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 December 29, 2006
-------------------------
[ ] 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
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Versar Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 54-0852979
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or orgnaization)
6850 Versar Center
Springfield, Virginia 22151
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703) 750-3000
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Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated 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 January 31, 2007
--------------------- -------------------------------
$.01 par value 8,147,364
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
December 29, 2006 and June 30, 2006 3
Consolidated Statements of Operations for the
Three-Month and Six-Month Periods Ended
December 29, 2006 and December 30, 2005 4
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended December 29, 2006
and December 30, 2005 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-18
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 18
ITEM 4 - Controls and Procedures 18
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 4 - Submission of Matters to a Vote of Stockholders 19
ITEM 6 - Exhibits 19
SIGNATURES 20
EXHIBITS 21-24
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 29, June 30,
2006 2006
--------------- ---------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 25 $ 140
Accounts receivable, net 19,943 16,227
Prepaid expenses and other current assets 868 1,430
Deferred income taxes 566 566
--------------- ---------------
Total current assets 21,402 18,363
Property and equipment, net 1,689 1,744
Deferred income taxes 1,144 1,144
Goodwill 776 776
Other assets 765 775
--------------- ---------------
Total assets $ 25,776 $ 22,802
=============== ===============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Bank line of credit $ 608 $ ---
Accounts Payable 4,313 4,691
Billings in excess of revenue 258 209
Accrued salaries and vacation 1,435 1,474
Other liabilities 3,989 2,585
Liabilities of discontinued
operations, net 199 285
--------------- ---------------
Total current liabilities 10,802 9,244
Other long-term liabilities 945 986
--------------- ---------------
Total liabilities 11,747 10,230
--------------- ---------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 8,155,192 shares and
8,144,692 shares issued; 8,139,687 and
8,129,187 shares outstanding at December
29, 2006 and June 30, 2006, respectively 82 81
Capital in excess of par value 22,891 22,790
Accumulated deficit (8,872) (10,227)
Treasury stock (72) (72)
--------------- ---------------
Total stockholders' equity 14,029 12,572
--------------- ---------------
Total liabilities and stockholders'
equity $ 25,776 $ 22,802
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month For the Six-Month
Periods Ended Periods Ended
------------------------- -------------------------
December 29, December 30, December 29, December 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
GROSS REVENUE $ 21,938 $ 16,571 $ 44,223 $ 30,073
Purchased services
and materials,
at cost 12,484 7,463 26,155 12,503
------------ ------------ ------------ ------------
NET SERVICE REVENUE 9,454 9,108 18,068 17,570
Direct costs of
services and overhead 6,986 7,030 13,452 13,905
Selling, general and
administrative expenses 1,691 1,381 3,188 2,832
------------ ------------ ------------ ------------
OPERATING INCOME 777 697 1,428 833
OTHER EXPENSE
Interest expense (income) 13 (26) 24 (6)
Income tax espense 15 --- 49 ---
------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS 749 723 1,355 839
LOSS FROM DISCONTINUED
OPERATIONS --- (205) --- (205)
------------ ------------ ------------ ------------
NET INCOME $ 749 $ 518 $ 1,355 $ 634
============ ============ ============ ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS
- BASIC $ 0.09 $ 0.09 $ 0.17 $ 0.10
============ ============ ============ ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS
- DILUTED $ 0.09 $ 0.09 $ 0.16 $ 0.10
============ ============ ============ ============
LOSS (PER SHARE) FROM
DISCONTINUED OPERATIONS
- DILUTED $ --- $ (0.02) $ --- $ (0.02)
============ ============ ============ ============
NET INCOME PER SHARE
- BASIC $ 0.09 $ 0.06 $ 0.17 $ 0.08
============ ============ ============ ============
NET INCOME PER SHARE
- DILUTED $ 0.09 $ 0.06 $ 0.16 $ 0.07
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- BASIC 8,154 8,053 8,151 8,021
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
- DILUTED 8,392 8,456 8,412 8,515
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Six-Month
Periods Ended
--------------------------------
December 29, December 30,
2006 2005
--------------- ---------------
Cash flows from operating activities
Income from continuing operations $ 1,355 $ 839
Loss from discontinued operations --- (205)
Net income 1,355 634
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Depreciation and amortization 354 374
Loss on sale of property and equipment --- 9
Provision for doubtful accounts
receivable 26 (11)
Share based compensation 77 21
Changes in assets and liabilities
(Increase) decrease in accounts
receivable (3,742) 1,544
