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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002 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 re-
quired to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes [x] No [ ]
Number of shares of Common Stock outstanding as of July 25, 2002: 2,181,540.
VSE Corporation and Subsidiaries
Forward Looking Statements
This filing contains statements which, to the extent they are not
recitations of historical fact, constitute "forward looking statements" under
federal securities laws. All such statements are intended to be subject to the
safe harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual VSE Corporation
("VSE" or the "company") results to differ materially from those anticipated in
the forward looking statements contained in this filing, see VSE's "Narrative
Description of Business", "Management's Discussion and Analysis" and "Notes to
Consolidated Financial Statements" contained in VSE's Annual Report and Form
10-K for the fiscal year ended December 31, 2001 (Form 10-K) filed with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
analysis only as of the date hereof. The company undertakes no obligation to
publicly revise these forward looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the company files from time to
time with the Securities and Exchange Commission, including this Quarterly
Report on Form 10-Q to be filed by the company subsequent to the Annual Report
on Form 10-K and any Current Reports on Form 8-K filed by the company.
-2-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
June 30, December 31,
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 247 $ 209
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 25,902 20,849
Deferred tax assets . . . . . . . . . . . . . . . 1,081 695
Other current assets . . . . . . . . . . . . . . . 1,801 1,984
-------- --------
Total current assets . . . . . . . . . . . . . . 29,031 23,737
Property and equipment, net . . . . . . . . . . . . 3,817 4,211
Deferred tax assets . . . . . . . . . . . . . . . . 678 793
Intangible assets, net . . . . . . . . . . . . . . . 1,726 1,822
Other assets . . . . . . . . . . . . . . . . . . . . 2,419 2,646
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 37,671 $ 33,209
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Bank notes payable . . . . . . . . . . . . . . . . $ 1,477 $ -
Accounts payable . . . . . . . . . . . . . . . . 13,453 10,609
Accrued expenses . . . . . . . . . . . . . . . . 4,569 4,235
Dividends payable . . . . . . . . . . . . . . . . 87 86
-------- --------
Total current liabilities . . . . . . . . . . . 19,586 14,930
Long-term debt . . . . . . . . . . . . . . . . . . . - 351
Deferred compensation . . . . . . . . . . . . . . . 1,135 1,453
-------- --------
Total liabilities . . . . . . . . . . . . . . . 20,721 16,734
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued and outstanding
2,181,540 shares in 2002 and 2,150,540 in 2001 . 109 107
Paid-in surplus . . . . . . . . . . . . . . . . . 3,549 3,294
Retained earnings . . . . . . . . . . . . . . . . 13,292 13,074
-------- --------
Total stockholders' investment . . . . . . . . . 16,950 16,475
-------- --------
Total liabilities and stockholders' investment . $ 37,671 $ 33,209
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three and six months ended June 30,
- --------------------------------------------------------------------------------
(in thousands, except share amounts)
Three Months Six Months
2002 2001 2002 2001
---- ---- ---- ----
Revenues, principally from
contracts . . . . . . . . . . . $ 36,353 $ 24,633 $ 65,433 $ 55,075
Costs and expenses of contracts . 35,835 24,010 64,651 53,958
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 518 623 782 1,117
Selling, general and administrative
expenses . . . . . 35 64 63 113
Interest expense, net of interest
income . . . . . . . . . . . . 29 14 46 29
--------- --------- --------- ---------
Income before income taxes . . . 454 545 673 975
Provision for income taxes . . . 180 211 280 385
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 274 $ 334 $ 393 $ 590
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .12 $ .16 $ .18 $ .28
========= ========= ========= =========
Basic weighted average shares
outstanding 2,173,790 2,130,863 2,163,826 2,128,720
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .12 $ .16 $ .18 $ .28
========= ========= ========= =========
Diluted weighted average shares
outstanding 2,199,866 2,130,863 2,188,685 2,128,720
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------
(in thousands)
Common Stock Paid-In Retained Treasury
Shares Amount Surplus Earnings Stock
------ ------ ------- -------- -----
Balance at
December 31, 2000 . . . . 2,198 $ 110 $ 3,914 $ 12,561 $ (792)
Net income
for the year . . . . . . -- -- -- 855 --
Issuance of
Treasury stock . . . . . -- -- (81) -- 220
Retirement of
Treasury stock . . . . . (52) (3) (569) -- 572
Issuance of stock . . . . . 4 -- 30 -- --
Dividends declared
($.16) . . . . . . . . . -- -- -- (342) --
----- ------ ------- -------- ------
Balance at
December 31, 2001 . . . . 2,150 107 3,294 13,074 --
Net income
for the period . . . . . -- -- -- 393 --
Issuance of stock . . . . . 31 2 255 -- --
Dividends declared
($.08) . . . . . . . . . -- -- -- (175) --
----- ------ ------- -------- ------
Balance at
June 30, 2002 . . . . . . 2,181 $ 109 $ 3,549 $ 13,292 $ --
===== ====== ======= ======== ======
The accompanying notes are an integral part of these financial statements.
