SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
The aggregate market value of outstanding voting stock held by nonaffiliates of
the registrant as of June 28, 2002, was approximately $9.0 million based on the
last reported sales price of the registrant's common stock on the Nasdaq
National Market as of that date.
Number of shares of Common Stock outstanding as of March 10, 2003: 2,188,635.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 2, 2003, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
PART I ----
ITEM 1. Business 3
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
Executive Officers of the Registrant 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
ITEM 6. Selected Financial Data 13
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 8. Financial Statements and Supplementary Data 26
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant 45
ITEM 11. Executive Compensation 45
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 45
ITEM 13. Certain Relationships and Related Transactions 45
ITEM 14. Controls and Procedures 45
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 46
Signatures 47
Certifications 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 48
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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" or the "registrant") 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". 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 the Quarterly Reports on Form 10-Q to be filed by the company
subsequent to this Annual Report on Form 10-K and any Current Reports on
Form 8-K filed by the company.
Part I
ITEM 1. Business
(a) General Development of Business
VSE was established and incorporated in Delaware in January 1959. The
parent company conducts a limited amount of business operations while primarily
serving as a centralized management and consolidating entity for the business
operations conducted 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"), Management Sciences Division ("MSD") beginning in December 2001,
Ordnance Division ("Ordnance"), Systems Engineering Division ("Systems
Engineering", formerly Land Systems Division) beginning in February 2001,
Telecommunications Technologies Division ("TTD") beginning in September 2000,
and Value Systems Services Division ("VSS"). As of December 31, 2002, SRR,
VSI, GSA Services, and Ordnance are not conducting any current business
operations. Work contracted under GSA schedules is performed directly by each of
the operating divisions or subsidiaries. In February 2003, VSE decided to no
longer market the services provided by TTD and intends to phase out the
operations of this division during 2003. The term "VSE" or "company" means VSE
and its subsidiaries and divisions unless the context indicates operations of
the parent company only.
The company's business operations consist primarily of diversified
engineering, technical, and management services, performed on a contract basis.
Substantially all of the company's contracts are with agencies of the United
States Government (the "government") and other government prime
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contractors. The company's customers also include non-government organizations
and commercial entities.
VSE seeks to provide its customers with competitive, cost effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products, and an in-depth understanding of
the basic requirements for effective systems and equipment. Customers are
generally billed for a specified level-of-effort incurred in performing a
project or providing a service or, less frequently, for installed products,
systems and maintenance charges.
(b) Financial Information
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis. Financial informa-
tion for the three years ended December 31, 2002 appears in the "Consolidated
Statements of Operations" contained in this Form 10-K.
(c) Narrative Description of Business
Services and Products
VSE engineering, technical, management and information technology
services include a broad array of capabilities and resources used in program
planning; systems integration support; configuration management; computer-aided
drafting and design; design and engineering, including prototype development;
ship reactivation and transfer support; logistics management; the design and
installation of intelligent conference rooms; office automation systems and
support; training, consulting and implementation support; technology insertion;
environmental management and support; technology research, development and
demonstration programs involving energy conservation and efficiency, advanced
technology transfers, and feasibility, assessment and development programs.
Typical engineering and technical services projects include sustaining
engineering support for military vehicles and combat trailers; ship maintenance,
repair, overhaul planning and follow-on technical support; logistics management
support; machinery condition analysis; specification preparation for ship
alterations and repairs; ship force crew training; life cycle support for ships;
energy conservation and advanced technology demonstration projects; technical
data package preparation; multimedia, computer LAN, and telecommunications
systems; cross-platform technical data, product data and technical manual
support.
Contracts
Depending on solicitation requirements and other factors, VSE offers
its professional and technical services and products through various competitive
contract arrangements and business units which are responsive to customer
requirements and which may also provide an opportunity for diversification. Such
arrangements include prime contracts, subcontracts, cooperative arrangements,
joint ventures, dedicated ventures, GSA schedules, dedicated cost centers
(divisions) and subsidiaries.
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Substantially all of the company's revenues are derived from contract
services performed for the government. The U.S. Navy is VSE's largest single
customer. Other significant customers include the U.S. Army and the Department
of Energy. The company's customers also include various other government
agencies, non-government organizations, and commercial entities.
VSE Revenues by Customer
(Dollars in Thousands)
2002 2001 2000
Customer Revenues % Revenues % Revenues %
- -------- -------- - -------- - -------- -
U.S. Navy $102,856 76.5 $ 80,101 71.8 $ 87,828 71.8
Department of Energy 11,660 8.7 11,887 10.7 10,009 8.2
Commercial 6,801 5.1 7,559 6.8 1,487 1.2
U.S. Army 6,570 4.9 8,722 7.8 9,497 7.8
U.S. Coast Guard 1,895 1.4 0 0.0 0 0.0
All other government 4,597 3.4 3,303 2.9 13,448 11.0
-------- ----- -------- ----- -------- -----
Total $134,379 100.0 $111,572 100.0 $122,269 100.0
======== ===== ======== ===== ======== =====
The government's procurement practices in recent years have tended
toward the bundling of various work efforts under large comprehensive
("omnibus") management contracts. As a result, the growth opportunities
available to the company have occurred in large unpredictable increments. The
company has pursued these larger efforts by assembling teams of subcontractors
to offer the range of technical competencies required by these omnibus
contracts. Typically the use of subcontractors and large material purchases on
government contracts does not allow for profit margins that are as high as on
work performed by company personnel. Accordingly, the use of such teaming
arrangements has lowered the company's overall profit margins in recent years.
Although the government's practice of using omnibus contracts is expected to
continue, there are indications that the company will have opportunities to
compete for smaller contracts requiring specific areas of expertise in the
future. VSE is positioned to pursue these opportunities while continuing to use
subcontractor teams to compete for the omnibus contracts. Due to competitive
pressures, the company has also elected to pursue more of its contract work
through its operating divisions and subsidiaries to focus on particular lines
of work or specific customer requirements.
As a result of the bundling trend described above, the company has
divisions for which revenues are derived predominantly from one major contract
effort. During 2002, the company's two largest contracts accounted for
approximately 64% of total revenues. The company's largest contract, performed
by BAV, is with the U.S. Navy and accounted for approximately 54%, 38%, and 41%
of consolidated revenues in 2002, 2001, and 2000, respectively. This contract is
a ten-year contract awarded in 1995, and it has the potential to generate total
revenues of over one billion dollars from 1995 through 2005. The company's
second major contract is a U.S. Navy contract performed by Fleet Maintenance,
which accounted for approximately 10% of consolidated revenues in 2002.
The company's contracts with the government are typically cost plus
fee, time and materials, or 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
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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. The company has a contract in its BAV Division for which contract terms
specify award fee payments that are determined by performance and level of
contract activity. Award fees are made three times during the year and a
contract modification authorizing the award fee payment is issued subsequent to
the period in which the work is performed. The company does not recognize award
fee income until the contract modification authorizing the award fee is issued.
Due to such timing, and to fluctuations in the level of revenues, profits as a
percentage of revenues on this contract will fluctuate from period to period.
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 certain fixed-price services contracts are recorded each period based on a
monthly amount for services provided. Revenues on other 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. Some of the contracts permit
the contracting agency to issue delivery orders or task orders in an expeditious
manner to satisfy relatively short-term requirements for engineering and
technical services. The services ordered pursuant to such arrangements are
normally performed and completed within one year.
Backlog
Total backlog represents a measure of the company's potential future
revenues and is defined as the total estimated value of contracts actually
awarded less the amount of revenues that have already been recognized on such
contracts. VSE's total backlog was approximately $921 million, $799 million,
and $804 million, as of December 31, 2002, 2001, and 2000, respectively. Funded
backlog for government contracts is the portion of total backlog that has been
appropriated and funded by the procuring agency. VSE's funded backlog as of
December 31, 2002, 2001, and 2000 was approximately $44 million, $65 million,
$81 million, respectively. On January 8, 2003, VSE received an additional
$13 million in funding on its BAV contract. Because of uncertainties associated
with changing program requirements and the ultimate availability of funds, the
company has no reasonable basis on which to determine when or if the portion of
total backlog that is not funded will become funded. Substantially all the
company's funded backlog is expected to be completed within one year.
Marketing
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators and other
personnel, with these activities centrally coordinated through the company's
Business Development staff. Information concerning new programs and requirements
becomes available in the course of contract performance, through formal and
informal briefings, from participation in professional organizations, and from
literature published by the government, trade associations, professional
organizations and commercial entities.
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Personnel
VSE services are provided by a staff of professional and technical
personnel having high levels of education, experience, training and skills. As
of February 2003, VSE employed approximately 450 employees.
Principal categories of VSE personnel include (a) engineers, and
technicians in mechanical, electronic, chemical, industrial, energy and
environmental services, (b) information technology professionals in computer
systems, applications and products, configuration, change and data management
disciplines, (c) technical editors and writers, (d) multimedia and computer
design engineers, (e) graphic designers and technicians, and (f) logisticians.
The expertise required by VSE customers also frequently includes knowledge of
government administrative procedures. Many VSE employees have had experience as
government employees or have served in the U.S. armed forces. The company
considers its relationships with employees to be excellent.
Competition and Risks
Competition. The professional and technical services industry in which
VSE is engaged is very competitive. There are a substantial number of other
organizations, including large, diversified firms with greater financial
resources and larger technical staffs, which are capable of providing
essentially the same services as those offered by VSE. Such companies may be
publicly owned or privately held and may be divisions of much larger organiza-
tions including large manufacturing corporations.
