UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period
Ended September 30, 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. EmployerIdentification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
----------------------------------- ---------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703) 750-3000
-----------------------------
Not Applicable
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at October 30, 2000
--------------------- -------------------------------
$ .01 par value 6,475,052 shares
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and June 30, 2000. 3
Consolidated Statements of Operations for the
Three-Month Periods Ended September 30, 2000 and 1999. 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
September 30, 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 9-11
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 11
ITEM 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, June 30,
2000 2000
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents . . . . . . . . $ 74 $ 55
Accounts receivable, net. . . . . . . . . 17,040 13,920
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . . 1,490 1,561
Deferred income taxes . . . . . . . . . . 536 536
------------- -------------
Total current assets. . . . . . . . 19,140 16,072
Property and equipment, net . . . . . . . . 2,644 2,461
Deferred income taxes . . . . . . . . . . . 1,358 1,481
Goodwill. . . . . . . . . . . . . . . . . . 904 922
Other assets. . . . . . . . . . . . . . . . 257 451
------------- -------------
Total assets. . . . . . . . . . . . $ 24,303 $ 21,387
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . $ 6,183 $ 3,629
Current portion of long-term debt . . . . 339 480
Accrued salaries and vacation . . . . . . 2,195 2,528
Liabilities of discontinued operations. . 114 114
Other liabilities . . . . . . . . . . . . 1,681 1,634
------------- -------------
Total current liabilities . . . . . 10,512 8,385
Bank line of credit . . . . . . . . . . . . 4,324 3,713
Other long-term liabilities . . . . . . . . 1,388 1,480
Liabilities of discontinued operations. . . 807 807
Reserve on guarantee of real estate debt. . 525 600
------------- -------------
Total liabilities . . . . . . . . . 17,556 14,985
------------- -------------
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 6,475,052 shares and
6,410,824 shares issued at September 30,
and June 30, 2000, respectively; 6,370,603
shares and 6,395,824 shares outstanding at
September 30, and June 30, 2000,
respectively . . . . . . . . . . . . . . . 65 64
Capital in excess of par value. . . . . . . 18,359 18,223
Accumulated deficit . . . . . . . . . . . . (11,517) (11,851)
Treasury stock. . . . . . . . . . . . . . . (160) (34)
------------- -------------
Total stockholders' equity. . . . . 6,747 6,402
------------- -------------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . $ 24,303 $ 21,387
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month
Periods Ended September 30,
---------------------------
2000 1999
------------ ------------
GROSS REVENUE . . . . . . . . . . . . . . . . $ 16,175 $ 13,976
Purchased services and materials, at cost . . 6,492 4,610
------------ ------------
NET SERVICE REVENUE . . . . . . . . . . . . . 9,683 9,366
Direct costs of services and overhead . . . . 7,681 7,279
Selling, general and administrative expenses. 1,461 1,607
------------ ------------
OPERATING INCOME. . . . . . . . . . . . . . . 541 480
OTHER EXPENSE
Interest expense. . . . . . . . . . . . . . . 109 180
Income tax expense. . . . . . . . . . . . . . 173 120
------------ ------------
NET INCOME. . . . . . . . . . . . . . . . . . $ 259 $ 180
============ ============
NET INCOME PER SHARE - BASIC AND DILUTED. . . $ .04 $ .03
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC . . . . . . . . . . . . . 6,456 6,380
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED . . . . . . . . . . . . 6,482 6,511
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Three-Month
Periods Ended September 30,
---------------------------
2000 1999
------------ ------------
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . $ 259 $ 180
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization. . . . . . . 190 182
Provision for doubtful accounts
receivable. . . . . . . . . . . . . . . . 30 (71)
Common stock issued to ESSOP . . . . . . . 11 147
Deferred tax . . . . . . . . . . . . . . . 123 120
------------ ------------
Subtotal . . . . . . . . . . . . . . 613 558
Changes in assets and liabilities
(Increase) decrease in accounts
receivable . . . . . . . . . . . . . . . (3,150) 801
Decrease in prepaids and other assets. . . 88 31
Increase (decrease) in accounts payable. . 2,554 (1,143)
(Decrease) increase accrued salaries
and vacation . . . . . . . . . . . . . . (333) 372
Decrease in other liabilities. . . . . . . (45) (936)
------------ ------------
Net cash used in continuing
operations . . . . . . . . . . . . (273) (317)
Changes in net assets/liabilities of
discontinued operations. . . . . . . . . . --- (6)
------------ ------------
Net cash used in operating
activities . . . . . . . . . . . . (273) (323)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment . . . . . (178) (110)
------------ ------------
Cash flows from financing activities
Net borrowings on bank line of credit. . . . 611 786
Principal payments on long-term debt . . . . (141) (361)
Proceeds from issuance of the Company's
common stock . . . . . . . . . . . . . . . --- 5
------------ ------------
Net cash provided by financing
activities . . . . . . . . . . . . 470 430
------------ ------------
Net increase (decrease) in cash. . . . . . . . 19 (3)
Cash at the beginning of the period. . . . . . 55 58
------------ ------------
Cash at the end of the period. . . . . . . . . $ 74 $ 55
============ ============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 74 $ 117
Income taxes . . . . . . . . . . . . . . . 26 9
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, 2000 for additional information.
