Back to GetFilings.com
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, 1997 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, 1998 was approximately $11 Million.
Number of shares of Common Stock outstanding as of March 1, 1998: 2,186,905.
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. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1997 Annual Report to Stockholders for the
year ended December 31, 1997, 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 7, 1998, are incorporated by reference
into Part III of this report.
PAGE
PART I
ITEM 1. Business
Refer to the discussions captioned "Letter to Stockholders", "VSE
Operations" and "Description of Business" in VSE Corporation's ("VSE"
or the "Registrant") 1997 Annual Report which is incorporated herein by
reference.
ITEM 2. Properties
Refer to the discussion captioned "Description of Business" in VSE's 1997
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 1997 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 1997 Annual
Report which is incorporated herein by reference.
ITEM 6. Selected Financial Data
Refer to table captioned "Financial Highlights" in VSE's 1997 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 1997 Annual Report which is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Refer to discussion captioned "Management Discussion and Analysis" in
VSE's 1997 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 1997 Annual Report
which is incorporated herein by reference. Also refer to the schedule on
page S-1 of this report.
- 1 -
PAGE
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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, 1997. 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 1997 Annual Report to Stockholders
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 1997 Annual Report to Stockholders
which is incorporated herein by reference:
Report of Independent Public Accountants
In section captioned "Consolidated Financial Statements":
- 2 -
PAGE
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Investment for the
Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995
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
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.
- 3 -
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, 1998 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 17, 1998, 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
_______________________ _______________________
C. S. Koonce J. D. Ross
/s/ B. K. Wachtel
_______________________ _______________________
J. M. Marchello B. K. Wachtel
- 4 -
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 20, 1998. 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 consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated 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 consolidated
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 20, 1998
- 5 -
PAGE
VSE CORPORATION AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged Additions
Against to and
Balance (Added (Deductions Balance
December 31, to) from) December 31,
Description 1996 Income Reserves 1997
- ----------- ----------- ------- ---------- -----------
Allowance for
doubtful accounts $ 160 $ 0 $ (20) $ 140
======== ======== ======== ========
Allowance for contract
disallowances $ 276 $ 0 $ 3 $ 279
======== ======== ======== ========
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 1995 Income Reserves 1996
- ----------- ----------- ------ --------- ----------
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
- ----------- ----------- ------ --------- -----------
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
======== ======== ======== ========
S-1
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 Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996).
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders expected be held on May 7, 1998).
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders expected be held
on May 7, 1998).
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
E-1
PAGE
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- ------------------------------------------------------------------------------
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
24 Power of attorney Not Applicable
27 Financial Data Schedule Exhibit III
28 Information from reports furnished to State
insurance regulatory authorities Not Applicable
99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
E-2
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-3
PAGE
EXHIBIT II
VSE Corporation 1997 ANNUAL REPORT
VSE 1997
"Value and quality ...
the VSE advantage."
PAGE
Corporate Profile
VSE Corporation is a professional services company established in 1959. VSE
provides diversified engineering, development, testing, maintenance and
management services and products to maintain and modernize equipment and
systems, principally to agencies of the U.S. Government and to other prime
contractors. The company's subsidiaries and divisions include BAV, CMstat
Corporation, Energetics Incorporated, Human Resource Systems, Inc., VSE Corona,
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.
Annual Meeting of Stockholders
VSE's Annual Meeting of Stockholders is expected to be held on May 7, 1998, at
10:00 a.m., at the Radisson Plaza Hotel at Mark Center, 5000 Seminary Road,
Alexandria, Virginia 22311.
Contents
Financial Highlights 1
Letter to Stockholders 2
VSE Operations 4
Description of Business 11
Management Discussion and Analysis 19
Executive Officers 27
VSE Common Stock 27
Report of Independent Public Accountants 28
Consolidated Financial Statements 29
Notes to Consolidated Financial Statements 33
Selected Quarterly Data 47
Form 10-K 48
Form 10-K Cross-Reference Index 49
Officers and Directors 51
PAGE
Financial Highlights
- ------------------------------------------------------------------------------------------------
Selected Financial Data (Unaudited)
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
Revenues, principally from contracts . . . . . $155,863 $120,087 $73,790 $63,682 $77,450
======== ======== ======= ======= =======
(Loss) income from continuing operations . . . $ (1,447) $ 1,946 $ 1,738 $ 1,547 $ 1,104
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . . 0 0 0 0 284
(Loss)income from discontinued operations . . 0 (25) (92) 6 55
Loss on disposal of discontinued
operations . . . . . . . . . . . . . . . . . 0 (179) 0 0 0
-------- -------- ------- ------- -------
Net (loss) income . . . . . . . . . . . . $ (1,447) $ 1,742 $ 1,646 $ 1,553 $ 1,443
======== ======== ======= ======= =======
Basic earnings per common share:
(Loss) income from continuing operations . . $ (.68) $ .89 $ .80 $ .72 $ .51
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . 0 0 0 0 .13
(Loss) income from discontinued operations 0 (.09) (.04) 0 .02
-------- -------- ------- ------- -------
Net (loss) income . . . . . . . . . . . . $ (.68) $ .80 $ .76 $ .72 $ .66
======== ======== ======= ======= =======
Diluted earnings per common share:
(Loss) income from continuing operations . . $ (.68) $ .88 $ .80 $ .72 $ .51
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . 0 0 0 0 .13
(Loss)income from discontinued operations . 0 (.09) (.04) 0 .02
-------- -------- ------- ------- -------
Net (loss) income . . . . . . . . . . . . $ (.68) $ .79 $ .76 $ .72 $ .66
======== ======== ======= ======= =======
Total assets . . . . . . . . . . . . . . . . . $ 38,048 $ 48,341 $28,938 $21,063 $23,231
======== ======== ======= ======= =======
Long-term debt . . . . . . . . . . . . . . . . $ 7,108 $ 12,651 $ 4,992 $ 0 $ 2,686
======== ======== ======= ======= =======
Stockholders' investment . . . . . . . . . . . $ 12,481 $ 14,595 $13,553 $12,101 $10,816
======== ======== ======= ======= =======
Cash dividends per common share . . . . . . . $ .144 $ .138 $ .13 $ .122 $ .116
======== ======== ======= ======= =======
Per share amounts have been adjusted to reflect stock splits in 1996 and 1997.
This consolidated summary of selected financial data should be read in con-
junction with the consolidated financial statements and related notes included
elsewhere in this Annual Report.
- 1 -
PAGE
Letter to Stockholders
Fellow Stockholders:
1997 was a remarkable year for VSE. The engineering, logistics, management
and technical services segment of VSE did very well and achieved record
revenues and profitability. Annual segment revenues increased by 32% to $153
million and segment net income increased by 32% to $2.6 million or $1.21 a
share. However, aggregate financial results were below expectations due to
the loss incurred by our software products and services segment. This segment
lost $4 million or $1.89 a share on segment revenues of about $3.3 million.
Adding the segments together results in a consolidated loss for the year of
$1.4 million or $.68 a share. The following discusses the problem we
encountered in 1997 and what we have done to fix it. With that behind us, we
want to tell you about our growth strategy and expectations for 1998.
CMstat
As reported earlier, our software products and services segment incurred a loss
during 1997 which had a serious negative impact on our earnings for the year.
However, decisive action has been taken to realign and restructure CMstat, and
we do not expect it to have the same impact on consolidated results for 1998.
CMstat is a software development company with a great product and excellent
potential. It lost time and money due to several factors including the loss of
an experienced sales staff, inefficient contract execution, the introduction of
an important product upgrade (Version 5.4), slow development of product
distribution channels, and other factors. We have restructured the management
of the company, and we have reduced the size of the company wherever we can
while still retaining quality product and service capability. At this point,
CMstat is working on a large service backlog and expects to close on an
increased amount of new product sales before mid-year.
CMstat's current business environment could lead to potentially dramatic
increases in sales and profits. However, VSE is not structured to provide
sufficient time and capital to achieve this potential. Accordingly, we are
pursuing various approaches to seek to assure that the technology developed by
CMstat will be preserved and VSE shareholders will not be exposed to long-term
losses.
Change and Challenge
The government marketplace which VSE serves continues to be very large.
Overall government spending is level, in part because the government is
beginning to use fewer people, perform fewer oversight functions, and rely more
on industry for an increasing level of support. The pace of change in this
sector of our economy is accelerating every day. Procurement rules are
changing rapidly, and the government is privatizing and outsourcing more work.
As a result, the government is increasingly looking to large, brand-name
suppliers, and it is seeking to establish long-term, successful contracts with
reliable industry partners.
- 2 -
PAGE
Letter to Stockholders
In this environment, successful and synergistic teaming arrangements with other
industry partners are essential for long-term corporate success. This fact is
the reason for much of the acquisition and merger activity in our industry, and
it drives VSE actions and priorities. Our ten-year BAV contract with the U.S.
Navy is a model arrangement, and it demonstrates our ability to compete
successfully. We are also an important team player in a number of other
essential government programs and markets, such as the Postal Service, energy
and environment, and health care. In all of these markets, our principal
strategy is to perform as an honest, responsive, and reliable prime contractor
or team player.
Near-Term Goals
In the business description which follows you will see how VSE is responding
to this changing business environment. You will also find descriptions of two
of our major initiatives: upgrading our information technology and seeking
certification of our quality management system.
Resources
VSE relies on the ability of its employees and teaming partners. In 1997 we
began new efforts to extend training opportunities to every employee,
principally through networked information technology, team building, and our
quality management system. We intend to pursue this initiative vigorously
because ultimately the success of VSE's employees and the success of customers
and stockholders is the same.
Finally, we acknowledge the very valuable support and contribution made by our
industry teaming partners, suppliers, bankers, directors, and stockholders.
