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, 1998 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, 1998: 2,186,905.
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
March 31, December 31,
1998 1997
--------- ------------
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 15 $ 15
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 26,575 24,650
Deferred tax assets . . . . . . . . . . . . . . . 454 899
Other current assets . . . . . . . . . . . . . . . 1,659 1,322
-------- --------
Total current assets . . . . . . . . . . . . . . 28,703 26,886
Property and equipment, net . . . . . . . . . . . . 4,798 5,034
Deferred tax assets . . . . . . . . . . . . . . . . 217 309
Intangible assets, net . . . . . . . . . . . . . . . 3,032 3,117
Other assets . . . . . . . . . . . . . . . . . . . . 2,932 2,702
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 39,682 $ 38,048
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 889 $ 555
Accounts payable and other current liabilities . . 11,684 10,184
Accrued expenses . . . . . . . . . . . . . . . . 5,741 6,152
Dividends payable . . . . . . . . . . . . . . . . 78 78
-------- --------
Total current liabilities . . . . . . . . . . . 18,392 16,969
Long-term debt . . . . . . . . . . . . . . . . . . . 6,949 7,108
Deferred compensation . . . . . . . . . . . . . . . 1,559 1,490
-------- --------
Total liabilities . . . . . . . . . . . . . . . 26,900 25,567
======== ========
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,186,905 shares in 1998
and 2,165,405 in 1997 . . . . . . . . . . . . . 109 108
Paid-in surplus . . . . . . . . . . . . . . . . . 3,832 3,631
Retained earnings . . . . . . . . . . . . . . . . 9,521 9,422
ESOP obligation . . . . . . . . . . . . . . . . . (680) (680)
-------- --------
Total stockholders' investment . . . . . . . . . 12,782 12,481
-------- --------
Total liabilities and stockholders' investment . $ 39,682 $ 38,048
======== ========
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three months ended March 31,
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
1998 1997
--------- ---------
Revenues, principally from contracts . . . . . . . . . $ 41,664 $ 47,494
Costs and expenses of contracts . . . . . . . . . . . . 41,023 47,352
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 641 142
Selling, general and administrative expenses . . . . . 208 480
Interest expense . . . . . . . . . . . . . . . . . . . 101 146
--------- ---------
Pretax income (loss). . . . . . . . . . . . . . . . . . 332 (484)
Provision (benefit) for income taxes . . . . . . . . . 154 (207)
--------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 178 $ (277)
========= =========
Weighted average shares outstanding: 2,181,530 2,145,574
========= =========
Basic earnings (loss) per share: . . . . . . . . . . . $ 0.08 $ (0.13)
========= =========
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the three months ended March 31,
- ------------------------------------------------------------------------------
(in thousands)
1998 1997
------- -------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 178 $ (277)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 440 574
Deferred compensation plan expense . . . . . . . . . . 38 0
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (1,925) 3,940
Other current assets and noncurrent assets . . . . . (567) (1,508)
Deferred taxes, net . . . . . . . . . . . . . . . . 537 404
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . 1,472 (3,567)
Accrued expenses. . . . . . . . . . . . . . . . . . . (411) 408
------- -------
Net cash used in operating activities (238) (26)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . . (119) (455)
Capitalized software development costs . . . . . . . . . . 0 (94)
Net proceeds from (payments of)deferred compensation . . . 59 (59)
------- -------
Net cash used in investing activities (60) (608)
------- -------
Cash flows from financing activities:
Net proceeds from revolving term loan . . . . . . . . . . 175 641
Stock grants . . . . . . . . . . . . . . . . . . . . . . 202 0
Cash dividends paid . . . . . . . . . . . . . . . . . . . (79) (78)
------- -------
Net cash provided by financing activities 298 563
------- -------
Net decrease in cash and cash equivalents . . . . . . . . . 0 (71)
Cash and cash equivalents at beginning of period . . . . 15 453
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 15 $ 382
======= =======
PAGE
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,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 requires a company to report comprehensive income and
its components in financial statements. The company adopted the provisions of
the standard during the first quarter of 1998. There were no differences
between comprehensive income and historical net income reported by the company.
Debt
VSE has a loan agreement with a syndicate of three banks that contains certain
financial covenants. As of December 31, 1997 and March 31, 1998, the company
did not meet the cash flow coverage ratio covenant, however, a waiver was
issued with regard to this covenant for the period ended December 31, 1997 and
the company was not in default on the loan.
Additionally, the lead bank has notified management that the related covenant
will be amended for 1998.
PAGE
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
management, the resolution of these claims will not have a material adverse
effect on the company's results of operations or financial position.
