<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
<TABLE>
<S> <C>
For the Quarterly Period Ended March 31, 1995 Commission File Number 1-9309
------------------------ ------
</TABLE>
VERSAR, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code (703) 750-3000
------------------------------
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at April 30, 1995
--------------------- -----------------------------
$ .01 par value 4,704,243 shares
<PAGE> 2
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 1995 and June 30, 1994. 3
Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
March 31, 1995 and 1994. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended March 31,
1995 and 1994. 5
Notes to Consolidated Financial Statements 6-9
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 13
ITEM 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
---------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . $ 56 $ 72
Accounts receivable, net . . . . . . . . . . . . . 11,521 10,693
Prepaid expenses and other current assets . . . . . 687 1,374
Assets of Sarnia transferred . . . . . . . . . . . 386 357
Deferred taxes . . . . . . . . . . . . . . . . . . 536 536
------------ ------------
Total current assets . . . . . . . . . . . . . 13,186 13,032
Property and equipment, net . . . . . . . . . . . . . 1,352 1,686
Assets of Sarnia transferred . . . . . . . . . . . . . 12,743 13,005
Other assets . . . . . . . . . . . . . . . . . . . . 26 59
------------ ------------
Total assets . . . . . . . . . . . . . . . . . $ 27,307 $ 27,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Liabilities of Sarnia transferred . . . . . . . . . $ 1,795 $ 648
Accounts payable . . . . . . . . . . . . . . . . . 1,959 1,476
Bank line of credit . . . . . . . . . . . . . . . . 230 ---
Current portion of long-term debt . . . . . . . . . 265 1,201
Income taxes payable . . . . . . . . . . . . . . . --- 95
Accrued salaries and vacation . . . . . . . . . . . 1,106 1,269
Other liabilities . . . . . . . . . . . . . . . . . 1,871 2,291
Liabilities of discontinued operations . . . . . . 695 791
------------ ------------
Total current liabilities . . . . . . . . . . 7,921 7,771
Long-term debt . . . . . . . . . . . . . . . . . . . . 4 17
Liabilities of Sarnia transferred . . . . . . . . . . 12,554 13,722
Other long-term liabilities . . . . . . . . . . . . . 1,020 1,011
------------ ------------
Total liabilities . . . . . . . . . . . . . . 21,499 22,521
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 10,000,000 shares
authorized; 4,728,591 shares and 4,609,213 shares
issued and outstanding at March 31, 1995, and
June 30, 1994, respectively
Less: Treasury stock, 24,348 shares at par . . . . 47 46
Capital in excess of par value . . . . . . . . . . . 12,531 12,238
Accumulated deficit . . . . . . . . . . . . . . . . . (6,770) (7,023)
------------ ------------
Total stockholders' equity . . . . . . . . . . 5,808 5,261
------------ ------------
Total liabilities and stockholders' equity . . $ 27,307 $ 27,782
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
---------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
GROSS REVENUE . . , , , . . . . . . . . . . . . . . . . . . . $ 10,054 $ 10,253 $ 28,837 $ 32,683
Purchased services and materials, at costs . . . . . . . . . 2,640 2,522 6,995 9,232
----------- ----------- ---------- -----------
NET SERVICE REVENUE . , . . . . . . . . . . . . . . . . . . . 7,414 7,731 21,842 23,451
Direct costs of services and overhead . . . . . . . . . . . . 6,030 6,526 17,938 19,018
Selling, general and administrative expenses . . . . . . . . 1,315 1,338 3,502 4,123
Other (income) costs , . . . . . . . . . . . . . . . . . . . (172) 836 (195) 797
Losses on Sarnia operations . . . . . . . . . . . . . . . . . 51 180 212 467
----------- ----------- ---------- -----------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . 190 (1,149) 385 (954)
OTHER EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . 23 54 93 82
Income tax expense (benefit) . . . . . . . . . . . . . . . . 15 (6) 38 10
----------- ----------- ---------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 152 (1,197) 254 (1,046)
----------- ----------- ---------- -----------
LOSS FROM
DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . --- (2,460) --- (2,766)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . --- --- --- 556
----------- ----------- ---------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . $ 152 $ (3,657) $ 254 $ (3,256)
=========== =========== ========== ===========
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . $ .03 $ (.26) $ .05 $ (.24)