Government agencies have placed an increased emphasis on awarding
contracts of the types performed by VSE on a competitive basis as opposed to a
non-competitive basis. All significant contracts currently being performed by
VSE were either initially awarded on a competitive basis or have been renewed at
least once on a competitive basis. Government agencies also order work through
contracts awarded by the General Services Administration ("GSA") which provides
a schedule of services at fixed prices which may be ordered outside of the
solicitation process. The company has been awarded six separate GSA schedule
contracts for various classes of services, but there is no assurance regarding
the level of work under these contract arrangements. Government budgets, and in
particular the budgets of certain government agencies, can also impact
competition in VSE's business. A reallocation of government spending priorities
or a general decline in government budgets can result in lower levels of
potential business for VSE and its competitors, thereby intensifying competition
for the remaining business.
It is not possible to predict the extent and range of competition that
VSE will encounter as a result of changing economic or competitive conditions,
customer requirements, or technological developments. VSE believes the principal
competitive factors for the professional and technical services business in
which it is engaged are technical and financial qualifications, quality and
innovation of services and products, past performance and low price.
Risks. In recent years, the government has initiated a series of
changes designed to improve and streamline its acquisition policies and
procedures. Such changes include an emphasis on very large contracts, which may
make it more difficult for VSE to qualify as a potential bidder; past per-
formance, which may be used to exclude entrance into new government markets; and
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multiple-award schedules, which may result in unequal contract awards between
successful contractors. In addition, VSE's business with the government is
subject to the risk that one or more of the company's potential contracts or
contract extensions may be awarded by the contracting agency to a "small and
disadvantaged" or minority-owned business pursuant to "set-aside" programs
administered by the Small Business Administration or may be bundled into omnibus
contracts for very large businesses. These risks can potentially have an
adverse effect on revenue growth and profit margins.
Government contract business is subject to funding delays, extensions,
and moratoriums caused by political and administrative disagreements. To date,
the effect of such negotiations and disagreements on the company has not been
material; however, no assurances can be given about such risks with respect to
future years.
Government contracts are subject to termination at the government's
convenience, which means that the government may terminate the contract at any
time, without cause. If a government contract is terminated for convenience, the
contractor is generally reimbursed for its allowable costs to the date of
termination and is paid a proportionate amount of the stipulated profit or fee
for the work actually performed. VSE has not suffered any material losses or
disruptions of its business due to government terminations for convenience.
VSE's business is subject to the risks arising from global economic and
political conditions associated with potential foreign customers served through
the company's contracts with the U.S. Government. For example, economic slow-
downs or political unrest in certain countries served under the BAV contract
could potentially affect sales.
ITEM 2. Properties
VSE's principal executive and administrative offices are located in a
five-story building in Alexandria, Virginia, leased by VSE through April 30,
2008. This building contains approximately 127,000 - square feet of engineering,
shop, and administrative space. VSE also provides services and products from
approximately 13 other U.S. offices located at or near customer sites to
facilitate communications and enhance project performance. These offices are
generally occupied under short-term leases and currently include an aggregate
of approximately 120,000 - square feet of office and warehouse space. VSE
employees often provide services at customer facilities, limiting VSE's require-
ment for additional space. BAV provides services from several locations outside
of the United States, generally at foreign shipyards.
VSE owns and operates an engineering test center in Ladysmith,
Virginia, consisting of approximately 45 acres of land and an improved storage
and vehicle maintenance facility. This facility has been used by VSE to test
military and commercial equipment for which VSE provides system technical
support or other engineering services and to supplement Alexandria, Virginia,
office and shop facilities.
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ITEM 3. Legal Proceedings
In June 2001, a personal injury lawsuit was filed against VSE, Astoria
Metals Corporation (AMC), Ship Dismantlement and Recycling Joint Venture (SDR,
a partnership in which a wholly owned subsidiary of VSE was a general partner),
Earth Tech, Inc., and Tyco International Ltd. in the Superior Court of the State
of California for the County of Alameda. The case was subsequently transferred
to the San Francisco Superior Court. VSE's insurance carrier is defending VSE,
SDR, and Earth Tech, Inc. in this matter. Counsel for AMC's insurance carrier
was tendered and has accepted defense of this matter on behalf of AMC, Earth
Tech, Inc. and SDR. Plaintiffs claimed damages of $15 million. A trial was
scheduled for April 28, 2003. In February 2003, VSE received notice that an
agreement in principle for settling the lawsuit had been reached and a
definitive settlement agreement was being prepared for execution. The company is
insured for this liability and believes that the damages will be fully covered
by its insurance carrier. 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. As of December 31,
2002, VSE has not accrued for any potential losses related to this action.
VSE is involved in various legal proceedings in the ordinary course of
business for which it does not expect the ultimate outcome to have a material
adverse effect on its financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the three-month period ended
December 31, 2002.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Registrant as of March 6, 2003. Each person named has served
as an executive officer of VSE, or has served in a similar executive capacity in
VSE, for more than the past five years, except for Mr. Dacus who joined VSE in
2001 and previously served as an officer of VSE from 1984 to 1991. From 1991 to
2001, Mr. Dacus served as an officer in four high technology service companies.
Mr. Dacus's career includes over 30 years experience in managing high technology
engineering programs and projects.
The executive officers are chosen annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and have qualified, or until
death, resignation or removal, whichever is sooner.
Name Age Position with Registrant
- ---- --- ------------------------
Thomas G. Dacus 57 Vice President and Director, Federal Group
Donald M. Ervine 66 Chairman and Chief Executive Officer,
President and Chief Operating Officer
Michael E. Hamerly 57 Senior Vice President and General Manager,
Fleet Maintenance Division
James M. Knowlton 60 Executive Vice President and Director,
International Group
Thomas R. Loftus 47 Senior Vice President and Chief Financial
Officer
Craig S. Weber 58 Executive Vice President, Chief
Administrative Officer, and Secretary
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market Information
The company's common stock (par value $.05 per share) is traded in the
Nasdaq National Market System, trading symbol: VSEC, Newspaper listing: VSE.
The following table sets forth the range of high and low sales price
information on VSE common stock for each quarter and annually during the last
two years based on information reported by the Nasdaq National Market System.
Quarter Ended High Low Dividends
------------- ---- --- ---------
2001:
March 31 $ 7.875 $ 5.31 $.04
June 30 7.65 5.75 .04
September 30 7.75 5.50 .04
December 31 7.75 5.75 .04
For the Year $ 7.875 $ 5.31 $.16
2002:
March 31 $ 8.97 $ 6.50 $.04
June 30 8.96 7.03 .04
September 30 8.24 5.01 .04
December 31 11.52 10.02 .04
For the Year $11.52 $ 5.01 $.16
(b) Holders
There were approximately 1,300 stockholders of VSE common stock as
of February 1, 2003, consisting of approximately 300 stockholders of record plus
the number of beneficial owner proxy sets provided in connection with VSE's 2002
Annual Meeting of Stockholders held on May 2, 2002, to (a) brokers, banks, and
nominees and (b) participants in the VSE Corporation Employee ESOP/401(k) Plan.
(c) Dividends
Cash dividends were declared at the rate of $.16 per share during 2002
and 2001. Pursuant to VSE's bank loan agreement (see Note 7 of "Notes to
Consolidated Financial Statements"), the payment of cash dividends by VSE is
subject to annual rate restrictions. VSE has paid cash dividends each year since
1973.
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(d) Equity Compensation Plan Information
Number of Shares
Remaining
Available for
Number of Weighted Future Issuance
Shares to be Average Under Equity
Issued upon Exercise Compensation Plans
Exercise of Price of (excluding shares
Outstanding Outstanding reflected in
Options Options column (a))
Plan Category (a) (b) (c) (1)
- ------------- ----------- ----------- ------------------
Equity compensation
plans approved by
shareholders 185,000 $7.66 195,207
Equity compensation
plan not approved
by shareholders - - -
------- ----- -------
Total 185,000 $7.66 195,207
(1) Excludes 349,485 issued and outstanding shares of VSE Common Stock (par
value $.05 per share) held by the VSE Corporation Employee ESOP/401(k) Plan,
which shares may be transferred to Plan participants on retirement or termina-
tion of VSE employment or pursuant to ESOP diversification.
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ITEM 6. Selected Financial Data
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues, principally from contracts . . . . . $134,379 $111,572 $122,269 $157,354 $177,074
======== ======== ======== ======== ========
Income from continuing operations . . . . . . $ 652 $ 855 $ 1,385 $ 2,364 $ 3,015
Loss from discontinued operations . . . . . - - - (256) (1,420)
Loss on disposal of discontinued
operations . . . . . . . . . . . . . . . . - - (417) (574) -
-------- -------- -------- -------- --------
Net income . . . . . . . . . $ 652 $ 855 $ 968 $ 1,534 $ 1,595
======== ======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations . . . . . $ .30 $ .40 $ .65 $ 1.12 $ 1.42
Loss from discontinued operations . . . . . - - (.19) (.39) (.67)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ .30 $ .40 $ .46 $ .73 $ .75
======== ======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations . . . . . $ .30 $ .40 $ .65 $ 1.12 $ 1.42
Loss from discontinued operations . . . . . - - (.19) (.39) (.67)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ .30 $ .40 $ .46 $ .73 $ . 75
======== ======== ======== ======== ========
Working Capital . . . . . . . . . . . . . . . $ 10,762 $ 8,807 $ 8,364 $ 7,078 $ 5,801
======== ======== ======== ======== ========
Total assets . . . . . . . . . . . . . . . . . $ 31,677 $ 33,209 $ 31,523 $ 31,250 $ 47,248
======== ======== ======== ======== ========
Long-term debt . . . . . . . . . . . . . . . . $ - $ 351 $ - $ - $ 1,503
======== ======== ======== ======== ========
Stockholders' investment . . . . . . . . . . . $ 17,043 $ 16,475 $ 15,793 $ 15,145 $ 13,852
======== ======== ======== ======== ========
Cash dividends per common share . . . . . . . $ .16 $ .16 $ .16 $ .144 $ .144
======== ======== ======== ======== ========
This consolidated summary of selected financial data should be read in
conjunction with Management's Discussion and Analysis of the Financial Condition
and Results of Operations included in Item 7 of this Form 10-K and with the
Consolidated Financial Statements and related Notes included in Item 8 in this
Form 10-K. The historical results set forth in this Item 6 are not necessarily
indicative of the results of operations to be expected in the future.
