UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 1996 Commission File Number 1-9309
___________________ _______
VERSAR, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
_______________________________________ ______________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
________________________________________ _____________________________________
(Address of principal executive offices) (Zip Code)
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 October 31, 1996
_____________________ _______________________________
$ .01 par value 5,013,051 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
____
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996. 3
Consolidated Statements of Operations for the
Three-Month Periods Ended September 30, 1996 and 1995. 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
September 30, 1996 and 1995. 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 10-11
ITEM 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
_____________ ___________
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . $ 94 $ 83
Accounts receivable, net. . . . . . . . 13,367 12,376
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . 1,094 1,365
Deferred income taxes . . . . . . . . . 473 473
________ ________
Total current assets . . . . . . . 15,028 14,297
Property and equipment, net . . . . . . 2,062 2,038
Deferred income taxes . . . . . . . . . 300 300
Other assets. . . . . . . . . . . . . . 339 344
________ ________
Total assets . . . . . . . . . . . $17,729 $16,979
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . $ 2,658 $ 2,098
Bank line of credit . . . . . . . . . . 1,146 492
Current portion of long-term debt . . . 132 323
Accrued salaries and vacation 1,323 1,619
Other liabilities . . . . . . . . . . . 1,908 2,136
________ ________
Total current liabilities. . . . . 7,167 6,668
Long-term debt. . . . . . . . . . . . . . 2 2
Other long-term liabilities . . . . . . . 987 1,033
Reserve on guarantee of real
estate debt. . . . . . . . . . . . . . . 1,500 1,500
________ ________
Total liabilities. . . . . . . . . 9,656 9,203
________ ________
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 10,000,000
shares authorized; 5,005,051 shares and
4,994,693 shares issued and outstanding
at September 30 and June 30, 1996,
respectively . . . . . . . . . . . . . 50 50
Capital in excess of par value. . . . . 13,331 13,299
Accumulated deficit . . . . . . . . . . (5,308) (5,573)
________ ________
Total stockholders' equity. . . . . 8,073 7,776
Total liabilities and
stockholders' equity. . . . . . . . $17,729 $16,979
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended September 30,
____________________________
1996 1995
_________ _________
<S> <C> <C>
GROSS REVENUE . . . . . . . . . . . $11,458 $10,490
Purchased services and
materials, at costs . . . . . . . 3,584 2,876
________ ________
NET SERVICE REVENUE . . . . . . . . 7,874 7,614
Direct costs of services
and overhead. . . . . . . . . . . 6,402 6,153
Selling, general and
administrative expenses . . . . . 1,171 1,172
Other (income). . . . . . . . . . . (10) (7)
Losses on Sarnia operations . . . . --- 83
________ ________
OPERATING INCOME. . . . . . . . . . 311 213
OTHER EXPENSE
Interest expense. . . . . . . . . . 19 24
Income tax expense. . . . . . . . . 27 14
________ ________
NET INCOME. . . . . . . . . . . . . $ 265 $ 175
======== ========
NET INCOME PER SHARE. . . . . . . . $ .05 $ .03
======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . . . . . 5,127 5,190
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended September 30,
___________________________
1996 1995
________ ________
<S> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . $ 265 $ 175
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization . . . . . 184 150
Provision for doubtful accounts
receivable . . . . . . . . . . . . . . 4 ---
Common stock issued to ESSOP. . . . . . 26 109
________ ________
Subtotal . . . . . . . . . . . . . . 479 434
Changes in assets and liabilities,
net of asset dispositions
Increase in accounts receivable . . . . (995) (757)
Decrease (increase) in prepaids
and other assets . . . . . . . . . . . 271 (158)
Increase in accounts payable. . . . . . 560 638
Decrease in accrued salaries and
vacation . . . . . . . . . . . . . . . (296) (91)
Decrease in other liabilities . . . . . (274) (292)
Net change in assets and liabilities
of Sarnia. . . . . . . . . . . . . . . --- 83
________ ________
Net cash from continuing operations . (255) (143)
Changes in net liabilities of
discontinued operations. . . . . . . . --- (41)
________ ________
Net cash used in operating
activities . . . . . . . . . . . . . (255) (184)
________ ________
Cash flows from investing activities
Purchase of property and equipment . . . . . (203) (179)
________ ________
Cash flows from financing activities
Net borrowings on bank line
of credit . . . . . . . . . . . . . . . . . 654 539
Principal payments on long-term debt . . . . (191) (198)
Proceeds from issuance of the Company's
common stock. . . . . . . . . . . . . . . . 6 22
________ ________
Net cash provided by
financing activities . . . . . . . . 469 363
________ ________
Net increase in cash . . . . . . . . . . . . . 11 ---
Cash at the beginning of the year. . . . . . . 83 58
________ ________
Cash at the end of the period. . . . . . . . . $ 94 $ 58
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . . $ 18 $ 11
Income taxes. . . . . . . . . . . . . . . 59 2
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
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, 1996
for additional information.
