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 Commission File Number
December 30, 2005 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
offices) (Zip Code)
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 by check mark whether the registrant is a large accelerated
filer, and accelerated filer, or a non-accelerated filer (see
definition of accelerated filer and large filer in Rule 12b-2 of the
Exchange Act).
X
Large accelerated filer___ Accelerated filer___ Non-accelerated filer___
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
________ ________
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 January 31, 2006
_____________________ _______________________________
$.01 par value 8,048,465
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
____
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
December 30, 2005 and July 1, 2005 3
Consolidated Statements of Operations
for the Three-Month and Six-Month Periods
Ended December 30, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended December 30,
2005 and December 31, 2004 5
Notes to Consolidated Financial Statements 6-12
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13-18
ITEM 3 - Quantitative and Qualitative Disclosures
About Market Risk 18
ITEM 4 - Procedures and Controls 18-19
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 4 - Submission of Matters to a Vote of Stockholders 20
ITEM 6 - Exhibits 20
SIGNATURES 21
EXHIBITS 22-25
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 30, July 1,
2005 2005
____________ ____________
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,601 $ 132
Accounts receivable, net 13,044 14,577
Prepaid expenses and other current
assets 1,205 2,017
Deferred income taxes 765 308
____________ ____________
Total current assets 17,615 17,034
Property and equipment, net 1,852 1,855
Deferred income taxes --- 457
Goodwill 776 776
Other assets 815 790
____________ ____________
Total assets $ 21,058 $ 20,912
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Bank line of credit $ --- $ 777
Accounts payable 4,326 3,958
Accrued salaries and vacation 1,406 1,490
Other liabilities 2,242 2,642
Liabilities of discontinued
operations, net 425 280
____________ ____________
Total current liabilities 8,399 9,147
Other long-term liabilities 1,077 1,041
Liabilities of discontinued operations, net --- 172
____________ ____________
Total liabilities 9,476 10,360
____________ ____________
Commitments and contingencies
Stockholders' equity
Common stock, $0.1 par value; 30,000,000
shares authorized; 8,061,351 shares and
7,924,116 shares issued December 30, 2005
and July 1, 2005, respectively; 8,045,846
and 7,908,611 shares outstanding at
December 30, 2005 and July 1, 2005,
respectively 81 79
Capital in excess of par value 22,513 22,119
Accumulated deficit (10,940) (11,574)
Treasury stock (72) (72)
____________ ____________
Total stockholders' equity 11,582 10,552
____________ ____________
Total liabilities and stockholders'
equity $ 21,058 $ 20,912
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
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 Periods Ended
_________________________ _________________________
December 30, December 31, December 30, December 31,
2005 2004 2005 2004
____________ ____________ ____________ ____________
GROSS REVENUE $ 16,571 $ 18,956 $ 30,073 $ 37,914
Purchased services
and materials,
at cost 7,463 10,164 12,503 20,078
____________ ____________ ____________ ____________
NET SERVICE REVENUE 9,108 8,792 17,570 17,836
Direct costs of
services and
overhead 7,030 6,686 13,905 13,724
Selling, general and
administrative
expenses 1,381 1,564 2,832 3,054
____________ ____________ ____________ ____________
OPERATING INCOME 697 542 833 1,058
OTHER EXPENSE
Interest expense (26) 10 (6) 23
____________ ____________ ____________ ____________
INCOME FROM CONTINUING
OPERATIONS 723 532 839 1,035
LOSS FROM DISCONTINUED
OPERATIONS (205) (111) (205) (207)
____________ ____________ ____________ ____________
NET INCOME $ 518 $ 421 $ 634 $ 828
============ ============ ============ ============
INCOME PER SHARE
FROM CONTINUING
OPERATIONS - BASIC $ 0.09 $ 0.07 $ 0.10 $ 0.13
============ ============ ============ ============
INCOME PER SHARE
FROM CONTINUING
OPERATIONS -
DILUTED $ 0.09 $ 0.06 $ 0.10 $ 0.12
============ ============ ============ ============
NET INCOME PER
SHARE - BASIC $ 0.06 $ 0.05 $ 0.08 $ 0.11
============ ============ ============ ============
NET INCOME PER
SHARE - DILUTED $ 0.06 $ 0.05 $ 0.07 $ 0.10
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING -
BASIC 8,053 7,880 8,021 7,862
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING -
DILUTED 8,456 8,345 8,515 8,316
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Six-Month
Periods Ended
__________________________
December 30, December 31,
2005 2004
____________ ____________
Cash flows from operating activities
Income from continuing operations $ 839 $ 1,035
Loss from discontinued operations (205) (207)
Net income 634 828
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 374 374
Loss and sale of property and equipment 9 ---
Provision for doubtful accounts
receivable (11) 14
Share based compensation 21 ---
Changes in assets and liabilities
Decrease (increase) in accounts
receivable 1,544 (1,820)
Decrease in prepaids and other assets 794 328
Increase in accounts payable 368 2,046
Decrease in accrued salaries and
vacation (84) (433)
Decrease in other liabilities (364) (268)
____________ ____________
Net cash provided by continuing
operating activities 3,285 1,069
____________ ____________
Changes in net liabilities of
discontinued operations (27) (130)
____________ ____________
Net cash provided by operating
activities 3,258 939
____________ ____________
Cash flows used in investing activities
Purchase of property and equipment (336) (360)
(Increase) in life insurance policies
cash surrender value (52) (22)
____________ ____________
Net cash used in investing activities (388) (382)
____________ ____________
Cash flows from financing activities
Net payments on bank line of credit (777) ---
Proceeds from issuance of common stock 376 155
____________ ____________
Net cash (used in) provided by
financing activities (401) 155
____________ ____________
Net increase in cash and cash equivalents 2,469 712
Cash and cash equivalents at the
beginning of the period 132 817
____________ ____________
Cash and cash equivalents at the end of
the period $ 2,601 $ 1,529
============ ============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 18 $ 15
Income taxes 17 21
The accompanying notes are an integral part of these consolidated
financial statements.
