As Filed with the Securities and Exchange Commission on September 26, 1997
Registration No. 333-33167
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2 to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Versar, Inc.
(Exact name of registrant as specified in its charter)
Delaware 8711 54-0852979
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Indentification
Number)
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James C. Dobbs
Versar, Inc.
6850 Versar Center 6850 Versar Center
Springfield, Virginia 22151 Springfield, Virginia 22151
(703) 750-3000 (703) 750-3000
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, of and telephone number, including area
registrant's principal executive offices) code, of agent for service)
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Copies of all communications to:
Elizabeth Hardy Noe, Esq. Steven B. Jackman, Esq.
Paul, Hastings, Janofsky & Walker LLP Sills Cummis Zuckerman
Suite 2400 Radin Tischman
600 Peachtree Street Epstein & Gross, P.A.
Atlanta, Georgia 30308 One Riverfront Plaza
(404) 815-2400 Newark, New Jersey 07102
(201) 643-7000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable following the effective date of this Registration
Statement.
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If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY COPY
[SMC LETTERHEAD]
September __, 1997
To Our Stockholders:
You are cordially invited to attend a special meeting of the stockholders
(the "Special Meeting") of Science Management Corporation ("SMC"), to be held on
October 22, 1997 at 10:00 a.m. Eastern Daylight Time at The Bridgewater Manor,
1251 Routes 202/206, Bridgewater, New Jersey, 08807.
At the Special Meeting you will be asked to consider and vote upon a
proposal to approve an Agreement and Plan of Merger dated as of July 29, 1997
(the "Merger Agreement"), among SMC, Versar, Inc., a Delaware corporation
("Versar"), and its wholly-owned subsidiary, Versar Acquisition I, Corp., a
Delaware corporation ("Sub"), pursuant to which SMC will be merged with and into
Sub (the "Merger"), each share of common stock, $0.10 par value per share (the
"SMC Common Stock"), of SMC (other than shares held by Versar or shares as to
which appraisal rights have been perfected and not withdrawn) will be converted
into the right to receive .573584 of a share of common stock, $0.01 par value of
Versar (the "Versar Common Stock"), and all outstanding preferred stock, $1.00
par value per share ("SMC Preferred Stock"), of SMC will be cancelled. The
Merger Agreement is described more thoroughly in the attached Proxy Statement,
which stockholders are urged to read carefully.
After careful consideration, your Board of Directors believes that the
Merger is in the best interests of SMC and its stockholders. Accordingly, your
Board of Directors has unanimously approved the Merger Agreement and recommends
that holders of SMC Common Stock vote FOR approval of the Merger Agreement.
All stockholders are invited to attend the meeting in person. The
affirmative vote of the holders of a majority of the issued and outstanding
shares of SMC Common Stock and SMC Preferred Stock voting as one class will be
necessary for approval and adoption of the Merger Agreement. Versar currently
owns approximately 53.5% of the issued and outstanding SMC Common Stock and 100%
of the outstanding SMC Preferred Stock and intends to vote such stock in favor
of the Merger. Further, pursuant to lock-up agreements entered into with Versar,
certain officers of SMC, collectively owning an aggregate of 15% of the issued
and outstanding shares of SMC Common Stock, have agreed to vote their respective
shares of SMC Common Stock in favor of the Merger Agreement. Accordingly,
approval of the Merger Agreement by the stockholders is assured.
Even if you plan to attend the Special Meeting in person, please complete,
sign and promptly return the enclosed proxy in the enclosed postage pre-paid
envelope. If you attend the Special Meeting, you may vote in person whether or
not you have previously returned your proxy.
Sincerely,
James A. Skidmore, Jr.
Chairman, President and Chief Executive Officer
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PRELIMINARY COPY
Science Management Corporation
721 Routes 202/206
Bridgewater, New Jersey 08807
(908) 722-0300
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held on October 22, 1997
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Notice is hereby given that a Special Meeting of the stockholders (the
"Special Meeting") of Science Management Corporation, a Delaware corporation
("SMC"), will be held on October 22, 1997 at 10:00 a.m. Eastern Daylight Time,
at The Bridgewater Manor, 1251 Routes 202/206, Bridgewater, New Jersey 08807,
for the purpose of considering and voting upon the following matters:
1. A proposal to approve and adopt an Agreement and Plan of Merger dated
as of July 29, 1997 (the "Merger Agreement"), among SMC, Versar, Inc.,
a Delaware corporation ("Versar"), and Versar's newly formed,
wholly-owned subsidiary Versar Acquisition I, Corp., a Delaware
corporation ("Sub"), pursuant to which, among other things, SMC will
be merged with and into Sub (the "Merger") and, as a result, SMC will
become a wholly-owned subsidiary of Versar, each share (other than
shares held by Versar or shares as to which appraisal rights have been
perfected and not withdrawn) of the common stock, $0.10 par value per
share (the "SMC Common Stock"), of SMC will be converted into the
right to receive .573584 of a share of common stock of Versar and all
outstanding preferred stock, $1.00 par value per share ("SMC Preferred
Stock"), of SMC will be cancelled.
2. Such other business as may properly come before the Special Meeting
and any postponements or adjournments thereof.
Holders of record of SMC Common Stock and SMC Preferred Stock at the close
of business on September 5, 1997 (the "Record Date"), are entitled to notice
of, and to vote at, the Special Meeting and any adjournment thereof.
If the Merger Agreement proposed herein is approved by the holders of SMC
Common Stock and SMC Preferred Stock at the Special Meeting and the Merger is
effected by SMC, any stockholder of SMC who (i) delivers to SMC, before the
taking of the vote on the approval of the Merger Agreement, written notice of
his intent to demand payment for his shares if the Merger is effectuated, (ii)
does not vote his shares in favor of the Merger and (iii) otherwise complies
with Section 262 of the Delaware General Corporation Law, has or may have the
right to demand in writing from SMC, payment for such stockholder's shares and
an appraisal of the value thereof. SMC and any such stockholder shall in such
case have the rights and duties and shall follow the procedure set forth in
Section 262 of the Delaware General Corporation Law regarding appraisal rights.
Please fill in the appropriate blanks, sign, date and return the enclosed
proxy card, whether or not you plan to attend the Special Meeting. If you attend
the meeting and wish to vote in person, you may do so by withdrawing your proxy
prior to voting at the Special Meeting. Proxies may be revoked by (i) filing
with the Secretary of SMC at or before the taking of the vote at the Special
Meeting a written notice of revocation bearing a later date than the proxy, (ii)
duly executing a later-dated proxy relating to the same shares and delivering it
to the Secretary of SMC before the taking of the vote at the Special Meeting or
(iii) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute a revocation of a
proxy).
By Order of the Board of Directors
Marion G. Hilferty
[Date] Secretary
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PRELIMINARY COPY
Versar, Inc.
PROSPECTUS
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Science Management Corporation
Proxy Statement
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This Proxy Statement/Prospectus is being furnished to the holders as of
September 5, 1997 (the "Record Date"), of common stock, $0.10 par value per
share (the "SMC Common Stock"), and preferred stock, $1.00 par value per share
(the "SMC Preferred Stock"), of Science Management Corporation, a Delaware
corporation ("SMC"), in connection with the solicitation of proxies by SMC's
Board of Directors (the "SMC Board"), for use at a special meeting of
stockholders of SMC (the "Special Meeting") to be held on October 22, 1997 at
10:00 a.m. Eastern Daylight Time at The Bridgewater Manor, 1251 Routes 202/206,
Bridgewater, New Jersey 08807, and at any postponements or adjournments thereof.
This Proxy Statement/Prospectus and the accompanying Proxy Card are first being
mailed to stockholders of SMC on or about ____________________, 1997.
At the Special Meeting, holders of SMC Common Stock and SMC Preferred Stock
will be asked to consider and vote upon a proposal to approve an Agreement and
Plan of Merger dated as of July 29, 1997 (the "Merger Agreement"), among SMC,
Versar, Inc., a Delaware corporation ("Versar"), and Versar's newly organized,
wholly-owned subsidiary, Versar Acquisition I, Corp., a Delaware corporation
("Sub"), pursuant to which SMC will be merged with and into Sub (the "Merger")
and, as a result, SMC will become a wholly-owned subsidiary of Versar, each
share of SMC Common Stock (other than shares held by Versar and shares as to
which appraisal rights have been perfected and not waived) will be converted
into the right to receive .573584 of a share of common stock, $0.01 par value
per share, of Versar (the "Versar Common Stock") and each share of SMC Preferred
Stock will be cancelled. The Merger is described more thoroughly in this Proxy
Statement/Prospectus and in the documents attached hereto which stockholders are
urged to read carefully. The stockholders of SMC will also consider and vote
upon such other matters as may properly come before the Special Meeting and any
postponements or adjournments thereof.
See "Risk Factors" on page 13 for a discussion of certain considerations in
evaluating the Merger.
Under Delaware law, stockholders of SMC will have appraisal rights in
connection with the Merger. See "The Merger - Appraisal Rights," and Appendix
II. In order to exercise such appraisal rights properly, and in addition to
other requirements of Delaware law, a dissenting stockholder must refrain from
voting in favor of the Merger.
This Proxy Statement/Prospectus also constitutes a prospectus of Versar
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the issuance of up to 533,433 shares of Versar Common Stock that may
be issued in consideration of the Merger to the holders of SMC Common Stock.
Versar will not issue fractional shares of Versar Common Stock, but instead will
pay cash to any stockholder otherwise entitled to receive a fractional share.
See "Summary - The Merger," "The Merger - Exchange of Stock Certificates" and
Appendix I.
Versar is publicly traded on the American Stock Exchange (the "AMEX"). On
September 16, 1997 the last reported sale price per share of Versar Common Stock
was $5.0625. Although SMC is publicly traded, no active public trading market
exists for SMC Common Stock. See "Summary - Market Value of Versar and SMC
Common Stock."
THE SECURITIES OF VERSAR, INC. OFFERED IN CONNECTION WITH THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is __________, 1997.
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AVAILABLE INFORMATION
Versar has filed with the Securities Exchange Commission (the "Commission")
in Washington, D.C., a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act, for the registration of Versar Common
Stock to be issued in the proposed Merger. This Proxy Statement/Prospectus was
filed as a part of the Registration Statement. This Proxy Statement/Prospectus
does not contain all of the information set forth in the Registration Statement
as certain parts are permitted to be omitted by the rules and regulations of the
Commission. For further information pertaining to Versar Common Stock and
related matters, reference is made to the Registration Statement, including the
exhibits filed as a part thereof, which may be inspected at, and copies of which
may be obtained by mail from, the public reference rooms and facilities of the
Commission referred to below.
Versar is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the Commission's public reference rooms located at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
the public reference facilities in the New York Regional Office, Seven World
Trade Center, 14th Floor, New York, New York 10048 and the Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621. Copies of such material can be obtained at prescribed rates by writing to
the Securities and Exchange Commission, Public Reference Branch, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site
(http:/www.sec.gov) that contains all information filed electronically by Versar
with the Commission, including this Proxy Statement/Prospectus. In addition,
such reports and other information may be inspected at the offices of the AMEX,
86 Trinity Place, New York, New York 10006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Versar's annual report on Form 10-K for the year ended June 30, 1996, as
previously filed by Versar with the Commission, is incorporated herein by
reference for purposes of incorporating the information included therein
concerning directors and executive officers of Versar, who shall remain in such
capacities subsequent to the Merger, the compensation of such directors and
executive officers and certain relationships and related transactions thereof,
and principal holders of outstanding voting securities of Versar.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy
Statement/Prospectus, shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations and business of Versar
and SMC. Statements in this document that are not historical facts are hereby
identified as "forward- looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the Securities
Act. Versar cautions the reader that such "forward-looking statements" including
without limitation, those relating to Versar's and SMC's future business
prospects, revenues, working capital, liquidity and capital needs and the
possible impact of current and future claims against either company based on
negligence and other theories of liability, and regarding Versar's cost controls
and reductions, resolution of billing delays, and the
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possibility of making additional acquisitions, wherever they occur in this
document, are necessarily estimates reflecting the best judgment of Versar's and
SMC's senior management and involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
"forward-looking statements," including the possibilities that the demand for
Versar's or SMC's services may decline as a result of possible changes in
general and industry specific economic conditions and the effect of competitive
services and pricing, the risk that one or more current or future claims made
against either company could result in substantial liabilities and the risk of
failure of Versar to integrate effectively the businesses of SMC. Such
"forward-looking statements" should, therefore, be considered in light of
various important factors, including those set forth in this Proxy
Statement/Prospectus.
The words "estimate," "project," "intend," "expect" and similar expressions
are intended to identify forwardlooking statements. These "forward-looking
statements" are found at various places throughout this document. The reader is
cautioned not to place undue reliance on forward-looking statements included
herein and to read carefully the discussion of risks set forth under the heading
"Risk Factors" for an understanding of the types of risks that may cause results
to differ from those projected herein.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by Versar, SMC or their respective affiliates.
This Proxy Statement/Prospectus does not constitute an offer to exchange or
sell, or a solicitation of an offer to exchange or purchase, any securities
other than the Versar Common Stock offered hereby, nor does it constitute an
offer to exchange or sell or a solicitation of an offer to exchange or purchase
such securities in any state or other jurisdiction to any person to whom such an
offer or solicitation would be unlawful.
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TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION........................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................. 1
FORWARD-LOOKING STATEMENTS................................................... 1
SUMMARY...................................................................... 6
RISK FACTORS................................................................. 14
Integration of Versar and SMC........................................... 14
Dependence on Government Contracts...................................... 14
Regulatory Enforcement.................................................. 14
Competition............................................................. 14
Growth Potential of Environmental Consulting Industry .................. 14
Dependence on Key Personnel............................................. 14
Versar Acquisition Growth Strategy, Integration of Acquired
Companies and Impact of Industry Consolidation on Growth Strategy .... 15
Financial Constraints................................................... 15
Weather Conditions...................................................... 15
Potential Federal Income Tax Consequences............................... 15
THE SMC SPECIAL MEETING...................................................... 15
Time, Date and Place.................................................... 15
Matters to be Considered at the Special Meeting......................... 16
Voting and Record Date.................................................. 16
Proxies ............................................................... 16
THE MERGER................................................................... 17
General ............................................................... 17
Effects of the Merger................................................... 17
Procedures for Exchange of Certificates................................. 17
Background and Reasons for the Merger................................... 18
Special Committee Review of the Merger and Recommendation to the Board.. 23
The Board's Approval of the Merger and Recommendation Regarding the
Merger............................................................... 23
Interests of Certain Persons in the Merger.............................. 24
American Stock Exchange Listing......................................... 24
Resale of Versar Common Stock by Affiliates............................. 24
Material Federal Income Tax Consequences of the Merger.................. 25
Regulatory Approvals.................................................... 26
Accounting Treatment.................................................... 26
Appraisal Rights........................................................ 26
THE MERGER AGREEMENT......................................................... 27
General ............................................................... 27
Closing; Effective Time................................................. 28
Merger Consideration.................................................... 28
Representations and Warranties.......................................... 28
Conduct of Business of SMC Prior to the Effective Time.................. 29
Acquisition Proposals................................................... 29
Conditions to Consummation of the Merger................................ 29
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Termination............................................................. 30
Lock-up Agreements...................................................... 30
Amendments and Waivers.................................................. 31
Expenses ............................................................... 31
BUSINESS OF VERSAR........................................................... 31
Background and Perspective.............................................. 31
A Business Approach to Environmental Management......................... 31
Establishing the Foundation for the Future.............................. 32
Consulting Core Business................................................ 33
Strategic Planning and Pollution Prevention............................. 33
Total Compliance Management............................................. 34
Personal Protection Equipment/ChemDemil................................. 35
Corrective/Remedial Action.............................................. 36
Backlog ............................................................... 37
Markets and Customers................................................... 37
Competition............................................................. 37
Employees............................................................... 37
Market Driving Forces and The Future.................................... 37
Properties.............................................................. 38
Legal Proceedings....................................................... 38
SELECTED FINANCIAL DATA -- VERSAR............................................ 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- VERSAR.................................................... 41
Comparison of Nine Months Ended March 31, 1997 to Nine Months Ended
March 31, 1996....................................................... 41
Comparison of Fiscal Years Ended June 30, 1996, 1995 and 1994........... 41
Liquidity and Capital Resources......................................... 43
Impact of Accounting Standards.......................................... 43
Impact of Inflation..................................................... 43
RECENT DEVELOPMENTS.......................................................... 44
BUSINESS OF SMC.............................................................. 44
SMC Business Information Systems........................................ 45
SMC Consulting.......................................................... 45
SMC Environmental Services Group........................................ 46
Engineering, Design and Construction Services Group..................... 47
Employees............................................................... 47
Properties.............................................................. 48
Legal Proceedings....................................................... 48
SELECTED FINANCIAL DATA - SMC................................................ 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SMC........................................................ 50
First Six Months and Second Quarter 1997 Compared to 1996............... 50
Comparison Of The Five Months Ended December 31, 1996, The Seven Months
Ended July 31, 1996, And The Years Ended December 31, 1995 and 1994.. 50
Liquidity And Capital Resources......................................... 52
Impact of Inflation..................................................... 52
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PRINCIPAL STOCKHOLDERS OF SMC................................................ 53
Security Ownership Of Certain Beneficial Owners......................... 53
Security Ownership Of Management........................................ 54
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)............ 55
DESCRIPTION OF CAPITAL STOCK OF VERSAR....................................... 61
Authorized Capital Stock................................................ 61
Versar Common Stock..................................................... 61
Versar Preferred Stock.................................................. 61
Certain Provisions of the DGCL.......................................... 61
Limitations on Liability of Officers and Directors...................... 61
Transfer Agent and Registrar............................................ 62
COMPARISON OF RIGHTS OF VERSAR STOCKHOLDERS AND SMC STOCKHOLDERS............. 62
Classes and Series of Capital Stock..................................... 62
Conversion and Dissolution.............................................. 62
Size and Election of Board of Directors................................. 63
Special Meetings of Stockholders........................................ 63
Vote Required for Extraordinary Corporate Transactions.................. 63
Nominations of Directors................................................ 64
Amendment or Repeal of Certificate of Incorporation and Bylaws.......... 64
Liability of Directors.................................................. 64
Action By Written Consent............................................... 64
EXPERTS...................................................................... 65
LEGAL MATTERS................................................................ 65
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SUMMARY
The following is a brief summary of information contained elsewhere in this
Proxy Statement/Prospectus. This summary is not a complete statement of all
information, facts or materials relating to a stockholder's decision with
respect to the matters to be voted on at the Special Meeting. This summary
should only be read in conjunction with, and is qualified in its entirety by
reference to, the more detailed information contained in this Proxy
Statement/Prospectus and the Appendices hereto. Unless otherwise defined,
capitalized terms used in this summary have the respective meanings ascribed to
them elsewhere in this Proxy Statement/Prospectus. Stockholders are urged to
review carefully this Proxy Statement/Prospectus and the Appendices hereto in
their entirety.
General
The Merger........ This Proxy Statement/Prospectus relates to a proposal to
approve an Agreement and Plan of Merger dated as of July 29,
1997, as amended (the "Merger Agreement"), among SMC, Versar
and Sub, pursuant to which SMC will be merged into Sub. Upon
consummation of the Merger, each outstanding share of SMC
Common Stock (other than shares held by Versar or shares as
to which appraisal rights have been perfected and not
withdrawn) will be converted into the right to receive
.573584 of a share of Versar Common Stock and all
outstanding shares of SMC Preferred Stock (all of which are
held by Versar) will be cancelled. The Merger Agreement is
attached to this Proxy Statement/Prospectus as Appendix I,
and any summary contained herein of the terms of the Merger
Agreement is qualified in its entirety by reference to the
Merger Agreement.
The Parties
SMC............... SMC is a diversified international professional services
firm,providing clients in the private and public sectors
with expertise in four major areas as follows: (i)
management services, (ii) information system services, (iii)
environmental services and (iv) engineering, design and
construction services to the process industry. SMC filed for
bankruptcy on July 28, 1993 and emerged from bankruptcy on
July 10, 1996. During the pendency of the bankruptcy
proceedings, SMC's operating subsidiaries, which were not
subject to the bankruptcy proceedings, continued to operate
SMC's traditional business, although they did not receive
the financial support SMC had provided in the past.
Following emergence from bankruptcy, SMC has suffered
continuing problems in growing its business and returning to
profitability. Notwithstanding these difficulties, since
emerging from bankruptcy, SMC has continued to maintain its
traditional business and has developed a new consulting
operation in France and signed a strategic alliance with its
ex-Dutch subsidiary which continues to use the SMC
international tradename. The principal executive offices of
SMC are located at 721 Routes 202/206, Bridgewater, New
Jersey 08807.
Versar and Sub.... Versar, founded in 1969, is a nationally recognized
environmental and infrastructure engineering and consulting
firm. From a network of 17
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offices nationwide, Versar specializes in providing
environmental risk and infrastructure management services to
industry, government and commercial clients. Sub is a
wholly-owned subsidiary of Versar formed for the purpose of
engaging in the Merger. Sub has not engaged in any business
other than in connection with its formation and the Merger.
The principal executive offices of both Versar and Sub are
located at 6850 Versar Center, Springfield, Virginia 22151.
The Special Meeting
Time, Date and
Place........... The Special Meeting will be held at The Bridgewater Manor,
1251 Routes 202/206, Bridgewater, New Jersey 08807, on
October 22, 1997, commencing at 10:00 a.m. Eastern Day-
light Time.
Matters to be
Considered at the
Special Meeting.. At the Special Meeting, the stockholders of SMC will be asked
to consider and vote upon a proposal to approve the Merger
Agreement and the transactions contemplated thereby and such
other business as may properly come before the meeting and
any postponements or adjournments thereof.
Record Date....... Holders of record of shares of SMC Common Stock and SMC
Preferred Stock at the close of business on September 5,
1997 are entitled to notice of, and to vote at, the Special
Meeting.
Voting and Lock-up
Agreements....... Under the laws of the State of Delaware, the affirmative vote
of the holders of a majority of the shares of SMC Common
Stock and SMC Preferred Stock issued and outstanding on the
Record Date voting together as a class is required to
authorize the Merger Agreement. See "THE SMC SPECIAL MEETING
-- Voting and Record Date."
SMC is seeking approval of the Merger Agreement under the
laws of the State of Delaware. Under the laws of the State
of Delaware, absent either failure of SMC to comply with
procedural requirements of such law or its certificate of
incorporation or bylaws or the obtaining of a vote in favor
of the Merger Agreement by fraud or deceptive means (in
which case other remedies are available), the exclusive
remedy of any stockholder desiring to challenge the Merger
Agreement is the exercise of appraisal rights. A stockholder
may vote in favor of or against the Merger Agreement or
abstain from voting. An abstention counts as a "no" vote
with respect to approval of the Merger Agreement and does
not prohibit a stockholder who otherwise complies with the
applicable legal requirements from exercising appraisal
rights. SMC intends to use this exclusive remedy defense
against any challenges to the Merger Agreement or the
corporate action giving rise to it.
Versar holds approximately 53.5% of the issued and
outstanding SMC Common Stock and 100% of the issued and
outstanding shares of SMC
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Preferred Stock and intends to vote such stock in favor of
the Merger Agreement. Further, pursuant to lock-up
agreements entered into between Versar and certain
stockholders of SMC (who are also officers of SMC),
collectively owning an aggregate of 15% of the outstanding
shares of SMC Common Stock, such stockholders have agreed to
vote their respective shares of SMC Common Stock in favor of
the Merger Agreement. Accordingly, approval of the Merger by
the stockholders is assured. See "THE MERGER AGREEMENT --
Lock-up Agreements."
Effects of the
Merger........... Upon consummation of the Merger, SMC will merge with and into
Sub and the surviving corporation of such merger will be a
direct, wholly- owned subsidiary of Versar. Each share of
SMC Common Stock outstanding immediately prior to the
Effective Time (other than shares held by Versar or shares
as to which appraisal rights have been perfected and not
withdrawn) will be converted into the right to receive
.573584 of a share of Versar Common Stock. All outstanding
shares of SMC Preferred Stock will be cancelled. See "THE
MERGER -- Effects of the Merger."
Procedures for
Exchange of
Certificates..... Promptly after the Effective Time as defined herein, a letter
of transmittal and instructions for surrendering stock
certificates evidencing shares of SMC Common Stock will be
mailed to each holder of SMC Common Stock for use in
exchanging such holder's stock certificates for the Versar
Common Stock and cash in lieu of fractional shares (the
"Merger Consideration") to which each holder is entitled as
a result of the Merger. STOCKHOLDERS SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS. See "THE MERGER
-- Procedures for Exchange of Certificates."
Background and
Reasons for
the Merger....... Subsequent to SMC's emergence from bankruptcy, disputes arose
between SMC's principal stockholder and the management of SMC
with respect to, among other things, the management and
working capital requirements of the company. Versar purchased
the various stock ownership interests of such principal
stockholder and is consummating the Merger in connection with
such purchase to provide liquidity to the remaining outside
stockholders of SMC. The terms of the Merger were negotiated
in connection with Versar's purchase of the principal
stockholder's interest. As a result, many of the outstanding
difficulties of SMC arising since its emergence from
bankruptcy will be resolved in connection with the Merger.
See "THE MERGER -- Background and Reasons for the Merger."
AMEX Listing..... A subsequent listing application will be filed with the AMEX
to list the shares of Versar Common Stock to be issued to
the SMC stockholders upon consummation of the Merger.
Although no assurance can be given that the AMEX will accept
such shares of Versar Common Stock
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for listing, Versar anticipates that these shares will
qualify for listing. See "THE MERGER -- American Stock
Exchange Listing."
Recommendation of
the Board of
Directors....... The Board has unanimously approved the Merger Agreement and
recommends to SMC's stockholders that they vote FOR its
approval. The Board has determined that the Merger
represents an attractive opportunity for the stockholders to
exchange their illiquid shares of SMC Common Stock for
freely tradeable shares of a financially stable company for
fair value. See "THE MERGER -- The Board's Approval of the
Merger and Recommendation Regarding the Merger."
Interests of Certain
Persons in the
Merger.......... Certain members of management and the Board of Directors of
SMC have interests in the Merger that are in addition to or
different from the interests of stockholders of SMC
generally. Such interests relate to continued employment of
certain executive officers of SMC following the Merger, the
election of James A. Skidmore, Jr. to the Board of Directors
of Versar, and certain other SMC board members' affiliation
with Versar. Further, Versar has granted options to purchase
an aggregate of 87,750 shares of Versar Common Stock to
certain members of SMC management and other key employees in
connection with the Merger. See "THE MERGER -- Interests of
Certain Persons in the Merger."
Regulatory
Approvals....... No governmental approvals are required with respect to the
Merger, except for the filing of the Certificate of Merger
with the Delaware Secretary of State.
Accounting
Treatment....... Versar accounted for its acquisition of 53.5% of the issued
and outstanding SMC Common Stock and the outstanding SMC
Preferred Stock under the purchase method of accounting. The
Merger constitutes an acquisition of minority interests and
will also be accounted for under the purchase method of
accounting. As a result, the total consideration paid by
Versar for its interests in SMC will be allocated to the
assets and liabilities of SMC based on the fair value of the
assets and liabilities acquired.
Material Income Tax
Consequences.... It is currently contemplated that the Merger will qualify as
a tax-free reorganization. If the Merger does so qualify, no
gain or loss will be recognized for federal income tax
purposes by SMC, Versar or Sub as a result of the Merger. In
addition, no gain or loss will be recognized by holders of
SMC Common Stock as a result of the exchange of their SMC
Common Stock for Versar Common Stock, except for any cash
received for fractional shares. However, the Merger may not
qualify as a tax-free reorganization, depending upon the
level of appraisal rights perfected, the value of the Versar
Common Stock at the time of the Merger, and how many shares
of Versar Common Stock are sold by former SMC stockholders
after the Merger. If the Merger does not
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qualify for tax-free reorganization status, the SMC
stockholders will recognize a gain or loss upon the exchange
of their SMC Common Stock for Versar Common Stock.
Regardless of whether the Merger qualifies for tax-free
reorganization status, SMC stockholders who perfect
appraisal rights will recognize gain or loss upon exchange
of their SMC Common Stock for cash. See "THE MERGER --
General -- and -- Material Federal Income Tax Consequences
of the Merger."
Appraisal Rights.. All stockholders of SMC on the Record Date will be entitled
to exercise appraisal rights in accordance with Delaware law
with respect to the Merger. A stockholder wishing to
exercise appraisal rights must file a notice with SMC before
the taking of the vote on the approval of the Merger
Agreement, must not vote in favor of the Merger (i.e., vote
"no" or abstain from voting) and must comply with all other
provisions of Delaware law necessary for the perfection of
appraisal rights. See "THE MERGER -- Appraisal Rights."
The Merger Agreement
General ......... Upon the terms and subject to the conditions of the Merger
Agreement, SMC will merge with and into Sub effective as of
the Effective Time. Upon consummation of the Merger, SMC
will become a wholly-owned subsidiary of Versar and the
stockholders of SMC will receive the Merger Consideration
described herein. Notwithstanding the above, if Versar (in
its sole discretion) determines that the Merger may not
qualify for tax-free reorganization status, the Merger
Agreement provides that Versar has the option (in its sole
discretion, after consultation with SMC) to restructure the
Merger such that Sub will merge with and into SMC, with SMC
becoming the surviving corporation. See "THE MERGER --
General -- and -- Material Federal Income Tax Consequences
of the Merger."
Effective Time.... The effective time of the Merger (the "Effective Time") will
occur upon the filing of a Certificate of Merger with the
Secretary of State of Delaware and acceptance thereof by
such Secretary of State or such later date as may be
specified in such certificate. It is anticipated that such
certificate will be filed promptly after the Special
Meeting. See "THE MERGER AGREEMENT -- Closing; Effective
Time."
Merger
Consideration.. In consideration for the Merger, Versar will issue .573584
of a share of Versar Common Stock in exchange for each share
of SMC Common Stock (other than shares held by Versar and
shares as to which appraisal rights have been perfected and
not withdrawn). In lieu of issuing fractional shares of
Versar Common Stock, Versar will pay cash to any stockholder
otherwise entitled to receive a fractional share, in an
amount equal to the fair market value of such fractional
share. No consideration will be allocated to shares of SMC
Preferred Stock, all of which are held by Versar and will be
cancelled in connection with the Merger.
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Conditions to and
Termination of
the Merger..... The consummation of the Merger is subject to a number
of conditions and the Merger Agreement may be terminated
by either party upon the occurrence or failure to occur
of certain events. See "THE MERGER AGREEMENT -- Conditions
to Consummation of the Merger -- and -- Termination."
Market Value of Versar
and SMC Common Stock
Market for Versar
Common Stock... Versar Common Stock is traded on the AMEX under the symbol
"VSR." The following table sets forth the actual high and
low closing sale prices for the Versar Common Stock for the
periods indicated.
Versar Common Stock
-------------------
Period High Low
------ ------- -------
Fiscal Year Ending June 30, 1998
First Quarter (thru September 16,
1997)................................. $5.0625 $3.375
Fiscal Year Ended June 30, 1997
Fourth Quarter.......................... 4.000 3.1875
Third Quarter........................... 3.1875 3.000
Second Quarter.......................... 3.250 2.5625
First Quarter........................... 3.9375 2.5625
Fiscal Year Ended June 30, 1996
Fourth Quarter.......................... 4.688 2.625
Third Quarter........................... 3.563 2.750
Second Quarter.......................... 4.063 3.125
First Quarter........................... 4.813 3.000
Fiscal Year Ended June 30, 1995
Fourth Quarter.......................... 3.438 2.625
Third Quarter........................... 3.125 2.000
Second Quarter.......................... 4.000 2.563
First Quarter........................... 3.938 2.875
On May 2, 1997, the last trading day prior to the
announcement by Versar that it had purchased a controlling
interest in SMC and that it
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intended to propose the Merger, the closing sale price of
Versar Common Stock as reported on the AMEX was $3.5625 per
share. On September 16, 1997, the closing sale price of
Versar Common Stock as reported on the AMEX was $5.0625 per
share. The number of recordholders of Versar Common Stock as
of June 30, 1997 was 748.
Market for SMC
Common Stock... Although SMC is a reporting company under the Exchange Act
and has been publicly traded in the past on the AMEX, SMC
Common Stock now trades on the over-the-counter bulletin
board. There is no established public trading market for SMC
Common Stock and trades in the stock are sporadic,
constituting on average fewer than one trade per month. The
number of record holders of SMC Common Stock as of August
31, 1997 was 655.
Dividends......... No cash dividends have been paid by Versar since it began
public trading of its stock in 1986. The Board of Directors
of Versar intends to retain any future earnings for use in
Versar's business and does not anticipate paying cash
dividends in the foreseeable future. Under the terms of
Versar's revolving line of credit, approval will be required
from Versar's primary bank for the payment of any dividends.
During the pendency of SMC's bankruptcy and since emerging
from bankruptcy, SMC has paid no dividends.
Risk Factors...... Ownership of Versar Common Stock involves certain risks. In
considering how to vote with respect to the Merger
Agreement, holders of SMC Common Stock should carefully
examine the "Risk Factors" section of this Proxy
Statement/Prospectus, as well as other pertinent information
set forth in this Proxy Statement/Prospectus. See "RISK
FACTORS."
Comparative Per Share Data
Set forth below, are earnings and book value per share data of Versar on an
historical and pro forma per share basis and of SMC on an historical and
equivalent pro forma per share basis. The Versar pro forma combined data was
derived by combining financial information of Versar and SMC after giving effect
to the Merger under the purchase method of accounting. The per share equivalent
pro forma data for SMC was calculated by multiplying Versar's pro forma amounts
by the exchange ratio stated in "THE MERGER--Effects of the Merger."
The information set forth below should be read in conjunction with the
respective historical audited and unaudited financial statements of Versar and
SMC and the respective notes thereto and with the unaudited pro forma financial
information and the related notes thereto, which appear elsewhere in this Proxy
Statement/Prospectus.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the future combined results of operations or
financial position.
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<PAGE>
Fiscal Year Nine Months
Ended Ended
June 30, 1996 March 31, 1997
------------- --------------
Earnings (Loss) per share:
Versar
Historical............................. $ 0.19 $ 0.17
Pro Forma.............................. (0.11) 0.05
SMC
Historical*............................ (0.58)** 0.30**
Book value per share:
Versar
Historical............................. 1.55 1.77
Pro Forma.............................. 1.75 1.94
SMC***
Historical*............................ -- $ (0.04)
* SMC's historical earnings per share and book value per share for the
six-month period ended June 30, 1997 was $0.07 and $0.03, respectively.
** SMC Historical amounts have been conformed to Versar's year end and are
calculated based on the shares outstanding subsequent to the Reorganization
from Bankruptcy.
*** SMC's historical book value per share is neither comparable nor meaningful
at June 1996 due to the "fresh-start" accounting adjustments adopted by SMC
in July 1996.
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<PAGE>
RISK FACTORS
Integration of Versar and SMC
There can be no assurance that Versar will be able to integrate
successfully the operations, facilities and management of SMC or realize any
benefits of the Merger. Additionally, there can be no assurance that the Merger
will not have an adverse effect on ongoing relationships with customers or
suppliers of SMC. Failure to successfully integrate the businesses of SMC with
Versar could have a material adverse effect on Versar's results of operations
and financial condition.
Dependence on Government Contracts
Contracts with agencies of the United States government and various state
and local governments have historically represented approximately two/thirds of
Versar's revenue. Therefore, Versar is materially dependent on various contracts
with such governmental agencies. Companies engaged in government contracting are
subject to certain unique business risks. Among these risks are dependence on
congressional appropriations and administrative allotment of funds, and changing
policies and regulations. Because the government contracts held by Versar are
usually awarded for relatively short periods of time and are subject to renewal
options in favor of the government, or, if of longer term, are subject to the
award of task orders, the stability and continuity of that portion of Versar's
business depends on the periodic exercise by the government of contract renewal
options and the awarding of task orders. Further, following the award of a
contract or task order, completion of the work is dependent on congressional
appropriations of the funds necessary to complete the task. Further, the federal
government contracting laws provide that the United States government is to do
business only with responsible contractors. In this regard, federal agencies
have the authority under certain circumstances to suspend or debar a contractor
from further government contracting for a certain period of time in order to
protect the government's interest. Neither Versar nor its subsidiaries have been
suspended or debarred from government contracting, nor has it ever been the
subject of any proceeding for such purpose.
Regulatory Enforcement
Versar's business is materially dependent on the continued enforcement by
state and federal governments of various environmental regulations. From time to
time, depending on political pressures, state and federal agencies relax
environmental clean-up standards to promote economic growth and to discourage
industrial businesses from relocating. Any relaxation in clean-up standards
impacts Versar's ability to secure additional contracting work with such
agencies. Further, in a period of relaxed environmental standards, private
industry may be less willing to allocate funds to consulting services designed
to prevent environmental problems.
Competition
The environmental consulting industry is highly competitive. Versar
competes with many companies, some of which have greater resources than Versar
and no assurance can be given that such competitors will not substantially
increase the resources devoted to their environmental consulting business in a
manner competitive with the services provided by Versar. In addition, Versar
faces competition from the growing use by its clients of in-house environmental
staff.
Growth Potential of Environmental Consulting Industry
The environmental consulting industry, while stable, has not exhibited
growth over the last few years. Unless government regulations are strengthened
and more stringently enforced with respect to environmental clean-up, Versar
does not expect the industry to grow in the foreseeable future. Given the strong
competition within this industry, this lack of growth may impact Versar's
ability to secure additional contracts in the future.
Dependence on Key Personnel
Versar's business is managed by a small number of management and operating
personnel, the loss of certain of whom could have a material adverse effect on
Versar. Versar believes that its ability to manage it planned growth
successfully will depend in large part on its continued ability to attract and
retain highly skilled and qualified personnel.
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<PAGE>
Versar Acquisition Growth Strategy, Intergration of Acquired Companies and
Impact of Industry Consolidation on Growth Strategy
A significant component of Versar's growth strategy is the growth of
Versar through acquisitions, such as the acquisition of SMC described herein.
Versar believes that its current financial resources and the availability of
Versar's Common Stock and the authorized, but unissued preferred stock of Versar
will enable it to consider additional acquisitions, some of which may be larger
than the currently proposed acquisition. Although additional acquisitions may
enhance the opportunity of Versar to increase net income over time, such
acquisitions will present greater administrative burdens, increased exposure to
uncertainties inherent in acquisitions and marketing new services, the financial
risks of additional operating costs and potential additional interest costs.
Versar may also need to obtain additional equity or debt financing in order to
complete such acquisitions. There can be no assurance that Versar will be able
to conclude any acquisitions in the future on terms favorable to it or that,
once consummated, such acquisitions will be advantageous to Versar.
Versar's future success is dependent upon its ability to effectively
integrate acquired businesses into Versar, including its ability to implement
potentially available marketing and costs saving opportunities. The financial
performance of Versar is and will be subject to various risks associated with
the acquisition of businesses, if additional acquisitions are completed,
including the financial impact of expenses and potential disruptions associated
with the integration of businesses. In addition, the diversion of senior
management's attention during the integration process could have an adverse
effect on Versar's operations. There can be no assurance that future
acquisitions will not have an adverse effect upon Versar's operating results,
particularly during the periods in which the operations of acquired businesses
are being integrated into Versar's operations.
The environmental consulting industry is currently experiencing a trend of
consolidation. As a result, Versar will face increasing competition in bidding
for additional acquisition targets, including competition with companies with
larger resources to complete such acquisitions than Versar. As a result,
Versar's strategy of growth through acquisitions may be more difficult to
achieve as consolidation continues. As a result, the diversion of senior
management's attention to Versar's acquisition strategy may increase as
competition for additional acquisitions increases. There can be no assurance
that Versar will be successful in future bids for acquisition targets.
Financial Constraints
In recent years Versar has reduced its outstanding debt and currently has
additional borrowing capacity. However, many of the companies with which Versar
competes for customers and for acquisition opportunities are larger and have
greater resources than Versar, particularly greater amounts of cash and greater
borrowing capacity. Versar's inability to access additional capital could
adversely impact its growth strategy, its ability to meet customer needs and its
ability to complete additional acquisitions.
Weather Conditions
Versar's ability to complete contracts in a timely, cost effective manner
is impacted by adverse weather conditions, particularly in the northern portion
of the country during the winter. As a result, Versar's revenue and earnings may
vary considerably from quarter to quarter.
Potential Federal Income Tax Consequences
It is currently contemplated that the Merger will qualify as a tax-free
reorganization. However, the Merger may not qualify as a tax-free
reorganization, depending upon the level of appraisal rights perfected, the
value of the Versar Common Stock at the time of the Merger, and how many shares
of Versar Common Stock are sold by former SMC stockholders after the Merger. If
the Merger does not qualify for tax-free reorganization status, the SMC
stockholders will recognize a gain or loss upon the exchange of their SMC Common
Stock for Versar Common Stock for federal income tax purposes. Further, in such
situation, if the Merger is not restructured as set forth under "THE MERGER --
General and -- Material Federal Income Tax Consequences of the Merger," the
transaction would be taxable to the Surviving Corporation. Further, regardless
of whether the Merger qualifies for tax-free reorganization status, SMC
stockholders who perfect appraisal rights will recognize gain or loss for
federal income tax purposes upon exchange of their SMC Common Stock for cash.
THE SMC SPECIAL MEETING
Time, Date and Place
This Proxy Statement/Prospectus is being furnished to the holders of SMC
Common Stock and SMC Preferred Stock as of the Record Date in connection with
the solicitation of proxies by the SMC Board for use at the Special Meeting to
be held on October 22, 1997 at 10:00 a.m. Eastern Daylight Time, at and at any
postponements or adjournments thereof.
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<PAGE>
Matters to be Considered at the Special Meeting
At the Special Meeting, the holders of SMC Common Stock and SMC Preferred
Stock will be asked to consider and vote upon (i) the Merger Agreement, and the
transactions contemplated thereby and (ii) such other business as may properly
come before the Special Meeting and any postponements or adjournments thereof.
Voting and Record Date
The Board has fixed September 5, 1997 (the "Record Date"), as the Record
Date for determining holders of SMC Common Stock and SMC Preferred Stock of
record entitled to receive notice of and to vote at the Special Meeting.
Accordingly, only holders of record of SMC Common Stock and SMC Preferred Stock
who are holders of such securities as of the Record Date will be entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there were
1,999,604 shares of SMC Common Stock outstanding and entitled to vote and
1,750,000 shares of SMC Preferred Stock outstanding and entitled to vote.