The financial information has been prepared in accordance with the
Company's customary accounting practices. In the opinion of management, the
information reflects all adjustments necessary for a fair presentation of the
Company's consolidated financial position as of September 30, 1996, and the
results of operations for the three-month periods ended September 30, 1996 and
1995. The results of operations for such periods, however, are not
necessarily indicative of the results to be expected for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with 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.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred
plus accrued profits or net estimated realizable value of incurred costs,
reduced by progress billings. The Company records income from major fixed-
price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed and
revisions are made as required. The effects of these revisions are included
in the periods in which the revisions are made. On cost-plus-fee contracts,
revenue is recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material contracts, revenue is
recognized to the extent of billable rates times hours delivered plus material
and other reimbursable costs incurred. Losses on contracts are recognized in
the period in which 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 is 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.
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(D) Income Taxes
At June 30, 1996, the Company had $1.5 million net deferred tax assets
which primarily relate to net operating loss and tax credit carryforwards.
Due to the Company's history of operating losses, a valuation allowance of
$0.7 million has been established. With increased profitability, such net
operating loss and tax credit carryforwards would be utilized and the
valuation allowance would be adjusted accordingly.
(E) Contingencies
Versar and its subsidiaries are parties to various legal actions arising
in the normal course of business. The Company believes that the ultimate
resolution of these legal actions will not have a material adverse effect on
its consolidated financial condition and results of operations.
(F) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the applicable period being
reported.
(G) Common Stock
In fiscal year 1997 to date, Versar issued approximately 7,498 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal year 1996. In the fiscal year 1996, Versar
issued approximately 32,348 shares to various employee benefit plans as part
of the Company's contribution to employee benefits for fiscal year 1995.
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
First Quarter 1997 Compared to First Quarter 1996
Versar's gross revenue for the first quarter of fiscal year 1997
increased by $968,000 (9%) compared to gross revenue for the comparable period
of fiscal year 1996. The increase is predominately due to continued work on
task orders in the Company's Rocky Mountain and Midwest regions as part of the
Air Force Center for Environmental Excellence contract.
Purchased services and materials for the first quarter of fiscal year
1997 increased by $708,000 (25%) compared to such costs for the comparable
period of fiscal year 1996. The increase is primarily due to the higher level
of gross revenue as mentioned above and higher levels of subcontracted
commercial work being performed in the Company's Midwest region.
Net service revenue is derived by deducting the cost of purchased
services and materials 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 increased by 3% compared to the first quarter of
fiscal year 1996. The increase is due to the higher volume in gross revenue
as mentioned above.
7
<PAGE>
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 these costs to net service revenue increased slightly to 81.3% in the first
quarter of fiscal year 1997 compared to 80.8% in the first quarter of fiscal
year 1996. The increase is attributable to lower labor utilization during the
quarter.
Selling, general and administrative expenses approximated 14.9% of net
service revenue in the first quarter of fiscal year 1997 compared to 15.4% in
the first quarter of fiscal year 1996. The reduction is due to increased net
service revenue while maintaining the selling, general and administrative
expenses at the fiscal year 1996 level.
Other costs include costs and revenues that are not directly
attributable to contracts. For the first quarter of fiscal year 1997, the
Company recognized non-compete income from the sale of its majority-owned
subsidiary, Gammaflux, Inc., of $10,000 compared to $7,000 recognized in the
first quarter of fiscal year 1996.
Versar no longer includes the results of operations and financial
position of Sarnia Corporation ("Sarnia") in the Company's consolidated
financial statements. In January 1996, Sarnia obtained new financing which
reduced Versar's guarantee of Sarnia's indebtedness from $12,400,000 to
$1,500,000. Versar has a reserve of $1,500,000 against the guarantee.
Operating income for the first quarter of fiscal year 1997 was $311,000,
an increase of $98,000 compared to the first quarter of fiscal year 1996. The
increase is the result of higher gross revenue, level selling, general and
administrative costs, and the exclusion of Sarnia losses.
