UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 2005
_________________________
Commission File Number 1-9309
_________
VersarInc.
_______________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
________________________________ ____________________________________
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703) 750-3000
_______________________
Not Applicable
_________________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
_____ _____
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
_____ _____
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
_____ _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class of Common Stock Outstanding at November 1, 2005
_____________________ _______________________________
$.01 par value 8,038,465
1
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
____
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 2005 and July 1, 2005 3
Consolidated Statements of Operations
for the Three-Month Periods Ended
September 30, 2005 and October 1, 2004 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended September
30, 2005 and October 1, 2004 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-16
ITEM 3 - Quantitative and Qualitative
Disclosures About Market Risk 16
ITEM 4 - Controls and Procedures 17
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 17-18
ITEM 6 - Exhibits 18
SIGNATURES 19
EXHIBITS 20-23
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
September 30, July 1,
2005 2005
______________ ______________
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 1,765 $ 132
Accounts receivable, net 11,852 14,577
Prepaid expenses and other
current assets 1,401 2,017
Deferred income taxes 765 308
______________ ______________
Total current assets 15,783 17,034
Property and equipment, net 1,795 1,855
Deferred income taxes --- 457
Goodwill 776 776
Other assets 833 790
______________ ______________
Total assets $ 19,187 $ 20,912
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Bank line of credit $ --- $ 777
Accounts payable 3,509 3,958
Accrued salaries and vacation 1,828 1,490
Other liabilities 1,512 2,642
Liabilities of discontinued
operations, net 235 280
______________ ______________
Total current liabilities 7,084 9,147
Other long-term liabilities 1,059 1,041
Liabilities of discontinued
operations, net 87 172
______________ ______________
Total liabilities 8,230 10,360
______________ ______________
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value;
30,000,000 shares authorized;
8,026,751 shares and 7,924,116
shares issued September 30, 2005
and July 1, 2005, respectively;
8,011,246 and 7,908,611 shares
outstanding at September 30, 2005
and July 1, 2005, respectively 80 79
Capital in excess of par value 22,407 22,119
Accumulated deficit (11,458) (11,574)
Treasury stock (72) (72)
______________ ______________
Total stockholders' equity 10,957 10,552
______________ ______________
Total liabilities and
stockholders' equity $ 19,187 $ 20,912
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month
Periods Ended
______________________________
September 30, October 1,
2005 2004
______________ ______________
GROSS REVENUE $ 13,502 $ 18,958
Purchased services and
materials, at cost 5,040 9,914
______________ ______________
NET SERVICE REVENUE 8,462 9,044
Direct costs of services and
overhead 6,875 7,038
Selling, general and
administrative expenses 1,451 1,490
______________ ______________
OPERATING INCOME 136 516
OTHER EXPENSE
Interest expense 20 13
______________ ______________
INCOME FROM CONTINUING OPERATIONS 116 503
LOSS FROM DISCONTINUED OPERATIONS --- (96)
______________ ______________
NET INCOME $ 116 $ 407
============== ==============
INCOME PER SHARE FROM CONTINUING
OPERATIONS - BASIC AND DILUTED $ 0.01 $ 0.06
============== ==============
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS - BASIC AND DILUTED $ --- $ (0.01)
============== ==============
NET INCOME PER SHARE - BASIC
AND DILUTED $ 0.01 $ 0.05
============== ==============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 7,988 7,846
============== ==============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 8,412 8,312
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Three-Month
Periods Ended
______________________________
September 30, October 1,
2005 2004
______________ ______________
Cash flows from operating activities
Net income $ 116 $ 407
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 192 182
Provision for doubtful accounts
receivable --- 1
Share based compensation 4 ---
Changes in assets and liabilities
Decrease in accounts receivable 2,725 53
Decrease (increase) in prepaids and
other assets 583 (115)
(Decrease) increase in accounts
payable (449) 1,001
Increase (decrease) in accrued
salaries and vacation 338 (38)
Decrease in other liabilities (1,112) (153)
______________ ______________
Net cash provided by continuing
operating activities 2,397 1,338
______________ ______________
Changes in net liabilities of
discontinued operations (130) (10)
______________ ______________
Net cash provided by operating
activities 2,267 1,328
______________ ______________
Cash flows used in investing activities
Purchase of property and equipment (107) (71)
(Increase) in life insurance policies
cash surrender value (35) (10)
______________ ______________
Net cash used in investing
activities (142) (81)
Cash flows from financing activities
Net payments on bank line of credit (777) ---
Proceeds from issuance of common stock 285 31
______________ ______________
Net cash (used in) provided by
financing activities (492) 31
______________ ______________
Net increase in cash and cash equivalents 1,633 1,278
Cash and cash equivalents at the beginning
of the period 132 817
Cash and cash equivalents at the end of
the period $ 1,765 $ 2,095
============== ==============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 23 $ 9
Income taxes 10 5
The accompanying notes are an integral part of these consolidated
financial statements.
5
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally
required by generally accepted accounting principles or those
normally made in Versar, Inc.'s Annual Report on Form 10-K/A
filed with the United States Securities and Exchange Commission.