Decrease in prepaids and other assets 585 794
(Decrease) increase in accounts payable (378) 368
Decrease in accrued salaries and vacation (39) (84)
Increase (decrease) in other liabilities 1,413 (364)
--------------- ---------------
Net cash (used in) provided by
continuing operating activities (349) 3,285
--------------- ---------------
Changes in net liabilities of
discontinued operations (86) (27)
--------------- ---------------
Net cash (used in) provided by
operating activities (435) 3,258
--------------- ---------------
Cash flows used in investing activities
Purchase of property and equipment (261) (336)
Increase in life insurance policies
cash surrender value (51) (52)
--------------- ---------------
Net cash used in investing
activities (312) (388)
--------------- ---------------
Cash flows from financing activities
Net borrowings (payments) on bank
line of credit 608 (777)
Proceeds from issuance of common stock 24 376
--------------- ---------------
Net cash provided by (used in)
financing activities 632 (401)
--------------- ---------------
Net (decrease) increase in cash and
cash equivalents (115) 2,469
Cash and cash equivalents at the
beginning of the period 140 132
--------------- ---------------
Cash and cash equivalents at the
end of the period $ 25 $ 2,601
=============== ===============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 25 $ 18
Income taxes 21 17
The accompanying notes are an integral part of these
consolidated financial statements.
5
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all of the disclosures normally required by accounting principles
generally accepted in the United States of America or those normally made
in Versar, Inc.'s Annual Report on Form 10-K filed with the United States
Securities and Exchange Commission. These financial statements should be
read in conjunction with the Company's Annual Report filed on Form 10-K
for the year ended June 30, 2006 for additional information.
The accompanying consolidated financial statements include the
accounts of Versar, Inc. and its wholly-owned subsidiaries ("Versar" or
the "Company"). All significant intercompany balances and transactions
have been eliminated in consolidation. The financial information has
been prepared in accordance with the Company's customary accounting
practices. In the opinion of management, the information reflects all
adjustments necessary for a fair presentation of the Company's
consolidated financial position as of December 29, 2006, and the
results of operations for the six-month periods ended December 29, 2006
and December 30, 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 December 29, 2006, the Company had approximately $4.1 million
in deferred tax assets which primarily relate to net operating loss
and tax credit carryforwards. The Company has an accumulated deficit
and has experienced losses in previous years, as such, management
recorded a valuation allowance of approximately $2.4 million against
the net deferred tax asset. The valuation allowance is adjusted
periodically based upon management's assessment of the Company's
ability to derive benefit from the deferred tax assets.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $5,000,000 based upon
qualifying receivables. Interest on borrowings is based on the
prime rate of interest (8.25% as of December 29, 2006). During October
2006, the Company obtained a letter of credit of approximately
$1,570,000 which serves as collateral for surety bond coverage
provided by the Company's insurance carrier. The letter of credit
reduces the Company's borrowing base on the line of credit. As of
December 29, 2006, there were $608,000 borrowings under the line
of credit. The remaining line of credit capacity at December 29,
2006 was $4,392,000. 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 December 29, 2006, the Company was in compliance
with the financial covenants.
The Company believes that the borrowing capacity under the line
of credit, together with anticipated cash flows from operations, is
sufficient to meet the Company's liquidity needs. There can be no
assurance, however, that amounts available in the future from existing
sources of liquidity will be sufficient to meet future capital needs.
(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 with the exception of certain
defined benefit obligations. In the second quarter of fiscal year 2006,
the Company recorded an additional $205,000 liability based on a revised
actuarial calculation of the remaining SMC pension plan obligation.
In the fourth quarter of fiscal year 2006, an additional $85,000 accrual
was deemed necessary to cover the under funding and plan termination
costs. At December 29, 2006, there was an accrual of approximately
$199,000 remaining to cover the cost to terminate the SMC pension plan
in accordance with the Pension Guaranty Corporation Benefit (PBGC)
requirements. The Company has received Internal Revenue Service (IRS)
and PBGC plan termination approval. Final distribution to eligible
participants of the pension plan was substantially completed as of
January 2007.
(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).
(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 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.
