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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 December 31, 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
incorporation or organization) Identification No.)
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 January 31. 2003
--------------------- -------------------------------
$ .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
December 31, 2002 and June 30, 2002. 3
Consolidated Statements of Operations for the
Three-Month and Six-Month Periods Ended
December 31, 2002 and 2001. 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended
December 31, 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 11-13
ITEM 4 - Procedures and Controls 14
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 14
ITEM 4 - Submission of Matters to a Vote of Stockholders 15
ITEM 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17-18
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
December 31, June 30,
2002 2002
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents . $ 86 $ 113
Accounts receivable, net. . 15,372 14,520
Prepaid expenses and other
current assets. . . . . . 539 1,038
Deferred income taxes . . . 419 419
------------- -------------
Total current assets. . 16,416 16,090
Property and equipment, net . 2,354 2,474
Deferred income taxes . . . . 706 1,280
Goodwill. . . . . . . . . . . 776 776
Other assets. . . . . . . . . 634 653
------------- -------------
Total assets. . . . . . $ 20,886 $ 21,273
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . $ 3,803 $ 4,426
Current portion of long-term
debt. . . . . . . . . . . 59 205
Accrued income taxes. . . . 7 57
Billing in excess of
revenue . . . . . . . . . 800 1,000
Accrued salaries and
vacation. . . . . . . . . 2,111 2,195
Other liabilities . . . . . 2,166 1,607
------------- -------------
Total current
liabilities . . . . . 8,946 9,490
Bank line of credit . . . . . 3,088 1,859
Other long-term liabilities . 1,278 1,239
Liabilities of discontinued
operations. . . . . . . . . 322 361
------------- -------------
Total liabilities . . . 13,634 12,949
============= =============
Stockholders' equity
Common stock, $.01 par value;
30,000,000 shares authorized;
7,226,546 shares issued at
December 31, and June 30, 2002;
7,213,906 and 7,213,896 shares
outstanding at December 31,
and June 30, 2002,
respectively . . . . . . . 72 72
Capital in excess of par
value. . . . . . . . . . . 20,270 20,270
Accumulated deficit . . . . (13,031) (11,959)
Treasury stock. . . . . . . (59) (59)
------------- -------------
Total stockholders'
equity. . . . . . . . 7,252 8,324
------------- -------------
Total liabilities and
stockholders' equity . $ 20,886 $ 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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
GROSS REVENUE . . . . . . . . . . . . $ 15,428 $ 18,275 $ 29,312 $ 33,277
Purchased services and materials,
at costs. . . . . . . . . . . . . . 6,157 8,031 12,017 14,130
------------ ------------ ------------ ------------
NET SERVICE REVENUE . . . . . . . . . 9,271 10,244 17,295 19,147
Direct costs of services and
overhead. . . . . . . . . . . . . . 7,129 7,474 13,854 15,028
Selling, general and administrative
expenses. . . . . . . . . . . . . . 1,589 1,636 3,057 3,151
Other Expenses. . . . . . . . . . . . --- --- 800 ---
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 553 1,134 (416) 968
OTHER EXPENSE
Interest expense. . . . . . . . . . . 43 56 75 125
Income tax expense. . . . . . . . . . 181 337 581 350
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS. . . . . . . . . . . . . 329 741 (1,072) 493
Loss from discontinued operations
(net of tax benefit $50). . . . . . --- (80) --- (80)
------------ ------------ ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . $ 329 $ 661 $ (1,072) $ 413
============ ============ ============ ============
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS - BASIC . . . $ .05 $ 0.11 $ (0.15) $ 0.08
============ ============ ============ ============
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS - DILUTED . . $ .05 $ 0.11 $ (0.15) $ 0.07
============ ============ ============ ============
(LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS - BASIC
AND DILUTED . . . . . . . . . . . . $ --- $ (0.01) $ --- $ (0.01)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE -
BASIC . . . . . . . . . . . . . . . $ .05 $ 0.10 $ (0.15) $ 0.06
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE -
DILUTED . . . . . . . . . . . . . . $ .05 $ 0.09 $ (0.15) $ 0.06
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC. . . . . 7,227 6,630 7,227 6,553
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED. . . . 7,247 7,006 7,227 6,794
============ ============ ============ ============
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 Six-Month
Periods Ended December 31,
2002 2001
------------ ------------
Cash flows from operating activities
Net (loss) income. . . . . . . . . . . . . . . . $ (1,072) $ 413
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization . . . . . . . . 352 387
Loss on sale of property and equipment. . . . 18 2
Provision for doubtful accounts receivable. . 60 108
Common stock issued to ESSOP. . . . . . . . . --- 106
Increase to tax valuation allowance . . . . . 574 228
Changes in assets and liabilities
