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 March 31, 1997 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 May 1, 1997: 1,738,334.
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 382 $ 453
Accounts receivable, principally
U. S. Government, net . . . . . . . . . . . . . 29,767 33,707
Deferred tax assets . . . . . . . . . . . . . . . 13 435
Other current assets . . . . . . . . . . . . . . . 3,171 1,916
-------- --------
Total current assets . . . . . . . . . . . . . . 33,333 36,511
Property and equipment, net . . . . . . . . . . . . 5,244 5,145
Capitalized software development costs, net . . . . 927 966
Intangible assets, net . . . . . . . . . . . . . . . 3,325 3,409
Other assets . . . . . . . . . . . . . . . . . . . . 2,562 2,310
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 45,391 $ 48,341
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable and other current liabilities . . $ 9,889 $ 13,508
Accrued expenses . . . . . . . . . . . . . . . . 6,249 5,841
Dividends payable . . . . . . . . . . . . . . . . 78 78
-------- --------
Total current liabilities . . . . . . . . . . . 16,216 19,427
Long-term debt . . . . . . . . . . . . . . . . . . . 13,292 12,651
Deferred tax liabilities . . . . . . . . . . . . . . 536 554
Deferred compensation . . . . . . . . . . . . . . . 1,107 1,114
-------- --------
Total liabilities . . . . . . . . . . . . . . . 31,151 33,746
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 3,908,088 shares . . . 195 195
Paid-in surplus . . . . . . . . . . . . . . . . . 8,241 8,241
Retained earnings . . . . . . . . . . . . . . . . 22,485 22,840
ESOP obligation . . . . . . . . . . . . . . . . . (350) (350)
Unrealized loss on available-for-sale security . . (46) (46)
Treasury stock, at cost (2,169,754 shares) . . . . (16,285) (16,285)
-------- --------
Total stockholders' investment . . . . . . . . . 14,240 14,595
-------- --------
Total liabilities and stockholders' investment . $ 45,391 $ 48,341
======== ========
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three months ended March 31,
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
1997 1996
---- ----
Revenues, principally from contracts . . . . . . . . . $ 47,494 $ 19,638
Costs and expenses of contracts . . . . . . . . . . . . 47,352 18,484
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 142 1,154
Selling, general and administrative expenses . . . . . 480 197
Interest expense . . . . . . . . . . . . . . . . . . . 146 142
--------- ---------
Pretax income (loss) from continuing operations . . . . (484) 815
Provision (benefit) for income taxes . . . . . . . . . (207) 347
--------- ---------
Income (loss) from continuing operations . . . . . . . (277) 468
Discontinued operations, net of tax:
Loss from operations (net of tax benefit of
$14 in 1996) . . . . . . . . . . . . . . . . . . . 0 (25)
Loss on disposal (net of tax benefit of $118) . . . . 0 (179)
--------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . $ (277) $ 264
========= =========
Earnings per common share, based on weighted
average shares outstanding:
Income (loss) from continuing operations . . . . . . $ (.16) $ .27
Loss from discontinued operations . . . . . . . . . . 0 (.12)
--------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . $ (.16) $ .15
========= =========
Weighted average shares outstanding 1,716,459 1,738,334
========= =========
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- -------------------------------------------------------------------------------------------------
(in thousands)
Unrealized
Loss on
Available-
Common Stock Paid-In Retained Treasury ESOP for-Sale-
Shares Amount Surplus Earnings Stock Obligation Securities
------ ------ ------- -------- -------- ---------- ----------
Balance at
December 31, 1995 . . . 1,954 $ 98 $8,338 $21,402 $(16,285) $ 0 $ 0
Net income
for the year . . . . . -- -- -- 1,742 -- -- --
ESOP obligation . . . . . -- -- -- -- -- (350) --
Stock split effected in
the form of a 100%
stock dividend . . . . 1,954 97 (97) -- -- -- --
Unrealized loss
on marketable
securities . . . . . . -- -- -- -- -- -- (46)
Dividends declared
($.1725) . . . . . . . -- -- -- (304) -- -- --
----- ---- ------ ------- ------- ----- ----
Balance at
December 31, 1996 . . . 3,908 195 8,241 22,840 (16,285) (350) (46)
Net loss
for the period . . . . -- -- -- (277) -- -- --
Dividends declared
($.045) . . . . . . . . -- -- -- (78) -- -- --
----- ---- ------ ------- ------- ----- ----
Balance at
March 31, 1997 . . . . 3,908 $195 $8,241 $22,485 $(16,285) $(350) $(46)
===== ==== ====== ======= ======== ===== ====
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the three months ended March 31,
- ------------------------------------------------------------------------------
(in thousands)
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ (277) $ 264
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Depreciation and amortization . . . . . . . . . . . . . 489 342
Discontinued operations . . . . . . . . . . . . . . . . 0 204
Deferred compensation plan expense . . . . . . . . . . 0 30
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 3,940 (1,515)
Other current assets and noncurrent assets . . . . . (1,423) (762)
Deferred taxes, net . . . . . . . . . . . . . . . . 404 307
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . (3,567) 335
Accrued expenses. . . . . . . . . . . . . . . . . . . 408 (131)