The carrying value of goodwill of approximately $776,000 relating to
the acquisition of VGSI, is part of Infrastructure and Management
Services (IMS) reporting unit. In performing its goodwill impairment
analysis, management has utilized a market-based valuation approach to
determine the estimated fair value of the
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, the
estimated fair value of the IMS reporting unit was $25 million which
exceeds the carrying value of its net assets by a substantial margin.
Should the IMS reporting unit 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 compliance with financial debt covenants.
On April 15, 2005, the Company acquired the Cultural Resources
Group from Parsons Infrastructure & Technology Group, Inc., a subsidiary
of Parsons Corporation for a purchase price of approximately $260,000 in
cash. The Cultural Resources Group, based in Fairfax County, Virginia
provides archaeological, cultural and historical services to federal,
state and municipal clients across the country. The acquisition expanded
the Company's existing and future capabilities in cultural resources work
enhancing and complimenting Versar's environmental core business. The
Cultural Resources Group was incorporated into the Company's IMS segment.
As part of the acquisition, the Company executed a two-year marketing
agreement with Parsons which gives Versar the first right of refusal to
certain Parsons cultural resources work from existing Parsons' clients.
Thereafter, this agreement is annually renewable should both parties agree.
Substantially all of the purchase price was allocated to contract rights
and is being amortized over a three-year period.
(I) Net Income Per Share
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted net income per common share also includes common
stock equivalents outstanding during the period if dilutive. The
Company's common stock equivalents consist of stock options and
restricted stock.
For the Three-Month For the Six-Month
Periods Ended Periods Ended
------------------------- -------------------------
December 29, December 30, December 29, December 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Weighted average common
shares outstanding
- basic 8,153,522 8,053,449 8,150,810 8,020,987
Assumed exercise of
options and restricted
stock (treasury stock
method) 238,771 402,436 261,301 493,815
------------ ------------ ------------ ------------
Weighted average common
shares outstanding
- basic/diluted 8,392,293 8,455,885 8,412,111 8,514,802
============ ============ ============ ============
For the six months periods ended December 29, 2006 and December 30,
2005, options to purchase approximately 194,000 and 341,000 shares,
respectively, were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive.
(J) Common Stock
The Company issued 10,500 shares of common stock upon the exercise
of stock options during the first six months of fiscal year 2007. Total
proceeds from the exercise of such stock options was approximately $24,000.
Effective January 1, 2005, the Company implemented an Employee
Stock Purchase Plan (ESPP) to allow eligible employees of Versar the
opportunity to acquire an ownership interest in the Company?s common
stock.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As amended, the Plan permits employees to purchase shares of Versar
common stock from the open market at 95% of its fair market value.
The Plan qualifies as an "employee stock purchase plan" under Section
423 of the Internal Revenue Code.
(K) Stock-Based Compensation
Effective July 1, 2005, the Company adopted the Financial
Accounting Standards Board (FASB) SFAS No. 123 (Revised 2004),
"Accounting for Stock-Based Compensation" (SFAS 123(R)). This
Statement revises SFAS No. 123 by eliminating the option to account
for employee stock options under APB No. 25 and generally requires
companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date
fair value of those awards (the "fair-value-based" method). In the
first six months of fiscal year 2007, the Company has awarded 34,800
shares of restricted stock to employees and the Board of Directors.
Compensation expense of $77,000 and $21,000 for the first six months
of fiscal year 2007 and 2006, respectively, was included in the
Consolidated Statements of Operations.
As a result of adopting SFAS 123(R) on July 1, 2005, the
Company's income before income taxes for the six months ended
December 29, 2006 and December 30, 2005 was reduced by stock-based
compensation expense of $77,000 and $21,000, respectively.
On June 21, 2005, the Board of Directors of the Company
accelerated the vesting of certain unvested "out-of-the-money"
employee options that had exercise prices of $3.00 or more per share.
The awards subject to acceleration were made under the Versar, Inc.
1996 Stock Option Plan and 2002 Stock Incentive Plan. As a result,
options to purchase 306,010 shares of the Company's common stock
became exercisable immediately. All other terms and conditions
applicable to the outstanding stock option grants remained in effect.
The acceleration of the out-of-the-money stock options was done in
order to avoid the impact of adopting SFAS 123(R). Based on the
potential for these options to have value over their expected term,
the acceleration of vesting of such avoided approximately $124,000
of compensation expense that otherwise would have been required to
be recognized.
In November 2005, the stockholders approved the Versar, Inc.