Segment Information
VSE has two reportable segments: the engineering, logistics, management, and
technical services segment which provides diversified engineering, technical,
and management services ("ELMTS"), principally to agencies of the United States
Government and to other government prime contractors; and the software products
and services segment, which provides application software and services ("SPS")
related to the installation of the software to primarily commercial customers.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different technology and
marketing strategies. The software products and services segment was acquired
as a unit, and the management has been maintained separately since the
acquisition.
The following table presents revenues and other financial information by
business segment for the periods ended March 31, 1998 and March 31, 1997, in
thousands:
March 31, 1998 ELMTS SPS Eliminations Total
- -----------------------------------------------------------------------------
Revenues from unaffiliated
customers $ 40,831 $ 833 $ $41,664
Interest expense 0 101 101
Depreciation and amortization 380 60 440
Operating income (loss) 938 (606) 332
Expenditures for capital assets 115 6 121
March 31, 1997 ELMTS SPS Eliminations Total
- -----------------------------------------------------------------------------
Revenues from unaffiliated
customers $ 46,822 $ 672 $ $47,494
Interest expense 82 64 146
Depreciation and amortization 366 208 574
Operating income (loss) 993 (1,477) (484)
Expenditures for capital assets 252 301 553
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE and its subsidiaries and divisions operate in two segments: the
engineering, logistics, management and technical services segment and the soft-
ware products and services segment.
Engineering, logistics, management and technical services including information
technology services are provided by VSE and by each of its subsidiaries and
divisions including Energetics Incorporated ("Energetics"), Human Resource
Systems, Inc. ("HRSI"), and BAV Division ("BAV"), Indian Head Division
("Ordnance"), and Value Systems Services Division ("VSS"), unincorporated
divisions of VSE. Two other VSE subsidiaries, VSE Corona, Inc. ("VCI") and VSE
Services Corporation ("VSES") have generally been inactive since 1992.
Software products and services are the primary business of VSE's subsidiary
CMstat Corporation ("CMstat").
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the amount of changes of such items of VSE
segments for the three month periods ended March 31, 1998 and 1997 (in
thousands).
1998
Compared
to
1998 1997 1997
------- ------- -------
Engineering, Logistics, Management and
Technical Services Segment:
Revenues . . . . . . . . . . . . . . . . . . $40,831 $46,822 $(5,991)
======= ======= =======
Pretax income . . . . . . . . . . . . . . . $ 938 $ 993 $ (55)
Provision for income taxes . . . . . . . . . 441 424 17
------- ------- -------
Net income . . . . . . . . . . . . . . . . $ 497 $ 569 $ (72)
======= ======= =======
Software Products and Services Segment:
Revenues . . . . . . . . . . . . . . . . . . $ 833 $ 672 $ 161
======= ======= =======
Pretax (loss) . . . . . . . . . . . . . . . $ (606) $(1,477) $ 871
Benefit for income taxes . . . . . . . . . . (287) (631) 344
------- ------- -------
Net (loss) . . . . . . . . . . . . . . . . . $ (319) $ (846) $ 527
======= ======= =======
RESULTS OF OPERATIONS
The discussion and analysis which follows is intended to assist in understanding
and evaluating the results of operations, financial condition, and certain other
matters of the company. The company is engaged principally in providing
engineering, software development, testing, and management services to the U.S.
Government (the "government"). All significant intercompany transactions have
been eliminated in consolidation. Certain prior year balances have been
reclassified for comparative purposes.
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Engineering, Logistics, Management and Technical Services Segment
Revenues for this segment for the three month period ending March 31, 1998
decreased by approximately 13% as compared to the same period of 1997. The
decrease in revenues is primarily due to a decrease in work performed by BAV in
1998. See the discussion about the BAV Contract below. Pretax income for
this segment decreased by approximately 5% for the three month period ended
March 31, 1998 as compared to the same period of 1997 due primarily to the
decrease in work performed by BAV in 1998.
The largest customer for the engineering, logistics, management and technical
services rendered by the company is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Army, Navy, and Air Force. VSE's
engineering services revenues have historically been subject to year to year
fluctuations resulting from changes in the level of Defense spending. The
Defense budget has been restrained by the federal budget deficit in recent
years, and there can be no assurance that future reductions in the Defense
budget will not have a material adverse impact on the company's results of
operations or financial position.