We need the effort of everyone to succeed. Your support is very important, and
we welcome your comments and suggestions for improvement at any time.
R. B. McFarland D. M. Ervine
President and COO Chairman and CEO
March, 1998
- 3 -
PAGE
VSE OPERATIONS
Engineering, Logistics, Management and Technical Services Segment
BAV Division
In 1997, the BAV Division of VSE continued to build on the successes of 1996 in
supporting the U.S. Navy's inactive ship transfer program. BAV and its nation-
wide team of subcontractors managed the reactivation and transfer of ten in-
active ships in 1997 to Taiwan, New Zealand, Portugal, Korea, Turkey and
Thailand. The team also completed the "hot transfer" of two ships to Egypt and
Bahrain. At the same time, BAV managed the completion of several shipyard
maintenance and repair availability periods. These maintenance availabilities
fully exercised the broad range of capabilities of the BAV team to provide
support for extensive ship overhaul periods, including advanced planning and
material procurement, repair and testing of machinery and equipment, and crew
training ashore and underway.
BAV developed its full-time engineering and maintenance support capabilities in
Egypt and Taiwan and completed planning for similar support capabilities in
Thailand and Italy. Augmenting permanent country presence, BAV provided quick
reaction "tiger team" response for emergent repair and training support in
numerous countries in Europe, the Middle East, and Asia. BAV technical experts
assisted the U.S. Navy in providing configuration validation services to the
government of Mexico. BAV also participated in several international defense
conventions and symposia, such as those held in Dubai, Malaysia, and Turkey,
where BAV's unique foreign military support to the U.S. Navy was on prominent
display.
In the fall of 1997, BAV concluded the first of many agreements to assume life-
cycle support for weapons systems that are no longer in the U.S. Navy inventory.
This unique government-industry teaming agreement combines BAV's technical
expertise with facilities and weapons engineering support from the Naval Surface
Warfare Center at Indian Head, Maryland, to provide long-term support for the
ASROC antisubmarine warfare weapons system used exclusively by foreign
customers. Based on the success of this venture, planning is underway to expand
support for additional weapons systems in the coming years.
The BAV supportability contract with the U.S. Navy is an evolving process as the
government continues to downsize and new opportunities are identified to provide
future support capabilities to foreign military sales customers around the
world.
Postal Service Program Center
To meet U.S. Postal Service technology initiatives, VSE's Postal Service Program
Center continued to expand its services and partnering capabilities in 1997.
For over 21 years, VSE has worked to meet the multiple challenges of the USPS
mission. Our staff provides diverse technical engineering services to design,
modernize, test and logistically support automated electro-mechanical mail
processing and delivery equipment and systems. We also support USPS stamp
- 4 -
PAGE
acquisition projects to develop state-of-the-art stamp manufacturing standards
and materials qualifications. VSE also provides services to support new auto-
mated processes and solutions for USPS configuration management, inventory
control, and equipment maintenance programs following a successful CMstat pilot
program supporting a USPS mainframe conversion.
VSE engineers and technicians sustain important programs involving next
generation automation enhancements to meet USPS customer service and
productivity goals such as advanced electronic recognition and computer for-
warding systems, tray management deployments, and robotics equipment systems
development. VSE employees also support USPS innovations such as the popular
"Celebrate the Century" stamp program, delivery confirmation initiatives, and
alternative fuel developments for USPS vehicle programs.
As our USPS customers meet and respond to the changing technology demands and
challenges of the 21st century, the VSE Postal Service Program Center team of
professionals will continue to provide responsive service, technical
excellence, and best value.
HRSI
Human Resource Systems, Inc. (HRSI), a wholly owned subsidiary of VSE, provides
long-term technical and health care services for government and industry. 1997
was a year of significant growth for HRSI. HRSI completed the successful
start-up and first-year operation of a five-year contract to provide nursing and
other health care services for a major naval medical center. Also during 1997
the company continued to expand its staffing and support of technical personnel,
including engineers, architects, and computer professionals. HRSI currently has
more than 250 employees nationwide, and the company continues to identify areas
for potential growth and expansion.
Throughout 1997, HRSI completed the development of an infrastructure to accommo-
date its rapid growth. With this critical component in place, HRSI is well
positioned to assist clients who recognize the many benefits of outsourcing
discrete portions of their operations. This enables clients to operate at
greater efficiency and generally at substantial savings.
During 1998, HRSI will continue to enhance the range of services provided to
current clients and expand into other areas.
Energetics
Energetics, a VSE subsidiary since 1995, is a full-service consulting company
specializing in energy and environmental issues. Since 1979 Energetics has
provided technical and managerial support to the U.S. Department of Energy (DOE)
as well as other clients in the public and private sectors. Assignments have
ranged across the energy and environmental spectrum, from management support to
analyses of advanced technological research and development. During 1997,
Energetics' experienced staff of more than 100 scientists and other
professionals concentrated on three areas vital to the future well-being of the
nation and world: energy supply, environmental management, and energy conserva-
tion.
In the area of energy supply, Energetics assists government regulators and
utility companies in planning and implementing innovative programs to improve
- 5 -
PAGE
the supply and delivery of electricity to consumers. Several of Energetics
staff are recognized internationally for their knowledge of battery energy-
storage technologies, hydrogen systems, clean coal technologies, supercon-
ductivity, electromagnetic fields, and utility deregulation.
Staff expertise in environmental management allows Energetics to assist clients
with regulatory analysis, environmental regulatory compliance, and restoration
support. In performing these activities, the environmental staff calls upon
their comprehensive knowledge and understanding of such statutes and regula-
tions as the Atomic Energy Act, the Clean Air Act as amended in 1990, the Clean
Water Act, the National Environmental Policy Act, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, and many
others.
For clients concerned with energy conservation, Energetics can provide advanced
technical solutions to reduce energy use, prevent pollution, and save costs.
In addition to conducting numerous technical, economic, and policy studies,
the staff helps clients identify energy-efficient technologies and alternative
fuels for use in buildings, industries, and transportation systems, including
emerging technologies that offer state-of-the-art options and performance.
With the recent interest nationally and internationally in global climate
change, Energetics is at the forefront in supporting associated activities
underway at DOE. The current focus is on reducing greenhouse-gas emissions
(particularly those of carbon dioxide, methane, and perfluorocarbons) from
industrial operations. Energetics has studied and analyzed the most energy-
intensive industries such as chemicals, steel, and aluminum for years, and
recently completed an evaluation of carbon dioxide emissions from eight
industrial sectors, needed by DOE for its role on the President's Climate Change
Task Force. Staff scientists also calculated the greenhouse-gas emissions
resulting from the electrolytic production of primary aluminum, and projected
the reduction in emissions that could be achieved by developing and applying a
new, non-consumable anode technology to the electrolytic cell. Energetics
expects to continue to make significant contributions to the on-going discussion
of global climate change.
VSE Land Warfare Group
VSE's Land Warfare Group provides innovative support solutions for Army and
Marine Corps customers and their fielded equipment and systems. For example,
in 1997 VSE redesigned and fabricated three prototypes for the AN/PRD-12
Direction Finder. Our task was to redesign the system, originally built by
another contractor, because it was not supportable as originally manufactured.
The redesigned state-of-the-art unit exceeded original performance specifica-
tions with modular configuration and ease of repair, while reducing costs by
more than $10,000 per unit. Successfully tested during night jump conditions
and at temperatures below 30 degrees, soldiers were elated with the unit's
performance and judged it a 150% improvement over the original unit. This
success has led to the award of a production contract to replace all of the
original models. This demonstrates the breadth and versatility of VSE's
engineering capabilities.
VSE continues to team with the U.S. Army Reserve to become partners in innova-
tion. VSE provides the technical expertise, research and development,
- 6 -
PAGE
and analysis to assist the Army Reserve in decreasing life-cycle maintenance
costs, increasing systems reliability, availability, maintainability and
durability, and enhancing mission readiness. In recent years, VSE has
investigated the feasibility of modifying, reengineering, upgrading, and
developing proof of principle prototypes for aging Army Reserve equipment.
We have developed prototypes for conversion of 3 kW generators, 3/4 ton
trailers, 5-ton dropside trucks, and refurbishment of eight and nine head
portable shower units. In addition, inspection and repair procedures are being
developed and validated for the 6,000 gallon water distributor semitrailers and
the 4.5 and 5 cubic yard scoop loaders. These approaches use innovative, cost
effective business practices to achieve high value, low cost modernization,
resulting in improved quality and technologically advanced equipment.
The award of the Government-Industry Data Exchange Program (GIDEP) Achievement
Award for Industry to VSE in 1997 was a testimony to VSE's sustained effort to
reduce customer costs. The award recognizes VSE's cost avoidance efforts as
demonstrated through reverse engineering and value engineering. VSE obtained
the largest cost avoidance of any government or industry GIDEP member --- in
this instance, documented cost savings were in excess of $3.6 million. We are
confident that our talented and dedicated employees will continue to explore
avenues to assist the Army and Marine Corps in achieving and maintaining
readiness goals and mission objectives at the lowest practicable cost with
minimal risks.
VSE Sea Warfare Group
Through 1997, VSE's Sea Warfare Group continued to position itself as a major
provider of single-source engineering solutions to the U.S. Navy, other defense
customers, and with our industry partners such as commercial shipyards. The Sea
Warfare Group's highlight in 1997 was the award of a $70 million, five-year
contract to provide services to the Naval Surface Warfare Center at Indian Head,
Maryland. VSE engineers will provide research engineering, design and develop-
ment, in-service engineering, integrated logistics support, explosive systems
safety engineering, information technology analysis, energetic demilitarization
analysis, and engineering data preparation, analysis, and maintenance to the
U.S. Navy ordnance community.
