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, 1999 Commission File Number 1-9309
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VERSAR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
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(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
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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
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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, 1999
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$ .01 par value 6,336,758 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and June 30, 1998. 3
Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended
March 31, 1999 and 1998. 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 12
ITEM 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT 11 - Computation of Per Share Earnings 14
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, June 30,
1999 1998
--------- ---------
ASSETS (unaudited)
Current assets
Cash and cash equivalents . . . . . . . . $ 58 $ 72
Accounts receivable, net. . . . . . . . . 14,897 14,631
Prepaid expenses and other current
assets. . . . . . . . . . . . . . . . . 1,235 1,378
Deferred income taxes . . . . . . . . . . 647 784
--------- ---------
Total current assets. . . . . . . . . . 16,837 16,865
Property and equipment, net . . . . . . . . 2,564 2,779
Deferred income taxes . . . . . . . . . . . 502 502
Goodwill. . . . . . . . . . . . . . . . . . 1,014 1,069
Other assets. . . . . . . . . . . . . . . . 184 273
--------- ---------
Total assets. . . . . . . . . . . . . . $ 21,101 $ 21,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . $ 3,887 $ 3,303
Bank line of credit . . . . . . . . . . . 4,374 3,664
Current portion of long-term debt . . . . 1,367 1,114
Accrued salaries and vacation . . . . . . 2,408 1,495
Other liabilities . . . . . . . . . . . . 603 2,645
Liabilities of discontinued
operations, net . . . . . . . . . . . . 166 1,524
--------- ---------
Total current liabilities . . . . . . . 12,805 13,745
Long-term debt. . . . . . . . . . . . . . . 125 688
Other long-term liabilities . . . . . . . . 1,950 2,084
Liabilities of discontinued
operations, net . . . . . . . . . . . . . --- 380
Reserve on guarantee of real estate debt. . 975 1,200
--------- ---------
Total liabilities . . . . . . . . . . . 15,855 18,097
--------- ---------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 6,257,834 shares and
6,071,887 shares issued and outstanding
at March 31, 1999 and June 30, 1998,
respectively. . . . . . . . . . . . . . 62 61
Capital in excess of par value . . . . . 17,889 17,458
Accumulated deficit. . . . . . . . . . . (12,705) (14,128)
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Total stockholders' equity . . . . . . 5,246 3,391
--------- ---------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . $ 21,101 $ 21,488
========= =========
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 For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
GROSS REVENUE . . . . . . . $ 13,593 $ 13,505 $ 43,871 $ 35,721
Purchased services and
materials, at costs. . . . 3,988 4,412 14,810 10,678
---------- ---------- ---------- ----------
NET SERVICE REVENUE . . . . 9,605 9,093 29,061 25,043
Direct costs of services
and overhead . . . . . . . 7,666 7,326 23,312 20,493
Selling, general and
administrative expenses. . 1,365 1,369 4,033 3,741
---------- ---------- ---------- ----------
OPERATING INCOME. . . . . . 574 398 1,716 809
OTHER EXPENSE
Interest expense. . . . . . 145 84 381 164
Income tax expense. . . . . 172 202 137 70
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS . . . . . . . . 257 112 1,198 575
(LOSS) INCOME FROM
DISCONTINUED OPERATIONS. . --- (77) --- 13
---------- ---------- ---------- ----------
NET INCOME. . . . . . . . . $ 257 $ 35 $ 1,198 $ 588
========== ========== ========== ==========
INCOME PER SHARE FROM
CONTINUING OPERATIONS
- BASIC. . . . . . . . . . $ 0.04 $ 0.02 $ 0.20 $ 0.10
========== ========== ========== ==========
INCOME PER SHARE FROM
CONTINUING OPERATIONS -
DILUTED. . . . . . . . . . $ 0.04 $ 0.02 $ 0.20 $ 0.09
========== ========== ========== ==========
(LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS -
BASIC AND DILUTED. . . . . $ --- $ (0.01) $ --- $ ---
========== ========== ========== ==========
NET INCOME PER SHARE -
BASIC. . . . . . . . . . . $ 0.04 $ 0.01 $ 0.20 $ 0.11
========== ========== ========== ==========
NET INCOME PER SHARE -
DILUTED. . . . . . . . . . $ 0.04 $ 0.01 $ 0.20 $ 0.10
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING -
BASIC. . . . . . . . . . . 6,234 5,937 6,148 5,574
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING -
DILUTED. . . . . . . . . . 6,234 6,428 6,148 6,064
========== ========== ========== ==========
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 Nine-Month
Periods Ended March 31,
---------------------------------
1999 1998
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Cash flows from operating activities
Net income from continuing operations . . $ 1,198 $ 575
Adjustments to reconcile net income
to net cash used in operating
activities
Income from discontinued operations. . --- 13
Depreciation and amortization. . . . . 542 566
Provision for doubtful accounts
receivable. . . . . . . . . . . . . . 7 (75)
Loss on disposal of property and
equipment . . . . . . . . . . . . . . 8 21
Common stock issued to ESSOP . . . . . 420 257
Deferred tax benefit . . . . . . . . . 137 70
------------- -------------
