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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, 2002
------------------------
Commission File Number 1-9309
------------
VERSAR, INC.
- -------------------------------------------------------------------
(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 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 October 30, 2002
--------------------- -------------------------------
$ .01 par value 7,226,546 shares
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, 2002 and June 30, 2002. 3
Consolidated Statements of Operations for the
Three-Month Periods Ended September 30, 2002
and 2001. 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
September 30, 2002 and 2001. 5
Notes to Consolidated Financial Statements 6-10
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-12
ITEM 4 - Procedures and Controls 13
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 13
ITEM 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
CERTIFICATIONS 16-19
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, June 30,
2002 2002
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents . . . $ 108 $ 113
Accounts receivable, net. . . . 14,019 14,520
Prepaid expenses and other
current assets. . . . . . . . 993 1,038
Deferred income taxes . . . . . 419 419
------------- -------------
Total current assets. . . . . 15,539 16,090
Property and equipment, net . . . 2,331 2,474
Deferred income taxes . . . . . . 880 1,280
Goodwill. . . . . . . . . . . . . 776 776
Other assets. . . . . . . . . . . 663 653
------------- -------------
Total assets. . . . . . . . . $ 20,189 $ 21,273
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . $ 3,511 $ 4,426
Current portion of long-term
debt. . . . . . . . . . . . . 125 205
Accrued income taxes. . . . . . --- 57
Billing in excess of revenue. . 1,000 1,000
Accrued salaries and vacation . 1,638 2,195
Other liabilities . . . . . . . 2,330 1,607
------------- -------------
Total current liabilities . . 8,604 9,490
Bank line of credit . . . . . . . 3,048 1,859
Other long-term liabilities . . . 1,255 1,239
Liabilities of discontinued
operations. . . . . . . . . . . 359 361
------------- -------------
Total liabilities . . . . . . 13,266 12,949
------------- -------------
Stockholders' equity
Common stock, $.01 par value;
30,000,000 shares authorized;
7,226,546 shares issued at
September 30, and June 30,
2002; 7,213,896 shares outstanding
at September 30, and June 30,
2002. . . . . . . . . . . . . 72 72
Capital in excess of par value. 20,270 20,270
Accumulated deficit . . . . . . (13,360) (11,959)
Treasury stock. . . . . . . . . (59) (59)
------------- -------------
Total stockholders' equity. . 6,923 8,324
------------- -------------
Total liabilities and
stockholders' equity. . . . $ 20,189 $ 21,273
============= =============
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,
----------------------------
2002 2001
------------- -------------
GROSS REVENUE . . . . . . . . . . . $ 13,884 $ 15,002
Purchased services and materials,
at cost . . . . . . . . . . . . . 5,860 6,099
------------- -------------
NET SERVICE REVENUE . . . . . . . . 8,024 8,903
Direct costs of services and
overhead. . . . . . . . . . . . . 6,725 7,554
Selling, general and administrative
expenses. . . . . . . . . . . . . 1,468 1,515
Non-recurring charge. . . . . . . . 800 ---
------------- -------------
OPERATING LOSS. . . . . . . . . . . (969) (166)
OTHER EXPENSE
Interest expense. . . . . . . . . . 32 69
Income tax expense. . . . . . . . . 400 13
------------- -------------
NET LOSS. . . . . . . . . . . . . . $ (1,401) $ (248)
============= =============
NET LOSS PER SHARE - BASIC
AND DILUTED. . . . . . . . . . . . $ (0.19) $ (.04)
============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC . . . . 7,227 6,476
============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED . . . 7,227 6,476
============= =============
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,
------------- -------------
2002 2001
------------- -------------
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . $ (1,401) $ (248)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Depreciation and amortization . . 168 196
Provision for doubtful accounts
receivable. . . . . . . . . . . (9) 31
Loss on disposal of property and
equipment . . . . . . . . . . . 16 ---
Increase to tax valuation
allowance . . . . . . . . . . . 400 9
Changes in assets and liabilities
Decrease in accounts receivable . 510 382
Decrease in prepaids and other
assets. . . . . . . . . . . . . 35 77
(Decrease) increase in accounts
payable . . . . . . . . . . . . (915) 633
Decrease in accrued salaries
and vacation. . . . . . . . . . (557) (510)
Increase (Decrease) in other
liabilities . . . . . . . . . . 682 (395)
------------- -------------
Net cash (used) provided by
continuing operating
activities. . . . . . . . . (1,071) 175
------------- -------------
Changes in net liabilities of
discontinued operations. . . . . . (2) ---
------------- -------------
Net cash (used) provided by
operating activities. . . . (1,073) 175
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (41) (188)
------------- -------------
Cash flows from financing activities
Net borrowings on bank line of
credit. . . . . . . . . . . . . . 1,189 134
