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 March 27, 2009
--------------
[ ] 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.
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(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
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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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer",
"accelerated filer", and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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 May 1, 2009
--------------------- --------------------------
$.01 par value 9,102,169
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements - Unaudited
Consolidated Balance Sheets as of March 27, 2009
and June 27, 2008 3
Consolidated Statements of Income for the Three-Month
and Nine-Month Periods Ended March 27, 2009 and
March 28, 2008 4
Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended March 27, 2009 and March 28,
2008 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 20
ITEM 4T - Controls and Procedures 20
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 20
ITEM 1A - Risk Factors 20
ITEM 6 - Exhibits 21
SIGNATURES 22
EXHIBITS 23-26
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 27, June 27,
2009 2008
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 5,248 $ 11,938
Accounts receivable, net 31,006 21,596
Prepaid expenses and other current assets 1,633 1,080
Deferred income taxes 821 1,015
------------- -------------
Total current assets 38,708 35,629
Property and equipment, net 2,487 2,152
Deferred income taxes 556 517
Goodwill 776 776
Other assets 639 754
------------- -------------
Total assets $ 43,166 $ 39,828
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,579 $ 7,731
Billings in excess of revenue --- 156
Accrued salaries and vacation 2,571 1,719
Accrued bonus 1,150 2,066
Other liabilities 1,863 1,686
------------- -------------
Total current liabilities 14,163 13,358
Other long-term liabilities 1,403 1,417
------------- -------------
Total liabilities 15,566 14,775
------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 9,193,635 shares and
9,059,135 shares issued; 9,074,300 shares
and 8,975,101 shares outstanding at
March 27, 2009 and June 27, 2008,
respectively 92 91
Retained earnings
Capital in excess of par value 27,650 27,115
Retained earnings (accumulated deficit) 660 (1,554)
Treasury stock (706) (578)
Accumulated other comprehensive loss (96) (21)
------------- -------------
Total stockholders' equity 27,600 25,053
------------- -------------
Total liabilities and stockholders'
equity $ 43,166 $ 39,828
============= =============
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 For the Nine-Month
Periods Ended Periods Ended
--------------------- ---------------------
March 27, March 28, March 27, March 28,
2009 2008 2009 2008
---------- ---------- ---------- ----------
GROSS REVENUE $ 31,851 $ 28,874 $ 84,816 $ 87,111
Purchased services and
materials, at cost 17,470 16,212 46,670 52,348
Direct costs of services and
overhead 10,026 8,866 27,408 24,401
---------- ---------- ---------- ----------
GROSS PROFIT 4,355 3,796 10,738 10,362
Selling, general and
administrative
Expenses 2,525 2,250 6,759 5,882
---------- ---------- ---------- ----------
OPERATING INCOME 1,830 1,546 3,979 4,480
OTHER EXPENSE
(Gain) loss on marketable
securities (20) --- 326 ---
Interest expense (income) 21 (35) 40 (151)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,829 1,581 3,613 4,631
Income tax expense 704 668 1,399 1,956
---------- ---------- ---------- ----------
NET INCOME $ 1,125 $ 913 $ 2,214 $ 2,675
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC $ 0.12 $ 0.10 $ 0.24 $ 0.30
========== ========== ========== ==========
NET INCOME PER SHARE - DILUTED $ 0.12 $ 0.10 $ 0.24 $ 0.29
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,170 8,985 9,099 8,890
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 9,199 9,257 9,131 9,246
========== ========== ========== ==========
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 Nine-Month Periods Ended
--------------------------------
March 27, March 28,
2009 2008
--------------- ---------------
Cash flows from operating activities
Net income $ 2,214 $ 2,675
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 750 658
Provision for doubtful accounts
receivable 125 (1)
Loss on marketable securities 326 ---
Loss on life insurance policy cash
surrender value 167 28
Share based compensation 594 688
Deferred taxes 155 1,824
Tax benefit on restricted stock (33) (551)
Changes in assets and liabilities
(Increase) decrease in accounts receivable (9,539) 211
Increase in prepaids and other assets (673) (948)
Increase (decrease) in accounts payable 905 (4,554)
Increase in accrued salaries and vacation 854 644
(Decrease) increase in other liabilities (1,021) 103
--------------- ---------------
Net cash (used in) provided by operating
activities (5,176) 777
--------------- ---------------
Cash flows used in investing activities
Purchase of property and equipment (1,102) (622)
Purchase of marketable securities (3,000) ---
Proceeds from sale of marketable securities 2,674 ---
Premium paid on life insurance policies (37) (38)
--------------- ---------------
Net cash used in investing activities (1,465) (660)
--------------- ---------------
Cash flows from financing activities
Proceeds from issuance of common stock 48 946
Purchase of treasury stock (128) (179)
Tax benefit on restricted stock 33 551
--------------- ---------------
Net cash (used in) provided by financing
activities (47) 1,318
--------------- ---------------
Effect of exchange rate changes (2) 26
--------------- ---------------
Net (decrease) increase in cash and cash
equivalents (6,690) 1,461
Cash and cash equivalents at the beginning
of the period 11,938 6,296
--------------- ---------------
Cash and cash equivalents at the end of
the period $ 5,248 $ 7,757
=============== ===============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 43 $ 39
Income taxes 1,501 135
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 condensed 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 27, 2008 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. Certain adjustments to the financial statements are necessary
for fair presentation and are of a normal recurring nature as part of the
operations of the business. In the opinion of management, the information
reflects all adjustments necessary for a fair presentation of the Company's
consolidated financial position as of March 27, 2009, and the results of
operations for the nine-month periods ended March 27, 2009 and March 28,
2008. 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
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 March 27, 2009, the Company had approximately $1.4 million in
deferred tax assets, which primarily relate to temporary differences between
financial statement and income tax reporting. Such differences include
depreciation, deferred compensation, accruals and reserves. 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.
