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 28, 2007
----------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
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 by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in
Rule 12b-2 of the Exchange Act.) Check one:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 November 2, 2007
--------------------- -------------------------------
$.01 par value 8,933,013
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements - Unaudited
Consolidated Balance Sheets as of September 28,
2007 and June 29, 2007 3
Consolidated Statements of Income for the
Three-Month Periods Ended September 28, 2007
and September 29, 2006 4
Consolidated Statements of Cash Flows for the
Three-Month Periods Ended September 28, 2007
and September 29, 2006 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-18
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 18
ITEM 4 - Procedures and Controls 18
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 18
ITEM 6 - Exhibits 18
SIGNATURES 19
EXHIBITS 20-23
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
September 28, June 29,
2007 2007
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 5,327 $ 6,296
Accounts receivable, net 23,142 22,507
Prepaid expenses and other current
assets 1,104 1,250
Deferred income taxes 1,679 2,107
------------- -------------
Total current assets 31,252 32,160
Property and equipment, net 2,332 2,306
Deferred income taxes 511 802
Goodwill 776 776
Other assets 792 773
------------- -------------
Total assets $ 35,663 $ 36,817
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,082 $ 10,454
Billings in excess of revenue 201 594
Accrued salaries and vacation 1,957 1,604
Accrued bonus 753 1,793
Other liabilities 1,098 1,539
------------- -------------
Total current liabilities 13,091 15,984
Other long-term liabilities 1,400 1,411
------------- -------------
Total liabilities 14,491 17,395
------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value;
30,000,000 shares authorized;
8,866,835 shares and 8,705,733
shares issued; 8,812,844 and
8,651,742 shares outstanding
at September 28, 2007 and
June 29, 2007, respectively 89 87
Capital in excess of par value 25,410 24,679
Accumulated deficit (3,928) (4,945)
Treasury stock (399) (399)
------------- -------------
Total stockholders' equity 21,172 19,422
------------- -------------
Total liabilities and
stockholders' equity $ 35,663 $ 36,817
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited - in thousands, except per share amounts)
For the Three-Month Periods Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
GROSS REVENUE $ 28,882 $ 22,285
Purchased services and materials,
at cost 18,171 13,671
Direct costs of services and
overhead 7,212 6,466
--------------- ---------------
GROSS PROFIT 3,499 2,148
Selling, general and administrative
expenses 1,776 1,497
--------------- ---------------
OPERATING INCOME 1,723 651
OTHER EXPENSE
Interest (income) expense, net (64) 11
Income tax expense 770 34
--------------- ---------------
NET INCOME $ 1,017 $ 606
=============== ===============
NET INCOME PER SHARE - BASIC $ 0.12 $ 0.07
=============== ===============
NET INCOME PER SHARE - DILUTED $ 0.11 $ 0.07
=============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 8,809 8,148
=============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 9,268 8,429
=============== ===============
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 Three-Month
Periods Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
Cash flows from operating activities
Net income $ 1,017 $ 606
Adjustments to reconcile net income
to net cash (used in)
Provided by operating activities
Depreciation and amortization 210 179
Provision for doubtful accounts
receivable --- 25
Share based compensation 105 8
Decrease in deferred tax assets 720 ---
Changes in assets and liabilities
(Increase) decrease in accounts
receivable (635) 1,349
Decrease (increase) in prepaids and
other assets 150 (135)
(Decrease) increase in accounts
payable (1,372) 716
Increase in accrued salaries and
vacation 353 362
(Decrease) in other liabilities (1,885) (142)
--------------- ---------------
Net cash (used in) provided by
continuing operating activities (1,337) 2,968
--------------- ---------------
Changes in net liabilities of
discontinued operations --- (72)
--------------- ---------------
Net cash (used in) provided by
operating activities (1,337) 2,896
--------------- ---------------
Cash flows used in investing activities
Purchase of property and equipment (236) (85)
Increase in life insurance policies
cash surrender value (24) (26)
--------------- ---------------
Net cash used in investing
activities (260) (111)
--------------- ---------------
Cash flows from financing activities
Proceeds from issuance of common stock 628 10
--------------- ---------------
Net cash provided by financing
activities 628 10
--------------- ---------------
Net (decrease) increase in cash and
cash equivalents (969) 2,795
Cash and cash equivalents at the
beginning of the period 6,296 140
--------------- ---------------
Cash and cash equivalents at the end
of the period $ 5,327 $ 2,935
=============== ===============
Supplementary disclosure of cash
flow information:
Cash paid during the period for
Interest $ 12 $ 9
Income taxes 50 $ 7
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 accounting principles
generally accepted in the United States of America 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
for the year ended June 29, 2007 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 September 28, 2007, and the
results of operations for the three-month periods ended September
28, 2007 and September 29, 2006. 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 construction and engineering 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 September 28, 2007, the Company had approximately $2.2
million in deferred tax assets which primarily relate to net
operating loss and tax credit carry forwards. Given the Company's
continued improved financial performance and funded backlog over
the last three years, management believes the Company will be
able to utilize the full benefit of the tax asset.