Principal payments on long-term
debt. . . . . . . . . . . . . . . (80) (92)
Purchase of treasury stock. . . . . --- (33)
Proceeds from issuance of common
stock . . . . . . . . . . . . . . --- 4
------------- -------------
Net cash provided by
financing activities. . . . 1,109 13
------------- -------------
Net decrease in cash and cash
equivalents . . . . . . . . . . . . (5) ---
Cash and cash equivalents at
beginning of the period . . . . . . 113 58
------------- -------------
Cash and cash equivalents at
end of the period . . . . . . . . . $ 108 $ 58
============= =============
Supplementary disclosure of
cash flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . $ 29 $ 58
Income taxes. . . . . . . . . . . 73 15
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 filed
with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the Company's
Annual Report filed on Form 10-K for the year ended June 30,
2002 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, 2002, and the results of operations
for the three-month periods ended September 30, 2002 and 2001.
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.
It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined
that it is probable that the Company will not collect all amounts
due and the amount of reserve requirements can be reasonably
estimated.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(D) Income Taxes
At September 30, 2002, the Company had $5.2 million net
deferred tax assets which primarily relate to net operating loss
and tax credit carryforwards. Due to the Company's history of
operating losses, a valuation allowance of approximately $3.9
million has been established. With stable profitability, such
net operating loss and tax credit carryforwards would be utilized
and the valuation allowance would be adjusted accordingly.
(E) 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
condition and results of operations.
(F) Warranty Estimates
The Company has certain warranty obligations under the sale
of personal protective equipment. As such, the Company accrues
for such costs based upon volume outstanding, historical
performance and time remaining under the warranty. Such costs
are either increased or decreased based upon the above factors
and current year performance.
(G) Net Loss Per Share
Basic net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share also
includes common equivalent shares outstanding during the period
if dilutive. The Company's common equivalent shares consist of
stock options. For the periods ended September 30, 2002, and
September 30, 2001, the assumed exercise of the Company's
outstanding stock options using the Treasury Stock Method are
not included in the calculation as the effect would be anti-
dilutive.
(H) Common Stock
There was no common stock issued during the first quarter of
fiscal year 2003. In the first quarter of fiscal year 2002,
2,400 shares of common stock were issued to an employee stock
option plan.
(I) Private Placement
In June 2002, the Company sold 359,183 shares of its common
stock at $2.78 per share to an institutional investor in a
private placement. The Company also issued warrants to the
institutional investor to purchase 359,183 shares of Common Stock,
one-half with an exercise price of $3.48 and the other half with
an exercise price of $4.00. The Company also issued warrants to
an investment banking firm to purchase 26,939 shares of common
stock with an exercise price of $3.48.
The securities sold in the private placement were not
registered under the Securities Act of 1933 and may not be
offered or sold in the United States absent registration or
an applicable exemption from the registration requirements.
The Company filed an S-3, dated September 10, 2002 to register
the shares with the Securities and Exchange Commission.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(J) As of the first quarter of fiscal year 2003, management
and the Board of Directors approved a restructuring plan, which
resulted in a non-recurring charge of $800,000. Approximately
$450,000 of this charge comprises severance payments relating
to the elimination of two senior management positions. Such
severance payments are expected to be paid out during the next
two years. The remainder of the charge consists of costs
expected to be incurred in connection with management's plan
to reduce occupancy expense. These reductions were taken in
order to reduce the Company's overall cost structure and reduce
costs in nonperforming divisions. Management believes the
elimination of these positions and reductions of occupancy
related expenses should improve operating profits in future
periods.
(K) Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method. The provisions of SFAS No. 142
eliminate amortization of goodwill and identifiable intangible
assets with indefinite lives and require an impairment assessment
at least annually by applying a fair-value based test. Versar
was required to adopt SFAS No. 142 on July 1, 2002. The Company
anticipates an annual increase to net income of $73,293, or $.01
per share, or $18,623 for the first quarter of fiscal year 2003
from the elimination of goodwill amortization. Management does
not expect the other provisions of the statements to have a
material impact on Versar's results of operations or financial
condition.