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ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 Inter-
national, 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"),
Management Sciences Division ("MSD") beginning in December 2001, Ordnance
Division ("Ordnance"), Systems Engineering Division ("Systems Engineering",
formerly Land Systems Division) beginning in February 2001, Telecommunications
Technologies Division ("TTD") beginning in September 2000, and Value Systems
Services Division ("VSS"). As of December 31, 2002, SRR, VSI, GSA Services, and
Ordnance are not conducting any current business operations. Work contracted
under GSA schedules is performed directly by each of the operating divisions or
subsidiaries. In February 2003, VSE decided to no longer market the services
provided by TTD and intends to phase out the operations of this division during
2003.
Due to competitive pressures, 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 more
flexible and 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 provider of 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. Systems Engineering 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
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and 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 conserva-
tion. TTD has offered 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. VSE will transfer many
of the technical capabilities of TTD to other divisions when TTD operations
cease in 2003.
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. The company has a contract in its BAV
Division for which contract terms specify award fee payments to BAV that are
determined by performance and level of contract activity. Award fees are made
three times during the year and a contract modification authorizing the award
fee payment is issued subsequent to the period in which the work is performed.
The company does not recognize award fee income until the contract modification
authorizing the award fee is issued. Due to such timing, and to fluctuations in
the level of revenues, profits as a percentage of revenues on this contract will
fluctuate from period to period. 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 certain fixed-price services
contracts are recorded each period based on a monthly amount for services
provided. Revenues on other 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. The company will occasionally perform work at risk, which is
work that is performed prior to formalizing contract terms for such work.
Potential revenue related to work performed at risk is not recognized until it
can be reliably estimated and its realization is probable. VSE recognizes this
"risk funding" as revenue when the associated costs are incurred or the work is
performed. As of December 31, 2002, VSE has recognized approximately $206
thousand in risk funding. The company provides for anticipated losses on
contracts by a charge to income during the period in which losses are
first identified.
-15-
Revenues by contract type for the three years ended December 31, 2002, were
as follows (in thousands):
2002 2001 2000
Contract Type Revenues % Revenues % Revenues %
- ------------- -------- - -------- - -------- -
Cost $106,346 79.1 $ 82,606 74.0 $ 92,556 75.7
Time and materials 15,176 11.3 14,528 13.0 25,511 20.9
Fixed-price 12,857 9.6 14,438 13.0 4,202 3.4
-------- ----- -------- ----- -------- -----
$134,379 100.0 $111,572 100.0 $122,269 100.0
======== ===== ======== ===== ======== =====
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. In addition to our revenue recognition
policy, discussed under "Overview of Services" above, we believe the following
critical accounting polices affect our more significant judgments, estimates and
assumptions used in the preparation of our consolidated financial statements.
Long-Lived Assets
In assessing the recoverability of long-lived assets, including
goodwill and other intangibles, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for these assets not
previously recorded.
Contingencies
From time to time we are subject to proceedings, lawsuits and other
claims related to environmental, labor and other matters. We are required to
assess the likelihood of any adverse judgments or outcomes to these
contingencies as well as potential ranges of probable losses and establish
reserves accordingly. The amount of reserves required may change in future
periods due to new developments in each matter or changes in approach to a
matter such as a change in settlement strategy.
Income Taxes
The carrying value of our net deferred tax assets is based on
assumptions regarding our ability to generate sufficient future taxable income
to utilize these deferred tax assets. If the estimates and related assumptions
regarding our future taxable income change in the future, we may be required to
record valuation allowances against our deferred tax assets, resulting in
additional income tax expense.
-16-
Results of Operations
Revenues
The following table shows the revenues from operations of VSE, its
subsidiaries and divisions, and such revenues as a percent of total revenues:
Revenues from Operations
(dollars in thousands)
2002 2001 2000
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- - -------- - -------- -
VSE (parent company). . . . . $ 14,796 11.0 $ 22,681 20.3 $ 39,165 32.0
BAV . . . . . . . . . . . . . 72,072 53.6 41,860 37.5 49,801 40.7
Energetics . . . . . . . . . 12,171 9.1 12,272 11.0 10,546 8.6
Fleet Maintenance . . . . . . 9,602 7.2 3,075 2.8 1,224 1.0
VSS . . . . . . . . . . . . . 8,156 6.1 1,683 1.5 4,233 3.5
Systems Engineering . . . . . 7,287 5.4 3,113 2.8 - 0.0
TTD . . . . . . . . . . . . . 5,962 4.4 8,082 7.2 813 0.7
Coast Guard . . . . . . . . . 1,895 1.4 - 0.0 - 0.0
Management Sciences . . . . . 1,440 1.1 - 0.0 - 0.0
HRSI . . . . . . . . . . . . 703 0.5 1,344 1.2 3,947 3.2
Ordnance . . . . . . . . . . 244 0.2 12,945 11.6 11,170 9.2
SRR . . . . . . . . . . . . . 46 0.0 4,165 3.8 1,104 0.9
VSI . . . . . . . . . . . . . 5 0.0 - 0.0 1 0.0
GSA Services . . . . . . . . - 0.0 352 0.3 265 0.2
-------- ----- -------- ----- -------- -----
$134,379 100.0 $111,572 100.0 $122,269 100.0
======== ===== ======== ===== ======== =====
Revenues increased by approximately 20% for the year ended December 31,
2002 and declined by approximately 9% for the year ended December 31, 2001. The
increase in revenues during 2002 was primarily due to an increase in the level
of services ordered under the BAV contract (see "BAV Contract" below), the
start-up of new businesses (see "Business Termination and New Business Start-up"
below), and increased sales in Fleet Maintenance. These increases were partially
offset by decreased revenues associated with closing SRR (see "Business Termina-
tion and New Business Start-up" below) and the expiration of the Ordnance
contract (see "Contract Expirations" below). The decrease in revenues during
2001 was primarily due to a decrease in the level of services ordered under the
BAV contract, the expiration of a contract performed by VSE for the U.S. Postal
Service (see "Contract Expirations" below), and a reduction in revenue
associated with the company's sale of its HRSI Health Care Division contracts
in July 2000. The reduction in revenue from these contracts in 2001 was
partially offset by increases in revenues in some of the company's other
divisions and subsidiaries, including increased revenues in TTD, SRR, and
Energetics.
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. This contract
is a ten-year contract awarded in 1995, and it has the potential to generate
total revenues of over one billion dollars from 1995 through 2005. BAV has
recognized revenues on this contract of approximately $463 million through
December 31, 2002, resulting in a backlog of potential future revenues of
approximately $597 million. The amount of this backlog that was funded at
December 31, 2002 was approximately $20.7 million and approximately $13.5
million of additional funding was received by BAV on January 8, 2003.
-17-
The contract accounted for approximately 54% and 38% of consolidated revenues
from operations during 2002 and 2001, respectively. 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. See "Global
Economic Conditions and Political Factors" below for further discussion of
potential impacts on future revenues associated with this contract. Contract
terms specify award fee payments to BAV that are determined by performance and
level of contract activity. Award fees are made three times during the year and
a contract modification authorizing the award fee payment is issued subsequent
to the period in which the work is performed. The company does not recognize
award fee income until the contract modification authorizing the award fee is
issued. Due to such timing, and to fluctuations in the level of revenues,
profits as a percentage of revenues will fluctuate from period to period.
Contract Expirations. 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 Systems Engineering
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 associated with the program for the company during this period. A
subsequent contract was obtained in April of 2002 and work on the program
resumed. VSE's VSS Division had a U.S. Navy contract to provide data management
and documentation, logistics support services and configuration management
services to the Naval Air Systems Command. VSS was not awarded the successor
contract and work on this contract effort terminated as of April 28, 2000. VSS
continued work on one of the programs associated with the expired VSS contract
under the above mentioned Ordnance contract during 2000 and 2001 and under a
delivery order issued to VSS in 2002. VSE (parent company) had a contract to
provide engineering support services to the U.S. Postal Service. VSE (parent
company) was not awarded the successor contract, and work on this contract
effort terminated as of January 31, 2001. The VSS Navy contract and the VSE
Postal Service contract together accounted for less than 1% of total company
revenues in 2001 and approximately 10% of total company revenues in 2000. The
loss of revenues associated with the expiration of these two contracts
contributed to the decline in company revenues and pretax income in 2001 as
compared to 2000.
