UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 5, 2015 (September 30, 2015)
VERSAR, INC.
(Exact name of Registrant as specified in its
charter)
| Delaware |
|
1-9309 |
|
54-0852979 |
| (State
of Incorporation) |
|
(Commission
File Number) |
|
(I.R.S.
Employer Identification No.) |
6850 Versar Center
Springfield, Virginia 22151 |
| (Address
of principal executive offices) |
| (Zip
Code) |
| |
| (703) 750-3000 |
| (Registrant’s
telephone number, including area code) |
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| |
|
| ¨ |
Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR 240.14a-12(b)) |
| |
|
| ¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| |
|
| ¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
EXPLANATORY NOTE
On September 30, 2015, pursuant to a Membership Interest Purchase
Agreement dated September 4, 2015 by and among Versar, Inc. (“Versar”), Johnson Controls Federal Systems, Inc.
(“JCFS”) and Johnson Controls, Inc. (“JCI”), Versar acquired all of the outstanding membership interests
of Johnson Controls Security Systems, LLC., Florida limited liability company (“JCSS”). This Current Report on Form
8-K/A amends Item 9.01 of the original Form 8-K filed on October 5, 2015 to present certain financial statements of JCSS (presented
as the Security Systems Business of Johnson Controls, Inc.) and to present certain unaudited pro forma financial information in
connection with Versar’s acquisition of JCSS. Such required financial statements and unaudited pro forma information of Versar
and its subsidiaries are filed as exhibits hereto.
| Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The audited combined statements of financial position of the Security
Systems Business of Johnson Controls, Inc. (which constitutes the business transferred to Versar as JCSS) as of September 30, 2015
and 2014, the related combined statements of income, cash flows and invested equity for the years ended September 30, 2015 and
2014, the notes to the combined financial statements and the Independent Auditors’ Report are filed as Exhibit 99.1 to this
Current Report on Form 8-K/A and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined balance
sheet of Versar, Inc. and its subsidiaries as of September 25, 2015 and the unaudited pro forma condensed combined statements of
income of Versar and its subsidiaries for the three months ended September 25, 2015 and the year ended June 26, 2015 giving effect
to Versar’s acquisition of JCSS are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated herein
by reference. Versar and JCSS have different fiscal year ends. The JCSS quarterly results used in preparing the unaudited proforma
condensed combined statement of income of Versar for the three months ended September 25, 2015, were calculated by dividing the
JCSS statement of income for the year ended September 30, 2015 by four to calculate a three-month period of performance. The JCSS
twelve month results used in preparing the unaudited pro forma condensed combined statements of income of Versar for the fiscal
year ended June 26, 2015 were calculated by dividing the JCSS statement of income for the year ended September 30, 2015 by four
representing each quarter, multiplying this by 3, to represent 3 quarters of performance and adding the results of JCSS for the
quarter ended September 30, 2014, to calculate a twelve-month period of performance.
(d) Exhibits.
| 23.1 |
Consent of Aronson LLC |
| |
|
| 99.1 |
Audited combined statements of financial position of the Security Systems Business of Johnson Controls, Inc. as of September 30, 2015 and 2014, the related combined statements of income, cash flows and invested equity for the years ended September 30, 2015 and 2014, the notes to the consolidated financial statements and the Independent Auditors’ Report. |
| |
|
| 99.2 |
The unaudited pro forma consolidated balance sheet as of September 25, 2015 of Versar, Inc. and its subsidiaries and the unaudited pro forma consolidated statement of operations of Versar, Inc. and its subsidiaries for the fiscal year ended June 26, 2015 and the three months ended September 25, 2015 giving effect to Versar’s acquisition of Johnson Controls Security Systems, LLC. |
SIGNATURE
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.
| Dated: December 15, 2015 |
VERSAR, INC. |
| |
| |
By: |
/s/ James D. Villa |
| |
|
James D. Villa |
| |
|
Senior Vice President and General Counsel |
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by
reference in the Registration Statements (No. 333-92382 and 333-33167) on Form S-8 of Versar, Inc. of our report dated December
14, 2015, related to our audit of the combined financial statements of the Security Systems Business of Johnson Controls, Inc.
as of and for the years ended September 30, 2015 and 2014, included in this Current Report on Form 8-K/A.
 |
|
| |
|
| Rockville, Maryland |
|
| December 15, 2015 |
|
Exhibit 99.1
Security
Systems Business of Johnson Controls, Inc.
Audited
Combined Financial Statements
September
30, 2015 and 2014
Security Systems Business of Johnson Controls,
Inc.
Index to Combined Financial Statements
| |
Page |
| Independent Auditor’s Report |
1 |
| |
|
| Combined Statements of Income for the years ended September 30, 2015 and 2014 |
2 |
| |
|
| Combined Statements of Financial Position as of September 30, 2015 and 2014 |
3 |
| |
|
| Combined Statements of Cash Flows for the years ended September 30, 2015 and 2014 |
4 |
| |
|
| Combined Statements of Invested Equity for the years ended September 30, 2015 and 2014 |
5 |
| |
|
| Notes to Combined Financial Statements |
6 – 13 |
 |
Independent Auditor’s Report
Management and Board of Directors
Johnson Controls, Inc.