-5-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the six months ended June 30,
- -------------------------------------------------------------------------------
(in thousands)
2002 2001
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 393 $ 590
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 726 754
Loss on sale of property and equipment . . . . . . . 9 26
Change in deferred compensation . . . . . . . . . . . (191) (48)
Change in deferred taxes . . . . . . . . . . . . . . (271) (76)
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (5,053) 912
Other current assets and noncurrent assets . . . . . 410 (537)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . 2,717 (2,230)
Accrued expenses . . . . . . . . . . . . . . . . . . 334 40
------- -------
Net cash used in operating activities (926) (569)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (245) (800)
------- -------
Net cash used in investing activities (245) (800)
------- -------
Cash flows from financing activities:
Net proceeds from bank notes payable . . . . . . . . . . 1,126 1,338
Cash dividends paid . . . . . . . . . . . . . . . . . . (174) (170)
Issuance of common stock . . . . . . . . . . . . . . . . 257 139
------- -------
Net cash provided by financing activities 1,209 1,307
------- -------
Net increase (decrease) in cash and cash equivalents . . . 38 (62)
Cash and cash equivalents at beginning of period . . . . 209 647
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 247 $ 585
======= =======
The accompanying notes are an integral part of these financial statements.
-6-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. For further information refer to the
consolidated financial statements and footnotes thereto included in the VSE
Corporation Annual Report on Form 10-K for the year ended December 31, 2001. The
company operates within one reportable segment.
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.
Debt
VSE has a revolving loan agreement with a bank on which the company can borrow
up to $15 million, subject to a borrowing formula based on billed receivables.
Under terms of the agreement, the company pays a fixed amount annual commitment
fee and interest on any borrowings at a prime-based rate or an optional LIBOR-
based rate. The expiration date of the revolving loan is May 31, 2003. The loan
agreement contains collateral requirements by which company assets secure
amounts outstanding, restrictive covenants that include minimum tangible net
worth and profitability requirements, a limit on annual dividends, and other
affirmative and negative covenants. This loan agreement replaced the previous
loan agreement that had a maximum commitment of $30 million. The company
determined that the new loan agreement was adequate to cover current and future
liquidity requirements. The amount borrowed under this loan agreement was
approximately $1.5 million as of June 30, 2002.
As of June 30, 2002, the loan expiration date was less than twelve months in the
future and is classified as a current obligation. VSE and the bank have agreed
to extend the loan expiration date to a date further into the future, and VSE is
waiting for bank loan committee approval and is expecting formal documentation
of this extension in August 2002.
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Due to the write off of a note receivable associated with the divestiture of a
former VSE subsidiary company prior to year end 2000 and to certain operating
losses, including losses associated with start-up costs of TTD and MSD, the
company did not achieve the original minimum amount established in the
profitability covenant for each quarter between December 31, 2000 and June 30,
2002. The company and the bank have made amendments to the loan agreement during
2001 and 2002 to restate this covenant and as a result, the company is in
compliance during 2000, 2001, and 2002.
