UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended March 31, 1997 Commission File Number 1-6059
----------------- -------
SCIENCE MANAGEMENT CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 21-0692362
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
721 Routes 202-206
Bridgewater, New Jersey 08807
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 722-0300
-----------------------------
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at April 30, 1997
--------------------- -----------------------------
$ .10 par value 2,000,000 shares
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SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996. 3
Consolidated Statements of Operations for the
Three-Month Periods Ended March 31, 1997 and 1996. 4
Consolidated Statements of Cash Flows
for the Three-Month Periods Ended
March 31, 1997 and 1996. 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 10
ITEM 5 - Other Information 10-11
ITEM 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited - in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . $ 306 $ 406
Accounts receivable, net. . . . . . . . 4,217 3,646
Prepaid and other current assets. . . . 71 151
------------ ------------
Total current assets . . . . . . . 4,594 4,203
Property and equipment, net . . . . . . 392 409
Other assets. . . . . . . . . . . . . . 85 87
Goodwill. . . . . . . . . . . . . . . . 444 449
------------ ------------
Total assets . . . . . . . . . . . $ 5,515 $ 5,148
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . $ 1,867 $ 1,737
Accrued payroll and vacation. . . . . . 223 136
Other liabilities . . . . . . . . . . . 1,197 1,107
------------ ------------
Total current liabilities. . . . . 3,287 2,980
Liabilities from reorganization plan . . 1,279 1,279
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Total liabilities . . . . . . . . 4,566 4,259
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 2,000,000 shares outstanding . . 200 200
Capital in excess of par value . . . . 14 14
Accumulated deficit. . . . . . . . . . . (1,015) (1,075)
------------ ------------
Total stockholders' equity. . . . 949 889
------------ ------------
Total liabilities and
stockholders' equity. . . . . . $ 5,515 $ 5,148
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
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SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)
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For the Three-Month
Periods Ended March 31,
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1997 1996
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<S> <C> <C>
GROSS REVENUE . . . . . . . . . . . . . . . . $ 5,874 $ 5,985
Purchased services and materials,
at costs. . . . . . . . . . . . . . . . . . 2,538 2,174
----------- -----------
NET SERVICE REVENUE . . . . . . . . . . . . . 3,336 3,811
Direct costs of services and overhead . . . . 2,012 2,470
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . . . 1,264 1,451
----------- -----------
OPERATING INCOME. . . . . . . . . . . . . . . 60 (110)
OTHER EXPENSE
Interest expense. . . . . . . . . . . . . . . --- 47
Income tax expense. . . . . . . . . . . . . . --- ---
----------- -----------
Income (loss) from continuing operations. . . 60 (157)
Loss from discontinued operations . . . . . . --- (115)
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NET INCOME (LOSS) . . . . . . . . . . . . . . $ 60 $ (272)
=========== ===========
Income (loss) per share from continuing
operations. . . . . . . . . . . . . . . . . $ 0.03 $ (0.05)
=========== ===========
Loss per share from discontinued
operations. . . . . . . . . . . . . . . . . $ --- $ (0.03)
=========== ===========
NET INCOME (LOSS) PER SHARE . . . . . . . . . $ 0.03 $ (0.08)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING. . . . . . . . . . . . . . 2,000 3,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
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<CAPTION>
For the Three-Month
Periods Ended March 31,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . . $ 60 $ (272)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities
Depreciation and amortization. . . . . 48 84
Provision for doubtful accounts
receivable . . . . . . . . . . . . . (67) 10
----------- -----------
Subtotal . . . . . . . . . . . . . 41 (178)
Changes in assets and liabilities,
net of asset dispositions
(Increase) decrease in accounts
receivable. . . . . . . . . . . . . . (504) 1,035
Decrease (increase) in prepaids
and other assets. . . . . . . . . . . 82 (195)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . . 130 (826)
Increase in accrued salaries
and vacation. . . . . . . . . . . . . 87 171
Increase (decrease) in other
liabilities . . . . . . . . . . . . . 90 (477)
----------- -----------
Net cash used in operating
activities. . . . . . . . . . . . (74) (470)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment . . . . (26) (96)
----------- -----------
Cash flows from financing activities
Net borrowings on notes payable. . . . . . --- 322
----------- -----------
Net decrease in cash . . . . . . . . . . . . (100) (244)
Cash at the beginning of the year. . . . . . 406 2,227
----------- -----------
Cash at the end of the period. . . . . . . . $ 306 $ 1,983
=========== ===========
Supplementary disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . $ 0 $ 47
Income taxes . . . . . . . . . . . . . . 0 0
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
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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 Form 10-Q and consequently do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in Science Management Corporation ("SMC" or
the "Company") Annual Report on Form 10-K. The Company has 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. All
financial statements presented have not been audited.