The Sea Warfare Group continues to support major customers such as the Naval Sea
Shipbuilding Support Office and the Naval Air Command, coupled with ship over-
haul advance planning efforts with our industry partners and with the Supervisor
of Shipbuilding at Portsmouth, Virginia. This effort has positioned VSE for
several potentially important contract awards in the fleet maintenance and
modernization community in 1998.
VSE's reputation for fleet maintenance and modernization support has enabled us
to put together teams with other industry leaders to respond to even larger and
more complex government fleet support acquisitions. Our personnel continue to
provide high quality "turn-key" support, including scheduling, project manage-
ment, material identification, procurement and control, shipping and expediting,
installation, repair and maintenance, testing, documentation and provisioning,
and training.
- 7 -
PAGE
Our ocean systems personnel provide engineering and installation services for
fixed and floating ocean facilities and marine systems, as well as specialized
marine materials and construction equipment for such projects as inactive ship
moorings, pier upgrades, and hurricane and typhoon moorings. Significant
accomplishments in 1997 included engineering, planning, and construction
management support for fleet mooring projects at Kings Bay, Georgia, Earle,
New Jersey, and Sasebo, Japan. These efforts included the offshore installa-
tion of driven plate and concrete pile anchors. Additional facility design and
construction support was provided for the Navy's inactive ship requirements in
Pearl Harbor, Hawaii, and Philadelphia, Pennsylvania, including new berthing
installations for the FORRESTAL, the AMERICA, and the IOWA. VSE divers provided
six months of test support to another of our industry partners for field
demonstrations of the Marine Corps advanced amphibious vehicle, as well as
continued support for Navy hull inspections and refurbishment projects.
VSS Division
VSE also serves Navy customers through our VSS naval air logistics support
contract. Awarded in 1994, the VSS Division provides approximately 100
engineers and technical personnel and leads a team to plan, develop, and
integrate supportability requirements into aircraft and missile system
designs. VSS supports Navy logistics managers for aircraft, helicopters, air-
launched weapons, and power plants. The VSS team 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.
When our customers move, VSE moves. During the summer, the VSS Division moved
from Arlington, Virginia, to Lexington Park, Maryland, to accommodate the
relocation of the Naval Air Systems Command to the Naval Air Station at Patuxent
River, Maryland, after 27 years at Crystal City, Virginia. NAVAIR's new
building at "Pax River," the Integrated Program Team (IPT) Building, signals
our customer's approach to the way it will do business in the future. The
VSS team at Pax River is proud to be a part of this new tradition.
In 1997 VSS was also awarded a subcontract from an industry partner to provide
logistics support to the U.S. Special Operations Command in Tampa, Florida.
Under this subcontract VSS provides technical services to the Air Force
component of the Joint Command and anticipates expanding its support to the
other services' counterparts. During 1997 VSS submitted several large
proposals for new work, and 1998 promises to provide further opportunities to
expand our teaming operations.
Software Products and Services Segment
CMstat
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.
- 8 -
PAGE
The CMstat (TM) 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
over 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, Sony, TRW, United
Defense Limited Partnership, U.S. Postal Service and other agencies of the
U.S. government.
Central to the CMstat solution in managing product data information are
applications and technology which address the elements and relationships that
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 off-the-shelf solution, CMstat is working to extend its product
line and distribution channels into new areas in response to customer require-
ments.
Since becoming a VSE company in 1995, 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 with upgrades and additions to
its current product line.
- 9 -
PAGE
VSE Quality Strategy I - ISO 9001 Certification
VSE expects to achieve an important milestone in 1998 in its quest to deliver
quality products and services: ISO 9001 quality management system certifica-
tion. ISO 9001 is an international quality standard. Culminating a multi-
year quality awareness and improvement effort, ISO 9001 certification will be
a visible step signaling VSE's commitment to quality and process improvement.
Quentin Conroy, VSE's Director of Quality and ISO 9001 Management Representa-
tive, reports that VSE is in the final stages of achieving ISO 9001 certifica-
tion. "Don Ervine, VSE's Chairman and CEO, initiated our formal quality program
in 1988," said Mr. Conroy. "At that time, we focused principally on the
Department of Defense TQM (Total Quality Management) initiative. We worked
to install continuous process improvement into our procedures throughout the
company, and we learned a lot about quality. Now, with the ISO 9001 system of
requirements, we have an even stronger set of standards, and we have a
structure that automatically integrates quality into everything we do."
"The importance of implementing a quality system like ISO 9001 cannot be
overemphasized," said Dick McFarland, VSE's President and COO. "Throughout
the company, we work in teams to improve quality and increase operating
efficiency. An effective quality management system begins and ends with
customer requirements. Our job is to satisfy the customer, and delivering value
to the customer is our quality goal. ISO 9001 is an important tool guiding these
efforts."
VSE Quality Strategy II - Information Technology
Over the past several years, VSE has worked to upgrade its facilities and equip-
ment in response to customer requirements and competitive pressures to deliver
a quality product, on time, at a fair price.
"Expanding communications links, creating faster response times, and improving
data access: these are a few of the benefits available to VSE teams and to our
customers through VSE's program of upgrading information systems," said Elliot
Goodman, VSE's Director of Management Information Systems. In the last few
years VSE has installed local and wide area networks covering almost all VSE
office sites, and VSE has inaugurated two Internet web sites (www.vsecorp.com
and www.cmstat.com). The company is now deploying a VSE intranet and has
installed video conferencing capabilities.
"VSE is acquiring and integrating information technology systems as rapidly as
VSE's team leaders can make the business case for specific applications," said
Mo Gauthier, VSE's Chief Technology Officer. "Our Department of Defense
customers are among the nation's information technology leaders, and they are
definitely driving VSE's pace in this process. In some cases, we have to run
hard to meet their needs. We are experiencing a rapid transition to electronic
commerce, and our daily challenge is to meet the full spectrum of our customers'
requirements. This challenge is being met through the timely integration of
mainstream software applications that are readily adaptable to our customer
base and are sufficiently scalable to ensure the achievement of VSE's strategic
goals. Our service, coordination, and quality all benefit from this strategy."
- 10 -
PAGE
Description of Business
Introduction
VSE Corporation ("VSE") is a Delaware corporation established in 1959.
During 1997, VSE and its subsidiaries and divisions operated in two segments:
the engineering, logistics, management and technical services segment and the
software products and services segment. 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, tech-
nical, and management services, principally to agencies of the United States
Government (the "government") and to other government prime contractors.
- Engineering, logistics, management and technical services including
information technology services are provided by VSE and by each of
its subsidiaries and divisions including BAV Division, Energetics
Incorporated, Human Resource Systems, Inc., Value Systems Services
Division, VSE Services Corporation, and VSE Corona, Inc.
- Software products and services are the primary business of VSE's
subsidiary CMstat Corporation ("CMstat").
The engineering, logistics, management and technical services segment
accounted for 97.9%, 96.3%, 98.1%, and software products and services segment
accounted for 2.1%, 3.7%, 1.9% of VSE's consolidated revenues from continuing
operations in 1997, 1996, and 1995, respectively.
Services and Products
Engineering, Logistics, Management and Technical Services Segment
VSE engineering, technical, management and information technology
services include a broad array of capabilities and resources used in program
planning; design and engineering, including prototype development; ship
reactivation and transfer support; logistics management; ship 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; logistics management support for military aircraft; machinery con-
dition analysis; specification preparation for ship alterations and repairs;
ships force crew training; energy conservation and advanced technology
demonstration projects; and technical data package preparation.
- 11 -
PAGE
Description of Business
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.
Software Products and Services Segment
Through its subsidiary CMstat, VSE 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
available in the course of contract performance, through formal and informal
briefings, from participation in professional organizations, and from literature
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 in-
stalled 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 arrange-
ments, joint ventures, dedicated ventures, dedicated cost centers, separate
profit centers (divisions), and subsidiaries.
During 1997, VSE's nine largest contracts accounted for approximately
80% of total revenues, and one such contract with the U.S. Navy accounted for
more than 48% 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:
- 12 -
PAGE
Description of Business
VSE Revenues by Customer or Agency
(Dollars in thousands)
1997 1996 1995
Group or Agency Revenues % Revenues % Revenues %
- --------------- -------- ----- -------- ----- -------- -----
U.S. Navy $108,416 69.5% $ 75,232 62.6% $42,402 57.5%
U.S. Army 19,423 12.5 18,880 15.7 18,291 24.8
All other government 25,804 16.6 23,836 19.8 10,563 14.3
Commercial 2,220 1.4 2,139 1.9 2,534 3.4
-------- ----- -------- ----- ------- -----
Total $155,863 100.0% $120,087 100.0% $73,790 100.0%
======== ===== ======== ===== ======= =====
During 1997, VSE provided services to the government and other prime con-
tractors under approximately 150 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 tech-
nical services. The services ordered pursuant to ID/IQ arrangements are
normally performed and completed within a one year period. During 1997, VSE
provided services under approximately 935 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 $30 million for five years with the U.S.
Postal Service.
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, an HRSI joint venture was awarded a five-year, $60 million contract
to provide nursing and allied services for a regional naval medical center.
In 1991, VSE formed the Value Systems Services ("VSS") division to
join with a prime contractor on a bid for a U.S. Marine Corps contract.
Services under the subcontract commenced in January 1992. The subcontract
generated VSS revenues of approximately $4 million in 1994 and $11 million in
1993, equal to about 10% of VSE's total business volume over these two years.
In April 1994, work on this contract ceased.
In 1991, VSE also formed VSE Services Corporation ("VSES") as a sub-
sidiary to compete for certain contracts, including security systems work and
other commercial international business opportunities. VSES has been inactive
since 1992.
In 1994, VSS was awarded a new contract with another 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.
