Form 10-Q VERSAR INC For: Sep 26

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

� QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended

September 26, 2014

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� Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File Number 1-9309

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(Exact name of registrant as specified in its charter)

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DELAWARE	�	54-0852979
(State or other jurisdiction of incorporation or organization)	�	(I.R.S. Employer Identification No.)
�	�	�
6850 Versar Center Springfield, Virginia	�	22151
(Address of principal executive offices)	�	(Zip Code)

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Registrant’s telephone number, including area code (703) 750-3000

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Not Applicable

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(Former name, former address and former fiscal year, if changed since last report.)

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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.

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Yes � No �

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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).

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Yes � No �

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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.

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Large accelerated filer �	Accelerated filer �
Non-accelerated filer � (Do not check if a smaller reporting company)	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).

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Yes � No �

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

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Class of Common Stock	�	Outstanding at November 3, 2014
$.01 par value	�	9,757,346

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VERSAR, INC. AND SUBSIDIARIES�

INDEX TO FORM 10-Q

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�		PAGE
�		�
PART I – FINANCIAL INFORMATION		�
�		�
ITEM 1.	Financial Statements.	�
�	�	�
�	Condensed Consolidated Balance Sheets as of September 26, 2014 (unaudited) and June 27, 2014.	3
�	�	�
�	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 26, 2014 and September 27, 2013.	�4
�	�	�
�	Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended September 26, 2014 and September 27, 2013.	5
�	�	�
�	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 26, 2014 and September 27, 2013.�	6
�	�	�
�	Unaudited Notes to Condensed Consolidated Financial Statements.	7
�	�	�
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15
�	�	�
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	21
�	�	�
ITEM 4.	Controls and Procedures.	21
�	�	�
PART II – OTHER INFORMATION		�
�		�
ITEM 1.	Legal Proceedings.	22
�	�	�
ITEM 6.	Exhibits.	22
�	�	�
SIGNATURES		24
�		�
EXHIBITS

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VERSAR, INC. AND SUBSIDIARIES

Condenesed Consolidated Balance Sheets

(In thousands, except share amounts)

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�	�	As of						�
�	�	September 26, 2014		�	�	June 27, 2014		�
ASSETS	�	�	�	�	�	�	�	�
Current assets	�	�	�	�	�	�	�	�
Cash and cash equivalents	�	$	2,627	�	�	$	9,674	�
Accounts receivable, net	�	�	30,179	�	�	�	25,983	�
Inventory, net	�	�	1,380	�	�	�	1,294	�
Prepaid expenses and other current assets	�	�	2,664	�	�	�	1,303	�
Deferred income taxes	�	�	2,254	�	�	�	2,254	�
Income tax receivable	�	�	2,328	�	�	�	2,325	�
Total current assets	�	�	41,432	�	�	�	42,833	�
Property and equipment, net	�	�	2,584	�	�	�	2,389	�
Deferred income taxes, non-current	�	�	-	�	�	�	533	�
Goodwill	�	�	18,029	�	�	�	8,073	�
Intangible assets, net	�	�	5,429	�	�	�	2,930	�
Other assets	�	�	1,061	�	�	�	1,003	�
Total assets	�	$	68,535	�	�	$	57,761	�
�	�	�	�	�	�	�	�	�
LIABILITIES AND STOCKHOLDERS' EQUITY	�	�	�	�	�	�	�	�
Current liabilities	�	�	�	�	�	�	�	�
Accounts payable	�	$	10,937	�	�	$	11,272	�
Accrued salaries and vacation	�	�	3,022	�	�	�	2,912	�
Other current liabilities	�	�	3,868	�	�	�	3,568	�
Income tax payable	�	�	57	�	�	�	-	�
Notes payable, current	�	�	2,767	�	�	�	958	�
Total current liabilities	�	�	20,651	�	�	�	18,710	�
Notes payable, non-current	�	�	8,580	�	�	�	156	�
Deferred income taxes	�	�	449	�	�	�	-	�
Other long-term liabilities	�	�	1,114	�	�	�	1,110	�
Total liabilities	�	�	30,794	�	�	�	19,976	�
�	�	�	�	�	�	�	�	�
Commitments and contingencies	�	�	-	�	�	�	-	�
Stockholders' equity	�	�	�	�	�	�	�	�
Common stock $.01 par value; 30,000,000 shares authorized; 10,020,392 shares issued and 9,715,614 shares outstanding��as of September 26, 2014, 9,849,773 shares issued and 9,708,107 shares outstanding�� as of June��27, 2014.	�	�	100	�	�	�	100	�
Capital in excess of par value	�	�	30,520	�	�	�	30,393	�
Retained earnings	�	�	8,943	�	�	�	9,032	�
Treasury stock, at cost	�	�	(1,396	)	�	�	(1,396	)
Accumulated other comprehensive loss; foreign currency translation	�	�	(426	)	�	�	(344	)
Total stockholders' equity	�	�	37,741	�	�	�	37,785	�
Total liabilities and stockholders' equity	�	$	68,535	�	�	$	57,761	�

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERSAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

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�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
�	�	�		�	�	�		�
GROSS REVENUE	�	$	29,586	�	�	$	29,120	�
��Purchased services and materials, at cost	�	�	12,228	�	�	�	14,410	�
��Direct costs of services and overhead	�	�	14,752	�	�	�	11,758	�
GROSS PROFIT	�	�	2,606	�	�	�	2,952	�
�	�	�	�	�	�	�	�	�
��Selling, general and administrative expenses	�	�	2,691	�	�	�	1,870	�
OPERATING (LOSS) INCOME	�	�	(85	)	�	�	1,082	�
�	�	�	�	�	�	�	�	�
OTHER EXPENSE	�	�	�	�	�	�	�	�
��Interest expense	�	�	57	�	�	�	25	�
�(LOSS) INCOME BEFORE INCOME TAXES	�	�	(142	)	�	�	1,057	�
�	�	�	�	�	�	�	�	�
��Income tax (benefit) expense	�	�	(53	)	�	�	398	�
�	�	�	�	�	�	�	�	�
NET (LOSS) INCOME	�	$	(89	)	�	$	659	�
�	�	�	�	�	�	�	�	�
NET (LOSS) INCOME PER SHARE-BASIC and DILUTED	�	$	(0.01	)	�	$	0.07	�
�	�	�	�	�	�	�	�	�
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC	�	�	9,711	�	�	�	9,585	�
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED	�	�	9,711	�	�	�	9,694	�

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The accompanying notes are an integral part of these condensed consolidated financial statements

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VERSAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

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�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
COMPREHENSIVE (LOSS) INCOME	�	�	�	�	�	�	�	�
Net (loss) income	�	$	(89	)	�	$	659	�
Foreign currency translation adjustments	�	�	(82	)	�	�	150	�
TOTAL COMPREHENSIVE (LOSS) INCOME	�	$	(171	)	�	$	809	�

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERSAR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

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�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
Cash flows from operating activities:	�	�	�	�	�	�	�	�
Net (loss) income	�	$	(89	)	�	$	659	�
Adjustments to reconcile net (loss) income to net cash provided by operating activities:	�	�	�	�	�	�	�	�
Depreciation and amortization	�	�	644	�	�	�	441	�
Loss on sale of property and equipment	�	�	-	�	�	�	26	�
(Recovery) provision for doubtful accounts receivable	�	�	(132	)	�	�	378	�
Gain (loss) on life insurance policy cash surrender value	�	�	1	�	�	�	(20	)
Deferred income taxes	�	�	986	�	�	�	244	�
Share based compensation	�	�	127	�	�	�	115	�
Changes in assets and liabilities:	�	�	�	�	�	�	�	�
(Increase) decrease��in accounts receivable	�	�	(70	)	�	�	1,916	�
Increase in prepaid and other assets	�	�	(907	)	�	�	(976	)
(Increase) decrease in inventories	�	�	(143	)	�	�	116	�
Decrease in accounts payable	�	�	(2,015	)	�	�	(985	)
Decrease��in accrued salaries and vacation	�	�	(1,198	)	�	�	(728	)
Decrease in income tax payable	�	�	51	�	�	�	252	�
Increase in other assets and liabilities	�	�	(1,197	)	�	�	(1,149	)
Net cash (used in ) provided by operating activities	�	�	(3,942	)	�	�	289	�
Cash flows from investing activities:	�	�	�	�	�	�	�	�
Purchase of property and equipment	�	�	(212	)	�	�	(70	)
Payment for Waller acquisition, net of cash acquired	�	�	(5,794	)	�	�	-	�
Payment for GMI acquisition, net of cash acquired	�	�	-	�	�	�	(3,101	)
Premiums paid on life insurance policies	�	�	(23	)	�	�	(16	)
Net cash used in investing activities	�	�	(6,029	)	�	�	(3,187	)
Cash flows from financing activities:	�	�	�	�	�	�	�	�
Loan for Waller Purchase	�	�	5,000	�	�	�	-	�
Repayment of Loan for Waller Purchase	�	�	(1,620	)	�	�	67	�
Repayments of notes payable	�	�	(479	)	�	�	(308	)
Purchase of treasury stock	�	�	-	�	�	�	(94	)
Net cash provided by (used in)��financing activities	�	�	2,901	�	�	�	(335	)
Effect of exchange rate changes on cash and cash equivalents	�	�	23	�	�	�	149	�
Net decrease in cash and cash equivalents	�	�	(7,047	)	�	�	(3,084	)
Cash and cash equivalents at the beginning of the period	�	�	9,674	�	�	�	8,728	�
Cash and cash equivalents at the end of the period	�	$	2,627	�	�	$	5,644	�
Supplemental disclosure of cash and non-cash activities:	�	�	�	�	�	�	�	�
�����Promissory notes-payable issued in connection with Waller acquisition	�	$	6,000	�	�	$	-	�
�����Promissory notes-payable issued in connection with GMI acquisition	�	$	-	�	�	$	1,250	�
�����Cash paid for interest	�	$	57	�	�	$	86	�
�����Cash paid for income taxes	�	$	13	�	�	$	1,964	�

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERSAR, INC. AND SUBSIDIARIES

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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NOTE A – BASIS OF PRESENTATION

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The condensed consolidated financial statements of Versar, Inc. and its wholly-owned subsidiaries (“Versar” or the “Company”) contained in this report are unaudited, but reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods reflected. All intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended June 27, 2014. The results of operations for the three-month periods reported herein are not necessarily indicative of results that may be expected for the full year. The fiscal year-end balance sheet data included in this report was derived from audited financial statements. The Company’s fiscal year is based upon a 52 - 53 week calendar, and ends on the last Friday of the fiscal period. The three-month periods ended September 26, 2014 and September 27, 2013 each included 13 weeks. Fiscal year 2015 and 2014 both include 52 weeks.

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Recent Accounting Pronouncements

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On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including Accounting Standards Codification (ASC) No. 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a specific point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 will be effective January 1, 2017, and may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluating both methods of adoption, as well as the potential effect ASU 2014-09 will have on the Company’s consolidated financial position, results of operations and cash flows. Other accounting standards updates effective after September 26, 2014, are not expected to have a material effect on the Company’s consolidated financial position or its annual results of operations and cash flows.

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NOTE B – BUSINESS SEGMENTS

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The Company is aligned into three reportable segments: Engineering and Construction Management (“ECM”), Environmental Services (“ESG”), and Professional Services (“PSG”), all described below.

