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