e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the Quarterly Period Ended March 26, 2010
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o |
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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
(Exact name of registrant as specified in its charter)
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DELAWARE
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54-0852979 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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6850 Versar Center
Springfield, Virginia
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22151 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (703) 750-3000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do
not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date.
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Class of Common Stock
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Outstanding at May 1, 2010 |
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$.01 par value
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9,280,327 |
VERSAR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
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PAGE |
PART I FINANCIAL INFORMATION |
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ITEM 1 Financial Statements Unaudited |
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3 |
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4 |
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5 |
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6-15 |
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16-24 |
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24 |
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24 |
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25 |
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25 |
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25-26 |
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27 |
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EXHIBITS |
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28-31 |
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2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, except share amounts)
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March 26, |
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June 26, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS
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Current assets |
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Cash and cash equivalents |
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$ |
2,854 |
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$ |
8,400 |
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Accounts receivable, net |
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26,511 |
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27,695 |
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Notes receivable |
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1,531 |
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200 |
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Inventory |
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1,001 |
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Income tax receivable |
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1,740 |
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Prepaid expenses and other current assets |
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2,441 |
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1,007 |
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Deferred income taxes |
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644 |
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720 |
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Total current assets |
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36,722 |
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38,022 |
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Property and equipment, net |
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3,184 |
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2,348 |
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Deferred income taxes |
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739 |
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765 |
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Goodwill |
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7,310 |
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776 |
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Intangible assets, net |
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1,000 |
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Other assets |
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932 |
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683 |
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Total assets |
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$ |
49,887 |
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$ |
42,594 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
10,845 |
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$ |
7,405 |
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Accrued salaries and vacation |
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2,484 |
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1,959 |
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Accrued bonus |
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444 |
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1,358 |
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Other liabilities |
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5,090 |
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1,787 |
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Notes payable current |
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1,355 |
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Total current liabilities |
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20,218 |
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12,509 |
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Notes
payable noncurrent |
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1,345 |
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Other
liabilities |
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868 |
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1,431 |
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Total long-term liabilities |
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2,213 |
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1,431 |
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Total liabilities |
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22,431 |
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13,940 |
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Commitments and contingencies |
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Stockholders equity |
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Common stock, $.01 par value; 30,000,000 shares
authorized; 9,444,324 shares and 9,193,635 shares
issued; 9,242,270 shares and 9,074,300 shares
outstanding |
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94 |
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92 |
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Capital in excess of par value |
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28,447 |
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27,734 |
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Retained earnings |
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34 |
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1,615 |
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Treasury stock (202,054 and 119,335 shares, respectively) |
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(1,000 |
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(706 |
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Accumulated other comprehensive loss |
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(119 |
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(81 |
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Total stockholders equity |
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27,456 |
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28,654 |
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Total liabilities and stockholders equity |
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$ |
49,887 |
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$ |
42,594 |
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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)
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For the Three-Month |
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For the Nine-Month |
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Periods Ended |
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Periods Ended |
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March 26, |
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March 27, |
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March 26, |
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March 27, |
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2010 |
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2009 |
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2010 |
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2009 |
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GROSS REVENUE |
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$ |
24,355 |
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$ |
31,851 |
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$ |
73,456 |
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$ |
84,816 |
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Purchased services and materials, at
cost |
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13,750 |
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17,470 |
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39,870 |
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46,670 |
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Direct costs of services and overhead |
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9,346 |
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10,026 |
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28,246 |
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27,408 |
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GROSS PROFIT |
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1,259 |
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4,355 |
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5,340 |
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10,738 |
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Selling, general and administrative
Expenses |
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2,256 |
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2,525 |
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6,469 |
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6,759 |
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Other expense |
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1,269 |
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1,269 |
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OPERATING (LOSS) INCOME |
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(2,266 |
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1,830 |
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(2,398 |
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3,979 |
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OTHER EXPENSE/(INCOME) |
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(Gain) loss on marketable securities |
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(20 |
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326 |
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Interest income |
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(41 |
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(1 |
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(106 |
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(3 |
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Interest expense |
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25 |
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22 |
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47 |
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43 |
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(LOSS) INCOME BEFORE INCOME TAXES |
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(2,250 |
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1,829 |
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(2,339 |
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3,613 |
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Income tax (benefit) expense |
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(733 |
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704 |
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(759 |
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1,399 |
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NET (LOSS) INCOME |
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$ |
(1,517 |
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$ |
1,125 |
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$ |
(1,580 |
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$ |
2,214 |
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NET (LOSS) INCOME PER SHARE BASIC |
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$ |
(0.16 |
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$ |
0.12 |
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$ |
(0.17 |
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$ |
0.24 |
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NET (LOSS) INCOME PER SHARE DILUTED |
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$ |
(0.16 |
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$ |
0.12 |
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$ |
(0.17 |
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$ |
0.24 |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING BASIC |
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9,224 |
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9,170 |
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9,107 |
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9,099 |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING DILUTED |
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9,224 |
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9,199 |
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9,107 |
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9,131 |
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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)
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For the Nine-Month Periods Ended |
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March 26, 2010 |
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March 27, 2009 |
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Cash flows from operating activities |
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Net (loss) income |
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$ |
(1,580 |
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$ |
2,214 |
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Adjustments to reconcile net income (loss) to net cash used
in operating Activities |
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Depreciation and amortization |
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788 |
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750 |
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Provision for doubtful accounts receivable |
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100 |
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125 |
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Loss on marketable securities |
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326 |
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(Gain) loss on life insurance policy cash surrender value |
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(203 |
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167 |
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Stock based compensation |
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279 |
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594 |
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Deferred taxes |
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44 |
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155 |
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Excess tax benefits on share based compensation |
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(33 |
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Changes in assets and liabilities |
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Decrease (increase) in accounts receivable |
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1,523 |
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(9,539 |
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Increase in inventories |
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(113 |
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Increase in prepaids and other assets |
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(4,060 |
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(673 |
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Increase in accounts payable |
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3,147 |
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905 |
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Increase in accrued salaries and vacation |
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524 |
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854 |
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Increase (decrease) in other liabilities |
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1,087 |
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(1,021 |
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Net cash provided by (used in) operating activities |
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1,536 |
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(5,176 |
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Cash flows used in investing activities |
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Purchase of property and equipment |
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(1,124 |
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(1,102 |
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Payment for Advent, net of cash acquired |
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(498 |
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Payment for PPS, net of cash acquired |
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(4,380 |
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Purchase of marketable securities |
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(3,000 |
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Proceeds from sale of marketable securities |
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2,674 |
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Premium paid on life insurance policies |
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(36 |
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(37 |
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Investment in notes receivable |
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(950 |
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Net cash used in investing activities |
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(6,988 |
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(1,465 |
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Cash flows from financing activities |
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Proceeds from issuance of common stock |
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1 |
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48 |
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Purchase of treasury stock |
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(56 |
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(128 |
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Tax benefit on exercise of stock options |
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33 |
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Net cash used in financing activities |
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(55 |
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(47 |
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Effect of exchange rate changes |
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(39 |
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(2 |
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Net decrease in cash and cash equivalents |
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(5,546 |
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(6,690 |
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Cash and cash equivalents at the beginning of the period |
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8,400 |
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11,938 |
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Cash and cash equivalents at the end of the period |
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$ |
2,854 |
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$ |
5,248 |
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Supplementary disclosure of cash flow information: |
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Cash paid during the period for |
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Interest |
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$ |
37 |
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$ |
43 |
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Income taxes |
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1,416 |
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1,501 |
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Supplemental disclosures of non-cash financing activities: |
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Exercise of stock options |
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238 |
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Acquisition of treasury stock for restricted shares |
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(238 |
) |
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Supplemental disclosures of non-cash investing activities: |
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Issuance of notes payable for acquisition |
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2,690 |
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Issuance of stock for PPS acquisition |
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240 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated condensed financial statements are presented in accordance with
the requirements of Form 10-Q and consequently do not include all of the disclosures normally
required by accounting principles generally accepted in the United States of America or those
normally made in Versar, Inc.s Annual Report on Form 10-K filed with the United States Securities
and Exchange Commission. These financial statements should be read in conjunction with the
Companys Annual Report filed on Form 10-K for the fiscal year ended June 26, 2009 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 Companys customary accounting practices. Certain adjustments to
the financial statements are necessary for fair presentation and are of a normal recurring nature
as part of the operations of the business. In the opinion of management, the information reflects
all adjustments necessary for a fair presentation of the Companys consolidated financial position
as of March 26, 2010, and the results of operations for the nine-month and three-month periods
ended March 26, 2010 and March 27, 2009. 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 financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which require 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
Receivables related to contracts in process are stated at the lower of actual cost incurred
plus accrued profits or 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 type
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 Companys 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 realized 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) Restructuring Charge
During the third quarter of fiscal year 2010, the Company took a charge to earnings of
$939,000. The $939,000 reserve is comprised of severance costs for 35
personnel of $789,000 and
office closure and project wind down costs of approximately $150,000.
