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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 Commission File Number
March 31, 2003 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
incorporation or organization) 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 by the check mark whether the registrant is an
accelerated filer (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 May 2, 2003
--------------------- --------------------------
$.01 par value 7,237,646
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 2003 and June 30, 2002. 3
Consolidated Statements of Operations
for the Three-Month and Nine-Month
Periods Ended March 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended
March 31, 2003 and 2002. 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 3 - Quantitative and Qualitative Disclosures
About Market Risk 14
ITEM 4 - Procedures and Controls 14
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 14
ITEM 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17-20
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 31, June 30,
2003 2002
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 113 $ 113
Accounts receivable, net 13,451 14,520
Prepaid expenses and other
current assets 1,145 1,038
Deferred income taxes 419 419
------------- -------------
Total current assets 15,128 16,090
Property and equipment, net 2,289 2,474
Deferred income taxes 184 1,280
Goodwill 776 776
Other assets 605 653
------------- -------------
Total assets $ 18,982 $ 21,273
============= =============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable $ 2,586 $ 4,426
Accrued income taxes 7 57
Billing in excess of revenue 800 1,000
Accrued salaries and vacation 1,699 2,195
Other liabilities 2,993 1,812
------------- -------------
Total current liabilities 8,085 9,490
Bank line of credit 2,602 1,859
Other long-term liabilities 1,178 1,239
Liabilities of discontinued
operations 319 361
------------- -------------
Total liabilities 12,184 12,949
------------- -------------
Stockholders' equity
Common stock, $0.1 par value;
30,000,000 shares authorized;
7,227,146 shares and 7,226,546
shares issued at March 31, 2003
and June 30, 2002, respectively;
7,214,506 and 7,213,896 shares
outstanding at March 31, 2003
and June 30, 2002, respectively 72 72
Capital in excess of par value 20,271 20,270
Accumulated deficit (13,486) (11,959)
Treasury stock (59) (59)
------------- -------------
Total stockholders' equity 6,798 8,324
------------- -------------
Total liabilities and
stockholders' equity $ 18,982 $ 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
GROSS REVENUE $ 13,366 $ 17,225 $ 42,678 $ 50,502
Purchased services and
materials, at cost 4,523 7,886 16,540 22,016
----------- ----------- ----------- -----------
NET SERVICE REVENUE 8,843 9,339 26,138 28,486
Direct costs of services
and overhead 7,314 7,590 21,167 22,618
Selling, general and
administrative expenses 1,415 1,567 4,473 4,718
Other Expenses --- --- 800 ---
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 114 182 (302) 1,150
OTHER EXPENSE
Interest expense 46 49 121 174
Income tax expense 523 42 1,104 392
----------- ----------- ----------- -----------
(LOSS) INCOME FROM
CONTINUING OPERATIONS (455) 91 (1,527) 584
Loss from discontinued
operations (net of tax
benefit --- --- --- (80)
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (455) $ 91 $ (1,527) $ 504
=========== =========== =========== ===========
(LOSS) INCOME PER SHARE
FROM CONTINUING OPERATIONS
- BASIC $ (0.06) $ 0.01 $ (0.21) $ 0.09
=========== =========== =========== ===========
(LOSS) INCOME PER SHARE
FROM CONTINUING OPERATIONS
- DILUTED $ (0.06) $ 0.01 $ (0.21) $ 0.08
=========== =========== =========== ===========
(LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS
- BASIC AND DILUTED $ --- $ --- $ --- $ (0.01)
=========== =========== =========== ===========
NET (LOSS) INCOME PER
SHARE - BASIC $ (0.06) $ 0.01 $ (0.21) $ 0.08
=========== =========== =========== ===========
NET (LOSS) INCOME PER
SHARE - DILUTED $ (0.06) $ 0.01 $ (0.21) $ 0.07
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- BASIC 7,227 6,828 7,227 6,644
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- DILUTED 7,227 7,195 7,227 6,915
=========== =========== =========== ===========
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 Nine-Month
Periods Ended March 31,
-----------------------
2003 2002
----------- -----------
Cash flows from operating activities
Net (loss) income $ (1,527) $ 504
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 528 569
Loss on sale of property and equipment 26 2
Provision for doubtful accounts receivable 57 157
Common stock issued to ESSOP --- 106
Increase in tax valuation allowance 1,096 205
Changes in assets and liabilities
Decrease in accounts receivable 1,012 201
Increase in prepaids and other assets (59) (49)
(Decrease) increase in accounts payable (1,840) 943
Decrease in accrued salaries and vacation (496) (525)
Increase (decrease) in other liabilities 870 (1,044)
----------- -----------
Net cash (used) provided by
continuing operations (333) 1,069
Changes in net assets/liabilities of
operations (42) (144)
----------- -----------
Net cash (used) provided by
operating activities (375) 925
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment (369) (548)
----------- -----------
Cash flows from financing activities
Net borrowings (payments) on bank line
of credit 743 (1,267)
Proceeds from issuance of the Company's
common stock 1 969
Purchase of treasury stock --- (79)
----------- -----------
Net cash provided (used) by
financing activities 744 (377)
----------- -----------
Net change in cash and cash equivalents --- ---
Cash and cash equivalents at the beginning
of the period 113 58
----------- -----------
Cash and cash equivalents at the end of
the period $ 113 $ 58
=========== ===========
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 113 $ 191
Income taxes 77 111
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 March 31, 2003, and the results of operations for
the three-month and nine-month periods ended March 31, 2003 and
2002. 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 costs
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.
