SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 14, 1997
VERSAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-9309 54-0852979
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
6850 Versar Center, Springfield, Virginia 22151
(Address of Principal Executive Offices)
(703) 750-3000
(Registrant's telephone number, including area code)
None
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On May 2, 1997, pursuant to a Stock Purchase Agreement dated April 30,
1997, Versar, Inc. (the "Company") purchased from Imperial Capital Worldwide
Partners, L.P., a Delaware limited partnership ("Imperial") 1,070,000 shares
common stock of Science Management Corporation ("SMC") (representing
approximately 53% of the issued and outstanding common stock of SMC), 100% of
the issued and outstanding preferred stock of SMC and certain options to
purchase 350,000 additional shares of SMC common stock for a purchase price of
$2,790,000 paid in cash. As additional consideration for such stock
purchases, the Company paid certain legal fees incurred by Imperial and its
affiliates in connection with the stock purchase and other matters related to
SMC in an aggregate amount of $80,000. The purchase price paid by the Company
was determined by the Company exceeding another competitive bid.
The funds used by the Company in connection with the stock purchase were
obtained from borrowings with NationsBank, N.A.
Neither the Company nor any if its affiliates had, and to the knowledge
of the Company no director or officer of the Company and its affiliates had,
any material relationship with SMC, Imperial or their respective affiliates
prior to the stock acquisition.
The Company presently intends to propose a merger pursuant to which SMC
will be merged with a subsidiary of the Company and the remaining shares of
SMC common stock not held by the Company will be exchanged for newly issued
shares of the Company's common stock, subject to the negotiation of a
definitive merger agreement by the Company and SMC.
SMC, founded in 1946, is a diversified professional services firm
providing consulting, process engineering, information technology and
environmental services to commercial and industrial clients in the U.S. and
internationally. SMC's operating units provide (i) design, engineering and
construction services to the petrochemical industry, material handling
projects and specialty chemical plants, (ii) consulting services to the health
care, food and petrochemical industries to assist companies more effectively
utilize their human and physical resources, (iii) systems support and
technology-based services in the areas of facilities management, business
recovery and professional support services and (iv) geotechnical, civil and
environmental engineering, design and construction management services to
municipal and industrial clients.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
Science Management Corporation
Unaudited financial statements for the period ending March 31, 1997.
Audited financial statements for the seven months ended July 31, 1996 and
financial statements for the five month period ending December
31, 1996 together with Auditors' Reports.
(b) Pro Forma Financial Information.
Unaudited Pro Forma condensed financial statements and notes to
unaudited Pro Forma condensed financial statements.
<PAGE>
Item 7. Financial Statements and Exhibits (continued)
(c) Exhibits Exhibit Reference
2.1 Stock Purchase Agreement among Imperial (A)
Capital Worldwide Partners, L.P., Imperial
Capital Investors Corp., Jonathan Borsuk and
Harvey Borsuk and Versar, Inc., dated as of
April 30, 1997.
99.1 Form of Press Release dated May 5, 1997. (A)
- -------------------------------
(A) Incorporated by rerference to similarly numbered exhibit to the
Registrant's Form 8-K dated May 16, 1997.
<PAGE>
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 hereunto duly authorized.
VERSAR, INC.
