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Executives

James C. Dobbs – General Counsel

Theodore M. Prociv, Ph.D. – President & Chief Executive Officer

Lawrence W. Sinnott - Chief Operating Officer & Chief Financial Officer

Analysts

David Starkey - Smith Barney

Vincent Staunton – Wedbush

Andrew Hackel – R. F. Lafferty & Co.

Bill Johnson

Darrell Patrick - Butler Wick & Co.

Versar, Inc. (VSR) F4Q08 Earnings Call September 23, 2008 2:00 PM ET

Operator

Welcome to the 2008 fiscal year IR conference call. (Operator Instructions) Mr. Dobbs, you may begin your conference.

James C. Dobbs

I am James Dobbs, Versar’s General Counsel and welcome to Versar’s investor’s conference call for fiscal 2008 annual financial results. With me are Versar’s President and CEO, Ted Prociv, and our Executive Vice President, Chief Operating Officer, and Chief Financial Officer, Larry Sinnott.

Before we begin let me make a brief statement about the content of this call. Statements made on this call will include forward-looking statements which are based on management’s current expectations, estimates, forecasts, and projections about the company’s business. These statements are forward-looking within the meaning of Section 27-A of the Securities Act of 1933, Section 21-E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995 and are subject to Safe Harbors created by such laws. Words such as expects, anticipates, plans, and believes and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which are difficult to predict. Therefore actual outcomes and results may differ materially from what is expressed on this call. We do not undertake to update publicity and forward-looking statements except as required by law. For descriptions of factors that could cause actual results to differ materially from that anticipated on this call, you are referred to the company’s public filings including the Form 10-K for fiscal year ended June 27, 2008.

Theodore M. Prociv, Ph.D.

I am very pleased to report the state of the company is excellent. Our future is bright and full of promise and we see tremendous changes coming. If you simply look at the annuals of our 2008 results you will see that this supports my assessment.

This report really is a combination of the planning and successful execution of our strategic plan for growth and profitability. Our senior staff and our employees have really embraced the global transformation philosophy and have taken off strongly in that direction.

For the year we had record gross revenue and operating income. In fact, the operating income grew 32% over $5.0 million and is the highest number we have ever achieved in our history. Our revenues and our contract backlog capacity are also the strongest in history, cash on hand is about $12.0 million and no debt, and these two numbers are unparalleled in history.

We are currently bidding on more multi-million dollar contracts, domestically and internationally. If we are successful we will greatly enhance the bottom line and stockholder value. And I expect to be very successful. All indications are that we are going in that direction.

We have made some strategic investments in the future of our company. This year we opened an office in Abu Dhabi in the Middle East, in the United Arab Emirate. This office is there to capitalize on some very strong commercial initiatives that are growing in the Middle East. In doing so we did incur some considerable startup expenses but apparently we expect that we will recover these very quickly.

Further, we incurred a full year’s cost in complying with Sarbannes-Oxley requirements so as we better understand what the cost of that is going to be we will be able to manage it much better.

We continue to invest in project management, training, and building expertise throughout Versar. In addition, we are going to continue to grow our investment in business development, marketing, and internal infrastructure of the company. As the company grows in revenue we are finding it necessary to influence the efficiency of the company with some internal growth.

Our transformation from consulting to a large, high-margin program management company overseas will continue to pay dividends for our shareholders and employees alike.

We are all aggressively pursuing an acquisition and merger strategy which should also increase the size of our company if we are successful. These initiatives will take us to the next level in the market place and have us compete at a much higher plane.

We are excited about our company and our shareholders and prospective shareholders should be, too. I am going to turn this over now to Larry Sinnott. As you know, he is our company’s COO and CFO and he will cover some of the financial highlights and then I will be back to close.

Lawrence W. Sinnott

The highlights for fiscal year 2008 are gross revenues as well as earnings continue to be at record levels for fiscal year 2008. This is primarily due to the performance of our Program Management business segment which is supporting infrastructure rebuilding efforts in the Middle East.

As Ted had mentioned, our funded backlog and total contract capacity continue to grow, to support BRAC, which is basic realignment effort as well as infrastructure requirements of the military world-wide.

In April 2007 the company was awarded a contract through a 50%-owned LLC with Johnson Controls Federal Systems. A five-year, $10.0 billion contract capacity for 19 contractors to help the Air Force with its modernization and capacity requirements. The company currently has over $125.0 million worth of outstanding competitive bids under this contract. We look forward to aggressively marketing and bidding on this contract task force for task orders under this contract.