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ECM

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This business segment performs Title I Design Services, Title II Construction Management Services, and Title III Construction Services. This business segment also provides other related engineering and construction type services both in the United States and internationally and provides national security services in several markets that require ongoing services and support and which have received funding priority from the federal government.

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ESG

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This business segment provides full-service environmental solutions and includes the Company’s remediation and compliance, exposure and risk assessment, natural resources, unexploded ordnance (“UXO”)/military munitions response program (“MMRP”), air, greenhouse gas, and cultural resources services. Clients include a wide-range of federal and state agencies.

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PSG

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This business segment provides onsite environmental management, planning and engineering services to the Department of Defense (“DOD”) installations and to the U.S. Department of Commerce (“DOC”). Versar provides on-site or staff augmentation services that enhance the customer’s mission through the use of subject matter experts who are fully dedicated to accomplish mission objectives. These services are particularly attractive as the DOD shifts emphasis to its core military mission and downsizes due to increasing budgetary pressure. Primarily at the U.S. Army Installation level or DOD Joint Base level (two or more DOD facilities realigning management functions to establish a single entity), this segment also serves government clients by supporting them in areas where their capabilities and capacities are lacking.

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Presented below is summary operating information by segment for the Company for the three-month periods ended September 26, 2014 and September 27, 2013.

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�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
�	�	(in thousands)						�
GROSS REVENUE	�	�	�	�	�	�	�	�
ECM	�	$	13,049	�	�	$	12,421	�
ESG	�	�	10,265	�	�	�	13,014	�
PSG	�	�	6,272	�	�	�	3,685	�
�	�	$	29,586	�	�	$	29,120	�
�	�	�	�	�	�	�	�	�
GROSS PROFIT (a)	�	�	�	�	�	�	�	�
ECM	�	$	1,520	�	�	$	1,718	�
ESG	�	�	315	�	�	�	472	�
PSG	�	�	771	�	�	�	762	�
�	�	$	2,606	�	�	$	2,952	�
�	�	�	�	�	�	�	�	�
Selling, general and administrative expenses	�	�	2,691	�	�	�	1,870	�
OPERATING (LOSS) INCOME	�	$	(85	)	�	$	1,082	�

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(a) - Gross profit is defined as gross revenues less purchased services and materials, at cost, less direct costs of services and overhead allocated on a proportional basis.

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NOTE C – ACQUISITIONS

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On July 1, 2014, Versar acquired all of the issued and outstanding capital stock of J.M. Waller Associates, Inc. (“JMWA”), a Virginia corporation. JMWA was a service disabled veteran owned small business providing architectural, design, planning, construction management, environmental, facilities, and logistical consulting services to federal, state, municipal and commercial clients. The outstanding capital stock of JMWA was acquired by Versar pursuant to a Stock Purchase Agreement by and among Versar, JMWA, and the stockholders of JMWA and entered into on June 30, 2014 (the “Stock Purchase Agreement”). The aggregate purchase price for the outstanding capital stock of JMWA was $13,000,000, which was comprised of: (i) cash in the amount of $7,000,000 paid pro rata in accordance with each stockholder’s ownership interest in JMWA at closing; and (ii) three seller notes with an aggregate principal amount of $6,000,000 issued by Versar to the stockholders, pro rata in accordance with each stockholders’ ownership interest in JMWA at closing. The seller notes bear interest of 5.00% per annum and mature on the third business day of January 2019. The purchase price is subject to a post-closing adjustment based on an agreed target net working capital of JMWA as of the date of closing. The Stock Purchase Agreement contains customary representations and warranties and requires the JMWA stockholders to indemnify Versar for certain liabilities arising under the agreement, subject to certain limitations and conditions.

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The preliminary purchase price allocation in the table below reflects the Company’s estimate of the fair value of the assets acquired and liabilities assumed on the July 1, 2014 acquisition date. Goodwill has been preliminarily allocated among our ECM, ESG, and PSG segments based on a percentage of segment specific JMWA revenue dollars for the first quarter of fiscal year 2015. Goodwill represents the value in excess of fair market value that the Company paid to acquire JMWA, less identified intangible assets. The Company incurred approximately $0.1 million in transaction costs related to the JMWA acquisition.

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�	�	Amount		�
Description	�	(in thousands)		�
Cash	�	$	456	�
Accounts receivable	�	�	4,049	�
Property and equipment	�	�	382	�
Other assets	�	�	156	�
Intangibles	�	�	2,782	�
Goodwill	�	�	8,923	�
Assets Acquired	�	�	16,748	�
�	�	�	�	�
Account payable	�	�	1,706	�
Other liabilities	�	�	2,042	�
Liabilities Assumed	�	�	3,748	�
�	�	�	�	�
Purchase Price	�	$	13,000	�

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The table below summarizes the unaudited pro forma statements of operations for the three months ended September 26, 2014 and September 27, 2013, assuming the JMWA acquisition had been completed as of the first day of the prior year fiscal quarter. These pro forma statements do not include any adjustments that may have resulted from synergies derived from the acquisitions or for amortization of intangibles other than during the period the acquired entity was part of the Company. For the three months ended September 26, 2014, JMWA has contributed approximately $6.4 million of revenue and approximately $5.1 million of expenses to operations.

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�

�

For the Three Months ended September 27, 2013 (in thousands)

�

�

�

Versar

�

�

JMWA

�

�

Pro Forma Combined

�

�

�

�

�

�

�

�

�

�

�

GROSS REVENUE

�

$

29,120

�

�

�

8,844

�

�

�

37,964

�

Purchased services and materials, at cost

�

�

14,410

�

�

�

1,479

�

�

�

15,889

�

Direct costs of services and overhead

�

�

11,758

�

�

�

5,522

�

�

�

17,280

�

GROSS PROFIT

�

�

2,952

�

�

�

1,843

�

�

�

4,795

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Selling, general and administrative expenses

�

�

1,870

�

�

�

1,133

�

�

�

3,003

�

OPERATING (LOSS) INCOME

�

�

1,082

�

�

�

710

�

�

�

1,792

�

�

�

�

�

�

�

�

�

�

�

�

�

�

OTHER EXPENSE

�

�

�

�

�

�

�

�

�

�

�

�

Interest income

�

�

-

�

�

�

(44

)

�

�

(44

)

Interest expense

�

�

25

�

�

�

-

�

�

�

25

�

(LOSS) INCOME BEFORE INCOME TAXES

�

�

1,057

�

�

�

754

�

�

�

1,811

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Income tax (benefit) expense

�

�

398

�

�

�

287

�

�

�

685

�

�

�

�

�

�

�

�

�

�

�

�

�

�

NET (LOSS) INCOME

�

$

659

�

�

�

467

�

�

�

1,126

�

�

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NOTE D – FAIR VALUE MEASUREMENT

�

Versar applies ASC 820 – Fair Value Measurements and Disclosures in determining the fair value to be disclosed for financial and nonfinancial assets and liabilities.

�

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy and a framework which requires categorizing assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment.

�

Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities.

�

Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

�

Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability.

�

As a result of the acquisition of JMWA, the Company is required to report at fair value the assets and liabilities it acquired as a result of the acquisition of JMWA. The valuation techniques utilized in the fair value measurement of the assets and liabilities presented are preliminary and were based on the definitions outlined above and the methodologies used by an external valuation firm, primarily an income approach for assigning value to the acquired intangible assets. Additionally, a market approach and an asset-based approach were used as secondary methodologies.

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NOTE E – ACCOUNTS RECEIVABLE

�

�	�	As of						�
�	�	September 26, 2014		�	�	June 27, 2014		�
�	�	(in thousands)						�
Billed receivables	�	�	�	�	�	�	�	�
U.S. Government	�	$	8,306	�	�	$	8,373	�
Commercial	�	�	4,400	�	�	�	3,484	�
Unbilled receivables	�	�	�	�	�	�	�	�
U.S. Government	�	�	17,509	�	�	�	14,295	�
Commercial	�	�	475	�	�	�	474	�
Total receivables	�	�	30,690	�	�	�	26,626	�
Allowance for doubtful accounts	�	�	(511	)	�	�	(643	)
Accounts receivable, net	�	$	30,179	�	�	$	25,983	�

�

The acquisition of JMWA contributed approximately $4.0 million in total accounts receivable. We have preliminarily allocated these receivables within the categories in the schedule above, and will make adjustments as we finalize the purchase price accounting for the JMWA acquisition in subsequent quarters.

�

��

Unbilled receivables represent amounts earned which have not yet been billed and other amounts which can be invoiced upon completion of fixed-price contract milestones, attainment of certain contract objectives, or completion of federal and state governments’ incurred cost audits. Management anticipates that such unbilled receivables will be substantially billed and collected in fiscal year 2015; therefore, in accordance with industry practice, they have been presented as current assets.

�

NOTE F – GOODWILL AND INTANGIBLE ASSETS

�

Goodwill

�

The preliminary carrying value of goodwill at September 26, 2014 and June 27, 2014 was $18.0 million and $8.1 million, respectively. The Company’s goodwill balance was derived from the acquisition of JMWA in fiscal year 2015, the acquisition of Geo-Marine, Inc. (“GMI”) in fiscal year 2014, the acquisition of Charron Construction Consulting, Inc. (“Charron”) in fiscal year 2012, the acquisitions of Professional Protective Systems Limited (“PPS”) and ADVENT Environmental, Inc. (“ADVENT”) in fiscal year 2010, and the acquisition of Versar Greenwood, Inc in fiscal year 1998. The Company recorded a preliminary goodwill balance with a fair value of $8.9 million from the acquisition of JMWA and allocated the balance between the ECM, ESG, and PSG segments based on segment specific JMWA revenue dollars for the first quarter of fiscal year 2015 (as presented in the table below):

��

�

�

Goodwill Balances

�

�

�

ECM

�

�

ESG

�

�

PSG

�

�

Total

�

Balance, June 27, 2014

�

$

5,302

�

�

$

2,771

�

�

$

-

�

�

$

8,073

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

JMWA Acquisition

�

�

1,652

�

�

�

1,633

�

�

�

5,638

�

�

�

8,923

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Deferred tax liability adjustment

�

�

191

�

�

�

189

�

�

�

653

�

�

�

1,033

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Balance, September 26, 2014

�

$

7,145

�

�

$

4,593

�

�

$

6,291

�

�

$

18,029

�

�

Intangible Assets

�

In connection with the acquisitions of JMWA, GMI, Charron, PPS, and ADVENT, the Company identified certain intangible assets.� These intangible assets were customer-related, marketing-related and technology-related.� A summary of the Company’s intangible asset balances as of September 26, 2014 and June 27, 2014, as well as their respective amortization periods, is as follows (in thousands):

�

�

�

Gross Carrying Amount

�

�

Accumulated Amortization

�

�

Net Carrying Amount

�

�

Amortization Period

As of September 26, 2014

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Customer-related

�

$

5,689

�

�

$

(1,184

)

�

$

4,505

�

�

5-15 yrs

Marketing-related

�

�

1,033

�

�

$

(392

)

�

�

641

�

�

2-7 yrs

Technology-related

�

�

841

�

�

$

(558

)

�

�

283

�

�

7 yrs

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Total

�

�

7,563

�

�

�

(2,134

)

�

�

5,429

�

�

�

�

��

�

�

Gross Carrying Amount

�

�

Accumulated Amortization

�

�

Net Carrying Amount

�

�

Amortization Period

As of June 27, 2014

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Customer-related

�

$

3,568

�

�

$

(1,027

)

