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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
December 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
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 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 January 30, 2004
_____________________ _______________________________
$.01 par value 7,288,766
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, 2003 and June 30, 2003. 3
Consolidated Statements of Operations
for the Three-Month and Six-Month
Periods Ended December 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended
December 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 13
ITEM 4 - Procedures and Controls 13
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 13
ITEM 4 - Submission of Matters to a Vote of
Stockholders 14
ITEM 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 31, June 30,
2003 2003
____________ ____________
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 77 $ 81
Accounts receivable, net 12,673 13,864
Prepaid expenses and other current
assets 812 1,231
Deferred income taxes 184 184
____________ ____________
Total current assets 13,746 15,360
Property and equipment, net 2,062 2,164
Deferred income taxes 418 418
Goodwill 776 776
Other assets 578 618
____________ ____________
Total assets $ 17,580 $ 19,336
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable $ 3,275 $ 3,160
Bank line of credit 1,412 2,125
Billing in excess of revenue --- 379
Accrued salaries and vacation 1,944 2,009
Other liabilities 1,276 2,747
____________ ____________
Total current liabilities 7,907 10,420
Other long-term liabilities 1,243 1,201
Liabilities of discontinued operations 317 319
____________ ____________
Total liabilities 9,467 11,940
____________ ____________
Stockholders' equity
Common stock, $0.1 par value;
30,000,000 shares authorized;
7,262,746 shares and 7,258,346
shares issued at December 31,
2003 and June 30, 2003, respectively;
7,250,106 and 7,245,706 shares
outstanding at December 31, and
June 30, 2003, respectively 73 73
Capital in excess of par value 20,357 20,349
Accumulated deficit (12,258) (12,967)
Treasury stock (59) (59)
____________ ____________
Total stockholders' equity 8,113 7,396
____________ ____________
Total liabilities and
stockholders' equity $ 17,580 $ 19,336
============ ============
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,
__________________________ __________________________
2003 2002 2003 2002
____________ ____________ ____________ ____________
GROSS REVENUE $ 14,288 $ 15,428 $ 27,893 $ 29,312
Purchased services 6,035 6,157 11,411 12,017
____________ ____________ ____________ ____________
NET SERVICE REVENUE 8,253 9,271 16,482 17,295
Direct costs of
services and overhead 6,469 7,129 12,921 13,854
Selling, general and
administrative expenses 1,385 1,589 2,765 3,057
Non-recurring charge --- --- --- 800
____________ ____________ ____________ ____________
OPERATING INCOME (LOSS) 399 553 796 (416)
OTHER EXPENSE
Interest expense 33 43 87 75
____________ ____________ ____________ ____________
INCOME (LOSS) BEFORE TAX 366 510 709 (491)
Income tax expense --- 181 --- 581
____________ ____________ ____________ ____________
NET INCOME (LOSS) $ 366 $ 329 $ 709 $ (1,072)
============ ============ ============ ============
NET INCOME (LOSS) PER
SHARE - BASIC $ 0.05 $ 0.05 $ 0.10 $ (0.15)
============ ============ ============ ============
NET INCOME (LOSS) PER
SHARE - DILUTED $ 0.05 $ 0.05 $ 0.09 $ (0.15)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
BASIC 7,262 7,227 7,261 7,227
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
DILUTED 7,569 7,247 7,548 7,227
============ ============ ============ ============
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
__________________________
2003 2002
____________ ____________
Cash flows from operating activities
Net income (loss) $ 709 $ (1,072)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 322 352
Loss on sale of property and equipment 1 18
Provision for doubtful accounts
receivable 18 60
Increase in tax valuation allowance --- 574
Changes in assets and liabilities
Decrease (increase) in accounts
receivable 1,173 (912)
Decrease in prepaids and other assets 459 518
Increase (decrease) in accounts payable 115 (623)
Decrease in accrued salaries and
vacation (65) (84)
(Decrease) increase in other liabilities (1,808) 202
____________ ____________
Net cash provided by (used in)
continuing operations 924 (967)
Changes in net assets/liabilities of
discontinued operations (2) (39)
____________ ____________
Net cash provided by (used in)
operating activities 922 (1,006)
____________ ____________
Cash flows used in investing activities
Purchase of property and equipment (221) (250)
____________ ____________
Cash flows from financing activities
Net (payment) borrowings on bank line of
credit (713) 1,229
Proceeds from issuance of the Company's
common stock 8 ---
____________ ____________
Net cash (used in) provided by
financing activities (705) 1,229
____________ ____________
Net decrease in cash and cash equivalents (4) (27)
Cash and cash equivalents at the beginning
of the period 81 113
____________ ____________
Cash and cash equivalents at the end of
the period $ 77 $ 86
============ ============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 82 $ 64
Income taxes 31 73
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 accounting principles generally accepted in the
United States of America (US GAAP) 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, 2003 for
additional information.
