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 December 31, 1995 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 750-3000
----------------------------
Not Applicable
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(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 January 31, 1996
--------------------- -------------------------------
$ .01 par value 4,889,875 shares
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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<TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
December 31, 1995 and June 30, 1995. 3
Consolidated Statements of Operations for the
Three-Month and Six-Month Periods Ended
December 31, 1995 and 1994. 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended December 31,
1995 and 1994. 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 12
ITEM 4 - Submission of Matters to a Vote of Stockholders 13
ITEM 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
------------ --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . $ 58 $ 58
Accounts receivable, net. . . . . . . . 12,782 11,723
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . 1,306 1,099
Assets of Sarnia transferred. . . . . . --- 434
Deferred income taxes . . . . . . . . . 536 536
-------- --------
Total current assets . . . . . . . 14,682 13,850
Property and equipment, net . . . . . . 1,746 1,457
Assets of Sarnia transferred. . . . . . --- 12,871
Other assets. . . . . . . . . . . . . . --- 17
--------- --------
Total assets . . . . . . . . . . . $16,428 $28,195
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Liabilities of Sarnia transferred . . . $ --- $ 2,133
Accounts payable. . . . . . . . . . . . 2,910 1,950
Bank line of credit . . . . . . . . . . 700 438
Current portion of long-term debt . . . 4 335
Accrued salaries and vacation . . . . . 1,732 1,390
Other liabilities . . . . . . . . . . . 1,315 1,564
Liabilities of discontinued
operations, net. . . . . . . . . . . . 450 615
-------- --------
Total current liabilities. . . . . 7,111 8,425
Long-term debt. . . . . . . . . . . . . . 3 4
Liabilities of Sarnia transferred . . . . --- 12,450
Other long-term liabilities . . . . . . . 1,001 1,026
Reserve on guarantee of real
estate debt. . . . . . . . . . . . . . . 1,420 ---
-------- --------
Total liabilities. . . . . . . . . 9,535 21,905
-------- --------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 10,000,000
shares authorized; 4,883,938 shares and
4,813,236 shares issued and outstanding
at December 31, and June 30, 1995,
respectively . . . . . . . . . . . . . 49 48
Capital in excess of par value. . . . . 13,008 12,816
Accumulated deficit . . . . . . . . . . (6,160) (6,565)
-------- --------
6,897 6,299
Less treasury stock, at cost (1,327
shares at December 31, and 3,327
shares at June 30, 1995) . . . . . . . (4) (9)
-------- --------
Total stockholders' equity . . . . 6,893 6,290
-------- --------
Total liabilities and
stockholders' equity . . . . . . . $16,428 $28,195
======== ========
</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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
GROSS REVENUE . . . . . . . . . $11,807 $ 9,364 $22,297 $18,783
Purchased services and
materials, at costs . . . . . 3,677 2,085 6,553 4,355
-------- -------- -------- --------
NET SERVICE REVENUE . . . . . . 8,130 7,279 15,744 14,428
Direct costs of services
and overhead. . . . . . . . . 6,633 5,934 12,786 11,909
Selling, general and
administrative expenses . . . 1,152 1,134 2,324 2,188
Other (income). . . . . . . . . (7) (12) (14) (24)
Losses on Sarnia operations . . 59 75 142 161
-------- -------- -------- --------
OPERATING INCOME. . . . . . . . 293 148 506 194
Interest expense. . . . . . . . 49 32 73 70
Income tax expense. . . . . . . 14 15 28 23
-------- -------- -------- --------
NET INCOME. . . . . . . . . . . $ 230 $ 101 $ 405 $ 101
======== ======== ======== ========
NET INCOME PER SHARE. . . . . . $ .04 $ .02 $ .08 $ .02
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING . . . . . 5,170 4,878 5,151 4,820
======== ======== ======== ========
</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 Six-Month
Periods Ended December 31,
--------------------------
1995 1994
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<S> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . $ 405 $ 101
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization . . . . . 327 358
Provision for doubtful accounts
receivable . . . . . . . . . . . . . . (7) (37)
Common stock issued to ESSOP and
stock bonus. . . . . . . . . . . . . . 114 231
Taxes payable . . . . . . . . . . . . . --- (95)
Changes in assets and liabilities,
net of asset dispositions
Increase in accounts receivable . . . . (1,052) (751)
(Increase) decrease in prepaids
and other assets . . . . . . . . . . . (206) 1,041
Increase in accounts payable. . . . . . 960 397
Increase in accrued salaries and
vacation . . . . . . . . . . . . . . . 342 106
Decrease in other liabilities . . . . . (274) (709)
Net change in assets and liabilities
of Sarnia. . . . . . . . . . . . . . . 142 161
-------- --------
Net cash from continuing operations . 751 803
Changes in net liabilities of
discontinued operations. . . . . . . . (165) (65)
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . 586 738
-------- --------
Cash flows from investing activities
Purchase of property and equipment . . . . . (600) (98)
-------- --------
Cash flows from financing activities
Net borrowings on the line of credit . . . . 262 ---
Principal payments on long-term debt . . . . (332) (692)
Proceeds from issuance of the Company's
common stock . . . . . . . . . . . . . . . 84 36
-------- --------
Net cash provided by (used in)
financing activities . . . . . . . . 14 (656)
-------- --------
Net decrease in cash . . . . . . . . . . . . . 0 (16)
Cash at the beginning of the year. . . . . . . 58 72
-------- --------
Cash at the end of the year. . . . . . . . . . $ 58 $ 56
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 46 $ 80
Income taxes . . . . . . . . . . . . . . . 5 141
</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, 1995
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 December 31, 1995, and the
results of operations for the six-month periods ended December 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 assets, liabilities, and results of operations of Sarnia Corporation
have been reflected in the Company's financial statements for fiscal year
ended June 30, 1995. At December 31, 1995, the assets and liabilities have
been removed from Versar's balance sheet due to the refinancing of Sarnia's
debt (refer to Note B for further information on the Sarnia refinancing).