Each holder of record of SMC Common Stock on the Record Date is entitled
to cast one vote per share, exercisable in person or by a properly executed
proxy, with respect to the approval of the Merger Agreement and any other matter
to be submitted to a vote of stockholders at the Special Meeting. The SMC
Preferred Stock is entitled as a class to a vote with respect to the Merger
Agreement equal to .01% of the aggregate vote to which all issued and
outstanding shares of SMC Common Stock is entitled, exercisable in person or by
properly executed proxy. As a result, Versar as the holder of the SMC Preferred
Stock, is entitled to approximately .00011 votes per share of SMC Preferred
Stock, or approximately 200 votes in the aggregate.
The presence at the Special Meeting, in person or by a proxy, of the
holders of a majority of the shares of SMC Common Stock and a majority of the
shares of SMC Preferred Stock outstanding on the Record Date will constitute a
quorum at the Special Meeting. Votes cast by proxy or in person at the Special
Meeting will be counted by the persons appointed by SMC to act as the inspectors
for the meeting. Shares represented by proxies that reflect abstentions or
include "broker non-votes" will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. Under the
laws of the State of Delaware, the affirmative vote of a majority of the shares
of SMC Common Stock and SMC Preferred Stock issued and outstanding on the Record
Date voting together as a class is required to authorize the Merger. Abstentions
and "broker non-votes" will be included in the calculation for purposes of
determining whether the Merger Agreement has been approved and will be treated
as "no" votes.
The Board has unanimously approved the Merger Agreement and recommends a
vote FOR the approval of the Merger Agreement. SMC is seeking stockholder
approval of the Merger Agreement. Certain stockholders of SMC owning in the
aggregate 15% of the outstanding SMC Common Stock have agreed to vote in favor
of the Merger Agreement. Further, Versar owns approximately 53.5% of the
outstanding SMC Common Stock and 100% of the outstanding SMC Preferred Stock and
intends to vote such stock in favor of the Merger Agreement. Therefore, approval
of the Merger Agreement by the stockholders of SMC is assured. See "THE MERGER
AGREEMENT -- Lock-up Agreements" and "PRINCIPAL STOCKHOLDERS OF SMC."
Proxies
All shares of SMC Common Stock and SMC Preferred Stock which are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not duly and timely revoked, will be voted at
the Special Meeting in accordance with the choices marked thereon by the
stockholders. If no choice is marked, the shares will be voted FOR approval of
the Merger Agreement.
At the time this Proxy Statement/Prospectus was filed with the Commission,
the Board was not aware of any other matters not referred to herein that would
be presented for action at the Special Meeting. If any other matters properly
come before the Special Meeting, the persons designated in the proxy will vote
the shares represented thereby in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of SMC at or before the taking of the vote at the Special
Meeting a written notice of revocation bearing a later date than the proxy, (ii)
duly executing a later-dated proxy relating to the same shares and delivering it
to the Secretary of SMC before the taking of the vote at the Special Meeting or
(iii) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute a revocation of a
proxy). Any proxy revoked in writing should be
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addressed to: Marion G. Hilferty, Secretary, Science Management Corporation, 721
Routes 202/206, Bridgewater, New Jersey 08807.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/Prospectus, will be borne by SMC and Versar
jointly. In addition to solicitation by mail, arrangements will be made with
brokers and other custodians, nominees and fiduciaries to forward proxy
solicitation materials to beneficial owners of shares of SMC Common Stock held
of record by such brokers, custodians, nominees and fiduciaries, and SMC may
reimburse such brokers, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith. Directors and employees of
SMC may also solicit proxies in person or by telephone without receiving any
compensation in addition to their regular compensation as directors and
employees.
THE MERGER
General
The following information sets forth the material terms of the Merger and
is qualified in its entirety by reference to more detailed information contained
elsewhere in this Proxy Statement/Prospectus, including the Appendices hereto. A
copy of the Merger Agreement is included as Appendix I and is incorporated
herein by reference. The stockholders of SMC are urged to read the Merger
Agreement carefully.
Effects of the Merger
At the Effective Time, SMC will be merged with and into Sub, and the
separate existence of SMC will cease. Sub will be the surviving corporation
("Surviving Corporation") in the Merger and will continue to exist as a
wholly-owned subsidiary of Versar. At the Effective Time, each share of SMC
Common Stock then issued and outstanding (other than shares held by Versar and
shares as to which the holder perfects appraisal rights in accordance with
Delaware law) will be converted into the right to receive .573584 of a share of
Versar Common Stock. As of the Record Date there were 1,999,604 shares of SMC
Common Stock outstanding of which 1,070,000 shares were held by Versar. See "--
Background and Reasons for the Merger." Upon consummation of the Merger, holders
of SMC Common Stock, excluding Versar, would be entitled to receive, in the
aggregate, approximately 533,433 shares of Versar Common Stock. At the Effective
Time, each share of SMC Preferred Stock will be cancelled. As of the Record Date
there were 1,750,000 shares of SMC Preferred Stock outstanding.
Each certificate representing SMC Common Stock prior to the Merger (other
than certificates held by Versar and certificates representing shares as to
which the holder has perfected appraisal rights) will thereafter represent only
the right to receive the Merger Consideration. For a description of the
procedures for exchanging certificates representing SMC Common Stock, see
"--Procedures for Exchange of Certificates." Each share of SMC Common Stock and
SMC Preferred Stock held by Versar prior to the Merger will be cancelled and no
payment will be made with respect thereto in connection with the Merger.
At the Effective Time, each issued and outstanding share of common stock
of Sub will constitute one share of common stock of the Surviving Corporation,
all of which will be held by Versar.
Pursuant to the Merger, at the Effective Time, all the properties, rights,
privileges, powers and franchises of SMC and Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of SMC and Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
Procedures for Exchange of Certificates
As of the Effective Time, a bank or trust company designated by Versar
shall act as exchange agent (the "Exchange Agent") in effecting the exchange for
the Merger Consideration of certificates that, immediately prior to the
Effective Time, represented shares of SMC Common Stock entitled to payment
pursuant to the Merger Agreement.
Promptly after the Effective Time, the Exchange Agent will mail to each
holder of record (other than Versar and holders of SMC Common Stock who have
properly demanded and perfected appraisal rights under the DGCL, as defined
herein) of a certificate which immediately prior to the Effective Time
represented outstanding Common Stock, a notice advising the holder of the
effectiveness of the Merger accompanied by a letter of transmittal in customary
form (the "Letter of Transmittal"). The Letter of Transmittal will contain
instructions with respect to the surrender of certificates representing SMC
Common Stock for Merger Consideration in connection with the
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Merger and will specify that delivery will be effected, and risk of loss and
title to such certificates will pass, only upon delivery of the certificates to
the Exchange Agent.
Upon surrender to the Exchange Agent of certificates representing SMC
Common Stock in accordance with the instructions contained in the Letter of
Transmittal, the holder thereof will be entitled to receive in exchange therefor
shares of Versar Common Stock and cash in lieu of fractional shares to which
such holder is entitled pursuant to the Merger Agreement. The stock certificates
so surrendered will forthwith be cancelled. In the event of a transfer of
ownership of SMC Common Stock which is not registered in the stock transfer
records of SMC, it shall be a condition to such exchange that a certificate
representing the proper number of shares of SMC Common Stock be presented by the
transferee to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered, each certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration upon surrender of the certificate. SMC
stockholders should not submit their certificates evidencing shares of SMC
Common Stock for exchange unless and until the transmittal instructions and a
Letter of Transmittal are received or obtained from the Exchange Agent.
Any SMC stockholder who has lost or misplaced a certificate representing
shares of SMC Common Stock must deliver to the Exchange Agent an affidavit of
that fact and, if required by Versar, post a bond in such reasonable amount as
Versar may direct as indemnity against any claim that may be made against SMC or
Versar with respect to such certificate, in order to receive the Merger
Consideration to which such holder is entitled.
Any portion of the aggregate Merger Consideration remaining undistributed
six months after the Effective Time will be returned to the Surviving
Corporation and any holders of theretofore unsurrendered SMC Common Stock will
thereafter be able to look only to the Surviving Corporation for any portion of
such Merger Consideration to which they are entitled. Neither Versar, Sub nor
SMC will be liable to any holder of SMC Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
Background and Reasons for the Merger
The terms of the Merger Agreement are the result of arms-length
negotiations between representatives of Versar and SMC. The following is a brief
discussion of the background of these negotiations, the Merger and related
transactions.
SMC has traditionally operated through a series of subsidiaries offering
management services and systems, environmental consulting and engineering
services to both the public and private sectors. During the 1970's and 1980's,
SMC grew from a relatively small company to a large, multi-national company with
several subsidiaries and aggregate annual sales of approximately $90 million. By
the early 1990's, SMC began to suffer financially from a soft economy, expensive
lease obligations undertaken in the 1980's, large overhead costs and personnel
defections in two of its subsidiaries. In the early 1990's, discretionary
spending for professional services in the United States and internationally
slowed dramatically, and, as a result, SMC's business suffered a decline in
revenue. This loss of revenue created a cash flow problem, particularly because
SMC was obligated to continue fulfilling office lease obligations that could not
be renegotiated. By 1993, although SMC had attempted to survive the difficult
market conditions by selling several of its subsidiaries and taking other
corporate action, the Board of Directors of SMC determined that the financial
condition of SMC could best be enhanced by seeking relief through the bankruptcy
process. Consequently, SMC, but not its operating subsidiaries, in cooperation
and agreement with its bank, filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of New Jersey in July 1993.
At the time the bankruptcy petition was filed, Constellation Bank N.A.
(the "Bank") held a first priority lien on the stock of SMC's domestic
subsidiaries and was owed approximately $5,150,000. In addition, Donald Gant,
who was owed approximately $2,000,000, held a first priority lien on the stock
of SMC's foreign subsidiaries except for the United Kingdom subsidiary.
Throughout 1993 and 1994, SMC continued to pursue a reorganization program
intended to reduce losses, strengthen and refocus its business and generate
working capital. SMC made substantial progress towards cost containment in a
number of areas, and began to realize the benefits of this cost reduction
program in the results of operations during 1994. Notwithstanding such progress,
in 1995 and 1996, SMC operations were adversely affected by the lack of
liquidity and working capital. SMC's cash position dramatically declined during
this period. During the pendency of the bankruptcy proceedings, no new capital
was invested in SMC, nor did it have any bank financing.
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On June 28, 1994, SMC and its domestic subsidiaries executed an agreement
(the "Agreement") with the Bank and Somerset Kensington Capital Corp.
("Somerset"), pursuant to which the Bank's claim of approximately $5,400,000 was
assigned to Somerset for the sum of $900,000. A dispute then arose between SMC
and Somerset concerning their respective rights under the Agreement. Ultimately,
Imperial Capital Worldwide Partners, L.P. ("Imperial") took an assignment of the
Bank's claim from Somerset for the sum of approximately $1,035,000. Prior to
SMC's motion to the Bankruptcy Court for approval of this assignment, Imperial
had assured SMC management that it would become a co-proponent of a plan of
reorganization for SMC and that it would contribute substantial additional
working capital to SMC.
During 1995, SMC and Imperial contentiously dealt with several disputes
arising from the written agreement between SMC and Imperial regarding the
reorganization plan and the introduction of working capital to SMC. On January
25, 1996, after months of protracted negotiations, SMC and Imperial, as
co-proponents, filed the Fifth Modified Plan of Reorganization (the "Bankruptcy
Plan"), which was confirmed by the U.S. Bankruptcy Court in a hearing held on
April 17, 1996. The Bankruptcy Plan became effective and SMC emerged from
bankruptcy protection on July 10, 1996 (the "Effective Date").
Pursuant to the Bankruptcy Plan, SMC was recapitalized as follows. SMC's
old common stock (3,300,000 shares outstanding) and all other equity interests
related thereto were canceled, annulled and extinguished. A total of 10,000,000
shares of new common stock were authorized, and 1,999,604 of such shares were
issued and distributed. SMC also issued 1,750,000 shares of new preferred stock,
redeemable subject to restrictions specified in the Bankruptcy Plan.
On the Effective Date, in satisfaction of Imperial's claim as successor to
the Bank and Somerset, Imperial received approximately 53.5% of SMC's new common
stock, 100% of SMC's new preferred stock and an option to purchase an additional
17.5% of SMC's new common stock from all of the other holders of SMC's new
common stock on a pro rata basis. The unsecured creditors received 20% of SMC's
new common stock plus cash in the amount of $570,000, to be paid over a
three-year period on each anniversary of the Effective Date. The remaining
shares of SMC's new common stock were issued to certain management stockholders
(17%), the former equity holders of SMC (7.5%) and Charles Gordon Holladay (2%).
On the Effective Date, and without the knowledge of the Bankruptcy Court
or SMC management, Imperial sold to Sorol, a New York partnership ("Sorol"), for
the sum of $500,000 a portion of the equity interests in SMC issued to Imperial,
consisting of 20% of SMC's new common stock, 37.7% of SMC's new preferred stock
and a portion of Imperial's option giving Sorol the right to purchase an
additional 6.6% of SMC's new common stock. The Stock Purchase Agreement between
Imperial and Sorol provided, among other things, that Imperial had the right to
repurchase all of the equity interests it had sold to Sorol for the sum of
$760,000 at any time during the 18 month period following the Effective Date
(the "Sorol Repurchase Option").
At a foreclosure auction conducted pursuant to the Bankruptcy Plan, Mr.
Gant purchased SMC's interest in its foreign subsidiaries except for the United
Kingdom subsidiary in exchange for his secured claim.
The Bankruptcy Plan provided, among other things, that administrative
claims would be paid up to an aggregate cap of $1,016,000. SMC paid $466,000 of
administrative claims on or about the Effective Date substantially using funds
provided by Imperial in accordance with the requirements of the Bankruptcy Plan.
The Bankruptcy Plan required the $550,000 balance of the administrative claims
to be paid in three installments, 12 months, 18 months and 24 months after the
Effective Date.
The Bankruptcy Plan specified who would be the officers of SMC as of the
Effective Date. The officers specified included James A. Skidmore, Jr., who has
been President and Chief Executive Officer of SMC since 1972 and Chairman of the
Board since 1975, as President and Chief Executive Officer. The Bankruptcy Plan
also addressed the composition of the Board of Directors of SMC, giving Imperial
the right to designate three members and providing that James A. Skidmore, Jr.
would be Chairman of the Board and that he would have the right to designate an
additional member of the Board. Mr. Skidmore's designee was Aaron Locker.
From inception, the Board appointees of Imperial, Harvey Borsuk, Jonathan
Borsuk and Michelle Borsuk Dana (collectively, the "Borsuks"), and the other
directors and management of SMC disagreed as to the management of SMC and the
requirements of the Bankruptcy Plan. One of the major disagreements was
regarding the subject of working capital. The Bankruptcy Plan did not provide
for any injection of working capital by Imperial or any other person; it did,
however, permit SMC to seek asset-based debt financing for purposes of working
capital. After the Effective Date, SMC continued to suffer financial difficulty,
primarily from the lack of working capital, as the Board of Directors of SMC
(controlled by Imperial) continually rejected management's working capital
proposals.
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The parties also disagreed regarding various payments that the Borsuks
caused or attempted to cause SMC to make to them. At a time when SMC had barely
enough funds to meet payroll, had difficulties meeting its responsibilities for
payables and could not afford to pay for refundable bid bonds for new projects,
and notwithstanding the fact that none of the Borsuks were experienced in the
business of SMC, the Borsuks voted to compensate Harvey Borsuk and Michelle
Borsuk Dana at the rate of $10,000 per year plus $1,000 per meeting for their
services as directors and to elect Jonathan Borsuk Vice Chairman and to
compensate him at the rate of $10,000 per month, plus benefits and expenses. In
addition, Jonathan Borsuk attempted to travel extensively at SMC's expense and
demanded an office, a secretary and company-provided transportation.
These disagreements led to a deadlock between management and the Board and
the inability of SMC to implement a viable business and financing plan. In
connection with these and related disagreements, including the involuntary
termination of Mr. Skidmore as President and Chief Executive Officer of SMC in
violation of his Employment Agreement, the following two lawsuits were
instituted against the Borsuks and Imperial: James A. Skidmore, Jr. et al vs.
Imperial Capital et al., pending before the Superior Court of New Jersey,
Monmouth County, Chancery Division (the "Superior Court Action") and Ravin
Sarasohn et al. vs. Imperial Capital et al., pending before the United States
Bankruptcy Court, New Jersey Division (the "Ravin Sarasohn Action"). See,
"BUSINESS OF SMC - Legal Proceedings" for a discussion of these lawsuits.
As a result of the Ravin Sarasohn Action, the Bankruptcy Court enjoined
the Borsuks from paying themselves any compensation. As a result of the Superior
Court Action, Mr. Skidmore was restored to his position as President and Chief
Executive Officer of SMC and both Imperial and the Borsuks were restrained from
interfering with his exercise of the corporate duties associated with his
position, including his ability to oversee the day-to-day operations of SMC, and
the Borsuks agreed to negotiate in good faith with Mr. Skidmore to resolve their
differences or to effectuate a buyout by one party of the other.
On or about December 4, 1996, Mr. Skidmore and his counsel, other
representatives of SMC and Harvey and Jonathan Borsuk and their counsel met to
discuss, among other things, whether or not other outside investors could be
brought in to purchase the Borsuks' equity interests in SMC. During that meeting
the Borsuks stated that they would require a minimum of $1,250,000 to $1,500,000
and that they would negotiate in good faith if Mr. Skidmore could produce such a
potential investor.
During the ensuing period, from December 1996 through March 1997, SMC
management worked vigorously at contacting potential investors. Very few of the
potential investors contacted by SMC were interested. Management believes that
this was partially due to the conflict between Imperial and management,
partially due to reluctance to invest in a company that was subject to a plan of
reorganization under the U.S. Bankruptcy Code and also partially due to the fact
that SMC's working capital difficulties over an extended period of time had left
it in a position where an immediate infusion of working capital was required in
addition to the purchase of the Borsuks' position. The ability to attract
investors was further complicated by the fact that the size of the investment
that SMC was pursuing was, at least initially, less than $2,000,000. SMC found
that most of the traditional financing organizations appear to prefer larger
investments and had little or no interest in pursuing an investment of this
size. Another complicating factor was the fact that SMC's business is more
diversified than that of most other professional services businesses, resulting
in most potential investors from within the industry still being unfamiliar with
significant parts of SMC's business.
By the end of February 1997, serious interest had developed from two
sources. One was Versar, one of the directors of which contacted Mr. Skidmore
directly; they had known each other through business dealings over a period of
time. The other (the "Other Interested Party") was introduced through a New York
investment banking firm that was familiar with the Borsuks. There were numerous
meetings between SMC management and representatives of each of the two
interested parties, as well as constant telephone conversations. During the
course of these discussions and meetings both interested parties requested
financial statements as well as various reports and forecasts, which were
furnished by SMC. On a daily basis Mr. Skidmore and members of his staff
answered questions from both organizations. In February and March 1997, the
Other Interested Party visited SMC's headquarters and the offices of most of its
domestic and international subsidiaries.
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On or about April 1, 1997, the Chief Executive Officer of the Other
Interested Party informed Mr. Skidmore that they had reached a tentative price
with the Borsuks to purchase their entire equity interest. This price was
$2,790,000. Notwithstanding the Borsuks' initial statements to management that
they required $1,250,000 to $1,500,000, their demands had increased several
times during the process. Although the Other Interested Party was the first to
reach agreement with the Borsuks, management had serious concerns about the
Other Interested Party because they had indicated on several occasions that they
would not be able to make a written commitment to abide by the terms of the
Bankruptcy Plan (including funding SMC to the extent necessary for it to do so)
and because they were unwilling to make any specific commitments regarding the
timing and amount of the funding of SMC's working capital requirements.
Management was concerned that they would not fund these requirements promptly.
Management was concerned about meeting SMC's obligations under the Bankruptcy
Plan in part because of the potential that its creditors could force the Company
back into bankruptcy and perhaps to be liquidated if these obligations were not
met. Imperial could not proceed without the support of Mr. Skidmore because of
the need for a resolution of the two legal proceedings referred to above before
a buyer would be willing to enter into a transaction with Imperial.
Versar was not at that time as serious a suitor because it had only
expressed a willingness to pay up to $1,500,000 for the Borsuks' equity
interests. The day after he was informed of the Other Interested Party's price
agreement with Imperial, Mr. Skidmore informed Versar of this price. Versar
reacted promptly. In response to Mr. Skidmore's request, Versar informed Mr.
Skidmore that it would send a detailed term sheet in a short period of time
outlining what it was willing to do.
The next day, SMC received a written proposed term sheet from the general
counsel of Versar. The term sheet provided that Versar would pay the price that
Imperial had negotiated with the Other Interested Party, would follow all of the
terms of the Bankruptcy Plan and would provide SMC with adequate working capital
to pursue a business plan to be agreed upon and to meet all of SMC's obligations
under the Bankruptcy Plan. It also provided that in addition to purchasing
Imperial's equity interests, Versar would purchase the SMC shares held by SMC
management for a price of $1.90 per share payable in Versar Common Stock valued
at $4.00 per share, and would purchase the SMC shares held by all other
stockholders of SMC in exchange for convertible preferred stock of Versar with
an annual dividend of 3%. The number of shares and conversion rate of the
preferred stock were to be fixed to reflect a $6.00 value per share for the
Versar Common Stock.
The term sheet further provided that the existing Employment Agreements of
Mr. Skidmore and of Frank S. Rathgeber, SMC's Executive Vice President, and
Marion G. Hilferty, SMC's Vice President - Administration and Secretary, would
remain in place. Mr. Skidmore's Employment Agreement is for a three-year term
which commenced on the Effective Date at an annual salary of not less than
$200,000, plus additional annual compensation equal to 4% of SMC's income before
income taxes. The term sheet provided that Mr. Skidmore would be elected to
Versar's Board of Directors as Vice Chairman. The term sheet also provided that
SMC management and other key employees of SMC would be granted options to
purchase an aggregate of up to 100,000 shares of Versar common stock at a price
equal to their fair market value on the date of grant. Pursuant to the term
sheet, options to purchase in the aggregate 87,750 shares of Versar Common Stock
were granted to certain SMC employees and members of SMC management effective
May 2, 1997, at a price of $3.569 per share, 25,000 of which were granted to Mr.
Skidmore.
Several days later, a full "due diligence team" arrived at SMC headed up
by the general counsel of Versar, to conduct a complete review of SMC's business
in connection with the proposed transaction. The next week, Versar visited the
offices of each of SMC's domestic subsidiaries.
Management proceeded to negotiate with Versar regarding the purchase of
management's stock and the stock held by the other stockholders of SMC. The
original discussions and documentation provided for the purchase of management's
aggregate holdings of 17% of SMC's Common Stock contemporaneously with the
purchase of Imperial's equity interests in exchange for common stock of Versar,
and for the purchase of the SMC Common Stock held by the remaining SMC
stockholders in a subsequent merger transaction in exchange for convertible
preferred stock of Versar.
The original discussions and documentation reflected a price of $1.90 per
share of SMC common stock for management's stock. Management viewed this as a
favorable price because it was equal to the price that Sorol had negotiated with
Imperial as the price Imperial would have to pay to repurchase Sorol's equity
interests in SMC pursuant to the Sorol Repurchase Option, allocating the entire
price to the SMC Common Stock held by Sorol and nothing to the SMC Preferred
Stock held by Sorol or to its options to purchase additional shares of SMC
common stock. The Sorol price represented a 52% premium over the price that
Sorol paid to Imperial for these equity interests. The $1.90 was also obviously
favorable compared to the $.125 at which the SMC Common Stock was generally
quoted in the market since January 1997. Management expressed concern, however,
about the reasonableness of the purchase price being offered to the
non-management stockholders in relation to the price being offered to
management. Management was anxious to have all stockholders treated equally.
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For purposes of determining how many shares of Versar Common Stock would
be received for each share of SMC Common Stock, Versar initially proposed that
the Versar Common Stock be valued at $4.00 per share, resulting in an exchange
ratio of .475 shares of Versar Common Stock to each share of SMC Common Stock
($1.90/$4.00). After negotiation, it was agreed that the Versar Common Stock
would be valued based on its average closing price over the five business days
preceding the closing of the transaction between Versar and Imperial. This
average turned out to be $3.3125 per share, resulting in an exchange ratio of
.573584 shares of Versar Common Stock to each share of SMC Common Stock
($1.90/$3.3125).
During this period the conversations continued with the Other Interested
Party. Several of their representatives met again with various representatives
of SMC. After that meeting, they were asked to respond regarding the amount and
timing of their funding of working capital requirements and to commit to abide
by all terms of the Bankruptcy Plan. In a letter dated April 16, 1997, the Other
Interested Party stated that it would provide up to $1 million of working
capital on a mutually agreed schedule by purchasing common stock from SMC at
$2.00 per share. The letter also stated that the Other Interested Party, if it
became majority stockholder of SMC, would not interfere with or prevent SMC's
compliance with the terms of the Bankruptcy Plan, provided that the Other
Interested Party would be free to exercise its rights as a stockholder of SMC as
it, in its sole discretion, determined.
In the meantime SMC had been late with several payrolls for certain of the
SMC subsidiaries. The missed payrolls particularly aggravated the situation at
the two data centers that SMC operates for IBM, since under SMC's contract with
IBM the employees at these sites were to be paid on time. Several senior members
of management had long intervals when they were not paid at all. Mr. Skidmore
was not paid for five months and others went without pay for approximately three
months. In addition there were numerous employee expenses that were not being
reimbursed throughout the company, in some cases for as much as eight months.
Mr. Skidmore used his personal credit card and wrote many personal checks to pay
for insurance and other expenses of the business. On one occasion Sheriff's
officers came into the headquarters to begin to tag the furniture and other
assets because the landlord of SMC's headquarters facility had gone into court
seeking immediate payment of past rents. The landlord for the facility used by
SMC's Environmental Services Group obtained an injunction freezing the
Environmental Services Group's payroll account. Numerous creditors were calling
on a frequent basis. Payables were accumulating to substantial amounts. In some
cases vendors that were important to various assignments would no longer work
for SMC until they were paid. This was particularly true in the environmental
business. Many business opportunities that otherwise would have been pursued
could not be pursued because there was no money to travel or to fund other
necessary marketing expenses. Several key staff members from the already very
small and depleted staff were asked to go on four day work weeks. These factors
combined to make it extremely difficult for SMC to function.
Mr. Skidmore held almost daily meetings with his management team and
management agreed unanimously that SMC had to act quickly or there would be no
business left to sell. Management determined that SMC could survive and rebuild
the business with either party. It was agreed that whichever party could fund
SMC's working capital needs in the shortest period of time should be given
priority in order to save SMC. Versar continued to move much more rapidly in its
pursuit of SMC and was also willing to modify its term sheet to include a
specific plan for the amount and timing of the funding of working capital
requirements. The aggregate amount under this plan was approximately $1.9
million, with approximately $730,000 in the first three months and approximately
$1.6 million over the course of the first 12 months. This compared favorably
with the $1 million of working capital offered by the Other Interested Party.
Versar also gave management comfort that bills would be satisfied, relationships
with vendors would be taken care of and employees' expenses and back salaries
would be given priority. Accordingly, management determined to proceed with
negotiations with Versar and to hold the Other Interested Party in reserve in
the event negotiations with Versar failed.
Representatives of SMC management and Versar and attorneys for both parties
met on April 29, 1997 to finalize documentation for the transaction. During this
meeting, it became clear that the transaction needed to be restructured in
certain respects. First, primarily to alleviate management's concerns about the
reasonableness of the purchase price for the stock held by the non-management
stockholders, and also to avoid the need for a significant outlay of cash by
Versar in lieu of issuing fractional shares of preferred stock, the parties
agreed that the non-management stockholders would receive Versar Common Stock
rather than Versar Preferred Stock, at the same .573584 exchange ratio as had
been agreed upon for the management shares. This meant that management and
non-management stockholders would be treated the same. It also would provide
liquidity for SMC's stockholders who had been faced with a higherly illiquid
market for the SMC Common Stock. Second, primarily because of adverse tax
consequences for the management stockholders that would have resulted from the
transaction as originally proposed, the parties agreed to include management's
shares in the Merger rather than Versar purchasing them at the time of the
closing of the transaction with Imperial.
Effecitve April 30, 1997, Versar executed an Agreement to Merge (the
"Agreement to Merge") in favor and for the benefit of each of the plaintiffs in
the Superior Court Action, and Versar also executed a revised term sheet, which
provided that it would become a legally binding obligation of Versar effective
upon the closing of Versar's purchase of Imperial's equity interests. Pursuant
to the Agreement to Merge, Versar agreed with such plaintiffs to cause SMC to be
merged with and into a newly formed, wholly-owned subsidiary of Versar on the
terms described above
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as soon as practicable following the Imperial closing. In connection with the
execution of the Agreement to Merge, Mr. Skidmore and two other corporate
executives of SMC, Marion G. Hilferty and Frank S. Rathgeber, entered into
lock-up agreements setting forth, among other things, their agreement to vote
all shares of SMC Common Stock held by them in favor of the Merger Agreement.
See "THE MERGER AGREEMENT--Lock-up Agreements."
On May 2, 1997, pursuant to a Stock Purchase Agreement dated April 30, 1997
among Imperial Capital Worldwide Partners L.P., Imperial Capital Investors
Corp., Jonathan Borsuk, Harvey Borsuk and Versar (the "Stock Purchase
Agreement"), Versar purchased from Imperial Capital Worldwide Partners, L.P. all
of its equity interests in SMC (including the shares and options that Imperial
had the right to repurchase from Sorol and another party), consisting of
1,070,000 shares of SMC Common Stock, 1,750,000 shares of SMC Preferred Stock
and an option to purchase an additional 350,000 shares of SMC Common Stock pro
rata from all holders of outstanding shares of SMC Common Stock, which option
was subsequently cancelled. Versar funded a portion of such stock purchase
through a $2,000,000 three-year term note with NationsBank, N.A. and the balance
from Versar's cash reserves. As a condition to the closing of such stock
purchase, Versar was required to secure a general release of the Superior Court
Action and the Ravin Sarasohn Action. For a discussion of these lawsuits see
above and "BUSINESS OF SMC -- Legal Proceedings." The releases of the Ravin
Sarasohn Action were executed prior to such closing. A majority of the
plaintiffs in the Superior Court Action executed releases prior to such closing;
all but one have now done so. For a discussion of the current status of this
matter, see "BUSINESS OF SMC -- Legal Proceedings." In satisfaction of an
additional condition to such closing, the Imperial entities described above, the
Borsuks, SMC, all SMC subsidiaries and their respective subsidiaries executed a
mutual release with respect to any liabilities accruing through the date of the
closing.
Effective April 30, 1997, pursuant to the Stock Purchase Agreement, the
Borsuks resigned as directors of SMC (as well as from all other positions held
with SMC and its subsidiaries) and Benjamin M. Rawls, Lawrence W. Sinnott and
James C. Dobbs, Chairman and CEO, Vice President and CFO and Vice President and
General Counsel, respectively, of Versar were elected to SMC's Board of
Directors.
To fulfill Versar's obligations under the Agreement to Merge, after the
May 2, 1997 closing Versar and SMC negotiated the terms of the Merger Agreement
to set forth in full the terms upon which the Merger would occur.
Special Committee Review of the Merger and Recommendation to the Board
Other than Mr. Locker, each member of the SMC Board of Directors has an
interest in the Merger. In the case of three of the directors this interest
results from being an officer of Versar. In the case of Mr. Skidmore this
interest results from his anticipated continuing employment as President and
Chief Executive Officer of SMC once it becomes a wholly-owned subsidiary of
Versar upon the occurrence of the Merger and his service as Vice Chairman of the
Board of Versar. Accordingly, at the SMC Board meeting held on May 29, 1997, the
SMC Board established a Special Committee to review the terms of the Merger
Agreement and the Merger and appointed Mr.
Locker as its sole member.
Mr. Locker conducted a diligent review of the background and reasons for
the Merger and of the terms of the Merger and of the Merger Agreement. He
reviewed numerous documents related to SMC, Versar and the Merger and he
conferred and exchanged detailed correspondence with executives of both SMC and
Versar. He then prepared a report to the Board discussing his review and
conclusions, which was distributed to the members of the Board of Directors of
SMC on or about July 16, 1997. Mr. Locker was assisted in this process by
David N. Brainin, Esq., who is Of Counsel to Mr. Locker's firm, Locker,
Greenberg & Brainin P.C., which acted as counsel to the Special Committee.
Mr. Brainin identified the relevant documents to be reviewed, assisted with
the review of documents, the preparation of correspondence and the preparation
of the report, and participated in conferences with executives of SMC and
Versar.
Mr. Locker's report lists the major documents that were reviewed and then
briefly describes the background and terms of the proposed Merger. The report
notes that both management and non-management stockholders will receive the same
per share consideration in the Merger, and that this consideration is equal to
the cash consideration paid to Sorol. The report further notes that analysis of
this consideration by customary valuation methods would, in the opinion of
negotiators for both SMC and Versar, have been inappropriate, if not impossible,
due to the SMC bankruptcy, the problems encountered by SMC since emerging from
bankruptcy, the uncertainty of future projections and other reasons. The report
then goes on to state that where values could be calculated, they were less than
10% of the value that Versar had agreed to pay to Imperial. The report concludes
that the proposed exchange ratio of .573584 shares of Versar common stock to
each share of SMC common stock is fair to the non-Versar stockholders of SMC,
that the proposed Merger is in the best interest of SMC and that Mr. Locker
recommends its approval to the Board.
The Board's Approval of the Merger and Recommendation Regarding the Merger
At a meeting held on July 21, 1997, the SMC Board accepted the report of
the Special Committee and, based upon the recommendation contained in such
report and all other relevant factors, the Board unanimously approved the Merger
and the Merger Agreement.
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For all of the reasons set forth above, the SMC Board believes that the
Merger is fair to, and in the best interests of, SMC and its stockholders. The
Board has determined that the Merger represents an attractive opportunity for
the stockholders to exchange their illiquid shares of SMC Common Stock for
freely tradeable shares of a financially stable company for fair value. SMC
Board therefore recommends to SMC's stockholders that they vote FOR the approval
of the Merger Agreement and the Merger contemplated thereby.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board with respect to the Merger
Agreement, SMC stockholders should be aware that certain of the executive
officers and directors of SMC have interests in the Merger that are in addition
to or different from the interests of stockholders of SMC generally, as
described below.
As disclosed under "- Background and Reasons for the Merger," in
connection with the Merger the existing Employment Agreements of Mr. Skidmore,
Mr. Frank S. Rathgeber and Ms. Marion G. Hilferty, each an executive officer of
SMC, will remain in place. Mr. Skidmore has been elected to Versar's Board of
Directors as Vice Chairman in connection with the purchase of Imperial stock by
Versar and will remain in such position following the Merger. Pursuant to the
term sheet, certain members of SMC management and other key employees of SMC
have been granted options to purchase in the aggregate 87,750 shares of Versar
Common Stock at a price of $3.569 per share, equal to the fair market value of
the Versar Common Stock on the date of grant, 25,000 of which were granted to
Mr. Skidmore.
As disclosed under "-Special Committee Review of the Merger and
Recommendation to the Board," other than Mr. Aaron Locker, each member of the
SMC Board of Directors has an interest in the Merger. In the case of three of
the Directors this interest results from being an officer of Versar. In the case
of Mr. Skidmore, this interest results from his anticipated continuing
employment under his Employment Agreement as President and Chief Executive
Officer of the Surviving Corporation as described above and his service as Vice
Chairman of the Board of Directors of Versar.
American Stock Exchange Listing
A subsequent listing application will be filed with the AMEX to list the
shares of Versar Common Stock to be issued to SMC stockholders in connection
with the Merger. Although no assurance can be given that the shares of Versar
Common Stock so issued will be accepted for listing, Versar anticipates that
these shares will qualify for listing on the AMEX, upon official notice of
issuance thereof.
Resale of Versar Common Stock by Affiliates
Versar Common Stock to be issued to SMC stockholders in connection with
the Merger has been registered under the Securities Act and, upon consummation
of the Merger, will be freely transferable under the Securities Act, except for
shares issued to any person who may be deemed an "Affiliate" (as defined below)
of SMC or Versar within the meaning of Rule 145 under the Securities Act.
"Affiliates" are generally defined as persons who control, are controlled by, or
are under common control with SMC or Versar at the time of the Special Meeting
(generally, directors and certain executive officers of SMC or Versar and major
stockholders of SMC or Versar).
Affiliates of SMC or Versar may not sell their shares of Versar Common
Stock acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. In general, under Rule 145, for one year
following the Effective Time (the "Restricted Period"), an Affiliate (together
with certain related persons) is entitled to sell shares of Versar Common Stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker", as such terms
are defined in Rule 144 under the Securities Act. Additionally, the number of
shares that may be sold by an Affiliate (together with certain related persons
and certain persons acting in concert) within any three-month period during the
Restricted Period for purposes of Rule 145 may not exceed the greater of (i) 1%
of the outstanding shares of Versar Common Stock or (ii) the average weekly
trading volume of such stock during the four calendar weeks preceding such sale.
Rule 145 is available to Affiliates only if Versar remains current with its
information filings with the Commission under the Exchange Act. Following the
Restricted Period, an Affiliate may sell such Versar Common Stock free of such
manner of sale or volume limitations, provided that Versar is current with its
Exchange Act information filings and such Affiliate is not then an Affiliate of
Versar. At any time following two years after the Effective Time, an Affiliate
may sell such shares of Versar Common Stock without any restrictions, so long as
such Affiliate is not then, and has not been for at least three months prior
thereto, an Affiliate of Versar.
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Material Federal Income Tax Consequences of the Merger
Set forth below is Paul, Hastings, Janofsky & Walker LLP's opinion
regarding the material federal income tax aspects of the Merger to holders of
SMC Common Stock deemed converted in the Merger into shares of Versar Common
Stock and to the Surviving Corporation under current law and regulations. Paul,
Hastings, Janofsky & Walker LLP, counsel to Versar, has issued to Versar and
filed as an exhibit to the Registration Statement, of which this Proxy
Statement/Prospectus is a part, a tax opinion indicating that the discussions of
the tax consequences and legal conclusions set forth in "THE MERGER -- Material
Federal Income Tax Consequences of the Merger" are accurate and complete in all
material respects and constitute its opinion as stated above. The discussion is
based on the Internal Revenue Code of 1986, as amended. Neither SMC nor Versar
will seek any rulings from the Internal Revenue Service with respect to the
transactions contemplated hereby.
The following discussion is limited to the material federal income tax
aspects of the Merger for a holder of SMC Common Stock who is a citizen or
resident of the United States, and who, on the date of conversion of such
holder's shares of SMC Common Stock, holds such shares as capital assets. All
holders are urged to consult their own tax advisors regarding the federal,
foreign, state and local tax consequences of disposition of SMC Common Stock in
the Merger. The following discussion does not address potential foreign, state,
local and other tax consequences nor does it address taxpayers subject to
special treatment under the federal income tax laws, such as life insurance
companies, tax-exempt organizations, Subchapter S corporations and taxpayers
subject to alternative minimum tax.
It is currently contemplated that the Merger will qualify for tax-free
reorganization status. As a tax-free reorganization, no gain or loss will be
recognized for federal income tax purposes by SMC, Versar or Sub as a result of
the Merger. In addition, no gain or loss will be recognized by holders of SMC
Common Stock as a result of the exchange of their shares of SMC Common Stock for
shares of Versar Common Stock pursuant to the Merger. The aggregate tax basis of
the shares of Versar Common Stock received by each holder of SMC Common Stock
will equal the aggregate tax basis of such holders' shares of SMC Common Stock
exchanged in the Merger. The holding period for the shares of Versar Common
Stock received by each holder of SMC Common Stock will include the holding
period for the shares of SMC Common Stock of such holder exchanged in the
Merger.
However, the Merger will not qualify for tax-free status if the continuity
of interest requirement is not satisfied. In general, to satisfy the continuity
of interest requirement in the context of this Merger, the SMC stockholders, as
a group (including Imperial), (1) must exchange a substantial part of their SMC
Common Stock for Versar Common Stock (the "substantial part" test), and (2)
either must (a) in fact, retain ownership of the Versar Common Stock for some
period following the Merger or (b) in the event the Versar Common Stock is sold
shortly after the Merger, demonstrate that the early disposition was not
pursuant to a plan or arrangement in place at the time of the Merger (the
"post-merger" test).
The Internal Revenue Service announced in Revenue Procedure 77-37 that for
purposes of the "substantial part" test, the target shareholders must receive
stock of the acquiring corporation equal to 50% of the value of the target's
stock at the time of the Merger. However, Revenue Ruling 77-37 states that this
percentage does not define the lower limits permitted for a tax-free
reorganization. Some courts have permitted a tax-free reorganization where the
value of the acquiring corporation's stock issued in a merger was less than 50%
of the total consideration for the target's stock.
Several factors impact the calculation of the percentage of the total
consideration paid with Versar Common Stock to determine whether the
"substantial part" test is satisfied. First, Versar's prior purchase of SMC
stock from Imperial must be counted as a cash acquisition. Second, cash will be
paid to those SMC stockholders who perfect appraisal rights. Third, the value of
the Versar Common Stock at the time of the Merger will affect the calculation of
the stock portion of the total consideration. The higher the value of the Versar
Common Stock at the time of the Merger, the greater the stock portion of the
total consideration.
In addition to the foregoing factors, the "post-merger" test may not be
satisfied if Versar Common Stock is sold shortly after the Merger (unless the
intent to sell was formed after the Merger). Even so, based on current law, it
appears that SMC stockholders owning less than five percent of the SMC Common
Stock may freely transfer their Versar Common Stock without impacting the
tax-free status of the Merger.
In summary, it is contemplated that the Merger will qualify for tax-free
reorganization status. However, in large part, factors beyond the control of
Versar or SMC will determine whether the Merger is tax-free, such as how many
SMC stockholders perfect appraisal rights, the value of the Versar Common Stock
at the time of the Merger, the amount of Versar Common Stock sold by former SMC
stockholders after the Merger, the timing of such sales, and the identity of
such former SMC stockholders.
If it is determined by Versar (in its sole discretion) at any time prior
to the Effective Date of the Merger, whether before or after the SMC Special
Stockholders' Meeting, that the Merger may not qualify for tax-free
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reorganization status, then Versar (in its sole discretion, after consultation
with SMC) may restructure the Merger so that SMC will be the surviving entity
rather than Sub to avoid adverse tax consequences to SMC. If the Merger is not
tax-free, all SMC stockholders (even those who approve the Merger) will
recognize gain or loss for federal income tax purposes as a result of the
Merger.