Interest expense during the first quarter of fiscal year 1997 decreased
by $5,000 compared to costs for the comparable period of the previous year.
The decrease is due to lower interest rates the Company is charged on its line
of credit.
Versar's net income for the first quarter of fiscal year 1997 was
$265,000 compared to $175,000 in the first quarter of fiscal year 1996. The
increase is primarily the result of higher volume of gross revenue during the
quarter.
Liquidity and Capital Resources
The Company's working capital at September 30, 1996 approximated
$7,861,000 or $232,000 (3%) higher than at June 30, 1996. In addition, the
Company's current ratio at September 30, 1996 was 2.10 to 1, slightly less
than that reported at the end of fiscal year 1996.
Versar maintains a line of credit for working capital purposes with
Riggs National Bank ("Riggs"), 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
September 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 of the
Company's subsidiaries individually and is collectively secured by accounts
receivable, equipment and intangibles, plus all insurance policies on property
constituting collateral.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 September 30, 1996 was $1,854,000. Advances under the line
are due upon demand or on December 31, 1996. The Company expects to extend
the line of credit at this time for another year. The Company must also
obtain Riggs' approval prior to paying dividends. Additionally, the loan has
certain covenants related to the maintenance of financial ratios. The Company
was in compliance with the financial covenants at September 30, 1996.
Management believes that cash generated by operations and borrowings available
with the extension of the bank line of credit will be adequate to meet the
working capital needs for fiscal year 1997.
Approximately $350,000 will be required for capital expenditures during
the remainder of fiscal year 1997 and will be funded from current working
capital.
Impact of Inflation
Versar seeks to protect itself form 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.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
9
<PAGE>
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 Versar 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.
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 counsel, 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 alleged the defendants breached certain covenants
that Versar would refer laboratory work to Kemron in the Asset Acquisition
Agreement and alleged damages in the amount of not less than $3,000,000.
10
<PAGE>
Item 1. Legal Proceedings (continued)
Versar responded by denying the allegations and filed a counterclaim
alleging various material breaches of the Asset Acquisition Agreement by
Kemron and seeking a declaratory judgment that Kemron's breaches have
terminated Versar's obligations under the Agreement.
Based upon an initial evaluation of the Company's defense and potential
exposure, management believes that an adverse outcome of this lawsuit will not
have a material impact on Versar's consolidated financial condition and
results of operations.
Versar and its subsidiaries are parties to various other legal actions
arising in the normal course of business. The Company believes that an
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 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None
11
<PAGE>
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/ Benjamin M. Rawls
_____________________________________
Benjamin M. Rawls
Chairman and Chief Executive Officer
By: /S/ Lawrence W. Sinnott
_____________________________________
Lawrence W. Sinnott
Vice President, Chief Financial
Officer, Treasurer, and Principal
Accounting Officer
Date: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 14,163
<ALLOWANCES> 796
<INVENTORY> 0
<CURRENT-ASSETS> 15,028
<PP&E> 9,186
<DEPRECIATION> 7,124
<TOTAL-ASSETS> 17,729
<CURRENT-LIABILITIES> 7,167
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 8,023
<TOTAL-LIABILITY-AND-EQUITY> 17,729
<SALES> 0
<TOTAL-REVENUES> 11,458
<CGS> 0
<TOTAL-COSTS> 11,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 292
<INCOME-TAX> 27
<INCOME-CONTINUING> 265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 265
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
Exhibit 11
VERSAR, INC.
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended September 30,
______________________________
1996 1995
___________ ___________
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . $ 265 $ 175
=========== ===========
Weighted average common shares
outstanding . . . . . . . . . . . . . 4,998,289 4,835,866
=========== ===========
NET INCOME PER SHARE - PRIMARY . . . . $ 0.05 $ 0.03
=========== ===========
Common shares from above . . . . . . . 4,998,289 4,835,866
Assumed exercise of options
(treasury stock method) . . . . . . . 102,298 320,648
___________ ___________
5,100,587 5,156,514
=========== ===========
NET INCOME PER SHARE - FULLY
DILUTED. . . . . . . . . . . . . . . . $ 0.05 $ 0.03
=========== ===========
Common shares from above. . . . . . . . 4,998,289 4,835,866
Assumed exercise of options
(treasury stock method). . . . . . . . 128,606 354,038
___________ ___________
5,126,895 5,189,904
=========== ===========
</TABLE>