=========== =========== ========== ===========
(LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . $ --- $ (.54) $ --- $ (.62)
=========== =========== ========== ===========
INCOME PER SHARE FROM
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . $ --- $ --- $ --- $ .13
=========== =========== ========== ===========
NET INCOME (LOSS) PER SHARE . . . . . . . . . . . . . . . . . $ .03 $ (.80) $ .05 $ (.73)
=========== =========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING . . . . . . . . . . . . . . . . . . . . . 4,853 4,533 4,784 4,452
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
VERSAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine-Month
Periods Ended March 31,
--------------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Income (Loss) from continuing operations . . . . . . . . . . . . . . . . $ 254 $ (1,046)
(Loss) from discontinued operations . . . . . . . . . . . . . . . . . . . --- (2,766)
Cumulative effect of change in accounting principle . . . . . . . . . . . --- 556
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 541 722
Provision for loss of discontinued operation . . . . . . . . . . . . . --- 2,100
Provision for doubtful accounts receivable . . . . . . . . . . . . . . (28) (204)
Common stock issued to 401K and ESSOP . . . . . . . . . . . . . . . . 231 734
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95) (556)
Change in assets and liabilities
(Increase) in accounts receivable . . . . . . . . . . . . . . . . . . (800) (261)
Decrease (Increase) in prepaids and other assets . . . . . . . . . . . 697 (441)
Increase (Decrease) in accounts payable . . . . . . . . . . . . . . . 483 (61)
(Decrease) in accrued salaries and vacation . . . . . . . . . . . . . (163) (438)
(Decrease) Increase in other liabilities . . . . . . . . . . . . . . . (411) 541
Net change in assets and liabilities of Sarnia . . . . . . . . . . . . 212 --
------------- ------------
Net cash from continuing operations . . . . . . . . . . . . . . . . . . . 921 (1,120)
Changes in net liabilities of discontinued operations . . . . . . . . (97) 762
------------- ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . 824 (358)
------------- ------------
Cash flows from investing activities
Purchase of property and equipment . . . . . . . . . . . . . . . . . . (184) (181)
------------- ------------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . (184) (181)
------------- ------------
Cash flows from financing activities
Net borrowings on the line of credit . . . . . . . . . . . . . . . . . 230 450
Principal payments on long-term debt . . . . . . . . . . . . . . . . . (949) (633)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . 63 50
------------- ------------
Net cash (used in) financing activities . . . . . . . . . . . . . . . . . (656) (133)
------------- ------------
Net (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . (16) (672)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 72 696
------------- ------------
Cash and cash equivalents at the end of the period . . . . . . . . . . . $ 56 $ 24
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114 $ 46
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 34
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in Versar, Inc.'s ("Versar" or the "Company")
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
These financial statements should be read in conjunction with the Company's
Annual Report filed on Form 10-K for the year ended June 30, 1994 for
additional information, which is in the process of being restated.
The financial information has been prepared in accordance with the
Company's accounting practices. In the opinion of Management, the information
presented reflects all adjustments necessary for a fair presentation of the
Company's consolidated financial position as of March 31, 1995, and the results
of operations for the nine-month periods ended March 31, 1995 and 1994. The
results of operations for such periods, however, are not necessarily indicative
of the results to be expected for a full fiscal year.
The Company's analytical laboratory operations have been presented as
discontinued operations for income statement purposes and the assets and
liabilities of the laboratory operations have been netted together and
presented as a net liability on the balance sheet. Refer to page 7 of Note E,
Notes to Consolidated Financial Statements for further information regarding
the financial treatment of the real estate operations, which were spun-off to
the shareholders on June 30, 1994.
