Diluted |                           | 7,558      |   | 7,011 |   |
|                                                  |                |                                |            |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

3

----

 

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

**Condensed Consolidated Statements of CashFlows**

**(Unaudited**)

 

Dollars in thousands

 
| ** **                                                                                           | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                           | ** ** | **June 30, 2004**         | ** ** | **June 30, 2003** | ** ** |
| **Cash flows from operating activities:**                                                            |       |                           |       |   |   |
| Net income (loss)                                                                                    |       | $                              | (541       | ) | $ | 120 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used for) operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                                        |       | 338                            |       | 481 |   |
| Provisions for inventory, accounts  receivable and warranty reserves                                 |       | 546                            |       | 82 |   |
| Realized gain on short-term investments                                                              |       | (2                             | )          | (21 | ) |
| Change in value of warrants issued                                                                   |       | 920                            |       | 274 |   |
| Changes in assets and liabilities:                                                                   |       |                           |       |   |   |
| Accounts receivable                                                                                  |       | 2,625                          |       | (957 | ) |
| Unbilled costs and fees                                                                              |       | 60                             |       | 1,069 |   |
| Inventories                                                                                          |       | (1,294                         | )          | 2,314 |   |
| Prepaid expenses, deposits and other assets                                                          |       | (35                            | )          | (339 | ) |
| Accounts payable                                                                                     |       | 528                            |       | (1,932 | ) |
| Customer deposits                                                                                    |       | (527                           | )          | 1,599 |   |
| Deferred revenue                                                                                     |       | (394                           | )          | (409 | ) |
| Accrued expenses and other current  liabilities                                                      |       | (424                           | )          | 462 |   |
| Non-current liabilities                                                                              |       | 32                             |       | (20 | ) |
| Total adjustments                                                                                    |       | 2,373                          |       | 2,603 |   |
| Net cash provided by (used for) operating  activities                                                |       | 1,832                          |       | 2,723 |   |
|                                                                                                 |       |                           |       |   |   |
| **Cash flows from investing activities:**                                                            |       |                           |       |   |   |
| Decrease (increase) restricted cash                                                                  |       | (44                            | )          | (244 | ) |
| Purchases of short-term investments                                                                  |       | —                         |       | (1,406 | ) |
| Maturities of short-term investments                                                                 |       | 926                            |       | 1,371 |   |
| Purchase of property and equipment                                                                   |       | (678                           | )          | (157 | ) |
| Net cash used for investing activities                                                               |       | 204                            |       | (436 | ) |
|                                                                                                 |       |                           |       |   |   |
| **Cash flows from financing activities:**                                                            |       |                           |       |   |   |
| Proceeds from exercise of stock options                                                              |       | 4,006                          |       | 64 |   |
| Net cash provided by financing activities                                                            |       | 4,006                          |       | 64 |   |
|                                                                                                 |       |                           |       |   |   |
| Foreign currency translation effect on cash                                                          |       | (10                            | )          | 2 |   |
|                                                                                                 |       |                           |       |   |   |
| Net increase in cash and cash equivalents                                                            |       | 6,032                          |       | 2,353 |   |
| Cash and cash equivalents at beginning of  period                                                    |       | 18,232                         |       | 5,585 |   |
| Cash and cash equivalents at end of period                                                           |       | $                              | 24,264     |   | $ | 7,938 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

4

----

 

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

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

1.               General

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedSubsidiary. All significant intercompany transactions and balances have beeneliminated.

 

The unaudited condensedconsolidated financial statements have been prepared in accordance with therequirements of Form 10-Q and consequently do not include all disclosuresrequired by Form 10-K. These condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and the notesthereto included in the Company’s Annual Report on Form 10-K for the year endedMarch 31, 2004.

 

The consolidated financialstatements, in the opinion of management, include all adjustments necessary,consisting solely of normal recurring adjustments, to present fairly theCompany’s financial position, results of operations and cash flows.  Theseresults are not necessarily indicative of the results to be expected for theentire year.

 

Nature ofOperations

 

The Company is engaged in thedevelopment and manufacture of sophisticated X-ray inspection systems forcritical detection and security screening solutions for sale primarily to U.S.and foreign government agencies.  The Company has only one reportingsegment, X-ray screening products.

 

SignificantAccounting Policies

 

Revenues on cost reimbursableand long-term fixed price contracts are generally recorded as costs areincurred using the percentage of completion method.  The Companyrecognizes sales for its systems that are produced in a standard manufacturingoperation and have shorter order to deliver cycles at the time of shipment ofthe system to the customer and when other revenue recognition criteria is met.

