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, 1997 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 (Zip Code)
offices)
Registrant's telephone number, including area code (703) 750-3000
_____________________________
Not Applicable
_______________________________________________________________________________
(Former name,former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
____ ____
Indicate 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, 1997
_____________________ _______________________________
$ .01 par value 5,222,555 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997. 3
Consolidated Statements of Operations for the
Three-Month Periods Ended September 30, 1997 and 1996. 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
September 30, 1997 and 1996. 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 10
ITEM 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, June 30,
1997 1997
_____________ _____________
(unaudited)
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . $ 409 $ 437
Accounts receivable, net. . . . . . . 14,723 17,525
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . 1,240 1,489
Deferred income taxes . . . . . . . . 652 652
____________ ____________
Total current assets. . . . . . . 17,024 20,103
Property and equipment, net . . . . . . 2,452 2,275
Deferred income taxes . . . . . . . . . 257 257
Goodwill. . . . . . . . . . . . . . . . 2,606 2,501
Other assets. . . . . . . . . . . . . . 279 312
____________ ____________
Total assets. . . . . . . . . . . $ 22,618 $ 25,448
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . $ 2,725 $ 4,959
Bank line of credit . . . . . . . . . 666 274
Current portion of long-term debt . . 705 819
Accrued salaries and vacation . . . . 1,845 1,627
Other liabilities . . . . . . . . . . 2,274 3,283
____________ ____________
Total current liabilities . . . . 8,215 10,962
Long-term debt. . . . . . . . . . . . . 1,250 1,437
Other long-term liabilities . . . . . . 1,793 2,026
Reserve on guarantee of real
estate debt. . . . . . . . . . . . . . 1,425 1,500
____________ ____________
Total liabilities . . . . . . . . 12,683 15,925
____________ ____________
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value;
30,000,000 shares authorized;
5,195,259 shares and 5,151,792
shares issued and outstanding at
September 30 and June 30, 1997,
respectively. . . . . . . . . . . . 52 52
Capital in excess of par value. . . . 13,922 13,788
Accumulated deficit . . . . . . . . . (4,039) (4,317)
____________ ____________
Total stockholders' equity. . . . 9,935 9,523
Total liabilities and
stockholders' equity . . . . . . $ 22,618 $ 25,448
============ ============
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)
For the Three-Month
Periods Ended September 30,
_______________________________________
1997 1996
___________ ___________
GROSS REVENUE . . . . . . . . . . . $ 16,972 $ 11,458
Purchased services and materials,
at costs . . . . . . . . . . . . . 6,040 3,584
___________ ___________
NET SERVICE REVENUE . . . . . . . . 10,932 7,874
Direct costs of services and
overhead . . . . . . . . . . . . . 9,319 6,402
Selling, general and administrative
expenses . . . . . . . . . . . . . 1,213 1,171
Other (income). . . . . . . . . . . --- (10)
___________ ___________
OPERATING INCOME. . . . . . . . . . 400 311
OTHER EXPENSE
Interest expense. . . . . . . . . . 63 19
Income tax expense. . . . . . . . . 134 27
___________ ___________
NET INCOME. . . . . . . . . . . . . $ 203 $ 265
=========== ===========
NET INCOME PER SHARE. . . . . . . . $ .04 $ .05
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . . . . . 5,597 5,127
=========== ===========
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)
For the Three-Month
Periods Ended September 30,
____________________________________
1997 1996
___________ ____________
Cash flows from operating activities
Net income . . . . . . . . . . . . . . $ 203 $ 265
Adjustments to reconcile net income
to net cash used in operating
activities
Depreciation and amortization . . . 248 184
Provision for doubtful accounts
receivable . . . . . . . . . . . . (8) 4
Common stock issued to ESSOP. . . . --- 26
___________ ____________
Subtotal. . . . . . . . . . . . . 443 479
Changes in assets and liabilities,
net of asset dispositions
Decrease (increase) in accounts
receivable . . . . . . . . . . . . 2,810 (995)
Decrease in prepaids and
other assets . . . . . . . . . . . 131 271
(Decrease) increase in accounts
payable. . . . . . . . . . . . . . (2,234) 560
Increase (decrease) in accrued
salaries and vacation. . . . . . . 218 (296)
Decrease in other liabilities . . . (1,242) (274)
___________ ____________
Net cash provided by (used in)
continuing operations . . . . . 126 (255)
___________ ____________
Cash flows from investing activities
Purchase of property and equipment . . (338) (203)
___________ ____________
Cash flows from financing activities
Net borrowings on bank line of
credit. . . . . . . . . . . . . . . . 392 654
Principal payments on long-term debt . (301) (191)
Proceeds from issuance of the
Company's common stock. . . . . . . . 93 6
___________ ____________
Net cash provided by financing
activities. . . . . . . . . . . 184 469
___________ ____________
Net (decrease) increase in cash. . . . . (28) 11
Cash at the beginning of the year. . . . 437 83
___________ ____________
Cash at the end of the period. . . . . . $ 409 $ 94
=========== ============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . $ 65 $ 18
Income taxes . . . . . . . . . . . . 47 59
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, 1997 for additional information.
