UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 26, 2008
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[ ] 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 offices) (Zip Code)
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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at November 3, 2008
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$.01 par value 9,003,221
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements - Unaudited
Consolidated Balance Sheets as of
September 26, 2008 and June 27, 2008 3
Consolidated Statements of Income for the Three-Months
Ended September 26, 2008 and September 28, 2007 4
Consolidated Statements of Cash Flows for the Three-Months
Ended September 26, 2008 and September 28, 2007 5
Notes to Consolidated Financial Statements 6-10
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-16
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4T - Controls and Procedures 16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 16
ITEM 6 - Exhibits 16
SIGNATURES 17
EXHIBITS 18-21
2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
September 26, June 27,
2008 2008
------------- -------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 9,318 $ 11,938
Marketable securities 2,663 ---
Accounts receivable, net 17,999 21,596
Prepaid expenses and other current assets 1,074 1,080
Deferred income taxes 860 1,015
------------- -------------
Total current assets 31,914 35,629
Property and equipment, net 2,468 2,152
Deferred income taxes 512 517
Goodwill 776 776
Other assets 719 754
------------- -------------
Total assets $ 36,389 $ 39,828
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,279 $ 7,731
Billings in excess of revenue 94 156
Accrued salaries and vacation 2,207 1,719
Accrued bonus 481 2,066
Other liabilities 1,171 1,686
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Total current liabilities 9,232 13,358
Other long-term liabilities 1,406 1,417
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Total liabilities 10,638 14,775
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Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000
shares authorized; 9,059,135 shares
issued; 8,975,101 shares outstanding at
September 26, 2008 and June 27, 2008 91 91
Capital in excess of par value 27,328 27,115
Accumulated deficit (1,029) (1,554)
Treasury stock (578) (578)
Accumulated other comprehensive loss (61) (21)
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Total stockholders' equity 25,751 25,053
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Total liabilities and stockholders'
equity $ 36,389 $ 39,828
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited - in thousands, except per share amounts)
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
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GROSS REVENUE $ 24,998 $ 28,882
Purchased services and materials, at cost 13,549 18,171
Direct costs of services and overhead 8,271 7,212
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GROSS PROFIT 3,178 3,499
Selling, general and administrative expenses 2,036 1,776
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OPERATING INCOME 1,142 1,723
OTHER (INCOME) EXPENSE
Loss on marketable securities 352 ---
Interest income (55) (64)
Income tax expense 320 770
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NET INCOME $ 525 $ 1,017
============= =============
NET INCOME PER SHARE - BASIC $ 0.06 $ 0.12
============= =============
NET INCOME PER SHARE - DILUTED $ 0.06 $ 0.11
============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,059 8,809
============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 9,198 9,268
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
------------- -------------
Cash flows from operating activities
Net income $ 525 $ 1,017
Adjustments to reconcile net income to
net cash (used in)
Provided by operating activities
Depreciation and amortization 243 210
Loss on marketable securities 352 ---
Share based compensation 213 105
Deferred taxes 163 720
Changes in assets and liabilities
Decrease (increase) in accounts receivable 3,593 (635)
(Increase) decrease in prepaids and other
assets (25) 150
Decrease in accounts payable (2,376) (1,372)
Increase in accrued salaries and vacation 489 353
Decrease in other liabilities (2,310) (1,885)
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Net cash provided by (used in)
continuing operating activities 867 (1,337)
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Cash flows used in investing activities
Purchase of property and equipment (568) (236)
Purchase of marketable securities (3,000) ---
Decrease (increase) in life insurance
policies cash surrender value 44 (24)
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Net cash used in investing activities (3,524) (260)
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Cash flows from financing activities
Proceeds from issuance of common stock --- 628
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Net cash provided by financing
activities --- 628
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Effect of exchange rate changes 37 ---
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Net decrease in cash and cash equivalents (2,620) (969)
Cash and cash equivalents at the beginning
of the period 11,938 6,296
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Cash and cash equivalents at the end of
the period $ 9,318 $ 5,327
============= =============
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest $ 11 $ 12
Income taxes 427 50
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 26, 2008 for additional information.