 

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

 

The Company’s Export andSecurity Agreement with Silicon Valley Bank East requires certain cash balancesto be restricted as collateral against outstanding standby letters of credit.(see Note 4)

 

The significant accountingpolicies followed by the Company and its Subsidiary in preparing itsconsolidated financial statements are set forth in Note 1 to the consolidatedfinancial statements included in its Form 10-K for the year endedMarch 31, 2004.  The Company has made no changes to these policiesduring this quarter.

 

Pro FormaStock-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’sstock-based compensation plans been determined based on the fair value at thegrant dates consistent with the method set forth under SFAS No. 123, theeffect on the Company’s net income (loss) and income (loss) per share wouldhave been as follows:

 
| ** **                                                                   | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| Net income (loss):                                                           |       |                   |       |   |   |
| As reported                                                                  |       | $                      | (541       | ) | $ | 120 |   |
| Less:  Stock based compensation using  fair value method for all awards |       | (112                   | )          | (919 | ) |
| Pro forma net loss                                                           |       | $                      | (653       | ) | $ | (799 | ) |
| Income (loss) per share—Basic:                                          |       |                   |       |   |   |
| As reported                                                                  |       | $                      | (0.07      | ) | $ | 0.02 |   |
| Pro forma                                                                    |       | $                      | (0.09      | ) | $ | (0.12 | ) |
| Income (loss) per share—Diluted:                                        |       |                   |       |   |   |
| As reported                                                                  |       | $                      | (0.07      | ) | $ | 0.02 |   |
| Pro forma                                                                    |       | $                      | (0.09      | ) | $ | (0.12 | ) |

 

The fair value of each optiongranted was estimated on the grant date using the Black-Scholes option pricingmodel with the following weighted average assumptions: risk-free interest rateof 5.0% was used for fiscal 2005, 2004 and 2003, respectively, expectedvolatility of 73%, was used for  fiscal2005, 2004 and 2003, respectively, an expected dividend yield of 0% and anexpected life of 7 years for all periods.

 

5

----

 

2.               Inventories

 
| **Inventories consisted of:  (Dollars in thousands)** | ** ** | **June 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                  |       |                   |       |                    |       |
| Raw materials and completed sub-assemblies            |       | $                      | 7,434      |                    | $          | 7,089 |   |
| Work-in-process                                       |       | 4,650                  |       | 4,168                   |       |
| Finished goods                                        |       | 527                    |       | 133                     |       |
| Total                                                 |       | $                      | 12,611     |                    | $          | 11,390 |   |

 

3.               Income perCommon and Common Equivalent Share

 

Basic earnings per common shareis computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period.  Diluted earnings per shareincludes the dilutive impact of options and warrants using the average shareprice of the Company’s common stock for the period. For the quarters endedJune 30, 2004 and June 30, 2003, common stock equivalents of 792,633and 1,448,072, respectively, are excluded from diluted earnings per share, astheir effect is anti-dilutive.

 
| **Earnings Per Share  (in thousands except per share amounts)**                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **June 30, 2004**                                                                    | ** ** | **June 30, 2003** |
|                                                                                      |       |                   |       |   |   |
| **Basic**                                                                                 |       |                   |       |   |   |
| Net income (loss)                                                                         |       | $                      | (541       | ) | $ | 120 |   |
| Weighted average number of common shares  outstanding – basic                        |       | 7,558                  |       | 6,883 |   |
| Net income (loss) per share – basic                                                  |       | $                      | (0.07      | ) | $ | 0.02 |   |
| **Diluted**                                                                               |       |                   |       |   |   |
| Net income (loss)                                                                         |       | $                      | (541       | ) | $ | 120 |   |
| Weighted average number of common shares  outstanding                                     |       | 7,558                  |       | 6,883 |   |
| Effect of stock options                                                                   |       | —                 |       | 128 |   |
| Weighted average number of common and  potential common shares outstanding – diluted |       | 7,558                  |       | 7,011 |   |
| Net income (loss) per share – diluted                                                |       | $                      | (0.07      | ) | $ | 0.02 |   |

 

4.               Borrowings

 

On August 11, 2003, theCompany entered into two new credit agreements with Silicon Valley Bank Eastreplacing its HSBC Bank USA credit agreements that expired on July 31,2003. The first agreement is a $5.0 million domestic loan and securityagreement to support the Company’s routine working capital needs. Maximumborrowings for this line are set at the lower of (a) the sum of 80% ofeligible domestic accounts receivable plus 10% of finished goods inventory upto $750,000, or; (b) $5 million. The second is a $20.0 millionexport loan and security agreement, guaranteed by the Export-Import Bank of theUnited States to support the Company’s overseas contract, trade finance andworking capital needs. On June 30, 2004, the Company, along with SiliconValley Bank, amended  the quarterlycovenants contained in these agreements. The Company was in compliance with the Bank covenants prior to and afterthe amendments.