5
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 United States 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 July 1, 2005 for additional information.
The accompanying consolidated financial statements include the
accounts of Versar, Inc. and its wholly-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 December 30,
2005, and the results of operations for the six-month periods ended
December 30, 2005 and December 31, 2004. 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
accounting principles generally accepted in the United States of
America 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 when 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 reasonably determinable in amount. Management reviews
outstanding receivables on a regular basis and assesses the need for
reserves taking into consideration past collection history and other
events that bear on the collectibility of such receivables.
(D) Income Taxes
At December 30, 2005, the Company had approximately $4.1
million in deferred tax assets which primarily relate to net
operating loss and tax credit carryforwards. Since the Company had
experienced losses in previous years, management recorded a
valuation allowance of approximately $3.3 million against the net
deferred tax asset. The valuation allowance is adjusted
periodically based upon management's assessment of the Company's
ability to derive benefit from the deferred tax assets.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $5,000,000 based upon
qualifying receivables. Interest on borrowings is based on the
prime rate of interest (7.25% as of December 30, 2005). As of
December 30, 2005, Versar had no borrowings outstanding under the
line of credit and borrowing capacity under the line of credit of
$5,000,000. Obligations under the credit facility are guaranteed
by the Company and each subsidiary individually and collectively
secured by accounts receivable, equipment and intangibles, plus
all insurance policies on property constituting collateral. The
credit facility was renewed in November 2005 and is due in
November 2007. The line of credit is subject to certain covenants
related to the maintenance of financial ratios. These covenants
require a minimum tangible net worth of $8,500,000, a maximum total
liabilities to tangible net worth ratio not to exceed 2.5 to 1; and
a minimum current ratio of at least 1.25 to 1. ailure to met the
covenant requirements gives the Bank the right to demand outstanding
amounts due under the line of credit, which may impact the Company's
ability to finance its working capital requirements. At December
30, 2005, the Company was in compliance with the financial
covenants.
(F) Discontinued Operations and Restructuring Charges
In fiscal year 1998, the Company discontinued a significant
portion of the operations of Science Management Corporation (SMC).
Since 1998, the Company has disposed of substantially all of the
remaining assets and liabilities of SMC. At December 30, 2005,
there was an additional $205,000 accrued to cover the additional
cost to wind down the plan and fully fund the plan in accordance
with the PBGC requirements for settling the remaining benefit
plan obligations of SMC. The Company is in the process of
locating eligible participants in the benefit plan and intends
to make a final distribution to clear any future obligations in
fiscal year 2006.
In the fourth quarter of fiscal year 2005, management
approved a plan to discontinue the operations of its biological
laboratory facilities due to lack of business volume, market
concentration and poor operating performance. The Company
recorded $420,000 facility termination costs at the end of
fiscal year 2005. During the first six months of fiscal year
2006, approximately $202,000 was charged against the termination
costs with a remaining accrued liability of approximately $218,000.
Management believes the balance is adequate to satisfy the
remaining lease obligation.
(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 position and results of operations. (See Part II,
Item 1 - Legal Proceedings).
In September 2002, the Company recorded a non-recurring
charge of $800,000 to reduce the Company's overall cost
structure and to reduce costs in non-performing divisions.
The costs included $450,000 for severance payments to
terminated employees and $350,000 for costs to restructure
certain leased facilities. At December 30, 2005, all of
the severance obligations were satisfied. As of December
30, 2005, there is an accrual of approximately $154,000 to
be utilized to reduce the facility costs for vacant space at
the Company's headquarters in Springfield, Virginia.
(H) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition
of The Greenwood Partnership, P.C. subsequently renamed
Versar Global Solutions, Inc. or VGSI. The transaction was
accounted for as a purchase. Goodwill resulting from this
transaction was approximately $1.1 million. In fiscal year
2003, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets"
which eliminated the
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
amortization of goodwill, but requires the Company to test
such goodwill for impairment annually. Currently, the
carrying value of goodwill is approximately $776,000 relating
to the acquisition of VGSI, which is now part of the
Infrastructure and Management Services (IMS) reporting unit.
The IMS business segment was combined with the Engineering
and Construction business segment during fiscal year 2005 and
continues to operate under the IMS segment name, because many
of the services provided were similar to the Company's
remediation business, and the two segments shared similar
customers and business opportunities, and were duplicative
in nature. Such a combination provided a more efficient use
of resources and more effective management of the business
operations. In performing its goodwill impairment analysis,
management has utilized a market-based valuation approach to
determine the estimated fair value of the IMS reporting unit.
Management engages outside professionals and valuation experts,
as necessary, to assist in performing this analysis. An
analysis was performed on public companies and company
transactions to prepare a market-based valuation. Based upon
the analysis as of July 1, 2005, the estimated fair value of
the IMS reporting unit was $23 million which is in excess of
the carrying amount of the net assets of the reporting unit
by a substantial margin.