Approximately, $470,000,
$359,000 and $110,000 of the reserves were taken against the corporate general and administrative
functions, the Compliance and Environmental Programs business segment, and the Program Management
business segment, respectively. The effective date for the closing of the Arizona and Chicago
offices was April 1, 2010.
(E) Acquisitions
On January 5, 2010, the Company acquired all of the outstanding share capital of Professional
Protection Systems, Ltd. (PPS), located in Milton Keynes, United Kingdom. PPS manufactures and
sells proprietary personal protective equipment to the nuclear industry, including protective
suites, decontamination showers and emergency shelters. The PPS worldwide distribution and
manufacturing capability significantly increased Versars personal protective equipment business
volume. The
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
outstanding share capital of PPS was acquired by Versars newly formed subsidiary, GEOI 1, Ltd.
The Company paid a purchase price for the outstanding share capital of PPS comprised of: (i) cash
of $5.1 million, (ii) issuance to the selling shareholders of seller notes with an aggregate
principal amount of $940,000, payable over two years with an interest rate of 5% per annum, and
(iii) issuance to one selling shareholder of 78,689 shares of common stock of Versar with a value
as of the date of closing of $240,000 on January 5, 2010. Certain of the selling shareholders are
also entitled to contingent cash consideration through an earn-out provision calculated based on
earnings before interest, taxes, depreciation and amortization of PPS for the 12-month period
ending January 1, 2011. The Company estimated the fair value of
the contingent earn-out liability to be $105,000 based on
the projections and probabilities of reaching PPSs business
goals through January 2011.
On March 18, 2010, the Company acquired Advent Environmental Inc., (Advent) headquartered in
Charleston, South Carolina. Advent is a Department of Defense, full service environmental
contractor with significant capabilities in Military Munitions Response Plans (MMRP) and Unexploded
Ordinance (UXO) clean-up. The acquisition of Advent added significant strategic contract capacity
to Versar, expanded our geographic presence to the Southeast United States, and added technical
expertise in the MMRP/UXO arena.
The
Company paid a purchase price for all of the outstanding stock of Advent comprised of:
(i) cash of $1.15 million, and (ii) issuance to the selling shareholders of seller notes with an
aggregate principal amount of $1.75 million, payable over two years with an interest rate of 5% per
annum. The selling shareholders are also entitled to contingent consideration up to a maximum of
$1.75 million through an earn-out provision calculated based on earnings before interest, taxes,
depreciation or amortization of Advent for the 12-month period ending March 2011. The Company
estimated the fair value of the contingent earn-out liability to be $100,000 based on the projections and probabilities of
reaching Advents business goals through March 2011.
The acquisitions were accounted for as purchases in accordance with the provisions of
Accounting Standards Codification (ASC) 805, Business Combinations (formerly SFAS No. 141 (R)).
The Company utilized its working capital in conjunction with notes and company stock to fund the
acquisitions of PPS and Advent. The Company recorded the excess of the purchase price over the
estimated fair value of the net tangible assets acquired of approximately $4.4 million for PPS and
$2.1 million for Advent. The Company believes that these two
acquisitions will enable us to
expand our markets globally and client base more broadly. The business synergies with the
Companys National Security and Compliance and Environmental Programs business segments enable the
Company to operate more efficiently with the business synergies between the Companies. The Company
has allocated approximately $500,000 each to the PPS and Advent
customer relationships. The intangible assets will be amortized over five years. PPS was purchased under the
election provision of Internal Revenue Code 338(h)(10), and therefore, the amortization of goodwill
and intangible assets are deductible for tax purposes over a fifteen-year period. The goodwill
associated with the Advent acquisition will not be tax deductible.
The transaction costs to purchase these two
companies was approximately $330,000 for legal, valuation and
financial support, which were included in the other expense line in
the Consolidated Statement of Operations.
The results of operations for PPS and Advent since the acquisition dates are included in the
Companys Statement of Operations for the three-month and nine-month periods ended March 26, 2010.
Revenue from PPS and Advent were approximately $934,000 and $104,000 respectively. Earnings
(loss) for the same periods was approximately $58,000 and ($32,000) for PPS and Advent,
respectively. Proforma data is impracticable to provide as both have not had a final accounting as
of the end of March 2010. Due to the similarity of the business process and business environment,
the Company has integrated PPS in the National Defense business segment while Advent was integrated
in the Compliance and Environmental business segment.
The purchase price allocation as reported below represents managements estimates of the fair
value on the acquisition date of PPS and Advent. Management is still in the process of refining
the fair value of the assets and liabilities of the acquired entities. Management will engage an
independent valuation firm to assist with the allocation of the purchase price of
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
the
acquired entities. The final results, which should be completed by the end of fiscal year 2010,
may differ from our preliminary purchase price allocations.
|
|
|
|
|
Professional Protection Systems, Ltd. |
|
(In Thousands) |
|
Cash |
|
$ |
720 |
|
Accounts receivable |
|
|
460 |
|
Inventory |
|
|
949 |
|
Property and equipment |
|
|
493 |
|
Goodwill |
|
|
4,397 |
|
Intangibles |
|
|
500 |
|
|
|
|
|
Total assets acquired |
|
|
7,519 |
|
|
|
|
|
Accounts payable |
|
|
304 |
|
Other liabilities |
|
|
830 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,134 |
|
|
|
|
|
Net assets acquired |
|
$ |
6,385 |
|
|
|
|
|
|
|
|
|
|
Advent Environmental, Inc. |
|
(In Thousands) |
|
Cash |
|
$ |
652 |
|
Accounts receivable |
|
|
1,236 |
|
Prepaid and other assets |
|
|
372 |
|
Goodwill |
|
|
2,138 |
|
Intangibles |
|
|
500 |
|
|
|
|
|
Total assets acquired |
|
|
4,898 |
|
|
|
|
|
Accounts payable |
|
|
1,573 |
|
Other liabilities |
|
|
325 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,898 |
|
|
|
|
|
Net assets acquired |
|
$ |
3,000 |
|
|
|
|
|
The Company incurred approximately $215,000 and $115,000 of transaction costs in the third
quarter of fiscal year 2010 related to the acquisitions of PPS and Advent, respectively. The
expenses are included in the Statement of Operations in the Other Expense line.
(F) Income Taxes
At March 26, 2010, the Company had approximately $1.4 million in deferred tax assets, which
primarily relate to temporary differences between financial statement and income tax reporting.
The effective tax rate for the three months and nine months of fiscal
year 2010 and 2009 was 32% and 38%, respectively which differs from the
statutory rate as a result of discrete items such as depreciation, deferred compensation, accruals,
reserves, federal alternative minimum tax and foreign withholding taxes.
(G) Debt
In March 2010, the Company modified its line of credit facility with United Bank to increase
its aggregate borrowing capacity from $7.5 million to $10 million in anticipation of higher working
capital requirements with the new acquisitions. The line of credit is subject to certain covenants
related to the maintenance of financial ratios. As modified, these covenants require a minimum
tangible net worth of $17.5 million; a maximum total liabilities to tangible net worth ratio not
exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Interest accrues on borrowings
under the line of credit at the prime rate of interest less 1/2% with a floor interest rate of 3.5%.
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 Companys ability to finance its working capital
requirements. As of March 26, 2010, the Company had no outstanding borrowings and was in
compliance with the financial covenants. The Company has a letter of credit of approximately
$455,000 outstanding under the line of credit facility which serves as collateral for the Companys
surety bonding provided by the Companys insurance carrier against project construction work. The
letter of credit reduces the Companys availability on the line of credit. Availability under the
line of credit at March 26, 2010 was approximately $9.5 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 on September 30, 2010.
