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 31, 2006
------------------
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,
and accelerated filer, or a non-accelerated filer (see definition of
accelerated filer and large filer in Rule 12b-2 of the Exchange Act).
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 April 28, 2006
--------------------- -----------------------------
$.01 par value 8,085,355
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 2006 and July 1, 2005 3
Consolidated Statements of
Operations for the Three-Month and
Nine-Month Periods Ended March 31,
2006 and April 1, 2005 4
Consolidated Statements of Cash
Flows for the Nine-Month Periods
Ended March 31, 2006 and April 1, 2005 5
Notes to Consolidated Financial Statements 6-12
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 13-19
ITEM 3 - Quantitative and Qualitative Disclosures
About Market Risk 19
ITEM 4 - Procedures and Controls 19
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19-20
ITEM 6 - Exhibits 20
SIGNATURES 21
EXHIBITS 22-25
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 31, July 1,
2006 2006
--------------- ----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,261 $ 132
Accounts receivable, net 11,019 14,577
Prepaid expenses and other current assets 1,532 2,017
Deferred income taxes 765 308
--------------- ----------------
Total current assets 15,577 17,034
Property and equipment, net 1,858 1,855
Deferred income taxes 945 457
Goodwill 776 776
Other Assets 796 790
--------------- ----------------
Total assets $ 19,952 $ 20,912
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ --- $ 777
Accounts payable 2,505 3,958
Billings in excess of revenue 324 ---
Accrued salaries and vacation 1,803 1,490
Other liabilities 1,531 2,642
Liabilities of discontinued operations, net 234 280
--------------- ----------------
Total current liabilities 6,397 9,147
Other long-term liabilities 968 1,041
Liabilities of discontinued operations, net --- 172
--------------- ----------------
Total liabilities 7,365 10,360
--------------- ----------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 8,086,405 shares and
7,924,116 shares issued March 31, 2006
and July 1, 2005, respectively; 8,070,900
and 7,908,611 shares outstanding at
March 31, 2006 and July 1, 2005, respectively 81 79
Capital in excess of par value 22,606 22,119
Accumulated deficit (10,028) (11,574)
Treasury stock (72) (72)
--------------- ----------------
Total stockholders' equity 12,587 10,552
--------------- ----------------
Total liabilities and stockholders'
equity $ 19,952 $ 20,912
=============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
------------------------------ ------------------------------
March 31, April 1, March 31, April 1,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
GROSS REVENUE $ 12,974 $ 14,921 $ 43,047 $ 52,835
Purchased services and materials, at cost 4,639 6,098 17,142 26,176
-------------- -------------- -------------- --------------
NET SERVICE REVENUE 8,335 8,823 25,905 26,659
Direct costs of services and overhead 6,912 7,000 20,817 20,724
Selling, general and administrative expenses 1,437 1,517 4,269 4,571
-------------- -------------- -------------- --------------
OPERATING (LOSS) INCOME (14) 306 819 1,364
OTHER EXPENSE
Interest expense 19 23 13 46
Income tax (benefit) (945) --- (945) ---
-------------- -------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS 912 283 1,751 1,318
LOSS FROM DISCONTINUED OPERATIONS --- (185) (205) (392)
-------------- -------------- -------------- --------------
NET INCOME $ 912 $ 98 $ 1,546 $ 926
============== ============== ============== ==============
INCOME PER SHARE FROM CONTINUING
OPERATIONS - BASIC $ 0.11 $ 0.04 $ 0.22 $ 0.17
============== ============== ============== ==============
INCOME PER SHARE FROM CONTINUING
OPERATIONS - DILUTED $ 0.11 $ 0.03 $ 0.21 $ 0.16
============== ============== ============== ==============
NET INCOME PER SHARE - BASIC $ 0.11 $ 0.01 $ 0.19 $ 0.12
============== ============== ============== ==============
NET INCOME PER SHARE - DILUTED $ 0.11 $ 0.01 $ 0.19 $ 0.11
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 8,071 7,914 8,038 7,879
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 8,336 8,302 8,343 8,306
============== ============== ============== ==============
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 31, April 1,
2006 2005
---------------- ----------------
Cash flows from operating activities
Income from continuing operations $ 1,751 $ 1,318
Loss from discontinued operations (205) (392)
---------------- ----------------
Net income 1,546 926
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 573 555
Loss on sale of property and equipment 30 ---
Provision for doubtful accounts receivable (34) 15
Share based compensation 47 ---
Decrease in tax valuation allowance (945) ---
Changes in assets and liabilities
Decrease in accounts receivable 3,592 1,575
Decrease (increase) in prepaids and other assets 474 (1,038)
Decrease in accounts payable (1,453) (541)
Increase (decrease) in accrued salaries and vacation 313 (36)
Decrease in other liabilities (860) (59)
---------------- ---------------
Net cash provided by continuing operating activities 3,283 1,397
---------------- ---------------
Changes in net liabilities of discontinued operations (218) (151)
---------------- ---------------
Net cash provided by operating activities 3,065 1,246
---------------- ---------------
Cash flows used in investing activities
Purchase of property and equipment (542) (432)
(Increase) in life insurance policies cash surrender value (59) (33)
---------------- ---------------
Net cash used in investing activities (601) (465)
---------------- ---------------
Cash flows from financing activities
Net payments on bank line of credit (777) ---
Proceeds from issuance of common stock 442 195
---------------- ---------------
Net cash (used in) provided by financing activities (335) 195
---------------- ---------------
Net increase in cash and cash equivalents 2,129 976
Cash and cash equivalents at the beginning of the period 132 817
---------------- ---------------
Cash and cash equivalents at the end of the period $ 2,261 $ 1,793
================ ===============
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest $ 83 $ 54
Income taxes 34 41
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 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. The
accompanying consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all of the
disclosures normally required by generally accepted accounting principles or
those normally made in the Company's Annual Report on Form 10-K filed with
the United States Securities and Exchange Commission. These financial
statements should be read in conjunction with the Company's Annual Report
filed on Form 10-K/A for the year ended July 1, 2005 for additional
information. In the opinion of management, the information reflects all
adjustments necessary for a fair presentation of the Company's consolidated
financial position as of March 31, 2006, and the results of operations for
the nine-month periods ended March 31, 2006 and April 1, 2005. The results
of operations for such periods, however, are not necessarily indicative of
the results to be expected for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from
those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred
plus accrued profits or net estimated realizable value of incurred costs,
reduced by progress billings. The Company records income from major fixed-
price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed and
revisions are made as required. The effects of these revisions are included
in the periods in which the revisions are made. On cost-plus-fee contracts,
revenue is recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material contracts, revenue is
recognized to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. Losses on contracts are
recognized when they become known. Disputes arise in the normal course of
the Company's business on projects where the Company is contesting with
customers for collection of funds because of events such as delays, changes
in contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change orders in
the process of negotiation, are recorded at the lesser of their estimated net
realizable value or actual costs incurred and only when realization is
probable and can be reliably estimated. Claims against the Company are
recognized where loss is considered probable and reasonably determinable in
amount. Management reviews outstanding receivables on a regular basis and
assesses the need for reserves taking into consideration past collection
history and other events that bear on the collectibility of such receivables.
