e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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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 28, 2008
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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
VERSAR, inc.
(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 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):
Large accelerated filer o Accelerated filer o Non-accelerated
filer þ Smaller
reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 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, 2008 |
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$.01 par value
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9,079,681 |
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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Consolidated Balance Sheets as of
March 28, 2008 and June 29, 2007 |
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3 |
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Consolidated Statements of Income for the Three-Month and Nine-Month
Periods Ended March 28, 2008 and March 30, 2007 |
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4 |
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Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended
March 28, 2008 and March 30, 2007 |
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5 |
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Notes to Consolidated Financial Statements |
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6-11 |
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ITEM 2 - Managements Discussion and Analysis
of Financial Condition and Results of Operations |
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12-19 |
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ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk |
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19 |
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ITEM 4T Procedures and Controls |
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19 |
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PART II OTHER INFORMATION |
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ITEM 1 - Legal Proceedings |
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20 |
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ITEM 6 - Exhibits |
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20 |
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SIGNATURES |
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21 |
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EXHIBITS |
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22-25 |
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2
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
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March 28, |
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June 29, |
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2008 |
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2007 |
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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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$ |
7,757 |
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$ |
6,296 |
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Accounts receivable, net |
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22,297 |
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22,507 |
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Prepaid expenses and other current assets |
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2,160 |
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1,250 |
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Deferred income taxes |
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1,125 |
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2,107 |
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Total current assets |
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33,339 |
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32,160 |
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Property and equipment, net |
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2,270 |
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2,306 |
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Deferred income taxes |
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511 |
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802 |
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Goodwill |
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776 |
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776 |
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Other assets |
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820 |
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773 |
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Total assets |
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$ |
37,716 |
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$ |
36,817 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
5,900 |
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$ |
10,454 |
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Billings in excess of revenue |
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398 |
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594 |
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Accrued salaries and vacation |
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2,248 |
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1,604 |
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Accrued bonus |
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1,676 |
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1,793 |
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Other liabilities |
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1,976 |
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1,539 |
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Total current liabilities |
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12,198 |
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15,984 |
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Other long-term liabilities |
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1,390 |
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1,411 |
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Total liabilities |
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13,588 |
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17,395 |
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Commitments and contingencies |
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Stockholders equity |
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Common stock, $.01 par value; 30,000,000 shares
authorized; 9,023,455 shares and 8,705,733 shares
issued; 8,939,421 and 8,651,742 shares outstanding
at March 28, 2008 and June 29, 2007, respectively |
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90 |
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87 |
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Capital in excess of par value |
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26,860 |
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24,679 |
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Accumulated deficit |
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(2,270 |
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(4,945 |
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Treasury stock |
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(578 |
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(399 |
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Accumulated other comprehensive income |
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26 |
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Total stockholders equity |
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24,128 |
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19,422 |
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Total liabilities and stockholders equity |
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$ |
37,716 |
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$ |
36,817 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited in thousands, except per share amounts)
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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 28, |
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March 30, |
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March 28, |
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March 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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GROSS REVENUE |
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$ |
28,874 |
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$ |
28,313 |
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$ |
87,111 |
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$ |
72,536 |
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Purchased services and materials, at cost |
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16,212 |
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17,465 |
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52,348 |
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43,620 |
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Direct costs of services and overhead |
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8,866 |
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7,988 |
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24,401 |
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21,440 |
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GROSS PROFIT |
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3,796 |
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2,860 |
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10,362 |
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7,476 |
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Selling, general and administrative
expenses |
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2,250 |
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1,734 |
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5,882 |
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4,922 |
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OPERATING INCOME |
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1,546 |
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1,126 |
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4,480 |
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2,554 |
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OTHER EXPENSE |
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Interest expense (income), net |
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(35 |
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29 |
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(151 |
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53 |
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Income tax expense (benefit) |
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668 |
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(2,000 |
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1,956 |
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(1,951 |
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NET INCOME |
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$ |
913 |
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$ |
3,097 |
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$ |
2,675 |
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$ |
4,452 |
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NET INCOME PER SHARE BASIC |
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$ |
0.10 |
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$ |
0.38 |
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$ |
0.30 |
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$ |
0.55 |
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NET INCOME PER SHARE DILUTED |
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$ |
0.10 |
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$ |
0.36 |
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$ |
0.29 |
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$ |
0.53 |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING BASIC |
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8,985 |
