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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 March 31, 1998 Commission File Number 1-9309
---------------- -------
VERSAR, INC.
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(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 (Zip Code)
offices)
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 April 30, 1998
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$ .01 par value 6,044,778 shares
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VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997. 3
Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
March 31, 1998 and 1997. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended
March 31, 1998 and 1997. 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 11
ITEM 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT 11 - Computation of Per Share Earnings 13
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VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, June 30,
1998 1997
----------- -----------
(unaudited)
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . . . $ 193 $ 437
Accounts receivable, net. . . . . . . . . . 20,688 17,525
Prepaid expenses and other current assets . 1,778 1,489
Deferred income taxes . . . . . . . . . . . 652 652
----------- -----------
Total current assets. . . . . . . . . . 23,311 20,103
Property and equipment, net . . . . . . . . . 3,070 2,275
Deferred income taxes . . . . . . . . . . . . 557 257
Goodwill. . . . . . . . . . . . . . . . . . . 6,070 2,501
Other assets. . . . . . . . . . . . . . . . . 277 312
----------- -----------
Total assets. . . . . . . . . . . . . . $ 33,285 $ 25,448
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . . $ 5,135 $ 4,959
Bank line of credit . . . . . . . . . . . . 3,782 274
Current portion of long-term debt . . . . . 1,451 819
Accrued salaries and vacation . . . . . . . 2,640 1,627
Other liabilities . . . . . . . . . . . . . 1,577 3,283
----------- -----------
Total current liabilities . . . . . . . 14,585 10,962
Long-term debt. . . . . . . . . . . . . . . . 875 1,437
Other long-term liabilities . . . . . . . . . 2,702 2,026
Reserve on guarantee of real estate debt. . . 1,275 1,500
----------- -----------
Total liabilities . . . . . . . . . . . 19,437 15,925
----------- -----------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 6,043,778 shares and
5,151,792 shares issued and outstanding
at March 31, 1998 and June 30, 1997,
respectively . . . . . . . . . . . . . . 60 52
Capital in excess of par value. . . . . . 17,307 13,788
Accumulated deficit . . . . . . . . . . . (3,504) (4,317)
Cumulative foreign currency translation
adjustment . . . . . . . . . . . . . . . (15) ---
----------- -----------
Total stockholders' equity. . . . . . . 13,848 9,523
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . $ 33,285 $ 25,448
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
3
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VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
GROSS REVENUE . . . . . . . $ 22,837 $ 10,727 $ 58,513 $ 32,934
Purchased services and
materials, at costs. . . . 9,449 3,022 22,955 9,614
---------- ---------- ---------- ----------
NET SERVICE REVENUE . . . . 13,388 7,705 35,558 23,320
Direct costs of services
and overhead . . . . . . . 11,658 6,345 30,904 19,047
Selling, general and
administrative expenses. . 1,369 998 3,741 3,398
Other income. . . . . . . . --- (11) --- (32)
---------- ---------- ---------- ----------
OPERATING INCOME. . . . . . 361 373 913 907
OTHER EXPENSE
Interest expense. . . . . . 124 11 255 48
Income tax expense
(benefit). . . . . . . . . 202 146 70 (14)
---------- ---------- ---------- ----------
NET INCOME. . . . . . . . . $ 35 $ 216 $ 588 $ 873
========== ========== ========== ==========
NET INCOME PER SHARE
- BASIC. . . . . . . . . . $ --- $ .04 $ .10 $ .17
========== ========== ========== ==========
NET INCOME PER SHARE
- DILUTED. . . . . . . . . $ --- $ .04 $ .10 $ .17
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . 6,393 5,209 5,990 5,101
========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
4
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VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Nine-Month
Periods Ended March 31,
-----------------------
1998 1997
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Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . $ 588 $ 873
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization . . . . . . . . 960 524
Provision for doubtful accounts receivable. . (75) (72)
Loss on sale of property and equipment. . . . 21 ---
Common stock issued to ESSOP. . . . . . . . . 257 399
Deferred tax benefit. . . . . . . . . . . . . (300) (358)
---------- ----------
Subtotal. . . . . . . . . . . . . . . . . . 1,451 1,366
Changes in assets and liabilities, net of asset
dispositions
(Increase) decrease in accounts receivable. . (3,521) 491
(Increase) decrease in prepaids and other
assets . . . . . . . . . . . . . . . . . . . (1,123) 117
Increase in accounts payable. . . . . . . . . 176 185
Increase in accrued salaries and vacation . . 1,013 66
Decrease in other liabilities . . . . . . . . 34 (225)
---------- ----------
Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . (1,970) 2,000
Cash flows from investing activities
Purchase of property and equipment . . . . . . . . (561) (452)
Acquisition of business. . . . . . . . . . . . . . (888) ---
---------- ----------
Net cash used in investment activities . . (1,449) (452)
Cash flows from financing activities
Net borrowings (payments) on bank line of credit . 3,508 (492)