Earnings Per Share
Basic earnings per share has been computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during each period. Shares issued during the period and shares
reacquired during the period are weighted for the portion of the period that
they were outstanding. Diluted earnings per share have been computed in a
manner consistent with that of basic earnings per share while giving effect to
all potentially dilutive common shares that were outstanding during each period.
Litigation
In June 2001 a personal injury lawsuit was filed against VSE, Astoria Metals
Corporation (AAMC@), Ship Dismantlement and Recycling Joint Venture, Earth Tech,
Inc., and Tyco International Ltd. While the plaintiffs' complaint does not
specify the amount of alleged damages suffered, the plaintiffs have provided the
defendants with a notice of damages aggregating approximately $20 million. VSE
provided notice of the suit to its insurance carrier, Travelers Insurance, which
is defending the company in this matter. While there is no assurance, VSE
believes that the resolution of the lawsuit will not have a material adverse
effect on VSE's consolidated financial position or results of operations.
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of
management, the resolution of these claims will not have a material adverse
effect on the company=s results of operations or financial position.
-8-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Company Organization and Overview
Company Organization
The term "VSE" or "company" refers to VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only. VSE's
business operations consist primarily of services performed by the company's
wholly owned subsidiaries and divisions. Wholly owned subsidiaries include
Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"),
Ship Remediation and Recycling, Inc. ("SRR") and VSE Services International,
Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Coast
Guard Division ("VCG") beginning in February 2002, Fleet Maintenance Division
("Fleet Maintenance"), GSA Services Division ("GSA Services"), Ordnance Division
("Ordnance"), Value Systems Services Division ("VSS"), Telecommunications
Technologies Division ("TTD"), and Land Systems Division ("Land Systems")
beginning in February 2001, and Management Sciences Division ("MSD") beginning
in December 2001. As of June 30, 2002, SRR, VSI, GSA Services, and Ordnance are
not conducting any current business operations. Currently, all work contracted
under GSA schedules is performed directly by each of the operating divisions or
subsidiaries.
Several of the company's operating divisions were formed in recent years to bid
on and perform contract work that had been previously performed by VSE (parent
company). The formation of these divisions has enabled the company to use an
operating structure that is better suited to perform certain types of contract
work. The company anticipates that it will continue using its operating
divisions to bid and perform new contract work to better serve the needs of
customers. Management believes that the use of operating divisions to perform
future work and the associated improvements in servicing customers will better
position the consolidated entity for future revenue growth.
Overview of Services
The company is engaged principally in providing engineering, design, logistics,
management and technical services to the U.S. Government (the "government"),
other government prime contractors, and commercial entities. The largest
customer for the services rendered by the company is the U.S. Department of
Defense ("Defense"), including agencies of the U.S. Army, Navy, and Air Force.
BAV is a major player in providing logistics, training, and technical assistance
in support of the Navy's ship transfer program. Fleet Maintenance, Ordnance (in
2001 and prior), and VSS also support the Navy by providing a variety of
services including ship installation efforts, combat systems inspections, ship
repair and overhaul availability planning, harpoon weapons management, ordnance
alteration, air combat logistics, and outsourcing decision assistance. SRR (in
2001 and prior) has provided environmentally sound solutions for the dismantling
and disposal of inactive ships. Land Systems provides the Army with engineering
and technical support for ground weapons, logistics and training services,
material procurement support, and prototype development support for combat
vehicles. MSD provides the Army and
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
other government agencies and commercial organizations with quality training
services for product, process, and management optimization.
VSE also provides services to other government agencies and industry. The
company has provided support services to the U.S. Postal Service for over twenty
years and is continuing to support this customer through its HRSI subsidiary.
Energetics is focused on providing the Department of Energy and other government
and industry customers with expert consulting services in environmental
management and energy supply, resource management, and conservation. TTD markets
the company's capability to provide government and industry customers with the
latest products, services, and support in network, multimedia, and audio-visual
technology. This includes design, installation, management and support for a
wide variety of voice, data, multimedia and related projects. These projects
include facility security solutions and intelligent conference rooms which
provide an ideal balance between technology and human interaction. VCG began
providing logistics, training, and technical assistance support to the U.S.