Business Terminations and New Business Start-ups. In February 2003, VSE
decided to terminate operations of TTD due to declining revenues and to
significant losses sustained by this division. In 2002, TTD experienced a
revenue decline of approximately 26% and a pretax loss of approximately $2.1
million, including a loss associated with the impairment of intangible assets of
$576 thousand. TTD will continue work on uncompleted contracts until all
contractual obligations are satisfied and then cease operations. Losses
associated with the cost to complete these remaining contracts have been
-18-
estimated and included in the loss reported for 2002. Some of TTD's technical
capabilities will be transferred to other VSE divisions. Revenues from TTD
represented approximately 4% of total company revenues in 2002. The loss of
future revenue associated with the termination of TTD operations is not expected
to be significant compared to total future VSE revenue, while the elimination of
TTD losses is expected to improve future VSE profits.
In January 2003, VSE formed its Communications and Engineering Division
(C&E) upon the award of a multi-year Rapid Response support contract by the
U.S. Army Communications-Electronics Command (CECOM). If all options are
exercised, this contract has a potential total ceiling of $2.9 billion over an
eight-year period. The contract is a multiple award, indefinite delivery,
indefinite quantity contract, and while actual revenue estimates for the
contract cannot be predicted, it is expected that this contract will contribute
to future VSE revenue growth.
In 2001, VSE decided 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 was 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. During 2002, revenues from MSD and VCG were
approximately equal to the revenues generated by SRR in 2001. The net effect of
these events is expected to be favorable to the company's future revenue and
profitability.
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from
continuing operations before income taxes, other items of income and expense,
and such amounts as a percent of revenues.
Income from Continuing Operations Before Income Taxes
(dollars in thousands)
Description 2002 % 2001 % 2000 %
- ----------- ---- - ---- - ---- -
Revenues . . . . . . . $134,379 100.0 $111,572 100.0 $122,269 100.0
Costs and expenses . . 132,306 98.5 109,990 98.6 119,937 98.1
-------- ----- -------- ----- -------- -----
Gross profit . . . . . 2,073 1.5 1,582 1.4 2,332 1.9
Selling, general and
administrative expenses 328 0.2 237 0.2 239 0.2
Interest(income)expense 24 0.0 49 0.0 (98) (0.1)
Loss on Impairment of
Intangible Assets. . 576 0.4 0 0.0 0 0.0
-------- ----- -------- ----- -------- -----
Income from continuing
operations before
income taxes . . . . $ 1,145 0.9 $ 1,296 1.2 $ 2,191 1.8
======== ===== ======== ===== ======== =====
-19-
TTD experienced significant losses during 2002 as revenues for this
division decreased approximately 26%. Costs and expenses of operating TTD did
not decrease in proportion to the revenue decline, which resulted in losses.
Costs and expenses of operations as a percentage of revenues in other VSE
divisions and subsidiaries, in the aggregate, decreased during this period due
to the increase in total VSE revenues while a portion of the costs and expenses
of operating the company remained fixed. The combination of these two factors
resulted in total VSE costs and expenses of operations as a percentage of
revenues remaining substantially unchanged in 2002 as compared to 2001. Costs
and expenses of operations as a percentage of revenues increased slightly in
2001 as compared to 2000. The increase on a percentage basis was primarily
attributable to the decrease in revenues while a portion of the costs and
expenses of operating the company remained fixed. Other factors that affect
the percentage of costs and expenses to revenues include the amount of work
performed on the BAV contract as a percentage of total revenues, the timing of
contract award fees, effective project and cost management and competitive
factors.
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on the company's operating
unit contracts. As a percentage of revenues, these expenses remained
substantially unchanged in 2002 and 2001 as compared to the respective prior
years.
VSE has not had significant borrowing requirements or interest expense
in 2002, 2001, and 2000. Interest expense declined in 2002 as compared to 2001
as profits from operations were used to pay down borrowings and receivables
collections times improved. The company's business financing requirements
changed slightly in 2001 as compared to 2000 due to the nature of TTD's
business. TTD performs a higher percentage of work for commercial entities and
on fixed-price contracts where the type of work and customer base requires
billing and collection cycles that are not as favorable to the company as the
cost reimbursable terms associated with the company's government contract work.
The resulting increase in bank borrowings in 2001 caused the company to incur
interest expense in 2001 as compared to realizing interest income during 2000.
In 2002, the company took a loss associated with the impairment of
intangible assets of $576 thousand held by TTD. These assets consisted of
acquired contracts, proposals, and opportunities; files and documentation;
rights to hire certain individuals; customer lists; trademarks; and, website
rights. The purpose of these acquired assets was to assist in the business
development efforts of TTD. The decision by VSE to terminate the operations of
TTD rendered these business development assets worthless.
Discontinued Operations
On May 21, 1999, the company sold its CMstat subsidiary for an
$800 thousand promissory note. The sale was a divestiture for legal and tax
purposes, but was primarily dependent on the buyer's ability to repay the
promissory note. Accordingly, the sale was not originally provided discontinued
operations treatment under Staff Accounting Bulletin No. 30 "Accounting for
Divestiture of a Subsidiary or Other Business Operation" ("SAB No. 30") since it
did not transfer the risks of ownership. In December 2000, the company
determined that the remaining balance under the promissory note acquired from
the sale of its CMstat subsidiary was not collectible
-20-
and approximately $688 thousand was written off. Accordingly, the company's
consolidated financial statements reflect the disposition as discontinued
operations.
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 some 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. Competing for these contracts
requires the company to use teams of subcontractors to be able to offer the
range of technical competencies needed to do the work. While the use of
subcontractors on a large scale basis allows the company to compete for this
work, profit margins on subcontract work is lower than on work performed by
company personnel, thereby reducing the company's overall profit margins.
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 twelve month period ended
December 31, 2002 is $206 thousand. Risk funding revenue represents certain
costs for work performed at risk which are not reimbursable under current
contracts. VSE believes that it will receive formal contractual coverage through
execution of contract documentation or amendments increasing funding 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 customers
served through VSE's contracts with the U.S. Government. An economic slowdown in
countries served under the BAV contract could potentially affect
-21-
sales. The
current international situation posed by potential terrorist activity 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 2002 and 2001, revenues
associated with BAV contract sales to Egypt accounted for approximately 28% and
24% of the company's revenues, respectively. In addition to the effect on BAV
contract work, international tensions can also affect work by Fleet Maintenance
on U.S. Navy ships when deployed outside of U.S. Navy facilities and are
unavailable for maintenance work during this time period. 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 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
revenue growth in 2002, accounts receivable declined and cash and cash
equivalents increased by approximately $4 million due to improved accounts
receivable collection. Accounts payable decreased by approximately $1.8 million
at December 31, 2002 as compared to December 31, 2001 due primarily to the
timing of subcontractor activity and the associated payments. The increase in
total stockholder's investment in 2002 resulted primarily from earnings and
dividend activity and from the exercise of stock options. The increase in total
stockholder's investment in 2001 resulted primarily from earnings and dividend
activity and from the sale of a portion of the company's Treasury Stock to a
director. The remaining Treasury Stock was retired.
Liquidity and Capital Resources
Cash Flows
The company's level of net cash and cash equivalents increased by
approximately $4 million during 2002. Approximately $5.0 million in net cash was
provided by continuing operations, investing activities used approximately $521
thousand, and financing activities used approximately $456 thousand. Investing
activities consisted of the purchase of property and equipment. Financing
activities consisted of the repayment of $351 thousand of bank loan borrowings,
$349 thousand used to pay dividends, and $244 thousand provided by the issuance
of common stock. Cash flows provided by continuing operations increased in 2002
as compared to 2001 due primarily to a decrease in accounts receivable, which
was partially offset by a decrease in accounts payable.
Cash and cash equivalents declined by $438 thousand during 2001 as a
result of approximately $2 million used in investing activities, approximately
$1.4 million provided by continuing operations, and approximately $179 thousand
provided by financing activities. Investing activities consisted of $2 million
used to purchase property and equipment, including investments in VSE's
information technology infrastructure and facilities improvements. Financing
activities consisted of $351 thousand provided by bank loan borrowing, $169
thousand provided by the issuance of common stock and $341 used to pay cash
dividends. Cash flows provided by continuing operations
-22-
decreased in 2001 as compared to 2000 due primarily to the decrease in income
and an increase in TTD's accounts receivable, which was partially offset by an
increase in accounts payable.
A net increase in cash and cash equivalents of $585 thousand during
2000 resulted from approximately $1.8 million provided by continuing operations,
approximately $1.1 million used in investing activities, $311 thousand used in
financing activities, and $248 thousand provided by discontinued operations.
Significant investing activities included $700 thousand associated with the
acquisition of certain contract and marketing rights and $424 thousand used to
purchase property and equipment. Financing activities consisted primarily of
$331 thousand used to pay cash dividends.
Cash dividends were declared at the rate of $.16 per share during 2002,
2001 and 2000. Pursuant to its bank loan agreement (see Note 7 of "Notes to
Consolidated Financial Statements"), the payment of cash dividends by VSE is
subject to annual rate restrictions. VSE has paid cash dividends each year since
1973.
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 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. A decrease in
accounts receivable due to generally faster collections contributed to an
increase in internally generated cash flows during 2002. 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. 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 during the 2002 were approximately $1.6 million lower than in the
comparable period of 2001. The decrease is primarily due to information
technology infrastructure and 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 Note 7 of "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 December 31, 2002. This loan agreement replaced a previous
loan agreement that had a maximum commitment of $30
-23-
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.