2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan provides
for grants of incentive awards, including stock options, SARS,
restricted stock, restricted stock units and performance based
awards, to directors, officers and employees of the Company and
its affiliates as approved from time to time by the Company's
Compensation Committee. Only employees may receive stock options
classified as "incentive stock options", also known as "ISO's".
The per share exercise price for options and SARS granted under
the 2005 Plan shall not be less than the fair market value of the
common stock on the date of grant. A maximum of 400,000 shares of
Common Stock may be awarded under the 2005 Plan. No single director,
officer, or employee may receive awards 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.
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
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
the Company and to encourage superior performance. The Company also
maintains the Versar 1992 Stock Option Plan (the "1992 Plan").
Options have been granted under these plans to purchase the Company's
common stock.
Under the 1996 Plan, through September 2006, options were
granted to key employees, directors and service providers at the
fair market value on the date of grant. The vesting of each option
was determined by the Administrator of the Plan. Each option expires
on the earlier of the last day of the tenth year after the date of grant
or after expiration of a period designated in the option agreement.
The 1996 Plan has expired and no additional options may be granted
under this plan. The Company will continue to maintain the plan until
all previously granted options have been exercised, forfeited or expire.
Under the 1992 Plan, through November 2002, options were
generally granted to key employees at the fair market value on the
date of grant and became exercisable during the five-year period from
the date of the grant at 20% per year. Options were granted with a ten
year term and expire if not exercised by the tenth anniversary of the
grant date. The 1992 plan has expired and no additional options may
be granted under this plan. The Company will continue to maintain the
plan until all previously granted options have been exercised,
forfeited or expire.
As a result of adopting SFAS 123(R) on July 1, 2005, the
Company's income before income taxes for the six months ended
December 29, 2006 and December 30, 2005 was reduced by stock-based
compensation expense of $77,000 and $21,000, respectively.
A summary of activity under the Company?s stock option plans
as of December 29, 2006, and changes during the first six months of
fiscal year 2007 are presented below:
Weighted-
Weighted- Average Aggregate
Options Average Remaining Intrinsic
Shares Exercise Contractual Value
(000) Price Term ($000)
----------------------- --------- ---------- ----------- ----------
Outstanding at July 1,
2006 1,229 $ 3.15
Exercised (10) $ 2.30
Forfeited or expired (24) $ 3.66
--------- ----------
Outstanding at December
29, 2006 1,195 $ 3.14 5.50 $ 2,096
========= ========== =========== ==========
Exercisable at December
29, 2006 1,125 $ 3.08 5.74 $ 1,954
========= ========== =========== ==========
As of December 29, 2006, there were unvested options to purchase
approximately 70,000 shares outstanding under the plans. Estimated
compensation costs of $16,000 is expected to be recognized over a
weighted-average period of 3 years. The total fair value of these
unvested options is approximately $141,000 as of December 29, 2006.
(L) Business Segments
The Company's business segments are Infrastructure and Management
Services and National Security. The Infrastructure and Management
Services segment provides a full range of services including remediation/
corrective actions, site investigations, remedial designs, and
construction, operation and maintenance of remedial systems, engineering,
design and construction management to industrial, commercial and government
facilities. The National Security segment provides expertise in developing,
testing and providing personal protection equipment.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
Summary financial information for each of the Company's segments
follows:
For the Three-Month For the Six-Month
Periods Ended Periods Ended
------------------------- -------------------------
December 29, December 30, December 29, December 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
NET SERVICE REVENUE
-------------------
Infrastructure and
Management Services $ 8,274 $ 7,747 $ 15,642 $ 14,799
National Security 1,180 1,361 2,426 2,771
------------ ------------ ------------ ------------
$ 9,454 $ 9,108 $ 18,068 $ 17,570
============ ============ ============ ============
OPERATING INCOME (A)
--------------------
Infrastructure and
Management Services $ 2,573 $ 1,785 $ 4,697 $ 3,111
National Security (105) 293 (81) 554
------------ ------------ ------------ ------------
2,468 2,078 4,616 3,665
Selling, general and
administrative
expenses (1,691) (1,381) (3,188) (2,832)
------------ ------------ ------------ ------------
OPERATING INCOME $ 777 $ 697 $ 1,428 $ 833
============ ============ ============ ============
(A) Operating income is defined as net service revenue less direct costs of
services and overhead.