The Company's revolving long-term line of credit has
been reclassified from a long term liability to a current
liability because the line of credit contains required
lock-box provisions as well as a subjective acceleration
clause if there were a material adverse change in the Company's
business. Such clauses contained in a revolving credit
agreement in accordance with FASB Technical Bulletin 79-3
should be considered short term obligations. The reclassi-
fication has no impact on the financial condition of the
Company.
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, 2003, and the results of operations
for the three and six-month periods ended December 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
US GAAP 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 December 31, 2003, the Company had approximately $4.4
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 $3.8 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
In September 2003, Versar entered into a new line of credit
facility with United Bank (Bank) that provides for advances up to
$5,000,000 based upon qualifying receivables. Interest on the
borrowings is based on prime plus one and a quarter percent
(5.25% as of December 31, 2003). 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. As
of December 31, 2003, the Company had outstanding borrowing of
$1,412,000 and unused borrowing availability of approximately
$3,588,000. The line is subject to renewal in November 2005.
The loan has certain covenants related to the maintenance of
financial ratios. At December 31, 2003, the Company met the
financial covenants. Management believes that cash generated
from operations and borrowings available from the line of credit
will be adequate to meet its working capital needs for fiscal
year 2004.
(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 relating to 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. Warranty
costs have decreased from $205,000 at June 30, 2003 to $68,000 at
December 31, 2003 as the Company's obligation to support such
products continues to expire.
(H) Goodwill and Other Intangible Assets
The Company's adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" eliminated the amortization of goodwill
relating to the acquisition of the Greenwood Partnership, P.C.,
which occurred in 1998. However, management is required to test
such goodwill for impairment annually. Goodwill relating to the
Greenwood Partnership acquisition resides in the Company's
Architecture and Engineering Reporting Unit (A&E Reporting Unit).
Impairment testing performed during the 3rd quarter of fiscal
year 2003 indicated that the fair value of the A&E Reporting Unit
exceeded its carrying value by approximately $100,000.
Management will perform impairment test for fiscal year 2004
during the 3rd quarter.
(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 six-month
period ended December 31, 2002, the assumed
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
exercise of the Company's outstanding stock options of 68,146
shares using the Treasury Stock Method are not included in the
following calculation as the effect would be anti-dilutive.
For the Three-Month For the Six-Month
Periods Ended December 31, Periods Ended December 31,
__________________________ __________________________
2003 2002 2003 2002
____________ ____________ ____________ ____________
Weighted average
common shares
outstanding - basic 7,262,072 7,226,546 7,260,928 7,226,546
Assumed exercise
of options (treasury
stock method) 307,393 20,753 287,360 ---
____________ ____________ ____________ ____________
Weighted average
common shares
outstanding -
basic/diluted 7,569,465 7,247,299 7,548,288 7,226,546
============ ============ ============ ============
(J) Common Stock
The Company received proceeds of approximately $8,000 from
the issuance of 4,400 shares of common stock pursuant to the
exercise of stock options during the first six months of fiscal
year 2004.
(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 being paid
quarterly over a period of two years. 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.
In the first six months of fiscal year 2004, the Company made
payments of approximately $148,500 and $24,000 related to
severance and occupancy expenses, respectively. In the second
quarter of fiscal year 2004, the Company reduced the real estate
reserve by approximately $69,000 due to the successful reduction
of office space in the regional offices. Currently, there is
approximately $327,000 remaining in the accrued liability.
(L) Recently Issued Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46
(FIN 46), "Consolidation of Variable Interest Entities." This
Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from
other parties. FIN 46 requires an enterprise to consolidate a
variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive
a majority of the entity's expected residual returns, or both.
FIN 46 also requires disclosures about unconsolidated variable
interest entities in which an enterprise holds a significant
variable interest. Application of FIN 46, as revised in December
2003, is required for financial statements of public entities
that have interest in variable interest entities, or potential
variable interest entities commonly referred to as special-
purpose entities for periods ending after December 15, 2003.