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 financial information has been prepared in
accordance with the Company's customary accounting practices. In the opinion
of management, the information reflects all adjustments necessary for a fair
presentation of the Company's consolidated financial position as of September
30, 2000, and the results of operations for the three-month periods ended
September 30, 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. 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.
6
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(D) Income Taxes
At June 30, 2000, the Company had $4.5 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 has been established. With stable profitability,
such net operating loss and tax credit carryforwards would be utilized and the
valuation allowance would be adjusted accordingly.
(E) Contingencies
Versar and its subsidiaries are parties to various legal actions arising
in the normal course of business. The Company believes that the ultimate
resolution of these legal actions will not have a material adverse effect on
its consolidated financial condition and results of operations.
(F) Net Income Per Share
Basic net income per share 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 outstanding for basic
net income per share to the weighted average number of shares outstanding for
diluted net income per share.
For the Three-Month
Periods Ended September 30,
---------------------------
2000 1999
------------ ------------
Weighted average common shares
outstanding - basic . . . . . . . . . . . . 6,455,995 6,379,959
Assumed exercise of options (treasury
stock method) . . . . . . . . . . . . . . . 26,198 131,109
------------ ------------
6,482,193 6,511,068
============ ============
(G) Common Stock
In fiscal year 2000, Versar issued approximately 69,066 shares to
various employee benefit plans as part of the Company's contribution to
employee benefits for fiscal years 1999 and 2000. In the first quarter of
fiscal year 2001, 64,228 shares were issued to the employee benefit plans for
contributions for the second quarter of fiscal year 2000.
7
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Business Segments
The Company's business segments are Environmental Services,
Architecture/ Engineering, Defense and Information Technology. The
Environmental Services segment provides a full range of services including
remediation/corrective actions, site investigations, remedial designs, and
construction, operation and maintenance (O&M) of remedial systems. The
Architecture/Engineering segment provides engineering, design and
construction management to industrial and commercial facilities. The Defense
segment provides expertise in the developing, testing and providing personal
protection equipment. The newly formed Information Technology segment will
focus on e-business by providing on-line consulting services through the
Company's website. The information technology segment currently is not
large enough to become a reportable segment.
The Company evaluates and measures the performance of its business
segments based on net sales and operating income. As such, selling, general
and administrative expenses, interest and income taxes have not been allocated
to the Company's business segments.
Summary financial information for each of the Company's segments
follows:
For the Three-Month
Periods Ended September 30,
---------------------------
(In thousands)
Net Sales Operating Income
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Environmental Services 5,939 6,033 1,234 1,380
Architecture/Engineering 2,296 2,008 387 305
Defense 1,448 1,325 381 402
--------- --------- --------- ---------
9,683 9,366 2,002 2,087
========= ========= ========= =========
Identifiable Assets
-------------------
(In thousands)
September 30, 2000 June 30, 2000
------------------ -------------
Environmental Services 10,925 9,208
Architecture/Engineering 4,940 4,170
Defense 3,307 2,295
Corporate and other 5,131 5,714
---------- ----------
24,303 21,387
========== ==========
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
---------------------
First Quarter Comparison for Fiscal Year 2001 and 2000
------------------------------------------------------
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.
Versar's gross revenue for the first quarter of fiscal year 2001 increased
by $2,199,000 (16%) compared to gross revenue for the comparable period of
fiscal year 2000. The increase is primarily due to higher construction work of
over $3,500,000 for the Air Force in the Company's Pacific and Northeast
operations. This increase was in part offset by the winding down of a large
delivery order for the Air Force in the Company's Rocky Mountain operations.
Purchased services and materials for the first quarter of fiscal year 2001
increased by $1,882,000 (41%) compared to comparable costs for fiscal year
2000. The increase is due to higher subcontracted costs associated with the
increase of gross revenue as mentioned above.
Net service revenue is derived by deducting the cost of purchased services
from 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 3% compared to the first quarter of fiscal year 2000. The
increase is attributable to the increase in gross revenues as mentioned above
as well as improved operating performance in the Company's Environmental
operations during the first quarter of fiscal year 2001.
Direct costs of services and overhead include the cost to Versar of direct
and overhead staff, including recoverable overhead costs and unallowable costs
that are directly attributable to contracts. The percentage of these costs
to net service revenue increased to 79% in the first quarter of fiscal year
2001 compared to 78% in the first quarter of fiscal year 2000. The increase is
primarily the result of lower margins associated with the increase in
construction work being performed by the Company.