As part of the PPS acquisition in January 2010, the Company issued $940,000 principal amount
of notes payable, which are payable quarterly over a 2 year period and bears an interest rate of
5%. As part of the Advent acquisition in March 2010, the Company issued notes payable of
$1,750,000 principal amount, which are payable quarterly over a 2 year period and bears an interest
rate of 5%. These notes were presented on the Consolidated Balance
Sheets as current and non-current notes payable.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(H) Notes Receivable
In June and July 2009, the Company provided interim debt financing of $400,000 to General
Power Green Energy, LLC (GPC) to fund certain GPC project start up costs. The project involves the
construction of a 25 mega watt co-generation plant that burns landfill gas in turbine engines
equipped with a steam generation unit. The note carries an annual
interest rate of 10% and was originally due
on March 31, 2010 or upon completion of project financing, if earlier. In addition, Versar will
provide the program
management services and purchase equipment and construct the facility. Versar also received a 7.5%
ownership interest in GPC in connection with providing the loan. On May 4, 2010, the Company
formally extended the term of the note to December 1, 2010 due to several bureaucratic delays to
extend the sale of landfill gas from 7 to 25 years in order to make the project financeable.
Furthermore, the Company increased the principal amount of the note to $550,000, which is also
secured by the assets of the project. In exchange for an increase in amount of the loan and
extension of the term, Versars ownership interest in GPC was increased from 7.5% to 20%. The
Company has not assigned a value to the 20% ownership interest due to the fact that GPC is in its
developmental stage, and no value can be placed on the ownership interest at this time.
In July 2009, the Company provided $750,000 of short term debt financing to Lemko Corporation
to enable them to buy long lead telecommunication equipment for several upcoming projects. Lemko
and Versar had previously announced a joint initiative to pursue the rural broadband
telecommunications market. The note bears an annual interest rate of 12% and is due on May 31,
2010. The note is partially secured by the equipment inventory purchased. The note also had a
conversion feature to a senior convertible debenture. This feature was not exercised by the
Company and expired on March 31, 2010, therefore, the original terms
of the note continue in effect.
The Company accounts for these debt security investments under the guidance of ASC 320
Investments Debt and Equity Securities. These notes are classified as held-to-maturity debt
securities due to their short term nature and the fact that the Company has the intent and ability
to hold to maturity. Therefore, these securities are recorded at amortized cost and presented as
current assets in the interim consolidated balance sheet.
(I) Inventory
As part of the Companys acquisition of Professional Protection Systems, Ltd., (PPS) the
Company acquired inventory as part of the transaction. Such inventory is recorded at the lower of
purchase price or fair values. The Companys inventory is
recorded on a first-in first-out basis.
(J) Prepaids and Other Current Assets
Other current assets include the renewal of the Companys overall insurance program which
covers an 18 month period for approximately $1.4 million.
(K) Intangible Assets
During the third quarter of fiscal year 2010, the Company acquired the stock of PPS and
Advent. The Company has estimated that the value of PPSs customer relationships is approximately
$500,000 and will amortize such costs over a 5 year period. With the acquisition of Advent, the
Company has several large contract vehicles with the Air Force, Army and Navy to which Versar will
now have access to along with Advent to perform work that would have otherwise had to be obtained
indirectly, thus saving the Company money and providing more direct access to execute work. The
Company has estimated the value of Advents customer relationships to be approximately $500,000 and
will amortize this over a 5 year period, which is in line with the period of performance of these
contracts.
(L) Other
Current Liabilities
Other liabilities include the renewal of the Companys overall insurance program which covers
an 18 month period for approximately $1.4 million, reserves taken in the third quarter balance of
approximately $890,000 (see Note D) for estimated earn out requirements for the PPS and Advent acquisitions of
approximately $205,000; and the chemical laboratory cleanup of $623,000 and approximately $1.9
million of other accrued expenses in the normal ordinary course of business for the Company.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(M) Net (Loss) 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 Companys common
stock equivalent shares consist of shares to be issued under outstanding stock options and unvested
shares of restricted stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
For the Nine-Month Periods Ended |
|
|
|
March 26, |
|
|
March 27, |
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Weighted average
common shares
outstanding
basic |
|
|
9,224,425 |
|
|
|
9,169,668 |
|
|
|
9,106,784 |
|
|
|
9,099,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of assumed
exercise of options
and vesting of
restricted stock
awards (treasury
stock method) |
|
|
|
|
|
|
29,716 |
|
|
|
|
|
|
|
32,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares
outstanding
diluted |
|
|
9,224,425 |
|
|
|
9,199,384 |
|
|
|
9,106,784 |
|
|
|
9,131,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 26, 2010 and March 27, 2009, options to purchase approximately
300,000 and 64,000 shares of restricted common stock were omitted from the computation of diluted
earnings per share because the effect would be anti-dilutive. For the three months ended March 26,
2010 and March 27, 2009, options to purchase approximately 270,000 shares and 64,000 shares of
restricted common stock were not included in the computation of diluted earnings per share because
the effect would be anti-dilutive.
(N) Common Stock
The Company has implemented an Employee Stock Purchase Plan (ESPP) to allow eligible employees
of Versar the opportunity to acquire an ownership interest in the Companys common stock. As
amended, the ESPP permits employees to purchase shares of Versar common stock from the open market
at 95% of its fair market value. The ESPP qualifies as an employee stock purchase plan under
Section 423 of the Internal Revenue Code.
(O) Stock-Based Compensation
Stock-based awards are measured based on the grant date fair value of the award. Fifty
percent of the stock vests on April 1, 2010 and the balance on
June 30, 2011. Expense is recognized ratably over the vesting
period. In the first nine
months of fiscal year 2010, the Company awarded 77,000 shares of restricted stock to board members,
executive officers and employees for promotions and as incentive awards. The awards vest over a period of one year to three years. Stock based compensation
expense relating to all outstanding restricted stock and option awards totaled $279,000 and
$594,000 for the nine months ended March 26, 2010 and March 27, 2009, respectively. Stock based
compensation expense for the three month periods ended March 26, 2010 and March 27, 2009 was
$69,000 and $80,000, respectively. These expenses were included in the direct costs of services
and overhead and general and administrative lines of the Consolidated
Statements of Operations. At
March 26, 2010, there were 38,832 shares of unvested restricted stock outstanding at a value of
approximately $135,000, and will be expensed on a weighted average of
1.6 yrs.
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 Companys
Compensation Committee. Only employees may receive stock options classified as incentive stock
options,
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
also known as ISOs. The per share exercise price for options and SARS granted under the 2005
Plan may not be less than the fair market value of the common stock on the date of grant. A
maximum of 400,000 shares of common stock may be awarded under the 2005 Plan. No single director,
officer, or employee may receive awards of more than 100,000 shares of common stock during the term
of the 2005 Plan. The ability to make awards under the 2005 Plan will terminate in November 2015.
As of
March 26, 2010, approximately 59,000 shares are available for future grant under the 2005 Plan.
There were no stock options awarded 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 may be granted to
any employee, service provider or director to whom a grant is approved from time to time by the
Companys 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 ability to make awards under the 2002
Plan will terminate in September 2012. As of March 26, 2010, approximately 37,500 shares are
available for future grant and 281,000 shares of vested stock options are outstanding.
Under the 1996 Plan, options were granted to key employees, directors and service providers at
the fair market value on the date of grant. Each option expires on the earlier of the last day of
the tenth year after the date of grant or after expiration of a period designated in the option
agreement. The 1996 Plan has expired and no additional options may be granted under this plan.
The Company will continue to maintain the plan until all previously granted options have been
exercised, forfeited or expire. As of March 26, 2010, there were vested stock options to purchase
50,761 shares of common stock outstanding under the 1996 Plan.
Under the 1992 Plan, options were granted to key employees at the fair market value on the
date of grant and became exercisable during the five-year period from the date of the grant at 20%
per year. Options were granted with a ten year term and expire if not exercised by the tenth
anniversary of the grant date. The 1992 Plan has expired and no additional options may be granted
under this plan. The Company will continue to maintain the plan until all previously granted
options have been exercised, forfeited or expire. As of March 26, 2010, there were vested stock
options to purchase 83,500 shares of common stock outstanding under the 1992 Plan.
