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 September 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
requirements for the past 90 days. Yes [x] No [ ]
Number of shares of Common Stock outstanding as of November 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>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 289 $ 15
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . 28,891 24,650
Deferred tax assets . . . . . . . . . . . . . . 866 899
Other current assets . . . . . . . . . . . . . . 1,541 1,322
-------- --------
Total current assets . . . . . . . . . . . . . 31,587 26,886
Property and equipment, net . . . . . . . . . . . 4,505 5,034
Deferred tax assets . . . . . . . . . . . . . . . 429 309
Intangible assets, net . . . . . . . . . . . . . . 2,920 3,117
Other assets . . . . . . . . . . . . . . . . . . . 3,011 2,702
-------- --------
Total assets . . . . . . . . . . . . . . . . . $ 42,452 $ 38,048
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . $ 1,333 $ 555
Accounts payable and other current liabilities . 15,193 10,184
Accrued expenses . . . . . . . . . . . . . . . 7,434 6,152
Dividends payable . . . . . . . . . . . . . . . 79 78
-------- --------
Total current liabilities . . . . . . . . . . 24,039 16,969
Long-term debt . . . . . . . . . . . . . . . . . . 3,257 7,108
Deferred compensation . . . . . . . . . . . . . . 1,782 1,490
-------- --------
Total liabilities . . . . . . . . . . . . . . 29,078 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 . . . . . . . . . . . . . . . 10,225 9,422
ESOP obligation . . . . . . . . . . . . . . . . (792) (680)
-------- --------
Total stockholders' investment . . . . . . . . 13,374 12,481
-------- --------
Total liabilities and stockholders' investment $ 42,452 $ 38,048
======== ========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three and nine months ended September 30,
- ------------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
1998 1997
-------------------- --------------------
Three Nine Three Nine
Months Months Months Months
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, principally from
contracts . . . . . . . . . . . . $ 45,082 $ 125,777 $ 34,564 $ 114,228
Costs and expenses of contracts . 43,774 123,121 33,923 113,434
--------- -------- --------- ---------
Gross profit . . . . . . . . . . 1,308 2,656 641 794
Selling, general and administrative
expenses . . . . . . . . . . . 221 625 270 900
Interest expense . . . . . . . . 175 427 149 426
--------- --------- --------- ---------
Pretax income (loss). . . . . . . 912 1,604 222 (532)
Provision (benefit) for income
taxes . . . . . . . . . . . . . 239 564 214 (107)
--------- --------- --------- ---------
Net income (loss) . . . . . . . . $ 673 $ 1,040 $ 8 $ (425)
========= ========= ========= =========
Weighted average shares
outstanding: 2,122,517 2,128,002 2,113,755 2,126,483
========= ========= ========= =========
Basic earnings (loss) per share: $ 0.32 $ 0.49 $ 0.00 $ (0.20)
========= ========= ========= =========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------------------------
(in thousands) (Unrealized)
<CAPTION> Realized
Common Stock Loss on
--------------- 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 ($.144) . . . -- -- -- (313) -- -- --
------ ----- ------- -------- -------- -------- --------
Balance at
December 31, 1997 . . . 2,165 108 3,631 9,422 -- (680) --
Stock grant 22 1 201 -- -- -- --
ESOP Obligation . . . . . -- -- -- -- -- (112) --
Net income
for the period . . . . -- -- -- 1,040 -- -- --
Dividends declared
($.108) . . . . . . . . -- -- -- (237) -- -- --
------ ----- ------- -------- -------- -------- --------
Balance at
September 30, 1998 . . 2,187 $ 109 $ 3,832 $ 10,225 $ -- $ (792) $ --
====== ===== ======= ======== ======== ======== ========
</TABLE>
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<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the nine months ended September 30,
- -------------------------------------------------------------------------------
(in thousands)
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 1,040 $ (425)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 1,336 1,796
Deferred compensation plan expense . . . . . . . . . . 109 276
Realized loss on sales of marketable securities . . . . 0 53
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (4,241) 6,450
Other current assets and noncurrent assets . . . . . (584) (109)
Deferred taxes, net . . . . . . . . . . . . . . . . (87) (693)
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . 5,073 (4,207)
Accrued expenses. . . . . . . . . . . . . . . . . . . 1,282 999
------- -------
Net cash provided by operating activities 3,928 4,140
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . . (554) (1,638)
Capitalized software development costs . . . . . . . . . . 0 (394)
Net proceeds from deferred compensation . . . . . . . . . 119 0
------- -------
Net cash used in investing activities (435) (2,032)
------- -------
Cash flows from financing activities:
Net payments of bank loan . . . . . . . . . . . . . . . . (3,073) (1,575)
Stock grants . . . . . . . . . . . . . . . . . . . . . . 202 0
Advance to ESOP . . . . . . . . . . . . . . . . . . . . . (112) (330)
Purchase of treasury stock . . . . . . . . . . . . . . . 0 (70)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (236) (234)
------- -------
Net cash used in financing activities (3,219) (2,209)
------- -------
Net increase (decrease) in cash and cash equivalents . . . 274 (101)
Cash and cash equivalents at beginning of period . . . . 15 453
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 289 $ 352
======= =======
</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 nine month period
ended September 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. The company has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements nor has it
determined the timing or method of adoption. The company does not believe the
adoption will have a material effect on its 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 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 a waiver to the loan
with regard to this covenant for the period ended December 31, 1997.