As mentioned in prior earnings calls the company is now accruing for income taxes because our financial performance has significantly improved. Prior to fiscal year 2007 the company had marginal financial performance and had a significant amount of tax assets. As such, the ability to access the benefit of those tax assets was a concern. Therefore, in fiscal 2007, with the improved earnings, the company was able to reverse the entire $2.9 million reserve because of the certainty of obtaining that tax asset will be utilized.

Our balance sheet and cash flows continue to remain healthy. We currently have approximately $12.0 million in cash and working capital capacity in excess of $22.0 million. We continue to substantially improve our liquidity and debt ratios, along with the financial results of the company and it enables us the flexibility to expand and pursue additional business opportunities.

Going into the financial results for fiscal year 2008, our gross revenues were $115.6 million, which was a 13% increase over fiscal year 2007. The majority of that increase came from the company’s Program Management business segment, as mentioned earlier, to support the Middle East reconstruction efforts in Iraq, Afghanistan.

Purchased services and materials also increased by 9% primarily due to the increased subcontracted efforts in supporting that effort as well.

Our direct cost of services increased by 14% in fiscal year 2008 as a result of increased internal gross revenues as well as business development activities and the establishing of our office in Abu Dhabi and pursuing other construction management opportunities.

Gross profit for fiscal year 2008 was $13.78 million, a 27% increase over 2007 as a result of our increased gross revenues.

Selling, general and administrative expenses increased by 24% in fiscal year 2008 primarily due to the increased business development costs, Sarbannes-Oxley requirements, and the development of our international operation.

Operating income for fiscal year 2008 was approximately $5.5 million, an increase of 32% over that reported in 2007. All business segments showed improved results over the prior fiscal year, with the majority of the increases coming from our Program management segment.

As mentioned earlier, in fiscal year 2007, the company was able to record a significant tax benefit resulting in a substantially improved financial result for fiscal year 2007 which enabled us to reverse the entire $2.9 million tax asset reserve that we had on the books through the statement of operations for fiscal year 2007.

Net income for fiscal year 2008 was $3.391 million, or $0.36 per share, as compared to $5.282 million, or $0.62 per share. For comparative purposes on a proforma basis, putting apples to apples, to remove the one-time effect of the tax reversal in 2007, net income actually increased in 2008 by 46% as well as earnings per share increased by 29% for fiscal year 2009, adjusted for the tax adjustment.

With that, I will turn it over to Ted.

Theodore M. Prociv, Ph.D.

As you’ve noted and probably seen in our press release that there was some confusion as to the way the tax benefit was handled last year. I believe we have corrected it in the proforma so that you can see a direct apples-to-apples comparison. As a result, you will see that performance is excellent in this company. We have achieved record gross revenue, record operating income, and we have a tremendous backlog capacity, better than we’ve had ever in this company. There is still much more to be done but we’re very proud of what we’ve done up to now.

So turning to summarize, the staff is flowed into the transformation, it’s moving very quickly, the results are increased revenue, increased profitability, and we are looking towards the future.

We will continue to grow as we can internally at some rate but we’re also going to begin an aggressive search for either an acquisition or possibly some sort of strategic fit with another company so that we can grow a little bit faster and get into some new markets at the same time.

We are clearly focused on delivering top and bottom lines. You have heard a lot of other things, but no fooling around, this is what we are focused on. We continue to grow our financial capacity and look to explore additional business opportunities and that’s been like a mantra that we’ve said over and over and I believe this will lead to a much more successful future as we continue this process.

I am looking forward to the next meeting where I’ll be happy to share our results again. I will turn this back over to Mr. Dobbs.

James C. Dobbs

We will be delighted to respond to any questions that you may have in regard to what was stated, our press release, or the Form 10-K that was filed the middle of this morning.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Starkey with Smith Barney.

David Starkey - Smith Barney

I wanted to ask you how the first quarter is going. You’re almost through with that now. Do you expect to begin to show some more positive earnings per share comparisons over the course of this year?

Lawrence W. Sinnott

We don’t really give out earnings projections. It sometimes is difficult because September is such an important month for us and we probably won’t have as complete an idea for a couple of weeks.

David Starkey - Smith Barney

Is the government year end this month? Is that one of the reasons?

Theodore M. Prociv, Ph.D.

Yes, generally the government does a good portion of its spending by September 30 and we have been just totally saturated with proposal efforts. So we can make a sort of a thumbnail projection that says it’s going to be great, but I hate to count those chickens.

David Starkey - Smith Barney

Can you give us an idea, I know you’ve said this in the past, but to reassure your investors I guess, that when the Iraq war winds down over time that you guys will continue to be a big presence there because you’re more doing a lot of commercial work right over there.

