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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 Commission File Number
Ended October 1, 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
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 November 1, 2004
--------------------- -------------------------------
$.01 par value 7,862,163
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
October 1, 2004 and June 30, 2004 3
Consolidated Statements of Operations
for the Three-Month Periods Ended
October 1, 2004 and September 30, 2003 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
October 1, 2004 and September 30, 2003 5
Notes to Consolidated Financial Statements 6-10
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11-12
ITEM 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 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS 16-19
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
October 1, June 30,
2004 2004
-------------- --------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 2,095 $ 817
Accounts receivable, net 14,090 14,144
Prepaid expenses and other
current assets 1,133 1,013
Deferred income taxes 168 168
-------------- --------------
Total current assets 17,486 16,142
Property and equipment, net 1,998 2,108
Deferred income taxes 501 501
Goodwill 776 776
Other assets 562 558
-------------- --------------
Total assets $ 21,323 $ 20,085
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable $ 5,521 $ 4,520
Billing in excess of revenue 495 433
Accrued salaries and vacation 1,929 1,967
Other liabilities 1,532 1,728
-------------- --------------
Total current liabilities 9,477 8,648
Other long-term liabilities 1,144 1,163
Liabilities of discontinued
operations, net 199 209
-------------- --------------
Total liabilities 10,820 10,020
-------------- --------------
Stockholders' equity
Common stock, $0.01 par value;
30,000 shares authorized; 7,852,613
shares and 7,837,033 shares issued
at October 1, 2004 and June 30, 2004,
respectively; 7,837,108 and 7,821,528
shares outstanding at October 1, 2004
and June 30, 2004, respectively 79 78
Capital in excess of par value 21,865 21,835
Accumulated deficit (11,369) (11,776)
Treasury stock (72) (72)
-------------- --------------
Total stockholders' equity 10,503 10,065
-------------- --------------
Total liabilities and
stockholders' equity $ 21,323 $ 20,085
============== ==============
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)
October 1, September 30,
2004 2003
------------ ------------
GROSS REVENUE $ 19,114 $ 13,605
Purchased services and
materials, at cost 9,927 5,376
------------ ------------
NET SERVICE REVENUE 9,187 8,229
Direct costs of services
and overhead 7,277 6,452
Selling, general and
administrative expenses 1,490 1,380
------------ ------------
OPERATING INCOME 420 397
OTHER EXPENSE
Interest expense 13 54
------------ ------------
INCOME BEFORE TAX 407 343
Income tax expense --- ---
------------ ------------
NET INCOME $ 407 $ 343
============ ============
NET INCOME PER SHARE - BASIC
AND DILUTED $ 0.05 $ 0.05
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 7,846 7,260
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 8,312 7,518
============ ============
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)
October 1, September 30,
2004 2003
------------ -------------
Cash flows from operating activities
Net income $ 407 $ 343
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 182 164
Provision for doubtful accounts receivable 1 10
Changes in assets and liabilities
Decrease in accounts receivable 53 928
(Increase) decrease in prepaids and
other assets (125) 415
Increase in accounts payable 1,001 1
Decrease in accrued salaries and vacation (38) (453)
Decrease in other liabilities (153) (799)
------------ -------------
Net cash provided by continuing
operating activities 1,328 609
------------ -------------
Changes in net liabilities of discontinued
operations (10) ---
------------ -------------
Net cash provided by operating
activities 1,318 (609)
------------ -------------
Cash flows used in investing activities
Purchase of property and equipment (71) (138)
------------ -------------
Cash flows from financing activities
Net payments on bank line of credit --- (473)
Proceeds from issuance of common stock 31 5
------------ -------------
Net cash provided by (used in)
by financing activities 31 (468)
------------ -------------
Net increase in cash and cash equivalents 1,278 3
Cash and cash equivalents at the beginning
of the period 817 81
------------ -------------
Cash and cash equivalents at the end
of the period $ 2,095 $ 84
============ =============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 9 $ 50
Income taxes 5 12
The accompanying notes are an integral part of these consolidated
financial statements.
5
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally
required by generally accepted accounting principles or those
normally made in Versar, Inc.'s Annual Report on Form 10-K filed
with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the Company's
Annual Report filed on Form 10-K for the year ended June 30, 2004
for additional information.
