SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1996 Commission File Number: 0-3676 VSE CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 54-0649263 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2550 Huntington Avenue Alexandria, Virginia 22303-1499 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (703) 960-4600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.05 per share (Title of Class) 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 [x] No [ ] Number of shares of Common Stock outstanding as of October 1, 1996: 1,738,334. VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - ------------------------------------------------------------------------------ (in thousands, except share amounts)
September 30, December 31, 1996 1995 ------ ------ Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . $ 403 $ 601 Accounts receivable, principally U. S. Government, net . . . . . . . . . . . . . 24,658 16,073 Deferred tax assets . . . . . . . . . . . . . . . 948 810 Other current assets . . . . . . . . . . . . . . . 1,739 856 Net current assets of discontinued operations . . 0 476 ------ ------ Total current assets . . . . . . . . . . . . . . 27,748 18,816 Property and equipment, net . . . . . . . . . . . . 4,568 4,355 Intangible assets, net . . . . . . . . . . . . . . . 3,493 3,874 Other assets . . . . . . . . . . . . . . . . . . . . 1,987 1,650 Net property, equipment, and other noncurrent assets of discontinued operations . . . . . . . . 0 243 ------ ------ Total assets . . . . . . . . . . . . . . . . . . $37,796 $28,938 ====== ====== Liabilities and Stockholders' Investment Current liabilities: Accounts payable and other current liabilities . . $ 7,811 $ 3,097 Accrued expenses . . . . . . . . . . . . . . . . 6,377 5,684 Dividends payable . . . . . . . . . . . . . . . . 78 74 ------ ------ Total current liabilities . . . . . . . . . . . 14,266 8,855 Long-term debt . . . . . . . . . . . . . . . . . . . 7,616 4,992 Deferred tax liabilities . . . . . . . . . . . . . . 98 411 Deferred compensation . . . . . . . . . . . . . . . 1,280 1,127 ------ ------ Total liabilities . . . . . . . . . . . . . . . 23,260 15,385 ------ ------ Commitments and contingencies Stockholders' investment: Common stock, par value $.05 per share, authorized 5,000,000 shares; issued 3,908,088 shares in 1996 and 1,954,044 in 1995 . . . . . . . . . . . 195 98 Paid-in surplus . . . . . . . . . . . . . . . . . 8,241 8,338 Retained earnings . . . . . . . . . . . . . . . . 22,385 21,402 Treasury stock, at cost (2,169,754 shares in 1996 and 1,084,877 in 1995) . . . . . . . . . . . . . (16,285) (16,285) ------ ------ Total stockholders' investment . . . . . . . . 14,536 13,553 ------ ------ Total liabilities and stockholders' investment $37,796 $28,938 ====== ======
-1- VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Income For the three and nine months ended - ------------------------------------------------------------------------------ (in thousands, except per share amounts)
September 30, --------------------------------------- 1996 1995 ------------------- ------------------- Three Nine Three Nine Months Months Months Months --------- --------- --------- --------- Revenues, principally from contracts . . . . . . . . . . . . . $ 29,664 $ 73,778 $ 20,892 $ 53,702 Costs and expenses of contracts . . . 28,772 70,894 19,373 51,023 -------- -------- -------- -------- Gross profit . . . . . . . . . . . . 892 2,884 1,519 2,679 Selling, general and administrative expenses . . . . . . . . . . . . . . 331 490 657 542 Interest expense . . . . . . . . . . 108 347 15 27 -------- -------- -------- -------- Pretax income from continuing operations . . . . . . . . . . . . . 453 2,047 847 2,110 Provision for income taxes . . . . . (25) 634 339 811 -------- -------- -------- -------- Income from continuing operations . . 478 1,413 508 1,299 Discontinued operations, net of tax: Loss from operations (net of tax benefit of $0 and $14 in 1996, $19 and $45 in 1995) . . . . . . 0 (25) (49) (129) Loss on disposal (net of tax benefit of $118). . . . . . . . . 0 (179) 0 0 -------- -------- -------- -------- Net income . . . . . . . . . . . . . $ 478 $ 1,209 $ 459 $ 1,170 ======== ======== ======== ======== Earnings per common share, based on weighted average shares outstanding: Income from continuing operations . . . . . . . . . . . $ .27 $ .81 $ .29 $ .75 Loss from discontinued operations . . . . . . . . . . . 0 (.12) (.02) (.07) -------- -------- -------- -------- Net income $ .27 $ .69 $ .27 $ .68 ======== ======== ======== ======== Weighted average shares outstanding 1,738,334 1,738,334 1,738,334 1,731,134 ========= ========= ========= =========
-2- VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Stockholders' Investment - ------------------------------------------------------------------------------ (in thousands)
