SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of March 1, 1997 was approximately $11 Million.
Number of shares of Common Stock outstanding as of March 1, 1997: 1,738,334.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1996 Annual Report to Stockholders for the year
ended December 31, 1996, are incorporated into Parts I and II of this report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 10, 1997, are incorporated by reference
into Part III of this report.
<PAGE>
PART I
ITEM 1. Business
Refer to the discussions captioned "Letter to Stockholders", "A Growing
Company" and "Description of Business" in VSE Corporation's ("VSE" or the
"Registrant") 1996 Annual Report which is incorporated herein by reference.
ITEM 2. Properties
Refer to the discussion captioned "Description of Business" in VSE's 1996
Annual Report which is incorporated herein by reference.
ITEM 3. Legal Proceedings
Refer to Note 9 (Commitments and Contingencies - Litigation) of the "Notes
to Consolidated Financial Statements" in VSE's 1996 Annual Report which is
incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Stockholders
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Refer to discussion captioned "VSE Common Stock" in VSE's 1996 Annual
Report which is incorporated herein by reference.
ITEM 6. Selected Financial Data
Refer to table captioned "Financial Highlights" in VSE's 1996 Annual Report
which is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Refer to discussion captioned "Management Discussion and Analysis" in VSE's
1996 Annual Report which is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
Refer to section captioned "Consolidated Financial Statements" and "Notes
to Consolidated Financial Statements" in VSE's 1996 Annual Report which is
incorporated herein by reference. Also refer to the schedule on page S-1 of
this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to VSE Directors is incorporated by reference to
VSE's definitive proxy statement for its annual meeting of stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after December 31, 1996. The
executive officers are chosen annually at the board of directors meeting next
following the annual meetings of stockholders and serve until their successors
have been duly elected and qualified, or until resignation or removal. Also
refer to section captioned "Executive Officers" in VSE's 1996 Annual Report
which is incorporated herein by reference.
ITEM 11. Executive Compensation
Information with respect to this item is incorporated by reference from the
Proxy Statement discussions captioned "Certain Relationships and Related
Transactions," "Compensation Committee Report," "Summary Compensation Table,"
"Option Grants in Last Fiscal Year," and "Aggregate Options Exercised in Last
Fiscal Year and Fiscal Year-End Option Values."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item is incorporated by reference to the
discussion captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to this item is incorporated by reference to the
discussion captioned "Certain Relationships and Related Transactions" in Item
No.1 (Election of Directors) in the Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements from VSE's 1996 Annual Report to Stockholders
which is incorporated herein by reference:
Report of Independent Public Accountants
In section captioned "Consolidated Financial Statements":
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Investment for the Years
Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
2. Financial Statement schedules required to be filed by Item 8 of this
Form:
Form 10-K Schedule
Page Number Description
5 -- Report of Independent Public Accountants
S-1 II Valuation and Qualifying Accounts
<PAGE>
Schedules not included herein have been omitted because of the absence of
conditions under which they are required.
3. Exhibits:
Information with respect to exhibits is contained at page E-1
Exhibit Index.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 31, 1997 By: /s/ C. S. Weber
C. S. Weber, Senior Vice President,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 18, 1997, by the following persons
on behalf of the Registrant and in the capacities indicated.
(a) Principal Executive Officers:
/s/ D. M. Ervine
D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ R. B. McFarland
R. B. McFarland, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. J. Corridon
C.S. Weber, Senior Vice President, T. J. Corridon, Senior Vice
Secretary and Treasurer President and Comptroller
(d) Directors:
/s/ D. M. Ervine /s/ R. B. McFarland
D. M. Ervine R. B. McFarland
/s/ R. J. Kelly /s/ D. M. Osnos
R. J. Kelly D. M. Osnos
/s/ C. S. Koonce /s/ J. D. Ross
C. S. Koonce J. D. Ross
/s/ J. M. Marchello /s/ B. K. Wachtel
J. M. Marchello B. K. Wachtel
<PAGE>
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in VSE Corporation's
annual report to stockholders incorporated by reference in this Form 10-K and
have issued our report thereon dated March 24, 1997. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
Schedule II listed in the index is the responsibility of the company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states,
in all material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 24, 1997
<PAGE>
<PAGE>
<TABLE>
VSE CORPORATION AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Charged Additions
Against to and
Balance (Added Deductions Balance
December 31, to) from December 31,
Description 1995 Income Reserves 1996
- ----------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $ 160 $ 0 $ 0 $ 160
====== ======= ======= ========
Allowance for contract
disallowances $ 1,349 $ (1,044) $ (29) $ 276
======= ======= ======= ========
Valuation allowance
for income taxes $ 50 $ 0 $ 0 $ 50
====== ======= ======= ========
Charged Additions
Against to and
Balance (Added Deductions Balance
December 31, to) from December 31,
Description 1994 Income Reserves 1995
- ----------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $ 247 $ (87) $ 0 $ 160
====== ======= ======= ========
Allowance for contract
disallowances $ 1,338 $ (651) $ 662 $ 1,349
====== ======= ======= ========
Valuation allowance
for income taxes $ 50 $ 0 $ 0 $ 50
====== ======= ======= ========
Charged Additions
Against to and
Balance (Added Deductions Balance
December 31, to) from December 31,
Description 1993 Income Reserves 1994
- ----------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $ 251 $ 0 $ (4) $ 247
====== ======= ======= ========
Allowance for contract
disallowances $ 1,384 $ 0 $ (46) $ 1,338
====== ======= ======= ========
Valuation allowance
for income taxes $ 50 $ 0 $ 0 $ 50
====== ======= ======= ========
S-1
</TABLE>
<PAGE>
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- ------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Exchange Agreement dated as of March 25, 1992,
amended as of September 1, 1992, by and between VSE
Corporation and JBT Holding Corp., et al. (Exhibit A
to Exhibit 1, Proxy Statement, filed on
Form 8-K on November 2, 1992) *
3 Articles of incorporation and by-laws
Restated Certificate of Incorporation of VSE
Corporation dated as of February 6, 1996 *
By-Laws of VSE Corporation as amended through
February 6, 1996 *
4 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2). *
9 Voting trust agreement Not Applicable
10 Material contracts
Employment Agreement entered into as of January 1,
1996, by and between VSE Corporation and
Donald M. Ervine *
Employment Agreement entered into as of January 1,
1996, by and between VSE Corporation and
Richard B. McFarland *
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Stock Option Plan dated May 4, 1996
11 Statement re computation of per share earnings Exhibit III
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or quarterly report to security holders Exhibit II
16 Letter re change in certifying accountant Not Applicable
18 Letter re change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
21 Subsidiaries of the registrant Exhibit I
22 Published report regarding matters submitted
to vote of security holders Not Applicable
23 Consents of experts and counsel Exhibit IV
24 Power of attorney Not Applicable
99 Additional exhibits Not Applicable
28 Information from reports furnished to State
insurance regulatory authorities Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
E-1
<PAGE>
EXHIBIT I
SUBSIDIARIES OF THE REGISTRANT
The following is a listing of the subsidiaries of the Registrant:
Jurisdiction of
Organization
---------------
CMstat Corporation Delaware
Energetics Incorporated Maryland
Human Resource Systems, Inc. Delaware
VSE Corona, Inc. Delaware
VSE Services Corporation Delaware
E-2
<PAGE>
Exhibit II
VSE Corporation
1996 Annual Report
<PAGE>
<PAGE>
Contents
Financial Highlights 1
Letter from the Chairman/CEO & President/COO 2
A Growing Company 4
Description of Business 12
Management Discussion and Analysis 18
Executive Officers 23
VSE Common Stock 23
Report of Independent Public Accountants 24
Consolidated Financial Statements 25
Notes to Consolidated Financial Statements 29
Selected Quarterly Data 38
Form 10-K 39
Form 10-K Cross-Reference Index 40
Officers and Directors 41
Corporate Profile
VSE Corporation is a professional services company established in 1959. VSE
provides diversified services and products to the engineering, energy and
environment, health care, information technology, and defense services
markets. The company's principal customers are agencies of the U.S.
Government and other government prime contractors. VSE's subsidiaries and
divisions include BAV, CMstat Corporation, Energetics Incorporated, Human
Resource Systems, Inc., VSE Services Corporation, Value Systems Services, and
from July 1990 through February 6, 1996, Schmoldt Engineering Services
Company. The company provides products and services to customers from more
than 20 locations across the United States.
Corporate Address
VSE's principal executive offices are located at 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499. The telephone number is (703) 960-4600. The
telecopier number is (703) 960-2688. The company's Worldwide Web address is
http://www.vsecorp.com.
Annual Meeting of Stockholders
VSE's Annual Meeting of Stockholders is expected to be held on May 10, 1997,
at 10:00 a.m., at the Value Engineering Building, 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499.
Stockholder Inquiries
Inquiries concerning stock ownership, dividends, and stockholder changes of
address may be directed to Registrar and Transfer Company, 10 Commerce Drive,
Cranford, New Jersey 07016, (1-800-346-6084) or to the company at 2550
Huntington Avenue, Alexandria, Virginia 22303-1499, Attention: Corporate
Secretary.
<PAGE>
Financial Highlights
<TABLE>
Selected Financial Data (Unaudited)
(in thousands, except per share data)
<CAPTION>
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues, principally from contracts . . . . . $120,087 $73,790 $63,682 $77,450 $75,962
======= ====== ====== ====== ======
Income from continuing operations. . . . . . . $ 1,946 $ 1,738 $ 1,547 $ 1,104 $ 1,260
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . . 0 0 0 284 0
Income (loss) from discontinued operations . . (25) (92) 6 55 56
Gain (loss) on disposal of discontinued
operations . . . . . . . . . . . . . . . . . (179) 0 0 0 776
------- ------ ------ ------ ------
Net income . . . . . . . . . . . . . . . $ 1,742 $ 1,646 $ 1,553 $ 1,443 $ 2,092
======= ====== ====== ====== ======
Earnings per common share:
Income from continuing operations . . . . . $ 1.12 $ 1.00 $ .90 $ .64 $ .41
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . 0 0 0 .16 0
Income (loss) from discontinued operations . (.11) (.05) 0 .03 .27
------- ------- ------ ------ ------
Net income . . . . . . . . . . . . . . . $ 1.01 $ .95 $ .90 $ .83 $ .68
======= ====== ====== ====== ======
Total assets . . . . . . . . . . . . . . . . . $ 48,341 $28,938 $21,063 $23,231 $20,457
======= ====== ====== ====== ======
Long-term obligations . . . . . . . . . . . . $ 12,651 $ 4,992 $ 0 $ 2,686 $ 2,243
======= ====== ====== ====== ======
Stockholders' investment . . . . . . . . . . . $ 14,595 $13,553 $12,101 $10,816 $ 9,623
======= ====== ====== ====== ======
Cash dividends per common share . . . . . . . $ .1725 $ .1625 $ .1525 $ .145 $ .14
======= ====== ====== ====== ======
This consolidated summary of selected financial data should be read in
conjunction with the consolidated financial statements and related notes included
elsewhere in this Annual Report.
</TABLE>
<PAGE>
Letter to Stockholders
Fellow Stockholders:
VSE made substantial progress in 1996, but we know we have a lot more to
do. This letter gives us an opportunity to comment on some important events
and achievements in 1996. We also want to discuss areas that require more work
and to indicate our plans and ideas for the future.