(D) Income Taxes
At March 31, 2003, 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 $4.6 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.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
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 three
hundred basis points (4.07% of March 31, 2003). 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 March 31, 2003 was approximately $2,418,000.
Advances under the line are due upon demand or on November 30,
2004. The loan has certain covenants related to maintenance of
financial ratios. At March 31, 2003, the Company did not meet
the financial covenants due to the performance in the third
quarter of fiscal year 2003. The Company obtained a temporary
waiver of the bank covenants through June 30, 2003 and reduced
the line of credit to $5,000,000 as part of the waiver. The
Company is currently negotiating with the Bank to amend its line
of credit agreement and anticipates that it will be completed
during the fourth quarter of fiscal year 2003. The Company
cannot give assurance that the amendment will have similar terms
to the existing agreement.
(F) 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.
(G) 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.
(H) 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), which is now part of the
Architecture and Engineering reporting unit. The Company
obtained an independent appraisal in accordance with SFAS No.
142. The appraisal, based upon the market value analysis,
indicated that there was no impairment of the goodwill of the
Architecture and Engineering reporting unit, as the fair value of
this business reporting unit was $3,187,000 and the carrying value
was $2,164,000.
(I) 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 three-month
and nine-month periods ended March 31, 2003, the assumed
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
exercise of the Company's outstanding stock options and warrants
of 106,655 and 80,682 shares using the Treasury Stock Method are
not included in the calculation as the effect would be anti-
dilutive.
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Weighted average common
shares outstanding
- basic 7,226,625 6,827,884 7,226,572 6,644,305
Assumed exercise of
options (treasury stock
method) --- 366,779 --- 270,979
----------- ----------- ----------- -----------
Weighted average common
shares outstanding
- basic/diluted 7,226,625 7,194,663 7,226,572 6,915,284
=========== =========== =========== ===========
(J) Common Stock
The Company issued 600 shares of common stock pursuant to
the exercise of stock options during the third quarter of fiscal
year 2003. In the nine months of fiscal year 2002, 369,911
shares of common stock were issued pursuant to the exercise of
stock options.
(K) 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,
and expire on June 14, 2007. 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, which expires on June 14,
2007.
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 issuable upon
exercise of the related warrants.
(L) 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. Such costs include lease
penalties, relocation, and other associated fees. Currently,
there is approximately $686,000 remaining in the reserve.
(M) 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-
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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. FAS 146 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.
The Company accounts for employee stock option grants using
the intrinsic method in accordance with Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees" and accordingly associated compensation expense, if
any, is measured as the excess of the underlying stock price over
the exercise price on the date of grant. The Company complies
with the disclosure option of Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148 "Accounting for Stock-
Based Compensation - Transition and Disclosure" which requires
pro-forma disclosure of compensation expense associated with
stock options under the fair value method.