The accompanying consolidated financial statements include the
accounts of Versar, Inc. and its wholly-owned subsidiaries ("Versar" or
the "Company"). All significant intercompany balances and transactions
have been eliminated in consolidation. The financial information has
been prepared in accordance with the Company's customary accounting
practices. In the opinion of management, the information reflects all
adjustments necessary for a fair presentation of the Company's
consolidated financial position as of September 26, 2008, and the
results of operations for the three-months ended September 26, 2008
and September 28, 2007. The results of operations for such periods,
however, are not necessarily indicative of the results to be expected
for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost
incurred plus accrued profits or net estimated realizable value of
incurred costs, reduced by progress billings. The Company records
income from major fixed-price construction and engineering contracts,
extending over more than one accounting period, using the
percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically
reviewed and revisions are made as required. The effects of these
revisions are included in the periods in which the revisions are made.
On cost-plus-fee contracts, revenue is recognized to the extent of
costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of
billable rates times hours delivered plus material and other
reimbursable costs incurred. Losses on contracts are recognized
when they become known. Disputes arise in the normal course of the
Company's business on projects where the Company is contesting with
customers for collection of funds because of events such as delays,
changes in contract specifications and questions of cost allowability
or collectibility. Such disputes, whether claims or unapproved change
orders in the process of negotiation, are recorded at the lesser of
their estimated net realizable value or actual costs incurred and only
when realization is probable and can be reliably estimated. Claims
against the Company are recognized where loss is considered probable
and reasonably determinable in amount. Management reviews outstanding
receivables on a regular basis and assesses the need for reserves
taking into consideration past collection history and other events
that bear on the collectibility of such receivables.
(D) Income Taxes
At September 26, 2008, the Company had approximately $1.4
million in deferred tax assets which primarily relate to temporary
differences between financial statement and income tax reporting.
Such differences include depreciation, deferred compensation, accruals
and reserves. Given the Company's continued improved financial
performance and funded backlog over the last three years, management
believes the Company will be able to utilize the full benefit of the
tax asset.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $7.5 million based upon
qualifying receivables. Interest on borrowings is based upon the
prime rate of interest minus 0.5% (4.5% as of September 26, 2008).
In October 2006, the Company obtained a letter of credit of
approximately $1.6 million which serves as collateral for surety bond
coverage provided by the Company's insurance carrier against project
construction work. The letter of credit reduces the Company's
availability on the line of credit. The line of credit capacity at
September 26, 2008 was $5.9 million. Obligations under the credit
facility are guaranteed by Versar and each subsidiary individually
and are secured by accounts receivable, equipment and intangibles,
plus all insurance policies on property constituting collateral of
Versar and its subsidiaries. The line of credit matures in November
2009 and is subject to certain covenants related to the maintenance
of financial ratios. These covenants require a minimum tangible net
worth of $15 million; a maximum total liabilities to tangible net
worth ratio not to exceed 2.5 to 1; and a minimum current ratio of
at least 1.25 to 1. The Company was in compliance with such covenants
as of September 26, 2008.
(F) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed (Versar Global
Solutions, Inc. or VGSI). The transaction was accounted for as a
purchase. Goodwill resulting from this transaction was approximately
$1.1 million. Currently, the carrying value of goodwill is
approximately $776,000 relating to the acquisition of VGSI, which is
now part of the Company's Program Management business segment. The
Company began reporting the Program Management business segment
separately in fiscal year 2007, primarily due to the increase in
business volume in Iraq and in United States construction related
work. In performing its goodwill impairment analysis, management
has utilized a market-based valuation approach to determine the
estimated fair value of the Program Management business segment.
Management engages outside professionals and valuation experts, as
necessary, to assist in performing this analysis. An analysis was
performed on public companies and company transactions to prepare a
market-based valuation. Based upon the analysis, the estimated fair
value of the Program Management business segment substantially exceeded
the carrying value of the net assets of $6.5 million as of June 27, 2008.
Should the Program Management business segment's financial performance
not meet estimates, then impairment of goodwill would have to be further
assessed to determine whether a write down of goodwill value would be
warranted. If such a write down were to occur, it would negatively
impact the Company's financial position and results of operations.