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 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.
6
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SCIENCE MANAGEMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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.
(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 of SMC ("New Common Stock"). In addition, and as described in the Plan,
Imperial Capital Worldwide Partners, the holder of the largest secured claim
against SMC, received a distribution of 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 2,000,000 shares.
(G) Subsequent Event
Effective April 30, 1997, Versar, Inc. ("Versar") acquired 53% 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. (See Item 5 - "Other Information" for
further details.)
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
First Quarter 1997 Compared to First Quarter 1996
- -------------------------------------------------
Gross revenue for the first quarter of 1997 decreased by $111,000 (2%)
compared with the first quarter of 1996. The result was due to a decrease in
sales from the environmental and engineering segment of the Company's business,
offset in part by increases in the management services and systems segment.
The decline in environmental and engineering reflected a decrease in sales of
environmental engineering services primarily caused by a reduced enforcement
7
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
activity in the Company's service region together with the positive impact on
the first quarter of 1996 of a major design and construction contract which was
concluded in April of that year. The improved revenues from the management
services and systems segment came primarily from the commencement in February
of a major domestic consulting project, augmented by increased consulting
revenues in the European operation.
Purchased services and materials increased $364,000 (17%) in the first
quarter of 1997 compared with such costs for the comparable period of fiscal
year 1996. This increase resulted from a higher level of equipment rental
costs associated with a remote construction project in the engineering segment,
coupled with the addition of several consultants in the domestic consulting
business pursuant to the contract noted above.
Direct costs of services and overhead decreased by $458,000 (19%), for the
first quarter of 1997 as compared to the first quarter of 1996. This is the
result of lower direct salaries and wages in the engineering segment in the
current year period and both the decreased revenues from environmental
engineering services which was partially offset by the impact of additional
personnel on staff during the first quarter of 1997 to fulfill the previously
mentioned major design and construction project.
Selling, general, and administrative expenses decreased $187,000 (13%) in
the first quarter of 1997 compared to the comparable prior-year period. This
reduction reflected cost control measures throughout the Company, primarily
through reducing insurance costs by consolidating insurance programs.
Loss from discontinued operations of $115,000, net of tax, in the first
quarter of 1996 represents the combined net loss from SMC's former subsidiaries
in Belgium, France, Germany, and the Netherlands. Pursuant to the Company's
Plan of Reorganization, these subsidiaries were sold in May, 1996, in
satisfaction of certain pre-petition secured debts of the Company.
SMC reported net income of $60,000 for the first quarter of 1997, compared
with a loss of $272,000 in the first quarter of 1996. The improvement resulted
from increases in the management services and systems unit income, which had
recorded a loss for the first three months of 1996, and an increase in the
engineering and construction operations, and reduced in part by a loss in the
environmental consulting unit.
Liquidity and Capital Resources
- -------------------------------
During the first quarter of 1997, the Company continued to suffer from
liquidity difficulties following its emergence from Chapter 11 in July, 1996.
While working capital at March 31, 1997, increased by $84,000 (7%) from
December 31, 1996; cash balances decreased by $100,000 due to increased
receivables. SMC continued its efforts to secure new financing throughout the
first quarter of 1997. In addition, the Company 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.
Impact of Inflation
- -------------------
SMC seeks to protect itself from the effects of inflation. The majority
of contracts the Company 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.
8
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Subsequent Events
- -----------------
Effective April 30, 1997, Versar, Inc. acquired 53% of the outstanding
common stock and all outstanding preferred stock of Science Management
Corporation 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. (See Item 5 - "Other Information" for further details.)
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Shortly after Science Management Corporation emerged from bankruptcy on
July 10, 1996, disputes arose between its new majority investors, Imperial
Capital Worldwide Partners, L.P. and the management of the Company.
Subsequently, two lawsuits were instituted against Imperial and its principals.