Year in Review
The spectacular event of the year was the success of VSE's BAV Division and
its team of eleven world-class subcontractors in supporting the Navy's ship
transfer program in 1996. At year's end, the BAV team was using four commercial
shipyards to overhaul seven combat vessels for friendly foreign buyers. There
were also more than fifty BAV technical experts in six allied countries around
the world providing regular and emergency technical services.
Team work was also evident in other contract activities reported in 1996.
Energetics, VSE, and the VSS Division all won important contract renewals during
the year, while HRSI and its joint venture partner were awarded a new five-year,
$60 million health care services contract, the largest contract of its kind ever
awarded for a Naval Medical Center. We saw steady growth in VSE's Postal
Service contract, and CMstat revenues doubled to an annual level nearing $5
million. At the end of the year, VSE's joint venture was awarded the first
contract of what could be a long-term, multi-year effort to produce common
bridge transport vehicles for the Army.
Financially, the results for 1996 were good. Revenues increased
substantially, while growth in net income was restrained by several factors
including the initial costs of rapid growth in BAV and CMstat, the wind-up costs
associated with the completion of a long-term West Coast contract, the disposal
of our former Oklahoma subsidiary, and other factors.
Future Plans
During the next few years we are eager to realize our potential for growth
and income through (a) an increase in the revenues of our BAV ship transfer
contract, (b) the earnings potential of several key VSE contracts renewed on
favorable terms during 1996, and (c) a growth in revenues and profits
attributable to subsidiary operations in information technology, energy and
environmental services, and health care services.
VSE's future workload involves risks associated with changing government
requirements and funding priorities, and in particular, the BAV contract volume
depends in part on action by the U. S. Congress on periodic foreign military
sales authorizations. In addition, some of our largest Army and Navy customers
are moving and consolidating offices in 1997, creating both new opportunities
and new risks for us as we adjust our workload and personnel to changing
requirements.
Changes in workload are also expected to bring greater volatility to VSE's
quarterly earnings reports than in recent years. The volatility in earnings
will result in part from more of our revenues being derived from large fixed-
price contracts, in part from the lengthy sales cycle involved in commercial
software sales, and in part from contracts such as the BAV contract which base
profit on periodic award fee cycles instead of fixed monthly percentages.
Accordingly, VSE's future revenues and earnings may not be as predictable from
quarter to quarter as in recent years. However, we believe that on year-to-year
comparisons, VSE will continue to show positive trends.
<PAGE>
Letter to Stockholders
We continue to work on potential acquisition efforts which, if successful,
could significantly affect VSE. These efforts could result in a larger VSE in
the years ahead, with corresponding increases in total assets and liabilities.
As of the date of this letter, no agreements have been reached or are pending on
any specific merger or acquisition prospect.
VSE People
As always, it is the people of VSE who make us successful. Ours is a total
team effort: employees, managers, officers, directors, vendors, subcontractors,
and consultants. We perform and succeed as a team.
We believe the keys to success are honesty, integrity, and hard work
combined with team work, communications, and leadership. When we succeed at
these things together, we build value for our shareholders.
VSE director Sarah (Sally) Clements passed away on January 14, 1997. Sally
had served as a VSE director since 1987 and had worked with our marketing
personnel for many years before then. At 86 years of age, Sally was an
inspiration to all of us. We shall miss her wise advice and counsel.
We would be pleased to discuss these matters with you further at our Annual
Meeting of Stockholders expected to be held at VSE on May 10, 1997. Your
comments and suggestions for improvement are welcome at any time.
R. B. McFarland D. M. Ervine
President and COO Chairman and CEO
March 1997
<PAGE>
A GROWING COMPANY......
"With the award of the Navy's ship transfer contract and with the acquisitions
of CMstat and Energetics in 1995, we have the opportunity to be a great
company, not just a good company, and to do it by the year 2000."
Don Ervine, Chairman and CEO,
VSE Corporation
There is a great company growing in Virginia, Maryland, New Jersey,
California, Michigan . . . and it is engineering solutions in U. S. communities
and around the world.
At the leading edge of technology and change management, we design and
implement solutions that work better and cost less. Since 1959 customers have
relied on VSE for a broad range of professional and technical services,
including:
* global privatizing and outsourcing,
* information technology services and products,
* energy and environment consulting services, and
* defense services.
Across the country and around the world, VSE engineers and scientists,
information specialists, technicians, and health care professionals are working
with customers to achieve productivity and readiness targets.
We work to preserve investments in systems, equipment, energy and the
environment through modernization, technology insertion, and logistics support.
We work to reactivate and maintain excess naval assets transferred to allied
countries. And we work to assist customers in controlling the pace of change
with our configuration and product data management software.
VSE is a growth-oriented company with a vision of excellence. We engineer
solutions that work better and cost less, every day. The following describes
some of the activities of VSE employees working with customers in 1996. We
would be pleased to tell you more.
Global Privatizing/Outsourcing
BAV Division
"The Navy's ship transfer program will be substantially funded by foreign
governments, and the additional capability gained by our allies as we transfer
destroyers, frigates, and auxiliary ships to them will reduce the burden on our
country in meeting mutual defense needs around the globe."
Jim Knowlton, Senior Vice President and General Manager,
BAV Division
Managing the most complex and global program in the four-decade history of
the company, VSE's BAV Division and its team of subcontractors are hard at work
in providing services to the U.S. Navy and representatives of foreign
governments. In one of the largest, long-term global efforts in the country, BAV
is privatizing much of the infrastructure involved in transferring excess
warship capacity and auxiliary vessels to America's allies.
The statement of work includes ship reactivation (cold and hot ship
transfers), overhaul and modernization, engineering and maintenance support, and
logistics support including spares, depot level support, crew training (Navy or
commercial), "Tiger Team" support, casualty support, ship transiting, and
inventory control (receiving, storing, issuing, and replenishing).
<PAGE>
As 1996 came to a close, BAV with about 140 employees and eleven
subcontractors was directing the reactivation of various classes of ships in
Mississippi, Oregon, South Carolina, and Virginia. BAV also had "Tiger Team" and
ad-hoc engineering repair and maintenance work groups located in or planned for
more than a dozen foreign countries. At year-end, the list of customers served
or in planning included seventeen countries touching every continent and ocean
on the globe.
As a high-profile global privatizing program operating under the guidance
of the U.S. Congress, the Navy and the State Department, and mandated by the
Department of Defense as a cost-reduction measure, BAV has achieved
international recognition. The BAV contract is the most spectacular success of
VSE's effort to win global privatizing and outsourcing contracts, but it is
only one of a number of important programs we have been awarded.
Postal Service Program Center
" VSE's Postal Service Program Center provides the United States Postal Service
with a range of individual technical and professional services. As a Postal
Service partner, we are dedicated to providing services that are responsive,
efficient and cost effective."
Jayne M. Tuohig, Senior Vice President and General Manager,
Postal Service Program Center
For over 20 years, VSE has provided outsourcing services to the U.S. Postal
Service. With a staff of nearly 100 employees, we provide diverse technical
engineering services to design, modernize, test, and logistically support
automated electro-mechanical mail processing and delivery equipment and systems.
We support the alternate fuel program for USPS vehicles, and we support the
stamp acquisition program in the development of manufacturing standards,
materials qualification, and distribution systems technology. In addition, we
are working with the USPS on pilot programs to bring the special expertise of
our information technology and energy and environmental services subsidiaries
to USPS modernization and cost reduction initiatives.
HRSI
"All service is personal service. At HRSI, we stay focused on client needs
and priorities. Our clients' challenges become our challenges."
Mark Robin, Senior Vice President (Human Resources) and President,
Human Resource Systems, Inc.
Since 1990, VSE has provided long-term outsourcing services through Human
Resource Systems, Inc. ("HRSI"). HRSI has over 200 employees in two divisions
supporting the different needs of its customers: a technical services division
which provides architects, engineers, computer professionals, and related
personnel, principally for the USPS and other clients, and a health services
division which provides nurses, pharmacists, and other technical medical
personnel, principally for medical centers. During 1996, the success of the HRSI
approach to managing outsourcing services was recognized by a winning bid for
a $60 million, five-year joint venture contract award to provide nursing and
allied services for a Naval Medical Center. This contract, which was identified
by the government as the largest "personal service" contract award of its kind,
provides for staffing more than 100 health care professionals to cover around
the clock shifts in several special care units and clinics.
VSE expects to develop and pursue many more opportunities in global
privatizing and outsourcing as private efforts to streamline operations and
reduce staffing costs continue, together with public efforts to contain the
federal budget. Having established our position in this market, the company is
<PAGE>
working to expand its volume of services and the range of outsourcing services
provided. With this approach, we predict continued VSE growth in winning future
outsourcing opportunities.
Information Technology
CMstat
"At CMstat, our goal is to provide low cost, low risk, off-the-shelf solutions
to enable customers to quickly realize the benefits of information technology."
Paul Gain, President and CEO,
CMstat Corporation
Established in San Diego in 1986, CMstat provides best in class systems and
software solutions which enable clients from around the world to manage change
through database, application, and documentation control.
The CMstat System of information technology products provides local and
multinational customers with configuration management and product data manage-
ment (CM/PDM) control. Our applications and services enable clients to capture
current and legacy data related to products, systems, and documentation, and to
manage the orderly propagation of engineering change data as products evolve in
time.
Although there are many aspects to a CM/PDM project, CMstat concentrates
on developing those applications and services which require specific experience
in configuration management, logistics support, management information, and
standards compliance. Product applications vary from aerospace, automotive, and
telecommunications industries to consumer electronics and medical devices.
CMstat users include Boeing, GTE, Hughes, Lockheed Martin, and Sony.
Central to the CMstat solution in managing product data information are
applications and technology which address the elements and relationships which
are important to maintaining configuration control:
* Change/Process/Workflow Management
* Electronic Vault Repository/Report Generation
* As-Designed/As-Built/As-Maintained
* Product/Asset Identification
* Item/Part Management
* Documentation Management/Product Structure
Currently providing the most completely integrated commercial CM/PDM
technology available as an out-of-the-box solution, CMstat is working to extend
its product line and distribution channels into new areas in response to
customer requirements.
Since becoming a VSE company in 1995, CMstat has grown from 12 to 80
employees, has more than doubled in size, and has relocated to a bright, new
facility in the heart of high-technology development in San Diego, California.
VSE has introduced CMstat to a broad range of potential new U.S. government
clients, and the company continues to expand its services with existing
commercial clients by investing in upgrades and additions to its current product
line.
<PAGE>
Energy and Environment
Energetics
"In 1996 we solidified our traditional business base, and we began to open new
avenues which can be pursued into the 21st century."
Thomas S. Bustard, Ph.D., President, Energetics Incorporated
Energetics Incorporated is a full-service energy and environmental consulting
services company. Established in 1979, Energetics provides technical and
management support to the Department of Energy and other clients in all aspects
of energy and environmental management and advanced technology research,
development, and demonstration. With an experienced staff of over 100
scientists and professional personnel, the company's efforts in 1996 were con-
centrated in three areas important to the future of our country and world:
energy supply, environmental management, and energy conservation.
In energy supply, Energetics assists Federal and state government
regulators and electric and gas utility companies in planning and implementing
programs using advanced energy resource management technologies to improve the
supply and delivery of electricity to consumers. Several Energetics
professionals are recognized international experts in such fields as battery
energy storage technology, hydrogen systems, clean coal technologies,
superconductivity, and electromagnetic fields.