In 1998, the loan agreement was amended to redefine certain terms and
conditions. After amendment, VSE was in compliance with the cash flow ratio
covenant and all other covenants for 1997 and through September 30, 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") provides diversified engineering,
technical, and management services, principally to agencies of the United
States Government and to other government prime contractors. The software
products and services segment ("SPS"), provides application software and
services related to the installation and use 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.
<TABLE>
The following table presents revenues and other selected financial information
by reportable segment for the three and nine month periods ended September 30,
1998 and September 30, 1997, in thousands:
<CAPTION>
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 44,202 $ 880 $ 45,082
Interest expense 42 133 175
Depreciation and amortization 391 65 456
Pretax income (loss) 1,067 (155) 912
Expenditures for capital assets
(net of dispositions) 306 (4) 302
Nine months ended September 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $123,419 $2,358 $125,777
Interest expense 57 370 427
Depreciation and amortization 1,150 186 1,336
Pretax income (loss) 2,946 (1,342) 1,604
Expenditures for capital assets
(net of dispositions) 525 29 554
Three months ended September 30, 1997 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 33,289 $1,275 $34,564
Interest expense 45 104 149
Depreciation and amortization 415 219 634
Pretax income (loss) 577 (355) 222
Expenditures for capital assets
(net of dispositions) 257 222 479
Nine months ended September 30, 1997 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $111,484 $2,744 $114,228
Interest expense 160 266 426
Depreciation and amortization 1,163 633 1,796
Pretax income (loss) 2,327 (2,859) (532)
Expenditures for capital assets
(net of dispositions) 1,308 724 2,032
</TABLE>
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE and its subsidiaries and divisions have two reportable segments. The
engineering, logistics, management and technical services segment ("ELMTS") and
the software products and services segment ("SPS").
Engineering, logistics, management and technical services including some
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.
SPS includes sales of developed software products and the services related to
the installation and use of the software and is 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 nine month periods ended September 30, 1998 and 1997 (in thousands):
<CAPTION>
1998
Compared
to
Three Months Nine Months 1997
Ended Ended ----------------
September 30, September 30, Three Nine
1998 1997 1998 1997 Months Months
------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ELMTS
Revenues . . . . . . . $44,202 $33,289 $123,419 $111,484 $10,913 $11,935
======= ======= ======== ======== ======= =======
Pretax income . . . . $ 1,067 $ 577 $ 2,946 $ 2,327 $ 490 $ 619
Provision for income
taxes . . . . . . . 350 316 1,224 1,150 34 74
------- ------- -------- -------- ------- -------
Net income . . . . . $ 717 $ 261 $ 1,722 $ 1,177 $ 456 $ 545
======= ======= ======== ======== ======= =======
SPS
Revenues . . . . . . . $ 880 $ 1,275 $ 2,358 $ 2,744 $ (395) $ (386)
======= ======= ======= ======== ======= =======
Pretax loss . . . . . $ (155) $ (355) $(1,342) $ (2,859) $ 200 $ 1,517
Income tax benefit . . (111) (102) (660) (1,257) (9) 597
------- ------- ------- -------- ------- -------
Net loss . . . . . . . $ (44) $ (253) $ (682) $ (1,602) $ 209 $ 920
======= ======= ======= ======== ======= =======
</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, logistics, management and technical services to the U.S. Government
(the "government") and software products and related services to commercial
customers. All significant intercompany transactions have been eliminated in
consolidation. Certain prior year balances have been reclassified for
comparative purposes.
Engineering, Logistics, Management and Technical Services Segment
Revenues for this segment increased by approximately 33% for the three month
period in 1998 as compared to 1997, and increased approximately 11% for the
nine month period of 1998 as compared to 1997. The increase in revenues for
the three and nine month periods was primarily due to the increased level of
work performed by BAV. (See "BAV contract" below). The timing of BAV revenue
varies from quarter to quarter and 1998 BAV revenue is not necessarily a good
indicator of future BAV revenue. The other subsidiaries and divisions recorded
a slight overall increase in aggregate revenue for the nine month period ended
September 30, 1998 as compared to 1997.
