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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE
JUNE 30, 1996 NO. 1-9309
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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 offices) (Zip code)
(703) 750-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
AMERICAN STOCK EXCHANGE
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of Act: NONE
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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of September 3, 1996 was approximately $7,804,674.
The number of shares of Common Stock outstanding as of September 3,
1996 was 4,996,053.
The Exhibit Index required by 17 CFR Part 240.0-3(c) is located on
Pages 21 through 25 hereof.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the 1996 Annual Meeting of
Stockholders scheduled to be held on November 14, 1996 are incorporated by
reference into Part III thereof.
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PART I
ITEM 1. BUSINESS
BACKGROUND & PERSPECTIVE
Versar, Inc. ("Versar" or "the Company"), founded in 1969, is a
nationally recognized environmental engineering and consulting firm. From a
network of 17 offices nationwide, Versar specializes in providing environmental
risk and infrastructure management services to industry, government, and
commercial clients.
For the past five years, management has focused on rebuilding and
restructuring Versar by establishing a focus and direction for the Company,
increasing sales volume, reducing the overhead cost structure, disposing of
highly leveraged real estate, divesting of unprofitable laboratory operations,
reducing high legal fees and increasing cash flow.
Versar has successfully completed its rebuilding and restructuring
efforts by completing the refinancing in January 1996 of its former real estate
operations spun-off to shareholders in June 1994. We have just completed our
ninth consecutive profitable quarter and increased our funded backlog by 36
percent in fiscal year 1996. In addition, our sales volume has increased to
$44 million or 13 percent over fiscal year 1995 and profitability improved by
more than 100 percent.
Versar has recently been ranked by Engineering New Record as 68th out
of the top 200 environmental firms in gross revenue and 17th out of the top 50
based on growth in new contracts in 1995 in the United States.
A BUSINESS APPROACH TO ENVIRONMENTAL MANAGEMENT
Management, while continuing to strengthen the Company's basic
operations in all areas of the organization, is also assessing the changing
market conditions and repositioning Versar for continued growth and enhanced
profitability. The 1990s continue to be a period of change as Government and
industry re-size their organizations and re-focus their operations on ways to
improve productivity and reduce costs. Versar believes that with this change
will come new business decision-making that no longer sees environment, health
and safety issues as a "cost of doing business," but rather a way to "achieve
economic benefit and competitive advantage" by preventing pollution, conserving
raw resources and protecting their workforce.
Versar is at the forefront in helping its clients capture the benefits
of this new approach to business. Having long recognized the limitations of
regulatory driven environmental, health and safety programs, Versar has focused
on the economic benefits of an alternative approach to environmental
management. This approach places the customers business objectives at the
center of the decision-making process, and then addresses the environmental,
health and safety issues in such a way that they compliment those objectives
while complying with the regulations. Beyond simple compliance, it challenges
Versar's expertise to develop alternatives that enhance the client's
productivity and reduce the unit cost of operations.
Versar is consolidating all of its services under the umbrella of
Strategic Environmental Management (SEM). SEM involves a shift from dealing
with the effects of regulations and waste generation in a reactive manner to
working proactively with clients to address new ways of dealing with wastes and
associated environmental expenditures. This involves moving upstream to
identify process inefficiencies which create waste and increase environmental
management costs. Environmental consulting and engineering services and
technologies are applied to minimize waste thereby reducing raw material and
eliminating disposal costs. With our background knowledge of regulations,
Versar helps clients comply with existing and future environmental standards.
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Manufacturers today are taking advantage of technology to improve
environmental performance and bolster profits. In doing so, companies are
turning to solutions that address pollution prevention as an integral part of
plant operations and control.
Versar, together with its alliance partners Honeywell and Pavilion
Technologies, offers the Environmental Compliance Management System (ECMS).
The uniquely integrated solution employs a variety of state-of-the-art
technologies and services to control operations -- not pollution.
This comprehensive solution addresses and serves the full range of
compliance and management requirements and balances environmental concerns with
economic objectives. This approach maximized environmental performance while
minimizing compliance costs. The result is cost-effective compliance and
increased profits from optimizing process and production operations. Versar's
ECMS is an important element of Honeywell's TOTALPLANT open solutions --
integrated and industry-focused applications. The ECMS is hosted on the new
generation of Honeywell's TDC 3000 industrial automation system or SCAN 3000
control system.
Technology is providing the tools that allow us to treat environmental
performance as a competitive advantage rather than a cost burden, by
integrating it into operational continuous improvement programs. Making this
shift requires a change in the way we think about the issue. We must evaluate
and implement pollution prevention measures from a business perspective. The
key to a long-term pollution prevention strategy will be our ability to
evaluate our performance and to mainstream environmental management functions
into the operations of our plants.
Over the last three years, Versar has substantially increased its
total contract backlog to $325 million, much of which is in the cutting edge
areas of pollution prevention, compliance management, and resource management
support services to Government and industry. Versar will continue to grow as
it expands its services to respond to the growing movement in Government and
industry toward privatization and out-sourcing of environmental infrastructure
services.
In 1996, Versar made its first investment in environmental
infrastructure management with the acquisition of Valu Add Management Services
(Valu Add). Valu Add brings extensive knowledge and experience to the Versar
team in consulting to industry, state, local, and foreign governments on
alternative approaches to optimize the management of their environmental
infrastructure and to consider alternative management options for capital
facility financing and operation.
In fiscal year 1997, Versar will be looking to build on this new
capability and further expand its service offerings to provide in-plant
continuing services to its clients through potential mergers and acquisitions.
ESTABLISHING THE FOUNDATION FOR THE FUTURE
Five years ago, Versar had many difficult issues to face. The Company
was highly leveraged; had many legal issues to deal with, and its cost
structure was significantly out of line with the sales volume. The Company
dealt with these issues as described below.
DEBT RETIREMENT AND COMPLETION OF REAL ESTATE SPIN-OFF
In fiscal year 1991, the Company had over $27 million in debt. Versar
was the most leveraged of all the publicly traded environmental engineering and
consulting firms, both from the perspective of total liabilities to equity as
well as debt to equity. The Company was faced with two problems: poor working
capital management and highly leveraged real estate debt. From fiscal years
1991 and through 1994, Versar was successful in reducing receivables as a
percentage of gross revenues by 15%. This helped the Company to cut in half
the outstanding debt by the end of fiscal year 1994.
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In June 1994, the Company attempted to spin-off the real estate
operations to its shareholders, yet Versar continued to guarantee the debt of
approximately $12.4 million and could not complete the spin-off due to the
guarantee. However, in January 1996, Sarnia was able to refinance the existing
debt and reduce Versar's guarantee from $12.4 million to $1.5 million. The
Company has taken a reserve against the guarantee, which will be reversed into
equity as the debt is paid down. With the refinancing, Versar was able to
complete the spin-off and significantly improve its balance sheet and bring in
line its financial ratios with its competitors.
LITIGATION
Since 1991, the Company has successfully resolved a number of
lawsuits. Due to the resolution of these lawsuits, legal costs have been
reduced by over $500,000 per year. These lawsuits presented a significant
drain of working capital and management time. While no assurance can be given
that a significant legal matter will not arise in the future, management has
devoted significant efforts to develop policies and procedures and program
management training to help mitigate future legal issues. See Item 3, Legal
Proceedings, for a discussion of current litigation involving the Company.
COST REDUCTIONS
The Company had several cost issues to deal with over the past five
years. They include staffing, computer systems, and occupancy expense. While
staffing will always remain the backbone of the consulting business,
administrative and technical staffing had to be balanced to the Company's
current and future sales volume. The company reduced administrative staff,
consolidated many duplicate functions, and consolidated its finance activities.
In addition, the Company reduced computer costs by over $1.5 million and
occupancy expense by over $1 million in its headquarters location in
Springfield, Virginia.
BUILDING THE BUSINESS BASE FOR FUTURE GROWTH
During fiscal year 1995, Versar won 15 large federal, state and
commercial contracts, which has boosted the Company's total backlog to $306
million. In fiscal year 1996, we increased total backlog to $325 million. Of
such backlog, approximately $32 million is funded, with the remaining $293
million of the backlog in unfunded contract capacity. Our challenge going
forward is to fully develop these new contracts and enhance the value of our
services by focusing on economic incentives and the application of new
technologies. For a further description regarding the Company's total backlog,
see "BACKLOG". The Company believes that its total backlog helps solidify its
business base and creates a framework for possible future growth.
By having these contracts in place, the key to Versar's future revenue
growth will be to develop these contracts by obtaining task orders to utilize
the contracts capacities fully. While funding of these contracts is not
assured due to federal budgetary cutbacks and changes in government and
industry priorities, management is taking steps to develop task orders under
these contracts in order to realize the maximum revenues.
CONSULTING CORE BUSINESS
Versar works in partnership with government and industry by becoming
an involved member of its clients' organization, a client-centered approach
that builds client relationships, sets priorities, ensures proper allocation
and control of resources, supports and encourages synergistic activities among
the various elements of the organization, and monitors results. Our goal is to
help our clients build environmental performance into each aspect of their
organizational activities to enhance both their environmental performance and
improve their bottom line. Versar achieves this goal by helping clients to be
more active in preventing pollution, better manage the spectrum of
environmental compliance, and apply innovative and cost-effective approaches to
remediation or corrective action of past problems in our environment.
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Today's environmental challenges require an integrated
multidisciplinary team actively assisting clients in making informed decisions
and implementing them at the least cost. These challenges are driven by:
- Complex and changing environmental regulations and the
need for a more strategic approach to meet national
and international environmental challenges in a way
that allows industry to be profitable and competitive
in a world market.
- Increased emphasis on compliance management and
recognition that pollution prevention and waste
minimization are a necessary part of the long-term
solution to local and national environmental
challenges.
- Competition for limited resources and a need for new
and better technology to achieve pollution prevention
and remediation goals more cost effectively.
Versar helps its clients meet these challenges through its distinction
as a full-service firm that emphasizes:
- STRATEGIC PLANNING AND POLLUTION PREVENTION. These
are Versar's trademark services capitalizing on its
combined strengths in regulatory policy, information
management, pollution control and treatment technology
that emphasize pollution prevention.
- TOTAL COMPLIANCE MANAGEMENT. A strategic approach and
process of continuous improvement that permits senior
management to view environmental compliance
expenditures as business investments--an
"Environmental Balance Sheet." Versar consults at the
highest levels of industry and government where policy
decisions are made.
- CORRECTIVE/REMEDIAL ACTION. Program management and
integration services for corrective/remedial action
are necessary to assist our clients in getting better
results at lower costs. Versar is forging long-term
strategic relationships with technology based,
architect and engineering and construction firms to
provide a fully-integrated
consulting/engineering/construction capability.
STRATEGIC PLANNING AND POLLUTION PREVENTION
The Pollution Prevention Act of 1990 is the legislative driver that
initially forced regulators, industry, and government to look at alternative
approaches to environmental management. Provisions of the Resource
Conservation and Recovery Act (RCRA), the Clean Water Act, and the Clean Air
Act Amendments of 1990 also emphasize pollution prevention. Pollution
prevention planning is emerging as a new environmental ethic as regulators
strive to develop better incentives for voluntary reduction of emissions and
industries struggle to find better ways to meet environmental challenges in
today's world economy.
In 1991, the Environmental Protection Agency (EPA) issued a Pollution
Prevention Strategy that has led to several nationwide programs, such as the
33/50 Program, the Green Lights Program, and revisions to Emergency Planning
and Community Right-To-Know Act (EPCRA) including the Toxic Release Inventory
(TRI) Form R's, for reporting by industry on pollution prevention plans and
progress. Also, on August 3, 1993, President Clinton signed Executive Order
12856, which requires all federal facilities to reduce their emissions by 50
percent by 1999. The order further requires agencies to comply with EPCRA,
including annual submissions of TRI Form R reports.
More recently, State legislation and local ordinances have been
adopted to encourage pollution prevention. In the past five years, most states
have enacted some form of pollution prevention legislation that affects the way
some industries operate.
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Five years ago, Versar began emphasizing a strategic approach to
environmental management that focuses on the economic benefit and business
advantage of solving environmental problems from inside the plant or operation
rather than the end-of-pipe. This approach is founded on a pollution
prevention ethic, and a process of continuous improvement in operations that
eliminate unnecessary overhead, enhances productivity, and improves the bottom
line.
Versar has been actively involved in pollution prevention since 1985.