Date: July 14, 1997 By: /s/ Lawrence W. Sinnott
------------------------------
Lawrence W. Sinnott
Vice President, Chief Financial
Officer and Treasurer
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited - in thousands)
<TABLE>
<CAPTION>
March 31,
1997
----------
<S> <C>
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . $ 306
Accounts receivable, net . . . . . . . . . . . 4,217
Prepaid and other current assets . . . . . . . 71
----------
Total current assets . . . . . . . . . . . . 4,594
Property and equipment, net. . . . . . . . . . . 392
Other assets . . . . . . . . . . . . . . . . . . 85
Intangibles. . . . . . . . . . . . . . . . . . . 1,028
----------
Total assets . . . . . . . . . . . . . . . . $ 6,099
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . $ 1,867
Accrued payroll and vacation . . . . . . . . . 223
Other liabilities. . . . . . . . . . . . . . . 1,197
----------
Total current liabilities. . . . . . . . . . 3,287
Liabilities from reorganization plan . . . . . . 1,144
----------
Total liabilities. . . . . . . . . . . . . . 4,431
----------
Stockholders' equity
Preferred stock, $1 par value,
1,750,000 shares authorized and
outstanding. . . . . . . . . . . . . . . . . 1,750
Common stock , $.10 par value;
5,000,000 shares authorized
and 2,000,000 shares outstanding . . . . . . 200
Capital in excess of par value . . . . . . . . 14
Accumulated deficit. . . . . . . . . . . . . . . (296)
----------
Total stockholders' equity . . . . . . . . . 1,668
----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . . . . $ 6,099
==========
</TABLE>
1
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended March 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
GROSS REVENUE . . . . . . . . . . . . . $ 5,874 $ 5,985
Purchased services and materials,
at costs . . . . . . . . . . . . . . . 2,538 2,174
________ ________
NET SERVICE REVENUE . . . . . . . . . . 3,336 3,811
Direct costs of services and
overhead . . . . . . . . . . . . . . . 2,012 2,585
Selling, general and administrative
expenses . . . . . . . . . . . . . . . 1,313 1,451
________ ________
OPERATING INCOME. . . . . . . . . . . . 11 (225)
OTHER EXPENSE
Interest expense. . . . . . . . . . . . --- 47
Income tax expense. . . . . . . . . . . --- ---
________ ________
NET INCOME (LOSS) . . . . . . . . . . . 11 (272)
======== ========
NET INCOME (LOSS) PER SHARE . . . . . . $ .01 $ ---
======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . . . . . . . 2,000 ---
======== ========
</TABLE>
2
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended March 31,
_______________________
1997 1996
________ ________
<S> <C> <C>
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . $ 11 $ (272)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities
Depreciation and amortization . . . 97 84
Provision for doubtful accounts
receivable . . . . . . . . . . . . . (67) 10
-------- --------
Subtotal. . . . . . . . . . . . 41 (178)
Changes in assets and liabilities,
net of asset dispositions
(Increase) decrease in accounts
receivable . . . . . . . . . . . . (504) 1,035
Decrease (increase) in prepaids
and other assets . . . . . . . . . 82 (195)
Increase (decrease) in accounts
payable. . . . . . . . . . . . . . 130 (826)
Increase in accrued salaries and
vacation . . . . . . . . . . . . . 87 171
Increase (decrease) in other
liabilities. . . . . . . . . . . . 90 (477)
-------- --------
Net cash used in operating
activities . . . . . . . . . . (74) (470)
-------- --------
Cash flows from investing activities
Purchase of property and equipment. . . (26) (96)
-------- --------
Cash flows from financing activities
Net borrowings on notes payable . . . . --- 322
-------- --------
Net decrease in cash. . . . . . . . . . . (100) (244)
Cash at the beginning of the year . . . . 406 2,227
Cash at the end of the period . . . . . . $ 306 $ 1,983
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . $ 0 $ 47
Income taxes . . . . . . . . . . . . 0 0
</TABLE>
<PAGE>
Science Management Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
----
<S> <C>
Consolidated Balance Sheet as of December 31, 1996 1-2
Consolidated Statements of Operations for the five
months ended December 31, 1996, and the seven
months ended July 31, 1996 3
Consolidated Statements of Shareholders' Equity for
the five months ended December 31, 1996, and the
seven months ended July 31, 1996 4
Consolidated Statements of Cash Flows for the five
months ended December 31, 1996, and the seven
months ended July 31, 1996 5
Notes to Consolidated Financial Statements 6-11
Report of Independent Public Accountants 12-13
</TABLE>
<PAGE>
Science Management Corporation and Subsidiaries
Consolidated Balance Sheet
As of December 31, 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 406
Accounts receivable:
Billed 2,510
Unbilled 1,508
Allowance for doubtful accounts (385)
--------
Net accounts receivable 3,633
Prepaid expenses and supplies 165
--------
Total current assets 4,204
Property and equipment:
Leasehold improvements 18
Furniture and equipment 428
Less: Accumulated depreciation and
amortization (37)
--------
Net property and equipment 409
Reorganization value in excess of amounts
allocated to identifiable assets 1,157
Less: Accumulated amortization (80)
--------
Net reorganization value 1,077
Other assets 86
--------
Total assets $ 5,776
========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
1
<PAGE>
Science Management Corporation and Subsidiaries
Consolidated Balance Sheet
