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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, 2004 1-9309
______________ ______
Versar Inc.
__________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
________________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
________________________________ ____________________________________
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703)750-3000
____________________
Not Applicable
______________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
____ ____
Indicate 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 April 30, 2004
_____________________ _____________________________
$.01 par value 7,549,766
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, 2004 and June 30, 2003. 3
Consolidated Statements of Operations
for the Three-Month and Nine-Month
Periods Ended March 31, 2004 and 2003. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended March 31,
2004 and 2003. 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 14-15
ITEM 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 31, June 30,
2004 2003
____________ ____________
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 44 $ 81
Accounts receivable, net 13,712 13,864
Prepaid expenses and other current
assets 978 1,231
Deferred income taxes 184 184
____________ ____________
Total current assets 14,918 15,360
Property and equipment, net 2,068 2,164
Deferred income taxes 418 418
Goodwill 776 776
Other assets 544 618
____________ ____________
Total assets $ 18,724 $ 19,336
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Bank line of credit $ 1,419 $ 2,125
Accounts payable 3,872 3,160
Billing in excess of revenue --- 379
Accrued salaries and vacation 1,535 2,009
Other liabilities 2,178 2,747
____________ ____________
Total current liabilities 9,004 10,420
Other long-term liabilities 1,138 1,201
Liabilities of discontinued operations 315 319
____________ ____________
Total liabilities 10,457 11,940
____________ ____________
Stockholders' equity
Common stock, $0.1 par value;
30,000,000 shares authorized;
7,331,846 shares and 7,258,346 shares
issued at March 31, 2004 and
June 30, 2003, respectively;
7,319,206 and 7,245,706 shares
outstanding at March 31, 2004 and
June 30, 2003, respectively 73 73
Capital in excess of par value 20,490 20,349
Accumulated deficit (12,237) (12,967)
Treasury stock (59) (59)
____________ ____________
Total stockholders' equity 8,267 7,396
____________ ____________
Total liabilities and
stockholders' equity $ 18,724 $ 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
_______________________ _______________________
2004 2003 2004 2003
___________ ___________ ___________ ___________
GROSS REVENUE $ 15,130 $ 13,366 $ 43,023 $ 42,678
Purchased services and
materials, at cost 6,683 4,523 18,094 16,540
___________ ___________ ___________ ___________
NET SERVICE REVENUE 8,447 8,843 24,929 26,138
Direct costs of services
and overhead 6,956 7,314 19,877 21,167
Selling, general and
administrative expenses 1,427 1,415 4,192 4,473
Non-recurring charge --- --- --- 800
___________ ___________ ___________ ___________
OPERATING INCOME (LOSS) 64 114 860 (302)
OTHER EXPENSE
Interest expense 43 46 130 121
___________ ___________ ___________ ___________
INCOME (LOSS) BEFORE TAX 21 68 730 (423)
Income tax expense --- 523 --- 1,104
___________ ___________ ___________ ___________
NET INCOME (LOSS) $ 21 $ (455) $ 730 $ (1,527)
=========== =========== =========== ===========
NET INCOME (LOSS) PER
SHARE - BASIC $ --- $ (0.06) $ 0.10 $ (0.21)
=========== =========== =========== ===========
NET INCOME (LOSS) PER
SHARE - DILUTED $ --- $ (0.06) $ 0.10 $ (0.21)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
BASIC 7,304 7,227 7,275 7,227
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
DILUTED 7,737 7,227 7,583 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 Nine-Month
Periods Ended March 31,
__________________________
2004 2003
____________ ____________
Cash flows from operating activities
Net income (loss) $ 730 $ (1,527)
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities
Depreciation and amortization 489 528
Loss on sale of property and equipment 1 26