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 $7.5 million based upon
qualifying receivables. Interest on borrowings is based upon the
prime rate of interest minus 0.5% (7.25% as of September 28, 2007).
In October 2006, the Company obtained a letter of credit of
approximately $1.6 million which serves as collateral for surety
bond coverage provided by the Company's insurance carrier against
project construction work. The letter of credit reduces the
Company's availability on the line of credit. The line of credit
capacity at September 28, 2007 was $5.9 million. Obligations under
the credit facility are guaranteed by the Company and each subsidiary
individually and collectively are secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property
constituting collateral. The line of credit matures in November
2009 and is subject to certain covenants related to the maintenance
of financial ratios. These covenants require a minimum tangible net
worth of $15 million; 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. The Company was in compliance with such
covenants as of September 28, 2007.
The Company believes that with its current cash balance of
over $5.3 million along with the anticipated cash flows, cash
provided by operating activities will be sufficient to meet the
Company's liquidity needs within the current fiscal year. Expected
capital requirements for fiscal year 2008 are approximately $750,000
primarily to maintain the Company's existing information technology
systems. Such capital requirements will be funded through existing
working capital.
(F) 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 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 Company's
Program Management business segment. The Company began reporting
the Program Management business segment separately in fiscal year
2007, primarily due to the increase in business volume in Iraq and
in United States construction related work. In performing its
goodwill impairment analysis, management has utilized a market-based
valuation approach to determine the estimated fair value of the
Program Management business segment. 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, the estimated fair value
of the Program Management business segment exceeds the carrying
value of the net assets of $6.5 million on an enterprise value
basis by a substantial margin. Should the Program Management
business segment's financial performance not meet estimates, then
impairment of goodwill would have to be further assessed to
determine whether a write down of goodwill value would be warranted.
If such a write down were to occur, it would negatively impact the
Company's financial position and results of operations. However,
it would not impact the Company's cash flow or financial debt
covenants.
On April 15, 2005, the Company acquired the Cultural
Resources Group from Parsons Infrastructure & Technology Group,
Inc., a subsidiary of Parsons Corporation's 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 expanded the Company's
existing and future capabilities in cultural resources work
enhancing and complimenting Versar's environmental core business.
The Cultural Resources Group was incorporated into the Company's
Compliance and Environmental Programs business segment. As part
of the acquisition, the Company executed a two year marketing
agreement with Parsons which gave Versar the first right of
refusal to certain Parsons cultural resources work from existing
Parsons' clients. Substantially all of the purchase price was
allocated to contract rights and was amortized over a three-year
period. In fiscal year 2007, the Company recorded approximately
$78,000 amortization expense for Culture Resources intangible assets.
At June 29, 2007, the remaining balance of the intangible asset was
written off due to the completion of Parson's agreement, which was
not renewed.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(G) 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 and restricted stock units.