The amount of gain or loss recognized by an SMC stockholder who approves
the Merger will be calculated by comparing, as of the date of the Merger, the
value of the Versar Common Stock received by the SMC stockholder with the SMC
stockholder's tax basis in the SMC Common Stock surrendered pursuant to the
Merger. Any gain or loss recognized by an SMC stockholder will generally be
long-term capital gain or loss if the SMC stockholder has held his or her SMC
Common Stock for more than one year as of the Effective Date of the Merger. An
SMC stockholder's tax basis in the Versar Common Stock will be its fair market
value as of the Effective Date of the Merger, and a new holding period will
start as of the Effective Date of the Merger. Therefore, if the Merger is not
tax-free, a former SMC stockholder must hold the Versar Common Stock for more
than one year to realize long-term capital gain on any appreciation in the value
of the Versar Common Stock after the Merger.
Regardless of whether the Merger is or is not tax-free, the amount of gain
or loss recognized by an SMC stockholder who perfects his or her appraisal
rights will be calculated by comparing the amount of cash received by the SMC
stockholder with the SMC stockholder's tax basis in the SMC Common Stock
redeemed by SMC. Any gain or loss recognized will generally be long-term capital
gain or loss if the SMC stockholder has held his or her SMC Common Stock for
more than one year as of the date the stock is redeemed.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF SMC COMMON STOCK IS URGED TO CONSULT HIS OR HER
OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER
OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL
AND OTHER TAX LAWS).
Regulatory Approvals
No governmental approvals or filings, state or federal, are required with
respect to the Merger, except for the filing of the Certificate of Merger with
the Delaware Secretary of State.
Accounting Treatment
Versar accounted for its acquisition of 53.5% of the issued and
outstanding SMC Common Stock and the outstanding SMC Preferred Stock under the
purchase method of accounting. The Merger constitutes an acquisition of minority
interests and will also be accounted for under the purchase method of
accounting. As a result, the total consideration paid by Versar for its
interests in SMC will be allocated to the assets and liabilities of SMC based on
the fair value of the assets and liabilities acquired.
Representatives of Versar's independent public accountants, Arthur
Andersen LLP, who have also audited certain periods of the SMC financial
statements included herein, will be present at the Special Meeting, will have
the opportunity to make a statement if they desire to do so and will be
available to respond to reasonable and appropriate questions.
Appraisal Rights
The following discussion is a complete summary in all material respects of
the law pertaining to dissenters' rights under the Delaware General Corporation
Law (the "DGCL"). However, such summary is qualified in its entirety by
reference to the full text of Section 262 of the DGCL setting forth the rights
of stockholders who object to the Merger Agreement and the Merger. Stockholders
wishing to exercise such appraisal rights or to preserve their rights to do so
("Dissenting Stockholders") should review the following discussion and the
provisions of Section 262 of the DGCL with counsel. A copy of Section 262 of the
DGCL is attached to this Proxy Statement/Prospectus as Appendix II. The failure
of Dissenting Stockholders to comply in a timely and proper manner with the
procedures set forth in the DGCL will result in the loss of appraisal rights
with respect to the Merger.
Section 262 of the DGCL sets forth the rights of stockholders of SMC who
object to the Merger. In general, as described in greater detail below, a
stockholder objecting to the Merger who wishes to dissent must file a written
notice of dissent prior to the vote on the Merger Agreement, and, after such
vote is taken, comply with Section 262 to seek appraisal of the value of SMC
Common Stock.
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Any holder of Common Stock who does not vote in favor of the Merger
Agreement (including any such holder who abstains from voting), or who duly
revokes a vote in favor of such transaction, and (in either case) who objects to
the Merger, may, if the Merger is consummated, obtain payment, in cash, for the
appraised fair market value of such stockholder's shares of SMC immediately
prior to the Merger by complying with the requirements of the DGCL. Holders of
SMC Common Stock are ineligible to exercise their appraisal rights unless they
are stockholders on the Record Date, continue to hold such shares through the
Effective Time and have not voted in favor of the Merger Agreement.
Before the taking of the vote on the Merger Agreement at the Special
Meeting, each Dissenting Stockholder must file with SMC a written demand for
appraisal of the value of his/her shares of SMC Common Stock if the Merger is
consummated. A written demand must be filed with SMC by holders of SMC Common
Stock who wish to demand appraisal even if they vote against the Merger. Such
written demand should be addressed to: Marion G. Hilferty, Secretary, Science
Management Corporation, 721 Routes 202/206, Bridgewater, New Jersey 08807.
If the Merger Agreement is approved, within ten days after the Effective
Time, the Surviving Corporation must provide written notice to each Dissenting
Stockholder of the Effective Time and that appraisal rights are available for
any or all of the shares of SMC. If the Dissenting Stockholders and the
Surviving Corporation cannot reach agreement as to the appraisal value of the
SMC Common Stock, the Surviving Corporation or any Dissenting Stockholder,
within 120 days after the Effective Time of the Merger, may file a petition in
the Court of Chancery in Delaware demanding a determination of the value of the
SMC Common Stock. Within such 120 day period, any Dissenting Stockholder is
entitled to receive upon request from the Surviving Corporation a statement
setting forth the aggregate number of shares not voted in favor of the Merger
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. This written statement must be
mailed to the Dissenting Stockholder within ten days after written request is
received by the Surviving Corporation. Further, at any time within 60 days after
the Effective Time of the Merger, any Dissenting Stockholder has the right to
withdraw his demand for appraisal and accept the terms offered upon the Merger.
Following the filing of a petition in the Court of Chancery for an
appraisal of the value of the SMC Common Stock, the Court shall determine the
stockholders who have complied with Section 262 and are entitled to appraisal
rights. The Court may demand that Dissenting Stockholders submit their
certificates of stock to the Registry in Chancery for notation thereon of the
pendency of the appraisal proceedings and may dismiss the proceedings as to any
Dissenting Stockholder failing to comply with such request. The Court will then
appraise the SMC Common Stock determining the fair value thereof immediately
prior to the Merger exclusive of any element of value arising from the
accomplishment or expectation of the Merger together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
The Court is authorized by the DGCL to take into account all relevant factors.
Upon determination of the fair value, the Court shall then direct the Surviving
Corporation to pay the Dissenting Stockholders the fair value so determined.
Interest may be simple or compound as the Court may direct.
SMC will accept a Dissenting Stockholder's objection to the Merger and
demand for payment of its shares by facsimile transmission, provided such
facsimile is confirmed, in writing, sent by certified or registered mail to SMC
at the address specified above within 24 hours after transmission of the
facsimile. The facsimile communication should be addressed to: Marion G.
Hilferty, Secretary, Science Management Corporation, facsimile number: (908)
722-0421.
A vote against the Merger does not constitute a "written demand" filed by
a Dissenting Stockholder. A Dissenting Stockholder's abstention from voting on
the Merger or failure to specify any vote on the accompanying proxy will not
constitute a waiver of such stockholder's rights under the DGCL, provided that a
written demand has been properly filed. A vote in favor of the Merger will
constitute a waiver of such stockholder's appraisal rights, however, even if a
written demand has been filed.
THE MERGER AGREEMENT
The following discussion of the Merger Agreement is qualified in its
entirety by reference to the complete text of the Merger Agreement, which is
included in this Proxy Statement as Appendix I (exclusive of certain exhibits)
and is incorporated herein by reference.
General
The Merger Agreement provides for the merger of SMC into Sub. Sub will be
the Surviving Corporation of the Merger and shall succeed to and assume all
rights and obligations of SMC. In connection with the Merger, the
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stockholders of SMC (other than Versar, and those stockholders who perfect
appraisal rights in accordance with the DGCL) will receive the Merger
Consideration described below. Notwithstanding the above, as described under the
heading "THE MERGER-Material Federal Income Tax Consequences of the Merger," the
Merger Agreement provides that, in the event the Versar determines (in its sole
discretion) that the Merger may not qualify for tax-free reorganization status,
Versar will have the option (exercisable in its sole discretion, after
consultation with SMC) to restructure the Merger such that SMC will be the
Surviving Corporation of the Merger. In such event, SMC will be a wholly-owned
subsidiary of Versar and will, as the Surviving Corporation, succeed to and
assume all rights and obligations of Sub and SMC. The payment of the Merger
Consideration to the Stockholders of SMC will not be impacted by any such change
in the structure of the Merger.
Closing; Effective Time
The closing of the Merger will take place as soon as practicable after the
day upon which all conditions to consummation of the Merger are satisfied or
waived. The Effective Time of the Merger will occur upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware and
acceptance thereof by such Secretary of State as required by the DGCL or at such
later date as may be specified in the Certificate of Merger. It is anticipated
that such Certificate will be filed promptly after the approval and adoption of
the Merger Agreement by the stockholders of SMC at the Special Meeting. Such
filing will be made, however, only upon satisfaction or waiver of all conditions
to the Merger contained in the Merger Agreement.
Merger Consideration
In connection with the Merger, each outstanding share of SMC Common Stock
at the Effective Time (except those shares held by Versar and shares for which
appraisal rights have been perfected and not withdrawn) will be converted into
the right to receive .573584 of a share of Versar Common Stock. Each share of
SMC Common Stock owned by Versar or held by SMC as treasury shares will be
cancelled without consideration. Instructions with regard to the surrender of
certificates formerly representing shares of SMC Common Stock will be delivered
to the holders thereof as described under the heading "THE MERGER - Procedures
for Exchange of Certificates."
No fractional share of Versar Common Stock will be issued to any holder of
SMC Common Stock, but in lieu thereof, each such stockholder who otherwise would
be entitled to receive a fraction of a share of Versar Common Stock (after
aggregating all fractional shares of Versar Common Stock which would be received
by such stockholder) shall receive cash from Versar in an amount equal to the
then fair market value of a share of Versar Common Stock multiplied by such
fraction. The fair market value of a share of Versar Common Stock shall be
deemed to be equal to the average of the closing sale price of the Versar Common
Stock as reported by the American Stock Exchange for the five-day trading period
ending two days prior to the closing date of the Merger.
After the Effective Time, the holder of a certificate formerly
representing shares of SMC Common Stock shall cease to have any rights as a
stockholder of SMC, and such holder's sole right will be to receive the Merger
Consideration with respect to such shares. No transfer of shares outstanding
immediately prior to the Effective Time will be made on the stock transfer books
of the Surviving Corporation after the Effective Time. Certificates formerly
representing shares of SMC Common Stock presented to the Surviving Corporation
after the Effective Time will be cancelled in exchange for the aggregate Merger
Consideration to which the holder of such certificates is entitled.
In no event will holders of SMC Common Stock be entitled to receive any
interest on the aggregate Merger Consideration to be distributed to them in
connection with the Merger.
Outstanding shares of SMC Preferred Stock, all of which are held by
Versar, and those shares of SMC Common Stock held by Versar will be cancelled in
connection with the Merger for no additional consideration.
Each of the outstanding shares of Sub will automatically be converted into
one share of common stock, $.01 par value per share, of the Surviving
Corporation.
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties of SMC relating to, among other things, (i) SMC's organization and
similar corporate matters; (ii) the execution, delivery and performance of the
Merger Agreement by SMC, the legality, validity and enforceability thereof
against SMC, and the noncontravention of, and lack of conflict with, the
Certificate of Incorporation or Bylaws of SMC, the terms of any note, bond,
mortgage, deed of trust, security interest, indenture, license, contract,
agreement, plan or other
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obligation of SMC, or any provision of any statute, law, ordinance or
administrative or arbitration order, award, judgment, writ, injunction or decree
applicable to SMC or any of its properties or assets; (iii) the financial
statements of SMC and the accuracy of the information contained therein; (iv)
subject to certain exceptions, absence of certain specified material changes or
events; (v) the absence of undisclosed litigation and other legal proceedings;
(vi) the absence of undisclosed liabilities; (vii) the absence of defaults under
or breaches of SMC's Certificate of Incorporation and Bylaws, agreements and
obligations to which SMC is subject, or orders, writs, injunctions, decrees,
statutes, rules or regulations applicable to SMC or its properties or assets;
(viii) the absence of any violations of applicable law; and (ix) entitlement to
brokers and finders fees.
The Merger Agreement also contains certain customary representations and
warranties of Versar and Sub relating to, among other things: (i) their
organization and similar corporate matters; (ii) the execution, delivery and
performance of the Merger Agreement by Versar and Sub, the legality, validity
and enforceability thereof against Versar and Sub, and the non-contravention of,
and lack of conflict with, the Certificates of Incorporation and Bylaws of
Versar and Sub, the terms of any note, bond, mortgage, deed of trust, security
interest, indenture, license, contract, agreement, plan or other obligation of
Versar, or any provision of any statute, law, ordinance or administrative or
arbitration order, award, judgment, writ, injunction or decree applicable to
Versar or any of its properties or assets; (iii) documents filed by Versar with
the Commission and the accuracy of the information contained therein; (iv)
subject to certain exceptions, absence of certain specified material changes or
events; (v) the absence of undisclosed liabilities; and (vi) entitlement to
brokers and finders fees.
None of the representations and warranties described above or contained in
the Merger Agreement survive the Effective Time of the Merger.
Conduct of Business of SMC Prior to the Effective Time
Pursuant to the Merger Agreement, SMC has agreed that, among other things,
prior to the Effective Time, it will conduct its business in the ordinary course
consistent with past practice and it will not, without the prior written consent
of Sub: (i) amend its Certificate of Incorporation or Bylaws; (ii) issue or
otherwise dispose of any securities of SMC; (iii) split, combine or reclassify
any shares of its capital stock, declare, set aside or pay any dividend or other
distribution in respect of its capital stock or redeem or otherwise acquire any
of its securities or authorize, adopt or otherwise participate in a plan of
liquidation or other corporate reorganization; (iv) except for borrowings under
SMC's existing credit facilities, incur any indebtedness, make any loans or
investments in any other person, or pledge or otherwise encumber any of its
shares of capital stock or assets; (v) enter into, amend or terminate any
employee benefit agreement, trust or other arrangement for the benefit or
welfare of any director, officer or employee, or increase the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by any current plan or arrangement; (vi) acquire, sell, lease or
dispose of any assets other than in the ordinary course of business consistent
with past practices; (vii) except as required by generally accepted accounting
principles, change any accounting principle or practice used by it; (viii) make
any tax selection or settle or compromise any tax liability; (ix) pay or
discharge any claims, obligations or liabilities, other than those reflected or
reserved against in the financial statements of SMC or incurred in the ordinary
course of business consistent with past practices; (x) acquire any corporation,
partnership or other business organization or division thereof, enter into any
contract or agreement other than in the ordinary course of business consistent
with past practice with executory obligations not to exceed $150,000 in each
case or authorize any capital expenditures in excess of $5,000; or (xi) commit
or agree in writing or otherwise to take any of the actions described above.
Acquisition Proposals
From the date of the Merger Agreement until termination thereof, SMC has
agreed, and has agreed to cause its officers, directors, employees or other
agents, not to, directly or indirectly, (i) take any action to solicit, initiate
or encourage any Acquisition Proposal, as defined below, (ii) waive any
provision of any standstill or similar agreement entered into by SMC, or (iii)
engage in negotiations with, or disclose any nonpublic information relating to
SMC or afford access to its properties, books or records to, any person that may
be considering making, or has made, an Acquisition Proposal. An "Acquisition
Proposal" is defined as any offer or proposal for, or any indication of interest
in, a merger or other business combination involving SMC or the acquisition of
any equity interest in, or a substantial portion of the assets of SMC other than
the transactions contemplated by the Merger Agreement.
Conditions to Consummation of the Merger
The respective obligations of SMC, Versar and Sub to consummate the Merger
are subject to the satisfaction (or waiver) at or prior to the Effective Time of
the following conditions: (i) no statute, rule, regulation, executive order,
decree, ruling or preliminary or permanent injunction existing which prohibits,
restrains, enjoins or restricts
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the consummation of the Merger; (ii) the effectiveness of this Registration
Statement, no stop order suspending the effectiveness of this Registration
Statement being in effect and no proceedings for such purpose being threatened
by the Commission or initiated by the Commission and not concluded or withdrawn;
(iii) the approval for listing on the American Stock Exchange of the Versar
Common Stock to be issued in connection with the Merger; and (iv) the approval
by the stockholders of SMC of the Merger Agreement and the transactions
contemplated thereby.
The obligation of SMC to consummate the Merger is subject to the
satisfaction (or waiver) of the following conditions: (i) Versar and Sub shall
have performed in all material respects their obligations under the Merger
Agreement; (ii) the representations and warranties of Versar and Sub contained
in the Merger Agreement shall be true and correct in all material respects; and
(iii) Sub shall have executed such documents as required by under the Bankruptcy
Plan to affirm its assumption of SMC's obligations thereunder.
The obligations of Versar and Sub to consummate the Merger are subject to
the satisfaction (or waiver) of the following conditions: (i) SMC shall have
performed in all material respects its obligations under the Merger Agreement;
(ii) the representations and warranties of SMC shall be true and correct in all
material respects; and (iii) SMC shall have secured all consents required for
its consummation of the Merger.
Termination
The Merger Agreement may be terminated (i) at any time prior to the
Effective Time by mutual consent of the parties; (ii) by Versar or SMC if the
Merger has not been consummated on or before December 31, 1997, or a United
States federal or state court or federal or state governmental, regulatory or
administrative agency or commission issues an order, decree or ruling or takes
other action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action is final and
nonappealable; (iii) by SMC prior to the Effective Time if there has been a
material breach by Versar or Sub of any obligation or any representation or
warranty, which is not cured within 20 days of notice thereof or (iv) by Versar
prior to the Effective Time if there has been a material breach by SMC of any
obligation or any representation or warranty contained in the Agreement, which
is not cured within 20 days of notice thereof.
Lock-up Agreements
In connection with, and as an inducement to, Versar's and Sub's execution
of the Agreement to Merge described under "THE MERGER -- Background and Reasons
for the Merger", Versar entered into Lock-up Agreements dated as of April 30,
1997 (the "Lock-up Agreements"), with each of James A. Skidmore, Jr., Marion G.
Hilferty and Frank S. Rathgeber (the "Management Stockholders") who together are
beneficial owners of approximately 15% of the outstanding SMC Common Stock. See
"PRINCIPAL STOCKHOLDERS OF SMC."
Pursuant to the Lock-up Agreements, the Management Stockholders have
agreed to vote all of their shares of SMC Common Stock on matters as to which
each such Management Stockholder is entitled to vote at a meeting of the
stockholders of SMC, or by written consent without a meeting, as follows: (i) in
favor of approval and adoption of the Merger Agreement and all related matters;
(ii) against any action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation or agreement of SMC under the Agreement to Merge; and (iii) against
any action or agreement that would impede, interfere with, delay, postpone or
attempt to discourage the Merger. In connection with the voting provisions of
the Lock-up Agreements, each Management Stockholder appointed Versar, with full
power of substitution, as attorney and proxy to vote all shares of Common Stock
with respect to those matters described in clauses (i), (ii) and (iii) above as
to which such Management Stockholder is entitled to vote.
Pursuant to the terms of the Lock-up Agreements, during the term of such
agreements, each Management Stockholder has agreed not to (i) sell, exchange or
otherwise dispose of or enter into any contract, agreement or other arrangement
to sell, exchange or otherwise dispose of any of such Management Stockholder's
shares or other securities received in respect thereof or in exchange therefor;
(ii) create or suffer to exist any lien with respect to any of such Management
Stockholder's shares or any securities received or to be received in respect
thereof or in exchange therefor; or (iii) grant any options, rights, warrants or
enter into any contracts, agreements or other arrangement to grant any options,
rights or warrants with respect to any of such Management Stockholder's shares
or other securities received in respect thereof or in exchange therefor.
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Amendments and Waivers
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of the parties thereto. The Merger Agreement provides that at
any time before the closing of the Merger, either SMC or Versar may waive any
inaccuracies in the representations and warranties of any other party contained
in the Merger Agreement and waive compliance by any other party with any of the
agreements or conditions contained in the Merger Agreement.
Expenses
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses.
BUSINESS OF VERSAR
Background and Perspective
Versar, founded in 1969, is a nationally recognized environmental and
infrastructure engineering and consulting management firm. From a network of 17
offices nationwide, Versar specializes in providing environmental risk and
infrastructure management services to industry, government, and commercial
clients.
For the past five years, management has focused on rebuilding and
restructuring Versar by establishing a focus and direction for the Company,
increasing sales volume, reducing the overhead cost structure, disposing of
highly leveraged real estate, divesting of unprofitable laboratory operations,
reducing high legal fees and increasing cash flow.
Versar has successfully completed its rebuilding and restructuring efforts
by completing the refinancing in January 1996 of its former real estate
operations spun-off to shareholders in June 1994. As of the March 31, 1997,
Versar had completed its twelfth consecutive profitable quarter and increased
its funded backlog by 42% in the past three years. In addition, during fiscal
1996 sales volume increased to $44 million or 13% over fiscal year 1995 and
profitability improved by more than 100 percent. During the first nine months of
the current fiscal year, sales volume remained stable and net income increased
to $873,000 or 41% over the same period in fiscal year 1996.
Versar has been ranked by Engineering News Record as 119th out of the top
500 engineering design firms in gross revenue in the United States.
A Business Approach to Environmental Management
Management, while continuing to strengthen Versar's basic operations in
all areas of the organization, is also assessing the changing market conditions
and repositioning Versar for continued growth and enhanced profitability. The
1990s continue to be a period of change as government and industry re-size their
organizations and re-focus their operations on ways to improve productivity and
reduce costs. Versar believes that with this change will come new business
decision-making that no longer sees environment, health and safety issues as a
"cost of doing business," but rather a way to "achieve economic benefit and
competitive advantage" by preventing pollution, conserving raw resources and
protecting their workforce.
Versar is at the forefront in helping its clients capture the benefits of
this new approach to business. Having long recognized the limitations of
regulatory driven environmental, health and safety programs, Versar has focused
on the economic benefits of an alternative approach to environmental management.
This approach places the customers business objectives at the center of the
decision-making process, and then addresses the environmental, health and safety
issues in such a way that they compliment those objectives while complying with
the regulations. Beyond simple compliance, it challenges Versar's expertise to
develop alternatives that enhance the client's productivity and reduce the unit
cost of operations.
Versar is consolidating all of its services under the umbrella of
Strategic Environmental Management (SEM). SEM involves a shift from dealing with
the effects of regulations and waste generation in a reactive manner to working
proactively with clients to address new ways of dealing with wastes and
associated environmental expenditures. This involves moving upstream to identify
process inefficiencies which create waste and increase environmental management
costs. Environmental consulting and engineering services and technologies are
applied
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to minimize waste thereby reducing raw material and eliminating disposal costs.
With its background knowledge of regulations, Versar helps clients comply with
existing and anticipated future environmental standards.
Manufacturers today are taking advantage of technology to improve
environmental performance and bolster profits. In doing so, companies are
turning to solutions that address pollution prevention as an integral part of
plant operations and control.
Technology is providing the tools that allows business to treat
environmental performance as a competitive advantage rather than a cost burden,
by integrating it into operational continuous improvement programs. Making this
shift requires a change in the way business thinks about the issue. Management
must evaluate and implement pollution prevention measures from a business
perspective. The key to a long-term pollution prevention strategy will be the
ability of management to evaluate performance and to mainstream environmental
management functions into the operations of plants.
Over the last three years, Versar has substantially increased its total
contract backlog to $325 million, much of which is in the cutting edge areas of
pollution prevention, compliance management, and resource management support
services to government and industry. Versar will continue to grow as it expands
its services to respond to the growing movement in government and industry
toward privatization and out-sourcing of environmental infrastructure services.
In 1996, Versar made its first investment in environmental infrastructure
management with the acquisition of Valu Add Management Services (Valu Add). Valu
Add brings extensive knowledge and experience to the Versar team in consulting
to industry, state, local, and foreign governments on alternative approaches to
optimize the management of their environmental infrastructure and to consider
alternative management options for capital facility financing and operation.
In fiscal year 1997, Versar is building on this new capability and further
expand its service offerings to provide in-plant continuing services to its
clients through potential mergers and acquisitions.
Establishing the Foundation for the Future
Five years ago, Versar faced many difficult issues. The Company was highly
leveraged; had many legal issues to deal with, and its cost structure was
significantly out of line with the sales volume.
In fiscal year 1991, Versar had over $27 million in debt. Versar was the
most leveraged of all the publicly traded environmental engineering and
consulting firms, both from the perspective of total liabilities to equity as
well as debt to equity. From fiscal years 1991 and through 1994, Versar was
successful in reducing outstanding debt in half by the end of fiscal year 1994
through sales of its manufacturing division and management of working capital.
In June 1994, Versar spun-off the stock of its real estate operations,
Sarnia Corporation ("Sarnia"), to Versar's shareholders. Notwithstanding this
spin-off, Sarnia continued to be reflected in Versar's financial statements due
to the guarantee of all of Sarnia's debt by Versar. In January 1996, Sarnia was
able to refinance the existing debt reducing Versar's guarantee from $12.4
million to $1.5 million and the divestiture of Sarnia was considered complete
for accounting purposes. Versar has a reserve of $1.5 million against the
guarantee, which will be reversed into equity as the debt is repaid. With the
refinancing, Versar's spin-off of Sarnia was complete and Versar was able to
significantly improve its balance sheet and bring in line its financial ratios
with its competitors.
Since 1991, Versar has successfully resolved a number of lawsuits. Due to
the resolution of these lawsuits, legal costs have been reduced by over $500,000
per year. See " - Legal Proceedings," for a discussion of current litigation
involving Versar.
Versar had several cost issues to deal with over the past five years. They
include staffing, computer systems, and occupancy expense. While staffing will
always remain the backbone of the consulting business, administrative and
technical staffing had to be balanced to Versar's current and future sales
volume. The company reduced administrative staff, consolidated many duplicate
functions, and consolidated its finance activities. In addition, Versar reduced
computer costs by over $1.5 million and occupancy expense by over $1 million in
its headquarters location in Springfield, Virginia.
During fiscal year 1995, Versar won 15 large federal, state and commercial
contracts, which boosted Versar's total backlog to $306 million. In fiscal year
1996, Versar's total backlog increased to $325 million. As of
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March 31, 1997, approximately $30.2 million of the backlog was funded, an
increase of 15 percent compared to approximately $26.18 million as of March 31,
1996. Versar's challenge going forward is to fully develop these new contracts
and enhance the value of our services by focusing on economic incentives and the
application of new technologies. For a further description regarding Versar's
total backlog, see "--Backlog". Versar believes that its total backlog helps
solidify its business base and creates a framework for possible future growth.
By having these contracts in place, the key to Versar's future revenue
growth will be to develop these contracts by obtaining task orders to utilize
the contracts capacities fully. While funding of these contracts is not assured
due to federal budgetary cutbacks and changes in government and industry
priorities, management is taking steps to develop task orders under these
contracts in order to realize the maximum revenues.
Consulting Core Business
Versar works in partnership with government and industry by becoming an
involved member of its clients' organization, a client-centered approach that
builds client relationships, sets priorities, ensures proper allocation and
control of resources, supports and encourages synergistic activities among the
various elements of the organization, and monitors results. Versar's goal is to
help its clients build environmental performance into each aspect of their
organizational activities to enhance both their environmental performance and
improve their bottom line. Versar achieves this goal by helping clients to be
more active in preventing pollution, better manage the spectrum of environmental
compliance, and apply innovative and cost-effective approaches to remediation or
corrective action of past problems in our environment.
Today's environmental challenges require an integrated multidisciplinary
team actively assisting clients in making informed decisions and implementing
them at the least cost. These challenges are driven by:
o Complex and changing environmental regulations and the need for a
more strategic approach to meet national and international
environmental challenges in a way that allows industry to be
profitable and competitive in a world market.
o Increased emphasis on compliance management and recognition that
pollution prevention and waste minimization are a necessary part of
the long-term solution to local and national environmental
challenges.
o Competition for limited resources and a need for new and better
technology to achieve pollution prevention and remediation goals more
cost effectively.
Versar helps its clients meet these challenges through its distinction as
a full-service firm that emphasizes:
o Strategic Planning and Pollution Prevention. These are Versar's
trademark services capitalizing on its combined strengths in
regulatory policy, information management, pollution control and
treatment technology that emphasize pollution prevention.
o Total Compliance Management. A strategic approach and process of
continuous improvement that permits senior management to view
environmental compliance expenditures as business investments--an
"Environmental Balance Sheet." Versar consults at the highest levels
of industry and government where policy decisions are made.
o Corrective/Remedial Action. Program management and integration
services for corrective/remedial action are necessary to assist our
clients in getting better results at lower costs. Versar is forging
long-term strategic relationships with technology based, architect
and engineering and construction firms to provide a fully-integrated
consulting/engineering/construction capability.
Strategic Planning and Pollution Prevention
The Pollution Prevention Act of 1990 is the legislative driver that
initially forced regulators, industry, and government to look at alternative
approaches to environmental management. Provisions of the Resource Conservation
and Recovery Act (RCRA), the Clean Water Act, and the Clean Air Act Amendments
of 1990 also emphasize pollution prevention. Pollution prevention planning is
emerging as a new environmental ethic as regulators strive to develop better
incentives for voluntary reduction of emissions and industries struggle to find
better ways to meet environmental challenges in today's world economy.
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In 1991, the Environmental Protection Agency (EPA) issued a Pollution
Prevention Strategy that has led to several nationwide programs, such as the
33/50 Program, the Green Lights Program, and revisions to Emergency Planning and
Community Right-To-Know Act (EPCRA) including the Toxic Release Inventory (TRI)
Form R's, for reporting by industry on pollution prevention plans and progress.
Also, on August 3, 1993, President Clinton signed Executive Order 12856, which
requires all federal facilities to reduce their emissions by 50 percent by 1999.
The order further requires agencies to comply with EPCRA, including annual
submissions of TRI Form R reports.
More recently, State legislation and local ordinances have been adopted to
encourage pollution prevention. In the past five years, most states have enacted
some form of pollution prevention legislation that affects the way some
industries operate.
Five years ago, Versar began emphasizing a strategic approach to
environmental management that focuses on the economic benefit and business
advantage of solving environmental problems from inside the plant or operation
rather than the end-of-pipe. This approach is founded on a pollution prevention
ethic, and a process of continuous improvement in operations that eliminate
unnecessary overhead, enhances productivity, and improves the bottom line.
Versar has been actively involved in pollution prevention since 1985.
Versar has developed a core department of senior process and environmental
engineers who specialize in waste reduction engineering and design. Versar was
instrumental in developing the original Waste Minimization Opportunity
Assessment Manual for the EPA. This manual was subsequently adopted by many
industrial firms as the standard for pollution prevention audits. Versar
provides training to plant managers and engineers on how to focus on pollution
problems and identify effective pollution prevention activities. Versar works
with the managers on methods to audit their operations and identify the problem
areas. Versar has conducted several training workshops for industry and
Department of Defense (DOD), resulting in several significant process changes
being made by participating managers at their facilities. The DOD is increasing
its emphasis in the area of pollution prevention as a way to deal with
increasing pressures on the Federal budget and deficit reduction as the military
downsizes and realigns its mission. Several of Versar's new contracts are
specifically focused on pollution prevention and compliance management. These
include WrightPatterson Air Force Base Aeronautical Systems Center, Air Force
Education and Training Command, and the Navy NFESC in Port Huenume, California,
and Weapons Systems Acquisition through the Air Force Human System Center.
Total Compliance Management
Versar is helping many of its clients make the change to an
incentive-based approach to compliance, limiting their liabilities to protect
their assets, while at the same time helping them remain competitive and improve
their profitability. Understanding the environmental consequences of industrial
processes starts with having the capability to monitor environmental emissions
and performance of all process elements.
Compliance Assessments -- A key element in helping a client manage its
environmental, health and safety concerns is to establish a plan and conduct
comprehensive site/facilities assessments. Versar conducts a wide range of
assessments and audits of industrial and government facilities. Versar also has
initiated efforts to assist clients in implementing the Standard ISO 9000 and
pending ISO 14000 series requirements both to position the firm to provide
technical consulting services worldwide and to assist clients in developing and
expanding overseas markets. Versar also now offers a turnkey "Total Compliance
Management" service to customers with the goal of serving as their environmental
manager as they downsize and outsource more of their environmental work.
Versar conducts nearly a thousand transactional environmental audits
annually for commercial and government clients. Many are performed at multiple
sites nationwide under urgent deadlines. Versar also conducts large-scale
environmental compliance assessments of major operating facilities for
government and industry. Versar has for many years provided compliance
management support to the DOD. As an example, for the Aeronautical Systems
Center (ASC) of the U.S. Air Force, Versar has routinely performed environmental
assessments at 11 governmentowned, contractor-operated facilities to monitor and
improve environmental compliance and management. The assessments followed the
guidelines of the Air Force's Environmental Compliance and Management Program
(ECAMP), which is an intensive multimedia assessment protocol for evaluating a
facility's environmental management activities and compliance status. Versar
will continue to provide compliance, as well as pollution prevention and
engineering support, to ASC under its $49 million multiyear contract at
Wright-Patterson AFB. We also expect to provide similar services to the Air
Force Education and Training Command as well as other DOD facilities worldwide
under our new $50 million Air Force Armstrong Laboratory multiyear contract.
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Air Quality Services -- Versar offers the following air services:
emissions inventories and inventory tracking, air toxics/risk assessments,
dispersion modeling, permitting/compliance status, and design and installation
of control technology. Special capabilities include Risk Management Planning
(RMP) services which are required under Section 112(r) of the Clean Air Act
Amendments of 1990. Versar also has experience with cost of air compliance
analysis which involves economic engineering analysis of control technologies.
This experience, coupled with strong air P2 and emission trading capabilities,
provides our clients with a wide range of options to choose from in responding
to any air issue. Versar has worked with over 100 industrial clients on air
quality matters, including mining, electric utilities, chemical manufacturing,
food processing, steel manufacturing, oil refineries, and other industries. We
have worked with industry groups in evaluating the impact of regulations and
helped them identify cost-effective strategies for complying with regulations.
Versar is helping industry groups to evaluate the impact of regulations and
helping them develop cost-effective strategies for compliance. Strategies vary
from recommending control technologies to achieving air P2 and creating
emissions trading opportunities. Versar has developed practical, innovative
approaches for estimating emissions, performing urban-scale dispersion modeling
analyses, and evaluating emerging control strategies for effectiveness and cost
efficiency.
Versar supported the DOD in determining the optimum strategy for complying
with the 1990 Clean Air Act Amendments (CAAA) for Army, Navy, and Air Force
bases. We have subsequently conducted emission inventories at over 40
installations and are in the process of supporting Title V permits for DOD
installations worldwide under our new $40 million multiyear contract with the
Norfolk District of the Army Corps of Engineers and the $50 million multiyear
contract with the Air Force's Armstrong Laboratory. Representing industry,
Versar participated in EPA roundtable discussions that helped focus the
development of new regulations implementing the new amendments. For the State of
Maryland, Versar prepared a regional assessment of the benefits of the amended
CAAA with respect to nitrate deposition in the Chesapeake Bay. As in the past,
Versar continues to provide permitting and compliance support to various
commercial, industry, and utility clients across the nation.
Research into air and meteorological issues has been a part of Versar's
business since its inception. Air research has included development of new
dispersion models that can better predict plume behavior. Air research has also
involved determining pollutant deposition patterns in support of the Chesapeake
Bay program. Meteorological research has included development of artificial
intelligence (AI) decision support systems for clients such as DOD and
utilities. Versar maintains a full weather center which has provided support to
a wide-variety of clients ranging from utilities and industry to DOD.
Indoor Environmental and Energy Services -- Indoor air quality and human
comfort are two of the most important characteristics of the indoor environment
affecting human health as well as worker productivity. Research indicates that
pollutant levels in the air inside our homes and offices may be two to five
times higher than the air outside. Because people generally spend 75 to 90
percent of their time indoors, the quality of indoor air has become a serious
concern.
Versar's subsidiary, GEOMET Technologies, Inc., is one of the pioneering
firms in the area of indoor air quality, providing research and technical
services to government, industry, and private clients since the early 1970s. In
support of its research programs, GEOMET has developed a wide range of
measurement and analysis capabilities that include radon, volatile organic
compounds (VOCs), biological aerosols, carbon monoxide, nitrogen dioxide,
particles, formaldehyde, inorganics, energy consumption, comfort factors, air
infiltration, and pressured differentials. Indoor air quality, comfort, and
energy studies have been performed in various types of environments, including
single-family homes, apartments, mobile homes, public access buildings,
laboratories, trains, and airline cabins.
GEOMET also provides energy conservation audit and support services.
Clients range from small businesses and utilities to the Federal government.
GEOMET is currently under contract to the General Services Administration to
provide comprehensive energy conservation services at GSA facilities within the
National Capitol Region and recently began work in support of EPA's Energy Star
Program. The Energy Star effort focuses on energy use and conservation
opportunities in buildings, plus environmental aspects of energy conservation.
GEOMET recently completed a successful program for the U.S. Postal Service which
included energy audits at 25 USPS facilities throughout the United States.
Personal Protection Equipment/ChemDemil
Support of the U.S. Army's efforts in Chemical Weapons Demilitarization is
an important business area for GEOMET. Current projects include development of
two different Personal Protective Equipment (PPE) ensembles for use in the
depots where chemical weapons are stockpiled and in activities where exposure to
chemical agents is likely, such as laboratory work and emergency response. The
ensembles include a protective suit, clean air
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source, radio communications, and an individual cooling system for the worker.
GEOMET is a commercial supplier to remedial action contractors and others of PPE
specially qualified for chemical protection. As a member of the Small Burials
Contract Team, GEOMET is involved in the disposal of residual chemical weapons
material at sites throughout the United States. GEOMET's program, now in its
second year, includes outfitting and operating the mobile laboratory which will
support the disposal operations, design of air monitoring and warning systems,
specification of the PPE to be used, and other assignments dealing with
environmental compliance, development of operational procedures, and program
management.
Corrective/Remedial Action
Versar applies both its strong regulatory foundation and its experience
base in compliance management to help clients take appropriate corrective or
remedial action in dealing with contamination and pollution problems. Versar
offers a strategic approach to accelerate cleanup and to reduce costs and
liability. For example, Versar completed a pilot demonstration at Langley, AFB,
in a partnering process whereby the federal and state regulators, the Base, and
other stakeholders agree on issues, the approach to their resolution, and the
use of alternative means of providing project oversight to reduce both the time
and cost of cleanup. Versar's project teams combine the best of its regulatory,
technology, design, and construction management expertise for each project to
ensure that the most cost-effective solutions are developed to meet regulatory
requirements. One integrated field team can support a project from
characterization of the site or problem through implementation of corrective
action or cleanup.
Versar emphasizes a turnkey approach to the investigation, design, and
remedial action process as much as practicable, whether it is a Resource
Conservation and Recovery Act; Comprehensive Environmental Response,
Compensation, and Liability Act; Clean Water Act; state "Brownfields" or other
response action. Examples of Versar's corrective/remedial action activities
include remedial planning and implementation, comprehensive tank management
services, and civil/infrastructure services.
Remedial Planning and Implementation -- Versar has extensive experience in
conducting multimedia investigations to characterize environmental
contamination. It has performed subsurface contaminant investigations at
multiple sites under contracts to the U.S. Army, Air Force, Navy, Coast Guard,
Department of Energy, several states, and numerous private corporations.
Versar's personnel have broad experience in sampling, analysis, and monitoring
of multimedia pollutants. Versar brings to a client an integrated field,
analytical and assessment program to help clients make informed decisions. We
conduct investigations in support of risk assessments, feasibility studies and
engineering design and construction oversight. We maintain an extensive network
of relationships with technology-based firms to aide in accelerated cleanup and
the most cost-effective solutions.
Versar is in its third year of a 5-year, $50 million national contract for
the Air Force Center of Environmental Excellence (AFCEE), performing
environmental support services from preliminary assessment and site
investigations through design and construction oversight. Versar currently has
assignments at Lowry AFB in Colorado; Brooks AFB in Texas; McClellan AFB in
California; Wurtsmith AFB in Michigan; Hanscom AFB in Massachusetts; Grissom AFB
in Indiana; Richards Gebaur in Missouri; and Homestead ARB in Florida. Versar is
also a prime contractor for environmental remedial action support work for the
Air Education and Training Command, the Washington Metropolitan Transit
Authority, NASA, and the Army Corps of Engineers.
Comprehensive Tank Management Services -- Since 1983, Versar has provided
the full range of tank services required by tank owners. The heart of Versar's
approach is an innovative risk rating and prioritization procedure that is used
to cost-effectively schedule tank upgrading and replacement programs for clients
with tanks at multiple locations. Versar has successfully applied the tank
action planning process for clients with up to hundreds of tanks each.
Versar prepares construction bid packages for tank replacements tailored
to individual clients' needs and preferences. Versar also provides construction
management services to verify to our clients that tank installations conform to
the bid package requirements. To better meet its clients' needs, Versar has
augmented its traditional strengths in geotechnical investigations/remediation
services with 1) preparation of plans and specifications for new tank
installations and 2) construction oversight to ensure that these specifications
are achieved.
Versar is now in its seventh year of a multi-year tank upgrading program
for a major telecommunications company, involving 600 Underground Storage Tanks
(USTs) at more than 100 locations across a multi-state region. Versar is
providing comprehensive tank services including: 1) scheduling and cost
estimating; 2) design; 3) construction management; 4) release
investigations/remediation and 5) all permitting and regulatory coordination.
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Civil/Infrastructure Services -- Versar continues to provide traditional
design services for commercial, state, DOD, and Department of Energy (DOE)
clients. One of Versar's Rocky Mountain Region principal clients is the State of
Utah Department of Transportation, for which Versar has several major design
projects for expressway upgrades, new interchanges, and environmental support
work.
Backlog
As of June 30, 1996, total backlog for Versar, including unfunded tasks
and orders, was approximately $325 million, as compared to approximately $306
million as of June 30, 1995. As of March 31, 1997, funded backlog for Versar was
approximately $30.2 million, an increase of 15 percent compared to approximately
$26.18 million as of March 31, 1996. Funded backlog is the incremental funding
authorization of contracts and task orders based on firm contractual
obligations. Unfunded backlog includes contracts and contract vehicles,
including option periods, in which specific work tasks and funding have not been
authorized and for which Versar and the client are contractually obligated to
perform. Funded backlog amounts have historically resulted in revenues; however,
no assurance can be given that all amounts included in funded backlog will
ultimately be realized as revenue.