(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%
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2.75% as of March 27, 2009). In October 2006, the Company obtained a
letter of credit of approximately $1.6 million under the line of credit
facility which serves as collateral for surety bond coverage provided
by the Company's insurance carrier against project construction work. The
letter of credit was reduced to $455,147 in January 2009. The letter of
credit reduces the Company's availability on the line of credit.
Availability under the line of credit at March 27, 2009 was approximately
$7 million. Obligations under the credit facility are guaranteed by Versar
and each subsidiary individually and are secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property
constituting collateral of Versar and its subsidiaries. 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 March 27,
2009. The Company had no borrowings outstanding under the line of credit
as of March 27, 2009.
(F) Goodwill and Other Intangible Assets
The carrying value of goodwill is approximately $776,000 relating
to prior acquisitions. Goodwill is reported in 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 substantially exceeded
the carrying value of the net assets of $6.5 million as of June 27, 2008.
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.
(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
awards.
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
--------------------- ---------------------
March 27, March 28, March 27, March 28,
2009 2008 2009 2008
--------- --------- --------- ---------
Weighted average common
shares outstanding - basic 9,169,668 8,984,653 9,099,276 8,890,338
Effect of assumed exercise
of options and vesting of
restricted stock awards
(treasury stock method) 29,716 271,963 32,128 355,962
--------- --------- --------- ---------
Weighted average common
shares outstanding -
diluted 9,199,384 9,256,616 9,131,404 9,246,300
========= ========= ========= =========
For fiscal year 2009, options to purchase approximately 27,000 shares
of common stock were not included in the computation of diluted earnings per
share because the effect would be anti-dilutive.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Common Stock
The Company has 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 ESPP
permits employees to purchase shares of Versar common stock from the open
market at 95% of its fair market value. The ESPP qualifies as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code.
(I) Stock-Based Compensation
In September 2008, the Company awarded 90,000 shares of restricted
stock to executive officers and employees. The awards vest over a period
of 4.5 months to 16.5 months. Stock-based compensation expense relating
to restricted stock and option awards totaled $594,000 and $688,000 for
the nine months ended March 27, 2009 and March 28, 2008, respectively.
Stock-based compensation expense relating to restricted stock and option
awards for the three-month periods ending March 27, 2009 and March 28,
2008 were $80,000 and $226,000, respectively. These expenses were
included in the direct costs of services and overhead lines of the
Consolidated Statements of Income. During the nine months ended
March 27, 2009, incentive stock options to purchase 6,000 shares of
common stock and non-qualified stock options to purchase 20,000 shares
of common stock with intrinsic value of approximately $7,300 and $18,000,
respectively, were exercised.
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 may 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. As of March 27, 2009, approximately 128,000 shares are available
for future grant under the 2005 Plan.
The Company also maintains the Versar 2002 Stock Incentive Plan
(the "2002 Plan"), the Versar 1996 Stock Option Plan (the "1996 Plan")
and the Versar 1992 Stock Option Plan (the "1992 Plan").
Under the 2002 Plan, restricted stock and other types of stock-based
awards were granted to any employee, service provider or director to whom
a grant was 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. No shares remain for
future grant under the 2002 Plan. The Company will continue to maintain
the plan until all previously granted securities have vested and been
exercised, forfeited or retired. As of March 27, 2009, there were vested
stock options to purchase 283,970 shares of common stock outstanding
under the 2002 Plan.
Under the 1996 Plan, options were granted to key employees,
directors and service providers at the fair market value on the date of
grant. 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. As of March 27, 2009, there were
vested stock options to purchase 153,761 shares of common stock
outstanding under the 1996 Plan.
Under the 1992 Plan, options were 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
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
granted options have been exercised, forfeited or expire. As of
March 27, 2009, there were vested stock options to purchase
83,500 shares of common stock outstanding under the 1992 Plan.