 

The credit facilities bear aninterest rate of the greater of 4.25% or the Silicon Valley Bank prime rate(4.0% at June 30, 2004) and have an expiration date of November 30,2004. The credit agreements are collateralized by certain assets of the Companyand contain certain restrictions, including limitations on the amount ofdistributions that can be made to stockholders, and the disposition orencumbrances of assets, and require the maintenance of certain financialcovenants. As of June 30, 2004, the Company was in compliance with thesecovenants. The Company has begun the process of renewing these creditfacilities with Silicon Valley Bank East.

 

At June 30, 2004, therewere no borrowings outstanding against these credit facilities. The Company hadoutstanding $569,000 in stand by letters of credit guaranteeing performance oncertain international projects, which have been collateralized by cash. Noamounts have been drawn on these stand by letters of credit.

 

5.               PrivatePlacement Offering

 

On May 28, 2002, the Companyclosed on a private placement offering of common stock and warrants.  Atotal of 1,115,000 shares were sold to accredited investors at a price of$17.64 each. In addition, warrants to purchase an additional 295,475 shares ofcommon stock at a price of $23.52 were issued.  Proceeds to the Companyapproximated $18.4 million, net of approximately $1.3 million of issuancecost.   The warrants were immediately vested and have a five-yearlife expiring in May of 2007.  Due to certain conversion

 

6

----

 

features of these warrants,that provide that the holder may opt for a cash settlement in certaininstances, including a merger, a sale of all or substantially all of theCompany’s assets, or a tender offer or exchange offer of shares of theCompany’s stock, a liability equal to the Black-Scholes valuation of thewarrants at the deal closing date was recorded on the Company’s balancesheet.  The “mark to market” change in the warrants value of $920,000 and$274,000 was recorded as other expense for the three months ended June 30,2004 and June 30, 2003, respectively.  The liability of $3,013,000and $2,093,000 associated with the warrants is recorded as a non-currentliability on the June 30, 2004 and March 31, 2004 balance sheets,respectively.  The fair market value of the warrants was determined usingthe Black-Scholes pricing model and an assumed volatility of 75% and interestrate of 5%.

 

6.               Guarantees

 

At June 30, 2004 theCompany had $569,000 of letters of credit outstanding guaranteeing performanceon certain large international cargo projects.  These letters of creditare issued through the Company’s export credit and security agreement (see Note4) and have expiration dates through November of 2004.

 

The Company’s parcel productline carries a one-year warranty, the costs of which are accrued for at time ofshipment.  Accrual rates are based upon historical experience over thepreceding twelve months and the adequacy of the warranty reserve is evaluatedmonthly.  Warranty experience for the three months ended June 30,2004 and June 30, 2003 is as follows:

 
| **(in thousands)**                    | ** ** | **Three months  ended June 30,  2004** | ** ** | **Three months  ended June 30,  2003** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Warranty accrual beginning of period  |       | $                                           | 699        |                                        | $          | 535 |   |
| Accruals for warranties               |       | 406                                         |       | 82                                          |       |
| Warranty costs incurred during period |       | (205                                        | )          | (82                                         | )          |
| Balance at end of period              |       | $                                           | 900        |                                        | $          | 535 |   |

 

**Item 2 – Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Results ofOperations

 

Total net revenues for thefirst quarter of fiscal 2005 decreased by $576,000 to $16,812,000 compared tothe corresponding period a year ago.  This decrease is attributableprimarily to a decrease in MobileSearch and other CargoSearch systems ascompared to the previous year.  Thisdecrease is offset by increased ZBV revenue ($3,695,000), increasedParcelSearch system revenue ($1,313,000), and increased field service revenueof ($1,500,000), as compared to the prior year.  Service revenuesincreased by $680,000 compared to the first quarter of fiscal 2004 as theCompany has entered into service contracts for equipment that had previouslybeen under warranty.

