UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended December 31, 1998 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 (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
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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 February 1, 1999
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$ .01 par value 6,186,123 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1998. 3
Consolidated Statements of Operations for the
Three-Month and Six-Month Periods Ended
December 31, 1998 and 1997. 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended
December 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 9-12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 12
ITEM 4 - Submission of Matters to a Vote of Stockholders 12-13
ITEM 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT 11 - Computation of Per Share Earnings 15
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
December 31, June 30,
1998 1998
------------ ------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents . . . . . . . . . $ 117 $ 72
Accounts receivable, net. . . . . . . . . . 16,427 14,631
Prepaid expenses and other current assets . 513 1,378
Deferred income taxes . . . . . . . . . . . 819 784
------------ ------------
Total current assets . . . . . . . . . . 17,876 16,865
Property and equipment, net . . . . . . . . . 2,647 2,779
Deferred income taxes . . . . . . . . . . . . 502 502
Goodwill. . . . . . . . . . . . . . . . . . . 1,032 1,069
Other assets. . . . . . . . . . . . . . . . . 174 273
------------ ------------
Total assets . . . . . . . . . . . . . . $ 22,231 $ 21,488
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . . $ 4,800 $ 3,303
Bank line of credit . . . . . . . . . . . . 4,669 3,664
Current portion of long-term debt . . . . . 750 1,114
Accrued salaries and vacation . . . . . . . 1,992 1,495
Other liabilities . . . . . . . . . . . . . 1,281 2,645
Liabilities of discontinued operations,
net. . . . . . . . . . . . . . . . . . . . 622 1,524
------------ ------------
Total current liabilities. . . . . . . . 14,114 13,745
Long-term debt. . . . . . . . . . . . . . . . 312 688
Other long-term liabilities . . . . . . . . . 1,982 2,084
Liabilities of discontinued operations, net . --- 380
Reserve on guarantee of real estate debt. . . 1,050 1,200
------------ ------------
Total liabilities. . . . . . . . . . . . 17,458 18,097
------------ ------------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 6,186,123 shares and
6,071,887 shares issued and outstanding
at December 31 and June 30, 1998,
respectively . . . . . . . . . . . . . . . 62 61
Capital in excess of par value. . . . . . . 17,748 17,458
Accumulated deficit . . . . . . . . . . . . (13,037) (14,128)
------------ ------------
Total stockholders' equity . . . . . . . 4,773 3,391
------------ ------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . $ 22,231 $ 21,488
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month For the Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
GROSS REVENUE . . . . . $ 15,479 $ 11,378 $ 30,278 $ 22,216
Purchased services
and materials, at
costs. . . . . . . . . 6,065 3,274 10,822 6,266
------------ ------------ ------------ ------------
NET SERVICE REVENUE . . 9,414 8,104 19,456 15,950
Direct costs of services
and overhead . . . . . 7,525 6,815 15,646 13,167
Selling, general and
administrative
expenses . . . . . . . 1,403 1,159 2,668 2,372
------------ ------------ ------------ ------------
OPERATING INCOME. . . . 486 130 1,142 411
OTHER EXPENSE
Interest expense. . . . 149 17 236 80
Income tax benefit. . . (264) (266) (35) (132)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS . . . . . . 601 379 941 463
(LOSS) INCOME FROM
DISCONTINUED
OPERATIONS . . . . . . --- (29) --- 90
------------ ------------ ------------ ------------
NET INCOME. . . . . . . $ 601 $ 350 $ 941 $ 553
============ ============ ============ ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS
- BASIC. . . . . . . . $ 0.10 $ 0.07 $ 0.15 $ 0.09
============ ============ ============ ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS
- DILUTED. . . . . . . $ 0.10 $ 0.06 $ 0.15 $ 0.08
============ ============ ============ ============
(LOSS) INCOME PER SHARE
FROM DISCONTINUED
OPERATIONS - BASIC
AND DILUTED. . . . . . $ --- $ (0.01) $ --- $ 0.02
============ ============ ============ ============
NET INCOME PER SHARE
- BASIC AND DILUTED . . $ 0.10 $ 0.06 $ 0.15 $ 0.10
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- BASIC . . . . . . . . 6,117 5,614 6,107 5,391
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- DILUTED . . . . . . . 6,117 6,032 6,107 5,808
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Six-Month
Periods Ended December 31,
--------------------------
1998 1997
------------ ------------
Cash flows from operating activities
Net income from continuing operations. . . . . . $ 941 $ 463
Adjustments to reconcile net income to
net cash used in operating activities
Income from discontinued operations . . . . . --- 90
Depreciation and amortization . . . . . . . . 357 365