(D) Income Taxes
At March 31, 2006, the Company had approximately $4.0 million in
deferred tax assets which primarily relate to net operating loss and tax
credit carryforwards. Since the Company had experienced losses in previous
years, management recorded a valuation allowance of approximately $2.3
million against the net deferred tax asset. The valuation allowance is
adjusted periodically based upon management's assessment of the Company's
ability to derive benefit from the deferred tax assets. In the third quarter
of fiscal year 2006, the Company decreased the tax valuation allowance by
$945,000 due to an improved history of earnings, significant reductions in
fixed costs and
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
recent contract wins, which should enhance profitability in future years. As
such, the net deferred tax asset of $1.7 million represents an amount that
management believes more likely than not will benefit future periods. This
also provides a greater assurance that the Company will be able to utilize
the tax assets in future periods.
(E) Debt
The Company has a line of credit facility with United Bank (the Bank)
that provides for advances up to $5,000,000 based upon qualifying
receivables. Interest on borrowings is based on the prime rate of interest
(7.75% as of March 31, 2006). As of March 31, 2006, there were no borrowings
outstanding under the line of credit and had borrowing capacity under the
line of credit of $5,000,000. Obligations under the credit facility are
guaranteed by the Company and each subsidiary individually and collectively
secured by accounts receivable, equipment and intangibles, plus all insurance
policies on property constituting collateral. The credit facility matures in
November 2007. The line of credit is subject to certain covenants related to
the maintenance of financial ratios. These covenants require a minimum
tangible net worth of $8,500,000, a maximum total liabilities to tangible net
worth ratio not to exceed 2.5 to 1; and a minimum current ratio of at least
1.25 to 1. Failure to 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
March 31, 2006, the Company was in compliance with the financial covenants.
(F) Discontinued Operations and Restructuring Charges
In fiscal year 1998, the Company discontinued a significant portion of
the operations of Science Management Corporation (SMC). Since 1998, the
Company has disposed of substantially all of the remaining assets and
liabilities of SMC. At December 30, 2005, there was a $205,000 reserve
set aside to cover the additional cost to wind down the SMC pension plan
and fully fund the pension plan in accordance with the PBGC requirements
for settling the remaining benefit plan obligations of SMC. The Company
is in the process of locating eligible participants in the pension plan and
intends to make a final distribution as early as administratively practical.
In the fourth quarter of fiscal year 2005, management approved a plan
to discontinue the operations of its biological laboratory facilities due to
lack of business volume, market concentration and poor operating performance.
The Company recorded $420,000 facility termination costs at the end of fiscal
year 2005. In fiscal year 2006, the Company sublet the laboratory facility
and completely satisfied the equipment leases. At March 31, 2006, there were
approximately $22,000 net liability remaining to wind down the Company's
existing obligations. Management believes the balance is adequate to satisfy
the remaining obligations.
(G) Contingencies
Versar and its subsidiaries are parties to various legal actions
arising in the normal course of business. The Company believes that the
ultimate resolution of these legal actions will not have a material adverse
effect on its consolidated financial position and results of operations.
(See Part II, Item 1 - Legal Proceedings).
In March 2006, the Company entered into a new master lease for its
headquarters facility in Springfield, Virginia. The new lease reduced the
prior leased square footage by 19,000 square feet to 47,222 square feet. The
rent is subject to two and one-half percent escalation per year through June
30, 2016. As a result of the new lease, the Company reversed the $154,000
vacant space reserve, which was set up in prior years to reduce the leased
space and is no longer required.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, P.C. subsequently renamed Versar Global Solutions, Inc. or VGSI.