In July 2001, the FASB issued SFAS 143, "Accounting for
Asset Retirement Obligations." The new statement provides
accounting standards for retirement obligations associated with
tangible long-lived assets, with adoption required by January 1,
2003. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recorded in the period in
which it is incurred. The associated asset retirement cost is
capitalized as part of the carrying amount of the long-lived
asset. Over time the capitalized costs are depreciated and
the present value of the asset retirement liability increases,
resulting in a period expense. Upon retirement, a gain or loss
will be recorded if the cost to settle the retirement obligation
differs from the carrying amount. The Company does not believe
there will be a material effect from the adoption of this
standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" which
addresses the accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" but retains many of the
fundamental provisions of SFAS 121. SFAS 144 also supercedes
the accounting and reporting provisions of Accounting Principles
Board Opinion ("APB") No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a
business. However, SFAS 144 retains the requirements of APB 30
to report discontinued operations separately and extends that
reporting requirement to components of an entity that has either
been disposed of or is classified as held for sale. SFAS 144
excludes goodwill and other intangibles that are not amortized
from its scope. For assets to be held and used, SFAS 144
addresses how cash flows should be estimated to test the
recoverability of an asset or group of assets, clarifies how
an impairment loss should be allocated, and creates a requirement
to use an expected present value technique to estimate fair value
if market prices are not available and uncertainties exist about
the timing and amount of future cash flows. For long-lived assets
to be disposed of by sale, SFAS 144 establishes the criteria to
be met to qualify for this classification, defines the timing of
when the related sale must be consummated, eliminates the net
realizable value measurement approach for segments of a business
and certain acquired assets in a business combination, and defines
costs to sell the asset. The provisions of SFAS 144 are effective
for fiscal years beginning after December 15, 2001 and are
generally to be applied prospectively. The Company does not
believe there will be a material effect from the adoption of
this standard.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
In April 2002, the FASB issued FAS 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." FAS 145 rescinds FAS 4 and FAS 64,
which addressed the accounting for gains and losses from
extinguishment of debt, rescinds FAS 44 which set forth industry-
specific transitional guidance, amends FAS 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner
as sale-leaseback transactions and makes technical corrections to
certain existing pronouncements that are not substantive in
nature. The Company does not believethere will be a material
effect from the adoption of this standard.
In July 2002, the FASB issued FAS 146, "Accounting for
Exit or Disposal Activities." FAS 146 addresses the recognition,
measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance set forth in
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring)." The scope of FAS 146 includes costs related
to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and certain
termination benefits provided to employees who are involuntarily
terminated. FAS146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not believe
there will be a material effect from the adoption of this
standard.
(L) Business Segments
The Company's business segments are Environmental Services,
Architecture/Engineering and Defense Systems. The Environmental
Services segment provides a full range of services including
remediation/corrective actions, site investigations, remedial
designs, and construction, operation and maintenance of remedial
systems. The Architecture/Engineering segment provides
engineering, design and construction management to industrial
and commercial facilities. The Defense Systems segment provides
expertise in developing, testing and providing personal
protection equipment, defecting and destroying biological and
chemical agents.
In April 2002, the A&E business segment sold its Utah
operations to its former employees. The buyers purchased the
existing capital assets, on-going contracts and remaining
accounts receivables at book value. The buyers also assumed
the liabilities of certain leased office equipments. Versar
retained all other liabilities. The sale did not have a material
impact on the business segment or consolidated operations of the
Company.
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.
9
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,
----------------------------
2002 2001
------------- -------------
(In thousands)
NET SERVICE REVENUE
- -------------------
Environmental Services $ 4,758 $ 5,379
Architecture/Engineering 1,957 2,126
Defense Systems 1,309 1,398
------------- -------------
$ 8,024 $ 8,903
============= =============
OPERATING INCOME/(LOSS)(A)
- --------------------------
Environmental Services $ 840 $ 963
Architecture/Engineering 340 4
Defense Systems 270 442
Corporate and other (151) (60)
------------- -------------
1,299 1,349
Selling, general and
administrative expenses 1,468 1,515
Non-recurring charge 800 ---
------------- -------------
$ (969) $ (166)
============= =============
(A) Operating income is defined as net service revenue less direct
costs of services and overhead.