Provision for doubtful accounts receivable. . (18) (55)
Common stock issued to ESSOP. . . . . . . . . 278 140
Deferred tax benefit. . . . . . . . . . . . . (35) (300)
------------ ------------
Subtotal. . . . . . . . . . . . . . . . . . 1,523 703
Changes in assets and liabilities
(Increase) decrease in accounts receivable. . (1,777) 913
Decrease in prepaids and other assets . . . . 964 505
Increase (decrease) in accounts payable . . . 1,497 (670)
Increase in accrued salaries and vacation . . 497 3
Decrease in other liabilities . . . . . . . . (1,465) (896)
------------ ------------
Net cash provided by continuing
operations . . . . . . . . . . . . . . . . 1,239 558
Changes in net assets/liabilities of
discontinued operations . . . . . . . . . . . . (1,282) (830)
------------ ------------
Net cash used in operating activities . . . (43) (272)
------------ ------------
Cash flows used in investing activities
Purchase of property and equipment . . . . . . . (188) (364)
Acquisition of business. . . . . . . . . . . . . --- (585)
------------ ------------
Net cash used in investing activities . . . (188) (949)
Cash flows from financing activities
Net borrowings on bank line of credit. . . . . . 1,005 1,537
Principal payments on long-term debt . . . . . . (740) (546)
Proceeds from issuance of the Company's
common stock. . . . . . . . . . . . . . . . . . 13 230
------------ ------------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . 278 1,221
------------ ------------
Net (decrease) in cash . . . . . . . . . . . . . . 47 0
Cash at the beginning of the year. . . . . . . . . 72 96
------------ ------------
Cash at the end of the period. . . . . . . . . . . $ 119 $ 96
============ ============
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . $ 234 $ 127
Income taxes . . . . . . . . . . . . . . . . . 40 200
The accompanying notes are an integral part of
these consolidated financial statements.
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<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/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
("Versar" or the "Company"). 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 ("SMC") 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 December 31, 1998, and the results of
operations for the six-month periods ended December 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 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 which they
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<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 common stock.
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 loss of three large contracts which
represented 75% of its sales volume. The Company has 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 of approximately $3.0 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.
-7-
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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 (SFAS) 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 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 first six months of fiscal year 1999, 114,236 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
- ---------------------
First Quarter 1999 Compared to First Quarter 1998
- -------------------------------------------------
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.
Second Quarter Comparison of Fiscal Years 1999 and 1998
- -------------------------------------------------------
Versar's gross revenue from continuing operations for the
second quarter of fiscal year 1999 totaled $15,479,000, an
increase of $4,101,000 (36%) compared to gross revenue of
$11,378,000 for the second quarter of fiscal year 1998. Gross
revenue for the Company's base business increased by $3,268,000,
which was driven by increased project revenues in the Company's
Rocky Mountain and GEOMET operations for the Air Force Armstrong
contract and the start of the production of STEPO suits. The
balance of the increase is from revenues from The Greenwood
Partnership ("TGP") acquired by Versar in the third quarter of
fiscal year 1998.
Purchased services and materials for the second quarter of
fiscal year 1999 increased by $2,791,000 (85%) compared to such
costs for the comparable period of fiscal year 1998. The
increase is due to additional services and materials purchased in
connection with the subcontracted efforts in the operating units
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 16% during the second quarter of fiscal year 1999
compared to the second quarter of fiscal year 1998. The increase
is due to the higher volume in gross revenue as mentioned above
and improved results in the Company's Atlantic and Ecological
Sciences operations.
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 79.9% in the second quarter of fiscal year 1999
compared to 84.1% in the second quarter of fiscal year 1998. The
decrease is due to improved labor utilization during the quarter.
Selling, general and administrative expenses approximated
14.9% of net service revenue in the second quarter of fiscal year
1999 compared to 14.3% in the second quarter of fiscal year 1998.