Subtotal . . . . . . . . . . . . . 2,312 1,427
Changes in assets and liabilities
Increase in accounts receivable. . . . (273) (1,634)
Decrease (increase) in prepaids
and other assets. . . . . . . . . . . 233 (1,137)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . . 584 (196)
Increase in accrued salaries and
vacation. . . . . . . . . . . . . . . 913 755
(Decrease) increase in other
liabilities . . . . . . . . . . . . . (2,176) 400
------------- -------------
Net cash provided by continuing
operations. . . . . . . . . . . . 1,593 (385)
Changes in net assets/liabilities of
discontinued operations. . . . . . . . . (1,738) (1,767)
------------- -------------
Net cash used in operating
activities. . . . . . . . . . . . (145) (2,152)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment. . . . (280) (371)
Acquisition of business . . . . . . . . . --- (585)
------------- -------------
Net cash used in investing
activities. . . . . . . . . . . . (280) (956)
Cash flows from financing activities
Net borrowings on bank line of credit . . 710 3,509
Principal payments on long-term debt. . . (310) (563)
Proceeds from issuance of the
Company's common stock . . . . . . . . . 11 244
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Net cash provided by financing
activities. . . . . . . . . . . . 411 3,190
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Effect of exchange rate changes on cash . . --- (15)
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Net (decrease) increase in cash . . . . . . (14) 67
Cash at the beginning of the period . . . . 72 96
------------- -------------
Cash at the end of the period . . . . . . . $ 58 $ 163
============= =============
Supplementary disclosure of cash
flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . $ 420 $ 250
Income taxes. . . . . . . . . . . . . . 53 319
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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/A for the year ended June 30, 1998
(the "Form 10-K/A") for additional information. In October 1998, as the
Company was in the process of winding down its discontinued engineering,
design and construction business acquired from SMC, the Company discovered an
error in the June 30, 1998 financial statements. The Audit Committee of the
Board of Directors instituted an investigation of the circumstances
surrounding the creation of the error. The investigation concluded that the
unbilled receivables, primarily related to one large contract, of the
discontinued operations were overstated by approximately $1.6 million at June
30, 1998. Appropriate remedial action has been taken to correct Company
procedures and the Company has restated its fiscal year 1998 financial
statements to reflect the impact of this error in the Form 10-K/A.
The accompanying consolidated financial statements include the accounts
of Versar, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
In September 1998, the Company decided to discontinue its management services
and engineering, design and construction services businesses, which are
classified as discontinued operations. Both of these businesses came from the
acquisition of Science Management Corporation in May 1997. The Company's
remaining business segments are environmental services, energy conservation
services and facility infrastructure services. The energy conservation and
facility infrastructure segments are collectively less than 10% of
consolidated revenues, operating profit and identifiable assets. Both
segments are expected to grow and may become separate reportable segments in
fiscal year 1999.
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, 1999, and the
results of operations for the nine month periods ended March 31, 1999 and
1998. 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 may 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-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
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
which they become known. Disputes arise in the normal course of the Company's
business on projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in contract
specifications and questions of cost allowability or collectibility. Such
disputes, whether claims or unapproved change orders in the process of
negotiation, are recorded at the lesser of their estimated net realizable
value or actual costs incurred and only when realization is probable and can
be reliably estimated. Claims against the Company are recognized where loss
is considered probable and is reasonably determinable in amount.
It is the Company's policy to provide reserves for the collectibility of
accounts receivable when it is determined that it is probable that the Company
will not collect all amounts due and the amount of reserve requirements can be
reasonably estimated.
(D) Intangible Assets
On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, P.C. ("Greenwood" or "TGP"). As a part of the acquisition, the
Company increased its then line of credit by $2,000,000 and retired existing
debt of Greenwood of approximately $672,000, paid $300,000 in cash, recorded
additional notes payable to Greenwood stockholders of $450,000 payable over 4
years, and issued 228,572 shares of Versar common stock. The notes payable of
$450,000 are included in other long term liabilities. The transaction was
accounted for as a purchase. Goodwill recorded as part of the transaction was
approximately $1.1 million. Versar is amortizing the goodwill related to the
acquisition over 15 years, which was determined to be reasonable based on the
mature business of Greenwood.