Milwaukee, Wisconsin
We have audited the accompanying combined financial
statements of the Security Systems Business (“JCSS”) of Johnson Controls, Inc. (“JCI”), which comprise
the Combined Statements of Financial Position as of September 30, 2015 and 2014, and the related Combined Statements of Income,
Invested Equity, and Cash Flows the years then ended, and the related notes to the combined financial statements.
Management’s Responsibility for
the Combined Financial Statements
JCI’s management is responsible for the
preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted
in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud
or error.
Auditor’s Responsibility
Our responsibility is to express an opinion
on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the combined financial statements are free from material misstatement.
An audit includes performing procedures to
obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the
combined financial statements.
We believe that the audit evidence that we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements
referred to above present fairly, in all material respects, the combined financial position of the Security Systems Business
of Johnson Controls, Inc. as of September 30, 2015 and 2014, and the combined results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Rockville, Maryland
December 14, 2015 |
Security Systems Business of Johnson Controls,
Inc.
Combined Statements of Income
| | |
Year Ended September 30, | |
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Net sales | |
$ | 31,438 | | |
$ | 41,526 | |
| Cost of sales | |
| 26,526 | | |
| 35,299 | |
| | |
| | | |
| | |
| Gross margin | |
| 4,912 | | |
| 6,227 | |
| | |
| | | |
| | |
| Selling, general and administrative expenses | |
| (1,207 | ) | |
| (2,021 | ) |
| Financing income | |
| 2 | | |
| 2 | |
| Income before income taxes | |
| 3,707 | | |
| 4,208 | |
| Provision for income taxes | |
| 1,394 | | |
| 1,520 | |
| Net income | |
$ | 2,313 | | |
$ | 2,688 | |
The accompanying notes are an integral
part of the combined financial statements.
Security Systems Business of Johnson Controls,
Inc.
Combined Statements
of Financial Position
| | |
September 30, | |
| (in thousands) | |
2015 | | |
2014 | |
| Assets | |
| | | |
| | |
| Accounts receivable, net of allowance of $0 in 2015 and $9 in 2014 | |
$ | 7,253 | | |
$ | 6,600 | |
| Unbilled receivables | |
| 1,963 | | |
| 4,641 | |
| Prepaid and other current assets | |
| 15 | | |
| 95 | |
| Deferred income tax assets | |
| 322 | | |
| 261 | |
| Current assets | |
| 9,553 | | |
| 11,597 | |
| | |
| | | |
| | |
| Property and equipment, net | |
| 29 | | |
| 29 | |
| Goodwill | |
| 14,446 | | |
| 14,446 | |
| Total assets | |
$ | 24,028 | | |
$ | 26,072 | |
| | |
| | | |
| | |
| Liabilities and Invested Equity | |
| | | |
| | |
| Accounts payable | |
$ | 2,308 | | |
$ | 5,740 | |
| Employee and other accrued expenses | |
| 1,438 | | |
| 1,495 | |
| Accrued warranty reserve | |
| 484 | | |
| 252 | |
| Deferred revenue | |
| 3,254 | | |
| 3,844 | |
| Current liabilities | |
| 7,484 | | |
| 11,331 | |
| | |
| | | |
| | |
| Long-term deferred income tax liabilities | |
| 5,217 | | |
| 4,856 | |
| Total liabilities | |
| 12,701 | | |
| 16,187 | |
| | |
| | | |
| | |
| Parent company net investment | |
| 11,327 | | |
| 9,885 | |
| Total liabilities and invested equity | |
$ | 24,028 | | |
$ | 26,072 | |
The accompanying notes are an integral
part of the combined financial statements.
Security Systems Business of Johnson Controls,
Inc.
Combined Statements of Cash Flows
| | |
Year Ended September 30, | |
| (in thousands) | |
2015 | | |
2014 | |
| Operating Activities | |
| | | |
| | |
| Net income | |
$ | 2,313 | | |
$ | 2,688 | |
| Adjustments to reconcile net income to cash provided by operating activities: | |
| | | |
| | |
| Depreciation | |
| 6 | | |
| 6 | |
| Provision for bad debt | |
| 76 | | |
| 9 | |
| Deferred income taxes | |
| 300 | | |
| 442 | |
| Changes in assets and liabilities: | |
| | | |
| | |
| Accounts receivable | |
| (729 | ) | |
| 1,665 | |
| Unbilled receivables | |
| 2,677 | | |
| (2,782 | ) |
| Prepaid and other current assets | |
| 80 | | |
| 101 | |
| Accounts payable | |
| (3,431 | ) | |
| 1,607 | |
| Employee and other accrued expenses | |
| (57 | ) | |
| (160 | ) |
| Accrued warranty reserve | |
| 232 | | |
| (43 | ) |
| Deferred revenue | |
| (590 | ) | |
| 2,137 | |
| Cash provided by operating activities | |
| 877 | | |
| 5,670 | |
| | |
| | | |
| | |
| Investing Activities | |
| | | |
| | |
| Capital expenditures | |
| (6 | ) | |
| (12 | ) |
| Cash used in investing activities | |
| (6 | ) | |
| (12 | ) |
| | |
| | | |
| | |
| Financing Activities | |
| | | |
| | |
| Net transfers to Parent | |
| (871 | ) | |
| (5,658 | ) |
| Cash used in financing activities | |
| (871 | ) | |
| (5,658 | ) |
| | |
| | | |
| | |
| Increase in cash and cash equivalents | |
| - | | |
| - | |
| | |
| | | |
| | |
| Cash and cash equivalents at beginning of year | |
| - | | |
| - | |
| Cash and cash equivalents at end of year | |
$ | - | | |
$ | - | |
The accompanying notes are an integral
part of the combined financial statements.