Provision for doubtful accounts
receivable 21 57
Increase in tax valuation allowance --- 1,096
Changes in assets and liabilities
Decrease in accounts receivable 131 1,012
Decrease (increase) in prepaids and
other assets 327 (59)
Increase (decrease) in accounts payable 712 (1,840)
Decrease in accrued salaries and
vacation (474) (496)
(Decrease) increase in other liabilities (1,011) 870
____________ ____________
Net cash provided by (used in)
continuing operations 926 (333)
Changes in net assets/liabilities of
discontinued operations (4) (42)
____________ ____________
Net cash provided by (used in)
oerating activities 922 (375)
____________ ____________
Cash flows used in investing activities
Purchase of property and equipment (394) (369)
____________ ____________
Cash flows from financing activities
Net (payment) borrowings on bank line of
credit (706) 743
Proceeds from issuance of the Company's
common stock 141 1
____________ ____________
Net cash (used in) provided by
financing activities (565) 744
____________ ____________
Net decrease in cash and cash equivalents (37) ---
Cash and cash equivalents at the beginning
of the period 81 113
____________ ____________
Cash and cash equivalents at the end of
the period $ 44 $ 113
============ ============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 120 $ 113
Income taxes 39 77
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. In accordance
with FASB Technical Bulletin 79-3, indebtedness under any
revolving facility containing such provisions should be
considered short term obligations. The reclassification 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 March 31, 2004, and the results of operations for
the three and nine-month periods ended March 31, 2004 and 2003.
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 March 31, 2004, 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
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
(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%
as of March 31, 2004). 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
March 31, 2004, the Company had outstanding borrowing of
$1,419,000 and unused borrowing availability of approximately
$3,581,000. The line is subject to renewal in November 2005.
The loan has certain covenants related to the maintenance of
financial ratios. At March 31, 2004, 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
prior sales 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 March 31, 2004 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 has begun its impairment analysis for 2004. The
outcome of such analysis will be finalized during the fourth
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 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 of 106,655
and 80,682 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
_______________________ _______________________
2004 2003 2004 2003
__________ __________ __________ __________
Weighted average
common shares
outstanding - basic 7,303,828 7,226,625 7,275,386 7,226,572
Assumed exercise
of options
(treasury stock
method) 432,894 --- 307,763 ---
__________ __________ __________ __________
Weighted average
common shares
outstanding -
basic/diluted 7,736,722 7,226,625 7,583,149 7,226,572
========== ========== ========== ==========
(J) Common Stock
The Company received proceeds of approximately $141,000 from
the issuance of 73,500 shares of common stock pursuant to the
exercise of stock options during the first nine 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 nine months of fiscal year 2004, the Company made
payments of approximately $192,000 and $55,000 related to
severance and occupancy expenses, respectively. In the second
and third quarters of fiscal year 2004, the Company reduced the
real estate reserve by approximately $75,000 due to the
successful reduction of office space in the regional offices.
Currently, there is approximately $247,000 remaining in the
accrued liability to cover remaining amounts expected to be paid
as a result of the restructuring.
(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. Upon adoption of FIN46, there was no impact to
the Company as it currently does not have any variable interest
entities.
