UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(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, 2000 Commission File Number 1-9309
--------------- ------
VERSAR, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
---------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
---------------------------------- -------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703) 750-3000
-----------------------------
Not Applicable
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at May 1, 2000
--------------------- --------------------------
$ .01 par value 6,410,824 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and June 30, 1999. 3
Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
March 31, 2000 and 1999. 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended
March 31, 2000 and 1999. 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 13
ITEM 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, June 30,
2000 1999
----------- -----------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents . . . . . . . . . . $ 53 $ 58
Accounts receivable, net. . . . . . . . . . . 12,555 15,939
Prepaid expenses and other current assets . . 1,714 1,125
Deferred income taxes . . . . . . . . . . . . 599 599
----------- -----------
Total current assets. . . . . . . . . . 14,921 17,721
Property and equipment, net . . . . . . . . . . 2,568 2,466
Deferred income taxes . . . . . . . . . . . . . 1,434 1,280
Goodwill. . . . . . . . . . . . . . . . . . . . 941 996
Other assets. . . . . . . . . . . . . . . . . . 376 224
----------- -----------
Total assets. . . . . . . . . . . . . . $ 20,240 $ 22,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . . . $ 3,104 $ 4,290
Current portion of long-term debt . . . . . . 829 1,135
Accrued salaries and vacation . . . . . . . . 2,653 2,180
Liabilities of discontinued operations, net . 114 98
Other liabilities . . . . . . . . . . . . . . 1,217 1,615
----------- -----------
Total current liabilities. . . . . . . 7,917 9,318
Bank line of credit. . . . . . . . . . . . . . 3,045 4,108
Other long-term liabilities. . . . . . . . . . 1,507 1,931
Liabilities of discontinued operations, net. . 807 807
Reserve on guarantee of real estate debt . . . 675 900
----------- -----------
Total liabilities. . . . . . . . . . . 13,951 17,064
----------- -----------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 6,410,824 shares and
6,336,758 shares issued and outstanding
at March 31, 2000 and June 30, 1999,
respectively . . . . . . . . . . . . . . . . 64 63
Capital in excess of par value. . . . . . . . 18,223 18,051
Accumulated deficit . . . . . . . . . . . . . (11,998) (12,491)
----------- -----------
6,289 5,623
----------- -----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . . $ 20,240 $ 22,687
=========== ===========
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,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
GROSS REVENUE . . . . . . . $ 12,955 $ 13,593 $ 40,689 $ 43,871
Purchased services and
materials, at costs. . . . 3,796 3,988 13,019 14,810
---------- ---------- ---------- ----------
NET SERVICE REVENUE . . . . 9,159 9,605 27,670 29,061
Direct costs of services
and overhead . . . . . . . 7,771 7,666 22,487 23,312
Selling, general and
administrative expenses. . 1,574 1,365 4,665 4,033
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME . . (186) 574 518 1,716
OTHER EXPENSE
Interest expense. . . . . . 123 145 404 381
Income tax (benefit)
expense. . . . . . . . . . (124) 172 (154) 137
---------- ---------- ---------- ----------
NET (LOSS) INCOME . . . . . $ (185) $ 257 $ 268 $ 1,198
========== ========== ========== ==========
NET (LOSS) INCOME PER
SHARE - BASIC. . . . . . . $ (0.03) $ 0.04 $ 0.04 $ 0.20
========== ========== ========== ==========
NET (LOSS) INCOMER PER
SHARE- DILUTED . . . . . . $ (0.03) $ 0.04 $ 0.04 $ 0.19
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- BASIC. . . . . . . . . . 6,405 6,234 6,396 6,148
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- DILUTED. . . . . . . . . 6,405 6,296 6,507 6,249
========== ========== ========== ==========
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,
------------------------
2000 1999
----------- -----------
Cash flows from operating activities
Net income from continuing operations . . . . . . $ 268 $ 1,198
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization . . . . . . . . . 564 542
Provision for doubtful accounts receivable. . . 60 7
Loss on disposal of property and equipment. . . --- 8
Common stock issued to ESSOP. . . . . . . . . . 164 420
Deferred income taxes . . . . . . . . . . . . . (154) 137
----------- -----------
Subtotal. . . . . . . . . . . . . . . . . 902 2,312
Changes in assets and liabilities
Decrease (increase) in accounts receivable . . . 3,324 (273)
(Increase) in prepaids and other assets. . . . . (754) 233
(Decrease) increase in accounts payable. . . . . (1,186) 584
Increase in accrued salaries and vacation. . . . 473 913
