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 30, 2007
-----------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-9309
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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 organization)
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
----------------------
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 May 1, 2007
--------------------- --------------------------
$.01 par value 8,244,000
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements - Unaudited
Consolidated Balance Sheets as of
March 30, 2007 and June 30, 2006 3
Consolidated Statements of Operations
for the Three-Month and Nine-Month Periods
Ended March 30, 2007 and March 31, 2006 4
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended March 30, 2007
and March 31, 2006 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-18
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risk 19
ITEM 4 - Controls and Procedures 19
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 20
ITEM 6 - Exhibits 20
SIGNATURES 21
EXHIBITS 22-25
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 30, June 30,
2007 2006
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,125 $ 140
Accounts receivable, net 20,397 16,227
Prepaid expenses and other current assets 1,790 1,430
Deferred income taxes 2,437 566
------------ ------------
Total current assets 27,749 18,363
Property and equipment, net 1,656 1,744
Deferred income taxes 1,276 1,144
Goodwill 776 776
Other assets 752 775
------------ ------------
Total assets $ 32,209 $ 22,802
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,247 $ 5,950
Billings in excess of revenue 712 209
Accrued salaries and vacation 1,964 1,474
Accrued bonus 1,109 ---
Other liabilities 1,895 1,326
Liabilities of discontinued
operations, net 71 285
------------ ------------
Total current liabilities 13,998 9,244
Other long-term liabilities 897 986
------------ ------------
Total liabilities 14,895 10,230
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 8,208,692 shares and
8,144,692 shares issued; 8,193,187 and
8,129,187 shares outstanding at March
30, 2007 and June 30, 2006, respectively 82 81
Capital in excess of par value 23,079 22,790
Accumulated deficit (5,775) (10,227)
Treasury stock (72) (72)
------------ ------------
Total stockholders' equity 17,314 12,572
------------ ------------
Total liabilities and stockholders'
equity $ 32,209 $ 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 Nine-Month
Periods Ended Periods Ended
---------------------- ----------------------
March 30, March 31, March 30, March 31,
2007 2006 2007 2006
---------- ---------- ---------- ----------
GROSS REVENUE $ 28,313 $ 12,974 $ 72,536 $ 43,047
Purchased services and
materials, at cost 17,465 4,639 43,620 17,142
Direct costs of services
and overhead 7,988 6,912 21,440 20,817
---------- ---------- ---------- ----------
GROSS PROFIT 2,860 1,423 7,476 5,088
Selling, general and
administrative expenses 1,734 1,437 4,922 4,269
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 1,126 (14) 2,554 819
OTHER EXPENSE
Interest expense 29 19 53 13
Income tax benefit (2,000) (945) (1,951) (945)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS 3,097 912 4,452 1,751
LOSS FROM DISCONTINUED
OPERATIONS --- --- --- (205)
---------- ---------- ---------- ----------
NET INCOME $ 3,097 $ 912 $ 4,452 $ 1,546
========== ========== ========== ==========
INCOME PER SHARE FROM
CONTINUING OPERATIONS - BASIC $ 0.38 $ 0.11 $ 0.55 $ 0.22
========== ========== ========== ==========
INCOME PER SHARE FROM
CONTINUING OPERATIONS -
DILUTED $ 0.36 $ 0.11 $ 0.53 $ 0.21
========== ========== ========== ==========
LOSS (PER SHARE) FROM
DISCONTINUED OPERATIONS -
BASIC $ --- $ --- $ --- $ (0.03)
========== ========== ========== ==========
LOSS (PER SHARE) FROM
DISCONTINUED OPERATIONS -
DILUTED $ --- $ --- $ --- $ (0.02)
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC $ 0.38 $ 0.11 $ 0.55 $ 0.19
========== ========== ========== ==========
NET INCOME PER SHARE -
DILUTED $ 0.36 $ 0.11 $ 0.53 $ 0.19
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 8,176 8,071 8,159 8,038
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 8,564 8,336 8,473 8,343
========== ========== ========== ==========
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 30, March 31,
2007 2006
----------- -----------
Cash flows from operating activities
Income from continuing operations $ 4,452 $ 1,751
Loss from discontinued operations --- (205)
----------- -----------
Net income 4,452 1,546
Adjustments to reconcile net income to
net cash
Provided by operating activities
Depreciation and amortization 522 573
Loss on sale of property and equipment --- 30
Provision for doubtful accounts receivable 214 (34)
Share based compensation 154 47
Decrease in tax valuation allowance (2,003) (945)
Changes in assets and liabilities
(Increase) decrease in accounts receivable (4,384) 3,592
(Increase) decrease in prepaids and other assets (337) 474
Increase (decrease) in accounts payable 2,297 (1,453)
Increase in accrued salaries and vacation 490 313
Increase (decrease) in other liabilities 2,092 (860)
----------- -----------
Net cash provided by continuing operating
activities 3,497 3,283
----------- -----------
Changes in net liabilities of discontinued
operations (214) (218)
----------- -----------
Net cash provided by operating activities 3,283 3,065
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment (376) (542)
Increase in life insurance policies cash