Increase in accounts receivable . . . . . . . (912) (2,327)
Decrease in prepaids and other assets . . . . 518 24
(Decrease) increase in accounts payable . . . (623) 1,825
Decrease in accrued salaries and vacation . . (84) (132)
Increase (decrease) in other liabilities. . . 348 (672)
------------ ------------
Net cash used in continuing operations. . (821) (38)
Changes in net assets/liabilities of
discontinued operations . . . . . . . . . . . . (39) (47)
------------ ------------
Net cash used in operating activities . . (860) (85)
------------ ------------
Cash flows used in investing activities
Purchase of property and equipment . . . . . . . (250) (314)
------------ ------------
Cash flows from financing activities
Net borrowings (payments) on bank line
of credit . . . . . . . . . . . . . . . . . . . 1,229 (43)
Principal payments on long-term debt . . . . . . (146) (154)
Proceeds from issuance of the Company's
common stock. . . . . . . . . . . . . . . . . . --- 675
Purchase of treasury stock . . . . . . . . . . . --- (79)
------------ ------------
Net cash provided by financing
activities . . . . . . . . . . . . . . . 1,083 399
------------ ------------
Net decrease in cash and cash equivalents . . . . (27) ---
Cash and cash equivalents at the beginning
of the period. . . . . . . . . . . . . . . . . . 113 58
------------ ------------
Cash and cash equivalents at the end
of the period. . . . . . . . . . . . . . . . . . $ 86 $ 58
============ ============
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . $ 64 $ 143
Income taxes . . . . . . . . . . . . . . . . . 73 44
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 December 31, 2002, and the results of operations for
the three-month and six-month periods ended December 31, 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 December 31, 2002, the Company had approximately $5.2
million 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 $4.1
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) Goodwill and Other Intangible Assets
The Company adopted the Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets"
in fiscal year 2003. The adoption of SFAS No. 142 eliminated the
amortization of goodwill and intangible assets expenses by
approximately $73,000 per year. Currently, the Company has a
carrying value of approximately $776,000 for the 1998 acquisition
of The Greenwood Partnership, P.C. subsequently renamed Versar
Global Solutions, Inc. (VGSI). The Company is in the process of
selecting an independent third party appraiser to evaluate the
fair value of the intangible assets and to determine the
impairment of the asset, if any. Such evaluation and testing is
anticipated to be completed in the third quarter of fiscal year
2003. Management does not expect the other provisions of the
statements to have a material impact on Versar's results of
operations or financial condition.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income 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 six-month period ended
December 31, 2002, the assumed exercise of the Company's
outstanding stock options and warrants using the Treasury Stock
Method are not included in the calculation as the effect would be
anti-dilutive.
For the Three-Month For the Six-Month
Periods Ended December 31, Periods Ended December 31,
------------ ------------ ------------ ------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Weighted average common shares
outstanding - basic . . . . . 7,226,546 6,630,298 7,226,546 6,553,387
Assumed exercise of options
(treasury stock method) . . . 20,753 375,601 --- 240,239
------------ ------------ ------------ ------------
Weighted average common shares
outstanding - basic/diluted 7,247,299 7,005,899 7,226,546 6,793,626
============ ============ ============ ============
(I) Common Stock
The Company did not issue any common stock during the first
six months of fiscal year 2003. In the first six months of fiscal
year 2002, 264,711 shares of common stock were issued to an
employee stock option plan.
(J) 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, which expired on October 14, 2002.
The other half has 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. In fiscal year 2002
the Company filed a registration statement on Form S-3, with the
Securities and Exchange Commission to register the resale of the
shares of common stock sold in the private placement as well as the
shares of common stock and the related warrants.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(K) Non-recurring Charge
In the first quarter of fiscal year 2003, management and the
Board of Directors approved a restructuring plan to reduce the
Company's overall cost structure and reduce costs in non-performing
divisions, 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 starting in the third quarter of fiscal year 2003. The
remainder of the charge consists of costs expected to be incurred
in connection with management's plan to reduce occupancy expense.
The management is currently negotiating with the lessors in such
occupancy realignments.
(L) Recently Issued Accounting Standards
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 believe there 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 on Versar's results of operations or financial
condition from its adoption of this standard.