As of December 31, 1996
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
Liabilities and Shareholder's Equity
<S> <C>
Current liabilities:
Accounts payable $ 1,736
Accrued expenses 1,260
--------
Total current liabilities 2,996
Liabilities from reorganization plan 1,123
--------
Total liabilities 4,119
--------
Shareholder's equity:
Preferred stock, $1 par value,
1,750,000 shares authorized
and outstanding 1,750
New common stock, $.10 par
value; 10,000,000 shares
authorized; 2,000,000 shares
issued and outstanding 200
Additional paid-in -capital 14
Accumulated deficit (307)
--------
1,657
--------
Total liabilities and
shareholders' equity $ 5,776
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
Science Management Corporation and Subsidiaries
Consolidated Statements of Operations
For the Five Months Ended December 31, 1996,
and the Seven Months Ended July 31, 1996
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
Five Months Ended Seven Months Ended
December 31, 1996 July 31, 1996
<S> <C> <C>
Sales $ 11,707 $ 14,039
Cost of Sales 10,287 11,582
Selling, general and
administrative expenses 1,771 2,838
-------------------- --------------------
Income (loss) from operations (351) (381)
Interest income (expense), net 3 (43)
Gain on transfer of foreign
subsidiary to creditor in
satisfaction of liability --- 846
Other income 41 113
Provision for income taxes --- (215)
-------------------- --------------------
Net income (loss) $ (307) $ 320
==================== ====================
Net loss per share $ (0.15)
====================
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
<PAGE>
Science Management Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Five Month Period Ended December 31, 1996,
and the Seven Months Ended July 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Preferred Additional
Stock Common Stock Paid-in
Amount Shares Amount Capital
<S> <C> <C> <C> <C>
Balance, December 31, 1995 0 3,696 $ 369 $ 16,833
Net income 0 0 0 0
Eliminate predecessor equity
accounts in connection with
fresh start reporting (3,696) $(369) $(16,833)
Issuance of new stock pursuant
to reorganization plan $ 1,750 2,000 $ 200 $ 14
Balance, July 31, 1996 $ 1,750 2,000 $ 200 $ 14
Net loss 0 0 0 0
Balance, December 31, 1996 $ 1,750 2,000 $ 200 $ 14
</TABLE>
<TABLE>
<CAPTION>
(Accumulated Treasury Stock
Deficit) Shares Amount Total
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $(21,373) (396) $(2,683) $(6,854)
Net income $ 320 0 0 $ 320
Eliminate predecessor equity
accounts in connection with
fresh start reporting $ 21,053 396 $ 2,683 $ 6,534
Issuance of new stock pursuant
to reorganization plan 0 0 0 $ 1,964
Balance, July 31, 1996 0 0 0 $ 1,964
Net loss $ (307) 0 0 $ (307)
Balance, December 31, 1996 $ (307) 0 0 $ 1,657
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
4
<PAGE>
Science Management Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Five Months Ended December 31, 1996,
and the Seven Months Ended July 31, 1996,
(in thousands of dollars)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
Five Months Ended Seven Months Ended
December 31, 1996 July 31, 1996
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (307) $ 320
Adjustments to reconcile net
(loss) income to net cash
provided (used) by operations:
Depreciation and amortization 166 123
Gain on transfer of foreign
subsidiary to creditor in
satisfaction of liability --- (846)
Noncash impact of liabilities
forgiven and net assets surrendered
during reorganization --- (1,979)
(Increase) decrease in accounts
receivable (769) 443
(Increase) decrease in prepaid
expenses and supplies 486 (26)
(Increase) decrease in other assets 9 (2)
Increase (decrease) in accounts
payable and accured expenses 733 (93)
------------------- --------------------
Net cash provided (used) by operations 318 (2,060)
Cash flows from investing activities:
Capital expenditures (37) (42)
------------------- --------------------
Net increase (decrease) in cash 281 (2,102)
Cash - beginning of period 125 2,227
------------------- --------------------
Cash - end of period $ 406 $ 125
=================== ====================
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
Science Management Corporation ( SMC ) and Subsidiaries (collectively referred
to as the "Company") is an international professional services firm that
applies its expertise in management, information and engineering and
technological services to a wide range of clients. During 1996, Science
Management Corporation had seven active subsidiaries; SMC Management Services
Group, SMC International, SMC International Holdings, SMC France, SMC Business
Information Systems Inc., SMC McEver Inc. and SMC Environmental Services
Group. SMC Management Services Group, SMC International, SMC International
Holdings, and SMC France provide comprehensive re-engineering and
transformation management programs and systems, competitive analysis, and
organizational effectiveness, although SMC International Holdings was disposed
of during 1996 (see Note 7). SMC Business Information Systems Inc. offers
solutions for all aspects of business recovery services, facilities management
(outsourcing) and professional services. SMC McEver Inc. and SMC
Environmental Services Group provide a diversity of engineering and technology
services in the fields of design and engineering analysis, environmental and
geotechnical consulting, process plant design and construction, contract
engineering and maintenance.