However, it would not impact the Company's cash flow or financial debt
covenants.
(G) Net Income Per Share
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding
during the period. Diluted net income per common share also includes
common stock equivalents outstanding during the period, if dilutive.
The Company's common stock equivalents consist of stock options and
restricted stock awards.
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
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Weighted average common shares
outstanding - basic 9,059,135 8,809,255
Effect of assumed exercise of options
and vesting of restricted stock
awards (treasury stock method) 138,858 459,126
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Weighted average common shares
outstanding - diluted 9,197,993 9,268,381
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7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Common Stock
Effective January 1, 2005, the Company implemented an Employee
Stock Purchase Plan (ESPP) to allow eligible employees of Versar the
opportunity to acquire an ownership interest in the Company's common
stock. As amended, the Plan permits employees to purchase shares of
Versar common stock from the open market at 95% of its fair market
value. The Plan qualifies as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code.
(I) Stock-Based Compensation
In the first three months of fiscal year 2009, the Company
awarded 90,000 shares of restricted stock to executive officers and
employees. The awards vest over a period of 4.5 months to 16 months.
Stock-based compensation expense relating to restricted stock and
option awards totaled $213,000 and $105,000 for the first three
months ended September 26, 2008 and September 28, 2007,
respectively. This expense is included in the direct costs of
services and overhead line of the Consolidated Statements of Income.
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.
As of September 26, 2008, approximately 141,000 shares are available
for future grant under the 2005 Plan.
The Company also maintains the Versar 2002 Stock Incentive
Plan (the "2002 Plan"), the Versar 1996 Stock Option Plan (the "1996
Plan") and the Versar 1992 Stock Option Plan (the "1992 Plan").
Under the 2002 Plan, restricted stock and other types of
stock-based awards are granted 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. No shares remain for future grant under the
2002 Plan. The Company will continue to maintain the plan until
all previously granted securities have vested, been forfeited or
retired.
Under the 1996 Plan, options were granted to key employees,
directors and service providers at the fair market value on the
date of grant. Each option expires on the earlier of the last
day of the tenth year after the date of grant or after expiration
of a period designated in the option agreement. The 1996 Plan has
expired and no additional options may be granted under this plan.
The Company will continue to maintain the plan until all previously
granted options have been exercised, forfeited or expire. There were
83,500 shares of vested stock options outstanding as of September 26,
2008 under the 1996 Plan.
Under the 1992 Plan, options were granted to key employees at
the fair market value on the date of grant and became exercisable
during the five-year period from the date of the grant at 20% per
year. Options were granted with a ten year term and expire if not
exercised by the tenth anniversary of the grant date. The 1992
Plan has expired and no additional options may be granted under
this plan. The Company will continue to maintain the plan until
all previously granted options have been exercised, forfeited or
expire. There were 179,761 shares of vested stock options
outstanding as of September 26, 2008 under the 1992 Plan.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
A summary of activity under the Company's stock option
plans as of September 26, 2008, and changes during the first
three months of fiscal year 2009 are presented below:
Weighted-
Weighted- Average Aggregate
Options Average Remaining Intrinsic
Shares Exercise Contractual Value
(in thousands) Price Term ($000)
---------------------- -------------- --------- ----------- -----------
Outstanding at June
27, 2008 571 $ 3.05
Cancelled (2) 3.43
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Outstanding at
September 26, 2008 569 $ 3.04 4.81 $ 988
============== ========= =========== ===========
Exercisable at
September 26, 2008 559 $ 2.96 4.61 $ 947
============== ========= =========== ===========
As of September 26, 2008, there were unvested options to purchase
approximately 10,000 shares outstanding under the plans. Vesting of these
options is conditioned on the Company's stock price reaching certain
thresholds over a fixed period. The Company expects to recognize estimated
compensation costs of $42,000 if the pricing and service conditions are met
in the future.
(J) Business Segments
The Company evaluates and measures the performance of its business
segments based on gross revenue, gross profit and operating income. As such,
selling, general and administrative expenses, interest and income taxes have
not been allocated to the Company's business segments. These segments were
segregated based on the nature of the work, business processes, customer base
and business environment in which each of the segments operates.