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 value 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
_______________________ _______________________
2004 2003 2004 2003
__________ __________ __________ __________
Net income (loss), as
reported $ 21 $ (455) $ 730 $ (1,527)
Less: Total Stock-Based
Compensation determined
under the fair-value
method (103) (97) (259) (169)
Pro-forma net income (loss) (82) (552) 471 (1,696)
Net income (loss) per
share - basic, as
reported $ --- $ (0.06) $ 0.10 $ (0.21)
Pro-forma net income
(loss) per share - basic (0.01) (0.08) 0.06 (0.23)
Net income (loss) per
share - diluted, as
reported $ --- $ (0.06) $ 0.10 $ (0.21)
Pro-forma net income
(loss) per share (0.01) (0.08) 0.06 (0.23)
(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,
commercial and government 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
_______________________ _______________________
2004 2003 2004 2003
__________ __________ __________ __________
NET SERVICE REVENUE
___________________
Environmental Services $ 6,126 $ 5,466 $ 17,128 $ 15,896
Architecture/Engineering 1,210 1,803 4,070 5,687
Defense Systems 1,111 1,574 3,731 4,555
__________ __________ __________ __________
$ 8,447 $ 8,843 $ 24,929 $ 26,138
========== ========== ========== ==========
OPERATING INCOME (LOSS)(A)
__________________________
Environmental Services $ 1,483 $ 886 $ 4,019 $ 2,916
Architecture/Engineering 57 236 489 835
Defense Systems (49) 407 544 1,220
__________ __________ __________ __________
1,491 1,529 5,052 4,971
Selling, general and
administrative expenses 1,427 1,415 4,192 4,473
Non-recurring charge --- --- --- 800
__________ __________ __________ __________
$ 64 $ 114 $ 860 $ (302)
========== ========== ========== ==========
(A)Operating income is defined as net service revenue less direct
costs of services and overhead.
IDENTIFIABLE ASSETS March 31, 2004 June 30, 2003
___________________ ______________ _____________
Environmental Services $ 9,229 $ 8,388
Architecture/Engineering 5,262 5,735
Defense Systems 2,649 3,019
Corporate and Other 1,584 2,194
_________ _________
$ 18,724 $ 19,336
========= =========
10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
_____________________
Third 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, delays in 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 third quarter of fiscal year
2004 increased by $1,764,000 (13%) compared to gross revenue for
the comparable period in fiscal year 2003. The increase was
primarily due to increased revenues relating to remediation work
of $2,080,000 in the Company's Environmental segment for
additional remediation work subcontracted by the Company
reflecting the Company's expanding mold remediation services
offset in part by a reduction in revenue in the Defense segment
with the completion of the STEPO contract.
Purchased services and materials for the third quarter of
fiscal year 2004 increased by $2,161,000 (48%) compared to
comparable costs for the third quarter of fiscal year 2003. The
increase was primarily the result of increased payments to
subcontractor for the mold remediation work mentioned above.
Subcontracted construction costs also increased in the Company's
Architecture and Engineering segment by $583,000 as a result of
recently awarded contracts, which was in part offset by a
reduction of subcontracted costs in the Company's Defense segment
with the completion of its STEPO contract.
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 4% compared to the third quarter of fiscal year
2003. The decrease is primarily due to lower revenue generated
by direct labor of approximately $600,000 as compared to the
prior fiscal year in the Company's Architecture and Engineering
and Defense segments during the quarter.
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
remained approximately the same at 83% for the third quarter of
fiscal year 2004 and 2003. The third quarter has historically
been a difficult quarter for the Company as portions of its work
are effected by winter weather delays. During the third quarter
of fiscal year 2004, the Company experienced a two month
contractual delay in a large anticipated contract award in the
Architecture and Engineering segment, as well as, a reduction in
activity in the Company's chemical surety laboratory in the
Defense segment because of ongoing re-certification activities.
These events temporarily caused the direct costs of services and
overhead as a percentage of net service revenue to increase by 5%
over that reported for the second quarter of fiscal year 2004.
Selling, general and administrative expenses approximated
17% of net service revenue in the third quarter of fiscal year
2004 compared to 16% in the third quarter of fiscal year 2003.
The increase is primarily due to the
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
decrease in net service revenue. Selling, general and
administrative expenses increased slightly by $11,000 in the
third quarter of fiscal year 2004 as compared to the same
period of the prior fiscal year.
Operating income for the third quarter of fiscal year 2004
was $64,000, a decrease of $50,000 compared to the third quarter
of fiscal year 2003. The decrease is primarily due to the
contract delays in the Architecture and Engineering segment and
the reduced demand in the Company's chemical surety laboratory in
the Defense segment.