On July 28, 1993, Science Management Corporation filed a voluntary petition
for relief under Chapter 11, Title 11 of the U.S. Bankruptcy Code and operated
its business as a debtor-in-possession under the supervision of the Bankruptcy
Court until July 10, 1996. SMC s subsidiaries were not subject to the
bankruptcy proceeding.
Effective April 30, 1997, Versar, Inc. ( Versar ) acquired 53.5% of the
outstanding common stock and all outstanding preferred stock of Science
Management Corporation for aggregate consideration of $2,870,000 in cash.
Versar has proposed a merger pursuant to which Versar will obtain the
remaining Science Management Corporation common stock for 533,433 newly issued
shares of Versar common stock. The proposed merger is subject to approval by
the stockholders of Science Management Corporation. Since Versar holds a
majority of the issued and outstanding Science Management Corporation common
stock, approval of the merger is assured.
Pursuant to the American Institute of Certified Public Accountants Statement
of Position No. 90-7 ( SOP 90-7 ), the Company adopted fresh start reporting
which has resulted in the creation of a new reporting entity. The Company s
assets and liabilities were adjusted to reflect fair values on July 31, 1996.
In fresh start reporting, an aggregate value of $1,964,000 was assigned to
SMC s common stock and preferred stock. Management established these values
with the assistance of its financial advisors. These valuations considered
SMC s expected future performance, relevant industry and economic conditions,
and analyses and comparisons with comparable companies.
The reorganization value of SMC has been allocated to the Reorganized
Company s assets and liabilities in a manner similar to the purchase method of
accounting for a business combination. The fresh start reporting adjustments
resulted in, among other things, the allocation of substantial amounts to
reorganization value in excess of amounts allocated to identifiable assets.
The amortization of this intangible asset, while not requiring the use of
cash, will significantly affect future operating results. Adjustments have
been made to reflect the discharge of pre-petition liabilities in accordance
with the terms of the Plan of Reorganization.
6
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The reorganization value of SMC has been determined using a modified version
of the five-year cash flow projections presented in Exhibit L to the
Disclosure Statement and a terminal value calculated in accordance with
guidance contained in SOP 90-7. The 5 year cash flow projections were
modified to reflect SMC s emergence in July 1996, rather than the first
quarter of 1996, as had been assumed in the Disclosure Statement, and since
SMC has not achieved the anticipated level of cash flows originally estimated,
modifications were made to reflect this shortfall and modify anticipated
future cash flow performance based on an assessment of current circumstances.
Estimated future cash flows and terminal values were discounted using an
assumed rate of 14%. Liabilities arising under the Plan are stated at present
value, using the same 14% discount rate applied to future cash flows.
The Company s emergence from bankruptcy proceedings was accomplished through a
series of mutually dependant transactions and agreements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Science
Management Corporation and all subsidiaries. Intercompany balances and
transactions have been eliminated.