Forward-Looking Disclosures
Goodwill
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 is no longer subject to amortization over its estimated useful life and
intangible assets with indefinite lives are no longer amortized over an
arbitrary number of years. Goodwill and intangible assets with indefinite lives
are instead subject to a review for impairment at least annually. The effective
date for VSE's implementation of SFAS No. 142 was January 1, 2002.
As of December 31, 2002, the company had approximately $1.1 million of
unamortized goodwill associated with its acquisition of Energetics in 1995. The
goodwill was being amortized prior to the adoption of SFAS No. 142. In 2002, the
company stopped amortizing the goodwill. As of December 31, 2002, the company h
as not recognized any reduction to the goodwill due to the impairment rules
associated with SFAS No. 142. 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.
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.
-24-
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 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.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations"("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The company does not anticipate that adoption of SFAS No.
143 will have a material impact, either positive or negative, on future results
of operations or financial condition.
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 was January 1, 2002. See Note 6
for the discussion of the company's goodwill and intangible assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123."
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the company's stock at the date of the grant
over the exercise price of the related option. The company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
year ended December 31, 2002 and will adopt the interim disclosure provisions
for its financial reports for the quarter ended March 31, 2003.
-25-
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
----
Report of Independent Auditors 27
Consolidated Balance Sheets as of
December 31, 2002 and 2001 29
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 30
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 2002, 2001 and 2000 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 32
Notes to Consolidated Financial Statements 33
-26-
Report of Independent Auditors
To the Board of Directors of VSE Corporation:
We have audited the accompanying consolidated balance sheet of VSE
Corporation and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' investment and cash flows
for the year then ended. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of VSE
Corporation as of December 31, 2001 and for each of the two years in the period
ended December 31, 2001 were audited by auditors who have ceased operations and
whose report dated February 22, 2002 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of VSE
Corporation and subsidiaries as of December 31, 2002 and the results of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 6 to the consolidated financial statements, in
2002 the Company changed its accounting for goodwill and intangibles assets.
/s/ Ernst & Young LLP
McLean, Virginia
February 21, 2003
-27-
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
investment and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VSE
Corporation as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the three years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 22, 2002
This page shows a copy of the audit report previously issued by Arthur Andersen
LLP in connection with the VSE Corporation filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K. (See Exhibit 23.2 for
further discussion).
-28-
VSE Corporation and Subsidiaries
Consolidated Balance Sheets As of December 31,
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 4,210 $ 209
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 17,524 20,849
Deferred tax assets . . . . . . . . . . . . . . . . . . 1,313 695
Other current assets . . . . . . . . . . . . . . . . . . 1,241 1,984
------- -------
Total current assets . . . . . . . . . . . . . . . . 24,288 23,737
Property and equipment, net . . . . . . . . . . . . . . . 3,483 4,211
Deferred tax assets . . . . . . . . . . . . . . . . . . . 449 793
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,054 1,822
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,403 2,646
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $31,677 $33,209
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 8,785 $10,609
Accrued expenses . . . . . . . . . . . . . . . . . . . . 4,654 4,235
Dividends payable . . . . . . . . . . . . . . . . . . . 87 86
------- -------
Total current liabilities . . . . . . . . . . . . . 13,526 14,930
Long-term debt . . . . . . . . . . . . . . . . . . . . . . - 351
Deferred compensation . . . . . . . . . . . . . . . . . . 1,108 1,453
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 14,634 16,734
------- -------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,185,760 in 2002 and
2,150,540 in 2001 . . . . . . . . . . . . . . . . . . 109 107
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 3,558 3,294
Retained earnings . . . . . . . . . . . . . . . . . . . 13,376 13,074
------- -------
Total stockholders' investment . . . . . . . . . . . 17,043 16,475
------- -------
Total liabilities and stockholders' investment . . . $31,677 $33,209
======= =======
The accompanying notes are an integral part of these statements.
-29-
VSE Corporation and Subsidiaries
Consolidated Statements of Operations For the years ended December 31,
- -----------------------------------------------------------------------------
(in thousands, except share and per share amounts)
2002 2001 2000
---- ---- ----
Revenues, principally from contracts . . . . $ 134,379 $ 111,572 $ 122,269
Costs and expenses of contracts . . . . . . 132,306 109,990 119,937
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . 2,073 1,582 2,332
Selling, general and administrative expenses 328 237 239
Interest (income) expense . . . . . . . . . 24 49 (98)
Loss on impairment of intangible assets . . 576 - -
--------- --------- ---------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . 1,145 1,296 2,191
Provision for income taxes . . . . . . . . . 493 441 806
--------- --------- ---------
Income from continuing operations . . . . . 652 855 1,385
Discontinued operations, net of tax:
Loss on disposal (net of tax benefit
of $271) . . . . . . . . . . . . . . . . - - (417)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 652 $ 855 $ 968
========= ========= =========
Basic earnings per share:
Income from continuing operations . . . . $ 0.30 $ 0.40 $ 0.65
Loss from discontinued operations . . . . - - (0.19)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 0.30 $ 0.40 $ 0.46
========= ========= =========
Basic weighted average shares outstanding 2,172,384 2,136,992 2,122,564
========= ========= =========
Diluted earnings per share:
Income from continuing operations . . . . $ 0.30 $ 0.40 $ 0.65
Loss from discontinued operations . . . . - - (0.19)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 0.30 $ 0.40 $ 0.46
========= ========= =========
Diluted weighted average shares outstanding 2,196,390 2,136,992 2,122,564
========= ========= =========
The accompanying notes are an integral part of these statements.
-30-
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------------------
(in thousands except per share data)
Total
Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Surplus Earnings Stock Investment
------ ------ ------- -------- ----- ----------
Balance at
December 31, 1999 2,194 $ 110 $ 3,894 $ 11,933 $ (792) $15,145
Net income for the year - - - 968 - 968
Issuance of stock 4 - 20 - - 20
Dividends declared ($.16) - - - (340) - (340)
----- ----- ------- -------- ------- -------
Balance at
December 31, 2000 2,198 110 3,914 12,561 (792) 15,793
Net income for the year - - - 855 - 855
Issuance of Treasury stock - - (81) - 220 139
Retirement of Treasury
Stock (52) (3) (569) - 572 -
Issuance of stock 4 - 30 - - 30
Dividends declared ($.16) - - - (342) - (342)
----- ----- ------- -------- ------- -------
Balance at
December 31, 2001 2,150 107 3,294 13,074 - 16,475
Net income for the year - - - 652 - 652
Exercised stock options 33 2 213 - - 215
Tax benefit of options
exercised - - 22 - - 22
Issuance of stock 3 - 29 - - 29
Dividends declared ($.16) - - - (350) - (350)
----- ----- ------- -------- ------- -------
Balance at
December 31, 2002 2,186 $ 109 $ 3,558 $ 13,376 $ - $17,043
===== ===== ======= ======== ======= =======
The accompanying notes are an integral part of these statements.
-31-
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows For the years ended December 31,
- ----------------------------------------------------------------------------------------------
(in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 652 $ 855 $ 968
Loss on disposal of discontinued operations . . . . . . . . . . - - 417
------- ------- -------
Income from continuing operations . . . . . . . . . . . . . . . 652 855 1,385
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,414 1,372 1,563
Loss on impairment of intangible assets . . . . . . . . . . 576 - -
Loss on sale of property and equipment . . . . . . . . . . 27 91 17
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . (274) 212 (45)
Tax benefit of options exercised . . . . . . . . . . . . . 22 - -
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . . 3,325 (1,634) 146
Other current assets and noncurrent assets . . . . . . . . 769 (532) (701)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . (1,952) 1,931 523
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 419 (886) (1,116)
------- ------- -------
Net cash provided by operating activities of
continuing operations 4,978 1,409 1,772
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . (521) (2,026) (424)
Purchase of intangible assets . . . . . . . . . . . . . . . . . - - (700)
------- ------- -------
Net cash used in investing activities of
continuing operations (521) (2,026) (1,124)
------- ------- -------
Cash flows from financing activities:
Net proceeds from (payments on) long-term bank loans . . . . . (351) 351 -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (349) (341) (331)
Proceeds from issuance of common stock . . . . . . . . . . . 244 169 20
------- ------- -------
Net cash (used in) provided by financing activities of
continuing operations (456) 179 (311)
------- ------- -------
Net cash provided by discontinued
operations - - 248
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . 4,001 (438) 585
Cash and cash equivalents at beginning of year . . . . . . . . 209 647 62
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 4,210 $ 209 $ 647
======= ======= =======
Supplemental cash flow disclosures (in thousands):
2002 2001 2000
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61 $ 56 $ 127
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 205 $ 336 $ 1,026
Noncash investing and financing activities:
Write off of note receivable from discontinued operations . . $ - $ - $ 688
Payable related to purchase of intangible assets . . . . . . . $ - $ - $ 260
The accompanying notes are an integral part of these statements.
-32-
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements consist of the operations of the
parent company, operations of the company's wholly owned subsidiaries, and
operations of the company's 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"), Management Sciences
Division ("MSD") beginning in December 2001, Ordnance Division ("Ordnance"),
Systems Engineering Division ("Systems Engineering", formerly Land Systems
Division) beginning in February 2001, Telecommunications Technologies Division
("TTD") beginning in September 2000, and Value Systems Services Division
("VSS"). As of December 31, 2002, SRR, VSI, GSA Services, and Ordnance are not
conducting any current business operations. Work contracted under GSA schedules
is performed directly by each of the operating divisions or subsidiaries.
The term "VSE" or "company" means VSE and its subsidiaries and divi-
sions unless the context indicates operations of the parent company only.