In environmental management, Energetics assists clients in regulatory
analysis, environmental impact compliance, and restoration support. In
performing these activities, Energetics consultants routinely address
environmental statutes and regulations such as the Atomic Energy Act, the Clean
Air Act, the National Environmental Policy Act, and others.
In energy conservation, Energetics assists clients by providing a variety
of technical, economic, and policy studies on the availability of advanced
technical solutions for conserving energy, reducing pollution, and saving money.
Some staff professionals work with clients to identify and define energy
efficiency and alternative fuels for use in buildings and industry, while others
work with emerging technologies that offer better energy, environmental, and
economic performance and transportation options than conventional light- and
heavy-duty vehicles.
In 1996 Energetics received a "Federal Technology Leadership Award"
recognizing its contribution in developing a technology tool called
RQ.Calculator. Once installed on a computer, RQ.Calculator provides a fast and
easy means to determine whether a Reportable Quantity (RQ) of a hazardous or an
extremely hazardous substance has been released into the environment. The award
is designed to recognize creative information technology applications.
Nominated projects are judged based on their degree of difficulty, innovative
use of technology, and real cost savings.
Defense Services
VSE Applied Engineering and Information Systems
"Capping a five-year effort by VSE engineers in 1996, we expect to provide the
U.S. Army with a proven vehicle system for transporting, launching, and
recovering combat bridge sections around the world."
Edward V. Karl, Senior Vice President and General Manager,
VSE Applied Engineering and Information Systems
<PAGE>
Continuing to bring innovation and service to VSE's traditional business base,
VSE engineers saw their efforts recognized in 1996 as the company was awarded
several new contracts and contract renewals for Army support programs, Navy
marine and ocean engineering services, and Navy logistics support for aircraft
and missile systems.
In Army and Army Reserve program areas, VSE reached an important new
plateau in 1996. We completed our design, prototype, and testing efforts for
the common bridge transporter ("CBT") system, and together with our joint
venture partner, we were awarded the first of a potential series of multi-year
contracts to produce CBT systems for the U.S. Army. This vehicle provides the
Army with a proven system to support Army mobility and deployment requirements,
such as those encountered in 1994 in establishing a peacekeeping force in
Bosnia. The CBT consists of a load handling system mounted on a 10-ton heavy-
equipment multipurpose tactical truck, together with a bridge adapter pallet
which allows the vehicle to carry, launch, and recover ribbon bridge sections
used to cross rivers. "The CBT program demonstrates VSE's versatility in total
engineering capabilities," according to Frank Beverina, VSE Vice President and
Ground Systems Manager. "This unique system doubles the lift capacity, speeds
bridge deployment operations, and improves interoperability by adapting to
accommodate NATO equipment."
For the U.S. Army Reserve, VSE completed a variety of projects in 1996, the
most successful of which was an Advanced Technology Demonstrator ("ATD") for
tactical wheeled vehicles. The ATD integrates 20 new technologies and products
to showcase the advantages, benefits, and potential applications of emerging
technology in the challenging environment facing today's Army. Technologies
involving collision avoidance, heads-up video displays, light emitting diode
running and tail lights, and automatic oil replenishing systems are a few of the
technologies featured in the ATD. Innovating with nearly 200 dedicated
employees working to reduce life-cycle costs and increase reliability and
dependability, VSE's Army program work continues to grow and gain recognition.
VSE Engineering and Logistics Center
"VSE provides customers with cost effective, single source marine and ocean
engineering services worldwide."
Michael E. Hamerly, Vice President and General Manager,
VSE Engineering and Logistics Center
1996 saw the competitive renewal of VSE's principal contract to provide
technical and marine engineering services for the U. S. Navy and the award of
a new Navy contract for ocean engineering services. Through this and related
contracts, over 200 personnel provide hands-on engineering, technical, and
logistic support to programs worldwide which are important to maintaining Navy
readiness and our national defense and to preserving our heritage. These
programs include technical reviews related to shipyard industrial capabilities,
foreign military sales support, ordnance alteration support, modernization,
overhaul, alteration, maintenance, and repair of Navy ships, construction and
upgrades of deep water moorings and piers, and upgrades to land-based tactical
air control towers.
VSE marine engineering personnel, working with original equipment
manufacturers such as Raytheon, Henchel and Furuno, are installing commercial
off-the-shelf and military specification systems such as digitized nautical
chart displays, navigation and air search radars, tactical air navigation
systems, enhanced radar displays, differential global positioning systems, and
fiber optic computer LAN systems on Navy and USGG ships. VSE provides turn-key
support including system and equipment design, pre-planning, scheduling, project
manage-ment, material identification, procurement and control, shipping and
expediting, installation, repair and maintenance, testing, documentation and
provisioning, and training.
<PAGE>
VSE ocean engineering personnel provide engineering and installation services
for fixed and floating ocean facilities, marine systems, and specialized marine
materials and construction support equipment for such projects as inactive ships
moorings, pier upgrades, and hurricane and typhoon moorings. These projects in
1996 included the tactical air control tower upgrade at a major naval air
station, and the disassembly and turn-over to museum personnel of an national
historic monument, the Cedar Point Lighthouse. The lighthouse, built in 1896,
was in the custody of the U.S. Navy at Solomons, Maryland. The Navy tasked VSE
to remove sections of the lighthouse and bring them ashore for transfer to the
Calvert Marine Museum.
VSS Division
" VSS has pledged quality, service, and continuity of support to our Navy
customer during the impending move to Patuxent River, Maryland. "
Will Albertolli, Vice President and General Manager,
VSS Division
VSE also serves Navy customers through our VSS naval air logistics support
contract. Awarded in 1994, VSS provides approximately 100 engineers and
technical personnel to plan, develop, and integrate supportability requirements
into aircraft and missile system designs. Under the contract, VSS supports Navy
logistics managers for aircraft, helicopters, air-launched weapons, and power
plants. VSS also provides expertise to establish, maintain, and integrate the
logistics elements required to sustain fleet operations and maintenance
throughout the life cycle of a weapons system.
During the year, several of our customers announced reorganizations and
relocations based on Defense Department efforts to reduce costs and close
unneeded military facilities. When our customers move, VSE moves. We have
strengthened our presence in northern New Jersey to accommodate recent Army
moves, and we expect to occupy new offices in southern Maryland to support our
VSS customers.
As VSE looks to the future, we see increasing opportunity to serve
customers and create value for our shareholders in our primary business areas:
global privatizing and outsourcing, information technology services and
products, energy and environment consulting services, and defense services.
As always, our goal is to engineer solutions that work better and cost
less. Our process remains the same, to build on honesty and integrity, and to
work together through leadership, team work, and communications. This is our
winning formula for growth and value in the 21st century.
<PAGE>
<PAGE>
(Quote from Shareholder letter)
"We believe the keys to success are honesty, integrity, and hard work combined
with teamwork, communications, and leadership. When we succeed at these things
together, we build value for our shareholders."
<PAGE>
<PAGE>
Introduction Page to Financial Section
<PAGE>
<PAGE>
Description of Business
Introduction.
VSE Corporation ("VSE") is a Delaware corporation established in 1959.
During 1996 VSE and its subsidiaries and divisions operated in a single
industry, the professional and technical services industry. The term "VSE" or
"company" means VSE and its subsidiaries and divisions unless the context
indicates operations of the parent company only.
Since incorporation, VSE has provided diversified engineering, technical,
and management services, principally to agencies of the United States Government
(the "government") and to other government prime contractors.
* Engineering and technical services are provided by VSE and by each
of its subsidiaries and divisions including BAV Division, CMstat Corporation,
Energetics Incorporated, Human Resource Systems, Inc., and Value Systems
Services Division.
* Information technology services and products are the primary business
of VSE's subsidiary CMstat Corporation and are also an important part of the
business of all other VSE business units depending on contract requirements.
Engineering, technical, and management services, including information
technology services and products, accounted for 100% of VSE's revenues from
continuing operations in 1996, 1995, and 1994.
Services and Products.
VSE engineering and technical services include a broad array of
capabilities and resources used in program planning; design and engineering,
including prototype development; electronic warfare support; logistics
management; ship reactivation, maintenance, repair, overhaul planning, and
follow on technical support; office automation systems and support; training;
technology research, development, and demonstration programs involving energy
conservation and efficiency, advanced technology transfers, and feasibility,
assessment, and development programs.
Typical engineering and technical services projects include sustaining
engineering support for military vehicles, combat trailers, bridging systems,
and amphibious transport; ocean engineering and mooring systems; depot repair
operations; electronic warfare software development; machinery condition
analysis; specification preparation for ship alterations and repairs; training
and video aids for air-launched missiles; energy conservation and advanced
technology demonstration projects; and technical data package preparation.
VSE information technology services and products include cross-platform
technical data, product data, and configuration management (CM/PDM) support, bar
coding and inventory applications, database management and control, and union
grievance system software. VSE's subsidiary CMstat, also markets a series of
proprietary products (the CMstat System) used in configuration, workflow, and
change management applications across a variety of functions including design
and engineering, prototype, manufacturing, purchasing, and support and
maintenance.
Marketing.
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators, and other
personnel. Information concerning new programs and requirements becomes avail-
able in the course of contract performance, through formal and informal
briefings, from participation in professional organizations, and from literature
<PAGE>
Description of Business
published by the government, trade associations, professional organizations, and
commercial entities.
Contracts.
VSE seeks to provide its customers with competitive, cost effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products, and an in-depth understanding of
the basic requirements for effective systems and equipment. Billing for services
is generally accomplished by billing customers for a specified level-of-effort
incurred in performing a project or providing a service or for installed
products, systems, and maintenance charges.
Depending on solicitation requirements and other factors, VSE offers its
professional and technical services and products through various competitive
contract arrangements and business units which are responsive to customer
requirements and which may also provide an opportunity for diversification. Such
arrangements include prime contracts, subcontracts, cooperative arrangements,
joint ventures, dedicated ventures, dedicated cost centers, separate profit
centers (divisions), and subsidiaries.
During 1996 VSE's 12 largest contracts accounted for approximately 80% of
total revenues, and one such contract with the U.S. Navy accounted for
approximately 38% of such revenues. The Navy contract was awarded in 1995 and
included a base year and nine option year periods which expire in July 2005.
See "Results of Operations-Revenues" in "Management Discussion and Analysis for
further discussion of this contract.
The following table shows the revenues of VSE and its subsidiaries and
divisions by customer or agency:
<TABLE>
VSE Revenues by Customer or Agency
(Dollars in thousands)
<CAPTION>
1996 1995 1994
Group or Agency Revenues % Revenues % Revenues %
- --------------- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Navy $ 75,232 62.6% $42,402 57.5% $36,086 56.7%
U.S. Army 18,880 15.7 18,291 24.8 17,860 28.0
Other government 23,836 19.8 10,563 14.3 8,443 13.3
Commercial 2,139 1.9 2,534 3.4 1,293 2.0
-------- ----- ------- ----- ------- -----
Total $120,087 100.0% $73,790 100.0% $63,682 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
During 1996 VSE and its subsidiaries and divisions provided services to the
government and other prime contractors under approximately 115 contracts, some
of which are of an indefinite delivery/indefinite quantity ("ID/IQ") ordering
nature. ID/IQ contracts permit the contracting agency to issue delivery orders
or task orders in an expeditious manner to satisfy relatively short-term
requirements for engineering and technical services. The services ordered
pursuant to ID/IQ arrangements are normally performed and completed within a one
year period. During 1996 VSE provided services under approximately 855 such
task orders.