These financial statements should be read in conjunction with the
Company's Annual Report filed on Form 10-K/A for the year ended
July 1, 2005 for additional information.
The accompanying consolidated financial statements include
the accounts of Versar, Inc. and its wholly-owned subsidiaries
("Versar" or the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The financial information has been prepared in accordance with
the Company's customary accounting practices. In the opinion of
management, the information reflects all adjustments necessary
for a fair presentation of the Company's consolidated financial
position as of September 30, 2005, and the results of operations
for the three-month periods ended September 30, 2005 and October
1, 2004. The results of operations for such periods, however,
are not necessarily indicative of the results to be expected for
a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ
from those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost
incurred plus accrued profits or net estimated realizable value
of incurred costs, reduced by progress billings. The Company
records income from major fixed-price contracts, extending over
more than one accounting period, using the percentage-of-
completion method. During performance of such contracts,
estimated final contract prices and costs are periodically
reviewed and revisions are made as required. The effects of
these revisions are included in the periods in which the
revisions are made. On cost-plus-fee contracts, revenue is
recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours
delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known.
Disputes arise in the normal course of the Company's business on
projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in
contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved
change orders in the process of negotiation, are recorded at the
lesser of their estimated net realizable value or actual costs
incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized
where loss is considered probable and reasonably determinable in
amount. Management reviews outstanding receivables on a regular
basis and assesses the need for reserves taking into
consideration past collection history and other events that bear
on the collectibility of such receivables.
(D) Income Taxes
At September 30, 2005, the Company had approximately $4.3
million in deferred tax assets which primarily relate to net
operating loss and tax credit carryforwards. Since the Company
had experienced losses in previous years, management recorded a
valuation allowance of approximately $3.5 million against the net
deferred tax asset. The valuation allowance is adjusted
periodically based upon management's assessment of the Company's
ability to derive benefit from the deferred tax assets.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
Versar's line of credit facility with United Bank (the Bank)
provides for advances up to $5,000,000 based upon qualifying
receivables. Interest on borrowings is based on prime plus one
and a half percent (7.75% as of September 30, 2005). The credit
facility is guaranteed by the Company and each subsidiary
individually and is collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on
property constituting collateral. There were no outstanding
borrowings on the credit facility as of September 30, 2005. The
credit facility is subject to renewal in November 2005 and is
subject to certain covenants related to the maintenance of
financial ratios. These covenants require a minimum tangible net
worth of $6,500,000, a maximum total liabilities to tangible net
worth ratio not to exceed 2.5 to 1; and a minimum current ratio
of at least 1.25 to 1. Failure to meet the covenant requirements
gives the Bank the right to demand the amount due under the
credit facility, which may impact the Company's ability to
finance its working capital requirements. At September 30, 2005,
the Company was in compliance with such financial covenants.
(F) Discontinued Operations and Restructuring Charges
In fiscal year 1998, the Company discontinued a significant
portion of the operations of Science Management Corporation (SMC).
As such, the Company disposed of portions of SMC and disposed of
substantially all of the remaining assets and liabilities. At
July 1, 2005, there was $32,000 remaining liability primarily
related to settling the remaining benefit plan obligations of SMC.
The Company is in the process of locating eligible participants
and will make a final distribution.
In the fourth quarter of fiscal year 2005, management
approved a plan to discontinue the operations of its biological
laboratory facilities due to lack of business volume, market
concentration and poor operating performance. The Company
recorded $420,000 facility termination costs at the end of fiscal
year 2005. During the first quarter of fiscal year 2006,
approximately $98,000 was charged against the termination costs
leaving an accrued liability of approximately $322,000.
Management believes the balance is adequate to satisfy the
remaining lease obligation.
(G) Contingencies
Versar and its subsidiaries are parties to various legal
actions arising in the normal course of business. The Company
believes that the ultimate resolution of these legal actions will
not have a material adverse effect on its consolidated financial
position and results of operations. (See Part II, Item 1 - Legal
Proceedings).
In September 2002, the Company recorded a non-recurring
charge of $800,000 to reduce the Company's overall cost structure
and to reduce costs in non-performing divisions. The costs
included $450,000 for severance payments to terminated employees
and $350,000 for costs to restructure certain leased facilities.
At September 30, 2005, all of the severance obligations were
satisfied. As of September 30, 2005, there is an accrual of
approximately $137,000 to be utilized to reduce the facility
costs for vacant space at the Company's headquarters in
Springfield, Virginia.