surrender value (58) (59)
----------- -----------
Net cash used in investing activities (434) (601)
----------- -----------
Cash flows from financing activities
Net (payments) on bank line of credit --- (777)
Proceeds from issuance of common stock 136 442
----------- -----------
Net cash provided by (used in) financing
activities 136 (335)
----------- -----------
Net increase in cash and cash equivalents 2,985 2,129
Cash and cash equivalents at the beginning of the
period 140 132
----------- -----------
Cash and cash equivalents at the end of the period $ 3,125 $ 2,261
=========== ===========
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest $ 53 $ 83
Income taxes 25 34
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 March 30, 2007, and the results of operations for the three
and nine-month periods ended March 30, 2007 and March 31, 2006. The results
of operations for such periods, however, are not necessarily indicative of
the results to be expected for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from
those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred
plus accrued profits or net estimated realizable value of incurred costs,
reduced by progress billings. The Company records income from major
fixed-price 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 30, 2007, the Company had approximately $3.8 million in
deferred tax assets which primarily relate to net operating loss and tax
credit carry forwards. A valuation allowance was recorded against a
substantial portion of such assets given management's lack of ability to
conclude more likely than not that the Company would derive benefit from
the entire deferred tax asset. In the third quarter of fiscal year 2007,
management re-evaluated the need for the valuation allowance. Given the
Company's continued improved financial performance and funded backlog over
the last three years, management believes the Company will be able to
utilize the full benefit of the tax asset. As such, the Company recognized
a tax benefit of approximately $2.0 million for the quarter ended March 30,
2007 as a result of releasing the valuation allowance.
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 $5.0 million based upon qualifying
receivables. Interest on borrowings is based on the prime rate of interest
(8.25% as of March 30, 2007). During October 2006, the Company obtained a
letter of credit of approximately $1.6 million which serves as collateral
for surety bond coverage provided by the Company's insurance carrier.
The letter of credit reduces the Company's borrowing base on the line of
credit. As of March 30, 2007, there were no borrowings under the line of
credit. The line of credit capacity at March 30, 2007 was $5.0 million.
Obligations under the credit facility are guaranteed by the Company and
each subsidiary individually and collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property
constituting collateral. The 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 $8.5 million; a maximum total liabilities to
tangible net worth ratio not to exceed 2.5 to 1; and a minimum current
ratio of at least 1.25 to 1. Failure to meet the covenant requirements
gives the Bank the right to demand outstanding amounts due under the line
of credit, which could impact the Company's ability to finance its working
capital requirements. At March 30, 2007, 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
March 30, 2007, the Company has successfully completed the final
distribution of benefits to eligible participants, and is in the process
of completing final regulatory filing requirements.
(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 segment. In
performing its goodwill impairment analysis, management has utilized a
market-based valuation approach to determine the estimated fair value of
the IMS reporting segment. Management engages outside professionals and
valuation experts, as necessary, to assist in performing this analysis.
An analysis was performed on public companies and company transactions
to prepare a
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
market-based valuation. Based upon the analysis, the estimated fair
value of the IMS reporting segment was $25 million which exceeds the
carrying value of its net assets by a substantial margin. Should the
IMS reporting segment 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.
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 Nine-Month
Periods Ended Periods Ended
----------------------- -----------------------
March 30, March 31, March 30, March 31,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Weigted average common
shares outstanding - basic 8,175,709 8,071,030 8,159,185 8,037,668
Assumed exercise of options
and restricted stock
(treasury stock method) 388,402 264,872 314,117 305,169
----------- ----------- ----------- -----------
Weighted average common
shares outstanding -
basic/diluted 8,564,111 8,335,902 8,473,302 8,342,837
=========== =========== =========== ===========
For the nine months periods ended March 30, 2007 and March 31, 2006,
options to purchase approximately 240,000 and 344,000 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 47,000 shares of common stock upon the exercise of
stock options during the nine months ended March 30, 2007. Total proceeds
from the exercise of such stock options were approximately $136,000. The
Company also issued 17,000 shares of restricted stock at the fair market
value of approximately $68,000 during the nine months of fiscal year 2007.