VSE has sought to expand its engineering services customer base to
non-defense clients, such as the U.S. Postal Service. In 1994, VSE won a
recompete of a contract worth approximately $35 million for five years with the
U.S. Postal Service.
<PAGE>
Description of Business
In 1990, VSE formed Human Resource Systems, Inc. ("HRSI") to compete for
certain technical and consulting service work. Through this subsidiary, VSE
provides technical personnel and health care professionals and technicians to
work on site at customer facilities at the direction of customer management. In
1996, HRSI is a partner in a joint venture which was awarded a five-year, $60
million contract to provide nursing and allied services for a regional Navy
medical center with potential revenues to HRSI in excess of $40 million.
In 1994 the Value Systems Services ("VSS") division was awarded a new
contract with a Navy customer to provide logistic support services for
Naval aircraft, helicopters, and airborne weapons systems. This contract has
the potential to generate revenues to VSE of about $77 million over a five-year
period ending in 1999.
In 1995 VSE made two acquisitions to expand and diversify its business
base:
* In May 1995, VSE acquired CMstat Corporation, an information
technology company located in San Diego, California. CMstat is a leading
supplier of commercial (off-the-shelf) software products and technology to
manage engineering, product, and configuration management data.
* In August 1995, VSE acquired Energetics Incorporated, an energy
management and environmental technology company located in Columbia, Maryland.
Energetics provides technical and management services for advanced technology
programs, primarily for the Department of Energy and other government and
commercial clients.
In 1995 VSE also established the BAV Division to compete for an
engineering, technical and support services contract for U.S. Navy ships to be
sold, leased, or otherwise transferred to foreign governments. BAV was awarded
this Navy contract in August 1995. This contract accounted for 38% of VSE s
revenues in 1996 and has the potential to generate total revenues of over $1
billion depending on delivery order requirements and option periods exercised
through the year 2005.
In early 1997, a VSE joint venture was awarded a $12.3 million fixed-price
production contract to make more than 100 common bridge transporter systems for
the U.S. Army. Depending on program requirements and funding availability, total
program requirements are estimated to be up to about 600 vehicle systems over
the next seven years. VSE is expected to receive approximately one-half of the
total program value.
Schmoldt Engineering Services Company, which was acquired by VSE in 1990,
was divested in February 1996.
<PAGE>
Description of Business
Personnel.
VSE services are provided by a staff of professional, scientific, medical,
and technical personnel having high levels of education, experience, training,
and skills. As of February 1997, employees by business unit (including
approximately 318 part-time personnel) were as follows:
VSE (parent company) . . . . . . 698
HRSI . . . . . . . . . . . . . . 224
BAV Division . . . . . . . . . . 140
Energetics . . . . . . . . . . . 112
VSS Division . . . . . . . . . . 99
CMstat . . . . . . . . . . . . . 81
-----
VSE consolidated . . . . . . . . 1,354
=====
Principal categories of VSE personnel include (a) engineers, scientists,
and technicians in mechanical, electrical, electronic, chemical, industrial,
energy and environmental services, marine, and ocean engineering disciplines,(b)
information technology professionals in computer systems, applications, and
product, configuration, change, and data management disciplines, (c) technical
editors and writers, (d) graphic designers and technicians, and (e) health care
professionals and technicians. The expertise required by VSE customers also
frequently includes knowledge of government administrative procedures. Many VSE
employees have had experience as government employees or have served in the U.S.
armed forces. The company considers its relationships with employees to be
excellent.
Facilities.
VSE's principal executive and administrative offices are located in a
five-story building in Alexandria, Virginia, leased by VSE through the year
2003. This building contains approximately 108,000 square feet of engineering,
shop, and administrative space. VSE also provides services and products from
more than 20 U.S. branch offices located at or near customer sites to facilitate
communications and enhance project performance. Branch, subsidiary and division
offices are generally occupied under short-term leases and currently include an
aggregate of approximately 195,000 square feet of office and warehouse space.
VSE employees often provide services at customer facilities, limiting VSE's
requirement for additional space. BAV provides services from several locations
outside of the Unites States (generally at foreign shipyards); these services
are often of short duration based on "tiger team" or "as-ordered" requirements.
VSE owns and operates an engineering test center in Ladysmith, Virginia,
consisting of approximately 44 acres of land and an improved storage and vehicle
maintenance facility. This facility has been used by VSE to test military and
commercial equipment for which VSE provides system technical support or other
engineering services and to supplement Alexandria, Virginia, shop facilities.
Current engineering test center projects include the construction of certain
ocean engineering contract deliverable items such as ship camels, pier fenders,
and plate anchor drive followers.
Backlog.
As of December 31, 1996, VSE's subsidiaries and divisions had proposals
pending for engineering services contracts covering approximately $100 million
in services for the Department of Defense or other government agencies or prime
contractors. If these contracts are awarded to VSE, resulting ordering periods
could extend through 2002. However, there is no assurance that VSE will be the
successful bidder for any of these contracts. Moreover, there can be no assur-
<PAGE>
Description of Business
ance that contract awards, if any, will result in any revenues to VSE because
(a) contract awards are often rescinded as a result of the government's bid
protest procedures, (b) contracts may not be funded at the nominal amounts cited
in competitive bid announcements, and (c) contracts when funded may be
terminated at the convenience of the government.
During 1996 and 1995 VSE was awarded contracts having potential ceiling
values of approximately $121.1 million and $1.1 billion, respectively.
VSE's funded backlog of work as of December 31, 1996, 1995, and 1994 was
approximately $121.7 million, $37.6 million and $36.9 million, respectively.
"Funded" backlog is defined as orders for services that have not been fully ren-
dered and for which funding has been provided either at the time of award or
thereafter. Substantially all of the funded backlog is expected to be
completed within one year.
The excess of unfulfilled contract estimates over the incremental funding
authorized represents an "unfunded" backlog. Based on the total estimated value
of contracts actually awarded, the potential revenues for work remaining to be
performed under existing engineering services contracts (both funded and
unfunded backlog) was approximately $1.3 billion, $1.3 billion, and $350
million, as of December 31, 1996, 1995 and 1994, respectively. VSE has no
reasonable basis on which to determine when or if such backlog may be funded.
However, because of uncertainties associated with changing program requirements
and the ultimate availability of funds, VSE believes that measurements of
unfunded backlog are of limited use in evaluating future workload.
Competition and Risks.
Competition. The professional and technical services industry in which VSE
is engaged is very competitive. There are a substantial number of other
organizations, some of which are large, diversified firms with greater financial
resources and larger technical staffs, which are capable of rendering
essentially the same services as those offered by VSE. Such companies may be
publicly owned or privately held and may be divisions of much larger organiza-
tions including large manufacturing corporations.
The government's own "in-house" capabilities are also, in effect, compet-
itors of VSE (including the government's own non-profit federally funded
research and development centers) because government employees often perform
many of the services that might otherwise be performed by VSE.
It is not possible to predict the extent and range of competition which VSE
will encounter as a result of changing economic or competitive conditions,
customer requirements, or technological developments. Competition in the
government contract business has intensified since 1987 due to declining
government budgets, and such markets are often dominated by one or few "niche"
companies. VSE believes the principal competitive factors for the professional
and technical services business in which it is engaged are technical and
financial qualifications, quality and innovation of services and products, and
low price.
Since 1993, the government has initiated a series of changes designed to
improve and streamline its acquisition policies and procedures. Such changes
include an emphasis on very large contracts, which may reduce the potential
number of qualified bidders; past performance, which may be used to exclude
entrance into new government markets; multiple-award schedules, which may result
in unbalanced procurements; and best value contract awards, which reduce the
<PAGE>
Description of Business
advantages of price competition. The net effect of all such changes on future
VSE revenues is unknown.
Risks. Sales of key business process or enterprise-wide computer software,
such as the software sold by CMstat, are subject to a lengthy sales cycle which
may exceed one year in some instances. The length of the sales cycle increases
marketing costs, increases the risk of product obsolescence, makes it difficult
to predict the timing and amount of revenues, and may result in large negative
cash flows and operating losses pending the final results of such sales efforts.
The company's services are typically provided under cost-plus-fee,
time-and-materials, or fixed-price contracts. Under cost-plus-fee contracts, the
customer reimburses VSE for its allowable costs permitted by regulations and
pays a fee based on negotiated terms. Under time-and-materials contracts, the
customer pays VSE at fixed hourly rates for direct labor costs and the related
overhead and profit, and reimburses VSE for the cost of materials without
profit. Under fixed-price contracts, the customer pays an agreed price for
services or products. Under fixed-price contracts and time-and-materials con-
tracts, VSE bears the risk that increased or unexpected costs may reduce its
profit or cause it to sustain a loss. To the extent VSE incurs actual costs
below anticipated costs on these contracts, VSE realizes greater profit margins.
Government agencies have placed an increased emphasis on awarding contracts
of the types performed by VSE on a competitive basis as opposed to a non-
competitive basis. All significant contracts currently being performed by VSE
were either initially awarded on a competitive basis or have been recompeted at
least once on a competitive basis.
VSE's business with the government is subject to the risk that one or more
of its potential contracts or extensions of existing contracts may be awarded by
the contracting agency to a competitor, including "small and disadvantaged" or
minority-owned businesses pursuant to "set-aside" programs administered by the
Small Business Administration or may be "bundled" into omnibus contracts for
very large businesses. In addition, VSE's business is subject to funding
delays, extensions, and moratoriums caused by political and administrative
disagreements such as occurred during the 1996 U.S. budget negotiations. To
date, the effect of such negotiations and disagreements on VSE has not been
material; however, no assurances can be given about such risks with respect to
future years.
Government contracts are subject to termination at the government's conve-
nience, which means that the government may terminate the contract at any time,
without cause. However, during VSE's 38-year history the aggregate amount of
such government terminations for convenience has not been material. If a
government contract is terminated for convenience, generally VSE is reimbursed
for its allowable costs to the date of termination and is paid a proportionate
amount of the stipulated profit or fee for the work actually performed.
The books and records of the company are subject to audit by the Defense
Contract Audit Agency, which audits can result in adjustments to contract costs
and fees. Audits by such agency have been completed for all years through 1995
without material adjustments. However, there is no assurance that future
adjustments will not be required.
<PAGE>
Management Discussion and Analysis
The discussion and analysis which follows is intended to assist in under-
standing and evaluating the results of 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"), VSE Corona, Inc. ("VCI"), VSE Services Corporation
("VSES"), and Value Systems Services ("VSS") and 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"). VCI and VSES have generally been inactive since 1992.
Intercompany sales are principally at cost and have been eliminated from the
consolidated financial statements.
Results of Operations
Revenues
The following table shows the revenues from continuing operations of VSE
and subsidiaries and such revenues as a percent of total revenues:
<TABLE>
Revenues from Continuing Operations
(dollars in thousands)
<CAPTION>
1996 1995 1994
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
VSE (parent only) . . . . . . . $ 47,996 40.0 $56,889 77.1 $57,041 89.6
BAV . . . . . . . . . . . . . . 45,399 37.8 1,431 1.9 0 0.0
Energetics . . . . . . . . . . 11,286 9.4 4,007 5.4 0 0.0
VSS . . . . . . . . . . . . . . 8,798 7.3 8,396 11.4 5,503 8.6
CMstat . . . . . . . . . . . . 3,879 3.2 1,412 1.9 0 0.0
HRSI . . . . . . . . . . . . . 2,729 2.3 1,655 2.3 1,138 1.8
-------- ----- ------- ----- ------- -----
Total revenues . . . . . . . . $120,087 100.0 $73,790 100.0 $63,682 100.0
======== ===== ======= ===== ======= =====
</TABLE>
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. VSE's engineering services revenues have his-
torically 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 continuing 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, 1995 and 1994, 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
<PAGE>
Management Discussion and Analysis
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 38% of consolidated revenues during 1996.