�

$

2,541

�

�

5-15 yrs

Marketing-related

�

�

372

�

�

�

(296

)

�

�

76

�

�

5-7 yrs

Technology-related

�

�

841

�

�

�

(528

)

�

�

313

�

�

7 yrs

�

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Total

�

�

4,781

�

�

�

(1,851

)

�

�

2,930

�

�

�

�

Amortization expense for intangible assets was approximately $0.4 million for the first quarter of fiscal year 2015. Expected future amortization expense in the fiscal quarters and years subsequent to September 26, 2014 is as follows:

�

Years	�	Amounts		�
�	�	(in thousands)		�
2015	�	$	800	�
2016	�	�	973	�
2017	�	�	548	�
2018	�	�	455	�
2019	�	�	455	�
�	�	�	�	�
Thereafter	�	�	2,198	�
Total	�	$	5,429	�

�

NOTE G – INVENTORY

�

The Company’s inventory balance includes the following:

�

�	�	As of						�
�	�	September 26, 2014		�	�	June 27, 2014		�
�	�	(in thousands)						�
Raw Materials	�	$	950	�	�	$	908	�
Finished Goods	�	�	343	�	�	�	276	�
Work-in-process	�	�	135	�	�	�	152	�
Reserve	�	�	(48	)	�	�	(42	)
Total	�	$	1,380	�	�	$	1,294	�

�

NOTE H – OTHER CURRENT LIABILITIES

�

The Company’s other current liabilities balance includes the following:

�

�	�	As of						�
�	�	September 26, 2014		�	�	June 27, 2014		�
�	�	(in thousands)						�
Project related reserves	�	$	98	�	�	$	693	�
JMWA holdback	�	�	750	�	�	�	-	�
Non-project related reserves	�	�	678	�	�	�	642	�
Payroll related	�	�	581	�	�	�	483	�
Deferred rent	�	�	774	�	�	�	716	�
Severance accrual	�	�	38	�	�	�	69	�
Acquired capital lease liability	�	�	343	�	�	�	263	�
Other	�	�	606	�	�	�	702	�
Total	�	$	3,868	�	�	$	3,568	�

�

��

As of September 26, 2014, other accrued liabilities include accrued legal, audit, value added tax liabilities, and foreign entity obligations. Additionally, we have preliminarily allocated the current liabilities assumed from the JMWA acquisition within “Other” in the schedule and will make necessary adjustments as we finalize the purchase price accounting for the JMWA acquisition in subsequent quarters. �Additionally, per the terms of the stock purchase agreement between the JMWA and the Company, the Company retained $0.8 million (“JMWA holdback” above) to secure any payment obligations of the JMWA shareholders for the adjustment to the purchase price, if any.

�

NOTE I – DEBT

�

Notes Payable

�

As part of the purchase price for JMWA in July 2014, the Company issued notes payable to the three stockholders with an aggregate principal balance of up to $6.0 million, which are payable quarterly over a four and a half-year period with interest accruing at a rate of 5% per year (the “Commercial Note”). Accrued interest is recorded within the note payable line item in the consolidated balance sheet. The Company also has outstanding notes payable from the acquisitions of GMI and Charron. As of September 26, 2014, the outstanding principal balance of the JMWA notes payable was $6.0 million, the principle balance of GMI notes payable was $0.6 million, and the principle balance of the Charron notes payable was $ 0.3 million.

�

Amended and Restated Loan Agreements

�

In conjunction with the execution of the Commercial Note, on June 30, 2014, the Company and the co-borrowers named therein entered into a Second Amended and Restated Loan and Security Agreement (the “Agreement”) with United Bank (the “Bank”), amending and restating certain provisions of the Amended and Restated Loan and Security Agreement dated September 13, 2012 (as modified by a certain Joinder Agreement dated December 12, 2013), and also executed a Second Amended and Restated Revolving Commercial Note in the aggregate principal amount of up to $15,000,000 (the “Revolving Note”), amending and restating certain provisions of the Amended and Restated Revolving Commercial Note dated September 13, 2012 (as modified by a certain First Modification Agreement dated December 12, 2013), each for the purpose of allowing for the issuance of the Commercial Note. As of September 26, 2014, the outstanding principal balance of the Commercial Note was $3.4 million with the following maturity schedule;

�

Years	�	Amounts		�
�	�	(in thousands)		�
2015	�	�	518	�
2016	�	�	782	�
2017	�	�	815	�
2018	�	�	848	�
2019	�	�	437	�
Total	�	$	3,400	�

�

Line of Credit

�

The Company has a $15 million line of credit facility with United Bank maturing September 25, 2015. The Company did not borrow any funds under its line of credit during the three month periods ended September 26, 2014 and September 27, 2013.

�

NOTE J – NET INCOME PER SHARE

�

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share also includes common stock equivalents outstanding during the period, if dilutive. The Company’s common stock equivalent shares consist of shares to be issued under outstanding stock options and unvested restricted stock units.

�

�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
�	�	(in thousands)						�
Weighted average common shares outstanding-basic	�	�	9,711	�	�	�	9,585	�
�	�	�	�	�	�	�	�	�
Effect of assumed exercise of options and vesting of restricted stock unit awards, using the treasury stock method	�	�	-	�	�	�	109	�
Weighted average common shares �outstanding-diluted	�	�	9,711	�	�	�	9,694	�

�

��

Due to the loss for the three month period ended September 26, 2014, basic and diluted shares are equal because all stock instruments are considered anti-dilutive.

�

NOTE K – SHARE-BASED COMPENSATION

�

Restricted Stock Unit Activity

�

In November 2010, the stockholders approved the Versar, Inc. 2010 Stock Incentive Plan (the “2010 Plan”), under which the Company may grant incentive awards to directors, officers, and employees of the Company and its affiliates and to service providers to the Company and its affiliates. One million shares of Versar common stock were reserved for issuance under the 2010 Plan. The 2010 Plan is administered by the Compensation Committee of the Board of Directors. Through September 26, 2014, a total of 405,285 restricted stock units have been issued under the 2010 Plan. There are 597,715 shares remaining available for future issuance of awards (including restricted stock units) under the 2010 Plan.

�

During the three month period ended September 26, 2014, the Company awarded 21,400 restricted stock units to certain employees, which vest over a two year period following the date of grant. The total unrecognized compensation cost, measured on the grant date, that relates to non-vested restricted stock awards at September 26, 2014, was approximately $285,652, which if earned, will be recognized over the weighted average remaining service period of two years. Share-based compensation expense relating to all outstanding restricted stock unit awards totaled approximately $127,203 and $105,073 for the three months ended September 26, 2014 and September 27, 2013, respectively. These expenses were included in the direct costs of services and overhead and general and administrative lines of the Company’s Condensed Consolidated Statements of Operations.

��

Stock Option Activity

�

There were approximately 3,500 incentive stock options outstanding and exercisable as of September 26, 2014 with a weighted average exercise price of $4.30, weighted average remaining contractual life of 0.54 years, with no intrinsic value. No stock options were issued during the three months ended September 26, 2014.

�

Total qualified and non-qualified stock options granted under the Company’s 2010 Plan and prior stock incentive plans are as follows:

�

Exercisable qualified stock options outstanding at September 26, 2014 are as follows:

�

�

�

Option Shares

�

�

Weighted Average Option Price Per Share

�

�

Total

�

�

�

(in thousands, except share price)

�

Outstanding at June 27, 2014

�

�

14

�

�

$

3.99

�

�

$

57

�

Exercised

�

�

-

�

�

�

-

�

�

�

-

�

Cancelled

�

�

11

�

�

�

3.90

�

�

�

42

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Outstanding at September 26, 2014

�

�

3

�

�

$

4.30

�

�

$

15

�

�

Exercisable non-qualified stock options outstanding at September 26, 2014 are as follows:

�

�

�

Option Shares

�

�

Weighted Average Option Price Per Share

�

�

Total

�

�

�

(in thousands, except share price)

�

Outstanding at June 27, 2014

�

�

8

�

�

$

4.58

�

�

$

37

�

Exercised

�

�

-

�

�

�

-

�

�

�

-

�

Cancelled

�

�

-

�

�

�

-

�

�

�

-

�

�

�

�

�

�

�

�

�

�

�

�

�

�

Outstanding at September 26, 2014

�

�

8

�

�

$

4.58

�

�

$

37

�

�

�

NOTE L – INCOME TAXES

�

As of September 26, 2014 and June 27, 2014, the Company had approximately $1.8 million and $2.8 million in net deferred income tax assets, respectively, which are primarily related to temporary differences between financial statement and income tax reporting. Such differences included depreciation, deferred compensation, accruals and reserves. The Company regularly reviews the recoverability of its deferred tax assets and establishes a valuation allowance as deemed appropriate. As of September 26, 2014 and June 27, 2014, the Company had $0.6 million recorded as a valuation allowance. The effective tax rates were approximately 37.4% and 37.6% for the first three months of fiscal 2015 and 2014, respectively.

�

NOTE M – SUBSEQUENT EVENTS

�

In connection with the preparation of its financial statements for the three months ended September 26, 2014, the Company has evaluated events that occurred subsequent to September 26, 2014, to determine whether any of these events required recognition or disclosure in the period ended September 26, 2014. Based on this review, the Company is not aware of any subsequent events that would require recognition or disclosure in the financial statements.

�

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

�

General Information

�

The following discussion and analysis relates to the Company’s financial condition and results of operations for the three month period ended September 26, 2014. This discussion should be read in conjunction with the condensed consolidated financial statements and other information disclosed herein as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the fiscal year ended June 27, 2014, including the critical accounting policies and estimates discussed therein. Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” the “Company,” “us,” or “Versar” as used in this Form 10-Q refer collectively to Versar, Inc. and its subsidiaries.

�

This quarterly report on Form 10-Q contains forward-looking statements in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements typically include assumptions, estimates or descriptions of our future plans, strategies and expectations, are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “intend,” “seek,” or other similar expressions. Examples of these include discussions regarding our operations and financial growth strategy, projections of revenue, income or loss and future operations.

�

These forward-looking statements and our future financial performance, may be affected by a number of factors, including, but not limited to, the “Risk Factors” contained in Part I, Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 27, 2014. Actual operations and results may differ materially from those forward-looking statements expressed in this Form 10-Q.

�

Overview

�

We are a global project management company providing sustainable value oriented solutions to government and commercial clients primarily in three business segments: (1) Engineering and Construction Management (“ECM”); (2) Environmental Services (“ESG”); and (3) Professional Services (“PSG”). We also provide tailored and secure solutions in harsh environments and offer specialized abilities in classified projects and hazardous material management.

�

��

Business Segments

�

ECM

�

This business segment performs Title I Design Services, Title II Construction Management Services, and Title III Construction Services, all of which are discussed further in the initial bullet below. This business segment also provides other related engineering and construction type services both in the United States and internationally. It provides national security solutions in several product and service areas that have received funding priority and require ongoing services and support. Our services in this segment include the following:

�

�

Title I Design Services entail a broad-range of expertise including master planning; land use planning; space utilization studies; requirements definition and scoping; programming; cost estimates; infrastructure and traffic planning; privatization studies; and other feasibility studies. Title II Construction Management Services involve construction oversight, inspection, job site evaluations, and construction documentation among other areas. Other related services include system optimization and commissioning, scheduling, and quality assurance/control. Title III Construction Services are actual construction services. Certain staff members in this business segment hold security clearances enabling Versar to provide services for classified construction efforts.