A summary of activity under the Company's stock incentive
plans as of March 27, 2009, and changes during the first nine months
of fiscal year 2009 are presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Options Shares Exercise Contractual Value
(in thousands) Price Term ($000)
--------------------- -------------- ----------- ----------- ----------
Outstanding at June
28, 2008 571 $ 3.05
Exercised (26) 2.85
Cancelled (2) 3.43
-------------- -----------
Outstanding at March
27, 2009 543 $ 3.10 4.44 yrs. $ 962
============== =========== =========== ==========
Exercisable at March
27, 2009 533 $ 3.01 4.23 yrs. $ 921
============== =========== =========== ==========
As of March 27, 2009, there were unvested options to purchase
approximately 10,000 shares outstanding under the plans. Vesting of these
options is conditioned on the Company's stock price reaching certain
thresholds over a fixed period. The Company expects to recognize estimated
compensation costs of $42,000 if the pricing and service conditions of these
options are met in the future.
At March 27, 2009, there were approximately 56,000 shares of
un-vested restricted stock to be vested within twelve months. A summary of
the restricted stock plan activity is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Restricted Stock Shares Award Contractual Value
(in thousands) Price Term ($000)
--------------------- -------------- ----------- ----------- ----------
Outstanding at June
28, 2008 69 $ 7.93
Granted 95 5.66
Vested (108) 7.17
-------------- -----------
Outstanding at March
27, 2009 56 $ 5.39 11.4 mos. $ 299
============== =========== =========== ==========
(J) New Accounting Pronouncements
In September 2006, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement is effective
for financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. In February 2008,
FASB issued FASB Staff Position ("FSP") No. FAS 157-2, Effective Dates of
FASB Statement No. 157, which deferred the effective date of SFAS 157 for
all nonrecurring fair value measurements of nonfinancial assets and
liabilities until fiscal years beginning after November 15, 2008. In
October 2008, the FASB also issued FSP No. FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, which clarifies the application of SFAS 157 in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market of that
financial asset is not active. The FSP observes that revisions resulting
from a change in valuation technique or its application should be
accounted for as a change in accounting estimate, and any effects on
fair-value measurement would be recognized in the period of adoption.
Our adoption of SFAS 157 on December 29, 2008 was limited to financial
assets and liabilities and had no impact on our condensed consolidated
financial statements in the first
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
nine months of fiscal 2009. We are currently evaluating the
anticipated effect of this statement on the non-financial assets and
non-financial liabilities in our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an Amendment of FASB Statement No. 115
("SFAS 159"). SFAS 159 permits entities to measure many financial
instruments and certain other items at fair value to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting.
Most of the provisions in SFAS 159 are elective and may be applied
prospectively. Early adoption is permitted, provided the Company also
elects to apply the provisions of SFAS 157. The Company has adopted the
provisions of SFAS 159 in fiscal year 2009 and determined that there was
no material impact on its financial position, results of operations or
cash flows.
In April 2008, the Financial Accounting Standards board issued FASB
Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of
Intangible Assets," to provide guidance for determining the useful life of
recognized intangible assets and to improve consistency between the period
of expected cash flows used to measure the fair value of a recognized
intangible asset and the useful life of the intangible asset as determined
under FASB Statement 142, Goodwill and Other Intangible Assets. The FSP
requires that an entity consider its own historical experience in renewing
or extending similar arrangements. However, the entity must adjust that
experience based on entity-specific factors included in Statement 142. If
the Company lacks historical experience to consider for similar
arrangements, it would consider assumptions that market participants would
use about renewal or extension, as adjusted for the entity-specific factors
under Statement 142. The Company will adopt FSP FAS 142-3 in fiscal year
2010. The Company believes that upon adoption, FSP FAS 142-3 will not have
an effect on the Company's financial statements.
In November 2008, the Financial Accounting Standards Board ratified
a consensus opinion reached by the Emerging Issues Task Force (EITF) on
EITF Issue 08-6, "Equity Method Investment Accounting Considerations,"
to clarify accounting and impairment considerations involving equity
method investments after the effective date of both FASB Statement 141
(revised 2007), Business Combinations, and FASB Statement 160,
Noncontrolling Interests in Consolidated Financial Statements. EITF
Issue 08-6 includes the Task Force's conclusions on how an equity method
investor should (1) initially measure its equity method investment,
(2) account for impairment charges recorded by its investee, and
(3) account for shares issued by the investee. EITF Issue 08-6 is
effective for fiscal years beginning on or after December 15, 2008.
The Company intends to adopt EITF Issue 08-6 effective January 1, 2009
on a prospective basis. The Company does not currently have any
investments that are accounted for under the equity method and as a
result, does not believe the adoption of EITF Issue 08-6 will have a
significant effect on its financial statements.
(K) Business Segments
The Company's business is operated through four business segments
as follows: Program Management, Compliance and Environmental Programs,
Professional Services, and National Security. 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. These segments were
segregated based on the nature of the work, business processes,
customer base and business environment in which each of the segments
operates.