The Program Management business segment manages larger more complex
projects whose business processes and management are unique to the rest of
the Company. The Compliance and Environmental Programs business segment
provides consulting support to several federal government and municipal
agencies. The Professional Services business segment provides outsourced
personnel to various government agencies providing our clients with
cost-effective resources. The National Security business segment provides
unique solutions to the federal government including testing and evaluation
and personal protective solutions to meet our clients' needs.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary of financial information for each of the Company's
segments follows:
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
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(In thousands)
GROSS REVENUE
-------------
Program Management $ 15,650 $ 17,263
Compliance and Environmental Programs 4,760 8,226
Professional Services 2,178 1,455
National Security 2,410 1,938
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$ 24,998 $ 28,882
============= =============
GROSS PROFIT (A)
----------------
Program Management $ 2,313 $ 2,282
Compliance and Environmental Programs 226 680
Professional Services 421 248
National Security 218 289
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$ 3,178 $ 3,499
Selling, general and administrative
Expenses (2,036) (1,776)
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OPERATING INCOME $ 1,142 $ 1,723
============= =============
(A) Gross Profit is defined as gross revenue less purchased services and
materials and direct costs of services and overhead.
Years Ended
----------------------------
September 26, June 27,
2008 2008
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(In thousands)
IDENTIFIABLE ASSETS
-------------------
Program Management $ 8,207 $ 11,405
Compliance and Environmental Programs 7,466 8,762
Professional Services 2,464 1,554
National Security 2,702 2,693
Corporate and Other 15,550 15,414
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Total Assets $ 36,389 $ 39,828
============= =============
(K) Marketable Securities
During the first quarter of fiscal year 2009, the Company recorded a
$352,000 loss on investments the Company was holding in FISCO Income Plus
Funds. The FISCO fund received an immediate demand margin call from its
broker, UBS, yet rather than allow the fund the customary time to satisfy
the margin call to the end of the day, UBS demanded the fund cover all
calls and puts at high premiums or they would take control of the fund
and start liquidating the fund itself. The fund has terminated its
relationship with UBS and transferred the assets to a new custodian.
The fund will seek legal action against UBS to cover its losses to which
the Company will be a part of any such settlement. The Company has taken
steps to redeem all of its assets from marketable securities and
reinvesting in its primary bank due to the volatile nature of the market.
10
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains certain forward-looking statements which are
based on current expectations. Actual results may differ materially.
The forward-looking statements include without limitation, those
regarding the continued award of future work or task orders from government
and private clients, cost controls and reductions, the expected resolution
of delays in billing of certain projects, and the possible impact of
current and future claims against the Company based upon negligence and
other theories of liability. Forward-looking statements involve numerous
risks and uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibility that the demand
for the Company's services may decline as a result of possible changes in
general and industry specific economic conditions and the effects of
competitive services and pricing; the possibility that the Company will not
be able to perform work within budget or contractual limitations; one or
more current or future claims made against the Company may result in
substantial liabilities; the possibility that the Company will not be able
to attract and retain key professional employees; changes to or failure of
the Federal government to fund certain programs in which the Company
participates; delays in project funding; and such other risks and
uncertainties, described in our Form 10-K for fiscal year ended
June 27, 2008 and in other reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.
Financial Trends
----------------
In fiscal year 2006, the Company's gross revenues declined
primarily due to the continuation of federal government delays in
funding, which in certain instances, spanned as much as nine months and
the continued diversion of funding to the war in Iraq. The Company
adapted to the funding shifts by expanding its services in Iraq work
under existing contracts and seeking new contract work in Iraq. By the
end of fiscal year 2006, the project funding began to return to normal
levels and increased the Company's funded backlog by 55% to $48 million.
By the end of fiscal year 2007, as a result of continued efforts to grow
the business and with new contracts, funded backlog had increased by an
additional 19% to $57 million. During fiscal year 2008, backlog continued
to grow, increasing by 12% to $64 million at June 27, 2008.