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 nine months of fiscal year 2007, the Company has
awarded 42,800 shares of restricted stock to employees and the Board of
Directors. Stock-based compensation expense of $154,000 and $47,000 for
the first nine months of fiscal year 2007 and 2006, respectively, was
included in the Consolidated Statements of Operations.
In November 2005, the stockholders approved the Versar, Inc. 2005
Stock Incentive Plan (the 2005 Plan). The 2005 Plan provides for grants
of incentive awards, including stock options, SARS, restricted stock,
restricted stock units and performance based awards, to directors,
officers and employees of the Company and its affiliates as approved from
time to time by the Company's Compensation Committee. Only employees may
receive stock options classified as "incentive stock options", also known
as "ISO's". The per share exercise price for options and SARS granted
under the 2005 Plan shall not be less than the fair market value of the
common stock on the date of grant. A maximum of 400,000 shares of Common
Stock may be awarded under the 2005 Plan. No single director, officer,
or employee may receive awards of more than 100,000 shares of Common Stock
during the term of the 2005 Plan. The ability to make awards under the
2005 Plan will terminate in November 2015.
In November 2002, the stockholders approved the Versar, Inc. 2002
Stock Incentive Plan (the 2002 Plan). The 2002 Plan provides for the
grant of options, restricted stock and other types of stock-based awards
to any employee, service provider or director to whom a grant is approved
from time to time by the Company's Compensation Committee. A "service
provider" is defined for purposes of the 2002 Plan as an individual who
is neither an employee nor a director of the Company or any of its
affiliates but who provides the Company or one of its affiliates
substantial and important services. The aggregate number of shares of
the Company's Common Stock that may be issued upon exercise of options
or granted as restricted stock or other stock-based awards under the 2002
Plan is 700,000. Grants of restricted stock, performance equity awards,
options and stock appreciation rights in any one fiscal year to any one
participant may not exceed 250,000 shares. The maximum amount of
compensation that may be received by any one employee with respect to
performance unit grants in any one fiscal year may not exceed $250,000.
In November 1996, the stockholders approved the Versar 1996 Stock
Option Plan (the 1996 Plan) to provide employees and directors of the
Company and certain other persons an incentive to remain as employees
of the Company and to encourage superior performance. The Company also
maintains the Versar 1992 Stock Option Plan (the "1992 Plan"). Options
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.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
A summary of activity under the Company's stock option plans as
of March 30, 2007, and changes during the nine 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 1,230 $ 3.15
Exercised (47) $ 2.89
Forfeited or expired (26) $ 3.63
Adjustment 9 $ 3.49
--------- ------------
Outstanding at
March 30, 2007 1,166 $ 3.15 5.19 $ 2,045
========= ============ ============= ============
Exercisable at
March 30, 2007 1,099 $ 3.08 5.44 $ 1,907
========= ============ ============= ============
As of March 30, 2007, there were unvested options to purchase
approximately 67,600 shares outstanding under the plans. Estimated
compensation costs of $16,000 is expected to be recognized over a
weighted-average period of 2 years. The total fair value of these
unvested options is approximately $138,000 as of March 30, 2007.
(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.
The Company evaluates and measures the performance of its business
segments based on gross 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.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary financial information for each of the Company's segments
follows:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
---------------------- ----------------------
March 30, March 31, March 30, March 31,
2007 2006 2007 2006
---------- ---------- ---------- ----------
GROSS REVENUE
-------------
Infrastructure and Management
Services $ 26,516 $ 11,166 $ 67,220 $ 37,815
National Security 1,797 1,808 5,316 5,232
---------- ---------- ---------- ----------
$ 28,313 $ 12,974 $ 72,536 $ 43,047
========== ========== ========== ==========
GROSS PROFIT/OPERATING
----------------------
INCOME (A)
----------
Infrastructure and Management
Services $ 2,723 $ 1,037 $ 7,420 $ 4,148
National Security 137 386 56 940
---------- ---------- ---------- ----------
Gross Profit 2,860 1,423 7,476 5,088
---------- ---------- ---------- ----------
Selling, general and
administrative expenses (1,734) (1,437) (4,922) (4,269)
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) $ 1,126 $ (14) $ 2,554 $ 819
========== ========== ========== ==========
(A) Operating income is defined as gross revenue less purchased services and
materials and direct costs of services and overhead.