(H) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed Versar Global
Solutions, Inc. or VGSI. The transaction was accounted for as a
purchase. Goodwill resulting from this transaction was
approximately $1.1 million. In fiscal year 2003, the Company
adopted the Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" which eliminated
the amortization of goodwill, but requires the Company to test
such goodwill for impairment annually. Currently, the carrying
value of goodwill is approximately $776,000 relating to the
acquisition of VGSI, which is now part of the Infrastructure and
Management Services (IMS) reporting unit. The IMS business
segment was combined with the Engineering and Construction
business segment during fiscal year 2005 and continues to
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
operate under the IMS segment name, because many of the services
provided were similar to the Company's remediation business, and
the two segments shared similar customers and business
opportunities, and were duplicative in nature. Such a
combination provided a more efficient use of resources and more
effective management of the business operations. In performing
its goodwill impairment analysis, management has utilized a
market-based valuation approach to determine the estimated fair
value of the IMS reporting unit. Management engages outside
professionals and valuation experts, as necessary, to assist in
performing this analysis. An analysis was performed on public
companies and company transactions to prepare a market-based
valuation. Based upon the analysis as of July 1, 2005, the
estimated fair value of the IMS reporting unit was $23 million
which is in excess of the carrying amount of the net assets of
the reporting unit by a substantial margin.
On April 15, 2005, the Company acquired the Cultural
Resources Group from Parsons Infrastructure & Technology Group,
Inc., a subsidiary of Parsons Corporation for a purchase price of
approximately $260,000 in cash. The Cultural Resources Group,
based in Fairfax County, Virginia provides archaeological,
cultural and historical services to federal, state and municipal
clients across the country. The acquisition will expand the
Company's existing and future capabilities in cultural resources
work. Their expertise will enhance and compliment Versar's
environmental core business. The Cultural Resources Group was
incorporated into the Company's Infrastructure and Management
Services (IMS) segment. As part of the acquisition, the Company
has executed a two year marketing agreement with Parsons to give
Versar the first right of refusal to certain Parsons cultural
resources work from existing Parsons' clients. Thereafter, this
agreement is annually renewable upon the agreement of both
parties. Approximately $25,000 of the purchase price was
allocated to fixed assets, with the remaining balance to be
allocated to contract rights which are being amortized over a
three-year period.
(I) Net Income Per Share
Basic net income per common share is computed by dividing
net income by the weighted average number of common shares
outstanding during the period. Diluted net income per common
share also includes common stock equivalents outstanding during
the period if dilutive. The Company's common stock equivalents
shares consist of stock options.
For the Three-Month Periods Ended
_________________________________
September 30, October 1,
2005 2004
_______________ _______________
Weighted average common shares
outstanding - basic 7,987,872 7,845,905
Assumed exercise of options
(treasury stock method) 423,716 466,538
_______________ _______________
Weighted average common shares
outstanding - diluted 8,411,588 8,312,443
=============== ===============
(J) Common Stock
The Company issued 102,635 shares of common stock upon the
exercise of stock options during the first three months of fiscal
year 2006. Total proceeds from the exercise of such stock
options was approximately $285,000.
Effective January 1, 2005, the Company implemented an
Employee Stock Purchase Plan (ESPP) to allow eligible employees
of Versar the opportunity to acquire an ownership interest in the
Company's common stock. Through the Plan, employees may purchase
shares of Versar common stock from the open market at 90% of its
fair market value. The plan has been modified, effective September
7, 2005, to increase the purchase price of shares to 95% of fair
market value as a result of the Company's adoption of the Statement
of Financial Accounting Standard
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
("SFAS") 123 (Revised 2004), "Accounting for Stock-Based
Compensation" (SFAS 123 (R) requirements. The Plan qualifies as
an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code.
(K) Stock-Based Compensation
Effective July 1, 2005, the Company adopted the Financial
Accounting Standards Board (FASB) SFAS No. 123 (Revised 2004),
"Accounting for Stock-Based Compensation" (SFAS 123(R)). This
Statement revises SFAS No. 123 by eliminating the option to
account for employee stock options under APB No. 25 and generally
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (the "fair-value-based"
method). The compensation expense of $4,000 for the first
quarter of fiscal year 2006 was included in the Consolidated
Statements of Operations.
On June 21, 2005, the Board of Directors of the Company
accelerated the vesting of certain previously awarded unvested
and "out-of-the-money" stock options that have an exercise price
per share of $3.00 or more for all employees and officers of the
Company. The awards accelerated were made under the Versar, Inc.
1996 Stock Option Plan and 2002 Stock Incentive Plan. As a
result, options to purchase 306,010 shares of the Company's
common stock became exercisable immediately. All other terms and
conditions applicable to the outstanding stock option grants
remain in effect. The closing price of the Company's common
stock on the American Stock Exchange on June 21, 2005 was $3.00.
The acceleration of the out-of-the-money stock options was done
in order to avoid the impact of adopting SFAS 123(R). Non-
qualified stock options were not included in the acceleration.
Based on the potential for these options to have value over their
expected life, the Company expects to reduce the stock option
expense it otherwise would have been required to recognize in its
consolidated statements of income by approximately $124,000 over
the next four years on a pre-tax basis, as a result of the
acceleration.
In November 2002, the stockholders approved the Versar, Inc.