Coast Guard in February 2002.
Substantially all of the company's services are performed for its customers on
a contract basis. The three primary types of contracts used are cost-type
contracts, time and materials contracts, and fixed-price contracts. Revenues
result from work performed on these contracts by the company's employees and
from pass-through of costs for material and work performed by subcontractors.
Revenues on cost-type contracts are recorded as contract allowable costs are
incurred and fees earned. Profits on cost-type contracts are equal to the fees
that are earned. Revenues for time and materials contracts are recorded on the
basis of contract allowable labor hours worked times the contract defined
billing rates, plus the cost of materials used in performance on the contract.
Profits on time and material contracts result from the difference between the
cost of services performed and the contract defined billing rates for these
services. 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. Profits on fixed-price contracts result from the difference
between the costs of services performed and the revenue earned based on
percentage-of-completion. Occasionally, VSE will perform contract work prior
to receiving formal contractual coverage, based on preliminary approval of
contract funding. VSE recognizes this "risk funding" as revenue when the
associated costs are incurred or the work is performed. As of June 30, 2002,
VSE has recognized approximately $67 thousand in risk funding.
-10-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the changes in these items for the three and
six month periods ended June 30, 2002, and 2001 (in thousands):
2002
Compared
to
2001
Three Months Six Months ----------------
Ended June 30, Ended June 30, Three Six
2002 2001 2002 2001 Months Months
---- ---- ---- ---- ------ ------
Revenues . . . . . . . $36,353 $24,633 $65,433 $55,075 $11,720 $10,358
Pretax income . . . . $ 454 $ 545 $ 673 $ 975 $ (91) $ (302)
Provision for income
taxes . . . . . . . 180 211 280 385 (31) (105)
------- ------- ------- ------- ------- -------
Net income . . . . . $ 274 $ 334 $ 393 $ 590 $ (60) $ (197)
======= ======= ======= ======= ======= =======
The discussion and analysis that follow are intended to assist in understanding
and evaluating the results of operations, financial condition, and certain other
matters of the company.
Results of Operations
Revenues increased by approximately 48% and 19% for the three and six month
periods ended June 30, 2002, as compared to the same periods of 2001. The
increase in revenues was primarily due to a significant increase in BAV's ship
transfer and overhaul work (See "BAV Contract" below). Revenues also increased
due to higher levels of subcontract pass-through work in Fleet Maintenance.
These increases in revenue were partially offset by decreased revenues
associated with the expiration of an Ordnance contract (see "Contract
Expiration" below), and to a reduction in revenue associated with the company's
decision to discontinue SRR's ship remediation and recycling efforts (See
"Business Termination and New Business Start-ups" below).
Pretax income decreased by approximately 17% and 31%, respectively, for the
three month and six month periods ended June 30, 2002, as compared to the same
periods of 2001. The decrease in pretax income for these periods is primarily
due to a reduction in profits in Land Systems due to losses on a certain
contract and a temporary suspension of work on a program previously performed
under the expired Ordnance contract, to larger losses in TTD, and to a non-
recurring VSE sublease transaction that resulted in an addition to pre-tax
income of $250,000 during the second quarter of 2001. The decrease in pretax
income for these periods was partially offset by the elimination of losses in
VSI and increased profits in Energetics. During the six month periods ended
June 30, 2002, and 2001, VSE incurred losses on the operations of Fleet
Maintenance and TTD. Estimated future losses have been reserved in Fleet
Maintenance and cost reduction efforts have been implemented in TTD which
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
should help to reduce the losses in these divisions. HRSI has operated at
substantially break even. Other currently active divisions and subsidiaries of
VSE remain profitable.
BAV does not recognize award fee until a contract modification authorizes such
an amount. As of June 30, 2002, BAV has recognized award fee based on a
contract modification received for the period ending April 30, 2002. The
potential award fee associated in part with the increased revenues of BAV
through June 30, 2002, will be recognized when the award fee period closes and
the award fee contract modification is received during the fourth quarter of
2002.