The transaction was accounted for as a purchase. Goodwill resulting from
this transaction was approximately $1.1 million. In fiscal year 2003, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" which eliminated the amortization of
goodwill, but requires the Company to test such goodwill for impairment
annually. Currently, the carrying value of goodwill is approximately
$776,000 relating to the acquisition of VGSI, which is now part of the
Infrastructure and Management Services (IMS) reporting unit. The IMS
business segment was combined with the Engineering and Construction business
segment during fiscal year 2005 and continues to operate under the IMS
segment name, because many of the services provided were similar to the
Company's remediation business, and the two segments shared similar customers
and business opportunities, and were duplicative in nature. This combination
provided a more efficient use of resources and more effective management of
the business operations. In performing its goodwill impairment analysis,
management has utilized a market-based valuation approach to determine the
estimated fair value of the IMS reporting unit. Management engages outside
professionals and valuation experts, as necessary, to assist in performing
this analysis. An analysis was performed on public companies and company
transactions to prepare a market-based valuation. Based upon the analysis as
of July 1, 2005, the estimated fair value of the IMS reporting unit was $23
million which is in excess of the carrying amount of the net assets of the
reporting unit by a substantial margin.
On April 15, 2005, the Company acquired the Cultural Resources Group
from Parsons Infrastructure & Technology Group, Inc., a subsidiary of Parsons
Corporation for a purchase price of approximately $260,000 in cash. The
Cultural Resources Group, based in Fairfax County, Virginia provides
archaeological, cultural and historical services to federal, state and
municipal clients across the country. The acquisition will expand the
Company's existing and future capabilities in cultural resources work. Their
expertise will enhance and compliment Versar's environmental core business.
The Cultural Resources Group was incorporated into the Company's IMS segment.
As part of the acquisition, the Company entered into a two year marketing
agreement with Parsons to give Versar the first right of refusal to certain
Parsons cultural resources work from existing Parsons' clients. Thereafter,
this agreement is annually renewable upon the agreement of both parties.
Approximately $25,000 of the purchase price was allocated to fixed assets,
with the remaining balance allocated to contract rights which are being
amortized over three years.
(I) Net Income Per Share
Basic net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per common share also includes the assumed exercise or
conversion of common stock equivalents outstanding during the period, if
dilutive. The Company's common stock equivalents consist of stock options.
For the Three-Month Periods Ended For the Nine-Month Periods Ended
------------------------------------ -----------------------------------
March 31, April 1, March 31, April 1,
2006 2005 2006 2005
---------------- ---------------- ---------------- ---------------
Weighted average
common shares
outstanding - basic 8,071,030 7,914,442 8,037,668 7,879,293
Assumed exercise of
options (treasury
stock method) 264,872 387,129 305,169 426,660
---------------- ---------------- ---------------- ---------------
Weighted average
common shares
outstanding - diluted 8,335,902 8,301,571 8,342,837 8,305,953
================ ================ ================ ===============
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(J) Common Stock
The Company issued 162,289 shares of common stock upon the exercise of
stock options during the first nine months of fiscal year 2006. Total
proceeds from the exercise of such stock options was approximately $440,000.
Effective January 1, 2005, the Company implemented an Employee Stock
Purchase Plan (ESPP) to allow eligible employees of Versar the opportunity to
acquire an ownership interest in the Company's common stock. Through the
Plan, employees initially purchased shares of Versar common stock from the
open market at 90% of its fair market value. The plan was modified,
effective January 1, 2006, to increase the purchase price to 95% of fair
market value to address certain issues raised under Statement of Financial
Accounting Standard ("SFAS") 123 (Revised 2004), "Share-Based Payment". The
Plan qualifies as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code.
(K) Stock-Based Compensation
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
share units and performance based awards, may be granted to directors,
officers and employees of the Company and its affiliates. Only employees may
receive stock options classified as "incentive stock options", also known as
"ISO". 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 be
granted more than 100,000 shares of Common Stock during the term of the 2005
Plan. The 2005 Plan awards in this plan will terminate in September 2015.
In November 2002, the stockholders approved the Versar, Inc. 2002 Stock
Incentive Plan (the 2002 Plan). The 2002 Plan provides for the grant of
options, restricted stock and other types of stock-based awards to any
employee, service provider or director to whom a grant is approved from time
to time by the Company's Compensation Committee. A "service provider" is
defined for purposes of the 2002 Plan as an individual who is neither an
employee nor a director of the Company or any of its affiliates but who
provides the Company or one of its affiliates substantial and important
services. The aggregate number of shares of the Company's Common Stock that
may be issued upon exercise of options or granted as restricted stock or
other stock-based awards under the 2002 Plan is 700,000. Grants of
restricted stock, performance equity awards, options and stock appreciation
rights in any one fiscal year to any one participant may not exceed 250,000
shares. The maximum amount of compensation that may be received by any one
employee with respect to performance unit grants in any one fiscal year may
not exceed $250,000.
In November 1996, the stockholders approved the Versar 1996 Stock
Option Plan (the 1996 Plan) to provide employees and directors of the Company
and certain other persons an incentive to remain as employees of the Company
and to encourage superior performance. The Company also maintains the Versar
1992 Stock Option Plan (the "1992 Plan") and the Versar 1987 Stock Option
Plan (the "1987 Plan"). Options to purchase all shares of common stock
reserved under these plans have been granted.
Under the 1996 Plan, which expires in November 2006, options may be
granted to key employees, directors and service providers at the fair market
value on the date of grant. The vesting of each option will be determined by
the Administrator of the Plan. Each option expires on the earlier of the
last day of the tenth year after the date of grant or after expiration of a
period designated in the option agreement.
Under the 1992 Plan and through the expiration of the 1992 Plan in
November 2002, options were generally granted to key employees at the fair
market value on the date of grant and became exercisable during the ten-year
period from the date of the grant at 20% per year. Options were granted with
a ten year term and expired if
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
not exercised by the tenth anniversary of the grant date. The 1992 plan has
expired and no additional options may be granted. The Company will continue
to maintain the plan until all previously granted options have been
exercised, forfeited or expire.