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-Month For the Nine-Month
Periods Ended Periods Ended
--------------------- ---------------------
March 27, March 28, March 27, March 28,
2009 2008 2009 2008
---------- ---------- ---------- ----------
GROSS REVENUE
-------------
Program Management $ 21,580 $ 17,823 $ 54,310 $ 51,627
Compliance and Environmental
Programs 4,682 6,859 15,146 23,784
Professional Services 3,050 2,160 8,012 5,938
National Security 2,539 2,032 7,348 5,762
---------- ---------- ---------- ----------
$ 31,851 $ 28,874 $ 84,816 $ 87,111
========== ========== ========== ==========
GROSS PROFIT(A)
---------------
Program Management $ 3,515 $ 2,608 $ 7,986 $ 6,980
Compliance and Environmental
Programs 106 490 641 1,650
Professional Services 411 346 1,220 960
National Security 323 352 891 772
---------- ---------- ---------- ----------
$ 4,355 $ 3,796 $ 10,738 $ 10,362
Selling, general and
administrative expenses (2,525) (2,250) (6,759) (5,882)
---------- ---------- ---------- ----------
OPERATING INCOME $ 1,830 $ 1,546 $ 3,979 $ 4,480
========== ========== ========== ==========
(A)Gross profit is defined as gross revenue less purchased services and
materials and direct costs of services and overhead.
Periods Ended
--------------------------------
March 27, June 27,
2009 2008
--------------- ---------------
(In thousands)
IDENTIFIABLE ASSETS
-------------------
Program Management $ 21,922 $ 11,405
Compliance and Environmental Programs 5,467 8,762
Professional Services 4,112 1,554
National Security 2,334 2,693
Corporate and Other 9,331 15,414
--------------- ---------------
Total Assets $ 43,166 $ 39,828
=============== ===============
(L) Marketable Securities
During the first quarter of fiscal year 2009, the Company recorded
a $352,000 loss on marketable securities the Company was holding in the
FISCO Income Plus Funds. The FISCO fund received an immediate demand
margin call from its broker, UBS. Rather than allow the fund the customary
time to satisfy the margin call at the end of the day, UBS demanded the
fund cover all calls and puts at high premiums immediately or indicated
it would take control of the fund and start liquidating the fund itself.
The fund has terminated its relationship with UBS and transferred the
assets to a new custodian. The fund has taken legal action against UBS
to cover its losses. The Company will participate in any recovery from any
such action. The Company has reallocated its remaining assets from
marketable securities to its primary bank due to the volatile nature of
the market. During the three months ended March 27, 2009, the Company
recovered $26,000 of the initial loss before the funds were liquidated
from the FISCO fund. A loss on marketable securities of $326,000 is
reflected in the consolidated statement of income for the nine months
ended March 27, 2009, as a result of the liquidation of the FISCO fund.
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 possibility 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 27, 2008 and in other reports and other documents
filed by the Company from time to time with the Securities and Exchange
Commission.
Financial Trends
----------------
During fiscal year 2008, backlog continued to grow, increasing
by 12% to $64 million at June 27, 2008. In the first nine months of
fiscal year 2009, the Company was awarded $97 million in additional
work, which resulted in an increase in funded backlog to $76 million as
of March 27, 2009. However, during the first nine months of fiscal year
2009, the Company experienced a 3% decline in gross revenues. This
decline was primarily attributable to a decrease in the award of
additional municipal aquatic facility work and the impact on our
commercial and municipal work as a result of the poor economic
conditions that have been in effect throughout in our Compliance and
Environmental Programs business segment in fiscal year 2009. Several
awards of new, larger projects for the Program Management business
segment were received late during the first quarter of fiscal year
2009 and have resulted in additional construction work during the
third and fourth quarters of fiscal year 2009. The Company continues
to experience a decline in the award of aquatic facility work and the
Company expects the Compliance and Environmental Programs business
segment to continue to experience a decline in revenues during the
balance of fiscal year 2009 as a result of the lack of commercial
and municipal project funding due to the overall poor U.S. economy.
Approximately 55% of the Company's business volume was related to
the reconstruction efforts in Iraq and Afghanistan for fiscal year 2009.
However, the Company has continued to take steps during fiscal year 2009
to further diversify its business to prepare for a time when
opportunities in Iraq may be reduced or eliminated. The Company has
focused primarily on BRAC efforts and requirements which have been
delayed as a result of the war in Iraq. We continue to follow the
funding shifts in Iraq to Afghanistan, and a new business initiative
in the United Arab Emirates, to maintain and expand our international
business basis. We believe the funding of BRAC work world-wide
represents our greatest opportunity for growth in the balance of fiscal
year 2009. We are also pursuing federal stimulus funded projects which
are in line with our federal and municipal business base.
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;
* The seasonality of spending in the federal government and
for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
12
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
* Increased pricing competition due to 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 the war in Iraq and Afghanistan.