BAV Contract. VSE's BAV Division has 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. Contract terms specify
award fee payments to BAV that are determined by performance and level of
contract activity. The contract accounted for approximately 49% and 37% of
consolidated revenues from operations during the six month periods ended
June 30, 2002 and 2001, respectively. Revenues on this contract increased by
approximately 60% during the six months ended June 30, 2002 as compared to the
same period of 2001, primarily due to work orders to support new client
countries, including the Kingdom of Bahrain. The level of revenues and
associated profits resulting from fee income generated by this contract varies
depending on a number of factors including the timing of ship transfers and
associated support services ordered by foreign governments and economic
conditions of potential customers worldwide. The company has experienced
significant quarterly and annual revenue fluctuations and anticipates that
future quarterly and annual revenues will be subject to significant variations
primarily due to changes in the level of activity on this contract.
Contract Expiration. VSE's Ordnance Division had a contract with the U.S. Navy
to provide program management and logistics services that expired in December
2001. VSE re-bid and was awarded the successor contract in its Fleet Maintenance
Division. Future work under the successor contract will be conducted by Fleet
Maintenance. This contract is a five year contract awarded in October 2001, and
it has the potential to generate total revenues of approximately $72.5 million
from 2001 through 2006. One program performed by Land Systems under the
predecessor contract was not renewed under the new contract, and this work was
not performed by the company during the first three months of 2002. The lapse in
contract coverage for this program resulted in a loss of revenue and profit for
the company during this period. A subsequent contract was obtained in April of
2002 and work on the program resumed.
Business Termination and New Business Start-ups. VSE decided in 2001 to
discontinue SRR's ship remediation and recycling efforts at the Hunters Point
Shipyard in San Francisco, California, due to the limited business opportunities
associated with ship dismantlement work, due in part to an absence of any
significant amount of government funding for these efforts. Profitability from
the SRR work has been marginal for VSE. Concurrent with the
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
decision to cease SRR operations, VSE formed MSD to offer government and
commercial organizations quality training and product, process, and management
optimization services. In February 2002, VCG began work for the U.S. Coast
Guard under a contract that has potential to generate total revenues of
approximately $25.4 million over five years. VSE expects revenues from MSD and
VCG to substantially offset the loss of revenues formerly generated by SRR, with
profit margins higher than the marginal profitability provided by SRR. The net
effect of these events is expected to be favorable to the company's future
revenue and profitability.
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from domestic economic conditions
and political factors that may impact the budgets and program funding of
customers served through VSE's contracts. VSE's revenues have historically been
subject to annual fluctuations resulting from changes in the level of Defense
spending. Future budgetary and funding decisions by government lawmakers or
Defense restructuring efforts could affect the types and level of services
provided by VSE to its government customers and could potentially have a
material adverse impact on the company=s results of operations or financial
condition.
The company's revenues depend on the ability of the company to win new contracts
and on the amount of work ordered by the government under the company's existing
contracts. The company's ability to win new contracts is affected by government
acquisition policies and procedures, including government procurement practices
that in recent years have tended toward bundling work efforts under large
comprehensive ("omnibus") management contracts. This emphasis on large contracts
presents challenges to winning new contract work, including making it more
difficult for the company to qualify as a bidder, increases in the level of
competition due to the award of fewer contracts, and forcing the company into
competition with larger organizations that have greater financial resources and
larger technical staffs. Other government procurement practices that can affect
the company's revenues are the use of past performance criteria that may
preclude entrance into new government markets and government social programs
that limit contract work to small, woman, or minority owned businesses.
Additional risk factors that could potentially affect the company's results of
operations are the government's right to terminate contracts for convenience,
the government's right to not exercise all of the option periods on a contract,
and funding delays caused by government political or administrative actions.
Risk funding revenue recognized for the six month period ended June 30, 2002 is
$67 thousand. VSE believes that it will receive formal contractual coverage for
all of this risk funding revenue. If formal contractual coverage is not
received, VSE is at risk of loss for any risk funding coverage not received.