2002 Stock Incentive Plan (the 2002 Plan). The 2002 Plan
provides for the grant of options, restricted stock and other
types of stock-based awards to any employee, service provider or
director to whom a grant is approved from time to time by the
Company's Compensation Committee. A "service provider" is
defined for purposes of the 2002 Plan as an individual who is
neither an employee nor a director of the Company or any of its
affiliates but who provides the Company or one of its affiliates
substantial and important services. The aggregate number of
shares of the Company's Common Stock that may be issued upon
exercise of options or granted as restricted stock or other stock-
based awards under the 2002 Plan is 700,000. Grants of
restricted stock, performance equity awards, options and stock
appreciation rights in any one fiscal year to any one participant
may not exceed 250,000 shares. The maximum amount of
compensation that may be received by any one employee with
respect to performance unit grants in any one fiscal year may not
exceed $250,000.
In November 1996, the stockholders approved the Versar 1996
Stock Option Plan (the 1996 Plan) to provide employees and
directors of the Company and certain other persons an incentive
to remain as employees of the Company and to encourage superior
performance. The Company also maintains the Versar 1992 Stock
Option Plan (the "1992 Plan") and the Versar 1987 Stock Option
Plan (the "1987 Plan"). Options have been granted from these
plans to purchase the Company's common stock.
Under the 1996 Stock Option Plan, options may be granted to
key employees, directors and service providers at the fair market
value on the date of grant. The vesting of each option will be
determined by the Administrator of the Plan. Each option expires
on the earlier of the last day of the tenth year after the date
of grant or after expiration of a period designated in the option
agreement.
Under the 1992 Plan, options through November 2002, were
generally granted to key employees at the fair market value on
the date of grant and became exercisable during the five-year
period from the date of the grant at 20% per year. Options were
granted with a ten year term and expire if not exercised by the
tenth anniversary of the grant date. The 1992 plan has expired
and no additional options may be granted. The Company will
continue to maintain the plan until all previously granted
options have been exercised, forfeited or expire.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As a result of adopting SFAS 123(R) on July 1, 2005, the
Company's income before income taxes and net income for the first
quarter ended September 30, 2005 is $4,000 lower than if it had
continued to account for share-based compensation under Opinion
25. Basic and diluted earnings per share for the first quarter
ended September 30, 2005 remained the same at $0.01 and $0.01,
respectively.
A summary of option activity under the Company's employee
stock option plans as of September 30, 2005, and changes during
the thirteen weeks then ended is presented below:
Weighted-
Weighted- Average Aggregate
Options Average Remaining Intrinsic
Shares Exercise Contractual Value
(000) Price Term ($000)
___________________________ ______ ________ ___________ __________
Outstanding at July 1, 2005 1,690 $ 3.10
Granted 5 $ 3.20
Exercised (104) $ 2.77
Forfeited or expired (40) $ 3.30
______ ________
Outstanding at September
30, 2005 1,551 $ 3.16 6.3 $ 2,730
====== ======== =========== ==========
Exercisable at September
30, 2005 1,238 $ 3.26 6.3 $ 2,248
====== ======== =========== =========
As of September 30, 2005, there was approximately 313,000
shares of unvested option under the plans. The estimated
compensation costs of $112,000 is expected to be recognized over
a weighted-average period of 6.4 years. The total fair value of
these unvested shares is approximately $482,000 as of September
30, 2005.
(L) Business Segments
The Company's business segments are Infrastructure and
Management Services and National Security. The Infrastructure
and Management Services segment provides a full range of services
including remediation/corrective actions, site investigations,
remedial designs, and construction, operation and maintenance of
remedial systems, engineering, design and construction management
to industrial, commercial and government facilities. The
National Security segment provides expertise in developing,
testing and providing personal protection equipment.
In fiscal year 2005, Versar combined the Infrastructure and
Management Services and the former Engineering and Construction
business segment because many of the services provided were
similar to the Company's remediation business, and the two
segments shared similar customers and business opportunities, and
were duplicative in nature. Such a combination provided a more
efficient use of resources and more effective management of the
business operations, given the cyclical nature of the former
Engineering and Construction business segment. The Company now
evaluates the business along these two business lines. The prior
year segment information has been restated to conform to the new
presentation.
The Company evaluates and measures the performance of its
business segments based on net service revenue and operating
income. As such, selling, general and administrative expenses,
interest and income taxes have not been allocated to the
Company's business segments.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary financial information for each of the Company's
segments follows:
For the Three-Month Periods Ended
______________________________________
September 30, October 1,
2005 2004
________________ ________________
NET SERVICE REVENUE (In thousands)
-------------------
Infrastructure and Management
Services $ 7,052 $ 7,533
National Security 1,410 1,511
________________ ________________
$ 8,462 $ 9,044
================ ================
OPERATING INCOME(A)
-------------------
Infrastructure and Management
Services $ 1,326 $ 1,706
National Security 261 300
________________ ________________
$ 1,587 $ 2,006
Selling, general and
administrative expenses (1,451) (1,490)
________________ ________________
OPERATING INCOME $ 136 $ 516
================ ================
(A) Operating income is defined as net service revenue less
direct costs of services and overhead.