Security Systems Business of Johnson Controls,
Inc.
Combined Statements of Invested Equity
| (in thousands) | |
| | |
| Balance October 1, 2013 | |
$ | 12,855 | |
| Net income | |
| 2,688 | |
| Change in Parent's net investment | |
| (5,658 | ) |
| Balance September 30, 2014 | |
| 9,885 | |
| Net income | |
| 2,313 | |
| Change in Parent's net investment | |
| (871 | ) |
| Balance September 30, 2015 | |
$ | 11,327 | |
The accompanying notes are an integral part of the combined
financial statements.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
| 1. | BACKGROUND AND NATURE OF OPERATIONS |
The accompanying combined financial statements
and notes to the combined financial statements reflect the combined historical results of the operations, financial position, and
cash flows of the Security Systems business, (“JCSS” or “the Company”), which is consolidated by the Johnson
Controls Federal Systems business (“JCFS”), a wholly-owned subsidiary of Johnson Controls, Inc. (“JCI”
or “the Parent”). JCSS is a leading North American security system integrator specializing in providing services to
the federal government as it relates to designing, installing, and supporting complex physical security, network security, and
facilities management systems. JCSS represents the business that was acquired by Versar, Inc. on September 30, 2015, and is now
a wholly-owned subsidiary of that company, doing business as Versar Security Systems, LLC.
These combined financial statements were prepared
on a stand-alone basis in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) as derived
from the accounting records of JCFS and the Parent as if JCSS had been operating as a stand-alone company for all periods presented.
The assets and liabilities in the combined financial statements have been reflected on a historical cost basis, as included in
the consolidated statements of financial position of JCI. The combined statements of income include allocations for certain shared
service functions that are provided by JCFS to the Company, such as expenses related to facilities, accounting and finance, purchasing,
payroll, human resources, payables processing and information technology. These expenses have been allocated to JCSS by JCFS on
the basis of direct usage when identifiable, with the remainder allocated on a proportional basis using appropriate measures including
employee headcount. The allocations and estimates in the combined financial statements, including allocations of corporate expenses
from the Parent and JCFS, are based on assumptions management believes are reasonable. The combined financial statements included
herein however may not be indicative of the results of operations, financial position and cash flows of the Company in the future
or if the Company had been a separate, standalone entity during the periods presented.
The cash and financing functions of the Company
are centrally managed by JCI and JCFS. Accordingly, none of the cash, cash equivalents, marketable securities, debt, or related
interest expense was assigned to or allocated to JCSS in the combined financial statements. At September 30, 2015 and 2014, $273
and $917, respectively of outstanding checks written by JCFS for payables of JCSS have been included as a liability within accounts
payable in the accompanying combined statements of financial position.
Transactions between JCSS and JCFS or the Parent
related to corporate allocations are considered to be effectively settled for cash at the time the transaction is recorded. There
were no intercompany loans or indebtedness to third parties identified to the JCSS business.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Combination
These combined financial statements present
the statements of operations, financial position, cash flows and Parent net investment. Intercompany transactions recorded by JCSS
with JCFS and the Parent have been included in these combined financial statements as Parent’s net investment. Transactions
between JCSS and Parent affiliates resulting from purchases and sales in the normal course of business are classified as related
party, rather than intercompany, in the combined financial statements. Refer to Note 8 “Related Party Transactions”
of the notes to the combined financial statements for further details.
Use of Estimates
The preparation of combined financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date of the combined financial statements, and the
reported amounts of revenues and expenses during the reporting period. The combined financial statements reflect management's estimates
as of the reporting date. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable,
accounts payable and accrued expenses approximate their fair value based on the short maturities of these instruments.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
Revenue Recognition
The majority of the Company’s revenue
is derived from firm fixed price contracts with the U.S. government. Revenues from firm fixed price contracts are recognized using
the “percentage of completion method” of accounting. Under this method, contract revenues are recognized over the performance
period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of
the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs.
Revenue recognized on contracts for which billings
have not been presented to customers at year-end is included as unbilled receivables in the accompanying combined statements of
financial position. Payments received in advance of the performance of services are included in the accompanying combined statements
of financial position as deferred revenue.
Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions
to costs and revenue, and are recognized in the period the revisions are determined.
The Company also earns revenues from planned
service and support, cost reimbursable, and time-and-materials contracts. Revenues from planned service and support contracts are
recognized on a straight-line basis over the term of the service contract. Revenue from cost-type contracts is recognized as costs
are incurred on the basis of direct costs plus allocable indirect costs and an allocable portion of the fixed fee. Under time and
material contracts, the Company recognizes revenue as costs are incurred and the service is provided based on negotiated billing
rates.