-13-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic conditions
and political factors associated with current and potential foreign customers
served through VSE's contracts with the U.S. Government and in particular, the
BAV contract. An economic slowdown in countries served under the BAV contract
could potentially affect sales. The international conflict initiated by the
terrorist attacks in New York and Washington, D. C. on September 11, 2001 and
the continuing conflict in the Middle-East could potentially increase the
political risks associated with BAV contract revenues. Failure by the government
of a potential foreign customer to approve and fund acquisition of U.S. Navy
ships serviced under the BAV contract could affect sales. In any one year, a
significant amount of the company's revenues may result from sales on the
BAV contract to a single foreign government. Severe adverse results arising from
these global economic and political risks could potentially have a material
adverse impact on the company's results of operations.
Financial Condition
VSE's financial condition did not change materially during the six month period
ended June 30, 2002. The company's largest asset is its accounts receivable and
its largest liabilities are its accounts payable and accrued expenses. Accounts
receivable increased approximately 24% and accounts payable increased by
approximately 27% at June 30, 2002 as compared to December 31, 2001 due
primarily to an increase in BAV's business during 2002.
The net increase in total stockholder's investment in 2002 resulted from
earnings and dividend activity.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased by approximately $38 thousand during the six
month period ended June 30, 2002. The increase in cash and cash equivalents
during this period resulted from cash provided by financing activities of
approximately $1.2 million, cash used in operating activities of approximately
$900 thousand, and cash used in investing activities of approximately $200
thousand. Significant financing activities included an increase of approximately
$1.1 million in bank loan borrowings. Cash flow used in operating activities was
primarily due to an increase in accounts receivable associated with the increase
in BAV work and losses incurred by TTD. Investing activities consisted of
purchases of property and equipment, net of dispositions.
Cash and cash equivalents decreased by approximately $62 thousand during the six
month period ended June 30, 2001. Cash provided by financing activities was
approximately $1.3 million. Cash used in investing activities was approximately
$800 thousand and cash used in operating activities was
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
approximately $600 thousand. Significant financing activities included an
increase of approximately $1.3 million in bank loan borrowings. Investing
activities consisted of purchases of property and equipment, net of
dispositions.
The difference between cash used in operating activities of approximately $900
thousand in 2002 as compared to approximately $600 thousand in 2001 is
primarily due to changes in the levels of accounts receivable and accounts
payable and accrued expenses resulting from fluctuations in contract activity.
Quarterly cash dividends at the rate of $.04 per share were declared during the
six month period ended June 30, 2002. Per its bank loan agreement, the
payment of cash dividends by VSE is subject to a maximum annual rate. VSE has
paid cash dividends each year since 1973.
Sources of Liquidity
The company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
accounts receivable from period to period and from profitability. Significant
increases or decreases in revenue and accounts receivable can cause significant
increases or decreases in internal liquidity. Accounts receivable arise
primarily from billings made by the company to the government or other
government prime contractors for services rendered and generally do not present
collection problems. Accounts receivable levels can also be affected by contract
retainages, differences between the provisional billing rates authorized by the
government compared to the costs actually incurred by the company, government
delays in processing administrative paperwork for contract funding, and the
timing of large materials purchases and subcontractor efforts used in
performance on the company's contracts. An increase in accounts receivable
associated with increased levels of work by BAV and generally slower collection
of accounts receivables in TTD contributed to a decrease in internally generated
cash flows during this period. Internal liquidity is also affected by the
acquisition of capital assets for office and computer support, facilities
improvements, and by the payment of cash dividends. Purchases of capital assets
for office and computer support and facilities improvements during the six
months ended June 30, 2002 did not substantially affect internal liquidity.
VSE's external sources of liquidity consist of a revolving bank loan agreement
that provides loan financing based on the company's accounts receivable. (See
"Notes to Consolidated Financial Statements".) The bank financing complements
the internal sources of liquidity by providing increasing levels of borrowing
capacity as accounts receivable levels increase. The bank loan agreement
provided loan financing up to a maximum commitment of $15 million as of June 30,
2002. This loan agreement replaced a previous loan agreement that had a maximum
commitment of $30 million. The company determined that the $15 million
commitment was adequate to cover current and future liquidity requirements.