IDENTIFIABLE ASSETS March 30, June 30,
------------------- 2007 2006
-------------- --------------
Infrastructure and Management
Services $ 20,647 $ 16,456
National Security 1,722 1,777
Corporate and Other 9,840 4,569
-------------- --------------
Total Assets $ 32,209 $ 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 nine months ended March 30, 2007, the Company
was able to increase its funded backlog to $59 million. 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 different
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 without limitation, those
regarding the continued award of future work or task orders from
government and private clients, cost controls and reductions, the
expected resolution of delays in billing of certain projects, and
the possible impact of current and future claims against the Company
based upon negligence and other theories of liability. Forward-looking
statements involve numerous risks and uncertainties that could cause
actual results to differ materially, including, but not limited to, the
possibilities that the demand for the Company's services may decline as
a result of possible changes in general and industry specific economic
conditions and the effects of competitive services and pricing; the
possibility that the Company will not be able to perform work within
budget or contractual limitations; one or more current or future claims
made against the Company may result in substantial liabilities; the
possibility that the Company will not be able to attract and retain
key professional employees; changes to or failure of the Federal
government to fund certain programs in which the Company participates;
delays in project funding; and such other risks and uncertainties, in
our form 10-K for fiscal year ended June 30, 2006 and in other reports
and other documents filed by the Company from time to time with the
Securities and Exchange Commission.
Third Quarter Comparison of Fiscal Year 2007 and 2006
-----------------------------------------------------
Gross revenue for the third quarter of fiscal year 2007 was
$28,313,000, an increase of $15,339,000 (118%) over that reported in
the third quarter of fiscal year 2006. Gross revenue in the
Infrastructure and Management Services business segment in the third
quarter of fiscal year 2007 were $26,516,000, an increase of $15,350,000
(137%) over that reported in the third quarter of fiscal year 2006.
Approximately 58% of the increase is attributable to efforts to support
both the Air Force and the Army in Iraq as part of the reconstruction
support efforts. The remaining balance of the increase is attributable
to increased construction CONUS projects and municipal aquatic facilities
of approximately 23% and 19%, respectively. The National Security
business segment gross revenues were approximately $1,797,000, 1% less
than that reported in the prior fiscal year.
Purchased services and materials increased by $12,826,000 (276%)
in the third quarter of fiscal year 2007 compared to that reported in
the third quarter of fiscal year 2006. The increase was the result of
the increased gross revenues as mentioned above in the Infrastructure
and Management Services segment.
Direct costs of services and overhead include the cost to Versar
of direct and overhead staff, including recoverable and unallowable costs
that are directly attributable to contracts. Direct costs of services
and overhead increased by $1,076,000 (16%) in the third quarter of fiscal
year 2007 compared to that reported in the third quarter of fiscal year
2006. The increase is due to increased marketing and sales costs in the
Infrastructure and Management Services segment in support of the segment's
business growth and further expansion of the business operations.
Gross profit for the third quarter of fiscal year 2007 was
$2,860,000, a $1,437,000 (101%) increase over that reported in the third
quarter of fiscal year 2006. The increase is attributable to the
increased gross revenues, reduced facility costs and improved profit
margins in project performance during the quarter.
Selling, general and administrative expenses increased by $297,000
during the third quarter of fiscal year 2007 compared to that reported
in the third quarter of fiscal year 2006. The increase is primarily due
to the Company's reinstitution of its corporate proposal development
capacity in the first quarter of fiscal year 2007 to address the
Company's recent business growth and generate business opportunities
required to continue the Company's growth.
Operating income for the third quarter of fiscal year 2007 was
$1,126,000, a $1,140,000 increase over the $14,000 operating loss in
the prior fiscal year. The increase is primarily due to the increased
gross revenues, reduced labor and facility costs, and improved operating
business margins during the third quarter of fiscal year of
13
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
2007. Operating income for the Infrastructure and Management Services
business segment was $2,723,000, a 163% increase over that reported in the
third quarter of fiscal year 2006. The increase is due to the higher gross
revenues mentioned above and reduced fixed facility costs. Operating income
for the National Security business segment was $137,000, a 65% reduction
from the prior fiscal year. The reduction is due to the poor financial
performance of business segments in the chemical surety laboratory.