Intercompany sales are principally at cost. All significant intercompany
transactions have been eliminated in consolidation. Certain prior year balances
have been reclassified for comparative purposes.
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting Pronouncements
In June 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 is no longer subject to amortization over its estimated useful life and
intangible assets with indefinite lives are no longer amortized over an
arbitrary number of years. Goodwill and intangible assets with indefinite lives
are instead subject to a review for impairment at least annually. The effective
date for VSE's implementation of SFAS No. 142 was January 1, 2002. See Note 6
for the discussion of the company's goodwill and intangible assets.
-33-
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The company does not anticipate that adoption of SFAS No.
143 will have a material impact, either positive or negative, on future results
of operations or financial condition.
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 was January 1, 2002. See Note 6
for the discussion of the company's goodwill and intangible assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation--Transition and Disclosure--an amendment of SFAS 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the company's stock at the date of the grant
over the exercise price of the related option. The company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
year ended December 31, 2002 and will adopt the interim disclosure provisions
for its financial reports for the quarter ended March 31, 2003.
Had compensation costs for the company's stock options been determined
based on SFAS No. 123, "Accounting for Stock-Based Compensation," the company's
net income and earnings per share would have been as follows (in thousands,
except per share amounts):
-34-
Year Ended December 31
2002 2001 2000
---- ---- ----
Net income, as reported $ 652 $ 855 $ 968
Add: Total stock-based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) for all awards, net
of related tax effects -- -- --
Deduct: Total stock-based
compensation expense
determined under fair value based
method (SFAS No. 123) for all
awards, net of related tax effects (111) (94) (94)
----- ----- -----
Pro forma net income $ 541 $ 761 $ 874
===== ===== =====
Earnings per share:
Basic and Diluted as reported $0.30 $0.40 $0.46
Basic and Diluted - pro forma $0.25 $0.36 $0.41
The fair value of the options is estimated on the date of grant using
the Black-Scholes option pricing model. The following assumptions were used in
the pricing calculations for 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Risk free interest rate 3.50% 5.04% 6.42%
Dividend yield 2.16% 2.77% 2.00%
Expected life 3 years 3 years 3 years
Expected volatility 32.90% 58.27% 61.95%
Earnings Per Share
Basic earnings per share has been computed by dividing net income 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. There was no dilutive impact on
reported earnings per share for 2002, 2001, and 2000.
Cash and Cash Equivalents
Cash and cash equivalents reported by the company consist of cash
balances in the company's bank accounts and short term temporary invested
balances connected to the bank accounts with sweep arrangements, netted by
checks issued on the company's bank accounts that have not yet been presented to
the bank for collection. The company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
-35-
Property and Equipment
Property and equipment are stated at cost. Depreciation of computer
systems equipment is provided principally by the double-declining method over
periods of two to four years. Depreciation of furniture and fixtures is provided
principally by the straight-line method over approximately nine years.
Depreciation of other equipment is provided principally by the double-declining
method over periods of three to ten years. Depreciation of buildings and land
improvements is provided principally by the straight-line method over
approximately thirty years. Amortization of leasehold improvements is provided
by the straight-line method over the lesser of their useful life or the
remaining term of the lease.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to
concentration of credit risk consist primarily of cash, cash equivalents and
trade accounts receivable. The company believes that concentrations of credit
risk with respect to trade accounts receivable are limited as they are primarily
government receivables. The company believes that the fair market value of all
financial instruments approximates book value.
Contracts with the government, primarily with the U.S. Department of
Defense, accounted for approximately 95% of revenues for 2002, 93% of revenues
for 2001 and 99% of revenues for 2000. These contracts were primarily for
engineering services. A contract awarded in 1995 with the U.S. Navy accounted
for approximately 54%, 38% and 41% of such revenues in 2002, 2001, and 2000,
respectively.
Contract Revenues
Substantially all of the company's revenues result from contract
services performed for the government or for contractors engaged in work for
the government under a variety of contracts. Revenues on cost-type contracts are
recorded on the basis of recoverable costs incurred and fees earned. The company
has a contract in its BAV Division for which contract terms specify award fee
payments to BAV that are determined by performance and level of contract
activity. Award fees are made three times during the year and a contract
modification authorizing the award fee payment is issued subsequent to the
period in which the work is performed. The company does not recognize award fee
income until the contract modification authorizing the award fee is issued. Due
to such timing, and to fluctuations in the level of revenues, profits as a
percentage of revenues on this contract will fluctuate from period to period.
Approximately $106.3 million, $82.6 million and $92.6 million of the company's
revenues were under cost reimbursable contracts for the years ended December 31,
2002, 2001, and 2000, respectively.
Revenues on time and material contracts are recorded on the basis of
billable rates times hours delivered plus material and other reimbursable costs
incurred. Revenues on certain fixed-price services contracts are recorded each
period based on a monthly amount for services provided. Revenues on other
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.
-36-
Potential revenue related to work performed at risk is not recognized
as income until it can be reliably estimated and its realization is probable.
The company provides for anticipated losses on contracts by a charge to income
during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is
subject to audit by the Defense Contract Audit Agency. The company's indirect
cost rates have been audited and approved for 2000 and prior years. In the
opinion of management, the audits of the indirect cost rates for 2002 and 2001
will not result in material adjustments, if any, to the company's results of
operations or financial position.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31,
2002, 2001, and 2000 was $7 thousand, $21 thousand and $117 thousand,
respectively.
Included in other assets are assets of the deferred compensation plans
which include equity securities recorded at fair value. The fair value of the
deferred compensation plan assets was approximately $1.2 million and $1.5
million as of December 31, 2002, and 2001, respectively. Because plan
participants are at risk for market value changes in these assets, the liability
to plan participants fluctuates with the asset values.
Impairment Review
The company performs a periodic review of certain long-lived assets to
determine if impairment has occurred. If impaired, the company writes down the
asset to its fair market value.
(2) Accounts Receivable
The components of accounts receivable as of December 31, 2002 and 2001,
were as follows (in thousands):
2002 2001
---- ----
Billed . . . . . . . . . . . . . . . . . . . . $ 7,559 $ 8,349
Unbilled:
Retainages . . . . . . . . . . . . . . . . . 80 116
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . 9,984 12,684
Less-Allowance for doubtful accounts . . . . . (99) (300)
------- -------
Total accounts receivable $17,524 $20,849
======= =======
The "Unbilled: Other" included in accounts receivable are reported net
of an allowance for contract disallowances of $398 thousand as of December 31,
2002 and $244 thousand as of December 31, 2001. "Unbilled: Other" also includes
certain costs for work performed at risk which are not reimbursable under
current contracts, but which the company believes will be reimbursable on
execution of contract documentation or amendments increasing funding. Amounts
not presently reimbursable included in "Unbilled: Other" were $206 thousand and
$702 thousand as of December 31, 2002, and 2001, respectively.
-37-
The company generally expects to collect all accounts receivable other
than retainages within one year.
The following table summarizes activity in the allowance for doubtful
accounts and in the allowance for contract disallowances (in thousands):
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Deductions(1) Expenses Period
--------- ------------- -------- ------
For the year ended December 31, 2002
- ------------------------------------
Allowance for doubtful
accounts $300 $270 $ 69 $ 99
Allowance for contract
disallowance 244 51 205 398
For the year ended December 31, 2001
- ------------------------------------
Allowance for doubtful
accounts 77 64 287 300
Allowance for contract
disallowance 260 39 23 244
For the year ended December 31, 2000
- ------------------------------------
Allowance for doubtful
accounts 77 - - 77
Allowance for contract
disallowance 452 247 55 260
(1) Write-offs and settlements
(3) Other Current Assets
Other current assets consisted of the following (in thousands):
2002 2001
---- ----
Federal and state tax receivable . . . . . . . . . . $ 92 $ 583
Travel advances . . . . . . . . . . . . . . . . . . 492 448
Prepaid rent expense . . . . . . . . . . . . . . . . 114 266
Other prepaid expenses . . . . . . . . . . . . . . . 543 687
------- -------
$ 1,241 $ 1,984
======= =======
(4) Other Assets
Other assets consisted of the following (in thousands):
2002 2001
---- ----
Deferred compensation trust . . . . . . . . . . . . $ 1,237 $ 1,453
Cash surrender value of life insurance . . . . . . . 1,160 1,120
Other assets . . . . . . . . . . . . . . . . . . . . 6 73
------- -------
$ 2,403 $ 2,646
======= =======
-38-
(5) Property and Equipment
Property and equipment (recorded at cost) consisted of the following
(in thousands):
2002 2001
---- ----
Computer systems equipment . . . . . . . . . . . . . $ 4,016 $ 4,798
Furniture, fixtures, equipment and other . . . . . . 2,832 3,132
Leasehold improvements . . . . . . . . . . . . . . . 2,412 2,419
Buildings . . . . . . . . . . . . . . . . . . . . . 302 302
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
9,947 11,036
Less accumulated depreciation and amortization . . . (6,464) (6,825)
------- -------
$ 3,483 $ 4,211
======= =======
Depreciation and amortization expense for property and equipment was
approximately $1.2 million for 2002, $1.1 million for 2001 and $1.4 million for
2000.