Substantially all of the company's revenues from this segment 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 1998
and 1997, the company did not experience any termination of contracts for the
convenience of the government nor 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. 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. The
contract accounted for approximately 53% and 60% of consolidated revenues from
operations during the three month period ended March 31, 1998 and 1997,
respectively. The level of revenues generated by this contract will vary
depending on a number of factors including the timing of ship transfers and
associated support services ordered by foreign governments and economic
conditions of potential customers worldwide. The company has experienced
significant quarterly revenue fluctuations and anticipates that future quarterly
revenues will be subject to significant variations primarily due to this
contract.
Software Products and Services Segment
Revenues for this segment for the three month period ending March 31, 1998
increased by about 24% as compared to the same period of 1997. The increase in
revenues is due to increases in both product sales and consulting services
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
related to the installation and implementation of CMstat products. Pretax loss
for this segment was reduced by approximately 59% for the three month period
ended March 31, 1998 as compared to the same period of 1997. The reduced loss
is primarily due to the increased level of revenues and to operating cost
reduction efforts implemented by management. The profitability of this segment
is dependent upon CMstat's sales. While management believes that CMstat will
generate sufficient future revenues, failure to do so could adversely affect
the company's results of operations.
The company expects that it will experience significant fluctuations in
quarterly 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 activities 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 operating results
could also be affected by general economic conditions. In addition, the
decision to license and implement an enterprise-level business software system
is usually discretionary, involves a significant commitment of customer
resources and is subject to delays, and to budget cycles and internal authoriza-
tion procedures of CMstat's customers. The loss or delay of individual orders
could have a significant impact on CMstat's operating results, particularly 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 transactions 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. The mix of revenues between these two components can
fluctuate materially from quarter to quarter, and such fluctuations can have a
significant effect on margins. Should lower margin service revenues 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.
The company's 1998 quarterly operating results are not a good indicator of
future quarterly results.
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Liquidity and Capital Resources
Cash and cash equivalents remained unchanged during the three month period ended
March 31, 1998. Cash provided by financing activities of approximately $298
thousand was used to finance approximately $238 thousand in operating activities
and approximately $60 thousand in investing activities. Significant financing
activities included increased borrowing on the company's revolving loan,
including commitments for checks outstanding, of approximately $175 thousand.
Significant investing activities included purchases of property and equipment of
approximately $119 thousand. Cash flows used in operating activities during
this period increased by approximately $212 thousand as compared to the same
period of 1997 due primarily to increases in accounts receivable, which were
partially offset by increases in accounts payable and net income.
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.
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
retainages, (b) start-up and termination costs associated with new or complete
contracts, (c) 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-
ments for working capital.
Quarterly cash dividends at the rate of $.036 per share were declared during the
three month period ended March 31, 1998. 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 each year since 1973.
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
ESOP Advances
During 1997 and 1996, the company advanced the ESOP trust $330 thousand and $350
thousand, respectively, in connection with distributions made to terminated
participants. In April, 1998, the company advanced the ESOP trust an additional
$200 thousand. The advances are payable to the company when the funds become
available. As of March 31, 1998, the ESOP trust held approximately 52,000
unallocated shares of the company's common stock related to these transactions.
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 overall impact of
inflation on replacement costs of such property and equipment is expected to be
insignificant.
Global Economic Conditions
VSE's business is subject to the risks associated with global economic
conditions associated with potential foreign customers served through VSE s
contracts with the U.S. Government. For example, the reported economic slowdown
of certain countries located in Southeast Asia could potentially affect BAV
sales. Management is unable to predict what, if any, impact such conditions may
have on the company's financial position or results of operations.
Year 2000
The company has assessed the impact of the Year 2000 issues on its systems and
operations and does not believe Iit will have a material impact on the financial
position or the results of operations of the company.
Market Risk
The company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at March 31,
1998.
Forward Looking Statements
This filing contains statements which, to the extent they are not recitations of
historical fact, constitute "forward looking statements" under federal
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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, 1997 (Form 10-K), including the discussions captioned "Change and
Challenges"; "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 1997 Annual Report incorporated by reference
and attached to VSE's Form 10-K filing.
PAGE
VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On April 7, 1998, the Registrant filed a Current Report on Form 8-K
reporting the Consent of Independent Public Accountants for the incorporation of
their reports included and incorporated by reference in the Registrant's Form
10-K for the year ended December 31, 1997, in the Registrant's previously filed
Registration Statement File Numbers 333-15307, 333-15309, and 333-15311.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has omitted all other items contained in "Part II. Other
Information" 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.
PAGE
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 14, 1998 -----------------------------------
C. S. Weber, Senior Vice President,
Secretary and Treasurer
(Principal Financial Officer)
/s/ T. J. CORRIDON
Date: May 14, 1998 -------------------------------------
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.
PAGE