Certain Balance Sheet, Statement of Operations, and Statement of Cash
Flows items have been restated for comparative financial statement purposes.
(B) Debt
Versar maintains a revolving bank line of credit for working capital
purposes with a commercial bank which provides for advances up to $1,500,000.
Borrowing availability under the line of credit agreement is restricted to the
borrowing base of qualifying receivables, less $3,150,000. Borrowings on the
line are at the prime rate of interest plus 2.5%, or 11.5% at March 31, 1995.
The bank line is guaranteed by the Company and each subsidiary individually and
collectively, secured by accounts receivable, equipment and intangibles, plus
all insurance policies on property constituting collateral. The loan is due
upon demand or September 30, 1995. The Company must obtain the bank's
approval prior to paying dividends.
With the spin-off of Versar's real estate operations to Sarnia
Corporation in the fourth quarter of fiscal year 1994, Versar assumed
$1,000,000 of the outstanding mortgages and the remaining balance of
$12,450,000 was retained by Sarnia Corporation. Versar will continue to act as
guarantor of the debt retained by Sarnia.
(C) Adoption of SFAS 109 "Accounting for Income Taxes"
Versar adopted SFAS 109 "Accounting for Income Taxes" as of July 1,
1993. The cumulative effect of this change was a credit to earnings of
$556,000 in the first quarter of fiscal year 1994, which related to the
release of deferred tax liabilities that were previously established under APB
11. The Company utilized the tax planning strategies available under SFAS 109
to accelerate the reversal of excess depreciation on the Versar Headquarters
buildings. A substantial portion of the $2.4 million net deferred tax assets
relate to net operating loss and tax credit carryforwards. Due to the
Company's history of operating losses, a valuation allowance of $1.8 million
has been established under SFAS 109. With increased profitability, such net
operating loss and tax credit carryforwards would be utilized and the valuation
allowance would be adjusted accordingly.
6
<PAGE> 7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(D) Discontinued Operation
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 for
the last three years. Subsequent to this decision, Kemron Environmental
Services, Inc. purchased the fixed assets of VLI for $250,000 on August 1,
1994. With the purchase of assets and the assumption of certain lease
obligations, the Company was able to reverse $300,000 of the previously
recorded reserve in the fourth quarter of fiscal year 1994.
(E) Sarnia Corporation
Sarnia Corporation (Sarnia), formerly Versar Virginia, Inc., owns and
operates an 18.3 acre office park in Springfield, Virginia, consisting of two
office buildings which aggregate 229,000 square feet. One building is
primarily occupied by Versar and the other building by primarily unrelated
third-party tenants.
On June 30, 1994, Sarnia was spun-off to Versar shareholders. The
spin-off was initially accounted for as a discontinuation of operations.
However, the spin-off did not transfer the risks of ownership to Sarnia due to
Versar's guarantee of Sarnia's $12.5 million debt at June 30, 1994. Therefore,
the financial statements of the Company should have continued to include
Sarnia's results of operations and financial position.