Markets and Customers
Versar markets its services and technologies to governmental and
industrial customers throughout the United States. Versar also services
customers in Canada, East Asia, South Africa and the Caribbean and will pursue
international projects on a case-by-case basis, e.g., plant facilities or
overseas operations of our U.S. clients. Versar's sales are technical in nature
and involve senior technical and management professionals, supported by Versar's
marketing group. Versar uses a coordinated system of in-house sales staff and
marketing managers, organized regionally. In fiscal year 1996, sales of
approximately 34% of Versar's services and technologies were to private sector
customers and 66% to governmental customers. Of the sales to governmental
customers, 57% was to the Department of Defense and 13% was to the Environmental
Protection Agency (EPA), through various contracts. Versar serves governmental
customers both as a prime contractor and as a subcontractor.
Versar has experienced no difficulty in obtaining supplies and materials
used in its operations and relies on a broad range of suppliers, the loss of any
of which would not have an adverse effect on Versar.
Competition
Versar faces substantial competition in each market in which it operates.
Versar competes primarily on its scientific, technological, and engineering
expertise. To the extent that non-proprietary or conventional technologies are
used, Versar also relies upon its experience and the experience of its
subsidiary, GEOMET, as a basis for competition. Many companies, some of which
have greater resources than Versar, participate in Versar's markets, and no
assurance can be given that other companies, some of which may also have greater
resources than Versar, will not enter its markets.
Almost all contracts for Versar's services and technologies are obtained
through competitive bidding. Industrial customers typically purchase these
services and technologies after a thorough evaluation of price, service,
experience, and quality. Although price is an important factor, it is not
necessarily the determining factor, because contracts are often awarded in part
on the basis of the efficiency of products and services.
Government entities typically award contracts on the basis of technical
qualifications and price. For technical services contracts, the majority of
which are cost-plus-fixed-fee arrangements, technical qualifications are the
primary factor followed by price competitiveness. In many of its technical
service markets, Versar competes with many local, regional, and national firms
on the basis of experience, reputation, and price.
Employees
At June 24, 1997, Versar had approximately 360 full-time employees, of
which approximately 197 were engineers, scientists, and other professionals.
Eighty percent of Versar's professional employees have a bachelors degree, 20%
have a masters degree, and 4% have doctorate degrees.
Market Driving Forces and The Future
The environmental business has historically been driven by environmental
legislation and the enforcement of environmental regulations. The likelihood of
environmental noncompliance over the years has increased as legislation and
implementing regulations have become more stringent. Because of this increased
risk, environmental
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risk management has become a critical and complex process. The costs of
noncompliance, including fines and cleanup, can be substantial. Environmental
laws and regulations affect nearly every industrial and commercial activity, as
well as the agencies of the Federal government and state and local governments
charged with their enforcement. Going forward, Versar believes environmental
laws will be more focused on a risk-based as opposed to a technology based
approach allowing more flexibility in their interpretation and providing
incentives for innovation and "common sense" approach to environmental
management. Versar also believes the 1990s mark the beginning of a cultural
change by both government and industry in recognizing that pollution prevention
and active compliance management are a necessary part of the long-term solution
to the cleanup of our common environment, the protection of the public health
and safety, and the preservation of our natural resources. Versar has positioned
itself to take advantage of this market shift.
Properties
Versar's executive office is located in a building in Springfield,
Virginia, a suburb of Washington, D.C., leased from Sarnia Corporation, which
was spun-off by Versar to its shareholders in June 1994. On June 29, 1994,
Versar initially rented 99,588 and 8,918 square feet of space from Sarnia at a
rate of $13.49 and $8.00 per foot, respectively. In June 1995, Versar reduced
the 99,588 square foot space to 73,371 square feet. In June 1996, Versar reduced
this leased space to 68,239 square feet. The rent is subject to a 4% escalation
per year. Both lease streams are subject to adjustment on June 1, 1999 and 2004.
In these years, the lease streams will be adjusted to the current fair value.
This value will set the base rate of the lease streams in the year of
adjustment. The adjusted lease stream is subject to the contracted escalation in
future years.
As of June 25, 1997, Versar had under lease an aggregate of approximately
167,445 square feet of office and laboratory space in the following locations:
Tempe, AZ; Alameda and Fair Oaks, CA; Northglenn, CO; Miami, FL; Lombard, IL;
Burlington and North Andover, MA; Eden Prairie, MN; Columbia, Gaithersburg, and
Germantown, MD; Cincinnati, OH; Bristol, PA; San Antonio, TX; American Fork, UT
and Springfield, VA.
These leases are generally for terms of five years or less.
Versar believes that its facilities are suitable and adequate for its
current and foreseeable operational and administrative needs.
Legal Proceedings
On June 28, 1990, Gary R. Windolph, a former officer and director of
Versar Architects & Engineers, Inc. ("VA&E", formerly ARIX Corporation, a former
subsidiary of Versar, which was merged into Versar in July 1993) and a former
officer of Versar, filed an action in the District Court for the City and County
of Denver, State of Colorado, entitled Gary R. Windolph v. ARIX Corporation,
Versar, Inc., et al., Case NO. 90-CV-7155. On October 21, 1991, the jury
returned verdicts for Mr. Windolph on two defamation claims against the Company
and awarded him damages in the amount of $200,000. The jury also returned
verdicts for Mr. Windolph on certain of his statutory and common law securities
claims and awarded damages in the amount of $1.00 each on all such claims. On
January 6, 1992, the Court ruled that, based upon the evidence presented at
trial, the $200,000 awarded to Mr. Windolph by the jury was excessive as a
matter of law and ordered a new damage trial on those claims. The retrial of
damages on these claims ended on October 21, 1992 with the jury returning a
verdict against Versar in the total amount of $1,000,001 including $500,000 for
damages to Mr. Windolph's reputation and $500,001 for personal humiliation,
mental anguish and suffering.
Versar promptly filed appropriate post-trial motions seeking either a new
trial or the entry of judgment in an amount less than the jury's verdict. On
January 10, 1993, the Court granted Versar's motion, in part, and gave the
plaintiff the choice of accepting the entry of judgment in the amount of
$75,000, or retrying for a third time the amount of damages for the defamation
claim. The Court also decided, as a matter of law, that the maximum amount Mr.
Windolph could recover was $250,000 due to a statutory limit on non-economic
damages. At the same time, the Court ordered the parties to participate in good
faith in a mandatory settlement conference to try to settle this matter. The
parties were unable to reach a settlement as a result of the settlement
conference held in April, 1993, and the plaintiff rejected the opportunity to
have judgment entered for $75,000 or proceed with a new trial. On June 16, 1993,
the trial court entered final judgment on all outstanding issues.
Both parties appealed to the Colorado Court of Appeals. On May 25, 1995
the Court issued its decision affirming in part, reversing in part and remanding
a part of the case to the trial court. The Court of Appeals reversed the trial
court's dismissal of Windolph's promissory estoppel claim, and remanded with
directions for a new trial on that matter only. The Court of Appeals affirmed
the trial court as to all other matters, including the
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trial court's refusal to enter judgment in Windolph's favor on the two jury
verdicts relating to the defamation claim. Both parties filed motions for
rehearing with the Court of Appeals, which were denied on August 10, 1995.
In September 1995, Windolph sought review of this case by the Colorado
Supreme Court which was denied on February 20, 1996. The case proceeded to trial
on the promissory estoppel claim only. A bench trial without jury was held on
January 27, 1997. On April 3, 1997, the Court entered judgment for Versar on the
promissory estoppel claim rejecting Windolph's arguments on the basis of
Delaware and Colorado law. Alternatively, the Court held that even if its
judgment is overturned on appeal, the maximum liability to Windolph would be
$11,000. On May 23, 1997, the parties entered into a Stipulation of Dismissal
pursuant to which Versar agreed to withdraw its demand for court costs and
Windolph agreed to waive his right to appeal the trial court's decision, thereby
fully terminating this litigation.
As part of the agreement to sell its laboratory assets and operations to
Kemron Environmental Services, Inc. (Kemron) in July 1994, Versar agreed to
refer its analytical laboratory work for a period of 48 months after the closing
date to Kemron subject to certain limitations and exclusions including federal
procurement requirements and the ability of Kemron to perform the required
services. On July 31, 1996, Kemron filed an action in the Circuit Court of
Fairfax County, Commonwealth of Virginia, entitled Kemron Environmental
Services, Inc. vs. Versar Laboratories, Inc. and Versar, Inc., Law No. L154205.
Kemron alleged the defendants breached certain covenants that Versar would refer
laboratory work to Kemron in the Asset Acquisition Agreement and alleged damages
in the amount of not less than $3,000,000.
Versar responded by denying the allegations and filed a counterclaim
alleging various material breaches of the Asset Acquisition Agreement by Kemron
and seeking a declaratory judgment that Kemron's breaches have terminated
Versar's obligations under the Agreement.
On June 16, 1997, the parties entered into a settlement agreement
extending and amending the right of Kemron to the referral of analytical
services from Versar.
Versar and its subsidiaries are parties to various other legal actions
arising in the normal course of business. The Company believes that an ultimate
unfavorable resolution of these other legal actions will not have a material
adverse effect on its consolidated financial condition and results of
operations.
39
<PAGE>
SELECTED FINANCIAL DATA -- VERSAR
The selected consolidated financial data set forth below should be read in
conjunction with the audited and unaudited consolidated financial statements of
Versar and the notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
March 31, Year Ended June 30,
------------------ ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
Consolidated Statement of Operations (In thousands, except per share data)
related data:
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Revenue........................ $32,934 $33,686 $44,283 $39,090 $42,764 $43,012 $48,519
Net Service Revenue.................. 23,320 23,968 31,919 29,347 31,032 32,980 35,325
Operating Income (Loss).............. 907 751 872 560 (1,269) 853 (1,663)
Income (Loss) from Continuing
Operations......................... 873 618 992 458 (2,658) (590) (262)
Net Income (Loss).................... 873 618 992 458 (4,367) (1,093) (996)
Income (Loss) per Share from
Continuing Operations.............. $.17 $.12 $.19 $.09 $(.59) $(.14) $(.07)
Net Income (Loss) per Share.......... $.17 $.12 $.19 $.09 $(.97) $(.27) $(.25)
Weighted Average Shares Outstanding.. 5,230 5,160 5,248 4,834 4,481 4,093 3,945
Consolidated Balance Sheet related
data:
Working Capital...................... $8,884 $7,896 $7,629 $5,425 $5,261 $7,627 $8,513
Current Ratio........................ 2.42 2.11 2.14 1.64 1.68 1.98 1.76
Total Assets......................... 17,812 16,787 16,979 28,195 27,782 31,922 37,733
Current Portion of Long-Term Debt.... -- 512 323 335 1,201 1,198 2.072
Long-Term Debt....................... -- 3 2 4 17 13,494 15,518
Mortgage Debt of Sarnia.............. -- -- -- 12,062 12,403 -- --
------- ------- ------- ------- ------- ------- -------
Total Debt, excluding bank line of
credit............................. -- 515 325 12,401 13,621 14,692 17,590
Stockholders' Equity................. $ 9,075 $ 7,247 $ 7,776 $ 6,290 $ 5,261 $ 8,690 $ 8,951
</TABLE>
Certain amounts in years prior to fiscal year 1994 have been reclassified
to reflect Versar Laboratories, Inc. and Gammaflux, Inc. as discontinued
operations for comparative purposes. In addition, Versar has included the
results of operations and financial position of Sarnia through January 1, 1996.
Sarnia was spun-off to stockholders in fiscal year 1994, but continued to be
reflected in Versar's financial statements due to the guarantee of all of
Sarnia's debt by Versar. After the completion of Sarnia's refinancing of its
debt, Versar's guarantee was reduced from $12.4 million to $1.5 million and the
divestiture was considered complete for accounting purposes.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- VERSAR
Comparison of Nine Months Ended March 31, 1997 to Nine Months Ended
March 31, 1996
Versar's gross revenue for the nine months ended March 31, 1997 totaled
$32,934,000, a decrease of $752,000 (2%) compared to the gross revenue of
$33,686,000 for the nine months of the prior fiscal year. The decrease was
primarily due to the winding down of the Presidio asbestos survey contract in
the Company's Pacific region, which was offset by higher gross revenues in the
Company's Rocky Mountain and Midwest regions in support of the Air Force Center
for Environmental Excellence contract.
Purchased services and materials for the first nine months of fiscal year
1997 decreased $104,000 (1%) compared to costs for the comparable period of the
previous year. The decrease is principally due to the changes in gross revenue
as mentioned above.
Net service revenue decreased by 3% compared to the first nine months of
fiscal year 1996. The decrease is due to the lower gross revenues as mentioned
above.
The percentage of direct costs and services and overhead to net service
revenue decreased slightly to 81.7% in the first nine months of 1997 compared to
82.1% in the first nine months of fiscal year 1996. The decrease is due to
higher direct labor utilization in the first nine months of fiscal year 1997.
Selling, general and administrative expenses approximated 14.6% of net
service revenue in the first nine months of fiscal year 1997, compared to 14.3%
in the first nine months of fiscal year 1996.
Other income includes the revenues that are not directly attributable to
contracts. For the first nine months of fiscal year 1997, the Company recognized
non-compete income from the sale of its majority-owned subsidiary, Gammaflux,
Inc. of $32,000 compared to $21,000 recognized in the first nine months of
fiscal year 1996.
As of January 1, 1996, Versar no longer includes the results of operations
and financial position of Sarnia Corporation ("Sarnia") in the Company's
consolidated financial statements. In January 1996, Sarnia obtained new
financing which reduced Versar's guarantee of Sarnia's indebtedness from
$12,400,000 to $1,500,000. Versar has a reserve of $1,500,000 against the
guarantee.
Operating income for the first nine months of fiscal year 1997 was
$907,000 an increase of $156,000 over the first nine months of fiscal year 1996.
The increase is primarily the result of the exclusion of Sarnia losses in the
first half of fiscal year 1997.
Interest expense during the first nine months of fiscal year 1997
decreased by $47,000 (49%) compared to costs for the comparable period of the
previous fiscal year. The decrease is due to the lower usage of the Company's
line of credit during the first nine months of fiscal year 1997.
Income tax expense during the first nine months of fiscal year 1997
decreased by $52,000 compared to costs for the comparable period of the previous
fiscal year. Income tax expense is affected by the reduction of the Company's
valuation allowance against its deferred tax assets.
Versar had net income of $873,000 for the first nine months of fiscal year
1997 compared to net income of $618,000 for the first nine months of fiscal year
1996. The increase is primarily the result of the reductions of the Company's
valuation against its deferred tax assets and the exclusion of Sarnia losses.
Comparison of Fiscal Years Ended June 30, 1996, 1995 and 1994
Versar's gross revenues for fiscal year 1996 totalled $44,283,000, or
$5,193,000 (13%) above fiscal year 1995 gross revenue of $39,090,000. Gross
revenue for fiscal year 1995 was $3,674,000 (9%) below that reported in fiscal
year 1994. Gross revenue excludes laboratory, real estate and manufacturing
revenues from operations. Discontinued subsidiaries of Versar Laboratories, Inc.
and Gammaflux, Inc. have been presented as discontinued operations in Versar's
Consolidated Financial Statements. The increase in Versar's revenue in the last
fiscal year was due to task orders being performed in the Company's Midwest and
Rocky Mountain regions in support of the Air Force Center for Environmental
Excellence contract. As reflected in the table on page 43, government revenue
represented 66% of the total revenue in 1996, compared to 64% in 1995 and 62% in
1994.
41
<PAGE>
Purchased services and materials for fiscal year 1996 totalled $12,364,000
or $2,621,000 (27%) higher than fiscal year 1995 purchased services. Purchased
services for fiscal year 1995 were $1,989,000 (17%) lower than reported for
fiscal year 1994. The increase in 1996 was principally due to the increase in
gross revenue as mentioned above. The decrease in 1995 was due to the winding
down of the Company's USATHAMA and EPA OMMSQA contracts.
Direct costs of services and overhead include the cost to Versar of direct
and overhead staff, including recoverable overhead costs and unallowable costs
that are directly attributable to overhead. The percentage of these costs to net
service revenue slightly increased to 81.4% in 1996 compared to 81.0% in 1995
and 82.2% in 1994. In 1996, the net service percentage remained relatively
stable compared to 1995. The decrease in the percentage of costs in 1995
compared to 1994 is attributable to improved labor utilization primarily in the
Company's Rocky Mountain and Pacific regions.
Selling, general and administrative expenses approximated 15.5% of net
service revenue in 1996, compared to 17.0% in 1995 and 16.6% in 1994. The
decrease is attributable to the higher volume of net revenue while the selling,
general and administrative expenses were maintained at 1995 levels.
Other (income) expense include costs and revenues that are not directly
attributable to contracts. In 1996, the Company recognized non-compete income
from the sale of its majority-owned subsidiary Gammaflux, Inc. of $28,000
compared to $47,000 in fiscal year 1995, and $78,000 in fiscal year 1994. In
1995 the remaining $214,000 of other (income) expense was due to the reversal of
$174,000 of anticipated costs that were ultimately not incurred as a result of
winning new contracts and the reduction of other operating reserves of $40,000.
In fiscal year 1994, the remaining $1,161,000 of other costs were for other real
estate losses of $400,000, $305,000 of transaction costs associated with the
spin-off of Sarnia, and $456,000 for software and service contracts which were
determined to be of limited future value.
Losses on Sarnia operations of $142,000 were recorded in the first six
months of fiscal year 1996 compared to losses of $270,000 in fiscal year 1995.
See Note B in the audited consolidated financial statements of Versar included
elsewhere in this Proxy Statement/Prospectus. The losses were recorded as a
separate line item due to the spin-off of Versar's real estate entity to
stockholders on June 30, 1994, which was completed as of January 25, 1996.
Operating income for 1996 was $872,000, an increase of $312,000 over
fiscal year 1995. The increase is primarily due to the lower selling, general
and administrative expenses as a percentage of net service revenue as discussed
above. Fiscal year 1995 operating income increased by $1,829,000 due to
decreased other costs and direct costs of services and overhead.
Interest expense in 1996 was $96,000, a decrease of $62,000 from 1995. The
decrease is due to reduced debt in fiscal year 1996. Interest expense in 1995
was $158,000, an increase of $101,000 from 1994 due to the assumption of
$1,000,000 of debt from Sarnia, which was paid in full in fiscal year 1995.
Versar's benefit for income taxes for fiscal year 1996 was $216,000
compared to a benefit of $56,000 in 1995. The Company reduced the valuation
against the deferred tax assets due to the improved earnings and future earnings
potential. In fiscal year 1994, the Company recorded a $1,309,000 tax expense as
a result of the spin-off of Sarnia as Versar's tax assets could no longer be
offset with Sarnia's tax liabilities.
Losses from discontinued operations for 1994 were $2,265,000. The loss was
attributable to the provision of $1,600,000 recorded by the Company during the
third quarter of fiscal year 1994 to discontinue its laboratory operations.
In the first quarter of 1994, the Company recognized $556,000 of income
with the adoption of SFAS No. 109, "Accounting for Income Taxes," which required
the Company to compute deferred taxes using the liability method.
In summary, Versar's net income was $992,000 in fiscal year 1996, compared
to net income of $458,000 in fiscal year 1995 and a net loss of $4,367,000 in
fiscal year 1994.
Versar provides environmental risk management services to various
industries, government and commercial clients. A summary of revenue generated
from the Company's client base is as follows:
42
<PAGE>
For the Years Ended June 30,
---------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands, except for percentages)
Government
EPA $ 3,787 9% $ 5,375 14% $ 6,151 15%
State & Local 6,733 15% 4,607 12% 7,797 18%
Department of Defense 16,479 37% 13,194 34% 11,260 26%
Other 2,035 5% 1,707 4% 1,312 3%
Commercial 15,249 34% 14,207 36% 16,244 38%
------- --- ------- --- ------- ---
Gross Revenue $44,283 100% $39,090 100% $42,764 100%
======= === ======= === ======= ===
Liquidity and Capital Resources
Versar's working capital at March 31, 1997 approximated $8,884,000 or
$1,255,000 (16%) higher than at June 30, 1996. In addition, Versar's current
ratio at March 31, 1997 was 2.42 to 1, 13% higher than that reported at the end
of fiscal year 1996.
Effective April 30, 1997, Versar entered into a line of credit facility
with NationsBank, N.A. This line of credit is restricted to a borrowing base of
qualifying receivables less $1,500,000, with a maximum of $3,000,000 available.
Borrowings on the line are at the lower of the 30 day libor plus 250 or the
prime rate. A fee of 1/4% on the unused portion of the line of credit is also
charged. The line is guaranteed by Versar and each of Versar's subsidiaries
individually and is collectively secured by accounts receivable, equipment and
intangibles, plus all insurance policies on property constituting collateral.
Advances on the line are due November 30, 1998. As of June 30, 1997, $273,603 of
borrowings were outstanding under this line of credit. Management believes that
cash generated by operations and borrowings available under the line of credit
will be adequate to meet the working capital needs for fiscal year 1998.
Approximately $200,000 will be required for currently contemplated capital
expenditures during fiscal year 1998 and will be funded from current working
capital.
Impact of Accounting Standards
In March 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS
121 is effective for fiscal year 1997, and requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS 121 has
not had a material effect on the financial position or results of operations of
Versar.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) was issued in October, 1995 and is
effective for fiscal years beginning after December 15, 1995. The Statement
encourages, but does not require, adoption of the fair value based method of
accounting for employee stock options and other stock compensation plans. The
Company has opted to account for its stock option plan in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." By doing so, Versar,
beginning in fiscal year 1997, is required to make proforma disclosure of net
income and earnings per share as if the fair value based method for accounting
defined in SFAS 123 had been applied. Versar will comply by providing the
required disclosures in its financial statements for the fiscal year ended June
30, 1997, but will not make an accounting principle change.
Impact of Inflation
Versar seeks to protect itself from the effects of inflation. The majority
of contracts Versar performs are for a period of one year or less or are cost
plus fixed-fee type contracts and, accordingly, are less susceptible to the
effects of inflation. Multi-year contracts provide for projected increases in
labor and other costs.
43
<PAGE>
RECENT DEVELOPMENTS
On May 7, 1997, in connection with the closing of Versar's purchase of
Imperial's interests in SMC, James A. Skidmore, Jr., President and Chief
Executive Officer of SMC, was appointed to the Versar Board of Directors as Vice
Chairman. Mr. Skidmore will serve as a member of the Versar Board of Directors
until the next annual stockholders' meeting of Versar and until his successor is
elected and qualified. Set forth below is a biography of Mr. Skidmore.
James A. Skidmore, Jr. has served as President and Chief Executive Officer
and a director of SMC since 1972 and as Chairman of the Board of Directors of
SMC since 1975. Mr. Skidmore is a director of the Blue Cross and Blue Shield of
New Jersey, HMO Blue and Medigroup, a consultant to the U.S. Junior Chamber of
Commerce, a member of the Board of Advisory Trustees for The State University of
New Jersey, Rutgers-Management School of Business, a member of the Board of
Trustees for the Public Affairs Research Institute of New Jersey, Inc. and a
Board member of the New Jersey State Chamber of Commerce.
On September 10, 1997, Versar announced for its fiscal year ended June 30,
1997, gross revenue of $48,517,000, net income of $1,256,000 and net income per
share of $0.24. For the fiscal year ended June 30, 1996, gross revenue, net
income and net income per share were $44,283,000, $992,000 and $0.19,
respectively. The increase in gross revenue for the 1997 fiscal year is due
primarily to the inclusion of the revenue and operating results of SMC for the
last two months of fiscal year 1997, subsequent to Versar's purchase of a
majority interest in SMC. The increases in net income and net income per share
are due primarily to a combination of lower direct costs of services and lower
selling, general and administrative expenses relative to net service revenues in
1997.
BUSINESS OF SMC
SMC is a diversified international professional services firm, providing
clients in the private and public sectors with expertise in four major areas as
follows: (i) management services, (ii) information system services, (iii)
environmental services and (iv) engineering, design and construction services to
the process industry. These services are provided through four primary operating
groups -- SMC Consulting, SMC Business Information Systems, SMC Environmental
Services Group and SMC McEver (SMC's Engineering, Design and Construction
Services Group). SMC's operating groups provide (i) consulting services to the
healthcare, food and petrochemical industries to assist companies to more
effectively utilize their human and physical resources, (ii) systems support and
technology-based services in the area of facilities management, business
recovery and professional support services, (iii) geotechnical, civil and
environmental engineering, design and construction management services to
municipal and industrial clients and (iv) design, engineering and construction
services to the petrochemical industry, material handling projects and specialty
chemical plants.
SMC was incorporated under the laws of the State of Delaware in 1957 as
the successor to Work Factor Company, which commenced doing business in 1946.
SMC is headquartered in Bridgewater, New Jersey and has offices in New York,
Connecticut, Pennsylvania, Tennessee, Texas, London and Paris.
SMC filed for bankruptcy in the Bankruptcy Court in the District of New
Jersey (the "Bankruptcy Court") on July 28, 1993 and emerged from bankruptcy on
July 10, 1996. During the pendency of SMC's bankruptcy, SMC's operating
subsidiaries, which were not included in the bankruptcy proceedings, continued
to operate SMC's traditional business, albeit with limited financial resources.
In order to enhance its operating cash flows during this period of limited
financial resources, SMC instituted stringent cost controls and emphasized
targeted marketing of those of its services that have relatively high profit
margins.
Pursuant to the Bankruptcy Plan, SMC sold its operations in Belgium,
Germany, France and the Netherlands in satisfaction of certain pre-petition
secured debt. Revenues from these operations constituted 20% of SMC's total
revenues and 81% of its European revenues for the seven months ended July 31,
1996.
Following emergence from bankruptcy, due to certain disputes between SMC
management and the then new majority stockholder of SMC, Imperial, as further
described under " - Legal Proceedings" and under "THE MERGER - Background and
Reasons for the Merger," and the failure of the SMC Board (which was controlled
by Imperial) to approve the securing of working capital lines, SMC suffered
continuing problems in growing its business and returning to profitability.
These problems have now been resolved by the acquisition by Versar of the equity
interests held by Imperial. See "THE MERGER -- Background and Reasons for the
Merger" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - SMC -- Liquity and Capital Resources."
<PAGE>
Notwithstanding these difficulties, since emerging from bankruptcy, SMC
has developed a new consulting operation in France and has signed a strategic
alliance with its ex-Dutch subsidiary which continues to use the SMC
international tradename.
Set forth below is a discussion of the primary operating groups within
SMC.
44
<PAGE>
SMC Business Information Systems
SMC Business Information Systems ("BIS") is headquartered in Bridgewater,
New Jersey, with offices in Connecticut, Tennessee and New York. The business of
BIS is conducted through SMC Business Information Systems, Inc., a wholly-owned
subsidiary of SMC. BIS offers systems support in technology-based services to
the business community and nonprofit sector in three distinct, although not
mutually exclusive, areas as follows: Facilities Management, Business Recovery,
and Professional Support Services.
In the facilities management or "outsourcing" area, BIS offers clients a
full range of services in managing, staffing and operating data processing
centers, operations or specific functions in accordance with client
specifications. Services performed and functions managed include data entry,
tape handling, library management, maintenance, and systems development. BIS
currently manages data centers in Connecticut and Tennessee under multi-year
subcontracts from IBM, performing a variety of activities for clients in several
industries. With low overhead and highly skilled management, BIS is able to
offer outsourcing services at significantly lower costs than larger competitors.
The facilities management operations of BIS have built an excellent service
record, historically achieving performance reliability targets well in excess of
contract requirements with consistency.
In the business recovery area, BIS offers a complete menu of services
covering all aspects of business continuation and recovery services. Through its
highly qualified staff and consultants, BIS professionally and costeffectively
evaluates a client's business continuation and recovery needs, creates specific
disaster recovery plans and programs, and audits, updates or tests existing
client plans for data backup and disaster response. Unlike many of its
competitors, however, BIS can also perform as a full solution provider, offering
clients online backup facilities and access to state of the art alternate EDP
operating sites in its capacity as a business partner to IBM and other well
known vendors. In this role, BIS professionals assist clients in identifying and
specifying their needs, arrange for backup or "hot sites" with their business
partners and support implementation, testing, and periodic update of the total
business continuation or disaster recovery program.
The professional services support group of BIS supports all of its
services and can also offer clients support in a variety of systems needs,
including network and internet anti-virus protection programs and products.
SMC Consulting
SMC Consulting (the "Consulting Group"), with offices in Bridgewater, New
Jersey, London and Paris, carries on a fifty year tradition of providing client
productivity enhancement services which constituted the original core business
of SMC. The business of the Consulting Group is conducted through SMC Management
Services Group, Inc., a wholly-owned subsidiary of SMC, and two European
subsidiaries. The Consulting Group provides management consulting services
designed to support and guide clients in their efforts to improve operating
efficiency, reduce cost, satisfy customer needs, assure quality and increase
profitability without disruption to operations or major capital expenditures.
The Consulting Group provides consulting services to assist its clients in
identifying areas needing improvement, makes specific recommendations, develops
programs and actively participates in their implementation. With a "Total
Enterprise" approach to productivity, the Consulting Group helps clients improve
profitability by more effectively employing all their resources (personnel,
materials, equipment, facilities, organizational structure and technology) in
day-to-day operations and in adapting to everchanging business conditions. The
Consulting Group's area of service include:
o Profit improvement
o Team building and management effectiveness
o Organizational analysis
o Complexity reduction
o Quality effectiveness/reengineering
o Business process reengineering
o Continuous improvement
45
<PAGE>
o Logistics
o Documentation reduction
o Maintenance
o Technology management
o Plant flexibility and scheduling
The Consulting Group employs a variety of proprietary analytical
techniques that SMC has developed, including the "Work-Factor(R) System" a
widely recognized, predetermined elemental time system used to measure the human
work component of highly-repetitive manufacturing processes. SMC has also
developed other systems and techniques designed to improve the productivity of
administrative, support and professional personnel in a wide range of functions.
Historically, the Consulting Group has provided services for a lengthy
list of major clients in a variety of industries both domestically and overseas.
In the early 1990s, as resources became limited and the domestic consulting
market softened, SMC made a strategic decision to concentrate on its consulting
business in Europe. During this period, the domestic consulting business was
wound down and domestic clients were not aggressively pursued. In 1995, SMC
began a process of reentry into the domestic consulting market. In reentering
the domestic market, SMC has faced a variety of significant obstacles including
continued resource limitations and the reorganization process in connection with
the Bankruptcy Plan. In addition, SMC has suffered from a lack of current
domestic client references, a lengthy selling cycle and stiff competition in the
marketplace. In an effort to overcome these obstacles, SMC has renewed contacts
with former clients and established a Work-Factor(R) user newsletter.
Additionally, personnel with prior SMC credentials have been added at minimal
cost, both on staff and through consulting arrangements. Through cross-licensing
agreements with outside vendors, automated Work-Factor(R) packages have been
added to SMC's offerings. Assignments of long-term recurring or multi-location
implementation potential are being aggressively pursued. The Consulting Group
has recently obtained a significant domestic assignment in the healthcare field.
However, no assurance can be given that the Consulting Group's marketing efforts
will result in the award of additional contracts.
In Europe, the Consulting Group has faced a challenge of rebuilding its
business from a significantly restructured base. In connection with the
Bankruptcy Plan, certain former subsidiaries in several countries were divested.
SMC is now focusing on rebuilding its former Pan-European business through its
existing office in London and a newly established French company. Business
contracts in both Western and Eastern Europe have been secured. SMC is also
seeking opportunities for strategic alliances or licensing relationships and has
recently concluded such an arrangement with its former subsidiary in the
Netherlands.
SMC Environmental Services Group
SMC Environmental Services Group ("ESG"), founded in 1956 and acquired by
SMC in 1970, is headquartered in King of Prussia, Pennsylvania with a branch
office in Bridgewater, New Jersey. The business of ESG is conducted through SMC
Environmental Services Group, Inc., a wholly-owned subsidiary of SMC. ESG
provides geotechnical, civil and environmental engineering and design and
construction management services to clients in the public and private sectors.
ESG has developed a reputation for excellence and practical
problem-solving and innovative management of land, resources and waste. Its
business has been built through years of integrating applied science with
engineering. ESG engineers work hand-in-hand with regulatory specialists to
provide clients with cost-effective solutions to problems. Engineers are backed
by SMC's experts in land planning, hydrology, risk assessment, water and air
resources, wetlands and surveying.
Since SMC emerged from bankruptcy, and in light of a reduction in
environmental activity in the private and public sectors, ESG has suffered
protracted delays in contract awards and reestablishment of client
relationships. During this period, many state governments have also relaxed
their environmental cleanup standards to promote economic growth, slow the
conversion of green open space and discourage industrial businesses from
relocating. As a result of this slowdown in the environmental services area, ESG
has developed a focus on "niche" innovative environmental technologies in the
functional areas of:
o Remedial design and engineering
46
<PAGE>
o Soil and groundwater cleanup
o Consulting Services
More and more clients are asking how their project can be accomplished
more efficiently with imaginative approaches. To this end, ESG has made the
investment in terms of the marketing and technical expertise in a new
alternative to conventional remedial technologies, known as Bio-Injection. This
method of remediation allows the concurrent treatment of soils and groundwater
with a mixture of bacteria and nutrients. This process typically requires a
one-time treatment with positive results achieved within months instead of years
at a fraction of the cost of conventional treatment methods.
ESG has also positioned itself to be a leader in marketing services
related to the environmental standards currently under consideration by the
International Organization for Standards, ISO 14000. A follow on to the ISO 9000
quality standards promulgated and widely adopted several years ago, ISO 14000
will establish voluntary environmental compliance standards for the
international business community. ESG has been working over a year to position
itself on the "Leading Edge" for marketing its consulting services to the
creation or audit of compliance programs targeting ISO 9000 certified companies.
While the emergence of this market has been significantly delayed awaiting the
issuance of final standards, management believes it to be a very large potential
market for ISO 14000 certification. As a non-capital intensive service driven by
"in-house expertise", management anticipates a potential for a profitable
addition to ESG's offerings.
Engineering, Design and Construction Services Group
SMC's Engineering, Design and Construction Services Group ("McEver") is a
Houston based engineering and construction company. The business of McEver is
conducted through SMC McEver, Inc., a wholly-owned subsidiary of SMC. Founded in
1966, and acquired by SMC in 1978, McEver provides design, engineering and
construction services to the process industries. Typical clients include
refinery and petrochemical plants, materials handling projects, specialty
chemical plants, bulk storage terminals, pipelines and other manufacturing
facilities. McEver also provides consulting services for a variety of projects
with unique engineering and construction demands.
With very special expertise in the engineering and construction of
refinery and petrochemical plants, McEver focuses its resources and experience
on providing services that encompass all relevant disciplines from concept
through completion and startup. This includes:
o Construction and construction management
o Detailed design and documentation
o Engineering specifications
o Equipment and materials procurement
o Cost analysis
o The preparation of bid packages
o Environmental impact statements
McEver's team of certified professionals are experts in all the necessary
disciplines. Assisted by a force of highly-skilled technicians, they prepare and
supervise every phase of each project. Although providing a comprehensive set of
services from a single source, McEver offers clients the choice of using any
individual service, or combination of services it provides, including services
available from other SMC divisions. McEver was recently awarded a substantial
contract for the design and construction of a specialty chemical plant.
Employees
At June 30, 1997, SMC had approximately 200 domestic employees and
approximately 20 employees located in Europe. SMC uses the services of a variety
of contractors and sub-contractors as needed to perform various assignments for
clients.
47
<PAGE>
Properties
SMC sub-leases approximately 5,700 square feet, at the rate of $22 per
square foot, in an office building in Bridgewater, New Jersey, in which the
Company's executive and administrative offices are located. The lease is
currently effective on a month-to-month basis. SMC is negotiating a new two-year
lease for this space.
SMC and its subsidiaries also currently lease (a) approximately 11,000
square feet in King of Prussia, Pennsylvania (Lease is running month-to-month);
(b) approximately 17,700 square feet in Houston, Texas (Lease expires on May 31,
2002 with a five year renewal option); (c) approximately 500 square feet in
Oyster Creek, Texas (Lease expires on July 31, 1998); (d) approximately 500
square feet in London, England (Lease expires on May 12, 1998); (e)
approximately 500 square feet in Bievres Cedex, France (Lease expires on June
30, 2000 with two three-year renewal options).
Legal Proceedings
Shortly after SMC emerged from bankruptcy on July 10, 1996, disputes arose
between its new majority investors, Imperial Capital Worldwide Partners, L.P.,
and the management of SMC. 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,
Sarasohn, 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 SMC to operate SMC 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,
including the termination of Mr. Skidmore's employment as President and Chief
Executive Officer of SMC, to enjoin their interference with Mr. Skidmore's day
to day management of SMC and to permit SMC to obtain working capital.
As part of the Stock Purchase Agreement dated April 30, 1997 between Versar
and Imperial 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 releases
have been executed and the Stipulation of Dismissal has been filed in the Ravin,
Sarasohn case. The mutual releases have been signed by all but one plaintiff in
the Skidmore case. The court in the Skidmore case issued an Order of Dismissal
on September 9, 1997 dismissing the case without prejudice and providing that
the dismissal will become with prejudice in 14 days, unless a motion seeking to
vacate the Order of Dismissal is filed before then. The one plaintiff who has
not signed a release had the right to file such a motion and attempt to pursue
the claim; however, she will be unable to pursue the claim if she did not file
such a motion within the 14 day period. As of September 25, 1997, SMC has not
been notified of the filing of such a motion.
In June 1996, Flintlock Ltd., a client of SMC McEver, a subsidiary of SMC,
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. SMC does not expect the outcome of this litigation to have a
material adverse effect on its financial condition or its results of operations.
SMC and its subsidiaries are parties to various other legal actions arising
in the normal course of business. SMC believes that the ultimate unfavorable
resolution of these other legal actions would not have a material adverse affect
on its consolidated financial condition or results of operations.
48
<PAGE>
SELECTED FINANCIAL DATA - SMC
<TABLE>
<CAPTION>
Unaudited
Six Months
Ended
June 30, Year Ended December 31,
----------------- -------------------------------------------
1997 1996(2) 1996(1) 1996(2) 1995(2) 1994(2) 1993(2) 1992(2)
---- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
Consolidated Statement
of Operations related
data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenue ......... $12,429 $12,438 $11,707 $14,039 $28,835 $22,821 $21,828 $34,837
Operating Income (Loss) 161 (153) (351) (318) 23 163 (5,245) (3,451)
Net Income (Loss) ..... 143 (412) (307) 320 (484) (789) (6,725) (6,114)
Net Income (Loss) per
Share ................. .07 -- (.15) -- -- -- -- --
Weighted Average
Shares Outstanding .... 2,000 -- 2,000 -- -- -- -- --
Consolidated Balance
Sheet related data:
Working Capital ....... 1,397 (9,904) 1,208 1,307 (6,284) (5,544) (5,413) (1,142)
Current Ratio ......... 1.32 0.24 1.40 1.56 0.52 0.56 0.57 0.91
Total Assets .......... 7,183 4,287 5,776 5,354 8,232 8,338 8,636 15,958
Current Liabilities ... 4,373 13,106 2,996 2,332 13,221 17,242 12,545 12,781
Liabilities from
reorganization plan ... 1,010 197 1,123 1,058 -- -- -- --
Total Liabilities ..... 5,383 13,303 4,119 3,390 17,620 17,242 16,751 17,273
Stockholders' Equity .. 1,800 (9,016) 1,657 1,964 (9,388) (8,904) (8,115) (1,315)
</TABLE>
- ----------
1 Represents five-month period ended December 31, 1996 of reorganized company
following SMC's emergence from bankruptcy.
2 Represents six-month period ended June 30, 1996, seven-month period ended
July 31, 1996 and the fiscal years ended December 31, 1992 through 1995 of
the predecessor company prior to SMC's emergence from bankruptcy. Statement
of Operations data for December 31, 1992 through 1995 and Balance Sheet
data for December 31, 1992 through 1994 are unaudited. Earnings (Loss) per
share of the predecessor company are not presented as the presentations are
not meaningful.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SMC
First Six Months and Second Quarter 1997 Compared to 1996
Gross revenue for the first half of 1997 was virtually unchanged from the
first six months of 1996, despite the absence in the 1997 period of the
Company's former European subsidiaries, which collectively contributed $2.9
million in revenues during the first half of 1996. This improvement came about
through significantly increased revenues in the Company's engineering and
construction business and domestic consulting business. The engineering and
construction increase reflected strong second quarter 1997 sales on new
projects, compared with a relatively slow second quarter in 1996, while the
increase in the consulting business was driven by work received in February
1997.
Gross revenue for the second quarter of 1997 increased $102,000 (2%) over
the comparable 1996 period. This resulted from the strong sales in the
engineering and construction and consulting units as noted above. In addition,
the gross revenues in the second quarter of 1997 included revenues of
approximately $474,000 from SMC's current efforts to rebuild its European
business. This significantly tempered the reduction of $947,000 of revenue
contributions during the second quarter of 1996 from the former European
businesses, which were sold in May 1996 in accordance with the Company's Plan of
Reorganization.
Purchased services and materials increased by $1,426,000 (31%) and
$1,062,000 (45%) in the first six months and in the second quarter of 1997,
respectively, as compared to similar periods in 1996. These increases reflected
the greater relative contribution from the engineering and construction units,
with a higher level of direct pass-through costs, coupled with the use of
contracted consultants in the current year.
The $1,216,000 (24%) reduction in direct costs of services and overhead for
the first six months of 1997 compared with the first six months of 1996 resulted
from lower direct salaries and wages in the environmental engineering unit in
the current year period along with the impact of the sale of SMC's former
European businesses in 1996. This reduction reflected both the decreased labor
utilization in the environmental engineering unit in 1997 and the impact of
additional personnel on staff during the first quarter of 1996 to fulfill a
major design and construction project, which was concluded in April 1996. The
$643,000 (26%) decrease in this category for the second quarter of 1997 compared
with the second quarter of 1996 resulted largely from the same factors as
mentioned above.
Selling, general, and administrative expenses decreased $533,000 (18%) in
the first six months and $395,000 (26%) in the second quarter of 1997 as
compared to similar periods in 1996. This reduction reflected cost control
measures throughout the Company, led by reduced commercial insurance costs
through consolidation of the insurance program, as well as the impact of the
absence in 1997 of general and administrative expenses from the former European
businesses.