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8,176 |
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8,890 |
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8,159 |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING DILUTED |
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9,257 |
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8,564 |
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9,246 |
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8,473 |
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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 |
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Periods Ended |
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March 28, |
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March 30, |
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2008 |
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2007 |
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Cash flows from operating activities |
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Net income |
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$ |
2,675 |
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$ |
4,452 |
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Adjustments to reconcile net income to net cash provided by operating
activities |
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Depreciation and amortization |
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658 |
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522 |
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Provision for doubtful accounts receivable |
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(1 |
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214 |
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Share based compensation |
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688 |
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154 |
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Deferred taxes |
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1,824 |
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(2,003 |
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Changes in assets and liabilities |
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Decrease (increase) in accounts receivable |
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211 |
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(4,384 |
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Increase in prepaids and other assets |
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(948 |
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(337 |
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(Decrease) increase in accounts payable |
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(4,554 |
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2,297 |
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Increase in accrued salaries and vacation |
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644 |
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490 |
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Increase in other liabilities |
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103 |
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2,092 |
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Net cash provided by continuing operating activities |
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1,300 |
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3,497 |
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Changes in net liabilities of discontinued operations |
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(214 |
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Net cash provided by operating activities |
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1,300 |
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3,283 |
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Cash flows used in investing activities |
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Purchase of property and equipment |
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(622 |
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(376 |
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Increase in life insurance policies cash surrender value |
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(10 |
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(58 |
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Net cash used in investing activities |
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(632 |
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(434 |
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Cash flows from financing activities |
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Proceeds from issuance of common stock |
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946 |
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136 |
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Purchase of treasury stock |
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(179 |
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Net cash provided by financing activities |
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767 |
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136 |
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Effect of exchange rate changes |
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26 |
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Net increase in cash and cash equivalents |
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1,461 |
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2,985 |
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Cash and cash equivalents at the beginning of the period |
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6,296 |
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140 |
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Cash and cash equivalents at the end of the period |
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$ |
7,757 |
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$ |
3,125 |
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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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$ |
39 |
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$ |
53 |
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Income taxes |
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135 |
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25 |
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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 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 year ended June 29, 2007 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. In the opinion of
management, the information reflects all adjustments necessary for a fair presentation of the
Companys consolidated financial position as of March 28, 2008, and the results of operations for
the three and nine-month periods ended March 28, 2008 and March 30, 2007. The results of
operations for such periods, however, are not necessarily indicative of the results to be expected
for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those estimates.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred plus accrued profits or
net estimated realizable value of incurred costs, reduced by progress billings. The Company
records income from major fixed-price construction and engineering contracts, extending over more
than one accounting period, using the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically reviewed and revisions are
made as required. The effects of these revisions are included in the periods in which the
revisions are made. On cost-plus-fee contracts, revenue is recognized to the extent of costs
incurred plus a proportionate amount of fee earned, and on time-and-material contracts, revenue is
recognized to the extent of billable rates times hours delivered plus material and other
reimbursable costs incurred. Losses on contracts are recognized when they become known. Disputes
arise in the normal course of the 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 realizable value or actual costs incurred and only when realization is probable and
can be reliably estimated. Claims against the Company are recognized where loss is considered
probable and reasonably determinable in amount. Management reviews outstanding receivables on a
regular basis and assesses the need for reserves taking into consideration past collection history
and other events that bear on the collectibility of such receivables.
(D) Income Taxes
At March 28, 2008, the Company had approximately $1.6 million in deferred tax assets which
primarily relate to net operating loss and tax credit carry forwards. Given the Companys
continued improved financial performance and funded backlog over the last three years, management
believes the Company will be able to utilize the full benefit of the tax asset.
6
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Debt
The Company has a line of credit facility with United Bank (the Bank) that provides for
advances up to $7.5 million based upon qualifying receivables. Interest on borrowings is based
upon the prime rate of interest minus 0.5% (4.75% as of March 28, 2008). In October 2006, the
Company obtained a letter of credit of approximately $1.6 million which serves as collateral for
surety bond coverage provided by the Companys insurance carrier against project construction work.
The letter of credit reduces the Companys availability on the line of credit. The line of credit
capacity at March 28, 2008 was $3.6 million. Obligations under the credit facility are guaranteed
by Versar and each subsidiary individually and are secured by accounts receivable, equipment and
intangibles, plus all insurance policies on property constituting collateral of Versar and its
subsidiaries. The line of credit matures in November 2009 and is subject to certain covenants
related to the maintenance of financial ratios. These covenants require a minimum tangible net
worth of $15 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.5 to
1; and a minimum current ratio of at least 1.25 to 1. The Company was in compliance with such
covenants as of March 28, 2008.
Management believes that with its current cash balance of over $7.7 million along with the
anticipated cash provided by operating activities and existing capacity on the line of credit,
there is sufficient capital to meet the Companys liquidity needs within the current fiscal year.
Expected capital requirements for the remainder of fiscal year 2008 are approximately $250,000
primarily to maintain the Companys existing information technology systems and software
applications. Such capital requirements will be funded through existing working capital.
(F) Goodwill and Other Intangible Assets
On January 30, 1998, Versar completed the acquisition of The Greenwood Partnership, P.C.
subsequently renamed (Versar Global Solutions, Inc. or VGSI). The transaction was accounted for as
a purchase. Goodwill resulting from this transaction was approximately $1.1 million. Currently,
the carrying value of goodwill is approximately $776,000 relating to the acquisition of VGSI, which
is now part of the Companys Program Management business segment. The Company began reporting the
Program Management business segment separately in fiscal year 2007, primarily due to the increase
in business volume in Iraq and in United States construction related work. In performing its
goodwill impairment analysis, management has utilized a market-based valuation approach to
determine the estimated fair value of the Program Management business segment. Management engages
outside professionals and valuation experts, as necessary, to assist in performing this analysis.
An analysis was performed on public companies and company transactions to prepare a market-based
valuation. Based upon the analysis, the estimated fair value of the Program Management business
segment substantially exceeded the carrying value of the net assets of $6.5 million as of June 29,
2007. Should the Program Management business segments financial performance not meet estimates,
then impairment of goodwill would have to be further assessed to determine whether a write down of
goodwill value would be warranted. If such a write down were to occur, it would negatively impact
the Companys financial position and results of operations. However, it would not impact the
Companys cash flow or financial debt covenants.