Results of Operations
---------------------
Third Quarter Comparison of Fiscal Year 2009 and 2008
-----------------------------------------------------
For the Three-Month Periods Ended
---------------------------------
March 27, March 28,
2009 2008
---------------- ---------------
GROSS REVENUE
-------------
Program Management $ 21,580 $ 17,823
Compliance and Environmental Programs 4,682 6,859
Professional Services 3,050 2,160
National Security 2,539 2,032
---------------- ---------------
$ 31,851 $ 28,874
================ ===============
Gross revenue for the third quarter of fiscal year 2009 was
$31,851,000, an increase of $2,977,000 (10%) over that reported in the
third quarter of fiscal year 2008. Gross revenue for the Program
Management business segment was $21,580,000, an increase of $3,757,000
(21%) compared to that reported in the third quarter of fiscal year 2008.
The increase is attributable to our efforts to support both the Air Force
and the Army in Iraq as part of the reconstruction support efforts. Gross
revenue for the Compliance and Environmental Programs business segment for
the third quarter of fiscal year 2009 was $4,682,000, a decrease of
$2,177,000 (32%) compared to that reported in the third quarter of fiscal
year 2008. The decrease is attributable to a decline in follow on work for
municipal aquatic facilities as a result of the overall poor U.S. economy.
Gross revenue for the Professional Services business segment was $3,050,000,
an increase of $890,000 (41%) compared to that reported in the third quarter
of fiscal year 2008. The increase was attributable to increased revenues
from the Company's U.S. Army's contracts. Gross revenue for the National
Security business segment for the third quarter of fiscal year 2009 was
$2,539,000, an increase of $507,000 (25%) compared to that reported in the
third quarter of fiscal year 2008. The increase is attributable to
increased chemical laboratory testing work during the quarter.
Purchased services and materials increased by $1,258,000 (8%) in the
third quarter of fiscal year 2009 compared to that reported in the third
quarter of fiscal year 2008. The increase was attributable to increases
in subcontracted work in the Program Management business segment, the
Professional Services business segment and the National Security business
segment, which was, in turn, offset, in part by a reduction of
approximately $1.6 million of purchased services and materials in the
Compliance and Environmental business segment as a result of the lack
of follow on municipal aquatic work and current economic conditions
which has resulted in a reduction in municipal and commercial business
activity.
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 $1,160,000 (13%) in the third quarter of
fiscal year 2009 compared to that reported in the third quarter of
fiscal year 2008. The increase is primarily due to the business growth
in the Program Management, Professional Services, and National Security
business segments, offset, in part, by the necessary overhead cost
reductions in the Compliance and Environmental business segment because
of its reduced business volume as discussed above.
13
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gross profit for the third quarter of fiscal year 2009 was $4,355,000,
a $559,000 (15%) increase over that reported in the third quarter of fiscal
year 2008. The increase is primarily attributable to the increased gross
revenues and improved operating margins during the third quarter of fiscal
year 2009.
For the Three-Month Periods Ended
---------------------------------
March 27, March 28,
2009 2008
---------------- ---------------
GROSS PROFIT
------------
Program Management $ 3,515 $ 2,608
Compliance and Environmental Programs 106 490
Professional Services 411 346
National Security 323 352
---------------- ---------------
$ 4,355 $ 3,796
================ ===============
Gross profit for the Program Management business segment was
$3,515,000, an increase of $907,000 (35%) over that reported in the third
quarter of fiscal year 2008. The increase is due to the increased gross
revenues and improved operating margins as a result of cost reduction
efforts and improved project profit margins. Gross profit for the
Compliance and Environmental Programs business segment for the third
quarter of fiscal year 2009 was $106,000, a decrease of $384,000 (78%)
compared to that reported in the third quarter of fiscal year 2008. The
decrease is due to the economic slow down, the lack of follow on municipal
aquatic renovation work and project reserves of approximately $150,000
during the third quarter. Gross profit for the Professional Services
business segment was $411,000, an increase of $65,000 (19%) compared to
that reported in the third quarter in fiscal year 2008. The increase is
attributable to the increased gross revenues as mentioned above. Gross
profit for the National Security business segment for the third quarter
of fiscal year 2009 was $323,000, a decrease of $29,000 compared to that
reported in the third quarter of fiscal year 2008. The decrease is due to
delays in executing personal protective suit orders which were primarily
caused by third party manufacturing delays.
Selling, general and administrative expenses increased by $275,000
during the third quarter of fiscal year 2009 compared to that reported in
the third quarter of fiscal year 2008. The increase is primarily due to
increased business development activity supporting all business segments
to continue the business growth of the Company.
Operating income for the third quarter of fiscal year 2009 was
$1,830,000, an increase of $284,000 (18%) compared to that reported in
the third quarter of fiscal year 2008. The increase is primarily due to
the improved financial performance of the Program Management business
segment during the quarter, which was, partially, offset by reduced
profitability in the Compliance and Environmental Programs business
segment as mentioned above.
Interest expense for the third quarter of fiscal year 2009 was
$21,000, a decrease of $56,000 over that reported in the third quarter
of fiscal year 2008. The decrease was due to the lower federal prime
interest rate and the fact that there was no off setting interest
income received on funds held by the Company in its bank account.