The absence of interest expense in the current year resulted from the
satisfaction in May 1996 of a secured interest-bearing pre-petition claim on the
sale of the former European subsidiaries.
Income tax expense in 1996 resulted entirely from the former European
subsidiaries.
SMC reported net income of $143,000 for the first six months and $132,000
for the second quarter of 1997, compared with losses of $412,000 and $140,000 in
the respective periods of 1996. The improvement is the result of improved
earnings in the consulting services and engineering and construction units, both
of which were profitable in the 1997 periods after reporting losses for the
first six months of 1996, complemented by increased profitability levels in the
business information systems unit. These gains were offset in part by continuing
losses in the environmental unit, which has experienced significant revenue
declines primarily as a result of decreased environmental enforcement activity
in its service area.
Comparison Of The Five Months Ended December 31, 1996, The Seven Months
Ended July 31, 1996, And The Years Ended December 31, 1995 and 1994
SMC filed a voluntary petition for relief under Chapter 11, Title 11 of
the U.S. Bankruptcy Code on July 28, 1993. During all of 1994 and 1995, SMC
operated as a debtor-in-possession under the supervision of the Bankruptcy
Court. SMC's Bankruptcy Plan was confirmed by the Bankruptcy Court on April 17,
1996, and became effective on July 10, 1996. At that time, SMC adopted "fresh
start" reporting procedures in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code." Application of the
principles of "fresh start" reporting effectively results in the creation of a
new reporting entity following emergence from the bankruptcy proceedings.
Accordingly, the accompanying financial presentation for 1996 have been
segregated into two periods, with the seven-month period ended July 31, 1996
reflecting operations of SMC prior to emergence from the Chapter 11 proceedings,
and the five-month period ended December 31, 1996, reflecting the operations of
the reorganized company subsequent to emergence.
Substantially all of SMC's revenues are derived from the operations of the
SMC subsidiaries. SMC's result for the seven months ended July 31, 1996, include
the operations of SMC's former European subsidiaries in Belgium, Germany,
France, and the Netherlands, which, in accordance with the terms of the
Bankruptcy Plan, were sold in May, 1996, in satisfaction of certain debt which
had been secured by the stock of those subsidiaries.
Sales of $14,039,000 for the seven-month period of 1996 included
approximately $2,854,000 derived from the disposed European subsidiaries'
operations. Sales for that period of $11,185,000, representing the operations of
the surviving entities, reflected an increase of approximately 14% over the
first seven months of 1995. Reorganized company sales of $11,707,000 for the
five months ended December 31, 1996, compare favorably with both sales for the
first seven months of the year and "surviving entity" sales of approximately
$11.0 million for the final five months of 1995. In both cases, the increases
came about primarily as a result of strengthened contributions from the
reorganized company's engineering design and construction unit, coupled with the
50
<PAGE>
contribution in the five-month period of a newly established consulting unit in
Europe and increased domestic consulting revenues. These gains were offset in
part by a decline in sales from the environmental engineering unit.
The predecessor company's sales increase of $6.0 million (26%) from 1994
to 1995 resulted primarily from a substantial increase in revenues in the
engineering group. This group of SMC's business, which had suffered from a
dearth of new projects in 1993 and 1994, was significantly bolstered in both
1995 and 1996 by awards of substantial design and construction contracts from
major clients. The 1995 increase was somewhat offset by a sales decline in the
consulting group.
Cost of sales for the seven-month period represented 82% of sales,
compared with 88% for the reorganized company's five-month period in 1996. The
higher percentage for the five months reflected the absence of the relatively
higher-margin European consulting businesses coupled with the increased revenue
derived from construction projects in the engineering group, which included
significant direct materials costs "passed through" to the clients with little
or no associated markup. Similarly, the predecessor company's costs of sales
relative to gross sales increased from 73% in 1994 to 79% in 1995 as a result of
the proportional 1995 revenue increase attributable to construction projects in
the engineering group noted above.
Selling, general, administrative expenses for the seven-month period of
the predecessor company in 1996 were $2,775,000, or 20% of sales, compared with
$1,771,000 (15% of sales) for the reorganized company in the five months ended
December 31, 1996. The decrease relative to sales reflected comparatively high
selling, general, and administrative expenses in the European companies during
the first five months. Fixed overhead costs in the management services and
systems services units, which include such items as incentive compensation and
government mandated benefits expenses, have been greater in the management
services unit, particularly in Europe. The reorganized company benefitted from
relatively lower selling, general, and administrative costs reflecting both the
ongoing cost control measures in place in the domestic units and the greater
proportion of project-driven direct costs in the engineering businesses than in
the management services and systems services unit.
Selling, general, and administrative expenses were relatively stable from
1994 to 1995, decreasing from $6,044,000 to $5,956,000 (1%). This reflected the
same fixed cost trends noted above. The significant decrease in selling,
general, and administrative expenses as a percentage of sales for those periods
(26% in 1994 compared with 21% in 1995) resulted from the greater contribution
to total sales from the engineering group, with lower selling, general, and
administrative and higher cost of sales patterns, in the latter year.
Interest income (net) in each of the predecessor company's seven-month
period ended July 31, 1996 and years ended December 31, 1994 and 1995, primarily
reflected interest charges on the $2,000,000 loan secured by the stock of the
European subsidiaries, offset in part by interest earnings on excess cash held
in those subsidiaries. With this debt satisfied upon reorganization by the sale
of the European subsidiaries in satisfaction of the debt, neither the interest
expense on the debt itself nor the benefit from invested cash balances in the
European companies were present in the five months ended December 31, 1996, for
the reorganized company.
The aforementioned sale of the subsidiaries in satisfaction of the secured
debt in May, 1996, resulted in the $846,000 gain on sale. The gain reflected the
difference between the carrying value of the debt and unpaid interest satisfied
through the sale and that of the investment in the subsidiaries sold.
Net reorganization costs reported for each of 1996, 1995 and 1994 include
the directs associated with SMC's reorganization process. In each case, these
consist primarily of legal and other professional fees; other components include
fees paid to the office of the U.S. Trustee and, in 1996, costs associated with
the cancellation of SMC's old common stock and issuance of new stock, as
specified in the Bankruptcy Plan. The Bankruptcy Plan specified a maximum amount
of administrative and professional fees which would be allowed under its terms;
this ceiling was reached in late 1995. As a result, the level of such costs
decreased significantly in 1996.
As a result of operating loss carryforwards and ongoing operating losses,
SMC has not incurred a Federal income tax liability during any of the reported
periods. Amounts reported as provision for income taxes for each of the years
ended December 31, 1994 and December 31, 1995, and the seven months ended July
31, 1996, are comprised of primarily foreign income taxes and reflect the
results of the European operations.
Reorganized SMC reported a net loss of $307,000 for the five months ended
December 31, 1996, compared with predecessor company net income of $320,000 for
the seven months ended July 31, 1996, and net losses of $484,000 and $789,000,
for the years ended December 31, 1995 and 1994, respectively. The reorganized
company loss in the five-month period primarily reflected losses in the
environmental engineering business and the surviving overseas management
services units. The seven-month 1996 period benefitted from significant profits
in the
51
<PAGE>
engineering and systems units and a gain from the sale of certain European
subsidiaries. The European units and domestic engineering business contributed
operating profits in 1994, although the former was significantly reduced by
income tax costs, with reorganization costs and lagging domestic consulting
income producing a net loss.
Liquidity And Capital Resources
Throughout 1994, 1995 and 1996, the Company continued to suffer from
liquidity difficulties, both during the pendency of the Chapter 11 proceedings
and following its emergence from Chapter 11 in July, 1996. The absence of
adequate financial resources throughout the reported periods significantly
impaired the ability of SMC to pursue and secure business in all of its domestic
units.
At December 31, 1995, the predecessor company's current liabilities
exceeded its current assets by $6.2 million. With the emergence from the Chapter
11 proceedings, the reorganized company's current assets exceeded current
liabilities by amounts of $1.3 million and $1.2 million at July 31, 1996 and
December 31, 1996, respectively. However, the bulk of the current assets at
those dates consisted of accounts receivable and unbilled receivables (work in
process) which lacked the currency of continuing liabilities.
Under the Bankruptcy Plan, no injection of working capital was realized by
the reorganized SMC. Debt financing proposals negotiated by SMC's management
during the five months ended December 31, 1996, intended to provide access to a
revolving working capital facility, were repeatedly rejected by the SMC Board of
Directors. As a result, the Company has continued to suffer significantly from
lack of cash during the post-emergence period.
During the first six-months of 1997, SMC continued to suffer from
liquidity difficulties. While working capital at June 30, 1997, increased by
$189,000 (16%) from December 31, 1996; cash balances decreased by $64,000 due to
increased receivables. SMC continued its efforts to secure new financing
throughout the first quarter of 1997. In addition, SMC has made substantial
progress in enhancing its operating cash flows through stringent cost control
and emphasis on targeted marketing of those of its services which attract higher
margins.
Following Versar's purchase of 53.5% of the outstanding SMC Common Stock
and all the outstanding SMC Preferred Stock, and in connection with the
execution of the Agreement to Merge and the related term sheet, Versar agreed to
assist SMC in meeting its working capital requirements. As of June 30, 1997,
Versar has loaned SMC approximately $700,000 for working capital purposes.
Impact of Inflation
SMC seeks to protect itself from the effects of inflation. The majority of
contracts SMC performs are for a period of one year or less or are cost plus
fixed-fee type contracts and, accordingly, are less susceptible to the effects
of inflation. Multi-year contracts provide for projected increases in labor and
other costs.
52
<PAGE>
PRINCIPAL STOCKHOLDERS OF SMC
Security Ownership Of Certain Beneficial Owners
The following table sets forth the number of shares of SMC Common Stock
beneficially owned by the following persons known by SMC to own more than 5% of
the outstanding SMC Common Stock. See also, " - Security Ownership of
Management."
Number of Shares Percentage
Name and Address Beneficially Owned of Class
- ---------------- --------------------- --------------
Versar, Inc. 1,070,000(1) 53.5%
6850 Versar Center
Springfield, VA 22151
Vista Properties 121,684(2) 6.1%
c/o Dreyer & Traub
101 Park Avenue
New York, NY 10178
- -------------
(1) As reported in Schedule 13D filed with the Commission on May 30, 1997.
(2) Pursuant to the Fifth Modified Plan of Reorganization, dated January 25,
1996, of SMC.
In addition to the above, Versar owns 1,750,000 shares of SMC Preferred
Stock, representing 100% of the outstanding SMC Preferred Stock.
53
<PAGE>
Security Ownership Of Management
According to information furnished to SMC, as of August 31, 1997, the
directors of SMC and all directors and officers of SMC as a group, beneficially
owned shares of SMC Common Stock as follows:
Name of Individual or Number of Shares Percentage
Identity of Group Beneficially Owned(1) of Class(2)
- --------------------- ------------------------ ---------------
James A. Skidmore, Jr.(3) 249,683 12.5%
641 Ocean Avenue
Sea Girt, NJ 08750
Aaron Locker, Esq. 4,157 --
Benjamin M. Rawls(4) 0 --
James C. Dobbs(4) 0 --
Lawrence W. Sinnott(4) 0 --
All present directors and 310,283 15.7%
executive officers as a
group (7 persons)(5)
- -------------
(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated.
(2) Percentages for each person or group are based on the aggregate number of
shares outstanding on August 31, 1997. Percentages of less than 1% are not
shown.
(3) Includes 973 shares held in Mr. Skidmore's account in the Employee Capital
Accumulation Plan of SMC, which were issued pursuant to the Bankruptcy
Plan with respect to shares purchased through the Employee Capital
Accumulation Plan prior to the commencement of the bankruptcy proceedings,
and as to which he has voting and investment discretion as described in
Note (5) below, 23 shares owned by Mr. Skidmore's wife and 113 shares
which are held in an Individual Retirement Account.
(4) As reported in Form 3, dated June 11, 1997, filed with the Commission.
Messrs. Rawls, Dobbs and Sinnott are officers of Versar, which owns
1,070,000 shares of SMC Common Stock and 1,750,000 shares of SMC Preferred
Stock. Messrs. Rawls, Dobbs and Sinnott disclaim beneficial ownership of
such SMC stock.
(5) Includes 1,474 shares owned in the Employee Capital Accumulation Plan as
of June 30, 1997, over which participants have voting discretion and
investment discretion, with respect to that portion of their accounts
pertaining to their voluntary contributions in excess of 1% of their
salary.
54
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The pro forma condensed consolidated balance sheet assumes that the Closing
had taken place as of March 31, 1997. The pro forma 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 SMC in the pro forma consolidated financial
information are not necessarily indicative of either the financial position or
the results of operations of Versar had the transaction occurred on the dates
described, nor are they necessarily indicative of the results of future
operations. Additionally, the pro forma 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 consolidated financial information should be read
in conjunction with the historical consolidated financial statements of Versar,
including the notes thereto included elsewhere in this Proxy
Statement/Prospectus.
55
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 31, 1997
(amounts in thousands)
(1) (2) Pro-forma Pro
Versar SMC Adjustments Notes Forma
------- ------- ----------- ----- --------
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 -- 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 -- 1,028 3,242 (3) 4,270
------- ------- ------- -------
Total assets $17,812 $ 6,099 $ 2,372 $26,283
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,283 $ 1,867 $ 4,150
Current portion of
long-term 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 (3) 3,503
------- ------- ------- -------
Total current
liabilities 6,236 3,287 640 10,163
Liabilities 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 real
estate debt 1,500 -- 1,500
------- ------- ------- -------
Total liabilities 8,737 4,431 2,140 15,308
Equity 9,075 1,668 232 (3) 10,975
------- ------- ------- -------
Total liabilities
& equity $17,812 $ 6,099 $ 2,372 $26,283
======= ======= ======= =======
See accompanying notes to unaudited pro forma consolidated balance sheet.
56
<PAGE>
VERSAR, INC.
NOTES TO UNAUDITED PRO FORMA 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 (a) the purchase of 53.5% of the common stock of SMC and all of
the preferred stock effective April 30, 1997, which was funded by $500 of
short term debt and $1,500 of long term debt and existing cash; and (b) the
proposed acquisition of 46.5% of the outstanding common stock of SMC in
exchange for 533,433 shares of common stock of Versar valued at $3.5625 per
share; which is recorded as follows:
Acquisition of 53.5% of common stock and
all preferred stock............................... $2,870
Proposed acquisition of 46.5% of common
stock............................................. 1,900
Transaction costs................................... 140
Less: Fair value of assets acquired................. (640)
------
Goodwill............................................ $4,270
======
57
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine-Month Period Ended March 31, 1997
(amounts in thousands except per share amounts)
(1) (2) Pro-forma Pro
Versar SMC Adjustments Notes Forma
------- ------- ----------- ----- -------
GROSS REVENUE $32,934 $19,186 $ $52,120
Purchased Services 9,614 6,173 15,787
------- ------- ------- -------
NET SERVICES REVENUE 23,320 13,013 36,333
Direct costs of service 19,047 9,515 28,562
Selling, general and
administrative 3,398 3,741 214 (5) 7,353
Other (32) -- (32)
------- ------- ------- -------
OPERATING INCOME (LOSS) 907 (243) (214) 450
Gain on transfer of
foreign subsidiary -- 846 (846) (4) --
Interest expense 48 -- 120 (3) 168
Income tax benefit (14) -- (14)
------- ------- ------- -------
NET INCOME $ 873 $ 603 $(1,180) $ 296
======= ======= ======= =======
Earnings per share $ 0.17 $ 0.05
======= =======
Shares outstanding 5,230 5,763
======= =======
See accompanying notes to unaudited pro forma consolidated statements of
operations.
58
<PAGE>
VERSAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended June 30, 1996
(amounts in thousands except per share amounts)
(1) (2) Pro-forma Pro
Versar SMC Adjustments Notes Forma
------- ------- ----------- ----- -------
GROSS REVENUE $44,283 $28,618 $ $72,901
Purchased Services 12,364 11,918 24,282
------- ------- ------- -------
NET SERVICES REVENUE 31,919 16,700 48,619
Direct costs of service 25,973 11,583 37,556
Selling, general and
administrative 4,960 5,939 285 (5) 11,184
Other (28) -- (28)
Losses on Sarnia operations 142 -- 142
------- ------- ------- -------
OPERATING INCOME (LOSS) 872 (822) (285) (235)
Interest expense 96 93 160 (3) 349
Income tax (benefit) expense (216) 243 27
------- ------- ------- -------
NET INCOME (LOSS) $ 992 $(1,158) $ (445) $ (611)
======= ======= ======= =======
Earnings (loss) per share $ 0.19 $ (0.11)
======= =======
Shares outstanding 5,248 5,781
======= =======
See accompanying notes to unaudited pro forma consolidated statements of
operations.
59
<PAGE>
VERSAR, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 1997 and the Year Ended June 30, 1996
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. Excluded 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. Because SMC is a
professional services firm without significant tangible or intangible
assets, a large portion of the purchase price is allocated to goodwill
which represents the customer relationships, existing technical
capabilities and ongoing business reputation of SMC that had been developed
over a significant period of time. Although Versar believes that these
relationships and the value of SMC's business reputation were and continue
to be long-term intangible assets with an almost infinite life, Versar has
selected a period of 15 years for amortization of the goodwill, which is
reasonable based on the mature businesses of SMC and the compatibility of
these businesses with Versar's business.
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DESCRIPTION OF CAPITAL STOCK OF VERSAR
Authorized Capital Stock
The Versar Restated Certificate of Incorporation, as amended to date,
(the "Versar Certificate") currently provides that Versar may issue 10,000,000
shares of preferred stock, par value $25.00 per share (the "Versar Preferred
Stock"), and 30,000,000 shares of Versar Common Stock.
Versar Common Stock
Holders of Versar Common Stock are entitled to one vote for each share
held of record on all matters to be submitted to a vote of the stockholders and
do not have preemptive rights. Subject to preferences that may be applicable to
any outstanding shares of Versar Preferred Stock, holders of Versar Common Stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by Versar's Board of Directors out of funds legally available
therefore. All outstanding shares of Versar Common Stock are fully paid and
nonassessable. In the event of any liquidation, dissolution or winding up of the
affairs of Versar, holders of Versar Common Stock will be entitled to share
ratably in the assets of Versar remaining after payment or provision for payment
of all of Versar's debts and obligations and liquidation payments to holders of
any outstanding shares of Versar Preferred Stock. As of June 30, 1997, there
were 5,151,792 shares of Versar Common Stock outstanding.
Versar Preferred Stock
Versar's Board of Directors, without further stockholder authorization,
is authorized to issue shares of Versar Preferred Stock in one or more series
and to determine and fix the rights, preferences and privileges of each series,
including dividend rights and preferences over dividends on the Versar Common
Stock and one or more series of Versar Preferred Stock, conversion rights,
voting rights, redemption rights and the terms of any sinking fund therefor, and
rights upon liquidation, dissolution, or winding up. There are no shares of
Versar Preferred Stock currently outstanding. Although Versar has no present
plans to issue any shares of Versar Preferred Stock, the issuance of shares of
Versar Preferred Stock may have the effect of delaying, deferring or preventing
a change in control of Versar or an unsolicited acquisition proposal.
Certain Provisions of the DGCL
Versar is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time that the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after such
date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3 percent of the outstanding
voting stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15 percent or
more of the outstanding voting stock of the corporation or (b) an affiliate or
associate of the corporation and was the owner of 15 percent or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is to be determined whether
such person is an interested stockholder.
Limitations on Liability of Officers and Directors
The Versar Certificate contains provisions eliminating or limiting
director liability to Versar and its stockholders for monetary damages arising
from acts or omissions in the director's capacity as the director. The provision
does not, however, eliminate or limit the personal liability of a director (i)
for any breach of such director's duty of loyalty to Versar or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under the DGCL making directors
personally liable, under a negligence standard, for unlawful dividends or
unlawful stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. This provision offers persons
who serve on Versar's Board of Directors protection against awards of monetary
damages resulting from breaches of their duty of care
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(except as indicated above). As a result of this provision, the ability of
Versar or a stockholder thereof to successfully prosecute an action against a
director for a breach of his duty of care is limited. However, the provision
does not affect the availability of equitable remedies such as an injunction or
recision based upon a director's breach of his duty of care. The Commission has
taken the position that the provision will have no effect on claims arising
under the federal securities laws.
In addition, the Versar Certificate and the Bylaws of Versar provide
for mandatory indemnification, subject to limited exceptions, of any director or
officer of Versar who, by reason of the fact that he or she is a director or
officer of Versar or acting as a director, officer, employee or agent of any
other company under the direction of Versar, is involved in a legal proceeding
of any nature. Such indemnification rights include reimbursement for expenses
incurred by such director or officer in advance of the final disposition of such
proceeding in accordance with applicable provisions of the DGCL.
Transfer Agent and Registrar
The transfer agent and registrar for the Versar Common Stock is Bank of
New York, New York, New York.
COMPARISON OF RIGHTS OF VERSAR STOCKHOLDERS AND SMC STOCKHOLDERS
Both Versar and SMC are incorporated in Delaware. Holders of SMC Common
Stock will have their rights and obligations as stockholders of Versar after the
Merger governed by Delaware law and the Versar Certificate and the Versar
Bylaws. Set forth below is a summary comparison of the material rights of a
Versar stockholder under the Versar Certificate and Bylaws, on the one hand, and
the material rights of a SMC stockholder under the SMC Restated Certificate of
Incorporation (the "SMC Certificate"), Bylaws and Bankruptcy Plan, on the other
hand. The information set forth below is qualified in its entirety by reference
to the Certificate and Bylaws of each of Versar and SMC.
Classes and Series of Capital Stock
SMC is authorized to issue 10,000,000 shares of SMC Common Stock and
1,750,000 shares of SMC Preferred Stock. As of the Record Date, there were
1,999,604 shares of SMC Common Stock outstanding and eligible to vote with
respect to the Merger and 1,750,000 shares of SMC Preferred Stock outstanding.
The SMC Certificate does not provide the SMC Board of Directors with authority
to issue additional shares of preferred stock. Thus, any such additional
authorization or issuance of preferred stock would be subject to approval of the
stockholders of SMC.
Versar is authorized by the Versar Certificate to issue 30,000,000
shares of Versar Common Stock and 10,000,000 shares of undesignated preferred
stock. As of June 30, 1997, there were 5,151,792 shares of Versar Common Stock
outstanding. In addition, there were outstanding options to purchase an
additional 1,801,365 shares of Versar Common Stock and an additional 2,580,043
shares Versar Common Stock have been reserved for issuance pursuant to Versar's
benefit plans. There are no shares of preferred stock currently outstanding. The
Board of Directors of Versar has the authority to issue shares of preferred
stock in one or more series and to designate the rights, preferences, privileges
and restrictions for each such series without any further vote or action by
Versar's stockholders. The Board of Directors of Versar has no present intention
of issuing shares of preferred stock.
As a consequence of and following the Merger, SMC stockholders will not
hold shares of SMC Common Stock, but will instead hold shares of Versar Common
Stock.
Conversion and Dissolution
The SMC Common Stock does not have a conversion feature or any
preferential right to payment upon dissolution. Further, the SMC Preferred Stock
does not have a conversion feature, but is entitled to a $1.00 preferential
payment per share prior to any payment to holders of SMC Common Stock upon the
liquidation or dissolution of SMC.
Similarly, the Versar Common Stock does not have a conversion feature
or any preferential right to payment upon dissolution. The Versar Certificate
authorizes the issuance of 10,000,000 shares of preferred stock and provides
that such shares may have such voting powers, preferences and other special
rights as shall be stated in the Versar Certificate or resolutions providing for
the issuance of preferred stock by the board of directors of
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Versar. If the board of directors of Versar was to designate such a series of
preferred stock, such preferred stock could be entitled to preferential payments
in the event of dissolution of Versar or contain conversion features with
respect to Versar Common Stock.
Size and Election of Board of Directors
The SMC Certificate sets the SMC Board at five members. Pursuant to the
Bankruptcy Plan, for three years following SMC's emergence from bankruptcy, the
Board must be comprised of three persons designated by Imperial Capital
Worldwide Partners, L.P. (which following Versar's purchase of Imperial's SMC
stock are now designated by Versar) James A. Skidmore, and one additional
director designated by Mr. Skidmore. Such board will serve for three years,
after which an annual election will be held for the board of directors pursuant
to the SMC Certificate. The SMC Certificate also states that any vacancy among
the directors may be filled by a vote of a majority of the board of directors
then remaining or at a special meeting of stockholders called by a majority of
the board of directors. If, as a result of a vacancy on the board or an increase
in the number of directors, the remaining directors equal less than a majority
of the total board required, stockholders of SMC holding at least ten percent of
the outstanding SMC Common Stock can petition the Chancery Court in Delaware to
order SMC to hold an election of directors.
The Bylaws of Versar require a board of directors of at least seven
members providing for the exact number to be fixed by resolution of the board of
directors from time to time. Currently the Versar board is comprised of nine
members. The Versar Bylaws provide that vacancies may be filled by a majority of
the directors remaining or the sole director remaining.
As stockholders of Versar following the Merger, SMC's current
stockholders will no longer be subject to the restrictions on the constitution
of the board of directors mandated by the Bankruptcy Plan. Conversely, their
rights with respect to the size and composition of the Versar board will be
governed by the Versar Bylaws as described above.
Special Meetings of Stockholders
The SMC Bylaws provide that special meetings of stockholders may be
called by the chairman of the SMC Board, a majority of the members of the SMC
Board, the president of SMC or SMC stockholders holding a majority of the entire
capital stock then issued and outstanding and entitled to vote.
The Versar Bylaws provide that special meetings of stockholders may be
called only by directors or any officer of Versar instructed by directors to
call such a meeting.
As a consequence of and following the Merger, the holders of SMC Common
Stock exchanged for Versar Common Stock will no longer be able to call a special
meeting of stockholders. As explained above, a special meeting of Versar
stockholders may be called only by the directors of Versar or an officer of
Versar at the instruction of its directors.
Vote Required for Extraordinary Corporate Transactions
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote with respect to an extraordinary corporate transaction,
such as a merger, sale of all or substantially all of the assets of a
corporation or other similar transaction, to approve such transaction, unless a
higher percentage is set by the corporation's certificate of incorporation.
The SMC Certificate provides that, until the third anniversary of the
adoption of the Bankruptcy Plan, approval by four of the five directors
constituting the SMC Board is required for a sale of more than twenty percent of
any entity that constitutes more than twenty-five percent of the total fair
market value of the assets of SMC, determining fair market value in accordance
with the terms of the Bankruptcy Plan. Further, any sale, lease, exchange or
other disposition of all or substantially all of the assets of SMC may be
approved only by the affirmative vote of holders of at least eighty percent of
the outstanding SMC Common Stock, if such sale, lease exchange or other
disposition occurs prior to the third anniversary of the date of adoption of the
Bankruptcy Plan; provided, if SMC cannot meet its mature and maturing
obligations with the honest use of credit, only a majority vote of the
stockholders will be required. A majority vote is required for all other actions
of stockholders.
The Versar Certificate and Bylaws do not alter the vote required by the
DGCL with respect to extraordinary transactions.
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Nominations of Directors
The SMC Certificate provides for the nomination of directors by
stockholders at an annual meeting upon written notice delivered to the
corporation at least 90 days in advance of the date in the year in which such
nomination is to be made which corresponds with the date of the proxy statement
distributed for the prior fiscal year's annual stockholder meeting. If no annual
stockholder meeting were held in the prior fiscal year or the meeting date in
the current fiscal year is more than thirty days from the corresponding date for
the prior meeting, such notice must be delivered within a reasonable period of
time. If a nomination is to be made at a special meeting of stockholders,
written notice must be provided to SMC by the close of business on the seventh
day following the day on which notice of the special meeting is first given to
SMC stockholders. A notice of director nomination must include: (i) the name and
address of the nominating stockholder and of the person nominated, (ii) a
representation that the stockholder is a holder of record of stock entitled to
vote in the election of directors of SMC and that such stockholder intends to
appear in person or by proxy to nominate the proposed nominee, (iii) a
description of any arrangements or understandings between the stockholder and
the nominee or any other person regarding such nomination, (iv) such other
information as is required by the proxy rules of the Commission and (v) the
consent of the nominee to such nomination.
Neither the Versar Certificate nor the Versar Bylaws provide a
procedure for the nomination of directors. As a result, as a stockholder of
Versar, a person wishing to nominate directors must follow the requirements of
the DGCL and Federal securities laws.
Amendment or Repeal of Certificate of Incorporation and Bylaws
Under the DGCL, unless a corporation's certificate of incorporation or
bylaws otherwise provide, amendment of a corporation's certificate of
incorporation generally requires the approval of the holders of a majority of
the outstanding stock entitled to vote thereon. If such amendment increases or
decreases the number of authorized shares of any class of series or the par
value of such shares or adversely affects the shares of such class or series,
such amendment requires the approval of the holders of a majority of the
outstanding stock of such class or series. Neither the SMC Certificate nor the
Versar Certificate alter the vote required with respect to amendments of their
certificates of incorporation.
With respect to the amendment of the Bylaws, the SMC Certificate
provides that the board of directors shall have the power to make, alter or
repeal bylaws. The Versar Certificate confers similar powers on the board of
directors provided that it restricts the ability of the board of directors to
make, alter or repeal any bylaw providing for a classified board with staggered
terms. Any such bylaw relating to a classified board must be approved by the
stockholders of Versar.
Liability of Directors
The DGCL permits a corporation to include a provision in its
Certificate of Incorporation eliminating or limiting the personal liability of a
director or officer to the corporation or its stockholders for damages for
breach of the director's fiduciary duty, subject to certain limitations.
Each of the Versar and SMC Certificates include such a provision which
limits such liability to the fullest extent permitted under Delaware law.
Although these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or recision based on a director's
breach of his or her duty of care. Such provisions do not apply to officers of
Versar or SMC unless such officer is a director of Versar or SMC and is acting
in his or her capacity as a director on account of such breach.
Action By Written Consent
Both the Versar Certificate and the SMC Certificate permit action by
stockholders of their respective corporations by a consent signed by
shareholders holding at a minimum the number of shares the affirmative vote of
which would be required to approve such action at a meeting duly called. Once a
written consent is executed, notice must be provided to all stockholders that
such action has been taken by written consent.
As a consequence of and following the Merger, the holders of SMC Common
Stock exchanged for Versar Common Stock will continue to have the right to act
by written consent.
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EXPERTS
The consolidated financial statements of Versar at June 30, 1996 and 1995
and for the three years ending June 30, 1996, 1995 and 1994, the consolidated
financial statements of SMC as of December 31, 1996, July 31, 1996 and December
31, 1995, and for the seven months ended July 31, 1996 and the five months ended
December 31, 1996, included in this Proxy Statement/Prospectus and Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are included
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
LEGAL MATTERS
The validity of the shares of Versar Common Stock to be issued to the
stockholders of SMC pursuant to the Merger will be passed upon by Paul,
Hastings, Janofsky & Walker LLP, Atlanta, Georgia. Paul, Hastings, Janofsky &
Walker LLP has also rendered an opinion concerning certain federal income tax
consequences of the Merger.
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VERSAR, INC.
UNAUDITED FINANCIAL STATEMENTS
For the Nine-Month Period Ended as of March 31, 1997
Page
----
Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996......... F-2
Consolidated Statements of Operations for the three-month periods
and nine-month periods ended March 31, 1997 and 1996....................... F-3
Consolidated Statements of Cash Flows for the nine-month periods
ended March 31, 1997 and 1996.............................................. F-4
Notes to Consolidated Financial Statements................................. F-5
F-1
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, June 30,
1997 1996
----------- --------
(Unaudited)
ASSETS
Current assets
Cash.................................................. $ 1,166 $ 83
Accounts receivable, net.............................. 11,957 12,376
Prepaid expenses and other current assets............. 1,307 1,365
Deferred income taxes................................. 690 473
------- -------
Total current assets................................ 15,120 14,297
Property and equipment, net............................. 1,922 2,038
Deferred income taxes................................... 441 300
Other assets............................................ 329 344
------- -------
Total assets........................................ $17,812 $16,979
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................................... $ 2,283 $ 2,098
Bank line of credit................................... -- 492
Accrued salaries and vacation......................... 1,685 1,619
Income tax payable.................................... 102 --
Other liabilities..................................... 2,166 2,459
------- -------
Total current liabilities........................... 6,236 6,668
Other long-term liabilities............................ 1,001 1,035
Reserve on guarantee of real estate debt............... 1,500 1,500
------- -------
Total liabilities................................... 8,737 9,203
------- -------
Commitments and Contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000 shares
authorized; 5,131,964 shares and 4,994,693 shares
issued and outstanding at March 31, 1997 and
June 30, 1996, respectively....................... 51 50
Capital in excess of par value...................... 13,724 13,299
Accumulated deficit................................. (4,700) (5,573)
------- -------
Total stockholders' equity........................ 9,075 7,776
------- -------
Total liabilities and stockholders' equity........ $17,812 $16,979
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
GROSS REVENUE................... $10,727 $11,389 $32,934 $33,686
Purchased services and
materials, at cost.......... 3,022 3,165 9,614 9,718
------- ------- ------- -------
NET SERVICE REVENUE............. 7,705 8,224 23,320 23,968
Direct costs of services
and overhead................ 6,345 6,883 19,047 19,669
Selling, general and
administrative expenses..... 998 1,103 3,398 3,427
Other (income)................ (11) (7) (32) (21)
Losses on Sarnia operations... -- -- -- 142
------- ------- ------- -------
OPERATING INCOME................ 373 245 907 751
OTHER EXPENSES
Interest expense.............. 11 22 48 95
Income tax expense (benefit).. 146 10 (14) 38
------- ------- ------- -------
NET INCOME...................... $ 216 $ 213 $ 873 $ 618
======= ======= ======= =======
NET INCOME PER SHARE............ $ .04 $ .04 $ .17 $ .12
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING........... 5,240 5,058 5,230 5,160
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Nine-Month
Periods Ended March 31,
-----------------------
1997 1996
---- ----
Cash flows from operating activities
Net income............................................. $ 873 $ 618
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization........................ 524 491
Provision for doubtful accounts receivable........... (72) 52
Common stock issued to ESSOP......................... 399 114
Deferred tax benefit................................. (358) --
------ ------
Subtotal........................................... 1,366 1,275
Changes in assets and liabilities
Decrease (increase) in accounts receivable........... 491 (1,291)
Decrease (increase) in prepaids and other assets..... 117 (342)
Increase in accounts payable......................... 185 649
Increase in accrued salaries and vacation............ 66 146
Increase in income tax payable....................... 102 --
(Decrease) increase in other liabilities............. (327) 836
Net change in assets and liabilities of Sarnia....... -- 142
------ ------
Net cash from continuing operations.................. 2,000 1,415
Changes in net liabilities of discontinued operations.. -- (615)
------ ------
Net cash provided by operating activities............ 2,000 800
------ ------
Cash flows from investing activities
Purchase of property and equipment..................... (452) (808)
------ ------
Cash flows from financing activities
Net payments on bank line of credit.................... (492) (217)
Proceeds from issuance of the Company's common stock... 27 225
------ ------
Net cash (used in) provided by financing activities.. (465) 8
------ ------
Net increase in cash..................................... 1,083 --
Cash at the beginning of the year........................ 83 58
------ ------
Cash at the end of the period............................ $1,166 $ 58
====== ======
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest............................................. $ 53 $ 78
Income taxes......................................... 250 5
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of the Securities and Exchange Commission
regarding interim financial statements and consequently do not include all of
the disclosures normally required by generally accepted accounting principles or
those normally made in Versar, Inc.'s ("Versar" or the "Company") Annual Report
on Form 10-K filed with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the Company's audited financial
statements included elsewhere in this Proxy Statement/Prospectus.
The financial information has been prepared in accordance with the
Company's customary accounting practices. In the opinion of management, the
information reflects all adjustments necessary for a fair presentation of the
Company's consolidated financial position as of March 31, 1997, and the results
of operations for the three-month and nine-month periods ended March 31, 1997
and 1996. The results of operations for such periods, however, are not
necessarily indicative of the results to be expected for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred plus
accrued profits or net estimated realizable value of incurred costs, reduced by
progress billings. The Company records income from major fixed-price contracts,
extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts, estimated
final contract prices and costs are periodically reviewed and revisions are made
as required. The effects of these revisions are included in the periods in which
the revisions are made. On cost-plus-fee contracts, revenue is recognized to the
extent of costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized 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 where 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.
(D) Income Taxes
At June 30, 1996, the Company had a net deferred tax asset of approximately
$1.5 million, which was offset by a valuation allowance of approximately $.7
million. During the first six months of fiscal year 1997, the valuation
allowance was reduced by $358,000 due to the increasing likelihood that the
Company will realize the remainder of its deferred tax assets.
F-5
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(E) Contingencies
Versar and its subsidiaries are parties to various legal actions arising in
the normal course of business. The Company believes that the ultimate resolution
of these legal actions will not have a material adverse effect on its
consolidated financial condition and results of operations.
(F) Net Income Per Share
Net income per share is computed by dividing net income by the fully
diluted weighted average number of common shares outstanding during the
applicable period being reported.
(G) Common Stock
For the nine month period ending March 31, 1997, Versar has issued
approximately 112,973 shares to various employee benefit plans as part of the
Company's contribution to employee benefits for fiscal year 1996. In fiscal year
1996, Versar issued approximately 32,348 shares to various employee benefit
plans as part of the Company's contribution to employee benefits for fiscal year
1995.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997. SFAS
128 requires a company to present basic and diluted earnings per share amounts
for net income on the face of the consolidated statement of operations. Basic
earnings per share is calculated by dividing net income by the weighted average
number of common shares outstanding during this period. Diluted earnings per
share takes into consideration the effect of all potential dilutive common
shares that were outstanding during the period. The statement is effective for
periods ending after December 15, 1997; earlier application is not permitted.
(H) Subsequent Event
Effective April 30, 1997, Versar acquired 53.5% of the outstanding common
stock and all outstanding preferred stock of Science Management Corporation
("SMC") for aggregate consideration of $2,870,000 in cash. Versar intends to
propose a merger pursuant to which Versar will obtain the remaining SMC common
stock for newly issued shares of Versar common stock, subject to SMC stockholder
approval. The transaction will be accounted for under the purchase method of
accounting. The results of SMC will be included with those of the company from
the closing date of April 30, 1997.
F-6
<PAGE>
VERSAR, INC.