The results of operations for Versar, Inc. for the quarters ended
December 31, and September 30, 1994 previously reported and as restated to
include Sarnia as follows (000's):
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, 1994 September 30, 1994
------------------- ----------------------
<S> <C> <C>
Net income previously reported . . . . . . . . . $ 262 $ 86
Provision for Sarnia losses (as restated) . . . . (161) (86)
-------- --------
Net income as restated . . . . . . . . . . . . . 101 0
======== ========
Income per share from continuing operations
previously reported . . . . . . . . . . . . . .05 .02
======== ========
Income per share from continuing operations
as restated . . . . . . . . . . . . . . . . .02 0
======== ========
Net income per share previously reported . . . . .05 0
======== ========
Net income per share as restated . . . . . . . . $ .02 $ 0
======== ========
</TABLE>
The balance sheets at December 31, September 30, and June 30, 1994 will be
restated to include the assets and liabilities of Sarnia which are as follows
(000's):
<TABLE>
<CAPTION>
December 31, 1994 September 30, 1994 June 30, 1994
----------------- ------------------ -------------
<S> <C> <C> <C>
Current assets of Sarnia transferred . . . . . . $ 445 $ 463 $ 357
Land and buildings, net . . . . . . . . . . . . . 12,765 12,884 13,005
Current liabilities and the current portion
of debt . . . . . . . . . . . . . . . . . . . . (1,723) (1,686) (648)
Mortgage and tax liabilities . . . . . . . . . . (12,656) (12,755) (13,722)
-------- -------- --------
Net liabilities of Sarnia transferred . . . . . . $(1,169) $(1,094) $(1,008)
======== ======== ========
</TABLE>
7
<PAGE> 8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Sarnia Corporation (continued)
The statement of operations for the year ended June 30, 1994 will be
restated for the above items:
<TABLE>
<CAPTION>
For the year ended
As previously As
reported restated
-------- ----------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $42,764 $42,764
Operating loss . . . . . . . . . . . . . . . . . (420) (1,264)
Loss from continuing operations . . . . . . . . . (500) (2,653)
Loss from discontinued operations . . . . . . . . (2,809) (2,266)
Cumulative effect of change in
accounting principle . . . . . . . . . . . . 556 556
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . $(2,753) $(4,363)
======== ========
Loss per share from continuing operations . . . . $ (.11) $ (.59)
Loss per share from discontinued operations . . . (.63) (.50)
Income per share from cumulative effect in
accounting . . . . . . . . . . . . . . . . . . . .13 .12
-------- --------
Net loss per share . . . . . . . . . . . . . . . $ (.61) $ (.97)
======== ========
</TABLE>
The adjustments to the financial statements include $1,614,000 to net
income for items previously charged to equity. The components of the
adjustment include a net tax liability of $1,309,000 as a result of the
spin-off of Sarnia as Versar's tax assets could no longer be offset by Sarnia's
tax liability, and $305,000 of spin-off costs. In addition, $543,000 of
Sarnia's losses included as discontinued operations were moved to continuing
operations.
Versar may elect from time to time, in its sole discretion, to loan
funds to Sarnia if needed by Sarnia to make its debt service payment on a
timely basis, in order to avoid any call of Versar's guaranty.
As a part of the transaction, Versar has entered into a 15-year lease
in the 6850 building for 99,588 square feet at an initial rate of $13.49 per
square foot. Also, the Company will lease 8,918 square feet of storage space
at an initial rate of $8.00 per square foot. Both leases are subject to two
percent escalation per year and readjustment every five years based upon the
fair market rental. Certain financial and administrative activities will be
performed by Versar for Sarnia at a fixed rate of $3,000 per month.
(F) Contingencies
The Company 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, certain customers, and some third parties are
currently in various stages of litigation. Management believes that any
adverse outcomes of these lawsuits will not have a material adverse effect of
the Company's consolidated financial position and results of operations.
8
<PAGE> 9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(G) Net Income (Loss) Per Share
Income per share from continuing operations, loss per share from
discontinued operations, and net income per share are computed by dividing each
by the weighted average number of common shares outstanding during the
applicable period being reported.
(H) Common Stock
In fiscal year 1995, Versar issued approximately 28,000 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal year 1994 and 29,000 shares for the nine months of
fiscal year 1995.
In the fiscal year 1994, Versar issued approximately 296,000 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal years 1994 and 1993.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations include the results of Versar and Sarnia
Corporation (formerly a wholly owned subsidiary), which was spun-off to
shareholders on June 30, 1994.
Third Quarter Comparison for Fiscal Years 1995 and 1994
Versar's gross revenue for the third quarter ended March 31, 1995
totaled $10,054,000, a decrease of $199,000 (2%) compared to gross revenue of
$10,253,000 for the same period in the prior year. The decrease in gross
revenue was due to the winding down of the Company's USATHAMA Total Program
Support and Metropolitan Washington Airport Authority contracts. These gross
revenue reductions were partially offset with increased revenues provided
through the Company's Air Force, San Francisco Airport, and Presideo contracts
in the Company's Rocky Mountain and Pacific divisions.