Revenue Recognition
Unbilled receivables are stated at the lower of actual costs incurred plus
accrued profits or net estimated realizable value of incurred costs, reduced
by progress billings. The Company records income from major fixed-price
contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed and
revisions are made as required. The effects of these revisions are included
in the periods in which the revisions are made. On cost-plus-fee contracts,
revenue is recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material and other reimbursable
contracts, revenues including any applicable mark-ups are recorded as costs
are incurred. Losses on contracts are recognized in the period in which they
become known. Disputes arise in the normal course of the Company s business
on projects where the Company is contesting with customers for collection of
funds because of events such as delays, changes in contract specifications and
questions of cost allowability or collectibility. Such disputes, whether
claims or unapproved change orders in the process of negotiation, are recorded
at the lesser of their estimated net realizable value or actual costs incurred
and only when realization is probable and can be reliably estimated. Claims
against the Company are recognized when the loss is considered probable and is
reasonably determinable in amount.
It is the Company s policy to provide reserves for the collectibility of
accounts receivable when it is determined that it is probable that the Company
will not collect all amounts due and the amount of reserve requirements can be
reasonably estimated.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the
reporting period. Actual results could differ from those estimates.
7
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment prior to July 1997 were stated at cost. Pursuant to
fresh start reporting, the property and equipment was reflected at estimated
fair value at July 31, 1997. Depreciation is provided principally on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the estimated useful life of the
asset or the lease term.
Income Taxes
Income taxes are calculated in accordance with Statement of Financial
Accounting Standards No. 109. Deferred income taxes result from timing
differences between financial reporting and taxable income. Deferred tax
assets are reduced by a valuation allowance when, based on management s
estimates, it is more likely than not that a portion of the deferred tax
assets will not be realized in a future period.
Loss Per Share
Net loss per share is computed by dividing net income by the weighted average
number of common shares outstanding during the applicable period (2,000,000
shares). Earnings per share of the predecessor company is not presented as
the amount is not meaningful.
Common and Preferred Stock
Pursuant to the Plan of Reorganization (the Plan ), which was confirmed by
the Bankruptcy Court on April 17, 1996, and became effective on July 10, 1996,
all of the common stock of SMC outstanding as of July 10, 1996 (the Old
Common Stock ), was cancelled. As provided by the terms of the Plan, holders
of Old Common Stock, the holders of unsecured claims allowed by the Court in
Chapter 11 proceedings, and certain members of the Company s management,
received distributions of new common stock of SMC ( New Common Stock ). In
addition, and as described in the Plan, Imperial Capital Worldwide Partners,
the holder of the largest secured claim against SMC, received a distribution
of 1,070,000 shares of New Common Stock together with a distribution of
1,750,000 shares of Science Management Corporation Preferred Stock, with a par
value of $1.00 per share. The Preferred Stock is non-convertible, non-
dividend bearing, and redeemable by the Company subject to conditions and
restrictions contained in the Plan.
A total of 10,000,000 shares of New Common Stock, par value $0.10 per share,
were authorized under the Plan, with 2,000,000 shares issued as described
above on July 10, 1996.
NOTE 3 - INCOME TAXES
The tax provision is entirely a current foreign provision which is the
statutory tax on earnings not offset by operating loss carryforwards in
Belgium.
8
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
At December 31, 1996, the Company has net operating loss carryforwards of
$9,313,000 for federal income tax purposes, which will expire in the years
1997 through 2011. Due to the substantial changes in the Company's ownership,
there are annual limitations on the amount of the carryforwards that can be
utilized. The Company also has net operating loss carryforwards available for
use in the United Kingdom of approximately $1,000,000, which are available
indefinitely, as well as minor amounts available for use in other
jurisdictions. Due to the annual limitations and questions surrounding the
Company s ability to utilize these carryforwards, the Company has recorded a
valuation allowance to reserve the full amount of the net operating loss
carryforwards.
Foreign and other tax credits of $2,018,000 are available to offset taxes
otherwise payable. These credits generally expire through 2007.
The following is a breakout by year of the Federal net operating losses and
tax credits. In each case, expiration dates are December 31 of the indicated
year (in thousands of dollars):
<TABLE>
<CAPTION>
Net Operating Foreign Tax
Expiration dates Losses Credits
<S> <C> <C>
2000 $ 349 $ ---
2003 805 ---
2004 325 ---
2005 1,095 858
2006 --- 736
2007 3,422 424
2008 2,520 ---
2009 850 ---
2010 30 ---
2011 (83) ---
------------- ------------
Total $ 9,313 $ 2,018
============= ============
</TABLE>
NOTE 4 - STOCK OPTION PLANS
Prior to the reorganization in 1996, the Company maintained various stock
option plans to provide incentive and nonqualified stock options to directors,
officers and other key employees of the Company. All stock option plans were
terminated when the reorganization plan became effective.