On April 15, 2005, the Company acquired the Cultural
Resources Group from Parsons Infrastructure & Technology
Group, Inc., a subsidiary of Parsons Corporation for a
purchase price of approximately $260,000 in cash. The
Cultural Resources Group, based in Fairfax County,
Virginia provides archaeological, cultural and historical
services to federal, state and municipal clients across the
country. The acquisition will expand the Company's existing
and future capabilities in cultural resources work. Their
expertise will enhance and compliment Versar's environmental
core business. The Cultural Resources Group was incorporated
into the Company's Infrastructure and Management Services
(IMS) segment. As part of the acquisition, the Company has
executed a two year marketing agreement with Parsons to give
Versar the first right of refusal to certain Parsons cultural
resources work from existing Parsons' clients. Thereafter,
this agreement is annually renewable upon the agreement of
both parties. Approximately $25,000 of the purchase price
was allocated to fixed assets, with the remaining balance
to be allocated to contract rights which are being amortized
over a three-year period.
(I) Net Income Per Share
Basic net income per common share is computed by
dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income
per common share also includes common stock equivalents
outstanding during the period, if dilutive. The Company's
common stock equivalents consist of stock options.
For the Three-Month For the Six-Month
Periods Ended Periods Ended
_________________________ _________________________
December 30, December 31, December 30, December 31,
2005 2004 2005 2004
____________ ____________ ____________ ____________
Weighted average
common shares
outstanding -
basic 8,053,449 7,880,100 8,020,987 7,862,369
Assumed exercise
of options
(treasury stock
method) 402,436 465,017 493,815 453,973
____________ ____________ ____________ ____________
Weighted average
common shares
outstanding -
basic/diluted 8,455,885 8,345,118 8,514,802 8,316,342
============ ============ ============ ============
(J) Common Stock
The Company issued 137,235 shares of common stock upon the exercise
of stock options during the first six months of fiscal year 2006. Total
proceeds from the exercise of such stock options was approximately
$376,000.
Effective January 1, 2005, the Company implemented an Employee Stock
Purchase Plan (ESPP) to allow eligible employees of Versar the
opportunity to acquire an ownership interest in the Company's common
stock.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Through the Plan, employees initially purchased shares of Versar common
stock from the open market at 90% of its fair market value. The plan was
modified, effective January 1, 2006, to increase the purchase price of
shares to 95% of fair market value to address certain issues raised under
Statement of Financial Accounting Standard ("SFAS") 123 (Revised 2004),
"Accounting for Stock-Based Compensation". The Plan qualifies as an
"employee stock purchase plan" under Section 423 of the Internal Revenue
Code.
(K) Stock-Based Compensation
In November 2002, the stockholders approved the Versar, Inc. 2002
Stock Incentive Plan (the 2002 Plan). The 2002 Plan provides for the
grant of options, restricted stock and other types of stock-based awards
to any employee, service provider or director to whom a grant is approved
from time to time by the Company's Compensation Committee. A "service
provider" is defined for purposes of the 2002 Plan as an individual who
is neither an employee nor a director of the Company or any of its
affiliates but who provides the Company or one of its affiliates
substantial and important services. The aggregate number of shares
of the Company's Common Stock that may be issued upon exercise of options
or granted as restricted stock or other stock-based awards under the 2002
Plan is 700,000. Grants of restricted stock, performance equity awards,
options and stock appreciation rights in any one fiscal year to any one
participant may not exceed 250,000 shares. The maximum amount of
compensation that may be received by any one employee with respect to
performance unit grants in any one fiscal year may not exceed $250,000.
In November 1996, the stockholders approved the Versar 1996 Stock
Option Plan (the 1996 Plan) to provide employees and directors of the
Company and certain other persons an incentive to remain as employees
of the Company and to encourage superior performance. The Company
also maintains the Versar 1992 Stock Option Plan (the "1992 Plan")
and the Versar 1987 Stock Option Plan (the "1987 Plan"). Options
have been granted from these plans to purchase the Company's common
stock.
Under the 1996 Stock Option Plan, options may be granted to key
employees, directors and service providers at the fair market value
on the date of grant. The vesting of each option will be determined
by the Administrator of the Plan. Each option expires on the earlier
of the last day of the tenth year after the date of grant or after
expiration of a period designated in the option agreement.
Under the 1992 Plan through November 2002, the expiration date
of the plan, options were generally granted to key employees at the
fair market value on the date of grant and became exercisable during
the five-year period from the date of the grant at 20% per year.
Options were granted with a ten year term and expire if not exercised
by the tenth anniversary of the grant date. The 1992 plan has expired
and no additional options may be granted. The Company will continue
to maintain the plan until all previously granted options have been
exercised, forfeited or expire.
Effective July 1, 2005, the Company adopted the Financial
Accounting Standards Board (FASB) SFAS No. 123 (Revised 2004),
"Accounting for Stock-Based Compensation" (SFAS 123(R)). This Statement
revises SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and generally requires companies to
recognize the cost of employee services received in exchange for awards
of equity instruments based on the grant-date fair value of those awards
(the "fair-value-based" method). As a result a compensation expense of
$21,000 for the first six months of fiscal year 2006 was included in the
Company's Consolidated Statements of Operations.