The slight increase is due to the additional costs associated
with the start-up for the STEPO production contract in the GEOMET
operations.
Operating income for the second quarter of fiscal year 1999
was $486,000, an increase of $356,000 compared to the second
quarter of fiscal year 1998. The increase is the result of the
reduced percentage of direct costs of services and overhead to
net service revenue as a result of improved labor utilization.
-9-
<PAGE>
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Interest expense during the second quarter of fiscal year
1999 increased by $132,000 compared to such costs for the
comparable period of the previous year. The increase is due to
the debt incurred to finance the acquisitions of SMC and TGP and
the higher utilization of the Company's line of credit. The
Company anticipates that interest expense will remain
approximately at the current level of expenditure for the next
three to six months as it completes the winding down of the
discontinued operations of SMC.
Income tax benefit during the second quarter decreased by
$2,000 compared to the comparable period of the previous year.
Income tax expense increased due to the higher income, which was
offset by a reduction to the tax valuation allowance as described
below. The Company decreased its valuation allowance during the
second quarter of fiscal year 1999 by $400,000 compared to a
decrease of $300,000 in the second quarter of fiscal year 1998.
The Company continues to carry a tax valuation allowance of
approximately $3 million against the Company's deferred tax
assets. The Company has established the valuation allowance
until the probability of realization of these amounts becomes
more certain.
Income from continuing operations was $601,000 for the
second quarter of fiscal year 1999 compared to $379,000 for the
second quarter of fiscal year 1998.
Loss from discontinued operations was $29,000 in the second
quarter of fiscal year 1998 for the consolidated discontinued
operations of SMC. While the results were only slightly negative
for the second quarter of fiscal year 1998, significant business
downturns occurred in the third and fourth quarters 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 second quarter of fiscal year
1999 was $601,000 compared to $350,000 in the second quarter of
fiscal year 1998. The increase is due to the improved results in
Versar's base business as mentioned above.
Six Month Comparison of Fiscal Years 1999 and 1998
- --------------------------------------------------
Versar's gross revenue for the first six months of fiscal
year 1999 totaled $30,278,000, an increase of $8,062,000 (36%)
compared to gross revenue for the comparable period of the
previous year. Half of the increase is due to work performed in
the Company's Rocky Mountain operations under its Air Force
Armstrong contract and a construction remediation contract in the
Company's Northeast operations. All other operating units had
increases in gross revenues in excess of 15% for the first six
months of fiscal year 1999. The balance of $2,074,000 came from
the gross revenues of TGP, which was acquired by Versar in the
third quarter of fiscal year 1998.
Purchased services and materials for the first six months of
fiscal year 1999 increased by $4,556,000 (73%) compared to such
costs for the comparable period of fiscal year 1998. The
increase is due to the higher revenues generated by subcontracted
efforts primarily in the Rocky Mountain and Northeast operations.
Net service revenue is derived by deducting the cost of
purchased services from the gross revenue. Net service revenue
for the first six months of fiscal year 1999 increased by 22%
compared to the first six 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 80.4% in the first six months of
fiscal year 1999 compared to 82.6% in the previous year. The
decrease is attributable to the improved labor utilization during
the first six months of fiscal year 1999.
-10-
<PAGE>
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Selling, general and administrative expenses approximated
13.7% of net service revenue for the first six months of fiscal year 1999
compared to 14.9% in the first six months of fiscal year 1998. The reduction
is due to the higher levels of net service revenue as mentioned above.
Operating income for the first six months of fiscal year
1999 was $1,142,000, an increase of $731,000 compared to the
first six 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 first six months of fiscal year
1999 increased by $156,000 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 TGP and higher utilization
of the Company's line of credit.
Income tax benefit decreased by $97,000 for the first six
months of fiscal year 1999 due to the higher income as compared
to the first six months of fiscal year 1998. The Company reduced
the valuation allowance against deferred tax assets by $400,000
and $300,000 in the first six months of fiscal year 1999 and
1998, respectively.