The company experienced significant quarterly fluctuations in 1996 and antic-
ipates that future quarterly revenues will be subject to significant variations
due to this contract.
VSE Navy Contract. VSE had a contract with the U. S. Navy which accounted
for approximately 14% of total revenues in 1995 and 17% in 1994. The Navy
combined the work performed under this contract with other related work, and VSE
was not the successful bidder for the new contract. Substantially all work on
the contract ended by September 1995.
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from continuing
operations of VSE and subsidiaries, other items of income and expense, and such
amounts as a percent of total revenues:
<TABLE>
Income from Continuing Operations Before Income Taxes
(dollars in thousands)
<CAPTION>
Description 1996 % 1995 % 1994 %
- ----------- -------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . $120,087 100.0% $73,790 100.0% $63,682 100.0%
Costs and expenses . . 116,134 96.7 70,588 95.7 60,421 94.9
Gross profit . . . . . 3,953 3.3 3,202 4.3 3,261 5.1
Selling, general and
administrative expenses 528 .4 218 .3 752 1.2
Interest expense . . . 463 .4 136 .2 20 .0
-------- ----- ------- ----- ------- -----
Income from continuing
operations before
income taxes . . . . $ 2,962 2.5% $ 2,848 3.8% $ 2,489 3.9%
======== ===== ======= ===== ======= =====
</TABLE>
Costs and expenses of operations, as a percentage of revenues, increased
slightly each year during 1996, 1995, and 1994. The percentage differences
between 1996 and 1995 and between 1995 and 1994 are primarily due to a
combination of factors, some of which are offsetting, including (a) differences
between costs incurred and whether they may be billed based on contract
provisions, (b) the effects of increases or decreases in facility and equipment
lease renewals, fringe benefit programs, and similar period expenses, (c) costs
associated with contract start-up and termination phases, and (d) the charges
and additions to income for potential contract disallowances due to the timing
of government audits on costs incurred, and (e) effective project and cost
management.
Selling, general and administrative expenses increased in 1996 as compared
to 1995 primarily due to an increase in the amortization of intangible asset
costs associated with the acquisitions of CMstat and Energetics in 1995.
Selling, general and administrative expenses decreased in 1995 as compared
to 1994 primarily due to a reduction in nonreimbursable administrative
expenses.
Interest expense increased in 1996 as compared to 1995 due primarily to the
use of bank borrowings to finance the increased levels of accounts receivable
<PAGE>
Management Discussion and Analysis
associated with the significant revenue growth in 1996, to finance the new
office facilities and software development costs of CMstat, and to reflect
interest costs associated with financing the acquisitions of CMstat and
Energetics in 1995 (see "Acquisitions and Divestitures" below).
Interest expense increased in 1995 as compared to 1994 due to the use of
bank borrowings to finance increased revenues and to consummate the acquisitions
of CMstat and Energetics in 1995.
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 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 recent 1996 quarterly results.
Acquisitions and Divestitures
On May 31, 1995 the company acquired all of the outstanding capital stock
of CMstat, which develops and supports software for commercial and government
customers. On August 29, 1995 the company acquired all of the outstanding stock
<PAGE>
Management Discussion and Analysis
of Energetics, which supports government and industry technology programs in the
fields of energy use and the environment.
On February 7, 1996, VSE sold its wholly owned subsidiary Schmoldt
Engineering. Under the terms of the transaction, VSE sold all of the out-
standing capital stock of Schmoldt Engineering to certain officers of Schmoldt
Engineering in exchange for cash and a promissory note for which principal is
payable in installments from January 1, 1997 through September 1, 2001. The
transaction resulted in a pretax loss of approximately $300 thousand to VSE.
Liquidity and Capital Resources
Cash Flows
A net decrease in cash and cash equivalents of approximately $150 thousand
during 1996 resulted from approximately $7 million provided by financing
activities, approximately $4.4 million used in operating activities, and
approximately $2.7 million used in investing activities. Significant financing
activities included borrowing on the company's revolving term loan, including
commitments for checks outstanding at year end, of approximately $7.7 million.
Significant investing activities included approximately $3.3 million associated
with the purchase of property and equipment, including the new office facilities
and equipment for CMstat and the capitalization of software development costs
by CMstat. Cash flows used in operating activities increased in 1996 as
compared to 1995 due primarily to increases in accounts receivable associated
with the increase in work on the BAV Contract.
A net decrease in cash and cash equivalents of approximately $2.5 million
during 1995 resulted from approximately $7 million used in investing activities,
approximately $4.9 million provided by financing activities, and approximately
$400 thousand used in operations. Significant investing activities included
approximately $3.7 million associated with the acquisition of Energetics,
approximately $1 million associated with the acquisition of CMstat, and $2.3
million associated with the purchase of property and equipment, including
property and equipment purchases to support the new BAV contract. Significant
financing activities included borrowing on the company's revolving term loan,
including commitments for checks outstanding at year end, of approximately $4.9
million. Cash flows from operations declined by approximately $6.4 million as
compared to 1994 primarily due to the absence of the decline in receivables
experienced in 1994 due to decreased contract revenue and the additional
accounts receivable associated with BAV, CMstat and Energetics in 1995.
A net increase in cash and cash equivalents of approximately $2.1 million
during 1994 resulted from approximately $6.1 million provided by operations,
approximately $700 thousand used in investing activities, and approximately $3.3
million used in financing activities. Investing activities consisted primarily
of the purchase of property and equipment. Significant financing activities
included reductions of borrowings on the company's revolving term bank loan of
approximately $2.7 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 including leaseholds for office and computer support, to pay cash
dividends, and to finance internal research and development, primarily software
development. 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.
<PAGE>
Management Discussion and Analysis
Working Capital
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 completed
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 pay-
ment 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.
Dividends
Cash dividends were declared at the rate of $.1725 per share during 1996,
$.1625 per share during 1995, and $.1525 per share during 1994. Pursuant to
its bank loan agreement (see Note 4 of "Notes to Consolidated Financial
Statements"), the payment of cash dividends by VSE is subject to annual rate
restrictions. VSE has paid cash dividends each year since 1973.
Inflation and Pricing
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.
<PAGE>
Executive Officers
Byron S. Bartholomew, 69
Executive Vice President - Business Development. Service with the
Company-27 years.
Thomas J. Corridon, 39
Senior Vice President and Comptroller. Service with the Company-9 years.
Donald M. Ervine, 60
Chairman and Chief Executive Officer. Service with the Company-13 years.
Edward V. Karl, 59
Senior Vice President and General Manager, Applied Engineering and
Information Systems Center. Service with the Company-9 years.
James M. Knowlton, 54
Senior Vice President and General Manager, BAV Division. Service with
the Company-12 years.
Richard B. McFarland, 63
President and Chief Operating Officer. Service with the Company-9 years.
Mark A. Robin, 43
Senior Vice President (Human Resources) and President, Human Resource
Systems, Inc. ("HRSI"). Service with the Company-15 years.
Jayne M. Tuohig, 50
Senior Vice President and Director, Postal Service Program Office.
Service with the Company-15 years.
Craig S. Weber, 52
Chief Financial Officer, Senior Vice President, Secretary and Treasurer.
Service with the Company-25 years.
VSE Common Stock
VSE common stock (par value $.05 per share) is traded in The Nasdaq National
Market System, trading symbol: VSEC; newspaper listing: VSE.
The following table sets forth the range of high and low sales price
information on VSE common stock during the last two years based on information
reported by the Nasdaq National Market System and adjusted for the two for one
stock split effective as of May 15, 1996. Trading in the VSE common stock has
been sporadic.
<TABLE>
<CAPTION>
Quarter High Low Dividends
- ------- ------ ------ ---------
<S> <C> <C> <C>
1995:
March 31 . . . $ 7.88 $ 7.00 $.04
June 30 . . . 8.13 7.13 .04
September 30 . 14.50 7.38 .04
December 31 . 13.50 9.75 .0425
For the year $14.50 $ 7.00 $.1625
1996:
March 31 . . . $17.50 $12.50 $.0425
June 30 . . . 21.00 14.50 .0425
September 30 . 21.50 14.75 .0425
December 31 . 18.75 15.75 .045
For the year $21.50 $12.50 $.1725
</TABLE>
There were approximately 1,400 stockholders of VSE common stock as of
March 1, 1997, consisting of about 315 stockholders of record plus the number
of beneficial owner proxy sets provided in connection with VSE's 1996 Annual
Meeting of Stockholders to (a) brokers, banks, and nominees and (b) participants
in the VSE Corporation Employee ESOP/401(k) Plan.
VSE has a revolving term loan agreement with a bank which permits the
payment of cash dividends at an annual rate not to exceed $.60 per share, sub-
ject to maintaining a minimum consolidated tangible net worth and a maximum
consolidated leverage ratio as defined in the loan agreement. See Note 4
(Debt) of "Notes to Consolidated Financial Statements" included elsewhere
in this Annual Report.