The Company has developed a core department of senior process and environmental
engineers who specialize in waste reduction engineering and design. Versar was
instrumental in developing the original Waste Minimization Opportunity
Assessment Manual for the EPA. This manual was subsequently adopted by many
industrial firms as the standard for pollution prevention audits. Versar
provides training to plant managers and engineers on how to focus on pollution
problems and identify effective pollution prevention activities. Versar works
with the managers on methods to audit their operations and identify the problem
areas. Versar has conducted several training workshops for industry and
Department of Defense (DOD), resulting in several significant process changes
being made by participating managers at their facilities. The DOD is
increasing its emphasis in the area of pollution prevention as a way to deal
with increasing pressures on the Federal budget and deficit reduction as the
military downsizes and realigns its mission. Several of Versar's new contracts
are specifically focused on pollution prevention and compliance management.
These include Wright-Patterson Air Force Base Aeronautical Systems Center, Air
Force Education and Training Command, and the Navy NFESC in Port Huenume,
California, and Weapons Systems Acquisition through the Air Force Human System
Center.
TOTAL COMPLIANCE MANAGEMENT
Versar is helping many of its clients make the change to an
incentive-based approach to compliance, limiting their liabilities to protect
their assets, while at the same time helping them remain competitive and
improve their profitability. Understanding the environmental consequences of
industrial processes starts with having the capability to monitor environmental
emissions and performance of all process elements.
Versar has developed specialized products to help its clients monitor
their operations, meet regulatory reporting requirements, and make more
informed decisions on investments that will enhance performance while reducing
environmental costs over the long term:
- Environmental Compliance Management System (ECMS) --
Versar's commercially available software, ECMS, is a
comprehensive, integrated information management system.
ECMS assists Versar's clients in managing environmental
data and generating regulatory reports, such as the Form
R, Discharge Monitoring Report, and Hazardous Waste
Manifest. ECMS stores monitoring data from environmental
compliance programs, provides reports for state and
federal agencies, projects potential compliance problems,
tracks environmental permits, and provides an automated
calendar of activities. Several Fortune 100 companies use
ECMS to manage their environmental data. Versar also has
used the system to manage compliance monitoring and
reporting at federal facilities.
- SARA Corporate System -- This Versar software product
allows the collection, management, and analysis of
corporate SARA Title III Form R data. The system
aggregates all Form R information for all chemical
releases, which allows prioritization of business
decisions. Form R data is used by industry for emergency
planning and demonstrating progress in emissions
reductions to regulatory agencies and the public.
Versar has entered into a "strategic alliance" with Honeywell
Industrial Automative and Control Group, aimed at supporting clients in
integrating environmental performance monitoring into plant operations by
linking Versar's ECMS with Honeywell's "Total Plant" TC 3000X master
controller. Our goal is to use this alliance to demonstrate that improved
economy and environmental performance can be achieved via pollution prevention
and risk reduction strategies through better plant control.
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Thus far, Versar has successfully linked its ECMS system to
Honeywell's TDC 3000X process controller so that plant operators can monitor
environmental performance in real time. We made our first major sale this past
year through Honeywell. We have also recently completed several small pilot
contracts. Honeywell is preparing formally to roll out to its clients its new
TCD 3000X with an Environmental Module, this fall. We expect the demand for
this kind of product integration to grow as the EPA and the states move forward
with its Enhanced Monitoring regulations.
COMPLIANCE ASSESSMENTS -- A key element in helping a client manage its
environmental, health and safety concerns is to establish a plan and conduct
comprehensive site/facilities assessments. Versar conducts a wide range of
assessments and audits of industrial and government facilities. We also have
initiated efforts to assist our clients in implementing the Standard ISO 9000
and pending ISO 14000 series requirements both to position the firm to provide
technical consulting services worldwide and to assist our clients in developing
and expanding overseas markets. We also now offer a turnkey "Total Compliance
Management" service to our customers with the goal of serving as their
environmental manager as they downsize and outsource more of their
environmental work.
Versar conducts nearly a thousand transactional environmental audits
annually for commercial and government clients. Many are performed at multiple
sites nationwide under urgent deadlines. Versar also conducts large-scale
environmental compliance assessments of major operating facilities for
government and industry. Versar has for many years provided compliance
management support to the DOD. As an example, for the Aeronautical Systems
Center (ASC) of the U.S. Air Force, Versar has routinely performed
environmental assessments at 11 government-owned, contractor-operated
facilities to monitor and improve environmental compliance and management. The
assessments followed the guidelines of the Air Force's Environmental Compliance
and Management Program (ECAMP), which is an intensive multimedia assessment
protocol for evaluating a facility's environmental management activities and
compliance status. Versar will continue to provide compliance, as well as
pollution prevention and engineering support, to ASC under our new $49 million
multiyear contract at Wright-Patterson AFB. We also expect to provide similar
services to the Air Force Education and Training Command as well as other DOD
facilities worldwide under our new $50 million Air Force Armstrong Laboratory
multiyear contract.
AIR QUALITY SERVICES -- Versar offers the following air services:
emissions inventories and inventory tracking, air toxics/risk assessments,
dispersion modeling, permitting/compliance status, and design and installation
of control technology. Special capabilities include Risk Management Planning
(RMP) services which are required under Section 112(r) of the Clean Air Act
Amendments of 1990. Versar also has experience with cost of air compliance
analysis which involves economic engineering analysis of control technologies.
This experience, coupled with strong air P2 and emission trading capabilities,
provides our clients with a wide range of options to choose from in responding
to any air issue. Versar has worked with over 100 industrial clients on air
quality matters, including mining, electric utilities, chemical manufacturing,
food processing, steel manufacturing, oil refineries, and other industries. We
have worked with industry groups in evaluating the impact of regulations and
helped them identify cost-effective strategies for complying with regulations.
Versar is helping industry groups to evaluate the impact of regulations and
helping them develop cost-effective strategies for compliance. Strategies vary
from recommending control technologies to achieving air P2 and creating
emissions trading opportunities. Versar has developed practical, innovative
approaches for estimating emissions, performing urban-scale dispersion modeling
analyses, and evaluating emerging control strategies for effectiveness and cost
efficiency.
Versar supported the DOD in determining the optimum strategy for
complying with the 1990 Clean Air Act Amendments (CAAA) for Army, Navy, and Air
Force bases. We have subsequently conducted emission inventories at over 40
installations and are in the process of supporting Title V permits for DOD
installations worldwide under our new $40 million multiyear contract with the
Norfolk District of the Army Corps of Engineers and the $50 million multiyear
contract with the Air Force's Armstrong Laboratory. Representing industry,
Versar participated in EPA roundtable discussions that helped focus the
development of new regulations implementing the new amendments. For the State
of Maryland, Versar prepared a regional assessment of the benefits of the
amended
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CAAA with respect to nitrate deposition in the Chesapeake Bay. As in the past,
Versar continues to provide permitting and compliance support to various
commercial, industry, and utility clients across the nation.
Research into air and meteorological issues has been a part of
Versar's business since its inception. Air research has included development
of new dispersion models that can better predict plume behavior. Air research
has also involved determining pollutant deposition patterns in support of the
Chesapeake Bay program. Meteorological research has included development of
artificial intelligence (AI) decision support systems for clients such as DOD
and utilities. Versar maintains a full weather center which has provided
support to a wide-variety of clients ranging from utilities and industry to
DOD.
INDOOR ENVIRONMENTAL AND ENERGY SERVICES -- Indoor air quality and
human comfort are two of the most important characteristics of the indoor
environment affecting human health as well as worker productivity. Research
indicates that pollutant levels in the air inside our homes and offices may be
two to five times higher than the air outside. Because people generally spend
75 to 90 percent of their time indoors, the quality of indoor air has become a
serious concern.
Versar's subsidiary, GEOMET Technologies, Inc., is one of the
pioneering firms in the area of indoor air quality, providing research and
technical services to government, industry, and private clients since the early
1970s. In support of its research programs, GEOMET has developed a wide range
of measurement and analysis capabilities that include radon, volatile organic
compounds (VOCs), biological aerosols, carbon monoxide, nitrogen dioxide,
particles, formaldehyde, inorganics, energy consumption, comfort factors, air
infiltration, and pressured differentials. Indoor air quality, comfort, and
energy studies have been performed in various types of environments, including
single-family homes, apartments, mobile homes, public access buildings,
laboratories, trains, and airline cabins.
GEOMET also provides energy conservation audit and support services.
Clients range from small businesses and utilities to the Federal government.
GEOMET is currently under contract to the General Services Administration to
provide comprehensive energy conservation services at GSA facilities within the
National Capitol Region and recently began work in support of EPA's Energy Star
Program. The Energy Star effort focuses on energy use and conservation
opportunities in buildings, plus environmental aspects of energy conservation.
GEOMET recently completed a successful program for the U.S. Postal Service
which included energy audits at 25 USPS facilities throughout the United
States.
PERSONAL PROTECTION EQUIPMENT/CHEMDEMIL
Support of the U.S. Army's efforts in Chemical Weapons
Demilitarization is an important business area for GEOMET. Current projects
include development of two different Personal Protective Equipment (PPE)
ensembles for use in the depots where chemical weapons are stockpiled and in
activities where exposure to chemical agents is likely, such as laboratory work
and emergency response. The ensembles include a protective suit, clean air
source, radio communications, and an individual cooling system for the worker.
GEOMET is a commercial supplier to remedial action contractors and others of
PPE specially qualified for chemical protection. As a member of the Small
Burials Contract Team, GEOMET is involved in the disposal of residual chemical
weapons material at sites throughout the United States. GEOMET's program, now
in its second year, includes outfitting and operating the mobile laboratory
which will support the disposal operations, design of air monitoring and
warning systems, specification of the PPE to be used, and other assignments
dealing with environmental compliance, development of operational procedures,
and program management.
CORRECTIVE/REMEDIAL ACTION
Versar applies both its strong regulatory foundation and its
experience base in compliance management to help clients take appropriate
corrective or remedial action in dealing with contamination and pollution
problems. Versar
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offers a strategic approach to accelerate cleanup and to reduce costs and
liability. For example, Versar completed a pilot demonstration at Langley,
AFB, in a partnering process whereby the federal and state regulators, the
Base, and other stakeholders agree on issues, the approach to their resolution,
and the use of alternative means of providing project oversight to reduce both
the time and cost of cleanup. Versar's project teams combine the best of its
regulatory, technology, design, and construction management expertise for each
project to ensure that the most cost-effective solutions are developed to meet
regulatory requirements. One integrated field team can support a project from
characterization of the site or problem through implementation of corrective
action or cleanup.
Versar emphasizes a turnkey approach to the investigation, design, and
remedial action process as much as practicable, whether it is a Resource
Conservation and Recovery Act; Comprehensive Environmental Response,
Compensation, and Liability Act; Clean Water Act; state "Brownfields" or other
response action. Examples of Versar's corrective/remedial action activities
include remedial planning and implementation, comprehensive tank management
services, and civil/infrastructure services.
REMEDIAL PLANNING AND IMPLEMENTATION -- Versar has extensive
experience in conducting multimedia investigations to characterize
environmental contamination. It has performed subsurface contaminant
investigations at multiple sites under contracts to the U.S. Army, Air Force,
Navy, Coast Guard, Department of Energy, several states, and numerous private
corporations. Versar's personnel have broad experience in sampling, analysis,
and monitoring of multimedia pollutants. We bring to a client an integrated
field, analytical and assessment program to help clients make informed
decisions. We conduct investigations in support of risk assessments,
feasibility studies and engineering design and construction oversight. We
maintain an extensive network of relationships with technology-based firms to
aide in accelerated cleanup and the most cost-effective solutions.
Versar is in its third year of a 5-year, $50 million national contract
for the Air Force Center of Environmental Excellence (AFCEE), performing
environmental support services from preliminary assessment and site
investigations through design and construction oversight. The Company
currently has assignments at Lowry AFB in Colorado; Brooks AFB in Texas;
Wurtsmith AFB in Michigan; Grissom AFB in Indiana; and Homestead AFB in
Florida. Versar is also a prime contractor for environmental remedial action
support work for the Army Environmental Center, the San Francisco International
Airport Authority, and the Army Corps of Engineers.
COMPREHENSIVE TANK MANAGEMENT SERVICES -- Since 1983, Versar has
provided the full range of tank services required by tank owners. The heart of
Versar's approach is an innovative risk rating and prioritization procedure
that is used to cost-effectively schedule tank upgrading and replacement
programs for clients with tanks at multiple locations. Versar has successfully
applied the tank action planning process for clients with up to hundreds of
tanks each.