For the Three-Month
Periods Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
Weighted average common shares
outstanding - basic 8,809,255 8,147,879
Assumed exercise of options and
vesting of restricted stock
units (treasury stock method) 459,126 281,251
--------------- ---------------
Weighted average common shares
outstanding - basic/diluted 9,268,381 8,429,130
=============== ===============
(H) Common Stock
The Company issued approximately 161,000 shares of common stock upon
the exercise of stock options during the three months ended September 28,
2007. Total proceeds from the exercise of such stock options were
approximately $628,000. The Company also awarded 93,000 shares of
restricted stock to its executive officers and employees for their
performance and contribution to the Company.
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. As amended, the Plan permits employees to purchase shares of
Versar common stock from the open market at 95% of its fair market
value. The Plan qualifies as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code.
(I) Stock-Based Compensation
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). In
the first three months of fiscal year 2008, the Company has
awarded 93,000 shares of restricted stock to employees.
Stock-based compensation expense relating to restricted stock
and options was $105,000 and $8,000 for the first three months
of fiscal year 2008 and 2007, respectively, was included in the
Consolidated Statements of Operations.
In November 2005, the stockholders approved the Versar,
Inc. 2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan
provides for grants of incentive awards, including stock options,
SARS, restricted stock, restricted stock units and performance
based awards, to directors, officers and employees of the Company
and its affiliates as approved from time to time by the Company's
Compensation Committee. Only employees may receive stock options
classified as "incentive stock options", also known as "ISO's".
The per share exercise price for options and SARS granted under
the 2005 Plan shall not be less than the fair market value of the
common stock on the date of grant. A maximum of 400,000 shares of
Common Stock may be awarded under the 2005 Plan. No single
director, officer, or employee may receive awards of more than
100,000 shares of Common Stock during the term of the 2005 Plan.
The ability to make awards under the 2005 Plan will terminate in
November 2015. Approximately 229,700 shares are available for
future grant at September 28, 2007.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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"). Options covering all shares
reserved under these plans have been granted.
Under the 1996 Plan, through September 2006, options were
granted to key employees, directors and service providers at the
fair market value on the date of grant. The vesting of each
option was 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. The 1996 Plan has expired and no
additional options may be granted under this plan. The Company
will continue to maintain the plan until all previously granted
options have been exercised, forfeited or expire.
Under the 1992 Plan, through November 2002, 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 under this plan. The
Company will continue to maintain the plan until all previously
granted options have been exercised, forfeited or expire.
A summary of activity under the Company's stock option
plans as of September 28, 2007, and changes during the first
three months of fiscal year 2008 are presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Value
Options (in thousands) Price Term ($000)
-------------------- -------------- --------- ----------- ----------
Outstanding at
June 30, 2007 838 $ 3.25
Exercised (156) $ 3.89
-------------- ---------
Outstanding at
September 28, 2007 682 $ 3.10 5.18 $ 1,197
============== ========= =========== ==========
Exercisable at
September 28, 2007 646 $ 3.12 5.14 $ 1,136
============== ========= =========== ==========
As of September 28, 2007, there were unvested options to purchase
approximately 36,000 shares outstanding under the plans. Estimated
compensation costs of $4,000 are expected to be recognized over a
weighted-average period of one year. The total fair value of these
unvested options is approximately $60,000 as of September 28, 2007.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(J) Business Segments
The Company evaluates and measures the performance of its
business segments based on gross revenue, gross profit and operating
income. As such, selling, general and administrative expenses,
interest and income taxes have not been allocated to the Company's
business segments.
Management re-evaluated its segment reporting in fiscal year
2007 due to significant growth in its business and changes in the
internal reporting of business segment financial information. The
Company's business is now operated through four business segments
as follows: Program Management, Compliance and Environmental
Programs, Professional Services, and National Security. The Chief
Operating Decision Maker (CODM) reviews financial performance based
upon these operating segments.
These segments were segregated based on the nature of the
work, business processes, customer base and the business environment
in which each of the segments operates. Segment information in
previous periods has been revised to conform to the current structure.