(E) Discontinued Operations
As a result of poor performance following its acquisition of SMC, the
Company determined to discontinue operations of its management services and
engineering, design and construction services segments (acquired from SMC),
which provided services to the commercial and the petrochemical industries.
The engineering, design and construction services segment was severely
impacted by the recent downturn in the petrochemical industry and the winding
down of a $20 million construction project, which reduced its sales volume by
over 80%. Such a downturn could not be reasonably anticipated as several
pending projects were put on hold or cancelled because reduced oil prices did
not make it economically feasible for the customers to complete such projects.
The management services segment of SMC also suffered from the loss of three
large contracts which represented 75% of its sales volume. The Company
completed the sale of these two business segments during the second quarter of
fiscal year 1999, for consideration consisting mainly of assumption of certain
liabilities, release of other liabilities and potential payments based upon
gross revenue in the next two years.
In conjunction with the decision for discontinuance of these businesses,
the Company in the fourth quarter of fiscal year 1998, recorded a loss from
discontinued operations of $10,429,000, net of $90,000 tax benefit, due to the
write-off of goodwill associated with its acquisition of SMC and operating
losses of $7,376,000 (net of tax) and accrued reserves of $3,053,000 to
finalize the disposition. As part of the accrued reserves, the Company
reserved approximately $1,700,000 for operating losses in the period prior to
the sale or shut down.
(F) Income Taxes
At June 30, 1998, the Company had $4.7 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
7
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
of approximately $3.0 million has been established. In the second quarter of
fiscal year 1999, the Company reduced the valuation allowance against the
deferred tax assets by $400,000. With stable profitability, such net
operating loss and tax credit carryforwards would be utilized and the
valuation allowance will be adjusted accordingly.
(G) 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.
(H) Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share," which requires companies to present basic earnings per
share and diluted earnings per share. The Standard requires additional
informational disclosures along with the restatement of earnings per share for
all prior periods reported.
Basic net income per share applicable to common stock is computed by
dividing net income applicable to common stock by the weighted average number
of shares outstanding during the applicable period being reported upon.
Diluted net income per share is computed by dividing net income applicable to
common stock by the weighted average number of shares outstanding plus the
effect of assumed exercise of stock options using the Treasury Stock Method.
(I) Common Stock
In the fiscal year 1998, Versar issued approximately 147,423 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal years 1997 and 1998. In the nine months of fiscal
year 1999, 180,947 shares were issued to the employee benefit plans for
contributions owed for fiscal years 1999 and 1998.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
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 discontinuance of certain business segments. 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; the possibility that acquired entities may not perform as well as
expected; 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.
Third Quarter Comparison of Fiscal Years 1999 and 1998
- ------------------------------------------------------
Versar's gross revenue from continuing operations for the third quarter
of fiscal year 1999 totaled $13,593,000, an increase of $88,000 (1%) compared
to gross revenue of $13,505,000 in the third quarter of fiscal year 1998. The
net increase is due to increased revenue in the Company's Rocky Mountain
operations in support of the Air Force's Armstrong contract.
Purchased services and materials for the third quarter of fiscal year
1999 decreased by $424,000 (10%) compared to costs for the comparable period
of fiscal year 1998. The decrease is due to lower revenues generated by
subcontracted efforts in the Company's Atlantic and Ecological Science
operating units.
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 6% compared to the third quarter of fiscal year 1998.
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 and unallowable
costs that are directly attributable to contracts. The percentage of these
costs to net service revenue decreased to 80% in the third quarter of fiscal
year 1999 compared to 81% in the third quarter of fiscal year 1998. The
increase is due to slightly improved labor utilization during the quarter.
Selling, general and administrative expenses approximated 14% of net
service revenue in the third quarter of fiscal year 1999 compared to 15% in
the third quarter of fiscal year 1998. The decrease is due to the higher
level of net service revenue, while selling, general and administrative
expenses remained relatively stable.
Operating income for the third quarter of fiscal year 1999 was $574,000,
an increase of $176,000 compared to the third quarter of fiscal year 1998.
The increase is primarily due to selling, general and administrative expenses
remained relatively stable at fiscal year 1998 levels while net service
revenues increased.
Interest expense during the third quarter of fiscal year 1999 increased
by $61,000 compared to costs for the comparable period of the previous year.
The increase is due to the cost of financing the acquisitions of SMC and TGP
and the higher utilization of the Company's line of credit. The Company
anticipates that the interest expense will remain approximately at the current
level of expenditure for the next three to six months with the completion of
the discontinuance of operations of SMC.