�

This segment consists of federal, state, local, international, and commercial clients. Examples of federal work include construction and construction management services for the U.S. Air Force (“USAF”) and U.S. Army, construction management and personal services including engineering, construction inspection, operations and maintenance and administrative support to the U.S. Army Corps of Engineers (“USACE”) and project and construction management services for the District of Columbia Courts and commercial customers.

�

In conjunction with our ESG business unit, ECM pursues opportunities in energy/green initiatives. Our acquisition of GMI has expanded our capacity to provide such energy-related services.

�

Versar’s subsidiary PPS is a leading UK manufacturer and distributor of decontamination equipment and personal protective equipment, specializing in providing complete solution packages to a wide variety of hazard prone industries throughout the world.

�

ESG

�

This business segment provides full service environmental solutions and includes our remediation and compliance, exposure and risk assessment, natural resources, unexploded ordnance (“UXO”)/military munitions response program (“MMRP”), air, greenhouse gas, energy, and cultural resources services. Clients include a wide-range of federal, state, and commercial agencies. Some examples include the following:

�

�

We provide support to USACE, USAF, the U.S. Navy, and many local municipal entities assisting with environmental compliance, remediation, biological assessments, and natural resource management. This work includes performance-based remediation (“PBR”) contracts for United States Air Force Civil Engineer Center (“AFCEC”).

�

For more than 30 years, Versar has supported the states of Virginia, Maryland, New York, Pennsylvania and Delaware on a variety of complex environmental projects. For example, we have supported the State of Maryland in the assessment of the ecological health and natural resources risk of the Chesapeake Bay. Versar continues to assess how the Delaware River is affected by dredging programs. We assist several counties in Maryland and Virginia with their watershed programs, identifying impaired watersheds and providing cost-effective solutions for their restoration programs. We also provide energy feasibility review, measurement and verification to the State of New York.

�

ESG provides munitions response services at two of the world’s largest ranges, the National Training Center at Fort Irwin, California and one of the largest U.S. Air Force testing and training ranges, Nellis Air Force base in Nevada. Our services include operational range clearance, operations and maintenance, and range sustainment services at both installations.

�

ESG is the prime contractor on three PBR Task Orders under Versar’s 2009 United States Air Force Worldwide Environmental Restoration and Construction (“WERC”) contract for AFCEC.� Each of the three contracts provides multi-year environmental remediation programs focused on achieving site-specific performance objectives (outcomes) for numerous project sites on USAF facilities in the Southwest, Midwest and Northeast.� We are also a key team member on a fourth PBR program for AFCEC providing similar services at Western USAF facilities.

�

�

�

The acquisition of GMI has allowed the Company to expand its portfolio of clients to include the U.S. Navy and increased our Cultural Resources staff by more than five times and doubled our Natural Resources capabilities.

�

We have supported the U.S. Environmental Protection Agency for the past 30 years providing a wide-range of regulatory mandated services involving exposure assessment and regulatory review.

�

The acquisition of JMWA has allowed the Company to expand its remediation capabilities and provide support to EPA Region 4.

�

PSG

�

This business segment provides onsite environmental management, planning and engineering services to the Department of Defense (“DOD”) installations and to the U.S. Department of Commerce (“DOC”). Versar provides on-site or staff augmentation services that enhance the customer’s mission through the use of subject matter experts who are fully dedicated to accomplish mission objectives. These services are particularly attractive as the DOD shifts emphasis to its core military mission and downsizes due to increasing budgetary pressure. Primarily at the U.S. Army Installation level or DOD Joint Base level (two or more DOD facilities realigning management functions to establish a single entity), this segment also serves government clients by supporting them in areas where their capabilities and capacities are lacking.

�

�

We provide expert services for the U.S. Army’s Net Zero energy, water, and solid waste program for several U.S. Army installations. Net Zero energy means that the installation produces as much energy/water/solid waste onsite as it uses. Our professionals facilitate establishment of strategic initiatives, develop implementation plans, conduct outreach, and apply technologies to deliver progress towards site-specific goals and objectives.

�

We field installation restoration managers under the Defense Environmental Restoration Program to clean-up landfill and disposal sites throughout the nation.

�

Versar serves the DOD Joint Base communities by providing facility and utilities integration, National Environmental Policy Act considerations, water program management and wildlife program management.

�

We manage hazardous materials and waste for large quantity generator sites through application of green procurement philosophies and hazardous material control program concepts.

�

We provide staff augmentation services ranging from field support of archaeological investigations to senior level advisors. Our archaeological and historic preservation professionals advise government officials regarding the protection of our nation’s cultural resources.

�

We provide biological and physical sciences support to the National Oceanic Atmospheric Administration to ensure efficiencies and accuracies in the lab environment.

�

Financial Trends

�

When the federal government’s new fiscal year began on October 1, 2014, the President's fiscal year 2015 budget request had not been approved by the Congress. On September 22, 2014, the President signed a continuing resolution that funds the government at fiscal year 2014 levels until December 11, 2014. It is unclear when or if annual appropriations bills will be enacted for the federal government’s fiscal year 2015. The federal government may operate under a continuing resolution for all of its fiscal year 2015, potentially restricting new contract or program starts for the year. We carefully follow federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration as our financial performance is impacted by federal government spending levels, particularly defense spending.

�

Our business performance is affected by the overall level of federal government spending and the alignment of our offerings and capabilities with the budget priorities of the federal government. The federal government budget deficit and the national U.S. debt have created pressure to examine and reduce spending across all federal agencies. Baseline spending for the DOD for the next 10 years has been reduced and there may be further reductions. Adverse changes in fiscal and economic conditions, such as the manner in which spending reductions are implemented, including sequestration, future government shutdowns, and issues related to the nation’s debt ceiling, could materially impact our business.

�

In this challenging economic environment, we will continue to focus on opportunities of critical importance to the federal government and which clearly align with our customers in the program management services segment. Such activities include sustainable range management, UXO, PBR, and construction contract management. We will also emphasize areas that we believe offer attractive enough returns to our clients and in which they will continue to provide funding, such as construction type services both in the United States and internationally, improvements in energy efficiency, and facility upgrades. While we have been proactive in managing costs in the business, there is a level of costs, much of it fixed, that must be maintained and that will be covered as revenues increase with an improved funding environment.

�

�

Specifically, we see the following four elements driving our strategy going forward:

�

�

Pursuit of larger contract opportunities. Our move to a large business, coincident with continued development of a strong internal infrastructure and associated technologies, allows us to focus on pursuing larger prime contracts and expand our pool of opportunities. We continue to strengthen our relationships with other contractors to create teaming arrangements that better serve our clients. Where we have seen a shift in focus to contracts for qualified small businesses, we are strengthening and developing relationships with qualified small businesses.

�

�

Leveraging of our services. The combination of our multiple skill sets and broad service offerings will allow us to work efficiently in the new economic environment whether selling sustainable risk management services utilizing our energy and environmental skill-sets, or via effective use of our project and construction management skills in relation to complex project oversight.

�

�

Expanding our international footprint. While the Company is strong internationally in the construction management business, we seek to offer our non-construction services to our overseas clients, thereby bringing our proven domestic skills into the international market and meeting growing overseas client needs.

�

�

Geographic and client expansion through acquisition. We have an active acquisition strategy and are focused on expanding our ability to offer our technical services to both new geographic areas and new clients, such as the U.S. Navy and the U.S. Department of State. On July 1, 2014, we announced our acquisition of J.M. Waller Associates, Inc, (“JMWA”), whose key long-term clients include the U.S. Army Corps of Engineers, U.S. Air Force, U.S. Navy, Environmental Protection Agency, and the General Services Administration. JMWA is a valuable strategic asset for the Company and has broadened our technical capabilities, list of clients, and geographic footprint.

�

We believe that our balance sheet is strong, and we are well positioned with our cash balance on hand to surmount unforeseen challenges while we continue to pursue merger and acquisition activity. As of the quarter ended September 26, 2014 we had $2.6 million of cash on hand and a working capital balance of $20.8 million. We also continue to have access to a line of credit of up to $15 million.

�

Consolidated Results of Operations

�

The table below sets forth our consolidated results of operations for the three months ended September 26, 2014 and September 27, 2013:

�

�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
�	�	(dollars in thousands)						�
GROSS REVENUE	�	$	29,586	�	�	$	29,120	�
Purchased services and materials, at cost	�	�	12,228	�	�	�	14,410	�
Direct costs of services and overhead	�	�	14,752	�	�	�	11,758	�
GROSS PROFIT	�	$	2,606	�	�	$	2,952	�
Gross Profit percentage	�	�	9	%	�	�	10	%
�	�	�	�	�	�	�	�	�
Selling general and administrative expenses	�	�	2,691	�	�	�	1,870	�
OPERATING (LOSS) INCOME	�	�	(85	)	�	�	1,082	�
�	�	�	�	�	�	�	�	�
OTHER EXPENSE	�	�	�	�	�	�	�	�
Interest expense	�	�	57	�	�	�	25	�
�(LOSS) INCOME BEFORE INCOME TAXES	�	$	(142	)	�	$	1,057	�

�

�

Three Months Ended September 26, 2014 compared to the Three Months Ended September 27, 2013

�

Gross revenue for the first quarter of fiscal year 2015 was $29.6 million, an increase of 2% compared to $29.1 million during the first quarter of the last fiscal year. Although JMWA contributed approximately $6.4 million to contract revenue for the first quarter of this fiscal year, increases were substantially offset by an approximate $1.5 million decrease in international work from ECM, an approximate $4.0 million decrease in performance based remediation (“PBR”) revenue from ESG, and an approximate $1.5 million decrease in revenue from PSG’s historical business lines as we continue to see a decline in our contract positions in this segment largely due to the continued shift to more contract solicitations being targeted at businesses that qualify for small business programs.

�

Purchased services and materials for the first quarter of fiscal year 2015 was $12.2 million, a decrease of 15% compared to $14.4 million during the first quarter of the last fiscal year. Within ESG, we continued to see a steady decrease in the percentage of services that we needed to sub-contract as we grow our internal capabilities through acquisitions. However, this was partially off-set by our increasing need to sub-contract our services within ECM in order to offer a broader range of services to our customers in that segment. Additionally within ECM, there has been an increase in the proportion of revenue from single award task orders (“SATOC”) where the Company acts as the general contractor and sub-contracts a significant portion of the direct labor.

�

Direct costs of services and overhead for the first quarter of fiscal year 2015 were $14.8 million, an increase of 25% compared to $11.8 million during the first quarter of the last fiscal year. This increase was primarily due to the increase in direct labor as a result of our acquisition of JMWA.

�

Gross profit for the first quarter of fiscal 2015 was $2.6 million, a decrease of 12% compared to $3.0 million during the first quarter of the last fiscal year. This decrease was due primarily to losses incurred on a construction project managed out of our Knoxville office that was inherited with the acquisition of Geo-Marine, Inc. (“GMI”) in fiscal year 2014. Additionally, as we continue to experience a compression in margins associated with the decline in our Title II work in Afghanistan and Iraq within the ECM segment and a stabilization of the margins associated with our PBR work within our ESG segment, we expect to continue to see lower margins when compared to prior years. As we complete our integration of JMWA, we expect to see our margins within our PSG segment return to previous levels and anticipate this improvement will help off-set the declines we have experienced in ECM.