- 13 -
PAGE
Description of Business
In 1995, VSE made two acquisitions to expand and diversify its business
base:
- In May 1995, VSE acquired CMstat Corporation, an information tech-
nology company located in San Diego, California. CMstat is a leading
supplier of commercial (off-the-shelf) software products and tech-
nology 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 48% of
VSE's revenues in 1997 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 an approximately $12
million fixed-price production contract to produce 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 increase over
the next several 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.
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 1998, VSE employed approximately 1200
employees, including approximately 300 part-time personnel.
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 service personnel. 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.
- 14 -
PAGE
Description of Business
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 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
United 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, 1997, VSE had proposals pending for engineering
services contracts covering approximately $800 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 2003.
However, there is no assurance that VSE will be the successful bidder
for any of these contracts. Moreover, there can be no assurance 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 con-
venience of the government.
During 1997 and 1996, VSE was awarded contracts having potential
ceiling values of approximately $130 million and $120 million, respectively.
VSE's funded backlog of work as of December 31, 1997, 1996, and 1995
was approximately $110 million, $120 million and $40 million, respectively.
"Funded" backlog is defined as orders for services that have not been fully
rendered 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.
- 15 -
PAGE
Description of Business
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 contracts (both funded and unfunded
backlog) was approximately $1.2 billion, $1.3 billion, and $1.3 billion, as of
December 31, 1997, 1996 and 1995, respectively. VSE has no reasonable basis
on which to determine when or if such unfunded 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,
competitors of VSE (including the government's own nonprofit 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 a few
"niche" companies. VSE believes the principal competitive factors for the
professional and technical services business in which it is engaged are tech-
nical 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 unequal contract awards between successful contractors ; and best value
contract awards, which reduce the 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 soft-
ware, 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
- 16 -
PAGE
Description of Business
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 contracts, VSE bears the risk that increased or un-
expected 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 renewed
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 dis-
advantaged" 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.
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.
Government contracts are subject to termination at the government's
convenience, which means that the government may terminate the contract at any
time, without cause. However, during VSE's 39-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
- 17 -
PAGE
Description of Business
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.
- 18 -
PAGE
Management Discussion and Analysis
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 VSE Corporation and its wholly owned subsidiaries
("VSE" or the "company"), including 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, unin-
corporated 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:
Revenues from Continuing Operations
(dollars in thousands)
1997 1996 1995
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- ----- -------- ----- -------- ----
Engineering, Logistics, Management and
Technical Services Segment:
VSE (parent only) . . . . . . . $ 50,126 32.2 $ 47,404 39.5 $56,889 77.1
BAV . . . . . . . . . . . . . . 75,296 48.3 45,399 37.8 1,431 1.9
Energetics . . . . . . . . . . 11,598 7.4 11,286 9.4 4,007 5.4
VSS . . . . . . . . . . . . . . 9,179 5.9 8,798 7.3 8,396 11.4
HRSI . . . . . . . . . . . . . 6,437 4.1 2,729 2.3 1,655 2.3
-------- ----- -------- ----- -------- -----
152,636 97.9 115,616 96.3 72,378 98.1
Software Products and Services
Segment:
CMstat . . . . . . . . . . . . 3,227 2.1 4,471 3.7 1,412 1.9
-------- ----- -------- ----- -------- -----
Total revenues . . . . . . . . $155,863 100.0 $120,087 100.0 $73,790 100.0
======== ===== ======== ===== ======= =====
Engineering, Logistics, Management and Technical Services Segment
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
- 19 -
PAGE
Management Discussion and Analysis
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 1997, 1996 and 1995, the company did not experience any termination of con-
tracts 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. The increases in revenues between periods
is driven primarily by the BAV contract.
BAV Contract - In August 1995, VSE's BAV Division was awarded a
contract with the U.S. Navy to provide engineering, technical and logistical
support services associated with the sale, lease, or transfer of Navy ships to
foreign governments. BAV began work on the contract in September 1995. This
contract has the potential, if all options are exercised, to generate revenues
in excess of one billion dollars over a ten year period from 1995 through 2005.
The contract accounted for approximately 48% and 38% of consolidated revenues
from continuing operations during 1997 and 1996, 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 world-
wide. The company experienced significant quarterly revenue fluctuations in
1997 and anticipates that future quarterly revenues will be subject to sig-
nificant variations primarily due to this contract.
Software Products and Services Segment
Revenues from the software products and services segment decreased
approximately 28% to $3.2 million in 1997 compared to 1996. The revenues 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 timing of new product introductions and product enhance-
ments by CMstat and its competitors. Revenues increased from $1.4 million in
1995 to $4.5 million in 1996 primarily due to closing several large customer
sales that CMstat had been vigorously pursuing.
The profitability of this segment is dependent upon CMstat's sales.
While management believes that CMstat will generate sufficient revenues in 1998,
failure to do so could adversely affect the company's results of operations.
- 20 -
PAGE
Management Discussion and Analysis
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from continuing
operations before income taxes of VSE segments, other items of income and
expense, and such amounts as a percent of segment revenues. Engineering,
logistics, management and technical services segment revenues were 97.9%,
96.3% and 98.1% of total revenues for 1997, 1996 and 1996, respectively.
Software products and services segment revenues made up the remaining
revenues.
Income (Loss) from Continuing Operations Before Income Taxes
(dollars in thousands)
Description 1997 % 1996 % 1995 %
- ----------- -------- ----- -------- ----- ------- -----
Engineering, Logistics, Management
and Technical Services Segment:
Revenues . . . . . . . $152,636 100.0% $115,616 100.0% $72,378 100.0%
Costs and expenses . . 147,649 96.7 111,852 96.7 69,478 96.0
-------- ----- -------- ----- ------- -----
Gross profit . . . . . 4,987 3.3 3,764 3.3 2,900 4.0
Selling, general and
administrative expenses 617 0.4 507 0.4 178 0.2
Interest expense . . . 130 0.1 314 0.3 94 0.1
-------- ----- -------- ----- ------- -----
Income from continuing
operations before
income taxes . . . . $ 4,240 2.8% $ 2,943 2.6% $ 2,628 3.7%
======== ===== ======== ===== ======= =====
Software Products and
Services Segment:
Revenues . . . . . . . $ 3,227 100.0% $ 4,471 100.0% $ 1,412 100.0%
Costs and expenses . . 8,941 277.1 4,138 92.6 1,110 78.6
-------- ----- -------- ----- ------- -----
Gross (loss) profit. . (5,714) (177.1) 333 7.4 302 21.4
Selling, general
administrative expenses 233 7.2 165 3.7 40 2.8
Interest expense . . . 376 11.6 149 3.3 42 3.0
-------- ----- -------- ----- ------- -----
(Loss)income from continuing
operations before
income taxes . . . $ (6,323) (195.9)% $ 19 0.4% $ 220 15.6%
======== ====== ======== ===== ======= =====
Engineering, Logistics, Management and Technical Services Segment
Costs and expenses of operations, as a percentage of segment revenues,
remained at 96.7% in 1997 as compared to 1996. Costs and expenses of opera-
tions, as a percentage of segment revenues, increased by approximately .7%
during 1996 as compared to 1995. The percentage differences between 1997,
- 21 -
PAGE
Management Discussion and Analysis
1996 and 1995 are 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, (d) narrower profit margins on new work due to increased competition,
(e) increased labor costs reflecting a more competitive marketplace for
attracting and retaining our employees, (f) the establishment and reversal of
reserves for potential contract disallowances due to the timing of government
audits on costs incurred, and (g) effective project and cost management.
Selling, general and administrative expenses as a percentage of segment
revenues remained constant in 1997 as compared to 1996.
Selling, general and administrative expenses as a percentage of segment
revenues increased slightly, .2 %,in 1996 as compared to 1995 primarily due to
a small increase in the amortization of intangible asset costs associated with
the acquisitions of CMstat and Energetics in 1995.
Interest expense as a percentage of segment revenues decreased
approximately .2% in 1997 as compared to 1996 due primarily to the improved
cash collection cycles on government contracts.
Interest expense as a percentage of segment revenues increased
approximately .2% in 1996 as compared to 1995 due primarily to the use of bank
borrowings to finance the increased levels of accounts receivable associated
with the significant revenue growth in 1996, and to reflect interest costs
associated with financing the acquisitions of CMstat and Energetics in 1995
(see "Acquisitions and Divestitures" below).
Software Products and Services Segment
Costs and expenses of operations, as a percentage of segment revenues,
increased approximately 185% attributable to CMstat's loss for 1997 due to the
failure to consummate several large contracts, higher operating costs incurred
in anticipation of such prospective contracts, the writedown of approximately
$725 thousand in leasehold improvements associated with the sublease of CMstat's
former headquarters space, and the amortization of approximately $1.4 million
of previously capitalized software development costs. CMstat's business
continues to consist of large contracts with long sales cycles. Cost reduction
efforts have been implemented to reduce CMstat's operating cost levels and
management believes that future CMstat sales will return to a level commensurate
with operating expenses.
Costs and expenses of operations, as a percentage of segment revenues,
increased approximately 14.0% during 1996 as compared to 1995. This increase
is primarily due to increased product development and operating expenses
related to product sales and services.
- 22 -
PAGE
Management Discussion and Analysis
Selling, general and administrative expenses, as a percentage of segment
revenues, increased approximately 3.5% during 1997 as compared to 1996. This
increase is primarily due to increased marketing expenses.
Selling, general and administrative expenses as a percentage of segment
revenues increased approximately .9% during 1996 as compared to 1995. This
increase is primarily due to administrative salaries.
Interest expense, as a percentage of segment revenues, increased
approximately 8.3% in 1997 as compared to 1996 due primarily to the cost of
financing the CMstat operating loss.
Interest expense, as a percentage of segment revenues, increased
approximately .3% during 1996 as compared to 1995. This increase is primarily
due to the cost of financing increased receivables.