Versar prepares construction bid packages for tank replacements
tailored to individual clients' needs and preferences. The Company also
provides construction management services to verify to our clients that tank
installations conform to the bid package requirements. To better meet its
clients' needs, Versar has augmented its traditional strengths in geotechnical
investigations/remediation services with 1) preparation of plans and
specifications for new tank installations and 2) construction oversight to
ensure that these specifications are achieved.
Versar is now in its seventh year of a multi-year tank upgrading
program for a major telecommunications company, involving 600 Underground
Storage Tanks (USTs) at more than 100 locations across a multi-state region.
Versar is providing comprehensive tank services including: 1) scheduling and
cost estimating; 2) design; 3) construction management; 4) release
investigations/remediation and 5) all permitting and regulatory coordination.
CIVIL/INFRASTRUCTURE SERVICES -- Versar continues to provide
traditional design services for commercial, state, DOD, and Department of
Energy (DOE) clients. One of Versar's Rocky Mountain Region principal clients
is the State of Utah Department of Transportation, for which Versar has several
major design projects for expressway upgrades, new interchanges, and
environmental support work.
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BACKLOG
As of June 30, 1996, total backlog for Versar, including unfunded
tasks and orders, was approximately $325 million, as compared to approximately
$306 million as of June 30, 1995. Funded backlog for Versar was approximately
$32 million, an increase of 36 percent compared to approximately $23.5 million
as of June 30, 1995. Funded backlog is the incremental funding authorization
of contracts and task orders based on firm contractual obligations. Unfunded
backlog includes contracts and contract vehicles, including option periods, in
which specific work tasks and funding have not been authorized and for which
Versar and the client are contractually obligated to perform. Funded backlog
amounts have historically resulted in revenues; however, no assurance can be
given that all amounts included in funded backlog will ultimately be realized
as revenue.
MARKETS AND CUSTOMERS
Versar markets its services and technologies to governmental and
industrial customers throughout the United States. Versar also services
customers in Canada, the Pacific Trust Territories, and the Caribbean and will
pursue international projects on a case-by-case basis, e.g., plant facilities
or overseas operations of our U.S. clients. Versar's sales are technical in
nature and involve senior technical and management professionals, supported by
Versar's marketing group. The Company uses a coordinated system of in-house
sales staff and marketing managers, organized regionally. In fiscal year 1996,
sales of approximately 34% of Versar's services and technologies were to
private sector customers and 66% to governmental customers. Of the sales to
governmental customers, 57% was to the Department of Defense and 13% was to the
Environmental Protection Agency (EPA), through various contracts. Versar
serves governmental customers both as a prime contractor and as a
subcontractor.
Versar has experienced no difficulty in obtaining supplies and
materials used in its operations and relies on a broad range of suppliers, the
loss of any of which would not have an adverse effect on the Company.
COMPETITION
Versar faces substantial competition in each market in which it
operates. Versar competes primarily on its scientific, technological, and
engineering expertise. To the extent that non-proprietary or conventional
technologies are used, Versar also relies upon its experience and the
experience of its subsidiary, GEOMET, as a basis for competition. Many
companies, some of which have greater resources than Versar, participate in
Versar's markets, and no assurance can be given that other companies, some of
which may also have greater resources than Versar, will not enter its markets.
Almost all contracts for Versar's services and technologies are
obtained through competitive bidding. Industrial customers typically purchase
these services and technologies after a thorough evaluation of price, service,
experience, and quality. Although price is an important factor, it is not
necessarily the determining factor, because contracts are often awarded in part
on the basis of the efficiency of products and services.
Government entities typically award contracts on the basis of
technical qualifications and price. For technical services contracts, the
majority of which are cost-plus-fixed-fee arrangements, technical
qualifications are the primary factor followed by price competitiveness. In
many of its technical service markets, Versar competes with many local,
regional, and national firms on the basis of experience, reputation, and price.
EMPLOYEES
At June 30, 1996, Versar had approximately 381 full-time employees, of
which approximately 324 were engineers, scientists, and other professionals.
Eighty percent of the Company's professional employees have a bachelors degree,
31% have a masters degree, and 5% have doctorate degrees.
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MARKET DRIVING FORCES AND THE FUTURE
The environmental business has historically been driven by
environmental legislation and the enforcement of environmental regulations.
The likelihood of environmental noncompliance over the years has increased as
legislation and implementing regulations have become more stringent. Because
of this increased risk, environmental risk management has become a critical and
complex process. The costs of noncompliance, including fines and cleanup, can
be substantial. Environmental laws and regulations affect nearly every
industrial and commercial activity, as well as the agencies of the Federal
government and state and local governments charged with their enforcement.
Going forward, Versar believes environmental laws will be more focused on a
risk-based as opposed to a technology based approach allowing more flexibility
in their interpretation and providing incentives for innovation and "common
sense" approach to environmental management. Versar also believes the 1990s
mark the beginning of a cultural change by both government and industry in
recognizing that pollution prevention and active compliance management are a
necessary part of the long-term solution to the cleanup of our common
environment, the protection of the public health and safety, and the
preservation of our natural resources. Versar has positioned itself to take
advantage of this market shift.
ITEM 2. PROPERTIES
The Company's executive office is located in a building in
Springfield, Virginia, a suburb of Washington, D.C., leased from Sarnia
Corporation, which was spun-off by the Company to its shareholders in June
1994. On June 29, 1994, Versar initially rented 99,588 and 8,918 square feet
of space from Sarnia at a rate of $13.49 and $8.00 per foot, respectively. In
June 1995, Versar reduced the 99,588 square foot space to 73,371 square feet.
In June 1996, Versar reduced this leased space to 68,239 square feet. The rent
is subject to a 4% escalation per year. Both lease streams are subject to
adjustment on June 1, 1999 and 2004. In these years, the lease streams will be
adjusted to the current fair value. This value will set the base rate of the
lease streams in the year of adjustment. The adjusted lease stream is subject
to the contracted escalation in future years.
As of September 1, 1996, the Company had under lease an aggregate of
approximately 190,000 square feet of office and laboratory space in the
following locations: Springfield, VA; Tempe, AZ; Alameda and Fair Oaks, CA;
Northglenn, CO; Miami, FL; Lombard, IL; North Andover, MA; Eden Prairie, MN;
Columbia, Gaithersburg, and Germantown, MD; Cincinnati, OH; Bristol, PA; San
Antonio, TX, and American Fork, UT. These leases are generally for terms of
five years or less.
Versar believes that its facilities are suitable and adequate for its
current and foreseeable operational and administrative needs.
ITEM 3. LEGAL PROCEEDINGS
On June 28, 1990, Gary R. Windolph, a former officer and director of
Versar Architects & Engineers, Inc. ("VA&E", formerly ARIX Corporation, a
former subsidiary of Versar, which was merged into the parent in July 1993) and
a former officer of Versar, filed an action in the District Court for the City
and County of Denver, State of Colorado, entitled Gary R. Windolph v. ARIX
Corporation, Versar, Inc., et al., Case NO. 90-CV-7155. On October 21, 1991,
the jury returned verdicts for Mr. Windolph on two defamation claims against
the Company and awarded him damages in the amount of $200,000. The jury also
returned verdicts for Mr. Windolph on certain of his statutory and common law
securities claims and awarded damages in the amount of $1.00 each on all such
claims. On January 6, 1992, the Court ruled that, based upon the evidence
presented at trial, the $200,000 awarded to Mr. Windolph by the jury was
excessive as a matter of law and ordered a new damage trial on those claims.
The retrial of damages on these claims ended on October 21, 1992 with the jury
returning a verdict against Versar in the total amount of $1,000,001 including
$500,000 for damages to Mr. Windolph's reputation and $500,001 for personal
humiliation, mental anguish and suffering.
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Versar promptly filed appropriate post-trial motions seeking either a
new trial or the entry of judgment in an amount less than the jury's verdict.
On January 10, 1993, the Court granted Versar's motion, in part, and gave the
plaintiff the choice of accepting the entry of judgment in the amount of
$75,000, or retrying for a third time the amount of damages for the defamation
claim. The Court also decided, as a matter of law, that the maximum amount Mr.
Windolph could recover was $250,000 due to a statutory limit on non-economic
damages. At the same time, the Court ordered the parties to participate in
good faith in a mandatory settlement conference to try to settle this matter.
The parties were unable to reach a settlement as a result of the settlement
conference held in April, 1993, and the plaintiff rejected the opportunity to
have judgment entered for $75,000 or proceed with a new trial. On June 16,
1993, the trial court entered final judgment on all outstanding issues.
Both parties appealed to the Colorado Court of Appeals. On May 25,
1995 the Court issued its decision affirming in part, reversing in part and
remanding a part of the case to the trial court. The Court of Appeals reversed
the trial court's dismissal of Windolph's promissory estoppel claim, and
remanded with directions for a new trial on that matter only. The Court of
Appeals affirmed the trial court as to all other matters, including the trial
court's refusal to enter judgment in Windolph's favor on the two jury verdicts
relating to the defamation claim. Both parties filed motions for rehearing
with the Court of Appeals, which were denied on August 10, 1995.
In September 1995, Windolph sought review of this case by the Colorado
Supreme Court which was denied on February 20, 1996. The case is now before
the trial court to proceed on the promissory estoppel claim only. A bench
trial without jury is set for January 27, 1997. Based upon the Court of
Appeals' decision and consultation with outside council, management believes an
adverse outcome of this lawsuit will not have a material impact on Versar's
consolidated financial condition and results of operations.
As part of the agreement to sell its laboratory assets and operations
to Kemron Environmental Services, Inc. (Kemron) in July 1994, Versar agreed to
refer its analytical laboratory work for a period of 48 months after the
closing date to Kemron subject to certain limitations and exclusions including
federal procurement requirements and the ability of Kemron to perform the
required services. On July 31, 1996, Kemron filed an action in the Circuit
Court of Fairfax County, Commonwealth of Virginia, entitled Kemron
Environmental Services, Inc. vs. Versar Laboratories, Inc. and Versar, Inc.,
Law No. L154205. Kemron alledged the defendents breached certain warranties
that Versar would refer laboratory work to Kemron in the Asset Acquisition
Agreement and alledged damages in the amount of not less than $3,000,000.
Versar has retained counsel and plans to defend this matter
vigorously. The management of the Company has begun a full evaluation of the
Company's defense and potential exposure.
Versar and its subsidiaries are parties to various other legal actions
arising in the normal course of business. The Company believes that the
ultimate unfavorable resolution of these other legal actions will not have a
material adverse effect on its consolidated financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of fiscal year 1996.
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EXECUTIVE OFFICERS
The current executive officers of Versar, and their ages as of September 1,
1996, their current offices or positions and their business experience for the
past five years are set forth below.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Benjamin M. Rawls 55 Chairman, Chief Executive
Officer and President
Thomas S. Rooney 62 Executive Vice President and
Chief Operating Officer
Robert L. Durfee 60 Executive Vice President,
President, GEOMET Technologies, Inc.
Lawrence A. White 53 Executive Vice President,
Corporate Development
Lawrence W. Sinnott 34 Vice President,
Chief Financial Officer and Treasurer
James C. Dobbs 51 Vice President, General Counsel and
Secretary
Gayaneh Contos 60 Senior Vice President
BENJAMIN M. RAWLS, M.B.A., joined Versar as President and Chief
Executive Officer in April 1991. He became Chairman of the Board in November
1993. From 1988 to April 1991, Mr. Rawls was President and Chief Executive
Officer of Rawls Associates, Inc., a management consulting firm. Mr. Rawls was
President and Chief Executive Officer of R-C Holding, Inc. (now Air & Water
Technologies Corporation) from 1987 to 1988 and was Chairman of Metcalf & Eddy,
Inc., a subsidiary of Research-Cottrell, Inc., from 1984 to 1988.
THOMAS S. ROONEY, P.E., B.S.C.E., joined Versar in 1991 as Executive
Vice President and Chief Operating Officer. From 1989 to 1991, Mr. Rooney was
the President of Rooney Consulting, Inc., an environmental engineering company
in Haddonfield, New York. Between 1987 and 1989, he was President of Orfa
Corporation, a company that built and operated plants that recycle municipal
solid waste into useful end products.