Income from discontinued operations was $90,000 for the
first six months of fiscal year 1998 for the consolidated results
of operations of SMC. While results were positive in the first
six months of fiscal year 1998, significant business downturns
occurred in the third and fourth quarters 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 first six months of fiscal year
1999 was $941,000 compared to $553,000 in the first six months of
fiscal year 1998. The increase is due to the improved results in
Versar's base business as mentioned above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 1998
approximated $3,762,000 or $642,000 (21%) higher than at June 30,
1998. The increase is primarily due to the improved operating
results and the increase to deferred income tax assets. In
addition, the Company's current ratio at December 31, 1998 was
1.26 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 $1,050,000 reserve for the
guarantee of debt of Sarnia and outstanding acquisition loan
balances (approximately $1,062,500 at December 31, 1998).
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 (8.05% at December 31, 1998). 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 any month in which
the Company borrows against the unbilled receivables. Unused
borrowing availability at December 31, 1998 was approximately
$1,831,000. Advances on the line of credit are due on May 31,
1999. The Company was in compliance with the financial covenants
at December 31, 1998. Management believes that cash generated by
operations and borrowings available under the extension of the
existing line of credit will be adequate to meet the working
capital needs for fiscal year 1999.
-11-
<PAGE>
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Approximately $125,000 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.
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 is presently investigating
the factual background of this matter and will respond
appropriately by March 1999.
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 4. Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders (the "Annual
Meeting") was held on November 18, 1998. The matters voted on at
the Annual Meeting were as follows:
(1) The Election of Directors
The nomination of the following persons to serve as
directors of the Company was approved as indicated
below:
Vote Withheld
for Authority
-------- ---------
Benjamin M. Rawls 4,258,515 238,386
Michael Markels, Jr. 4,279,051 217,850
Robert L. Durfee 4,281,217 215,684
M. Lee Rice 4,277,603 219,298
-12-
<PAGE>
Item 4. Submission of Matters to a Vote of Stockholders (continued)
Charles I. Judkins, Jr. 4,279,117 217,784
Thomas J. Shields 4,280,705 216,196
Constantine G. Caras 4,279,191 217,710
David Gladstone 4,211,971 284,930
Pat H. Moore 4,277,415 219,486
(2) The amendment of Versar, Inc.'s Certificate of Incorporation to
change par value of preferred stock from $25.00 to $.01 per share.
For Against Abstain
-------- --------- -------
4,297,641 58,462 37,311
(3) Ratification of the appointment of Arthur Andersen LLP
as independent accountants for fiscal year 1999. The
appointment of Arthur Andersen LLP as the Company's independent
accountants was ratified as follows:
For Against Abstain
-------- --------- -------
4,312,635 171,051 13,214
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.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VERSAR, INC.
--------------------
(Registrant)
By: /S/ Benjamin M. Rawls
-------------------------
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: February 10, 1999
-14-
<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 Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET INCOME. . . . . . . $ 601 $ 350 $ 941 $ 553
=========== =========== =========== ===========
Weighted average
common shares
outstanding - Basic. . 6,116,803 5,614,256 6,106,770 5,390,831
=========== =========== =========== ===========
NET INCOME PER SHARE -
BASIC . . . . . . . . $ 0.10 $ 0.06 $ 0.15 $ 0.10
=========== =========== =========== ===========
Common shares from
above. . . . . . . . . 6,116,803 5,614,256 6,106,770 5,390,831
Assumed exercise of
options (treasury
stock method). . . . . --- 417,298 --- 417,298
----------- ----------- ----------- -----------
6,116,803 6,031,554 6,106,770 5,808,129
=========== =========== =========== ===========
NET INCOME PER SHARE -
DILUTED. . . . . . . . $ 0.10 $ 0.06 $ 0.15 $ 0.10
=========== =========== =========== ===========
-15-
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 17,060
<ALLOWANCES> 633
<INVENTORY> 0
<CURRENT-ASSETS> 17,876
<PP&E> 11,370
<DEPRECIATION> 8,723
<TOTAL-ASSETS> 22,231
<CURRENT-LIABILITIES> 14,114
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 4,711
<TOTAL-LIABILITY-AND-EQUITY> 22,231
<SALES> 0
<TOTAL-REVENUES> 30,278
<CGS> 0
<TOTAL-COSTS> 29,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> 906
<INCOME-TAX> (35)
<INCOME-CONTINUING> 941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 941
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