The company expects that this segment 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 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, 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, budget cycles and to the 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 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 CMstat'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.
- 23 -
PAGE
Management Discussion and Analysis
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 1997 quarterly operating results are not a good indicator of
future 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 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.
Liquidity and Capital Resources
Cash Flows
A net decrease in cash and cash equivalents of approximately $400
thousand during 1997 resulted from approximately $8.1 million provided by
operations, approximately $2.7 million used in investing activities, and
approximately $5.8 million used in financing activities. Significant investing
activities included approximately $2.2 million associated with the purchase of
property and equipment. Significant financing activities included a decrease
in bank loan borrowings of $5.5 million, net of commitments for checks out-
standing at year end of approximately $3.0 million. Cash flows provided by
operating activities increased in 1997 as compared to 1996 due primarily to
decreases in accounts receivable due to collections of accounts receivable on
the BAV contract.
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 increased 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 equip-
ment, including the new office facilities and equipment for CMstat and
- 24 -
PAGE
Management Discussion and Analysis
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 $350 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 increased borrowing on the
company's revolving term loan, including commitments for checks outstanding at
year end, of approximately $4.9 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 has the potential to
cause substantial requirements for cash; however, management believes that the
cash flows from future operations and the bank term loan and revolving loan
commitments are adequate to meet current operating cash requirements.
Working Capital
VSE's requirements for working capital are affected significantly by
its revenues and accounts receivable, which are primarily derived 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, (d) differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company, and (e) profitability.
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 $.144 per share during
1997, $.138 per share during 1996, and $.13 per share during 1995. Pursuant
to its
- 25 -
PAGE
Management Discussion and Analysis
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.
ESOP Advances
During 1997 and 1996, the company advanced the ESOP trust $330 thousand
and $350 thousand, respectively, in connection with distributions made to
terminated participants. The advances are payable to the company when the
funds become available. The ESOP trust holds approximately 52,000 unallocated
shares of the company's common stock related to these transactions.
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.
Global Economic Conditions
VSE's business is subject to the risks associated with global economic
conditions associated with potential foreign customers served through VSE's
contracts with the U.S. Government. For example, the reported economic slowdown
of certain countries located in Southeast Asia could potentially affect BAV
sales. Management is unable to predict what, if any, impact such conditions
may have on the company's financial position or results of operations.
Year 2000
The company has assessed the impact of the "Year 2000" issues on its
systems and operations and does not believe it will have a material impact on
the financial position or the results of operations of the company.
Market Risk
The Company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at December 31,
1997.
- 26 -
PAGE
Executive Officers
- -------------------
William R. Albertolli, 55
Senior Vice President and General
Manager, VSS Division
Byron S. Bartholomew, 70
Executive Vice President, Business
Development
Thomas J. Corridon, 40
Senior Vice President and Comptroller
Donald M. Ervine, 61
Chairman and Chief Executive Officer
James M. Knowlton, 55
Executive Vice President and
General Manager, BAV Division
Richard B. McFarland, 64
President and Chief Operating Officer
Thomas L. Prather, Jr., 57
Senior Vice President and General
Manager, Land Warfare Group
Mark A. Robin, 44
Senior Vice President, Human
Resources and President,
Human Resource Systems, Inc. ("HRSI")
Jayne M. Tuohig, 51
Senior Vice President and General
Manager, Postal Service Program Center
Paul A. Vander Myde, 61
Senior Vice President, Corporate
Affairs
Craig S. Weber, 53
Senior Vice President, Chief
Financial Officer, Secretary
and Treasurer
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 for
each quarter and annually during the
last two years based on information
reported by the Nasdaq National Market
System and adjusted for the five-for-
four stock split effected on January 7,
1998 and the two-for-one stock split
effected on May 15, 1996. Trading in
the VSE common stock has been sporadic.
Quarter High Low Dividends
- ------- ---- --- ---------
1996:
March 31 . . . $14.00 $10.00 $.034
June 30 . . . 16.80 11.60 .034
September 30 . 17.20 11.80 .034
December 31 . 15.00 12.60 .036
For the year $17.20 $10.00 $.138
1997:
March 31 . . . $13.80 $11.60 $.036
June 30 . . . 11.80 8.00 .036
September 30 . 10.70 9.60 .036
December 31 . 10.20 9.60 .036
For the year $13.80 $ 8.00 $.144
There were approximately 1,200
stockholders of VSE common stock as of
March 1, 1998, consisting of about 299
stockholders of record plus the number
of beneficial owner proxy sets provided
in connection with VSE's 1997 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 loan agreement with a
bank which permits, subject to absence
of any event of default the payment of
cash dividends subject to annual rate
restrictions. See Note 4 (Debt) of
"Notes to Consolidated Financial
Statements" included elsewhere in this
Annual Report.
- 27 -
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
investment and cash flows for the years ended December 31, 1997, 1996, and 1995.
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 the 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 presentation. 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, 1997 and 1996, and the results of its opera-
tions and its cash flows for the years ended December 31, 1997, 1996 and 1995,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 20, 1998
- 28 -
PAGE
Consolidated Financial Statements
- ------------------------------------------------------------------------------
Consolidated Balance Sheets As of December 31,
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
1997 1996
------- -------
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 15 $ 453
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 24,650 33,707
Deferred tax assets . . . . . . . . . . . . . . . . . . 899 435
Other current assets . . . . . . . . . . . . . . . . . . 1,322 1,916
------- -------
Total current assets . . . . . . . . . . . . . . . . 26,886 36,511
------- -------
Property and equipment, net . . . . . . . . . . . . . . . 5,034 5,145
Capitalized software development costs, net . . . . . . . 0 966
Deferred tax assets . . . . . . . . . . . . . . . . . . . 309 0
Intangible assets, net . . . . . . . . . . . . . . . . . . 3,117 3,409
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,702 2,310
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $38,048 $48,341
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . $ 555 $ 0
Accounts payable and other current liabilities . . . . . 10,184 13,508
Accrued expenses . . . . . . . . . . . . . . . . . . . . 6,152 5,841
Dividends payable . . . . . . . . . . . . . . . . . . . 78 78
------- -------
Total current liabilities . . . . . . . . . . . . . 16,969 19,427
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 7,108 12,651
Deferred tax liabilities . . . . . . . . . . . . . . . . . 0 554
Deferred compensation . . . . . . . . . . . . . . . . . . 1,490 1,114
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 25,567 33,746
------- -------
Commitments and contingencies (Note 9)
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,165,405 in 1997 and
3,908,088 in 1996 . . . . . . . . . . . . . . . . . . 108 195
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 3,631 8,241
Retained earnings . . . . . . . . . . . . . . . . . . . 9,422 22,840
ESOP obligation . . . . . . . . . . . . . . . . . . . . (680) (350)
Unrealized loss on available-for-sale securities . . . . 0 (46)
Treasury stock, at cost (2,712,193 shares in 1996) . . . 0 (16,285)
------- -------
Total stockholders' investment . . . . . . . . . . . 12,481 14,595
------- -------
Total liabilities and stockholders' investment . . $38,048 $48,341
======= =======
See accompanying notes
- 29 -
PAGE
Consolidated Financial Statements
- ------------------------------------------------------------------------------
Consolidated Statements of Income For the years ended December 31,
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
1997 1996 1995
--------- -------- ---------
Revenues, principally from contracts . . . . $ 155,863 $ 120,087 $ 73,790
Costs and expenses of contracts . . . . . . 156,590 115,990 70,588
--------- --------- ---------
Gross (loss) profit . . . . . . . . . . . . (727) 4,097 3,202
Selling, general and administrative expenses 850 672 218
Interest expense . . . . . . . . . . . . . . 506 463 136
--------- --------- ---------
(Loss) income from continuing operations
before income taxes . . . . . . . . . . . (2,083) 2,962 2,848
(Benefit) provision for income taxes . . . . (636) 1,016 1,110
--------- --------- ---------
(Loss)income from continuing operations . . (1,447) 1,946 1,738
========= ========= =========
Discontinued operations, net of tax:
Loss from operations (net of tax
benefit of $14 in 1996, $46 in 1995) . . 0 (25) (92)
Loss on disposal (net of tax benefit
of $118) . . . . . . . . . . . . . . . . 0 (179) 0
--------- --------- ---------
Net (loss) income . . . . . . . . . . . . . $ (1,447) $ 1,742 $ 1,646
========= ========= =========
Weighted average shares outstanding: 2,123,544 2,164,505 2,165,994
========= ========= =========
Basic earnings per share:
(Loss) income from continuing operations . $ (0.68) $ 0.89 $ 0.80
Loss from discontinued operations . . . . 0.00 (0.09) (0.04)
--------- --------- ---------
Net (loss) income . . . . . . . . . . . . . $ (0.68) $ 0.80 $ 0.76
========= ========= =========
Diluted earnings per share:
(Loss) income from continuing operations . $ (0.68) $ 0.88 $ 0.80
Loss from discontinued operations . . . . 0.00 (0.09) (0.04)
--------- --------- ---------
Net (loss) income . . . . . . . . . . . . . $ (0.68) $ 0.79 $ 0.76
========= ========= =========
See accompanying notes
- 30 -
PAGE
Consolidated Financial Statements
- ----------------------------------------------------------------------------
Consolidated Statements of Stockholders' Investment
- ----------------------------------------------------------------------------
(in thousands)
Unrealized
Loss on
Common Stock Paid-In Retained Treasury ESOP Available-for-
Shares Amount Surplus Earnings Stock Obligation Sale securities
------ ------ ------- -------- --------- ---------- ---------------
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 ($.13) -- -- -- (286) -- -- --
Issuance of stock 6 1 91 -- -- -- --
----- ----- ------- ------- -------- ----- ----
Balance at
December 31, 1995 1,954 98 8,338 21,402 (16,285) 0 0
Net income for
the year -- -- -- 1,742 -- -- --
ESOP obligation -- -- -- -- -- (350) --