The Program Management business segment manages larger more
complex projects whose business processes and management are unique
to the rest of the Company. The Compliance and Environmental
Programs business segment provides consulting support to several
federal government and municipal agencies. The Professional
Services business segment provides outsourced personnel to various
government agencies providing our clients with cost-effective
resources. The National Security business segment provides unique
solutions to the federal government including testing and evaluation
and personal protective solutions to meet our clients' needs.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary of financial information for each of the Company's
segments follows:
For the Three-Months Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
(In thousands)
GROSS REVENUE
-------------
Program Management $ 17,263 $ 12,325
Compliance and Environmental Programs 8,226 6,477
Professional Services 1,455 1,736
National Security 1,938 1,747
--------------- ---------------
$ 28,882 $ 22,285
=============== ===============
GROSS PROFIT (A)
----------------
Program Management $ 2,282 $ 974
Compliance and Environmental Programs 680 772
Professional Services 248 378
National Security 289 24
--------------- ---------------
$ 3,499 $ 2,148
Selling, general and administrative
Expenses (1,776) (1,497)
--------------- ---------------
OPERATING INCOME $ 1,723 $ 651
=============== ===============
(A) Gross Profit is defined as gross revenue less purchased services and
materials and direct costs of services and overhead.
Years Ended
---------------------------------
September 28, June 29,
2007 2007
--------------- ---------------
(In thousands)
IDENTIFIABLE ASSETS
-------------------
Program Management $ 12,981 $ 11,497
Compliance and Environmental Programs 9,415 10,042
Professional Services 1,382 1,651
National Security 2,294 1,985
Corporate and Other 9,591 11,642
--------------- ---------------
Total Assets $ 35,663 $ 36,817
=============== ===============
11
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains certain forward-looking statements which are
based on current expectations. Actual results may differ materially.
The forward-looking statements include without limitation, 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 that 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 that 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; delays in project funding; and
such other risks and uncertainties, described in our Form 10-K for
fiscal year ended June 29, 2007 and in other reports and other
documents filed by the Company from time to time with the Securities
and Exchange Commission.
Financial Trends
----------------
Operating results for the Company were relatively flat
through fiscal year 2006, but began to improve in fiscal year 2007.
Prior to fiscal year 2007, the Company's gross revenues and gross
profits were relatively stagnant. In fiscal year 2006, the
Company's operating results were further impacted by decreases
in federal funding. During 2006, the Company took a number of
steps to eliminate non-performing operations as well as
significantly reduce fixed facility costs.
In fiscal year 2006, the Company's gross revenues declined
primarily due to the continuation of federal government delays
in funding, which in certain instances, spanned as much as nine
months and the continued diversion of funding to the war in Iraq.
The Company adapted to the funding shifts by expanding its
services in Iraq under existing contracts and seeking new contract
work in Iraq. By the end of fiscal year 2006, the project funding
began to return to normal levels and as a result, the Company's
funded backlog increased by 55% to $48 million. By the end of
fiscal year 2007, as a result of continued efforts to grow the
business and success in securing new contracts, increased funded
backlog by an additional 19% to $57 million.
In the first quarter of fiscal year 2008, the Company's
funded backlog further increased to $91 million, a 60% increase
over that reported at the end of fiscal year 2007. The increase
is primarily due to additional funding by the Air Force in support
of the Company's continuing Title II efforts to support the
reconstruction work in Iraq.
Approximately 40% of the Company's business volume related
to the war in Iraq in fiscal year 2007. However, the Company is
taking steps to further diversify the business in anticipation that
those efforts in Iraq will eventually be reduced or eliminated.
The Company's current primary business development focus is on
BRAC efforts and requirements which have been delayed as a result
of the war in Iraq.
The Company re-evaluated its segment reporting in fiscal
year 2007 due to the business growth and changes in its business
mix during the year. The Company's business is now operated
through four segments as follows: Program Management, Compliance
and Environmental Programs, Professional Services, and National
Security. These segments were segregated based on the nature of
the work, business processes, customer base and the business
environment in which each of the segments operates. Information
in previous periods has been allocated among these segments as
discussed below for comparative purposes.