------- -------
Net cash used in continuing operations . . . . . . (26) (926)
Net cash used in discontinued operations . . . . . 0 (25)
------- -------
Net cash used in operating activities (26) (951)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions). . . . . . . . . . . . . . . . . . (455) (520)
Capitalized software development costs . . . . . . . . . (94) 0
Net payments of deferred compensation . . . . . . . . . . (59) 0
Net proceeds from sale of Schmoldt Engineering . . . . . 0 100
Change in net assets of discontinued operations . . . . . 0 440
------- -------
Net cash (used in) provided by investing activities (608) 20
------- -------
Cash flows from financing activities:
Net proceeds from revolving term loan . . . . . . . . . . 641 1,306
Cash dividends paid . . . . . . . . . . . . . . . . . . . (78) (74)
------- -------
Net cash provided by financing activities 563 1,232
------- -------
Net increase (decrease) in cash and cash equivalents . . . (71) 301
Cash and cash equivalents at beginning of period . . . . 453 601
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 382 $ 902
======= =======
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 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 three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information refer to the consoli-
dated financial statements and footnotes thereto included in the VSE Corporation
Annual Report on Form 10-K for the year ended December 31, 1996.
Use of Estimates in the Preparation of Financial Statements
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.
Actual results could differ from those estimates.
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128") which
supersedes Accounting Principles Board Opinion No. 15. FAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock. The objective of FAS 128
is to simplify the computation of EPS and to make the U. S. Standard for com-
puting EPS more compatible with international EPS computations. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. The company will be required to adopt FAS 128 in the fourth quarter of
1997 and does not expect the adoption to have a material impact on the
company's EPS.
Litigation
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of manage-
ment, the resolution of these claims will not have a material adverse effect on
the company's results of operations or financial position.
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 month periods ended March 31, 1997 and 1996 (in thousands).
1997
Compared
to
1997 1996 1996
------- ------- -------
Revenues from continuing operations . . . . $47,494 $19,638 $27,856
======= ======= =======
Pretax income (loss) from continuing
operations . . . . . . . . . . . . . . . . $ (484) $ 815 $(1,299)
Provision (benefit) for income taxes . . . . (207) 347 (554)
------- ------- -------
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . (277) 468 (745)
(Loss) from discontinued operations,
net of taxes. . . . . . . . . . . . . . . . 0 (204) 204
------- ------- -------
Net income (loss) . . . . . . . . . . . . . $ (277) $ 264 $ (541)
======= ======= =======
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"), Energetics Incorporated
("Energetics"), 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 since 1992. Inter-
company sales are principally at cost. All significant intercompany transac-
tions have been eliminated in consolidation. Certain prior year balances have
been reclassified for comparative purposes.
Revenues for the three month period ended March 31, 1997 increased by
approximately 142% compared to the same period of 1996. The increase in
revenues is primarily due to an increase in work performed by BAV in 1997.
See the discussion about the "BAV Contract" below. The level of revenues
generated by the BAV Contract will vary depending on the timing of ship trans-
fers and associated support services ordered by foreign governments. The level
of BAV contract revenues experienced during this period is not necessarily
indicative of the levels to be expected every three month period.
The company had a net loss from continuing operations for the three month period
ended March 31, 1997 of approximately $277 thousand as compared to net income
from continuing operations of approximately $468 thousand for the same period of
1996. The loss was due almost entirely to the pretax operating loss of
approximately $1.6 million experienced by CMstat during this period. CMstat
experienced diminished revenues due to lower software sales and higher operating
costs incurred in anticipation of future revenue growth. Cost reduction efforts
have been implemented to reduce CMstat's operating cost levels and management
believes that future CMstat sales will return to a level commensurate with
operating expenses. The company's loss from continuing operations was partially
offset by profits generated by the company's other businesses.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
The largest customer for the engineering 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. 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 1997 and 1996 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.
The company expects that it will experience significant fluctuations in quar-
terly operating results due largely to the nature of CMstat's business.