Billings under cost-based government contracts
are calculated using provisional rates which permit recovery of indirect costs. These rates are subject to audit on an annual basis
by the government agencies’ cognizant audit agency. The cost audit will result in the negotiation and determination of the
final indirect cost rates which the Company may use for the years audited. The final rates, if different from the provisional rates,
may create a receivable or a liability.
As of September 30, 2015, the Company had negotiated
final settlements on indirect cost rates through September 30, 2007. The Company periodically reviews is cost estimates and experience
rates, and adjustments, if needed, are made and reflected in the period in which the estimates are revised. In the opinion of management,
redetermination of any cost-based contracts for the open years will not have any material effect on the Company’s financial
position or results of operations.
Accounts Receivable
Accounts receivable includes amounts billed
and currently due from customers. The Company extends credit to customers in the normal course of business and maintains an allowance
for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful
accounts is based on historical experience, existing economic conditions and any specific customer collection issues the Company
has identified. Bad debt expense was $76 and $9 for the years ended September 30, 2015 and 2014, respectively.
The Company’s revenues and accounts receivable
are almost entirely derived from security services provided to the U.S. government. The Company may contract directly with a U.S.
government agency, or may partner with another third-party company to provide security services to the U.S. government. During
the years ended September 30, 2015 and 2014, three customers generated approximately 73% and 68%, respectively of total revenue.
As of September 30, 2015 and 2014, accounts
receivable from three customers representing 10% or more of total gross accounts receivable accounted for approximately 85% and
76%, respectively.
Property and Equipment, Net
Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial
reporting purposes. The estimated useful lives include 10 years for furniture and fixtures, and 3 to 5 years for computer equipment
and software assets.
Goodwill
Goodwill reflects the cost of an acquisition
in excess of the fair values assigned to identifiable net assets acquired. The goodwill recorded in the combined statements of
financial position originates from JCI’s acquisition of the JCSS business in 2001.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
The Company reviews goodwill for impairment
at least annually or whenever events or changes in circumstances indicate the asset might be impaired. The annual goodwill impairment
test is performed during the fourth fiscal quarter of each fiscal year. Goodwill is tested for impairment by first evaluating qualitative
factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. If the
Company’s concludes it is more likely than not that the fair value of goodwill is less than its carrying amount, a two-step
quantitative impairment test is performed. This first step in this test includes comparing the fair value of each reporting unit
to its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step in
the test is performed, which is measurement of the impairment loss. The impairment loss is calculated by comparing the implied
fair value of goodwill, as if the reporting unit has been acquired in a business combination, to its carrying amount. Based on
the qualitative assessment of goodwill performed by the Company in its fiscal fourth quarter, there was no indicator of impairment
of goodwill for fiscal years ended September 30, 2015 and 2014.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including
property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances
indicate that the asset's carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses
in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company
to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted
cash flows do not indicate that the carrying amount of the asset is recoverable, an impairment charge is measured as the amount
by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Income Taxes
The Company's operations have historically
been included in the Parent's U.S. federal and state tax returns. The income tax provision in the combined statements of income
has been calculated as if the JCSS business filed a separate income tax return and was operating as a stand-alone business for
the periods presented. This may result in differences when the sum of the amounts allocated to the Company’s tax provisions
are compared with amounts presented in consolidated financial statements of the Parent.
The Company accounts for income taxes in accordance
with ASC 740, “Income Taxes.” ASC 740 requires an asset and liability approach for financial accounting and reporting
for income taxes. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Valuation allowances are established when management determines that it is more likely than not that some portion or all of a deferred
tax asset will not be realized.
Because portions of the Company's operations
are included in the Parent's tax returns, payments to certain tax authorities are made by the Parent, and not by the Company. The
Company does not maintain taxes payable to/from the Parent and the balances are deemed to settle the annual current tax payable
balances immediately with the legal tax-paying entities in the respective jurisdictions. These settlements are reflected as changes
in the Parent's net investment in the accompanying combined statements of invested equity.
The Company recognizes tax benefits from uncertain
tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the combined financial statements from such positions
are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The
Company has not recorded any unrecognized tax benefits in these stand-alone company financial statements. The years from October
1, 2012 through the current year remain open for examination by federal and state tax authorities.
Accrued Warranty
Warranty obligations are estimated and recorded
as an accrued liability upon completion of the contracted services, which also aligns with the commencement date of the warranty
period. The estimated cost of providing the warranty to customers is considered within the Company’s total estimated cost
to provide the services under relevant contracts. Warranty obligations may vary by contract and warranty terms, and the Company
estimates its warranty obligation based on historical expenses for similar contracts, as well as analysis of projected claims versus
the actual claims incurred.