IDENTIFIABLE ASSETS December 29, June 30,
------------------- 2006 2006
------------ -----------
Infrastructure and Management Services $ 20,291 $ 16,456
National Security 1,659 1,777
Corporate and Other 3,826 4,569
------------ -----------
Total Assets $ 25,776 $ 22,802
============ ===========
11
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial trends
----------------
In fiscal year 2006, the Company's gross revenues continued to
decline primarily due to federal government delays in funding, which in
certain instances, spanned as much as nine months and the continued
diversion of funding to the war in Iraq. The Company adapted to the
funding shifts by expanding its services in Iraq under existing
contracts and seeking new contract work in Iraq. By the end of fiscal
year 2006, government project funding began to return to normal levels
and the Company's funded backlog increased by 55% to $48 million at
June 30, 2006. For the first six months of fiscal year 2007, the
Company was able to further increase its funded backlog to $53 million
at December 29, 2006. The increase was primarily attributable to
increased funding of construction work as a result of the U.S.
government's year end funding of such project work and the award of
additional work in Iraq. Management continues to pursue many business
opportunities to continue such growth.
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;
* The impact of a negative government audit or investigation
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;
* Federal funding delays due to war in Iraq, and funding of Iraq
support; and
* Changes in political parties and the impact to funding of
priorities.
12
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 those regarding the continued
award of future work or task orders from government and private clients,
cost controls and reductions, the expected resolution of delays in
billing of certain projects, and the possible impact of current and
future claims against the Company based upon negligence and other
theories of liability. Forward-looking statements involve numerous
risks and uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibilities that the
demand for the Company's services may decline as a result of possible
changes in general and industry specific economic conditions and the
effects of competitive services and pricing; the possibility that the
Company will not be able to perform work within budget or contractual
limitations; one or more current or future claims made against the
Company may result in substantial liabilities; the possibility that the
Company will not be able to attract and retain key professional employees;
changes to or failure of the Federal government to fund certain programs
in which the Company participates; delays on project funding; and such
other risks and uncertainties as are described under Item 1A Risk Factors
of this report and in other reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.
Second Quarter Comparison of Fiscal Year 2007 and 2006
------------------------------------------------------
Gross revenue for the second quarter of fiscal year 2007 was
$21,938,000, an increase of $5,367,000 (32%) over that reported in the
second quarter of fiscal year 2006. The increase is attributable to the
Company's work on supporting of both the Air Force and the Army in
Iraq as part of the reconstruction efforts.
Purchased services and materials increased by $5,021,000 (67%)
in the second quarter of fiscal year 2007 compared to that reported
in the second quarter of fiscal year 2006. The increase was the
result of the additional subcontract work as part of the Iraq projects
mentioned 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 increased
by 4% in the second quarter of fiscal year 2007 compared to that reported
in the second quarter of fiscal year 2006. The increase was primarily
due to the markup on the increased purchased services and materials.
The increase in such markup was reduced by lower revenue generated by the
Company's labor force as such labor was 12% lower than the prior fiscal
year as the Company adjusted to the changes in business mix and reduced
business volume from the prior fiscal year.
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. The percentage of these
costs to net service revenue decreased to 73.9% in the second quarter of
fiscal year 2007 compared to 77.2% in the second quarter of fiscal year
2006. The decreased was primarily due to lower direct labor and facility
costs compared to that reported in the second quarter of fiscal year 2006.
Selling, general and administrative expenses approximated 17.9% of
net service revenue in the second quarter of fiscal year 2007, compared
to 15.2% in the second quarter of fiscal year 2006. The increase is
primarily due to the Company's reinstitution of its corporate proposal
development group in the first quarter of fiscal year 2007 to enhance
the Company's business growth and future business opportunities.
Operating income for the second quarter of fiscal year 2007 was
$777,000, an $80,000 increase over that reported in the prior fiscal
year. The increase is primarily attributable to the increased gross
revenues, and reduced labor and facility costs. Operating income was
decreased by various incentive plan accruals of $323,000 as part of the
Company's approved incentive plans during the second quarter of fiscal
year 2007.
13
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Interest expense (income) for the second quarter of fiscal year 2007
was $13,000, an increase of $39,000 (150%) over that reported in the prior
fiscal year. Fiscal year 2006 included interest income that was received
in connection with the settlement of a lawsuit. The Company has used its
line of credit to a limited extent during the second quarter of fiscal year
2007. The interest expense is primarily associated with capital leases and
the financing of insurance programs for the Company.