IDENTIFIABLE ASSETS September 30, July 1,
------------------- 2005 2004
_____________ _____________
Infrastructure and Management
Services $ 12,280 $ 14,817
National Security 1,536 1,738
Corporate and Other 5,371 4,357
_____________ _____________
Total Assets $ 19,187 $ 20,912
============= =============
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial trends
----------------
From fiscal year 2002 to 2004, the Company's net service
revenue declined as the Company wound down the Army STEPO suit
production contract in its National Security business segment.
With increased funded contract backlog in the fourth quarter of
fiscal year 2004 and the first quarter of fiscal year 2005, the
Company began to reverse this trend. Multi-million dollar
contracts were awarded in the IMS business segment; including
roofing projects in San Diego in support of the Defense Logistic
Agency and hurricane emergency response projects in various
locations in Florida. The Company achieved significant gross
revenue growth in the first half of fiscal year 2005 as a result
of increased IMS work.
However, during the third and fourth quarters of fiscal year
2005, gross revenues on the major construction projects declined
compared to the first half of the fiscal year, due to delays in
obtaining follow-on and new projects. The resulting reduction in
gross revenues along with the delay in resolution of several
construction change orders had a negative effect on the Company's
operating results for the second half of fiscal year 2005.
Additionally, during 2005, there were delays in contract funding
for the Environmental Protection Agency and certain delays with
civilian agencies because of diversion of funds for the war
effort, and the announcement of additional military base closings
by the BRAC commission, which impacted funding by approximately
$5 million.
During much of the first quarter of 2006, the Company
continued to experience reduced gross revenues as a result of
continuing effects of the delays and other factors that impacted
the last half of fiscal 2005. However, late in the first quarter
of 2006, the Company increased its funded contract backlog from
$31 million as reported at July 1, 2005 to $40 million for the
end of the first quarter of fiscal 2006, primarily due to the
release of several construction projects, recently awarded an
additional $3 million contract for construction oversight in Iraq
and increased activity at the government fiscal year end.
Further, the Company has over $11 million of pending large
construction projects that as of yet have not been funded. We
anticipate that with the increased funded backlog, that gross
revenues will increase during the remainder of the fiscal year as
compared to that reported for the first quarter of fiscal 2006.
However, for the Company to foster and sustain growth, it must
win additional follow-on projects and additional new contracts to
keep funded contract backlog at levels that will support
continued growth. There can be no assurance that the Company's
efforts to grow the business base will be successful or that the
Company will receive sufficient contract awards to replace work
as contracts are completed.
In fiscal year 2005, the Company discontinued the operations
of its biological laboratory primarily due to the continued poor
operating performance, market saturation and poor future business
outlook. Such results are presented as discontinued operations
for financial statement purposes and the liabilities of such
operations have been segregated as the Company winds down the
business affairs of the laboratory.
There are a number of risk factors or uncertainties that
could significantly impact our financial performance including
the following:
* General economic or political conditions;
* Threatened or pending litigation;
* The timing of expenses incurred for corporate
initiatives;
* Employee hiring, utilization, and turnover rates;
* The seasonality of spending in the federal government
and for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
* Reductions in prices by our competitors;
* The ability to obtain follow on project work;
* Failure to properly manage projects resulting in
additional costs;
* The cost of compliance for the Company's laboratories;
* The impact of a negative government audit potentially
impacting our costs, reputation and ability to work
with the federal government;
12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
* Loss of key personnel;
* The ability to compete in a highly competitive
environment; and
* Federal funding delays due to war in Iraq.
Results of Operations
---------------------
First Quarter Comparison of Fiscal Year 2006 and 2005
-----------------------------------------------------
This report contains certain forward-looking statements
which are based on current expectations. Actual results may
differ materially. The forward-looking statements include those
regarding the continued award of future work or task orders from
government and private clients, cost controls and reductions, the
expected resolution of delays in billing of certain projects, and
the possible impact of current and future claims against the
Company based upon negligence and other theories of liability.
Forward-looking statements involve numerous risks and
uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibilities that
the demand for the Company's services may decline as a result of
possible changes in general and industry specific economic
conditions and the effects of competitive services and pricing;
the possibility the Company will not be able to perform work
within budget or contractual limitations; one or more current or
future claims made against the Company may result in substantial
liabilities; the possibility the Company will not be able to
attract and retain key professional employees; changes to or
failure of the Federal government to fund certain programs in
which the Company participates; and such other risks and
uncertainties as are described in reports and other documents
filed by the Company from time to time with the Securities and
Exchange Commission.
Gross revenue for the first quarter of fiscal year 2006 was
$13,502,000, a $5,456,000 (29%) decrease over that reported in
the first quarter of fiscal year 2005, which had significant
growth due to several large construction projects. The decrease
in gross revenue is primarily attributable to decreased revenue
in the Company's Infrastructure and Management Services segment
due to reduced new construction work and delayed project funding
of pending construction work. A portion of that funding was
received late in the first quarter of fiscal year 2006. Such
revenue was primarily generated from purchased services and
materials, which is further discussed below.