Decrease in other liabilities. . . . . . . . . . (822) (2,176)
----------- -----------
Net cash provided by continuing
operations . . . . . . . . . . . . . . . 1,937 1,593
Changes in net assets/liabilities of
discontinued operations. . . . . . . . . . . . . 16 (1,738)
----------- -----------
Net cash provided by (used in)
operating activities . . . . . . . . . . 1,953 (145)
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment. . . . . . . . (598) (280)
----------- -----------
Cash flows from financing activities
Net (payments) borrowings on bank line of
credit . . . . . . . . . . . . . . . . . . . . . (1,063) 710
Principal payments on long-term debt. . . . . . . (306) (310)
Proceeds from issuance of the Company's
common stock . . . . . . . . . . . . . . . . . . 9 11
----------- -----------
Net cash (used in) provided by
financing activities . . . . . . . . . . (1,360) 411
----------- -----------
Net decrease in cash. . . . . . . . . . . . . . . . (5) (14)
Cash at the beginning of the period . . . . . . . . 58 72
----------- -----------
Cash at the end of the period . . . . . . . . . . . $ 53 $ 58
=========== ===========
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . . . . . $ 332 $ 420
Income taxes. . . . . . . . . . . . . . . . . . 76 53
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in Versar, Inc.'s 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, 1999 for additional information.
Restatement of Fiscal Year 1998 Discontinued Operations
-------------------------------------------------------
During fiscal year 2000, the Company had several audits and inquiries
into the discontinued operations of SMC McEver, Inc. ("McEver"). The audits
and inquiries, which were recently completed, revealed that the former
principals of McEver had not paid certain payroll and state sales tax
obligations. These obligations were neither recorded nor disclosed in
McEver's financial records. The financial and business affairs of this
subsidiary were managed separately from those of Versar, and as such, Versar
had no knowledge of these tax obligations until these audits and inquiries.
The estimated obligations are approximately $807,000. The effect on net
income, after consideration of the related Federal income tax is $500,000.
The Company is reviewing different alternatives to protect itself from the tax
obligations of McEver, including possibly placing McEver into Chapter 7
bankruptcy proceedings. Until such time as the obligation has been settled or
adjudicated by the bankruptcy court, the Company must accrue the liability in
the consolidated financial statements. Therefore, the Company has restated
the fiscal year 1998 financial statements to reflect the obligation of
approximately $807,000 (and the related income tax effect of $307,000) in the
period when the obligation was incurred. As a result, the Company increased
the operating losses from discontinued operations by $500,000 ($807,000 net of
tax of $307,000) in fiscal year 1998.
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. The Company's 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 and therefore separate segment reporting is not
required.
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, 2000, and the
results of operations for the nine- month periods ended March 31, 2000 and
1999. 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.
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
During performance of such contracts, estimated final contract prices
and costs are periodically reviewed and revisions are made as required. The
effects of these revisions are included in the periods in which the revisions
are made. On cost-plus-fee contracts, revenue is recognized to the extent of
costs incurred plus a proportionate amount of fee earned, and on time-and-
material contracts, revenue is recognized to the extent of billable rates
times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized in the period in which they become known.
Disputes arise in the normal course of the Company's business on projects
where the Company is contesting with customers for collection of funds because
of events such as delays, changes in contract specifications and questions of
cost allowability or collectibility. Such disputes, whether claims or
unapproved change orders in the process of negotiation, are recorded at the
lesser of their estimated net realizable value or actual costs incurred and
only when realization is probable and can be 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, 1999, the Company had $4 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 $2.5 million was carried at June 30, 1999. With stable
profitability, such net operating loss and tax credit carryforwards would be
utilized and the valuation allowance would be adjusted accordingly. In the
second quarter of fiscal year 2000, the Company reversed $200,000 of the
valuation allowance. Net income will accrue income tax expense at an
estimated effective rate of 40%.