Application by public companies for all other types of entities
is required in financial statements for periods ending after
March 15, 2004. The Company does not expect the adoption of FIN
46 to have a material effect on its financial statements.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(M) Stock Based Compensation
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 related interpretations. 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 Six-Month
Periods Ended December 31, Periods Ended December 31,
__________________________ __________________________
2003 2002 2003 2002
____________ ____________ ____________ ____________
Net income (loss), as
reported $ 366 $ 329 $ 709 $ (1,072)
Less: Total Stock-Based
Compensation determined
under the fair-value
method (87) (76) (161) (116)
Pro-forma net income
(loss) 279 253 548 (1,188)
Net income (loss) per
share - basic, as
reported $ 0.05 $ 0.05 $ 0.10 $ (0.15)
Pro-forma net income
(loss) per share - basic 0.04 0.04 0.08 (0.16)
Net income (loss) per
share - diluted, as
reported $ 0.05 $ 0.05 $ 0.09 $ (0.15)
Pro-forma net income
(loss) per share 0.04 0.03 0.07 (0.16)
(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)
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 Six-Month
Periods Ended December 31, Periods Ended December 31,
__________________________ __________________________
2003 2002 2003 2002
____________ ____________ ____________ ____________
NET SERVICE REVENUE
___________________
Environmental Services $ 5,690 $ 5,672 $ 11,001 $ 10,430
Architecture/Engineering 1,343 1,927 2,861 3,884
Defense Systems 1,220 1,672 2,620 2,981
____________ ____________ ____________ ____________
$ 8,253 $ 9,271 $ 16,482 $ 17,295
============ ============ ============ ============
OPERATING INCOME (LOSS)(A)
__________________________
Environmental Services $ 1,381 $ 1,340 $ 2,536 $ 2,029
Architecture/Engineering 137 259 432 599
Defense Systems 266 543 593 813
____________ ____________ ____________ ____________
1,784 2,142 3,561 3,441
Selling, general and
administrative expenses 1,385 1,589 2,765 3,057
Non-recurring charge --- --- --- 800
____________ ____________ ____________ ____________
$ 399 $ 553 $ 796 $ (416)
============ ============ ============ ============
(A)Operating income is defined as net service revenue less direct
costs of services and overhead.
IDENTIFIABLE ASSETS December 31, 2003 June 30, 2003
___________________ _________________ _____________
Environmental Services $ 8,844 $ 8,388
Architecture/Engineering 4,274 5,735
Defense Systems 2,617 3,019
Corporate and Other 1,845 2,194
_________________ _____________
$ 17,580 $ 19,336
================= =============
10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
_____________________
Second Quarter Comparison of Fiscal Year 2004 and 2003
______________________________________________________
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
changes to or failure of the Federal government to fund certain
programs in which the Company participates. 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
2004 decreased by $1,140,000 (7%) compared to gross revenue for
the comparable period in fiscal year 2003. The decrease was
primarily due to a decrease in the subcontracting of construction
work by the Company and contract funding delays of $1,630,000 in
the Company's Architecture and Engineering segment and a $900,000
decrease in revenue from the completion of the Company's STEPO
contract in the Defense segment. Such decreases were offset in
part by increased gross revenue of $1,433,000 in the Company's
Environmental segment primarily in the area of mold remediation.
Purchased services and materials for the second quarter of
fiscal year 2004 decreased by $122,000 (2%) compared to
comparable costs for the second quarter of fiscal year 2003. The
decrease is primarily the result of the decrease in subcontracted
work in the Defense and Architecture and Engineering segments as
mentioned above.
Net service revenue is derived by deducting the costs 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 11% compared to the second quarter of fiscal year
2003. 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 78% in the second quarter of fiscal year 2004
compared to 77% in the second quarter of fiscal year 2003. The
increase is due to a temporary reduction in labor utilization as
a result of the reduced business volume during the second quarter
of fiscal year 2004. In addition, the Company reduced
approximately $69,000 of its real estate reserve with the
successful reduction of office space in its regional offices,
which was recorded as a credit to direct costs of services and
overhead.
Selling, general and administrative expenses approximated
17% of net service revenue for the second quarter of fiscal year
2004, which was approximately the same percentage in the second
quarter in fiscal year 2003. Therefore, the Company was able to
keep the costs in balance with the reduction in business volume.
Operating Income for the second quarter of fiscal year 2004
was $399,000, a decrease of $154,000 (28%) compared to the second
quarter of fiscal year 2003. The decrease was primarily the
result of the decrease in gross revenues.
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Interest expense for the second quarter of fiscal year 2004
decreased by $10,000 compared to the second quarter of fiscal
year 2003. The decrease is due to lower borrowings on the
Company's long term line of credit.
Income tax expense for the second quarter decreased by
$181,000 compared to the second quarter of fiscal year 2003. The
Company has approximately $4.4 million in tax assets of which a
$3.8 million valuation allowance has been reserved against these
assets. The valuation allowance will be adjusted in future
periods based upon the Company's ability to utilize such assets.