Purchased services and materials for the third quarter of fiscal year
1995 increased by $118,000 (5%) compared to costs for the comparable period of
the previous year. The increase is principally due to the increased
subcontract costs associated with the Company's Air Force contract mentioned
above.
Net service revenue is derived by deducting the costs of purchased
services from the gross revenue. Versar considers it appropriate to analyze
operating margins and other ratios in relation to net service revenue because
such revenues reflect the actual work performed by the Company. Net service
revenue decreased by $317,000 (4%) compared to the third quarter of fiscal year
1994. The decrease is due to more competitive pricing and the lower level of
gross revenue as mentioned above.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 contracts. The percentage of costs to
net service revenue decreased to 82% in the third quarter of 1995 compared to
84% in the third quarter of fiscal year 1994. The decrease is attributable to
improved labor utilization in the Rocky Mountain and Pacific divisions.
Selling, general and administrative expenses approximated 18% of net
service revenue in the third quarter of fiscal year 1995, compared to 17% in
the third quarter of fiscal year 1994. The increase is due to increased
proposal activities during the quarter.
Other costs include costs and revenues that are not directly
attributable to contracts. For the third quarter of fiscal year 1995, the
Company recognized non-compete income of $12,000 compared to $20,000 recognized
in the third quarter of fiscal year 1994. In the third quarter of fiscal year
1995 the Company reversed $160,000 of accrued real estate costs that were no
longer required. In the third quarter of fiscal year 1994, the Company accrued
$400,000 for other real estate losses and $456,000 for software and service
contracts which were determined to be of limited future value.
Losses on Sarnia operations are from the Company's real estate
operations that were spun-off to shareholders on June 30, 1994. Because the
risks of ownership have not transferred, Sarnia's losses are included in
Versar's financial statements. For the third quarter of fiscal year 1995,
Sarnia had losses of $51,000 compared to $180,000 in the third quarter of
fiscal year 1994. Sarnia's losses decreased due to increased rentals, other
income, and tight management of expenses.
Operating income for the third quarter of fiscal year 1995 was
$190,000, an increase of $1,339,000 over the third quarter of fiscal year 1994.
The increase is attributable to the decrease in direct costs of services and
overhead and other costs.
Interest expense during the third quarter of fiscal year 1995
decreased by $31,000 (57%) compared to costs for the comparable period of the
previous year. The decrease reflects the lower level of utilization of the
Company's line of credit and reduced long-term debt.
Versar had a net income of $152,000 in the third quarter of fiscal
year 1995 compared to a net loss of $3,657,000 in the third quarter of the
prior fiscal year. The increase in income is primarily the result of
management's decision to focus on the core consulting business by selling its
analytical laboratory operations.
Nine Month Comparison for Fiscal Years 1995 and 1994
Versar's gross revenue for the nine months ended March 31, 1995
totaled $28,837,000, a decrease of $3,846,000 (12%) compared to gross revenue
of $32,683,000 for the nine months of fiscal year 1994. The decrease in gross
revenue was due to the winding down of the Company's USATHAMA and Metropolitan
Washington Airport Authority contracts, which are being performed by the
Company's Atlantic division and Geomet subsidiary.
Purchased services and materials for the nine months of fiscal year
1995 decreased by $2,237,000 (24%) compared to costs for the comparable period
of the previous year. The decrease is principally due to the decrease in gross
revenue as mentioned above.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net service revenue decreased by 7% compared to the first nine months
of fiscal year 1994. The decrease is due to the lower volume in gross revenue.
The percentage of direct costs of services and overhead to net service
revenue increased slightly to 82% in the first nine months of fiscal year 1995
compared to 81% in the first nine months of fiscal year 1994. The increase is
attributable to more competitive pricing and lower markup earned from purchased
services and materials due to the lower volume.