CMstat's future operating results will depend upon a number of factors,
including the demand for its products, the size and timing of specific sales,
the delay or deferral of customer implementations, the level of product and
price competition that it encounters, the length of its sales cycles, the
successful expansion of its direct sales force and customer support organiza-
tion, the timing of new product introductions and product enhancements by
CMstat and its competitors, the mix of products and services sold, the activ-
ities of and acquisitions by its competitors, the timing of new hires and its
ability to develop and market new products and control costs. CMstat's opera-
ting results could also be affected by general economic conditions. In addi-
tion, the decision to license and implement an enterprise-level business soft-
ware system is usually discretionary, involves a significant commitment of
customer resources and is subject to delays, and to budget cycles and internal
authorization procedures of CMstat's customers. The loss or delay of individual
orders could have a significant impact on CMstat's operating results, particu-
larly on a quarterly basis. Furthermore, while CMstat's revenue from license
fees is difficult to predict because of the length and variability of CMstat's
sales cycles, CMstat's operating expenses are based on anticipated revenue
trends. Because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of license transac-
tions could cause significant variations in operating results from quarter to
quarter. To the extent such expenses precede, or are not subsequently followed
by, anticipated revenue, the Company's operating results could be materially
and adversely affected.
CMstat derives substantially greater profit margins from license fees than from
service revenues or from third-party equipment and software. The mix of
revenues among these three components can fluctuate materially from quarter to
quarter, and such fluctuations can have a significant effect on margins. Over
the past year, the percentage of the company's total revenues represented by
service revenues has increased slightly. Should lower margin service revenues
or revenues from third-party equipment and software increase in the future as a
percentage of the company's total revenues, CMstat's margins and income from
operations could be adversely affected.
As a result of these and other factors, the company's operating results for any
quarter are subject to significant variation, and the company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
It is likely that the company's future quarterly operating results from time to
time may not be consistent with 1996 quarterly results.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
BAV Contract. VSE's BAV Division provides services under a U. S. Navy contract
for engineering, technical and logistical support services associated with the
sale, lease, or transfer of Navy ships to foreign governments. Work on this
contract accounted for approximately 60% of consolidated revenues for the three
month period ended March 31, 1997 and approximately 9% of consolidated revenues
for the three month period ended March 31, 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.
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
installments between March 1, 1996 and September 1, 2001. The transaction
resulted in a net loss of approximately $200 thousand to VSE.
Liquidity and Capital Resources
A net decrease in cash and cash equivalents of approximately $71 thousand during
the three month period ended March 31, 1997 resulted from approximately $608
thousand used in investing activities, approximately $563 thousand provided by
financing activities, and approximately $26 thousand used in operating
activities. Significant investing activities included approximately $455
thousand associated with the purchase of property and equipment. Significant
financing activities included increased borrowing on the company's revolving
term loan, including commitments for checks outstanding, of approximately $641
thousand. Significant operating activities affecting cash flows included the
operating loss in CMstat and fluctuations in BAV contract activity that
resulted in cash used to decrease accounts payable, which was offset partially
by cash provided by decreased accounts receivable.
A net increase in cash and cash equivalents of approximately $301 thousand
during the three month period ending March 31, 1996 resulted from approximately
$1.2 million provided by financing activities, approximately $951 thousand used
in operating activities, and approximately $20 thousand provided by investing
activities. Significant financing activities included increased borrowing on
the company's revolving term loan, including commitments for checks outstanding,
of approximately $1.3 million. Significant investing activities included
approximately $520 thousand used to purchase property and equipment, which was
offset by $100 thousand cash and $400 thousand change in net assets provided by
the divestiture of Schmoldt Engineering.
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 has increased 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 is also affected by (a) contract retain-
ages, (b) start-up and termination costs associated with new or complete
contracts, (c)
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
capital equipment requirements, and (d) differences between the provisional
billing rates authorized by the government compared to the costs actually
incurred by the company.
Government contracts generally require VSE to pay for material and subcontract
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 require-
for working capital.
Quarterly cash dividends at the rate of $.045 per share were declared during
the three month period ended March 31, 1997. Pursuant to its bank loan agree-
ment, the payment of cash dividends by VSE is subject to a maximum annual rate.
VSE has paid cash dividends each year 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 reimburs-
able at cost.
VSE property and equipment consists principally of computer systems equipment
and furniture and fixtures. The overall impact of inflation on replacement
costs of such property and equipment is expected to be insignificant.
Forward Looking Statements
This contains statements which, to the extent they are not recitations of
historical fact, constitute "forward looking statements" under federal
securities laws. All such statements are intended to be subject to the safe
harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual VSE results to
differ materially from those anticipated in the forward looking statements
contained in this statement, see VSE's Securities and Exchange Commission
filings including, but not limited to, VSE's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (Form 10-K), including the discussions
captioned "Future Plans"; "Backlog" and "Competition and Risks"; and "Income
from Continuing Operations Before Income Taxes" contained respectively in VSE's
"Letter to Stockholders"; "Description of Business"; and "Management Discussion
and Analysis" in the VSE Corporation 1996 Annual Report incorporated by refer-
ence and attached to VSE's Form 10-K filing.
VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
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 March 31, 1997.
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.
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: May 15, 1997 -------------------------------------
C. S. Weber, Senior Vice President,
Secretary and Treasurer
(Principal Financial Officer)
/s/ T. J. CORRIDON
Date: May 15, 1997 -------------------------------------
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.