ROBERT L. DURFEE, Ph.D., is a co-founder of Versar and has been
President of GEOMET Technologies, Inc., a subsidiary of the Company, since
1991. Prior to that, Dr. Durfee managed all environmental services provided by
Versar, Inc.
LAWRENCE A. WHITE, P.E., M.E.A., joined Versar in 1992 as Executive
Vice President, Corporate Development. From 1990 to 1992, Mr. White was the
Senior Vice President, Corporate Development for Dynamac Corporation in the
firm's marketing, sales, proposals, and client development areas and Group Vice
President of Roy F. Weston, Inc. between 1983 and 1990, where he managed major
programs and served as principal consultant to numerous government and
industrial clients.
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LAWRENCE W. SINNOTT, CPA, B.S., joined Versar in 1991 as Assistant
Controller. In 1992, he became Corporate Controller. In 1993, he was elected
Treasurer and Corporate Controller. In 1994, he became Vice President, Chief
Financial Officer and Treasurer. From 1989 to 1991, he was Controller of a
venture capital company, Defense Group, Inc.
JAMES C. DOBBS, J.D.,L.L.M., joined Versar in 1992 as Vice President,
General Counsel, and Secretary. From 1984 to 1992, Mr. Dobbs was employed by
Metcalf & Eddy, Inc. as Vice President and General Counsel where he was
responsible for providing legal and regulatory advice to senior management.
GAYANEH CONTOS, B.S., joined Versar in 1974, was elected Vice
President in 1985 and a Senior Vice President in 1989. Since 1980, she has
been responsible for supervising the majority of the Company's contracts with
EPA.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's common stock is traded on the American Stock Exchange,
under the symbol VSR. At June 30, 1996, the Company had 792 stockholders of
record, excluding stockholders whose shares were held in nominee name. The
quarterly high and low sales prices as reported during fiscal years 1996 and
1995 are presented below.
Fiscal Year High Low
- ----------------------------- -------- --------
1996 4th Quarter . . . . . . . . . . . . . . . . . $ 4.688 $ 2.625
3rd Quarter . . . . . . . . . . . . . . . . . 3.563 2.750
2nd Quarter . . . . . . . . . . . . . . . . . 4.063 3.125
1st Quarter . . . . . . . . . . . . . . . . . 4.813 3.000
Fiscal Year High Low
- ----------------------------- -------- --------
1995 4th Quarter . . . . . . . . . . . . . . . . . $ 3.438 $ 2.625
3rd Quarter . . . . . . . . . . . . . . . . . 3.125 2.000
2nd Quarter . . . . . . . . . . . . . . . . . 4.000 2.563
1st Quarter . . . . . . . . . . . . . . . . . 3.938 2.875
No cash dividends have been paid by Versar since it began public
trading of its stock in 1986. The Board of Directors intends to retain any
future earnings for use in the Company's business and does not anticipate
paying cash dividends in the foreseeable future. Under the terms of the
Company's revolving line of credit, approval would be required from the
Company's primary bank for the payment of any dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be
read in conjunction with Versar's Consolidated Financial Statements and notes
thereto beginning on page F-2 of this report. The financial data is as
follows:
For the Years Ended June 30,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ------------ ----------- ------------
(In thousands, except per share data)
Consolidated Statement of Operations
related data:
Gross Revenue . . . . . . . . . . $ 44,283 $ 39,090 $ 42,764 $ 43,012 $ 48,519
Net Service Revenue . . . . . . . 31,919 29,347 31,032 32,980 35,325
Operating Income (Loss) . . . . . 872 560 (1,269) 853 (1,663)
Income (Loss) from Continuing
Operations . . . . . . . . . . 992 458 (2,658) (590) (262)
Net Income (Loss) . . . . . . . . 992 458 (4,367) (1,093) (996)
Income (Loss) per Share from Continuing
Operations . . . . . . . . . . $ .19 $ .09 $ (.59) $ (.14) $ (.07)
Net Income (Loss) per Share . . . $ .19 $ .09 $ (.97) $ (.27) $ (.25)
Weighted Average Shares Outstanding 5,248 4,834 4,481 4,093 3,945
Consolidated Balance Sheet related data:
Working Capital . . . . . . . . . $ 7,629 $ 5,425 $ 5,261 $ 7,627 $ 8,513
Current Ratio . . . . . . . . . . 2.14 1.64 1.68 1.98 1.76
Total Assets . . . . . . . . . . 16,979 28,195 27,782 31,922 37,733
Current Portion of Long-Term Debt 323 335 1,201 1,198 2,072
Long-Term Debt . . . . . . . . . 2 4 17 13,494 15,518
Mortgage Debt of Sarnia . . . . . --- 12,062 12,403 --- ---
----------- -------- ---------- ----------- -----------
Total Debt, excluding bank line of credit 325 12,401 13,621 14,692 17,590
Stockholders' Equity . . . . . . $ 7,776 $ 6,290 $ 5,261 $ 8,690 $ 8,951
Certain amounts in years prior to fiscal year 1994 have been
reclassified to reflect Versar Laboratories, Inc. and Gammaflux, Inc. as
discontinued operations for comparative purposes. In addition, Versar has
included the results of operations and financial position of Sarnia through
January 1, 1996. Sarnia was spun-off to stockholders in fiscal year 1994, but
continued to be reflected in Versar's financial statements due to the guarantee
of all of Sarnia's debt by Versar. After the completion of Sarnia's
refinancing of its debt, Versar's guarantee was reduced from $12.4 million to
$1.5 million and the divestiture was considered complete for accounting
purposes. See Notes B and E of the Notes to Consolidated Financial Statements
for further information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Versar's gross revenues for fiscal year 1996 totalled $44,283,000, or
$5,193,000 (13%) above fiscal year 1995 gross revenue of $39,090,000. Gross
revenue for fiscal year 1995 was $3,674,000 (9%) below that reported in fiscal
year 1994. Gross revenue excludes laboratory, real estate and manufacturing
revenues from operations.
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Discontinued subsidiaries of Versar Laboratories, Inc. and Gammaflux, Inc. have
been presented as discontinued operations in Versar's Consolidated Financial
Statements. The increase in Versar's revenue in the last fiscal year was due
to task orders being performed in the Company's Midwest and Rocky Mountain
regions in support of the Air Force Center for Environmental Excellence
contract. As reflected in the table on page 17, government revenue represented
66% of the total revenue in 1996, compared to 64% in 1995 and 62% in 1994.
Purchased services and materials for fiscal year 1996 totalled
$12,364,000 or $2,621,000 (27%) higher than fiscal year 1995 purchased
services. Purchased services for fiscal year 1995 were $1,989,000 (17%) lower
than reported for fiscal year 1994. The increase in 1996 was principally due
to the increase in gross revenue as mentioned above. The decrease in 1995 was
due to the winding down of the Company's USATHAMA and EPA OMMSQA contracts.
Direct costs of services and overhead include the cost to Versar of
direct and overhead staff, including recoverable overhead costs and unallowable
costs that are directly attributable to overhead. The percentage of these
costs to net service revenue slightly increased to 81.4% in 1996 compared to
81.0% in 1995 and 82.2% in 1994. In 1996, the net service percentage remained
relatively stable compared to 1995. The decrease in the percentage of costs in
1995 compared to 1994 is attributable to improved labor utilization primarily
in the Company's Rocky Mountain and Pacific regions.
Selling, general and administrative expenses approximated 15.5% of net
service revenue in 1996, compared to 17.0% in 1995 and 16.6% in 1994. The
decrease is attributable to the higher volume of net revenue while the
selling, general and administrative expenses were maintained at 1995 levels.
Other (income) expense include costs and revenues that are not
directly attributable to contracts. In 1996, the Company recognized
non-compete income from the sale of its majority-owned subsidiary Gammaflux,
Inc. of $28,000 compared to $47,000 in fiscal year 1995, and $78,000 in fiscal
year 1994. In 1995 the remaining $214,000 of other (income) expense was due to
the reversal of $174,000 of anticipated costs that were ultimately not incurred
as a result of winning new contracts and the reduction of other operating
reserves of $40,000. In fiscal year 1994, the remaining $1,161,000 of other
costs were for other real estate losses of $400,000, $305,000 of transaction
costs associated with the spin-off of Sarnia, and $456,000 for software and
service contracts which were determined to be of limited future value.
Losses on Sarnia operations of $142,000 were recorded in the first six
months of fiscal year 1996 compared to losses of $270,000 in fiscal year 1995.
See Note B in the consolidated financial statements. The losses were recorded
as a separate line item due to the spin-off of Versar's real estate entity to
shareholders on June 30, 1994, which was completed as of January 25, 1996.
Operating income for 1996 was $872,000, an increase of $312,000 over
fiscal year 1995. The increase is primarily due to the lower selling, general
and administrative expenses as a percentage of net service revenue as discussed
above. Fiscal year 1995 operating income increased by $1,829,000 due to
decreased other costs and direct costs of services and overhead.
Interest expense in 1996 was $96,000, a decrease of $62,000 from 1995.
The decrease is due to reduced debt in fiscal year 1996. Interest expense in
1995 was $158,000, an increase of $101,000 from 1994 due to the assumption of
$1,000,000 of debt from Sarnia, which was paid in full in fiscal year 1995.
Versar's benefit for income taxes for fiscal year 1996 was $216,000
compared to a benefit of $56,000 in 1995. The Company reduced the valuation
against the deferred tax assets due to the improved earnings and future
earnings potential. In fiscal year 1994, the Company recorded a $1,309,000 tax
expense as a result of the spin-off of Sarnia as Versar's tax assets could no
longer be offset with Sarnia's tax liabilities. Refer to Note G of the Notes
to Financial Statements.
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Losses from discontinued operations for 1994 were $2,265,000. The
loss was attributable to the provision of $1,600,000 recorded by the Company
during the third quarter of fiscal year 1994 to discontinue the laboratory
operations.
In the first quarter of 1994, the Company recognized $556,000 of
income with the adoption of SFAS No. 109, "Accounting for Income Taxes," which
required the Company to compute deferred taxes using the liability method.
In summary, Versar's net income was $992,000 in fiscal year 1996,
compared to net income of $458,000 in fiscal year 1995 and a net loss of
$4,367,000 in fiscal year 1994.
REVENUE
Versar provides environmental risk management services to various
industries, government and commercial clients. A summary of revenue generated
from the Company's client base is as follows:
For the Years Ended June 30,
-----------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- -----------------------
(In thousands, except for percentages)
Government
EPA $ 3,787 9% $ 5,375 14% $ 6,151 15%
State & Local 6,733 15% 4,607 12% 7,797 18%
Department
of Defense 16,479 37% 13,194 34% 11,260 26%
Other 2,035 5% 1,707 4% 1,312 3%
Commercial 15,249 34% 14,207 36% 16,244 38%
--------- -------- -------- ----- -------- -----
Gross Revenue $ 44,283 100% $ 39,090 100% $ 42,764 100%
========= ======== ======== ===== ======== =====
LIQUIDITY AND CAPITAL RESOURCES
The company's operating activities provided $967,000 of cash in 1996
primarily from operations. Non-cash expenses of $684,000 for depreciation and
amortization were offset by the reduced liabilities from discontinued
operations.
Accounts receivable increased by 6% in fiscal year 1996 primarily due
to increased revenues of 13%.
The Company utilized short-term bank financing to supplement its
ability to meet day-to-day operating cash requirements. At June 30, 1996, the
Company had $7,629,000 of working capital, compared to $5,425,000 in 1995.
Working capital increased by 41% due to the removal of Sarnia's assets and
liabilities from the Company's balance sheet as a result of Sarnia's
refinancing of its mortgages and due to improved earnings of the Company.
Versar maintains a bank line of credit for working capital purposes
with Riggs National Bank (Riggs). Prior to January 25, 1996, the line provided
for advances up to $1,500,000. On January 25, 1996, Versar obtained a new line
of credit with Riggs National Bank which provides for advances up to
$3,000,000. Borrowings on the line are at the prime rate of interest plus 1/2%
(8.75% at June 30, 1996). A fee of 1/4% on the unused portion of the line of
credit is also charged. The line is guaranteed by the Company and each
subsidiary individually and is collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property constituting
collateral. Borrowing availability under the bank line of credit is restricted
to the borrowing base of qualifying receivables less $1,500,000. Unused
borrowing availability at June 30, 1996 was $2,508,000. Advances under the
line are due upon demand or on December 31, 1996. The Company must also obtain
Riggs' approval
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prior to paying dividends. Additionally, the loan has certain covenants
related to maintenance of financial ratios. The Company was in compliance with
the financial covenants at June 30, 1996. Management believes that cash
generated by operations and borrowings available from the line of credit will
be adequate to meet the working capital needs for fiscal year 1997.