Stock split
effected in the
form of a 2-for-1
stock dividend 1,954 97 (97) -- -- -- --
Unrealized loss
on marketable
securities -- -- -- -- -- -- (46)
Dividends
declared ($.138) -- -- -- (304) -- -- --
----- ----- ------- ------- -------- ----- ----
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) $ --
===== ===== ======= ======= ======== ===== ====
See accompanying notes
- 31 -
PAGE
Consolidated Financial Statements
- ---------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows For the years ended December 31,
- ---------------------------------------------------------------------------------------
(in thousands)
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . $(1,447) $ 1,742 $ 1,646
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 2,667 1,344 959
Amortization of capitalized software development costs 1,420 147 51
Discontinued operations . . . . . . . . . . . . . . . 0 204 92
Loss on sale of property and equipment . . . . . . . 47 13 19
Deferred compensation plan expense . . . . . . . . . 6 141 188
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . 9,057 (17,634) (5,679)
Other current assets and noncurrent assets . . . 157 (1,255) 468
Deferred taxes . . . . . . . . . . . . . . . . . (1,327) 518 1,249
Increase (decrease) in:
Current portion of long-term debt . . . . . . . . 555 0 1
Accounts payable and other current liabilities . (3,324) 10,271 629
Accrued expenses . . . . . . . . . . . . . . . . 311 157 129
------- ------- -------
Net cash provided by (used in)
continuing operating activities . . . . . . . . . 8,122 (4,352) (248)
Net cash used in discontinued
operating activities . . . . . . . . . . . . . . 0 (25) (92)
------- ------- -------
Net cash provided by (used in)
operating activities 8,122 (4,377) (340)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (2,229) (2,465) (2,296)
Capitalized software development costs . . . . . . . . . (491) (795) (192)
Acquisition of CMstat, net of cash received. . . . . . . 0 0 (970)
Acquisition of Energetics, net of cash received. . . . . 0 0 (3,660)
Net proceeds from sale of Schmoldt Engineering . . . . . 0 100 0
Change in net assets of discontinued operations. . . . . 0 440 92
------- ------- -------
Net cash used in investing activities (2,720) (2,720) (7,026)
------- ------- -------
Cash flows from financing activities:
Net (payments of) proceeds from revolving term loan . . (5,543) 7,659 4,939
Net proceeds from other long-term debt . . . . . . . . 0 0 53
Cash dividends paid . . . . . . . . . . . . . . . . . . (313) (300) (281)
Net proceeds from (payments of) deferred compensation . 370 (14) 68
Advance to ESOP . . . . . . . . . . . . . . . . . . . . (330) (350) 0
Purchase of Treasury stock . . . . . . . . . . . . . . (70) 0 0
Realized (unrealized) loss on marketable securities . . 46 (46) 0
Issuance of common stock . . . . . . . . . . . . . . . 0 0 92
------- ------- -------
Net cash (used in) provided by financing activities (5,840) 6,949 4,871
------- ------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . (438) (148) (2,495)
Cash and cash equivalents at beginning of year. . . . . 453 601 3,096
------- ------- -------
Cash and cash equivalents at end of year. . . . . . . . $ 15 $ 453 $ 601
======= ======= =======
See accompanying notes
- 32 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include two segments: the engineering,
logistics, management, and technical services segment and the software products
and services segment. The engineering, logistics, management, and technical
services segment is comprised of VSE Corporation and its wholly-owned sub-
sidiaries ("VSE" or the "company"), Energetics Incorporated ("Energetics"),
and Human Resource Systems, Inc. ("HRSI"), and the unincorporated divisions of
VSE, Value Systems Services ("VSS") and BAV. This segment is engaged
principally in providing engineering, testing, management and information tech-
nology services to the U. S. Government (the "government"). Two other VSE sub-
sidiaries, VSE Corona, Inc. ("VCI") and VSE Services Corporation ("VSES"), have
generally been inactive after 1992. The software products and services segment
is comprised of VSE's wholly-owned subsidiary CMstat and is engaged principally
in software development and sales of software products and services to
primarily government prime contractors. 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.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires a company to report comprehensive
income and its components in financial statements. The company is required
to adopt the provisions of the standard during the first quarter of 1998, and,
when adopted, will require reclassification of prior years' financial state-
ments. There will be no material difference between comprehensive income and
historical net income reported by the company.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128")
which supersedes Accounting Principles Board Opinion No. 15 SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock. The
objective of SFAS No. 128 is to make the U.S. standard for computing EPS more
compatible with international EPS computations. SFAS No. 128 has been adopted
in these financial statements. Refer to "Stockholders' Investment and Earnings
Per Share" below for the discussion of EPS.
- 33 -
PAGE
Notes to Consolidated Financial Statements
Stockholders' Investment and Earnings Per Share
On December 10, 1997 VSE announced a five-for-four stock split in the form of
a stock dividend payable to stockholders of record as of the close of business
on December 31, 1997. The stock dividend was distributed on January 7, 1998.
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.
At December 31, 1997, options to purchase 159,533 shares and 45,750 shares of
common stock at $10.91 and $13.04, respectively, were outstanding. There were
no options outstanding during 1995. There was no dilutive impact on reported
earnings per share for 1997 and 1995. The computation for earnings per share
for the year ended December 31, 1996 is as follows:
Net
Income
from Weighted
Continuing Average Per-Share
Operations Shares Amount
------------- --------- ----------
(in thousands)
Basic EPS $1,946 2,164,504 $ 0.89
Assumed Exercise of Options 0 33,747 0.00
------ --------- ------
Diluted EPS $1,946 2,198,251 $ 0.88
====== ========= ======
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
installments 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 of 1996.
The company's consolidated financial statements for 1996 and 1995 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 commercial customers. The net losses of these operations from January 1,
1995 to February 7, 1996, are included in the consolidated statements of income
under "Discontinued operations, net of tax: Losses from operations."
Revenues from such operations were $66 thousand for the period ended
February 7, 1996, and $1,278 thousand for the year ended December 31, 1995.
- 34 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
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, 1997 and December 31, 1996 consisted of
overnight repurchase agreements of $3.5 million and $253 thousand, respectively,
secured by U. S. Government agency securities. 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 of $46 thousand is presented as a separate
component of stockholders' investment. These securities were sold in December
1997 at a realized loss of $53 thousand.
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
Supplemental disclosures of cash flow information for the three years ended
December 31, are presented below (in thousands):
1997 1996 1995
------ ------ ------
Interest payments . . . . . . . . . . . . $ 568 $ 447 $ 107
Income tax payments . . . . . . . . . . . 319 590 839
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.
- 35 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
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.
Potential revenue related to work performed at risk is not recognized either
as income or as an offset against a potential loss until it can be reliably
estimated and its realization is probable. 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 were 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 audits of the indirect cost rates for 1997 and 1996
will not result in material adjustments, 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.
Property and Equipment
Property and equipment (valued at cost) consisted of the following (in
thousands):
1997 1996
-------- --------
Computer systems equipment . . . . . . . . . . . . . $ 8,262 $ 7,600
Furniture, fixtures, equipment, and other . . . . . 5,043 4,760
Leasehold improvements . . . . . . . . . . . . . . . 2,295 1,877
Buildings . . . . . . . . . . . . . . . . . . . . . 381 381
Land and land improvements . . . . . . . . . . . . . 385 385
-------- --------
16,366 15,003
Less accumulated depreciation . . . . . . . . . . . (11,332) (9,858)
-------- --------
$ 5,034 $ 5,145
======== ========
- 36 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Depreciation and amortization expense for property and equipment was
approximately $2.3 million for 1997, $1.3 million for 1996 and $1 million for
1995. 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.
In the fourth quarter of 1997, the company entered into negotiations to sub-
lease approximately 20,000 square feet formerly occupied by CMstat. The sub-
lease agreement was signed in March of 1998. Leasehold improvements of
approximately $725 thousand, which will not be recovered by future sublease
payments, were fully written down in 1997.
Capitalized Software Development Costs
The company capitalizes certain computer software development costs, primarily
associated with CMstat upon the establishment of technological feasibility.
Costs capitalized include labor and associated fringe benefits. These costs
are amortized utilizing the straight-line method generally over a period of two
years. Accumulated amortization as of December 31, 1997 and 1996 was
approximately $1.5 million and $226 thousand, respectively. Amortization
expense for 1997, 1996 and 1995 was approximately $1.4 million, $147 thousand
and $51 thousand, respectively.
The company performs a quarterly review of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to
be generated from the applicable software, any remaining capitalized amounts
are written off. In 1997, approximately $890 thousand of previously
capitalized software development costs were written down in the fourth quarter
of 1997.
Nonoperating Net Income
Nonoperating net income included in selling, general and administrative
expenses, primarily interest income, was approximately $46 thousand, $32
thousand, and $79 thousand for the years ended December 31, 1997, 1996 and
1995, respectively.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1997, 1996
and 1995 was approximately $6 thousand, $141 thousand and $188 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
- 37 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
securities was approximately $1,564 thousand and $1,253 thousand as of December
31, 1997 and 1996, 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 PrinciplesIn 1995, the
company adopted 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 company elected the disclosure-
only alternative and accordingly discloses the pro forma net income and per
share amounts in the notes to the consolidated financial statements using the
fair-value based method. Refer to Note 7 Stock Option Plans.
(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.
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
purchase 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 year ended
December 31, 1995 assume the Energetics acquisition occurred as of the
beginning of the period 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 that date or
of results which may occur in the future.