The statements in this report, including statements under
the headings of Legal Proceedings and Management's Discussion and
Analysis and the attached financial statements, reflect the
business lines and three month's financial results of Science
Management Corporation ("SMC"). On May 2, 1997, Versar, Inc.
purchased a majority of the common shares and all of the
outstanding preferred shares of SMC. As a result, the SMC
revenue for the first three months of Versar's fiscal year is
included in Versar's financial statements as a majority owned
subsidiary. In addition, because SMC has negative retained
earnings, the entire net income of SMC for July, August and
September of 1997 is also included in Versar's results. This
inclusion will continue until the negative retained earnings are
eliminated and then, until the closing of the merger. The merger
was completed on October 22, 1997 as described in Note H.
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, 1997, and the results of
operations for the three-month periods ended September 30, 1997
and 1996. 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
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
(D) Income Taxes
At June 30, 1997, the Company had $1.242 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 approximately $0.3
million has been established. With stable 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.
The Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share" in February 1997. SFAS 128 requires a
company to present basic and diluted earnings per share amounts
on the face of the Consolidated Statements of Operations. The
Company is required to adopt the provisions of the standard
during the second quarter of 1998, and when adopted, will require
restatement of prior years' earnings per share. The standard
will not have a material impact on historical earnings per share
reported by the Company.
(G) Common Stock
In the fiscal year 1997, Versar issued approximately 226,242
shares to various employee benefit plans as part of the Company's
contribution to employee benefits for fiscal years 1996 and 1997.
No shares were issued to the employee benefit plans in the first
quarter of fiscal year 1998.
(H) Subsequent Event
On October 22, 1997, the shareholders of SMC approved the
Agreement and Plan of Merger between Versar and SMC.
Subsequently, Versar acquired all of the remaining outstanding
common stock of SMC by issuing approximately 533,000 shares of
Versar's common stock. SMC is now a wholly-owned subsidiary of
Versar.
7
<PAGE>
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
_________________________________________________
This report contains certain forward-looking statements
which are based on current expectations. Actual results may
differ materially. The forward-looking statements include those
regarding cost controls and reductions, the expected resolution
of delays in billing of certain projects, the possible impact of
current and future claims against the Company based upon
negligence and other theories of liability, the integration of
the recent or ongoing acquisitions, and the possibility of the
Company making acquisitions during the next 12 to 18 months.
Forward-looking statements involve numerous risks and
uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibilities that
the demand for the Company's services may decline as a result of
possible changes in general and industry specific economic
conditions and the effects of competitive services and pricing;
one or more current or future claims made against the Company may
result in substantial liabilities; and such other risks and
uncertainties as are described in reports and other documents
filed by the Company from time to time with the Securities and
Exchange Commission.
The Management's Discussion and Analysis of Financial
Condition and Results of Operations includes the business
operations of Versar and SMC. Refer to Note A on page 6.
Versar's gross revenue for the first quarter of fiscal year
1998 increased by $5,514,000 (48%) compared to gross revenue for
the comparable period of fiscal year 1997. The increase is
predominately due to the revenue of Science Management
Corporation ("SMC") included in Versar's financial statements as
a result of the acquisition described in Note A.
Purchased services and materials for the first quarter of
fiscal year 1998 increased by $2,456,000 (69%) compared to such
costs for the comparable period of fiscal year 1997. The
increase is primarily due to the costs incurred in generating the
higher level of gross revenue as mentioned above.
Net service revenue is derived by deducting the cost 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 39% compared to the first quarter of fiscal year
1997. The increase is due to the higher volume in gross revenue
as mentioned above.
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 to 85.2% in the first quarter of fiscal
year 1998 compared to 81.3% in the first quarter of fiscal year
1997. The increase is attributable to the incremental direct
costs from SMC.
Selling, general and administrative expenses approximated
11.1% of net service revenue in the first quarter of fiscal year
1998 compared to 14.9% in the first quarter of fiscal year 1997.
The reduction is due to a 39% increase in net service revenue as
mentioned while selling, general and administrative expenses
increased by 4% in the first quarter of fiscal year 1998.
Operating income for the first quarter of fiscal year 1998
was $400,000, an increase of $89,000 compared to the first
quarter of fiscal year 1997. The increase is the result of the
higher net service revenue.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest expense during the first quarter of fiscal year
1998 increased by $44,000 compared to costs for the comparable
period of the previous year. The increase is due to the cost of
financing the acquisition of SMC and higher utilization of the
line of credit.
Income tax expense during the first quarter increased by
$107,000 compared to costs for the comparable period of the
previous year. The increase is primarily due to the increase in
Versar's effective tax rate to 40% in fiscal year 1998 as
compared to 9% for the first quarter of fiscal year 1997.
Versar's net income for the first quarter of fiscal year
1998 was $203,000 compared to $265,000 in the first quarter of
fiscal year 1997. The decrease is primarily the result of higher
interest costs, taxes, and goodwill associated with the
acquisition of SMC.