Interest expense for the third quarter of fiscal year 2007 was
$29,000, an increase of $10,000 over that reported in the prior fiscal
year. The increase is due to interest costs associated with some limited
use of the Company's line of credit early in the third quarter of fiscal
year 2007 and expense associated with capital leases and the financing of
insurance programs for the Company.
In the third quarter of fiscal year 2007, management re-evaluated
the need for the valuation allowance. Given the Company's continued
improved financial performance and funded backlog over the last three
years, management believes the Company will be able to utilize the full
benefit of the tax asset. As such, the Company recognized a tax benefit
of approximately $2.0 million for the quarter ended March 30, 2007 as a
result of releasing the valuation allowance.
Versar's net income for the third quarter of fiscal year 2007 was
$3,097,000 compared to $912,000 in the third quarter of fiscal year 2006.
Nine Months Comparison of Fiscal Years 2007 and 2006
----------------------------------------------------
Gross revenue for the nine months ended March 30, 2007 was
$72,536,000, an increase of $29,489,000 (69%) over that reported in the
prior fiscal period. Gross revenue for the first nine months of fiscal
year 2007 for the Infrastructure and Management Services business segment
was $67,220,000, and increase of $29,405,000 (78%) over that reported in
the first nine months of fiscal year 2006. Approximately, 65% of the
increase was attributable to efforts to support both the Air Force and
Army in Iraq. The balance is primarily due to increased construction
CONUS work and municipal aquatic facilities work. Gross revenues from
the National Security segment were $5,316,000, a 2% increase over the
prior fiscal year.
Purchased services and materials increased by $26,478,000 (154%)
in the nine months ended March 30, 2007 compared to that reported in
the first nine months of fiscal year 2006. The increase was the result
of the increased gross revenue as mentioned above in the Infrastructure
and Management Services segment.
Direct costs of services and overhead include the cost to Versar
of direct and overhead staff, including recoverable and unallowable
costs that are directly attributable to contracts. Direct costs of
services and overhead increased by $623,000 (3%) in the nine months
ended March 30, 2007 compared to that reported in the prior fiscal
period. The increase is due to increased costs in the Infrastructure
and Management Services segment in support of the segment's business
growth and further expansion of the business operations, which was in
part offset by reduced facility costs.
Gross profit for the nine months ended March 30, 2007 was
$7,476,000, a $2,388,000 (47%) increase over that reported in the
prior fiscal period. The increase is attributable to the increased
gross revenue, reduced facility costs and improved profit margins in
project performance during this period.
Selling, general and administrative expenses increased by
$653,000 during the first nine months of fiscal year 2007 compared
to that reported in the first nine months of fiscal year 2006. The
increase is primarily due to the Company's reinstitution of its
corporate proposal development capacity in the first quarter of
fiscal year 2007 to address the Company's business growth and
generate business opportunities required to continue the Company's
growth.
Operating income for the nine months ended March 30, 2007
was $2,554,000, a $1,735,000 increase over that reported in the
prior fiscal period. The increase is primarily due to the increased
gross revenues, reduced facility costs and improved operating margins.
Operating income for the Infrastructure and Management Services
14
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
business segment was $7,420,000, an increase of 79% over the prior fiscal
year. The increase is due to the increased gross revenues mentioned above
and reduced facility costs from the prior fiscal year. Operating income
for the National Security business segment for the first nine months of
fiscal year 2007 was $56,000, a decrease of $884,000. The decrease was
due to the poor performance in this segment's chemical laboratory during
the first nine months of fiscal year 2007.
Net interest expense for the first nine months of fiscal year 2007
was $53,000, an increase of $40,000 over that reported in the prior fiscal
period. The increase is primarily due to the fact that the Company
reported interest income of $25,000 in the second quarter of fiscal year
2006 associated with the settlement of a lawsuit. The Company has had very
limited use of its line of credit during the first nine months of fiscal
year 2007. The interest expense is primarily associated with capital
leases and the financing of insurance policies.
In the nine months ended March 30, 2007, the Company recorded a
$205,000 loss associated with increased pension obligations for the
disposal of a former discontinued business of the Company in order to
complete the satisfaction of the Company's pension obligations.
Versar's net income for the nine months ended March 30, 2007
was $4,452,000 compared to $1,546,000 in the first nine months of
fiscal year 2006.