On September 6, 1996, two SMC administrative creditors filed a Complaint for
injunctive and other relief entitled Ravin, Sarashon, Cook, Baumgarten, Fisch
& Rosen, P.C. and Shanley & Fisher, P.C. v. Imperial Worldwide Partners, L.P.
et al. Case No. 93-34553 in the United States Bankruptcy Court, District of New
Jersey, to restrain certain actions by Imperial and its principals and to
designate James A. Skidmore, Jr. as the manager of the Company to operate the
Company on a day to day basis and carry out the terms of the Plan of
Reorganization. On November 6, 1996, James A.Skidmore, Jr. and other
management shareholders, and certain other shareholders filed a Complaint
against Imperial entitled - James A. Skidmore, Jr. et al. v. Imperial Capital
Worldwide Partners, L.P. et al. Docket No. MON C 278-96 in the Superior Court
of New Jersey, Monmouth County, Chancery Division seeking an injunction against
Imperial and its principals to rescind certain Board of Directors actions, to
enjoin their interference with Mr. Skidmore's day to day management of the
Company and to permit the corporation to obtain working capital.
As part of the Stock Purchase Agreement dated April 30, 1997 between
Versar, Inc. and Imperial Worldwide Partners, L.P. it was agreed that the
Plaintiffs and the Defendants in the two above cited proceedings would execute
mutual releases from further liability and agree to enter into Stipulations of
Dismissal for both actions. The Mutual Releases have been signed by all but
four plaintiffs in the Skidmore case. In the event all releases are executed,
Stipulations of Dismissal will be filed in the appropriate courts.
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.
The management of the Company is evaluating the Company s defenses and
potential exposure.
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 affect on its consolidated financial condition and results of
operations.
Item 5. Other Information
Science Management Corporation filed for bankruptcy on July 28, 1993. The
Company emerged from bankruptcy on July 10, 1996 as a result of an investment
by Imperial Capital Worldwide Partners, L.P. in exchange for approximately 53%
of the outstanding newly issued Common Stock, 100% of the newly issued
preferred stock of the Company and certain options to purchase 350,000
additional shares of outstanding common stock from other shareholders of the
Company. Since that time the Company has continued to suffer financial
difficulty, primarily from the lack of working capital. After emerging from
bankruptcy, the Company has not had the financial resources to maintain its
10
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 5. Other Information (continued)
periodic reporting under the Securities Exchange Act of 1934, as amended.
Further, shortly after the Company emerged from bankruptcy, its new majority
investors were sued in state and bankruptcy courts by certain management
stockholders, other stockholders and two of the Company's administrative
creditors. See Item 1, Legal Proceedings. The limited resources of the
Company were monopolized by this litigation.
On May 2, 1997, pursuant to a Stock Purchase Agreement dated April 30,
1997, Versar, Inc. (Versar) purchased from Imperial Capital Worldwide Partners,
L.P., a Delaware limited partnership (Imperial) 1,070,000 shares of common
stock of the Company (representing approximately 53% of the issued and
outstanding common stock of the Company), 100% of the issued and outstanding
preferred stock of the Company and certain options to purchase 350,000
additional shares of the Company s common stock for an aggregate purchase
price of $2,790,000 paid in cash. As additional consideration for such stock
purchases, Versar paid certain legal fees incurred by Imperial and its
affiliates in connection with the stock purchase and other matters related to
the Company in an aggregate amount of $80,000.
At the same time, Versar entered into an Agreement to Merge with James A.
Skidmore, Jr., Chairman and CEO of the Company and certain other management
shareholders. Pursuant to this Agreement, Versar presently intends to propose
a merger pursuant to which the Company will be merged into a subsidiary of
Versar and the remaining shares of Company s common stock not held by Versar
will be exchanged for newly issued shares of the Versar's common stock, subject
to the negotiation of a definitive merger agreement by the Company and Versar.
On April 30, 1997, pursuant to the Stock Purchase Agreement, Harvey Borsuk,
Jonathan Borsuk and Michelle Borsuk Dana resigned as director s of the Company
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 the Company s Board of Directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENCE MANAGEMENT CORPORATION
--------------------------------
(Registrant)
By: /s/ James A. Skidmore, Jr.
-----------------------------
James A. Skidmore, Jr.
President and Chief Executive Officer
Date: May 23, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 306
<SECURITIES> 0
<RECEIVABLES> 4,535
<ALLOWANCES> 318
<INVENTORY> 0
<CURRENT-ASSETS> 4,594
<PP&E> 2,219
<DEPRECIATION> 1,827
<TOTAL-ASSETS> 5,515
<CURRENT-LIABILITIES> 3,287
<BONDS> 0
0
1,750
<COMMON> 200
<OTHER-SE> (1,001)
<TOTAL-LIABILITY-AND-EQUITY> 5,515
<SALES> 0
<TOTAL-REVENUES> 5,874
<CGS> 0
<TOTAL-COSTS> 5,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 60
<INCOME-TAX> 0
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