Common Stock Paid-In Retained Treasury Shares Amount Surplus Earnings Stock ------ ------ ------- -------- -------- Balance at December 31, 1994 . . 1,948 $ 97 $8,247 $20,042 $(16,285) Net income for the year. . . . . -- -- -- 1,646 -- Dividends declared ($.325) . . . -- -- -- (286) -- Issuance of stock . . . . . . . 6 1 91 -- -- ----- --- ----- ------ ------- Balance at December 31, 1995 . . 1,954 98 8,338 21,402 (16,285) Net income for the period . . . -- -- -- 1,209 -- Dividends declared ($.1275). . . -- -- -- (226) -- Stock split effected in the form of a 100% stock dividend . . . . . . . . . . . 1,954 97 (97) -- -- ----- --- ----- ------ ------- Balance at September 30, 1996 . 3,908 $195 $8,241 $22,385 $(16,285) ===== === ===== ====== =======
-3- VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Cash Flows For the nine months ended September 30, - ------------------------------------------------------------------------------ (in thousands)
1996 1995 ------- ------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 1,209 $ 1,170 Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: Depreciation and amortization . . . . . . . . . . . . . 1,017 1,938 Discontinued operations . . . . . . . . . . . . . . . . 204 129 Deferred compensation plan expense . . . . . . . . . . 171 94 Change in assets and liabilities, net of discontinued operations (Increase) decrease in: Accounts receivable . . . . . . . . . . . . . . . . . (8,585) (6,383) Other current assets and noncurrent assets . . . . . (839) 351 Deferred tax assets, net . . . . . . . . . . . . . . (451) 640 Increase (decrease) in: Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . 4,697 1,417 Accrued expenses. . . . . . . . . . . . . . . . . . . 693 1,660 ------ ------ Net cash used in continuing operating activities . . . . . . . . . . . . . . . . . . . (1,884) 1,016 Net cash used in discontinued operating activities . . . . . . . . . . . . . . . . . . . (25) (129) ------ ------ Net cash (used in) provided by operating activities (1,909) 887 ------ ------ Cash flows from investing activities: Purchase of property and equipment, (net of dispositions). . . . . . . . . . . . . . . . . . (1,230) (2,503) Acquisition of CMstat . . . . . . . . . . . . . . . . . . 0 (970) Acquisition of Energetics . . . . . . . . . . . . . . . . 0 (3,660) Issuance of treasury stock . . . . . . . . . . . . . . . 0 91 Net proceeds from sale of Schmoldt Engineering . . . . . 100 0 Change in net assets of discontinued operations . . . . . 439 129 ------ ------ Net cash used in investing activities (691) (6,913) ------ ------ Cash flows from financing activities: Net proceeds from revolving term loan . . . . . . . . . . 2,624 3,651 Cash dividends paid . . . . . . . . . . . . . . . . . . . (222) (207) ------ ------ Net cash provided by financing activities 2,402 3,444 ------ ------ Net decrease in cash and cash equivalents . . . . . . . . . (198) (2,582) Cash and cash equivalents at beginning of period . . . . 601 3,096 ------ ------ Cash and cash equivalents at end of period . . . . . . . $ 403 $ 514 ====== ======
-4- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information refer to the consolidated financial statements and footnotes thereto included in the VSE Corporation annual report on Form 10-K for the year ended December 31, 1995. Stockholder's Investment Stockholder's Investment and Earnings Per Share On April 17, 1996, VSE announced a two for one stock split in the form of a 100% stock dividend payable to stockholders of record as of May 15, 1996. The stock dividend was made on May 22, 1996. All share and per share amounts have been adjusted to give retroactive effect to the increased number of common shares outstanding due to the stock split. Stock Option Plan In February 1996, the company's Stock Option Plan (the "Plan") was adopted by the Board of Directors and approved by the company's stockholders on May 4, 1996. Under the plan, stock options may be granted for up to an aggregate of 218,958 shares of the common stock of the company. The maximum term of the options granted is five years. The option price is equal to the fair market value per share of common stock on the date of grant. The vesting period is three years and allows for 25% vesting immediately upon date of the grant and an additional 25% on each successive anniversary date after the grant date. Vesting may be accelerated for shares granted to certain individuals as deter- mined by the Board of Directors. As of September 30, 1996, options covering 131,380 shares were granted, of which 32,845 shares were exercisable at fair market value of $13.64 per share. FAS 123 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensa- tion" ("FAS 123"). The expense recognition provision encouraged by FAS 123 would require fair-value based financial accounting to recognize