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Performance of work under the BAV contract has the potential to cause
substantial requirements for working capital; however, management believes that
the cash flows from future operations and the bank loan commitment are adequate
to meet current operating cash requirements.
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.
Forward-Looking Disclosures
New Business
In December 2001, VSE formed MSD to provide government and commercial
organizations with quality training and product, process, and management
optimization services. While VSE management expects MSD to provide only a
minimal amount of revenue growth, profit margins on the type of work performed
by MSD are expected to be higher than profit margins in other VSE operations,
and therefore, should play a part in improving the future profitability of VSE
operations. In February 2002, VSE formed VCG to provide logistics, training, and
technical assistance support to the U.S. Coast Guard under a new contract that
has the potential to generate total revenue of approximately $25.4 million over
five years.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing goodwill
and intangible assets. Under SFAS No. 142, goodwill will no longer be subject to
amortization over its estimated useful life and intangible assets with
indefinite lives will no longer be amortized over an arbitrary number of years.
The effective date for VSE's implementation of SFAS No. 142 is January 1, 2002.
The adoption of SFAS No. 142 has not had a material impact, either positive or
negative, on results of operations or financial condition.
Impairment or Disposal of Long-Lived Assets
In September 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment and disposal of long-
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
lived assets. The effective date for VSE's implementation of SFAS No. 144 is
January 1, 2002. The adoption of SFAS No. 144 has not had a material impact,
either positive or negative, on results of operations or financial condition.
Disclosures About Market Risk
Interest Rates
VSE's bank loan financing provides available borrowing to the company at
variable interest rates. The company has not borrowed significant amounts on the
loan in recent years. Accordingly, the company does not believe that any move-
ment in interest rates would have a material impact on future earnings or
cash flows. If VSE were to significantly increase borrowings on the current loan
arrangement, future interest rate changes could potentially have such a material
impact.
Foreign Currency
While a significant amount of the company's business results from the services
provided by BAV related to the transfer of ships to foreign governments, the BAV
contract payments are made to BAV by the U.S. Government in U.S. dollars.
Additionally, most funding requirements to support work performed or services
purchased in foreign countries are made in U.S. dollars, and the infrequent
disbursements that are made in foreign currencies are reimbursable to BAV in
post conversion dollars. Foreign currency transactions of other VSE divisions
or subsidiaries are virtually non-existent. Accordingly, the company does not
believe that it is exposed to any material foreign currency risk.
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VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On May 21, 2002, the Registrant filed a Current Report on Form 8-K/A to amend
the Current Report on Form 8-K dated May 17, 2002, as filed on May 17, 2002,
for the purpose of adding Exhibit 16 Letter of Arthur Andersen LLP regarding
change in certifying accountant to Item 7. Financial Statement and Exhibits.
On May 17, 2002, the Registrant filed a Current Report on Form 8-K reporting
Changes in Registrant's Certifying Accountant. On May 15, 2002, on the
recommendation of its Audit Committee, the Board of Directors dismissed Arthur
Andersen LLP (Andersen) as VSE Corporation's (VSE's) independent public
accountants and approved the selection of Ernst & Young LLP to serve as VSE's
independent public accountants for the current fiscal year which ends on
December 31, 2002. The change in independent public accountants was effective
immediately.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other Information"
because such other items are not applicable or are not required if the answer is
negative or because the information required to be reported therein has been
previously reported.
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VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
/s/ C. S. Weber
Date: July 25, 2002 ______________________________________
C. S. Weber, Executive Vice President,
Secretary, and Chief
Administrative Officer
/s/ T. R. Loftus
Date: July 25, 2002 ______________________________________
T. R. Loftus, Senior Vice President,
and Chief Financial Officer
(Principal Accounting Officer)
The financial information included in this report reflects all known adjustments
normally determined or settled at year-end which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods. The accompanying notes to consolidated financial statements are an
integral part of this report.
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