Principal payments on long-term debt . . . . . . . (562) ---
Proceeds from issuance of the Company's
common stock. . . . . . . . . . . . . . . . . . . 244 27
---------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . 3,190 (465)
---------- ----------
Effect of exchange rate changes on cash. . . . . . . (15) ---
---------- ----------
Net (decrease) increase in cash. . . . . . . . . . . (244) 1,083
Cash at the beginning of the year. . . . . . . . . . 437 83
---------- ----------
Cash at the end of the period. . . . . . . . . . . . $ 193 $ 1,166
========== ==========
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . . $ 250 $ 53
Income taxes . . . . . . . . . . . . . . . . . . 319 250
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
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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 of Financial
Condition and Results of Operations, and the attached financial statements,
reflect the business lines and financial results of Science Management
Corporation ("SMC") all of the outstanding stock of which was acquired by
Versar by merger on October 23, 1997. On May 2, 1997, Versar purchased a
majority of the outstanding common stock and all of the outstanding preferred
stock of SMC. As a result, for the first quarter and a portion of the second
quarter ending October 23, 1997 of fiscal 1998, SMC was included in Versar's
financial statements as a majority owned subsidiary. In addition, because SMC
had negative retained earnings, the entire net income of SMC for the period
July 1, 1997 through October 23, 1997 was included in Versar's results.
Subsequent to the consummation of the merger on October 23, 1997, SMC has been
a wholly owned subsidiary.
On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, P.C. ("Greenwood"). As a part of the acquisition, the Company
increased its current line of credit by $2,000,000 and retired existing debt
of Greenwood of $671,791, paid $300,000 in cash, recorded an additional note
payable to Greenwood stockholders of $450,000 payable over 4 years, and issued
228,572 shares of common stock. The transaction was accounted for as a
purchase of assets and goodwill recorded as part of the transaction was
approximately $1.1 million. The assets of Greenwood are now included as
collateral as part of the Company's line of credit.
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 March 31, 1998, and the
results of operations for the first nine months ended March 31, 1998 and 1997.
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. Actual results could differ from those estimates.
(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 fixed-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.
6
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VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
(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 had
been established. Approximately $0.3 and $0.358 million of the valuation
allowance was reversed into income during the second quarter of fiscal years
1998, and 1997, respectively.
(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 was required to adopt the provisions of the
standard during the second quarter of 1998, and as required restated prior
years' earnings per share.
(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. Approximately 78,444 shares
were issued to the employee benefit plans in the first nine months of fiscal
year 1998 for fiscal years 1998 and 1997.
(H) Translation of Foreign Currencies
Local currencies have been determined to be functional currencies for
the company's international operations. Foreign currency balance sheets are
translated at the end-of-period exchange rates and earnings statements at the
average exchange rates for each period. The resulting translation gains or
losses are included as "foreign currency translation adjustments" in the
calculation of other comprehensive income and included in the equity section
of the Consolidated Balance Sheet.
7
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VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(I) Completion of SMC Merger
On October 22, 1997, the shareholders of SMC approved the Agreement and
Plan of Merger between Versar and SMC, and SMC was merged into a wholly owned
subsidiary of Versar effective October 23, 1997. In connection with the
merger, Versar issued approximately 533,433 shares of Versar's common stock to
SMC stockholders other than Versar and SMC became a wholly-owned subsidiary of
Versar. The issuance of the 533,433 shares increased goodwill and equity of
Versar during the second quarter of fiscal year 1998 by $2,000,374.
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Third Quarter Comparison of Fiscal Years 1998 and 1997
- ------------------------------------------------------
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 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.
Versar's gross revenue for the fiscal quarter ended March 31, 1998 totaled
$22,837,000, an increase of $12,110,000 (113%) compared to gross revenue of
$10,727,000. The increase is due to a 13% increase in Versar's base business
and the inclusion of revenues of Science Management Corporation ("SMC") and two
months revenues from the acquisition of Greenwood during the quarter.
Purchased services and materials for the third quarter of fiscal year 1998
increased by $6,427,000 (213%) compared to costs for the comparable period of
the previous fiscal year. The increase is due to a 41% increase in purchased
services and materials in Versar's base business with the balance due to
purchased services and materials from SMC McEver, a design construction
subsidiary of SMC.