On June 21, 2005, the Board of Directors of the Company accelerated
the vesting of certain previously awarded unvested and "out-of-the-money"
stock options that had an exercise price per share of $3.00 or more for
all employees and officers of the Company. The accelerated awards were
made under the Versar, Inc. 1996 Stock Option Plan and 2002 Stock
Incentive Plan. As a result, options to purchase 306,010 shares of the
Company's common stock became exercisable immediately. All other terms
and conditions applicable to the outstanding stock
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
option grants remain in effect. The closing price of the Company's
common stock on the American Stock Exchange on June 21, 2005 was $3.00.
The acceleration of the out-of-the-money stock options was done in order
to avoid as significant an impact from the adoption of SFAS 123(R).
Outstanding non-qualified stock options and options held by non-employee
directors were not included in the acceleration. As a result of the
acceleration, the Company reduced the amount of stock compensation
expense it otherwise would have been required to recognize in its
consolidated statements of income by approximately $124,000 over the
next four years on a pre-tax basis.
In November 2006, the stockholders approved the Versar 2005
Incentive Plan ("the 2005 Plan") to provide employees, directors of the
Company, and certain other parties incentives to remain as employees and
to encourage superior performance. No options under the 2005 Plan have
been issued to date.
As a result of adopting SFAS 123(R) on July 1, 2005, the Company's
income before income taxes and net income for the first six months ended
December 30, 2005 was $21,000 lower than if it had continued to account
for share-based compensation under Opinion 25.
A summary of option activity under the Company's employee stock
option plans in the six months ended December 30, 2005, is presented
below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Options Shares Exercise Contractual Value
(000) Price Term ($000)
______________________ ___________ ____________ ____________ ____________
Outstanding at
July 1, 2005 1,690 $ 3.10
Granted 5 $ 3.20
Exercised (137) $ 2.73
Forfeited or expired (179) $ 3.18
___________ ____________
Outstanding at
December 30, 2005 1,379 $ 3.17 6.1 $ 2,432
=========== ============ ============ ============
Exercisable at
December 30, 2005 1,204 $ 3.26 6.2 $ 2,143
=========== ============ ============ ============
As of December 30, 2005, there were approximately 175,000 unvested
options to purchase common stock under the plans. An estimated compensation
cost of $64,000 is expected to be recognized over 5.3 years. The total fair
value of these unvested options is approximately $289,000 as of December 30,
2005.
For periods prior to the adoption of SFAS 123R, the Company accounts
for employee stock option grants using the intrinsic method in accordance
with Accounting Principles Board (APB) Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations. Accordingly
compensation expense, if any, is measured as the excess of the underlying
stock price over the exercise price on the date of grant. The Company
complies with the disclosure option of Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", as
amended by SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure" which requires pro-forma disclosure of
compensation expense associated with stock options under the fair
value method.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Company's pro forma information follows (in thousands, except
per share data):
For the Three-Month For the Six-Month
Periods Ended Periods Ended
December 31, December 31,
_____________________ __________________
2004 2004
_____________________ __________________
Net income, as reported $ 421 $ 828
Less: Total Stock-Based
Compensation determined
under the fair-value
based method (112) (209)
Pro-forma net income 309 619
Net income per share -
basic, as reported $ 0.05 $ 0.11
Pro-forma net income per
share - basic 0.04 0.08
Net income per share -
diluted, as reported $ 0.05 $ 0.10
Pro-forma net income per
share 0.04 0.07
(L) Business Segments
The Company's business segments are Infrastructure and Management
Services and National Security. The Infrastructure and Management
Services segment provides a full range of services including
remediation/corrective actions, site investigations, remedial
designs, and construction, operation and maintenance of remedial
systems, engineering, design and construction management to
industrial, commercial and government facilities. The National
Security segment provides expertise in developing, testing and
providing personal protection equipment.
In fiscal year 2005, Versar combined the Infrastructure and
Management Services and the former Engineering and Construction
business segment because many of the services provided were similar
to the Company's remediation business, and the two segments shared
similar customers and business opportunities, and were duplicative
in nature. The combination provided a more efficient use of
resources and more effective management of the business operations,
given the cyclical nature of the former Engineering and Construction
business segment. The Company now evaluates the business along
these two business lines. The prior year segment information has
been restated to conform to the new presentation.
The Company evaluates and measures the performance of its
business segments based on net service revenue and operating income.
As such, selling, general and administrative expenses, interest and
income taxes have not been allocated to the Company's business
segments.
11
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary financial information for each of the Company's segments follows:
For the Three-Month For the Six-Month
Periods Ended Periods Ended
_________________________ _________________________
December 30, December 31, December 30, December 31,
2005 2004 2005 2004
____________ ____________ ____________ ____________
NET SERVICE REVENUE
___________________
Infrastructure and
Management Services $ 7,747 $ 7,571 $ 14,799 $ 15,104
National Security 1,361 1,221 2,771 2,732
____________ ____________ ____________ ____________
$ 9,108 $ 8,792 $ 17,570 $ 17,836
============ ============ ============ ============
OPERATING INCOME (A)
____________________
Infrastructure and
Management Services $ 1,785 $ 1,967 $ 3,111 $ 3,673
National Security 293 139 554 439
____________ ____________ ____________ ____________
2,078 2,106 3,665 4,112
Selling, general and
administrative
expenses (1,381) (1,564) (2,832) (3,054)
____________ ____________ ____________ ____________
OPERATING INCOME $ 697 $ 542 $ 833 $ 1,058
============ ============ ============ ============
(A) Operating income is defined as net service revenue less direct costs of
services and overhead.