In the first quarter of fiscal year 2009, the Company was awarded
an additional $71 million in additional work, which increased funded
backlog up to $110 million as of September 26, 2008. Although the
Company has continued to exhibit success with the award of additional
work, resulting in increased backlog, during the first quarter of fiscal
year 2009, the Company experienced a 13% decline in gross revenues. This
decline was primarily attributable to a decrease in the award of
construction projects in the U.S. in the Project Management segment
during fiscal year 2008 resulting in lower construction work and a
decline in aquatic facility work in the Compliance and Environmental
Programs segment. Several awards of new, larger projects for the
Project Management segment were received late in the first quarter of
fiscal year 2009 and the Company anticipates that these new awards will
result in additional construction work during the second half of fiscal
year 2009. There continues to be a decline in the award of additional
aquatic facility work and the Company expects this segment to continue
to face a decline in revenues during the 2009 fiscal year.
Approximately 53% of the Company's business volume related to
the reconstruction efforts in Iraq in fiscal year 2008. However, the
Company is taking steps to further diversify its business if
opportunities in Iraq are reduced or are eliminated. The Company's
primary focus is on BRAC efforts and requirements which have been
delayed as a result of the war in Iraq. Gross revenues and gross
profit increased among all business segments in fiscal year 2008.
We see the Compliance and Environmental business segment being
impacted by the funding of work into fiscal year 2009. We continue
to follow the funding shifts in Iraq and Afghanistan to maintain and
expand our business basis. The funding of BRAC work world-wide
represents our greatest opportunity for growth in the second half of
fiscal year 2009.
There are a number of risk factors or uncertainties that could
significantly impact our future financial performance including the
following:
* General economic or political conditions;
* Threatened or pending litigation;
* The timing of expenses incurred for corporate initiatives;
* Employee hiring, utilization, and turnover rates;
* The seasonality of spending in the federal government and
for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
* Reductions in prices by our competitors;
11
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
* The ability to obtain follow-on project work;
* Failure to properly manage projects resulting in additional
costs;
* The cost of compliance for the Company's laboratories;
* The results of a negative government audit potentially
impacting our costs, reputation and ability to work with
the federal government;
* Loss of key personnel;
* The ability to compete in a highly competitive environment; and
* Federal funding delays due to the war in Iraq.
Results of Operations
---------------------
First Quarter Comparison of Fiscal Year 2009 and 2008
-----------------------------------------------------
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
------------- -------------
GROSS REVENUE
-------------
Program Management $ 15,650 $ 17,263
Compliance and Environmental Programs 4,760 8,226
Professional Services 2,178 1,455
National Security 2,410 1,938
------------- -------------
$ 24,998 $ 28,882
============= =============
Gross revenue for the first quarter of fiscal year 2009 was
$24,998,000, a decrease of $3,884,000 (13%) from the first quarter of
fiscal year 2008. Gross revenues in the Program Management business
segment for the first quarter of fiscal year 2009 was $15,650,000, a
decrease of $1,613,000 (9%) from that reported in the first quarter of
fiscal year 2008. The decrease is due to lower construction related work
in the United States as several large projects in the pipeline were not
awarded until late in the first quarter of fiscal year 2009. Gross
revenues for the Compliance and Environmental Programs business segment
for the first quarter of fiscal year 2009 was $4,760,000, a decrease of
$3,466,000 (42%) from the first quarter of fiscal year 2008. The decrease
is due the completion of several large municipal aquatic facility projects
at the end of fiscal year 2008, and state and municipal budget constraints
due to the poor economy for additional aquatic facility work. Gross
revenues for the Professional Services business segment for the first
quarter of 2009 was $2,178,000, an increase of $723,000 (50%) from the
first quarter of fiscal year 2008. The increase is attributable to
additional larger professional services outsourcing awards awarded in
fiscal year 2008. Gross revenues for the National Security business
segment for the first quarter of fiscal year 2009 was $2,410,000, an
increase of $472,000 (24%) from the first quarter of fiscal year 2008.
The increase is primarily due to additional chemical laboratory work
during the first quarter of fiscal year 2009.
Purchased services and materials decreased by $4,622,000 (25%)
in the first quarter of fiscal year 2009 compared to the first quarter
of fiscal year 2008. The decrease is attributable to the decrease
in construction work and municipal aquatic facility work in the
Program Management and the Compliance and Environmental Programs
business segments as mentioned above.