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of March 30, 2007 approximated
$13,751,000, an increase of $4,632,000 (51%) from June 30, 2006. In
addition, at March 30, 2007, the Compan'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 receivable, offset by increased accounts payable,
current liabilities and accruals, causing a slight decrease in the
first nine months of fiscal year 2007.
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $5.0 million based upon
qualifying receivables. Interest on borrowings is based on the prime
rate of interest (8.25% as of March 30, 2007). During October 2006,
the Company obtained a letter of credit of approximately $1.6 million
which serves as collateral for surety bond coverage provided by the
Company's insurance carrier. The letter of credit reduces the Company's
borrowing base on the line of credit. As of March 30, 2007, there were
no borrowings under the line of credit. The line of credit capacity at
March 30, 2007 was $5.0 million. Obligations under the credit facility
are guaranteed by the Company and each subsidiary individually and
collectively secured by accounts receivable, equipment and intangibles,
plus all insurance policies on property constituting collateral. The
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 $8.5 million;
a maximum total liabilities to tangible net worth ratio not to exceed
2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Failure
to meet the covenant requirements gives the Bank the right to demand
outstanding amounts due under the line of credit, which may impact the
Company's ability to finance its working capital requirements. At
March 30, 2007, the Company was in compliance with the financial
covenants.
The Company believes that the current cash position along with
anticipated cash flows will be sufficient to meet its liquidity needs
within the next year. Expected capital requirements for the remainder
of fiscal year 2007 are approximately $125,000 primarily to maintain
our existing information technology systems. Such capital requirements
will be funded through existing working capital.
15
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Contractual Obligations
-----------------------
At June 30, 2006, the Company had unfunded contractual payment
obligations of approximately $2,492,000 due within the next twelve months.
Estimated interest payments related to the short term notes payable was
$2,000 based on the financing agreement. Estimated interest payments for
the long term capital lease were calculated using the Company's
incremental borrowing rate. The table below specifies the total
contractual payment obligations as of June 30, 2006.
Contractual Total Less than 1-3 4-5 After 5
Obligations Cost 1 Year Years Years Years
------------------ --------- --------- --------- --------- ---------
(In thousands)
Operating lease
obligations $ 14,323 $ 2,221 $ 3,833 $ 3,016 $ 5,253
Capital lease
obligations 961 48 104 115 694
Notes payable 223 223 --- --- ---
Estimated interest
obligations 304 31 58 56 159
--------- --------- --------- --------- ---------
Total contractual
cash obligations % 15,811 $ 2,523 $ 3,995 $ 3,187 $ 6,106
========= ========= ========= ========= =========
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.
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
16
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 $254,000 reserved as of March 30,
2007. 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 March 30, 2007, the
Company had approximately $3.8 million in deferred tax assets which
primarily relate to net operating loss and tax credit carry forwards.
A valuation allowance was recorded against a substantial portion of
such assets given management's lack of ability to conclude more likely
than not that the Company would derive benefit from the entire deferred
tax asset. In the third quarter of fiscal year 2007, management
re-evaluated the need for the valuation allowance. Given the Company's
continued improved financial performance and funded backlog over the
last three years, management believes the Company will be able to
utilize the full benefit of the tax asset. As such, the Company
recognized a tax benefit of approximately $2.0 million for the quarter
ended March 30, 2007 as a result of releasing the valuation allowance.
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 segment. In performing its goodwill impairment
analysis, management has utilized a market-based valuation approach to
determine the estimated fair value of the IMS reporting segment.
Management engages outside professionals and valuation experts, as
necessary, to assist in performing this analysis. An analysis was
performed on public companies and company transactions to prepare a
market-based valuation. Based upon the analysis, the estimated fair
value of the IMS reporting segment was $25 million which exceeds the
carrying value of its net assets by a substantial margin. Should the
IMS reporting segment 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
17
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
revised SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and related interpretations and generally
requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments based on the grant-date
fair value of those awards (the "fair-value-based" method).
New accounting pronouncements: On July 13, 2006, the Financial
Accounting Standards Board (FASB) issued FIN No. 48, Accounting for
Uncertainty of Income Taxes, which is an interpretation of FAS 109,
Accounting for Income Taxes. The 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 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).
18
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.
19
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 settled their various claims against each other
and have executed a settlement agreement. The settlement did not have
a material 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, 2007
21