IDENTIFIABLE ASSETS September 30, 2002 June 30, 2002
- ------------------- ------------------ --------------
Environmental Services $ 8,298 $ 7,780
Architecture/Engineering 5,935 5,346
Defense Systems 2,982 3,565
Corporate and Other 2,974 4,582
---------- ----------
$ 20,189 $ 21,273
========== ==========
10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
First Quarter Comparison of Fiscal Year 2003 and 2002
- -----------------------------------------------------
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,
the possible impact of current and future claims against the
Company based upon negligence and other theories of liability,
and the possibility of the Company making acquisitions during
the next 12 to 18 months. 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 that
acquired entities may not perform as well as expected; the
possibility the Company will not be able to attract and retain
key professional employees; 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.
Versar's gross revenue for the first quarter of fiscal year
2003 decreased by $1,118,000 (7%) compared to gross revenue for
the comparable period of fiscal year 2002. The decrease in gross
revenue was due to the winding down of the Company's STEPO contract
in the Defense Segment and lower remedial construction work in the
Company's Environmental Segment. Such decrease was, in part,
offset by increased design construction work of approximately
$1,350,000 in the Company's Architecture and Engineering segment.
Purchased services and materials for the first quarter of
fiscal year 2003 decreased by $239,000 (4%) compared to the
comparable costs for the first quarter of fiscal year 2002.
The decrease is due to lower subcontracted activities in the
Defense segment as mentioned above.
Net service revenue is derived by deducting the cost of
purchased services 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. Net service revenue
decreased by 10% compared to the first quarter of fiscal
year 2002. The decrease is primarily due to the lower gross
revenues as mentioned above.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable
overhead costs and unallowable costs that are directly
attributable to contracts. The percentage of these costs
to net service revenue decreased to 84% in the first quarter
of fiscal year 2003 compared to 85% in the first quarter of
fiscal year 2002. The decrease in the first quarter of fiscal
year 2003 was attributable to severance costs that were incurred
in the first quarter of fiscal year 2002.
Selling, general and administrative expenses approximated
18% of net service revenue in the first quarter of fiscal year
2003 compared to 17% in the first quarter of fiscal year 2002.
The increase is primarily due to the decrease in net service
revenue during the first quarter of fiscal year 2003. Actual
selling, general and administrative costs decreased by 3% in
the first quarter of fiscal year 2003 as compared to the
comparable period in fiscal year 2002.
As of the first quarter of fiscal year 2003, management
and the Board of Directors approved a restructuring plan, which
resulted in a non-recurring charge of $800,000. Approximately
$450,000 of this charge comprises severance payments relating
to the elimination of two senior management positions. Such
severance payments are expected to be
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
paid out during the next two years. The remainder of the charge
consists of costs expected to be incurred in connection with
management's plan to reduce occupancy expense. These
reductions were taken in order to reduce the Company's overall
cost structure and reduce costs in nonperforming divisions.
Management believes the elimination of these positions and
reductions of occupancy related expenses should improve
operating profits in future periods.
Operating loss for the first quarter of fiscal year 2003
was $969,000, an increase of $803,000 compared to the first
quarter of fiscal year 2002. The increase is primarily
attributable to the non-recurring charge as mentioned above.
Income tax expense for the first quarter of fiscal year 2003
increased by $387,000 compared to the comparable period of the
previous fiscal year. The increase is due to a $400,000 increase
in the Company's deferred tax valuation allowance during the first
quarter of fiscal year 2003. The additional valuation allowance
is the result of revisions to fiscal year 2003 projected taxable
income, which was lower than originally expected. The Company has
approximately $5.2 million in tax assets of which a $3.9 million
valuation allowance has been reserved against the tax assets.
The Company established the valuation allowance until the
probability of the realization of these amounts becomes more
certain. The valuation allowance will be increased or decreased
depending on the financial performance of the Company going
forward, which will directly impact the Company's Consolidated
Statement of Operations.