Purchased Services and materials decreased by $4,874,000
(49%) in the first quarter of fiscal year 2006 compared to that
reported in the first quarter of fiscal year 2005. The decrease
was primarily the result of reduced subcontracted construction
work and delayed project funding of pending construction work. A
portion of that funding was not received until late in the first
quarter of fiscal year 2006.
Net service revenue is derived by deducting the costs of
purchased services and materials from gross revenue. Versar
considers it appropriate to analyze operating margins and other
ratios in relation to net service revenue, because such revenues
reflect the actual work performed by the Company's labor force.
Net service revenues decreased by 6% in the first quarter of
fiscal year 2006 compared to that reported in the first quarter
of fiscal year 2005. This was primarily due to the lower markup
on purchased services and materials as a result of the reduced
subcontracted work in the first quarter of fiscal year 2006.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable and
unallowable costs that are directly attributable to contracts.
The percentage of these costs to net service revenue increased to
81.2% in the first quarter of fiscal year 2006 compared to 77.8%
in the first quarter of fiscal year 2005. The increase was
primarily due to lower labor utilization over that reported in
the prior fiscal reporting period and significant proposal
activity during the first quarter of fiscal year 2006.
Selling, general and administrative expenses approximated
17.1% of net service revenue in the first quarter of fiscal year
2006, compared to 16.5% in the first quarter of fiscal year 2005.
The increase is primarily due to the decrease in business volume
in the first quarter of fiscal year 2006 as compared to the first
quarter of fiscal year 2005.
13
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Operating income from continuing operations for the first
quarter of fiscal year 2006 was $136,000, a 74% decrease over
that reported in the prior fiscal year. The decrease is
primarily due to the decreased gross revenues and the increased
direct costs of services and overhead as discussed above.
Interest expense for the first quarter of fiscal year 2006
was $20,000, an increase of $7,000 (59%) over that reported in
the first quarter of fiscal year 2005. The increase was due to
the Company's temporary utilization of the line of credit as well
as interest rate increases as the line of credit is tied to the
prime rate. During the first quarter of fiscal year 2006, the
Company repaid outstanding borrowings on the line of credit and
reduced the Company's reliance on such credit facility to manage
the Company's working capital requirements.
Income from continuing operations was $116,000, a decrease
of $387,000 over that reported in the prior fiscal year. The
decrease is primarily due to the decreased gross revenues and
increased direct costs of services and overhead as discussed
above.
In the fourth quarter of fiscal year 2005, management
approved a plan to discontinue the operations of its biological
laboratory facilities due to the lack of business volume, market
concentration, and poor operating performance. The loss from
discontinued operations for the biological laboratory for the
first quarter of fiscal year 2005 was $96,000. No further losses
were incurred in the first quarter of fiscal year 2006.
Versar's net income for the first quarter of fiscal year
2006 was $116,000 compared to $407,000 in the first quarter of
fiscal year 2005. The lower earnings were primarily attributable
to the decrease in gross revenues and higher direct costs of
services as discussed above.
Liquidity and Capital Resources
The Company's working capital as of September 30, 2005
approximated $8,699,000, an increase of $812,000 (10%). In
addition, the Company's current ration was 2.23 which improved
over the 1.86 reported on July 1, 2005. The improvement was
primarily due to the decrease in accounts receivables, which
improved the Company's cash position and allowed it to repay its
line of credit.
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $5,000,000 based upon
qualifying receivables. Interest on borrowings is based on the
prime rate plus one and half percent (7.75% as of September 30,
2005). As of September 30, 2005, Versar had no balance
outstanding on the line of credit. Borrowing capacity available
under the line of credit was $5,000,000. Obligations under the
credit facility are guaranteed by the Company and each subsidiary
individually and collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on
property constituting collateral. The credit facility is
scheduled for renewal in November 2005, and is subject to certain
covenants related to the maintenance of financial ratios. These
covenants require a minimum tangible net worth of $6,500,000, a
maximum total liabilities to tangible net worth ratio not exceed
2.5 to 1; and a minimum current ratio of at least 1.25 to 1.
Failure to met the covenant requirements gives the Bank the right
to demand the amount due under the line of credit, which may
impact the Company's ability to finance its working capital
requirements. At September 30, 2005, the Company was in
compliance with the financial covenants.
We believe that with our current cash position, together
with anticipated cash flows and the renewal of the line of
credit, will be sufficient to meet the Company's liquidity needs
within the next year. Expected capital requirements for fiscal
year 2006 are approximately $500,000 primarily to maintain and
upgrade our chemical laboratory and the Company's computer
systems. Such capital requirements will either be funded through
the existing working capital or will be financed through third
party financing sources. However, third party financing services
may not be available on terms acceptable to us, or at all.
14
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Critical Accounting Policies and Related Estimates That Have a
--------------------------------------------------------------
Material Effect on Versar's Consolidated Financial Statements
-------------------------------------------------------------
Below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding
the Company's consolidated, financial position, and results of
operations which require management judgments and estimates, or
involve uncertainties. Information regarding our other
accounting policies is included in the notes to our consolidated
financial statements included in our annual report filed on Form
10-K.