As previously reported, Versar has guaranteed certain debt of Sarnia
Corporation. At June 30, 1995, Versar guaranteed the total mortgage debt of
Sarnia Corporation (Sarnia) (formerly Versar Virginia, Inc., which was spun-off
to Versar shareholders on June 30, 1994) which was approximately $12,062,000.
On January 25, 1996, Sarnia refinanced its outstanding debt. Sarnia obtained a
first mortgage of $9,000,000 with I.D.S. Life Insurance Company, a $500,000
second mortgage with Riggs and a $1,500,000 seven year term loan with Riggs.
As a result of the refinancing, Versar's guarantee of Sarnia's debt has
decreased from approximately $12,400,000 to $1,500,000. Sarnia issued $750,000
of its Series A Cumulative Convertible Preferred Stock to a group of private
investors. Versar has established a reserve of $1,500,000 against the loan.
As the term loan is repaid, the reserve will be reduced and added to Versar's
equity.
IMPACT OF ACCOUNTING STANDARDS NOT YET EFFECTIVE
In March 1995, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121). SFAS 121 is effective for fiscal year 1997, and requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 will not have a material effect on the
financial position of the Company.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) was issued in October, 1995 and is
effective for fiscal years beginning after December 15, 1995. The Statement
encourages, but does not require, adoption of the fair value based method of
accounting for employee stock options and other stock compensation plans. The
Company has opted to account for its stock option plan in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." By doing so, the
Company, beginning in fiscal year 1997, will be required to make proforma
disclosure of net income and earnings per share as if the fair value based
method for accounting defined in SFAS 123 had been applied.
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 one year or less
or are cost plus fixed-fee type contracts and, accordingly, are less
susceptible to the effects of inflation. Multi-year contracts provide for
projected increases in labor and other costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data begin on
page F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors of the
Company is to be contained in the Company's Proxy Statement for its 1996 Annual
Meeting of Stockholders, which is expected to be filed with the Commission not
later than 120 days after the end of the Company's 1996 fiscal year and is
incorporated herein by reference.
Information required by this item with respect to executive officers
of the Company is included in Part I of this report and is incorporated herein
by reference.
For the purpose of calculating the aggregate market value of the
voting stock of Versar held by non-affiliates as shown on the cover page of
this report, it has been assumed that the directors and executive officers of
the Company and the Company's Employee Savings and Stock Ownership Plan are the
only affiliates of the Company. However, this is not an admission that all
such persons are, in fact, affiliates of the Company.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by these items is incorporated herein by
reference to the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders which is expected to be filed with the Commission not later than
120 days after the end of the Company's 1996 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) Financial Statements:
The consolidated financial statements and financial
statement schedules of Versar Inc. and Subsidiaries are filed as part
of this report and begin on page F-1.
a) Report of Independent Public Accountants
b) Consolidated Balance Sheets as of June 30, 1996 and
1995
c) Consolidated Statements of Operations for the Years
Ended June 30, 1996, 1995, and 1994
d) Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 1996, 1995, and
1994
e) Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996, 1995, and 1994
f) Notes to Consolidated Financial Statements
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(2) Financial Statement Schedules:
a) Schedule II - Valuation and Qualifying Accounts for the
years ended June 30, 1996, 1995, and 1994
All other schedules, except those listed above, are omitted
because they are not applicable or the required information
is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits:
The exhibits to this Form 10-K are set forth in a separate
Exhibit Index which is included on pages 21 through 26 of
this report.
(B) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter
of the Company's fiscal year 1996.
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EXHIBIT INDEX
Page Number/
Item No. Description Reference
- -------- ----------- -----------
3.1 Restated Articles of Incorporation of Versar, Inc. filed as an exhibit to the
Registrant's Registration Statement on Form S-1 effective November 20, 1986
(File No. 33-9391) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (A)
3.2 Bylaws of Versar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (A)
4 Specimen of Certificate of Common Stock of Versar, Inc, . . . . . . . . . . . . . . . . . (A)
10.3 Agreement dated July 31, 1990 between the Registrant and the U.S.
Army Natick RD&E Center and as modified through May 23,1991 . . . . . . . . . . . . . . (G)
10.10 Incentive Stock Option Plan *. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (B)
10.11 Executive Tax and Investment Counseling Program. . . . . . . . . . . . . . . . . . . . . . (A)
10.12 Nonqualified Stock Option Plan *. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (B)
10.13 Employee Incentive Plan, as amended *. . . . . . . . . . . . . . . . . . . . . . . . . . . (E)
10.14 Incentive Stock Option Plan of Gammaflux, Inc., a subsidiary of the Registrant . . . . . . (D)
10.15 Letter agreement dated June 28, 1991 among the Registrant,
Geomet Technologies, Inc., and Charles I. Judkins, Jr. . . . . . . . . . . . . . . . . . . (G)
10.17 Deferred Compensation Agreements dated as follows:
July 1, 1987 between the Registrant and the following persons:
Charles I. Judkins, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (C)
July 1, 1988 between the Registrant and Gayaneh Contos . . . . . . . . . . . . . . . . . . (F)
10.26 Executive Medical Plan dated August 21, 1991, effective July 1, 1991 . . . . . . . . . . . (G)
10.28 The Riggs National Bank of Washington, D.C.'s consent dated June 4, 1991 to the
sale of substantially all of the assets of Gammaflux, Inc., a partially owned
subsidiary of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (G)
10.31 Judgment against Versar Architects Engineers Inc. (formally Arix Corp.),
dated February 19, 1991 with regards to City of Sterling, Colorado, Arix Corp,
Utility Control Equipment Corporation and Ralston Properties . . . . . . . . . . . . . . . (G)
10.32 Versar Architects and Engineers, Inc. voluntary petition for protection
under Chapter 11 of the Bankruptcy Code dated June 19, 1991 . . . . . . . . . . . . . . . (G)
21
22
Page Number/
Item No. Description Reference
- -------- ----------- -----------
10.33 Structure and Agreement for use of Cash Collateral and Adequate Protection
dated August 2, 1991 between Versar Architects and Engineers, Inc. and the
Riggs National Bank of Washington, D.C. . . . . . . . . . . . . . . . . . . . . . . . . . (G)
10.34 Asset Purchase Agreement dated June 5, 1991 related to the sale of substantially all of
the assets of Gammaflux, Inc., a majority owned subsidiary of the Registrant . . . . . . . (G)
10.35 Promissory Note dated June 5, 1991 between Gammaflux, Inc., a majority owned
subsidiary of the Registrant and CHC Acquisition Partners, L.P. . . . . . . . . . . . . . (G)
10.36 Noncompetition Agreement dated June 5, 1991 between the Registrant and
CHC Acquisition Partners, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (G)
10.38 Agreement dated September 24, 1990 between Geomet Technologies Inc., a
subsidiary of the Registrant and the U.S. Army Troop Support Command as
modified through March 25, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (G), (H)
10.39 Agreement dated September 30, 1988 between Geomet Technologies Inc., a
subsidiary of the Registrant and the U.S. Army Troop Support Command
Natick Research, Development and Engineering Center as modified
through April 26, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (H),(I)
10.40 Option Exchange Offer dated April 16, 1991 between the Registrant and
participants of the Incentive Stock Option Plan and the Nonqualified
Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (G)
10.41 Securities and Exchange Commission response dated September 23, 1991
to certain question regarding the Registrant's Option Exchange Offer . . . . . . . . . . . (G)
10.44 Agreement dated March 30, 1990 between the Registrant, the Department
of the Army, U.S. Army Toxic and Hazardous Materials Agency, as modified
through March 29, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (H),(I)
10.47 Bankruptcy Court-approved Settlement Agreement and Mutual Release
between Versar Architects and Engineers, Inc. and the City of
Sterling, Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (H)
10.48 Versar Architects and Engineers, Inc. Plan of Reorganization and
Disclosure Statement filed with the United States Bankruptcy Court
on August 25, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (H)
10.49 Agreement dated March 27, 1992 among Versar, Inc., Fluxagamm, Inc.,
Maurice I. Stein and Gammaflux, L.P. accelerating payment of certain
notes, non-competition, and stock repurchase agreements . . . . . . . . . . . . . . . . (H)
22
23
Page Number/
Item No. Description Reference
- -------- ----------- -----------
10.52 Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992 * . . . . . . . . . . . (I)
10.54 Versar Architects & Engineers, Inc. Order Confirming First Amended Plan
of Reorganization dated March 2, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . (I)
10.56 Employment Agreement revised May 1, 1994 between the Registrant and
Thomas S. Rooney * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (I),(K)
10.58 Agreement dated March 10, 1993 between the Registrant and the Environmental
Protection Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (I)
10.60 Employment Agreement dated May 1, 1994 between the Registrant and Benjamin
M. Rawls * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (K)
10.64 Asset Purchase Agreement dated July 29, 1994 between Registrant and Kemron
Environmental Services, Inc. of certain assets of the registrants wholly-owned subsidiary
Versar Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (K)
10.65 Information Statement for the Distribution to Shareholders of Versar, Inc., the
Outstanding Shares of its Wholly-owned Subsidiary, Sarnia Corporation,
dated June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (J)
10.66 Agreement dated January 13, 1994 between the Registrant and the Department of
the Air Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (K)
10.67 Agreement dated January 18, 1994 between the Registrant and OHM Services
Remediation Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (K)
10.70 Agreement dated July 18, 1995 between the Registrant and the U.S. Air Force
Human Systems Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
10.71 Agreement dated March 29, 1995 between the Registrant and the U.S. Army Norfolk
Corps of Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
10.72 Agreement dated March 16, 1995 between the Registrant and the U.S. Army Baltimore
Corps of Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
10.73 Agreement dated April 25, 1995 between the Registrant and the U.S. Army Philadelphia
Corps of Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
10.74 Agreement dated August 10, 1995 between the Registrant and the Environmental
Protection Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
23
24
Page Number/
Item No. Description Reference
- -------- ----------- -----------
10.75 Agreement dated January 31, 1995 between Geomet Technologies, Inc., a subsidiary
of the Registrant and the U.S. Army Soldier Systems Command . . . . . . . . . . . . . . . (M)
10.76 Agreement dated July 13, 1995 between Geomet Technologies, Inc., a subsidiary of
the Registrant and the U.S. General Services Administration . . . . . . . . . . . . . . . (M)
10.77 The Riggs National Bank of Washington D.C.'s letter dated, September 15, 1995
modifying certain provisions of the Revolving Loan and Security Agreement, dated
April 9, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (M)
10.78 Loan and Security Agreement between the Registrant and the Riggs
National Bank of Washington, D.C dated January 25, 1996. . . . . . . . . . . . . . . . . . 28-54
10.79 Employment Agreement dated September 1, 1996 between the Registrant
and Benjamin M. Rawls* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55-60
10.80 Employment Agreement dated September 1, 1996 between the Registrant
and Thomas S. Rooney* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-66
10.81 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and Lawrence W. Sinnott* . . . . . . . . . . . . . . . . . . . . . . . . . 67-70
10.82 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and James C. Dobbs* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71-74
11 Statement Re: Computation of Per Share Earnings . . . . . . . . . . . . . . . . . . . . . 75
22 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
23 Consent of Arthur Andersen LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
27 Financial Data Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------
* Indicates management contract or compensatory plan or arrangement
24
25
(A) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form S-1 Registration Statement ("Registration
Statement") effective November 20, 1986 (File No. 33-9391).
(B) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1987 ("FY 1987 Form 10-K") filed with the Commission on September
28, 1987.
(C) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1988 ("FY 1988 Form 10-K") filed with the Commission on September
28, 1988.
(D) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1989 ("FY 1989 Form 10-K") filed with the Commission on September
28, 1989.
(E) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1990 ("FY 1990 Form 10-K") filed with the Commission on September
28, 1990.
(F) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-Q for the quarter ended September 30, 1989 ("1st
Quarter FY 1990 Form 10-Q").
(G) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1991 ("FY 1991 Form 10-K") filed with the Commission on October
15, 1991.
(H) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
1992 ("FY 1992 Form 10-K") filed with the Commission on September 28,
1992.
(I) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
1993 ("FY 1993 Form 10-K") filed with the Commission on September 22,
1993.