Effective July 1, 2005, the Company adopted the Financial Accounting
Standards Board (FASB) SFAS No. 123 (Revised 2004), "Accounting for Stock-
Based Compensation" (SFAS 123(R)). This Statement revises SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and generally requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (the "fair-value-based" method). As a result a
compensation expense of $47,000 for the nine months of fiscal year 2006 was
included in the Company's Consolidated Statements of Operations.
On June 21, 2005, the Board of Directors of the Company accelerated the
vesting of certain previously awarded unvested and "out-of-the-money" stock
options that had an exercise price per share of $3.00 or more for all
employees and officers of the Company. The accelerated awards were
originally made under the Versar, Inc. 1996 Stock Option Plan and 2002 Stock
Incentive Plan. As a result, options to purchase 306,010 shares of the
Company's common stock became exercisable immediately. All other terms and
conditions applicable to the outstanding stock option grants remain in effect.
The closing price of the Company's Common Stock on the American Stock Exchange
on June 21, 2005 was $3.00. The acceleration of the out-of-the-money stock
options was effected in order to avoid as significant an impact from the
adoption of SFAS 123(R). Outstanding non-qualified stock options and
options held by non-employee directors were not included in the acceleration.
As a result of the acceleration, the Company reduced the amount of stock
compensation expense it otherwise would have been required to recognize
in its consolidated statements of income by approximately $124,000 over
the next four years on a pre-tax basis.
A summary of option activity under the Company's employee stock
incentive plans in the nine months ended March 31, 2006, is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Options Shares Exercise Contractual Value
(000) Price Term ($000)
--------------------------- --------------- ---------- ----------- ----------
Outstanding at July 1, 2005 1,690 $ 3.10
Granted 5 $ 3.20
Exercised (163) $ 2.72
Forfeited or cancelled (196) $ 3.20
--------------- ----------
Outstanding at march 31, 2006 1,336 $ 3.18 5.9 $ 2,362
=============== ========== =========== ===========
Exercisable at March 31, 2006 1,164 $ 3.19 6.0 $ 2,077
=============== ========== =========== ===========
As of March 31, 2006, there were approximately 172,000 unvested options
to purchase common stock under the plans. The total fair value of these
unvested options was approximately $285,000. An estimated compensation cost
of $64,000 is expected to be recognized over 5 years.
For periods prior to the adoption of SFAS 123R, the Company accounts
for employee stock option grants using the intrinsic method in accordance
with Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly compensation
expense, if any, is measured as the excess of the underlying stock price over
the exercise price on the date of grant. The Company complies with the
disclosure option of Statement of Financial Accounting Standards (SFAS) No.
123 "Accounting for Stock-Based Compensation", as amended by SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
requires pro-forma disclosure of compensation expense associated with stock
options under the fair value method.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Company's pro forma information follows (in thousands, except per
share data):
For the Three-Month For the Nine-Month
Periods Ended April 1, Periods Ended April 1,
------------------------ ------------------------
2005 2005
------------------------ ------------------------
Net income, as reported $ 98 $ 926
Less: Total Stock-Based
Compensation determined
under the fair-value based
method (130) (334)
Pro-forma net income (32) 592
Net income per share - basic,
as reported $ 0.01 $ 0.12
Pro-forma net income per
share - basic $ --- $ 0.08
Net income per share - diluted,
as reported $ 0.01 $ 0.11
Pro-forma net income per share $ --- $ 0.07
(L) Business Segments
The Company's two business segments are Infrastructure and Management
Services and National Security. The Infrastructure and Management Services
segment provides a full range of services including remediation/corrective
actions, site investigations, remedial designs, construction, operation and
maintenance of remedial systems, and engineering, design and construction
management to industrial, commercial and government facilities. The National
Security segment provides expertise in developing, testing and providing
personal protection equipment.
In fiscal year 2005, Versar combined the Infrastructure and Management
Services and the former Engineering and Construction business segment because
many of the services provided were similar to the Company's remediation
business, and the two segments shared similar customers and business
opportunities, and were duplicative in nature. The combination provided a
more efficient use of resources and more effective management of the business
operations, given the cyclical nature of the former Engineering and
Construction business segment. The Company now evaluates the business along
the two business lines described above. The prior year segment information
has been restated to conform to the new presentation.
The Company evaluates and measures the performance of its business
segments based on net service revenue and operating income. As such,
selling, general and administrative expenses, interest and income taxes have
not been allocated to the Company's business segments.
11
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary financial information for each of the Company's segments
follows:
For the Three-Month Periods Ended For the Nine-Month Periods Ended
------------------------------------ -----------------------------------
March 31, April 1, March 31, April 1,
2006 2005 2006 2005
---------------- ---------------- ---------------- ---------------
NET SERVICE REVENUE
-------------------
Infrastructure and
Management Services $ 6,860 $ 7,149 $ 21,659 $ 22,253
National Security 1,475 1,674 4,246 4,406
---------------- ---------------- ---------------- ---------------
$ 8,335 $ 8,823 $ 25,905 $ 26,659
================ ================ ================ ===============
OPERATING INCOME (A)
--------------------
Infrastructure and
Management Services $ 1,037 $ 1,387 $ 4,148 $ 5,060
National Security 386 436 940 875
---------------- ---------------- ---------------- ---------------
1,423 1,823 5,088 5,935
Selling, general and
administrative
expenses (1,437) (1,517) (4,269) (4,571)
---------------- ---------------- ---------------- ---------------
OPERATING (LOSS)
INCOME (A) $ (14) $ 306 $ 819 $ 1,364
================ ================ ================ ===============
Operating income is defined as net revenue less direct costs of services and overhead.