Effective July 1, 2004, the Company changed its fiscal
reporting period from the last day of the calendar month end to
the last Friday closest to the calendar month end. As such, the
first quarter of fiscal year 2005 ended on October 1, 2004.
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 October 1, 2004, and the results of operations for
the three-month periods ended October 1, 2004 and September 30,
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
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ
from those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost
incurred plus accrued profits or net estimated realizable value
of incurred costs, reduced by progress billings. The Company
records income from major fixed-price contracts, extending over
more than one accounting period, using the percentage-of-
completion method. During performance of such contracts,
estimated final contract prices and costs are periodically
reviewed and revisions are made as required. The effects of
these revisions are included in the periods in which the
revisions are made. On cost-plus-fee contracts, revenue is
recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours
delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known.
Disputes arise in the normal course of the Company's business on
projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in
contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved
change orders in the process of negotiation, are recorded at the
lesser of their estimated net realizable value or actual costs
incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized
where loss is considered probable and reasonably determinable in
amount. Management reviews outstanding receivables on a regular
basis and assesses the need for reserves taking into
consideration past collection history and other events that bear
on the collectibility of such receivables.
(D) Income Taxes
At October 1, 2004, the Company had approximately $4.5
million in 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. The valuation
allowance is adjusted
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
periodically based upon management's assessment of the Company's
ability to derive benefit from the deferred tax assets.
(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 half percent (6.25%
as of October 1, 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. There
were no outstanding borrowings on the line of credit as of
October 1, 2004. The line is subject to renewal in November
2005. The loan has certain covenants related to the maintenance
of financial ratios. At October 1, 2004, the Company was in
compliance with the financial covenants.
(F) Discontinued Operations
In fiscal year 1998, the Company discontinued a significant
portion of the operations of Science Management Corporation (SMC).
As such, the Company disposed of portions of SMC and wound down
the remaining assets and liabilities. The remaining liability at
October 1, 2004 of $109,000 is primarily reserved to wind down
the remaining benefit plans of SMC.
(G) 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.
(H) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed (Versar Global
Solutions, Inc. or VGSI). The transaction was accounted for as a
purchase. Goodwill resulting from this transaction was
approximately $1.1 million. In fiscal year 2003, the Company
adopted the Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" which eliminated
the amortization of goodwill, but does require the Company to
test such goodwill for impairment annually. Currently, the
carrying value of goodwill is approximately $776,000 relating to
the acquisition of VGSI, which is now part of the Engineering &
Construction (E&C) reporting unit. In performing its goodwill
impairment analysis, management has utilized a discounted cash
flow model to determine the estimated fair value of the E&C
reporting unit. This model requires management, among other
things, to estimate future revenue and expenses of the E&C
reporting unit based upon current contract backlog and projected
growth resulting from new business. Management engages outside
professionals and valuation experts, as necessary, to assist in
performing this analysis.
For fiscal years 2004 and 2003, management concluded, based
upon its impairment analysis, that goodwill relating to the E&C
reporting unit was not impaired. Goodwill impairment testing for
fiscal year 2005 will be performed in the fourth quarter.
(I) Net Income Per Share
Basic net income per common share is computed by dividing
net income by the weighted average number of common shares
outstanding during the period. Diluted net income per common
share also includes common
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
stock equivalents outstanding during the period if dilutive. The
Company's common stock equivalents shares consist of stock
options.
For the Three-Months Periods Ended
----------------------------------
October 1, September 30,
2004 2003
--------------- ---------------
Weighted average common shares
outstanding - basic 7,845,905 7,259,770
Assumed exercise of options
(treasury stock method) 466,538 257,871
--------------- ---------------
Weighted average common shares
outstanding - diluted 8,312,443 7,517,641
=============== ===============
(J) Common Stock
The Company issued 15,580 shares of common stock upon the
exercise of stock options during the first quarter of fiscal year
2005. Total proceeds from the exercise of such stock options
were approximately $31,000.
(K) 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 variable
interest entities defined as certain entities in which the equity
investors lack certain characteristics of a controlling financial
interest or have insufficient equity investment 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 have any variable
interest entities and as such, the adoption of FIN46 did not have
a significant impact on the Company's financial position or
results of operations.
