SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of Common Stock outstanding as of October 29, 1999: 2,115,217.
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 288 $ 49
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 22,951 34,105
Deferred tax assets . . . . . . . . . . . . . . . 880 403
Other current assets . . . . . . . . . . . . . . . 1,484 1,266
-------- --------
Total current assets . . . . . . . . . . . . . . 25,603 35,823
Property and equipment, net . . . . . . . . . . . . 4,677 4,480
Deferred tax assets . . . . . . . . . . . . . . . . 711 208
Intangible assets, net . . . . . . . . . . . . . . . 1,293 2,836
Other assets . . . . . . . . . . . . . . . . . . . . 2,724 2,777
Assets of business transferred under contractual
arrangements . . . . . . . . . . . . . . . . . . . 779 1,124
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 35,787 $ 47,248
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 0 $ 1,333
Accounts payable and other current liabilities . . 6,596 12,063
Accrued expenses . . . . . . . . . . . . . . . . 6,510 5,935
Dividends payable . . . . . . . . . . . . . . . . 76 77
Net liabilities of business transferred
under contractual arrangements . . . . . . . . . 0 6,747
-------- --------
Total current liabilities . . . . . . . . . . . 13,182 26,155
Long-term debt . . . . . . . . . . . . . . . . . . . 6,338 5,370
Deferred compensation . . . . . . . . . . . . . . . 1,736 1,871
-------- --------
Total liabilities . . . . . . . . . . . . . . . 21,256 33,396
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,187,217 shares in 1999
and 2,186,905 in 1998 . . . . . . . . . . . . . 109 109
Paid-in surplus . . . . . . . . . . . . . . . . . 3,835 3,832
Retained earnings . . . . . . . . . . . . . . . . 11,379 10,703
Treasury stock, at cost (72,000 shares in 1999
and 1998) . . . . . . . . . . . . . . . . . . . (792) (792)
-------- --------
Total stockholders' investment . . . . . . . . . 14,531 13,852
-------- --------
Total liabilities and stockholders' investment . $ 35,787 $ 47,248
======== ========
</TABLE>
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three and nine months ended September 30,
- ------------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
1999 1998
-------------------- --------------------
Three Nine Three Nine
Months Months Months Months
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, principally from
contracts . . . . . . . . . . . $ 36,609 $ 122,848 $ 44,203 $ 123,419
Costs and expenses of contracts . 35,385 119,364 42,759 119,464
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 1,224 3,484 1,444 3,955
Selling, general and administrative
expenses . . . . . . . . . . . 36 528 183 479
Loss on CMstat operations . . . . 0 1,499 307 1,815
Interest expense . . . . . . . . 64 91 42 57
--------- --------- --------- ---------
Pretax income . . . . . . . . . . 1,124 1,366 912 1,604
Provision for income taxes . . . 449 462 239 564
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 675 $ 904 $ 673 $ 1,040
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ 0.32 $ 0.43 $ 0.32 $ 0.49
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ 0.32 $ 0.43 $ 0.32 $ 0.49
========= ========= ========= =========
Weighted average shares
outstanding: 2,115,061 2,114,967 2,122,517 2,128,002
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- ---------------------------------------------------------------------------------
(in thousands)
<CAPTION>
Common Stock Paid-In Retained Treasury ESOP
Shares Amount Surplus Earnings Stock Obligation
------ ------ ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 . . 2,165 $ 108 $ 3,631 $ 9,422 $ -- $ (680)
Net income
for the year . . . . -- -- -- 1,595 -- --
ESOP Obligation . . . . -- -- -- -- -- (112)
Purchase of Treasury
Stock . . . . . . . . -- -- -- -- (792) 792
Issuance of stock . . . 22 1 201 -- -- --
Dividends declared
($.144) . . . . . . . -- -- -- (314) -- --
------ ------ ------- -------- ------- --------
Balance at
December 31, 1998 . . 2,187 109 3,832 10,703 (792) 0
Net income
for the period . . . -- -- -- 904 -- --
Issuance of stock . . . -- -- 3 -- -- --
Dividends declared
($.108) . . . . . . . -- -- -- (228) -- --
------ ------ ------- -------- ------- --------
Balance at
September 30, 1999 . . 2,187 $ 109 $ 3,835 $ 11,379 $ (792) $ 0
====== ====== ======= ======== ======= ========
</TABLE>
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the nine months ended September 30,
- -------------------------------------------------------------------------------
(in thousands)
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 904 $ 1,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 1,277 1,150
Deferred compensation plan expense . . . . . . . . . . 34 109
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 11,154 (4,891)
Other current assets and noncurrent assets . . . . . 1,223 (729)
Deferred taxes, net . . . . . . . . . . . . . . . . (980) (103)
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . (5,453) 5,021
Accrued expenses. . . . . . . . . . . . . . . . . . . 575 1,137
Net liabilities of business transferred under
contractual arrangements . . . . . . . . . . . . . (6,744) 1,153
------- -------