IDENTIFIABLE ASSETS March 31, July 1,
------------------- 2006 2005
------------------ ----------------
Infrastructure and Management Services $ 11,212 $ 14,817
National Security 1,847 1,738
Corporate and Other 6,893 4,357
------------------ ----------------
Total Assets $ 19,952 $ 20,912
================== ================
12
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial trends
----------------
During the third and fourth quarters of fiscal year 2005, gross
revenues on major construction projects declined compared to the first half
of the fiscal year, due to delays in obtaining follow-on and new projects.
The resulting reduction in gross revenues along with the delay in resolution
of several construction change orders had a negative effect on the Company's
operating results for the second half of fiscal year 2005. Additionally,
during 2005, there were delays in contract funding for the Environmental
Protection Agency and certain delays with civilian agencies because of
diversion of funds for the war effort and the announcement of additional
military base closings by the BRAC commission, which cancelled project
funding of approximately $5 million.
During much of the first quarter of 2006, the Company continued to
experience reduced gross revenues as a result of continuing effects of the
delays and other factors that impacted the last half of fiscal year 2005.
However, late in the first quarter of fiscal year 2006, the Company increased
its funded contract backlog from $31 million as reported at July 1, 2005 to
$40 million at September 30, 2005, primarily due to the release of several
construction projects, the award of an additional $3 million contract for
construction oversight in Iraq and increased activity at the government
fiscal year end. Late in the third quarter of fiscal year 2006, with the
award of the Army's professional services contract, funded backlog increased
to $48 million as of March 31, 2006. In addition, the Company has over $16
million of pending large construction projects that as of yet have not been
funded by the government. Subsequent to the third quarter end, $9.6 million
of the $16 million of funding was received. We anticipate that with the
current level of funded backlog, that quarterly gross revenues will increase
during the fourth quarter of the fiscal year as compared to that reported for
the first nine months of fiscal 2006. However, for the Company to foster and
sustain growth, it must win additional follow-on projects and additional new
contracts to keep funded contract backlog at levels that will support
continued growth. There can be no assurance that the Company's efforts to
grow the business base will be successful or that the Company will receive
sufficient contract awards to replace work as contracts are completed.
In fiscal year 2005, the Company discontinued the operations of its
biological laboratory primarily due to the continued poor operating
performance, market saturation and poor future business outlook. Such
results are presented as discontinued operations for financial statement
purposes and the liabilities of such operations have been segregated as the
Company winds down the business affairs of the laboratory.
There are a number of risk factors or uncertainties that could
significantly impact our financial performance including the following:
- General economic or political conditions;
- Threatened or pending litigation;
- The timing of expenses incurred for corporate initiatives;
- Employee hiring, utilization, and turnover rates;
- The seasonality of spending in the federal government and for
commercial clients;
- Delays in project contracted engagements;
- Unanticipated contract changes impacting profitability;
- Reductions in prices by our competitors;
- The ability to obtain follow on project work;
- Failure to properly manage projects resulting in additional
costs;
- The cost of compliance for the Company's laboratories;
13
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- The impact of a negative government audit potentially impacting
our costs, reputation and ability to work with the federal
government;
- Loss of key personnel;
- The ability to compete in a highly competitive environment; and
- Federal funding delays due to war in Iraq.
Results of Operations
---------------------
Third Quarter Comparison of Fiscal Year 2006 and 2005
-----------------------------------------------------
This report contains certain forward-looking statements which are
based on current expectations. Actual results may differ materially.
The forward-looking statements include those regarding the continued award
of future work or task orders from government and private clients, cost
controls and reductions, the expected resolution of delays in billing of
certain projects, and the possible impact of current and future claims
against the Company based upon negligence and other theories of liability.
Forward-looking statements involve numerous risks and uncertainties that
could cause actual results to differ materially, including, but not limited
to, the possibilities that the demand for the Company's services may decline
as a result of possible changes in general and industry specific economic
conditions and the effects of competitive services and pricing; the
possibility the Company will not be able to perform work within budget or
contractual limitations; one or more current or future claims made against
the Company may result in substantial liabilities; the possibility the
Company will not be able to attract and retain key professional employees;
changes to or failure of the Federal government to fund certain programs in
which the Company participates; and such other risks and uncertainties as
are described in reports and other documents filed by the Company from time
to time with the Securities and Exchange Commission.
Gross revenue for the third quarter of fiscal year 2006 was
$12,974,000, a $1,947,000 (13%) decrease over that reported in the third
quarter of fiscal year 2005. The decrease is attributable to reduced new
construction work and continued delayed project funding of over $16 million
in pending construction work in the Company's Infrastructure and Management
Services Business segment due to delays in federal funding and the diversion
of funds to the war in Iraq. Subsequent to the third quarter end, $9.6
million of the $16 million of funding was received. A large portion of these
revenues was primarily generated from purchased services and materials.
Purchased services and materials decreased by $1,459,000 (24%) in the
third quarter of fiscal year 2006 compared to that reported in the third
quarter of fiscal year 2005. The decrease was primarily the result of
reduced subcontracted construction work and delayed project funding as
discussed above.
Net service revenue is derived by deducting the costs of purchased
services and materials from gross revenue. Versar considers it appropriate
to analyze operating margins and other ratios in relation to net service
revenue, because such revenues reflect the actual work performed by the
Company's labor force. Net service revenues decreased by 6% in the third
quarter of fiscal year 2006 compared to that reported in the third quarter of
fiscal year 2005. The decrease was primarily due to the lower labor
utilization as a result of project funding delays which translated into lower
margins for the Company during the quarter, and the lower markup associated
with the reduced purchased services and materials as mentioned above.
Direct costs of services and revenue include the cost to Versar of
direct and overhead staff, including recoverable and unallowable costs that
are directly attributable to contracts. The percentage of these costs to net
service revenue increased to 82.9% in the third quarter of fiscal year 2006
compared to 79.3% in the third quarter of fiscal year 2005. The increase is
attributable to the reduced labor utilization, lower than anticipated
performance in the chemical laboratory, and the increases in costs related to
a performance based project in the Infrastructure and Management Services
Business segment.