In the second quarter of fiscal year 2007, the Company recorded
$15,000 of tax expenses associated with the various annual minimum tax
filing requirements for the Company.
In the second quarter of fiscal year 2006, the Company accrued
an additional $205,000 for discontinued operations associated with changes
in actuarial estimates in the dissolution of the former SMC pension plan.
Versar's net income for the second quarter of fiscal year 2007
was $749,000 compared to $518,000 in the second quarter of fiscal year 2006.
Six Months Comparison of Fiscal Years 2007 and 2006
---------------------------------------------------
Gross revenue for the first six months of fiscal year 2007 was
$44,223,000, an increase of $14,150,000 (47%) over that reported in the
first six months of fiscal year 2006. Seventy percent of the increase
is attributable to the Company's efforts to support both the Air Force
and the Army in Iraq as part of the reconstruction support efforts.
The balance is from increased construction work in the United States
in support of the Air Force and the Department of State.
Purchased services and materials increased by $13,652,000 (109%)
in the first six months of fiscal year 2007 compared to that reported
in the first six months of fiscal year 2006. The increase was the
result of the increased Iraq, domestic and subcontract work as
mentioned above.
Net service revenue is derived by deducting the costs of
purchased services and materials from gross revenue. Net service
revenues increased by 3% in the first six months of fiscal year 2007
compared to that reported in the first six months of fiscal year 2006.
The increase was primarily due to the markup on the increased purchased
services and materials. The increase in such markup was reduced by
lower revenue generated by the Company's labor force which was 9%
lower than the prior fiscal year as the Company resulting from the
changes in business mix and reduced business volume from the prior
fiscal year.
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.
The percentage of these costs to net service revenue decreased to
74.5% in the first six months of fiscal year 2007 compared to 79.1%
in the first six months of fiscal year 2006. The decrease was
primarily due to lower direct labor and facility costs compared to
that reported in the first six months of fiscal year 2006.
Selling, general and administrative expenses approximated 17.6%
of net service revenue in the first six months of fiscal year 2007,
compared to 16.1% in the first six months of fiscal year 2006.
The increase is primarily due to the Company's reinstitution of
its corporate proposal development group in fiscal year 2007 to
enhance the Company's business growth and future business
opportunities.
Operating income for the first six months of fiscal year 2007
was $1,428,000, a $595,000 increase over that reported in the prior
fiscal year. The increase is primarily attributable to the increased
gross revenues, and reduced labor and facility costs. Operating
income was decreased by various incentive plan accruals of $511,000
as part of the Company's incentive plans during the first six months
of fiscal year 2007.
14
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Interest expense (income) for the first six months of fiscal year
2007 was $24,000, an increase of $30,000 over that reported in the prior
fiscal year. Fiscal year 2006 included interest income that was
reported in connection with the settlement of a lawsuit. The Company
currently has had very limited use of the Company's line of credit
during the first six months of fiscal year 2007. The interest expense
is primarily associated with capital leases and the financing of insurance
programs for the Company.
In the first six months of fiscal year 2007, the Company recorded
$49,000 of tax expenses associated with the various annual minimum tax
filing requirements for the Company.
In the second quarter of fiscal year 2006, the Company accrued
an additional $205,000 for discontinued operations associated with
changes in actuarial estimates in the dissolution of the former SMC
pension plan.
Versar's net income for the first six months of fiscal year 2007
was $1,355,000 compared to $634,000 in the first six months of fiscal
year 2006.
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of December 29, 2006
approximated $10,600,000, an increase of $1,481,000 (16%) from
June 30, 2006. In addition, at December 29, 2006, the Company's
current ratio was 1.98, which was slightly less than at June 30, 2006.
The reduction was primarily due to the increased business growth of
the Company resulting in increased accounts receivables, offset by
increased current liabilities and accruals, causing a slight
decrease in the first six months of fiscal year 2007.
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 (8.25% as of December 29, 2006). During
October 2006, the Company obtained a letter of credit of
approximately $1,570,000 which serves as collateral for surety bond
coverage provided by the Company?s insurance carrier. The letter
of credit reduces the Company's borrowing base on the line of credit.