Pension and Postretirement Benefits
Under the guidance in ASC 715, “Compensation
- Retirement Benefits,” the Company accounts for its employee participation in a defined benefit plan of the Parent by applying
multi-employer accounting. Contributions by the Company to the pension plan are recorded as an allocation of net periodic pension
cost or income by the Parent to the Company. The net periodic pension income allocation to JCSS was $171 and $0 for the years ended
September 30, 2015 and 2014, respectively.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
Share-Based Compensation
The Parent maintains certain stock compensation
plans for the benefit of certain of its officers, directors and employees, including grants of employee stock options and restricted
awards. These combined financial statements include certain expenses of the Parent that were allocated to the Company for share-based
compensation. The share-based compensation expense is based on the estimated grant-date fair value and is recognized over the requisite
service period, net of estimated forfeitures. The Company’s combined balance sheets do not include any Parent outstanding
equity related to these stock-based compensation programs. The share-based compensation expense identified to JCSS employees and
included in selling, general and administrative expenses of the combined financial statements was $2 and $10 for the years ended
September 30, 2015 and 2014.
Parent's Net Investment
The accompanying combined financial statements
may not include all of the expenses that would have been incurred and may not reflect the results of operations, financial position
and cash flows had the Company been a stand-alone company during the periods presented. Because a direct ownership relationship
does not exist for the Company, the Parent’s equity in the Company is shown as Parent net investment in lieu of stockholder’s
equity in the combined financial statements.
The Parent net investment includes the Parent’s
historical investment in the Company, accumulated net earnings after taxes, and the net effect of transactions with, and allocations
from, the Parent.
Earnings per share data has not been presented
in the accompanying combined financial statements because the Company does not operate as a separate legal entity with its own
capital structure.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 clarifies the principles for recognizing revenue
when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer
of non-financial assets. The original standard was effective retrospectively for the Company for the quarter ending December 31,
2017; however in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date," which defers the effective date of ASU 2014-09 by one-year for all entities. The new standard will
become effective retrospectively for the Company for the quarter ending December 31, 2018, with early adoption permitted, but not
before the original effective date. The Company is currently assessing the impact adoption of this guidance will have on its consolidated
financial statements.
In July 2013, the FASB issued Accounting Standards
Update (ASU) No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 clarifies that companies should present
an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or
a tax credit carryforward. ASU No. 2013-11 was effective for the Company for the quarter ending December 31, 2014. The adoption
of this guidance did not have a significant impact on the Company’s consolidated financial statements.
| 4. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consisted of the following:
| | |
September 30, | |
| | |
2015 | | |
2014 | |
| Leasehold improvement | |
$ | 3 | | |
$ | 3 | |
| Furniture and fixtures | |
| 19 | | |
| 19 | |
| Computers & equipment | |
| 33 | | |
| 42 | |
| | |
| 55 | | |
| 64 | |
| Accumulated depreciation | |
| (26 | ) | |
| (35 | ) |
| | |
$ | 29 | | |
$ | 29 | |
Depreciation expense for the fiscal years September 30, 2015 and
2014 totaled $6 for each year respectively. During the year ended September 30, 2015, the Company retired assets that were fully
depreciated with a cost basis and accumulated depreciation of $15. There were no disposals of property and equipment during the
year ended September 30, 2014.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
The Company accrues the estimated expense to satisfy its contractual
warranty requirements. The changes in the carrying amount of the Company’s warranty liability, for the years ended September
30, 2015 and 2014 follows:
| | |
2015 | | |
2014 | |
| Balance at the beginning of the year | |
$ | 252 | | |
$ | 295 | |
| Accruals for warranties issued during the year | |
| 702 | | |
| 174 | |
| Settlements made during the year | |
| (470 | ) | |
| (217 | ) |
| Balance at the end of the year | |
$ | 484 | | |
$ | 252 | |
| 6. | SAVINGS AND INVESTMENT PLANS |
The Company participates in defined contribution
savings plans of the Parent that allow employees to contribute a portion of their pre-tax income in accordance with plan specified
guidelines. Under specified conditions, the Company will contribute to certain savings plans based on the employees’ eligible
pay and will match a percentage of the employee contributions up to certain limits. Retirement contributions charged to expense
amounted to $455 and $476 for the years ended September 30, 2015 and 2014, respectively.