Versar's net loss for the first quarter of fiscal year
2003 was $1,401,000 compared to a net loss of $248,000 in the
first quarter of fiscal year 2002. The increase in net loss
is due to the lower net service revenue as well as the
non-recurring charge recorded in the first quarter of fiscal
year 2003.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at September 30, 2002
approximated $6,935,000, an increase of $338,000 (5%) from
June 30, 2002. The increase is primarily due to lower short
term liabilities, which were financed by the Company's long
term line of credit, which increased by $1,189,000. In
addition, the Company's current ratio at September 30, 2002
was 1.80, which was slightly higher than that reported on
June 30, 2002.
Versar's line of credit with the Bank of America (Bank)
provides for advances up to $6,500,000 based on qualifying
receivables. Interest on the borrowings is based on the
lower of the 30 day London Interbank Offered Rate (LIBOR)
plus two hundred and seventy-five basis points (4.56% of
September 30, 2002). A commitment fee of 1/4% on the
unused portion of the line of credit is also charged.
The line 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. Unused
borrowing availability at September 30, 2002 was approximately
$1,460,000. Advances under the line are due upon demand or on
November 30, 2003. The loan has certain covenants related to
maintenance of financial ratios. In November 2002, the
Company had to obtain a waiver of certain financial covenants
under its line of credit as a result of a loss incurred in the
first quarter of fiscal year 2003. Management believes that
cash generated by operations and borrowings available from the
Bank line of credit will be adequate to meet the working capital
needs for fiscal year 2003.
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.
12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Item 4 - Procedures and Controls
Prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the
participation of the Company's management, including 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-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls
and procedures are effective. There were no significant
changes in the Company's internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In August 1997, Versar entered into a contract with the
Trustees for the Environ-Chem Superfund Site that, based upon
an existing design, Versar would perform a detailed design,
construct and operate a soil vapor extraction system.
Subsequently, during the operation phase, Versar was terminated
by the Trustees for convenience. The Trustees failed to pay
certain invoices and retainages due Versar.
On March 19, 2001, Versar instituted a lawsuit against the
Trustees of the Environmental Conservation and Chemical
Corporation Site Trust Fund 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 a remediation contract from the Trustees of a Superfund
site, claiming 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. At the same time,
on April 20, 2001, the two Trustees filed suit against Versar
in the U.S. District Court for the Southern District of Indiana,
entitled, Roy O. Ball and Norman W. Berstein, 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 judgement
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
has filed an answer to the Indiana lawsuit and the plaintiffs and
third-party defendants have filed Motions to Dismiss the Company's
counter-claim. The court granted the motions in part and denied
them in part. Versar has amended its answer and counter-claim
and has moved for reconsideration. In the meantime, plaintiffs
have filed a Motion for Partial Summary Judgement to which the
Company has responded. That motion is pending. Written and oral
discovery has commenced and is expected to be completed by the end
of the year. Trial is scheduled for February 2003. Based upon
discussions with outside counsel, management does not believe that
any adverse determination under the Trustees' lawsuit would have a
materially adverse effect on the Company's consolidated financial
condition and results of operations.
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.
13
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
14
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)
By: /S/ Theodore M. Prociv
-------------------------
Theodore M. Prociv
Chief Executive Officer,
President, and Director
By: /S/ Lawrence W. Sinnott
--------------------------
Lawrence W. Sinnott
Vice President, Chief
Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: November 12, 2002
15
CERTIFICATION BY THEODORE M. PROCIV PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Theodore M. Prociv, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Versar,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design
or operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/S/ Theodore M. Prociv
- -----------------------------------
Theodore M. Prociv
President and Chief Executive Officer
16
CERTIFICATION BY LAWRENCE W. SINNOTT PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Lawrence W. Sinnott, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Versar,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/S/ Lawrence W. Sinnott
- -----------------------------------
Lawrence W. Sinnott
Senior Vice President and Chief Financial Officer
17
Section 906 Certification
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Versar, Inc.
(the "Company") on Form 10-Q for the period ending September 30,
2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Theodore M. Prociv, Chief
Executive Officer and President of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) the information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
/S/ Theodore M. Prociv
-----------------------
Theodore M. Prociv
President and CEO
November 12, 2002
18
Section 906 Certification
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Versar, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Lawrence W. Sinnott, Senior Vice
President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) the information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
/S/ Lawrence W. Sinnott
-------------------------
Lawrence W. Sinnott
Senior Vice President and Chief
Financial Officer
November 12, 2002
19