7
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(G) Net Income Per Share
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per common share also
includes common stock equivalents outstanding during the period, if dilutive. The Companys common stock
equivalents consist of stock options and restricted stock units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month |
|
For the Nine-Month |
|
|
Periods Ended |
|
Periods Ended |
|
|
March 28, |
|
March 30, |
|
March 28, |
|
March 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Weighted average common shares
outstanding basic |
|
|
8,984,653 |
|
|
|
8,175,709 |
|
|
|
8,890,338 |
|
|
|
8,159,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of options and
vesting of restricted stock units
(treasury stock method) |
|
|
271,963 |
|
|
|
388,402 |
|
|
|
355,962 |
|
|
|
314,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted |
|
|
9,256,616 |
|
|
|
8,564,111 |
|
|
|
9,246,300 |
|
|
|
8,473,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(H) Common Stock
The Company issued approximately 240,000 shares of common stock upon the exercise of stock
options during the nine months ended March 28, 2008. Total proceeds from the exercise of such
stock options were approximately $946,000. The Company also issued 78,100 shares of restricted
stock to its board members, executive officers and employees for their performance and contribution
to the Company.
Effective January 1, 2005, the Company implemented an Employee Stock Purchase Plan (ESPP) to
allow eligible employees of Versar the opportunity to acquire an ownership interest in the
Companys common stock. As amended, the Plan permits employees to purchase shares of Versar common
stock from the open market at 95% of its fair market value. The Plan qualifies as an employee
stock purchase plan under Section 423 of the Internal Revenue Code.
(I) Stock-Based Compensation
In the first nine months of fiscal year 2008, the Company awarded 131,500 shares of restricted
stock and non-qualified stock options to employees, directors, and service providers. Stock-based
compensation expense relating to restricted stock and options of $688,000 and $154,000 for the
first nine months ended March 28, 2008 and March 30, 2007, respectively, is included in the
Consolidated Statements of Income.
In November 2005, the stockholders approved the Versar, Inc. 2005 Stock Incentive Plan (the
2005 Plan). The 2005 Plan provides for grants of incentive awards, including stock options,
SARS, restricted stock, restricted stock units and performance based awards, to directors, officers
and employees of the Company and its affiliates as approved from time to time by the Companys
Compensation Committee. Only employees may receive stock options classified as incentive stock
options, also known as ISOs. The per share exercise price for options and SARS granted under
the 2005 Plan shall not be less than the fair market value of the common stock on the date of
grant. A maximum of 400,000 shares of Common Stock may be awarded under the 2005 Plan. No single
director, officer, or employee may receive awards of more than 100,000 shares of Common Stock
during the term of the 2005 Plan. The ability to make awards under the 2005 Plan will terminate in
November 2015. Approximately 213,200 shares are available for future grant under this plan at
March 28, 2008.
8
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, until approval of the 2005 Plan, options, restricted stock and other
types of stock-based awards are granted to any employee, service provider or director to whom a
grant is approved from time to time by the 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. No shares remain for future grant under this plan.
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.
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.
A summary of activity under the Companys stock option plans as of March 28, 2008, and changes
during the first nine months of fiscal year 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Options |
|
(in thousands) |
|
|
Price |
|
|
Term |
|
|
($000) |
|
Outstanding at June 30, 2007 |
|
|
838 |
|
|
$ |
3.25 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(234 |
) |
|
$ |
3.94 |
|
|
|
|
|
|
|
|
|
Awarded |
|
|
10 |
|
|
|
7.77 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(6 |
) |
|
|
4.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 28, 2008 |
|
|
608 |
|
|
$ |
3.05 |
|
|
|
4.85 |
|
|
$ |
1,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 28, 2008 |
|
|
598 |
|
|
$ |
2.97 |
|
|
|
4.78 |
|
|
$ |
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 28, 2008, 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 $7,000 over the next twelve months related to these unvested options. The
total fair value of these unvested options is approximately $42,000 as of March 28, 2008.
9
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(J) Business Segments
The Company evaluates and measures the performance of its business segments based on gross
revenue, gross profit and operating income. As such, selling, general and administrative expenses,
interest and income taxes have not been allocated to the Companys business segments.
Management re-evaluated its segment reporting in fiscal year 2007 due to significant growth in
its business and changes in the internal reporting of business segment financial information. The
Companys business is now operated through four business segments as follows: Program Management,
Compliance and Environmental Programs, Professional Services, and National Security. The Chief
Operating Decision Maker (CODM) reviews financial performance based upon these operating segments.
These segments were segregated based on the nature of the work, business processes, customer
base and business environment in which each of the segments operates.
The Program Management business segment manages larger more complex projects whose business
processes and management are unique to the rest of the Company. The Compliance and Environmental
Programs business segment provides consulting support to several federal government and municipal
agencies. The Professional Services business segment provides outsourced personnel to various
government agencies providing our clients with cost-effective resources. The National Security
business segment provides unique solutions to the federal government including testing and
evaluation and personal protective solutions to meet our clients needs.