Income tax expense for the third quarter of fiscal year 2009 was
$704,000, an increase of $36,000 compared to that reported in the third
quarter of fiscal year 2008. The effective tax rates were 38% and 42%
for the third quarters of fiscal years 2009 and 2008, respectively.
Versar's net income for the third quarter of fiscal year 2009 was
$1,125,000 compared to $913,000 in the third quarter of fiscal year 2008,
a 23% increase compared to that reported in the same period last year.
14
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Nine Month Comparison of Fiscal Year 2009 and 2008
--------------------------------------------------
For the Nine-Month Periods Ended
---------------------------------
March 27, March 28,
2009 2008
---------------- ---------------
GROSS REVENUE
-------------
Program Management $ 54,310 $ 51,627
Compliance and Environmental Programs 15,146 23,784
Professional Services 8,012 5,938
National Security 7,348 5,762
---------------- ---------------
$ 84,816 $ 87,111
================ ===============
Gross revenue for the first nine months of fiscal year 2009 was
$84,816,000, a decrease of $2,295,000 (3%) over that reported in the first
nine months of fiscal year 2008. Gross revenue for the first nine months
of fiscal year 2009 in the Program Management business segment was
$54,310,000, an increase of $2,683,000 (5%) compared to that reported in
the first nine months of fiscal year 2008. The increase is attributable
to our efforts to support both the Air Force and the Army in Iraq and
Afghanistan as well as the Company's new business initiative in the
United Arab Emirates of approximately $1.6 million. Gross revenue for
the first nine months of fiscal year 2009 in the Compliance and
Environmental Programs business segment was $15,146,000, a decrease of
$8,638,000 (36%) compared to that reported in the first nine months of
fiscal year 2008. The decrease is primarily attributable to a decline
throughout fiscal year 2009 in the availability of work for municipal
aquatic facilities due to the current economic conditions. Gross
revenue for the first nine months of fiscal year 2009 in the Professional
Services business segment was $8,012,000, an increase of $2,074,000
(35%) compared to that reported in the first nine months of fiscal year
2008. The increase was attributable to a contract award received in the
fourth quarter of fiscal year 2008 with the U.S. Army to provide
additional professional services. Gross revenue for the first nine
months of fiscal year 2009 in the National Security business segment
was $7,348,000, an increase of $1,586,000 (28%) compared to that reported
in the first nine months of fiscal year 2008. The increase is
attributable to increased laboratory testing work during the first
nine months of fiscal year 2009.
Purchased services and materials decreased by $5,678,000 (11%) in
the first nine months of fiscal year 2009 compared to that reported in the
first nine months of fiscal year 2008. The decrease was attributable to
the decline in subcontracted work in the Compliance and Environmental
Programs business segment as a result of the decreased work for municipal
aquatic facilities as mentioned above.
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 $3,007,000 (12%) in the first nine months of fiscal
year 2009 compared to that reported in the first nine months of fiscal year
2008. The increase is due increased marketing and sales costs, staffing and
recruiting costs in support of the Company's business growth during the
third quarter of fiscal year 2009.
Gross profit for the first nine months of fiscal year 2009 was
$10,738,000, a $376,000 (4%) increase over that reported in the first nine
months of fiscal year 2008. The increase is attributable to the increased
gross revenues in the Program Management, Professional Services and
National Security business segments, which was, partially, offset, by the
poor operating performance in the Compliance and Environmental Programs
business segment.
15
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
For the Nine-Month Periods Ended
---------------------------------
March 27, March 28,
2009 2008
---------------- ---------------
GROSS PROFIT
-------------
Program Management $ 7,986 $ 6,980
Compliance and Environmental Programs 641 1,650
Professional Services 1,220 960
National Security 891 772
---------------- ---------------
$ 10,738 $ 10,362
================ ===============
Gross profit for the Program Management business segment for the first
nine months of fiscal year 2009 was $7,986,000, an increase of $1,006,000
(14%) compared to that reported in the first nine months of fiscal year
2008. The increase is due to the increased gross revenues and as a result
of cost reduction efforts and improved project profit margins. Gross
profit for the Compliance and Environmental Programs business segment for
the first nine months of fiscal year 2009 was $641,000, a decrease of
$1,009,000 (61%) compared to that reported in the first nine months of
fiscal year 2008. The decrease is due to poor operating performance
resulting from the impact of current economic conditions on the municipal
aquatic work previously done by this segment. Gross profit for the
Professional Services business segment was $1,220,000, an increase of
$260,000 (27%) compared to that reported in the first nine months of
fiscal year 2008. The increase is attributable to the increased gross
revenues as mentioned above. Gross profit for the National Security
business segment for the first nine months of fiscal year 2009 was
$891,000, an increase of $119,000 (15%) compared to that reported in the
first nine months of fiscal year 2008. The increase is due to increased
laboratory work and improved operating margins during the period.