Revenue recognition: Contracts in process are stated at the
lower of actual costs incurred plus accrued profits or net
estimated realizable value of costs, reduced by progress
billings. On cost-plus fee contracts, revenue is recognized to
the extent of costs incurred plus a proportionate amount of fee
earned, and on time-and material contracts, revenue is recognized
to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. The Company
records income from major fixed-price contracts, extending over
more than one accounting period, using the percentage-of-
completion method. During the performance of such contracts,
estimated final contract prices and costs are periodically
reviewed and revisions are made as required. Fixed price
contracts can be significantly impacted by changes in contract
performance, contract delays, liquidated damages and penalty
provisions, and contract change orders, which may effect the
revenue recognition on a project. Losses on contracts are
recognized in the period when they become known.
From time to time we may proceed with work based on customer
direction pending finalizing and signing of contract funding
documents. We have an internal process for approving any such
work. The Company recognizes revenue based on actual costs
incurred to the extent that the funding is assessed as probable.
In evaluating the probability of funding being received, we
consider our previous experiences with the customer,
communications with the customer regarding funding status, and
our knowledge of available funding for the contract or program.
If funding is not assessed as probable, costs are expensed as
they are incurred.
There is the possibility that there will be future and
currently unforeseeable significant adjustments to our estimated
contract revenues, costs and margins for fixed price contracts,
particularly in the later stages of these contracts. It is most
likely that such adjustments could occur in our Engineering and
Construction business segment. Such adjustments are common in
the construction industry given the nature of the contracts.
These adjustments could either positively or negatively impact
our estimates due to the circumstances surrounding the
negotiations of change orders, the impact of schedule slippage,
subcontractor claims and contract disputes which are normally
resolved at the end of the contract. Adjustments to the
financial statement are made when they are known.
Allowance for doubtful accounts: Disputes arise in the
normal course of the Company's business on projects where the
Company is contesting with customers for collection of funds
because of events such as delays, changes in contract
specifications and questions of cost allowability or
collectibility. Such disputes, whether claims
or unapproved change orders in process of negotiation, are
recorded at the lesser of their estimated net realizable
value or actual costs incurred and only when realization is
probable and can be reliably estimated. Claims against the
Company are recognized where loss is considered probable and
reasonably determinable in amount. Management reviews
outstanding receivables on a regular basis and assesses the need
for reserves, taking into consideration past collection history
and other events that bear on the collectibility of such
receivables.
Deferred tax valuation allowance: The Company has
approximately $4.3 million in deferred tax assets of which a $3.5
million valuation allowance has been established against such
assets. Management provides for a valuation allowance until such
time as it can conclude more likely than not that the Company
will derive a benefit from such assets. The valuation allowance
is adjusted as necessary based upon the Company's ability to
generate taxable income, including management's ability to
implement tax strategies that will enable the Company to benefit
from such deferred tax assets.
15
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Goodwill and other intangible assets:
-------------------------------------
On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed Versar Global
Solutions, Inc. or VGSI. The transaction was accounted for as a
purchase. Goodwill resulting from this transaction was
approximately $1.1 million. In fiscal year 2003, the Company
adopted the Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" which eliminated
the amortization of goodwill, but requires the Company to test
such goodwill for impairment annually. Currently, the carrying
value of goodwill is approximately $776,000 relating to the
acquisition of VGSI, which is now part of the Infrastructure and
Management Services (IMS) reporting unit. The IMS business
segment was combined with the Engineering and Construction
business segment during fiscal year 2005 and continues to operate
under the IMS segment name, because many of the services provided
were similar to the Company's remediation business, and the two
segments shared similar customers and business opportunities, and
were duplicative in nature. Such a combination provided a more
efficient use of resources and more effective management of the
business operations. In performing its goodwill impairment
analysis, management has utilized a market-based valuation
approach to determine the estimated fair value of the IMS
reporting unit. Management engages outside professionals and
valuation experts, as necessary, to assist in performing this
analysis. An analysis was performed on public companies and
company transactions to prepare a market-based valuation. Based
upon the analysis, as of July 1, 2005, the estimated fair value
of the IMS reporting unit was $23 million which is in excess of
the carrying amount of the net assets of the reporting unit by a
substantial margin. As such, management concluded goodwill was
not impaired.
On April 15, 2005, the Company acquired the Cultural
Resources Group from Parsons Infrastructure & Technology Group,
Inc., a subsidiary of Parsons Corporation for a purchase price of
approximately $260,000 in cash. The Cultural Resources Group,
based in Fairfax County, Virginia provides archaeological,
cultural and historical services to federal, state and municipal
clients across the country. The acquisition will expand the
Company's existing and future capabilities in cultural resources
work. Their expertise will enhance and compliment Versar's
environmental core business. The Cultural Resources Group was
incorporated into the Company's Infrastructure and Management
Services (IMS) segment. As part of the acquisition, the Company
has executed a two year marketing agreement with Parsons to give
Versar the first right of refusal to certain Parsons cultural
resources work from existing Parsons' clients. Thereafter, this
agreement is annually renewable upon agreement of both parties.