 

Total cost of sales andcontracts for the first quarter of fiscal 2004 decreased by $1,142,000 to$11,674,000 compared to the corresponding period a year ago. Cost of sales andcontracts represented 69% of revenues versus 74% for the corresponding periodlast year.  This margin improvement is attributable to reductions inmanufacturing and service overhead costs and improved margins on servicecontracts.

 

Selling, general andadministrative expenses for the first quarter of fiscal 2005 of $3,274,000 were$222,000 higher than the corresponding period a year ago.  Selling,general and administrative expenses represented 19% of revenues in the currentperiod as compared to 18% for the corresponding period last year.  Theincrease is attributable to an increase in facility expense due to therelocation of the HES Division as well as an increase in sales and marketingpersonnel, partially offset by a decrease in severance accruals.

 

Company funded research anddevelopment expenses of $1,455,000 for the first quarter of fiscal 2005increased by $170,000 compared to the corresponding period last year. Researchand development expenses represented 9% of revenues in the current periodcompared to 7% for the corresponding period last year**.  **Company expenditures increasedprimarily due to a major Cargosearch design project.

 

Other expense was $991,000 forthe first quarter of fiscal 2005 as compared to $143,000 for the correspondingperiod a year ago.   As part of the private equity placement duringthe first quarter of 2003, the Company issued 295,475 warrants.  Due tocertain conversion features of these warrants that provide that the holder mayopt for a cash settlement in certain instances, including a merger, a sale ofall or substantially all of the Company’s assets, or a tender offer or exchangeoffer of shares of the Company’s stock, a liability equal to the Black-Scholesvaluation of the warrants at the deal closing date was recorded on theCompany’s balance sheet.  At June 30, 2004, these warrants were“marked to market” using Black-Scholes and the change in the valuation of thewarrants of $920,000 was recorded as other expense in the quarter. During thethree months ended June 30, 2003, this calculation generated $274,000 in other expense.

 

7

----

 

The potential tax benefits onlosses incurred during the first quarter of fiscal 2005 were fully reservedagainst due to the uncertainty as to whether the additional loss carryforwardswould ultimately be realized. In assessing the realizability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized.

 

The Company had a net loss of $541,000during the first quarter of fiscal 2005 as compared to net income of $120,000in the first quarter of fiscal 2004.  The significant factors contributingto these results are noted in the above sections.

 

Liquidity andCapital Resources

 

Cash and cash equivalentsincreased by $6,032,000 to $24,264,000 at June 30, 2004 compared to$18,232,000 at March 31, 2004. This increase in cash and cash equivalentsis primarily due to $4,006,000 of cash generated from the exercise of employeestock options and the collection of some large account receivable balances thatwere outstanding at the end of fiscal year 2004.

 

On August 11, 2003, theCompany entered into two new credit agreements with Silicon Valley Bank Eastreplacing its HSBC Bank USA credit agreements that expired on July 31,2003. The first agreement is a $5.0 million domestic loan and securityagreement to support the Company’s routine working capital needs. Maximumborrowings for this line are set at the lower of (a) the sum of 80% ofeligible domestic accounts receivable plus 10% of finished goods inventory upto $750,000, or (b) $5 million. The second is a $20.0 millionexport loan and security agreement, guaranteed by the Export-Import Bank of theUnited States to support the Company’s overseas contract, trade finance andworking capital needs.

 

The credit facilities bear aninterest rate of the greater of 4.25% or the Silicon Valley Bank prime rate(4.0% at June 30, 2004) and have an expiration date of November 30,2004. The credit agreements are collateralized by certain assets of the Companyand contain certain restrictions, including limitations on the amount ofdistributions that can be made to stockholders, and the disposition orencumbrances of assets, and require the maintenance of certain financialcovenants. As of June 30, 2004, the Company was in compliance with thesecovenants. The Company has begun the process of renewing these creditfacilities with Silicon Valley Bank East.

 

At June 30, 2004, therewere no borrowings outstanding against these credit facilities. The Company hadoutstanding $569,000 in stand by letters of credit guaranteeing performance oncertain international projects, which have been collateralized by cash. Noamounts have been drawn on these stand by letters of credit.

 

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

 

The Company is subject tointerest rate risk on its credit facilities which have variable interest ratestied to the Prime Rate or LIBOR.  As of June 30, 2004, the Companyhad no variable interest rate debt outstanding.

 

The cash accounts for theCompany’s operations in Singapore, Hong Kong, England, and Abu Dhabi aremaintained in Singapore dollars, Hong Kong dollars, pounds sterling anddirhams, respectively.  Foreign currency accounts are marked to market atcurrent rates that resulted in immaterial translation adjustments tostockholders’ 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 rateswould not have a material impact on the Company’s results of operations orfinancial position.