Selling, general and administrative expenses increased by $877,000
during the first nine months of fiscal year 2009 compared to that reported
in the first nine months of fiscal year 2008. The increase is primarily
due to increased business development activity in support of all business
segments to continue the business growth of the Company as well as Sarbanes
Oxley compliance costs.
Operating income for the first nine months of fiscal year 2009 was
$3,979,000, a $501,000 (11%) decrease compared to that reported in the
first nine months of fiscal year 2008. The decrease is due to the
reduced revenues and operating performance in the Company's Compliance
and Environmental Programs business segment and increased selling, general
and administrative costs.
During the first quarter of fiscal year 2009, the Company recorded
a $326,000 loss on marketable securities the Company was holding in the
FISCO Income Plus Funds. The FISCO fund received an immediate demand
margin call from its broker, UBS. Rather than allow the fund the
customary time to satisfy the margin call at the end of the day, UBS
demanded the fund cover all calls and puts at high premiums immediately
or indicated it would take control of the fund and start liquidating the
fund itself. The fund has terminated its relationship with UBS and
transferred the assets to a new custodian. The fund currently is taking
legal action against UBS to cover its losses. The Company will
participate in any recovery from any such action. The Company has
reallocated its remaining assets from marketable securities to its
primary bank due to the volatile nature of the market.
Interest expense for the first nine months of fiscal year 2009
was $40,000, a decrease of $191,000 compared to that reported in the
first nine months of fiscal year 2008. The decrease was due to lower
interest rates and a decline in cash balances maintained with the
Company's bank.
Income tax expense for the first nine months of fiscal year 2009
was $1,399,000, a decrease of $557,000 compared to that reported in the
first nine months of fiscal year 2008. The effective tax rates were 39%
and 42%, for the first nine months of fiscal years 2009 and 2008,
respectively.
16
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Versar's net income for the first nine months of fiscal year
2009 was $2,214,000 compared to $2,675,000 in the first nine months of
fiscal year 2008. The decrease is due to the reduced revenues and
operating performance in the Company's Compliance and Environmental
business segment, increased selling, general and administrative costs
and the loss on marketable securities discussed above.
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of March 27, 2009 approximated
$24,545,000, an increase of $2,274,000 (10%) from June 27, 2008.
In addition, at March 27, 2009, the Company's current ratio was 2.73,
an improvement over the 2.67 current ratio reported on June 27, 2008.
The increase was due to increases in current assets during the first
nine months of fiscal year 2009.
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% (2.75% as of March 27, 2009).
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 was reduced to
$455,147 in January 2009. The letter of credit reduces the
Company's availability on the line of credit. Availability under
the line of credit at March 27, 2009 was approximately $7.0 million.
There are no borrowings outstanding under the line of credit as of
March 27, 2009. Obligations under the credit facility are
guaranteed by Versar and each subsidiary individually and are
secured by accounts receivable, equipment and intangibles, plus
all insurance policies on property constituting collateral of Versar
and its subsidiaries. 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 March 27, 2009.
Management believes that the current cash balance of over $5.2
million along with anticipated cash from operations and existing
availability under the line of credit, are sufficient to meet its
liquidity needs within the next year. Expected capital requirements
for the remainder of fiscal year 2009 are approximately $200,000
primarily to maintain our existing information technology systems
and software applications. Such capital requirements will be funded
through existing working capital.
The global economic business downturn has primarily impacted our
commercial and state and municipal work in our Compliance and
Environmental Programs business segment. As such, we are adjusting
the Company's cost structure to minimize the impact to the overall
Company financial performance.
The Company's cash balances held with United Bank have decreased
by approximately $6.7 million, primarily a result of increased
receivables of $9.4 million. The increase in receivables resulted
from a change in certain contract vehicles, which resulted in an
increase in the number of days our invoices remain outstanding for
payment. The Company also paid approximately $1.5 million in taxes
for fiscal year 2008 and estimated taxes for fiscal year 2009. We do
not anticipate that this trend will continue.
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 the 2008 fiscal year.
17
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Revenue recognition: Contracts in process are stated at the lower
of actual costs incurred plus accrued profits or incurred 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. Revisions to such
estimates are made when they become known.
There is the possibility that there will be currently unforeseeable
adjustments to our estimated contract revenues, costs and margins for
fixed price contracts in the future, particularly in the later stages of
these contracts. 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.
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.
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.
Asset retirement obligation: The Company has 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 approximately $180,000 to
$190,000 per year over the next 2 1/2 years. The Company is
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 higher
than expected or the likelihood of recovery from the U.S. Army is
remote, such adjustments will be reflected when they become known
in accordance with SFAS 143. At March 27, 2009, the Company has
accrued approximately $574,000 long-term liability to clean up the
chemical laboratory.
Goodwill and other intangible assets: The carrying value of
goodwill is approximately $776,000. 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 on an annual basis. An analysis is
performed on public companies and company transactions to prepare
a market-based valuation. Based upon the latest analysis as of
June 27, 2008, the estimated fair value of the Program Management
business segment exceeded 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.