Pretax income for this segment for the three and nine month periods ending
September 30, 1998 increased by approximately 85% and 27%, respectively, as
compared to the same periods of 1997. The increase in pretax income for these
periods is primarily due to increases in revenues.
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 VSE's BAV Division provides the U.S. Navy with engineering,
technical and logistical support services associated with the sale, lease, or
transfer of Navy ships to foreign governments. This contract has the potential,
if all options are exercised, to generate revenues in excess of one
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
billion dollars over a ten year period from 1995 through 2005. The contract
accounted for approximately 50% and 46% of consolidated revenues from opera-
tions during the nine month periods ended September 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 31% for the three month
period and 14% for the nine month period ending September 30, 1998, as compared
to the same periods of 1997.
The decrease in revenues for the three and nine month periods is due to the
timing of and fluctuations in product sales and consulting services related to
the installation and implementation of CMstat products.
Pretax loss for this segment for the three and nine month periods ending
September 30, 1998 decreased by approximately 56% 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
organization, 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
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<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 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 profit margins. When
lower profit margin service revenues comprise a greater percentage of the
company's total revenues, CMstat's profit 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 $274 thousand
during the nine month period ended September 30, 1998 resulted from
approximately $3.9 million provided by operating activities, approximately
$3.2 million used in financing activities, and approximately $435 thousand
used in investing activities. Significant financing activities included
decreased borrowing on the company's bank loan, including commitments for checks
outstanding, of approximately $3.1 million. Significant investing activities
included purchases of equipment of approximately $554 thousand.
A net decrease in cash and cash equivalents of approximately $101 thousand
during the nine month period ended September 30, 1997 resulted from
approximately $4.1 million provided by operating activities, approximately $2.2
million used in financing activities, and approximately $2 million used in
investing activities. Significant financing activities included decreased
borrowing on the company's bank loan, including commitments for checks
outstanding, of approximately $1.6 million. Significant financing activities
included approximately $1.6 million associated with the purchase of property and
equipment.
The difference between the cash used in operating activities of approximately
$3.9 million in 1998 as compared to the cash provided by operating activities
of approximately $4.1 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, management
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<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
believes that the cash flows from operations and the bank loan commitment are
adequate to meet current operating cash requirements.VSE's requirements for
working capital are affected significantly by its revenues and accounts
receivable, which are primarily from billings made by the company to the
government or other government prime contractors for services rendered. Such
accounts receivable generally do not present liquidity or collection problems.
Working capital is also affected by (a) contract retainages, (b) start-up and
termination costs associated with new or complete contracts, (c) capital equip-
ment 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 September 30, 1998. 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 agreements 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 September 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 compu-
ter 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 relating to 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 opera-
tions.
Year 2000
State of Readiness. Ongoing assessments on the impact of the "Year 2000" issue
on systems and operations have been formalized into a Year 2000 Action Plan
("Y2K Plan"). The Y2K Plan includes phases for awareness, inventory and
assessment, correction and renovation, validation and testing, and testing
and implementation. At this time, the company is completing the inventory and
assessment phase, and will begin the correction and renovation phase of VSE's
hardware, software and embedded technological systems prior to December 31,
1998.
Costs. Costs incurred to date for year 2000 compliance efforts have been
minimal and are included as part of the company's ongoing administrative costs
and have not been separately identified. Future potential costs have not yet
been estimated. Management 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.
Risks. The full range of potential risks associated with the year 2000 is under
review. Potential risks include obligations related to contract performance on
current and past contracts, the reliance on infrastructure services to conduct
the company's business operations, and the possibility of liquidity issues
caused by payment problems with VSE's banks or government customers.
Contingency Plans. The Y2K Plan calls for the development of contingency plans.
VSE currently has extra borrowing capacity under its bank loan agreement and
intends to maintain this extra borrowing capacity beyond the year 2000 to
provide funding in the event of government customer payment problems.
Contingency plans related to contract performance obligations and to business
operation infrastructure services will be developed prior to December 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 September 30,
1998.
PAGE
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Forward Looking StatementsThis 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 Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Registrant during
the three month period ended September 30, 1998.
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: November 4, 1998 /s/ C. S. WEBER
_____________________________________
C. S. Weber, Senior Vice President,
Secretary and Treasurer
(Principal Financial Officer)
Date: November 4, 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 manage-
ment, 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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