(M) 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,
detecting 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
receivable for approximately $200,000. The buyers also assumed the
liabilities of certain leased office equipment. 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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
------------ ------------ ------------ ------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SERVICE REVENUE
- -------------------
Environmental Services $ 5,672 $ 5,885 $ 10,430 $ 11,264
Architecture/Engineering 1,927 2,341 3,884 4,467
Defense Systems 1,672 2,018 2,981 3,416
------------ ------------ ------------ ------------
$ 9,271 $ 10,244 $ 17,295 $ 19,147
============ ============ ============ ============
OPERATING INCOME (LOSS)(A)
- --------------------------
Environmental Services $ 1,319 $ 1,485 $ 2,159 $ 2,447
Architecture/Engineering 259 357 599 361
Defense Systems 543 948 813 1,391
Corporate and other 21 (20) (130) (80)
------------ ------------ ------------ ------------
2,142 2,770 3,441 4,119
Selling, general and
administrative expenses 1,589 1,636 3,057 3,151
Non-recurring charge --- --- 800 ---
------------ ------------ ------------ ------------
$ 553 $ 1,134 $ (416) $ 968
============ ============ ============ ============
(A)Operating income is defined as net service revenue less direct costs of services
and overhead.
IDENTIFIABLE ASSETS December 31, 2002 June 30, 2002
- ------------------- ----------------- -------------
Environmental Services $ 9,023 $ 7,780
Architecture/Engineering 5,889 5,346
Defense Systems 3,529 3,565
Corporate and Other 2,413 4,582
----------------- -------------
$ 20,854 $ 21,273
================= =============
10
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
Second 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 second quarter of fiscal year
2003 decreased by $2,847,000 (16%) compared to gross revenue for
the comparable period of fiscal year 2002. The decrease in gross
revenue was due to the anticipated winding down of the Company's
STEPO contract in the Defense Segment and reduced anthrax detection
and remediation activities in the Company's Environmental Segment.
Gross revenue for the second quarter of fiscal year 2003 increased
by 11% over the gross revenue in the first quarter of fiscal year
2003. The increase was due to the receipt of additional contract
funding primarily in the Company's Environmental Segment.
Purchased services and materials for the second quarter of
fiscal year 2003 decreased by $1,874,000 (23%) compared to
comparable costs in the second quarter of fiscal year 2002.
Approximately seventy percent of the decrease is attributable to
the winding down of the STEPO contract in the Company's Defense
Segment as mentioned above. The remaining decrease is due to lower
subcontracted activities in the Environmental Segment due to a
reduction in its anthrax detection activities described 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 revenues
decreased by 9% compared to the second quarter of fiscal year 2002.
The decrease is primarily due to the decline in gross revenues as
mentioned above.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable overhead
and unallowable costs that are directly attributable to contracts.
The percentage of these costs to net service revenue increased to
77% in the second quarter of fiscal year 2003 compared to 73% in
the second quarter of fiscal year 2002. The increases in the
second quarter of fiscal year 2003 were due to increased legal
expenses for current pending litigation and slightly lower labor
utilization.
Selling, general and administrative expenses approximated 17%
of net service revenue in the second quarter of fiscal year 2003
compared to 16% in the second quarter of fiscal year 2002. The
increase is primarily due to the decrease in net service revenue
during the second quarter of fiscal year 2003.
11
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Operating income for the second quarter of fiscal year 2003
was $553,000, a decrease of $581,000 compared to the second quarter
of fiscal year 2002. The decrease is primarily due to the decrease
in gross revenues and higher direct costs of services as mentioned
above.
Income tax expense for the second quarter of fiscal year 2003
decreased by $156,000 compared to the comparable period of the
previous fiscal year. The decrease is due to the reduced taxable
earnings during the second quarter of fiscal year 2003. The
Company has approximately $5.2 million in tax assets of which a
$4.1 million valuation allowance has been reserved against the tax
assets. The Company increased its reserve by approximately
$174,000 during the second quarter of fiscal year 2003. 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.
In the second quarter of fiscal year 2002, the Company
recorded a loss from discontinued operations of $80,000, net of tax
of $50,000 due to a requirement for additional accruals in order to
wind down a benefit plan of Science Management Corporation (SMC),
a former subsidiary of the Company.
Versar's net income for the second quarter of fiscal year 2003
was $329,000 compared to $661,000 in the second quarter of fiscal
year 2002. The decrease is primarily due to the lower gross
revenues and higher direct costs of services during the second
quarter of fiscal year 2003.
Six Months Comparison of Fiscal Years 2003 and 2002
- ---------------------------------------------------
Versar's gross revenue for the first six months of fiscal year
2003 decreased by $3,965,000 (12%) compared to gross revenue for
the comparable period of fiscal year 2002. Approximately 75% of
the decrease was from the anticipated winding down of the Company's
STEPO contract in the Company's Defense segment. The remaining
decrease is attributable to reduced anthrax detection and
remediation activities in the Company's Environmental segment.