(6) Goodwill and Intangible Assets
As part of the August 29, 1995, acquisition of Energetics, the company
recorded approximately $1.7 million of goodwill, including approximately $200
thousand of additional goodwill due to contingency requirements established in
the purchase agreement. Between 1995 and 2001, VSE amortized the goodwill by the
straight-line method using a fifteen year life. In accordance with SFAS No. 142,
VSE stopped amortizing the goodwill in January 2002, but continues to review it
annually to determine if impairment has occurred. Approximately $1.1 million of
unamortized goodwill remains on the books as of December 31, 2002.
Had the company been accounting for its goodwill under SFAS No. 142 for the
fiscal years ended December 31, 2001 and 2000, the company's net income and
earnings per share would have been as follows (in thousands, except per share
data):
Year ended December 31,
2001 2000
---- ----
Reported net income . . . . . . . . . . . . . . . . . . $ 855 $ 968
Add back goodwill amortization, net of tax . . . . . . 74 70
------ ------
Adjusted net income . . . . . . . . . . . . . . . . . . $ 929 $1,038
====== ======
Basic earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . $ .40 $ .46
Goodwill amortization, net of tax . . . . . . . . . . .03 .03
------ ------
Adjusted basic earnings per share . . . . . . . . . . $ .43 $ .49
====== ======
Diluted earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . $ .40 $ .46
Goodwill amortization, net of tax . . . . . . . . . . .03 .03
------ ------
Adjusted diluted earnings per share . . . . . . . . . $ .43 $ .49
====== ======
-39-
On December 28, 2000, TTD invested $960 thousand in the acquisition of
certain contract and marketing rights. Between January 2001 and December 2002,
these intangible assets were amortized by the straight-line method using a life
of five years. During the fourth quarter of 2002, VSE determined that an
impairment of the intangible assets had occurred due to recurring losses and
reduced backlog. As a result, an impairment loss for the remaining unamortized
amount of $576 thousand was included in VSE's results of operations for 2002.
Total company amortization expense for goodwill and intangible assets was
approximately $192 thousand, $311 thousand and $115 thousand for 2002, 2001, and
2000, respectively. Accumulated amortization of intangible assets, including
goodwill, was $0 and approximately $863 thousand as of December 31, 2002, and
2001 respectively. Accumulated amortization of intangible assets for the year
ending December 31, 2002 was $0 due to the complete write-off of TTD's
intangible assets and the new accounting treatment for goodwill per SFAS No.
142.
(7) 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. The amount borrowed under this
loan agreement was $0 and approximately $351 thousand as of December 2002 and
2001, respectively. Interest expense incurred on the loan was approximately
$55 thousand, $60 thousand and $107 thousand for 2002, 2001, and 2000,
respectively.
(8) Accrued Expenses
The components of accrued expenses as of December 31, 2002 and 2001, were
as follows (in thousands):
2002 2001
---- ----
Accrued salaries . . . . . . . . . . . . . . . . $1,068 $1,174
Accrued vacation . . . . . . . . . . . . . . . . 1,270 1,291
Estimated future losses on fixed-price and
time and material contracts . . . . . . . . . . 754 463
Other accrued expenses . . . . . . . . . . . . . 1,562 1,307
------ ------
Total accrued expenses $4,654 $4,235
====== ======
(9) ESOP/401(k) Plan and Profit Sharing Plan
VSE established an ESOP/401(k) plan in 1984. Under the provisions of
the ESOP, VSE and certain of its operating entities made contributions into a
trust which purchased VSE stock on behalf of employees who met certain age and
service requirements and were employed at the end of the plan year.
Contributions at the rate of up to 2% of eligible employee compensation were
-40-
permitted at the discretion of the VSE Board of Directors and were allocated,
subject to a vesting schedule, on a pro rata basis on eligible employee
compensation. The 401(k) segment of the plan allows employees meeting certain
age and service requirements to contribute a portion of their salary to certain
investment trusts. As of April 1, 1999, the ESOP contributions were discontinued
and replaced by employer 401(k) contributions made on behalf of the eligible
employee participants based on the employees' 401(k) payroll deferrals. For 2001
and prior years, the employer contribution was equal to 50% of the employee
deferral on the first 5% of the employee pay deferred. For 2002 the employer
contribution is equal to 50% of the employee deferral on the first 6% of the
employee pay deferred. The company expense associated with this plan for 2002,
2001, and 2000 was $342 thousand, $249 thousand, and $245 thousand,
respectively.
The ESOP/401(k) plan held 349,485 shares and 429,526 shares of VSE
stock as of December 31, 2002 and 2001, respectively. Such shares receive
dividend payments and are included in the weighted average shares for earnings
per share calculations.
Energetics maintains a profit sharing plan for employees. All
employees who have completed two years of service are members of the profit
sharing plan. At its discretion, Energetics may make contributions to the plan.
The plan expense for 2002, 2001, and 2000 was $458 thousand, $450 thousand, and
$400 thousand, respectively.
(10) Stock Option Plans
1996 and 1998 Stock Option Plans
Under the 1996 Plan, the company may grant options for and sell up to
an aggregate of 273,698 shares of the common stock of the company. Through
December 31, 2002 the company has granted options for 211,455 shares of common
stock priced at 100% of the fair value of the stock at the time of the grant of
the option. The maximum term of the options granted is five years. The vesting
period is three years and allows for 25% vesting immediately upon date of the
grant and an additional 25% on each successive anniversary date thereafter.
Vesting may be accelerated for shares granted to certain individuals as
determined by the Board of Directors. The 1996 Plan will terminate on the
earliest of February 5, 2006, or the date on which all options under the 1996
plan have been exercised or terminated. As of December 31, 2002, zero shares are
exercisable under this plan.
Under the 1998 Plan, the company may grant options for and sell up to
an aggregate of 343,750 shares of common stock. Of the shares available for
grant, 15,625 shares may be granted to non-employee directors of VSE, and
328,125 shares may be granted to executive officers and key employees. Through
December 31, 2002 the company has granted options for 209,000 shares of common
stock priced at 100% of the fair value of the stock at the time of the grant of
the option. The vesting period is three years and allows for 25% vesting
immediately upon date of the grant and an additional 25% on each successive
anniversary date thereafter. The 1998 Plan will terminate on the earliest of
May 6, 2008, or the date on which all options under the 1998 Plan have been
exercised or terminated.
-41-
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2002 Price 2001 Price 2000 Price
---- ----- ---- ----- ---- ----
Number of shares under
stock options:
Outstanding at beginning
of year 217,375 $ 8.12 343,455 $10.28 279,085 $11.01
Granted 69,750 6.62 69,750 5.77 79,000 7.89
Exercised (32,500) 6.59 - - - -
Forfeited (39,000) 7.86 (19,000) 9.01 (14,630) 11.29
Terminations (30,625) 9.42 (176,830) 11.30 - -
------- ------ ------- ------ ------- ------
Outstanding at end
of year 185,000 $ 7.66 217,375 $ 8.12 343,455 $10.28
======= ====== ======= ====== ======= ======
Exercisable at end
of year 111,063 $ 8.29 112,687 $ 8.83 247,486 $10.80
======= ====== ======= ====== ======= ======
Weighted average remaining
contractual life 3 years 3 years 2 years
Weighted average fair
value of options granted $1.97 $2.24 $3.32
===== ===== =====
(11) Income Taxes
The company files consolidated federal income tax returns with all of
its subsidiaries. The components of the provision for income taxes for the
years ended December 31, 2002, 2001, and 2000 are as follows (in thousands):
2002 2001 2000
---- ---- ----
Current
Federal . . . . . . . . . . . . . . . . . . $ 619 $ 218 $ 682
State . . . . . . . . . . . . . . . . . . . 148 11 169
------ ------ ------
767 229 851
Deferred
Federal . . . . . . . . . . . . . . . . . . (238) 182 (36)
State . . . . . . . . . . . . . . . . . . (36) 30 (9)
------ ------ ------
(274) 212 (45)
------ ------ ------
Provision for income taxes $ 493 $ 441 $ 806
====== ====== ======
The differences between the amount of tax computed at the federal
statutory rate of 34% and the provision for income taxes for 2002, 2001, and
2000 are as follows (in thousands):
2002 2001 2000
---- ---- ----
Tax at statutory federal income
tax rate at 34% . . . . . . . . . . . . . . $ 389 $ 441 $ 744
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 67 74 112
Permanent differences, net . . . . . . . . 14 (2) -
Other, net . . . . . . . . . . . . . . . . 23 (72) (50)
------ ------ ------
Provision for income taxes $ 493 $ 441 $ 806
====== ====== ======
-42-
The provision for income taxes was reduced for the period ending
December 31, 2001 due to a change in the company's effective state tax rate.
The reduction in the effective state tax rate was the result of lower apportion-
ment factors in states with higher tax rates. The provision for income taxes
included a one time state tax adjustment of approximately $72,000.