Net cash provided by operating activities 1,990 3,887
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (977) (524)
Net (payments of) proceeds from deferred compensation . . (183) 119
------- -------
Net cash used in investing activities (1,160) (405)
------- -------
Cash flows from financing activities:
Net payments of bank loan . . . . . . . . . . . . . . . . (365) (3,068)
Stock grants . . . . . . . . . . . . . . . . . . . . . . 3 202
Advance to ESOP . . . . . . . . . . . . . . . . . . . . 0 (112)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (229) (236)
------- -------
Net cash used in financing activities (591) (3,214)
------- -------
Net increase in cash and cash equivalents . . . . . . . . 239 268
Cash and cash equivalents at beginning of period . . . . 49 15
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 288 $ 283
======= =======
</TABLE>
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information refer to the
consolidated financial statements and footnotes thereto included in the VSE
Corporation Annual Report on Form 10-K for the year ended December 31, 1998.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Debt
VSE has a loan agreement with a syndicate of banks that included a revolving
loan and a term loan. The original principal amount of the term loan was $4
million and the term of the loan was four years. There were no principal
payments due during the first 12 months of the loan. Monthly principal
payments of approximately $111 thousand were due in 36 installments beginning
August 1998 through July 2001. During September 1999, VSE repaid the principal
amount in full, and the term loan portion of the loan agreement no longer
exists. Repayment of the term loan did not cause any changes in the terms
related to the revolving loan portion of the agreement.
Litigation
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of
management, the resolution of these claims will not have a material adverse
effect on the company's results of operations or financial position.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment Information
Prior to May 21, 1999, VSE had two reportable segments: the engineering,
logistics, management, and technical services segment ("ELMTS"), which provides
diversified engineering, technical, and management services principally to
agencies of the United States Government and to other government prime
contractors; and the software products and services segment ("SPS"), which
provides application software and services related to the installation of the
software to primarily commercial customers.
On May 21, 1999, the company sold all of its interests in the SPS segment for an
$800 thousand promissory note and certain fixed assets valued at approximately
$342 thousand. The sale is a divestiture for legal and tax purposes but
not for accounting purposes. The sale is not afforded treatment of a
discontinued operation for accounting purposes 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 as it is
interpreted under SAB No. 30, because the sales price is primarily dependent on
the buyer's ability to repay the promissory note.
As such, the results of the SPS segment will be included in the company's
financial statements and are presented as the single line item "Loss on CMstat
operations" in the Consolidated Statement of Operations. The assets and
liabilities are presented as separate line items in the Consolidated Balance
Sheet as "Assets of business transferred under contractual arrangements" and
"Net liabilities of business transferred under contractual arrangements",
respectively.
<TABLE>
The following table presents revenues and other financial information by
business segment for the three and nine month periods ended September 30, 1999,
and September 30, 1998, in thousands:
<CAPTION>
Three months ended September 30, 1999 ELMTS SPS Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 36,609 $ 0 $ 36,609
Interest expense 64 0 64
Depreciation and amortization 433 0 433
Operating income 1,124 0 1,124
Expenditures for capital assets 339 0 339
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine months ended September 30, 1999 ELMTS SPS Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $122,848 $ 902 $123,750
Interest expense 91 128 219
Depreciation and amortization 1,277 105 1,382
Operating income (loss) 2,844 (1,478) 1,366
Expenditures for capital assets 1,158 25 1,183
Three months ended September 30, 1998 ELMTS SPS Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 44,203 $ 880 $ 45,083
Interest expense 42 133 175
Depreciation and amortization 391 64 455
Operating income (loss) 1,197 (285) 912
Expenditures for capital assets 315 4 319
Nine months ended September 30, 1998 ELMTS SPS Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $123,419 $2,358 $125,777
Interest expense 57 370 427
Depreciation and amortization 1,150 185 1,335
Operating income (loss) 3,316 (1,712) 1,604
Expenditures for capital assets 537 37 574
</TABLE>
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE and its subsidiaries and divisions have two reportable segments: the
engineering, logistics, management and technical services segment ("ELMTS") and
the software products and services segment ("SPS").
