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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 September 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 October 28, 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)
September 30, December 31,
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 4,055 $ 209
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 20,903 20,849
Deferred tax assets . . . . . . . . . . . . . . . 929 695
Other current assets . . . . . . . . . . . . . . . 2,058 1,984
-------- --------
Total current assets . . . . . . . . . . . . . . 27,945 23,737
Property and equipment, net . . . . . . . . . . . . 3,696 4,211
Deferred tax assets . . . . . . . . . . . . . . . . 565 793
Intangible assets, net . . . . . . . . . . . . . . . 1,678 1,822
Other assets . . . . . . . . . . . . . . . . . . . . 2,353 2,646
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 36,237 $ 33,209
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 13,312 $ 10,609
Accrued expenses . . . . . . . . . . . . . . . . 4,681 4,235
Dividends payable . . . . . . . . . . . . . . . . 87 86
-------- --------
Total current liabilities . . . . . . . . . . . 18,080 14,930
Long-term debt . . . . . . . . . . . . . . . . . . . - 351
Deferred compensation . . . . . . . . . . . . . . . 1,072 1,453
-------- --------
Total liabilities . . . . . . . . . . . . . . . 19,152 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 . . . . . . . . . . . . . . . . . 3,514 3,294
Retained earnings . . . . . . . . . . . . . . . . 13,462 13,074
-------- --------
Total stockholders' investment . . . . . . . . . 17,085 16,475
-------- --------
Total liabilities and stockholders' investment . $ 36,237 $ 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 nine months ended September 30
- ------------------------------------------------------------------------------------
(in thousands, except share amounts)
Three Months Nine Months
2002 2001 2002 2001
---- ---- ---- ----
Revenues, principally from
contracts . . . . . . . . . . . $ 37,836 $ 28,986 $ 103,269 $ 84,061
Costs and expenses of contracts . 37,352 28,612 102,003 82,570
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 484 374 1,266 1,491
Selling, general and administrative
expenses . . . . . 59 29 122 142
Net interest (income) expense . . (3) 2 43 31
--------- --------- --------- ---------
Income before income taxes . . . 428 343 1,101 1,318
Provision for income taxes . . . 171 132 451 517
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 257 $ 211 $ 650 $ 801
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .12 $ .10 $ .30 $ .38
========= ========= ========= =========
Basic weighted average shares
outstanding 2,181,540 2,145,863 2,169,140 2,133,863
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .12 $ .10 $ .30 $ .38
========= ========= ========= =========
Diluted weighted average shares
outstanding 2,204,803 2,145,863 2,192,599 2,133,863
========= ========= ========= =========
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
($.16) . . . . . . . . . -- -- -- (342) --
----- ------ ------- -------- ------
Balance at
December 31, 2001 . . . . 2,150 107 3,294 13,074 --
Net income
for the period . . . . . -- -- -- 650 --
Exercised stock options . . 31 2 199 -- --
Tax benefit of options
exercised . . . . . . . . -- -- 21 -- --
Dividends declared
($.12) . . . . . . . . . -- -- -- (262) --
----- ------ ------- -------- ------
Balance at
September 30, 2002 . . . 2,181 $ 109 $ 3,514 $ 13,462 $ --
===== ====== ======= ======== ======
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 nine months ended September 30
- ------------------------------------------------------------------------------
(in thousands)
2002 2001
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 650 $ 801
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 998 1,054
Loss on sale of property and equipment . . . . . . . 8 28
Change in deferred compensation . . . . . . . . . . . (253) (404)
Change in deferred taxes . . . . . . . . . . . . . . (6) 85
Tax benefit related to exercise of non-qualified
stock options . . . . . . . . . . . . . . . . . . . 21 --
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (54) (1,835)
Other current assets and noncurrent assets . . . . . 219 (219)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . 2,575 (48)
Accrued expenses . . . . . . . . . . . . . . . . . . 446 304
------- -------
Net cash provided by (used in) operating
activities 4,604 (234)
------- -------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . (347) (1,480)
------- -------
Net cash used in investing activities (347) (1,480)
------- -------
Cash flows from financing activities:
Net(payments of) proceeds from bank notes payable. . . . (351) 1,672
Cash dividends paid . . . . . . . . . . . . . . . . . . (261) (256)
Proceeds from issuance of common stock . . . . . . . . . 201 139
------- -------
Net cash (used in) provided by financing
activities (411) 1,555
------- -------
Net increase (decrease) in cash and cash equivalents . . . 3,846 (159)
Cash and cash equivalents at beginning of period . . . . 209 647
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 4,055 $ 488
======= =======
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 nine month periods ended
September 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 in 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, 2004. 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. There were no borrowings under this loan agreement as
of September 30, 2002.