NOTE 5 - PROFIT SHARING AND PENSION PLANS
SMC and certain subsidiaries have contributory or non-contributory profit
sharing and pension plans covering substantially all of their employees.
Subsequent to December 31, 1993, and as a result of the Company's cost savings
reviews, actions were taken to terminate the profit sharing plans and
consolidate the pension plans of the Company and its subsidiaries. As a
result, there was no profit sharing expense in 1996.
The Employee Capital Accumulation Plan (EMCAP), a 401-K savings plan, is
designed to encourage employees of the Company to save systematically through
payroll deductions. Contributions by eligible employees are voluntary, and
are not supplemented by the Company.
9
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 6 - OPERATING LEASES
The Company leases certain office equipment with remaining noncancellable
lease terms in excess of one year and occupies office facilities under long-
term operating lease agreements.
The future minimum rental payments as of December 31, 1996, associated with
long-term noncancellable lease obligations, net of sublease income, are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1997 $ 415
1998 178
-----
Total $ 593
=====
</TABLE>
Rental expense was approximately $275,000 for the seven months ended July 31,
1996 and $195,000 for the five months ended December 31, 1996.
NOTE 7 - RELATED PARTY TRANSACTIONS
During 1992, the Company entered into transactions with Donald R. Gant, a
stockholder who held a significant portion of SMC s Old Common Stock
outstanding. Under the terms of the transaction, SMC sold 500,000 shares of
Old Common Stock to Mr. Gant for an aggregate purchase price of $750,000, paid
in cash. Mr. Gant also loaned $2 million to SMC for working capital and
general corporate purposes. The loan had a term of three years, with an
interest rate of 9% per annum and was secured by certain assets of the Company
held by SMC International Holdings. The Company did not make all of the
required interest payments to service this loan, and was in default thereof.
As part of the plan of reorganization, Mr. Gant exchanged the note for
ownership of SMC International Holdings resulting in a gain of $846,000.
NOTE 8 - CONTINGENCIES
Shortly after Science Management Corporation emerged from bankruptcy on July
10, 1996, disputes arose between its new majority investors, Imperial Capital
Worldwide Partners, L.P. and the management of the Company. Subsequently, two
lawsuits were instituted against Imperial and its principals. On September 6,
1996, two SMC administrative creditors filed a Complaint for injunctive and
other relief entitled Ravin Sarashon, Cook, Baumgarten, Fisch & Rosen, P.C.
and Shanley & Fisher, P.C. v. Imperial Worldwide Partners, L.P. et al. Case
No. 93-34553 in the United States Bankruptcy Court, District of New Jersey, to
restrain certain actions by Imperial and its principals and to designate James
A. Skidmore, Jr. as the manager of the Company to operate the Company on a day
to day basis and carry out the terms of the Plan of Reorganization. On
November 6, 1996, James A. Skidmore, Jr. and other management shareholders,
and certain other shareholders filed a Complaint against Imperial
entitled James A. Skidmore, Jr. et al, v. Imperial Capital Worldwide Partners,
L.P. et al. Docket No. MON C 278-96 in the Superior Court of New Jersey,
Monmouth County, Chancery Division seeking an injunction against Imperial and
its principals to rescind certain Board of Directors actions, to enjoin their
interference with Mr. Skidmore s day to day management of the Company and to
permit the corporation to obtain working capital.
10
<PAGE>
Science Management Corporation and Subsidiaries
Notes to Consolidated Financial Statements
As part of the Stock Purchase Agreement dated April 30, 1997 between Versar,
Inc. and Imperial Worldwide Partners, L.P. it was agreed that the Plaintiffs
and the Defendants in the two above cited proceedings would execute mutual
releases from further liability and agree to enter into Stipulations of
Dismissal for both actions. The Mutual Releases have been signed by all but
one plaintiff in the Skidmore case. In the event all releases are executed,
Stipulations of Dismissal will be filed in the appropriate courts. Management
does not expect that this case will have a material impact on the results of
operations of financial condition of the Company.
