SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days.
Yes [x] No [ ]
Number of shares of Common Stock outstanding as of August 1, 1998: 2,186,905.
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 328 $ 15
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 25,900 24,650
Deferred tax assets . . . . . . . . . . . . . . . 504 899
Other current assets . . . . . . . . . . . . . . . 1,610 1,322
-------- --------
Total current assets . . . . . . . . . . . . . . 28,342 26,886
Property and equipment, net . . . . . . . . . . . . 4,575 5,034
Deferred tax assets . . . . . . . . . . . . . . . . 309 309
Intangible assets, net . . . . . . . . . . . . . . . 2,948 3,117
Other assets . . . . . . . . . . . . . . . . . . . . 3,198 2,702
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 39,372 $ 38,048
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 1,222 $ 555
Accounts payable and other current liabilities . . 6,890 10,184
Accrued expenses . . . . . . . . . . . . . . . . 6,507 6,152
Dividends payable . . . . . . . . . . . . . . . . 79 78
-------- --------
Total current liabilities . . . . . . . . . . . 14,698 16,969
Long-term debt . . . . . . . . . . . . . . . . . . . 10,149 7,108
Deferred compensation . . . . . . . . . . . . . . . 1,745 1,490
-------- --------
Total liabilities . . . . . . . . . . . . . . . 26,592 25,567
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,186,905 shares in 1998
and 2,165,405 in 1997 . . . . . . . . . . . . . 109 108
Paid-in surplus . . . . . . . . . . . . . . . . . 3,832 3,631
Retained earnings . . . . . . . . . . . . . . . . 9,631 9,422
ESOP obligation . . . . . . . . . . . . . . . . . (792) (680)
-------- --------
Total stockholders' investment . . . . . . . . . 12,780 12,481
-------- --------
Total liabilities and stockholders' investment . $ 39,372 $ 38,048
======== ========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the six months ended June 30,
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
1998 1997
-------------------- --------------------
Three Six Three Six
Months Months Months Months
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, principally from
contracts . . . . . . . . . . . $ 39,031 $ 80,695 $ 32,170 $ 79,664
Costs and expenses of contracts . 38,324 79,347 32,159 79,511
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 707 1,348 11 153
Selling, general and administrative
expenses . . . . . . . . . . . 196 404 150 630
Interest expense . . . . . . . . 151 252 131 277
--------- --------- --------- ---------
Pretax income (loss). . . . . . . 360 692 (270) (754)
Provision (benefit) for income
taxes . . . . . . . . . . . . . 171 325 (114) (321)
--------- --------- --------- ---------
Net income (loss) . . . . . . . . $ 189 $ 367 $ (156) $ (433)
========= ========= ========= =========
Weighted average shares
outstanding: 2,132,061 2,130,353 2,121,710 2,131,937
========= ========= ========= =========
Basic earnings (loss) per share: $ 0.09 $ 0.17 $ (0.07) $ (0.20)
========= ========= ========= =========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
Realized
Loss on
Common Stock Paid-In Retained Treasury ESOP Marketable
Shares Amount Surplus Earnings Stock Obligation Securities
------ ------ ------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 . . . 3,908 $ 195 $ 8,241 $ 22,840 $(16,285) $ (350) $ (46)
Net loss for
the year . . . . . . . -- -- -- (1,447) -- -- --
Purchase of Treasury
Stock . . . . . . . . . -- -- -- -- (70) -- --
ESOP Obligation . . . . . -- -- -- -- -- (330) --
Realized loss on
marketable
securities . . . . . . -- -- -- -- -- -- 46
Retirement of
Treasury Stock . . . . (2,176) (109) (4,588) (11,658) 16,355 -- --
Stock split
effected in the
form of a 5-for-4
stock dividend . . . . 433 22 (22) -- -- -- --
Dividends
declared ($.144) . . . -- -- -- (313) -- -- --
------ ------ ------- -------- -------- -------- ----------
Balance at
December 31, 1997 . . . 2,165 108 3,631 9,422 -- (680) --
Stock grant 22 1 201 -- -- -- --
ESOP Obligation . . . . . -- -- -- -- -- (112) --
Net income
for the period . . . . -- -- -- 367 -- -- --
Dividends declared
($.072) . . . . . . . . -- -- -- (158) -- -- --
------ ------ ------- -------- -------- -------- ----------
Balance at
June 30, 1998 . . . . . 2,187 $ 109 $ 3,832 $ 9,631 $ -- $ (792) $ --
====== ====== ======= ======== ======== ======== ==========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the six months ended June 30,
- -------------------------------------------------------------------------------
(in thousands)
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 367 $ (433)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 880 1,162
Deferred compensation plan expense . . . . . . . . . . 72 119
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (1,250) 8,936
Other current assets and noncurrent assets . . . . . (784) (914)
Deferred taxes, net . . . . . . . . . . . . . . . . 395 (228)
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . (3,229) (6,400)
Accrued expenses. . . . . . . . . . . . . . . . . . . 355 197
------- -------
Net cash (used in) provided by
operating activities (3,194) 2,439
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . . (252) (1,352)
Capitalized software development costs . . . . . . . . . . 0 (201)
Net proceeds from deferred compensation . . . . . . . . . 119 0
------- -------
Net cash used in investing activities (133) (1,553)
------- -------
Cash flows from financing activities:
Net proceeds from (payments of) bank loan . . . . . . . . 3,708 (481)
Stock grants . . . . . . . . . . . . . . . . . . . . . . 202 0
Advance to ESOP . . . . . . . . . . . . . . . . . . . . . (112) (330)
Purchase of treasury stock . . . . . . . . . . . . . . . 0 (70)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (158) (156)