(J) Incorporated by reference Sarnia Corporation Information Statement for
distribution to shareholders of Versar, Inc. of the outstanding shares
of its wholly-owned subsidiary, Sarnia Corporation, dated June 30,
1994.
(K) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
1994 ("FY 1994 Form 10-K") filed with the Commission on September 27,
1994.
(L) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K/A Annual Report for Fiscal Year Ended June 30,
1994 ("FY 1994 Form 10-K/A") filed with the Commission on May 31,
1995.
(M) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
1995 ("FY 1995 Form 10-K") filed with the Commission on September 28,
1995.
Exhibit item numbers are as outlined by item 601 of Regulation S-K.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: September 16, 1996 /S/ Benjamin M. Rawls
------------------------------------------------
Benjamin M. Rawls
Chairman, Chief Executive Officer,
President, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/S/ Benjamin M. Rawls Chairman, Chief Executive Officer, September 16, 1996
- -------------------------------- President, and Director
Benjamin M. Rawls
/S/ Robert L. Durfee Executive Vice President and September 16, 1996
- -------------------------------- Director
Robert L. Durfee
/S/ Lawrence W. Sinnott Vice President, Chief Financial September 16, 1996
- -------------------------------- Officer, Treasurer, and
Lawrence W. Sinnott Principal Accounting Officer
/S/ Michael Markels, Jr. Chairman Emeritus and Director September 16, 1996
- --------------------------------
Michael Markels, Jr.
/S/ John P. Horton Director September 16, 1996
- --------------------------------
John P. Horton
/S/ Thomas J. Shields Director September 16, 1996
- --------------------------------
Thomas J. Shields
/S/ John E. Gray Director September 16, 1996
- --------------------------------
John E. Gray
26
27
/S/ Charles I. Judkins, Jr. Director September 16, 1996
- -----------------------------------
Charles I. Judkins, Jr.
/S/ M. Lee Rice Director September 16, 1996
- -----------------------------------
M. Lee Rice
27
28
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Versar, Inc.:
We have audited the accompanying consolidated balance sheets of Versar, Inc.
and its subsidiaries (a Delaware corporation) as of June 30, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Versar, Inc. and
its subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, effective July 1, 1993, the
Company changed its method of accounting for income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ Arthur Andersen LLP
-----------------------------
Arthur Andersen LLP
Washington, D.C.,
September 16, 1996
F-1
29
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
---------------------------------------
1996 1995
------------- -------------
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83 $ 58
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . 12,376 11,723
Prepaid expenses and other current assets . . . . . . . . . . . . . 1,365 1,099
Assets of Sarnia transferred . . . . . . . . . . . . . . . . . . . --- 434
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 473 536
------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 14,297 13,850
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 2,038 1,457
Assets of Sarnia transferred . . . . . . . . . . . . . . . . . . . . . --- 12,871
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 300 ---
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 17
------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,979 $ 28,195
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Liabilities of Sarnia transferred . . . . . . . . . . . . . . . . . $ --- $ 2,133
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 2,098 1,950
Bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . 492 438
Current portion of long-term debt . . . . . . . . . . . . . . . . . 323 335
Accrued salaries and vacation . . . . . . . . . . . . . . . . . . . 1,619 1,390
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 2,136 1,564
Liabilities of discontinued operations, net . . . . . . . . . . . . --- 615
------------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 6,668 8,425
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4
Liabilities of Sarnia transferred . . . . . . . . . . . . . . . . . . --- 12,450
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . 1,033 1,026
Reserve on guarantee of real estate debt . . . . . . . . . . . . . . . 1,500 ---
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 9,203 21,905
------------- ------------
Commitments and contingencies (Note I)
Stockholders' equity
Common stock, $.01 par value; 10,000,000 shares
authorized; 4,994,693 shares and 4,813,236
shares issued and outstanding at June 30, 1996
and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . 50 48
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . 13,299 12,816
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (5,573) (6,565)
------------- -------------
7,776 6,299
Less treasury stock, at cost (3,327 shares at
June 30, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . --- (9)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 7,776 6,290
------------- ------------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 16,979 $ 28,195
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
30
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended June 30,
-----------------------------------------------
1996 1995 1994
---------- ---------- ----------
GROSS REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,283 $ 39,090 $ 42,764
Purchased services and materials, at cost . . . . . . . . . . 12,364 9,743 11,732
---------- ---------- ----------
NET SERVICE REVENUE . . . . . . . . . . . . . . . . . . . . . . . 31,919 29,347 31,032
Direct costs of services and overhead . . . . . . . . . . . . 25,973 23,785 25,516
Selling, general, and administrative expenses . . . . . . . . 4,960 4,993 5,158
Other (income) expenses, net . . . . . . . . . . . . . . . . . (28) (261) 1,083
Losses on Sarnia operations . . . . . . . . . . . . . . . . . 142 270 544
---------- ---------- ----------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . 872 560 (1,269)
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 96 158 57
Income tax (benefit) expense . . . . . . . . . . . . . . . . . (216) (56) 1,332
---------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 992 458 (2,658)
LOSS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . --- --- (2,265)
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . 992 458 (4,923)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . . . --- --- 556
---------- ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . $ 992 $ 458 $ (4,367)
========== ========== ==========
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . $ .19 $ .09 $ (.59)
LOSS PER SHARE FROM
DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ (.51)
---------- ---------- ----------
INCOME (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . . . . $ .19 $ .09 $ (1.10)
INCOME PER SHARE FROM
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ .13
---------- ---------- ----------
NET INCOME (LOSS) PER SHARE . . . . . . . . . . . . . . . . . . . $ .19 $ .09 $ (.97)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . 5,248 4,834 4,481
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
31
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Total
Number Capital in Stock-
of Common Excess of Accumulated Treasury holders'
Shares Stock Par Value Deficit Stock Equity
------ ----- --------- ------- ----- ------
Years Ended June 30, 1996, 1995, and 1994
----------------------------------------------------------------------------
(In thousands)
Balance, June 30, 1993 . . . . . . . . . . . 4,270 $ 43 $ 11,303 $ (2,656) $ - - $ 8,690
Exercise of stock options . . . . . . . . . . 35 - - 88 - - - - 88
Common stock issued to ESSOP . . . . . . . . 304 3 847 - - - - 850
Net loss . . . . . . . . . . . . . . . . . . - - - - - - (4,367) - - (4,367)
-------- --------- -------- --------- --------- --------
Balance, June 30, 1994 . . . . . . . . . . . 4,609 46 12,238 (7,023) - - 5,261
-------- ---------- -------- --------- --------- --------
Exercise of stock options . . . . . . . . . . 58 1 136 - - - - 137
Common stock issued to ESSOP . . . . . . . . 146 1 442 - - - - 443
Purchase of common stock
for treasury . . . . . . . . . . . . . . (26) - - - - - - (76) (76)
Issuance of treasury stock for stock
awards . . . . . . . . . . . . . . . . . 23 - - - - - - 67 67
Net income . . . . . . . . . . . . . . . . . - - - - - - 458 - - 458
-------- ---------- -------- ---------- --------- --------
Balance, June 30, 1995 . . . . . . . . . . . 4,810 48 12,816 (6,565) (9) 6,290
-------- ---------- -------- --------- -------- --------
Exercise of stock options . . . . . . . . . . 119 1 278 - - - - 279
Common stock issued for Valu Add . . . . . . 30 - - 97 - - - - 97
Common stock issued to ESSOP . . . . . . . . 32 1 108 - - - - 109
Purchase of common stock
for treasury . . . . . . . . . . . . . . (18) - - - - - - (63) (63)
Issuance of treasury stock for stock
awards . . . . . . . . . . . . . . . . . 7 - - - - - - 22 22
Issuance of treasury stock for
ESSOP . . . . . . . . . . . . . . . . . 15 - - - - - - 50 50
Net income . . . . . . . . . . . . . . . . . - - - - - - 992 - - 992
-------- --------- -------- ---------- ------- ---------
Balance, June 30, 1996 . . . . . . . . . . . 4,995 $ 50 $ 13,299 $ (5,573) $ - - $ 7,776
======== ========= ======== ========== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
32
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
---------------------------------------------
1996 1995 1994
------------ ----------- ----------
(In thousands)
Cash flows from operating activities
Income (loss) from continuing operations . . . . . . . . . . . . . . . $ 992 $ 458 $ (2,658)
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . --- --- (2,265)
Cumulative effect of change in accounting principle . . . . . . . . . . --- --- 556
Adjustments to reconcile income (loss) to
net cash provided by operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . 684 699 956
Loss on sale of property and equipment . . . . . . . . . . . . . 14 --- ---
Provision for doubtful accounts receivable . . . . . . . . . . . (37) 1 (12)
Common stock issued to ESSOP and Valu Add . . . . . . . . . . . . 216 434 851
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . (250) --- (556)
------------ ----------- ------------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . 1,619 1,592 (3,128)
------------ ----------- ------------
Changes in assets and liabilities, net of asset dispositions
(Increase) decrease in accounts receivable . . . . . . . . . . . (616) (1,031) 1,767
(Increase) decrease in prepaids and other assets . . . . . . . (598) 287 271
Increase (decrease) in accounts payable . . . . . . . . . . . . . 148 474 (850)
Increase (decrease) in accrued salaries and vacation . . . . . . 228 121 (252)
Increase (decrease) in other liabilities . . . . . . . . . . . . 659 (807) (201)
Net change in assets and liabilities of Sarnia . . . . . . . . . 142 270 1,614
------------ ----------- ------------
Net cash from continuing operations . . . . . . . . . . . . 1,582 906 (779)
Changes in net liabilities of
discontinued operations . . . . . . . . . . . . (615) (176) 921
------------ ----------- ------------
Net cash provided by operating activities . 967 730 142
------------ ----------- ------------
Cash flows from investing activities
Purchases of property and equipment . . . . . . . . . . (1,261) (440) (674)
------------ ----------- ------------
Cash flows from financing activities
Net borrowings on bank line of credit . . . . . . . . . 54 438 ---
Principal payments on long-term debt . . . . . . . . . (14) (879) (184)
Proceeds from issuance of the Company's
common stock . . . . . . . . . . . . . . . . . . . . 279 137 88
------------ ----------- ------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . 319 (304) (96)
------------ ---------- ------------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . 25 (14) (628)
Cash at the beginning of the year . . . . . . . . . . . . . . . . . . . . . 58 72 700
------------ ----------- ------------
Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . $ 83 $ 58 $ 72
============ =========== ============
Supplementary disclosure of non-cash transactions
Issuance of treasury stock, net . . . . . . . . . . . . $ (9) $ 9 $ ---
============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
33
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Versar, Inc. and its subsidiaries ("Versar"
or "the Company"). All significant intercompany balances and transactions have
been eliminated in consolidation. The assets, liabilities, and results of
operations of Sarnia Corporation were included in the Company's financial
statements for fiscal years 1995 and 1994 and through January 1, 1996. The
assets and liabilities have been removed from Versar's balance sheet due to the
refinancing of Sarnia's debt (refer to Note E for further information on the
Sarnia refinancing). Refer to Note B for further information regarding the
financial treatment of the former real estate operations.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles 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.
Contract Accounting: Contracts in process are stated at the lower of actual
cost incurred plus accrued profits or net estimated realizable value of
incurred costs, reduced by progress billings. The Company records income from
major fixed-price contracts, extending over more than one accounting period,
using the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions are
included in the periods in which the revisions are made. On cost-plus-fee
contracts, revenue is recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. Losses on contracts are
recognized when they become known. Disputes arise in the normal course of the
Company's business on projects where the Company is contesting with customers
for collection of funds because of events such as delays, changes in contract
specifications and questions of cost allowability or collectibility. Such
disputes, whether claims or unapproved change orders in the process of
negotiation, are recorded at the lesser of their estimated net realizable value
or actual costs incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized where loss is
considered probable and reasonably determinable in amount.
It is the Company's policy to provide reserves for the collectibility of
accounts receivable when it is determined that it is probable that the Company
will not collect all amounts due and the amount of reserve requirements can be
reasonably estimated.
Depreciation and amortization: Depreciation and amortization are computed on a
straight-line basis over the estimated useful lives of the assets.
Intangible assets: On April 29, 1996, Versar purchased for 30,000 shares the
assets of Valu Add, which was primarily contract vehicles. The purchase
resulted in the Company recording goodwill of $97,500, which will be amortized
over a five year period.