A summary of activity under the Companys stock incentive plans for both ISOs and
non-qualified options as of March 26, 2010, and changes during the first nine months of fiscal year
2010 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Options |
|
(in thousands) |
|
|
Price |
|
|
Term |
|
|
($000) |
|
Outstanding at June 27, 2009 |
|
|
542 |
|
|
$ |
3.11 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(100 |
) |
|
|
2.38 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(7 |
) |
|
|
3.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 26, 2010 |
|
|
435 |
|
|
$ |
3.27 |
|
|
4.11 yrs. |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 26, 2010 |
|
|
425 |
|
|
$ |
3.15 |
|
|
3.84 yrs. |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of the 100,000 shares issued as a result of option exercised during the
first nine months of fiscal year 2010 was approximately $131,500. As of March 26, 2010, there were
unvested options to purchase approximately 10,000 shares outstanding under the plans. Vesting of
these options is conditioned on the Companys stock price reaching certain thresholds over a fixed
period. The Company expects to recognize estimated compensation costs
of $52,000 immediately when
the pricing and service conditions of these options are met in the future.
11
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(P) New Accounting Pronouncements
In August 2009, the FASB amended guidance in FASB Accounting Standards
CodificationTM (ASC) 820, Fair Value Measurements and Disclosures, to clarify how
entities should estimate the fair value of liabilities. The amendments provide clarification that
in circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or more of the following
valuation techniques: (1) a valuation technique that uses (a) the quoted price of the identical
liability when traded as an asset or (b) quoted prices for similar liabilities or similar
liabilities when traded as assets and/or (2) another valuation technique that is consistent with
fair value principles such as an income or market approach. The amendments also clarify that when
estimating the fair value of a liability, a reporting entity is not required to consider the
existence of transfer restrictions on that liability. The Company adopted the amended guidance
effective October 1, 2009. The adoption did not have a material impact on the Companys financial
condition and results of operations.
In September 2009, the FASB ratified the final consensus on Emerging Issues Task Force
(EITF) Issue 08-1, Revenue Arrangements With multiple Deliverables, (Issue 08-1) which
supersedes ASC 605-25 (formerly EITF Issue 00-21, Revenue Arrangements With Multiple Deliverables).
Issue 08-1 addresses how arrangement consideration should be allocated to separate units of
accounting, when applicable. Although Issue 08-1 retains the criteria from ASC 605-25 for when
delivered items in a multiple deliverable arrangement should be considered separate units of
accounting, it removes the previous separation criterion under ASC 605-25 that objective and
reliable evidence of the fair value of any undelivered items must exist for the delivered items to
be considered a separate unit or separate units of accounting. The final consensus is effective
for fiscal years beginning on or after June 15, 2010. Entities can elect to apply Issue 08-1
prospectively to new or materially modified arrangements after the effective date or
retrospectively for all periods presented. Issue 08-1 was issued as Accounting Standards Update
(ASU) 2009-13 in October 2009 and amended ASC
605-25. The Company expects to implement ASU 2009-13 on June 26, 2010
and does not anticipate that
adoption of ASU 2009-13 will have any impact on the Companys financial position or results of
operations.
In August 2009, the FASB issued ASU 2009-05 to provide guidance on measuring fair value of
liabilities under ASC 820 (formerly FSP FAS 157-f). The guidance clarifies how entities should
estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for
circumstances in which a quoted price in an active market is not available, the effect of the
existence of liability transfer restrictions, and the effect of quoted prices for the identical
liability, including when the identical liability is traded as an asset. ASU 2009-05 is effective
for the first interim or annual reporting period beginning after 2009. The Company adopted this
guidance during the second quarter of fiscal year 2010. The adoption of the amended guidance in
ASC 820 did not have a material effect on the Companys consolidated financial statements.
In April 2009, the FASB issued authoritative guidance for fair value measurements and
disclosures. The guidance provides companies with guidelines on how to determine fair value
measurements when the volume and level of activity for an asset or liability have significantly
decreased and how to identify transactions that are not orderly. This guidance is effective for
interim reporting periods ending after June 15, 2009. The Company adopted this guidance during the
first quarter of fiscal year 2010. Adoption of this guidance did not have any impact on its
consolidated financial statements.
In April 2009, the FASB issued authoritative guidance for interim disclosures for financial
instruments. This guidance amends prior authoritative guidance by requiring disclosures of the fair
value of financial instruments included within the scope of the prior guidance whenever a public
company issues summarized financial information for interim reporting periods. This guidance is
effective for interim reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009 under certain circumstances. The Company adopted this
guidance for the quarter ended September 25, 2009, which adoption did not have an impact on its
unaudited condensed consolidated financial statements. The carrying amounts of Versars cash and
cash equivalents, accounts receivable, accounts payable and amounts included in notes receivable,
other current assets and current liabilities that meet the definition of a financial instrument
approximate fair value because of the short-term nature of these instruments.
Effective June 27, 2009, the Company adopted new accounting guidance related to the reporting
of subsequent events. This guidance establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this guidance sets forth the
period after the balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in the financial
statements; the circumstances under which an entity should
12
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
recognize events or transactions occurring after the balance sheet date in its financial
statements; and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance was amended by
ASU 2010-09 Amendments to Certain Recognition and Disclosure Requirements. The amendment did not have an impact to the
Company.
In December 2007, the FASB issued ASC 805, Business Combinations (formerly SFAS No. 141
(revised 2007), Business Combinations). ASC 805 establishes principles and requirements for how
companies recognize and measure identifiable assets acquired, liabilities assumed, and any
non-controlling interest in connection with a business combination, recognize and measure the
goodwill acquired in a business combination or a gain from a bargain purchase, and determine what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. ASC 805 is effective for business combinations
completed on or after June 27, 2009. The Company has adopted ASC 805 in the acquisitions of PPS
and Advent during the third quarter of 2010.
(Q) Fair Value Measures
Financial assets and liabilities
We analyze our financial assets and liabilities measured at fair value and categorize them
within the fair value hierarchy based on the level of judgment associated with the inputs used to
measure their fair value in accordance with the authoritative guidance for fair value instruments
and the fair value option for financial assets and financial liabilities.
The levels as defined by the fair value hierarchy are as follows:
Level 1 Inputs are unadjusted, quoted prices in active markets for identical assets
or liabilities at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly at the measurement date.
Level 3 Inputs are unobservable for the asset or liability and usually reflect the
reporting entitys best estimate of what market participants would use in pricing the
asset or liability at the measurement date.
Non financial assets and liabilities
The Company applies fair value techniques on a non-recurring basis associated with (1) valuing
potential impairment losses related to goodwill which are accounted for pursuant to the
authoritative guidance for intangibles goodwill and other, (2) valuing potential impairment
losses related to long-lived assets which are accounted for pursuant to the authoritative guidance
for property, plant and equipment, and (3) valuing an asset retirement liability initially measured
at fair value under the authoritative guidance for asset retirement obligations.
The Company currently
has four separate business segments. Goodwill impairment is tested at the reporting unit level. During this reporting period,
goodwill is associated with the Program Management business segment, Professional Protection
Systems, Inc. (PPS), which is part of the National Security business segment and Advent
Environmental, Inc. (Advent), which is part of the Compliance and Environmental Programs business
segment which were acquired in the third quarter of fiscal year 2010. The Company will determine
the fair value of these business segments based on a combination of inputs including the market
capitalization of the Company as well as Level 3 inputs such as discounted cash flows which are not
observable from the market, directly or indirectly. The Company conducts the goodwill impairment
analysis annually during the fourth quarter of the fiscal year, or upon the occurrence of certain
triggering events.
The Company tests for the impairment of long-lived assets when triggering events occur and
such impairment, if any, is measured at fair value. The inputs for fair value of the long lived
assets would be based on Level 3 inputs as data used for such fair value calculations would be
based on discounted cash flows which are not observable from the market, directly or indirectly.
During the nine months ended March 26, 2010, there have been no triggering events associated with
reporting units carrying long lived assets and thus no impairment analysis was conducted during the
period.