Engineering, logistics, management and technical services including information
technology services are provided by VSE and by each of its subsidiaries and
divisions. Subsidiaries include Energetics Incorporated ("Energetics"), Human
Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR")
(formerly VSE Services Corporation ("VSES")), and VSE Services International
Inc. ("VSI") incorporated in August 1999. Divisions include BAV Division
("BAV"), Fleet Maintenance Division ("Fleet Maintenance") formed in June 1999,
VSE IT Services Division ("IT Services") formed in January 1999, Indian Head
Division ("Ordnance"), and Value Systems Services Division ("VSS").
Software products and services include sales of developed software products and
the services related to the installation and use of the software. This is the
primary business of VSE's former subsidiary CMstat Corporation ("CMstat"), sold
in May 1999. (See "Divestiture" below).
<TABLE>
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the changes in these items by segment for the
three and nine month periods ended September 30, 1999 and 1998 (in thousands).
The revenues, pretax losses and net losses of the SPS segment for the three and
nine month periods ended September 30, 1999 include the activity of CMstat
through May 21, 1999.
<CAPTION>
1999
Compared
to
Three Months Nine Months 1998
Ended September 30, Ended September 30, Three Nine
1999 1998 1999 1998 Months Months
------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Engineering, Logistics,
Management and
Technical Services
Segment:
Revenues . . . . . . . $36,609 $44,203 $122,848 $123,419 $(7,594) $ (571)
======= ======= ======== ======== ======= =======
Pretax income . . . . $ 1,124 $ 1,197 $ 2,844 $ 3,316 $ (73) $ (472)
Provision for income
taxes . . . . . . . 449 350 1,132 1,224 99 (92)
------- ------- -------- -------- ------- -------
Net income . . . . . $ 675 $ 847 $ 1,712 $ 2,092 $ (172) $ (380)
======= ======= ======== ======== ======= =======
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
1999
Compared
to
Three Months Nine Months 1998
Ended September 30, Ended September 30, Three Nine
1999 1998 1999 1998 Months Months
------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Software Products and
Services Segment:
Revenues . . . . . . . $ 0 $ 880 $ 902 $ 2,358 $ (880) $(1,456)
======= ======= ======== ======== ======= =======
Pretax loss . . . . . $ 0 $ (285) $(1,478) $ (1,712) $ 285 $ 234
Benefit for income
taxes . . . . . . . 0 (111) (670) (660) 111 (10)
------- ------- ------- -------- ------- -------
Net loss . . . . . . . $ 0 $ (174) $ (808) $ (1,052) $ 174 $ 244
======= ======= ======== ======== ======= =======
</TABLE>
RESULTS OF OPERATIONS
The discussion and analysis which follows is intended to assist in understanding
and evaluating the results of operations, financial condition, and certain other
matters of the company. The company is engaged principally in providing
engineering, testing, and management services to the U.S. Government (the
"government") and software products and related services to commercial
customers. All significant intercompany transactions have been eliminated
in consolidation. Certain prior year balances have been reclassified for
comparative purposes.
Engineering, Logistics, Management and Technical Services Segment
Revenues for this segment declined by less than 1% for the nine month period
ending September 30, 1999, as compared to the same period of 1998. A decrease in
the level of services ordered by HRSI's customers during the first nine months
of 1999 was substantially offset by increased revenues in the company's other
business units. Revenues for the three month period ending September 30, 1999,
decreased by approximately 17% as compared to the same period of 1998. The
decrease in revenues for this three month period is primarily due to the timing
of BAV revenue from quarter to quarter. (See "BAV Contract" below).