Selling, general and administrative expenses approximated 15% of net
service revenue in the first quarter of fiscal year 2001 compared to 17% in the
first quarter of fiscal year 2000. The decrease is primarily due to a
reduction in marketing activities as compared to the first quarter of fiscal
year 2000. The Company anticipates that its marketing activities will be much
higher in the second quarter as a significant number of large proposals will be
prepared in the second quarter of fiscal year 2001.
9
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Operating income for the first quarter of fiscal year 2001 was $541,000,
an increase of $61,000 (13%) compared to the first quarter of fiscal year
2000. The increase is attributable to the higher gross revenues and lower
selling, general and administrative expenses as mentioned above.
Interest expense during the first quarter of fiscal year 2001 decreased
by $71,000 compared to interest expense for the comparable period of the
previous fiscal year. The decrease is primarily due to the payment of the
Company's term debt by the end of fiscal year 2000. The Company anticipates
that utilization of the line of credit will increase in the second quarter of
fiscal year 2001 due to cash flow delays caused by the Company's financial
system conversion. Such increases are expected to be corrected by the end of
second quarter of fiscal year 2001.
Income tax expense during the first quarter of fiscal year 2001 increased
by $53,000 compared to the comparable period of the previous fiscal year. The
increase is the result of higher taxable income for the quarter. The effective
tax rate for the Company is 40% for the first quarters of fiscal years 2001 and
2000. The Company continues to carry a tax valuation allowance of
approximately $2.5 million against the deferred tax assets. The Company has
established the valuation allowance until the probability of the realization of
these amounts becomes more certain. The valuation allowance will be increased
or decreased depending on the financial performance of the Company going
forward, which will directly impact the Company's Consolidated Statement of
Operations.
Versar's net income for the first quarter of fiscal year 2001 was $259,000
compared to $180,000 in the first quarter of fiscal year 2000. The increase is
due to the higher gross revenues and lower selling, general and administrative
expenses as mentioned above.
Liquidity and Capital Resources
-------------------------------
The Company's working capital at September 30, 2000 approximated
$8,628,000 or $941,000 (12%) higher than June 30, 2000. The increase is
primarily due a higher balance on the Company's line of credit and improved
financial performance. In addition, the Company's current ratio at
September 30, 2000 was 1.82, compared to 1.92 reported for the year ended
June 30, 2000.
Versar's line of credit provides for advances up to $6,500,000 based on
qualifying receivables and unbilled receivables less the $525,000 guarantee on
Sarnia's term loan by Versar and any outstanding acquisition loan balance.
Interest is based on the lower of the 30-day London Interbank Offered Rate
(LIBOR) plus two hundred and eighty basis points ( 9.12% at September 30,
2000). A commitment 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 subsidiary
individually and is collectively secured by accounts receivable, equipment and
intangibles, plus all insurance policies on property constituting collateral.
Unused borrowing availability at September 30, 2000 was approximately
$1,678,000. The Company was in compliance with its financial covenants at
September 30, 2000. Advances under the line of credit are due upon demand or
on November 30, 2001. Management believes that the cash generated by
operations and borrowings available from the bank line of credit will be
adequate to meet the working capital needs for fiscal year 2001.
Versar guarantees certain debt of Sarnia Corporation. Sarnia's balance
due on the term loan was $525,000 at September 30, 2000 and accordingly, Versar
reduced its reserve to $525,000 as of September 30, 2000. As the term loan is
repaid, the reserve will be reduced and added to Versar's equity.
10
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Approximately $250,000 will be required for capital expenditures during
the remainder of fiscal year 2001 primarily for upgrading existing computer
hardware and systems. The Company plans to utilize funds generated from
operations to fund such capital expenditures during the fiscal year.
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 Segments
-----------------
During fiscal year 2001, the Company has shifted and reallocated its
operations into four business segments, which will require segment reporting in
fiscal year 2001. The four segments are Environment, Defense, Architecture/
Engineering, and Information Technology. The Environmental Services segment
provides a full range of services including remediation/corrective actions,
site investigations, remedial designs, and construction, operation and
maintenance (O&M) of remedial systems. The Architecture/Engineering segment
provides engineering, design and construction management to industrial and
commercial facilities. The Defense segment provides expertise in the
developing, testing and providing personal protection equipment. The newly
formed Information Technology segment will focus on e-business by providing
on-line consulting services through the Company's website. The information
technology segment currently is not large enough to become a reportable
segment.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Versar and its subsidiaries are parties from time to time to various legal
actions arising in the normal course of business. The Company believes that an
ultimate unfavorable resolution of these 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.
11
<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/ Theodore M. Prociv
------------------------------
Theodore M. Prociv
Chief Executive Officer, President,
and Director
By: /S/ Lawrence W. Sinnott
------------------------------
Lawrence W. Sinnott
Vice President, Chief Financial
Officer, Treasurer, and Principal
Accounting Officer
Date: November 10, 2000
12
<PAGE>