13
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(R) 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 Companys business segments.
The Companys business is currently operated through four business segments as follows:
Program Management, Compliance and Environmental Programs, Professional Services, and National
Security.
These segments were segregated based on the nature of the work, business processes, customer
base and the business environment in which each of the segments operates. These segments have
discrete financial information that is used by the Chief Operating decision-maker in allocating
resources.
The Program Management business segment manages larger more complex projects with business
processes and management unique to the rest of the Company. The Compliance and Environmental
Programs business segment which includes Advent, provides regulatory and environmental 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 which includes PPS, provides
unique solutions to the federal government including testing and evaluation and personal protective
solutions.
Summary of financial information for each of the Companys segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
For the Nine-Month Periods Ended |
|
|
|
March 26, |
|
|
March 27, |
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
13,993 |
|
|
$ |
21,580 |
|
|
$ |
45,858 |
|
|
$ |
54,314 |
|
Compliance and Environmental
Programs |
|
|
2,956 |
|
|
|
4,682 |
|
|
|
9,888 |
|
|
|
15,146 |
|
Professional Services |
|
|
3,293 |
|
|
|
3,050 |
|
|
|
9,161 |
|
|
|
8,012 |
|
National Security |
|
|
4,113 |
|
|
|
2,539 |
|
|
|
8,549 |
|
|
|
7,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,355 |
|
|
$ |
31,851 |
|
|
$ |
73,456 |
|
|
$ |
84,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT(LOSS)(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
1,110 |
|
|
$ |
3,515 |
|
|
$ |
4,290 |
|
|
$ |
7,986 |
|
Compliance and Environmental
Programs |
|
|
(284 |
) |
|
|
106 |
|
|
|
(444 |
) |
|
|
641 |
|
Professional Services |
|
|
520 |
|
|
|
411 |
|
|
|
1,449 |
|
|
|
1,220 |
|
National Security |
|
|
(87 |
) |
|
|
323 |
|
|
|
45 |
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,259 |
|
|
$ |
4,355 |
|
|
$ |
5,340 |
|
|
$ |
10,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
(2,256 |
) |
|
|
(2,525 |
) |
|
|
(6,469 |
) |
|
|
(6,759 |
) |
Other expense |
|
|
(1,269 |
) |
|
|
|
|
|
|
(1,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME |
|
$ |
(2,266 |
) |
|
$ |
1,830 |
|
|
$ |
(2,398 |
) |
|
$ |
3,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Gross profit is defined as gross revenue less purchased services and materials and direct costs of services and overhead. |
14
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
Periods Ended |
|
|
|
March 26, |
|
|
June 26, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
IDENTIFIABLE ASSETS |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
16,871 |
|
|
$ |
19,531 |
|
Compliance and Environmental Programs |
|
|
7,487 |
|
|
|
5,910 |
|
Professional Services |
|
|
2,646 |
|
|
|
2,561 |
|
National Security |
|
|
9,485 |
|
|
|
2,447 |
|
Corporate and Other |
|
|
13,398 |
|
|
|
12,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
49,887 |
|
|
$ |
42,594 |
|
|
|
|
|
|
|
|
15
|
|
|
ITEM 2 |
|
Managements 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 Companys 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 26, 2009 and in
other reports and other documents filed by the Company from time to time with the Securities and
Exchange Commission.
Financial Trends
During fiscal year 2009, continued government emphasis on funding of a number of international
programs within the Companys core business, resulted in increases in gross revenues and gross
profit in all of Versars business segments, except for the Companys Compliance and Environmental
business segment, which has been most significantly impacted by the declining U.S. economy.
However, in the first nine months of fiscal year 2010, a number of the Companys business segments
experienced a decline in revenue and gross profit as a result of shifts in government spending and
the continued impact of the weak economy on funding of projects in certain of the Companys
business segments. The negative impact of these funding shifts and continued delays in project
funding continued during the third quarter of fiscal year 2010. Further, since fiscal year 2008,
the Company has experienced a significant decline in work for the Air Force in Iraq. During fiscal
year 2008, approximately 53% of the Companys business volume related to reconstruction efforts in
Iraq and Afghanistan. The volume of this work began to decline during fiscal year 2009 and this
decline accelerated during the first
nine months of fiscal year 2010. As a result, this work comprised
57% and 39%, respectively, of the Companys business volume in fiscal year 2009 and the first nine
months of fiscal year 2010, respectively. The Company expects that the reconstruction efforts in
Iraq will be significantly further reduced during the remainder of fiscal year 2010 because of the
reduced Air Force role in reconstruction work in Iraq and currently expects that the reduction in
revenues for fiscal year 2010, as a result of the loss of work in Iraq, will be approximately $23
million.
The Company pursued many efforts to obtain additional revenues to offset this anticipated
decline in revenues, yet was unable to do so.
With the recent acquisitions of PPS and Advent, the Company expects to add an additional $15
to $20 million of annualized revenue to the Companys business base and expects to do so on an
accretive basis. The PPS acquisition will be included in the results of the National Security
business segment and the Advent acquisition results will be included in the Compliance and
Environmental business segment.
As a result of the anticipated business decline discussed above, in January 2010, the Company
implemented a cost reduction plan that will reduce the Companys overall cost structure by over
$3.3 million on an annualized basis. The cost reduction plan was designed to balance the Companys
costs with current and anticipated business volume. The Company recorded approximately $789,000 of
severance costs for 35 employees as well as $150,000 to close two offices in Arizona and Chicago.
16
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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; |
|
|
|
|
The ability to obtain follow-on work; |
|
|
|
|
Failure to properly manage projects resulting in additional costs; |
|
|
|
|
The cost of compliance for the Companys 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; |
|
|
|
|
Federal funding delays due to wars in Iraq and Afghanistan; and |
|
|
|
|
Foreign exchange rate fluctuations. |
Results of Operations
Third Quarter Comparison of Fiscal Year 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
13,993 |
|
|
$ |
21,580 |
|
Compliance and Environmental Programs |
|
|
2,956 |
|
|
|
4,682 |
|
Professional Services |
|
|
3,293 |
|
|
|
3,050 |
|
National Security |
|
|
4,113 |
|
|
|
2,539 |
|
|
|
|
|
|
|
|
|
|
$ |
24,355 |
|
|
$ |
31,851 |
|
|
|
|
|
|
|
|
Gross revenue for the third quarter of fiscal year 2010 was $24,355,000, a decrease of
$7,496,000 (24%) from the third quarter of fiscal year 2009. Gross revenue for the Program
Management business segment for the third quarter of fiscal year 2010 was $13,993,000, a decrease
of $7,587,000 (35%) from the third quarter of fiscal year 2009. The decrease was primarily due to
anticipated reduced work in support of the Air Forces Iraq reconstruction efforts. Gross revenue
for the Compliance and Environmental Programs business segment for the third quarter of fiscal year
2010 was $2,956,000, a decrease of $1,726,000 (37%) from the third quarter of fiscal year 2009.
The decrease in gross revenue was due to budget shortfalls for state and municipal agencies driven
by the U.S. economic recession and resulting continuing delay and deferral of projects by these
agencies. Gross revenue for the Professional Services business segment for the third quarter of
fiscal year 2010 was $3,293,000, an increase of $243,000 (8%) over that reported in the third
quarter of fiscal year 2009. The increase is due to continuing work under existing awards and
additional outsourcing awards from the U.S. Army during the quarter. Gross revenue for the
National Security business segment for the third quarter of fiscal year 2010 was $4,113,000, an
increase of $1,574,000 (62%) over that reported in the third quarter of fiscal year 2009.
Fifty-nine percent of the increase was from revenues attributable to PPS acquired in January 2010.
The remaining balance of the increase is attributable to revenues from the $13 million Tooele
contract awarded late in the second quarter of fiscal year 2010.
Purchased services and materials decreased by $3,720,000 (21%) in the third quarter of fiscal
year 2010 compared to the third quarter of fiscal year 2009. The decrease is attributable to lower
subcontractor costs as a result of the decreased gross revenues in the Program Management and the
Compliance and Environmental business segments as mentioned above.
17
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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 decreased by $680,000 (7%) as a result of the reduced gross revenues
as mentioned above in the Program Management and Compliance and Environmental business segments.