 

As of June 30, 2004, theCompany holds short-term investments consisting of money market funds and U.S.government and government agency bonds.  The Company’s primary objectivewith its investment portfolio is to invest available cash while preservingprincipal and meeting liquidity needs. These investments have an averageinterest rate of approximately .9% and are subject to interest rate risk. As aresult of the average maturity and conservative nature of the investmentportfolio, a sudden change in interest rates would not have a material effecton the value of these investments.

 

In fiscal 2003, the Companyissued 295,475 warrants in connection with a private placement offering ofcommon stock.  These warrants can be exchanged for cash under certaincircumstances including a merger, sale or tender offer of the Company and assuch a liability equal to Black-Scholes value of the warrants is recorded onthe balance sheet.  Changes in the fair value of the warrants are recordedas other income (expense).  The Black-Scholes value of these warrants canfluctuate significantly based on the current fair market value of the Company’scommon stock.  A 10% change in the fair market value of the Company’scommon stock, holding other assumptions constant, would have approximately a$450,000 impact on earnings.

 

8

----

 

**Item 4 - Controls and Procedures**

 

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Interim Acting Chief Financial Officer, of the effectiveness of the designand operation of our disclosure controls and procedures pursuant to Rule13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon thatevaluation, our Chief Executive Officer and our Interim Acting Chief FinancialOfficer concluded that our disclosure controls and procedures are effective forgathering, analyzing and disclosing the information we are required to disclosein reports filed under such Act.

 

There have been no changes inour internal controls over financial reporting that occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting .

 

**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 and PerkinElmer, Inc.(the former parent of EG&G) completed a settlement agreement which resolvedall of the Company’s claims against EG&G through June 14, 2002, thedate 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. InFebruary 2004, the District Court entered an order dismissing theCompany’s claims with prejudice and L-3’s counterclaims without prejudice. TheCompany covenanted not to sue L-3 for infringement by any current products ofthe two above-referenced patents.*

 

*On or aboutFebruary 19, 2004, L-3 filed a lawsuit against the Company in the UnitedStates District Court for the District of Massachusetts, in Boston, seekingdeclaratory judgments of non-infringement and/or invalidity of two of theCompany’s patents—United States Pat. No. 6,292,533 and No. 5,903,623.The Company filed a motion to dismiss the litigation for lack of subject matterjurisdiction, but was denied. The Company has answered L-3’s underlyingcomplaint, vigorously opposing the plaintiff’s non-infringement and invalidityclaims.*

 

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

 

9

----

 

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

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

 
|     |                                                                                                                                                                 |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1     | Certification  by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                            |
|     |                                                                                                                                                                 |
| 31.2     | Certification  by Acting Chief 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 Acting 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  June 29, 2004 announcing the resignation of the Company’s Chief  Financial Officer                                                                  |
| Form 8-K | Dated  June 4, 2004 in connection with the announcement of the fourth quarter  and fiscal 2004 financial results                                                |
|          |                                                                                                                                                                      |  |

 

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

 

**SIGNATURES**

 

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

 
|                                | AMERICAN  SCIENCE AND ENGINEERING, INC.                       |
|-------------------------------------|---------------------------------------------------------------|
| (Registrant)                        |                                                          |
|                                |                                                          |
| Date  July 22,  2004 | /s/ Kenneth  J. Galaznik                                      |   |
|                                | Kenneth J.  Galaznik                                          |
|                                | Vice  President, 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 this Form 10-Q that actualresults might differ materially from those projected in any forward-lookingstatements.*

 

*Factors which might cause actual results to differ materially fromthose projected in the forward-looking statements contained herein include thefollowing: significant reductions or delays in procurements of the Company’ssystems by the United States and other governments; disruption in the supply ofany source component incorporated into AS&E’s products; litigation seekingto restrict the use of intellectual property used by the Company; potentialproduct liability claims against the Company; global political trends andevents which affect public perception of the threat presented by drugs,explosives and other contraband; global economic developments and the abilityof governments and private organizations to fund purchases of the Company’sproducts to address such threats; and the potential insufficiency of Companyresources, including human resources, capital, plant and equipment andmanagement systems, to accommodate any future growth and any future delays infederal funding. These and certain other factors which might cause actualresults to differ materially from those projected are more fully set forthunder the caption “Forward-Looking Information and Factors Affecting FuturePerformance” in the Company’s Registration Statement on Form 10-K.*

 

10

----