The Company's pro forma information follows (in thousands,
except per share data):
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net (loss) income, as
reported (455) 91 (1,527) 504
Less: Total Stock-Based
Compensation determined
under the fair-value based
method (97) (27) (169) (81)
Pro-forma net (loss) income (552) 64 (1,696) 423
Net (loss) income per share
- basic, as reported (0.06) 0.01 (0.21) 0.08
Pro-forma net (loss) income
per share - basic (0.08) 0.01 (0.23) 0.06
Net (loss) income per share
- diluted, as reported (0.06) 0.01 (0.21) 0.07
Pro-forma net (loss) income
per share (0.08) 0.01 (0.23) 0.06
(N) 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, and detecting and destroying biological and
chemical agents.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
Summary financial information for each of the Company's
segments follows:
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SERVICE REVENUE
- -------------------
Environmental Services $ 5,466 $ 5,304 $ 15,896 $ 16,568
Architecture/Engineering 1,803 2,356 5,687 6,822
Defense Systems 1,574 1,679 4,555 5,096
----------- ----------- ----------- -----------
$ 8,843 $ 9,339 $ 26,138 $ 28,486
=========== =========== =========== ===========
OPERATING INCOME (LOSS)(A)
- --------------------------
Environmental Services $ 886 $ 882 $ 2,916 $ 4,154
Architecture/Engineering 236 207 835 567
Defense Systems 407 660 1,220 1,147
----------- ----------- ----------- -----------
1,529 1,749 4,971 5,868
Selling, general and
administrative expenses 1,415 1,567 4,473 4,718
Other expenses --- --- 800 ---
----------- ----------- ----------- -----------
$ 114 $ 182 $ (302) $ 1,150
=========== =========== =========== ===========
(A)Operating income is defined as net service revenue less direct
costs of services and overhead.
IDENTIFIABLE ASSETS March 31, 2003 June 30, 2002
- ------------------- -------------- -------------
Environmental Services $ 8,068 $ 7,780
Architecture/Engineering 5,282 5,346
Defense Systems 2,906 3,565
Corporate and Other 2,726 4,582
-------------- -------------
$ 18,982 $ 21,273
============== =============
10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Third 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, the success of 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 ability of the Company to negotiate
required amendments to its line of credit. 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 third quarter of fiscal year
2003 decreased by $3,859,000 (22%) compared to gross revenue for
the comparable period in fiscal year 2002. Approximately fifty
percent of the decrease was due to the anticipated winding down
of the Company's STEPO contract in the Defense segment. The
remaining decrease was primarily due to reduced construction
activities in the Company's Architecture and Engineering segment
and reduced subcontracted activities in the Company's
Environmental segment. With the winding down of the STEPO
contract, the Company currently estimates that gross revenues
will continue to be approximately 15% below fiscal year 2002
gross revenues as the Company has not been able to replace the
volume of the STEPO contract to date. Management has taken
action to reduce costs to balance the cost structure with the
lower volume.
Purchased services and materials for the third quarter of
fiscal year 2003 decreased by $3,363,000 (43%) compared to
comparable costs in the third quarter of fiscal year 2002.
Approximately sixty-five 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 reduced subcontracted activities in the Architecture and
Engineering and Environmental segments 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 5% compared to the third quarter of fiscal year
2002. The decrease is primarily due to the lower purchased
services and materials 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 83% in the third quarter of fiscal year 2003
compared to 81% in the third quarter of fiscal year 2002. The
increase in direct costs of services and overhead percentage in
the third quarter of 2003 was due to lower labor utilization
during the third quarter of fiscal year 2003.
Selling, general and administrative expenses approximated
16% of net service revenue in the third quarter of fiscal year
2003 compared to 17% in the third quarter of fiscal year 2002.
The decrease is primarily due to cost reduction efforts
implemented during fiscal year 2003 to balance costs with
revenues.
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Operating income for the third quarter of fiscal year 2003
was $114,000, a decrease of $68,000 compared to the third quarter
of fiscal year 2002. The decrease is primarily due to the
decrease in gross revenues and higher direct costs of services
and overhead as mentioned above.
Income tax expense for the third quarter of fiscal year 2003
increased by $481,000 compared to the comparable period of the
previous fiscal year. In the third quarter of fiscal year 2003,
the Company recorded an increase of $500,000 to the tax valuation
allowance due to the lower financial performance in fiscal year
2003. The Company has approximately $5.2 million in tax assets
of which a $4.6 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 third quarter of fiscal year 2003
was $455,000 compared to net income of $91,000 in the third
quarter of fiscal year 2002. The decrease is primarily due to
the increase in the deferred tax valuation allowance, the lower
gross revenues, and the higher direct costs of services.
Nine Months Comparison of Fiscal Years 2003 and 2002
- ----------------------------------------------------
Versar's gross revenues for the first nine months of fiscal
year 2003 decreased by $7,824,000 (15%) compared to the gross
revenue for the comparable period of fiscal year 2002.