compensation expense for employee stock compensation plans. The company has determined that -5- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) it will elect the disclosure-only alternative and accordingly the company will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair value based method. Companies are not required to include pro forma disclosures in interim financial data. The company has not yet determined the impact of these pro forma adjustments. Discontinued Operation On February 7, 1996, VSE sold its wholly owned subsidiary Schmoldt Engineering Services Company ("Schmoldt Engineering"). Under the terms of the transaction, VSE sold all of the outstanding capital stock of Schmoldt Engineering to certain officers of Schmoldt Engineering in exchange for $100 thousand in cash and a $300 thousand promissory note for which principal and interest is payable in monthly installments between March 1, 1996 and September 1, 2001. The transac- tion resulted in a pretax loss of approximately $293 thousand to VSE which was recorded in the first quarter. The consolidated financial statements of the company have been reclassified to report separately the net assets and operating results of the discontinued operations. Financial results for periods prior to the dates of discontinuance have been restated to reflect continuing operations. -6- VSE CORPORATION AND SUBSIDIARIES Management Discussion and Analysis The following table sets forth certain items, including consolidated revenues, pretax income, and net income, and the amount of changes of such items for the three and nine month periods ended September 30, 1996 and 1995 (in thousands).
1996 Compared to Three Months Nine Months 1995 Ended Ended --------------- September 30 September 30 Three Nine 1996 1995 1996 1995 Months Months ------ ------ ------ ------ ------- ------ Revenues, principally from contracts . . $29,664 $20,892 $73,778 $53,702 $ 8,772 $20,076 ====== ====== ====== ====== ====== ====== Pretax income from continuing opera- tions . . . . . . . $ 453 $ 847 $ 2,047 $ 2,110 $ (394) $ (63) Provision for income taxes . . . (25) 339 634 811 (364) (177) ------ ------ ------ ------ ------ ------ Income from continu- ing operations . . 478 508 1,413 1,299 (30) 114 Loss from discontinu- ed operations, net of taxes . . . . . 0 (49) (204) (129) 49 (75) ------ ------ ------ ------ ------ ------ Net income $ 478 $ 459 $ 1,209 $ 1,170 $ 19 $ 39 ====== ====== ====== ====== ====== ======
RESULTS OF OPERATIONS The discussion and analysis which follows is intended to assist in understanding and evaluating the results of continuing operations, financial condition, and certain other matters of VSE Corporation and its wholly owned subsidiaries ("VSE" or the "company"), CMstat Corporation ("CMstat"), acquired in May 1995, Energetics Incorporated ("Energetics"), acquired in August 1995, Human Resource Systems, Inc. ("HRSI"), and Value Systems Services Division ("VSS") and BAV Division ("BAV"), unincorporated divisions of VSE. The company is engaged principally in providing engineering, software development, testing, and management services to the U. S. Government (the "government"). Two other VSE subsidiaries, VSE Corona, Inc. ("VCI") and VSE Services Corporation ("VSES"), have generally been inactive after 1992. Intercompany sales are principally at cost and have been eliminated from the consolidated financial statements. Revenues from continuing operations for the three and nine month periods ending September 30, 1996 increased by approximately 42% and 37%, respectively, com- pared to the same periods of 1995. The increase in revenues is primarily due to the new work performed by BAV in 1996 (see the discussion about the "BAV Contract" below) and to the inclusion of full nine month revenues of CMstat and Energetics in 1996. The increase in revenues was partially offset by the loss of one of VSE's major contracts. (See the discussion about "VSE Navy Contract" below). Income from continuing operations for the nine month period ended September 30, 1996 increased by approximately 9%, compared to the same period ended September 30, 1995. The increase was primarily attributable to the inclusion of nine month income from BAV, CMstat and Energetics in 1996 and the recording of a -7- VSE CORPORATION AND SUBSIDIARIES Management Discussion and Analysis deferred tax asset from the acquisition of CMstat. The increase was partially offset by the reduced profits associated with the loss of the VSE Navy Contract. Net income for the nine month period ended September 30, 1996 increased by approximately 3% compared to the same period ended September 30, 1995. The increase was primarily attributable to the inclusion of nine month income from BAV, CMstat and Energetics in 1996 and the recording of a deferred tax asset from the acquisition of CMstat. The