�

Selling, general and administrative expenses for the first quarter of fiscal 2015 increased 44% to $2.7 million, when compared to the first quarter of last fiscal year. The increase is primarily due to approximately $0.9 million in additional administrative, occupancy, and integration costs associated with the JMWA acquisition at the beginning of the first quarter. Included in these costs are approximately $0.1 million of indirect labor and fringe expense for integration, $0.2 million of professional fees for due diligence, marketing, and legal activities, and approximately $0.5 million in additional company-wide business development costs. Additionally, GMI was acquired in September 2013 and, therefore, the first quarter of the last fiscal year only included one month of additional administrative and integration costs.

�

Loss, before income taxes, for the first quarter of fiscal year 2015 was $0.1 million, compared to income, before income taxes, of $1.1 million for the first quarter of the last fiscal year. This decrease is attributable to the factors discussed above.

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Backlog

�

We report “funded” backlog, which represents orders for goods and services for which firm contractual commitments have been received. As of September 26, 2014, funded backlog was approximately $223 million, an increase of 96% compared to approximately $114 million of backlog at the end of fiscal year 2014. We received additional funding, subsequent to the Company’s quarter end but prior to the federal government’s fiscal year end, of $16 million and therefore, had a funded backlog of $239 million as of September 30, 2014.

�

Results of Operations by Reportable Segment

�

The tables below set forth our operating results by reportable segment for the three month periods ended September 26, 2014 and September 27, 2013. (Dollar amounts in following tables are in thousands)

�

��

Engineering and Construction Management

�

�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
GROSS REVENUE	�	$	13,049	�	�	$	12,421	�
Purchased services and materials, at cost	�	�	7,726	�	�	�	7,078	�
Direct costs of services and overhead	�	�	3,803	�	�	�	3,625	�
GROSS PROFIT	�	$	1,520	�	�	$	1,718	�
Gross profit percentage from continuing operations	�	�	12	%	�	�	14	%

�

Three Months Ended September 26, 2014 compared to the Three Months Ended September 27, 2013

�

Gross revenue for the first quarter of fiscal 2015 was $13.0 million, an increase of 5% compared to $12.4 million during the first quarter of the last fiscal year. Revenue increased by $1.2 million as a result of the JMWA acquisition and by $0.5 million as a result of increased sales in Asia through our wholly-owned subsidiary, PPS. These increases were partially offset by decreases in international revenue attributable to our construction management operations.

�

Gross profit for the first quarter of fiscal 2015 was $1.5 million, a decrease of 12% compared to $1.7 million during the first quarter of the last fiscal year. JMWA contributed approximately $1.1 million in additional expenses to our design and construction management divisions. The decrease in gross profit was due primarily to losses on a construction project managed out of our Knoxville office that was inherited with the acquisition of GMI in fiscal year 2014. Additionally, as we continue to sub-contract a greater percentage of our services to expand our ability to offer a broader set of capabilities to market, we continue to see a compression of our gross margins. In the current business environment, we expect a continued need to provide a broader set of services, and thus expect to continue to experience compressed gross margins in the near term.

�

Environmental Services Group

�

�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
GROSS REVENUE	�	$	10,265	�	�	$	13,014	�
Purchased services and materials, at cost	�	�	4,138	�	�	�	7,102	�
Direct costs of services and overhead	�	�	5,812	�	�	�	5,440	�
GROSS PROFIT	�	$	315	�	�	$	472	�
Gross profit (loss) percentage	�	�	3	%	�	�	4	%

�

Three Months Ended September 26, 2014 compared to the Three Months Ended September 27, 2013

�

Gross revenue for the first quarter of fiscal 2015 was $10.3 million, a decrease of 21% compared to $13.0 million during the first quarter of the last fiscal year. Increases in revenue of $1.2�million attributable to JMWA were off-set by decreases in revenue related to the timing of the work on our PBR contracts.

�

Gross profit for the first quarter of fiscal 2015 was $0.3 million, a decrease of 33% compared to $0.5 million in the first quarter of the last fiscal year. JMWA contributed approximately $0.9 million in additional expenses; however, we continued to see a steady decrease in the percentage of services that we need to sub-contract, as we grow our internal capabilities through acquisitions. As we see an increasing amount of the sub-contractor costs to shift to direct labor, we expect our margins to increase in future quarters.

�

�

Professional Services Group

�

�	�	For the Three Months Ended						�
�	�	September 26, 2014		�	�	September 27, 2013		�
GROSS REVENUE	�	$	6,272	�	�	$	3,685	�
Purchased services and materials, at cost	�	�	364	�	�	�	230	�
Direct costs of services and overhead	�	�	5,137	�	�	�	2,693	�
GROSS PROFIT	�	$	771	�	�	$	762	�
Gross profit percentage	�	�	12	%	�	�	21	%

�

Three Months Ended September 26, 2014 compared to the Three Months Ended September 27, 2013

�

Gross revenue for the first quarter of fiscal 2015 was $6.3 million, an increase of 70% compared to $3.7 million during the first quarter of the last fiscal year resulting from a $4.1 million contribution by JMWA offset in part by a $1.5 million decline in revenue from our historical PSG business. We continue to see a decline in our contract positions largely due to the continued shift to more contract solicitations being targeted at businesses that qualify for small business programs. As a result, we continue to seek new ways to develop our relationships with firms qualified for these programs to increase our ability to capture more of this work and maintain current projects.

�

Gross profit for the first quarter of fiscal 2015 remained relatively flat at $0.8 million when compared to the first quarter of the last fiscal year. JMWA contributed approximately $3.1 million in additional expenses during the quarter and, due to the increase in direct labor as a result of the acquisition of JMWA, PSG had a larger proportionate share of allocable costs because our cost allocation methodology uses direct labor dollars as a basis for allocation. As PSG increases in size, relative to our other two segments, it will continue to be burdened with a higher proportionate share of allocable costs, which will continue to put pressure on margins. However, as we continue to integrate and eliminate excess overhead costs, we anticipate margins returning to previous levels.

�

Liquidity and Capital Resources

�

Our working capital as of September 26, 2014 was approximately $20.8 million compared to working capital at June 27, 2014 of $24.1 million. This decrease was primarily due to the decrease in cash as a result of the cash payment portion of the purchase price related to the acquisition of JMWA. Our current ratio at September 26, 2014 was 2.01 compared to 2.29 at June 27, 2014.

�

We believe that our current cash balance of $2.6 million, anticipated cash flows from ongoing operations, and the funds available from our line of credit facility will be sufficient to meet our ongoing liquidity needs. Our expected capital requirements for the full 2015 fiscal year are approximately $1.5 million which will be funded through existing working capital. These capital expenditures will be used primarily for upgrades to maintain our existing information technology systems, equipment related to our range management projects, and upgrades to our personal protective equipment manufacturing facility.

�

Critical Accounting Policies and Related Estimates

�

There have been no material changes with respect to the critical accounting policies and related estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 27, 2014.

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ITEM 3.

Quantitative and Qualitative Disclosure about Market Risk

�

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and we believe that our exposure to interest rate risk and other relevant market risk is not material.

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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 Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of such date, to ensure that required information will be disclosed on a timely basis in its reports under the Exchange Act.

�

��

Further, our Chief Executive Officer and Chief Financial Officer 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 Company’s internal control over financial reporting during the quarter ended September 26, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

�

ITEM 1.

Legal Proceedings

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We are parties from time to time to various legal actions arising in the normal course of business. We believe that any ultimate unfavorable resolution of these legal actions will not have a material adverse effect on our consolidated financial condition and results of operations.

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ITEM 6.

Exhibits

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Exhibit No.	�	Description
�	�	�
10.1	�	Commercial Note dated as of June 30, 2014 among Versar, certain of the Versar, Inc.’s subsidiaries and United Bank (A)
�	�	�
10.2	�	Second Amended and Restated Loan and Security Agreement dated as of June 30, 2014 among Versar, Inc., certain of the Versar’s subsidiaries and United Bank (A)
�	�	�
10.3	�	Second Amended and Restated Revolving Commercial Note dated as of June 30, 2014 among Versar, Inc., certain of the Versar’s subsidiaries and United Bank (A)
�	�	�
10.4	�	Stock Purchase Agreement dated June 30, 2014, between Versar, Inc., JMWA, and the stockholders of JMWA named therein (A)
�	�	�
10.5	�	Separation Agreement and General Release dated as of July 1, 2014 by and between Versar, Inc. and J. Joseph Tyler * (A)
�	�	�
10.6	�	Employment Agreement dated July 1, 2014, by and between Versar, Inc. and Wendell A. Newton
�	�	�
31.1	�	Certifications by Anthony L. Otten, Chief Executive Officer pursuant to Securities Exchange Rule 13a-14
�	�	�
31.2	�	Certifications by Cynthia A. Downes, Executive Vice President, Chief Financial Officer and Treasurer pursuant to Securities Exchange Act Rule 13a-14
�	�	�
32.1	�	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Anthony L. Otten, Chief Executive Officer
�	�	�
32.2	�	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Cynthia A. Downes, Executive Vice President, Chief Financial Officer and Treasurer
�	�	�
101	�	The following financial statements from Versar, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 26, 2014, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Income,��(iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (iiv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

�

�

* Indicates management contract or compensatory plan or arrangement.

�

(A)

�

Incorporated by reference to the similarly numbered exhibit to the Registrant’s Form 8-K filed with the Commission on September 17, 2014.

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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)
�	�	�
�	By:	/S/ Anthony L. Otten
�	Anthony L. Otten
�	Chief Executive Officer
�	�	�
�	By:	/S/ Cynthia A. Downes
�	Cynthia A. Downes
�	Executive Vice President,
�	Chief Financial Officer,
�	and Treasurer

�

Date: November 05, 2014

�

�

Exhibit 10.6

�

�

EMPLOYMENT AGREEMENT

�

THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the “Employment Agreement”) is made and entered into as of the 1^st day of July, 2014, by and between Versar, Inc., a Delaware corporation (hereinafter referred to as the “Employer” or “Versar”), and Wendell A. Newton, a resident of the State of Georgia (hereinafter referred to as the “Employee”).

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W I T N E S S E T H:

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WHEREAS, as of the date hereof and under the terms of a Stock Purchase Agreement, dated as of June 30, 2014 (the “Purchase Agreement”), Versar purchased from the shareholders of J.M. Waller & Associates, Inc., a Virginia corporation (the “Company”), all of the issued and outstanding shares of capital stock of the Company (the “Acquisition”);

�

WHEREAS, prior to the Acquisition, Employee was the Executive Vice President of the Company;

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WHEREAS, following the Acquisition, the Employer desires to employ the Employee as a Senior Vice President, Professional Services Group, and the Employee desires to accept employment on the terms and conditions hereinafter stated;

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WHEREAS, in the course of his employment with the Company and Versar, the Employee has gained and will gain (i) knowledge of the business, affairs, customers and methods of the Company and Versar, including their techniques for offering and delivering services, all at the Company’s or Versar’s expense, (ii) access to lists of the Company’s and Versar’s customers and their needs, and (iii) relationships with the Company’s and Versar’s customers; and

�

WHEREAS, the Company and Versar would suffer irreparable harm if the Employee were to use such knowledge, information and personal relationships in competition with the Company or Versar.

�

NOW, THEREFORE, for and in consideration of the employment of Employee by the Employer, and for and in consideration of the premises, the mutual covenants and agreements hereinbelow set forth, the Employer and the Employee covenant and agree as follows:

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1.

Definitions.

�

(a)��������������� “Affiliate” as used herein with respect to a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

�

(b)�������������� “Board” as used herein means the Board of Directors of Employer.