Pretax income for this segment decreased by approximately 6% for the three month
period and by approximately 14% for the nine month period ending September 30,
1999, as compared to the same periods of 1998. The decrease for the nine month
period was due primarily to the decrease in work performed by VSE in 1999
without a corresponding timely decrease in indirect costs. In addition to the
sale of the SPS segment (See "Divestiture" below), the company is continuing the
process of restructuring which includes continued emphasis and focus on
decreasing its indirect costs. The decrease in pretax income for the three
month period was due primarily to the decrease in profits associated with the
decline in HRSI revenues in 1999 as compared to 1998.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
The largest customer for the engineering, logistics, management and technical
services rendered by the company is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Army, Navy, and Air Force. VSE's
engineering services revenues have historically been subject to annual
fluctuations resulting from changes in the level of Defense spending.
Accordingly, there can be no assurance that future reductions in Defense
spending will not have a material adverse impact on the company's results of
operations or financial position.
Substantially all of the company's revenues from this segment depend on the
award of new contracts, on current contracts not being terminated for the
convenience of the government, on the exercise of option periods, and the
satisfaction of incremental funding requirements on current contracts. In
1999 and 1998, the company did not experience any termination of contracts for
the convenience of the government or any non-exercise of option periods on
current contracts which were material to the company's ongoing results of
operations or financial position.
BAV Contract. In August 1995, VSE's BAV Division was awarded a contract with
the U.S. Navy to provide engineering, technical and logistical support services
associated with the sale, lease, or transfer of Navy ships to foreign
governments. BAV began work on the contract in September 1995. This contract
has the potential, if all options are exercised, to generate revenues in excess
of one billion dollars over a ten year period from 1995 through 2005.
The contract accounted for approximately 52% and 50% of consolidated revenues
from operations during the nine month periods ending September 30, 1999 and
1998, respectively. The level of revenues generated by this contract will vary
depending on a number of factors including the timing of ship transfers and
associated support services ordered by foreign governments and economic
conditions of potential customers worldwide. The company has experienced
significant quarterly revenue fluctuations and anticipates that future quarterly
revenues will be subject to significant variations primarily due to changes in
the level of activity on this contract.
New Business. The company has been successful in bidding and winning new types
of work in the ELMTS segment. VSE IT Services was formed in January 1999 to bid
and perform on work issued through the government's GSA schedule. This division
was awarded a second purchase agreement in October 1999 to support the U.S.
Navy's Engineering Investigations (EI) safety program related to naval aircraft
and aircraft systems and subsystems, and is expected to begin work in November
1999.
VSI was formed in August 1999 to expand VSE's international presence and perform
services for foreign governments and commercial customers similar to the
services it has traditionally provided in the United States. VSI received its
first work order in September 1999.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
SRR is a part of a joint venture that was awarded a contract associated with a
new government program to dismantle and recycle retired U. S. Navy ships. The
contract award was protested and SRR has not begun work on the contract pending
resolution of the protest.
Software Products and Services Segment
The company sold its CMstat subsidiary in May 1999. (See "Divestiture" below).
The revenues and pretax losses of this segment for the nine month periods ending
September 30, 1999, include the activity of CMstat through May 21, 1999, and the
pretax loss includes a loss on sale. Accordingly, year to year comparisons of
revenue and income for this segment are not meaningful. As a result of the sale
of CMstat, the company will no longer have any active business operations in the
software products and services segment.
Divestiture
On May 21, 1999, VSE sold its wholly owned subsidiary CMstat Corporation which
comprised 100% of the business activity of the SPS segment. Under terms of the
sale, VSE transferred 100% of the outstanding capital stock of CMstat to a
company wholly-owned by CMstat's CEO in exchange for fixed assets valued at
approximately $342 thousand and an $800 thousand promissory note for which
principal and interest is payable in installments between September 1, 1999 and
May 20, 2006. The transaction resulted in a net loss of approximately $574
thousand to VSE.
Liquidity and Capital Resources
Cash and cash equivalents increased by approximately $239 thousand during the
nine month period ended September 30, 1999. Cash from operating activities of
approximately $2 million was used to finance investing activities of
approximately $1.2 million and to reduce financing requirements by approximately
$600 thousand. Significant investing activities included purchases of property
and equipment of approximately $977 thousand. Significant financing activities
included reduced borrowing on the company's bank loan, including commitments
for checks outstanding, of approximately $365 thousand and the payment of cash
dividends of approximately $229 thousand.