(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
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.
The following is a reconciliation of the weighted average number of shares
7
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
outstanding for basic earnings per share to the weighted average number of
shares outstanding for diluted earnings per share. Options were not included
in the third quarter calculation due to the loss for the quarter, which makes
them anti-dilutive.
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Weighted average common
shares outstanding
- basic . . . . . . . . . 6,405,279 6,233,671 6,395,774 6,147,535
Assumed exercise of
options (treasury stock
method) . . . . . . . . . --- 62,008 111,095 101,329
----------- ----------- ----------- -----------
6,405,279 6,295,679 6,506,869 6,248,864
=========== =========== =========== ===========
(G) Common Stock
In fiscal year 1999, Versar issued approximately 259,871 shares to various
employee benefit plans as part of the Company's contribution to employee
benefits for fiscal years 1998 and 1999. In fiscal year 2000, 69,066 shares
were issued to the employee benefit plans for contributions for fiscal year
1999 and 2000.
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
---------------------
Forward Looking Statements
--------------------------
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 the continued award of future work
or task orders from government and private clients, 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, and the possibility of the
Company making acquisitions during the next 12 to 18 months. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's services may decline as a result of possible
changes in general and industry specific economic conditions and the effects
of competitive services and pricing; the ability to perform work within budget
or contractual limitations; 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; the ability to attract
and retain key professional employees; 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.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
During fiscal year 2000, the Company had several audits and inquiries into
the discontinued operations of SMC McEver, Inc. ("McEver"). The audits and
inquiries, which were recently completed, revealed that the former principals
of McEver had not paid certain payroll and state sales tax obligations. These
obligations were neither recorded nor disclosed in McEver's financial records.
The financial and business affairs of this subsidiary were managed separately
from those of Versar, and as such, Versar had no knowledge of these tax
obligations until these audits and inquiries. The estimated obligations are
approximately $807,000. The effect on net income, after consideration of the
related Federal income tax is $500,000. The Company is reviewing different
alternatives to protect itself from the tax obligations of McEver, including
possibly placing McEver into Chapter 7 bankruptcy proceedings. Until such
time as the obligation has been settled or adjudicated by the bankruptcy
court, the Company must accrue liability in the consolidated financial
statements. Therefore, the Company has restated the fiscal year 1998
financial statements to reflect the obligation of approximately $807,000 (and
the related income tax effect of $307,000) in the period when the obligation
was incurred. As a result, the Company increased the operating losses from
discontinued operations by $500,000 ($807,000 net of tax of $307,000) in
fiscal year 1998.
Third Quarter Comparison of Fiscal Year 2000 and 1999
-----------------------------------------------------
Versar's gross revenue for the third quarter of fiscal year 2000 totaled
$12,955,000, a decrease of $638,000 (5%) compared to gross revenue of
$13,593,000 for the third quarter of fiscal year 1999. Gross revenues
decreased primarily from a reduction of revenue from Air Force work under the
Company's AFCEE and Armstrong contracts in the Rocky Mountain operations.
Purchased services and materials for the third quarter of fiscal year 2000
decreased by $192,000 (5%) compared to such costs for the comparable period of
fiscal year 1999. The purchased services and materials decreased primarily
due to the lower outside third party subcontracted revenue levels in the
Armstrong contract 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 decreased by 5% during the third quarter of fiscal year 2000 compared
to the third quarter of fiscal year 1999. The decrease is due to the lower
revenue volume under the Company's Air Force AFCEE and Armstrong contracts.
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 increased to 84.8% in the third quarter of fiscal year 2000
compared to 79.8% in the third
quarter of fiscal year 1999. The increase is primarily attributable to lower
labor billability in the first half of the quarter due to project award delays
and inclement weather delays along with project losses during the quarter.
Selling, general and administrative expenses approximated 17.2% of net
service revenue for the third quarter of fiscal year 2000 compared to 14.2% in
the third quarter of fiscal year 1999. The increase is due to lower net
service revenue and increased labor and business development costs during the
quarter.