IDENTIFIABLE ASSETS December 30, July 1,
___________________ 2005 2005
____________ ____________
Infrastructure and
Management Services $ 13,198 $ 14,817
National Security 1,921 1,738
Corporate and Other 5,939 4,357
____________ ____________
Total Assets $ 21,058 $ 20,912
============ ============
12
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial trends
________________
From fiscal year 2002 to 2004, the Company's net service revenue
declined as the Company wound down the Army STEPO suit production contract
in its National Security business segment. With increased funded contract
backlog in the fourth quarter of fiscal year 2004 and the first quarter of
fiscal year 2005, the Company began to reverse this trend. Multi-million
dollar contracts were awarded in the IMS business segment; including roofing
projects in San Diego in support of the Defense Logistic Agency and hurricane
emergency response projects in various locations in Florida. The Company
achieved significant gross revenue growth in the first half of fiscal year
2005 as a result of increased IMS work.
However, during the third and fourth quarters of fiscal year 2005,
gross revenues on major construction projects declined compared to the
first half of the fiscal year, due to delays in obtaining follow-on and
new projects. The resulting reduction in gross revenues along with the
delay in resolution of several construction change orders had a negative
effect on the Company's operating results for the second half of fiscal
year 2005. Additionally, during 2005, there were delays in contract
funding for the Environmental Protection Agency and certain delays with
civilian agencies because of diversion of funds for the war effort, and
the announcement of additional military base closings by the BRAC
commission, which impacted funding by approximately $5 million.
During much of the first quarter of 2006, the Company continued to
experience reduced gross revenues as a result of continuing effects of
the delays and other factors that impacted the last half of fiscal year
2005. However, late in the first quarter of fiscal year 2006, the Company
increased its funded contract backlog from $31 million as reported at
July 1, 2005 to $40 million for the end of the first quarter of fiscal
2006, primarily due to the release of several construction projects, the
award of an additional $3 million contract for construction oversight in
Iraq and increased activity at the government fiscal year end. In the
second quarter of fiscal year 2006, with the government's continued budget
delays and continuing resolutions, funded backlog declined to $34 million
as of December 30, 2005. The Company now has over $15 million of pending
large construction projects that as of yet have not been funded by the
government. We anticipate that with the current level of funded backlog,
that quarterly gross revenues will increase modestly during the remainder
of the fiscal year as compared to that reported for the first quarter of
fiscal 2006. However, for the Company to foster and sustain growth, it
must win additional follow-on projects and additional new contracts to
keep funded contract backlog at levels that will support continued growth.
There can be no assurance that the Company's efforts to grow the business
base will be successful or that the Company will receive sufficient
contract awards to replace work as contracts are completed.
In fiscal year 2005, the Company discontinued the operations of its
biological laboratory primarily due to the continued poor operating
performance, market saturation and poor future business outlook. Such
results are presented as discontinued operations for financial statement
purposes and the liabilities of such operations have been segregated as
the Company winds down the business affairs of the laboratory.
There are a number of risk factors or uncertainties that could
significantly impact our financial performance including the following:
* General economic or political conditions;
* Threatened or pending litigation;
* The timing of expenses incurred for corporate initiatives;
* Employee hiring, utilization, and turnover rates;
* The seasonality of spending in the federal government and
for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
* Reductions in prices by our competitors;
* The ability to obtain follow on project work;
* Failure to properly manage projects resulting in additional
costs;
* The cost of compliance for the Company's laboratories;
13
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
* The impact of a negative government audit potentially
impacting our costs, reputation and ability to work with the
federal government;
* Loss of key personnel;
* The ability to compete in a highly competitive environment;
and
* Federal funding delays due to war in Iraq.
Results of Operations
_____________________
Second Quarter Comparison of Fiscal Year 2006 and 2005
______________________________________________________
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, and the possible impact of current and
future claims against the Company based upon negligence and other
theories of liability. 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 possibility the
Company will not be able 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 the
Company will not be able to attract and retain key professional
employees; changes to or failure of the Federal government to fund
certain programs in which the Company participates; 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.
Gross revenues for the second quarter of fiscal year 2006 were
$16,571,000, a $2,385,000 (13%) decrease over that reported in the
second quarter of fiscal year 2005. The decrease is attributable to
reduced new construction work and continued delayed project funding of
over $15 million of pending construction work in the Company's
Infrastructure and Management Services Business segment due to delays
in approvals of the Federal budget and allocations to agencies.
Such revenue was primarily generated from purchased services and
materials, which will be further discussed below.
Purchased services and materials decreased by $2,701,000 (27%)
in the second quarter of fiscal year 2006 compared to that reported
in the second quarter of fiscal year 2005. The decrease was primarily
the result of reduced subcontracted construction work and delayed
project funding of over $15 million of pending construction work.
Net service revenue is derived by deducting the costs of
purchased services and materials from gross revenue. Versar considers
it appropriate to analyze operating margins and other ratios in
relation to net service revenue, because such revenues reflect the
actual work performed by the Company's labor force. Net service
revenues increased by 4% in the second quarter of fiscal year 2006
compared to that reported in the second quarter of fiscal year 2005.
This was primarily due to improved labor utilization, which translated
into higher margins for the Company during the quarter.
Direct costs of services and revenue include the cost to Versar
of direct and overhead staff, including recoverable and unallowable
costs that are directly attributable to contracts. The percentage of
these costs to net service revenue increased to 77.2% in the second
quarter of fiscal year 2006 compared to 76.0% in the second quarter of
fiscal year 2005. The increase is attributable to the lower markup
obtained from the reduced level of purchased services and materials
during the second quarter as mentioned above.