Approximately $25,000 of the purchase price was allocated to
fixed assets, with the remaining balance to be allocated to
contract rights which are being amortized over a three-year
period.
Impact of Inflation
-------------------
Versar seeks to protect itself from the effects of
inflation. The majority of contracts the Company performs are
for a period of a year or less or are cost plus fixed-fee type
contracts and, accordingly, are less susceptible to the effects
of inflation. Multi-year contracts provide for projected
increases in labor and other costs.
Commitments and Contingencies
-----------------------------
In September 2002, the Company recorded a non-recurring
charge of $800,000 to reduce the Company's overall cost structure
and to reduce costs in non-performing divisions. The costs
included $450,000 for severance payments to terminated employees
and $350,000 for costs to restructure certain leased facilities.
At September 2005, all of the severance obligations were
satisfied. As of September 30, 2005, there is an accrual of
approximately $137,000 to be utilized to reduce the facility
costs for vacant space at the Company's headquarters in
Springfield, Virginia.
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes regarding the Company's
market risk position from the information provided on Form 10-K
for the fiscal year end July 1, 2005.
16
Item 4 - Procedures and Controls
As of the last day of the period covered by this report, the
Company carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, as of such
date, to ensure that required information will be disclosed on a
timely basis in its reports under the Exchange Act.
Further, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is
accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, in a manner
to allow timely decisions regarding the required disclosure.
There were no changes in the Company's internal control over
financial reporting during the last quarter that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In August 1997, Versar entered into a contract with the
Trustees for the Enviro-Chem Superfund Site, which provided that,
based upon an existing performance specification, Versar would
refine the design of, and construct and operate a soil vapor
extraction system. During the performance of the contract,
disputes arose between Versar and the Trustees regarding the
scope of work. Eventually, Versar was terminated by the Trustees
for convenience. The Trustees then failed to pay certain
invoices and retainages due Versar.
On March 19, 2001, Versar instituted a lawsuit against the
Trustees and three environmental consulting companies in the U.S.
District Court of the Eastern District of Pennsylvania, entitled
Versar, Inc. v. Roy O. Ball, Trustee, URS Corporation,
Environmental Resources Management and Environ Corp., No.
01CV1302. Versar, in seeking to recover amounts due under the
remediation contract from the Trustees of the Superfund Site,
claimed breach of contract, interference with contractual
relationships, negligent misrepresentations, breach of good faith
and fair dealing, unjust enrichment and implied contract. Mr.
Ball and several defendants moved to dismiss the action or, in
the alternative, transfer the action to the U.S. District Court
for the Southern District of Indiana, where, on April 20, 2001,
the two Trustees had filed suit against Versar in the U.S.
District Court for the Southern District of Indiana, entitled,
Roy O. Ball and Norman W. Bernstein, Trustees v. Versar, Inc.,
Case No. IPO1-0531 C H/G. The Trustees alleged breach of
contract and breach of warranty with respect to the remediation
contract and asked for a declaratory judgment on a number of the
previously stated claims.
On July 12, 2001, the Federal District Court in Pennsylvania
granted defendants' motion to transfer the Pennsylvania lawsuit
and consolidate the two legal actions in Indiana. The Company
filed an answer and counterclaim to the Indiana lawsuit. The
plaintiffs and third-party defendants filed Motions to Dismiss
the Company's counterclaim. The court granted the motions in
part and denied them in part. Versar amended its answer and
counterclaim. In the meantime, plaintiffs filed a Motion for
Partial Summary Judgment which the Judge granted in part and
denied in part. The Judge held that certain agreements entered
into by the parties prevented Versar from recovering certain
amounts under its counterclaim but that Versar could pursue its
claim for fraud in other areas. Written and oral discovery has
continued for several years. The court granted Versar's demand
that the Trustees supply requested information and documents,
including electronic documents. Versar continues to seek
additional discovery compliance by the Trustees. Motions for
Partial Summary Judgement have been filed by both parties. No
trial date is presently scheduled. Based upon discussions with
outside counsel, management does not believe that the ultimate
resolution under the Trustees' lawsuit will have a materially
adverse effect on the Company's consolidated financial condition
and results of operations.
17
Versar and its subsidiaries are parties from time to time to
various other legal actions arising in the normal course of
business. The Company believes that any ultimate unfavorable
resolution of these legal actions will not have a material
adverse effect on its consolidated financial condition and
results of operations.
Item 6 - Exhibits
(a) Exhibits
31.1 and 31.2 - Certification pursuant to Securities
Exchange Act Section 13a-14.
32.1 and 32.2 - Certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
18
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 the undersigned thereunto duly authorized.
VERSAR, INC.
(Registrant)
/S/ Theodore M. Prociv
By:_____________________
Theodore M. Prociv
Chief Executive Officer,
President, and Director
/S/ Lawrence W. Sinnott
By:_____________________
Lawrence W. Sinnott
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: November 10, 2005
19