Selling, general and administrative expenses approximated 16% of net
service revenue in the first nine months of fiscal year 1995, compared to 18%
in the first nine months of fiscal year 1994. The decrease is the result of
management's continued efforts to reduce costs and maintain a stable
relationship as a percentage of net service revenue.
Other costs for the first nine months of fiscal year 1995 decreased by
$992,000 over that reported in the previous fiscal year. The Company
recognized $35,000 on non-compete income from the sale of its majority-owned
subsidiary, Gammaflux, Inc. in the first nine months of fiscal year 1995
compared to $59,000 in the first nine months of fiscal year 1994. In the first
nine months of fiscal year 1995, the Company reversed $160,000 of accrued real
estate costs that were no longer required. In the first nine months of fiscal
year 1994, the Company accrued $400,000 for other real estate losses and
$456,000 for software and service contracts which were determined to be of
limited future value.
Losses on Sarnia operations are from the Company's real estate
operations that were spun-off to shareholders on June 30, 1994. Losses on
Sarnia operations for the first nine months decreased by $255,000 compared to
costs for the comparable period of the previous year.
Operating income for the first nine months of fiscal year 1995 was
$385,000 an increase of $1,339,000 over the first nine months of fiscal year
1995. The increase is attributable to the lower other costs and maintaining
stable cost relationships as a percentage of net service revenue.
Interest expense during the first nine months of fiscal year 1995
increased by $11,000 (13%) compared to costs for the comparable period of the
previous year. The increase reflects the assumption of $1,000,000 of debt from
the spin-off of the Company's real estate operations and from higher interest
rates.
Versar had a net income of $254,000 for the first nine months of
fiscal year 1995 compared to a net loss of $3,256,000 for the first nine months
of fiscal year 1994. The increase is primarily the result of the provision for
discontinued operations and other costs in fiscal year 1994 as discussed above.
Liquidity and Capital Resources
The Company's working capital at March 31, 1995 approximated
$5,265,000 or $4,000 higher than June 30, 1994. The increase is primarily due
to Sarnia liabilities due under its mortgages that become current in fiscal
year 1996. In addition, the Company's current ratio at March 31, 1995 was
1.66 to 1, slightly less than that reported at the end of fiscal year 1994.
The Company's revolving line of credit for working capital provides for
advances up to $1,500,000. Borrowing availability under the line of credit is
restricted to the borrowing base of qualifying receivables, less $3,150,000.
Borrowings on the line are at the prime rate of interest plus 2.5%, or 11.5% at
March 31, 1995. The Company uses the line of credit for short-term working
capital needs, and at March 31, 1995, the Company had $230,000 borrowing under
the line of credit and $1,270,000 of availability. The line of credit is due
upon demand, or September 30, 1995. Management
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
believes that cash generated by operations and borrowings available from its
line of credit will be adequate to meet the working capital needs for fiscal
year 1995, provided the Company is successful in maintaining its profitability.
At March 31, 1995, the Company was in compliance with the covenants of the line
of credit. However, the bank is not required to make working capital advances
if Versar is in non-compliance with the covenants of the Credit Facility,
therefore, the Company cannot predict the bank's decision in advance of an
actual default.