Selling, general and administrative expenses approximated 15.2%
of net service revenue in the second quarter of fiscal year 2006,
compared to 17.8% in fiscal year 2005. The decrease is due to the
consolidation of certain administrative functions during the first
part of fiscal year 2006.
14
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Operating income for the second quarter of fiscal year 2006 was
$697,000, a 29% decrease over that reported in the prior fiscal year.
The decrease is attributable to the lower gross revenues as a result
of the lower levels of subcontracted construction work described above.
Interest income for the second quarter of fiscal year 2006 was
$26,000, compared to interest expense of $10,000 reported in the second
quarter of the prior fiscal year. The improvement was the result of the
resolution of an outstanding receivable with interest of $25,000, paying
off the Company's line of credit, and interest earned on investment,
further improving its working capital and cash flow generated by
operations.
In the second quarter of fiscal year 2006, the Company recorded
an additional expense of $205,000 due to additional estimated costs to
close the SMC pension plan and higher than expected plan funding
requirements based upon actuarial calculations. In the fourth quarter
of fiscal year 2005, the Company discontinued the operations of its
biological laboratory due the lack of business volume, market
concentration, and poor operating performance. The second quarter of
fiscal year 2005 was adjusted to reflect the discontinued operations
of the biological laboratory. In the second quarter of fiscal year
2005, the loss from discontinued operations was $111,000.
Versar's net income for the second quarter of fiscal year 2005
was $518,000 compared to $421,000 in the prior fiscal year. The
improved earnings were primarily attributable to removal of the
biological laboratory from the operating results of the Company.
Six Months Comparison of Fiscal Years 2006 and 2005
___________________________________________________
Gross revenues for the first six months of fiscal year 2006
decreased by $7,841,000 (21%) compared to gross revenue in the first
six months of fiscal year 2005. The decrease is due to the decrease
in construction work in fiscal year 2006 in the Infrastructure and
Management Services Business segment. The decrease is attributable
to the completion of two large construction projects. Three large
construction projects remain outstanding pending funding from the
federal government for over $15 million. See "Financial Trends"
for additional discussion.
Purchased services and materials decreased by $7,575,000 (38%)
in the first six months of fiscal year 2006 compared to that
reported in the first six months of fiscal year 2005. As discussed
above, with the completion of the two large construction projects,
there was decreased subcontractor activity in the Infrastructure
and Management Services segment.
Net service revenue decreased by 1% in the first six months of
fiscal year 2006 primarily due to the lower level of purchased
services and materials discussed above.
Direct costs of services as a percentage of net service revenue
increased to 79.1% in the first six months of fiscal year 2006,
compared to 76.9% in the first six months of fiscal year 2005.
The increase is attributable to higher proposal costs in the first
quarter and to the lower markup obtained from the reduced level of
purchased services and materials during the second quarter discussed
above.
Selling, general and administrative expenses approximated 16.1%
of net service revenue for the first six months of fiscal year 2006,
compared to 17.1% in fiscal year 2005. The decrease is due to the
consolidation of certain administrative functions during fiscal year
2006.
Operating income for the first six months of fiscal year 2006
was $833,000, a $225,000 decrease over that reported in the prior
fiscal year. The decrease is primarily due to significant proposal
costs incurred in the first quarter of fiscal year 2006 and reduced
construction work in the first six months of fiscal year 2006.
15
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Interest income for the first six months was $6,000, a $29,000
decrease to that reported in the prior fiscal year, with the
resolution of an outstanding receivable, which included $25,000 of
interest. In addition to the improved cash flow, the utilization of
the Company's line of credit has been minimal. The Company continues
to finance certain insurance policies and capital equipment, which will
continue to incur interest costs in the future.
Loss from discontinued operations in the first six months of
fiscal year 2006 was $205,000 reserve to cover the additional cost to
wind down the SMC pension plan and to fully fund the plan in accordance
with the PBGC requirements. The loss for the discontinuance of the
Company's biological laboratory operations for the first six months of
fiscal year 2005 was $207,000.
Liquidity and Capital Resources
_______________________________
The Company's working capital as of December 30, 2005 approximated
$9,216,000, an increase of $1,329,000 (17%). In addition, the Company's
current ratio was 2.10, which improved over the 1.86 reported at July 1,
2005. The improvement was primarily due to a decrease in accounts
receivable, which improved the Company's cash position and allowed it to
repay its line of credit.
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $5,000,000 based upon
qualifying receivables. Interest on borrowings is based on the prime
rate of interest (7.25% as of December 30, 2005). As of December 30,
2005, Versar had no borrowings outstanding under the line of credit and
borrowing capacity under the line of credit of $5,000,000. Obligations
under the credit facility are guaranteed by the Company and each
subsidiary individually and collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property
constituting collateral. The credit facility was renewed in November
2005 and is due in November 2007. The line of credit is subject to
certain covenants related to the maintenance of financial ratios.
These covenants require a minimum tangible net worth of $8,500,000,
a maximum total liabilities to tangible net worth ratio not to exceed
2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Failure
to met the covenant requirements gives the Bank the right to demand
outstanding amounts due under the line of credit, which may impact
the Company's ability to finance its working capital requirements.
At December 30, 2005, the Company was in compliance with the financial
covenants.
We believe that our current cash position, together with
anticipated cash flows and the renewal of the line of credit, will be
sufficient to meet the Company's liquidity needs within the next year.