There are a number of risk factors or uncertainties that
could significantly impact our future 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;
12
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
* 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;
* The results 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
---------------------
First Quarter Comparison of Fiscal Year 2008 and 2007
-----------------------------------------------------
For the Three-Months Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
(In thousands)
GROSS REVENUE
-------------
Program Management $ 17,263 $ 12,325
Compliance and Environmental Programs 8,226 6,477
Professional Services 1,455 1,736
National Security 1,938 1,747
--------------- ---------------
$ 28,882 $ 22,285
=============== ===============
Gross revenue for the first quarter of fiscal year 2008 was
$28,882,000, an increase of $6,597,000 (30%) over that reported in the
first quarter of fiscal year 2007. Gross revenue increased during the
first quarter of fiscal year 2008 in each of our segments other than the
Professional Services business segment. Gross revenue for the Program
Management business segment was $17,263,000, an increase of $4,938,000
(40%) over that reported in the first quarter of fiscal year 2007. The
increase is attributable to our efforts on behalf of the Air Force and
the Army in Iraq as part of their reconstruction support efforts. Gross
revenue for the Compliance and Environmental Programs business segment
was $8,226,000, an increase of $1,749,000 (27%) over that reported in
the first quarter of fiscal year 2007. The increase is attributable to
increased work for municipal aquatic facilities. Gross revenue for the
National Security business segment was $1,938,000, an increase of
$191,000 (11%) over that reported in the first quarter of fiscal year
2007. The increase is attributable to revenue from increased laboratory
testing during the quarter. Gross revenue for the Professional Services
business segment was $1,455,000, a decrease of $281,000 (16%) over that
reported in the first quarter of fiscal year 2007. The decrease was
attributable to funding delays and the completion of task orders
during the quarter.
Purchased services and materials increased by $4,500,000 (33%)
in the first quarter of fiscal year 2008 compared to that reported
in the first quarter of fiscal year 2007. The increase was
attributable to increases in subcontracted work in the Program
Management business segment and Compliance and Environmental
Programs business segments.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable and
unallowable costs that are directly attributable to contracts.
Direct costs of services and overhead increased by $746,000 (12%)
in the first quarter of fiscal year 2008 compared to that reported
in the first quarter of fiscal year 2007. The increase is due to
increased marketing and sales costs, and staffing and recruiting
costs in support of the Company's business growth during the first
quarter of fiscal year 2008.
13
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gross profit for the first quarter of fiscal year 2008 was
$3,499,000, a $1,351,000 (63%) increase over that reported in the
first quarter of fiscal year 2007. The increase is attributable
to the increased gross revenues as mentioned above, while the
Company continued to control costs.
For the Three-Months Ended
---------------------------------
September 28, September 29,
2007 2006
--------------- ---------------
(In thousands)
GROSS PROFIT
------------
Program Management $ 2,282 $ 974
Compliance and Environmental Programs 680 772
Professional Services 248 378
National Security 289 24
--------------- ---------------
$ 3,499 $ 2,148
=============== ===============
Selling, general and administrative expenses increased by $279,000
during the first quarter of fiscal year 2008 compared to that reported
in the first quarter of fiscal year 2007. The increase is primarily
due to costs of increased business development activity to continue
the business growth of the Company.
Operating income for the first quarter of fiscal year 2008 was
$1,723,000, a $1,072,000 (165%) increase over that reported in the
first quarter of fiscal year 2007. The increase is primarily due to
increased gross profit for the Program Management business segment of
$2,282,000, an increase of $1,308,000 (134%) over that reported in the
first quarter of fiscal year 2007. The increase is due to the increased
gross revenues and improved operating margins as a result of the
increased business volume. Operating income for the Compliance and
Environmental Programs business segment for the first quarter of fiscal
year 2008 was $680,000, a decrease of $92,000 (12%) over that reported
in the first quarter of fiscal year 2007. The decrease is due to
increased business development costs during the quarter. Operating
income for the Professional Services business segment was $248,000,
a decrease of $130,000 (34%) over that reported in the first quarter
of fiscal year 2007. The decrease is due to completed delivery orders
during the quarter, and funding delays due to the war effort in Iraq.
Operating income for the National Security business segment for the
first quarter of fiscal year 2008 was $289,000, an increase of $265,000
over that reported in the first quarter of fiscal year 2007. The
increase is due to increased laboratory work and improved operating
margins during the quarter.