14
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Selling, general and administrative expenses remained at approximated
17.2% of net service revenue in the third quarter of fiscal years 2006 and
2005.
Operating loss for the third quarter of fiscal year 2006 was $14,000
compared to operating income of $306,000 over the same period in fiscal year
2005. The decrease was due to the lower gross revenues, and purchased
services and higher direct costs of services in relation to the business
volume as mentioned above.
Interest expense for the third quarter of fiscal year 2006 was $19,000,
a reduction of $4,000 over that reported in the third quarter of fiscal year
2005. The interest expense is primarily for the financing of large insurance
premiums and capital leases as part of the normal operations of the business.
The Company continues to remain cash positive and did not utilize the
existing line of credit during the third quarter of fiscal year 2006.
In the third quarter of fiscal year 2006, the Company decreased the tax
valuation allowance by $945,000 due to an improved earnings history,
significant reductions in fixed costs and recent contract wins, which should
enhance profitability in future years. As such, the net deferred tax asset
of $1.71 million represents an amount that management believes more likely
than not will benefit future periods. This also provides a greater assurance
that the Company will be able to utilize the tax assets in future periods.
Income from continuing operations was $912,000 for the third quarter of
fiscal year 2006, an increase of $629,000 over that reported in the third
quarter of fiscal year 2005 as a result of tax benefit recorded in the
quarter due to the reduction of the tax valuation allowance as noted above.
Loss from discontinued operations for the third quarter of fiscal year
2005 was $185,000, which was due to the discontinuance of the Company's
biological laboratory operations in the fourth quarter of fiscal year 2005.
The results for the third quarter of fiscal year 2005 were adjusted to
reflect the discontinued operations of the biological laboratory.
Versar's net income for the third quarter of fiscal year 2006 was
$912,000 compared to $98,000 in the prior fiscal year. The improved earnings
were primarily attributable to the removal of the biological laboratory from
the operating results of the Company and the tax benefit recorded during the
quarter.
Nine Months Comparison of Fiscal Years 2006 and 2005
----------------------------------------------------
Gross revenues for the first nine months of fiscal year 2006 decreased
by $9,788,000 (19%) compared to the first nine months of fiscal year 2005.
The decrease is due to the decrease in construction work in fiscal year 2006
in the Infrastructure and Management Services business segment. The decrease
is attributable to the completion of two large construction projects in
fiscal year 2005. One project for $4.7 million was received late in the
third quarter of fiscal year 2005 and an additional $16 million remain
outstanding pending funding from the federal government. Subsequent to the
end of the third quarter, the Company has received $9.6 million of the $16
million of pending project funding. See "Financial Trends" for additional
discussion.
Purchased services and materials decreased by $9,034,000 (35%) in the
first nine months of fiscal year 2006 compared to that reported in the first
nine months of fiscal year 2005. As discussed above, with the completion of
the two large construction projects, there was decreased subcontractor
activity in the Infrastructure and Management Services segment, which
accounted for a majority of the reduction in purchased services and
materials.
Net service revenue decreased by 3% for the first nine months of fiscal
year 2006 primarily due to the reduced markup associated with the lower level
of purchased services and materials due to the delay in the award of
construction related projects.
15
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Direct costs of services as a percentage of net service revenue
increased to 80.4% in the first nine months of fiscal year 2006, compared to
77.7% in the first nine months of fiscal year 2005. The increase is due to
higher proposal costs, lower markup obtained from the reduced level of
purchased services and materials, and lower than expected financial
performance in the Company's chemical laboratory.
Selling, general and administrative expenses approximated 16.5% of net
service revenue for the first nine months of fiscal year 2006, compared to
17.1% in the prior fiscal year. The decrease is due to the consolidation of
certain administrative functions during fiscal year 2006.
Operating income for the first nine months of fiscal year 2006 was
$819,000, a $545,000 decrease over that reported in the prior fiscal year.
The decrease is primarily due to the decrease in gross revenues as a result
of reduced construction work and higher proposal costs in fiscal year 2006.
Interest expense for the first nine months was $13,000, a decrease of
$33,000 to that reported in the prior fiscal year. The decrease is
attributable to $25,000 of interest income associated with the resolution of
a receivable that was resolved in arbitration and improved cash flow of the
Company. The Company continues to finance certain insurance policies and
capital equipment, which will continue to incur interest costs in the future.
In the third quarter of fiscal year 2006, the Company decreased the tax
valuation allowance by $945,000 due to an improved earnings history,
significant reductions in fixed costs and recent contract wins, which should
enhance profitability in future years. As such, the net deferred tax asset
of $1.71 million represents an amount that management believes more likely
than not will benefit future periods. This also provides a greater assurance
that the Company will be able to utilize the tax assets in future periods.
Income from continuing operations for the first nine months of fiscal
year 2006 was $1,751,000, an increase of $433,000. The increase was
primarily due to the tax benefit recorded in the third quarter of fiscal year
2006.
Loss from discontinued operations in the first nine months of fiscal
year 2006 was $205,000, which resulted from additional costs to wind down the
SMC pension plan and to fully fund the plan in accordance with PBGC
requirements. The loss incurred from discontinued operations of $392,000
for the first nine months of fiscal year 2005 resulted from the
discontinuance of the Company's biological laboratory operations.
Net income for the first nine months of fiscal year 2006 was $1,546,000
compared to $926,000 in the first nine months of fiscal year 2005.