Expected capital requirements for fiscal year 2006 are approximately
$400,000, primarily to maintain and upgrade our chemical laboratory
and the Company's computer systems. Such capital requirements will
either be funded through the existing working capital or will be
financed through third party financing sources. However, third party
financing may not be available on terms acceptable to us, or at all.
Critical Accounting Policies and Related Estimates That Have a
______________________________________________________________
Material Effect on Versar's Consolidated Financial Statements
_____________________________________________________________
Below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding the
Company's consolidated, financial position, and results of operations
which require management judgments and estimates, or involve
uncertainties. Information regarding our other accounting policies
is included in the notes to our consolidated financial statements
included in our annual report filed on Form 10-K.
Revenue recognition: Contracts in process are stated at the lower
of actual costs incurred plus accrued profits or net estimated
realizable value of costs, reduced by progress billings. 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. The Company records income from major
fixed-price contracts, extending over more than one accounting
period, using the percentage-of-completion method. During the
performance of such contracts, estimated final contract prices
and costs are periodically reviewed and revisions are made as
required. Fixed price contracts can be significantly impacted
by changes in contract performance, contract delays, liquidated
damages and
16
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
penalty provisions, and contract change orders, which may effect
the revenue recognition on a project. Losses on contracts are
recognized in the period when they become known.
From time to time we may proceed with work based on customer
direction pending finalizing and signing of contract funding documents.
We have an internal process for approving any such work. The Company
recognizes revenue based on actual costs incurred to the extent that
the funding is assessed as probable. In evaluating the probability
of the receipt of funding, we consider our previous experiences with
the customer, communications with the customer regarding funding
status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed
as they are incurred.
There is the possibility that there will be future and currently
unforeseeable significant adjustments to our estimated contract
revenues, costs and margins for fixed price contracts, particularly
in the later stages of these contracts. It is most likely that such
adjustments could occur in our Engineering and Construction business
segment. Such adjustments are common in the construction industry
given the nature of the contracts. These adjustments could either
positively or negatively impact our estimates due to the circumstances
surrounding the negotiations of change orders, the impact of schedule
slippage, subcontractor claims and contract disputes which are
normally resolved at the end of the contract. Adjustments to the
financial statements for such events are made when they are known.
Allowance for doubtful accounts: 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 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 reasonably determinable in amount.
Management reviews outstanding receivables on a regular basis and
assesses the need for reserves, taking into consideration past
collection history and other events that bear on the collectibility
of such receivables.
Deferred tax valuation allowance: The Company has approximately
$4.1 million in deferred tax assets of which a $3.3 million valuation
allowance has been established against such assets. Management
provides for a valuation allowance until such time as it can conclude
more likely than not that the Company will derive a benefit from such
assets. The valuation allowance is adjusted as necessary based upon
the Company's ability to generate taxable income, including
management's ability to implement tax strategies that will enable the
Company to benefit from such deferred tax assets.
Goodwill and other intangible assets:
____________________________________
On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed Versar Global
Solutions, Inc. or VGSI. The transaction was accounted for as a
purchase. Goodwill resulting from this transaction was
approximately $1.1 million. In fiscal year 2003, the Company
adopted the Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" which eliminated the
amortization of goodwill, but requires the Company to test such
goodwill for impairment annually. Currently, the carrying value
of goodwill is approximately $776,000 relating to the acquisition
of VGSI, which is now part of the Infrastructure and Management
Services (IMS) reporting unit. The IMS business segment was
combined with the Engineering and Construction business segment
during fiscal year 2005 and continues to operate under the IMS
segment name, because many of the services provided were similar
to the Company's remediation business, and the two segments shared
similar customers and business opportunities, and were duplicative
in nature. Such a combination provided a more efficient use of
resources and more effective management of the business operations.
In performing its goodwill impairment analysis, management has
utilized a market-based valuation
17
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
approach to determine the estimated fair value of the IMS reporting
unit. Management engages outside professionals and valuation experts,
as necessary, to assist in performing this analysis. An analysis was
performed on public companies and company transactions to prepare a
market-based valuation. Based upon the analysis, as of July 1, 2005,
the estimated fair value of the IMS reporting unit was $23 million
which is in excess of the carrying amount of the net assets of the
reporting unit by a substantial margin. As such, management
concluded goodwill was not impaired.
On April 15, 2005, the Company acquired the Cultural Resources
Group from Parsons Infrastructure & Technology Group, Inc., a
subsidiary of Parsons Corporation for a purchase price of
approximately $260,000 in cash. The Cultural Resources Group,
based in Fairfax County, Virginia provides archaeological, cultural
and historical services to federal, state and municipal clients
across the country. The acquisition will expand the Company's
existing and future capabilities in cultural resources work. Their
expertise will enhance and compliment Versar's environmental core
business. The Cultural Resources Group was incorporated into the
Company's Infrastructure and Management Services (IMS) segment.
As part of the acquisition, the Company has executed a two year
marketing agreement with Parsons to give Versar the first right of
refusal to certain Parsons cultural resources work from existing
Parsons' clients. Thereafter, this agreement is annually renewable
upon agreement of both parties. Approximately $25,000 of the
purchase price was allocated to fixed assets, with the remaining
balance to be allocated to contract rights which are being amortized
over a three-year period.
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.
Commitments and Contingencies
_____________________________
In September 2002, the Company recorded a non-recurring charge
of $800,000 to reduce the Company's overall cost structure and to
reduce costs in non-performing divisions. The costs included
$450,000 for severance payments to terminated employees and
$350,000 for costs to restructure certain leased facilities. At
September 2005, all of the severance obligations were satisfied.