In June 1996, Flintlock Ltd., a client of SMC McEver, a subsidiary of the
Company, filed an action in the 165th Judicial District Court of Harris
County, Texas, entitled Flintlock LTD, v. SMC McEver, Inc., Case No. 96-
002700. Flintlock alleged that SMC McEver negligently failed to manage the
construction of a citronella candle project and negligently misrepresented the
project s cost. Flintlock asserts that it incurred over $700,000 in damages.
SMC McEver has counterclaimed for over $244,000 which it claims is due under
the contract between the parties. The parties have taken certain discovery
which remains ongoing. The parties have also engaged in discussions regarding
possible mediation. SMC McEver has retained counsel and is defending this
matter vigorously. Management is evaluating the Company s defenses and
potential exposure. The Company does not expect a material adverse effect on
the financial condition or results of operations.
SMC and its subsidiaries are parties to various other legal actions arising in
the normal course of business. The Company believes that the ultimate
unfavorable resolution of these other legal actions will not have a material
adverse effect on its financial condition and results of operations.
NOTE 9 BUSINESS INFORMATION
The Company s operates principally in one industry segment, which offers
professional services for management, information, and engineering and
technological services. The Company s operations include its domestic
consulting operations as well as consulting operations in European countries.
Revenue information by geographic area is as follows:
<TABLE>
<CAPTION>
Domestic Foreign
Operations Operations Total
<S> <C> <C> <C>
Seven months ended
July 31, 1996 $ 10,519 $ 3,520 $ 14,039
Five months ended
December 31, 1996 $ 11,067 $ 640 $ 11,707
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Science Management Corporation:
We have audited the accompanying consolidated balance sheet of Science
Management Corporation (Successor) and subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, cash flows and
shareholders equity for the five months ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Science
Management Corporation (Successor) as of December 31, 1996 and the results of
their operations and their cash flows for the five months ended December 31,
1996, in conformity with generally accepted accounting principles.
Washington, D.C.
July 3, 1997
/s/ Arthur Andersen LLP
--------------------------------
Arthur Andersen LLP
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Science Management Corporation:
We have audited the accompanying consolidated statements of operations, cash
flows and shareholders equity of Science Management Corporation (Predecessor)
and subsidiaries for the seven months ended July 31, 1996. These consolidated
financial statements are the responsibility of the Company s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of Science
Management Corporation (Predecessor) and their cash flows and equity for the
seven months ended July 31, 1996, in conformity with generally accepted
accounting principles.
Washington, D.C.
July 3, 1997
/s/ Arthur Andersen LLP
-----------------------------
Arthur Andersen LLP
13
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The pro forma condensed consolidated balance sheet assumes that the closing
had taken place as of March 31, 1997. The pro forma condensed consolidated
statements of operations for the nine months ended March 31, 1997 and for the
fiscal year ended June 30, 1996 assume the closing had taken place as of July 1,
1996 and July 1, 1995, respectively.
The estimated financial effects of the purchase of all of the assets and
assumption of certain liabilities of Science Management Corporation, in the
pro forma condensed financial information are not necessarily indicative of
either the financial position or the results of operations of Versar, Inc. had
the transaction occurred on the dates described, nor are they necessarily
indicative of the results of future operations. Additionally, the pro forma
condensed consolidated balance sheet as of March 31, 1997 does not reflect
results of operations or any changes in asset values since that date. The pro
forma condensed financial information should be read in conjunction with the
historical consolidated financial statements of Versar, Inc., including the
notes thereto.
1
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
(1) (2)
Pro-forma Pro
Versar SMC Adjustments Notes Forma
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash 1,166 306 (870) (3) 602
Accounts receivable 11,957 4,217 16,174
Prepaids & other 1,307 71 1,378
Deferred income taxes 690 0 690
-------- -------- -------- --------
Total current assets 15,120 4,594 (870) 18,844
Property and equipment 1,922 392 2,314
Deferred income taxes 441 --- 441
Other assets 329 85 414
Intangibles 0 1,028 1,342 (3,4) 2,370
-------- -------- -------- --------
Total assets 17,812 6,099 472 24,383
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 2,283 1,867 4,150
Bank line of credit --- --- 0
Current portion of
L/T debt --- --- 500 (3) 500
Accrued salaries and
vacation 1,685 223 1,908
Income tax payable 102 --- 102
Other liabilities 2,166 1,197 140 (4) 3,503
-------- -------- -------- --------
Total current liabilites 6,236 3,287 640 10,163
Liabs. from reorganization --- 1,144 1,144
Long-term debt --- --- 1,500 (3) 1,500
Other long-term liabilities 1,001 --- --- 1,001
Reserve on guarantee of R/E
debt 1,500 --- --- 1,500
-------- -------- -------- --------
Total liabilities 8,737 4,431 2,140 15,308
Equity 9,075 1,668 (1,668) 9,075
-------- -------- -------- --------
Total liabilities &
equity 17,812 6,099 472 24,383
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed
consolidated balance sheet.