9
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Income tax expense during the third quarter decreased by $30,000
compared to such costs for the comparable period of the previous year. Income
tax expense was lower due to a lower effective income tax rate of 40% in 1999
compared to 64% for the same period in the prior fiscal year. The higher
income tax rate in the prior fiscal year was due to the non-deductibility of
the goodwill associated with the SMC acquisition.
Income from continuing operations was $257,000 for the third quarter of
fiscal year 1999 compared to $112,000 for the third quarter of fiscal year
1998.
Loss from discontinued operations was $77,000 in the third quarter of
fiscal year 1998 for the consolidated discontinued operations of SMC. While
the results were only slightly negative for the third quarter of fiscal year
1998, significant business downturns occurred in the fourth quarter in fiscal
year 1998 causing the Company to discontinue the majority of SMC's operations
in the fourth quarter of fiscal year 1998.
Versar's net income for the third quarter of fiscal year 1999 was
$257,000 compared to $35,000 in the third quarter of fiscal year 1998. The
increase is due to the higher net service revenue and stable selling, general
and administrative expenses.
Nine Month Comparison of Fiscal Years 1999 and 1998
- ---------------------------------------------------
Versar's gross revenue for the first nine months of fiscal year 1999
totaled $43,871,000, an increase of $8,150,000 (23%) compared to such gross
revenue for the comparable period of the previous year. Forty-five percent of
the increase is due to work performed in the Company's Rocky Mountain
operations under its Air Force Armstrong contract. Twenty-five percent of the
increase came from the gross revenues of The Greenwood Partnership, P.C.
("TGP"), which was acquired by Versar in the third quarter of fiscal year
1998. The balance of the increase came from Versar's baseline business.
Purchased services and materials for the first nine months of fiscal
year 1999 increased by $4,132,000 (39%) compared to such costs for the
comparable period of fiscal year 1998. The increase is due to the higher
subcontractor efforts in the Rocky Mountain and Northeast operating units.
Net service revenue is derived by deducting the cost of purchased
services from the gross revenue. Net service revenue for the nine months of
fiscal year 1999 increased by 16% compared to the nine months of fiscal year
1998. The increase is due to the higher volume in gross revenue as mentioned
above.
Direct costs of services and overhead as a percentage of net service
revenue decreased to 80% in the nine months of fiscal year 1999 compared to
82% in previous year. The decrease is attributable to the improved labor
utilization during the nine months of fiscal year 1999.
Selling, general and administrative expenses approximated 14% of net
service revenue for the nine months of fiscal year 1999 compared to 15% in the
nine months of fiscal year 1998. The reduction is due to the higher levels of
net service revenue as mentioned above.
Operating income for the nine months of fiscal year 1999 was $1,716,000,
an increase of $907,000 compared to the nine months of fiscal year 1998. The
increase is due to the higher net service revenue and improved labor
utilization as mentioned above.
Interest expense during the nine months of fiscal year 1999 increased by
$217,000 compared to such costs for the comparable period of the previous
year. The increase is due to the cost of financing the acquisition of SMC and
TGP and higher utilization of the Company's line of credit.
10
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Income tax expense increased by $67,000 for the nine months of fiscal
year 1999 due to the increased pre-tax income and non-deductibility of the
goodwill associated with the SMC acquisition. The Company reduced the
valuation allowance against deferred tax assets by $400,000 and $300,000 in
the nine months of fiscal year 1999 and 1998, respectively.
Income from discontinued operations was $13,000 for the nine months of
fiscal year 1998 for the consolidated results of operations of SMC. While
results were positive in the nine months of fiscal year 1998, significant
business downturns occurred in the fourth quarter of fiscal year 1998 causing
the Company to discontinue the majority of SMC's operations in the fourth
quarter of fiscal year 1998.
Versar's net income for the nine months of fiscal year 1999 was
$1,198,000 compared to $588,000 in the nine months of fiscal year 1998. The
increase is due to the improved results in Versar's baseline business as
mentioned above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at March 31, 1999 approximated $4,032,000
or $912,000 (29%) higher than June 30, 1998. The increase is primarily due to
the improved operating results and the decreased current liabilities. In
addition, the Company's current ratio at March 31, 1999 was 1.32 to 1,
slightly higher than the June 30, 1998 current ratio.
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 $975,000 reserve for the guarantee of debt of Sarnia and outstanding
acquisition loan balances (approximately $875,000 at March 31, 1999).