Net service revenue is derived by deducting the costs of purchased
services and materials from gross revenue. Versar considers it appropriate to
analyze operating margins and other ratios in relation to net service revenue
because such revenues reflects the actual work performed by the Company. Net
service revenue increased by 74% compared to the third 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 costs to net
service revenue increased to 87.1% in the third quarter of fiscal year 1998
compared to 82.3% in the third quarter of fiscal year 1997. The increase is
due to the lower overhead markup of the newly acquired SMC, project losses in
SMC of approximately $255,000, goodwill expense associated from acquisitions of
approximately $100,000, and lower labor utilization in Versar.
8
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Selling, general and administrative expenses were 10.2% of net service
revenue in the third quarter of fiscal year 1998, compared to 13.0% in the
third quarter of fiscal year 1997. The decrease is primarily due to higher net
service revenue. In the third quarter of fiscal year 1997, the Company
reversed approximately $200,000 due to the resolution of the Windolph suit and
other legal matter.
Other costs include costs and revenues that are not attributable to
contracts. For the third quarter of fiscal year 1997, the Company recognized
non-compete income for the sale of its majority-owned subsidiary, Gammaflux,
Inc. of $11,000.
Operating income for the third quarter of fiscal year 1998 was $361,000,
a decrease of $12,000 compared to the third quarter of fiscal year 1997. The
decrease is the result of the increased direct costs of services and overhead
as mentioned above.
Interest expense during the third quarter increased by $113,000 compared
to interest expense for the comparable period for the previous fiscal year.
The increase is due to the financing of the acquisition of SMC, financing SMC's
working capital, and the purchase of Greenwood during the quarter.
Income tax expense during the third quarter of fiscal year 1998 increased
by $56,000 compared to such costs for the comparable period of the previous
fiscal year. The increase in income tax expense is due to the completion of
the evaluation of the tax alternatives the Company would take associated with
the SMC acquisition. Initially, the transaction had been contemplated as a
stock transaction. After evaluating the SMC transaction, the Company was not
able to utilize the 338(h)(10) election, which would essentially enable the
Company to deduct the goodwill for tax purposes. Because the Company is not
able to deduct the goodwill associated with the SMC acquisition for tax
purposes, the impact for the nine months of fiscal year 1998 was charged in the
third quarter of fiscal year 1998. The impact is $107,000 in the third quarter
of fiscal year 1998 and the effective tax rate for the third quarter and nine
months of fiscal year 1998 was 85% and 56%, respectively. The Company's net
operating losses associated with SMC transaction is approximately $5,000,000.
Due to the change in control, the utilization of the net operating losses is
limited to approximately $300,000 per year. As the net operating losses are
utilized, they will be credited back to goodwill and will not impact the
results of operations.
Versar had net income of $35,000 during the third quarter of fiscal year
1998 compared to net income of $216,000 in the third quarter of fiscal year
1997. The decrease is due to the higher direct cost of services, interest
expenses, and higher effective tax rates as mentioned above.
Nine Month Comparison Years 1998 and 1997
- -----------------------------------------
Versar's gross revenue for the nine months ended March 31, 1998 totaled
$58,513,000, an increase of $25,579,000 (78%) compared to gross revenue of
$32,934,000 for the nine months of the prior fiscal year. The increase is due
to the inclusion of revenues of SMC and Greenwood.
Purchased services and materials for the nine months of fiscal year 1998
increased by $13,341,000 (139%) compared to such costs for the comparable
period of the previous fiscal year. The increase is primarily due to the
increase in purchased services and materials from the SMC McEver design and
construction subsidiary of SMC.
Net service revenue is derived by deducting the costs of purchased
services and materials from gross revenue. Net service revenue increased by
52% compared to the nine month period of fiscal year 1997. The increase is due
to the higher volume in gross revenue.
9
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Direct costs of services and overhead as a percentage of net service
revenue increased to 86.9% in the nine month period of fiscal year 1998
compared to 81.7% in the nine month period of fiscal year 1997. The increase
is due to the lower markup on the newly acquired SMC, project reserves and
overruns in SMC, goodwill expense, lower labor utilization in Versar, and the
winding down of the Company's EIMS software business.
Selling, general and administrative expenses were 10.5% of net service
revenue in the nine month period of fiscal year 1998, compared to 14.6% in the
nine months of fiscal year 1997. The decrease is primarily due to higher net
service revenue. In the third quarter of fiscal year 1997 the Company reversed
$200,000 of reserves due to the resolution of several legal issues.
Other costs for the nine month period ended March 31, 1997 was $32,000
associated with non-compete income from the sale of the Company's majority-
owned subsidiary, Gammaflux, Inc.
Operating income for the nine month period of fiscal year 1998 was
$913,000, an increase of $6,000 compared to the nine month period of fiscal
year 1997.