2
<PAGE>
VERSAR, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 1997
(amounts in thousands)
1. Represents the historical consolidated financial position of Versar,
Inc. as of March 31, 1997.
2. Represents the historical consolidated financial position of Science
Management Corporation ("SMC") as of March 31, 1997.
3. Represents the purchase of 53.5% of the common stock of SMC and all of
the preferred stock as follows:
<TABLE>
<S> <C>
Acquisition price $ 2,870
Less: FMV of assets 640
Goodwill $ 2,230
</TABLE>
The transaction was funded by $500 of short term debt and $1,500 of long
term debt and $870 of cash.
4. Represents transaction cost of $140 which increases goodwill and other
liabilities.
3
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine-Month Period Ended March 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
(1) (2)
Pro-forma Pro
Versar SMC Adjustments Notes Forma
--------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
GROSS REVENUE $ 32,934 $ 19,186 $ $ 52,120
Purchased Services 9,614 6,173 15,787
--------- --------- --------- ---------
NET SERVICES REVENUE 23,320 13,013 0 36,333
Direct costs of service 19,047 9,515 28,562
Selling, general and
administrative 3,398 2,895 119 (5) 6,412
Other (32) 0 (32)
--------- --------- --------- ---------
OPERATING INCOME 907 603 (119) 1,391
Interest expense 48 0 120 (3) 168
Income tax expense (14) 0 (14)
--------- --------- --------- ---------
NET INCOME $ 873 $ 603 $ (239) $ 1,237
========= ========= ========= =========
Earnings per share $ 0.17 $ 0.24
========= =========
Shares outstanding 5,230 5,230
========= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed
consolidated statements of operations
4
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended June 30, 1996
(amounts in thousands)
<TABLE>
<CAPTION>
(1) (2)
Pro-forma Pro
Versar SMC Adjustments Notes Forma
--------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
GROSS REVENUE $ 44,283 $ 28,618 $ $ 72,901
Purchased Services 12,364 11,918 24,282
--------- --------- --------- ----------
NET SERVICES REVENUE 31,919 16,700 0 48,619
Direct costs of service 25,973 11,583 37,556
Selling, general and
administrative 4,960 5,939 158 (5) 11,057
Other (28) 0 (28)
Losses on Sarnia operations 142 0 142
--------- --------- --------- ---------
OPERATING INCOME 872 (822) (158) (108)
Interest expense 96 93 160 (3) 349
Income tax expense (216) 243 27
--------- --------- --------- ---------
NET INCOME $ 992 $ (1,158) $ (318) $ (484)
========= ========= ========= =========
Earnings per share $ 0.19 $ (0.09)
========= =========
Shares outstanding 5,248 5,248
========= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed
consolidated statements of operations
5
<PAGE>
VERSAR, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 1997 and the Year Ended June 30, 1996
(amounts in thousands)
1. Represents the historical consolidated operating results of Versar, Inc.
for the nine months ended March 31, 1997 and the year ended June 30,
1996.
2. Represents the historical consolidated operating results of Science
Management Corporation for the nine months ended March 31, 1997 and the
year ended June 30, 1996.
3. Interest expense has been adjusted to show the impact of the interest
expense for the $2,000 of debt recorded as part of the purchase of SMC.
4. Included in the statement of operations of SMC for the nine months ended
March 31, 1997 is a gain of $846 related to the transfer of a foreign
subsidiary to a creditor in satisfaction of a liability.
5. Represents amortization of goodwill over a 15-year period.
6
<PAGE>