The components of the Company’s income tax provision are as
follows:
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| Current | |
| | | |
| | |
| Federal | |
$ | 890 | | |
$ | 865 | |
| State | |
| 204 | | |
| 213 | |
| | |
| 1,094 | | |
| 1,078 | |
| Deferred | |
| | | |
| | |
| Federal | |
| 265 | | |
| 389 | |
| State | |
| 35 | | |
| 53 | |
| | |
| 300 | | |
| 442 | |
| Provision for income taxes | |
$ | 1,394 | | |
$ | 1,520 | |
The provision for income taxes for the years ended September 30,
2015 and 2014 reflected in the accompanying combined financial statements varies from the amount which would have been computed
using statutory rates as follows:
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Provision at federal statutory rate | |
$ | 1,261 | | |
$ | 1,431 | |
| State income taxes, net of income tax provision | |
| 170 | | |
| 191 | |
| Permanent differences and other | |
| (37 | ) | |
| (102 | ) |
| Provision for income taxes | |
$ | 1,394 | | |
$ | 1,520 | |
The Company reviews the realizability of its
deferred tax assets on an annual basis, or whenever events or changes in circumstances indicate that a review is required. In determining
the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group
recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial
results may differ from previous estimates, periodic adjustments to the Company's valuation allowances may be necessary. The Company
has not recorded any valuation allowance in these stand-alone company financial statements.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
Deferred tax assets were classified in the statements of financial
position as follows:
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| Deferred income tax assets | |
$ | 322 | | |
$ | 261 | |
| Long-term deferred income tax liabilities | |
| (5,217 | ) | |
| (4,856 | ) |
| Net deferred tax liability | |
$ | (4,895 | ) | |
$ | (4,595 | ) |
Temporary differences and carryforwards which gave rise to deferred
tax assets and liabilities included:
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| Deferred tax assets | |
| | | |
| | |
| Accrued expenses and reserves | |
$ | 322 | | |
$ | 261 | |
| | |
| 322 | | |
| 261 | |
| Deferred tax liabilities | |
| | | |
| | |
| Property, plant and equipment | |
| (6 | ) | |
| (6 | ) |
| Amortizable goodwill | |
| (5,211 | ) | |
| (4,850 | ) |
| | |
| (5,217 | ) | |
| (4,856 | ) |
| | |
| | | |
| | |
| Net deferred tax liability | |
$ | (4,895 | ) | |
$ | (4,595 | ) |
On a separate company basis, the income tax
provision considers net operating loss carryback and carryforward rules under applicable federal and state tax laws.
| 8. | RELATED PARTY TRANSACTIONS AND PARENT'S NET INVESTMENT |
Related Party Transactions
In the ordinary course of business, JCSS generates
sales and cost of sales in transactions with other JCI businesses. Under the Parent's reporting structure, these transactions would
have been classified as intercompany and eliminated in consolidation. However, in the JCSS stand-alone combined financial statements,
these transactions are recorded as related party transactions.
The Company records related party sales of
equipment to Parent affiliates at terms that are comparable with third party customers. The following table sets forth the net
sales to related parties included in net sales of the combined statements of income:
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| Net sales to related parties | |
$ | 277 | | |
$ | 586 | |
There were no receivables outstanding from
related parties at September 30, 2015 & 2014.
JCSS also procures security equipment and labor
resources from the Parent and other consolidated entities of the Parent to service customer contracts. The following table sets
forth the net purchases from related parties included in cost of sales of the combined statements of income:
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
| | |
Year Ended September 30, | |
| | |
2015 | | |
2014 | |
| Net purchases from related parties | |
$ | 521 | | |
$ | 957 | |
Included in accounts payable on the combined statements of financial
position were payables to related parties of $0 and $28 at September 30, 2015 and 2014, respectively.
Corporate Allocations and Parent's Net
Investment
The combined statements of income include allocations
for certain support functions that are provided by JCFS to the Company and subsequently recorded at the JCSS business unit level,
such as expenses related to facilities, accounting and finance, purchasing, payroll, human resources, payables processing and information
technology. These expenses have been allocated to JCSS on the basis of direct usage when identifiable, with the remainder allocated
on a proportional basis using appropriate measures including employee headcount. Management believes the assumptions underlying
the combined financial statements, including the assumptions regarding the allocation of corporate expenses from the Parent and
JCFS are reasonable. Nevertheless, the combined financial statements may not include all actual expenses that would have been incurred
by JCSS and may not reflect the combined results of operations, financial position and cash flows had it been a stand-alone company
during the periods presented. Actual costs that would have been incurred if JCSS had been a stand-alone company would depend on
multiple factors, including organizational structure and strategic decisions made in various areas, including information technology
and infrastructure. The corporate allocations made during the fiscal years ended September 30, 2015 and 2014 were
$1.1 million and $1.3 million, respectively.
In addition to the transactions discussed above,
certain intercompany transactions between JCSS and the Parent have not been recorded as related party transactions. These transactions
are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement
of these intercompany transactions is reflected in the combined statements of cash flows as a financing activity and in the combined
statements of financial position as Parent's net investment.
| 9. | COMMITMENTS AND CONTINGENCIES |
Operating Leases
Lease agreements for facilities, computers
and equipment used in the Company’s business are recorded as operating leases. Leases agreements are entered into by the
Parent and charged to the Company based on the square footage of the facilities occupied, or the computer and equipment identified
to the Company. Total rental expense for the fiscal years ended September 30, 2015 and 2014 related to leased facilities, was $262
and $373, respectively.
At September 30, 2015, the Company’s
lease commitments included three office facilities, as well as computers and vehicles used by the JCSS business. The future minimum
lease commitments related to these lease commitments follow:
| 2016 | |
$ | 132 | |
| 2017 | |
| 65 | |
| 2018 | |
| 32 | |
| 2019 | |
| 11 | |
| 2020 | |
| 2 | |
| Total minimum lease payments | |
$ | 242 | |
Litigation and Other Claims
The Parent is involved in various lawsuits
incident to the operation of its businesses. The Company maintains insurance coverage and records estimated costs for claims and
suits of this nature. It is management’s opinion that none of these will have a material adverse effect on the Company’s
financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
Security Systems Business of Johnson Controls,
Inc.