Purchased services and materials for the first six months of
fiscal year 2003 decreased by $2,113,000 (15%) compared to the
comparable costs for the first six months of fiscal year 2002. The
decrease is due the decrease in the purchase of materials
associated with the winding down of the STEPO contract as mentioned
above.
Net service revenue for the first six months of fiscal year
2003 decreased by 10% compared to the first six months of fiscal
year 2002. Approximately fifty percent of the decrease is due to
the reduced anthrax detection and remediation activities in the
Company's Environmental segment, thirty percent attributable to the
sale of the Company's Utah operations in the Company's Architecture
and Engineering segment and the balance was from the winding down
of the Company's STEPO contract as mentioned above.
Selling, general and administrative expenses approximated 18%
of net service revenue in the first six months of fiscal year 2003
compared to 16% in the first six months of fiscal year 2002. The
increase is primarily due to the decrease in net service revenue
for the first six months of fiscal year 2003. Actual selling,
general and administrative expenses decreased by 3% in the first
six months of fiscal year 2003 as compared to the comparable period
in the prior fiscal year.
In the first quarter of fiscal year 2003, management and the
Board of Directors approved a restructuring plan to reduce the
Company's overall cost structure and reduce costs in non-performing
divisions, 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
12
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
two years starting in the third quarter of fiscal year 2003. The
remainder of the charge consists of costs expected to be incurred
in connection with management's plan to reduce occupancy expense.
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 six months of fiscal year 2003
was $416,000, compared to the operating income of $968,000 in the
first six months of fiscal year 2002. The operating loss in fiscal
year 2003 is primarily due to the non-recurring charge and
reduction in gross revenues as mentioned above.
Income tax expense for the first six months of fiscal year
2003 increased by $231,000 compared to the comparable period of the
previous fiscal year. The increase is due to the additional
reserve in the Company's deferred tax valuation allowance in the
first six months of fiscal year 2003.
Versar's net loss for the first six months of fiscal year 2003
was $1,072,000 compared to net income of $413,000 for the first six
months of fiscal year 2002. The decrease in income was due to
lower gross revenues, the non-recurring charge and higher income
tax expense recorded in the first six months of fiscal year 2003.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 2002
approximated $7,470,000, an increase of $870,000 (13%) from June
30, 2002. The increase is primarily due to a decrease in short
term liabilities, as a result of the financing of these liabilities
through the Company's long term line of credit, which increased by
$1,229,000. In addition, the Company's current ratio at December
31, 2002 was 1.84, 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 (4.17% of December 31, 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 December 31, 2002 was approximately $2,999,000.
Advances under the line are due upon demand or on November 30,
2004. The loan has certain covenants related to maintenance of
financial ratios. In November 2002, the Company obtained a waiver
of certain financial covenants under its line of credit for the
first and second quarters of fiscal year 2003 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 its 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.
13
Item 4 - Procedures and Controls
Within ninety days 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 to ensure that
required information will be disclosed on a timely basis in its
reports under the Exchange Act. 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 Enviro-Chem Superfund Site (the "Superfund Site"),
which provided that, based upon an existing design, Versar would
refine the design, 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 a remediation contract from
the Trustees of a 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. 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
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 has amended its answer
and counterclaim 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 middle of the calendar year. Trial is
scheduled for July 2003. 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.
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.
14
Item 4 - Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders (the "Annual
Meeting") was held on November 20, 2002. The matters voted on
at the Annual Meeting were as follows:
(1) The Election of Directors
The election of nine nominees to serve as directors
of the Company was approved as indicated below:
For Withheld Exceptions
-------- -------- ----------
5,878,408 44,185 342,630
(2) To approve the Versar, Inc. 2002 Stock Incentive Plan
was approved as follows:
For Against Abstain
-------- ---------- ----------
3,923,704 660,455 46,959
(3) To ratify the appointment of Grant Thornton LLP as
independent accountants for fiscal year 2003 was
approved as follows:
For Against Abstain
-------- --------- ---------
6,208,526 31,334 25,363
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 and 99.2 - the Certifications under 906.
(b) Reports on Form 8-K
None
15
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: February 10, 2003
16
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: February 10, 2003
/S/ Theodore M. Prociv
-----------------------------------
Theodore M. Prociv
President and Chief Executive Officer
17
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: February 10, 2003
/S/ Lawrence W. Sinnott
-----------------------------------
Lawrence W. Sinnott
Senior Vice President and Chief Financial Officer
18