Borrowings on the line of credit are at the lower of the 30 day London
Interbank Rate ("LIBOR") plus 310 basis points or the prime rate plus 30 basis
points (8.05% at March 31, 1999). 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 receivables, equipment and intangibles, plus
all insurance policies on property constituting collateral. In July 1998, the
Company increased the line to $6,500,000, which included an increase to the
interest rate of 30 basis points. In October, 1998, the Company further
modified its existing line of credit to include unbilled receivables in its
borrowing base. As a part of this amendment, the interest rate was increased
by an additional 30 basis points and a $40,000 fee was charged. Additional
monthly fees will be charged during the month where the Company borrows
against the unbilled receivables. Unused borrowing availability at March 31,
1999 was approximately $2,226,000. Advances on the line of credit are due on
May 31, 1999. The Company was in compliance with the financial covenants at
March 31, 1999. Management believes that cash generated by operations and
borrowings available under the expected extension of the existing line of
credit will be adequate to meet the working capital needs for fiscal year
1999.
Approximately $75,000 will be required for capital expenditures during
the remainder of fiscal year 1999 primarily for Y2K software purchases and
will be funded out of current working capital.
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.
11
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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. On August 4, 1998,
the Company's Board of Directors adopted a comprehensive Strategy for
Achieving Year 2000 ready program for Versar and its subsidiaries.
Subsequently, management has begun to implement the eight step program to
identify both internally and externally the extent of any Year 2000 problem,
the cost to the Company to mitigate any Year 2000 effects and identify any
significant client or subcontractor compliance issues.
Presently, Versar does not believe that Year 2000 ready will result in
any material investments, nor does Versar have any information that the Year
2000 problem will have material adverse effects on the business operations or
financial performance of Versar. In the third quarter of fiscal year 1999,
the Company modified its financial reporting and project management software
to be Year 2000 ready. Total costs incurred for the Year 2000 ready program
is approximately $50,000. The Company is in the process of obtaining the
remaining patches for its windows and network software in the coming months to
ensure Year 2000 ready.
In addition, after completing a survey of significant customers and
suppliers, 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. It is expected
that the remaining costs will be between $20,000 to $40,000. Versar expects
that the Company will be in Year 2000 ready by June 30, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
At the end of December 1998, the Company was served with a complaint
entitled Servi-Sure Corporation v. Versar, Inc., No. 98L14567, filed in the
Circuit Court of Cook County, Illinois. In the complaint, Plaintiff alleges
damages from a property investigation conducted in December 1988 based upon
breach of contract and negligence. The Company has moved to dismiss the
lawsuit on the basis of the Illinois statute of limitations. It has also had
settlement negotiations with the Plaintiff. Based upon an initial evaluation,
management does not believe this lawsuit will have a material adverse effect
on its consolidated financial condition and results of operations.
Versar and its subsidiaries are parties to various other legal actions
arising in the normal course of business. The Company believes that an
ultimate unfavorable resolution of these other legal actions will not have a
material adverse effect on its consolidated financial condition and results of
operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None.
12
<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: May 12, 1999
13
<PAGE>
<PAGE>
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,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET INCOME. . . . . . . . . $ 257 $ 35 $ 1,198 $ 588
=========== =========== =========== ===========
Weighted average common
shares outstanding -
Basic. . . . . . . . . . . 6,233,671 5,937,264 6,147,535 5,573,532
=========== =========== =========== ===========
NET INCOME PER SHARE -
BASIC . . . . . . . . . $ 0.04 $ 0.01 $ 0.20 $ 0.11
=========== =========== =========== ===========
Common shares from above. . 6,233,671 5,937,264 6,147,535 5,573,532
Assumed exercise of
options (treasury stock
method). . . . . . . . . . --- 490,528 --- 490,528
----------- ----------- ----------- -----------
6,233,671 6,427,792 6,147,535 6,064,060
=========== =========== =========== ===========
NET INCOME PER SHARE -
DILUTED . . . . . . . . . . $ 0.04 $ 0.01 $ 0.20 $ 0.10
=========== =========== =========== ===========
14
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 15,490
<ALLOWANCES> 593
<INVENTORY> 0
<CURRENT-ASSETS> 16,837
<PP&E> 11,425
<DEPRECIATION> 8,861
<TOTAL-ASSETS> 21,101
<CURRENT-LIABILITIES> 12,805
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 5,184
<TOTAL-LIABILITY-AND-EQUITY> 21,101
<SALES> 0
<TOTAL-REVENUES> 43,871
<CGS> 0
<TOTAL-COSTS> 42,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 381
<INCOME-PRETAX> 1,335
<INCOME-TAX> 137
<INCOME-CONTINUING> 1,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,198
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