Gross profit for the third quarter of fiscal year 2010 was $1,259,000, a decrease of
$3,096,000 (71%) from the third quarter of fiscal year 2009. The decrease is primarily due to the
reduced revenue and profit margin declines shown below in the Program Management, Compliance and
Environmental Programs, and National Security business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
Gross Profit (Loss) Margin (%) |
|
|
|
March 26, |
|
|
March 27, |
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
GROSS PROFIT (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
1,110 |
|
|
$ |
3,515 |
|
|
|
7.9 |
% |
|
|
16.3 |
% |
Compliance and Environmental Programs |
|
|
(284 |
) |
|
|
106 |
|
|
|
(9.6 |
%) |
|
|
2.3 |
% |
Professional Services |
|
|
520 |
|
|
|
411 |
|
|
|
15.8 |
% |
|
|
13.5 |
% |
National Security |
|
|
(87 |
) |
|
|
323 |
|
|
|
(2.1 |
%) |
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,259 |
|
|
$ |
4,355 |
|
|
|
5.17 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin for the Program Management business segment for the third quarter of
fiscal year 2010 was 7.9% compared to 16.3% for the same period last year. The decrease was due to
the declining revenues in our Iraq title II work. The Compliance and Environmental Programs
business segment for the third quarter continued to incur operating losses. This segment was
largely impacted by the economic downturn in the U.S. domestic markets resulting in reduced
billable work. As a result the Company took steps to balance its work force with the reduced
levels of revenues as is further described below. Gross profit margin for the Professional
Services business group was 15.8% for the third quarter of fiscal year 2010, compared to 13.5% for
the third quarter of the prior fiscal year. The increase is due to improved margins with the
increase in gross revenue and reduced incremental costs due to the increased business volume. The
National Security business segment for the third quarter incurred operating losses resulting in a
negative margin of 2.1% for the third quarter of fiscal year 2010 as compared to an operating
profit margin of 12.7% in the third quarter of the prior fiscal year. The reduction in
profitability is primarily due to reduced laboratory work as a result of required renovations to
the laboratory facility as well as reduced personal protective equipment (PPE) orders with delays
in the funding of several Department of Defense requirements, offset in part by gross profit margin
of $6.2% on the PPS business.
Selling, general and administrative expenses decreased by $269,000 (11%) in the third quarter
of fiscal year 2010 compared to the third quarter of fiscal year 2009. The decrease is primarily
due to reductions in staffing as a result of the Companys cost reduction plan introduced during
the third quarter of fiscal year 2010.
Other costs include expenses incurred due to the Companys cost reduction plan and the costs
incurred to acquire PPS and Advent during the third quarter of fiscal year 2010. The cost
reduction plan costs include approximately $789,000 for severance costs and $150,000 for closing
two of the Companys offices. The cost reduction plan will reduce the Companys overall cost
structure by $3.3 million on an annualized basis. In addition, acquisition costs of $330,000
include outside legal, accounting, and other acquisition fees associated with the two acquisitions
during the quarter.
During the third quarter of fiscal year 2010, the Company incurred an operating loss of
$2,266,000 as compared to operating income of $1,830,000 in the third quarter of fiscal year 2009.
Approximately fifty-six percent of the loss is attributable to the restructuring costs incurred
during the quarter to realign the Companys cost structure as well as the costs associated with the
two acquisitions made during the quarter. The balance of the reduction in operating income is due
to the reduced performance in the Program Management business segment as well as the poor operating
performance in the Compliance and Environmental and the National Security business segments during
the quarter.
Interest income was $41,000, which was associated with the two outstanding notes receivable of
approximately $1,150,000.
18
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Interest expense for financing the Companys insurance plans increased by approximately $3,000
during the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009.
Loss before taxes was $2,250,000 for the third quarter of fiscal year 2010 as compared to
income before taxes of $1,829,000 in the third quarter of fiscal year 2009.
Income tax benefit for the third quarter of fiscal year 2010 was $733,000 compared to income
tax expense of $704,000 in the third quarter of fiscal year 2009. The income tax benefit for the
third quarter of fiscal year 2010 was the result of the loss incurred during the quarter. The
effective tax rates for the third quarter of fiscal year 2010 and 2009 were 33% and 38%,
respectively.
Versars net loss for the third quarter of fiscal year 2010 was $1,517,000 compared to net
income of $1,125,000 in the third quarter of fiscal year 2009.
Nine Month Comparison of Fiscal Year 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
For the Nine-Month Periods Ended |
|
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
45,858 |
|
|
$ |
54,310 |
|
Compliance and Environmental Programs |
|
|
9,888 |
|
|
|
15,146 |
|
Professional Services |
|
|
9,161 |
|
|
|
8,012 |
|
National Security |
|
|
8,549 |
|
|
|
7,348 |
|
|
|
|
|
|
|
|
|
|
$ |
73,456 |
|
|
$ |
84,816 |
|
|
|
|
|
|
|
|
Gross revenue for the first nine months of fiscal year 2010 was $73,456,000, a decrease of
$11,360,000 (13%) from the first nine months of fiscal year 2009. Gross revenue for the Program
Management business segment for the first nine months of fiscal year 2010 was $45,858,000, a
decrease of $8,456,000 (16%) from the first nine months of fiscal year 2009. The decrease was
primarily due to anticipated reduced work in support of Iraq reconstruction efforts. Gross revenue
for the Compliance and Environmental Programs business segment for the first nine months of fiscal
year 2010 was $9,888,000, a decrease of $5,258,000 (35%) from the first nine months of fiscal year
2009. The decrease in gross revenues was due to budget shortfalls for state and municipal agencies
driven by the continuing U.S. economic recession and a resulting delay and deferral of projects by
these agencies. Gross revenue for the Professional Services business segment for the first nine
months of fiscal year 2010 was $9,161,000, an increase of $1,149,000 (16%) over that reported in
the first nine months of fiscal year 2009. The increase is due to continuing work under existing
awards and additional outsourcing awards from the U.S. Army during the year. Gross revenue for the
National Security business segment for the first nine months of fiscal year 2010 was $8,549,000, an
increase of $1,201,000 (16%) over that reported in the first nine months of fiscal year 2009.
Seventy-eight percent of the increase was from revenues attributable to PPS, acquired in January
2010. The remaining balance is revenues from the Tooele contract award awarded late in the second
quarter of fiscal year 2010.
Purchased services and materials decreased by $6,800,000 (15%) in the first nine months of
fiscal year 2010 compared to the first nine months of fiscal year 2009. The decrease is
attributable to lower subcontractor costs as a result of the decreased gross revenues in the
Program Management and the Compliance and Environmental business segments as mentioned above.
Direct costs of services and overhead increased by $838,000 (3%) for the first nine months of
fiscal year 2010. The increase is attributable to the costs of the operations of the two recently
acquired businesses and investments in a telecommunication initiative in the Program Management
business segment.
Gross profit for the first nine months of fiscal year 2010 was $5,340,000, a decrease of
$5,398,000 (50%) from the first nine months of fiscal year 2009. The decrease is primarily due to
the reduced revenue and profit margin declines shown below in the Program Management, Compliance
and Environmental Programs, and National Security business segments.
19
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine-Month Periods Ended |
|
|
Gross Profit (Loss) Margin (%) |
|
|
|
March 26, |
|
|
March 27, |
|
|
March 26, |
|
|
March 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
GROSS PROFIT (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
4,290 |
|
|
$ |
7,986 |
|
|
|
9.4 |
% |
|
|
14.7 |
% |
Compliance and
Environmental
Programs |
|
|
(444 |
) |
|
|
641 |
|
|
|
(4.5 |
%) |
|
|
4.2 |
% |
Professional Services |
|
|
1,449 |
|
|
|
1,220 |
|
|
|
15.8 |
% |
|
|
15.2 |
% |
National Security |
|
|
45 |
|
|
|
891 |
|
|
|
0.5 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,340 |
|
|
$ |
10,738 |
|
|
|
7.3 |
% |
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin for the Program Management business segment for the first nine months of
fiscal year 2010 was 9.4% compared to 14.7% for the same period last year. The decrease was due to
the declining revenues in our Iraq title II work. The Compliance and Environmental Programs
business segment for the first nine months incurred operating losses. This segment was largely
impacted by the economic downturn in the U.S. domestic markets resulting in reduced billable work.