- 38 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(in thousands, except per share amounts)
1995
-------
Revenues . . . . . . . . . . . . . . . . . . . $81,341
=======
Income from continuing operations . . . . . . . $ 1,980
=======
Income from continuing operations per share . . $ 0.91
=======
(3) Accounts Receivable
The components of accounts receivable as of December 31, 1997 and 1996, were
as follows (in thousands):
1997 1996
--------- ---------
Billed . . . . . . . . . . . . . . . . . . . . $ 12,369 $ 10,149
Unbilled:
Retainages . . . . . . . . . . . . . . . . . . 126 467
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . . . 12,295 23,251
Less-Allowance for doubtful accounts . . . . . (140) (160)
--------- ---------
Total accounts receivable $ 24,650 $ 33,707
========= =========
The "Unbilled: Other" included in accounts receivable are reported net of an
allowance for contract disallowances of approximately $279 thousand as of
December 31, 1997 and approximately $276 thousand as of December 31, 1996.
"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
$102 thousand and $288 thousand as of December 31, 1997, and 1996, 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% of such
revenues in 1995. A new contract awarded in 1995 with the U.S. Navy accounted
for approximately 48% and 38% of such revenues in 1997 and 1996, respectively.
The company generally expects to collect all accounts receivable other than
retainages within one year.
(4) Debt
Long-term debt as of December 31, 1997 and 1996 was as follows (in thousands):
- 39 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1997 1996
------- -------
Bank loan borrowings and commitments . . . . . . . $ 7,663 $12,629
Other debt . . . . . . . . . . . . . . . . . . . . 0 22
------- -------
7,663 12,651
Less portion due within one year . . . . . . . . . (555) 0
------- -------
$ 7,108 $12,651
======= =======
Prior to July 1997, VSE had a revolving term loan agreement (the "Loan") with
a syndicate of three banks. Under the Loan, VSE could borrow up to $45 million,
subject to a borrowing formula based on billed receivables. The Loan contained
collateral requirements by which company assets were secured and restrictive
covenants that included minimum tangible net worth, profitability requirements
and a limit on annual dividends. In July, 1997 the company and its lending
banks signed an amended loan agreement (the "Amended Loan") which cured
covenant noncompliances associated with the Loan, included a term loan portion
of debt in addition to revolving loan debt, and made certain other changes to
the lending agreement. Under the revolving loan portion of the Amended Loan,
VSE can borrow up to $30 million, subject to a borrowing formula based on billed
receivables. Interest is charged at a prime-based rate or an optional LIBOR-
based rate. A commitment fee is charged on the unused portion of the revolving
loan commitment. The termination date of the revolving loan is May 31, 1999.
Under the term loan portion of the Amended Loan, VSE converted $4 million of
existing revolving loan debt to a term loan payable over four years. Interest
is charged at a LIBOR-based rate 1% higher than the LIBOR-based rate charged on
the revolving loan. The interest rates charged at year end was approximately
8% for 1997 and 1996. Principal payments are due in 48 monthly installments of
approximately $111,000 beginning in August 1998 through July 2001. The Amended
Loan contains collateral requirements by which company assets secured amounts
outstanding, restrictive covenants that include minimum tangible net worth and
cash flow coverage ratio requirements, a limit on annual dividends, and limits
on advances to affiliates. As of December 31, 1997, the company did not meet
the cash flow coverage ratio covenant, however, a waiver was issued with
regard to this covenant for the period ended December 31, 1997 and the company
is not in default on the Amended Loan.
Additionally, the lead bank has notified management that the related covenant
will be amended for the next four quarters such that financial results prior to
December 31, 1997 will not be included in the ratio computation. Management
expects that future financial results used in this ratio computation will
result in a ratio that will comply with the amended covenant requirements.
There were no outstanding borrowed amounts under the revolving portion of the
Amended Loan as of December 31, 1997. Included in long-term debt are commit-
ments for checks outstanding at December 31, 1997 and December 31, 1996 of
approximately $3.7 million and $7.7 million, respectively.
Other debt is related to debt acquired in the acquisitions of CMstat and
Energetics.
(5) Accrued Expenses
The components of accrued expenses as of December 31, 1997 and 1996, were as
follows (in thousands):
- 40 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1997 1996
-------- --------
Accrued salaries . . . . . . . . . . . . . . . . $ 1,700 $ 1,710
Accrued vacation . . . . . . . . . . . . . . . . 1,595 1,417
Estimated future losses on fixed price and
time and material contracts . . . . . . . . . . 257 355
Other accrued expenses . . . . . . . . . . . . . 2,600 2,359
-------- --------
Total accrued expenses $ 6,152 $ 5,841
======== ========
(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 VSE and certain of its subsidiaries for 1997, 1996, and 1995,
was approximately $236 thousand, $328 thousand, and $449 thousand, respectively.
The ESOP/401(k) plan held 816,211 shares and 841,941 shares of VSE stock as of
December 31, 1997 and 1996, respectively, which receive dividend payments and
are included in the weighted average shares for earnings per share calcula-
tions.
During 1997 and 1996, the company advanced the ESOP trust $330 thousand and
$350 thousand, respectively, in connection with distributions made to
terminated participants. The advances are payable to the company when the
funds become available. As of December31, 1997 and 1996, respectively, the
ESOP trust held approximately 52 thousand and 22 thousand unallocated shares
of the company's common stock related to these transactions, which are not
included in the weighted average shares for earnings per share calculations.
The ESOP trust may sell these shares to repay the advances from the company.
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 1997 and 1996 was approximately $420 thousand and $460 thousand,
respectively, and from August 29, 1995 to December 31, 1995 the plan expense
was approximately $28 thousand.
(7) Stock Option Plans
1996 Stock Option Plan
The company accounts for the 1996 Stock Option Plan (the "1996 Plan") pursuant
to APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which
no compensation cost has been recognized because the exercise price of
- 41 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
the stock options equals the market price of the underlying stock on the date
of grant. 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):
1997 1996
------- ------
Net (loss) income: As reported $(1,447) $1,742
======= ======
Pro forma (1,569) 1,643
======= ======
Earnings per share: As reported $ (0.68) $ 0.79
======= ======
Pro forma (0.74) 0.75
======= =======
Under the Plan, the company may grant options for and sell up to an aggregate
of 273,698 shares of the common stock of the company. Through December 31,
1997 the company has granted options for 220,725 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. The 1996 plan will terminate on the earliest of
January 1, 2007, or the date on which all options under the 1996 plan have
been exercised or terminated.
Information with respect to stock options is as follows:
Weighted Weighted
Average Average
Exercise Exercise
1997 Price 1996 Price
---- ----- ---- -----
Number of shares under stock options:
Outstanding at beginning of year 160,707 $10.91 0 $ 0
Granted 56,500 13.04 164,225 10.91
Forfeited (11,924) 12.83 (3,518) 10.91
------- ------ ------- ------
Outstanding at end of year 205,283 11.38 160,707 10.91
======= ====== ======= ======
Exercisable at end of year 91,203 11.18 41,056 10.91
======= ====== ======= ======
Weighted average fair value of
options granted $3.15 $2.43
======= =======
The fair value of the options is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used in
the pricing calculation for 1997 and 1996:
- 42 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1997 1996
Risk free interest rate 6.03% 5.14%
Dividend yield 2.00% 2.00%
Expected life 3 years 3 years
Expected volatility 29.00% 29.00%
1998 Stock Option Plan
On December 3, 1997, the company's board of directors ratified, subject to
shareholder approval, the VSE Corporation 1998 Stock Option Plan (the "1998
Plan"). Under the proposed 1998 Plan, an aggregate of up to 343,750 shares of
common stock may be purchased pursuant to the grant of options. Under the 1998
Plan, 15,625 shares will be available for grants to non-employee directors of
VSE, and 328,125 shares will be available for grants to executive officers and
key employees. Each option granted under the plan will be at fair market value
of VSE's stock and will vest 25% immediately on the date of the grant and 25%
on each successive anniversary date after the date of the grant (100% vested
after three years). Subject to stockholder approval of the 1998 Plan, it is
anticipated that no grants will be made under the 1998 Plan until January 1,
1999. Under the 1998 Plan, however, grants may be made at any time after the
stockholders approve the 1998 Plan. The 1998 Plan will terminate on the
earliest of May 6, 2008, or the date on which all options under the 1998 Plan
have been exercised or terminated.
(8) Income Taxes
The company files consolidated federal income tax returns with all of its
subsidiaries. The components of the (benefit) provision for income taxes for
the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
------- ------ ------
Current
Federal . . . . . . . . . . . . . . . . . . $ 460 $ 408 $ 508
State . . . . . . . . . . . . . . . . . . . 231 106 115
------- ------ ------
691 514 623
Deferred
Federal . . . . . . . . . . . . . . . . . . (1,103) 413 393
State . . . . . . . . . . . . . . . . . . (224) 89 94
------- ------ ------
(1,327) 502 487
------- ------ ------
(Benefit) provision for income taxes $ (636) $1,016 $1,110
======= ====== ======
The differences between the amounts of tax computed at the federal statutory
rate of 34% and the provisions for income taxes for 1997, 1996, and 1995 are as
follows (in thousands):
- 43 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1997 1996 1995
------ ------ ------
Tax at statutory federal income tax rate . . . $ (708) $1,007 $ 969
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 39 124 138
Permanent differences for tax . . . . . . . 33 3 3
Other, net . . . . . . . . . . . . . . . . 0 (118) 0
------ ------ ------
(Benefit) provision for income taxes $ (636) $1,016 $1,110
====== ====== ======
The company's deferred tax assets (liabilities) as of December 31, 1997 and
1996, 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):
1997 1996
------ -------
Current deferred tax assets . . . . . . . $1,421 $ 1,252
Current deferred tax liabilities . . . . . (522) (817)
------ -------
Net current deferred tax assets . . . . . 899 435
------ -------
Noncurrent deferred tax assets . . . . . . 1,151 855
Noncurrent deferred tax liabilities . . . . (792) (1,359)
Valuation allowance . . . . . . . . . . . . (50) (50)
------ -------
Net noncurrent deferred tax
assets (liabilities) . . . . . . . . . 309 (554)
------ -------
Net deferred tax assets (liabilities) . . . $1,208 $ (119)
====== =======
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.