10
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Summary of financial information for each of the Companys segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
For the Nine-Month Periods Ended |
|
|
|
March 28, |
|
|
March 30, |
|
|
March 28, |
|
|
March 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
17,823 |
|
|
$ |
15,588 |
|
|
$ |
51,627 |
|
|
$ |
39,880 |
|
Compliance and Environmental Programs |
|
|
6,859 |
|
|
|
8,823 |
|
|
|
23,784 |
|
|
|
21,765 |
|
Professional Services |
|
|
2,160 |
|
|
|
2,106 |
|
|
|
5,938 |
|
|
|
5,575 |
|
National Security |
|
|
2,032 |
|
|
|
1,796 |
|
|
|
5,762 |
|
|
|
5,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,874 |
|
|
$ |
28,313 |
|
|
$ |
87,111 |
|
|
$ |
72,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Management |
|
$ |
2,608 |
|
|
$ |
1,792 |
|
|
$ |
6,980 |
|
|
$ |
4,548 |
|
Compliance and Environmental Programs |
|
|
490 |
|
|
|
578 |
|
|
|
1,650 |
|
|
|
1,888 |
|
Professional Services |
|
|
346 |
|
|
|
352 |
|
|
|
960 |
|
|
|
984 |
|
National Security |
|
|
352 |
|
|
|
138 |
|
|
|
772 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,796 |
|
|
$ |
2,860 |
|
|
$ |
10,362 |
|
|
$ |
7,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
(2,250 |
) |
|
|
(1,734 |
) |
|
|
(5,882 |
) |
|
|
(4,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
1,546 |
|
|
$ |
1,126 |
|
|
$ |
4,480 |
|
|
$ |
2,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Gross profit is defined as gross revenue less purchased services and materials and direct costs of services and overhead. |
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
March 30, |
|
|
June 29, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
IDENTIFIABLE ASSETS |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
11,652 |
|
|
$ |
11,497 |
|
Compliance and Environmental Programs |
|
|
9,164 |
|
|
|
10,042 |
|
Professional Services |
|
|
2,482 |
|
|
|
1,651 |
|
National Security |
|
|
1,923 |
|
|
|
1,985 |
|
Corporate and Other |
|
|
12,495 |
|
|
|
11,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
37,716 |
|
|
$ |
36,817 |
|
|
|
|
|
|
|
|
11
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 29, 2007 and in
other reports and other documents filed by the Company from time to time with the Securities and
Exchange Commission.
Financial Trends
Operating results for the Company were relatively flat through fiscal year 2006, but began to
improve in fiscal year 2007. The Company adapted to the trends in its business and eliminated
non-performing operations and reduced fixed facility costs. This improvement has continued through
the first nine months of fiscal year 2008.
By the end of fiscal year 2006, project funding began to return to normal levels and as a
result, the Companys funded backlog increased by 55% to $48 million. During fiscal year 2007, the
Company continued efforts to grow the business and succeeded in securing several new contracts,
resulting in increased funded backlog by an additional 19% to $57 million at the end of fiscal year
2007.
For the first nine months of fiscal year 2008, the Company continued to experience improved
performance as a result of increased revenue growth across all business segments. As a result, the
Companys funded backlog further increased to $67 million at March 28, 2008, an 18% increase over
that reported at the end of fiscal year 2007. The increase is primarily due to additional funding
by the Air Force in support of the Companys continuing Title II efforts to support the
reconstruction work in Iraq.
Approximately 40% of the Companys business volume in fiscal year 2007 related to the war in
Iraq. However, the Company is taking steps to further diversify its business in anticipation that
those efforts in Iraq will eventually be reduced or eliminated. The Companys current primary
business development focus is on Base Realignment and Closure (BRAC) efforts and requirements which
have been delayed as a result of the war in Iraq.
The Company re-evaluated its segment reporting in fiscal year 2007 due to the business growth
and changes in its business mix during the year. The Companys business is now operated through
four segments as follows: Program Management, Compliance and Environmental Programs, Professional
Services, and National Security. These segments are aggregated based on the nature of the work,
business processes, customer base and the business environment in which each of the segments
operates. Information in previous periods has been allocated among these segments for comparative
purposes.
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; |
12
ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
|
|
|
The seasonality of spending in the federal government and for commercial clients; |
|
|
|
|
Delays in project contracted engagements; |
|
|
|
|
Unanticipated contract changes impacting profitability; |
|
|
|
|
Reductions in prices by our competitors; |
|
|
|
|
The ability to obtain follow-on project work; |
|
|
|
|
Failure to properly manage projects resulting in additional costs; |
|
|
|
|
The cost of compliance for the 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 war in Iraq; and |
|
|
|
|
Reduction of funding of reconstruction work in Iraq. |
Results of Operations
Third Quarter Comparison of Fiscal Year 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
|
March 28, |
|
|
March 30, |
|
|
|
2008 |
|
|
2007 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
17,823 |
|
|
$ |
15,588 |
|
Compliance and Environmental Programs |
|
|
6,859 |
|
|
|
8,823 |
|
Professional Services |
|
|
2,160 |
|
|
|
2,106 |
|
National Security |
|
|
2,032 |
|
|
|
1,796 |
|
|
|
|
|
|
|
|
|
|
$ |
28,874 |
|
|
$ |
28,313 |
|
|
|
|
|
|
|
|
Gross Revenue for the third quarter of fiscal year 2008 was $28,874,000, an increase of
$561,000 (2%) over that reported for the third quarter of fiscal year 2007. Gross revenues for the
Program Management business segment was $17,823,000, an increase of $2,235,000 (14%) over that
reported for the third quarter of fiscal year 2007. The increase is attributable to the Companys
efforts to support both the Air Force and the Army in Iraq as part of the reconstruction support
efforts. Gross revenues for the Compliance and Environmental Programs business segment was
$6,859,000, a decrease of $1,964,000 (22%) over that reported for the third quarter of fiscal year
2007. The decrease is primarily due to reduced municipal aquatic facility work and reduced
environmental compliance work. Gross revenues for the Professional Services business segment for
the third quarter of fiscal year 2008 was $2,160,000, an increase of $54,000 (3%) over that
reported for the third quarter of fiscal year 2007. The increase is due to the additional work
awarded at the end of the first quarter of fiscal year 2008 in support of the U.S. Army. Gross
revenue for the National Security business segment for the third quarter of fiscal year 2008 was
$2,032,000, an increase of $236,000 (13%) over that reported for the third quarter of fiscal year
2007. The increase is attributable to additional personal protective suit royalty income during
the quarter.