Direct costs of services and overhead include the cost to
Versar of direct and overhead staff, including recoverable and
unallowable costs that are directly attributable to contracts.
Direct costs of services and overhead increased by $1,059,000 (15%)
in the first quarter of fiscal year 2009 compared to that reported
in the first quarter of fiscal year 2008. Approximately 47% of
the increase is due to the business growth in the Professional
Services business segment. The balance of the increase is due
to additional costs required to support business growth efforts
in the Program Management business segment.
12
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gross profit for the first quarter of fiscal year 2009 was
$3,178,000, a decrease of $321,000 (9%) from that reported in the
first quarter of fiscal year 2008. The decrease is primarily due
to the decreased gross revenues in the Compliance and Environmental
business segment as mentioned above.
For the Three-Months Ended
----------------------------
September 26, September 28,
2008 2007
------------- -------------
GROSS PROFIT
------------
Program Management $ 2,313 $ 2,282
Compliance and Environmental Programs 226 680
Professional Services 421 248
National Security 218 289
------------- -------------
$ 3,178 $ 3,499
============= =============
Gross profit for the Program Management business segment for the
first quarter of fiscal year 2009 was $2,313,000, an increase of $31,000
(1%) over that reported in the first quarter of fiscal year 2008. Gross
profit for the Compliance and Environmental business segment for the
first quarter of fiscal year 2009 was $226,000, a decrease of $454,000
(67%) lower than that reported in the first quarter of fiscal year 2008.
Thirty-five percent of the decrease is due to the lower aquatic facility
work. The balance of the decrease is due to funding delays and poor
economic conditions. Gross profit for the Professional Services
business segment for the first quarter of fiscal year 2009 was $421,000,
an increase of $173,000 (70%) over that reported in the first quarter
of fiscal year 2008. The increase is attributable to the increased gross
revenues as mentioned above. Gross profit for the National Security
business segment was $218,000, a decrease of $71,000 (25%) lower than
that reported in the first quarter of fiscal year 2008. The decrease
was due to delayed product shipments of personal protective equipment
during the first quarter of fiscal year 2009.
Selling, general and administrative expenses increased by
$260,000 (15%) during the first quarter of fiscal year 2009 compared
to that reported in the first quarter of fiscal year 2008. The
increase is primarily due to increased business development
activities and compliance costs associated with Sarbanes Oxley.
Operating income for the first quarter of fiscal year 2009
was $1,142,000, a decrease of $581,000 (34%) lower than that reported
for the first quarter of fiscal year 2008. The decrease is
attributable to the decreased revenues, project funding delays, and
higher selling, general and administrative costs as mentioned above.
During the first quarter of fiscal year 2009, the Company
recorded a $352,000 loss on marketable securities the Company was
holding in the FISCO Income Plus Funds. The FISCO fund received an
immediate demand margin call from its broker, UBS, yet rather than
allow the fund the customary time to satisfy the margin call to the
end of the day, UBS demanded the fund cover all calls and puts at
high premiums or they would take control of the fund and start
liquidating the fund itself. The fund has terminated its
relationship with UBS and transferred the assets to a new
custodian. The fund is pursuing legal action against UBS to
cover its losses. The Company will participate in any such
settlement. The Company has taken steps to redeem all of its
assets from marketable securities and reinvesting in its
primary bank due to the volatile nature of the market.
Interest income for the first quarter of fiscal year
2009 was $55,000, a decrease of $9,000 lower than that reported
in the first quarter of fiscal year 2008. The decrease is due
to lower interest rates in the first quarter of fiscal year 2009.
Income tax expense for the first quarter of fiscal year
2009 was $320,000, a $450,000 decrease from that reported in the
first quarter of fiscal year 2008. The effective tax rates were
38% and 43% for the first quarter of fiscal year 2009 and 2008,
respectively.
Versar's net income for the first quarter of fiscal year
2009 was $525,000 compared to $1,017,000 in the first quarter
of fiscal year 2008. The decreased revenue, project funding
delays, higher selling, general and administrative costs, and
the marketable security loss accounted for the reduced net
income for the first quarter of fiscal year 2009.