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of March 31, 2006 approximated
$9,180,000, an increase of $1,293,000 (16.4%). In addition, the Company's
current ratio was 2.44, which improved over the 1.86 reported at July 1,
2005. The improvement was primarily due to efforts to decrease accounts
receivable through improved collections, which improved the Company's cash
position and allowed it to repay its line of credit.
The Company has a line of credit facility with United Bank (the Bank)
that provides for advances up to $5,000,000 based upon qualifying
receivables. Interest on borrowings is based on the prime rate of interest
(7.75% as of March 31, 2006). As of March 31, 2006, there were no borrowings
outstanding under the line of credit and borrowing capacity under the line of
credit of $5,000,000. Obligations under the credit facility are guaranteed
by the Company and each subsidiary individually and collectively secured by
accounts receivable, equipment and intangibles, plus all insurance policies
on property constituting collateral. The credit facility matures in November
2007. The line of credit is subject to certain covenants related to the
maintenance of financial ratios. These covenants require a minimum tangible
net worth of $8,500,000, a maximum total liabilities to tangible net worth
ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to
1. Failure to meet the covenant
16
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 March 31, 2006, the Company was in
compliance with the financial covenants.
We believe that our current cash position, together with anticipated
cash flows and the renewal of the line of credit, will be sufficient to meet
the Company's liquidity needs within the next year. Expected capital
requirements for remainder of fiscal year 2006 are approximately $200,000,
primarily to maintain and upgrade our chemical laboratory and the Company's
computer systems. Such capital requirements will either be funded through
the existing working capital or will be financed through third party
financing sources. However, third party financing may not be available on
terms acceptable to us, or at all.
Critical Accounting Policies and Related Estimates That Have a Material
-----------------------------------------------------------------------
Effect on Versar's Consolidated Financial Statements
----------------------------------------------------
Below is a discussion of the accounting policies and related estimates
that we believe are the most critical to understanding the Company's
consolidated, financial position, and results of operations which require
management judgments and estimates, or involve uncertainties. Information
regarding our other accounting policies is included in the notes to our
consolidated financial statements included in our annual report filed on Form
10-K.
Revenue recognition: Contracts in process are stated at the lower of
actual costs incurred plus accrued profits or net estimated realizable value
of costs, reduced by progress billings. On cost-plus fee contracts, revenue
is recognized to the extent of costs incurred plus a proportionate amount of
fee earned, and on time-and material contracts, revenue is recognized to the
extent of billable rates times hours delivered plus material and other
reimbursable costs incurred. The Company records income from major fixed-
price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During the performance of such contracts,
estimated final contract prices and costs are periodically reviewed and
revisions are made as required. Fixed price contracts can be significantly
impacted by changes in contract performance, contract delays, liquidated
damages and 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.
There is the possibility that there will be future and currently
unforeseeable significant adjustments to our estimated contract revenues,
costs and margins for fixed price contracts, particularly in the later stages
of these contracts. It is most likely that such adjustments could occur in
our Engineering and Construction business segment. Such adjustments are
common in the construction industry given the nature of the contracts. These
adjustments could either positively or negatively impact our estimates due to
the circumstances surrounding the negotiations of change orders, the impact
of schedule slippage, subcontractor claims and contract disputes which are
normally resolved at the end of the contract. Adjustments to the financial
statements for such events are made when they are known.
Allowance for doubtful accounts: Disputes arise in the normal course
of the Company's business on projects where the Company is contesting with
customers for collection of funds because of events such as delays, changes
in contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change orders
in process of negotiation, are recorded at the lesser of their estimated
net realizable value or actual costs incurred and only when realization is
probable and can be reliably estimated. Claims against
17
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the Company are recognized where loss is considered probable and reasonably
determinable in amount. Management reviews outstanding receivables on a
regular basis and assesses the need for reserves, taking into consideration
past collection history and other events that bear on the collectibility of
such receivables.
Deferred tax valuation allowance: The Company has approximately $4.0
million in deferred tax assets of which a $2.3 million valuation allowance
has been established against such assets. Management provides for a
valuation allowance until such time as it can conclude more likely than not
that the Company will derive a benefit from such assets. In the third
quarter of fiscal year 2006, the Company decreased the tax valuation
allowance by $945,000 due to an improved history of earnings, significant
reductions in fixed costs and recent contract wins, which should enhance
profitability in future years. This also provides a greater assurance that
the Company will be able to utilize the tax assets in future periods. The
valuation allowance is adjusted as necessary based upon the Company's ability
to generate taxable income, including management's ability to implement tax
strategies that will enable the Company to benefit from such deferred tax
assets.
Goodwill and other intangible assets: On January 30, 1998, Versar
completed the acquisition of The Greenwood Partnership, P.C. subsequently
renamed Versar Global Solutions, Inc. or VGSI. The transaction was accounted
for as a purchase. Goodwill resulting from this transaction was
approximately $1.1 million. In fiscal year 2003, the Company adopted the
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" which eliminated the amortization of goodwill, but
requires the Company to test such goodwill for impairment annually.
Currently, the carrying value of goodwill is approximately $776,000 relating
to the acquisition of VGSI, which is now part of the Infrastructure and
Management Services (IMS) reporting unit. The IMS business segment was
combined with the Engineering and Construction business segment during fiscal
year 2005 and continues to operate under the IMS segment name, because many
of the services provided were similar to the Company's remediation business,
and the two segments shared similar customers and business opportunities, and
were duplicative in nature. This combination provided a more efficient use
of resources and more effective management of the business operations. In
performing its goodwill impairment analysis, management has utilized a
market-based valuation approach to determine the estimated fair value of the
IMS reporting unit. Management engages outside professionals and valuation
experts, as necessary, to assist in performing this analysis. An analysis
was performed on public companies and company transactions to prepare a
market-based valuation. Based upon the analysis, as of July 1, 2005, the
estimated fair value of the IMS reporting unit was $23 million which is in
excess of the carrying amount of the net assets of the reporting unit by a
substantial margin. As such, management concluded goodwill was not impaired.