Interest expense during the nine month period increased by $207,000
compared to interest expense for the comparable period for the previous fiscal
year. The increase is due to the financing of the acquisition of SMC,
financing SMC's working capital, and the purchase of Greenwood during the nine
month period.
Income tax expense during the nine month period of fiscal year 1998
increased by $84,000 compared to costs for the comparable period of the
previous fiscal year 1997. The increase is due to the higher effective tax
rate of 56% for the nine month period in fiscal year rate compared to 40% in
nine month period of fiscal year 1997 because the company will not be able to
deduct the goodwill expense of SMC for tax purposes.
Versar had net income $588,000 in the nine month period of fiscal year
1998 compared to net income of $873,000 in the nine month period of fiscal year
1997. The decrease is due to the higher direct costs of services and overhead
and interest expense in the second and third quarters of fiscal year 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's current working capital at March 31, 1998 approximated
$8,726,000 or $415,000 (5%) lower than at June 30, 1997. In addition, the
Company's current ratio at March 31, 1998 was 1.6 to 1. The decreased working
capital is primarily the result of the payment of long-term debt and increased
borrowing of the line of credit during the first nine month period of fiscal
year 1998.
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
$1,275,000 reserve for the guarantee of debt of Sarnia and outstanding loan
balances (approximately $1,685,000 at March 31, 1998). 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 (8.25% at March 31, 1998.) A fee of 1/4%
on the unused portion of the line of credit is also charged. This line of
credit 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 March 31, 1998 was approximately
$1,218,000. Advances on the line of credit are due on November 30, 1998. The
Company was in compliance with the financial covenants at March 31, 1998.
Management believes that cash generated by operations and borrowings available
under the line of credit will be adequate to meet its working capital needs for
fiscal year 1998.
Approximately $100,000 will be required for capital expenditures during
the remainder of fiscal year 1998 and will be funded out of current working
capital.
10
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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.
Year 2000
- ---------
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000.
This, in turn, could result in major system failures and in miscalculations,
and is generally referred to as the "Year 2000" problem. Versar is in the
process of evaluating the different options that are available to upgrade the
Company's existing data processing and financial reporting software
applications to be Year 2000 compliant. Presently, Versar does not believe
that Year 2000 compliance will result in any material investments, nor does
Versar anticipate that the Year 2000 problem will have material adverse effects
on the business operations or financial performance of Versar. In addition,
Versar is not aware of any Year 2000 problems of its customers, suppliers or
network affiliates that will have a material adverse effect on the business,
operations or financial performance of Versar. There can be no assurance,
however, that the year 2000 problem will not adversely affect Versar and its
business.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1996, Flintlock Ltd, a client of SMC McEver, an indirect
subsidiary of Versar, filed an action in the165th 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 denied the allegations and 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. Flintlock recently
changed counsel and, at its request, the trial date is now set for the week of
August 31, 1998. Settlement discussions between the parties continue. Based
upon consultation with outside counsel, management does not believe that an
adverse outcome on this lawsuit will have a material impact on Versar's
consolidated 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
11
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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: May 13, 1998
12
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Exhibit 11
VERSAR, INC.
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET INCOME. . . . . . . . $ 35 $ 216 $ 588 $ 873
========== ========== ========== ==========
Weighted average common
shares outstanding. . . . 5,937,264 5,019,585 5,573,532 5,009,960
========== ========== ========== ==========
NET INCOME PER SHARE -
BASIC . . . . . . . . $ --- $ .04 $ .10 $ .17
========== ========== ========== ==========
Common shares from
above. . . . . . . . . . 5,937,264 5,019,585 5,573,532 5,009,960
Assumed exercise of
options (treasury stock
method). . . . . . . . . 455,777 188,961 416,254 90,957
---------- ---------- ---------- ----------
6,393,041 5,208,546 5,989,786 5,100,917
========== ========== ========== ==========
NET INCOME PER SHARE -
DILUTED. . . . . . . . $ --- $ .04 $ .10 $ .17
========== ========== ========== ==========
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 21,798
<ALLOWANCES> 1,110
<INVENTORY> 0
<CURRENT-ASSETS> 23,311
<PP&E> 13,394
<DEPRECIATION> 10,324
<TOTAL-ASSETS> 33,285
<CURRENT-LIABILITIES> 14,585
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 13,803
<TOTAL-LIABILITY-AND-EQUITY> 33,285
<SALES> 0
<TOTAL-REVENUES> 58,513
<CGS> 0
<TOTAL-COSTS> 57,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255
<INCOME-PRETAX> 658
<INCOME-TAX> 70
<INCOME-CONTINUING> 588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