Audited Consolidated Financial Statements
Page
----
Report of Independent Public Accountants.................................. F-8
Consolidated Balance Sheets as of June 30, 1996 and 1995.................. F-9
Consolidated Statements of Operations for the years ended
June 30, 1996, 1995 and 1994.............................................. F-11
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994.............................................. F-13
Consolidated Statements of Changes in Stockholders' Equity for the
years ended June 30, 1996, 1995 and 1994.................................. F-15
Notes to Consolidated Financial Statements................................ F-16
Schedule II - Valuation and Qualifying Accounts........................... F-27
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Versar, Inc.:
We have audited the accompanying consolidated balance sheets of Versar, Inc. and
its subsidiaries (a Delaware corporation) as of June 30, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 Versar, Inc. and its
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, effective July 1, 1993, the
Company changed its method of accounting for income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
---------------------------
Arthur Andersen LLP
Washington, D.C.,
September 16, 1996
F-8
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30,
------------------
1996 1995
---- ----
ASSETS
Current assets
Cash.................................................. $ 83 $ 58
Accounts receivable, net.............................. 12,376 11,723
Prepaid expenses and other current assets............. 1,365 1,099
Assets of Sarnia transferred.......................... -- 434
Deferred income taxes................................. 473 536
------- -------
Total current assets................................ 14,297 13,850
Property and equipment, net............................. 2,038 1,457
Assets of Sarnia transferred............................ -- 12,871
Deferred income taxes................................... 300 --
Other assets............................................ 344 17
------- -------
Total assets........................................ $16,979 $28,195
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Liabilities of Sarnia transferred..................... $ -- $ 2,133
Accounts payable...................................... 2,098 1,950
Bank line of credit................................... 492 438
Current portion of long-term debt..................... 323 335
Accrued salaries and vacation......................... 1,619 1,390
Other liabilities..................................... 2,136 1,564
Liabilities of discontinued operations, net........... -- 615
------- -------
Total current liabilities........................... 6,668 8,425
Long-term debt.......................................... 2 4
Liabilities of Sarnia transferred....................... -- 12,450
Other long-term liabilities............................. 1,033 1,026
Reserve on guarantee of real estate debt................ 1,500 --
------- -------
Total liabilities................................... 9,203 21,905
------- -------
F-9
<PAGE>
Commitments and contingencies (Note I)
Stockholders' equity
Common stock, $.01 par value; 10,000,000 shares
authorized; 4,994,693 shares and 4,813,236 shares
issued and outstanding at June 30, 1996 and 1995,
respectively.......................................... 50 48
Capital in excess of par value.......................... 13,299 12,816
Accumulated deficit..................................... (5,573) (6,565)
------- -------
7,776 6,299
Less treasury stock, at cost (3,327 shares at
June 30, 1995)........................................ -- (9)
------- -------
Total stockholders' equity.......................... 7,776 6,290
------- -------
Total liabilities and stockholders' equity........ $16,979 $28,195
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended June 30,
-----------------------------
1996 1995 1994
---- ---- ----
GROSS REVENUE ................................. $44,283 $39,090 $42,764
Purchased services and materials, at cost ... 12,364 9,743 11,732
------- ------- -------
NET SERVICE REVENUE ........................... 31,919 29,347 31,032
Direct costs of services and overhead ....... 25,973 23,785 25,516
Selling, general, and administrative expenses 4,960 4,993 5,158
Other (income) expenses, net ................ (28) (261) 1,083
Losses on Sarnia operations ................. 142 270 544
------- ------- -------
OPERATING INCOME (LOSS) ....................... 872 560 (1,269)
OTHER EXPENSE
Interest expense ............................ 96 158 57
Income tax (benefit) expense ................ (216) (56) 1,332
------- ------- -------
INCOME (LOSS) FROM
CONTINUING OPERATIONS ......................... 992 458 (2,658)
LOSS FROM DISCONTINUED OPERATIONS ............. -- -- (2,265)
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE ............. 992 458 (4,923)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .......................... -- -- 556
------- ------- -------
NET INCOME (LOSS) ............................. $ 992 $ 458 $(4,367)
======= ======= =======
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS ......................... $ .19 $ .09 $ (.59)
LOSS PER SHARE FROM
DISCONTINUED OPERATIONS ....................... $ -- $ -- $ (.51)
------- ------- -------
INCOME (LOSS) PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .......................... $ .19 $ .09 $ (1.10)
F-11
<PAGE>
INCOME PER SHARE FROM
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........................ $ -- $ -- $ .13
------- -------- -------
NET INCOME (LOSS) PER SHARE.................... $ .19 $ .09 $ (.97)
======= ======== =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING............................. 5,248 4,834 4,481
======= ======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30,
-------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from operating activities
Income (loss) from continuing operations ........ $ 992 $ 458 $(2,658)
Loss from discontinued operations ............... -- -- (2,265)
Cumulative effect of change in accounting
principle ....................................... -- -- 556
Adjustments to reconcile income (loss) to net
cash provided by operating activities
Depreciation and amortization ................. 684 699 956
Loss on sale of property and equipment ........ 14 -- --
Provision for doubtful accounts receivable .... (37) 1 (12)
Common stock issued to ESSOP and Valu
Add ........................................... 216 434 851
Deferred tax benefit .......................... (250) -- (556)
------ ------ -------
Subtotal .................................... 1,619 1,592 (3,128)
------ ------ -------
Changes in assets and liabilities, net of asset
dispositions
(Increase) decrease in accounts receivable .... (616) (1,031) 1,767
(Increase) decrease in prepaids and other ..... (598) 287 271
assets
Increase (decrease) in accounts payable ....... 148 474 (850)
Increase (decrease) in accrued salaries and
vacation ...................................... 228 121 (252)
Increase (decrease) in other liabilities ...... 659 (807) (201)
Net change in assets and liabilities of Sarnia 142 270 1,614
------ ------ -------
Net cash from continuing operations ........... 1,582 906 (779)
Changes in net liabilities of discontinued
operations ...................................... (615) (176) 921
------ ------ -------
Net cash provided by operating activities ..... 967 730 142
------ ------ -------
Cash flows from investing activities
Purchases of property and equipment ........... (1,261) (440) (674)
------ ------ -------
F-13
<PAGE>
Cash flows from financing activities
Net borrowings on bank line of credit ......... 54 438 --
Principal payments on long-term debt .......... (14) (879) (184)
Proceeds from issuance of the Company's
common stock .................................. 279 137 88
------ ------ -------
Net cash provided by (used in)
financing activities ........................ 319 (304) (96)
------ ------ -------
Net increase (decrease) in cash ................. 25 (14) (628)
Cash at the beginning of the year ............... 58 72 700
------ ------ -------
Cash at the end of the year ..................... $ 83 $ 58 $ 72
====== ====== =======
Supplementary disclosure of non-cash transactions
Issuance of treasury stock, net ............... $ (9) $ 9 $ --
====== ====== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended June 30, 1996, 1995, and 1994
-------------------------------------------------------------
Total
Number Capital in Stock-
of Common Excess of Accumulated Treasury holders'
Shares Stock Par Value Deficit Stock Equity
------ ----- --------- ------- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 ......... 4,270 $43 $11,303 $(2,656) $ -- $ 8,690
Exercise of stock options ...... 35 -- 88 -- -- 88
Common stock issued to ESSOP ... 304 3 847 -- -- 850
Net loss ....................... -- -- -- (4,367) -- (4,367)
----- --- ------- ------- ---- -------
Balance, June 30, 1994 ......... 4,609 46 12,238 (7,023) -- 5,261
----- --- ------- ------- ---- -------
Exercise of stock options ...... 58 1 136 -- -- 137
Common stock issued to ESSOP ... 146 1 442 -- -- 443
Purchase of common stock
for treasury ................. (26) -- -- -- (76) (76)
Issuance of treasury stock
for stock awards ............. 23 -- -- -- 67 67
Net income ..................... -- -- -- 458 -- 458
----- --- ------- ------- ---- -------
Balance, June 30, 1995 ......... 4,810 48 12,816 (6,565) (9) 6,290
----- --- ------- ------- ---- -------
Exercise of stock options ...... 119 1 278 -- -- 279
Common stock issued for Valu Add 30 -- 97 -- -- 97
Common stock issued to ESSOP ... 32 1 108 -- -- 109
Purchase of common stock
for treasury ................. (18) -- -- -- (63) (63)
Issuance of treasury stock
for stock awards ............. 7 -- -- -- 22 22
Issuance of treasury stock
for ESSOP .................... 15 -- -- -- 50 50
Net income ..................... -- -- -- 992 -- 992
----- --- ------- ------- ---- -------
Balance, June 30, 1996 ......... 4,995 $50 $13,299 $(5,573) $ -- $ 7,776
===== === ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Versar, Inc. and its subsidiaries ("Versar" or "the
Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. The assets, liabilities, and results of operations
of Sarnia Corporation were included in the Company's financial statements for
fiscal years 1995 and 1994 and through January 1, 1996. The assets and
liabilities have been removed from Versar's balance sheet due to the refinancing
of Sarnia's debt (refer to Note E for further information on the Sarnia
refinancing). Refer to Note B for further information regarding the financial
treatment of the former real estate operations.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Contract Accounting: Contracts in process are stated at the lower of actual cost
incurred plus accrued profits or net estimated realizable value of incurred
costs, reduced by progress billings. The Company records income from major
fixed-price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts, estimated
final contract prices and costs are periodically reviewed and revisions are made
as required. The effects of these revisions are included in the periods in which
the revisions are made. On cost-plus-fee contracts, revenue is recognized to the
extent of costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known. Disputes arise in the
normal course of the 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 where
loss is considered probable and 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.
Depreciation and amortization: Depreciation and amortization are computed on a
straight-line basis over the estimated useful lives of the assets.
Intangible assets: On April 29, 1996, Versar purchased for 30,000 shares the
assets of Valu Add, which was primarily contract vehicles. The purchase resulted
in the Company recording goodwill of $97,500, which will be amortized over a
five year period.
Direct costs of services and overhead: These expenses represent the cost to
Versar of direct and overhead staff, including recoverable overhead costs and
unallowable costs that are directly attributable to overhead.
Net income (loss) per share: Per share amounts are computed by dividing the
related captions in the Consolidated Statements of Operations by the fully
diluted weighted average number of common shares outstanding during the
applicable period being reported upon.
Income taxes: Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109). The
adoption of the standard changed the Company's method of
F-16
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
accounting for income taxes from the deferred method (Accounting Principle Board
Opinion No. 11) to the liability method. The liability method requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. The cumulative effect of adopting the new
standard as of July 1, 1993 was a $556,000 credit to the Consolidated Statement
of Operations.
Deferred Compensation: The Company permitted employees to defer a portion of
their compensation, during fiscal years 1988 through 1991, providing for future
annual payments, including interest. Interest is accrued on a monthly basis at
the amount stated in each employee's agreement. The Company recorded liabilities
for deferred compensation of $949,000 and $914,000 at June 30, 1996 and 1995,
respectively. Versar purchased key-man life insurance policies to fund the
amounts due under the deferred compensation agreements. The Company borrows
against the cash surrender value of the policies to pay premiums. The cash
surrender value of the policies, net of loans, was $236,000 and $244,000 at June
30, 1996 and 1995, respectively.
Statements of cash flows: For statements of cash flows purposes, all investments
with an original maturity of three months or less are considered to be cash
equivalents.
Impact of Accounting Standards not yet Effective: In March 1995, the Financial
Accounting Standard Board issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). SFAS 121 is effective for fiscal year
1997, and requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The adoption of SFAS 121 will not have a material effect on the
financial position or results of operations of the Company.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October, 1995 and is effective for fiscal year 1997. The Statement encourages,
but does not require, adoption of the fair value based method of accounting for
employee stock options and other stock compensation plans. The Company has opted
to account for its stock option plan in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." By doing so, the Company, beginning
in fiscal year 1997, will be required to make proforma disclosure of net income
and earnings per share as if the fair value based method for accounting defined
in SFAS 123 had been applied.
NOTE B ASSET DISPOSITIONS
Gammaflux, Inc.: Gammaflux, Inc. (Gammaflux), a majority-owned manufacturing
subsidiary of the Company, sold substantially all of its assets to CHC
Acquisition Partners, L.P., an Illinois limited partnership (CHC), pursuant to
an Asset Purchase Agreement, dated June 5, 1991 (effective May 1, 1991), among
Gammaflux, the Company, CHC, the minority shareholder of Gammaflux, the general
partner of CHC, and the principals of CHC. As a part of the transaction, CHC
agreed to assume certain liabilities of Gammaflux.
On May 1, 1992, Versar agreed to the early payout for the note receivable
and the non-competition agreements. The net cash generated from the early payout
was approximately $1,727,000 and was used to reduce debt. Versar and the
previous minority shareholder are still bound by the terms of the non-compete
agreement, and therefore, the Company has deferred certain income to be
recognized over the life of the agreement.
Versar Laboratories: In the third quarter of fiscal year 1994, management
announced that Versar was going to discontinue further operations of Versar
Laboratories, Inc. (VLI). VLI had lost approximately $800,000 per year from
fiscal years 1991 through 1994. Subsequent to this decision, Kemron
Environmental Services, Inc. purchased the fixed assets of VLI for $250,000 on
August 1, 1994. The Company established a reserve of $1,900,000 for
F-17
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
anticipated shut down costs in March 1994. With the purchase of assets and the
assumption of certain lease obligations, the Company was able to reverse
$300,000 of the reserve in the fourth quarter of fiscal year 1994.
VLI's assets and liabilities are presented as net liabilities of
discontinued operations in the consolidated balance sheets. At June 30, 1995,
current assets of $74,000 were offset by current liabilities of $7,000 and a
shutdown reserve of $682,000, resulting in net liabilities of $615,000. No
material balances existed at June 30, 1996.
The operating results of Versar Laboratories, Inc. have been classified as
discontinued operations for all periods presented in the consolidated financial
statements.
Sarnia Corporation: Sarnia, formerly Versar Virginia, Inc., a former
wholly-owned real estate subsidiary of Versar, was spun-off to Versar
shareholders on June 30, 1994. Sarnia was established in 1982 to own and operate
Versar Center, the headquarters buildings of Versar in Springfield, Virginia. On
June 30, 1994, Versar distributed to the holders of its common stock
substantially all of the common stock of Sarnia (the Distribution). The
Distribution provided Versar stockholders one share of Sarnia common stock for
every outstanding share of Versar common stock. The spin-off although a
divestiture for legal and tax purposes was not initially accounted for as a
divestiture for accounting purposes until January 1996, since the spin-off did
not relieve Versar of the risks of ownership due to Versar's guaranty of
Sarnia's $12.4 million debt at June 30, 1994.
Sarnia's results of operations through January 1, 1996 are presented as
single line items in the Consolidated Statements of Operations, and its assets
and liabilities at June 30, 1995 are presented as separate line items in the
Consolidated Balance Sheet.
On January 25, 1996, Sarnia obtained new financing which reduced Versar's
guarantee of Sarnia's indebtedness from $12,400,000 to $1,500,000. Versar has
taken a reserve of $1,500,000 against the guarantee. Therefore, after the second
quarter of fiscal year 1996, Versar will no longer include the results of
operations and financial position of Sarnia in the consolidated financial
statements.
NOTE C ACCOUNTS RECEIVABLE
June 30,
--------------------
1996 1995
---- ----
(In thousands)
Billed receivables
U.S. Government.......................... $ 6,143 $ 5,239
Commercial............................... 2,716 3,131
Unbilled receivables
U.S. Government.......................... 3,029 3,107
Commercial............................... 1,191 1,203
------- -------
13,079 12,680
Allowance for doubtful accounts................... (703) (957)
------- -------
$12,376 $11,723
======= =======
F-18
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Unbilled receivables represent amounts earned which have not yet been
billed and other amounts which can be invoiced upon completion of fixed-price
contracts, attainment of certain contract objectives, or completion of federal
and state governments' incurred cost audits. Management anticipates that the
June 30, 1996 unbilled receivables will be substantially billed and collected in
fiscal year 1997.
NOTE D PROPERTY AND EQUIPMENT
Estimated
Useful Life
in Years June 30,
----------- -----------------
1996 1995
---- ----
(In thousands)
Furniture and fixtures..................... 5 $ 1,987 $ 1,935
Equipment.................................. 3 to 10 6,505 6,177
Leasehold improvements..................... Life of lease 1,408 581
------- -------
9,900 8,693
Accumulated depreciation and amortization.. (7,862) (7,236)
------- -------
$ 2,038 $ 1,457
======= =======
Depreciation and amortization of property and equipment included as expense
in the accompanying Consolidated Statements of Operations was $665,000,
$668,000, and $925,000 for the years ended June 30, 1996, 1995, and 1994,
respectively.
Maintenance and repair expenses approximated $268,000, $219,000 and
$354,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
F-19
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE E DEBT
June 30,
------------------
1996 1995
---- ----
(In thousands)
Bank line of credit, dated January 25, 1996...... $ 492 $ 438
Other............................................ 325 339
----- -----
Total debt.............................. 817 777
Current portion of long-term debt................ (815) (773)
----- -----
Long-term debt................................... $ 2 $ 4
===== =====
Versar maintained a bank line of credit for working capital purposes with
Riggs National Bank ("Riggs"). Prior to January 25, 1996, the line provided for
advances up to $1,500,000. On January 25, 1996, Versar obtained a new line of
credit with Riggs which provides for advances up to $3,000,000. Borrowings on
the line are at the prime rate of interest plus 1/2% (8.75% at June 30, 1996). A
fee of 1/4% on the unused portion of the line of credit is also charged. The
line is guaranteed by the Company and each subsidiary individually and is
collectively secured by accounts receivable, equipment and intangibles, plus all
insurance policies on property constituting collateral. Borrowing availability
under the bank line of credit is restricted to the borrowing base of qualifying
receivables less $1,500,000. Unused borrowing availability at June 30, 1996 was
$2,508,000. Advances under the line are due upon demand or on December 31, 1996.
The Company must also obtain Riggs' approval prior to paying dividends.
Additionally, the loan has certain covenants related to maintenance of financial
ratios. The Company was in compliance with the financial covenants at June 30,
1996. Management believes that cash generated by operations and borrowings
available from the bank line of credit will be adequate to meet the working
capital needs for fiscal year 1997.
As previously reported, Versar has guaranteed certain debt of Sarnia
Corporation. At June 30, 1995, Versar guaranteed the total mortgage debt of
Sarnia Corporation ("Sarnia") (formerly Versar Virginia, Inc., which was
spun-off to Versar shareholders on June 30, 1994) which was approximately
$12,062,000. On January 25, 1996, Sarnia refinanced its outstanding debt. Sarnia
obtained a first mortgage of $9,000,000 with I.D.S. Life Insurance Company, a
$500,000 second mortgage with Riggs and a $1,500,000 seven year term loan with
Riggs. As a result of the refinancing, Versar's guarantee of Sarnia's debt has
decreased from approximately $12,400,000 to $1,500,000. Sarnia has issued
$750,000 of its Series A Cumulative Convertible Preferred stock to a group of
private investors. Versar has established a reserve of $1,500,000 against the
loan. As the term loan is repaid, the reserve will be reduced and added to
Versar's equity.
The revolving bank line of credit amount outstanding based on average daily
balances for the years ended June 30, 1996, 1995, and 1994, approximated
$673,000, $544,000, and $292,000, respectively, and the weighted average
interest rates for such periods were 10.94%, 10.92%, and 8.79%, respectively.
The maximum amount outstanding approximated $1,500,000, $1,375,000, and
$1,120,000 during fiscal years 1996, 1995, and 1994, respectively. Weighted
average interest rates are computed by relating the interest expense to the
average month-end balance.
F-20
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Interest payments were $89,000, $157,000, and $62,000 for the years ended
June 30, 1996, 1995, and 1994, respectively.
NOTE F STOCK OPTIONS
The Versar 1992 Stock Option Plan provides employees of the Company and
certain other persons an incentive to remain as employees of the Company and
encourages superior performance for the Company's benefit. Options are also
outstanding from the Incentive Stock Option Plan adopted in 1982 and a
Non-Qualified Option Plan adopted in 1987. Options are granted from these plans
to purchase the Company's common stock.
At June 30, 1996, options to purchase an aggregate of 1,215,790 shares of
common stock were outstanding under the 1992 and 1982 Incentive Stock Option
Plans at per share exercise prices ranging from $2.125 to $3.940 and options to
purchase an aggregate of 372,835 shares were outstanding under the Non-Qualified
Stock Option Plan at per share exercise prices ranging from $2.375 to $3.563.
Under the Plan, options have been granted and may be granted to key
employees at the fair market value on the date of grant and become exercisable
during the four-year period from the date of the grant at 20% per year.
Unexercised options are cancelled on the fifth anniversary of certain grants
under the 1982 Plan and on the tenth anniversary of the grant under the
remainder of the 1982 and 1992 Plans.
Options under the Incentive Stock Option 1982 and 1992 Plans are as
follows:
Optioned Option Price
Shares Per Share Total
-------- ------------------------ -------
(In thousands, except per share price)
Outstanding at June 30, 1993... 971 $2.063 to $3.940 $2,575
Issued....................... 88 2.563 to 3.938 282
Exercised.................... (35) 2.063 to 3.000 (88)
Cancelled.................... (72) 2.063 to 3.940 (187)
----- ------
Outstanding at June 30, 1994... 952 2.063 to 3.940 2,582
Issued....................... 62 2.000 to 3.375 184
Exercised.................... (30) 2.000 to 2.437 (67)
Cancelled.................... (42) 2.000 to 3.940 (108)
----- ------
Outstanding at June 30, 1995... 942 2.063 to 3.940 2,591
Issued....................... 389 2.813 to 3.625 1,178
Exercised.................... (80) 2.063 to 2.563 (185)
Cancelled.................... (35) 2.063 to 3.940 (96)
----- ------
Outstanding at June 30, 1996... 1,216 $2.125 to $3.940 $3,488
===== ======
At June 30, 1996, 1995, and 1994, options of 807,408, 667,515, and 508,443
shares were exercisable.
On April 30, 1987, the Board of Directors adopted a Non-Qualified Stock
Option plan. Participants in the plan include employees, independent
contractors, and, in certain circumstances, Directors of the Company. Options
are granted by the Board of Directors at a price not less than 50% of the fair
market value at the date of grant and for a period not to exceed 10 years.
Generally, options are issued at 100% of the market value at the date of grant.
F-21
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Options under the 1987 Non-Qualified Plan are as follows:
Optioned Option Price
Shares Per Share Total
-------- ------------------------ -------
(In thousands, except per share price)
Outstanding at June 30, 1993... 178 $2.375 to $2.500 $ 437
Issued....................... -- -- to -- --
Cancelled.................... -- -- to -- --
----- ------
Outstanding at June 30, 1994... 178 2.375 to 2.500 437
Issued....................... -- --- to --- --
Cancelled.................... -- --- to --- --
Exercised.................... (28) 2.500 to 2.500 (70)
----- ------
Outstanding at June 30, 1995... 150 2.375 to 2.500 367
Issued....................... 264 3.000 to 3.563 804
Cancelled.................... (2) 2.437 to 2.437 (5)
Exercised.................... (39) 2.375 to 2.437 (93)
----- ------
Outstanding at June 30, 1996... 373 $2.375 to $3.563 $1,073
===== ======
Non-Qualified stock options of 163,367, 150,000, and 161,200 shares were
exercisable at June 30, 1996, 1995, and 1994, respectively.
NOTE G INCOME TAXES
At June 30, 1996, the Company had, for tax reporting purposes,
approximately $230,000 of business tax credit carryforwards available to offset
future taxes payable through 2002. In addition, the Company had $182,000 of
alternative minimum tax credit carryforwards which can be carried forward
indefinitely. The alternative minimum tax credit carryforward may be used to
offset regular tax liability in future years to the extent it exceeds the
alternative minimum tax liability. These carryforwards are reflected as deferred
tax assets.
F-22
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The provision (benefit) for income taxes consists of the following:
Years ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Currently payable
Federal.................................... $ 2 $(67) $ 95
State...................................... 32 11 23
Deferred
Federal.................................... (250) -- (536)
State...................................... -- -- --
Federal tax charge due to Sarnia spin-off.. -- -- 1,750
----- ---- ------
$(216) $(56) $1,332
===== ==== ======
Deferred tax assets are comprised of the following:
June 30, June 30,
1996 1995
-------- --------
(In thousands)
Deferred Tax Assets:
Employee benefits............................ $ 564 $ 430
Bad debt reserve............................. 239 318
All other reserves........................... 332 501
Alternative minimum tax credits.............. 182 182
Other business tax credits................... 230 250
Net operating loss carryforwards............. -- 233
----- ------
Total Deferred Tax Assets.................. 1,547 1,914
Deferred Tax Liabilities:
Depreciation................................. (65) (118)
Other........................................ (1) --
----- ------
Total Deferred Tax Liabilities............. (66) (118)
Net Deferred Tax Assets........................ 1,481 1,796
Valuation Allowance............................ (708) (1,260)
----- ------
Net Deferred Tax Asset......................... $ 773 $ 536
===== ======
At June 30, 1996, Versar had approximately $3.3 million of future tax
deductions to utilize against future taxable income. Due to Versar's losses in
previous years, the Company was unable to record a tax benefit of $708,000 until
the probability to realize these amounts becomes more certain.
F-23
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The tax (benefit) provision was composed of the following:
Years ended June 30,
------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Expected provision (benefit) at federal statutory
rate.............................................. $ 264 $ 137 $ (451)
Change in valuation allowance....................... (552) (512) --
Increase in valuation allowance due to spin-off..... -- -- 1,309
State income tax, net of federal benefit............ 32 11 23
Losses on Sarnia operations not deductible.......... 48 92 185
Other............................................... (8) 216 266
----- ----- ------
$(216) $ (56) $1,332
===== ===== ======
Income taxes paid for the years ended June 30, 1996, 1995, and 1994 were
$7,000, $140,000, and $34,000, respectively.
Tax Impact of Spin-off
The spin-off of Sarnia triggered a taxable event in 1994 through the
recapture of an "Excess Loss Account" (loss recorded for tax purposes in excess
of the investment due to accelerated depreciation). The excess loss account had
a balance of approximately $5 million, which was offset by debt forgiveness by
Versar of approximately $2.4 million, leaving $2.6 million of taxable income to
Versar. At March 31, 1994, Versar had $9.5 million of future tax deductions,
which were reduced by approximately $2.4 million for the debt forgiveness and
applied to the remaining taxable income of $2.6 million resulting from the
spin-off. In addition, approximately $141,000 of general business credits were
utilized in fiscal year 1994.
NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Company has established an Employee Savings and Stock Ownership Plan
(ESSOP) for the benefit of its employees and those of its subsidiaries. To be
eligible to participate in the plan, an employee must have been employed for one
year with at least 1,000 hours of service. The plan includes an Employee Stock
Ownership Plan (ESOP) and an Employee Savings Plan (401(k)).
Contributions to the ESOP are made at the discretion of the Company in the
form of the Company's stock or cash, which is invested by the plan's trustee in
the Company's stock. No contributions were made in fiscal years 1996, 1995, and
1994, respectively.
The Employee Savings Plan was adopted in accordance with Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to defer up to
15% of salary through contributions to the plan, which are invested in selected
mutual funds or used to buy insurance. The Company will match qualified
contributions with a contribution of 100% of each employee's contribution up to
4% of the employee's salary. This contribution may be in the Company's stock or
cash, which will be invested by the plan's trustees in the Company's stock.
Company matching contributions approximated $473,000, $434,000, and $425,000 for
fiscal years 1996, 1995, and 1994, respectively.
F-24
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
All contributions to the 401(k) Plan vest immediately. Contributions to the
ESOP vest ratably with years of service such that full vesting occurs after five
years of credited service.
GEOMET Technologies, Inc. (Geomet), a wholly-owned subsidiary, has a
profit-sharing retirement plan for the benefit of its employees. Contributions
are made at the discretion of Geomet's Board of Directors. Geomet contributed
$0, $29,000 and $19,000 in fiscal years 1996, 1995 and 1994, respectively.
Vesting occurs over time, such that an employee is 100% vested after seven years
of participation.
VA&E, a former subsidiary of the Company, had a trusteed employee stock
ownership plan for all qualified employees. Employees generally are eligible for
participation after attaining age 21 and completing 1,000 or more hours of
service within a plan year. Benefits vest at the rate of 10% per year of service
for the first two years and 20% per year of service thereafter. With the
acquisition of VA&E by the Company, the plan received 45,042 shares of the
Company's stock in exchange for VA&E shares held. Since VA&E employees are now
eligible for participation in the Company's ESSOP, the VA&E plan has been
terminated and the assets merged with the Company's ESSOP in fiscal year 1995.
NOTE I COMMITMENTS AND CONTINGENCIES
Versar has a substantial number of U.S. Government contracts, the costs of
which are subject to audit by the Defense Contract Audit Agency. All fiscal
years through 1993 have been audited and closed. Management believes that the
effect of disallowed costs, if any, for the periods not yet audited will not
have a material adverse effect on the consolidated financial position and
results of operations.
The Company leases approximately 190,000 square feet of office space,
including space leased from Sarnia, as well as data processing and other
equipment under agreements expiring through 2009. Minimum future obligations
under operating leases are as follows:
Total
Years Ending June 30, Amount
--------------------- ------
(In thousands)
1997.................................... $ 3,339
1998.................................... 2,826
1999.................................... 2,143
2000.................................... 1,639
2001.................................... 1,196
2002 and thereafter..................... 8,327
-------
$19,470
=======
Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total rental expense approximated
$2,467,000, $2,938,000, and $2,986,000 for 1996, 1995, and 1994, respectively.
As part of the agreement to sell its laboratory assets and operations to
Kemron Environmental Services, Inc. (Kemron) in July 1994, Versar agreed to
refer its analytical laboratory work for a period of 48 months after the closing
date to Kemron subject to certain limitations and exclusions including federal
procurement requirements and the ability of Kemron to perform the required
services. On July 31, 1996, Kemron filed an action in the Circuit Court of
Fairfax County, Commonwealth of Virginia, entitled Kemron Environmental
Services, Inc. vs. Versar Laboratories, Inc. and Versar, Inc., Law No. L154205.
Kemron alleged the defendants breached warranties of
F-25
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
certain provisions in the Asset Acquisition Agreement and alleged damages in the
amount of not less than $3,000,000. Management is unable to estimate its
ultimate exposure for this matter at this time.
Versar is a defendant in lawsuits that have arisen in the ordinary course
of its business. Such lawsuits include actions brought by a former officer of
the Company and certain customers and are currently in various stages of
litigation. Management does not believe that the outcome of these lawsuits will
have a material adverse effect on the Company's consolidated financial position
or results of operations.
NOTE J CUSTOMER INFORMATION
A substantial portion of the Company's consulting revenue is derived from
contracts with the U.S. Government as follows:
Years Ended June 30,
-------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
U.S. Department of Defense .................. $16,479 $13,194 $11,260
U.S. Environmental Protection Agency ........ 3,787 5,375 6,151
Other U.S. Government Agencies .............. 2,035 1,707 1,312
------- ------- -------
Total U.S. Government .............. $22,301 $20,276 $18,723
======= ======= =======
The Company's largest contract generated revenues of approximately
$7,951,000 in fiscal year 1996.
No other contracts individually exceeded 10% of total revenues in fiscal
year 1996, 1995, and 1994, respectively.
NOTE K QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 1996 and 1995 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995
------------------------------------- ----------------------------------
Quarter ending Jun 30 Mar 31 Dec 31 Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
- ---------------------------- ------ ------ ------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenue............... $10,597 $11,389 $11,807 $10,490 $10,254 $10,054 $9,364 $9,418
Net Service Revenue......... 7,951 8,224 8,130 7,614 7,505 7,414 7,279 7,149
Operating income............ 121 245 293 213 176 190 148 46
Net income.................. $ 374 $ 213 $ 230 $ 175 $ 205 $ 152 $ 101 $ --
======= ======= ======= ======= ======= ======= ====== ======
Net income per share........ $ .07 $ .04 $ .04 $ .03 $ .04 $ .03 $ .02 $ --
======= ======= ======= ======= ======= ======= ====== ======
Weighted average number of
shares outstanding........ 5,276 5,216 5,170 5,178 4,837 4,853 4,878 4,824
======= ======= ======= ======= ======= ======= ====== ======
</TABLE>
Quarterly financial data may not equal annual totals due to rounding. Quarterly
earnings per share data will not equal annual total due to fluctuations in
common shares outstanding.
F-26
<PAGE>
VERSAR, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
YEAR EXPENSES CHARGE OFF OF YEAR
------------ ---------- ---------- -------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
1994 $1,760,713 $(12,167) $(396,937) $1,351,609
1995 1,351,609 770 (395,180) 957,199
1996 957,199 (36,710) (217,262) 703,227
F-27
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS
For the Six-Month Period Ended as of June 30, 1997
Page
----
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996......................................................... F-29
Consolidated Statements of Operations for the three-month
periods and six month periods ended June 30, 1997 and 1996................ F-30
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 1997 and 1996...................................... F-31
Notes to Consolidated Financial Statements................................ F-32
F-28
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets
Cash .............................................. $ 342 $ 406
Accounts receivable, net .......................... 5,280 3,633
Prepaid and other current assets .................. 148 165
------- -------
Total current assets ............................ 5,770 4,204
Property and equipment, net ......................... 371 409
Other assets ........................................ 62 86
Reorganization value in excess of amounts allocated
to identifiable assets, net ....................... 980 1,077
------- -------
Total assets .................................... $ 7,183 $ 5,776
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................. $ 2,408 $ 1,736
Accrued payroll and vacation ...................... 164 136
Other liabilities ................................. 1,801 1,124
------- -------
Total current liabilities ....................... 4,373 2,996
Liabilities from reorganization plan ................ 1,010 1,123
------- -------
Total liabilities ............................... 5,383 4,119
------- -------
Stockholders' equity
Preferred stock, $1 par value, 1,750,000 shares
authorized and outstanding ...................... 1,750 1,750
Common stock, $.10 par value; 10,000,000 shares
authorized and 1,999,604 shares outstanding ..... 200 200
Additional paid-in-capital ........................ 14 14
Accumulated deficit ............................... (164) (307)
------- -------
Total stockholders' equity ...................... 1,800 1,657
------- -------
Total liabilities and stockholders' equity ...... $ 7,183 $ 5,776
======= =======
F-29
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Periods Ended June 30, Periods Ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
GROSS REVENUE.................................... $6,555 $6,453 $12,429 $12,438
Purchased services and materials, at cost........ 3,444 2,382 5,982 4,556
------ ------ ------- -------
NET SERVICE REVENUE.............................. 3,111 4,071 6,447 7,882
Direct costs of services and overhead............ 1,826 2,469 3,838 5,054
Selling, general and administrative expenses..... 1,135 1,530 2,448 2,981
------ ------ ------- -------
OPERATING INCOME (LOSS).......................... 150 72 161 (153)
OTHER EXPENSES
Interest (income) expense........................ -- (4) -- 43
Income tax expense............................... 18 216 18 216
------ ------ ------- -------
NET INCOME (LOSS)................................ $ 132 $ (143) $ 143 $ (412)
====== ====== ======= =======
NET INCOME PER SHARE............................. $ .07 $ .07
====== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.... 2,000 2,000
====== =======
</TABLE>
F-30
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
For the Six-Month
Periods Ended June 30,
----------------------
1997 1996
---- ----
Cash flows from operating activities
Net income (loss)................................... $ 143 $ (412)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization..................... 180 200
Provision for doubtful accounts receivable........ (106) 20
----- ------
Subtotal........................................ 217 (192)
Changes in assets and liabilities
(Increase) decrease in accounts receivable...... (1,542) 1,701
Decrease (increase) in prepaids and other assets 41 (49)
Increase (decrease) in accounts payable......... 672 (979)
Increase (decrease) in accrued salaries and
vacation..................................... 28 (462)
Increase (decrease) in other liabilities........ (25) (2,266)
----- ------
Net cash used in operating activities......... (609) (2,247)
----- ------
Cash flows from investing activities
Purchase of property and equipment ............... (46) (34)
----- ------
Cash flows from financing activities
Net borrowings on notes payable................... -- 173
Principal payments on long-term debt.............. (113) --
Proceeds from Versar.............................. 704 --
----- ------
Net cash provided by financing activities.... 591 173
----- ------
Net decrease in cash.................................. (64) (2,108)
Cash at the beginning of the year..................... 406 2,227
----- ------
Cash at the end of the period......................... $ 342 $ 119
===== ======
Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest.......................................... $ -- $ 43
Income taxes...................................... -- --
F-31
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A) Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of the Securities and Exchange Commission
regarding interim financial statements and consequently do not include all of
the disclosures normally required by generally accepted accounting principles or
those normally made in an Annual Report on Form 10-K. Until the filing of its
Form 10-Q for the quarter ended March 31, 1997, Science Management Corporation
("SMC" or the "Company") had not made any public filings since November 23, 1994
due to bankruptcy proceedings under Chapter 11. The Company has subsequently
emerged from Chapter 11 on July 10, 1996.
The financial information has been prepared in accordance with the
Company's customary accounting practices. In the opinion of management, the
information reflects all adjustments necessary for a fair presentation of the
Company's consolidated financial position as of June 30, 1997, and the results
of operations for the three-month and six-month periods ended June 30, 1997 and
1996. The results of operations for such periods, however, are not necessarily
indicative of the results to be expected for a full fiscal year.
(B) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
(C) Contract Accounting
Contracts in process are stated at the lower of actual cost incurred plus
accrued profits or net estimated realizable value of incurred costs, reduced by
progress billings. The Company records income from major fixed-price 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. On cost-plus-fee contracts, revenue is recognized to the extent of costs
incurred plus a proportionate amount of fee earned, and on time-and-material
contracts, revenue is recognized to the extent of billable rates times hours
delivered plus material and other reimbursable costs incurred. Losses on
contracts are recognized 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 where 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.
(D) Contingencies
SMC and its subsidiaries are parties to various legal actions arising in
the normal course of business. The Company believes that the ultimate resolution
of these legal actions will not have a material adverse effect on its
consolidated financial condition and results of operations.
(E) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the applicable period being
reported. Loss per share of the predecessor company is not presented as the
presentation is not meaningful.
(F) Common and Preferred Stock
Pursuant to SMC's Plan of Reorganization (the "Plan"), which was confirmed
by the U.S. Bankruptcy Court on April 17, 1996, and became effective on July 10,
1996, all of the common stock of Science Management Corporation, 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 the Chapter 11 proceeding, and certain members of the
Company's management, received distributions of new common shares
F-32
<PAGE>
of SMC ("New Common Stock"). In addition, and as described in the Plan, Imperial
Capital Worldwide Partners, L.P., the holder of the largest secured claim
against SMC, received a distribution 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 and redeemable by the Company subject
to conditions and restrictions contained in the Plan.
The total number of Old Common Stock cancelled pursuant to the Plan was
3,300,000 shares. A total of 10,000,000 shares of New Common Stock, par value
$0.10 per share, were authorized under the Plan, with issuance as described
above on July 10, 1996, of a total of 1,999,604 shares.
(G) Acquisition by Versar
Effective April 30, 1997, Versar, Inc. ("Versar") acquired 53.5% of the
outstanding common stock and all outstanding preferred stock of SMC for
aggregate consideration of $2,870,000 in cash. Versar intends to propose a
merger pursuant to which Versar will obtain the remaining SMC common stock for
newly issued shares of Versar common stock, subject to SMC stockholder approval.
F-33
<PAGE>
SCIENCE MANAGEMENT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................. F-35
Consolidated Balance Sheets as of December 31, 1996, July 31, 1996
and December 31, 1995..................................................... F-37
Consolidated Statements of Operations for the five months ended
December 31, 1996, the seven months ended July 31, 1996 and the
years ended December 31, 1995 and 1994.................................... F-39
Consolidated Statements of Shareholders' Equity for the five months
ended December 31, 1996, the seven months ended July 31, 1996 and the
years ended December 31, 1995 and 1994.................................... F-40
Consolidated Statements of Cash Flows for the five months ended
December 31, 1996, the seven months ended July 31, 1996 and the
years ended December 31, 1995 and 1994.................................... F-41
Notes to Consolidated Financial Statements................................ F-42
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Science Management Corporation:
We have audited the accompanying consolidated balance sheets of Science
Management Corporation (Successor) and subsidiaries as of December 31, 1996 and
July 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) and subsidiaries as of December 31, 1996 and July 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
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Science Management Corporation:
We have audited the accompanying consolidated balance sheet of Science
Management Corporation (Predecessor) and subsidiaries as of December 31, 1995
and the related consolidated statements of operations, cash flows and
shareholders' equity 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 financial position of Science Management
Corporation (Predecessor) and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows 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
F-36
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 1996, July 31, 1996, and December 31, 1995
(in thousands of dollars)
Predecessor
Reorganized Company Company
---------------------- -----------
December July 31, December
31, 1996 1996 31, 1995
-------- -------- --------
Assets
Current assets:
Cash .................................. $ 406 $ 125 $ 2,227
Accounts and notes receivable:
Billed .............................. 2,510 2,257 4,376
Unbilled ............................ 1,508 982 1,703
Allowance for doubtful accounts ..... (385) (376) (1,984)
------- ------- -------
Net accounts receivable ............. 3,633 2,863 4,095
Prepaid expenses and supplies ......... 165 651 615
------- ------- -------
Total current assets .............. 4,204 3,639 6,937
Property and equipment:
Leasehold improvements ................ 18 18 101
Furniture and equipment ............... 428 445 2,451
Less: Accumulated depreciation and
amortization .................... (37) -- (1,921)
------- ------- -------
Net property and equipment .......... 409 463 631
Reorganization value in excess of amounts 1,157 1,157 --
allocated to identifiable assets
Less: Accumulated amortization ........ (80) -- --
------- ------- -------
Net reorganization value ............ 1,077 1,157 --
Goodwill ................................ -- -- 474
Other assets ............................ 86 95 190
------- ------- -------
Total assets ...................... $ 5,776 $ 5,354 $ 8,232
======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
F-37
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 1996, July 31, 1996, and December 31, 1995
(in thousands of dollars)
Predecessor
Reorganized Company Company
---------------------- -----------
December July 31, December
31, 1996 1996 31, 1995
-------- -------- --------
Current liabilities:
Accounts payable ......................... $ 1,736 $ 1,460 $ 2,138
Note payable ............................. -- -- 5,150
Loan from shareholder .................... -- -- 2,000
Accrued expenses ......................... 1,260 872 3,933
------- ------- -------
Total current liabilities ................ 2,996 2,332 13,221
Long term liabilities:
Liabilities from reorganization plan ..... 1,123 1,058 --
Liabilities subject to compromise ........ -- -- 4,399
------- ------- ------
Total liabilities .......................... 4,119 3,390 17,620
Shareholders' equity:
Preferred stock, $1 par value, 1,750,000
shares authorized and outstanding ...... 1,750 1,750 --
New common stock, $.10 par value,
10,000,000 shares authorized;
1,999,604 shares issued and
outstanding ............................ 200 200 --
Old common stock, $.10 par value,
10,000,000 shares authorized;
3,696,000 shares issued ................ -- -- 369
Additional paid-in-capital ............... 14 14 16,833
Accumulated deficit (See Note 1) ......... (307) -- (23,907)
Less: Common stock in treasury, 370,000
shares, at cost .......................... -- -- (2,683)
------- ------- ------
Total shareholders' equity ................. 1,657 1,964 (9,388)
------- ------- ------
Total liabilities and shareholders' equity.. $ 5,776 $ 5,354 $8,232
======= ======= ======
The accompanying notes are an integral part of the
consolidated financial statements.
F-38
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Five Months Ended December 31, 1996,
the Seven Months Ended July 31, 1996
and the Years Ended December 31, 1995 and 1994
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
------------- -----------------------------------------
Five Months Seven Months
Ended Ended Year Ended Year Ended
December 31, July 31, December 31, December 31,
1996 1996 1995 1994
------------ ------------ ---------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales........................... $11,707 $14,039 $28,835 $22,821
Cost of sales................... 10,287 11,582 22,856 16,614
Selling, general and
administrative expenses....... 1,771 2,775 5,956 6,044
-------- -------- -------- --------
Income (loss) from operations... (351) (318) 23 163
Interest income (expense), net.. 3 (43) (115) (75)
Gain on transfer of foreign
subsidiary to creditor in
satisfaction of liability..... -- 846 -- --
Net reorganization costs........ -- (63) (329) (522)
Other income (expense).......... 41 113 51 (118)
Provision for income taxes...... -- (215) (114) (237)
-------- -------- -------- --------
Net income (loss)............... ($307) $320 ($484) ($789)
======== ======== ======== ========
Net loss per share.............. ($0.15)
========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-39
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Five Months Ended December 31, 1996,
the Seven Months Ended July 31, 1996 and
the Years Ended December 31, 1995 (unaudited);
and 1994 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Stock Additional Treasury Stock
Stock ---------------- Paid-in Accumulated ---------------
Amount Shares Amount Capital Deficit Shares Amount Total
------ ------ ------ ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ................. $ -- 3,696 $ 369 $ 16,833 ($22,634) (396) ($2,683) ($8,115)
Net loss ................................. -- -- -- -- (789) -- -- (789)
----- ----- ----- ------- ------- ----- ------ ------
Balance, December 31, 1994 ............... -- 3,696 369 16,833 (23,423) (396) (2,683) (8,904)
Net loss ................................. -- -- -- -- (484) -- -- (484)
----- ----- ----- ------- ------- ----- ------ -------
Balance, December 31, 1995 ............... -- 3,696 369 16,833 (23,907) (396) (2,683) (9,388)
Net income ............................... -- -- -- -- 320 -- -- 320
Eliminate predecessor equity
accounts in connection with
fresh start reporting (See Note 1) ..... -- (3,696) (369) (16,833) 23,587 396 2,683 9,068
Issuance of new stock pursuant
to reorganization plan ................. 1,750 2,000 200 14 -- -- -- 1,964
----- ----- ---- ------ ------ ---- ----- -----
Balance, July 31, 1996 ................... 1,750 2,000 200 14 -- -- -- 1,964
Net loss ................................. -- -- -- -- (307) -- -- (307)
----- ----- ---- ------ ------ ---- ----- -----
Balance, December 31, 1996 ............... $1,750 2,000 $ 200 $ 14 ($307) -- $ -- $1,657
===== ===== ==== ====== ====== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-40
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Five Months Ended December 31, 1996, the
Seven Months Ended July 31, 1996, and the
Years Ended December 31, 1995, and 1994
(in thousands of dollars)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
------------- ------------------------------------------------
Five Months
Ended Seven Months Year Ended Year Ended
December 31, Ended December 31, December 31,
1996 July 31, 1996 1995 1994
------------ ------------- ------------ ------------
Cash flows from operating activities (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income .................................... ($307) $ 320 ($ 484) ($ 789)
Adjustments to reconcile net (loss)
income to net cash provided
(used) by operations:
Depreciation and amortization expenses............ 171 123 249 240
Gain on transfer of foreign
subsidiary to creditor in
satisfaction of liability ........................ -- (846) -- --
(Increase) decrease in accounts
receivable ....................................... (770) 443 523 627
(Increase) decrease in prepaid
expenses ......................................... 486 (26) (348) 299
(Increase) decrease in other assets............... 9 (2) 60 142
Increase (decrease) in accounts
payable and accrued expenses ..................... 729 (2,072) 93 209
--- ------ -- ---
Net cash provided (used) by operations.................... 318 (2,060) 93 728
Cash flows from investing activities
Capital expenditures ................................. (37) (42) (36) (87)
--- --- --- ---
Cash flows from financing activities
Net borrowings on note payable ....................... -- -- -- 209
--- --- --- ---
Net increase (decrease) in cash .......................... 281 (2,102) 57 850
Cash - beginning of period ............................... 125 2,227 2,170 1,320
--- ----- ----- -----
Cash - end of period ..................................... $ 406 $ 125 $ 2,227 $ 2,170
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-41
<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
(U.K.), SMC International Holdings, SMC France, SMC Business Information Systems
Inc., SMC McEver Inc. and SMC Environmental Services Group. SMC Management
Services Group, SMC International (U.K.), SMC International Holdings, and SMC
France (started in June 1996) provide comprehensive re-engineering and
transformation management programs and systems, competitive analysis, and
organizational effectiveness. SMC International Holdings was disposed of during
1996 (see Note 9). 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. The Company's emergence from bankruptcy proceedings was accomplished
through a series of mutually interdependent transactions and agreements executed
simultaneously at the closing.