Liquidity and Capital Resources
_______________________________
The Company's working capital at September 30, 1997
approximated $8,809,000 or $332,000 (4%) lower than June 30,
1997. The decrease is primarily due to the purchase of property
and equipment as well as principal payments on long-term debt
during the quarter. In addition, the Company's current ratio at
September 30, 1997 was 2.07 to 1, an improvement over the 1.83
recorded as the end of fiscal year 1997.
The Company maintains a line of credit with NationsBank,
N.A. The line of credit is restricted to the borrowing base of
qualifying receivables less the $1,425,000 reserve for a
guarantee of debt of Sarnia and outstanding acquisition loan
balances (approximately $1,792,000 at September 30, 1997).
Borrowings on the line of credit are at the lower of the 30 day
London Interbank Offered Rate ("LIBOR") plus 250 or the prime
rate ( 8.16% at September 30, 1997). 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 wholly owned
subsidiaries individually and is collectively secured by accounts
receivable, equipment and intangibles, plus all insurance
policies on property constituting collateral. Unused borrowing
availability at September 30, 1997 was approximately $2,000,000.
Advances on the line of credit are due on November 30, 1998. The
Company was in compliance with the financial covenants at
September 30, 1997. Management believes that cash generated by
operations and borrowings available under the line of credit will
be adequate to meet the working capital needs for fiscal year
1998.
Acquisition of Science Management Corporation
_____________________________________________
On May 2, 1997, Versar acquired 53.5% of the outstanding
common stock and all outstanding preferred stock of SMC for
aggregate consideration of $2,870,000 paid in cash. The
acquisition was financed by a three year $2,000,000 term note at
a prime rate of interest plus 1/2% (9% at June 30, 1997) from
NationsBank, N.A. The remaining portion of $870,000 was paid
with current working capital. Principal payments on the term
note of $520,833, $750,000, and $687,500 are due in fiscal years
1998, 1999, and 2000, respectively. On July 29, 1997, Versar and
SMC entered into an Agreement and Plan of Merger pursuant to
which Versar will obtain the remaining SMC common stock for newly
issued shares of Versar common stock via a merger of SMC with a
newly formed wholly owned subsidiary of Versar. The merger was
completed on October 22, 1997 for the remaining 46.5% of SMC,
which will be accounted for in the second quarter of fiscal year
1998. The transaction costs associated with the merger are
projected to be approximately $500,000.
Approximately $250,000 will be required for capital
expenditures during the remainder of fiscal year 1998 and will be
funded out of current working capital.
9
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1996, Flintlock Ltd, a client of SMC McEver, (a
subsidiary of SMC which is a wholly owned subsidiary of Versar),
filed an action in the 165th Judicial District Court of Harris
County, Texas, entitled Flintlock Ltd. v. SMC McEver, Inc., Case
No. 96-002700. Flintlock alleged that SMC McEver negligently
failed to manage the construction of a citronella candle project
and negligently misrepresented the project's cost. Flintlock
asserts that it incurred over $700,000 in damages. SMC McEver
has counterclaimed for over $244,000 which it claims is due under
the contract between the parties. The parties have taken certain
discovery which remains ongoing. The parties have agreed to
submit the claims to third party mediation after several
depositions are completed. SMC McEver has retained counsel and
is defending this matter vigorously. The Company does not expect
the outcome of this litigation to have a material adverse effect
on its financial condition or its 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
Form 8-K/A which provided details on the
acquisition of SMC and the pro forma combined
financial statements of such transactions were
filed on July 15, 1997.
10
<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 7, 1997
11
<PAGE>
<PAGE>
Exhibit 11
VERSAR, INC.
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
For the Three-Month
Periods Ended September 30,
___________________________
1997 1996
____________ ____________
NET INCOME. . . . . . . . . . . . . . . . . . . $ 203 $ 265
============ ============
Weighted average common shares outstanding. . . 5,168,048 4,998,289
============ ============
NET INCOME PER SHARE - PRIMARY. . . . . . . . . $ 0.04 $ 0.05
============ ============
Common shares from above. . . . . . . . . . . . 5,168,048 4,998,289
Assumed exercise of options (treasury
stock method). . . . . . . . . . . . . . . . . 248,716 102,298
____________ ____________
$ 5,416,764 $ 5,100,587
============ ============
NET INCOME PER SHARE - FULLY DILUTED. . . . . . $ 0.04 $ 0.05
============ ============
Common shares from above. . . . . . . . . . . . 5,168,048 4,998,289
Assumed exercise of options (treasury
stock method). . . . . . . . . . . . . . . . . 429,361 128,606
____________ ____________
5,597,409 5,126,895
============ ============
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 409
<SECURITIES> 0
<RECEIVABLES> 15,425
<ALLOWANCES> 702
<INVENTORY> 0
<CURRENT-ASSETS> 17,024
<PP&E> 11,400
<DEPRECIATION> 8,948
<TOTAL-ASSETS> 22,618
<CURRENT-LIABILITIES> 8,215
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 9,883
<TOTAL-LIABILITY-AND-EQUITY> 22,618
<SALES> 0
<TOTAL-REVENUES> 16,972
<CGS> 0
<TOTAL-COSTS> 16,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 337
<INCOME-TAX> 134
<INCOME-CONTINUING> 203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