Refer to Note E for further information regarding the financial treatment of
the real estate operations.
The Company's analytical laboratory operations assets and liabilities
have been netted together and presented as a net liability on the balance
sheet.
Certain Balance Sheet, Statement of Operations, and Statement of Cash
Flows items have been restated for comparative financial statement purposes.
(B) Debt
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. Borrowings on the line are at the
prime rate of interest plus 2.5%, (11% at December 31, 1995). The 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. Borrowing availability under
the bank line of credit was restricted to the borrowing base of qualifying
receivables less $3,150,000. Unused borrowing availability at December 31,
1995 was $800,000. The Company must also obtain Riggs' approval prior to
paying dividends. Additionally, the loan has certain covenants related to the
maintenance of certain financial ratios. The Company was in compliance with
the financial covenants at December 31, 1995.
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%. 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 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.
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.
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As previously reported, Versar has guaranteed the debt of Sarnia
Corporation. At June 30, 1995 the total mortgage debt of Sarnia Corporation
("Sarnia") (formerly Versar Virginia, Inc., which was spun-off to Versar
shareholders on June 30, 1994) 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. In
addition, Sarnia has issued $750,000 of its Series A Cumulative Convertible
Preferred Shares to a group of private investors. Versar will guarantee
Sarnia's $1,500,000 term loan. There is a reserve of $1,420,000 against the
loan. As a result of the refinancing, Versar's guarantee of Sarnia's debt has
decreased from approximately $12,000,000 to $1,500,000. The impact of the
refinancing has been reflected in Versar's December 31, 1995 Balance Sheet.
As the term loan is repaid, the reserve will be reduced and added to Versar's
equity.
(C) Income Taxes
At June 30, 1995, the Company has $2.0 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
$1.4 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.
(D) Discontinued Operation
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
prior 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 owns and operates an 18.3 acre office park in
Springfield, Virginia, consisting of two office buildings which aggregate
229,000 square feet of which Versar leases approximately 35% of the buildings.
On June 30, 1994, Sarnia was spun-off to the Versar shareholders. The
spin-off was initially accounted for as a discontinuation of operations.
However, the spin-off did not relieve Versar of the risks of ownership due to
Versar's guarantee of Sarnia's debt. Sarnia's results of operations are
presented as single line items in Versar's Consolidated Statement of
Operations for the three-month and six-month periods ended December 31, 1995
and 1994, and its assets and liabilities are presented as separate line items
in Versar's Consolidated Balance Sheet for fiscal year ended June 30, 1995.
On January 25, 1996, Sarnia refinanced its existing debt (Refer to Note B).
As a part of the refinancing, Versar's guarantee was reduced from $12 million
to $1.5 million. Versar has a reserve of $1.42 million against this loan.
Therefore, effective January 1, 1996, Versar will no longer include the
results of operations of Sarnia in its consolidated financial statements.
7
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(F) Contingencies
Versar and its subsidiaries are parties to various legal actions arising
in the normal course of business. The Company believes that the ultimate
resolution of these legal actions will not have a material adverse effect on
its consolidated financial condition and results of operations.
(G) Net Income Per Share
Net income per share is computed by dividing the net income for a period
by the weighted average number of common shares outstanding and exercisable
options during the applicable period being reported.
(H) Common Stock
In fiscal year 1996, Versar has issued approximately 32,000 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal year 1995. In the fiscal year 1995, Versar
issued approximately 140,000 shares to various employee benefit plans as part
of the Company's contribution to employee benefits for fiscal years 1995 and
1994.