increase was partially offset by the reduced profits associated with the loss of the VSE Navy Contract and the loss from discontinued operations. Income from continuing operations for the three month period ended September 30, 1996 decreased slightly by approximately 6%, compared to the same period ended September 30, 1995. The decrease was due primarily to the timing of profits associated with various contracts. Decreased profits from the VSE Navy Contract were offset by increases in other new contracts, as well as the recording of a deferred tax asset due to the acquisition of CMstat. Net income for the three month period ended September 30, 1996 increased by approximately 4% compared to the same period ended September 30, 1995. The increase was due to the elimination of losses from the discontinued operations in 1995, as well as the recording of a deferred tax asset from the acquisition of CMstat. The largest customer for the services rendered by the company is the U. S. Department of Defense ("Defense"), including agencies of the U. S. Army, Navy, and Air Force. The Defense budget has been restrained by the federal budget deficit in recent years, resulting in increased competition for contracts for the services performed by VSE. There can be no assurance that future reductions in the Defense budget will not have a materially adverse impact on the company's results of operations or financial position. Substantially all of the company's revenues from operations depend on the award of new contracts, on current contracts not being terminated for the convenience of the government, and on the exercise of option periods and the satisfaction of incremental funding requirements on current contracts. In 1996 and 1995 the company did not experience any termination of contracts for the convenience of the government or any non-exercise of option periods on current contracts which were material to the company's results of operations or financial position. BAV Contract. In August 1995, VSE's BAV Division was awarded a contract with the U. S. Navy to provide engineering, technical and logistical support services associated with the sale, lease, or transfer of Navy ships to foreign governments. BAV began work on the contract in September 1995. Work on this contract accounted for approximately 23% of total revenues for the nine month period ended September 30, 1996. This contract has the potential, if all options are exercised, to generate revenues in excess of one billion dollars over a ten year period from 1995 through 2005. VSE Navy Contract. VSE had a contract with the U. S. Navy which accounted for approximately 18% of total revenues for the nine month period ended September 30, 1995. The Navy combined the work performed under this contract with other related work under a new contract, and VSE was not the successful bidder for the new contract. Substantially all work on the contract ended in September 1995. -8- VSE CORPORATION AND SUBSIDIARIES Management Discussion and Analysis Discontinued Operation On February 7, 1996, VSE sold its wholly owned subsidiary Schmoldt Engineering Services Company ("Schmoldt Engineering"). Under the terms of the transaction, VSE sold all of the outstanding capital stock of Schmoldt Engineering to certain officers of Schmoldt Engineering in exchange for $100 thousand cash and a $300 thousand promissory note for which principal and interest are payable in monthly installments between March 1, 1996 and September 1, 2001. The transaction resulted in a pretax loss of approximately $293 thousand to VSE during the first quarter of 1996. Liquidity and Capital Resources A net decrease in cash and cash equivalents of approximately $200 thousand during the nine month period ended September 30, 1996 resulted from approximately $2.4 million provided by financing activities, approximately $1.9 million used in operating activities and approximately $700 thousand used in investing activities. Significant financing activities included borrowing on the company's revolving term loan, including commitments for checks outstanding, of approximately $2.6 million. Significant investing activities included approximately $1.2 million net cash used to purchase property and equipment, which was partially offset by approximately $100 thousand cash and $400 thousand change in net assets provided by the divestiture of Schmoldt Engineering. Cash flows from operating activities declined by approximately $2.8 million as com- pared to the same period of 1995 primarily due to the additional accounts receivable associated with the increasing level of work on the BAV Contract in 1996. A net decrease in cash and cash equivalents of approximately $2.6 million during the nine month period ended September 30, 1995, resulted from approximately $6.9 million used in investing activities, approximately $3.4 