New accounting pronouncements: In September 2006, the Financial
Accounting Standard Board ("FASB") issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008, FASB
issued FASB Staff Position ("FSP") No. FAS 157-2, Effective Dates of
FASB Statement No. 157, which deferred the effective date of SFAS 157
for all nonrecurring fair value measurements of nonfinancial assets and
liabilities until fiscal
18
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
years beginning after November 15, 2008. In October 2008, the FASB also
issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active, which clarifies the
application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value
of a financial asset when the market of that financial asset is not
active. The FSP observes that revisions resulting from a change in
valuation technique or its application should be accounted for as a
change in accounting estimate, and any effects on fair-value
measurement would be recognized in the period of adoption. Our
adoption of SFAS 157 on December 29, 2008 was limited to financial
assets and liabilities and had no impact on our condensed consolidated
financial statements in the first nine months of fiscal 2009. We are
currently evaluating the anticipated effect of this statement on the
non-financial assets and non-financial liabilities in our consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an Amendment of FASB Statement No. 115
("SFAS 159"). SFAS 159 permits entities to measure many financial
instruments and certain other items at fair value to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge
accounting. Most of the provisions in SFAS 159 are elective and may
be applied prospectively. Early adoption is permitted, provided the
Company also elects to apply the provisions of SFAS 157. The Company
has adopted the provisions of SFAS 159 in fiscal year 2009 and determined
that there was no material impact on its financial position, results of
operations or cash flows.
In April 2008, the Financial Accounting Standards board issued FASB
Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of
Intangible Assets," to provide guidance for determining the useful life of
recognized intangible assets and to improve consistency between the period
of expected cash flows used to measure the fair value of a recognized
intangible asset and the useful life of the intangible asset as determined
under FASB Statement 142, Goodwill and Other Intangible Assets. The FSP
requires that an entity consider its own historical experience in renewing
or extending similar arrangements. However, the entity must adjust that
experience based on entity-specific factors included in Statement 142. If
the Company lacks historical experience to consider for similar
arrangements, it would consider assumptions that market participants would
use about renewal or extension, as adjusted for the entity-specific factors
under Statement 142. The Company will adopt FSP FAS 142-3 in fiscal year
2010. The Company believes that upon adoption, FSP FAS 142-3 will not have
an effect on the Company's financial statements.
In November 2008, the Financial Accounting Standards Board ratified
a consensus opinion reached by the Emerging Issues Task Force (EITF) on
EITF Issue 08-6, "Equity Method Investment Accounting Considerations,"
to clarify accounting and impairment considerations involving equity
method investments after the effective date of both FASB Statement 141
(revised 2007), Business Combinations, and FASB Statement 160,
Noncontrolling Interests in Consolidated Financial Statements. EITF
Issue 08-6 includes the Task Force's conclusions on how an equity
method investor should (1) initially measure its equity method investment,
(2) account for impairment charges recorded by its investee, and
(3) account for shares issued by the investee. EITF Issue 08-6 is
effective for fiscal years beginning on or after December 15, 2008.
The Company intends to adopt EITF Issue 08-6 effective January 1, 2009
on a prospective basis. The Company does not currently have any
investments that are accounted for under the equity method and as a
result, does not believe the adoption of EITF Issue 08-6 will have
a significant effect on its financial statements.
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
include provisions 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).
19
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Business Segments
Versar currently has four business segments: Program Management,
Compliance and Environmental Programs, Professional Services, and
National Security. See Note J of the Notes to the Consolidated
Financial Statements for details regarding these segments.
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 4T - Controls and Procedures
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
have 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 1A - Risk Factors
The risk factors discussed in Part 1, "Item 1A. Risk Factors," in
our Annual Report on Form 10-K for the year ended June 27, 2008, should
be considered in conjunction with the other information set forth in this
quarterly report on Form 10-Q.
If our partners fail to perform their contractual obligations on
a project, we could be exposed to legal liability, loss of reputation or
reduced profits.
We, from time to time, enter joint venture agreements and other
contractual arrangements with outside partners to jointly bid on and
execute a particular project. The success of these joint projects
depends in part on the satisfactory performance of the contractual
obligations of our partners. If any of our partners fail to
satisfactorily perform their contractual obligations, we may be
required to make additional investments and provide additional services
to complete projects, increasing our cost on those projects. If we are
unable to adequately address a partner's performance issues, then our
client could terminate the joint project, exposing us to legal liability,
loss of reputation or reduced profits.
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Item 6 - Exhibits
(a) Exhibits
Exhibit No. Description Reference
----------- ----------- ---------
10.1* Employment Agreement between Charles S. Cox and
Versar, Inc. entered into on February 2, 2009
and effective as of January 3, 2009. (A)
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.
_______________________
* Indicates management contract or compensatory plan or arrangement.
(A) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 8-K Current Report dated February 2, 2009 filed
with the Commission on February 4, 2009.
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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: May 11, 2009
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