<PAGE>
Report of Independent Public
Accountants To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE Cor-
poration (a Delaware corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders'
investment and cash flows for the years ended December 31, 1996, 1995, and
1994. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of VSE Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of its opera-
tions and its cash flows for the years ended December 31, 1996, 1995 and 1994,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 24, 1997
<PAGE>
Consolidated Financial Statements
<TABLE>
Consolidated Balance Sheets
(in thousands, except share amounts)
<CAPTION>
As of December 31,
1996 1995
------ ------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 453 $ 601
Accounts receivable, principally
U. S. Government, net . . . . . . . . . . . . . . . . 33,707 16,073
Deferred tax assets . . . . . . . . . . . . . . . . . . 435 810
Other current assets . . . . . . . . . . . . . . . . . . 1,916 856
Net current assets of discontinued operations . . . . . 0 476
------ ------
Total current assets . . . . . . . . . . . . . . . . 36,511 18,816
Property and equipment, net . . . . . . . . . . . . . . . 5,145 4,037
Capitalized software development costs, net . . . . . . . 966 318
Intangible assets, net . . . . . . . . . . . . . . . . . . 3,409 3,874
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,310 1,650
Net property, equipment, and other noncurrent
assets of discontinued operations . . . . . . . . . . . 0 243
------ ------
Total assets . . . . . . . . . . . . . . . . . . . . $48,341 $28,938
====== ======
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable and other current liabilities . . . . . $13,508 $ 3,097
Accrued expenses . . . . . . . . . . . . . . . . . . . . 5,841 5,684
Dividends payable . . . . . . . . . . . . . . . . . . . 78 74
------ ------
Total current liabilities . . . . . . . . . . . . . 19,427 8,855
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 12,651 4,992
Deferred tax liabilities . . . . . . . . . . . . . . . . . 554 411
Deferred compensation . . . . . . . . . . . . . . . . . . 1,114 1,127
------ ------
Total liabilities . . . . . . . . . . . . . . . . . 33,746 15,385
------ ------
Commitments and contingencies (Note 9)
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 3,908,088 in 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . 195 98
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 8,241 8,338
Retained earnings . . . . . . . . . . . . . . . . . . . 22,840 21,402
ESOP obligation . . . . . . . . . . . . . . . . . . . . (350) 0
Unrealized loss on available-for-sale security . . . . . (46) 0
Treasury stock, at cost (2,169,754 shares in 1996
and 1995). . . . . . . . . . . . . . . . . . . . . . . (16,285) (16,285)
------ ------
Total stockholders' investment . . . . . . . . . . . 14,595 13,553
------ ------
Total liabilities and stockholders' investment . . . $48,341 $28,938
====== ======
</TABLE>
See accompanying notes
<PAGE>
Consolidated Financial Statements
<TABLE>
Consolidated Statements of Income
(in thousands, except share amounts)
<CAPTION>
For the years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues, principally from contracts . . . . $ 120,087 $ 73,790 $ 63,682
Costs and expenses of contracts . . . . . . 116,134 70,588 60,421
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . . 3,953 3,202 3,261
Selling, general and administrative expenses 528 218 752
Interest expense . . . . . . . . . . . . . . 463 136 20
-------- -------- --------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . 2,962 2,848 2,489
Provision for income taxes . . . . . . . . . 1,016 1,110 942
-------- -------- --------
Income from continuing operations . . . . . 1,946 1,738 1,547
Discontinued operations, net of tax:
Income (loss) from operations (net of tax
benefit of $14 in 1996, $46 in 1995
and tax expense of $18 in 1994) . . . . (25) (92) 6
Loss on disposal (net of tax benefit
of $118) . . . . . . . . . . . . . . . . (179) 0 0
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . $ 1,742 $ 1,646 $ 1,553
======== ======== ========
Earnings per share, based on weighted
average shares outstanding:
Income from continuing operations . . . . $ 1.12 $ 1.00 $ .90
Loss from discontinued operations . . . . (0.11) (0.05) 0
-------- -------- --------
Net income per share . . . . . . . . . . . . $ 1.01 $ .95 $ .90
======== ======== ========
Weighted average shares outstanding 1,731,601 1,732,796 1,726,334
========= ========= =========
</TABLE>
See accompanying notes
<PAGE>
Consolidated Financial Statements
<TABLE>
Consolidated Statements of Stockholders' Investment
(in thousands)
<CAPTION>
Unrealized
Loss on
Common Stock Paid-In Retained Treasury ESOP Available-for-
Shares Amount Surplus Earnings Stock Obligation Sale Securities
------ ------ ------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 1,948 $ 97 $8,247 $18,757 $(16,285) $ 0 $ 0
Net income for
the year . . . . -- -- -- 1,553 -- -- --
Dividends
declared ($.1525) -- -- -- (268) -- -- --
----- --- ----- ------ ------- ---- ---
Balance at
December 31, 1994 1,948 97 8,247 20,042 (16,285) 0 0
Net income for
the year . . . . -- -- -- 1,646 -- -- --
Dividends
declared ($.1625) -- -- -- (286) -- -- --
Issuance of stock 6 1 91 -- -- -- --
----- --- ----- ------ - ----- ---- ---
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)
===== === ===== ====== ======= ==== ===
</TABLE>
See accompanying notes
<PAGE>
Consolidated Financial Statements
<TABLE>
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
For the years ended December,
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 1,742 $ 1,646 $ 1,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . 1,491 1,010 999
Discontinued operations . . . . . . . . . . . 204 92 (6)
Loss on sale of property and equipment . . . 13 19 5
Deferred compensation plan expense . . . . . 141 188 125
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . (17,634) (5,679) 4,224
Other current assets and noncurrent assets (1,255) 468 (169)
Deferred taxes . . . . . . . . . . . . . . 518 1,249 (594)
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . 10,271 630 (108)
Accrued expenses . . . . . . . . . . . . . 157 129 24
------ ------ ------
Net cash (used in) provided by
continuing operating activities . . . . (4,352) (248) 6,053
Net cash (used in) provided by
discontinued operating activities . . . (25) (92) 6
Net cash (used in) provided by ------ ------ ------
operating activities (4,377) (340) 6,059
------ ------ ------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . (2,465) (2,296) (499)
Capitalized software development costs . . . . . (795) (192) (149)
Acquisition of CMstat, net of cash received. . . 0 (970) 0
Acquisition of Energetics, net of cash received. 0 (3,660) 0
Net proceeds from sale of Schmoldt Engineering . 100 0 0
Change in net assets of discontinued operations. 440 92 (6)
------ ------ ------
Net cash used in investing activities (2,720) (7,026) (654)
------ ------ ------
Cash flows from financing activities:
Net proceeds from (payments of) revolving term
loan . . . . . . . . . . . . . . . . . . . . 7,659 4,939 (2,683)
Net proceeds from other long-term debt . . . . 0 53 0
Cash dividends paid . . . . . . . . . . . . . . (300) (281) (264)
Net proceeds from (payments of) deferred
compensation . . . . . . . . . . . . . . . . (14) 68 (375)
Advance to ESOP . . . . . . . . . . . . . . . . (350) 0 0
Unrealized loss on marketable securities . . . (46) 0 0
Issuance of common stock . . . . . . . . . . . 0 92 0
------ ------ ------
Net cash provided by (used in) financing
activities 6,949 4,871 (3,322)
------ ------ ------
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . . . (148) (2,495) 2,083
Cash and cash equivalents at beginning of year. 601 3,096 1,013
------ ------ ------
Cash and cash equivalents at end of year. . . . $ 453 $ 601 $ 3,096
====== ====== ======
</TABLE>
See accompanying notes
<PAGE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include VSE Corporation and its wholly-
owned subsidiaries ("VSE" or the "company"), CMstat Corporation ("CMstat"),
Energetics Incorporated ("Energetics"), and Human Resource Systems, Inc.
("HRSI"), and the unincorporated divisions of VSE, Value Systems Services
("VSS") and BAV. The company is engaged principally in providing engineering,
testing, and management services to the U. S. Government (the "government") and
software development to primarily government prime contractors. 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. All significant intercompany transactions have been eliminated in
consolidation. Certain prior year balances have been reclassified for
comparative purposes.
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.
Stockholders' 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.
Discontinued Operations
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 is payable in monthly install-
ments from January 1, 1997 through September 1, 2001. The transaction resulted
in a pretax loss of approximately $300 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 Schmoldt Engineering
as discontinued operations pursuant to the provisions of Accounting Principles
Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Schmoldt Engineering
operated in the oil and gas pipeline services business, providing its services
to non U.S. government customers. The net losses of these operations from
January 1, 1996 to February 7, 1996, are included in the consolidated state-
ments of income under "Discontinued operations, net of tax: Income (loss) from
operations." Revenues from such operations were $66 thousand for the period
ended February 7, 1996, and
<PAGE>
Notes to Consolidated Financial Statements
$1,278 thousand and $1,898 thousand for the years ended December 31, 1995 and
1994, respectively.
Cash and Cash Equivalents
The company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of tax, reported as a component of stockholders' investment.
Realized gains and losses are included in other income. Available-for-sale debt
securities as of December 31, 1996 consisted of overnight repurchase agreements
of $253 thousand secured by U. S. Government agency securities. Available-for-
sale debt securities at December 31, 1995 consisted of commercial paper of $200
thousand. The estimated fair value of these securities approximated cost, and
the amount of gross unrealized gains and losses was not significant.
Additionally, the company held available-for-sale marketable securities as of
December 31, 1996 with a fair value of $20 thousand, consisting of publicly
traded stock. The unrealized loss on these securities as of December 31, 1996
was $46 thousand and is presented as a separate component of stockholders'
equity.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to concentration of
credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The company believes that concentrations of credit risk with respect
to trade accounts receivable are limited as they are primarily U. S. Government
receivables. The company believes that the fair market value of all financial
instruments approximates book value.
Consolidated Statements of Cash Flows
<TABLE>
Supplemental disclosures of cash flow information for the three years ended
December 31, are presented below (in thousands):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest payments . . . . . . . . . . . . $ 447 $ 107 $ 44
Income tax payments . . . . . . . . . . . 590 839 1,566
</TABLE>
Contract Revenues
Substantially all of the company's revenues result from contract services
performed for the U. S. Government or for contractors engaged in work for the
U. S. Government under a variety of contracts. Revenues on cost-type contracts
are recorded on the basis of recoverable costs incurred and fees earned.
Revenues on fixed price contracts are recorded as services are performed, using
the percentage-of-completion method of accounting, primarily based on contract
costs incurred to date compared with total estimated costs at completion.
Revenues on time and material contracts are recorded on the basis of hours
delivered plus other allowable direct costs as incurred.
<PAGE>
Notes to Consolidated Financial Statements
The company provides for anticipated losses on contracts by a charge to income
during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is subject to
audit by the Defense Contract Audit Agency. In 1996, the company's indirect cost
rates have been audited and approved for years 1995, 1994 and 1993 with no
material changes. This resulted in a reduction of previously established
reserves of $1,044 thousand for contract and audit disallowances related to
those years. All audit years prior to 1996 have now been approved. In the
opinion of management, the audit of 1996 will not result in material adjust-
ments, if any, to the company's results of operations or financial position.
The company's software revenues result from sales of software licenses and post
contract customer support. Revenue from the sale of licenses is recognized upon
delivery of the software. Revenue from the support is recognized ratably over
the period to which the support agreement relates.
Income Taxes
The company accounts for income taxes pursuant to provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach to accounting for income
taxes for financial statement purposes. Under SFAS No. 109, deferred tax assets
and liabilities represent the tax effects of temporary differences between tax
and financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates.
Property and Equipment
<TABLE>
Property and equipment (valued at cost) consisted of the following (in
thousands):
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Computer systems equipment . . . . . . . . . . . . . $ 7,600 $ 6,704
Furniture, fixtures, equipment, and other . . . . . 4,760 4,366
Leasehold improvements . . . . . . . . . . . . . . . 1,877 1,275
Buildings . . . . . . . . . . . . . . . . . . . . . 381 381
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
15,003 13,111
Less accumulated depreciation . . . . . . . . . . . (9,858) (9,074)
------- -------
$ 5,145 $ 4,037
======= =======
</TABLE>
Depreciation and amortization expense for property and equipment was
approximately $1.3 million for 1996 and $1 million for 1995 and 1994.
Depreciation of computer systems equipment is provided principally by the
double-declining method over periods of four to six years. Depreciation of
furniture and fixtures is provided principally by the straight-line method over
approximately nine years. Depreciation of all other property and equipment is
provided principally by the double-declining method over periods of three to
twenty years. Depreciation of buildings and land improvements is provided
principally by the straight-line method over approximately thirty years.
Capitalized Software Development Costs
The company capitalizes certain computer software development costs, primarily
associated with CMstat upon the establishment of technological feasibility.
<PAGE>
Notes to Consolidated Financial Statements
Costs capitalized include labor and associated fringe benefits. These costs
are amortized utilizing the straight-line method over periods of two to four
years. Accumulated amortization as of December 31, 1996 and 1995 was
approximately $226 thousand and $79 thousand, respectively. Amortization
expense for 1996, 1995 and 1994 was approximately $147 thousand, $51 thousand
and $28 thousand, respectively.
Nonoperating Net Income
Nonoperating net income included in selling, general and administrative
expenses, primarily interest income, was approximately $32 thousand, $79
thousand, and $126 thousand for the years ended December 31, 1996, 1995,
and 1994, respectively.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1996, 1995
and 1994 was approximately $141 thousand, $188 thousand and $125 thousand,
respectively.