One of the buildings in Springfield, Virginia, formerly held by the
Company and spun-off to Sarnia, was refinanced on June 22, 1994 by a reducing
term loan and is being amortized over a three-year period. The reducing term
loan provides for sixty equal installments and certain quarterly installments
over the term of the loan. This agreement has been renegotiated as part of the
spin-off of Versar's real estate operations to its shareholders. At June 30,
1994, the total bank debt was approximately $13,450,000 of which Versar assumed
$1,000,000 and the balance was retained by the real estate entity, Sarnia
Corporation. At March 31, 1995, the balance of $234,400 of principal payments
of the debt directly assumed by Versar is due in monthly installments during
the remaining three months of fiscal year 1995, which will be paid out of
current working capital. Versar may elect from time to time, in its sole
discretion, to loan funds to Sarnia if needed by Sarnia to make its debt
service payments on a timely basis, in order to avoid call of Versar's
guaranty. Versar will continue to act as guarantor of the total debt should an
event of default occur. Principal payments due under Sarnia's reducing
revolving loan and term loan are approximately $1,406,000 and $1,342,000 in
fiscal years 1996 and 1997, respectively. The remaining outstanding balance of
$9,291,502 is due in May 1997. In fiscal year 1995 Sarnia has the capability
to pay approximately $300,000 in principal payments. In fiscal years 1996 and
1997, Sarnia expects to have the capability to pay between $300,000 to $500,000
in principal payments. Therefore, Versar and Sarnia are currently seeking
alternatives to refinance the existing debt in fiscal year 1995 in order to
reduce the amount of principal payments and minimize Versar's guarantee of
Sarnia's debt.
Divested Real Estate Spun-Off to Shareholders
As previously reported, the Company's financial reporting of the
spin-off of its real estate holdings in Sarnia Corporation on June 30, 1994,
has been under review. The Company's independent accountants advised it to
change its financial reporting to include the results of operations and
financial position of Sarnia in the Company's audited financial statements for
the fiscal year ended June 30, 1994 and for the first three quarters of 1995.
The Company has therefore adopted the change for the third quarter and will
restate its June 30, 1994 financial statements and its September and December
1994 quarterly filings.
The Company is evaluating a number of alternatives to resolve this
issue, including the refinancing of certain of Sarnia's outstanding debt to
lessen the Company's guarantee with respect to such debt.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. 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, Inc. (the "Company"), 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 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.
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 has rejected the opportunity
to have judgement entered for $75,000 or proceed with a new trial. On June 16,
1993, the trial court entered final judgement on all outstanding issues. The
matter is now on appeal to the Colorado Court of Appeals by both parties. Both
parties have filed briefs and oral argument took place on April 18, 1995.
Versar's management believes that the possibility of a material adverse outcome
in this case is unlikely.
On June 24, 1992, William Levy, a real estate developer, on behalf of
himself and Harper Realty, Inc., a company he controls filed an action in
Illinois state court which was removed to federal court and is entitled William
Levy and Harper Realty Trust v. Versar, Inc. Civil Action No. 92 C4836 the
lawsuit alleges breach of contract and negligent misrepresentation as a result
for failure to advise plaintiffs to test for certain contamination at a former
commercial laundry site. Pursuant to motion by Versar the Court dismissed the
breach of contract claim but refused to dismiss the claim for negligent
misrepresentation on the pleadings alone. In a separate lawsuit in federal
court, plaintiffs sued the prior owner under federal superfund law and state
common law theories. In November 1993 in the second lawsuit, the court held
the prior owner responsible for the contamination and all response and clean-up
costs. In July 1994, Versar filed a motion for partial summary judgment on
liability for future response costs in the Levy case which was denied by the
Court in April 1995. The parties have recently engaged in settlement
negotiations but because of settlement of other claims by the Company there may
not be sufficient insurance coverage to pay all of any settlement or judgement.
However, based upon opinion of outside counsel, Versar's management believes it
has meritorious defenses to this lawsuit and, further, an adverse result will
not have a material adverse impact on the Company's consolidated financial
position and results of operations.
Versar and its subsidiaries are parties to various legal actions
arising in the normal course of business. The Company believes that the
ultimate resolution of these legal actions will not have a material adverse
effect on its consolidated financial condition.
13
<PAGE> 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSAR, INC.
-----------------------------
(Registrant)
By: /s/ Lawrence W. Sinnott
-----------------------------------------
Lawrence W. Sinnott
Vice President, Chief Financial
Officer, and Treasurer (duly authorized
officer and Principal Financial Officer)
Date: May 22, 1995
15
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