Notes to Combined Financial Statements
(Amounts in thousands, unless otherwise
indicated)
On September 30, 2015, the Company was acquired
by Versar, Inc. (“Versar”) pursuant to the September 4, 2015 Membership Interest Purchase Agreement (“Purchase
Agreement”) executed by and among Versar, JCFS and JCI. The cash purchase price for the Company was $10,546 and the parties
have agreed that Versar will pay a contingent amount of up to $9,500 for JCSS, for a total purchase price of up to $20,046 upon
the achievement of an agreed target working capital and earn-out provisions.
JCI’s management has evaluated subsequent
events for disclosure in these combined financial statements through December 14, 2015, which is the date the financial statements
were available to be issued.
As part of the Purchase Agreement, JCFS and
JCI retained $1.5 million of the Company’s accounts receivable and $1.6 million of the Company’s accrued expenses included
in the current liabilities on the accompanying combined statements of financial position as of September 30, 2015.
Exhibit 99.2
VERSAR, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet
As of September 25, 2015
(In thousands, except share amounts)
| | |
Versar | | |
JCSS | | |
Pro Forma
Adjustments | |
| |
Pro Forma | |
| ASSETS | |
| | | |
| | | |
| | |
| |
| | |
| Current assets | |
| | | |
| | | |
| | |
| |
| | |
| Cash and cash equivalents | |
$ | 396 | | |
$ | - | | |
| - | |
| |
| 396 | |
| Accounts receivable, net | |
| 47,580 | | |
| 9,216 | | |
| (1,500 | ) |
a | |
| 55,296 | |
| Inventory, net | |
| 1,227 | | |
| - | | |
| - | |
| |
| 1,227 | |
| Prepaid expenses and other current assets | |
| 2,508 | | |
| 15 | | |
| - | |
| |
| 2,523 | |
| Deferred income taxes | |
| 1,396 | | |
| 322 | | |
| (322 | ) |
b | |
| 1,396 | |
| Income tax receivable | |
| 915 | | |
| - | | |
| - | |
| |
| 915 | |
| Total current assets | |
| 54,022 | | |
| 9,553 | | |
| (1,822 | ) |
| |
| 61,753 | |
| Property and equipment, net | |
| 2,042 | | |
| 29 | | |
| - | |
| |
| 2,071 | |
| Deferred income taxes, non-current | |
| 441 | | |
| - | | |
| - | |
| |
| 441 | |
| Goodwill and Intangible assets, net | |
| 20,454 | | |
| 14,446 | | |
| 1,678 | |
c | |
| 36,578 | |
| Other assets | |
| 252 | | |
| - | | |
| - | |
| |
| 252 | |
| Total assets | |
$ | 77,211 | | |
$ | 24,028 | | |
| (144 | ) |
| |
| 101,095 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| | |
| |
| | |
| Current liabilities | |
| | | |
| | | |
| | |
| |
| | |
| Accounts payable | |
$ | 23,211 | | |
$ | 2,308 | | |
| (162 | ) |
a | |
| 25,357 | |
| Accrued salaries and vacation | |
| 2,499 | | |
| 1,438 | | |
| (1,438 | ) |
a | |
| 2,499 | |
| Line of Credit | |
| 1,770 | | |
| | | |
| | |
| |
| 1,770 | |
| Other current liabilities | |
| 653 | | |
| 3,738 | | |
| - | |
| |
| 4,391 | |
| Notes payable, current | |
| 3,329 | | |
| | | |
| 5,000 | |
d | |
| 8,329 | |
| Total current liabilities | |
| 31,462 | | |
| 7,484 | | |
| 3,400 | |
| |
| 42,346 | |
| Notes payable, non-current | |
| 5,375 | | |
| | | |
| 13,000 | |
d | |
| 18,375 | |
| Other long-term liabilities | |
| 1,446 | | |
| 5,217 | | |
| (5,217 | ) |
b | |
| 1,446 | |
| Total liabilities | |
| 38,283 | | |
| 12,701 | | |
| 11,183 | |
| |
| 62,167 | |
| Commitments and contingencies | |
| - | | |
| | | |
| | |
| |
| | |
| | |
| | | |
| | | |
| | |
| |
| | |
| Stockholders' equity | |
| | | |
| | | |
| | |
| |
| | |
| Common stock $.01 par value | |
| 101 | | |
| - | | |
| - | |
| |
| 101 | |
| Capital in excess of par value | |
| 30,889 | | |
| - | | |
| - | |
| |
| 30,889 | |
| Retained earnings | |
| 10,010 | | |
| 11,327 | | |
| (11,327 | ) |
| |
| 10,010 | |
| Treasury stock, at cost | |
| (1,460 | ) | |
| - | | |
| - | |
| |
| (1,460 | ) |
| Paid in Capital | |
| - | | |
| - | | |
| - | |
| |
| - | |
| Accumulated other comprehensive loss; foreign currency translation | |
| (612 | ) | |
| - | | |
| - | |
| |
| (612 | ) |
| Total stockholders' equity | |
| 38,928 | | |
| 11,327 | | |
| (11,327 | ) |
| |
| 38,928 | |
| Total liabilities and stockholders' equity | |
$ | 77,211 | | |
$ | 24,028 | | |
| (144 | ) |
| |
| 101,095 | |
Notes to unaudited pro forma consolidated Balance Sheet