Included in other assets are assets of the deferred compensation plans which
include equity securities recorded at fair value. The fair value of these
securities was approximately $1,253 thousand and $940 thousand as of December
31, 1996 and 1995, respectively. Because plan participants are at risk for
market value changes in these assets, the liability to plan participants
fluctuates with the asset values.
Changes in Accounting Principles
In 1995, the company elected an early adoption of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This adoption had no impact on the company.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The expense recognition provision
encouraged by SFAS No. 123 would require fair-value based financial accounting
to recognize compensation expense for employee stock compensation plans. The
company has determined that it will elect the disclosure-only alternative and
accordingly the company will be required to disclose the pro forma net income
and per share amounts in the notes to the consolidated financial statements
using the fair-value based method.
(2) Acquisitions
On May 31, 1995 the company acquired all of the outstanding stock of CMstat, a
leading developer and supplier of commercial off-the-shelf configuration and
product data management solutions, for approximately $970 thousand in cash.
The acquisition was accounted for by the purchase method of accounting. The
results of CMstat's operations since May 31, 1995 are included in these
consolidated financial statements. The company has recorded approximately
$1.2 million of identifiable intangible assets, $800 thousand of deferred taxes
related to the identifiable intangible assets and $400 thousand of goodwill.
Goodwill and identifiable intangible assets are being amortized by the
straight-line method generally over a period of ten years.
<PAGE>
On August 29, 1995 the company acquired all of the outstanding stock of
Energetics for approximately $3.7 million. Energetics assists government and
industry in conducting effective technology programs, primarily in the fields of
energy use and the environment. The acquisition was accounted for by the pur-
chase method of accounting. The results of Energetics' operations since August
29, 1995 are included in these consolidated financial statements. The company
has recorded approximately $1.5 million of goodwill and $100 thousand of
identifiable intangible assets. Goodwill is being amortized by the straight-
line method over fifteen years. Identifiable intangible assets were amortized
over one year.
The following unaudited pro forma results of operations for the years ended
December 31, 1995 and 1994 assume the Energetics acquisition occurred as of the
beginning of the respective periods after giving effect to certain adjustments,
including amortization of identifiable intangible assets, increased interest
expense on acquisition debt, and related income tax effects. The pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1995 1994
-------- --------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 81,341 $ 74,240
======== ========
Income from continuing operations . . . . . . . $ 1,980 $ 1,727
======== ========
Income from continuing operations per share . . $ 1.14 $ 1.00
======== ========
</TABLE>
(3) Accounts Receivable
<TABLE>
The components of accounts receivable as of December 31, 1996 and 1995, were
as follows (in thousands):
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Billed . . . . . . . . . . . . . . . . . . . . $ 10,149 $ 10,057
Unbilled:
Retainages . . . . . . . . . . . . . . . . . . 467 691
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . . . 23,251 5,485
Less-Allowance for doubtful accounts . . . . . (160) (160)
------- -------
Total accounts receivable $ 33,707 $ 16,073
======= =======
</TABLE>
The "Unbilled: Other" included in accounts receivable are reported net of an
allowance for contract disallowances of approximately $276 thousand as of
December 31, 1996 and approximately $1.3 million as of December 31, 1995.
"Unbilled: Other" also includes certain costs which are not reimbursable under
current contracts, but which the company believes will be reimbursable on
execution of contract documentation or amendments increasing funding. Amounts
not presently reimbursable included in "Unbilled: Other" were approximately $288
thousand and $328 thousand as of December 31, 1996, and 1995, respectively.
Contracts with the U. S. Government, primarily with the U. S. Department of
Defense, accounted for more than 95% of revenues in all years presented. These
contracts were performed primarily in the engineering services industry. One
such contract with the U.S. Navy accounted for approximately 14% and 17% of such
revenues in 1995 and 1994, respectively. A new contract awarded in 1995 with
the U. S. Navy accounted for approximately 38% of such revenues in 1996.
<PAGE>
Notes to Consolidated Financial Statements
The company generally expects to collect all accounts receivable other than
retainages within one year. The carrying amount of the accounts receivable does
not significantly differ from fair value.
(4) Debt
<TABLE>
Long-term debt as of December 31, 1996 and 1995 was as follows (in thousands):
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Revolving term loan borrowings and commitments . . $12,629 $4,939
Other debt . . . . . . . . . . . . . . . . . . . . 22 54
------ -----
12,651 4,993
Less portion due within one year . . . . . . . . . 0 (1)
------ -----
$12,651 $4,992
====== =====
</TABLE>
VSE has a revolving term loan agreement (the "Loan") with a syndicate of three
banks. Under the Loan, VSE can borrow up to $45 million, subject to a borrowing
formula based on billed receivables. Interest is charged at a prime-based rate
or at an optional LIBOR-based rate, 7.86% and 8.5%, as of December 31, 1996 and
1995, respectively. A commitment fee is charged on the unused portion of the
loan commitment. The interest rates and the amount of the commitment fee
increase or decrease as VSE's leverage ratio increases or decreases. The Loan
contains collateral requirements by which company assets are secured and
restrictive covenants that include minimum tangible net worth and profitability
requirements and a limit on annual dividends. The termination date of the Loan
is May 31, 1998. Commitments above are for checks outstanding at December 31,
1996 and 1995 of approximately $7.7 million and $800 thousand, respectively.
Additional funds available at December 31, 1996, under the Loan totaled approx-
imately $32 million, subject to the borrowing base formula described above.
Other debt is related to debt acquired in the acquisitions of CMstat and
Energetics.
(5) Accrued Expenses
<TABLE>
The components of accrued expenses as of December 31, 1996 and 1995, were as
follows (in thousands):
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accrued salaries . . . . . . . . . . . . . . . . $ 1,710 $ 1,456
Accrued vacation . . . . . . . . . . . . . . . . 1,417 1,434
Estimated future losses on fixed price and
time and material contracts . . . . . . . . . . 355 753
Other accrued expenses . . . . . . . . . . . . . 2,359 2,041
------- -------
Total accrued expenses $ 5,841 $ 5,684
======= =======
</TABLE>
(6) ESOP/401(k) Plan and Profit Sharing Plan
VSE established an ESOP/401(k) plan in 1984. Under the provisions of the ESOP,
the company and certain of its subsidiaries make contributions into a trust
which purchases VSE stock on behalf of employees who meet certain age and
service requirements and are employed at the end of the plan year. Contribu-
tions at the rate of up to 2% of eligible employee compensation may be made at
the discretion of the board of directors. Contributions are allocated, subject
to a vesting schedule, pro rata based on eligible employee compensation. The
plan expense for
<PAGE>
Notes to Consolidated Financial Statements
VSE and certain of its subsidiaries for 1996, 1995, and 1994,
was approximately $328 thousand, $449 thousand, and $490 thousand, respectively.
The ESOP/401(k) plan owned 673,553 shares and 687,786 shares as of December 31,
1996 and 1995, respectively, which receive dividend payments and are included in
the weighted average shares for earnings per share calculations.
During 1996, the company advanced the ESOP trust $350 thousand in connection
with distributions made to terminees. The advance is payable to the company by
September 30, 1997 unless extended by mutual agreement. The ESOP trust holds
approximately 22 thousand unallocated shares of the company's common stock
related to this transaction, which are not included in the weighted average
shares for earnings per share calculations.
Energetics maintains a profit sharing plan for employees. All employees who
have completed two years of service are members of the profit sharing plan. At
its discretion, Energetics may make contributions to the plan. The plan
expense for 1996 was approximately $460 thousand and from August 29, 1995 to
December 31, 1995 the plan expense was approximately $28 thousand.
(7) Stock Option Plan
The company's Stock Option Plan (the "Plan") was implemented in 1996. The
company accounts for the Plan pursuant to APB Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost has been
recognized. Had compensation cost for the Plan been determined based on SFAS
No. 123, "Accounting for Stock-Based Compensation," the company's net income
and earnings per share would have been as follows (in thousands, except per
share amounts):
1996
-----
Net Income: As reported $1,742
=====
Pro forma 1,643
=====
Net Income per share: As reported $ 1.01
=====
Pro forma .95
=====
Under the Plan, the company may grant options for and sell up to an aggregate of
218,958 shares of the common stock of the company. Through December 31, 1996 the
company has granted options for 131,380 shares of common stock priced at 100% of
the fair value of the stock at the time of the grant of the option. The maximum
term of the options granted is five years. 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 thereafter. Vesting may be accelerated for
shares granted to certain individuals as determined by the Board of Directors.
<TABLE>
Information with respect to stock options is as follows:
<PAGE>
Notes to Consolidated Financial Statements
<CAPTION>
1996
--------------------------
Weighted Average
Shares Exercise Price
------- ----------------
<S> <C> <C>
Outstanding at beginning of year 0
Granted 131,380 $13.64
Forfeited 2,815 $13.64
-------
Outstanding at end of year 128,565 $13.64
=======
Exercisable at end of year 32,845 $13.64
=======
Weighted average fair value of
options granted $3.04
====
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
The fair value of the options is estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions used in the pricing
calculation: risk free interest rate of 5.14%; dividend yield of 2%; expected
life of 3 years; and expected volatility of 29%.
(8) Income Taxes
<TABLE>
The company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision for income taxes for the years
ended December 31, 1996, 1995 and 1994 are as follows (in thousands):
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Current
Federal . . . . . . . . . . . . . . . . . . $ 408 $ 508 $ 926
State . . . . . . . . . . . . . . . . . . . 106 115 228
----- ----- -----
514 623 1,154
----- ----- -----
Deferred
Federal . . . . . . . . . . . . . . . . . . 413 393 (142)
State . . . . . . . . . . . . . . . . . . 89 94 (70)
----- ----- -----
Provision for income taxes $1,016 $1,110 $ 942
===== ===== =====
</TABLE>
<TABLE>
The differences between the amounts of tax computed at the federal statutory
rate of 34% and the provisions for income taxes for 1996, 1995, and 1994 are
as follows (in thousands):
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Tax at statutory federal income tax rate . . . $1,007 $ 969 $ 846
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 124 138 125
Permanent differences for tax . . . . . . . 3 3 (8)
Federal and state tax rate adjustments . . 0 0 (21)
Other, net . . . . . . . . . . . . . . . . (118) 0 0
----- ----- -----
Provision for income taxes $1,016 $1,110 $ 942
===== ===== =====
</TABLE>
<TABLE>
The company's deferred tax (liabilities) assets as of December 31, 1996 and
1995, which represent the tax effects of temporary differences between tax and
financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates, are as follows (in thousands):
<PAGE>
Notes to Consolidated Financial Statements
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current deferred tax assets . . . . . . .$ 1,252 $ 1,876
Current deferred tax liabilities . . . . . (817) (1,066)
------ ------
Net current deferred tax assets . . . . . 435 810
------ ------
Noncurrent deferred tax assets . . . . . . 855 833
Noncurrent deferred tax liabilities . . . . (1,359) (1,194)
Valuation allowance . . . . . . . . . . . . (50) (50)
------ ------
Net noncurrent deferred tax
liabilities . . . . . . . . . . . . . (554) (411)
------ ------
Net deferred tax (liabilities) assets . . .$ (119) $ 399
====== ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The company has
established such a valuation allowance for the deferred tax asset associated
with certain real property because of the uncertainty that the deferred tax
asset will be fully realized.