Interest income, net for the first quarter of fiscal year 2008
was $64,000, an increase of $75,000 compared to interest expense, net
of $11,000 reported in the first quarter of fiscal year 2007. The
increase was due to the interest earned on short-term investment of
cash balances maintained with the Company's bank.
Income tax expense for the first quarter of fiscal year 2008
was $770,000 an increase of $736,000 over that reported in the first
quarter of fiscal year 2007. During fiscal year 2007, the Company
was carrying a valuation allowance against its tax assets. In the
third quarter of fiscal year 2007, the Company re-evaluated the need
for the valuation allowance. Because of the Company's continued
improved financial performance and funded contract backlog over the
past three years, management believes that the Company will be able
to utilize the full benefit of the tax asset. At the end of the
first quarter of fiscal year 2008, the Company has approximately
$2.2 million of tax assets available.
Versar's net income for the first quarter of fiscal year
2008 was $1,017,000 compared to $606,000 in the first quarter of
fiscal year 2007. The increase was due to the increased gross
revenues and operating margins, in part offset by the tax expense
discussed above.
14
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of September 28, 2007
approximated $18,161,000, an increase of $1,985,000 (12%) from
June 29, 2007. In addition, at September 28, 2007, the Company's
current ratio was 2.39, an improvement over the 2.01 current ratio
reported on June 29, 2007. The increase was due to the reduction
of current liabilities during the quarter.
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $7.5 million based
upon qualifying receivables. Interest on borrowings is based on
the prime rate of interest minus 0.5% (7.25% as of September 28,
2007). In October 2006, the Company obtained a letter of credit
of approximately $1.6 million which serves as collateral for
surety bond coverage provided by the Company's insurance carrier.
The letter of credit reduces the Company's borrowing base on the
line of credit. As of September 28, 2007, there were no borrowings
under the line of credit. The line of credit capacity at September
28, 2007 was $5.9 million. 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 line of credit matures in November 2009 and is
subject to certain covenants related to the maintenance of financial
ratios. These covenants require a minimum tangible net worth of
$15 million; 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 meet 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 September 28, 2007, the Company
was in compliance with the financial covenants.
The Company believes that the current cash balance of over
$5.3 million along with anticipated cash flows from operations
will be sufficient to meet its liquidity needs within the next
year. Expected capital requirements for the remainder of fiscal
year 2008 are approximately $750,000 primarily to maintain our
existing information technology systems. Such capital requirements
will be funded through existing working capital.
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 elsewhere in this report on Form 10-Q and in
our annual report on Form 10-K filed for our 2007 fiscal year.
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 penalty
provisions, and contract change orders, which may affect 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.
15
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 likely
that such adjustments could occur with our larger fixed priced projects.
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 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 and 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 assets: The Company has approximately
$2.2 million in deferred tax, net assets as of September 28, 2007.
In the third quarter of fiscal year 2007, the Company released the
entire $2.95 million tax valuation allowance that was previously
established against such assets due to improved earnings and the
likelihood of using such assets in future periods.
Asset retirement obligation: In fiscal year 2007, the
Company recorded an asset retirement obligation associated with
the estimated clean-up costs for its chemical laboratory in its
National Security business segment. In accordance with SFAS 143,
the Company estimated the costs to clean up the laboratory and
return it to its original state at a present value of approximately
$497,000. The Company currently estimates the amortization and
accreation expense to be between $180,000 to $190,000 per year
over the next 3 1/2 years. The Company is currently rigorously
pursuing reimbursement for such costs and other costs from the
U.S. Army as a significant portion of the chemical agent that
was used in the chemical laboratory was government owned. If
the Company determines that the estimated clean up cost is
larger than expected or the likelihood of recovery from the
U.S. Army is remote, such adjustments will be reflected when
they become known and adjusted in accordance with SFAS 143.
During the first quarter of fiscal year 2008, the Company
recorded accreation and depreciation expenses of approximately
$10,000 and $47,000, respectively, for this obligation.