million in cash provided by financing activities and approximately $900 thousand provided by operating activities. Significant investing activities included approximately $3.7 million associated with the acquisition of Energetics, $1 million associated with the acquisition of CMstat and approximately $2.5 million used to purchase property and equipment. Significant financing activities included borrowing on the company's revolving term loan, including commitments for checks outstanding, of approximately $3.6 million. The company's principal requirements for cash are to finance the costs of operations pending the collection of accounts receivable, to acquire capital assets for office and computer support, and to pay cash dividends. Performance of work under the BAV contract is expected to substantially increase the company's requirements for cash, however, management believes that the cash flows from operations and the bank loan commitment are adequate to meet current operating cash requirements. VSE's requirements for working capital are affected significantly by its revenues and accounts receivable, which are primarily from billings made by the company to the government or other government prime contractors for services rendered. Such accounts receivable generally do not present liquidity or collection problems. Working capital requirements are also affected by (a) contract retainages, (b) start-up and termination costs associated with new or -9- VSE CORPORATION AND SUBSIDIARIES Management Discussion and Analysis completed contracts, (c) capital equipment requirements, and (d) differences between the provisional billing rates authorized by the government and billable costs actually incurred by the company. Government contracts require VSE to pay for costs included in VSE's contract billings prior to receiving payment for such costs from the government. However, such contracts generally provide for progress payments on a monthly or semimonthly basis, thereby reducing requirements for working capital. Quarterly cash dividends at the rate of $.0425 per share were declared during the three month periods ended March 31, June 30, and September 30, 1996. Pursuant to its bank loan agreement, the payment of cash dividends by VSE is subject to a maximum annual rate. VSE has paid cash dividends since 1973. Inflation and Pricing Policy Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The impact of inflation on replacement costs of such property and equipment is expected to be insignificant. -10- VSE CORPORATION AND SUBSIDIARIES PART II. Other Information Item 5. Other Information. On October 18, 1996, the Registrant filed a Form 11-K containing audited financial statements for the VSE Corporation Employee ESOP/401(k) Plan for the plan years ended December 27, 1995 and 1994. On October 31, 1996, the Registrant filed a Form S-3 covering the potential sale of up to 200,000 shares of VSE Common Stock ($.05 par value) to meet employee benefit plan obligations under the VSE Corporation Employee ESOP/401(k) Plan. On October 31, 1996, the Registrant filed a Form S-8 covering up to 218,996 new shares of VSE Common Stock ($.05 par value) which may be issued on exercise of option agreements under the VSE Corporation 1996 Stock Option Plan. On October 31, 1996, the Registrant filed a Form S-8 covering up to 100,000 shares of VSE Common Stock ($.05 par value) owned by the VSE Corporation Employee ESOP/401(k) Plan. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (11) Statement regarding computation of per share earnings. Reference is made to the "Consolidated Statements of Income" included in Part I of this Form 10-Q on the computation of per share earnings. (b) Reports on Form 8-K. No current reports on Form 8-K were filed by the Registrant during the three month period ended September 30, 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has omitted all other items contained in "Part II. Other Informa- tion" because such other items are not applicable or are not required if the answer is negative or because the information required to be reported therein has been previously reported. -11- VSE CORPORATION AND SUBSIDIARIES 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. VSE CORPORATION /s/ C. S. WEBER Date: November 14, 1996 _____________________________________ C. S. Weber, Senior Vice President, Secretary and Treasurer (Principal Financial Officer) /s/ T. J. CORRIDON Date: November 14, 1996 _____________________________________ T. J. Corridon, Senior Vice President and Comptroller (Principal Accounting Officer) The financial information included in this report reflects all known adjustments normally determined or settled at year-end which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. The accompanying notes to consolidated financial statements are an integral part of this report. -12-