Versar's net income for the second quarter of fiscal year
2004 was $366,000 compared to $329,000 in the second quarter of
fiscal year 2003.
Six Months Comparison of Fiscal Years 2004 and 2003
___________________________________________________
Versar's gross revenues for the first six months of fiscal
year 2004 decreased by $1,419,000 (5%) compared to gross revenue
in the first six months of fiscal year 2003. The decrease was
primarily due to a reduction in subcontracted construction work
and project funding delays of $3,339,000 in the Company's
Architecture and Engineering segment and a decrease of $1,626,000
on revenue from the completion of the Company's STEPO contract in
the Defense segment. These decreases were in part offset by
increased gross revenue of $3,562,000 in the Company's
Environmental segment due to its expanding work in mold
remediation.
Purchased services and materials for the first six months of
fiscal year 2004 decreased by $606,000 (5%) compared to
comparable costs for the first six months of fiscal year 2003.
The decrease was primarily the result of the decrease in
subcontracted work mentioned above.
Net service revenue decreased by 5% in the first six months
of fiscal year 2004 compared to the first six months of fiscal
year 2003. The decrease is primarily due to the decrease in
gross revenues as mentioned above.
Direct costs of services as a percentage of net service
revenue decreased to 78% in the first six months of fiscal year
2004 as compared to 80% for the first six months of fiscal year
2003. The decrease is due to the Company's cost reduction
efforts to ensure that the cost structure is in line with the
business volume. In addition, the Company reduced approximately
$69,000 of its real estate reserve with the successful reduction
of office space in its regional offices, which was recorded as a
credit to direct costs of services and overhead.
Selling, general and administrative expenses approximated
17% of net service revenue in the first six months of fiscal year
2004 compared to 18% in the first six months of fiscal year 2003.
The decrease is primarily due to the cost reduction efforts
implemented during fiscal year 2003.
In the first quarter of fiscal year 2003, the Company
recorded an $800,000 non-recurring charge to reduce the Company's
overall cost structure and reduce costs in non-performing
divisions.
Operating income for the first six months of fiscal year
2004 was $796,000 compared to an operating loss of $416,000 in
the first six months of fiscal year 2003. The increase is
primarily due to improved cost controls and the absence of the
non-recurring charge recorded in the first quarter of fiscal year
2003.
Income tax expense decreased by $581,000 in the first six
months of fiscal year 2004. The decrease is due to an increase
in the Company's tax valuation allowance of $581,000 in the first
six months of fiscal year 2003. No similar adjustments were
required in 2004.
Versar's net income for the first six months of fiscal year
2004 was $709,000 compared to a net loss of $1,072,000 in the
first six months of fiscal year 2003. The increase is the result
of improved financial performance, the absence of non-recurring
charges and adjustment to the deferred tax valuation allowance.
12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Liquidity and Capital Resources
_______________________________
The Company's working capital at December 31, 2003
approximated $5,839,000, an increase of $899,000 (18%) from June
30, 2003. The increase was due to improved collections of
accounts receivable and the Company's ability to reduce
outstanding liabilities through improved financial performance.
The Company's current ratio at December 31, 2003 was 1.74, which
was higher than the 1.47 reported on June 30, 2003.
In September 2003, Versar entered into a new line of credit
facility with United Bank (Bank) that provides for advances up to
$5,000,000 based upon qualifying receivables. Interest on the
borrowings is based on prime plus one and a quarter percent
(5.25% as of December 31, 2003). 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. As
of December 31, 2003, the Company had outstanding borrowing of
$1,412,000 and unused borrowing availability of approximately
$3,588,000. The line is subject to renewal in November 2005.
The loan has certain covenants related to the maintenance of
financial ratios. At December 31, 2003, the Company met the
financial covenants. Management believes that cash generated
from operations and borrowings available from the line of credit
will be adequate to meet its working capital needs for fiscal
year 2004.
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.
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, 2003.
Item 4 - Controls and Procedures
As of the last day of the period covered by this report, the
Company carried out an evaluation, under the supervision and with
the participation by the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective, as of the last day of the period
covered by this report, to ensure that required information will
be disclosed on a timely basis in its reports under the Exchange
Act.
There were no changes in the Company's internal control over
financial reporting during the last quarter that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In August 1997, Versar entered into a contract with the
Trustees for the Enviro-Chem Superfund Site (the ASuperfund
Site@), which provided that, based upon an existing performance
specification, Versar would refine the design of, and construct
and operate a soil vapor extraction system. During the
performance of the contract, disputes arose between Versar and
the Trustees regarding the scope of work. Eventually, Versar was
terminated by the Trustees for convenience. The Trustees then
failed to pay certain invoices and retainages due Versar.