In May 2003, the FASB issued, Statement of Financial
Accounting Standard No. 150 (SFAS 150), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity." SFAS 150 changes the classification in the
statement of financial position of certain common financial
instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS 150 requires an issuer to classify
the following financial instruments as liabilities: a)
mandatorily redeemable preferred and common stocks; b) forward
purchase contracts that obligate the issuer to repurchase shares
of its stock by transferring assets; c) freestanding put options
that may obligate the issuer to repurchase shares of its stock by
transferring assets; and d) freestanding financial instruments
that require or permit the issuer to settle an obligation by
issuing a variable number of its shares if, at inception, the
monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in
something other than the issuer's shares, such as the price of
gold multiplied by a fixed notional amount, or variations
inversely related to changes in the value of the issuer's shares,
such as a written put option that can be net share settled. The
effect of adopting SFAS 150 will be recognized as a cumulative
effect of an accounting change as of the beginning of the period
of adoption. Restatement of prior
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
periods is not permitted. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and, with
one exception, is effective at the beginning of the first interim
period beginning after June 15, 2003 (July 1, 2003 for calendar
year companies). Since the Company does not have any financial
instruments that meet the criteria of SFAS 150, the adoption did
not have an impact on the Company's financial position or results
of operations.
(L) 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 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 Periods Ended
---------------------------------
October 1, September 30,
2004 2003
--------------- ---------------
Net income, as reported $ 407 $ 343
Less: Total Stock-Based
Compensation determined under
the fair-value based method (102) (75)
Pro-forma net income 305 268
Net income per share - basic, as
reported $ 0.05 $ 0.05
Pro-forma net income per share
- basic 0.04 0.04
Net income per share - diluted,
as reported $ 0.05 $ 0.05
Pro-forma net income per share 0.04 0.04
(M) Business Segments
Effective July 1, 2004, the Company renamed and made minor
organizational changes to its business segments. The
Environmental Business segment has been renamed to the
Infrastructure and Management Services segment and now includes
the Company's Pennsylvania, Ohio, and Arizona offices which were
formerly part of the Architecture and Engineering business
segment. The Architecture and Engineering business segment has
been renamed the Engineering and Construction segment and now is
focused on larger construction projects. The Defense segment has
been renamed the National Security segment. Previous year
segment information has been reclassified to conform to the
current presentation.
The Infrastructure and Management 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 Engineering
and Construction segment provides engineering, design and
construction management to industrial and commercial facilities.
The National Security 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)
Management 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 Periods Ended
---------------------------------
October 1, September 30,
2004 2003
--------------- ---------------
GROSS REVENUE
- -------------
Infrastructure and Management
Services $ 10,884 $ 10,344
Engineering and Construction 5,733 1,547
National Security 2,497 1,714
--------------- ---------------
$ 19,114 $ 13,605
=============== ===============
NET SERVICE REVENUE
- -------------------
Infrastructure and Management
Services $ 6,540 $ 5,923
Engineering and Construction 993 906
National Security 1,654 1,400
--------------- ---------------
$ 9,187 $ 8,229
=============== ===============
OPERATING INCOME(A)
- -------------------
Infrastructure and Management
Services $ 1,408 $ 1,232
Engineering and Construction 298 218
National Security 204 327
--------------- ---------------
1,910 1,777
Selling, general and
administrative expenses 1,490 1,380
--------------- ---------------
$ 420 $ 397
=============== ===============
(A)Operating income is defined as net service revenue less
direct costs of services and overhead.
IDENTIFIABLE ASSETS October 1, June 30,
- ------------------- 2004 2004
--------------- ---------------
Infrastructure and Management
Services $ 8,607 $ 10,856
Engineering and Construction 6,338 3,762
National Security 2,138 2,997
Corporate and Other 3,854 2,470
--------------- ---------------
$ 20,937 $ 20,085
=============== ===============
10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
First Quarter Comparison of Fiscal Year 2005 and 2004
- -----------------------------------------------------
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, and
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 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.
Gross Revenue for the first quarter of fiscal year 2005 was
$19,114,000, a $5,509,000 (40%) increase over that reported in
the first quarter of fiscal year 2004. Approximately 62% of the
increase is attributable to significantly higher subcontracted
construction work in the Engineering and Construction Services
business segment in support of the Air Force roofing project.
The balance of the increase was primarily in the Infrastructure
and Management Services business segment in support of Air Force
remediation work.