Operating loss for the third quarter of fiscal year 2000 was $186,000, a
decrease of $760,000 compared to the third quarter of fiscal year 1999. The
decrease is the result of the lower net service revenue, lower direct labor
billability and higher selling, general and administrative expenses during the
quarter.
9
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Interest expense during the third quarter of fiscal year 2000 decreased by
$22,000 compared to such costs for the comparable period of the previous year.
The decrease is due to decreased use of the Company's line of credit and
reduction of long term debt.
Income tax benefit during the third quarter of fiscal year 2000 was $124,000
as compared to the expense of $172,000 in the comparable period of the
previous year. The difference is attributable to the tax affect of the
current quarter operating loss. The Company's effective tax rate is 40%.
Versar's net loss for the third quarter of fiscal year 2000 was $185,000
compared to net income of $257,000 for the third quarter of fiscal year 1999.
The decrease is due to the lower net service revenue, higher direct costs of
services, and selling, general and administrative expenses.
Nine Month Comparison of Fiscal Years 2000 and 1999
---------------------------------------------------
Versar's gross revenue for the nine months of fiscal year 2000 totaled
$40,689,000, a decrease of $3,182,000 (7%) compared to the gross revenue for
the comparable period of the previous year. Thirty-five percent of the
decrease was due to lower volume in the Air Force work in the Company's Rocky
Mountain region. Forty percent of the decrease is due to the winding down of
a remedial construction project in the Company's Northeast operations.
Decreases in the Company's Atlantic, Midwest and Pacific operations'
commercial volume were offset by increased volume in the Company's GEOMET
operation for the production of the STEPO suits for the Army.
Purchased services and materials for the nine months of fiscal year 2000
decreased by $1,791,000 (12%) compared to such costs for the comparable period
of fiscal year 1999. Seventy-five percent of the decrease is attributable to
a reduction in subcontractor costs associated with the winding down of a
remedial construction contract in the Company's Northeast operations as
mentioned above. Decreases in the Rocky Mountain operations subcontracted
costs as mentioned above were offset by an increase in subcontracted
activities in the Company's GEOMET operation as mentioned above.
Net service revenue for the nine months of fiscal year 2000 decreased by 5%
compared to the nine months of fiscal year 1999. The decrease is attributable
to the lower gross revenue as mentioned above and lower markup associated with
the decrease in purchased services and materials.
Direct costs and services and overhead as a percentage of net service
revenue increased to 81.3% in the nine months of fiscal year 2000 compared to
80.2% in the previous year. The increase is attributable to the decrease in
labor billability and project losses during the third quarter of fiscal year
2000.
Selling, general and administrative expenses approximated 16.9% of net
service revenue for the nine months of fiscal year 2000 compared to 13.9% in
the comparable nine months of fiscal year 1999. One third of the increase is
attributable to the lower net service revenue. The balance of the increase is
attributable to higher business development activities, labor costs and
increases in the expenses of the Company's GEOMET subsidiary.
Operating income for the nine months of fiscal year 2000 decreased by
$1,198,000 compared to income for the comparable period of the previous year.
The decrease is due to the lower net service revenue, higher direct costs and
services and selling, general and administrative expenses as mentioned above.
10
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Interest expense during the nine months of fiscal year 2000 increased by
$23,000 compared to costs for the comparable period of the previous year. The
increase is due to higher utilization of the Company's line of credit during
the first quarter of fiscal year 2000 and higher interest rates associated
with the increase in the prime rate of interest compared to last fiscal year.
Income tax benefit increased by $291,000 due to the operating loss during
the third quarter and the reversal of $200,000 of the Company's valuation
allowance against deferred tax assets during the second quarter of fiscal year
2000. There was a reversal of valuation allowance of $400,000 in the second
quarter of fiscal year 1999.
Versar's net income for the nine months of fiscal year 2000 was $268,000
compared to $1,198,000 for the nine months of fiscal year 1999. The decrease
is due to the lower net service revenue, increased direct costs of services
and selling, general and administrative expenses as mentioned above.