Interest expense for the third quarter of fiscal year 2004
was $43,000, a $3,000 decrease over that reported for the third
quarter of the prior fiscal year. The decrease is due to the
Company's decreased borrowings under its long-term line of
credit.
Income tax expense for the third quarter of fiscal year 2004
decreased by $523,000 compared to the third quarter of fiscal
year 2003. In the third quarter of fiscal year 2003, the Company
increased the deferred tax valuation allowance by $523,000 as a
result of losses during the year. No adjustment to the valuation
allowance was considered necessary for the current fiscal year.
The Company has approximately $4.4 million in tax assets of which
a $3.8 million valuation allowance has been reserved against the
assets. Management 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 income for the third quarter of fiscal year
2004 was $21,000 compared to a net loss of $455,000 in the third
quarter of fiscal year 2003. As mentioned above, third quarter
2003 included an adjustment to the deferred tax valuation
allowance of $523,000.
First Nine Months Comparison of Fiscal Year 2004 and 2003
_________________________________________________________
Versar's gross revenue for the first nine months of fiscal
year 2004 increased by $345,000 (1%) compared to gross revenue
for the comparable period in fiscal year 2003. The increase was
primarily due to higher revenues in the Environmental segment of
$6,351,000, which was offset by decreases in the Architecture and
Engineering and Defense segments. The higher Environmental
segment revenues relate primarily to subcontracted mold
remediation work in the Environmental segment. The decrease in
the Architecture and Engineering segment was primarily due to
reduced construction work and the delay in starting one major
project. The decrease in the Defense segment is due to the
completion of the Company's STEPO contract.
Purchased services and materials for the first nine months
of fiscal year 2004 increased by $1,554,000 (9%) over that
reported for the first nine months of fiscal year 2003. The
increase is primarily due to the subcontractor costs associated
with the increase in remediation activity as mentioned above.
Net service revenue for the first nine months decreased by
5% compared to the first nine months of fiscal year 2003. The
decrease is primarily due to lower revenue generated by direct
labor of approximately $1,200,000 as compared to the prior fiscal
year in the Architecture and Engineering and Defense segments.
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 direct costs and services to net
service revenue for the first nine months of fiscal year 2004
decreased to 80%, as compared to 81% for the first nine months of
fiscal year 2003. During the third quarter of fiscal year 2004,
the Company experienced a two month delay in a large anticipated
contract award in the Architecture and Engineering segment, as
well as, a reduced demand in the Company's chemical surety
laboratory in the Defense segment. These events resulted in an
increase in the direct costs of services and overhead by 2% over
that reported for the first six months of fiscal year 2004.
12
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Selling, general and administrative expenses approximated
17% of net service revenue for the first nine months of fiscal
years 2004 and 2003, respectively. The Company has been able to
balance its selling, general and administrative expenses to match
its business volume during the first nine months of fiscal year
2004.
In fiscal year 2003, the Company recorded a non-recurring
charge of $800,000 to reduce the Company's overall cost structure
and reduce costs in non-performing divisions.
Operating income for the first nine months of fiscal year
2004 was $860,000, an increase of $1,162,000 compared to the
first nine months of fiscal year 2003. The increase in operating
income is primarily due to the cost reductions and the non-
recurring charge that was taken in fiscal year 2003.
Interest expense for the third quarter of fiscal year 2004
was $130,000, a $9,000 increase over that reported in the prior
fiscal year. The increase was primarily due to increased
borrowings under the Company's line of credit in the first
quarter of fiscal year 2004.
Income tax expense decreased by $1,104,000 for the first
nine months of fiscal year 2004. The decrease is due to an
increase in the Company's tax valuation allowance of $1,104,000
in the first nine months of fiscal year 2003. No similar
adjustments have been required in fiscal year 2004.
Versar's net income for the first nine months of fiscal year
2004 was $730,000 compared to a net loss of $1,527,000 in the
first nine months of fiscal year 2003. The increase is the
result of improved financial performance, and the effect of the
non-recurring charges taken in 2003 and the adjustment to the
deferred tax valuation allowance in 2003.