------- -------
Net cash provided by (used in)
financing activities 3,640 (1,037)
------- -------
Net increase (decrease) in cash and cash equivalents . . . 313 (151)
Cash and cash equivalents at beginning of period . . . . 15 453
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 328 $ 302
======= =======
</TABLE>
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information refer
to the consolidated financial statements and footnotes thereto included in the
VSE Corporation Annual Report on Form 10-K for the year ended December 31, 1997.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. We have not yet
quantified the impacts of adopting SFAS No. 133 on our financial statements and
have not determined the timing or method of our adoption of SFAS No. 133. The
company does not believe the adoption will have a material effect on the
company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
a company to modify or expand the financial statement disclosures for operating
segments, products and services, and geographic areas. Implementation of this
disclosure standard will not affect the company's financial position or results
of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 requires a company to report comprehensive
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
income and its components in financial statements. The company adopted the
provisions of the standard during the first quarter of 1998. There were no
differences between comprehensive income and historical net income reported by
the company.
Debt
VSE has a loan with a syndicate of three banks that contains certain financial
covenants. As of December 31, 1997 the company was not in compliance with the
cash flow coverage ratio covenant. The banks issued an amendment to the loan
with regard to this covenant for the period ended December 31, 1997. The
company was in compliance with the covenant as amended.
Additionally, the banks agreed to amend the cash flow coverage covenant and
certain other covenants of the loan for 1998. As of March 31, 1998 and
June 30, 1998, the company was not in compliance with the cash flow coverage
covenant as it was originally written. The banks have agreed to modify the
computation method of the cash flow coverage ratio for 1998 as well as make
changes to certain other covenants. As of March 31, 1998 and June 30, 1998,
the company was in compliance with the loan covenants as amended for 1998.
Litigation
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of
management, the resolution of these claims will not have a material adverse
effect on the company's results of operations or financial position.
Segment Information
VSE has two reportable segments: the engineering, logistics, management, and
technical services segment ("ELMTS") which provides diversified engineering,
technical, and management services, principally to agencies of the United
States Government and to other government prime contractors; and the software
products and services segment ("SPS"), which provides application software and
services related to the installation of the software to primarily commercial
customers.
The accounting policies are described in the summary of significant accounting
policies included in the VSE Corporation Annual Report on Form 10-K for the
year ended December 31, 1997. VSE's reportable segments are strategic business
units that offer different products and services. They are managed separately
because each business requires different technology and marketing strategies.
The software products and services segment was acquired as a unit, and the
management has been maintained separately since the acquisition.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
The following table presents revenues and other financial information by
business segment for the three and six month periods ended June 30, 1998 and
June 30, 1997, in thousands:
<CAPTION>
Three months ended June 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 38,386 $ 645 $39,031
Interest expense 15 136 151
Depreciation and amortization 379 61 440
Operating income (loss) 941 (581) 360
Expenditures for capital assets 104 27 131
Six months ended June 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 79,217 $1,478 $80,695
Interest expense 15 237 252
Depreciation and amortization 759 121 880
Operating income (loss) 1,879 (1,187) 692
Expenditures for capital assets 219 33 252
Three months ended June 30, 1997 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 31,373 $ 797 $32,170
Interest expense 33 98 131
Depreciation and amortization 382 206 588
Operating income (loss) 757 (1,027) (270)
Expenditures for capital assets 799 201 1,000
Six months ended June 30, 1997 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 78,195 $1,469 $79,664
Interest expense 115 162 277
Depreciation and amortization 748 414 1,162
Operating income (loss) 1,750 (2,504) (754)
Expenditures for capital assets 1,051 502 1,553
</TABLE>
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE and its subsidiaries and divisions operate in two segments: the
engineering, logistics, management and technical services segment and the
software products and services segment.Engineering, logistics, management and
technical services including information technology services are provided by
VSE and by each of its subsidiaries and divisions including Energetics
Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), and BAV
Division ("BAV"), Indian Head Division ("Ordnance"), and Value Systems Services
Division ("VSS"), unincorporated divisions of VSE. Two other VSE subsidiaries,
VSE Corona, Inc. ("VCI") and VSE Services Corporation ("VSES") have generally
been inactive since 1992.