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(c)��������������� “Business” as used herein means the business currently conducted by the Company and Versar.

�

�

(d)�������������� “Cause” as used herein means the following: (i) the conviction of the Employee of, or the entry of a plea of guilty or nolo contendere by the Employee, to any felony or misdemeanor involving moral turpitude; (ii) fraud, misappropriation or embezzlement by the Employee; (iii) the Employee’s willful failure, gross negligence or gross misconduct in the performance of his assigned duties for the Employer; (iv)�the Employee’s breach of a fiduciary duty to the Employer; (v) any act or omission of the Employee not at the express direction of the Board of Directors or other appropriate authority that reflects adversely on the integrity and reputation for honesty and fair dealing of the Employer or has a material detrimental effect on the Employer’s financial condition, position or business; (vi) any action by the Employee which results in loss of his security clearance; or (vii) the breach by the Employee of any material term of this Employment Agreement (provided that in the case of clauses (iii), (iv), (v) or (vii), to the extent the act, breach or other event may be cured by Employee’s further action, Employer shall have provided Employee with written notice thereof and Employee shall have failed to cure or remedy such act, breach or other event within ten (10) days following receipt of such notice).

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(e)��������������� “Disability” means “disability” as defined in any group long-term disability insurance maintained by Employer applicable to Employee, or, if no such insurance is maintained, “Disability” means a determination by the Board, acting reasonably and in good faith, that the Employee is incapacitated by reason of a physical or mental illness which is long-term in nature (but in no event less than one hundred twenty (120) days) and which prevents the Employee, with reasonable accommodation to the extent required by applicable law, from performing the substantial and material duties of his employment under this Employment Agreement. The Employer may require the Employee to have a physical examination at any time for the purpose of determining whether or not the Employee has a long-term disability, and the Employee agrees to submit to such examination upon request of the Board.

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(f)��������������� “Duties” as used herein means the Duties shown on Schedule A, which is attached to this Employment Agreement and thereby made an integral part hereof.

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(g)�������������� “Effective Date” as used herein means the Effective Date shown on Schedule A.

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(h)�������������� “Employment Termination Date” as used herein means the effective date Employees’ employment is terminated.

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(i)���������������� “Good Reason” as used herein means: (i) the required relocation of Employee, without Employee’s consent, to an employment location which is more than a fifty (50) mile commute from the Atlanta office of Employer; (ii) the breach or violation of any material provision of this Employment Agreement by the Employer; or (iii) a material diminution in the duties of employment of Employee not commensurate to a Senior Vice President (provided that in the case of clauses (ii) or (iii), Employee shall have provided Employer with written notice of the acts, breaches or other events that would otherwise constitute “Good Reason” hereunder and Versar shall have failed to cure or remedy such acts, breaches or other events within ten (10) days following receipt of such notice).

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2.

Employment.

�

(a)��������������� During the term, the Employer employs the Employee as Senior Vice President, Professional Services Group, of Employer. In such position, the Employee shall perform the Duties for the term hereof, and the Employee hereby accepts and agrees to such employment, subject to the provisions of this Employment Agreement.

�

(b)�������������� Subject to Section 3 below, the Employee agrees to devote his full working time, energy and skill, requiring a minimum of forty (40) hours per week but such hours that are reasonable, to the performance of the Duties as a full time employee of the Employer (vacation time as shown on Schedule A, Employer holidays, and reasonable absences due to illness excepted).

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(c)��������������� The Employee agrees that he shall faithfully and industriously perform the Duties to the best of his ability and in accordance with the Employer’s direction and control pursuant to the terms of this Employment Agreement.

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(d)�������������� The term of Employee’s employment under this Employment Agreement shall commence on the Effective Date and continue for a period of twelve (12) months or as until terminated in accordance with Section 5 below. If Employee’s employment is not terminated in accordance with Section 5 of this Agreement, he will become an employee at will effective July 1, 2015.

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(e)��������������� The Employee shall receive compensation from the Employer as shown on Schedule A in full payment for all of his services hereunder and all rights granted herein.

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3.

Other Employment/Activities.

�

(a)��������������� During the term of this Employment Agreement and except as otherwise provided in this Section 3, the Employee shall work full time for Employer and shall not be employed by, or involved as an officer, director, consultant, owner (including stockholder, member, or partner), or otherwise, in any other business activity for gain, profit or other pecuniary advantage. Notwithstanding the foregoing, the prohibitions and restrictions of this Section 3(a) shall not prohibit Employee from directly or indirectly owning up to three percent (3%) of the shares or other equity of any public company.

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(b)�������������� The Employer acknowledges and agrees that the Employee may (i) volunteer services for or on behalf of such religious, educational, non profit and/or other charitable organization as the Employee may wish to serve and (ii) manage his personal, financial and legal affairs.

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4.

Representations.

�

(a)��������������� The Employee hereby represents and warrants that he has the right to enter into this Employment Agreement with the Employer and to grant the rights contained herein, and that the provisions of this Employment Agreement do not violate any other contracts or agreements that he has entered into with any other individual or entity.

�

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(b)�������������� The Employee hereby represents and warrants to Employer that the execution of this Agreement by the Employee, his employment by Employer and the performance of his duties hereunder will not violate or be a breach of any agreement with a former employer, client or any person. Further, Employee agrees to indemnify and hold harmless the Employer and its officers, directors, representatives and Affiliates for any claim, including, but not limited to, reasonable attorney’s fees and expenses of investigation, of any such third party that such third party may now have or may hereafter come to have against Employer or such other persons, based upon or arising out of any non-competition agreement, invention, secrecy or other agreement between Employee and such third party that was in existence as of the date of this Agreement.

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5.����������� Termination. Employee’s employment may be terminated (a) by Employer (i) for Cause pursuant to Section 5(a) or (ii) otherwise at any time for reasons other than Cause pursuant to Section 5(b); (b) by Employee (i) for Good Reason pursuant to Section 5(c); or for other than Good Reason pursuant to Section 5(d); or (c) by reason of Employee’s death or disability pursuant to Section 5(e) below.

�

(a)��������������� The Employer may terminate the Employee’s employment under this Employment Agreement at any time for Cause upon giving the Employee a written notice of termination stating specifically the reason for such for termination for Cause and where applicable under Section 1(d) providing the opportunity for cure. In the event of a termination of Employee’s employment under this Employment Agreement for Cause, the Employee shall receive the Base Salary through Employment Termination Date.

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(b)�������������� Subject to the provisions of Section 5(d) with respect to termination (by the Employer or otherwise upon the death or Disability of the Employee), the Employer may terminate the Employee’s employment under this Employment Agreement at any time for reasons other than for Cause upon giving the Employee at least thirty (30) days notice of termination. If Employee’s employment is terminated without Cause (and not on account of death or Disability), then (i) Employee shall receive any unpaid Base Salary through the Employment Termination Date and (ii) as long as Employee (A) executes a release in the form attached hereto as Exhibit B (and such release is not revoked during any revocation period provided for in the release, with the executed release being received no later than that date which will result in lapse of any revocation period occurring not later than thirty (30) days following the date of the Employment Termination Date) and (B) has and continues to comply with the requirements of Sections 6 and 7 hereof, the Employer, during the Severance Period, shall continue to pay the Employee’s Base Salary as in effect on the Employment Termination Date (any such payments being hereinafter referred to as the “Termination Payments”). The “Severance Period” is as set forth on Schedule A. The Termination Payments, if any, shall be due and payable in installments on the same schedule as the Employer’s general payroll. All Termination Payments shall be paid subject to all legally required payroll deductions and withholdings. Any payments required to be made pursuant to this Section 5(b) prior to the thirtieth (30^th) day following the Employment Termination Date (the “First Pay Date”) and which the Employer has not paid prior to such thirtieth (30^th) day shall be paid by the Employer in a single lump sum on the first regularly scheduled payroll date on or following the earlier of (i) the First Pay Date, or (ii) delivery of the release described above and the expiration of all revocation periods, but in no event earlier than the Employment Termination Date.

�

�

(c)��������������� The Employee may terminate his employment under this Employment Agreement at any time for Good Reason upon giving the Employer not less than thirty (30) days prior written notice (which notice shall describe the reason for termination) and where applicable under Section 1(j) provides opportunity to cure. If (i) Employee terminates his employment for Good Reason, and (ii) executes a release in the form attached hereto as Exhibit B, and (iii) has and continues to comply with the requirements of Sections 6 and 7 hereof; then the Employee shall be entitled to the Termination Payments provided for in Section 5(b).

�

(d)�������������� Employee may terminate his employment under this Employment Agreement at any time for other than Good Reason upon giving the Employer not less than thirty (30) days prior written notice. In the event of a termination by Employee of his employment under this Section 5(d), the Employee shall receive the Base Salary through the date of his termination. Notwithstanding the foregoing, the Employment Termination Date shall be effective when and as determined by the Employer in its sole and absolute discretion prior to the expiration of the 30-day notice period, provided that, Employer continues to pay Employee for the 30-day period following receipt of such notice.

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(e)��������������� Upon Employee’s death during the term of this Agreement or Employer’s termination of Employee’s employment for Disability, Employer shall pay the Employee’s Base Salary through the date of Employee’s death or the Employment Termination Date.

�

(f)��������������� Notwithstanding anything to the contrary contained herein, the Employer and the Employee specifically acknowledge and agree that Sections 5, 6, 7, 8 and 9 hereof shall survive termination of the Employee’s employment under this Employment Agreement and that Sections 5, 6, 7, 8 and 9 shall continue to be in full force and effect after termination of the Employee’s employment under this Employment Agreement.

�

(g)�������������� Employee agrees prior to commencing any employment during the Severance Period that he will provide written notice to the President and Chief Executive Officer of Versar.

�

(h)�������������� In the event of any termination of Employee’s employment under this Agreement, the Employee shall have no obligation to seek other employment.

�

(i) The provisions of Sections 5(b) and (c) notwithstanding, Employee shall have the election not to execute the Exhibit B release and to pursue his remedies, in which case Employee shall not be deemed to have waived his rights, if any, to any Base Salary and Termination Payments otherwise due under the terms of this Agreement, as finally determined by a court of competent jurisdiction.

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6.����������� Confidential Information. The Employee acknowledges that all confidential information regarding the Business is the exclusive property of the Employer and/or its Affiliates. On the Employment Termination Date, if Employee voluntarily separates from Employer, or within ten (10) business days after the Employment Termination Date in all other cases, the Employee shall return to the Employer all copies of any material involving such confidential information, and the Employee agrees that he will not, directly or indirectly, divulge or use such information, whether or not such information is in written or other tangible form. The Employee also shall return to the Employer by that date any other items in his possession, custody or control that are the property of the Employer or any of its Affiliates. This Section is intended to cover confidential information of the Company and Versar that relates to the Business that (i) has not or does not become generally available to the public other than as a result of a disclosure by the Employee, or (ii) with respect to confidential information regarding the Company or Versar, (A) was not within the Employee's possession prior to its being furnished to the Employee by or on behalf of the Company or Versar or (B) becomes available to the Employee on a non-confidential basis from a source other than the Company or Versar; provided that Employee shall have the burden of proving, by clear and convincing evidence, the application of the foregoing clause (ii). This Section shall not apply to Employee responses that may be required by proper governmental or judicial inquiry.

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7.����������� Non-Solicitation and Non-Competition.