The company's deferred tax assets (liabilities) as of December 31, 2002
and 2001, which represent the tax effects of temporary differences between tax
and financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates, are as follows (in thousands):
2002 2001
---- ----
Current deferred tax assets . . . . . . . . . . $1,437 $1,007
Current deferred tax liabilities . . . . . . . . (124) (312)
------ ------
Net current deferred tax assets . . . . . . . . 1,313 695
------ ------
Noncurrent deferred tax assets . . . . . . . . . 788 1,038
Noncurrent deferred tax liabilities . . . . . . . (339) (245)
------ ------
Net noncurrent deferred tax assets . . . . . . 449 793
------ ------
Net deferred tax assets . . . . . . . . . . . . . $1,762 $1,488
====== ======
The tax effect of temporary differences representing deferred tax
assets and liabilities as of December 31, 2002 and 2001, are as follows (in
thousands):
2002 2001
---- ----
Deferred compensation and accrued paid leave . . $ 988 $1,082
Intangible assets . . . . . . . . . . . . . . . . 270 82
Allowance for contract and other disallowances . 138 78
Accrued expenses . . . . . . . . . . . . . . . . 79 88
Bad debt expense . . . . . . . . . . . . . . . . 38 115
Accelerated depreciation . . . . . . . . . . . . 23 134
Retainages not taxed until billed . . . . . . . (32) (46)
Deferred revenues . . . . . . . . . . . . . . . . (74) (225)
Other . . . . . . . . . . . . . . . . . . . . . . 332 180
------ ------
Net deferred tax assets $1,762 $1,488
====== ======
(12) Commitments and Contingencies
Leases and other commitments
The principal facilities of the company and its subsidiaries are generally
rented under non-cancelable operating leases for periods of one to 10 years. The
company and its subsidiaries also lease equipment generally under non-cancelable
operating leases for periods of one to five years. In addition, the company
entered into a Microsoft license agreement requiring contract payments over
three years, beginning in June, 2001. Total rent, lease and other commitments
for 2002, 2001, and 2000 was approximately $1.8 million, $1.8 million, and $1.9
million, respectively, which was net of sublease income of $869 thousand, $689
thousand and $694 thousand, respectively. The future minimum annual commitments
having remaining non-cancelable commitment terms in excess of one year, net of
non-cancelable sublease income, will approximate $2.3 million in 2003, $2.5
million in 2004, $2.3 million in 2005, $1.8 million in 2006, $1.7 million in
2007, and $763 thousand thereafter.
-43-
Litigation
In June 2001, a personal injury lawsuit was filed against VSE, Astoria
Metals Corporation (AMC), Ship Dismantlement and Recycling Joint Venture (SDR,
a partnership in which a wholly owned subsidiary of VSE was a general partner),
Earth Tech, Inc., and Tyco International Ltd. in the Superior Court of the State
of California for the County of Alameda. The case was subsequently transferred
to the San Francisco Superior Court. VSE's insurance carrier is defending VSE,
SDR, and Earth Tech, Inc. in this matter. Counsel for AMC's insurance carrier
was tendered and has accepted defense of this matter on behalf of AMC, Earth
Tech, Inc. and SDR. Plaintiffs claimed damages of $15 million. A trial was
scheduled for April 28, 2003. In February 2003, VSE received notice that an
agreement in principle for settling this lawsuit had been reached and a
definitive settlement agreement was being prepared for execution. The company is
insured for this liability and believes that the damages will be fully covered
by its insurance carrier. 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. As of December 31,
2002, VSE has not accrued for any potential losses related to this action.
The company and its subsidiaries have, in the normal course of
business, certain claims against them and against other parties. The company is
not aware of any present claims which would have a material adverse effect on
the company's financial condition or results of operations.
(13) Discontinued Operations
On May 21, 1999, the company sold all of its interests in the SPS
segment. This entailed selling its CMstat subsidiary for an $800 thousand
promissory note. While the sale was a divestiture for legal and tax purposes,
for accounting purposes, the sale was not originally provided discontinued
operations treatment under Staff Accounting Bulletin No. 30 "Accounting for
Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the
sale did not transfer the risks of ownership because the sales price was
primarily dependent on the buyer's ability to repay the promissory note.
In December 2000, the company determined that the remaining balance
under the promissory note acquired from the sale of its CMstat subsidiary was
not collectible and approximately $688 thousand was written off. Accordingly,
the consolidated financial statements reflect the disposition of its CMstat
subsidiary as discontinued operations. The revenues, costs and expenses,
assets and liabilities and cash flows from the CMstat subsidiary have been
excluded from the respective captions in the Consolidated Statement of
Operations, Cash Flows and related footnotes.
-44-
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
VSE Corporation engaged the services of Ernst & Young LLP as its new
independent auditors to replace Arthur Andersen LLP, effective May 15, 2002.
For additional information, see VSE Corporation's current report on Form 8-K
dated May 17, 2002 (as amended by the Form 8-K/A filed May 21,2002).
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the company is incorporated by
reference from the registrant's definitive proxy statement for its annual
meeting of stockholders to be filed not later than 120 days after December 31,
2002, with the Securities and Exchange Commission pursuant to Regulation 14A
(the "Proxy Statement"). Certain information relating to Executive Officers of
the company appears on page 10 of this Form 10-K Annual Report.
ITEM 11. Executive Compensation
Information with respect to this item is incorporated by reference from
the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to this item is incorporated by reference from
the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to this item is incorporated by reference from
the Proxy Statement.
ITEM 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a - 14(c) and 15d -
14(c)) as of a date (the "Evaluation Date") within 90 days before the filing of
this annual report, have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed to ensure that the
information required to be disclosed in the reports filed or submitted by us
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the requisite time periods.
(b) Changes in internal controls
There were no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the Evaluation Date.
-45-
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements
The consolidated financial statements are listed under Item 8 of
this report.
2. Supplemental Financial Statement Schedule
Schedules not included herein have been omitted because of
the absence of conditions under which they are required or because the required
information, where material, is shown in the consolidated financial statements,
financial notes, or supplementary financial information.
3. Exhibits
See "Exhibit Index" hereinafter contained and incorporated by
reference.
4. Reports on Form 8-K
No reports on Form 8-K have been filed by the company during the
last quarter of the period covered by this Form 10-K.
-46-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VSE CORPORATION
Date: March 4, 2003 By: /s/ D. M. Ervine
---------------------------
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- ------------------------------------------------------------------------------
/s/ D. M. Ervine
_____________________________ Chairman, President, March 4, 2003
Donald M. Ervine Chief Executive Officer,
Chief Operating Officer
/s/ C. S. Weber
_____________________________ Executive Vice President, March 4, 2003
Craig S. Weber Chief Administrative
Officer, Secretary
/s/ T. R. Loftus
_____________________________ Senior Vice President and March 4, 2003
Thomas R. Loftus Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ R. J. Kelly
_____________________________ Director March 4, 2003
Robert J. Kelly
_____________________________ Director March 4, 2003
Clifford M. Kendall
/s/ C. S. Koonce
_____________________________ Director March 4, 2003
Calvin S. Koonce
/s/ D. M. Osnos
_____________________________ Director March 4, 2003
David M. Osnos
/s/ J. D. Ross
_____________________________ Director March 4, 2003
Jimmy D. Ross
/s/ B. K. Wachtel
_____________________________ Director March 4, 2003
Bonnie K. Wachtel
-47-
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 annual report on Form 10-K of VSE Corporation (the
"registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
-48-
6. The registrant's other certifying officers and I have indicated in the
annual 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: March 10, 2003 /s/ D. M. Ervine
___________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
-49-
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 annual report on Form 10-K of VSE Corporation (the
"registrant");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
-50-
6. The registrant's other certifying officers and I have indicated in the
annual 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: March 10, 2003 /s/ T. R. Loftus
___________________________
T. R. Loftus
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
-51-
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Exchange Agreement dated as of March 25, 1992,
amended as of September 1, 1992, by and between VSE
Corporation and JBT Holding Corp., et al. (Exhibit A
to Exhibit 1, Proxy Statement, filed on
Form 8-K on November 2, 1992) *
3 Articles of incorporation and by-laws
Restated Certificate of Incorporation of VSE
Corporation dated as of February 6, 1996 *
By-Laws of VSE Corporation as amended through
May 16, 2000 (Exhibit 3.2 to Form 10-Q dated
October 27, 2000) *
4 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2) *
9 Voting trust agreement Not Applicable
10 Material contracts
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Jayne M. Tuohig (Exhibit VII to form 10-K dated
March 7, 2001) *
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Craig S. Weber (Exhibit VIII to form 10-K dated
March 7, 2001) *
Employment Agreement entered into as of October 21,
1998, by and between VSE Corporation and
Donald M. Ervine (Exhibit VI to Form 10-K dated
March 18, 1999) *
Employment Agreement entered into as of January 15,
1999, by and between VSE Corporation and
Energetics Incorporated and Robert J. Kelly
(Exhibit VII to Form 10-K dated March 18, 1999) *
Employment Agreement entered into as of June 3,
1999, by and between VSE Corporation and
James M. Knowlton (Exhibit V to Form 10-K dated
March 15, 2000) *
Employment Agreement dated as of November 1,
2000, by and between VSE Corporation and
James M. Todd (Exhibit V to form 10-K dated
March 7, 2001) *
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
-52-
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
Separation Agreement and General Release dated
February 15, 2002, by and between
VSE Corporation and James M. Todd (Exhibit IV
to Form 10-K dated March 6, 2002) *
Consulting Agreement dated February 15, 2002,
by and between VSE Corporation and
James M. Todd (Exhibit V to Form 10-K dated March
March 6, 2002) *
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996) *
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 6, 1998) *
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on May 6, 1998) *
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or selected quarterly data Exhibit 13
16 Letter re change in certifying accountant Not Applicable
18 Letter re change in accounting principles Not Applicable
21 Subsidiaries of the registrant Exhibit 21
22 Published report regarding matters submitted
to vote of security holders Not Applicable
23.1 Consent of independent auditors Exhibit 23.1
23.2 Information regarding consent of Arthur Andersen Exhibit 23.2
24 Power of attorney Not Applicable
99.1 Section 906 CEO Certification Exhibit 99.1
99.2 Section 906 CFO Certification Exhibit 99.2
*Document has been filed as indicated and is incorporated by reference herein.
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