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.
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 five-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.
Under the Bankruptcy Code, substantially all of SMC's liabilities existing prior
to July 28, 1993 were stayed. These liabilities were presented at historical
cost and classified in the Consolidated Balance Sheets as "Liabilities Subject
to Compromise." Liabilities subject to compromise exclude pre-petition debt
which was fully secured. Creditors and others affording pre-petition claims
against the Company were obliged to file the basis of such claims with the Court
by January 31, 1994. These claims were settled under the Plan of Reorganization
through issuance of 400,000 shares of New Common Stock and payment of
approximately $570,000 in cash to be paid over a three-year period on each
anniversary of the effective date of the Plan of Reorganization.
F-42
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 amount of revenues and expense during the reporting
period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment prior to July 1996 were stated at cost. Pursuant to fresh
start reporting, the property and equipment was reflected at estimated fair
value at July 31, 1996. 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.
Excess of Cost Over Net Assets of Businesses Acquired
Prior to July 1996, excess of cost over net tangible assets of businesses
acquired ("goodwill") resulted from acquisitions accounted for as purchases, was
amortized over a 40-year period. Amortization of approximately $22,000, $22,000,
and $13,000 is included in selling, general and administrative expenses in the
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and the seven months ended July 31, 1996, respectively. On July 31, 1996,
the balance was reduced to zero with all intangible assets being included in the
caption "Reorganization Value". Amortization of the Reorganization Value
included in selling, general and administrative expenses in the Consolidated
Statement of Operations for the five months ended December 31, 1996 was $80,000.
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.
F-43
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the applicable period (1,999,604
shares). Earnings (loss) per share of the predecessor company are not presented
as the presentations are 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, L.P., 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 1,999,604 shares issued as described above
on July 10, 1996.
NOTE 3 - ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands of dollars):
December 31, July 31, December 31,
1996 1996 1995
---- ---- ----
Advance billings ...................... $ 122 $ 74 $ 87
Payroll and other taxes ............... 336 40 371
payable
Accrued salaries and vacation ......... 137 91 520
Accrued commissions and ............... 12 -- 469
bonuses
Accrued pension and profit ............ 208 201 187
sharing
Accrued legal and accounting .......... -- -- 521
fees
Other accrued expenses ................ 445 466 1,778
------ ---- ------
TOTAL ................................. $1,260 $872 $3,933
====== ==== ======
F-44
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4 - INCOME TAXES
The components of income (loss) before income tax expense are as follows (in
thousands of dollars):
Seven Months
Five Months Ended Ended Year Ended Year Ended
December 31, 1996 July 31, 1996 December 31, 1995 December 31, 1994
----------------- ------------- ----------------- ------------------
Domestic.... $(344) $309 $ (27) $ (837)
Foreign..... 37 226 (343) 285
-- --- ---- ---
Total..... $(307) $535 $(370) $(552)
The provisions for income taxes were composed on the following (in thousands of
dollars):
Seven Months
Five Months Ended Ended Year Ended Year Ended
December 31, 1996 July 31, 1996 December 31, 1995 December 31, 1994
----------------- ------------- ----------------- -----------------
Foreign.... $ -- $215 $114 $212
Federal.... -- -- -- --
State...... -- -- -- 25
----- ---- ---- ----
Total.... $ -- $215 $114 $237
The foreign tax provision is entirely a current provision which is the statutory
tax on earnings in Belgium.
The Company has recorded a valuation allowance which offset the impact of any
income tax provisions or benefits for U.S. federal tax purposes for the years
presented.
SMC and its domestic subsidiaries file separate returns for state purposes. The
state tax provision in 1994 relates to the states in which the Company had
profitable operations.
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 2010. 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.
F-45
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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):
Expiration Dates Net Operating Losses Foreign Tax Credit
- ---------------- -------------------- ------------------
2000 $ 266 $ --
2003 805 --
2004 325 --
2005 1,095 858
2006 -- 736
2007 3,422 424
2008 2,520 --
2009 850 --
2010 30 --
------ ------
Total $9,313 $2,018
====== ======
NOTE 5 - NOTE PAYABLE
As of December 31, 1995, Imperial Capital Worldwide Partners, L.P. held claim to
previous bank debt of the Company in the amount of approximately $5,150,000
which was secured by a first priority lien on the stock of SMC's domestic
subsidiaries. Under the terms of the assignment, the debt was no longer accruing
interest. (See Note 2 for a description of the satisfaction of the Imperial
claim.)
NOTE 6 - 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. There were no shares granted for the
years presented. All stock option plans were terminated when the reorganization
plan became effective.
NOTE 7 - 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 during the three year period. Net periodic
pension cost for 1996, 1995 and 1994 included the following components (in
thousands of dollars):
F-46
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
1996 1995 1994
---- ---- ----
Service costs-benefits
earned during the period .................. $ 93 $ 77 $ 77
Interest cost on projected benefit ......... 145 130 139
obligations
Actual return on plan assets ............... (240) (433) 75
Net amortization and deferral .............. 3 216 (308)
--- --- ----
Net periodic pension cost (income)
for defined benefit plans ................. $ 1 $ (10) $ (17)
The weighted average assumed rate of return on assets for the Company's defined
benefit pension plans was seven percent in 1996, 1995 and 1994. Benefits were
calculated based on a seven percent weighted average assumed discount rate for
all years. In addition, the weighted average assumed annual increase in
compensation over employees' estimated remaining working lives was four percent
for 1996, 1995 and 1994.
Benefits under the plans are generally based on years of service and employees'
compensation during the last years of employment. The Company's policy is
generally to fund net periodic pension costs as determined by actuarial
valuations. As of December 31, 1996, the plan assets were composed of
approximately 16 percent cash and equivalents, 48 percent fixed income
securities (including preferred stock) and 36 percent common stock.
Presented below are the plans' funded status and amounts recognized in the
Company's Consolidated Balance Sheets at December 31, 1996 and 1995 for its
defined benefit pension plans (in thousands of dollars):
1996 1995
---- ----
Actuarial present value
of benefit obligation:
Vested ..................................... $ 2,155 $ 1,993
Non-vested ................................. 42 35
----- -----
Accumulated benefit
obligation .................................... 2,197 2,028
Additional benefits based
on estimated future salary .................... 220 119
----- -----
Projected benefit obligation ................... 2,417 2,147
Less: Fair value of assets .................... 2,723 2,616
----- -----
Plan assets in excess of projected
benefit obligation ............................ 306 469
Unrecognized transition obligation ............. (250) (300)
Unrecognized net gain .......................... (65) (182)
Unrecognized prior service cost ................ (80) (74)
----- -----
Total accrued pension cost ..................... $ (89) $ (87)
F-47
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Employee Capital Accumulation Plan (EM CAP), 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.
NOTE 8 - 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):
Year Ending December 31,
------------------------
1997 $415
1998 178
---
Total $593
====
Rental expense, net of sublease income, was $195,000 for the five months ended
December 31, 1996, $275,000 for the seven months ended July 31, 1996, $522,000
for the year ended December 31, 1995 and $624,000 for the year ended December
31, 1994.
NOTE 9 - 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.
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 10 - COMMITMENTS AND 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, Sarasohn, 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 Company to
obtain working capital.
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
F-48
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 or 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 expert a material adverse effect on the financial
condition or results of operations.
SMC has entered into employment agreements with Messrs. Skidmore and Rathgeber.
Each of the agreements is for a three year term that commenced on July 10, 1996
(the Effective Date). The agreements provide for annual salaries of not less
than $200,000 for Mr. Skidmore and not less that $124,875 for Mr. Rathgeber. Mr.
Rathgeber's salary was increased to $150,000 effective June 1, 1997. Mr.
Skidmore is also entitled to receive additional annual compensation in an amount
equal to 4% of SMC's income before income taxes, as well as certain disability
and life insurance benefits. Mr. Rathgeber's agreement provides that he is
eligible to receive a discretionary bonus. If Mr. Skidmore's employment is
terminated without cause by SMC or for cause by Mr. Skidmore (as such terms are
defined in the agreement), Mr. Skidmore will be entitled to receive liquidated
damages equal to the aggregate salary payable with respect to the remainder of
the three year term plus an additional $100,000, as well as continuation of
benefits for the remainder of the term. Mr. Rathgeber's employment may be
terminated by SMC only for cause.
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 or results of operations.
NOTE 11 BUSINESS INFORMATION
The Company 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 for 1996, 1995 and 1994 is as follows (in
thousands of dollars):
Domestic Foreign
Operations Operations Total
---------- ---------- -----
Five months ended December 31,
1996................................... $11,067 $ 640 $11,707
Seven months ended July 31,
1996................................... 10,519 3,520 14,039
Year ended December 31, 1995 ............ 19,250 9,585 28,835
Year ended December 31, 1994 ............ 12,496 10,325 22,821
F-49
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 12 - REORGANIZATION COSTS
The process of reorganization gave rise to various types of revenues, expenses,
gain and loss realizations, and provisions for anticipated losses (collectively,
"net reorganization costs"). Net reorganization costs for the seven months ended
July 31, 1996 and years ended December 31, 1995 and 1994, have been identified
as such in the Consolidated Statements of Operations, and are as follows (in
thousands of dollars):
1996 1995 1994
---- ---- ----
Accounting fees ................. $11 $ 9 $105
Legal fees ...................... 30 305 402
Other ........................... 22 15 15
--- ---- ----
Total ........................... $63 $329 $522
F-50
<PAGE>
Appendix I
Agreement and Plan of Merger
<PAGE>
====================================
AGREEMENT AND PLAN OF MERGER
by and among
VERSAR, INC., a Delaware corporation
and
VERSAR ACQUISITION I, CORP., a Delaware corporation,
and
SCIENCE MANAGEMENT CORPORATION, a Delaware
corporation,
Dated as of July 29, 1997
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TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
ARTICLE II
PLAN OF MERGER
SECTION 2.1 The Merger................................................ 3
SECTION 2.2 Option to Restructure..................................... 4
SECTION 2.3 Effective Time............................................ 4
SECTION 2.4 Effects of the Merger..................................... 4
SECTION 2.5 Certificate of Incorporation and Bylaws................... 4
SECTION 2.6 Directors................................................. 4
SECTION 2.7 Officers.................................................. 4
SECTION 2.8 Conversion of Securities.................................. 5
SECTION 2.9 Approval by SMC Stockholders.............................. 5
ARTICLE III
CLOSING
SECTION 3.1 Location; Date............................................ 5
SECTION 3.2 Deliveries................................................ 5
ARTICLE IV
DISSENTING SHARES; EXCHANGE OF SHARES
SECTION 4.1 Dissenting Shares......................................... 6
SECTION 4.2 Exchange of Certificates.................................. 6
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SMC
SECTION 5.1 Organization.............................................. 8
SECTION 5.3 Capitalization............................................ 8
SECTION 5.4 Subsidiaries and Material Investments..................... 8
SECTION 5.5 Authority Relative to this Agreement...................... 9
SECTION 5.6 Consents and Approvals; No Violations..................... 9
SECTION 5.7 Litigation................................................ 10
SECTION 5.8 Financial Reports......................................... 10
SECTION 5.9 Absence of Certain Changes of Events...................... 10
SECTION 5.10 Absence of Undisclosed Liabilities........................ 10
SECTION 5.11 No Default................................................ 11
SECTION 5.12 Compliance with Applicable Law............................ 11
SECTION 5.13 Brokers................................................... 11
SECTION 5.14 Investment Intent......................................... 11
SECTION 5.15 Disclosure................................................ 11
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Table of Contents (Con't.)
Page
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF VERSAR AND VERSAR
ACQUISITION
SECTION 6.1 Organization.............................................. 11
SECTION 6.2 No Versar Acquisition Assets, Liabilities or Business..... 12
SECTION 6.3 Authority Relative to this Agreement...................... 12
SECTION 6.4 Consents and Approvals; No Violations..................... 12
SECTION 6.5 Financial Reports......................................... 13
SECTION 6.6 Capitalization............................................ 13
SECTION 6.7 Absence of Certain Changes or Events...................... 13
SECTION 6.8 Litigation................................................ 14
SECTION 6.9 Absence of Undisclosed Liabilities........................ 14
SECTION 6.10 Brokers................................................... 14
SECTION 6.11 Disclosure................................................ 14
ARTICLE VII
COVENANTS OF SMC
SECTION 7.1 Conduct of Business of SMC................................ 14
SECTION 7.2 Access to Information..................................... 16
SECTION 7.3 SMC Special Stockholders' Meeting......................... 16
SECTION 7.4 Fulfillment of Closing Conditions......................... 16
SECTION 7.5 Acquisition Proposals..................................... 17
ARTICLE VIII
COVENANTS OF VERSAR
SECTION 8.1 Fulfillment of Closing Conditions......................... 17
SECTION 8.2 Registration Statement on Form S-4........................ 18
SECTION 8.3 Stock Exchange Listing.................................... 18
ARTICLE IX
COVENANTS OF THE PARTIES
SECTION 9.1 Public Announcements...................................... 18
SECTION 9.2 Further Assurances........................................ 18
ARTICLE X
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 10.1 Conditions Precedent to Each Party's Obligation to Effect
the Merger................................................ 18
SECTION 10.2 Conditions Precedent to Obligation of SMC to Effect the
Merger.................................................... 19
SECTION 10.3 Conditions to Obligations of Versar to Effect the Merger.. 19
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Table of Contents (Con't.)
Page
ARTICLE XI
TERMINATION: AMENDMENT: WAIVER
SECTION 11.1 Termination............................................... 20
SECTION 11.2 Effect of Termination..................................... 20
SECTION 11.3 Extension; Waiver......................................... 21
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Amendment................................................. 21
SECTION 12.2 Nonsurvival of Representations and Warranties............. 21
SECTION 12.3 Entire Agreement; Assignment.............................. 21
SECTION 12.4 Validity.................................................. 21
SECTION 12.5 Notices................................................... 21
SECTION 12.6 Governing Law............................................. 22
SECTION 12.7 Descriptive Headings...................................... 22
SECTION 12.8 Parties in Interest....................................... 22
SECTION 12.9 Further Assurances........................................ 22
SECTION 12.10 Counterparts.............................................. 22
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AGREEMENT
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
July 29, 1997, is by and among VERSAR, INC., a Delaware corporation ("Versar"),
and VERSAR ACQUISITION I, CORP., a Delaware corporation and newly formed
subsidiary of Versar ("Versar Acquisition"), on the one hand, and SCIENCE
MANAGEMENT CORPORATION, a Delaware corporation ("SMC"), on the other hand.
W I T N E S S E T H:
WHEREAS, Versar currently owns approximately 53% of the issued and
outstanding common stock of SMC and all outstanding preferred stock of SMC;
WHEREAS, this Agreement sets forth the terms and conditions under
which SMC shall merge with Versar Acquisition, a newly formed, wholly owned
subsidiary of Versar (the "Merger"), and in connection therewith the SMC
Stockholders, as defined below, shall receive shares of Versar Common Stock, as
defined below, upon the terms and subject to the conditions set forth herein;
and
WHEREAS, the parties intend that, upon completion of the
transactions contemplated by this Agreement, Versar Acquisition, the surviving
corporation of the Merger, will be a wholly owned subsidiary of Versar.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Versar, Versar Acquisition and SMC hereby agree as follows:
ARTICLE I
DEFINITIONS
For convenience, certain terms used in more than one part of this Agreement are
listed in alphabetical order and defined or referred to below (such terms as
well as any other terms defined elsewhere in this Agreement shall be equally
applicable to both the singular and plural forms of the terms defined).
"Agreement"shall mean this Agreement and Plan of Merger and the Exhibits hereto.
"Bankruptcy Plan" means the Fifth Modified Plan of Reorganization, as amended,
in SMC's bankruptcy proceedings, Case No. 93-34553, filed in the Bankruptcy
Court in the District of New Jersey.
"Certificate" shall mean a certificate representing SMC Common Stock.
"Closing" is defined in Section 3.1 hereof.
"Closing Date" is defined in Section 3.1 hereof.
"Constituent Corporations" means SMC and Versar Acquisition.
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"Converted Shares" means the shares of SMC Common Stock that are issued and
outstanding immediately prior to the Effective Time (other than Dissenting
Shares and shares held by Versar).
"Delaware Law" means the Delaware General Corporation Law.
"Dissenting Shares" is defined in Section 4.1 hereof.
"Effective Time" is defined in Section 2.3 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" is defined in Section 4.1 hereof.
"Fair Market Value" of a share of Versar Common Stock means the average of the
closing sale price of the Versar Common Stock as reported by the American Stock
Exchange for the five-day trading period ending two days prior to the Closing
Date.
"Form S-4" is defined in Section 8.3 hereof.
"GAAP" means generally accepted accounting principles.
"Knowledge" of any Person means actual knowledge, after reasonable
investigation, of such Person or the officers and directors of such Person.
"Letter of Transmittal" means a letter of transmittal in the form attached
hereto as Exhibit A.
"Lien" means any claim, mortgage, deed of trust, pledge, lien, security
interest, charge, encumbrance or similar agreement of any kind or nature
whatsoever.
"Merger Consideration" means the Versar Common Stock to be issued and any cash
to be paid in lieu of fractional shares pursuant to Section 2.8 hereof.
"Person" means any natural person, corporation, partnership, limited liability
company, proprietorship, association, trust or other legal entity.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"SMC" is defined above in the preamble.
"SMC Common Stock" means the common stock, $0.10 par value per share, of SMC.
"SMC Financial Statements" is defined in Section 5.8.
"SMC Holder" means each record holder of an outstanding Certificate that
immediately prior to the Effective Time represents Converted Shares.
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"SMC Material Adverse Effect" means a material adverse effect on the business,
assets, liabilities, results of operations or financial condition of SMC and its
Subsidiaries, taken as a whole.
"SMC Preferred Stock" means the preferred stock, $1.00 par value per share, of
SMC.
"SMC Required Consents" is defined in Section 5.6 hereof.
"SMC Special Stockholders' Meeting" is defined in Section 2.9 hereof.
"SMC Stockholder" means an owner of any SMC Common Stock.
"Subsidiary" means as to any Person, (i) a corporation of which more than 50% of
the outstanding capital stock having full voting power is at the time, directly
or indirectly, owned by such Person or by one or more Subsidiaries of such
Person or by such Person and one or more Subsidiaries thereof or (ii) any other
Person (other than a corporation) in which such Person, or one or more
Subsidiaries of such Person or such Person and one or more Subsidiaries thereof,
directly or indirectly, has at least a majority ownership interest and power to
direct the policies, management and affairs thereof.
"Surviving Corporation" is defined in Section 2.1 hereof.
"Termination Date" is defined in Section 11.1 hereof.
"Versar" is defined above in the preamble.
"Versar Acquisition" is defined above in the preamble.
"Versar Common Stock" means the common stock, $0.01 par value per share, of
Versar issued and outstanding at any designated time.
"Versar Financial Statements" is defined in Section 6.5 hereof.
"Versar Material Adverse Effect" means a material adverse effect on the
business, assets, liabilities, results of operations or financial condition of
Versar and its Subsidiaries, taken as a whole.
ARTICLE II
PLAN OF MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions set
forth herein, and in compliance with the requirements of Delaware Law, at the
Effective Time, SMC shall be merged with and into Versar Acquisition pursuant to
Section 252 of Delaware Law. Upon consummation of the Merger, the separate
corporate existence of SMC shall cease. Versar Acquisition shall continue as the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of SMC existing prior to the Merger.
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SECTION 2.2 Option to Restructure. If it is determined by Versar in its sole
discretion at any time prior to the Effective Time, whether before or after the
SMC Special Stockholders' Meeting, that the Merger may not qualify for tax-free
reorganization status under the Internal Revenue Code of 1986, as amended, for
any reason including without limitation the exercise of appraisal rights by SMC
Stockholders or a decline in the price of Versar Common Stock, Versar shall have
the option in its sole discretion, after consultation with SMC, to restructure
the Merger such that Versar Acquisition shall merge with and into SMC, with SMC
continuing as the Surviving Corporation. In such event SMC shall succeed to and
assume all the rights and obligations of Versar Acquisition existing prior to
the Merger.
SECTION 2.3 Effective Time. The Surviving Corporation shall cause the Merger
to be consummated by filing with the Secretary of State of the State of Delaware
a certificate of merger (the "Certificate of Merger") that sets forth the Plan
of Merger contained in this Article II and is otherwise in such form as may be
required under, and is executed in accordance with, the relevant provisions of
Delaware Law. The Merger shall become effective at such time as the Certificate
of Merger is duly filed with and accepted by the Secretary of State of the State
of Delaware, or at such other time as is stated therein (the "Effective Time").
SECTION 2.4 Effects of the Merger. The Merger shall have the effects set
forth in Sections 259 and 261 of Delaware Law. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, immunities, powers and franchises of each
Constituent Corporation shall vest in the Surviving Corporation, and all debts,
liabilities, obligations and duties of each Constituent Corporation shall become
the debts, liabilities, obligations and duties of the Surviving Corporation.
SECTION 2.5 Certificate of Incorporation and Bylaws.
(a) The Certificate of Incorporation of the Surviving Corporation in
effect from and after the Effective Time, until amended in accordance with
applicable law, shall be the Certificate of Incorporation of SMC as in
effect immediately prior to the Effective Time.
(b) The Bylaws of the Surviving Corporation in effect from and after
the Effective Time, until amended in accordance with applicable law, shall
be the Bylaws of SMC as in effect immediately prior to the Effective Time.
SECTION 2.6 Directors. The directors of SMC who are directors of SMC
immediately prior to the Effective Time, shall be the initial directors of the
Surviving Corporation, each to hold office from the Effective Time in accordance
with the Certificate of Incorporation and Bylaws of the Surviving Corporation
and the Bankruptcy Plan and until his or her successor is duly elected and
qualified.
SECTION 2.7 Officers. The officers of SMC immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation, each to hold
office from the Effective Time in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation and until his or her
successor is duly appointed and qualified.
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SECTION 2.8 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Versar, Versar Acquisition, SMC
or the holder of any shares of SMC Common Stock or SMC Preferred Stock:
(a) Each share of SMC Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares of SMC Common Stock held by
Versar or Dissenting Shares) shall be converted into the right to receive
.573584 shares of Versar Common Stock. Any shares of SMC Common Stock held
in the treasury of SMC shall be canceled.
(b) No fractional share of Versar Common Stock shall be issued to any
SMC Holder, but in lieu thereof each SMC Holder who otherwise would be
entitled to receive a fraction of a share of Versar Common Stock (after
aggregating all fractional shares of Versar Common Stock which would be
received by such SMC Holder) shall receive cash from Versar in an amount
equal to the then Fair Market Value of a share of Versar Common Stock
multiplied by such fraction.
(c) Versar shall take all steps necessary to provide the Surviving
Corporation with Versar Common Stock, as of the Effective Time, in an
amount sufficient to issue the shares contemplated by this Section 2.8.
(d) All SMC Common Stock held by Versar and all shares of SMC
Preferred Stock outstanding immediately prior to the Effective Time shall
not be converted or exchanged by virtue of the Merger, and each such share
shall be canceled and retired as of the Effective Time.
(e) Each share of capital stock of Versar Acquisition issued and
outstanding immediately prior to the Effective Time shall be converted into
and become a fully paid and nonassessable share of common stock of the
Surviving Corporation.
SECTION 2.9 Approval by SMC Stockholders. Consistent with Delaware Law, as
soon as reasonably practicable following the date hereof, SMC shall cause a
special meeting of the SMC Stockholders (the "SMC Special Stockholders'
Meeting") to be duly called and held for the purpose of considering and taking
action upon the adoption of this Agreement and approval of the Merger in
accordance with Delaware Law. The Board of Directors of SMC shall recommend that
the SMC Stockholders approve the Agreement and Merger.
ARTICLE III
CLOSING
SECTION 3.1 Location; Date. The closing of the Merger (the "Merger") shall
be held at the offices of Paul, Hastings, Janofsky & Walker LLP, Thirty-First
Floor, 399 Park Avenue, New York, New York 10022-4697, as promptly as
practicable (and in any event within three business days) after satisfaction or
waiver of the conditions to the consummation of the Merger set forth in Article
X hereof, unless the parties hereto agree in writing to another date or place.
The date on which the Closing occurs is referred to herein as the "Closing
Date."
SECTION 3.2 Deliveries. At the Closing,
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(a) The Surviving Corporation shall deliver to the Secretary of State
of the State of Delaware a duly executed and verified copy of the
Certificate of Merger, as required by Delaware Law;
(b) The parties hereto shall deliver to each other the respective
agreements and other documents and instruments specified with respect to
them in Article X hereof and such other items as may be reasonably
requested; and
(c) The parties shall take all such other and further actions as may
be required by Delaware Law and other applicable law to make the Merger
effective upon the terms and subject to the conditions set forth herein.
ARTICLE IV
DISSENTING SHARES; EXCHANGE OF SHARES
SECTION 4.1 Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of SMC Common Stock that are issued and outstanding
immediately prior to the Effective Time and that are held by an SMC Stockholder
who has not voted in favor of the Merger and who has demanded dissenters' rights
for such shares of SMC Common Stock in accordance with Section 262 of Delaware
Law ("Dissenting Shares") shall not be converted into the right to receive
Merger Consideration unless and until such SMC Stockholder fails to perfect or
withdraws or otherwise loses such Stockholder's right to dissenters' rights
under Delaware Law. If, after the Effective Time, such Stockholder fails to
perfect or withdraws or loses such Stockholder's dissenters' rights, such
Stockholder's Dissenting Shares shall thereupon be deemed to have been converted
into and to have become exchangeable, as of the Effective Time, for the right to
receive the Merger Consideration without any interest thereon, pursuant to
Section 2.8 hereof.
SECTION 4.2 Exchange of Certificates.
(a) From and after the Effective Time, a bank or trust company to be
designated by Versar which shall be reasonably acceptable to SMC (the
"Exchange Agent") shall act as Exchange Agent in effecting the exchange for
the Merger Consideration of the Certificates representing SMC Common Stock
entitled to payment pursuant to Section 2.8 hereof. As soon as practicable
after the Effective Time, the Surviving Corporation shall cause the
Exchange Agent to mail to each record holder of an outstanding Certificate
or Certificates, as of the Effective Time, which immediately prior to the
Effective Time represented SMC Common Stock, a Letter of Transmittal and
instructions for use in effecting the surrender of the Certificates for
payment thereof. Upon the surrender of each such Certificate, together with
such duly executed Letter of Transmittal, the Exchange Agent shall promptly
pay the holder of such Certificate the Merger Consideration in exchange
therefore, and such Certificate shall forthwith be canceled. Until so
surrendered and exchanged, each such Certificate (other than Certificates
representing Dissenting Shares or shares of SMC Common Stock held by
Versar) shall represent solely the right to receive the Merger
Consideration. No interest shall be paid or accrue on the Merger
Consideration. If the Merger Consideration (or any portion thereof) is to
be delivered to any person other than the person in whose name the
Certificate representing SMC Common Stock surrendered in exchange therefore
is registered, it shall be a condition to such exchange that the
Certificate so surrendered
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shall be properly endorsed or otherwise be in proper form for transfer and
that the person requesting such exchange shall pay to the Exchange Agent
any transfer or other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable. From and
after the Effective Time, the holders of Certificates shall cease to have
any rights with respect to shares of SMC Common Stock, except as otherwise
provided herein or by law.
(b) At or before the Effective Time, Versar shall instruct the Bank of
New York, as its transfer agent, to issue upon instruction from the
Exchange Agent, the shares of Versar Common Stock to which holders of
shares of SMC Common Stock shall be entitled at the Effective Time pursuant
to Section 2.8 hereof in such names and such denominations as the Exchange
Agent shall direct and shall deposit with the Exchange Agent funds
sufficient to pay holders of SMC Common Stock any cash to which they may be
entitled in lieu of fractional shares.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making and delivery of an affidavit (containing a
guaranteed signature in the form required by Versar) of that fact by the
Person claiming such Certificate to have been lost, stolen or destroyed
and, if required by Versar, the posting by such Person of a bond in such
reasonable amount as Versar may direct as indemnity against any claim that
would be made against SMC, Versar or Versar Acquisition with respect to
such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration deliverable in
respect thereof pursuant to this Agreement.
(d) After the Effective Time, there shall be no transfer of Converted
Shares that were outstanding immediately prior to the Effective Time on the
stock transfer books of SMC. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for transfer, they shall be canceled
and exchanged for Merger Consideration. At the Effective Time, the stock
ledger of SMC shall be closed.
(e) At and after the Effective Time, the SMC Holders shall cease to
have any rights as stockholders of SMC, except for the right to surrender
Certificates to be converted pursuant to Section 4.2(a). All shares of
Versar Common Stock issued (and cash paid in lieu of fractional shares)
upon conversion of the SMC Common Stock in accordance with the terms of
this Agreement shall be deemed to have been issued and paid in full
satisfaction of all rights pertaining to such shares of SMC Common Stock.
(f) Promptly following the date which is six months after the
Effective Time, the Exchange Agent shall deliver to the Surviving
Corporation all cash and shares of Versar Common Stock in its possession
relating to the transactions described in this Agreement, and the Exchange
Agent's duties shall terminate. Thereafter, each holder of a Certificate
formerly representing Converted Shares may surrender such Certificate to
the Surviving Corporation and (subject to applicable abandoned property,
escheat and similar laws) the Surviving Corporation shall pay to such
holder in exchange therefore its Merger Consideration, without any interest
thereon. None of Versar, the Surviving Corporation, the Exchange Agent or
any other person will be liable to any former holder of Converted Shares
for any amount properly delivered to a public office pursuant to applicable
abandoned property, escheat or similar laws.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SMC
SMC represents and warrants to Versar and Versar Acquisition as follows:
SECTION 5.1 Organization. SMC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power to own, lease and operate its properties and to
carry on its business as it is now being conducted or presently proposed to be
conducted. SMC is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
individually or in the aggregate have an SMC Material Adverse Effect.
SECTION 5.2 Organizational Documents. SMC has furnished to Versar complete
and correct copies of the organizational documents of SMC and each Subsidiary of
SMC, as amended or restated, and as currently in effect. Neither SMC nor any of
its Subsidiaries is in violation of any of the provisions of its organizational
documents, as amended or restated.
SECTION 5.3 Capitalization. The authorized capital stock of SMC consists of
10,000,000 shares of SMC Common Stock and 1,750,000 shares of SMC Preferred
Stock. As of the date of this Agreement (i) 1,999,604 shares of SMC Common Stock
are issued and outstanding and are held of record by 653 persons and (ii)
1,750,000 shares of SMC Preferred Stock are issued and outstanding and are held
of record by Versar. All of the issued and outstanding SMC Common Stock is
validly issued, fully paid and nonassessable and has not been issued in
violation of, and is not currently subject to, any preemptive rights. Except as
set forth above, as of the date of this Agreement there are no shares of capital
stock of SMC issued or outstanding or any options, warrants, subscriptions,
calls, rights, convertible securities or other agreements or commitments
obligating SMC to issue, transfer, sell, redeem, repurchase or otherwise acquire
any shares of its capital stock or securities.
SECTION 5.4 Subsidiaries and Material Investments.
(a) The Subsidiaries of SMC are listed on Exhibit B hereto. Except as
set forth on Exhibit B, (i) there are no Subsidiaries of SMC and (ii) SMC
does not directly or indirectly own any equity or similar interest in, or
interest convertible into or exchangeable for any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
(b) SMC holds 100% of the outstanding capital stock of each Subsidiary
listed on Exhibit B. SMC has good and marketable title to the securities
evidencing its ownership of its Subsidiaries, which securities have been
validly issued and are fully paid and nonassessable and, except as set
forth on Exhibit B, are held by SMC free and clear of any Liens, restraint
on alienation, or any other restriction with respect to the transferability
or assignability thereof (other than restrictions on transfer imposed by
federal or state securities laws).
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(c) Each Subsidiary of SMC is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power to own, lease and
operate its properties and to carry on its business as it is now being
conducted or presently proposed to be conducted. Each such Subsidiary is
duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would
not individually or in the aggregate have an SMC Material Adverse Effect.
SECTION 5.5 Authority Relative to this Agreement. SMC has the power to enter
into this Agreement and to carry out its obligations hereunder. The execution,
delivery and performance of this Agreement by SMC and the consummation by SMC of
the transactions contemplated hereby have been duly authorized by the SMC Board
of Directors and, except for notification and recommendation by the SMC Board of
Directors to, and approval of the Merger by, the SMC Stockholders in accordance
with Delaware Law, no other corporate proceedings on the part of SMC are
necessary to authorize this Agreement or the transactions contemplated hereby.
Subject to the foregoing, this Agreement has been duly and validly executed and
delivered by SMC and constitutes a valid and binding agreement of SMC,
enforceable against SMC in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or
similar laws affecting creditors' rights and to equitable principles.
SECTION 5.6 Consents and Approvals; No Violations. (a) Except for the filing
of the Certificate of Merger as required by Delaware Law and the filing of the
Form S-4 with the SEC, no filing with, and no permit, authorization, consent or
approval of, any court or tribunal or administrative, governmental or regulatory
body, agency, public body or authority is necessary for the execution and
delivery of this Agreement, and performance of the transactions contemplated by
this Agreement, by SMC. Neither the execution, delivery and performance of this
Agreement by SMC, nor the consummation by SMC of the transactions contemplated
hereby, nor compliance by SMC with any of the provisions hereof, will (i)
conflict with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of SMC or organizational documents of any SMC
Subsidiary, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, vesting, payment, exercise, acceleration,
suspension or revocation) under, any of the terms, conditions or provisions of
any material note, bond, mortgage, deed of trust, security interest, indenture,
license, contract, agreement, plan or other instrument or obligation, including
the Bankruptcy Plan, to which SMC or any SMC Subsidiary is a party or by which
SMC or any SMC Subsidiary or any of their respective properties or assets may be
bound or affected, except as listed on Exhibit C hereto ("SMC Required
Consents"), (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to SMC or any SMC Subsidiary or any of their respective
properties or assets, (iv) result in the creation or imposition of any Lien on
any material asset of SMC or any SMC Subsidiary or (v) cause the suspension or
revocation of any registrations, licenses, permits and other consents or
approvals of any governmental agency held by SMC or any SMC Subsidiary, except,
in the case of clauses (ii), (iii), (iv), and (v) for violations, breaches,
defaults, terminations, cancellations, accelerations, creations, impositions,
suspensions or revocations which would not individually or in the
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aggregate have an SMC Material Adverse Effect and provided that, in the case of
clauses (ii) and (iv), no representation or warranty is hereby made with respect
to the lease agreements of SMC and its Subsidiaries, which agreements were
previously delivered to Versar.
SECTION 5.7 Litigation. There is no suit, action or proceeding (whether at
law or equity, before or by any federal, state or foreign commission, court,
tribunal, board, agency or instrumentality, or before any arbitrator) pending
or, to the Knowledge of SMC, threatened against or affecting SMC or any of its
Subsidiaries, the outcome of which could, individually or in the aggregate, have
an SMC Material Adverse Effect, nor is there any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or arbitrator outstanding against SMC or any of its Subsidiaries
having, or which, insofar as can reasonably be foreseen, in the future may have,
any such effect.
SECTION 5.8 Financial Reports. SMC has previously furnished to Versar
unaudited financial statements for the three-month period ended March 31, 1997
and in connection with the Form S-4 will furnish to Versar audited financial
statements for the fiscal year ended December 31, 1996 and such other audited
financial statements as are determined to be required by Form S-4 after
consultation with the SEC (collectively, the "SMC Financial Statements"). The
SMC Financial Statements have been, or will be, prepared in accordance with GAAP
consistently applied (except in the case of the unaudited financial statements
referenced above as otherwise permitted by the SEC for interim financial
statements), present, or will present, fairly the consolidated financial
position and consolidated assets and liabilities of SMC as of the dates thereof,
and the results of operations and cash flows for the periods then ended, subject
in the case of unaudited SMC Financial Statements to normal recurring year-end
adjustments and absence of notes. Except as disclosed on Exhibit D, since July
10, 1996, SMC has made all filings required to be made by it in compliance with
the Exchange Act, and such filings did not contain any untrue statement of any
material fact and did not omit to state any material fact necessary in order to
make the statements contained therein not misleading in light of the
circumstances under which such statements were made as of the respective dates
of filing.
SECTION 5.9 Absence of Certain Changes of Events. Except as disclosed in
filings that have been made by SMC under the Exchange Act, such actions as have
been taken in connection with SMC's efforts to sell the company or as disclosed
on Exhibit E, since March 31, 1997, SMC has in all material respects conducted
its business in the ordinary course consistent with past practices and there has
not occurred with respect to SMC any change or event that has had or is
reasonably likely to have a SMC Material Adverse Effect.
SECTION 5.10 Absence of Undisclosed Liabilities. Except for liabilities or
obligations which are accrued or reserved against in the SMC Financial
Statements (or specifically referenced in the notes thereto) or were incurred
after March 31, 1997 in the ordinary course of business and consistent with past
practices, neither SMC nor its Subsidiaries have any liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of a nature required by
GAAP to be reflected in a consolidated balance sheet (or reflected in the notes
thereto).
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SECTION 5.11 No Default. Neither SMC nor any of its Subsidiaries is in
violation or breach of, or default under (and no event has occurred which with
notice or the lapse of time or both would constitute a violation or breach of,
or a default under) any term, condition or provision of (i) any material note,
bond, mortgage, deed of trust, security interest, indenture, license, contract,
agreement, plan or other instrument or obligation to which SMC or any such
Subsidiary is a party or by which SMC or any such Subsidiary or any of their
respective properties or assets may be bound or affected, (ii) any order, writ,
injunction, decree, statute, rule or regulation applicable to SMC, any SMC
Subsidiary or any of their respective properties or assets, or (iii) any
registration, license, permit and other consent or approval of any governmental
agency, except in each case for breaches, defaults or violations which would not
individually or in the aggregate have an SMC Material Adverse Effect.
SECTION 5.12 Compliance with Applicable Law. SMC and its Subsidiaries are in
compliance with all material applicable laws.
SECTION 5.13 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's fee or other fee or commission payable by SMC in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of SMC.
SECTION 5.14 Investment Intent. To the knowledge of the senior officers of
SMC without investigation, there is no present plan or intention by any SMC
Stockholder to sell, exchange or otherwise dispose of their Versar Common Stock
subsequent to the Effective Time of the Merger.
SECTION 5.15 Disclosure. No representation or warranty contained in this
Article V or in any Exhibit hereto or any closing certificate and all
information in the Form S-4 furnished or to be furnished by either SMC, its
Subsidiaries, or any SMC Holder to Versar pursuant to this Agreement or in
connection with the Merger contains or, at the Effective Time, will contain any
untrue statement of material fact, or omits or, at the Effective Time, will omit
to state a material fact necessary to make the statements contained herein or
therein not misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF VERSAR AND VERSAR ACQUISITION
Versar and Versar Acquisition represent and warrant to SMC as follows:
SECTION 6.1 Organization. Versar is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power to own, lease and operate its properties and to
carry on its business as it is now being conducted or presently proposed to be
conducted. Versar is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
individually or in the aggregate have a Versar Material Adverse Effect. Versar
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power to
carry
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on its business as it is now being conducted or presently proposed to be
conducted. Versar Acquisition is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified would
not individually, or in the aggregate, have a Versar Material Adverse Effect.
SECTION 6.2 No Versar Acquisition Assets, Liabilities or Business. Versar
Acquisition is a newly formed wholly owned subsidiary of Versar, and except for
any rights and liabilities that Versar Acquisition may have with respect to this
Agreement, Versar Acquisition does not have any assets or liabilities, nor has
Versar Acquisition conducted any business other than in connection with the
transactions contemplated hereby and the formation of Versar Acquisition.
SECTION 6.3 Authority Relative to this Agreement. Each of Versar and Versar
Acquisition has the power to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this Agreement
by Versar and Versar Acquisition and the consummation by Versar and Versar
Acquisition of the transactions contemplated hereby have been duly authorized by
all necessary corporate action and no other corporate proceedings on the part of
Versar or Versar Acquisition are necessary to authorize this Agreement or the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Versar and Versar Acquisition and constitutes a valid
and binding agreement of Versar and Versar Acquisition, enforceable against
Versar and Versar Acquisition in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, moratorium,
reorganization or similar laws affecting creditors' rights and to equitable
principles.