�

(a)��������������� During the “Non-Competition Period” (hereinafter defined), as long as Versar is not in default of its obligations under Section 5(b), the Employee shall not directly or indirectly (i) employ or solicit for employment, or assist in any way in solicitation for employment, any person employed by the Employer or any of its Affiliates then or at any time within the preceding eighteen (18) months; (ii)�solicit, or assist in any way in the solicitation of “Business” (hereinafter defined) from any of the Employer’s or any of its Affiliates’ customers with whom Employee has had material contact or prospective customers with whom Employee has had material contact, either for the Employee’s own benefit or the benefit of anyone other than the Employer or any of its Affiliates, unless the business being solicited is not competitive with the services or products provided by the Employer or any of its Affiliates; or (iii) induce or attempt to induce any of the Employer’s or any of its Affiliates’ customers with whom Employee has had material contact or prospective customers with whom Employee has had material contact to reduce its purchase of services or products from the Employer or any of its Affiliates or to cease having the Employer or any of its Affiliates provide services or prospective services or having the Employer or any of its Affiliates develop products or prospective products for any such customer or prospective customer.

�

(b)�������������� For purposes of this Employment Agreement, the term “Non-Competition Period” shall include the period that Employee is employed or retained by Employer (or an Affiliate or subsidiary of Employer) and after Employer’s employment ceases, then for a period equal to twelve (12) months after the Employment Termination Date; provided, however, that in all events Employer, by written notice to Employee not later than four�(4) months following the Employment Termination Date, may extend the Non-Competition Period for an additional twelve (12) months. During any extended Non-Competition Period, Employer shall pay to Employee Employee’s Base Salary (as in effect on the Employment Termination Date) in pay periods and on the same schedule as Employer’s general payroll, subject to all legally required payroll deductions and withholdings.

�

(c)��������������� For purposes of this Employment Agreement, the term “Business” shall mean the provision of products or services offered by Employer to any customers, including but not limited to the United States of America.

�

�

8.�������������Assignment of Inventions and Innovations.

�

(a)��������������� The Employee shall and hereby covenants and agrees to and does hereby, without charge to the Employer but at the Employer’s expense, transfer and assign to the Employer all right, title, interest, claim and demand of the Employee in to and under and by virtue of any and all inventions, creations, discoveries, improvements, ideas, algorithms, computer software programs or other technology or other works of authorship, and all related documentation, relating to the Business, whether or not patentable, copyrightable or susceptible to other forms of protection, which, during the term of the Employee’s employment with the Employer, the Employee makes, creates, develops, writes or conceives whether during or outside of the Employee’s regular working hours, either solely or jointly with another (hereinafter collectively referred to as the “Innovations”). The Employee hereby covenants and agrees that all such Innovations shall be deemed to be works made-for-hire for the Employer.

�

(b)�������������� The Employee hereby covenants and agrees without charge to the Employer but at the Employer’s expense: (i) to disclose promptly to the Employer all Innovations; (ii) upon the Employer’s request, to execute promptly a specific assignment to the Employer of all rights, title, interest, claim and demand of the Employee in, to, and under and by virtue of the Innovations; and (iii) to do anything else and to execute any all documents reasonably necessary to enable the Employer to secure patents, copyrights or other forms of intellectual property protection for the Innovations in the United States of America and in other countries and territories of the world.

�

9.������������Unique Nature of Services and Covenants and Employment Agreements.

�

(a)��������������� It is agreed that the services to be rendered by the Employee under the terms of this Employment Agreement are of a unique, unusual, special and extraordinary nature, and of a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by the Employee will cause the Employer and its Affiliates great and irreparable injury and damage. It is agreed that the Employer, in addition to any other remedies, shall be entitled to injunctive and other equitable relief to prevent a breach of this Employment Agreement by the Employee.

�

(b)�������������� The parties hereto agree that by virtue of the special knowledge that the Employee will gain about the affairs, business, operations, customers, and other employees of the Employer and its Affiliates as a consequence of the Employee rendering services to the Employer under this Employment Agreement, irreparable loss and damage would be suffered and incurred by the Employer and its Affiliates if the Employee should breach or violate any of the covenants or agreements contained in Sections 6, 7, or 8 hereof and that money damages alone may not be an adequate remedy for the loss and damage which would be suffered and incurred by the Employer and its Affiliates in the event of such breach or violation; and the parties hereto further acknowledge and agree that each of such covenants and agreements are reasonably necessary to protect and preserve the Business. The Employee therefore agrees and consents that, in addition to any other remedies available to the Employer, at law or in equity, the Employer may seek a restraining order, preliminary injunction, injunction, or other similar remedy to prevent a breach or violation or contemplated breach or violation by the Employee of any of the covenants or agreements contained in Sections 6, 7, or 8 hereof. In the event the Employer seeks an injunction hereunder, the Employee hereby waives any requirement for the posting of a bond or other security.

�

�

10.�����������General.

�

(a) This Employment Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, successors and assigns of the parties; provided, however, that except as herein expressly provided, this Employment Agreement shall not be assignable either by the Employer or by the Employee. Notwithstanding the foregoing, Employer may assign this agreement to any of its Affiliates without Employee’s consent, and no change of control of Employer shall be deemed to constitute an assignment of this Agreement.

�

(b) A waiver by either party of any paragraph, term or condition of this Employment Agreement in any instance shall not be deemed or construed to be a waiver of such paragraph, term or condition for the future or of any subsequent breach thereof, and any such waiver must be in writing. All rights and remedies contained in this Employment Agreement are cumulative and none of them shall be construed so as to limit any other right or remedy of either party.

�

(c) All notices and other communications permitted or required by the provisions of this Employment Agreement shall be in writing and shall be personally delivered, sent through the United States Postal Service or any official successor thereto, designated as registered or certified mail, return receipt requested, bearing adequate first class postage and addressed as hereinafter provided, or sent by overnight courier. Notices delivered in person shall be effective upon the date of delivery. Notices by mail shall be effective upon the receipt thereof by the addressee or upon the fourth (4th) calendar day subsequent to the postmark date, whichever is earlier. Rejection or the refusal to accept or the inability to deliver because of a change in address of which no notice was given as provided herein shall be deemed to be receipt of the notice sent as of the fourth (4th) calendar day subsequent to the postmark date. By giving to the other party hereto at least thirty (30) days’ notice thereof, any party hereto shall have the right from time to time and at any time while this Employment Agreement is in effect to change the respective addresses thereof and each shall have the right to specify as the address thereof any other address within the continental United States of America. Each notice to the Employee or the Employer shall be addressed, until notice of change as aforesaid, as set forth on the signature page.

�

(d) This Employment Agreement shall be governed and construed as to both substantive and procedural matters in accordance with the laws of the Commonwealth of Virginia, United States of America. This Employment Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof and, except as provided herein, supersedes all previous written and oral agreements between the parties with respect to the subject matter set forth herein. This Employment Agreement may not be modified or amended except by a writing signed by both of the parties hereto. The invalidity or unenforceability of any particular term or provision of this Employment Agreement shall not affect the validity or enforceability of any other term or provision hereof, and this Employment Agreement shall be construed in all respects as if such invalid or unenforceable term or provision were omitted. This Employment Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which shall constitute one and the same agreement.

�

�

IN WITNESS WHEREOF, the Employer has caused this Employment Agreement to be executed by its duly authorized representative and the Employee has executed this Employment Agreement as set forth below.

�

�	EMPLOYER:
�	�
�	VERSAR, INC.
�	�
�	By:�/s/ Jeffrey A. Wagonhurst���������������������
�	Name: Jeffrey A. Wagonhurst
�	Title: President / COO������������������������������������
�	�
�	Address for notice purposes:
�	�
�	Versar, Inc.
�	6850 Versar Center
�	Springfield, Virginia� 22151
�	Attention: James Villa
�	�
�	�
�	EMPLOYEE:
�	�
�	�
�	�
�	/s/ Wendell A. Newton���������������������������������
�	Wendell A. Newton
�	�
�	Address for notice purposes:
�	�
�	373 Goza Road
�	Fayetteville, GA 30215
�	________________________________

�

�

SCHEDULE A

�

1.������ DUTIES will entail serving as Senior Vice President, Professional Services Group of Versar, Inc. In such capacity, Employee will report directly to Jeffrey A. Wagonhurst, Sr., the President and Chief Operating Officer of Versar, or his successor, and perform such duties and responsibilities as may be directed or assigned to him commensurate with such position.

�

2.������ EFFECTIVE DATE is July 1, 2014.

�

3.������ COMPENSATION. The Employer shall pay the Employee compensation as follows:

�

(a)������ Base Salary. From the Effective Date, the Employee shall be paid an annual base salary at a rate of $190,000 per annum (hereinafter referred to as the “Base Salary”). The Base Salary shall accrue and be due and payable in equal, or as nearly equal as practicable, installments on the regular payroll schedule as the Employer may implement from time to time for general payroll purposes. The Employer may deduct from each payment to Employee any and all amounts required to be deducted or withheld for general payroll purposes in accordance with the provisions of federal law and any applicable state law now in effect or hereafter in effect including without limitation, state and federal income withholding, FICA and other withholding tax requirements, and such other deductions permitted by the Employer which Employee may authorize from time to time

�

(b)������ Bonus. The Employee shall be eligible to receive an annual discretionary bonus of up to thirty-five percent (35%) of the Base Salary during the term of this Employment Agreement. The actual bonus awarded, if any, will be based on the Employee achieving specific performance objectives established by Versar and Employee, as well as the Company’s overall financial performance, and will be pro-rated from the Effective Date for Versar’s current fiscal year.

�

(c)������ Allowance. Beginning on January 1, 2015, Employee shall receive an allowance from Versar in the amount of $269.23 per pay period, representing an annualized total of $7,000.

�

(d)������ Restricted Stock. Versar will issue, subject to approval of the Compensation Committee of the Board of Directors of Versar and his execution of a Restricted Stock Unit Award Agreement, 7,500 shares of Versar common stock, par value $.01 per share, which shares will be “restricted” and subject to forfeiture (the “Restricted Shares”). All of these Restricted Shares will be issued by Versar as promptly as possible after the Effective Date and vest over a two-year period. The Restricted Shares will be issued under, and otherwise be subject to the terms and conditions of, a Versar incentive stock plan.

�

4.������ PAID TIME OFF. During each calendar year during the Term, the Employee shall be entitled to accrue five (5) weeks of paid vacation, at the rate of 7.69 hours per pay period. The Employee may carryover unused vacation days from year to year consistent with the existing leave policies of J.M. Waller Associates, Inc. Upon termination of this Agreement under Section 5, Employer shall promptly pay Employee for all unused vacation consistent with the existing leave policies of J.M. Waller Associates, Inc., which allows for payment for up to eighty (80) hours of leave. Effective January 1, 2015, Employee shall be subject to Versar’s current PTO policy, a copy of which is attached to this Agreement. Employee shall be entitled to all paid holidays and other paid time off provided by Employer to its employees.

�

5.������ BENEFITS.� In addition to the compensation received by Employee as specified above, Employee shall be eligible to and receive the other benefits made available to full-time employees of Employer.

�

6.������ EXPENSE REIMBURSEMENT. Employee shall be reimbursed in accordance with Employer’s standard policies and procedures for all approved, reasonable and necessary expenses incurred by him in connection with the performance of his duties of employment hereunder; provided Employee shall, as a condition of reimbursement, submit verification of the nature and amount of such expenses in accordance with said reimbursement policies.