The tax effects of temporary differences representing deferred tax assets and
liabilities as of December 31, 1997 and 1996, are as follows (in thousands):
1997 1996
------- -------
Deferred compensation . . . . . . . . . . . . . . $ 1,265 $ 1,024
Accrued expenses . . . . . . . . . . . . . . . . 312 347
Accelerated depreciation . . . . . . . . . . . . 301 (367)
Other . . . . . . . . . . . . . . . . . . . . . . 150 175
Allowance for contract and other disallowances . 109 108
Deferred revenues . . . . . . . . . . . . . . . . 65 (640)
Bad debt expense . . . . . . . . . . . . . . . . 57 65
Retainages not taxed until billed. . . . . . . . (429) (132)
Intangible assets . . . . . . . . . . . . . . . . (572) (649)
------- -------
1,258 (69)
Valuation allowance . . . . . . . . . . . . . . . (50) (50)
------- -------
Net deferred tax assets (liabilities) $ 1,208 $ (119)
======= =======
- 44 -
PAGE
Notes to Consolidated Financial Statements
(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 1997, 1996, and 1995 was approximately $3.2 million, $2.9 million,
and $2.2 million, respectively, which was net of sublease income of
approximately $318 thousand, $425 thousand, and $272 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 $2.3 million in 1998 and 1999, $2 million in 2000,
$1.7 million in 2001, $803 thousand in 2002 and $156 thousand thereafter.
Litigation
The company and its subsidiaries have, in the normal course of business,
certain other claims against them and against other parties. Two former
employees of the company filed suit in a state court against the company
related to their terminations of employment. The company is vigorously
defending its position and believes the outcome of this lawsuit will not have
a material adverse effect on the company's results of operations or financial
position.
(10) Segment Information
VSE has two reportable segments: the engineering, logistics, management, and
technical services segment which provides diversified engineering, technical,
and management services ("ELMTS"), principally to agencies of the United States
Government and to other government prime contractors; and the software products
and services segment, which provides application software and services ("SPS")
related to the installation of the software to primarily commercial customers.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments
are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and
marketing strategies. The software products and services segment was acquired
as a unit, and the management has been maintained separately since the
acquisition.
The following table presents revenues and other financial information by
business segment for the years 1997, 1996 and 1995, in thousands:
- 45 -
PAGE
Notes to Consolidated Financial Statements
1997 ELMTS SPS Eliminations Consolidated
- ------------------------------------------------------------------------------
Revenues from unaffiliated
customers $152,636 $3,227 $ $155,863
Interest expense 130 376 506
Depreciation and amortization 1,622 2,465 4,087
Operating income (loss) 4,240 (6,323) (2,083)
Assets 53,917 2,498 (18,367) 38,048
Expenditures for capital assets 1,826 974 2,800
1996
- -------------------------------------------------------------------------------
Revenues from unaffiliated
customers $115,616 $4,471 $ $120,087
Interest expense 314 149 463
Depreciation and amortization 1,261 230 1,491
Operating income 2,943 19 2,962
Assets 51,141 4,421 (7,221) 48,341
Expenditures for capital assets 1,101 2,166 3,267
1995
- -------------------------------------------------------------------------------
Revenues from unaffiliated
customers $72,378 $1,412 $ $ 73,790
Interest expense 94 42 136
Depreciation and amortization 985 25 1,010
Operating income 2,628 220 2,848
Assets 32,129 1,222 (4,413) 28,938
Expenditures for capital assets 2,121 389 2,510
- 46 -
PAGE
Selected Quarterly Data
- -------------------------------------------------------------------------------
Selected Quarterly Data (Unaudited)
- -------------------------------------------------------------------------------
(in thousands, except earnings per share)
1997 Quarters
1st 2nd 3rd 4th
------- ------- ------- -------
Revenues . . . . . . . . . . . . . . . . $47,494 $32,170 $34,564 $41,635
======= ======= ======= =======
Gross profit (loss). . . . . . . . . . . $ 142 $ 11 $ 641 $(1,521)
======= ======= ======= =======
(Loss) income from continuing operations $ (277) $ (156) $ 8 $(1,022)
======= ======= ======= =======
Net (loss) income . . . . . . . . . . . $ (277) $ (156) $ 8 $(1,022)
======= ======= ======= =======
Weighted average shares outstanding . . 2,146 2,122 2,114 2,114
======= ======= ======= =======
Basic earnings per share:
(Loss) income from continuing operations $ (.13) $ (.07) $ 0 $ (.48)
======= ======= ======= =======
Net (loss) income per share . . . . . . $ (.13) $ (.07) $ 0 $ (.48)
======= ======= ======= =======
Diluted earnings per share:
Weighted average shares outstanding . . 2,146 2,122 2,114 2,114
======= ======= ======= =======
(Loss) income from continuing operations $ (.13) $ (.07) $ 0 $ (.48)
======= ======= ======= =======
Net loss per share . . . . . . . . . . $ (.13) $ (.07) $ 0 $ (.48)
======= ======= ======= =======
1996 Quarters
1st 2nd 3rd 4th
------- ------- ------- -------
Revenues . . . . . . . . . . . . . . . . $19,638 $24,476 $29,664 $46,309
======= ======= ======= =======
Gross profit . . . . . . . . . . . . . $ 1,154 $ 838 $ 892 $ 1,213
======= ======= ======= =======
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 . . 2,173 2,173 2,166 2,146
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations . . . $ .22 $ .21 $ .22 $ .24
======= ======= ======= =======
Loss from discontinued operations . . . $ (.09) $ 0 $ 0 $ 0
======= ======= ======= =======
Net income per share . . . . . . . . . . $ .13 $ .21 $ .22 $ .24
======= ======= ======= =======
Diluted earnings per share:
Weighted average shares outstanding . . 2,207 2,207 2,200 2,179
======= ======= ======= =======
Income from continuing operations . . . $ .21 $ .21 $ .22 $ .24
======= ======= ======= =======
Loss from discontinued operations . . . $ (.09) $ 0 $ 0 $ 0
======= ======= ======= =======
Net (loss) income per share . . . . . . $ .12 $ .21 $ .22 $ .24
======= ======= ======= =======
- 47 -
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, 1997
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
contained in definitive proxy statements incorporated by reference in Part
III of 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, 1998, was
approximately $11 million.
As of March 1, 1998, 2,186,905 shares of VSE Corporation Common Stock were
outstanding.
Portions of the Registrant's 1997 Annual Report to stockholders for the year
ended December 31, 1997, 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 7, 1998, 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 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 17, 1998, 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 51.
- 48 -
PAGE
Form 10K Cross-Reference Index
- -------------------------------------------------------------------------------
Part Item Page(s)
- -------------------------------------------------------------------------------
I. 1. Business 11-18
2. Properties 4-10
3. Legal Proceedings 44
4. Submission of Matters to a Vote of Security Holders None
- Executive Officers of the Registrant 27
II. 5. Market for Registrant's Common Stock and Related
Stockholder Matters 27
6. Selected Financial Data 1
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-26
8. Financial Statements and Supplementary Data 29-46
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 28
Consolidated Balance Sheets 29
Consolidated Statements of Income 30
Consolidated Statements of Stockholder's
Investments 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33-46
(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 -
shareholders of Energetics Incorporated +
(b) Reports on Form 8-K: None
- 49 -
PAGE
Form 10K Cross-Reference Index
- -------------------------------------------------------------------------------
*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.
- 50 -
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
Executive Vice President,
General Manager, BAV Division
James M. Knowlton
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
Craig S. Weber
Senior Vice President and
Comptroller
Thomas J. Corridon
Senior Vice Presidents
William R. Albertolli
Thomas L. Prather, Jr.
Mark A. Robin
Jayne M. Tuohig
Paul A. Vander Myde
Vice Presidents
Peter J. Desrosiers
Maurice A. Gauthier
John S. Gilroy
Michael E. Hamerly
H. Eugene Hosier
Thomas R. Loftus
Jeffrey H. McCurdy
George M. Musick III
John J. Werbowski
Assistant Vice Presidents
Bryan E. Adams
Stephen W. Austin
Deborah R. Blakeman
Richard A. Hannah
M. Darleen Stein
Sushil Baluja
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 Member,
Arent Fox Kintner Plotkin &
Kahn, PLLC, 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
formerly Senior
Vice President and Director
(1961-1995), VSE Corporation
- 51 -
PAGE
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 Internet address is
http://www.vsecorp.com.
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.
This Annual Report contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. All forward looking statements involve
risks and uncertainties. The forward looking statements in this document are
intended to be subject to the safe harbor protection provided by Sections 27A
and 21E. For a discussion identifying some important factors that could cause
actual VSE results to differ materially from those anticipated in the forward
looking statements, please see VSE's Securities and Exchange Commission
filings, including but not limited to the discussions captioned "Letter to
Stockholders" on pages 2 and 3 and "Description of Business" including the
discussion on "competition and risks" contained on pages 11 through 18 of VSE's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 ("SEC
Form 10-K"); "Management Discussion and Analysis" on pages 19 through 26 of
this Annual Report; and "Note 1 -- Summary of Significant Accounting Policies"
and "Note 9 -- Commitments and Contingencies" included in the Notes to
Consolidated Financial Statements included on pages 33 through 46 of this
Annual Report and incorporated by reference into the SEC Form 10-K.
- 52 -
PAGE
EXHIBIT III