Theodore M. Prociv, Ph.D.

Well, we’re doing a lot of reconstruction work, which is still government. As I mentioned in one of the earlier conference calls, there’s two parts to that business there. There’s the military and the reconstruction part. We are seeing a sort of a drop off in the military part and we are watching at the same time an increase in the reconstruction part. We are particularly seeing a growth in reconstruction in Afghanistan.

So I expect that we will be continuing on in the military side for quite some time. But again, it depends on who is going to manage the reconstruction. That may change in the next administration. The money will be there it’s just who manages it will be different.

The commercial side of it is an attempt for us to grow into a very lucrative market which for one reason or another is very good for American companies in Abu Dhabi. And that’s just emerging. We’ve made our investments, we have the office, we have the business licenses, we have all the necessary business connections that we need to have, and we are starting to begin the work there. That will take a little while to grow but that was one of our hedges against the potential demise of the Iraq business. But as it’s going right now our bets are that both businesses will flourish.

David Starkey - Smith Barney

And one questions related to the security over there. We’ve heard a lot less in the news recently about problems with security. Are you experiencing any at this point.

Theodore M. Prociv, Ph.D.

No, and we still maintain our security contractor. But we have, in fact in the entire length of this contract, we truly have not had very many problems, outside of occasional shellings of the compound by misguided mortar shells. No one has been hurt.

In fact, I’m going to be making a trip out there sometime. It is a much more benign climate.

David Starkey - Smith Barney

And how much over the next few years do you anticipate coming back toward the U.S. with your business now that you have had success overseas in that area?

Theodore M. Prociv, Ph.D.

I think the nice thing about the overseas success is that it gave us time to really engineer an excellent domestic set of contracts here. Our domestic business now has one of the largest of the government contracts, the SATOC contract, which we just announced a task on. We expect that to really grow. We expect the BRAC base realignment and closure business to really grow. There will be some growth on the commercial side but the lower hanging fruit right now is in the federal government and we are going to attack that veraciously.

David Starkey - Smith Barney

It sound like the company is completely transformed and has a bright future. I’m curious, can you comment at all as to why the stock is sort of the same level it was back in 2004?

Theodore M. Prociv, Ph.D.

That’s one of the frustrations. I like to say there is a small tap recession going on. Not everybody agrees with me. We still have some problems with shorts once in a while, I suppose. But the market just has not responded to, you know, a few years ago a couple of good wins would get us a pretty nice response. The last time we announced a really good win, we lost $0.10 a share. I’m not sure what’s going on there.

David Starkey - Smith Barney

And you continue to plan on announcing major contracts as they come out?

Theodore M. Prociv, Ph.D.

Yes, that policy we created that some years ago to try and improve communications and we aggressively will continue to pursue that.

Operator

Your next question comes from Vincent Staunton with Wedbush.

Vincent Staunton – Wedbush

For the fourth quarter what percent of revenues were from Iraq, base revenues?

Lawrence W. Sinnott

It was approximately 50%.

Vincent Staunton – Wedbush

And when can we expect to start seeing BRAC revenues coming in?

Lawrence W. Sinnott

We’re starting them in this quarter. We expect to see much more in the back half of fiscal year 2009. As I mentioned, we had a significant amount of work that’s in the pipeline that waiting to be awarded. We’ve been awarded roughly $5.0 million worth of work plus I guess there was another award toward the end of the quarter that we just started. So roughly about $10.0 of flow is going through and we’re after quite a significant amount of other opportunities.

Theodore M. Prociv, Ph.D.

Let me add that for BRAC to really grow we do have to find the source of funding and right now that source of funding, we expect, will be some of the Iraqi money, as things wind down in Iraq. So as it’s slow in coming, but we have been very successful in winning the vehicles, or the large IDIQ contracts which will allow us to go out to any of the customers.

And that press release on SATOC, that is, in fact, a BRAC-related contract. It will allow us to do the Air Force’s SRM, which is sustainability, restoration, and modernization, for the next five years. And I think the ceiling on that budget is $1.0 billion. Of course, there’s 19 companies, but a $1.0 billion for 19 companies is still a lot of money.

Vincent Staunton – Wedbush

And excluding BRAC, where do you see growth coming from in the next couple of years?

Theodore M. Prociv, Ph.D.