�

�

EXHIBIT B

�

GENERAL RELEASE OF ALL CLAIMS

THIS GENERAL RELEASE OF ALL CLAIMS (“Release”) is made and entered into as of _______________, ______, by and between Versar, a Delaware corporation (“Versar”), and Wendell A. Newton, a resident of the State of Georgia (the “Employee”). As used in this Release, the term “Versar” will include its direct and indirect subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, employees, successors, assigns, representatives, agents and counsel, unless the context clearly requires otherwise.

�

WHEREAS, the Employee and Versar entered into an Employment Agreement dated as of __________ __, 2014 (the “Employment Agreement”);

�

NOW THEREFORE, in consideration of the promises set forth in this Release, the Employee and Versar agree as follows:

�

1.������ Effectiveness of Release. This Release will be effective on the eighth day after it is executed by the Employee, provided that the Employee has not revoked the Employee’s release as provided in Section 4(b) of this Release below (the “Effective Date”).

�

2.������ Termination of Employment. The parties acknowledge that the Employee’s employment relationship with Versar ceased on _____________________ (the “Termination Date”).

�

3.������ Resignations. The Employee hereby resigns, effective as of the Termination Date, from all administrative, fiduciary or other positions the Employee may hold or have held with respect to arrangements or plans for, of or relating to Versar. Versar consents to and accepts all such resignations. After the Termination Date, neither Versar nor the Employee will represent or state to any other party that the Employee has any authority to act for or on behalf of Versar or has any relationship with Versar (other than as a stockholder, if applicable).

�

4.������ Release by the Employee.

�

(a)������ In accordance with Section 5 of the Employment Agreement and except as otherwise provided in Sections 4(c) and 4(d) below, in consideration for the promises contained therein and herein, the Employee hereby releases and forever discharges Versar from, and agrees not to sue or join in any suit against Versar for, any and all charges, complaints, liabilities, claims, promises, agreements, controversies, damages, causes of action, suits or expenses of any kind or nature whatsoever, known or unknown, foreseen or unforeseen (collectively, “Claims”), of the following types:

�

(i)������ any and all Claims of alleged discrimination or acts of discrimination based upon race, color, sex (including sexual harassment), creed, national origin, age, disability, religion, sexual orientation, marital status, parental status or any other violation of any equal employment opportunity law, ordinance, rule, regulation or order (including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, as amended (“Title VII”), the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, as amended (“ADEA”) (as further described in Section 4(b) below), the Americans with Disabilities Act (“ADA”), the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Family Medical Leave Act, or any other federal, state or local laws or regulations regarding employment discrimination or termination of employment);

�

�

(ii)������ any Claim under any local, state or federal wage, labor or hour law or regulation, wage collection law or regulation, or labor relations law or regulation (including but not limited to the Fair Labor Standards Act and the National Labor Relations Act);

�

(iii)������ any Claim that Versar has violated any personnel policies, any handbooks, or any covenants of good faith and fair dealing between Versar and its employees; and

�

(iv)������ any Claim that Versar has violated the terms of the Employment Agreement (but excluding any claims based on Versar's failure to pay Termination Payments as required under the Employment Agreement).

�

(b)������ The Employee acknowledges that Versar encouraged the Employee to consult with an attorney of the Employee’s choosing prior to executing this Release, and through this Release encourages the Employee to consult with the Employee’s attorney with respect to possible Claims under the ADEA and that the Employee understands that the ADEA is a federal statute that prohibits discrimination, on the basis of age, in employment, benefits, and benefit plans. The Employee wishes to waive any and all Claims under the ADEA that the Employee may have, as of the date upon which the Employee executes this Release, against Versar, and hereby waives such Claims. The Employee further understands that by signing this Release, the Employee is in fact waiving, releasing and forever giving up any Claim under the ADEA that may have existed on or prior to the date upon which the Employee executes this Release. The Employee acknowledges that the Employee is receiving consideration for the Employee’s waiver of any and all Claims under the ADEA in addition to anything of value to which the Employee is already entitled. The Employee also acknowledges that Versar has informed the Employee that the Employee has at the Employee’s option, twenty-one (21) days from the date this Release was first presented to the Employee in order to consider this Release, and, if executed prior to the expiration of the twenty-one (21) day period, the Employee does hereby knowingly and voluntarily waive all or part of said twenty-one (21) day period. The Employee also understands that the Employee has seven (7) days following the date upon which the Employee executes this Release within which to revoke the release contained in this Section 4(b) (the “Revocation Period”) by providing a written notice of the Employee’s revocation of the release and waiver contained in this Section 4(b) to Versar. The release of claims under the ADEA contained in this Section 4(b) does not become effective or enforceable until the Revocation Period has expired.

�

(c)������ In no event shall this Release be construed or deemed to waive, release, or otherwise effect in any way the rights or obligations of Employee, Versar, or any other party to any document relating to (i) any stock of Versar owned by Employee or with respect to which Employee has an interest, (ii) any options or warrants to purchase stock of Versar, (iii) any debt owed by Versar to Employee, other than under the Employment Agreement, (iv) the rights and/or obligations of Employee or Versar under the Stock Purchase Agreement dated _________ __, 2014 to which the Employee and Versar are parties, and (v) any debt owed by Employee to Versar.

�

�

5.������ No Inconsistent Actions; Enforcement.

�

(a)������ Versar and the Employee will not voluntarily undertake any action or course of action that is inconsistent with the provisions or essential intent of this Release.

�

(b)������ The Employee acknowledges and agrees that the remedy at law available to Versar for breach of any of the Employee’s obligations under Section 4 herein would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, the Employee acknowledges, consents and agrees that, in addition to any other rights or remedies that Versar may have at law, in equity or under this Release, in connection with any breach of this Release by Employee, Versar will be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage or posting any bond.

�

(c)������ The Employee acknowledges and understands that by entering into this Release, the Employee will be limiting the availability of certain remedies that the Employee may have against Versar and limiting also the Employee’s ability to pursue certain claims against Versar.

�

6.������ No Admissions. Nothing contained in this Release will be deemed or construed as an admission of wrongdoing or liability on the part of Versar or the Employee.

�

7.������ Binding on Successors; Assignment. This Release will be binding upon and inure to the benefit of Versar, the Employee and each of their respective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable; provided, however, that neither this Release nor any rights or obligations hereunder will be assignable or otherwise subject to hypothecation by the Employee (except by will or by operation of the laws of intestate succession) or by Versar, except that Versar may assign this Release to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of Versar.

�

8.������ Governing law. This Release will be governed, construed, interpreted and enforced in accordance with the laws of the Commonwealth of Virginia, without regard to conflicts of law principles.

�

9.������ Severability. Whenever possible, each provision of this Release shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Release is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Release shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

�

10.������ Notices. For all purposes of this Release, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service and shall be addressed as provided in Section 10(c) of the Employment Agreement, or to such other address as any party may have furnished to the other in writing and in accordance therewith, except that notices of changes of address will be effective only upon receipt.

�

�

11.������ Counterparts. This Release may be executed in counterparts, each of which will be deemed to be an original, but both of which together will constitute one and the same agreement.

�

12.������ Entire Agreement. This Release is the final expression of the parties’ agreement with respect to the matters addressed herein, may not be contradicted by evidence of any prior or contemporaneous agreement, and constitutes the complete and exclusive statement of its terms such that no extrinsic evidence whatsoever may be introduced in any judicial, administrative or other legal proceeding to vary the terms of this Release, except that the terms of the Employment Agreement shall remain in full force and effect and shall not be affected by execution of this Release.

�

13.������ Amendments; Waivers. This Release may not be modified, amended, or terminated except by an instrument in writing, signed by the Employee and Versar. Failure on the part of either party to complain of any action or omission, breach or default on the part of the other party, no matter how long the same may continue, will never be deemed to be a waiver of any rights or remedies hereunder, at law or in equity. The Employee or Versar may waive compliance by the other party with any provision of this Release that such other party was or is obligated to comply with or perform only through an executed writing; provided, however, that such waiver will not operate as a waiver of, or estoppel with respect to, any other or subsequent failure.

�

14.������ Headings and Section References. The headings used in this Release are intended for convenience or reference only and will not in any manner amplify, limit, modify or otherwise be used in the construction or interpretation of any provision of this Release. All section references are to sections of this Release, unless otherwise noted.

�

THIS RELEASE INCLUDES A COMPLETE AND PERMANENT RELEASE OF CERTAIN KNOWN AND UNKNOWN CLAIMS. THE EMPLOYEE ACKNOWLEDGES THAT THE EMPLOYEE HAS READ THIS RELEASE AND THAT THE EMPLOYEE FULLY KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT THE EMPLOYEE HEREBY EXECUTES THE SAME AND MAKES THIS RELEASE VOLUNTARILY AND OF THE EMPLOYEE’S OWN FREE WILL.

�

* * *

�

�

IN WITNESS WHEREOF, the parties have executed this Release as of the date first above written.

�

�	VERSAR, INC.		�
�	�	�	�
�	By:	�	�
�	Name:	�	�
�	Title:	�	�
�	�	�	�
�	�	�	�
�	EMPLOYEE:		�
�	�	�	�
�	�	�	�
�	�	�	�
�	�		�
�	Wendell A. Newton		�

�

�

�

Exhibit 31.1

�

CERTIFICATION BY ANTHONY L. OTTEN PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

�

I, Anthony L. Otten, of Versar, Inc., certify that:

�

1.

�

I have reviewed this quarterly report on Form 10-Q of Versar, Inc. (the “Registrant”);

�

2.

�

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.

�

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

�

4.

�

The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:

�

�

a)

�

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

�

�	b)	�	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�	�	�	�
�	c)	�	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

�

�

d)

�

Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

�

5.

�

The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

�

�

a)

�

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

�

�

b)

�

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

�

Date: November 05, 2014	�	�
�		�
�	/S/ Anthony L. Otten	�
�	Anthony L. Otten	�
�	Chief Executive Officer	�

�

�

�

Exhibit 31.2

�

CERTIFICATION BY CYNTHIA A. DOWNES PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

�

I, Cynthia A. Downes, of Versar, Inc., certify that:

�

1.

�

I have reviewed this quarterly report on Form 10-Q of Versar, Inc. (the “Registrant”);

�

2.

�

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.

�

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

�

4.

�

The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:

�

�

a)

�

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

�

�	b)	�	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�	�	�	�
�	c)	�	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

�

�

d)

�

Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

�

5.

�

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

�

�

a)

�

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

�

�

b)

�

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

�

Date: November 05, 2014	�	�
�		�
�	/S/ Cynthia A. Downes	�
�	Cynthia A. Downes	�
�	Executive Vice President, Chief Financial	�
�	Officer and Treasurer	�

�

�

�

Exhibit 32.1

�

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

�

In connection with the Quarterly Report of Versar, Inc. (the “Company”) on Form 10-Q for the period ending September 26, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Otten, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

�

(1)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

�

(2)

the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

�

�		�
�	/S/ Anthony L. Otten	�
�	Anthony L. Otten	�
�	Chief Executive Officer	�
�	�	�
November 05, 2014	�	�

�

�

�

Exhibit 32.2

�

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

�

In connection with the Quarterly Report of Versar, Inc. (the “Company”) on Form 10-Q for the period ending September 26, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cynthia A. Downes, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

�

(1)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

�

(2)

the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

�

�		�
�	/S/ Cynthia A. Downes	�
�	Cynthia A. Downes	�
�	Executive Vice President, Chief Financial	�
�	Officer and Treasurer	�
�	�	�
November 05, 2014	�	�

�

�

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