Gross profit for the Professional Services business group was 15.8% for the first nine months of
fiscal year 2010, compared to 15.2% for the first nine months of the prior fiscal year. The
increase is due to improved margins with the increase in gross revenue and less incremental costs.
Gross profit for the National Security business segment was 0.5% for the first nine months of
fiscal year 2010 as compared to 12.1% in the first nine months of the prior fiscal year. The
reduction in profitability is primarily due to reduced laboratory work as a result of required
renovations to the facility as well as reduced suit orders with delays in the funding of several
department of defense requirements.
Selling, general and administrative expenses decreased by $290,000 (4%) in the first nine
months of fiscal year 2010 compared to the first nine months of fiscal year 2009. The decrease is
primarily due to reductions in staffing as a result of the implementation of the Companys cost
reduction plan during the third quarter of fiscal year 2010.
Other costs include the cost of the Companys cost reduction plan and the acquisition costs
incurred to acquire PPS and Advent during the third quarter of fiscal year 2010. The cost
reduction plan costs include approximately $789,000 for severance costs and $150,000 for the
closing two of the Companys offices. Acquisition costs of $330,000 include outside legal,
accounting, and other acquisition fees associated with the two acquisitions during the quarter.
During the first nine months of fiscal year 2010, the Company incurred an operating loss of
$2,398,000 as compared to operating income of $3,979,000 in the first nine months of fiscal year
2009. Approximately fifty-three percent of the loss is attributable to the restructuring costs
incurred during the third quarter to realign the Companys cost structure as well as the costs
associated with the two acquisitions made in the third quarter. The balance of the reduction in
operating income is due to the reduced performance in the Program Management business segment as
well as the poor operating performance in the Compliance and Environmental and the National
Security business segments during the quarter.
Interest income was $106,000, which was associated with the two outstanding notes receivable
of approximately $1,150,000.
Interest expense for the financing of the Companys insurance policies increased by
approximately $4,000 during the first nine months of fiscal year 2010 as compared to the first nine
months of fiscal year 2009.
Loss before taxes was $2,339,000 for the first nine months of fiscal year 2010 as compared to
income before taxes of $3,613,000 in the first nine months of fiscal year 2009.
Income tax benefit for the first nine months of fiscal year 2010 was $759,000 compared to
income tax expense of $1,399,000 in the first nine months of fiscal year 2009. The income tax
benefit for the first nine months of fiscal year 2010 was the result of the loss incurred during
the period.
The effective tax rate for the three months and nine months of
fiscal year 2010 and 2009 was 32%
and 38%, respectively which differs from the statutory rate as a
result of discrete items such as depreciation, deferred compensation,
accruals, reserves, federal alternative minimum tax and foreign
withholding taxes.
Versars net loss for the first nine months of fiscal year 2010 was $1,580,000 compared to net
income of $2,214,000 in the first nine months of fiscal year 2009.
20
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources
The Companys working capital as of March 26, 2010 was approximately $16,504,000, a decrease
of $9,009,000 from the working capital of $25,513,000 at June 26, 2009. The decrease in working
capital is primarily due to cash used for the costs associated with acquisitions during the quarter
and the additional costs accrued to balance the Companys cost structure during the third quarter
of fiscal year 2010. The Companys current ratio at March 26, 2010 was 1.82, compared to 3.04
reported on June 26, 2009.
In March 2010, the Company modified its line of credit facility with United Bank to increase
its aggregate borrowing capacity from $7.5 million to $10 million in anticipation of higher working
capital requirements with the new acquisitions. The line of credit is subject to certain covenants
related to the maintenance of financial ratios. As modified, these covenants require a minimum
tangible net worth of $17.5 million; a maximum total liabilities to tangible net worth ratio not
exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Interest accrues on borrowings
under the line of credit at the prime rate of interest less 1/2% with a floor interest rate of 3.5%.
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 Companys ability to finance its working capital
requirements. As of March 26, 2010, the Company had no outstanding borrowings and was in
compliance with the financial covenants. The Company has a letter of credit of approximately
$455,147 outstanding under the line of credit facility which serves as collateral for surety bond
coverage provided by the Companys insurance carrier against project construction work. The letter
of credit reduces the Companys availability on the line of credit. Availability under the line of
credit at March 26, 2010 was approximately $9.5 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 September 2010.
The Company believes that anticipated cash flows from operations and availability under its
line of credit will be sufficient to meet the Companys liquidity needs for the remainder of the
fiscal year. Expected capital requirements for the remainder of fiscal year 2010 are approximately
$1,400,000, primarily due to the start up of a contract at Ft. Irwin and upgrades to maintain the
Companys existing information technology systems. Such capital requirements and other funding
needs will be funded through existing working capital and the line of credit.
Critical Accounting Policies and Related Estimates That Have a Material Effect on Versars
Consolidated Financial Statements
Below is a discussion of the accounting policies and related estimates that we believe are the
most critical to understanding the Companys 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 fiscal year 2009.
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. Detailed
quarterly project reviews are conducted with project managers to review all project progress
accruals and revenue recognition.
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.
21
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Allowance for doubtful accounts: Disputes arise in the normal course of the Companys
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 quarterly basis and assesses the need for
reserves, taking into consideration past collection history and other events that bear on the
collectibility of such receivables. All receivables over 60 days old are reviewed as part of this
process.
Asset retirement obligation: 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 ASC-410-20-05 (formerly SFAS 143, Accounting for Asset
Retirement Obligation), 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 $190,000 to $200,000 per year over the
next year. The current liability as of March 26, 2010 was $623,000. 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.
Goodwill and other intangible assets: The carry value of goodwill has increased from
$776,000 to $7.3 million during the third quarter of fiscal year. The Company recorded $4.4
million and $2.1 million of goodwill related to the PPS and Advent acquisitions, respectively which
are included in the National Security and Compliance and Environmental business segments,
respectively. Management is still in the process of refining the fair value of the assets and
liabilities of the acquired entities. Management will engage an independent valuation firm to
assist with the allocation of the purchase price of the acquired entities. The final results which
should be completed by the end of fiscal year 2010, may differ from our preliminary purchase price
allocation. The carrying value of goodwill relating to the acquisition of Versar Global Solutions,
Inc., is approximately $776,000 which is part of the Program Management business segment. 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 annually, as necessary, to assist in
performing this analysis and will test more often if events and circumstances warranted it. Should
the financial performance of any business segment with goodwill 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 Companys
financial position and results of operations.
Inventory reserves: The Company establishes inventory reserves for estimated
obsolescence, spoilage or unmarketable inventory in an amount equal to the difference between the
cost of inventory and its estimated realizable value based upon assumptions about future demand and
market conditions.
Share-based compensation: The Company records stock based compensation in accordance
with the fair value provisions of ASC 718-10-1 (formerly SFAS No. 123R, Share-Based Payment).
This statement 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).
There was no share-based compensation expense recorded related to stock options during the
first nine months of fiscal years 2009 and 2010 as all previously granted stock options were fully
vested except 10,000 shares of non-qualified stock options. These options will vest based on the
achievement of certain stated conditions, and the Company will record the related expense at that
time.
The Company awarded 125,000 shares of restricted stock to directors and employees in fiscal
year 2009. During the first nine months of fiscal year 2010, the Company awarded 77,000 shares of
restricted stock to key employees in recognition of their outstanding performance in the prior
year, and recorded compensation expense of $279,000 for the first nine months of fiscal year 2010.
Stock based compensation expense for the third quarter of fiscal year 2010 was approximately
$69,000.
22
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
New
accounting pronouncements: In August 2009, the FASB amended guidance in FASB Accounting Standards
CodificationTM (ASC) 820, FairValue Measurements and Disclosures, to clarify how
entities should estimate the fair value of liabilities. The amendments provide clarification that
in circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or more of the following
valuation techniques: (1) a valuation technique that uses (a) the quoted price of the identical
liability when traded as an asset or (b) quoted prices for similar liabilities or similar
liabilities when traded as assets and/ or (2) another valuation technique that is consistent with
fair value principles such as an income or market approach. The amendments also clarify that when
estimating the fair value of a liability, a reporting entity is not required to consider the
existence of transfer restrictions on that liability. The Company adopted the amended guidance
effective October 1, 2009. The adoption did not have a material impact on the Companys financial
condition and results of operations.