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 and subsequent
restructuring of TTD, the company did not achieve the original minimum amount
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
established in the profitability covenant for each quarter between December 31,
2000 and September 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 ("AMC"), 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"), Land Systems
Division ("Land Systems") beginning in February 2001, Management Sciences
Division ("MSD") beginning in December 2001, Ordnance Division ("Ordnance"),
Telecommunications Technologies Division ("TTD"), and Value Systems Services
Division ("VSS"). As of September 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 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. Generally, revenues on fixed-price contracts are recorded as costs are
incurred, using the percentage-of-completion method of accounting. Profits on
fixed-price contracts result from the difference between the incurred costs 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
September 30, 2002, VSE has recognized approximately $147 thousand in risk
funding.
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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
nine month periods ended September 30, 2002, and 2001 (in thousands):
2002
Compared
to
2001
Three Months Nine Months --------------
Ended September 30, Ended September 30, Three Nine
2002 2001 2002 2001 Months Months
---- ---- ---- ---- ------ ------
Revenues . . . . . . $37,836 $28,986 $103,269 $84,061 $8,850 $19,208
======= ======= ======== ======= ====== =======
Pretax income . . . $ 428 $ 343 $ 1,101 $ 1,318 $ 85 $ (217)
Provision for income
taxes . . . . . . 171 132 451 517 39 (66)
------- ------- -------- ------- ------ -------
Net income . . . . $ 257 $ 211 $ 650 $ 801 $ 46 $ (151)
======= ======= ======== ======= ====== =======
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 31% and 23% for the three and nine month
periods ended September 30, 2002, as compared to the same periods of 2001. The
increase in revenues was primarily due to an increase in BAV's ship transfer and
overhaul work (See "BAV Contract" below). Revenues also increased during these
periods due to the addition of MSD and VCG operations in 2002. These increases
in revenue were partially offset by 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), decreased
revenues associated with the expiration of an Ordnance contract (see "Contract
Expiration" below), and to lower revenues in TTD.
Pretax income increased by approximately 25% for the three month period ended
September 30, 2002, as compared to the same period of 2001. The increase for the
three month period was primarily due to a decrease in losses on a Fleet
Maintenance contract. The company negotiated an indirect rate change with the
customer during the third quarter of 2002 that increased the amount of costs
that will be recovered by Fleet Maintenance. The reduction in the loss on this
contract resulted in an increase in company's profitability during the third
quarter of 2002.
Pretax income decreased by approximately 16% for the nine month period ended
September 30, 2002, as compared to the same period of 2001. The decrease in
pretax income for the nine month period was primarily due to losses in the
operations of TTD. Additional reasons for the decrease in pretax income for the
nine month period are a reduction in profits in Land Systems due to losses
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
on a certain contract and a temporary suspension of work on a program previously
performed under the expired Ordnance contract 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 this period
was partially offset by the reduction in losses on the previously mentioned
Fleet Maintenance contract. This contract operated at a loss for the nine month
period, but the loss was less than in the prior year. The elimination of losses
in VSI, the additions to profits from MSD and VCG, and increased profits in
Energetics also offset the decrease in pretax income for the nine month period.
TTD incurred pretax losses for both the three month and nine month periods ended
September 30, 2002. An aggressive cost reduction and restructuring program
designed to operate the business on an ongoing basis without operating losses
was implemented by VSE management in September 2002.
BAV does not recognize award fee until a contract modification authorizes such
an amount. Award fees are made three times during the year. Due to such timing,
BAV did not recognize an award fee during the three month period ended September
30, 2002. The potential award fee associated with the increased revenues of BAV
through September 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 54% and 36% of
consolidated revenues from operations during the nine month periods ended
September 30, 2002 and 2001, respectively. Revenues on this contract increased
by approximately 85% during the nine months ended September 30, 2002 as compared
to the same period of 2001, primarily due to work orders to support new client
countries, including the State 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
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 relative to the risk. Concurrent with the
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
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 nine month period ended September 30,
2002 is $147 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.
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. During 2001, revenues associated with
BAV contract sales to Egypt accounted for approximately 24% of the company's
revenues. 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 nine month period
ended September 30, 2002. The company's largest asset is its accounts receivable
and its largest liabilities are its accounts payable and accrued expenses. While
the company experienced rapid revenue growth for the nine month period ended
September 30, 2002, accounts receivable remained substantially unchanged and
cash and cash equivalents increased by approximately $3.8 million due to
improved accounts receivable collection times. Accounts payable increased by
approximately $2.6 million at September 30, 2002 as compared to December 31,
2001 due primarily to the increase in the company's business during 2002.
The net increase in total stockholder's investment in 2002 resulted from
earnings and dividend activity and to the issuance of stock associated with the
exercise of employee stock options.