Direct costs of services and overhead: These expenses represent the cost to
Versar of direct and overhead staff, including recoverable overhead costs and
unallowable costs that are directly attributable to overhead.
F-6
34
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net income (loss) per share: Per share amounts are computed by dividing the
related captions in the Consolidated Statements of Operations by the fully
diluted weighted average number of common shares outstanding during the
applicable period being reported upon.
Income taxes: Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS
109). The adoption of the standard changed the Company's method of accounting
for income taxes from the deferred method (Accounting Principle Board Opinion
No. 11) to the liability method. The liability method requires the recognition
of deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
other assets and liabilities. The cumulative effect of adopting the new
standard as of July 1, 1993 was a $556,000 credit to the Consolidated
Statements of Operations.
Deferred Compensation: The Company permitted employees to defer a portion of
their compensation, during fiscal years 1988 through 1991, providing for future
annual payments, including interest. Interest is accrued on a monthly basis at
the amount stated in each employee's agreement. The Company recorded
liabilities for deferred compensation of $949,000 and $914,000 at June 30, 1996
and 1995, respectively. Versar purchased key-man life insurance policies to
fund the amounts due under the deferred compensation agreements. The Company
borrows against the cash surrender value of the policies to pay premiums. The
cash surrender value of the policies, net of loans, was $236,000 and $244,000
at June 30, 1996 and 1995, respectively.
Statements of cash flows: For statements of cash flows purposes, all
investments with an original maturity of three months or less are considered to
be cash equivalents.
Impact of Accounting Standards not yet Effective: In March 1995, the Financial
Accounting Standard Board issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). SFAS 121 is effective for fiscal year
1997, and requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The adoption of SFAS 121 will not have a material effect on
the financial position of the Company.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October, 1995 and is effective for fiscal year 1997. The Statement encourages,
but does not require, adoption of the fair value based method of accounting for
employee stock options and other stock compensation plans. The Company has
opted to account for its stock option plan in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." By doing so, the Company,
beginning in fiscal year 1997, will be required to make proforma disclosure of
net income and earnings per share as if the fair value based method for
accounting defined in SFAS 123 had been applied.
NOTE B ASSET DISPOSITIONS
GAMMAFLUX, INC.: Gammaflux, Inc. (Gammaflux), a majority-owned manufacturing
subsidiary of the Company, sold substantially all of its assets to CHC
Acquisition Partners, L.P., an Illinois limited partnership (CHC), pursuant to
an Asset Purchase Agreement, dated June 5, 1991 (effective May 1, 1991), among
Gammaflux, the Company, CHC, the minority shareholder of Gammaflux, the general
partner of CHC, and the principals of CHC. As a part of the transaction, CHC
agreed to assume certain liabilities of Gammaflux.
F-7
35
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 1, 1992, Versar agreed to the early payout for the note receivable
and the non-competition agreements. The net cash generated from the early
payout was approximately $1,727,000 and was used to reduce debt. Versar and
the previous minority shareholder are still bound by the terms of the
non-compete agreement, and therefore, the Company has deferred certain income
to be recognized over the life of the agreement.
VERSAR LABORATORIES: In the third quarter of fiscal year 1994, management
announced that Versar was going to discontinue further operations of Versar
Laboratories, Inc. (VLI). VLI had lost approximately $800,000 per year from
fiscal years 1991 through 1994. Subsequent to this decision, Kemron
Environmental Services, Inc. purchased the fixed assets of VLI for $250,000 on
August 1, 1994. The Company established a reserve of $1,900,000 for
anticipated shut down costs in March 1994. With the purchase of assets and the
assumption of certain lease obligations, the Company was able to reverse
$300,000 of the reserve in the fourth quarter of fiscal year 1994.
VLI's assets and liabilities are presented as net liabilities of
discontinued operations in the consolidated balance sheets. At June 30, 1995,
current assets of $74,000 were offset by current liabilities of $7,000 and a
shut-down reserve of $682,000, resulting in net liabilities of $615,000. No
material balances existed at June 30, 1996.
The operating results of Versar Laboratories, Inc. have been classified as
discontinued operations for all periods presented in the consolidated financial
statements.
SARNIA CORPORATION: Sarnia, formerly Versar Virginia, Inc., a former
wholly-owned real estate subsidiary of Versar, was spun-off to Versar
shareholders on June 30, 1994. Sarnia was established in 1982 to own and
operate Versar Center, the headquarters buildings of Versar in Springfield,
Virginia. On June 30, 1994, Versar distributed to the holders of its common
stock substantially all of the common stock of Sarnia (the Distribution). The
Distribution provided Versar stockholders one share of Sarnia common stock for
every outstanding share of Versar common stock. The spin-off although a
divestiture for legal and tax purposes was not initially accounted for as a
divestiture for accounting purposes until January 1996, since the spin-off did
not relieve Versar of the risks of ownership due to Versar's guaranty of
Sarnia's $12.4 million debt at June 30, 1994.
Sarnia's results of operations through January 1, 1996 are presented as
single line items in the Consolidated Statements of Operations, and its assets
and liabilities at June 30, 1995 are presented as separate line items in the
Consolidated Balance Sheet.
On January 25, 1996, Sarnia obtained new financing which reduced Versar's
guarantee of Sarnia's indebtedness from $12,400,000 to $1,500,000. Versar has
taken a reserve of $1,500,000 against the guarantee. Therefore, after the
second quarter of fiscal year 1996, Versar will no longer include the results
of operations and financial position of Sarnia in the consolidated financial
statements.
F-8
36
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C ACCOUNTS RECEIVABLE
June 30,
-------------------------------
1996 1995
------------- --------------
(In thousands)
Billed receivables
U.S. Government . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,143 $ 5,239
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,716 3,131
Unbilled receivables
U.S. Government . . . . . . . . . . . . . . . . . . . . . . . . . . 3,029 3,107
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191 1,203
------------- -----------
13,079 12,680
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . (703) (957)
------------- -----------
$ 12,376 $ 11,723
============= ===========
Unbilled receivables represent amounts earned which have not yet been
billed and other amounts which can be invoiced upon completion of fixed-price
contracts, attainment of certain contract objectives, or completion of federal
and state governments' incurred cost audits. Management anticipates that the
June 30, 1996 unbilled receivables will be substantially billed and collected
in fiscal year 1997.
NOTE D PROPERTY AND EQUIPMENT
Estimated
Useful Life
in Years June 30,
----------- -----------------------------
1996 1995
------------- --------------
(In thousands)
Furniture and fixtures . . . . . . . . . . . . . . . . . . 5 $ 1,987 $ 1,935
Equipment . . . . . . . . . . . . . . . . . . . . . . 3 to 10 6,505 6,177
Leasehold improvements . . . . . . . . . . . . . . . . . . Life of lease 1,408 581
----------- -----------
9,900 8,693
Accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . (7,862) (7,236)
----------- -----------
$ 2,038 $ 1,457
=========== ===========
Depreciation and amortization of property and equipment included as
expense in the accompanying Consolidated Statements of Operations was $665,000,
$668,000, and $925,000 for the years ended June 30, 1996, 1995, and 1994,
respectively.
Maintenance and repair expenses approximated $268,000, $219,000 and
$354,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
F-9
37
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E DEBT
June 30,
------------------------------
1996 1995
------------------------------
(In thousands)
Bank line of credit, dated January 25, 1996 . . . . . . . . . $ 492 $ 438
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 339
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . 817 777
Current portion of long-term debt . . . . . . . . . . . . . . (815) (773)
---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 4
========== ==========
Versar maintained a bank line of credit for working capital purposes
with Riggs National Bank ("Riggs"). Prior to January 25, 1996, the line
provided for advances up to $1,500,000. On January 25, 1996, Versar obtained a
new line of credit with Riggs National Bank which provides for advances up to
$3,000,000. Borrowings on the line are at the prime rate of interest plus 1/2%
(8.75% at June 30, 1996). A fee of 1/4% on the unused portion of the line of
credit is also charged. The line is guaranteed by the Company and each
subsidiary individually and is collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property constituting
collateral. Borrowing availability under the bank line of credit is restricted
to the borrowing base of qualifying receivables less $1,500,000. Unused
borrowing availability at June 30, 1996 was $2,508,000. Advances under the
line are due upon demand or on December 31, 1996. The Company must also obtain
Riggs' approval prior to paying dividends. Additionally, the loan has certain
covenants related to maintenance of financial ratios. The Company was in
compliance with the financial covenants at June 30, 1996. Management believes
that cash generated by operations and borrowings available from the bank line
of credit will be adequate to meet the working capital needs for fiscal year
1997.
As previously reported, Versar has guaranteed certain debt of Sarnia
Corporation. At June 30, 1995, Versar guaranteed the total mortgage debt of
Sarnia Corporation ("Sarnia") (formerly Versar Virginia, Inc., which was
spun-off to Versar shareholders on June 30, 1994) which was approximately
$12,062,000. On January 25, 1996, Sarnia refinanced its outstanding debt.
Sarnia obtained a first mortgage of $9,000,000 with I.D.S. Life Insurance
Company, a $500,000 second mortgage with Riggs and a $1,500,000 seven year term
loan with Riggs. As a result of the refinancing, Versar's guarantee of
Sarnia's debt has decreased from approximately $12,400,000 to $1,500,000.
Sarnia has issued $750,000 of its Series A Cumulative Convertible Preferred
stock to a group of private investors. Versar has established a reserve of
$1,500,000 against the loan. As the term loan is repaid, the reserve will be
reduced and added to Versar's equity.
The revolving bank line of credit amount outstanding based on average
daily balances for the years ended June 30, 1996, 1995, and 1994, approximated
$673,000, $544,000, and $292,000, respectively, and the weighted average
interest rates for such periods were 10.94%, 10.92%, and 8.79%, respectively.
The maximum amount outstanding approximated $1,500,000, $1,375,000, and
$1,120,000 during fiscal years 1996, 1995, and 1994, respectively. Weighted
average interest rates are computed by relating the interest expense to the
average month-end balance.
Interest payments were $89,000, $157,000, and $62,000 for the years
ended June 30, 1996, 1995, and 1994, respectively.
F-10
38
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F STOCK OPTIONS
The Versar 1992 Stock Option Plan provides employees of the Company
and certain other persons an incentive to remain as employees of the Company
and encourages superior performance for the Company's benefit. Options are
also outstanding from the Incentive Stock Option Plan adopted in 1982 and a
Non-Qualified Option Plan adopted in 1987. Options are granted from these
plans to purchase the Company's common stock.
At June 30, 1996, options to purchase an aggregate of 1,215,790 shares
of common stock were outstanding under the 1992 and 1982 Incentive Stock Option
Plans at per share exercise prices ranging from $2.125 to $3.940 and options
to purchase an aggregate of 372,835 shares were outstanding under the
Non-Qualified Stock Option Plan at per share exercise prices ranging from
$2.375 to $3.563.
Under the Plan, options have been granted and may be granted to key
employees at the fair market value on the date of grant and become exercisable
during the four-year period from the date of the grant at 20% per year.
Unexercised options are cancelled on the fifth anniversary of certain grants
under the 1982 Plan and on the tenth anniversary of the grant under the
remainder of the 1982 and 1992 Plans.
Options under the Incentive Stock Option 1982 and 1992 Plans are as
follows:
Optioned Option Price
Shares Per Share Total
--------- ----------------------- ---------
(In thousands, except per share price)
Outstanding at June 30, 1993 . . . 971 $ 2.063 to $ 3.940 $ 2,575
Issued . . . . . . . . . . 88 2.563 to 3.938 282
Exercised . . . . . . . . . (35) 2.063 to 3.000 (88)
Cancelled . . . . . . . . . (72) 2.063 to 3.940 (187)
-------- ----------
Outstanding at June 30, 1994 . . . 952 2.063 to 3.940 2,582
Issued . . . . . . . . . . 62 2.000 to 3.375 184
Exercised . . . . . . . . . (30) 2.000 to 2.437 (67)
Cancelled . . . . . . . . . (42) 2.000 to 3.940 (108)
-------- ----------
Outstanding at June 30, 1995 . . . 942 2.063 to 3.940 2,591
Issued . . . . . . . . . . 389 2.813 to 3.625 1,178
Exercised . . . . . . . . . (80) 2.063 to 2.563 (185)
Cancelled . . . . . . . . . (35) 2.063 to 3.940 (96)
-------- ----------
Outstanding at June 30, 1996 . . . 1,216 $ 2.125 to $ 3.940 $ 3,488
======== ==========
At June 30, 1996, 1995, and 1994, options of 807,408, 667,515, and
508,443 shares were exercisable.