SECTION 6.4 Consents and Approvals; No Violations. Except for the filing of
the Certificate of Merger as required by Delaware Law and the filing of the Form
S-4 with the SEC, no filing with, and no permit, authorization, consent or
approval of, any court or tribunal or administrative, governmental or regulatory
body, agency, public body or authority is necessary for the execution and
delivery of this Agreement, and performance of the transactions contemplated by
this Agreement, by Versar or Versar Acquisition. Neither the execution, delivery
and performance of this Agreement by Versar and Versar Acquisition, nor the
consummation by Versar and Versar Acquisition of the transactions contemplated
hereby, nor compliance by Versar and Versar Acquisition with any of the
provisions hereof, will (i) conflict with or result in any breach of any
provisions of the Certificate of Incorporation and Bylaws of Versar or Versar
Acquisition, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, vesting, payment, exercise, acceleration,
suspension or revocation) under, any of the terms, conditions or provisions of
any material note, bond, mortgage, deed of trust, security interest, indenture,
license, contract, agreement, plan or other instrument or obligation to which
Versar or Versar Acquisition is a party or by which Versar or Versar Acquisition
or any of their respective properties or assets may be bound or affected, (iii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Versar or Versar Acquisition or any of their respective properties
or assets, (iv) result in the creation or imposition of any Lien on any material
asset of Versar or Versar Acquisition, or (v) cause the suspension or revocation
of any registrations, licenses, permits and other
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consents or approvals of any governmental agency held by Versar or Versar
Acquisition, except in the case of clauses (ii), (iii), (iv) and (v) for
violations, breaches, defaults, terminations, cancellations, accelerations,
creations, impositions, suspensions or revocations which would not individually
or in the aggregate have a Versar Material Adverse Effect.
SECTION 6.5 Financial Reports. Versar has previously furnished to SMC a true
and complete copy of all reports and other documents filed by Versar with the
SEC since June 30, 1996, including without limitation (i) its annual report on
Form 10-K for the fiscal year ended June 30, 1996 including, among other things,
audited consolidated balance sheets of Versar as of June 30, 1995 and 1996, and
the related consolidated statements of earnings, cash flows and stockholders'
equity for each of the three fiscal years in the period ended June 30, 1996 and
(ii) its quarterly reports on Form 10-Q for the fiscal quarters ended September
30, 1996, December 31, 1996 and March 31, 1997 containing unaudited consolidated
balance sheets of Versar as of the periods then ended, and the related
consolidated statements of earnings, cash flows and stockholders equity for each
of the fiscal periods referenced therein (collectively with the audited
financial statements referenced above, the "Versar Financial Statements"). The
Versar Financial Statements have been prepared in accordance with GAAP
consistently applied (except in the case of the unaudited financial statements
referenced above as otherwise permitted by the SEC for interim financial
statements), present fairly the consolidated financial position and consolidated
assets and liabilities of Versar as of the dates thereof, and the results of
operations and cash flows for the periods then ended, subject in the case of
unaudited Versar Financial Statements to normal recurring year-end adjustments
and the absence of notes. Since June 30, 1996, Versar has made all filings
required to be made in compliance with the Exchange Act, and such filings did
not contain any untrue statement of any material fact and did not omit to state
any material fact necessary in order to make the statements contained therein
not misleading in light of the circumstances under which such statements were
made as of their respective dates of filing.
SECTION 6.6 Capitalization. The authorized capital stock of Versar consists
of 30,000,000 shares of Versar Common Stock and 10,000,000 shares of
undesignated preferred stock. As of the date of this Agreement, 5,131,964 shares
of Versar Common Stock and no shares of preferred stock are issued and
outstanding. All of the issued and outstanding Versar Common Stock is validly
issued, fully paid and nonassessable and free of preemptive rights. As of the
date of this Agreement, there are no shares of capital stock of Versar issued or
outstanding or any options, warrants, subscriptions, calls, rights, convertible
securities or other agreements or commitments obligating Versar to issue,
transfer, sell, redeem, repurchase or otherwise acquire any shares of its
capital stock or securities, other than obligations and commitments, including
outstanding options to purchase 1,243,709 shares of Versar Common Stock, under
Versar's stock option and certain employee benefit plans.
SECTION 6.7 Absence of Certain Changes or Events. Except as disclosed in
filings that have been made by Versar under the Exchange Act, since June 30,
1996, Versar has in all material respects conducted its business in the ordinary
course consistent with past practices and there has not occurred with respect to
Versar any change or event that has had or is reasonably likely to have a Versar
Material Adverse Effect.
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SECTION 6.8 Litigation. Except for litigation disclosed in filings that have
been made by Versar under the Exchange Act, there is no suit, action or
proceeding (whether at law or equity, before or by any federal, state or foreign
commission, court, tribunal, board, agencies or instrumentality, or before any
arbitrator) pending or, to the Knowledge of Versar, threatened against or
affecting Versar or any of its Subsidiaries the outcome of which could,
individually or in the aggregate, have a Versar Material Adverse Effect, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against Versar or any of its Subsidiaries having, or which, in so far as can
reasonably be foreseen in the future may have, any such effect.
SECTION 6.9 Absence of Undisclosed Liabilities. Except as disclosed in
Versar's filings that have been made by Versar under the Exchange Act, and
liabilities incurred after March 31, 1997 in the ordinary course of business and
consistent with past practices, Versar does not have any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of a nature
required by GAAP to be reflected in a consolidated balance sheet (or reflected
in the notes thereto).
SECTION 6.10 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's fee or other fee or commission payable by Versar in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Versar.
SECTION 6.11 Disclosure. No representation or warranty contained in this
Article VI or any Exhibit hereto or any closing certificate furnished or to be
furnished by either Versar or its Subsidiaries to SMC pursuant to this Agreement
or in connection with the Merger contains or, at the Effective Time, will
contain any untrue statement of a material fact, or omits or, at the Effective
Time, will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
ARTICLE VII
COVENANTS OF SMC
SECTION 7.1 Conduct of Business of SMC. Except as expressly contemplated by
this Agreement, during the period from the date hereof to the Effective Time,
SMC will, and will cause each of its Subsidiaries to, conduct its operations
according to its ordinary course of business consistent with past practice, and
will use its reasonable best efforts to (i) preserve intact its business
organization and assets, (ii) maintain in effect all federal, state and local
licenses, approvals and authorizations, that are required for it to carry on its
business, (iii) keep available the services of its officers and employees, and
(iv) maintain existing relationships with its lenders, suppliers and others
having business relationships with it. Without limiting the generality of the
foregoing, and except as otherwise contemplated by this Agreement, prior to the
Effective Time, SMC will not, without the prior written consent of Versar:
(a) amend its articles of incorporation or bylaws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell, pledge, encumber, deliver or otherwise dispose of (whether
through the issuance or
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granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any stock of any class or any other securities or
equity equivalents (including, without limitation, stock appreciation
rights), or amend in any respect any of the terms of any such securities or
options outstanding as of the date hereof;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock, or property or any combination thereof) in respect of its
capital stock or redeem, repurchase or otherwise acquire any of its
securities or adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization;
(d) (i) except for borrowings under its existing credit facilities,
incur any indebtedness for borrowed money or issue any debt securities or
assume, guarantee or endorse the obligations of any other person; (ii) make
any loans, advances or capital contributions to, or investments in, any
other person; (iii) pledge or otherwise encumber shares of its capital
stock; or (iv) mortgage or pledge any of its assets, tangible or
intangible, or create or suffer to exist any Lien thereupon;
(e) enter into, adopt or (except as may be required by law) amend or
terminate any bonus, profit sharing, compensation, severance, termination,
stock option, stock appreciation right, restricted stock, performance unit,
stock equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer or employee, or increase in any manner the compensation
or fringe benefits of any director, officer or employee or pay any benefit
not required by any plan or arrangement in effect as of the date hereof (or
that has been in effect within the six-month period ending on the date
hereof) or enter into any contract, agreement, commitment or arrangement to
do any of the foregoing;
(f) acquire, sell, lease or dispose of any assets outside the ordinary
course of business or commit or agree to do any of the above;
(g) except as required by GAAP, change any of the accounting
principles or practices used by it (provided that, prior to making any
change required by GAAP, SMC shall inform Versar in writing of the nature
of such change);
(h) make any Tax election or settle or compromise any Tax liability;
(i) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or specifically referred
to in, the SMC Financial Statements (or the notes thereto) or incurred in
the ordinary course of business consistent with past practice; provided
that in no event shall SMC and its Subsidiaries repay any indebtedness
except to the extent required by the terms thereof;
(j) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) enter into
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any contract or agreement, other than contracts entered into in the
ordinary course of business consistent with past practice with executory
obligations not to exceed $150,000 in each case; (iii) authorize any
capital expenditures in excess of $5,000 or (iv) enter into or amend any
contract, agreement, commitment or arrangement with respect to any of the
foregoing; or
(k) commit or agree in writing or otherwise to take any of the actions
described in Section 7.1(a) through 7.1(j) or any action which would make
any of the representations or warranties of SMC contained in this Agreement
untrue or incorrect as of the date when made or would result in any of the
conditions set forth in this Agreement not being satisfied.
SECTION 7.2 Access to Information. Between the date hereof and the Effective
Time, SMC will give each of Versar and Versar Acquisition and their respective
authorized representatives reasonable access to all employees, offices and other
facilities and to all books and records of SMC and its Subsidiaries, will permit
each of Versar and Versar Acquisition to make such inspections as they may
reasonably require and will cause SMC's officers to furnish Versar and Versar
Acquisition with such financial and operating data and other information with
respect to the business and properties of SMC as Versar or Versar Acquisition
may from time to time request.
SECTION 7.3 SMC Special Stockholders' Meeting. As soon as practicable
following the date hereof, SMC shall assist in the preparation of a notice to
SMC Stockholders as required by Delaware Law relating to the SMC Special
Stockholders' Meeting to be included in the Form S-4, and shall otherwise assist
in the preparation of the Form S-4 to the extent requested by Versar (including
assisting with the preparation of such audited financial statements of SMC as
are required for inclusion in the Form S-4), and shall cause such meeting to be
convened and the SMC Stockholders to vote with respect to this Agreement and the
Merger in accordance with the Form S-4.
SECTION 7.4 Fulfillment of Closing Conditions. At and prior to the Closing,
SMC shall use commercially reasonable efforts to fulfill the conditions
specified in Article X hereof to the extent that the fulfillment of such
conditions is then in its control, except that SMC shall not be required to pay
or expend any funds in excess of $ 10,000 in the aggregate to correct any
default under the representations and warranties of SMC or to fulfill any of
such conditions. In connection with the foregoing, SMC will (a) refrain from any
actions that would cause any of its representations and warranties to be
inaccurate in any material respect as of the Closing, (b) execute and deliver
the agreements and other documents referenced in Section 10.3, (c) comply in all
material respects with all applicable laws in connection with its execution,
delivery and performance of this Agreement and the Merger, (d) use commercially
reasonable efforts to obtain in a timely manner the SMC Required Consents, and
(e) use commercially reasonable efforts to take, or cause to be taken, all other
actions and to do, or cause to be done, all of the things reasonably necessary,
proper or advisable to consummate and make effective as promptly as practicable
the Merger. SMC shall give Versar prompt written notice of any event or
development that occurs or fails to occur (and that is known to SMC) that gives
SMC reason to believe the conditions set forth in Section 10.3 will not be
satisfied prior to the Termination Date.
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SECTION 7.5 Acquisition Proposals. SMC will not, and will use its best
efforts to cause its officers, directors, employees, representatives and agents
not to, initiate, encourage or solicit, directly or indirectly, any inquiries or
the making of any proposal with respect to, or, except to the extent required by
their fiduciary duties, engage in negotiations concerning, provide any
confidential information or data to, or have any discussions with, any person
relating to, any acquisition, or purchase of all or any significant portion of
the assets of, or any equity interest in, SMC or any of its Subsidiaries or any
merger, consolidation or other business combination of SMC or any of its
Subsidiaries with any other Person. SMC represents that as of the date hereof it
has ceased any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. SMC agrees to
notify immediately Versar if any such negotiations, provision of confidential
information or data or discussions are entered into or made or any such
inquiries are received in respect thereof, and shall provide details with
respect thereto.
SECTION 7.6 Rule 145 Affiliates. Promptly after the date hereof, SMC shall
identify in a letter to Versar all persons who might, at the time of the SMC
Special Stockholders' Meeting, be deemed to be "affiliates" of SMC for the
purposes of Rule 145 under the Securities Act (the "Securities Act Affiliates")
and shall use its best efforts to cause each person who is identified as a
possible Securities Act Affiliate to enter into, prior to the Effective Time, an
agreement in form and substance reasonably acceptable to Versar pursuant to
which (i) each such person acknowledges such person's responsibilities as a
Securities Act Affiliate and (ii) agrees to comply with the security transfer
restrictions imposed by the Securities Act.
ARTICLE VIII
COVENANTS OF VERSAR
SECTION 8.1 Fulfillment of Closing Conditions. At and prior to the Closing,
Versar shall use commercially reasonable efforts to fulfill the conditions
specified in Article X hereof to the extent that the fulfillment of such
conditions is then in its control, except that Versar shall not be required to
pay or expend any funds in excess of $10,000 in the aggregate to correct any
default under the representations and warranties of Versar or to fulfill any of
such conditions. In connection with the foregoing, Versar will (a) refrain from
any actions that would cause any of its representations and warranties to be
inaccurate in any material respect as of the Closing, (b) execute and deliver
the agreements and other documents referenced in Section 10.2, (c) comply in all
material respects with all applicable laws in connection with its execution,
delivery and performance of this Agreement and the Merger, (d) use commercially
reasonable efforts to obtain in a timely manner all necessary waivers, consents
and approvals required for the consummation of the Merger and (e) use
commercially reasonable efforts to take, or cause to be taken, all other actions
and to do, or cause to be done, all of the things reasonably necessary, proper
or advisable to consummate and make effective as promptly as practicable the
Merger. Versar shall give SMC prompt written notice of any event or development
that occurs or fails to occur (and that is known to Versar) that gives Versar
reason to believe the conditions set forth in Section 10.2 will not be satisfied
prior to the Termination Date.
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SECTION 8.2 Registration Statement on Form S-4. Versar shall prepare and
file with the SEC as soon as reasonably practicable after the date hereof, a
registration statement on Form S-4 under the Securities Act, for purposes of
registering the Versar Common Stock to be issued in the Merger. Such
registration statement on Form S-4 and any amendments or supplements thereto are
referred to herein as the "Form S-4". The Form S-4 will also contain a proxy
statement and notice soliciting proxies from the SMC Stockholders with respect
to the Merger and providing all notices required with respect to the SMC Special
Stockholders' Meeting. Versar shall use commercially reasonable efforts to have
the Form S-4 declared effective under the Securities Act as promptly as
practicable after its filing. Versar shall also take such action as may be
reasonably required to cause the shares covered by Form S-4 to be registered or
to obtain an exemption from registration under applicable state "blue sky" or
securities laws. Versar covenants that the Form S-4 (i) will comply in all
material respects with the applicable provisions of the Securities Act and the
rules and regulations promulgated thereunder and (ii) will not at the time such
document is filed with the SEC or at any time after it becomes effective under
the Securities Act, contain any untrue statement of any material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein in light of the circumstances under which they were
made, not misleading; provided that such covenant shall not apply to any
information related to SMC or provided by SMC for inclusion in the Form S-4.
SECTION 8.3 Stock Exchange Listing. Versar shall prepare and file an
application with the American Stock Exchange, Inc. to list on such exchange the
Versar Common Stock issuable pursuant to the Merger effective as of the
consummation of the Merger and will use commercially reasonable efforts to cause
such application to be approved by such time.
ARTICLE IX
COVENANTS OF THE PARTIES
SECTION 9.1 Public Announcements. Versar and SMC will consult with each
other, and SMC shall secure Versar's consent, before issuing any press release
or otherwise making any public statements with respect to this Agreement and the
Merger.
SECTION 9.2 Further Assurances. If, at any time after the Effective Time,
any further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession in and to all properties, interests, assets, rights, privileges,
immunities, powers and franchises of either of the Constituent Corporations, the
officers of the Surviving Corporation are fully authorized in the name of each
Constituent Corporation or otherwise to take, and shall take, all such lawful
and necessary action.
ARTICLE X
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 10.1 Conditions Precedent to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Closing of the following
conditions:
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(a) No statute, rule, regulation, executive order, decree, ruling or
preliminary or permanent injunction shall have been enacted, entered,
promulgated or enforced by any federal or state court or other governmental
authority which prohibits, restrains, enjoins or restricts the consummation
of the Merger.
(b) The Form S-4 shall have become effective, no stop order suspending
the effectiveness of the Form S-4 shall then be in effect,and no
proceedings for that purpose shall then be threatened by the SEC or shall
have been initiated by the SEC and not concluded or withdrawn. All state
securities or blue sky permits or approvals required to carry out the
Merger shall have been received.
(c) The Versar Common Stock issuable in connection with the Merger
shall have been duly approved for listing on the American Stock Exchange.
(d) The SMC Stockholders shall have approved this Agreement and the
Merger.
SECTION 10.2 Conditions Precedent to Obligation of SMC to Effect the Merger.
The obligation of SMC to effect the Merger shall be subject to the satisfaction
at or prior to the Closing of the following additional conditions:
(a) Versar shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior
to the Closing and the representations and warranties of Versar contained
in this Agreement which are qualified with respect to materiality shall be
true and correct in all respects, and such representations and warranties
that are not so qualified shall be true and correct in all material
respects, in each case as of the date of this Agreement and at and as of
the Closing as if made at and as of such time, except as contemplated by
this Agreement, and SMC shall have received a certificate of the Chairman
of the Board, the President or the Chief Financial Officer of Versar as to
the satisfaction of this condition.
(b) Versar and Versar Acquisition shall have secured all waivers,
consents and approvals necessary for the consummation of the Merger.
(c) Versar Acquisition shall execute such documents as shall be
required under the Bankruptcy Plan to affirm its assumption of all
obligations of SMC thereunder.
SECTION 10.3 Conditions to Obligations of Versar to Effect the Merger. The
obligations of Versar to effect the Merger shall be subject to the satisfaction
at or prior to the Closing of the following additional conditions:
(a) SMC shall have performed in all material respects its obligations
under this Agreement required to be performed by it at or prior to the
Closing and the representations and warranties of SMC contained in this
Agreement which are qualified with respect to materiality shall be true and
correct in all respects, and such representations and warranties that are
not so qualified shall be true and correct in all material respects, in
each case as of the date of this Agreement and at and as of the Closing as
if made at and as of such time, except as expressly disclosed by SMC
Disclosure Letter or this Agreement, and Versar shall have received a
Certificate of the
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Chairman of the Board, the President or the Chief Financial Officer of SMC
as to the satisfaction of this condition.
(b) SMC shall have secured all SMC Required Consents.
ARTICLE XI
TERMINATION: AMENDMENT: WAIVER
SECTION 11.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time by written notice as set forth below:
(a) by mutual written consent duly authorized by the Board of
Directors of each of Versar and SMC;
(b) by either Versar or SMC if the Merger shall not have been
consummated on or before December 31, 1997 (the "Termination Date");
provided, however, that the right to terminate this Agreement under this
Section 11.1 shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before the Termination
Date;
(c) by either Versar or SMC if a court of competent jurisdiction or a
governmental, regulatory or administrative agency, or commission shall have
issued an injunction (which injunction the parties shall use their best
efforts to lift) that permanently restrains, enjoins or otherwise prohibits
the Merger, and such injunction shall have become final and non-appealable;
(d) by SMC if Versar and Versar Acquisition shall have materially
breached, or failed to comply with, any of their obligations under this
Agreement or any representation or warranty made by Versar and Versar
Acquisition shall have been materially incorrect when made, and such
breach, failure or misrepresentation is not cured within 20 days after
notice thereof, and in either case, any such breaches, failures or
misrepresentations, individually or in the aggregate, results or would
reasonably be expected to result in a Versar Material Adverse Effect; or
(e) by Versar if SMC shall have materially breached, or failed to
comply with, any of its obligations under this Agreement or any
representation or warranty made by it shall have been materially incorrect
when made, and such breach, failure or misrepresentation is not cured
within 20 days after notice thereof, and in each case, any such breaches,
failures or misrepresentations, individually or in the aggregate, results
or would reasonably be expected to result in an SMC Material Adverse
Effect.
SECTION 11.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 11.1, this Agreement shall
forthwith become void and have no further effect, without any liability on the
part of any party hereto or its affiliates, directors, officers or shareholders.
Nothing contained in this Section 11.2 shall relieve any party from liability
for any willful breach of this Agreement.
20
<PAGE>
SECTION 11.3 Extension; Waiver. At any time prior to the Closing, each party
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of either party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of the parties hereto.
SECTION 12.2 Nonsurvival of Representations and Warranties. Except for any
agreements to be performed in any part after the Effective Time, the
representations, warranties, covenants and other agreements contained herein and
in any certificate delivered pursuant hereto shall not survive beyond the
Effective Time or any termination of this Agreement.
SECTION 12.3 Entire Agreement; Assignment. This Agreement and documents and
instruments referred to herein and therein (i) constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersede all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and (ii) shall not
be assigned by operation of law or otherwise.
SECTION 12.4 Validity. If any provision of this Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of this Agreement, and the application of such provision to other
persons or circumstances, shall not be affected thereby, and to such end, the
provisions of this Agreement are agreed to be severable.
SECTION 12.5 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram or telex, or by registered or certified mail (postage prepaid, return
receipt requested), to the other party as follows:
If to Versar or Versar Versar, Inc.
Acquisition: 6850 Versar
Springfield, Virginia 22151
Attn: James C. Dobbs, Esq.
21
<PAGE>
with a copy to: Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308-2222
Attn: Wayne Shortridge, Esq.
If to SMC: Science Management Corporation
721 Route 202/206
1610 Independent Square
Bridgewater, New Jersey 08807
Attn: James A. Skidmore, Jr.
with a copy to: Sills Cummis Zuckerman Radin Tischman
Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102-5400
Attn: Steven B. Jackman, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
SECTION 12.6 Governing Law. Delaware law shall govern all issues concerning
this Agreement and the Merger, including, without limitation, the validity of
this Agreement, the construction of its terms and the interpretation and
enforcement of the rights and duties of the parties hereto.
SECTION 12.7 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 12.8 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 12.9 Further Assurances. The parties hereto shall execute and
deliver any and all documents and take any and all other actions that may be
deemed reasonably necessary by their respective counsel to complete the
transactions contemplated hereby.
SECTION 12.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 12.11 Assignment. This Agreement shall not be assigned by any party
hereto without the prior written consent of the other parties hereto.
22
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
Versar:
-------
Versar, Inc., a Delaware corporation
By: /s/ Benjamin M. Rawls
------------------------------------
Name: Benjamin M. Rawls
Title: Chairman, President and CEO
Versar Acquisition
------------------
Versar Acquisition I, Corp. a Delaware
corporation
By: /s/ James Charles Dobbs
------------------------------------
Name: James Charles Dobbs
Title: Vice President
SMC:
----
Science Management Corporation, a Delaware
corporation
By: /s/ James A. Skidmore, Jr.
-------------------------------------
Name: James A. Skidmore, Jr.
Title: Chairman, President and CEO
23
<PAGE>
Apprendix II
Delaware General Corporation Law
Section Regarding Appraisal Rights
<PAGE>
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss. 228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to ss.251 (other than a merger effected
pursuant to ss.251(g) of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or
ss.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f)1 of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to ss.ss.251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
<PAGE>
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders.
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b.of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss.253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient
<PAGE>
if it reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss.228
or ss.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is
<PAGE>
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have
<PAGE>
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally
<PAGE>
determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting
<PAGE>
corporation. (Last amended by
Ch. 299, L. '96, eff. 2-1-96 and Ch. 349, L. '96, eff. 7-1-96.)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. The Certificate of Incorporation and Bylaws of the
Registrant provide for indemnification of its officers and directors to the full
extent authorized by such section.
Item 21. Exhibits and Financial Statement Schedules
The exhibits filed as part of this Registration Statement are as
follows:
Exhibit
Number Description of Exhibit
- ---------- ------------------------
2.0 Agreement and Plan of Merger among Versar, Inc., Versar Acquisition I,
Corp. and Science Management Corporation, dated July 29, 1997
(included as Appendix I to the Proxy Statement/Prospectus in Part I of
this Registration Statement).
4.1 Restated Certificate of Incorporation of Versar, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-1
effective November 20, 1986 File No. 33-9391 (the "Form S-1")).
4.2 Amendment to Restated Certificate of Incorporation (incorporated by
reference to the Registrant's Form 10-Q for the fiscal quarter ended
December 31, 1996).
4.3 Bylaws of Versar, Inc. (incorporated by reference to the Registrant's
Form 10-K for the fiscal year ended June 30, 1996).
5.0 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the legality of
the Common Stock registered hereunder.*
8.0 Opinion of Paul, Hastings, Janofsky & Walker LLP pertaining to the
federal income tax consequences of the Merger.*
10.1 Agreement dated July 31, 1990 between the Registrant and the U.S. Army
Natick RD&E Center and as modified through May 23, 1991 (incorporated
by reference to exhibit 10.3 to the Registrant's Form 10-K for the
fiscal year ended June 30, 1991 (the "1991 Form 10-K")).
10.2 Incentive Stock Option Plan (incorporated by reference to exhibit
10.10 to the Registrant's Form 10-K for the fiscal year ended June 30,
1987 (the "1987 Form 10-K")).**
10.3 Executive Tax and Investment Counseling Program (incorporated by
reference to exhibit 10.11 to the Form S-1).
10.4 Nonqualified Stock Option Plan (incorporated by reference to exhibit
10.12 to the 1987 Form 10-K).**
10.5 Employee Incentive Plan, as amended (incorporated by reference to
exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended
June 30, 1990 (the "1990 Form 10-K")).**
10.6 Deferred Compensation Agreements dated as follows:
July 1, 1987 between the Registrant and Charles I. Judkins, Jr.
(incorporated by reference to exhibit 10.17 to the Registrant's Form
10-K for the fiscal year ended June 30, 1988 (the "1988 Form 10-K")).
1
<PAGE>
July 1, 1988 between the Registrant and Gayaneh Contos (incorporated
by reference to exhibit 10.17 to the Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1989).
10.7 Executive Medical Plan dated August 21, 1991, effective July 1, 1991
(incorporated by reference to exhibit 10.26 to the 1991 Form 10-K).
10.8 Agreement dated March 30, 1990 between the Registrant, the Department
of the Army, U.S. Army Toxic and Hazardous Materials Agency as
modified through March 29, 1993 (incorporated by reference to exhibit
10.44 to the Registrant's Form 10-K for the fiscal year ended June 30,
1992 and exhibit 10.44 to the Registrant's Form 10-K for the fiscal
year ended June 30, 1993 (the "1993 Form 10-K")).
10.9 Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992
(incorporated by reference to exhibit 10.52 to the 1993 Form 10-K).**
10.10 Agreement dated March 10, 1993 between the Registrant and the
Environmental Protection Agency (incorporated by reference to exhibit
10.58 to the 1993 Form 10-K).
10.11 Asset Purchase Agreement dated July 29, 1994 between Registrant and
Kemron Environmental Services, Inc. of certain assets of the
registrants wholly-owned subsidiary Versar Laboratories, Inc.
(incorporated by reference to exhibit 10.64 to the Registrant's Form
10-K for the fiscal year ended June 30, 1994 (the "1994 Form 10-K")).
10.12 Agreement dated January 13, 1994 between the Registrant and the
Department of the Air Force (incorporated by reference to exhibit
10.66 to the 1994 Form 10-K).
10.13 Agreement dated January 18, 1994 between the Registrant and OHM
Services Remediation Corporation (incorporated by reference to exhibit
10.67 to the 1994 Form 10-K).
10.14 Agreement dated July 18, 1995 between the Registrant and the U.S. Air
Force Human Systems Center (incorporated by reference to exhibit 10.70
to the Registrant's Form 10-K for the fiscal year ended June 30, 1995
(the "1995 Form 10-K")).
10.15 Agreement dated March 29, 1995 between the Registrant and the U.S.
Army Norfolk Corps of Engineers (incorporated by reference to exhibit
10.71 to the 1995 Form 10-K).
10.16 Agreement dated March 16, 1995 between the Registrant and the U.S.
Army Baltimore Corps of Engineers (incorporated by reference to
exhibit 10.72 to the 1995 Form 10-K).
10.17 Agreement dated April 25, 1995 between the Registrant and the U.S.
Army Philadelphia Corps of Engineers (incorporated by reference to
exhibit 10.73 to the 1995 Form 10-K).
10.18 Agreement dated August 10, 1995 between the Registrant and the
Environmental Protection Agency (incorporated by reference to exhibit
10.74 to the 1995 Form 10-K).
10.19 Agreement dated January 31, 1995 between Geomet Technologies, Inc., a
subsidiary of the Registrant and the U.S. Army Soldier Systems Command
(incorporated by reference to exhibit 10.75 to the 1995 Form 10-K).
10.20 Agreement dated July 13, 1995 between Geomet Technologies, Inc., a
subsidiary of the Registrant and the U.S. General Services
Administration (incorporated by reference to exhibit 10.76 to the 1995
Form 10-K).
10.21 Employment Agreement dated September 1, 1996 between the Registrant
and Benjamin M. Rawls (incorporated by reference to exhibit 10.79 to
the Registrant's Form 10-K for the fiscal year ended June 30, 1996
(the "1996 Form 10-K")).**
10.22 Employment Agreement dated September 1, 1996 between the Registrant
and Thomas S. Rooney (incorporated by reference to exhibit 10.80 to
the 1996 Form 10-K).**
2
<PAGE>
10.23 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and Lawrence W. Sinnott (incorporated by reference to
exhibit 10.81 to the 1996 Form 10-K).**
10.24 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and James C. Dobbs (incorporated by reference to
exhibit 10.82 to the 1996 Form 10-K).**
11.0 Statement Re: Computation of Earnings Per Common Share.***
21.0 Subsidiaries of Versar, Inc.***
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.*
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP to the filing and use
of their opinions relating to the legality of the securities and the
tax consequences of the Merger. Such consent is contained in their
opinions filed as Exhibits 5 and 8 to this Registration Statement.*
24 Power of Attorney authorizing Benjamin M. Rawls and James C. Dobbs to
sign amendments to this Registration Statement on behalf of officers
and directors of the Registrant (contained on signature page of
Registration Statement).
99.1 Form of Proxy.***
- --------------------------------
* Filed by this amendment.
** Management contract or compensatory plan or arrangement.
*** Previously filed.
Item 22. Undertakings
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to provisions pursuant to which the
directors, officers or controlling persons may be indemnified by the registrant
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will submit
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Springfield, State of Virginia, on this 25th day of September, 1997.
VERSAR, INC.
By:/s/ Benjamin M. Rawls
---------------------
Benjamin M. Rawls
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Benjamin M. Rawls and James C. Dobbs,
jointly and severally, his attorneys-in-fact, each with power of substitution
for him in any and all capacities, to sign any amendments to this Registration
Statement, and to file the same, with the exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/ * 09/25/97
- ---------------------------------- --------
Benjamin M. Rawls, Chairman Date
of the Board of Directors,
President and Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ * 09/25/97
- ---------------------------------- --------
Michael Markels, Jr. Date
Chairman Emeritus and Director
/s/ * 09/25/97
- ---------------------------------- --------
Lawrence W. Sinnott, Vice Date
President, Chief Financial
Officer and Principal Accounting Officer
[Signatures continued on next page]
4
<PAGE>
[Signatures continued from preceding next page]
/s/ * 09/25/97
- ---------------------------------- --------
Robert L. Durfee, Executive Vice Date
President and Director
- ---------------------------------- --------
John E. Gray Date
Director
- ---------------------------------- --------
John P. Horton Date
Director
/s/ * 09/25/97
- ---------------------------------- --------
Charles I. Judkins, Jr. Date
Director
/s/ * 09/25/97
- ---------------------------------- --------
M. Lee Rice Date
Director
/s/ * 09/25/97
- ---------------------------------- --------
Thomas J. Shields Date
Director
/s/ * 09/25/97
- ---------------------------------- --------
James A. Skidmore, Jr. Date
Director
* /s/ James C. Dobbs 09/25/97
------------------------------- --------
James C. Dobbs, as Date
attorney in fact
5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ---------- ----------------------
2.0 Agreement and Plan of Merger among Versar, Inc., Versar Acquisition I,
Corp. and Science Management Corporation, dated July 29, 1997
(included as Appendix I to the Proxy Statement/Prospectus in Part I of
this Registration Statement).
4.1 Restated Certificate of Incorporation of Versar, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-1
effective November 20, 1986 File No. 33-9391 (the "Form S-1")).
4.2 Amendment to Restated Certificate of Incorporation (incorporated by
reference to the Registrant's Form 10-Q for the fiscal quarter ended
December 31, 1996).
4.3 Bylaws of Versar, Inc. (incorporated by reference to the Registrant's
Form 10-K for the fiscal year ended June 30, 1996).
5.0 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the legality of
the Common Stock registered hereunder.*
8.0 Opinion of Paul, Hastings, Janofsky & Walker LLP pertaining to the
federal income tax consequences of the Merger.*
10.1 Agreement dated July 31, 1990 between the Registrant and the U.S. Army
Natick RD&E Center and as modified through May 23, 1991 (incorporated
by reference to exhibit 10.3 to the Registrant's Form 10-K for the
fiscal year ended June 30, 1991 (the "1991 Form 10-K")).
10.2 Incentive Stock Option Plan (incorporated by reference to exhibit
10.10 to the Registrant's Form 10-K for the fiscal year ended June 30,
1987 (the "1987 Form 10- K")).**
10.3 Executive Tax and Investment Counseling Program (incorporated by
reference to exhibit 10.11 to the Form S-1).
10.4 Nonqualified Stock Option Plan (incorporated by reference to exhibit
10.12 to the 1987 Form 10-K).**
10.5 Employee Incentive Plan, as amended (incorporated by reference to
exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended
June 30, 1990 (the "1990 Form 10-K")).**
10.6 Deferred Compensation Agreements dated as follows:
July 1, 1987 between the Registrant and Charles I. Judkins, Jr.
(incorporated by reference to exhibit 10.17 to the Registrant's Form
10-K for the fiscal year ended June 30, 1988 (the "1988 Form 10-K")).
July 1, 1988 between the Registrant and Gayaneh Contos (incorporated
by reference to exhibit 10.17 to the Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1989).
10.7 Executive Medical Plan dated August 21, 1991, effective July 1, 1991
(incorporated by reference to exhibit 10.26 to the 1991 Form 10-K).
10.8 Agreement dated March 30, 1990 between the Registrant, the Department
of the Army, U.S. Army Toxic and Hazardous Materials Agency as
modified through March 29, 1993 (incorporated by reference to exhibit
10.44 to the Registrant's Form 10-K for the fiscal year ended June 30,
1992 and exhibit 10.44 to the Registrant's Form 10-K for the fiscal
year ended June 30, 1993 (the "1993 Form 10-K")).
10.9 Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992
(incorporated by reference to exhibit 10.52 to the 1993 Form 10-K).**
6
<PAGE>
10.10 Agreement dated March 10, 1993 between the Registrant and the
Environmental Protection Agency (incorporated by reference to exhibit
10.58 to the 1993 Form 10- K).
10.11 Asset Purchase Agreement dated July 29, 1994 between Registrant and
Kemron Environmental Services, Inc. of certain assets of the
registrants wholly-owned subsidiary Versar Laboratories, Inc.
(incorporated by reference to exhibit 10.64 to the Registrant's Form
10-K for the fiscal year ended June 30, 1994 (the "1994 Form 10-K")).
10.12 Agreement dated January 13, 1994 between the Registrant and the
Department of the Air Force (incorporated by reference to exhibit
10.66 to the 1994 Form 10-K).
10.13 Agreement dated January 18, 1994 between the Registrant and OHM
Services Remediation Corporation (incorporated by reference to exhibit
10.67 to the 1994 Form 10-K).
10.14 Agreement dated July 18, 1995 between the Registrant and the U.S. Air
Force Human Systems Center (incorporated by reference to exhibit 10.70
to the Registrant's Form 10-K for the fiscal year ended June 30, 1995
(the "1995 Form 10-K")).
10.15 Agreement dated March 29, 1995 between the Registrant and the U.S.
Army Norfolk Corps of Engineers (incorporated by reference to exhibit
10.71 to the 1995 Form 10- K).
10.16 Agreement dated March 16, 1995 between the Registrant and the U.S.
Army Baltimore Corps of Engineers (incorporated by reference to
exhibit 10.72 to the 1995 Form 10-K).
10.17 Agreement dated April 25, 1995 between the Registrant and the U.S.
Army Philadelphia Corps of Engineers (incorporated by reference to
exhibit 10.73 to the 1995 Form 10-K).
10.18 Agreement dated August 10, 1995 between the Registrant and the
Environmental Protection Agency (incorporated by reference to exhibit
10.74 to the 1995 Form 10- K).
10.19 Agreement dated January 31, 1995 between Geomet Technologies, Inc., a
subsidiary of the Registrant and the U.S. Army Soldier Systems Command
(incorporated by reference to exhibit 10.75 to the 1995 Form 10-K).
10.20 Agreement dated July 13, 1995 between Geomet Technologies, Inc., a
subsidiary of the Registrant and the U.S. General Services
Administration (incorporated by reference to exhibit 10.76 to the 1995
Form 10-K).
10.21 Employment Agreement dated September 1, 1996 between the Registrant
and Benjamin M. Rawls (incorporated by reference to exhibit 10.79 to
the Registrant's Form 10-K for the fiscal year ended June 30, 1996
(the "1996 Form 10-K")).**
10.22 Employment Agreement dated September 1, 1996 between the Registrant
and Thomas S. Rooney (incorporated by reference to exhibit 10.80 to
the 1996 Form 10- K).**
10.23 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and Lawrence W. Sinnott (incorporated by reference to
exhibit 10.81 to the 1996 Form 10-K).**
10.24 Change of Control Severance Agreement dated September 1, 1996 between
the Registrant and James C. Dobbs (incorporated by reference to
exhibit 10.82 to the 1996 Form 10-K).**
11.0 Statement Re: Computation of Earnings Per Common Share.***
7
<PAGE>
21.0 Subsidiaries of Versar, Inc.***
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.*
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP to the filing and use
of their opinions relating to the legality of the securities and the
tax consequences of the Merger. Such consent is contained in their
opinions filed as Exhibits 5 and 8 to this Registration Statement.*
24 Power of Attorney authorizing Benjamin M. Rawls and James C. Dobbs to
sign amendments to this Registration Statement on behalf of officers
and directors of the Registrant (contained on signature page of
Registration Statement).
99.1 Form of Proxy.***
- --------------------------------
* Filed by this amendment.
** Management contract or compensatory plan or arrangement.
*** Previously filed.
8
Versar, Inc.
September 24, 1997
Page 1
EXHIBIT 5
PAUL,HASTINGS, JANOFSKY & WALKER LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308-2222
September 24, 1997
Versar, Inc.
6850 Versar Center
Springfield, Virginia 22151
Ladies and Gentlemen:
We have acted as counsel for Versar, Inc., a Delaware corporation
("Versar"), in connection with the registration, pursuant to a Registration
Statement on Form S-4 filed with the Securities and Exchange Commission (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), of up to 533,433 shares of Versar's common stock, $0.01 par value per
share ("Versar Common Stock"), to be issued to the holders of common stock,
$0.10 par value per share, of Science Management Corporation ("SMC"), in
connection with the proposed merger of SMC with Versar Acquisition I, Corp., a
Delaware corporation and wholly owned subsidiary of Versar (the "Merger").
In rendering this opinion, we have examined the corporate records of Versar
including its certificate of incorporation, as amended, bylaws and minutes of
meetings of its directors or written consents in lieu thereof. We have also
examined (i) the Agreement and Plan of Merger dated July 29, 1997, among Versar,
Versar Acquisition I, Corp. and SMC (the "Merger Agreement"), (ii) the
Registration Statement, together with the exhibits thereto, and (iii) such other
documents as we have deemed necessary for the purposes of expressing the
opinions contained herein. With respect to certain factual matters, we have
relied on statements of officers of Versar.
Based upon the foregoing, we are of the opinion that the shares of Versar
Common Stock to be issued to the holders of common stock of SMC in consideration
of the Merger are duly authorized and, when issued and delivered as described in
the Merger Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and consent to
the use of our name in the Proxy Statement/ Prospectus forming a part of the
Registration Statement under the caption "Legal Matters." In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act and the rules and
regulations promulgated thereunder.
Sincerely,
Wayne Shortridge
-----------------------------------------
for PAUL, HASTINGS, JANOFSKY & WALKER LLP
Versar, Inc.
September 24, 1997
Page 1
EXHIBIT 8
PAUL,HASTINGS, JANOFSKY & WALKER LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308-2222
September 24, 1997
Versar, Inc.
6850 Versar Center
Springfield, Virginia 22151
Gentlemen:
You have requested our opinion with respect to the disclosures relating to
the material federal income tax consequences generally applicable to the receipt
by stockholders of Science Management Corporation (SMC") of shares of common
stock of Versar, Inc. ("Versar Common Stock") in connection with the proposed
merger ("Merger") of SMC with Versar Acquisition I, Corp. ("Versar
Acquisition"), a wholly-owned subsidiary of Versar, Inc. formed for the purpose
of effecting the Merger as described in the Proxy Statement/Prospectus relating
to the Merger (the "Proxy Statement/Prospectus") forming a part of the
Registration Statement on Form S-4 (the "Registration Statement") being filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act").
It is our opinion that the discussions and legal conclusions set forth in
the Proxy Statement/Prospectus under the heading "The Merger - Certain Federal
Income Tax Consequences of the Merger" are accurate and complete in all material
respects and constitute our opinion of the material tax consequences to
stockholders of SMC receiving Versar Common Stock in the Merger and to the
surviving corporation of the Merger.
Our opinion is based and conditioned upon the initial and continuing
accuracy of the factual matters assumed as set forth in the Proxy
Statement/Prospectus. Our opinion is also based upon existing provisions of the
Internal Revenue Code of 1986, as amended,
Regulations promulgated thereunder and interpretations thereof by the
Internal Revenue Service and the courts, all of which are subject to change with
prospective or retroactive effect, and our opinion could be adversely affected
or rendered obsolete by any change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and consent to the use of our name in the Proxy
Statement/Prospectus under the captions "The Merger - Certain Federal Income Tax
Consequences of the Merger" and "Legal Matters". In giving this consent, we do
not thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act and the rules and regulations promulgated
thereunder.
Very truly yours,
Philip J. Marzetti
-----------------------------------------
for PAUL, HASTINGS, JANOFSKY & WALKER LLP
EXHIBIT 23.1
As independent public accountants, we hereby consent to the use of
our reports and to all references to our firm included in this Registration
Statement.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Washington, D.C.,
September 25, 1997