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Second Quarter Comparison for Fiscal Years 1996 and 1995
- --------------------------------------------------------
Versar's gross revenue for the fiscal quarter ended December 31, 1995
totaled $11,807,000 an increase of $2,443,000 (26%) compared to gross revenue
of $9,364,000 for the second quarter of the prior fiscal year. The increase
is primarily due to work being performed in the Company's Rocky Mountain
region in support of the Air Force Center for Environmental Excellence
contract.
Purchased services and materials for the second quarter of fiscal year
1996 increased by $1,592,000 (76%) compared to costs for the comparable period
of the previous year. The increase is principally due to the increase in
gross revenue as 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 increased by 12% compared to the second quarter of fiscal year 1995.
The increase is due to the higher volume in gross revenue.
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 increased slightly to 81.6% in the second
quarter of 1996 compared to 81.5% in the second quarter of fiscal year 1995.
The slight increase is attributable to more competitive pricing.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Selling, general and administrative expenses approximated 14% of net
service revenue in the second quarter of fiscal year 1996, compared to 16% in
the second quarter of fiscal year 1995. The decrease is the result of higher
net service revenue volume while maintaining selling, general and
administrative expenses at the same level.
Other costs include the costs and revenues that are not directly
attributable to contracts. For the second quarter of fiscal year 1996, the
Company recognized non-compete income from the sale of its majority-owned
subsidiary, Gammaflux, Inc. of $7,000 compared to $12,000 recognized in the
second quarter of fiscal year 1995.
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 had not transferred, due to Versar's guarantee of Sarnia's
debt, Sarnia's losses are included in Versar's financial statements included
in this Form 10-Q. For the second quarter of fiscal year 1996, Sarnia had
losses of $59,000 compared to $75,000 in the second quarter of fiscal year
1995. Sarnia's losses decreased due to higher rental income. On January 25,
1996, Sarnia refinanced its debt and Versar's guarantee of Sarnia's
indebtedness was reduced to $1,500,000. Therefore, Versar will no longer
include the results of operations and financial position of Sarnia in its
consolidated financial statements. See Note (B) and (E) to the Notes of
Consolidated Financial Statements.
Operating income for the second quarter of fiscal year 1996 was
$293,000, an increase of $145,000 over the second quarter of fiscal year 1995.
The increase is primarily due to the higher gross revenue as mentioned above.
Interest expense during the second quarter of fiscal year 1996 increased
by $17,000 (53%) compared to costs for the comparable period of the previous
year. The increase for the second quarter of 1996 compared to the same period
in fiscal year 1995, reflects increased borrowing on the Company's line of
credit as a result of the increase in gross revenue volume.
Versar had a net income of $230,000 in the second quarter of fiscal year
1996 compared to a net income of $101,000 in the second quarter of fiscal year
1995. The increase is primarily the result of the higher gross revenue as
mentioned above.
Six Month Comparison for Fiscal Years 1996 and 1995
- ---------------------------------------------------
Versar's gross revenue for the six months ended December 31, 1995
totaled $22,297,000 an increase of $3,514,000 (19%) compared to gross revenue
of $18,783,000 for the six months of the prior fiscal year. The increase in
gross revenue was primarily due to work being performed by the Rocky Mountain
Region in support of the Air Force Environmental Excellence contract.
Purchased services and materials for the first six months of fiscal year
1996 increased by $2,198,000 (51%) compared to costs for the comparable period
of the previous year. The increase is principally due to the increase in
gross revenue as mentioned above.
Net service revenue increased by 9% compared to the first six months of
fiscal year 1995. The increase is due to the higher volume in gross revenue.
9
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The percentage of direct costs and services and overhead to net service
revenue decreased to 81% in the first six months of 1996 compared to 83% in
the first six months of fiscal year 1995. The decrease is attributable to
higher direct labor utilization due to the award of several task orders from
the Air Force.
Selling, general and administrative expenses approximated 15% of net
service revenue in the first six months of fiscal year 1996, compared to 15%
in the first six months of fiscal year 1995. Management continues efforts to
balance the spending on selling, general, and administrative expenses with the
volume of business of the Company.
Other costs include costs and revenues that are not directly
attributable to contracts. For the first six months of fiscal year 1996, the
Company recognized non-compete income from the sale of its majority-owned
subsidiary, Gammaflux, Inc. of $14,000 compared to $24,000 recognized in the
first six months of fiscal year 1995.
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 had not transferred, due to Versar's guarantee of Sarnia's
debt, Sarnia's losses are included in Versar's financial statements included
in this Form 10-Q. For the first six months of fiscal year 1996, Sarnia had
losses of $142,000 compared to $161,000 in the first six months of fiscal year
1995. Sarnia's losses decreased due to higher rental income. On January 25,
1996, Sarnia refinanced its debt and Versar's guarantee of Sarnia's
indebtedness was reduced to $1,500,000. Therefore, Versar will no longer
include the results of operations and financial position of Sarnia in its
consolidated financial statements. See Note (B) and (E) to the Notes of
Consolidated Financial Statements.