We’re making some investments in Homeland Security. Homeland Security is starting to show some maturity. I think in the next administration it will come back stronger. We already have a small foothold, we’re moving to a larger position there. We see a resurgent in environmental. But more in the energy sustainability market where energy becomes an integral part of how we balance the environment. And we’re getting ourselves smart and going green. In fact you may see some ads in the near future about how green we are.

The real market is going to be, that market is not going to change, I think, until we see some new elections results. Just around the corner.

Operator

Your next question comes from Andrew Hackel with R. F. Lafferty & Co.

Andrew Hackel – R. F. Lafferty & Co.

Regarding the BRAC work, what percentage of the revenue in 2008 was BRAC-related and what can you expect for the 2009 year?

Lawrence W. Sinnott

BRAC-related work was roughly 6% I believe, for the year. And we’re expecting it to hopefully get up into the 20% range.

Operator

Your next question comes from Bill Johnson.

Bill Johnson

I wondered if you would explain for us the program management international operations segment seems to be your biggest growth in the year-over-year and again this year. How about if you describe that for us and let’s talk about the leadership of the management of that.

Theodore M. Prociv, Ph.D.

In what respects, Bill? Who’s in charge, you mean?

Bill Johnson

Yes.

Theodore M. Prociv, Ph.D.

The international business is under the control of the Program Management group, which is Jeff Wagonhurst. Jeff and his team are the ones that are essentially operating that. We have managers like any other organization. Mr. Stony Cox is running the operation. He has a number of persons under him, I can’t go through all the details, it would take us forever. But the international operations is doing very, very well and we have a lot of confidence in the performance and the ability to turn a nice business there.

Bill Johnson

You talked earlier in your opening remarks about the strategic investment you made in Abu Dhabi and you expect to recover your initial costs very quickly. Can you describe for us that investment and how that came about and what you see happening in that?

James C. Dobbs

Bill, this is Jamie. We’ve invested in opening an office and being able to legally operate there and we need to be able to have that so that we can go after a lot of business opportunities. In addition to Abu Dhabi there’s up and down the gulf coast of the cooperation group a lot of our oil money is going there and being utilized for building infrastructure facilities and long-term sustainable businesses there and we’re going to after as many opportunities as we can find.

Operator

Your next question comes from Darrell Patrick with Butler Wick & Co.

Darrell Patrick - Butler Wick & Co.

The environmental work, typically happens when the government throws a lot of money at projects or industries. Profit margins will have a tendency expand. Can the environmental work be more profitable than the commercial work that you are doing?

Theodore M. Prociv, Ph.D.

It can be. It’s going to take some pressure from the government. Do you remember earlier when I said environmental is going to be more linked to the whole green movement, the whole energy sustainability. You’re going to see more and more of that. Rather than just throwing money at problems, we’re going to have to be innovative enough to make those problems convert to profitable ventures. And I think we’re very capable of doing that in this company because we have both sides of the equation.

So I’ve got my hopes up and I’ve been talking to some of our government folks. Like I said, it may talk until the next administration but that’s where it’s going, because we’re struggling with an energy problem, we’re struggling with an infrastructure problem, we’re struggling with just the cost of quality of life in this country. And they’re going to have to pool all that together, into one place, and we’re ready to do that. We’re ready to go after that kind of work.

So I think if you’re expecting more money to be spent, yes. But it will be a little different than the old environmental market.

Operator

Your next question is a follow up from Bill Johnson.

Bill Johnson

Did I hear Larry say that fourth quarter revenues, 50%, came from Iraq?

Lawrence W. Sinnott

From our international work.

Bill Johnson

Oh, I thought the second caller asked you how much came from Iraq.

Lawrence W. Sinnott

It’s not just Iraq. It’s our work that we do in Iraq, Afghanistan, and Kuwait.

Bill Johnson

Under the SATOC contract?

Lawrence W. Sinnott

For both the Air Force and the Army.

Bill Johnson

So 50% came from Iraq, Afghanistan, and Kuwait.

Lawrence W. Sinnott

Correct.

Bill Johnson

And then a follow up on the strategic investment in Abu Dhabi. You said you expect to recover approximately, about how much were your initial costs to set up there, what partners do you have, and do you have any contracts ongoing?

James C. Dobbs

We’re not in a position to discuss that now.

Theodore M. Prociv, Ph.D.

We consider that information business-sensitive, Bill.

Operator

There are no further questions.

James C. Dobbs

If there are no further questions, we thank everybody for their time. We expect to have this up on our website for you and other people who were not able to participate in this call in approximately two days. And if you have any questions please give me a call at 703-642-6712.

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Source: Versar, Inc. F4Q08 (Qtr End 06/27/08) Earnings Call Transcript
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