Purchased services and materials decreased by $1,253,000 (7%) in the third quarter of fiscal
year 2008 compared to that reported in the third quarter of fiscal year 2007. The decrease was
attributable to the decrease in work in the Compliance and Environmental Programs business segment
as mentioned above.
Direct costs of services and overhead include the cost to Versar of direct and overhead staff,
including recoverable and unallowable costs that are directly attributable to contracts. Direct
costs of services and overhead increased by $878,000 (11%) in the third quarter of fiscal year 2008
compared to that reported in the third quarter of fiscal year 2007. The increase is due to
additional costs required to support business growth efforts in the Program Management and
Professional Services business segments.
13
ITEM 2 Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Gross profit for the third quarter of fiscal year 2008 was $3,796,000, an increase of $936,000
(33%) over that reported in the third quarter of fiscal year 2007. The increase is attributable to
the increased gross revenues in the Program Management and National Security business segments as
mentioned above.
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Periods Ended |
|
|
|
March 28, |
|
|
March 30, |
|
|
|
2008 |
|
|
2007 |
|
GROSS PROFIT(A) |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
2,608 |
|
|
$ |
1,792 |
|
Compliance and
Environmental Programs |
|
|
490 |
|
|
|
578 |
|
Professional Services |
|
|
346 |
|
|
|
352 |
|
National Security |
|
|
352 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
$ |
3,796 |
|
|
$ |
2,860 |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses increased by $516,000 during the third quarter of
fiscal year 2008 compared to that reported in the third quarter of fiscal year 2007. The increase
is primarily due to increased business development activities, restricted stock expense and
business infrastructure support to continue the business growth of the Company.
Operating income for the third quarter of fiscal year 2008 was $1,546,000, an increase of
$420,000 (37%) over that reported in the third quarter of fiscal year 2007. Operating income for
the Program Management business segment for the third quarter of fiscal year 2008 was $2,608,000,
an increase of $816,000 (46%) over that reported in the third quarter of fiscal year 2007. The
increase is attributable to the improved operating performance on our fixed price work. Operating
income for the third quarter of fiscal year 2008 in the Compliance and Environmental business
segment was $490,000, a decrease of $88,000 (15%) over that reported in the third quarter of fiscal
year 2007. The decrease is primarily due to the reduced gross revenues as mentioned above.
Operating income for the third quarter of fiscal year 2008 in the Professional Services business
segment was $346,000, a slight increase of 2% over that reported in the third quarter of fiscal
year 2007. Operating income for the third quarter of fiscal year 2008 in the National Security
business segment was $352,000, an increase of $214,000 (155%) over that reported in the third
quarter of fiscal year 2007. The increase is primarily due to the increased gross revenues as
mentioned above.
Interest income for the third quarter of fiscal year 2008 was $35,000, a $64,000 increase over
the net interest expense of $29,000 reported in the third quarter of fiscal year 2007. The
increase was due to interest earned on cash balances maintained with the Companys bank which more
than offset expenses associated with capital leases and financial insurance policies.
Income tax expense for the third quarter of fiscal year 2008 was $668,000. During fiscal year
2007, the Company was carrying a valuation allowance against its tax assets. In the third quarter
of fiscal year 2007, the Company re-evaluated the need for the valuation allowance. Because of the
Companys continued improved financial performance and funded backlog over the past three years,
management believes that the Company will be able to utilize the full benefit of the tax asset and
thus the entire $2 million tax reserve was reversed. At the end of the third quarter of fiscal
year 2008, the Company has approximately $1.6 million of tax assets available. Currently, the
Company is only paying certain state and federal minimums. Approximately $135,000 was paid in
income tax in the first nine months of fiscal year 2008. The remaining accruals reduce the
Companys deferred tax asset on the balance sheet. The non-cash tax accruals have the effect of
reducing earnings as compared to prior periods where minimal tax expense was included.
Versars net income for the third quarter of fiscal year 2008 was $913,000 compared to
$3,097,000 in the third quarter of fiscal year 2007. The decrease was attributable to the
increased tax expenses and accruals and the reversal of the tax allowance in the third quarter of
fiscal year 2007 as mentioned above.