Software products and services are the primary business of VSE's subsidiary
CMstat Corporation ("CMstat").
<TABLE>
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the changes in these items by segment for the
three and six month periods ended June 30, 1998 and 1997 (in thousands):
<CAPTION>
1998
Compared
to
1997
Three Months Six Months ----------------
Ended June 30, Ended June 30, Three Six
1998 1997 1998 1997 Months Months
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Engineering, Logistics,
Management and
Technical Services
Segment:
Revenues . . . . . . . $38,386 $31,373 $79,217 $78,195 $ 7,013 $1,022
======= ======= ======= ======= ======= ======
Pretax income . . . . $ 941 $ 757 $ 1,879 $ 1,750 $ 184 $ 129
Provision for income
taxes . . . . . . . 433 410 874 834 23 40
------- ------- ------- ------- ------- ------
Net income . . . . . $ 508 $ 347 $ 1,005 $ 916 $ 161 $ 89
======= ======= ======= ======= ======= ======
Software Products and
Services Segment:
Revenues . . . . . . . $ 645 $ 797 $ 1,478 $ 1,469 $ (152) $ 9
======= ======= ======= ======= ======= ======
Pretax loss . . . . . $ (581) $(1,027) $(1,187) $(2,504) $ 446 $1,317
Benefit for income
taxes . . . . . . . (262) (524) (549) (1,155) 262 606
------- ------- ------- ------- ------- ------
Net loss . . . . . . . $ (319) $ (503) $ (638) $(1,349) $ 184 $ 711
======= ======= ======= ======= ======= ======
</TABLE>
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
RESULTS OF OPERATIONS
The discussion and analysis which follows is intended to assist in understanding
and evaluating the results of operations, financial condition, and certain other
matters of the company. The company is engaged principally in providing
engineering, software development, testing, and management services to the U.S.
Government (the "government"). All significant intercompany transactions have
been eliminated in consolidation. Certain prior year balances have been re-
classified for comparative purposes.
Engineering, Logistics, Management and Technical Services Segment
Revenues for this segment increased by approximately 22% for the three month
period in 1998 as compared to 1997, and increased only slightly, 1%, for the
six month period of 1998 as compared to 1997. The timing of BAV revenue from
quarter to quarter is primarily responsible for the three month increase, while
revenue for BAV was basically unchanged for the six month periods ending
June 30, 1998 and 1997. All of the other subsidiaries and divisions recorded
slight increases in revenue for the six month period ended June 30, 1998 as
compared to 1997.
Pretax income for this segment for the three and six month periods ending
June 30, 1998 increased by approximately 24% and 7%, respectively, as compared
to the same periods of 1997. The increase in pretax income for these periods
is primarily due to increases in revenues and the timing of receipt of award
fees on the BAV Contract.
The largest customer for the engineering, logistics, management and technical
services rendered by the company is the U.S. Department of Defense ("Defense"),
including agencies of the U.S. Army, Navy, and Air Force. VSE's engineering
services revenues have historically been subject to year to year fluctuations
resulting from changes in the level of Defense spending. The Defense budget
has been restrained by the federal budget deficit in recent years, and there
can be no assurance that future reductions in the Defense budget will not have
a material adverse impact on the company's results of operations or financial
position.
Substantially all of the company's revenues from this segment depend on the
award of new contracts, on current contracts not being terminated for the
convenience of the government, and on the exercise of option periods and the
satisfaction of incremental funding requirements on current contracts. In 1998
and 1997, the company did not experience any termination of contracts for the
convenience of the government nor any non-exercise of option periods on current
contracts which were material to the company's results of operations or
financial position.