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 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
Program Management business segment. The Company began reporting the
Program Management business segment separately in fiscal year 2007,
primarily due to the increase in business volume in Iraq and in United
States construction related work. In performing its goodwill
impairment analysis, management has utilized a market-based valuation
approach to determine the estimated fair value of the Program
Management business segment. 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, the estimated fair value of the Program Management
business segment exceeds the carrying value of the net assets of
$6.5 million on an enterprise value basis by a substantial margin.
Should the Program Management business segment's financial performance
not meet estimates, then impairment of goodwill would have to be
further assessed to determine whether a write down of goodwill value
would be warranted. If such a write down were to occur, it would
negatively impact the Company's financial position and results of
operations. However, it would not impact the Company's cash flow
or financial debt covenants.
16
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
On April 15, 2005, the Company acquired the Cultural Resources
Group from Parsons Infrastructure & Technology Group, Inc., a subsidiary
of Parsons Corporation's 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
expanded the Company's existing and future capabilities in cultural
resources work enhancing and complimenting Versar's environmental core
business. The Cultural Resources Group was incorporated into the
Company's Compliance and Environmental Programs business segment. As
part of the acquisition, the Company executed a two year marketing
agreement with Parsons which gave Versar the first right of refusal to
certain Parsons cultural resources work from existing Parsons' clients.
Substantially all of the purchase price was allocated to contract rights
and was amortized over a three-year period. In fiscal year 2007, the
Company recorded approximately $78,000 amortization expense for Culture
Resources intangible assets. At June 29, 2007, the remaining balance of
the intangible asset was written off due to the completion of Parson's
agreement, which was not renewed.
Share-based compensation: Effective July 1, 2005, the Company
adopted the Financial Accounting Standards Board (FASB) SFAS No. 123
(Revised 2004), "Share-Based Payment" (FAS 123(R)). This Statement
revised SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and related interpretations 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).
New accounting pronouncements: On July 13, 2006, the Financial
Accounting Standards Board (FASB) issued FIN No. 48, Accounting for
Uncertainty of Income Taxes, which is an interpretation of FAS 109,
Accounting for Income Taxes. The regulation requires that the Company cannot
record tax benefits of a transaction unless it is more likely than not
to be entitled to the benefits from a tax position in the financial
statements. FIN No. 48 became effective as of July 1, 2007. As a
result of the implementation of FIN 48, the Company made a comprehensive
review of its portfolio of uncertain tax positions in accordance with
recognition standards established by FIN 48. As a result of this review,
the Company concluded that at this time there are no unrecognized tax
benefits. As a result of applying the provisions of FIN 48, there was
no cumulative effect on retained earnings. The Company conducts
business in the US and the Philippines and is subject to tax in those
jurisdictions. For income tax returns filed by the Company, the
Company is no longer subject to examination by the tax authorities
for year prior to June 30, 2003, although carryforward tax attributes
that were generated prior to FY 2003 may still be adjusted by the tax
authorities if either they have been or will be utilized. The Company
has not received any communications by taxing authorities that cause it
to believe it is currently under examination by the tax authorities in
any of the jurisdictions in which it operates. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits as
a component of income tax provision. For the three months ended
September 30, 2007, there have been no interest and penalties recorded
as a component of income tax provision.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which is effective January 1, 2008. SFAS No. 157 defines
fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value
measurements. The new standard is applicable whenever another
accounting pronouncement requires or permits assets and liabilities
to be measured at fair value, with limited exceptions. Management is
currently evaluating the effect that adoption of this statement may
have on the Company's consolidated financial position and results of
operations when it becomes effective in 2008.
In February 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115." SFAS No. 159 permits entities to choose
to measure eligible items at fair value at specified election dates
and report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect
that adoption of this statement may have on the Company's consolidated
financial position and results of operations when it becomes effective
in 2008.
17
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.
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).
Business Segments
Versar currently has four business segments: Program Management,
Compliance and Environmental Programs, Professional Services, and
National Security. Details regarding these segments may be found in
Note J of the Notes to the Consolidated Financial Statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company has not entered into any transactions using
derivative financial instruments or derivative commodity instruments
and believes that its exposure to interest rate risk and other
relevant market risk is not material.
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.
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
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 any 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
(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.
18
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
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: November 12, 2007
19