14
ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Nine Months Comparison of Fiscal Year 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
For the Nine-Month Periods Ended |
|
|
|
March 28, |
|
|
March 30, |
|
|
|
2008 |
|
|
2007 |
|
GROSS REVENUE |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
51,627 |
|
|
$ |
39,880 |
|
Compliance and
Environmental
Programs |
|
|
23,784 |
|
|
|
21,765 |
|
Professional Services |
|
|
5,938 |
|
|
|
5,575 |
|
National Security |
|
|
5,762 |
|
|
|
5,316 |
|
|
|
|
|
|
|
|
|
|
$ |
87,111 |
|
|
$ |
72,536 |
|
|
|
|
|
|
|
|
Gross Revenue for the nine months of fiscal year 2008 was $87,111,000, an increase of
$14,575,000 (20%) over that reported for the nine months of fiscal year 2007. Gross revenues for
the Program Management business segment was $51,627,000, an increase of $11,747,000 (29%) over that
reported for the nine months of fiscal year 2007. The increase is attributable to the Companys
efforts to support both the Air Force and the Army in Iraq as part of the reconstruction support
efforts. Gross revenues for the Compliance and Environmental Programs business segment was
$23,784,000, an increase of $2,019,000 (9%) over that reported for the nine months of fiscal year
2007. The increase is primarily due to increased municipal aquatic facility work. Gross revenues
for the Professional Services for the nine months of fiscal year 2008 was $5,938,000, an increase
of $363,000 (7%) over that reported for the nine months of fiscal year 2007. The increase is due
to the additional work awarded at the end of the first quarter of fiscal year 2008 in support of
the U.S. Army. Gross revenue for the National Security business segment for the nine months of
fiscal year 2008 was $5,762,000, an increase of $446,000 (8%) over that reported for the nine
months of fiscal year 2007. The increase is attributable to additional personal protective suit
royalty income and higher chemical laboratory revenues during the third quarter of fiscal year
2008.
Purchased services and materials increased by $8,728,000 (20%) in the nine months of fiscal
year 2008 compared to that reported in the nine months of fiscal year 2007. The increase was
primarily attributable to the increased work in the Program Management business segment as
mentioned above.
Direct costs of services and overhead include the cost to Versar of direct and overhead staff,
including recoverable and unallowable costs that are directly attributable to contracts. Direct
costs of services and overhead increased by $2,961,000 (14%) for the nine months of fiscal year
2008 compared to that reported for the nine months of fiscal year 2007. The increase is due to
additional costs required to support business growth efforts, in the Program Management business
segment.
Gross profit for the nine months of fiscal year 2008 was $10,362,000, an increase of
$2,886,000 (39%) over that reported in the nine months of fiscal year 2007. The increase is
primarily attributable to the increased gross revenues in the Program Management business segment
as mentioned above.
|
|
|
|
|
|
|
|
|
|
|
For the Nine-Month Periods Ended |
|
|
|
March 28, |
|
|
March 30, |
|
|
|
2008 |
|
|
2007 |
|
GROSS PROFIT(A) |
|
|
|
|
|
|
|
|
Program Management |
|
$ |
6,980 |
|
|
$ |
4,548 |
|
Compliance and Environmental
Programs |
|
|
1,650 |
|
|
|
1,888 |
|
Professional Services |
|
|
960 |
|
|
|
984 |
|
National Security |
|
|
772 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
$ |
10,362 |
|
|
$ |
7,476 |
|
|
|
|
|
|
|
|
15
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued) |
Selling, general and administrative expenses increased by $960,000 during the nine months of
fiscal year 2008 compared to that reported in the nine months of fiscal year 2007. The increase is
primarily due to increased business development activities, restricted stock expense and business
infrastructure support to continue the business growth of the Company.
Operating income for the nine months of fiscal year 2008 was $4,480,000, an increase of
$1,926,000 (75%) over that reported for the nine months of fiscal year 2007. Operating income for
the Program Management business segment for the nine months of fiscal year 2008 was $6,980,000, an
increase of $2,432,000 (53%) over that reported for the nine months of fiscal year 2007. The
increase is attributable to the increased gross revenues as mentioned above. Operating income for
the nine months of fiscal year 2008 in the Compliance and Environmental business segment was
$1,650,000, a decrease of $238,000 (13%) over that reported for the nine months of fiscal year
2007. The decrease is primarily due to the reduced gross revenues as mentioned above. Operating
income for the nine months of fiscal year 2008 in the Professional Services business segment was
$960,000, a slight increase of 2% over that reported for the nine months of fiscal year 2007.
Operating income for the nine months of fiscal year 2008 in the National Security business segment
was $772,000, an increase of $716,000 over that reported for the nine months of fiscal year 2007.
The increase is primarily due to the increased gross revenues as mentioned above.
Interest income for the nine months of fiscal year 2008 was $151,000, a $204,000 increase over
the net interest expense of $53,000 reported for the nine months of fiscal year 2007. The increase
was due to interest earned on cash balances maintained with the Companys bank.
Income tax expense for the nine months of fiscal year 2008 was $1,956,000. During fiscal year
2007, the Company was carrying a valuation allowance against its tax assets. In the third quarter
of fiscal year 2007, the Company re-evaluated the need for the valuation allowance. Because of the
Companys continued improved financial performance and funded backlog over the past three years,
management believes that the Company will be able to utilize the full benefit of the tax asset and
thus the entire $2 million tax reserve was reversed. At the end of the third quarter of fiscal
year 2008, the Company has approximately $1.1 million of tax assets available. Currently, the
Company is only paying certain state and federal minimums. Approximately $135,000 was paid in
income tax in the nine months of fiscal year 2008. The remaining accruals reduce the Companys
deferred tax asset on the balance sheet. The non-cash tax accruals have the effect of reducing
earnings as compared to prior periods where minimal tax expense was included.