Liquidity and Capital Resources
_______________________________
The Company's working capital at March 31, 2004 approximated
$5,914,000, an increase of $974,000 (20%) from June 30, 2003.
The increase was primarily due to improved financial performance,
which resulted in the paying down the Company's line of credit by
$706,000. The Company's current ratio at March 31, 2004 was
1.66, which was higher than the 1.47 reported on June 30, 2003.
Versar's line of credit with United Bank (Bank) provides for
advances up to $5,000,000 based upon qualifying receivables.
Interest on the borrowings is based on prime plus one percent
(5.0% as of March 31, 2004). 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, 2004 was approximately
$3,581,000. Advances under the line are due on November 2005.
The loan has certain covenants related to the maintenance of
financial ratios. At March 31, 2004, 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.
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, 2003.
Item 4 - Controls and Procedures
As of the last day of the period covered by this report
(March 31, 2004), 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 "Superfund
Site"), which provided that, based upon an existing performance
specification, Versar would refine the design of, and construct
and operate a soil vapor extraction system. During the
performance of the contract, disputes arose between Versar and
the Trustees regarding the scope of work. Eventually, Versar was
terminated by the Trustees for convenience. The Trustees then
failed to pay certain invoices and retainages due Versar.
On March 19, 2001, Versar instituted a lawsuit against the
Trustees and three environmental consulting companies in the U.S.
District Court of the Eastern District of Pennsylvania, entitled
Versar, Inc. v. Roy O. Ball, Trustee, URS Corporation,
Environmental Resources Management and Environ Corp., No.
01CV1302. Versar, in seeking to recover amounts due under the
remediation contract from the Trustees of the Superfund Site,
claimed breach of contract, interference with contractual
relationships, negligent misrepresentations, breach of good faith
and fair dealing, unjust enrichment and implied contract. Mr.
Ball and several defendants moved to dismiss the action or, in
the alternative, transfer the action to the U.S. District Court
for the Southern District of Indiana, where, on April 20, 2001,
the two Trustees had filed suit against Versar in the U.S.
District Court for the Southern District of Indiana, entitled,
Roy O. Ball and Norman W. Bernstein, Trustees v. Versar, Inc.,
Case No. IPO1-0531 C H/G. The Trustees alleged breach of
contract and breach of warranty with respect to the remediation
contract and asked for a declaratory judgment on a number of the
previously stated claims.
On July 12, 2001, the Federal District Court in Pennsylvania
granted defendants' motion to transfer the Pennsylvania lawsuit
and consolidate the two legal actions in Indiana. The Company
filed an answer and counterclaim to the Indiana lawsuit. The
plaintiffs and third-party defendants filed Motions to Dismiss
the Company's counterclaim. The court granted the motions in
part and denied them in part. Versar amended its answer and
counterclaim. In the meantime, plaintiffs filed a Motion for
Partial Summary Judgment which the Judge granted in part and
denied in part. The Judge held that certain agreements entered
into by the parties prevented Versar from recovering certain
amounts under its counterclaim but that Versar could pursue its
claim for fraud in other areas. Written and oral discovery has
commenced and is expected to be completed by late 2004. Trial is
scheduled for May 2005. 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.
14
Versar and its subsidiaries are parties from time to time to
various other legal actions arising in the normal course of
business. The Company believes that any ultimate unfavorable
resolution of these legal actions will not have a material
adverse effect on its consolidated financial condition and
results of operations.
Item 6 - Exhibits 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
On February 13, 2004, a Form 8-K, which reported the
Company's second quarter Results of Operations and
Financial Condition, was furnished to, but not filed with
the Securities and Exchange Commission.
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 11, 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: May 11, 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: May 11, 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 March 31, 2004 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
May 11, 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 March 31, 2004 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
May 11, 2004
20