In September 2009, the FASB ratified the final consensus on Emerging Issues Task Force
(EITF) Issue 08-1, Revenue Arrangements With multiple Deliverables, (Issue 08-1) which will
supersede ASC 605-25 (formerly EITF Issue 00-21, Revenue Arrangements With Multiple Deliverables).
Issue 08-1 addresses how arrangement consideration should be allocated to separate units of
accounting, when applicable. Although Issue 08-1 retains the criteria from ASC 605-25 for when
delivered items in a multiple deliverable arrangement should be considered separate units of
accounting, it removes the previous separation criterion under ASC 605-25 that objective and
reliable evidence of the fair value of any undelivered items must exist for the delivered items to
be considered a separate unit or separate units of accounting. The final consensus is effective
for fiscal years beginning on or after June 15, 2010. Entities can elect to apply Issue 08-1
prospectively to new or materially modified arrangements after the effective date or
retrospectively for all periods presented. Issue 08-1 was issued as Accounting Standards Update
(ASU) 2009-13 in October 2009 and amended ASC 605-25. The Company
expects to implement ASU 2009-13 on June 26, 2010 and does not anticipate that ASU
2009-13 will have any impact on the Companys financial position or results of operations.
In August 2009, the FASB issued ASU 2009-05 to provide guidance on measuring fair value of
liabilities under ASC 820 (formerly FSP FAS 157-f). The guidance clarifies how entities should
estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for
circumstances in which a quoted price in an active market is not available, the effect of the
existence of liability transfer restrictions, and the effect of quoted prices for the identical
liability, including when the identical liability is traded as an asset. ASU 2009-05 is effective
for the first interim or annual reporting period beginning after August 29, 2009. The Company
adopted this guidance during the second quarter of fiscal year 2010. The adoption of the amended
guidance in ASC 820 did not have a material effect on its consolidated financial statements.
In April 2009, the FASB issued authoritative guidance for fair value measurements and
disclosures. The guidance provides companies with guidelines on how to determine fair value
measurements when the volume and level of activity for an asset or liability have significantly
decreased and how to identify transactions that are not orderly. This guidance is effective for
interim reporting periods ending after June 15, 2009. The Company adopted this guidance during the
first quarter of fiscal year 2010. Adoption of this guidance did not have any impact on its
consolidated financial statements.
In April 2009, the FASB issued authoritative guidance for interim disclosures for financial
instruments. This guidance amends prior authoritative guidance by requiring disclosures of the fair
value of financial instruments included within the scope of the prior guidance whenever a public
company issues summarized financial information for interim reporting periods. This guidance is
effective for interim reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009 under certain circumstances. The Company adopted this
guidance for the quarter ended September 25, 2009, but it did not have an impact on its unaudited
condensed consolidated financial statements. The carrying amounts of Versars cash and cash
equivalents, accounts receivable, accounts payable and amounts included in notes receivable, other
current assets and current liabilities that meet the definition of a financial instrument
approximate fair value because of the short-term nature of these amounts.
23
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Effective June 27, 2009, the Company adopted new accounting guidance related to the reporting
of subsequent events. This guidance establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this guidance sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements; and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
This guidance was amended by ASU 2010-09 Amendments to Certain
Recognition and Disclosure Requirements. The amendment did not
have an impact to the Company.
In December 2007, the FASB issued ASC 805, Business Combinations (formerly SFAS No. 141
(revised 2007), Business Combinations). ASC 805 establishes principles and requirements for how
companies recognize and measure identifiable assets acquired, liabilities assumed, and any
non-controlling interest in connection with a business combination, recognize and measure the
goodwill acquired in a business combination or a gain from a bargain purchase, and determine what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. ASC 805 is effective for business combinations
completed on or after June 27, 2009. The Company has adopted ASC 805 in the acquisitions of PPS
and Advent during the third quarter of 2010.
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 time and materials contracts with built
in escalation 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).
Business Segments
Versar currently has four business segments: Program Management, Compliance and Environmental
Programs, Professional Services, and National Security.
|
|
|
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 4 |
|
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 Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys 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 Companys disclosure controls and procedures
are effective, as of such date, to ensure that required information will be disclosed on a timely
basis in its reports under the Exchange Act.
Further, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer, in a manner to allow
timely decisions regarding the required disclosure.
There were no changes in the Companys internal control over financial reporting during the
last quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
24
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 2 |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
During the third quarter of fiscal year 2010, employees of the Company surrendered shares of
common stock to the Company to pay taxes on vesting of restricted stock. The purchase price of the
stock was based on the closing price of the Companys common stock on the NYSE Amex on the date of
surrender.
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number (or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Yet Be |
|
|
|
Total Number |
|
|
Average Price |
|
|
Purchased as Part of |
|
|
Purchased Under |
|
|
|
of Shares |
|
|
Paid Per |
|
|
Publicly Announced |
|
|
the Plans or |
|
Period |
|
Purchased |
|
|
Share |
|
|
Plans or Programs |
|
|
Programs |
|
January 1-31, 2010 |
|
|
2,324 |
|
|
$ |
3.26 |
|
|
|
|
|
|
|
|
|
February 1-28, 2010 |
|
|
6,847 |
|
|
$ |
3.00 |
|
|
|
|
|
|
|
|
|
March 1-26, 2010 |
|
|
8,217 |
|
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
17,388 |
|
|
$ |
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Exhibits
|
|
|
Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Second Amended and Restated By-laws of Versar, Inc. (previously filed as exhibit 3.1 to the registrants
current report on Form 8-K filed on February 17, 2010 and incorporated by reference herein). |
|
|
|
10.1
|
|
Separation and General Release Agreement between Theodore M. Prociv, PhD and Versar, Inc. effective
March 29, 2010 (previously field as exhibit 10.1 to the registrants current report on Form 8-K filed on April 1,
2010 and incorporated by reference herein). |
|
|
|
10.2
|
|
Eighth Modification Agreement effective as of the 17th day of March 2010 by and between United Bank,
Versar, Inc., Geomet Technologies, LLC, Versar Global Solutions, Inc., VEC Corp., Versar International, Inc.,
and Advent Environmental, Inc. (previously filed as exhibit 10.1 to the registrants current report on Form 8-K
filed on March 22, 2010 and incorporated by reference herein). |
|
|
|
10.3
|
|
Stock Purchase Agreement dated as of March 17, 2010 by and among Versar, Inc., Advent Environmental,
Inc., Jeffrey C. Smoak, Kenna E. Sellers, the Mark A. Sellers Revocable Life Insurance Trust, through
Margaret Mitchum Spicher, Trustee and the Mark A. Sellers Revocable Life Insurance Trust, through Kenna
A. Sellers, Trustee (previously filed as exhibit 10.2 to the registrants current report on
Form 8-K filed on
March 22, 2010 and incorporated by reference herein). |
25
|
|
|
Exhibit No. |
|
Description |
|
10.4
|
|
Share Purchase Agreement dated as of January 5, 2010 by and among Versar, Inc., GEOI 1 Ltd., Professional
Protection Systems, Ltd., Stephen Nobbs, Mark Whitcher, Stephen Kimbell, Peter Holden, Timothy Clark,
Jonathan Hambleton, Richard Brown, Simon Cuthbertson, Oliver Wright, Ingrid Sladden and the executors of
the estate of Neil Bruce Cobb (previously filed as exhibit 10.1 to the registrants current report on Form 8-K
filed on January 8, 2010 and incorporated by reference herein). |
|
|
|
31.1 and 31.2
|
|
Certification pursuant to Securities Exchange Act Section 13a-14. |
|
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32.1 and 32.2
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Certification under Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSAR,
INC.
(Registrant)
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By:
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/s/ Anthony L. Otten
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Anthony L. Otten |
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Chief Executive Officer and Director |
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By: |
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/s/ Lawrence W. Sinnott |
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Lawrence W. Sinnott |
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Executive Vice President, Chief Financial Officer,
Treasurer,
and Principal Accounting Officer |
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Date: May 10, 2010
27