Approximately sixty-five percent 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 primarily
due to the reduced anthrax detection and remediation activities
in the Company's Environmental segment.
Purchased services and materials for the first nine months
of fiscal year 2003 decreased by $5,476,000 (25%) compared to
comparable costs for the first nine months of fiscal year 2002.
The decrease is primarily due to 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 nine months of fiscal year
2003 decreased by 8% compared to the first nine months of fiscal
year 2002. Approximately fifty percent of the decrease was due
to the lower subcontracted activities in the Company's
Architecture and Engineering segment. The remaining balance is
due to reduced anthrax detection and remediation activities in
the Company's Environmental segment and the winding down of the
Company's STEPO contract as mentioned above.
Selling, general and administrative expenses approximated
17% of net service revenue in the first nine months of fiscal
year 2003, which was a slight increase over that reported in the
first nine months of fiscal year 2002. The actual dollar amount
of selling, general and administrative expenses decreased by 5%
in the first nine months of fiscal year 2003 as compared to the
comparable period in the prior fiscal year due to cost reduction
efforts.
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. Management believes the
elimination of these positions and reductions of occupancy
related expenses should improve operating profits starting in the
first quarter of fiscal year 2004.
12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Operating loss for the first nine months of fiscal year 2003
was $302,000, compared to the operating income of $1,150,000 in
the first nine months of fiscal year 2002. The operating loss in
fiscal year 2003 is primarily due to the non-recurring charge and
the reduction in gross revenues as mentioned above.
Interest expense for the first nine months of fiscal year
2003 was $53,000 lower than the comparable period for fiscal
year 2002. The decrease is primarily attributable to lower
interest rates on the Company's line of credit.
Income tax expense for the first nine months of fiscal year
2003 increased by $712,000 compared to the comparable period of
the previous fiscal year. The increase is due to the additional
increase of $1,096,000 in the Company's deferred tax valuation
allowance in the first nine months of fiscal year 2003.
Versar's net loss for the first nine months of fiscal year
2003 was $1,527,000 compared to net income of $504,000 for the
first nine months of fiscal year 2002. The decrease in income
was due to the additional reserve in the Company's deferred tax
valuation allowance, lower gross revenues, and the non-recurring
$800,000 charge recorded in the first quarter of fiscal year
2003.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at March 31, 2003 approximated
$7,043,000, an increase of $443,000 (7%) from June 30, 2002. The
increase was due to the reduction in accounts payable, which was
funded by the Company's long-term line of credit. The Company's
current ratio at March 31, 2003 was 1.87, which was higher than
the 1.70 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 three
hundred basis points (4.07% of March 31, 2003). 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 March 31, 2003 was approximately $2,418,000.
Advances under the line are due upon demand or on November 30,
2004. The loan has certain covenants related to maintenance of
financial ratios. At March 31, 2003, the Company did not meet
the financial covenants due to the performance in the third
quarter of fiscal year 2003. The Company obtained a temporary
waiver of the bank covenants through June 30, 2003 and reduced
the line of credit to $5,000,000 as part of the waiver. The
Company is currently negotiating with the Bank to amend its line
of credit agreement and anticipates that it will be completed
during the fourth quarter of fiscal year 2003. The Company
cannot give assurance that the amendment will have similar terms
to the existing agreement.
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 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 June 30, 2002.
Item 4 - Procedures and Controls
Within the ninety-day period 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 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 has amended its answer and
counterclaim and has moved for reconsideration. In the meantime,
plaintiffs have 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 counter claim
but that Versar could pursue its claim for fraud in other areas.
Written and oral discovery has commenced and is expected to be
completed by this summer. Trial is scheduled for December 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 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
____________
* Pursuant to Securities and Exchange Commission Release No. 33-
8212, this certification will be treated as "accompanying" this
Quarterly Report on Form 10-Q and not "filed" as part of such
report for purposes of Section 18 of the Exchange Act of 1934, as
amended (the "Exchange Act"), or otherwise subject to the
liability of Section 18 of the Exchange Act, and this
certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or
the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
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
Senior Vice President,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: May 15, 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 of, 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: May 15, 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 of, 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: May 15, 2003
/S/ Lawrence W. Sinnott
______________________________
Lawrence W. Sinnott
Senior Vice President and Chief Financial
Officer
18