BAV Contract In August 1995, VSE's BAV Division was awarded a contract with
the U.S. Navy to provide engineering, technical and logistical support services
associated with the sale, lease, or transfer of Navy ships to foreign govern-
ments. BAV began work on the contract in September 1995. This contract has
the potential, if all options are exercised, to generate revenues in
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
excess of one billion dollars over a ten year period from 1995 through 2005.
The contract accounted for approximately 49% and 51% of consolidated revenues
from operations during the six month periods ended June 30, 1998 and 1997,
respectively. The level of revenues generated by this contract will vary
depending on a number of factors including the timing of ship transfers and
associated support services ordered by foreign governments and economic
conditions of potential customers worldwide. The company has experienced
significant quarterly revenue fluctuations and anticipates that future quarterly
revenues will be subject to significant variations primarily due to this
contract.
Software Products and Services Segment
Revenues for this segment decreased by approximately 19% for the three month
period, and remained substantially unchanged for the six month period ending
June 30, 1998, as copared to the same periods of 1997.
The decrease in revenues for the three month period is due to the timing of and
fluctuations in product sales and consulting services related to the
installation and implementation of CMstat products for the periods compared.
Pretax loss for this segment for the three and six month periods ending
June 30, 1998 decreased by approximately 43% and 53%, respectively, as compared
to the same periods of 1997. The reduced loss is primarily due to operating
cost reduction efforts implemented by management. Profitability of this segment
is dependent on CMstat's sales. While management believes that CMstat will
generate sufficient future revenues, failure to do so could adversely affect
the company's results of operations.
The company expects that it will experience significant fluctuations in
quarterly operating results due largely to the nature of CMstat's business.
CMstat's future operating results will depend upon a number of factors,
including the demand for its products, the size and timing of specific sales,
the delay or deferral of customer implementations, the level of product and
price competition that it encounters, the length of its sales cycles, the
successful expansion of its direct sales force and customer support organiza-
tion, the timing of new product introductions and product enhancements by
CMstat and its competitors, the mix of products and services sold, the
activities of and acquisitions by its competitors, the timing of new hires and
its ability to develop and market new products and control costs. CMstat's
operating results could also be affected by general economic conditions. In
addition, the decision to license and implement an enterprise-level business
software system is usually discretionary, involves a significant commitment of
customer resources and is subject to delays, and to budget cycles and internal
authorization 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
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<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
of license transactions could cause significant variations in operating results
from quarter to quarter. To the extent such expenses precede, or are not
subsequently followed by, anticipated revenue, the company's operating results
could be materially and adversely affected.
CMstat derives substantially greater profit margins from license fees than from
service revenues. The mix of revenues between these two components can
fluctuate materially from quarter to quarter, and such fluctuations can have a
significant effect on margins. When lower margin service revenues comprise a
greater percentage of the company's total revenues, CMstat's margins and income
from operations could be adversely affected.
As a result of these and other factors, the company's operating results for any
quarter are subject to significant variation, and the company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The company's 1998 quarterly operating results are not a good indicator of
future quarterly results.
Liquidity and Capital Resources
A net increase in cash and cash equivalents of approximately $313 thousand
during the six month period ended June 30, 1998 resulted from approximately
$3.6 million provided by financing activities, approximately $3.2 million used
in operating activities, and approximately $133 thousand used in investing
activities. Significant financing activities included increased borrowing on
the company's bank loan, including commitments for checks outstanding, of
approximately $3.7 million. Significant investing activities included purchases
of equipment of approximately $252 thousand.
A net decrease in cash and cash equivalents of approximately $151 thousand
during the six month period ended June 30, 1997 resulted from approximately
$2.4 million provided by operating activities, approximately $1.5 million used
in investing activities, and approximately $1 million used in financing
activities. Significant investing activities included approximately $1.4
million associated with the purchase of property and equipment. Significant
financing activities included decreased borrowing on the company's bank loan,
including commitments for checks outstanding, of approximately $481 thousand.
The difference between the cash used in operating activities of approximately
$3.2 million in 1998 as compared to the cash provided by operating activities
of approximately $2.4 million for the same period of 1997 is primarily due to
changes in the levels of accounts receivable and accounts payable associated
with fluctuation in BAV contract activity.
The company's principal requirements for cash are to finance accounts
receivable, to acquire capital assets for office and computer support, and to
pay bank debt and pay cash dividends. Performance of work under the BAV
contract has increased the company's requirements for cash, however, manage-
ment believes that the cash flows from operations and the bank loan commitment
are adequate to meet current operating cash requirements.