On April 30, 1987, the Board of Directors adopted a Non-Qualified
Stock Option plan. Participants in the plan include employees, independent
contractors, and, in certain circumstances, Directors of the Company. Options
are granted by the Board of Directors at a price not less than 50% of the fair
market value at the date of grant and for a period not to exceed 10 years.
Generally, options are issued at 100% of the market value at the date of grant.
F-11
39
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options under the 1987 Non-Qualified Plan are as follows:
Optioned Option Price
Shares Per Share Total
---------- --------------------- ----------
(In thousands, except per share price)
Outstanding at June 30, 1993 . . . 178 $ 2.375 to $ 2.500 $ 437
Issued . . . . . . . . . . 0 --- to --- 0
Cancelled . . . . . . . . . 0 --- to --- 0
------- ---------
Outstanding at June 30, 1994 . . . 178 2.375 to 2.500 437
Issued . . . . . . . . . . 0 --- to --- 0
Cancelled . . . . . . . . . 0 --- to --- 0
Exercised . . . . . . . . . (28) 2.500 to 2.500 (70)
------- ---------
Outstanding at June 30, 1995 . . . 150 2.375 to 2.500 367
Issued . . . . . . . . . . 264 3.000 to 3.563 804
Cancelled . . . . . . . . . (2) 2.437 to 2.437 (5)
Exercised . . . . . . . . . (39) 2.375 to 2.437 (93)
------- ---------
Outstanding at June 30, 1996 . . . 373 $ 2.375 to $ 3.563 $ 1,073
======= =========
Non-Qualified stock options of 163,367, 150,000, and 161,200 shares
were exercisable at June 30, 1996, 1995, and 1994, respectively.
NOTE G INCOME TAXES
At June 30, 1996, the Company had, for tax reporting purposes,
approximately $230,000 of business tax credit carryforwards available to offset
future taxes payable through 2002. In addition, the Company had $182,000 of
alternative minimum tax credit carryforwards which can be carried forward
indefinitely. The alternative minimum tax credit carryforward may be used to
offset regular tax liability in future years to the extent it exceeds the
alternative minimum tax liability. These carryforwards are reflected as
deferred tax assets.
F-12
40
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The provision (benefit) for income taxes consists of the following:
Years ended June 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Currently payable
Federal . . . . . . . . . . . . $ 2 $ (67) $ 95
State . . . . . . . . . . . . . 32 11 23
Deferred
Federal . . . . . . . . . . . . (250) --- (536)
State . . . . . . . . . . . . . --- --- ---
Federal tax charge due to Sarnia
spin-off . . . . . . . . . . . --- --- 1,750
-------- ------- -------
$ (216) $ (56) $ 1,332
======== ======= =======
Deferred tax assets are comprised of the following:
June 30, June 30,
1996 1995
---------- ----------
Deferred Tax Assets:
Employee benefits . . . . . . . $ 564 $ 430
Bad debt reserve . . . . . . . . 239 318
All other reserves . . . . . . . 332 501
Alternative minimum tax credits 182 182
Other business tax credits . . . 230 250
Net operating loss carryforwards --- 233
--------- ----------
Total Deferred Tax Assets . . . . . . 1,547 1,914
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . (65) (118)
Other . . . . . . . . . . . . . (1) ---
--------- ----------
Total Deferred Tax Liabilities (66) (118)
Net Deferred Tax Assets . . . . . 1,481 1,796
Valuation Allowance . . . . . . . . (708) (1,260)
--------- --------
Net Deferred Tax Asset . . . . . . $ 773 $ 536
========= ==========
At June 30, 1996, Versar had approximately $3.3 million of future tax
deductions to utilize against future taxable income. Due to Versar's
losses in previous years, the Company was unable to record a tax benefit of
$708,000 until the probability to realize these amounts becomes more certain.
F-13
41
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax (benefit) provision was composed of the following:
Years Ended June 30,
-------------------------------------------
1996 1995 1994
---------- ------------ ---------
(In thousands)
Expected provision (benefit) at federal
statutory rate . . . . . . . . . . $ 264 $ 137 $ (451)
Change in valuation allowance . . . . . . . (552) (512) --
Increase in valuation allowance due to spin-off -- -- 1,309
State income tax, net of federal benefit . 32 11 23
Losses on Sarnia operations not deductible 48 92 185
Other . . . . . . . . . . . . . . . . . (8) 216 266
-------- -------- -------
$ (216) $ (56) $ 1,332
========= ======== =======
Income taxes paid for the years ended June 30, 1996, 1995, and 1994
were $7,000, $140,000, and $34,000, respectively.
Tax Impact of Spin-off
The spin-off of Sarnia triggered a taxable event in 1994 through the
recapture of an "Excess Loss Account" (loss recorded for tax purposes in excess
of the investment due to accelerated depreciation). The excess loss account
had a balance of approximately $5 million, which was offset by debt forgiveness
by Versar of approximately $2.4 million, leaving $2.6 million of taxable income
to Versar. At March 31, 1994, Versar had $9.5 million of future tax
deductions, which were reduced by approximately $2.4 million for the debt
forgiveness and applied to the remaining taxable income of $2.6 million
resulting from the spin-off. In addition, approximately $141,000 of general
business credits were utilized in fiscal year 1994.
NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Company has established an Employee Savings and Stock Ownership
Plan (ESSOP) for the benefit of its employees and those of its subsidiaries.
To be eligible to participate in the plan, an employee must have been employed
for one year with at least 1,000 hours of service. The plan includes an
Employee Stock Ownership Plan (ESOP) and an Employee Savings Plan (401(k)).
Contributions to the ESOP are made at the discretion of the Company in
the form of the Company's stock or cash, which is invested by the plan's
trustee in the Company's stock. No contributions were made in fiscal years
1996, 1995, and 1994, respectively.
The Employee Savings Plan was adopted in accordance with Section
401(k) of the Internal Revenue Code. Under the plan, participants may elect to
defer up to 15% of salary through contributions to the plan, which are invested
in selected mutual funds or used to buy insurance. The Company will match
qualified contributions with a contribution of 100% of each employee's
contribution up to 4% of the employee's salary. This contribution may be in the
Company's stock or cash, which will be invested by the plan's trustees in the
Company's stock. Company matching contributions approximated $473,000,
$434,000, and $425,000 for fiscal years 1996, 1995, and 1994, respectively.
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42
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
All contributions to the 401(k) Plan vest immediately. Contributions
to the ESOP vest ratably with years of service such that full vesting occurs
after five years of credited service.
GEOMET Technologies, Inc. (Geomet), a wholly-owned subsidiary, has a
profit-sharing retirement plan for the benefit of its employees. Contributions
are made at the discretion of Geomet's Board of Directors. Geomet contributed
$0, $29,000 and $19,000 in fiscal years 1996, 1995 and 1994, respectively.
Vesting occurs over time, such that an employee is 100% vested after seven
years of participation.
VA&E, a former subsidiary of the Company, had a trusteed employee
stock ownership plan for all qualified employees. Employees generally are
eligible for participation after attaining age 21 and completing 1,000 or more
hours of service within a plan year. Benefits vest at the rate of 10% per year
of service for the first two years and 20% per year of service thereafter.
With the acquisition of VA&E by the Company, the plan received 45,042 shares of
the Company's stock in exchange for VA&E shares held. Since VA&E employees are
now eligible for participation in the Company's ESSOP, the VA&E plan has been
terminated and the assets merged with the Company's ESSOP in fiscal year 1995.
NOTE I COMMITMENTS AND CONTINGENCIES
Versar has a substantial number of U.S. Government contracts, the
costs of which are subject to audit by the Defense Contract Audit Agency. All
fiscal years through 1993 have been audited and closed. Management believes
that the effect of disallowed costs, if any, for the periods not yet audited
will not have a material adverse effect on the consolidated financial position
and results of operations.
The Company leases approximately 190,000 square feet of office space,
including space leased from Sarnia, as well as data processing and other
equipment under agreements expiring through 2009. Minimum future obligations
under operating leases are as follows:
Total
Years Ending June 30, Amount
--------------------- -------
(In thousands)
1997 . . . . . . . . . . . . . . . $ 3,339
1998 . . . . . . . . . . . . . . . 2,826
1999 . . . . . . . . . . . . . . . 2,143
2000 . . . . . . . . . . . . . . . 1,639
2001 . . . . . . . . . . . . . . . 1,196
2002 and thereafter . . . . . . . . 8,327
---------
$ 19,470
=========
Certain of the lease payments are subject to adjustment for increases
in utility costs and real estate taxes. Total rental expense approximated
$2,467,000, $2,938,000, and $2,986,000 for 1996, 1995, and 1994, respectively.
As part of the agreement to sell its laboratory assets and operations
to Kemron Environmental Services, Inc. (Kemron) in July 1994, Versar agreed to
refer its analytical laboratory work for a period of 48 months after the
closing date to Kemron subject to certain limitations and exclusions including
federal procurement requirements and the ability of Kemron to perform the
required services. On July 31, 1996, Kemron filed an action in the Circuit
Court of Fairfax County, Commonwealth of Virginia, entitled Kemron
Environmental Services, Inc. vs. Versar
F-15
43
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Laboratories, Inc. and Versar, Inc., Law No. L154205. Kemron alledged the
defendents breached warranties of certain provisions in the Asset Acquisition
Agreement and alledged damages in the amount of not less than $3,000,000.
Management is unable to estimate its ultimate exposure for this matter at this
time.
Versar is a defendant in lawsuits that have arisen in the ordinary
course of its business. Such lawsuits include actions brought by a former
officer of the Company and certain customers and are currently in various
stages of litigation. Management does not believe that the outcome of these
lawsuits will have a material adverse effect on the Company's consolidated
financial position and results of operations.
NOTE J CUSTOMER INFORMATION
A substantial portion of the Company's consulting revenue is derived
from contracts with the U.S. Government as follows:
Years Ended June 30,
-----------------------------------------------
1996 1995 1994
------------ --------------- ------------
(In thousands)
U.S. Department of Defense $ 16,479 $ 13,194 $ 11,260
U.S. Environmental Protection Agency 3,787 5,375 6,151
Other U. S. Government Agencies 2,035 1,707 1,312
------------- ---------- ----------
Total U.S. Government $ 22,301 $ 20,276 $ 18,723
============= ========== ==========
The Company's largest contract generated revenues of approximately
$7,951,000 in fiscal year 1996.
No other contracts individually exceeded 10% of total revenues in
fiscal year 1996, 1995, and 1994, respectively.
F-16
44
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 1996 and 1995 is as
follows (in thousands, except per share amounts):
Fiscal Year 1996 Fiscal Year 1995
------------------------------------------------- ---------------------------------------------
Quarter ending Jun 30 Mar 31 Dec 31 Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
- -------------------------- --------- ------------ ----------- ----------- ---------- ------------ -------- ----------
Gross Revenue . . . . . . . $ 10,597 $ 11,389 $ 11,807 $ 10,490 $ 10,254 $ 10,054 $ 9,364 $ 9,418
Net Service Revenue . . . . 7,951 8,224 8,130 7,614 7,505 7,414 7,279 7,149
Operating income . . . . . 121 245 293 213 176 190 148 46
Net income . . . . . . . . $ 374 $ 213 $ 230 $ 175 $ 205 $ 152 $ 101 $ ---
======== ========= ========== ========== ========= ========= ========= ========
Net income per share . . . $ .07 $ .04 $ .04 $ .03 $ .04 $ .03 $ .02 $ ---
======== ========= ========== ========== ========= ========= ========= ========
Weighted average number of
shares outstanding . . . 5,276 5,216 5,170 5,178 4,837 4,853 4,878 4,824
======== ========= ========== ========== ========= ========= ========= ========
Quarterly financial data may not equal annual totals due to rounding.
Quarterly earnings per share data will not equal annual total due to
fluctuations in common shares outstanding.
F-17
45
SCHEDULE II
VERSAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
YEAR EXPENSES CHARGE OFF YEAR
----------- ----------- ------------ ------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
1994 $ 1,760,713 $ (12,167) $ (396,937) $ 1,351,609
1995 1,351,609 770 (395,180) 957,199
1996 957,199 (36,710) (217,262) 703,227
F-18