As of December 29, 2006, there were $608,000 borrowings under the
line of credit. The remaining line of credit capacity at December
29, 2006 was $4,392,000. 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 December 29, 2006,
the Company was in compliance with the financial covenants.
We believe that our current cash position along with
anticipated cash flows will be sufficient to meet the Company's
liquidity needs for the next year. Expected capital requirements
for fiscal year 2007 are approximately $250,000 primarily to
maintain our existing information technology systems. Such capital
requirements will either be funded through existing working capital
or will be financed through third party sources.
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 our annual report on Form 10-K filed for our 2006
fiscal year.
15
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 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 likely that such adjustments could
occur with our larger fixed priced projects. Such adjustments are
common in the construction industry given the nature of the contracts.
These adjustments could either positively or negatively impact our
estimates due to the circumstances surrounding the negotiations of
change orders, the impact of schedule slippage, subcontractor claims
and contract disputes which are normally resolved at the end of the
contract. Adjustments to the financial statements are made when they
are known.
Allowance for doubtful accounts: Disputes arise in the normal
course of the Company's business on projects where the Company is
contesting with customers for collection of funds because of events
such as delays, changes in contract specifications and questions of
cost allowability or collectibility. Such disputes, whether claims
or unapproved change orders in process of negotiation, are recorded
at the lesser of their estimated net realizable value or actual costs
incurred and only when realization is probable and can be reliably
estimated. Claims against the Company are recognized where loss
is considered probable and reasonably determinable in amount. The
Company currently has approximately $370,000 reserved as of December
29, 2006. 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: At December 29, 2006, the
Company had approximately $4.3 million in deferred tax assets which
primarily relate to net operating loss and tax credit carryforwards.
The Company has an accumulated deficit and has experienced losses in
previous years, as such, management recorded a valuation allowance of
approximately $2.6 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.
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. The carrying value of goodwill of
approximately $776,000 relating to the acquisition of VGSI, is part of
the Infrastructure and Management Services (IMS) reporting unit. 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
16
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
transactions to prepare a market-based valuation. Based upon the
analysis, the estimated fair value of the IMS reporting unit was
$25 million which exceeds the carrying value of its net assets by a
substantial margin. Should the IMS reporting unit 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 compliance
with financial debt covenants.
On April 15, 2005, the Company acquired the Cultural Resources
Group from Parsons Infrastructure & Technology Group, Inc., a subsidiary
of Parsons Corporation for a purchase price of approximately $260,000
in cash. The Cultural Resources Group, based in Fairfax County,
Virginia provides archaeological, cultural and historical services to
federal, state and municipal clients across the country. The acquisition
expanded the Company's existing and future capabilities in cultural
resources work enhancing and complimenting Versar's environmental core
business. The Cultural Resources Group was incorporated into the
Company's IMS segment. As part of the acquisition, the Company executed
a two year marketing agreement with Parsons which gives Versar the first
right of refusal to certain Parsons cultural resources work from existing
Parsons' clients. Thereafter, this agreement is annually renewable should
both parties agree. Substantially all of the purchase price was allocated
to contract rights and is being amortized over a three-year period.
Stock-based compensation: Effective July 1, 2005, the Company
adopted the Financial Accounting Standards Board (FASB) SFAS No. 123
(Revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement
revised SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and related interpretations and generally
requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments based on the grant-date
fair value of those awards (the "fair-value-based" method).
On June 21, 2005, the Board of Directors of the Company
accelerated the vesting of certain unvested "out-of-the-money" employee
options that had exercise prices of $3.00 or more per share. The awards
subject to acceleration were made under the Versar, Inc. 1996 Stock Option
Plan and 2002 Stock Incentive Plan. As a result, options to purchase
306,010 shares of the Company's common stock became exercisable
immediately. All other terms and conditions applicable to the
outstanding stock option grants remained in effect. The acceleration
of the out-of-the-money stock options was done in order to avoid the
impact of adopting SFAS 123(R). Based on the potential for these
options to have value over their expected term, the Company estimated
the stock-based compensation of expense it otherwise would have been
required to recognize in its consolidated statements of income would have
been approximately $124,000.