Purchased Services and materials increased by $4,551,000
(85%) in the first quarter of fiscal year 2005 compared to that
reported in the first quarter of fiscal year 2004. Approximately
90% of the increase was due to increased subcontractor activity
in the Engineering and Construction business segment in support
of the Air Force and other government agencies.
Net service revenue is derived by the deducting of 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's labor force. Net
service revenue increased by 12% in the first quarter of fiscal
year 2005 primarily due to the profit on the higher subcontracted
construction activities as mentioned above.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable and
unallowable costs that are directly attributable to contracts.
The percentage of these costs to net service revenue increased to
79.2% in the first quarter of fiscal year 2005 compared to 78.4%
in the first quarter of fiscal year 2004. The increase was
primarily due to the lower labor utilization resulting in higher
indirect labor costs in the National Security business segment
with the continued reduced volume in the chemical and biological
laboratories.
Selling, general and administrative expenses approximated
16.2% of net service revenue in the first quarter of fiscal year
2005, compared to 16.8% in fiscal year 2004. The decrease is
primarily due to the increased business volume in first quarter
of fiscal year 2005, while expenses were relatively stable.
Operating income for the first quarter of fiscal year 2005
was $420,000, a 6% increase over that reported in the prior
fiscal year. The increase is primarily due to growth in revenue
as mentioned above.
11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Interest expense for the first quarter of fiscal year 2005
was $13,000, a decrease of $41,000 (76%) over that reported in
the prior fiscal year. The decrease was due to the Company's
improved financial performance, which has resulted in the Company
paying off the Company's line of credit and significantly
reducing the Company's reliance on its line of credit to meet the
working capital requirements.
Versar's net income for the first quarter of fiscal year
2005 was $407,000 compared to $343,000 in the prior fiscal year.
The improved earnings were primarily attributable to the increase
in gross revenue as well as the reduced interest costs in the
first quarter of fiscal year 2005.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital as of October 1, 2004
approximated $8,009,000, an increase of $515,000 (7%) compared to
the prior fiscal year. The increase is primarily due to the
improved operating cash flows in the first quarter of fiscal year
2005. In addition, the Company's current ratio at October 1,
2004 was 1.85, which was slightly higher than that reported on
June 30, 2004.
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 and a half
percent (6.25% as of October 1, 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 October 1, 2004 was $5,000,000.
The line is subject to renewal in November 2005. The loan has
certain covenants related to the maintenance of financial ratios.
At October 1, 2004, the Company was in compliance with the
financial covenants. The Company intends to expand approximately
$450,000 for capital purposes, primarily associated with updating
existing information technology systems. Such working capital
requirements will be funded through the use of existing cash or
the Company's lease line of credit.
Impact of Inflation
- -------------------
Versar seeks to protect itself from the effects of
inflation. The majority of contracts the Company performs are
for a period of a year or less or are cost plus fixed-fee type
contracts and, accordingly, are less susceptible to the effects
of inflation. Multi-year contracts provide for projected
increases in labor and other costs.
12
Item 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, 2004.
Item 4 - Procedures and Controls
As of the last day of the period covered by this report, the
Company carried out an evaluation, under the supervision of 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 such
date, 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, 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 has continued for several years. The court
recently granted Versar's demand that the Trustees supply
requested information and documents. Versar continues to seek
additional discovery compliance by the Trustees. Discovery is
expected to be completed by the end of calendar 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.
13
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
Pursuant to the Securities Exchange Release No. 33-
8216, Form 8-K, which reported the Company's annual
Results of Operations and Financial Condition, was
furnished to, but not filed with the Securities and
Exchange Commission on September 16, 2004.
14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VERSAR, INC.
------------
(Registrant)
/S/ Theodore M. Prociv
By:________________________
Theodore M. Prociv
Chief Executive Officer,
President, and Director
/S/ Lawrence W. Sinnott
By:________________________
Lawrence W. Sinnott
Senior Vice President,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: November 8, 2004
15
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: November 8, 2004
/S/ Theodore M. Prociv
______________________________
Theodore M. Prociv
President and Chief Executive Officer
16
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: November 8, 2004
/S/ Lawrence W. Sinnott
______________________________
Lawrence W. Sinnott
Senior Vice President and Chief Financial
Officer
17
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 October 1, 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
November 8, 2004
18
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 October 1, 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
November 8, 2004
19