a The seller retained $1.5million of Accounts Receivable and $1.6million
of Accrued Expenses
b All deferred income taxes have been eliminated for the pro forma
presentation
c This is an estimated of Goodwill and Intangibles which is subject
to adjustment based on the final valuation analysis
d Bank of America financing facility of $20million net of $2million
repayment of other debt
VERSAR, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Statement of
Operations
Year ended June 26, 2015
(In thousands, except per share amounts)
| | |
Versar | | |
JCSS | | |
Pro Forma
Adj | |
| |
Pro Forma | |
| GROSS REVENUE | |
$ |
159,877 | | |
$ |
39,004 | | |
| |
| |
$ |
198,881 | |
| Purchased services and materials, at cost | |
| 90,289 | | |
| - | | |
| | |
| |
| 90,289 | |
| Direct costs of services and overhead | |
| 55,797 | | |
| 33,106 | | |
| | |
| |
| 88,903 | |
| GROSS PROFIT | |
| 13,791 | | |
| 5,899 | | |
| | |
| |
| 19,690 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| Selling, general and administrative expenses | |
| 11,003 | | |
| 1,818 | | |
| | |
| |
| 12,821 | |
| OPERATING (LOSS) INCOME | |
| 2,788 | | |
| 4,081 | | |
| - | |
| |
| 6,869 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| OTHER (INCOME) EXPENSE | |
| | | |
| | | |
| | |
| |
| | |
| Interest income | |
| (2 | ) | |
| (2 | ) | |
| 2 | |
| |
| (2 | ) |
| Interest expense | |
| 447 | | |
| - | | |
| | |
| |
| 447 | |
| (LOSS) INCOME BEFORE INCOME TAXES, FROM CONTINUING OPERATIONS | |
| 2,343 | | |
| 4,083 | | |
| (2 | ) |
| |
| 6,424 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| Income tax (benefit) expense | |
| 936 | | |
| 1,489 | | |
| 16 | |
e | |
| 2,441 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| NET (LOSS) INCOME FROM CONTINUING OPERATIONS | |
$ | 1,407 | | |
$ | 2,595 | | |
| (19 | ) |
| |
| 3,983 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| NET (LOSS) INCOME PER SHARE-BASIC and DILUTED | |
| | | |
| | | |
| | |
| |
| | |
| Continuing operations | |
$ | 0.14 | | |
| | | |
| | |
| |
| 0.41 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED | |
| 9,771 | | |
| | | |
| | |
| |
| 9,771 | |
Notes to unaudited pro forma Consolidated Statement of Operations
e To adjust to effective pro forma rate of 38%
VERSAR, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Statement of
Operations
For the 3 months ended September 25, 2015
(In thousands, except per share amounts)
| | |
Versar | | |
JCSS | | |
Pro Forma
Adj | |
| |
Pro Forma | |
| | |
| | | |
| | | |
| | |
| |
| | |
| GROSS REVENUE | |
$ | 44,905 | | |
$ | 7,860 | | |
| | |
| |
$ | 52,765 | |
| Purchased services and materials, at cost | |
| 29,767 | | |
| - | | |
| | |
| |
| 29,767 | |
| Direct costs of services and overhead | |
| 12,826 | | |
| 6,631 | | |
| | |
| |
| 19,457 | |
| GROSS PROFIT | |
| 2,312 | | |
| 1,228 | | |
| | |
| |
| 3,540 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| Selling, general and administrative expenses | |
| 2,854 | | |
| 302 | | |
| | |
| |
| 3,156 | |
| OPERATING (LOSS) INCOME | |
| (542 | ) | |
| 927 | | |
| | |
| |
| 385 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| OTHER (INCOME) EXPENSE | |
| | | |
| | | |
| | |
| |
| | |
| Interest expense | |
| 175 | | |
| (1 | ) | |
| (1 | ) |
| |
| 174 | |
| (LOSS) INCOME BEFORE INCOME TAXES | |
| (717 | ) | |
| 927 | | |
| 1 | |
| |
| 211 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| Income tax (benefit) expense | |
| (286 | ) | |
| 349 | | |
| 17 | |
e | |
| 80 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| NET (LOSS) INCOME | |
$ | (431 | ) | |
$ | 579 | | |
| (17 | ) |
| |
| 131 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| NET (LOSS) INCOME PER SHARE-BASIC and DILUTED | |
| | | |
| | | |
| | |
| |
| | |
| NET (LOSS) INCOME PER SHARE-BASIC and DILUTED | |
$ | (0.04 | ) | |
| | | |
| | |
| |
| 0.01 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC | |
| 9,808 | | |
| | | |
| | |
| |
| 9,808 | |
| | |
| | | |
| | | |
| | |
| |
| | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED | |
| 9,808 | | |
| | | |
| | |
| |
| 9,808 | |
Notes to unaudited pro forma Consolidated Statement of Operations
e To adjust to effective pro forma rate of 38%
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