Versars net income for the nine months of fiscal year 2008 was $2,675,000 compared to
$4,452,000 in the nine months of fiscal year 2007. The decrease was attributable to the increased
tax expenses and accruals and the reversal of the tax allowance in the third quarter of fiscal year
2007 as mentioned above.
Liquidity and Capital Resources
The Companys working capital as of March 28, 2008 approximated $21,141,000, an increase of
$4,965,000 (31%) from June 29, 2007. In addition, at March 28, 2008, the Companys current ratio
was 2.73, an improvement over the 2.01 current ratio reported on June 29, 2007. The increase was
due to the reduction of current liabilities during the quarter.
The Company has a line of credit facility with United Bank (the Bank) that provides for
advances up to $7.5 million based upon qualifying receivables. Interest on borrowings is based on
the prime rate of interest minus 0.5% (4.75% as of March 28, 2008). In October 2006, the Company
obtained a letter of credit of approximately $1.6 million which serves as collateral for surety
bond coverage provided by the Companys insurance carrier. The letter of credit reduces the
Companys borrowing base on the line of credit. As of March 28, 2008, there were no borrowings
under the line of credit. The line of credit capacity at March 28, 2008 was $3.6 million.
Obligations under the credit facility are guaranteed by the Company and each subsidiary
individually and collectively secured by accounts receivable, equipment and intangibles, plus all
insurance policies on property constituting collateral. The line of credit matures in November
2009 and is subject to certain covenants related to the maintenance of financial ratios. These
covenants require a minimum tangible net worth of $15 million; a
16
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued) |
maximum total liabilities to tangible net worth ratio not to exceed 2.5 to 1; and a minimum current
ratio of at least 1.25 to 1. Failure to meet the covenant requirements gives the Bank the right to
demand outstanding amounts due under the line of credit, which may impact the Companys ability to
finance its working capital requirements. At March 28, 2008, the Company was in compliance with
the financial covenants.
Management believes that the current cash balance of over $7.7 million along with anticipated
cash from operations and existing capacity on the line of credit, there is sufficient capital to
meet its liquidity needs within the next year. Expected capital requirements for the remainder of
fiscal year 2008 are approximately $250,000 primarily to maintain our existing information
technology systems and software applications. Such capital requirements will be funded through
existing working capital.
Critical Accounting Policies and Related Estimates That Have a Material Effect on 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 our 2007 fiscal year.
Revenue recognition: Contracts in process are stated at the lower of actual costs
incurred plus accrued profits or net estimated realizable value of costs, reduced by progress
billings. On cost-plus fee contracts, revenue is recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and on time-and-material contracts, revenue is recognized to
the extent of billable rates times hours delivered plus material and other reimbursable costs
incurred. The Company records income from major fixed-price contracts, extending over more than
one accounting period, using the percentage-of-completion method. During the performance of such
contracts, estimated final contract prices and costs are periodically reviewed and revisions are
made as required. Fixed price contracts can be significantly impacted by changes in contract
performance, contract delays, liquidated damages and penalty provisions, and contract change
orders, which may affect the revenue recognition on a project. Losses on contracts are recognized
in the period when they become known.
From time to time we may proceed with work based on customer direction pending finalizing and
signing contract funding documents. We have an internal process for approving any such work. The
Company recognizes revenue based on actual costs incurred to the extent that the funding is
assessed as probable. In evaluating the probability of the receipt of funding, we consider our
previous experiences with the customer, communications with the customer regarding funding status,
and our knowledge of available funding for the contract or program. If funding is not assessed as
probable, costs are expensed as they are incurred.
There is the possibility that there will be future and currently unforeseeable significant
adjustments to our estimated contract revenues, costs and margins for fixed price contracts,
particularly in the later stages of these contracts. It is likely that such adjustments could
occur with our larger fixed priced projects. Such adjustments are common in the construction
industry given the nature of the contracts. These adjustments could either positively or
negatively impact our estimates due to the circumstances surrounding the negotiations of change
orders, the impact of schedule slippage, subcontractor claims and contract disputes which are
normally resolved at the end of the contract. Adjustments to the financial statements are made
when they are known.
Allowance for doubtful accounts: Disputes arise in the normal course of the 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. 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.
17
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued) |
Asset retirement obligation: In fiscal year 2007, the Company recorded an asset
retirement obligation associated with the estimated clean-up costs for its chemical laboratory in
its National Security business segment. In accordance with SFAS 143, the Company estimated the
costs to clean up the laboratory and return it to its original state at a present value of
approximately $497,000. The Company currently estimates the amortization and accreation expense to
be between $180,000 to $190,000 per year over the next 3 1/2 years. The Company is currently
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, adjustments to the record expense accrual will
be reflected when they become known in accordance with SFAS 143. During the first nine months of
fiscal year 2008, the Company recorded accreation and amortization expenses of approximately
$138,000 for this obligation.