On April 15, 2005, the Company acquired the Cultural Resources Group
from Parsons Infrastructure & Technology Group, Inc., a subsidiary of Parsons
Corporation for a purchase price of approximately $260,000 in cash. The
Cultural Resources Group, based in Fairfax County, Virginia provides
archaeological, cultural and historical services to federal, state and
municipal clients across the country. The acquisition will expand the
Company's existing and future capabilities in cultural resources work. Their
expertise will enhance and compliment Versar's environmental core business.
The Cultural Resources Group was incorporated into the Company's IMS segment.
As part of the acquisition, the Company entered into a two year marketing
agreement with Parsons to give Versar the first right of refusal to certain
Parsons cultural resources work from existing Parsons' clients. Thereafter,
this agreement is annually renewable upon agreement of both parties.
Approximately $25,000 of the purchase price was allocated to fixed assets,
with the remaining balance to be allocated to contract rights which are being
amortized over three years.
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.
18
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Commitments and Contingencies
-----------------------------
In September 2002, the Company recorded a non-recurring charge of
$800,000 to reduce the Company's overall cost structure and to reduce costs
in non-performing divisions. The costs included $450,000 for severance
payments to terminated employees and $350,000 for costs to restructure
certain leased facilities. At September 2005, all of the severance
obligations were satisfied. As of March 31, 2006, the remaining accrual was
reversed due to the Company's lease renewal in Springfield at reduced square
footage, which made the accrual no longer necessary.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes regarding the Company's market risk
position from the information provided on Form 10-K for the fiscal year end
July 1, 2005.
Item 4 - Procedures and Controls
As of the last day of the period covered by this report, the Company
carried out an evaluation, under the supervision of the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, as of such date, to ensure
that required information will be disclosed on a timely basis in its reports
under the Exchange Act.
Further, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures have been designed to
ensure that information required to be disclosed in reports filed by us under
the Exchange Act is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, in a manner to allow
timely decisions regarding the required disclosure.
There were no changes in the Company's internal control over financial
reporting during the last quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In August 1997, Versar entered into a contract with the Trustees for
the Enviro-Chem Superfund Site, which provided that, based upon an existing
performance specification, Versar would refine the design of, and construct
and operate a soil vapor extraction system. During the performance of the
contract, disputes arose between Versar and the Trustees regarding the scope
of work. Eventually, Versar was terminated by the Trustees for convenience.
The Trustees then failed to pay certain invoices and retainages due Versar.
On March 19, 2001, Versar instituted a lawsuit against the Trustees and
three environmental consulting companies in the U.S. District Court of the
Eastern District of Pennsylvania, entitled Versar, Inc. v. Roy O. Ball,
Trustee, URS Corporation, Environmental Resources Management and Environ
Corp., No. 01CV1302. Versar, in seeking to recover amounts due under the
remediation contract from the Trustees of the Superfund Site, claimed breach
of contract, interference with contractual relationships, negligent
misrepresentations, breach of good faith and fair dealing, unjust enrichment
and implied contract. Mr. Ball and several defendants moved to dismiss the
action or, in the alternative, transfer the action to the U.S. District Court
for the Southern District of Indiana, where, on April 20, 2001, the two
Trustees had filed suit against Versar in the U.S. District Court for the
Southern District of Indiana, entitled, Roy O. Ball and Norman W. Bernstein,
Trustees v. Versar, Inc., Case No. IPO1-0531 C H/G.
19
The Trustees alleged breach of contract and breach of warranty with respect
to the remediation contract and asked for a declaratory judgment on a number
of the previously stated claims.
On July 12, 2001, the Federal District Court in Pennsylvania granted
defendants' motion to transfer the Pennsylvania lawsuit and consolidate the
two legal actions in Indiana. The Company filed an answer and counterclaim
to the Indiana lawsuit. The plaintiffs and third-party defendants filed
Motions to Dismiss the Company's counterclaim. The court granted the motions
in part and denied them in part. Versar amended its answer and counterclaim.
In the meantime, plaintiffs filed a Motion for Partial Summary Judgment which
the Judge granted in part and denied in part. The Judge held that certain
agreements entered into by the parties prevented Versar from recovering
certain amounts under its counterclaim but that Versar could pursue its claim
for fraud in other areas. Written and oral discovery has continued for
several years. The court granted Versar's demand that the Trustees supply
requested information and documents, including electronic documents. Versar
continues to seek additional discovery compliance by the Trustees. Motions
for Summary Judgement have been filed and briefed by both parties. No trial
date is presently scheduled. Based upon discussions with outside counsel,
management does not believe that the ultimate resolution under the Trustees'
lawsuit will have a materially adverse effect on the Company's consolidated
financial condition and results of operations.
Versar and its subsidiaries are parties from time to time to various
other legal actions arising in the normal course of business. The Company
believes that any ultimate unfavorable resolution of these legal actions will
not have a material adverse effect on its consolidated financial condition
and results of operations.
Item 6 - Exhibits
(a) Exhibits
31.1 and 31.2 - Certification pursuant to Securities Exchange Act
Section 13a-14.
32.1 and 32.2 - Certification under Section 906 of the Sarbanes-
Oxley Act of 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSAR, INC.
-----------------------
(Registrant)
/S/ Theodore M. Prociv
By:__________________________
Theodore M. Prociv
Chief Executive Officer,
President, and Director
/S/ Lawrence W. Sinnott
By:__________________________
Lawrence W. Sinnott
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: May 11, 2006
21