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
The tax effects of temporary differences representing deferred tax assets and
liabilities as of December 31, 1996 and 1995, are as follows (in thousands):
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred compensation . . . . . . . . . . . . . . $ 1,024 $ 1,018
Accrued expenses . . . . . . . . . . . . . . . . 347 364
Other . . . . . . . . . . . . . . . . . . . . . . 175 263
Allowance for contract and other disallowances . 108 488
Bad debt expense . . . . . . . . . . . . . . . . 65 65
Retainages not taxed until billed. . . . . . . . (132) (191)
Accelerated depreciation . . . . . . . . . . . . (367) (132)
Deferred revenues . . . . . . . . . . . . . . . . (640) (684)
Intangible assets . . . . . . . . . . . . . . . . (649) (742)
------ ------
(69) 449
Valuation allowance . . . . . . . . . . . . . . . (50) (50)
------ ------
Net deferred tax (liabilities) assets $ (119) $ 399
====== ======
</TABLE>
(9) Commitments and Contingencies
Leases
The principal facilities of the company and its subsidiaries are generally
rented under noncancelable operating leases for periods of one to ten years.
The company and its subsidiaries also lease furniture and equipment generally
under noncancelable operating leases for periods of one to five years. Rent
expense for 1996, 1995, and 1994, was approximately $2.9 million, $2.2 million,
and $2.0 million, respectively, which was net of sublease income of approx-
imately $425 thousand, $272 thousand, and $331 thousand, respectively. The
future minimum annual rental required under leases having remaining non-
cancelable lease terms in excess of one year, net of noncancelable sublease
income, will approximate $2.1 million in 1997, $2.2 million in 1998, $1.8
million in 1999, $1.9 million in 2000, $1.4 million in 2001 and $1.3 million
thereafter.
Note Guarantee
The company is a guarantor of an Industrial Development Revenue Note assumed by
Alexandria Tech Center II/Starr Associates, a Virginia general partnership of
which Starr Management Corporation, a former VSE subsidiary ("Starr"), is a 50%
partner. As of December 31, 1996, the outstanding principal of the note was
$2.4 million. The note evidences loan proceeds that were used to finance the
con-
<PAGE>
Notes to Consolidated Financial Statements
struction of an office building owned by the partnership for a period of ten
years and has a one year lease for an additional 16% of the building. The ten
year lease period expires in July 1997.
Starr has agreed to indemnify the company for any liabilities resulting from any
guarantee given by VSE on behalf of Starr.
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.
<PAGE>
Selected Quarterly Data
<TABLE>
Selected Quarterly Data (Unaudited)
(in thousands, except earnings per share)
<CAPTION>
1996 Quarters
---------------------------------
1st 2nd 3rd 4th
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $19,638 $24,476 $29,664 $46,309
====== ====== ====== ======
Gross profit . . . . . . . . . . . . . . . $ 1,154 $ 838 $ 892 $ 1,069
====== ====== ====== ======
Income from continuing operations . . . . $ 468 $ 467 $ 478 $ 533
====== ====== ====== ======
Loss from discontinued operations . . . . $ (204) $ 0 $ 0 $ 0
====== ====== ====== ======
Net income . . . . . . . . . . . . . . . . $ 264 $ 467 $ 478 $ 533
====== ====== ====== ======
Weighted average shares outstanding . . . 1,738 1,738 1,738 1,716
====== ====== ====== ======
Earnings per share:
Income from continuing operations . . . . $ .27 $ .27 $ .27 $ .31
====== ====== ====== ======
Loss from discontinued operations . . . . $ (.11) $ 0 $ 0 $ 0
====== ====== ====== ======
Net income per share . . . . . . . . . . . $ .16 $ .27 $ .27 $ .31
====== ====== ====== ======
1995 Quarters
---------------------------------
1st 2nd 3rd 4th
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $15,944 $16,866 $20,892 $20,088
====== ====== ====== ======
Gross profit . . . . . . . . . . . . . . $ 800 $ 360 $ 1,519 $ 523
====== ====== ====== ======
Income from continuing operations . . . . $ 458 $ 333 $ 508 $ 439
====== ====== ====== ======
Income (loss) from discontinued operations $ (44) $ (36) $ (49) $ 37
====== ====== ====== ======
Net income . . . . . . . . . . . . . . . . $ 414 $ 297 $ 459 $ 476
====== ====== ====== ======
Weighted average shares outstanding . . . 1,726 1,726 1,738 1,738
====== ====== ====== ======
Earnings per share:
Income from continuing operations . . . . $ .26 $ .20 $ .29 $ .25
====== ====== ====== ======
Income (loss) from discontinued operations $ (.02) $ (.03) $ (.02) $ .02
====== ====== ====== ======
Net income per share . . . . . . . . . . . $ .24 $ .17 $ .27 $ .27
====== ====== ====== ======
</TABLE>
<PAGE>
Form 10-K
Securities and Exchange Commission
Washington, D. C. 20509
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 1996
Commission File No. 0-3676
Registrant: VSE Corporation
Incorporated in the State of Delaware
IRS Employer Identification No. 54-0649263
Address: 2550 Huntington Avenue
Alexandria, Virginia 22303-1499
Telephone: (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.
VSE Corporation 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 and has been subject to such filing requirements for the past 90
days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value (average of high and low sales prices) of VSE
Corporation voting stock held by non-affiliates as of March 1, 1997,
was approximately $11 million.
As of March 1, 1997, 1,738,334 shares of VSE Corporation Common Stock were
outstanding.
Portions of the Registrant's 1996 Annual Report to stockholders for the
year ended December 31, 1996, are incorporated by reference into Part I
and II of this report.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 10, 1997, are incorporated by
reference in Part III of the Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VSE Corporation
Registrant
C. S. Weber, Senior Vice President, Secretary and Treasurer
March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 31, 1997, by the following persons in the
capacities indicated:
D. M. Ervine
Chairman and Chief Executive Officer
R. B. McFarland
President and Chief Operating Officer
C. S. Weber
Senior Vice President and Principal
Financial Officer
T. J. Corridon
Senior Vice President and Principal
Accounting Officer
A majority of the Directors of the Registrant whose names appear on page
42.
<PAGE>
<PAGE>
Form 10K Cross-Reference Index
Part Item Page(s)
- -------------------------------------------------------------------------------
I. 1. Business 12-17
2. Properties 6-10
3. Legal Proceedings 37
4. Submission of Matters to a Vote of Security Holders None
- Executive Officers of the Registrant 23
II. 5. Market for Registrant's Common Stock and Related
Stockholder Matters 23
6. Selected Financial Data 1
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-22
8. Financial Statements and Supplementary Data 25-37
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure None
III. 10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners
and Management *
13. Certain Relationships and Related Transactions *
IV. 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) Financial Statements:
Report of Independent Public Accountants 24
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Stockholder's
Investments 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29-37
(a) (2) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts +
(a) (3) Exhibits:
Exhibits Filed with the Report:
Subsidiaries of the Registrant +
Employment Agreement entered into as of
January 1, 1996, by and between VSE
Corporation and Donald M. Ervine +
Employment Agreement entered into as of
January 1, 1996, by and between VSE
Corporation and Richard B. McFarland +
Restated Certificate of Incorporation +
Amended By-Laws +
Exhibits Incorporated by Reference:
Specimen Stock Certificate +
Exchange Agreement dated as of March 25, 1992,
amended as of September 1, 1992, by and between
VSE Corporation and JBT Holding Corp., et al. +
Deferred Supplemental Compensation Plan +
Stock Purchase Agreement dated August 19, 1995
by and between VSE Corporation and the share-
holders of Energetics Incorporated +
(b) Reports on Form 8-K: None
*The information required by Part III, Items 10 through 13, is incorporated by
reference from portions of the VSE Corporation Notice of 1997 Annual Meeting
and Proxy Statement.
+Copies of financial statement schedules and exhibits are available on request.
<PAGE>
<PAGE>
Officers and Directors
Officers
Chairman of the Board
and Chief Executive Officer
Donald M. Ervine
President and
Chief Operating Officer
Richard B. McFarland
Executive Vice President,
Business Development
Byron S. Bartholomew
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
Craig S. Weber
Senior Vice President and
Comptroller
Thomas J. Corridon
Senior Vice Presidents
Edward V. Karl
James M. Knowlton
Mark A. Robin
Jayne M. Tuohig
Vice Presidents
William R. Albertolli
Francis F. Beverina
Peter J. Desrosiers
Michael E. Hamerly
John S. Gilroy
H. Eugene Hosier
William J. Nelson
Thomas L. Prather, Jr.
Paul Vander Myde
John J. Werbowski
Assistant Vice Presidents
Bryan E. Adams
Stephen W. Austin
Deborah R. Blakeman
Lester M. Buckner
James C. Cheney
Leonard Goldstein
Thomas R. Loftus
Jeffrey H. McCurdy
George M. Musick
M. Darleen Stein
Board of Directors
Donald M. Ervine
Chairman of the Board, VSE
Corporation
Robert J. Kelly
Admiral, U.S. Navy (Ret.);
Director of International
Operations, The Wing Group
Calvin S. Koonce, Ph.D.
President, Koonce Securities,
Inc.
Joseph M. Marchello, P.E., Ph.D.
Professor, Old Dominion
University; formerly Chancellor
of the University of Missouri
Rolla
Richard B. McFarland
President, VSE Corporation
David M. Osnos
Senior Partner,
Arent Fox Kintner Plotkin &
Kahn, Attorneys-at-Law
Jimmy D. Ross
General, U.S. Army (Ret.);
Senior Vice President,
Biomedical Services, American
Red Cross
Bonnie K. Wachtel
Vice President and General
Counsel, Wachtel & Co., Inc.
Brokers and Underwriters
Director Emeritus
Harold P. Weinberg
Consultant; formerly Senior
Vice President and Director
(1961-1995), VSE Corporation
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 453
<SECURITIES> 0
<RECEIVABLES> 33,707
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,511
<PP&E> 5,145
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,341
<CURRENT-LIABILITIES> 19,427
<BONDS> 0
<COMMON> 195
0
0
<OTHER-SE> 14,400
<TOTAL-LIABILITY-AND-EQUITY> 48,341
<SALES> 120,087
<TOTAL-REVENUES> 120,087
<CGS> 116,134
<TOTAL-COSTS> 116,134
<OTHER-EXPENSES> 528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> 2,962
<INCOME-TAX> 1,016
<INCOME-CONTINUING> 1,946
<DISCONTINUED> (204)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,742
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
</TABLE>
EXHIBIT III
<TABLE>
VSE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands; except share data)
<CAPTION>
Year Ended December 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net income:
Continuing operations $1,946 $1,738 $1,547
Discontinued operations:
Income (loss) from operations (25) (92) 6
Loss on disposal (179) 0 0
------ ------ ------
$1,742 $1,646 $1,553
====== ====== ======
Weighted average shares
outstanding 1,731,601 1,732,796 1,726,334
========= ========= =========
Net earnings per share - primary and
fully diluted:
Continuing operations $1.11 $1.00 $ .90
Discontinued operations:
Income (loss) from operations (.01) (.05) 0
Loss on disposal (.10) 0 0
---- ---- ----
$1.00 $ .95 $ .90
==== ==== ====
Shares from above 1,731,601 1,732,796 1,726,334
Assumed exercise of options
(treasury stock method) 15,909 0 0
--------- --------- ---------
1,747,510 1,732,796 1,726,334
========= ========= =========
</TABLE>
EXHIBIT IV
VSE CORPORATION
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included and incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statement file numbers 333-15307,
333-15309, and 333-15311.
/s/ ARTHUR ANDERSENT LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 31,1997