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<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE's requirements for working capital are affected significantly by its
revenues and accounts receivable, which are primarily from billings made by
the company to the government or other government prime contractors for services
rendered. Such accounts receivable generally do not present liquidity or
collection problems. Working capital is also affected by (a) contract
retainages, (b) start-up and termination costs associated with new or complete
contracts, (c) capital equipment requirements, and (d) differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company.
Government contracts generally require VSE to pay for material and subcontract
costs included in VSE's contract billings prior to receiving payment for such
costs from the government. However, such contracts generally provide for
progress payments on a monthly or semimonthly basis, thereby reducing require-
ments for working capital.
Quarterly cash dividends at the rate of $.036 per share were declared during
the three month period ended June 30, 1998. Pursuant to its bank loan agree-
ment, the payment of cash dividends by VSE is subject to a maximum annual rate.
VSE has paid cash dividends each year since 1973.
ESOP Advances
During 1997 and 1996, the company advanced the ESOP trust $330 thousand and $350
thousand, respectively, in connection with distributions made to participants
terminating from the ESOP plan administered by the ESOP trust. The loan agree-
ments provide for repayment by September 30, 1998 or as market conditions
permit. The loan agreements are unsecured and do not require the payment of
interest. In June, 1998, the company advanced the ESOP trust an additional
$112 thousand for additional distributions to terminating participants. This
advance is due December 31, 1998. As of June 30, 1998, the ESOP trust held
approximately 72,000 unallocated shares of the company's common stock related
to these transactions.
Inflation and Pricing Policy
Most of the contracts performed by VSE provide for estimates of future labor
costs to be escalated for any option periods provided by the contracts, while
the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to
be insignificant.
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<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Global Economic Conditions
VSE's business is subject to the risks associated with global economic
conditions associated with potential foreign customers served through VSE's
contracts with the U.S. Government. For example, the reported economic
slowdown of certain countries located in Southeast Asia could potentially
affect BAV sales. Management is unable to predict what, if any, impact such
conditions may have on the company's financial position or results of
operations.
Year 2000
The company has ongoing assessments on the impact of the "Year 2000" issue on
its systems and operations. Some systems will require modification or
replacement over the next two years in order to render the systems ready for
the year 2000. Modifications of some systems have already occurred and others
are in various stages of activity ranging from evaluation to testing. The
company is also assessing how it could be affected by the failure of third
parties (i.e. customers and vendors) to address their Year 2000 issues.
Management currently believes that the incremental costs of addressing these
issues will not materially affect the company's consolidated financial
position, liquidity, or results of operations through December 31, 1999.
The company currently believes it will be able to resolve all major Year 2000
issues by the end of 1999.
Market Risk
The company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at June 30,
1998.
Forward Looking Statements
This filing contains statements which, to the extent they are not recitations
of historical fact, constitute "forward looking statements" under federal
securities laws. All such statements are intended to be subject to the safe
harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual VSE results to
differ materially from those anticipated in the forward looking statements
contained in this statement, see VSE's Securities and Exchange Commission
filings including, but not limited to, VSE's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (Form 10-K), including the discussions
captioned "Change and Challenge"; "Backlog" and "Competition and Risks"; and
"Income from Continuing Operations Before Income Taxes" contained respectively
in VSE's "Letter to Stockholders"; "Description of Business"; and "Management
Discussion and Analysis" in the VSE Corporation 1997 Annual Report incorporated
by reference and attached to VSE's Form 10-K filing.
PAGE
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
PART II. Other InformationItem
6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On April 7, 1998, the Registrant filed a Current Report on Form 8-K
reporting the Consent of Independent Public Accountants for the incorporation
of their reports included and incorporated by reference in the Registrant's
Form 10-K for the year ended December 31, 1997, in the Registrant's previously
filed Registration Statement File Numbers 333-15307, 333-15309, and 333-15311.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has omitted all other items contained in "Part II. Other
Information" because such other items are not applicable or are not required if
the answer is negative or because the information required to be reported
therein has been previously reported.
PAGE
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
Date: August 11, 1998 /s/ C. S. WEBER
-------------------------------------
C. S. Weber, Senior Vice President,
Secretary and Treasurer
(Principal Financial Officer)
Date: August 11, 1998 /s/ T. J. CORRIDON
-------------------------------------
T. J. Corridon, Senior Vice President
and Comptroller
(Principal Accounting Officer)
The financial information included in this report reflects all known adjustments
normally determined or settled at year-end which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods. The accompanying notes to consolidated financial statements are an
integral part of this report.
PAGE
<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 328
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<RECEIVABLES> 25,900
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0
0
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