New accounting pronouncements: On July 13, 2006, the Financial
Accounting Standards Board (FASB) issued FIN No. 48, Accounting for
Uncertainty of Income Taxes, which is an interpretation of FAS 109,
Accounting for Income Taxes. The FASB issued FIN No. 48 to address
concerns about the diversity in financial reporting of tax positions
with uncertainty. The regulation prevents the recording of tax benefits
of a transaction unless it is more-likely-than-not that the benefits from
a tax position will be realized in the financial statements. FIN No. 48
becomes effective as of July 1, 2007. The Company is currently evaluating
the effect of the adoption of this standard to determine any potential
impact to the consolidated financial results of the Company.
In September 2006, the Financial Accounting Standard Board issued
a Statement of Financial Accounting Standards (SFAS) No. 157. The
Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), 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.
Management believes that the adoption of SFAS 157 will not have a material
impact on the consolidated financial results of the Company.
In September 2006, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses
the SEC staff?s views regarding the process of quantifying financial
statement misstatements. These interpretations were issued to address
diversity in practice and the potential under
17
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
current practice for the build up of improper amounts on the balance
sheet. SAB 108 expresses the SEC staff's view that a registrant's
materiality evaluation of an identified unadjusted error should quantify
the effects of the error on each financial statement and related financial
statement disclosures and that prior year misstatements should be
considered in quantifying misstatements in current year financial
statements. SAB 108 also states that correcting prior year financial
statements for immaterial errors would not require previously filed
reports to be amended. Such correction may be made the next time the
registrant files the prior year financial statements. Registrants
electing not to restate prior periods should reflect the effects of
initially applying the guidance in SAB 108 in their annual financial
statements covering the first fiscal year ending after November 15, 2006.
The cumulative effect of the initial application should be reported in
the carrying amounts of assets and liabilities as of the beginning of
that fiscal year and the offsetting adjustment should be made to the
opening balance of retained earnings for that year. Registrants should
disclose the nature and amount of each individual error being corrected
in the cumulative adjustment. The disclosure should also include when
and how each error arose and the fact that the errors had previously
been considered immaterial. The SEC staff encourages early application
of the guidance in SAB 108 for interim periods of the first fiscal year
ending after November 15, 2006. The Company anticipates that the
adoption of SAB 108, would have minimal impact to the Company.
Impact of Inflation
-------------------
Versar seeks to protect itself from the effects of inflation.
The majority of contracts the Company performs are for a period of a
year or less or are cost plus fixed-fee type contracts and, accordingly,
are less susceptible to the effects of inflation. Multi-year contracts
provide for projected increases in labor and other costs.
Contingencies
-------------
Versar and its subsidiaries are parties to various legal actions
arising in the normal course of business. The Company believes that
the ultimate resolution of these legal actions will not have a material
adverse effect on its consolidated financial position and results of
operations. (See Part II, Item 1 - Legal Proceedings).
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 June 30, 2006.
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.
18
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.
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. On April 20, 2001, the
Trustees filed suit against Versar in the U.S. District Court for the
Southern District of Indiana, entitled, Roy O. Ball and Norman W.
Bernstein, Trustees v. Versar, Inc., Case No. IPO1-0531 C H/G.
The parties have agreed to settle their various claims against
each other and are in the process of executing a settlement agreement.
The settlement is not expected to 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 4 - Submission of Matters to a Vote of Stockholders
The Company's Annual Meeting of Stockholders (the "Annual Meeting")
was held on November 15, 2006. The matters voted on at the Annual
Meeting were as follows:
(1) The Election of Directors
The election of nine nominees to serve as directors of
the Company was approved as indicated below:
For Withheld
--------- ---------
Robert L. Durfee 6,857,267 150,020
Fernando V. Galaviz 6,827,803 179,484
James L. Gallagher 6,775,114 232,173
James V. Hansen 6,857,910 149,377
Amoretta M. Hoeber 6,857,076 150,211
Paul J. Hoeper 6,857,910 149,377
Michael Markels, Jr. 6,790,351 216,936
Amir A. Metry 6,841,510 165,777
Theodore M. Prociv 6,853,192 154,095
(2) To ratify the appointment of Grant Thornton LLP as independent
accountants for fiscal year 2007:
For Against Abstain
--------- --------- --------
6,952,871 47,887 6,529
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.
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSAR, INC.
--------------------
(Registrant)
/S/ Theodore M. Prociv
By:_____________________
Theodore M. Prociv
Chief Executive Officer,
President, and Director
/S/ Lawrence W. Sinnott
By:_____________________
Lawrence W. Sinnott
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
Date: February 12, 2007
20