13
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of September 26, 2008
approximated $22,682,000, an increase of $411,000 (2%) from June 29,
2007. In addition, at September 26, 2008, the Company's current ratio
was 3.46, an improvement over the 2.67 current ratio reported on June
27, 2007. The increase was due to the reduction of current
liabilities during the quarter.
The Company has a line of credit facility with United Bank
(the Bank) that provides for advances up to $7.5 million based upon
qualifying receivables. Interest on borrowings is based upon the
prime rate of interest minus 0.5% (4.5% as of September 26, 2008).
In October 2006, the Company obtained a letter of credit of
approximately $1.6 million which serves as collateral for surety
bond coverage provided by the Company's insurance carrier against
project construction work. The letter of credit reduces the
Company's availability on the line of credit. The line of credit
capacity at September 26, 2008 was $5.9 million. Obligations
under the credit facility are guaranteed by Versar and each
subsidiary individually and are secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property
constituting collateral of Versar and its subsidiaries. The line
of credit matures in November 2009 and is subject to certain
covenants related to the maintenance of financial ratios. These
covenants require a minimum tangible net worth of $15 million; a
maximum total liabilities to tangible net worth ratio not to
exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1.
The Company was in compliance with such covenants as of September
26, 2008.
Management believes that the current cash balance and
marketable securities of over $12 million along with anticipated
cash from operations and existing capacity on the line of credit,
there is sufficient capital to meet its liquidity needs within the
next year. Expected capital requirements for the remainder of
fiscal year 2009 are approximately $750,000 primarily to maintain
our existing information technology systems and software
applications. Such capital requirements will be funded through
existing working capital.
Critical Accounting Policies and Related Estimates That Have a
Material Effect on Versar's Consolidated Financial Statements
Below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding
the Company's consolidated financial position and results of
operations, which require management judgments and estimates,
or involve uncertainties. Information regarding our other
accounting policies is included in the notes to our consolidated
financial statements included elsewhere in this report on Form
10-Q and in our annual report on Form 10-K filed for 2008
fiscal year.
Revenue recognition: Contracts in process are stated
at the lower of actual costs incurred plus accrued profits or
incurred costs reduced by progress billings. On cost-plus fee
contracts, revenue is recognized to the extent of costs incurred
plus a proportionate amount of fee earned, and on time-and-material
contracts, revenue is recognized to the extent of billable rates
times hours delivered plus material and other reimbursable costs
incurred. The Company records income from major fixed-price
contracts, extending over more than one accounting period, using
the percentage-of-completion method. During the performance of
such contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. Fixed
price contracts can be significantly impacted by changes in
contract performance, contract delays, liquidated damages and
penalty provisions, and contract change orders, which may affect
the revenue recognition on a project. Revisions to such estimates
are made when they become known.
There is the possibility that there will be future and
currently unforeseeable adjustments to our estimated contract
revenues, costs and margins for fixed price contracts,
particularly in the later stages of these contracts. Such
adjustments are common in the construction industry given the
nature of the contracts. These adjustments could either
positively or negatively impact our estimates due to the
circumstances surrounding the negotiations of change orders,
the impact of schedule slippage, subcontractor claims and
contract disputes which are normally resolved at the end of
the contract.
Allowance for doubtful accounts: Disputes arise in the
normal course of the Company's business on projects where the
Company is contesting with customers for collection of funds
because of events such as delays, changes in contract
specifications and questions of cost allowability and
collectibility. Such disputes, whether claims or unapproved
change orders in process of negotiation, are recorded at the
lesser of their estimated net realizable value or actual
costs incurred and only when realization is probable and can be
reliably estimated. Management reviews outstanding receivables
on a regular
14
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
basis and assesses the need for reserves, taking into consideration
past collection history and other events that bear on the
collectibility of such receivables.