As of December 30, 2005, there is an accrual of approximately
$154,000 to be utilized to reduce the facility costs for vacant
space at the Company's headquarters in Springfield, Virginia.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes regarding the Company's
market risk position from the information provided on Form 10-K
for the fiscal year end July 1, 2005.
Item 4 - Procedures and Controls
As of the last day of the period covered by this report, the
Company carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, as of such
date, to ensure that required information will be disclosed on a
timely basis in its reports under the Exchange Act.
Further, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is
accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, in a manner
to allow timely decisions regarding the required disclosure.
18
There were no changes in the Company's internal control over
financial reporting during the last quarter that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In August 1997, Versar entered into a contract with the
Trustees for the Enviro-Chem Superfund Site, which provided that,
based upon an existing performance specification, Versar would
refine the design of, and construct and operate a soil vapor
extraction system. During the performance of the contract,
disputes arose between Versar and the Trustees regarding the
scope of work. Eventually, Versar was terminated by the
Trustees for convenience. The Trustees then failed to pay
certain invoices and retainages due Versar.
On March 19, 2001, Versar instituted a lawsuit against
the Trustees and three environmental consulting companies in
the U.S. District Court of the Eastern District of
Pennsylvania, entitled Versar, Inc. v. Roy O. Ball, Trustee,
URS Corporation, Environmental Resources Management and
Environ Corp., No. 01CV1302. Versar, in seeking to recover
amounts due under the remediation contract from the Trustees
of the Superfund Site, claimed breach of contract,
interference with contractual relationships, negligent
misrepresentations, breach of good faith and fair dealing,
unjust enrichment and implied contract. Mr. Ball and
several defendants moved to dismiss the action or, in the
alternative, transfer the action to the U.S. District Court
for the Southern District of Indiana, where, on April 20, 2001,
the two Trustees had filed suit against Versar in the U.S.
District Court for the Southern District of Indiana, entitled,
Roy O. Ball and Norman W. Bernstein, Trustees v. Versar, Inc.,
Case No. IPO1-0531 C H/G. The Trustees alleged breach of
contract and breach of warranty with respect to the remediation
contract and asked for a declaratory judgment on a number of
the previously stated claims.
On July 12, 2001, the Federal District Court in
Pennsylvania granted defendants' motion to transfer the
Pennsylvania lawsuit and consolidate the two legal actions
in Indiana. The Company filed an answer and counterclaim to
the Indiana lawsuit. The plaintiffs and third-party defendants
filed Motions to Dismiss the Company's counterclaim. The court
granted the motions in part and denied them in part. Versar
amended its answer and counterclaim. In the meantime,
plaintiffs filed a Motion for Partial Summary Judgment which
the Judge granted in part and denied in part. The Judge held
that certain agreements entered into by the parties prevented
Versar from recovering certain amounts under its counterclaim
but that Versar could pursue its claim for fraud in other
areas. Written and oral discovery has continued for several
years. The court granted Versar's demand that the Trustees
supply requested information and documents, including
electronic documents. Versar continues to seek additional
discovery compliance by the Trustees. Motions for Summary
Judgement have been filed and briefed by both parties.
No trial date is presently scheduled. Based upon discussions
with outside counsel, management does not believe that the
ultimate resolution under the Trustees' lawsuit will have a
materially adverse effect on the Company's consolidated
financial condition and results of operations.
Versar and its subsidiaries are parties from time to
time to various other legal actions arising in the normal
course of business. The Company believes that any ultimate
unfavorable resolution of these legal actions will not have
a material adverse effect on its consolidated financial
condition and results of operations.
19
Item 4 - Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders (the
"Annual Meeting") was held on November 16, 2005. The matters
voted on at the Annual Meeting were as follows:
(1) The Election of Directors
The election of nine nominees to serve as directors
of the Company was approved as indicated below:
For Withheld
________________ _____________
Robert L. Durfee 6,983,836 349,856
Fernando V. Galaviz 6,884,178 449,514
James L. Gallagher 6,989,932 343,760
James V. Hansen 6,959,450 374,242
Amoretta M. Hoeber 7,022,930 310,762
Paul J. Hoeper 7,052,514 281,178
Michael Markels, Jr. 6,897,223 436,469
Amir A. Metry 6,928,580 405,112
Theodore M. Prociv 7,039,310 294,382
(2) To approve an amendment to the Versar, Inc. Employee Stock
Purchase Plan:
For Against Abstain
____________ __________ _______
3,748,056 252,040 31,384
Broker Non-Votes 3,302,212
(3) To approve the 2005 Stock Incentive Plan:
For Against Abstain
____________ __________ _______
3,386,242 597,782 47,456
Broker Non-Votes 3,302,212
(4) To ratify the appointment of Grant Thornton LLP as independent
accountants for fiscal year 2006:
For Against Abstain
____________ __________ _______
7,215,875 28,235 89,582
Item 6 - Exhibits
(a) Exhibits
31.1 and 31.2 - Certification pursuant to Securities
Exchange Act Section 13a-14.
32.1 and 32.2 - Certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
20
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)
/S/ Theodore M. Prociv
By:_______________________
Theodore M. Prociv
Chief Executive Officer,
President, and Director
/S/ Lawrence W. Sinnott
By:______________________
Lawrence W. Sinnott
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: February 13, 2006
21