Liquidity and Capital Resources
-------------------------------
The Company's working capital at March 31, 2000 approximated $7,004,000 or
$1,399,000 (17%) lower than at June 30, 1999. The decrease is primarily due
to the payments on the Company's long term line of credit. In addition, the
Company's current ratio at March 31, 2000 was 1.88 to 1, which was
approximately the same as that reported on June 30, 1999.
Versar's line of credit provides for advances up to $6,500,000 based on
qualifying receivables less the $675,000 guarantee of Sarnia's term loan by
Versar and the outstanding acquisition loan balance described below. Interest
on the borrowings is based on the lower of the 30 day London Interbank Offered
Rate (LIBOR) plus two hundred and eighty basis points (8.63% at March 31,
2000) or the prime rate. A commitment fee of one quarter of one percent
(.25%) on the unused portion of the line of credit is also charged. The line
is guaranteed by the Company and each subsidiary 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, 2000 was approximately $2.2 million. Advances under
the line are due upon demand or on November 30, 2001. The loan has certain
covenants related to maintenance of financial ratios. The Company was in
compliance with these covenants as of March 31, 2000. Because the line of
credit has a term of greater than one year, it has been classified as long-
term on the balance sheet. Management believes that cash generated by
operations and borrowings available from the bank line of credit will be
adequate to meet the working capital needs for the remainder of fiscal year
2000.
Versar obtained a $2,000,000 promissory note from NationsBank on April 30,
1997 for the acquisition of SMC. The interest on the note is based on prime
rate plus one half of one percent (.50%) per annum (9% at March 31, 2000).
Principal payment commenced on May 31, 1997 and it was scheduled to be paid in
full on April 30, 2000. At March 31, 2000, approximately $125,000 was the
remaining balance due on this loan.
Versar guarantees certain debt of Sarnia Corporation. Sarnia's balance due
on the term loan was $675,000 at March 31, 2000 and, accordingly, Versar
reduced its reserve to $675,000 as of March 31, 2000. As the term loan is
repaid, the reserve will be reduced and added to Versar's equity.
Approximately $150,000 will be required for capital expenditures during the
remainder of fiscal year 2000. The Company plans to utilize funds generated
from operations and third party financing.
11
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Impact of Inflation
-------------------
Versar seeks to protect itself from the effects of inflation. The majority
of contracts the Company performs are for a period of a 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.
Business Segment
----------------
Versar currently has three business segments: environmental services,
energy conservation services, and industrial and public infrastructure
services. Currently, the energy conservation and facility infrastructure
services segments do not meet the segment reporting requirements. The energy
conservation and facility infrastructure services segments are collectively
less than 10% of consolidated revenues, operating profit and identifiable
assets.
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 readiness program for Versar and its subsidiaries. The
Versar Year 2000 program was designed to (a) identify computer systems
(hardware and software) and other equipment (telecommunications equipment and
technical field equipment) that may fail to recognize or properly process data
on or after January 1, 2000; (b) upgrade or replace all non-compliant systems,
components, and software; and (c) evaluate the Year 2000 readiness of key
clients and critical vendors and service providers.
Management implemented an 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. These actions included a comprehensive
survey of internal equipment, systems and software to identify potential Year
2000 failures, including a physical inventory of such equipment and
products. We surveyed suppliers of such equipment, systems and software on
their Year 2000 readiness and any requirements for change or upgrade. The
Company then implemented a company-wide program to replace, modify, upgrade
and test such equipment, systems and software.
In the third and fourth quarters of fiscal year 1999, the Company and its
subsidiaries modified its financial reporting and project management software,
and computer systems to be Year 2000 ready. The estimated total costs
incurred for the Year 2000 program for hardware, software and internal costs
is approximately $175,000. To the best of management's knowledge, the Company
did not experience any Year 2000 related failures nor did any of its major
customers or vendors experience a Year 2000 failure that had any impact on the
Company, its operations or financial performance.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Versar and its subsidiaries are parties to various 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 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
Senior Vice President,
Chief Financial Officer, Treasurer,
and Principal Accounting Officer
Date: September 1, 2000
14
<PAGE>
