Case

Versar Inc. (VSR)

Case outline

 

Versar Inc. is a small environmental consulting company located in the State of Virginia. In its annual report, Versar lists three business segments, environmental, energy conservation and facility infrastructure, but indicates that the last two are insignificant. For the past six years, revenues from its core activity have experienced little or no growth with government contracts representing 64% (e.g. the US Defense Department contracts accounting for 40%). The company has sought to diversify with more non-governmental work, and to seek new revenue opportunities by acquiring other consulting firms and by entering various new markets with some minor successes and one major debacle. In 1999, Versar Inc. sees counter-terrorism civil defense as its next major potential revenue source.

Versar was incorporated in 1986. In 1994, it spun off its real-estate activity in Sarnia Corporation, recorded a $ 4 million loss which wiped out all its retained earnings, but remained liable as a guarantor on $ 12 million of Sarnia's debt. By 1999, less than $ 1 million remained of Sarnia's debt that Versar guaranteed. In 1996, Versar Inc. purchased the assets of ValueAdd, a municipal services operation, for 30,000 shares of Versar's stock, but because of business shortfalls, Versar had to write off $330,000 of the receivables obtained from ValuAdd and $97,000 of goodwill recorded when ValuAdd was purchased. In 1997, Versar Inc. purchased all the shares of Science Management Corporation (SMC), an oil industry design, contruction and management services contractor that had been put in bankruptcy proceedings in 1996, for 533,433 shares of Versar and $ 2.87 millions in cash (financed in part by a $ 2 millions note due in 2000). SMC was supposed to bring over $34 millions in revenue in 1998. Instead, because one $20 million project closed, other projects being put on hold because of the drop in oil in 1996-97, and operating losses on SMC management service contracts, Versar decided to shut down the management services, design and construction segments and take a $ 10.1 million loss in 1998. VSR stock lost 70% of its value dropping from $ 6.5 to $ 1.8 between May and September 1998.

In 1998, Versar Inc. acquired The Greenwood Partnership (TGP), an architectural and engineering contractor, for 228,573 Versar shares, a four year note of $450,000 and $300,000 in cash. TGP added over $ 2 millions to Vesar's revenues in 1998 and in 1999. To finance the absorption of SMC and TGP, Versar had to obtain a line of credit from National Bank, N.A. for up to $ 6.5 millions, in addition to the $ 2 million promissory note previously mentioned. The line of credit is secured by accounts receivable, equipment and intangibles, plus insurance policies on same, and requires the maintenance of certain financial ratios. In 1999, the average outstanding credit balance was just under $ 5 millions, and the maximum had been $ 6.125 millions. Versar expects that the line of credit will be extended one more year when it becomes due on November 2000. Because the line of credit is for more than twelve months, Versar shows in as a noncurrent obligation.

Financial data:

Condensed financial statements without notes are presented for selected years in following tables:

Table T-VSR.1 - Versar Inc. Balance Sheets
Table T-VSR.2 - Versar Inc. Income Statements

Normalized statements and selected ratios based on above financial statements are presented in

Table T-VSR.3 - Versar Inc. Normalized Balance Sheets
Table T-VSR.4 - Versar Inc. Normalized Income Statements
Table T-VSR.5 - Versar Inc. Ratios

 

Information sources:

Visit company web site at http://www.versar.com

SEC 10-K file available at http://www.sec.gov/cgi-bin/srch-edgar or http://www.edgar-online.com/

Versar stock is traded on the American Stock Exchange under the symbol VSR. Find stock quotes and recent news from http://finance.yahoo.com/ or http://www.quote.com/ or from the exchange.