-14-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased by approximately $3.8 million during the
nine month period ended September 30, 2002. The increase in cash and cash
equivalents during this period resulted from cash provided by operating
activities of approximately $4.6 million, cash used in financing activities of
approximately $410 thousand, and cash used in investing activities of
approximately $350 thousand. Significant financing activities included a
decrease of approximately $350 thousand in bank loan borrowings. Investing
activities consisted of purchases of property and equipment, net of
dispositions.
Cash and cash equivalents decreased by approximately $159 thousand during the
nine month period ended September 30, 2001. The decrease in cash and cash
equivalents during this period resulted from cash provided by financing
activities of approximately $1.6 million, cash used in investing activities of
approximately $1.5 million and cash used in operating activities of
approximately $234 thousand. Significant financing activities included an
increase of approximately $1.7 million in bank loan borrowings. Investing
activities consisted of purchases of property and equipment, net of
dispositions.
The difference between cash provided by operating activities of approximately
$4.6 million in 2002 as compared to cash used in operating activities of
approximately $234 thousand in 2001 is primarily due to changes in the levels of
accounts receivable and accounts payable resulting from the increase in revenues
and improvements in accounts receivable collection times in 2002.
Cash dividends at the rate of $.04 per share were declared during each of the
three quarters of 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 and accounts payable from period to period and from
profitability. Significant increases or decreases in revenue and accounts
receivable and accounts payable 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
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
company's contracts. Accounts payable arise primarily from purchases of
subcontractor services and materials used by the company in the performance of
its contract work. Accounts payable levels can be affected by changes in the
level of contract work performed by the company and by the timing of large
materials purchases and subcontractor efforts used in performance on the
company's contracts. An increase in accounts payable primarily associated with
increased levels of work by BAV during the nine months ended September 30, 2002
and generally faster collections of accounts receivable contributed to an
increase 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 nine months ended September 30, 2002 were approximately
$1.1 million lower than in the comparable period of 2001. The decrease is
primarily due to facility improvements made by VSE in 2001.
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
September 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.
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.
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 MSS are expected to be higher than profit margins in other VSE operations,
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 with indefinite lives. 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. Goodwill and intangible assets with indefinite lives
will instead be subject to a review for impairment at least annually. The
effective date for VSE's implementation of SFAS No. 142 is January 1, 2002.
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-lived
assets, including intangible assets with finite lives. The effective date for
VSE's implementation of SFAS No. 144 is January 1, 2002.
The company has unamortized goodwill associated with its acquisition of
Energetics in 1995 and TTD has unamortized intangible assets associated with the
acquisition of certain contract and marketing rights in 2000. Both the goodwill
and the intangible assets were being amortized prior to the adoption of SFAS
No. 142 in 2002. In 2002, the company stopped amortizing the goodwill and TTD
continued to amortize the intangible assets because they have a finite life. As
of September 30, 2002, the company had approximately $1.1 million of unamortized
goodwill and TTD had $624 thousand of unamortized intangible assets. The change
in accounting treatment with respect to the amortization of goodwill has not had
a material impact, and is not expected to have a future material impact, on the
company's results of operations or financial condition. As of September 30,
2002, the company has not recognized any reduction to the goodwill or TTD
intangible assets due to the impairment rules associated with SFAS No. 142 and
SFAS No. 144. If at some time in the future it is determined that impairment
has occurred, such impairment could potentially have a material adverse impact
on the company's results of operations or financial condition.
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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
movement 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
Item 4. Controls and Procedures
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the company's Chief Executive Officer and Chief
Financial Officer believe the company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that
information required to be disclosed by the company's management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. There were no significant
changes in the company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 99.1 Certification by D. M. Ervine, Chairman, President, Chief
Executive Officer and Chief Operating Officer, pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 99.2 Certification by T. R. Loftus, Senior Vice President and Chief
Financial Officer, pursuant to Section 1350, Chapter 63 of
Title 18, United States Code, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On August 14, 2002, the Registrant filed a Current Report on Form 8-K to
announce that VSE has engaged Quarterdeck Investment Partners, LLP, as financial
advisor to assist VSE's Board in pursuing strategic business alternatives,
including the potential sale of the business, mergers, or acquisitions, to
maximize shareholder value.
There is no assurance that any alternatives the company may identify will
increase shareholder value or that any transactions will be completed.
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: October 28, 2002 ______________________________________
C. S. Weber, Executive Vice President,
Secretary, and Chief
Administrative Officer
/s/ T. R. Loftus
Date: October 28, 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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CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, D. M. Ervine, Chairman, President, Chief Executive Officer and Chief
Operating Officer of the company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VSE Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
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6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: October 28, 2002 /s/ D. M. Ervine
___________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
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CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T. R. Loftus, Senior Vice President and Chief Financial Officer of the
company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VSE Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
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6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: October 28, 2002 /s/ T. R. Loftus
___________________________
T. R. Loftus
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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