Operating income for the first six months of fiscal year 1996 was
$506,000 a increase of $312,000 over the first six months of fiscal year 1995.
The increase is the result of higher gross revenues as mentioned above.
Interest expense during the first six months of fiscal year 1996
increased by $3,000 (4%) compared to costs for the comparable period of the
previous year. The increase for the first six months of 1996 compared to the
same period in fiscal year 1995, reflects the higher usage of the Company's
line of credit as a result of the increase in revenue for the period.
Versar had net income of $405,000 for the first six months of fiscal
year 1996 compared to net income of $101,000 for the first six months of
fiscal year 1995. The increase is primarily the result of the higher gross
revenue as mentioned above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 1995 approximated
$7,571,000, an increase of $2,146,000 (40%) over June 30, 1995. The increase
is primarily due to the removal of Sarnia's assets and liabilities from the
Company's balance sheet due to Sarnia's refinancing of its mortgages.
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. Borrowings on the line were at the
prime rate of interest plus 2.5%, (11% at December 31, 1995). The 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. Borrowing availability under
the bank line of credit was restricted to the borrowing base of qualifying
receivables less $3,150,000. Unused borrowing availability at December 31,
1995 was $800,000. The Company must also obtain Riggs' approval prior to
10
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
paying dividends. Additionally, the loan has certain covenants related to
maintenance of financial ratios. The Company was in compliance with the
financial covenants at December 31, 1995.
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% and 1/4% on the unused
portion of the line of credit. The 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. Borrowing availability under the bank line of credit
is restricted to the borrowing base of qualifying receivables less $1,500,000.
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.
At June 30, 1995 the total mortgage debt of Sarnia Corporation (formerly
Versar Virginia, Inc., which was spun-off to Versar shareholders on June 30,
1994) 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. In addition, Sarnia has issued
$750,000 of its Series A Cumulative Convertible Preferred Shares to a group of
private investors. Versar has guaranteed Sarnia's $1,500,000 term loan and
has taken a reserve of $1,420,000 against the loan. As a result of the
refinancing, Versar's guarantee of Sarnia's debt has decreased from
approximately $12,000,000 to $1,500,000. As the term loan is repaid, the
reserve will be reduced and added to Versar's equity.
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.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
11
<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 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.
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. It is impossible to predict whether the Colorado Supreme Court
will elect to hear some or all of the issues Windolph would seek to raise.
However, based on the Court of Appeals' decision and consultation with
counsel, Versar's management believes the outcome of this lawsuit will not
have a material impact on Versar's consolidated financial position or 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 and results of operations.
12
<PAGE>
Item 4 - Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders was held on November 16,
1995. The matters voted on at the Annual meeting were as follows:
(1) The Election of Directors
The nomination of Rawls, Markels, Durfee, Halpin, Rice, Horton,
Judkins and Gray to serve as directors of the Company was approved
as indicated below:
<TABLE>
<CAPTION>
Vote Withheld
for Authority
--------- ---------
<S> <C> <C>
Benjamin M. Rawls 3,564,561 36,377
Michael Markels, Jr. 3,530,292 70,646
Robert L. Durfee 3,531,943 68,995
Gerald T. Halpin 3,533,576 67,362
M. Lee Rice 3,532,576 68,362
John P. Horton 3,533,292 67,646
Charles I. Judkins 3,565,438 35,500
John E. Gray 3,566,338 34,600
</TABLE>
(2) Ratification of the appointment of Arthur Andersen, LLP as
independent accountants for
fiscal year 1996.
Arthur Andersen was ratified as the Company's independent
accountants as follows:
<TABLE>
<CAPTION>
For Againtst Abstain
--------- -------- -------
<C> <C> <C>
3,578,302 14,884 7,552
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None
13
<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
Chairman and Chief
Executive Officer
By: \s\
-----------------------------------
Lawrence W. Sinnott
Vice President, Chief
Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: February 14, 1996
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 13,710
<ALLOWANCES> 928
<INVENTORY> 0
<CURRENT-ASSETS> 14,682
<PP&E> 9,293
<DEPRECIATION> 7,547
<TOTAL-ASSETS> 16,428
<CURRENT-LIABILITIES> 7,111
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 6,848
<TOTAL-LIABILITY-AND-EQUITY> 16,428
<SALES> 0
<TOTAL-REVENUES> 22,297
<CGS> 0
<TOTAL-COSTS> 21,663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 433
<INCOME-TAX> 28
<INCOME-CONTINUING> 405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