13
On March 19, 2001, Versar instituted a lawsuit against the
Trustees and three environmental consulting companies in the U.S.
District Court of the Eastern District of Pennsylvania, entitled
Versar, Inc. v. Roy O. Ball, Trustee, URS Corporation,
Environmental Resources Management and Environ Corp., No.
01CV1302. Versar, in seeking to recover amounts due under the
remediation contract from the Trustees of the Superfund Site,
claimed breach of contract, interference with contractual
relationships, negligent misrepresentations, breach of good faith
and fair dealing, unjust enrichment and implied contract. Mr.
Ball and several defendants moved to dismiss the action or, in
the alternative, transfer the action to the U.S. District Court
for the Southern District of Indiana, where, on April 20, 2001,
the two Trustees had filed suit against Versar in the U.S.
District Court for the Southern District of Indiana, entitled,
Roy O. Ball and Norman W. Bernstein, Trustees v. Versar, Inc.,
Case No. IPO1-0531 C H/G. The Trustees alleged breach of
contract and breach of warranty with respect to the remediation
contract and asked for a declaratory judgment on a number of the
previously stated claims.
On July 12, 2001, the Federal District Court in Pennsylvania
granted defendants' motion to transfer the Pennsylvania lawsuit
and consolidate the two legal actions in Indiana. The Company
filed an answer and counterclaim to the Indiana lawsuit. The
plaintiffs and third-party defendants filed Motions to Dismiss
the Company's counterclaim. The court granted the motions in
part and denied them in part. Versar amended its answer and
counterclaim. In the meantime, plaintiffs filed a Motion for
Partial Summary Judgment which the Judge granted in part and
denied in part. The Judge held that certain agreements entered
into by the parties prevented Versar from recovering certain
amounts under its counterclaim but that Versar could pursue its
claim for fraud in other areas. Written and oral discovery has
commenced and is expected to be completed by mid-2004. Trial is
scheduled for September 2004. 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.
Item 4 - Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders (the "Annual
Meeting") was held on November 19, 2003. The matters voted on at
the Annual Meeting were as follows:
(1) The Election of Directors
The election of ten nominees to serve as directors
of the Company was approved as indicated below:
For Withheld
____________ __________
Robert L. Durfee 6,612,904 54,088
Fernando V. Galaviz 6,600,218 66,774
James L. Gallagher 6,581,335 85,657
James V. Hansen 6,611,235 55,757
Amoretta M. Hoeber 6,595,563 71,429
Paul J. Hoeper 6,581,735 85,257
Michael Markels, Jr. 6,466,876 200,116
Amir A. Metry 6,499,072 167,920
Theodore M. Prociv 6,596,506 70,486
Benjamin M. Rawls 6,535,698 131,294
(2) Ratify the appointment of Grant Thornton LLP as
independent accountants for fiscal year 2004 was
ratified as follows:
For Against Abstain
______ _______ _______
6,575,443 76,939 14,610
14
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 and 31.2 - Certification pursuant to Securities
Exchange Act Section 13a-14.
32.1 and 32.2 - Certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Pursuant to the Securities Exchange Release No. 33-
8216, a Form 8-K, which reported the Company's first
quarter Results of Operations and Financial Condition,
was furnished to, but not filed with the Securities and
Exchange Commission on November 13, 2003.
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: February 12, 2004
16
Exhibit 31.1
CERTIFICATION BY THEODORE M. PROCIV PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13a-14
I, Theodore M. Prociv, Chief Executive Officer of Versar, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Versar, Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: February 12, 2004
/S/ Theodore M. Prociv
______________________________
Theodore M. Prociv
President and Chief Executive Officer
17
Exhibit 31.2
CERTIFICATION BY LAWRENCE W. SINNOTT PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13a-14
I, Lawrence W. Sinnott, Senior Vice President and Chief Financial
Officer of Versar, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Versar, Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: February 12, 2004
/S/ Lawrence W. Sinnott
______________________________
Lawrence W. Sinnott
Senior Vice President and Chief Financial
Officer
18
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Versar, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2003
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Theodore M. Prociv, Chief Executive
Officer and President of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material aspects, the financial condition and results
of operations of the Company.
/S/ Theodore M. Prociv
__________________________
Theodore M. Prociv
President and CEO
February 12, 2004
19
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Versar, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2003
as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Lawrence W. Sinnott, Senior Vice
President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material aspects, the financial condition and results of
operations of the Company.
/S/ Lawrence W. Sinnott
__________________________
Lawrence W. Sinnott
Senior Vice President and
Chief Financial Officer
February 12, 2004
20