Asset retirement obligation: During fiscal year 2007, the
Company recorded an asset retirement obligation associated with the
estimated clean-up costs for its chemical laboratory in its
National Security business segment. In accordance with SFAS 143,
the Company estimated the costs to clean up the laboratory and
return it to its original state at a present value of approximately
$497,000. The Company currently estimates the amortization and
accreation expense to be approximately $180,000 to $190,000 per
year over the next 2 1/2 years. The Company is rigorously pursuing
reimbursement for such costs and other costs from the U.S. Army as
a significant portion of the chemical agent that was used in the
chemical laboratory was government owned. If the Company
determines that the estimated clean up cost is larger than
expected or the likelihood of recovery from the U.S. Army is
remote, such adjustments will be reflected when they become
known in accordance with SFAS 143. At September 26, 2008 the
Company has accrued approximately $551,000 long-term liability
to clean up the chemical laboratory.
Goodwill and other intangible assets: The carrying value
of goodwill is approximately $776,000 relating to the acquisition
of Versar Global Solutions, Inc., which is now part of the Program
Management business segment. The Program Management business
segment was broken out separately in fiscal year 2007, primarily
due to the increase in business volume in Iraq and in the United
States construction related work. In performing its goodwill
impairment analysis, management has utilized a market-based
valuation approach to determine the estimated fair value of the
Program Management business segment. Management engages outside
professionals and valuation experts, as necessary, to assist in
performing this analysis. An analysis was performed on public
companies and company transactions to prepare a market-based
valuation. Based upon the analysis, the estimated fair value
of the Program Management business segment exceeds the carrying
value of the net assets of $6.5 million on an enterprise
value basis by a substantial margin. Should the Program
Management business segments financial performance not meet
estimates, then impairment of goodwill would have to be further
assessed to determine whether a write down of goodwill value
would be warranted. If such a write down were to occur,
it would negatively impact the Company's financial position
and results of operations. However, it would not impact the
Company's cash flow or financial debt covenants.
New accounting pronouncements: In December 2007, the
FASB issued Statement of Financial Accounting Standards No.
141(R),Business Combinations ("SFAS 141(R)"). SFAS 141(R)
changes the requirements for an acquiring entity's recognition
and measurement of the assets acquired and liabilities assumed
in a business combination. This statement is effective for
fiscal years beginning after December 15, 2008. The Company
is in the process of determining what effect, if any, the
application of the provisions of SFAS 141(R) will have on
its financial position and results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160,Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51
("SFAS 160"). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS 160 is effective
for fiscal years beginning on or after December 15, 2008. The
Company does not believe the adoption of SFAS 160 will have a
material impact on its consolidated financial statements.
Impact of Inflation
Versar seeks to protect itself from the effects of inflation.
The majority of contracts the Company performs are for a period of
a year or less or are cost-plus-fixed-fee type contracts and,
accordingly, are less susceptible to the effects of inflation.
Multi-year contracts include provisions for projected increases
in labor and other costs.
Contingencies
Versar and its subsidiaries are parties to various legal
actions arising in the normal course of business. The Company
believes that the ultimate resolution of these legal actions
will not have a material adverse effect on its consolidated
financial position and results of operations. (See Part II,
Item 1 - Legal Proceedings).
15
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Business Segments
Versar currently has four business segments: Program
Management, Compliance and Environmental Programs, Professional
Services, and National Security. See Note J of the Notes to the
Consolidated Financial Statements for details regarding these
segments.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company has not entered into any transactions using
derivative financial instruments or derivative commodity
instruments and believes that its exposure to interest rate
risk and other relevant market risk is not material.
Item 4T - Controls and Procedures
As of the last day of the period covered by this report,
the Company carried out an evaluation, under the supervision of
the Company's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective, as of such date, to ensure
that required information will be disclosed on a timely basis in
its reports under the Exchange Act.
Further, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is
accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, in a manner
to allow timely decisions regarding the required disclosure.
There were no changes in the Company's internal control
over financial reporting during the last quarter that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Versar and its subsidiaries are parties from time to time
to various legal actions arising in the normal course of
business. The Company believes that any ultimate unfavorable
resolution of these legal actions will not have a material
adverse effect on its consolidated financial condition and
results of operations.
Item 6 - Exhibits
(a) Exhibits
31.1 and 31.2 - Certification pursuant to Securities
Exchange Act Section 13a-14.
32.1 and 32.2 - Certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
16
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: November 10, 2008
17