Goodwill and other intangible assets: On January 30, 1998, Versar completed the
acquisition of The Greenwood Partnership, P.C. subsequently renamed Versar Global Solutions, Inc.
or (VGSI). The transaction was accounted for as a purchase. Goodwill resulting from this
transaction was approximately $1.1 million. In fiscal year 2003, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets which eliminated the amortization of goodwill, but requires
the Company to test such goodwill for impairment annually. Currently, the carrying value of
goodwill is approximately $776,000 relating to the acquisition of VGSI, which is now part of the
Program Management business segment. The Company began reporting the Program Management business
segment separately in fiscal year 2007, primarily due to the increase in business volume in Iraq
and in United States construction related work. In performing its goodwill impairment analysis,
management has utilized a market-based valuation approach to determine the estimated fair value of
the Program Management business segment. Management engages outside professionals and valuation
experts, as necessary, to assist in performing this analysis. An analysis was performed on public
companies and company transactions to prepare a market-based valuation. Based upon the analysis,
the estimated fair value of the Program Management business segment exceeds the carrying value of
the net assets of the segment of $6.5 million on an enterprise value basis by a substantial margin.
Should the Program Management business segments financial performance not meet estimates, then
impairment of goodwill would have to be further assessed to determine whether a write down of
goodwill value would be warranted. If such a write down were to occur, it would negatively impact
the Companys financial position and results of operations. However, it would not impact the
Companys cash flow or financial debt covenants.
New accounting pronouncements: On July 13, 2006, the Financial Accounting Standards
Board (FASB) issued FIN No. 48, Accounting for Uncertainty of income taxes, which is an
interpretation of FAS 109, Accounting for Income Taxes. The regulation provides that a company
cannot record tax benefits of a transaction unless it is more likely than not that the company will
be entitled to the benefits from the tax position recorded. FIN No. 48 became effective as of July
1, 2007. As a result of the implementation of FIN 48, the Company conducted a comprehensive review
of its portfolio of uncertain tax positions in accordance with recognition standards established by
FIN 48. As a result of this review, the Company concluded that at this time the Company has no
unrecognized tax benefits. As a result of applying the provisions of FIN 48, there was no
cumulative effect on retained earnings. The Company conducts business in the US and the
Philippines and is subject to tax in those jurisdictions. For income tax returns filed by the
Company, the Company is no longer subject to examination by the tax authorities for years prior to
June 30, 2003, although carryforward tax attributes that were generated prior to fiscal year 2003
may still be adjusted by the tax authorities if either of the tax attributes have been or will be
utilized. The Company has not received any communications by taxing authorities that cause it to
believe it is currently under examination by any tax authorities in any of the jurisdictions in
which it operates.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which is effective
January 1, 2008. SFAS No. 157 defines fair value, establishes a market-based framework or hierarchy
for measuring fair value and expands disclosures about fair value measurements. The new standard is
applicable whenever another accounting
18
|
|
|
ITEM 2 |
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued) |
pronouncement requires or permits assets and liabilities to be measured at fair value, with limited
exceptions. Management is currently evaluating the effect that adoption of this statement may have
on the Companys consolidated financial position and results of operations when adopted for the
first quarter of fiscal year 2009.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of
FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure eligible items at fair
value at specified election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. Management is currently evaluating
the effect that adoption of this statement may have on the Companys consolidated financial
position and results of operations when it becomes effective for the Companys 2009 fiscal year.
Impact of Inflation
Versar seeks to protect itself from the effects of inflation. The majority of contracts the
Company performs are for a period of a year or less or are cost-plus-fixed-fee type contracts and,
accordingly, are less susceptible to the effects of inflation. Multi-year contracts provide for
projected increases in labor and other costs.
Contingencies
Versar and its subsidiaries are parties to various legal actions arising in the normal course
of business. The Company believes that the ultimate resolution of these legal actions will not
have a material adverse effect on its consolidated financial position and results of operations.
(See Part II, Item 1 Legal Proceedings).
Business Segments
Versar currently has four business segments: Program Management, Compliance and Environmental
Programs, Professional Services, and National Security. See Note J of the Notes to the
Consolidated Financial Statements for details regarding these segments.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has not entered into any transactions using derivative financial instruments or
derivative commodity instruments and believes that its exposure to interest rate risk and other
relevant market risk is not material.
Item 4T Procedures and Controls
As of the last day of the period covered by this report, the Company carried out an
evaluation, under the supervision of the 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 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.
19
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Versar and its subsidiaries are parties from time to time to various legal actions arising in
the normal course of business. The Company believes that any ultimate unfavorable resolution of
these legal actions will not have a material adverse effect on its consolidated financial condition
and results of operations.
Item 6 Exhibits
(a) Exhibits
31.1 and 31.2 Certification pursuant to Securities Exchange Act Section 13a-14.
32.1 and 32.2 Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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|
VERSAR, INC. |
|
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
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|
|
By: |
|
/s/ Theodore M. Prociv |
|
|
|
|
|
|
|
|
|
|
|
Theodore M. Prociv |
|
|
|
|
Chief Executive Officer, President, and Director |
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Lawrence W. Sinnott |
|
|
|
|
|
|
|
|
|
|
|
Lawrence W. Sinnott |
|
|
|
|
Executive Vice President, Chief Operating Officer, Chief |
|
|
|
|
Financial Officer, Treasurer, and Principal Accounting Officer |
|
|
Date: May 9, 2008
21