A net increase in cash and cash equivalents of approximately $300 thousand
during the nine month period ending September 30, 1998, resulted from
approximately $3.9 million provided by operating activities, approximately $3.2
million used in financing activities, and approximately $400 thousand used in
investing activities. Significant financing activities included reduced
borrowing on the company's bank loan, including commitments for checks
outstanding, of approximately $3.1 million. Significant investing activities
included purchases of property and equipment of approximately $524 thousand.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
The difference between the cash provided by operating activities of
approximately $2 million in 1999 as compared to approximately $3.9 million in
1998 is primarily due to the reduction in assets and liabilities associated with
the sale of CMstat. The effect of the CMstat sale on cash provided by operating
activities was offset somewhat by changes in the levels of accounts receivable
and accounts payable associated with fluctuations in BAV contract activity.
The company's principal requirements for cash are to finance the costs of
operations pending the collection of accounts receivable, to acquire capital
assets for office and computer support, to pay cash dividends, and to finance
internal research and development. Performance of work under the BAV contract
has the potential to cause substantial requirements for cash; however, manage-
ment believes that the cash flows from future operations and the bank loan
commitment are adequate to meet current operating cash requirements.
VSE's requirements for working capital are affected significantly by its
revenues and accounts receivable, which are primarily from billings made by the
company to the government or other government prime contractors for services
rendered. Such accounts receivable generally do not present liquidity or
collection problems. Working capital is also affected by (a) contract
retainages, (b) start-up and termination costs associated with new or completed
contracts, (c) capital equipment requirements, (d) differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company, and (e) profitability.
Government contracts generally require VSE to pay for material and subcontract
costs included in VSE's contract billings prior to receiving payment for such
costs from the government. However, such contracts generally provide for
progress payments on a monthly or semimonthly basis, thereby reducing require-
ments for working capital.
Quarterly cash dividends at the rate of $.036 per share were declared during the
three month period ending September 30, 1999. Pursuant to its bank loan
agreement, the payment of cash dividends by VSE is subject to a maximum annual
rate. VSE has paid cash dividends each year since 1973.
ESOP Advances
During 1998, 1997 and 1996, the company advanced the ESOP trust $112 thousand,
$330 thousand and $350 thousand, respectively, in connection with distributions
made to terminated participants. In December 1998, the company purchased 72,000
shares of VSE stock from the ESOP at market price and the ESOP simultaneously
returned the proceeds of $792 thousand from the stock sale to the company as
repayment of the advances.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Inflation and Pricing Policy
Most of the contracts performed by VSE provide for estimates of future labor
costs to be escalated for any option periods provided by the contracts, while
the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to
be insignificant.
Global Economic Conditions
VSE's business is subject to the risks arising from global economic conditions
associated with potential foreign customers served through VSE's contracts with
the U.S. Government. Adverse economic conditions in certain parts of the world
could potentially affect BAV sales. Management is unable to predict what, if
any, impact such conditions may have on the company's financial position or
results of operations.
Year 2000
Overview. The "Year 2000" issue, or the inability of many computerized systems
to properly recognize a date in the year 2000, could potentially affect the
company's ability to perform many common business functions. The company
recognizes the impact that this could have on its operating and financial
results and has implemented a Year 2000 Action Plan ("Y2K Plan") to address
the issue. The Y2K Plan includes: 1) Assignment of compliance responsibilities
to operating managers, staff directors, information technology staff, contract
administration and procurement staff, and the Comptroller. Additionally, the
company has assigned a Senior Vice President to serve as the Y2K Coordinator,
with responsibility for ensuring development and implementation of the Y2K Plan;
2) Development of a Y2K Communications System to ensure proper information
dissemination and reporting with regard to Year 2000 compliance efforts; and
3) Development and implementation of a Year 2000 Compliance Program ("Y2K
Program").
State of Readiness. Ongoing assessments of the impact of the Year 2000 issue on
systems and operations have been formalized into the Y2K Program. The Y2K
Program includes phases for awareness, inventory and assessment, correction
and renovation (including validation and testing and implementation), and
contingency planning.
Awareness. Managers have been informed about the nature of the Year 2000 problem
and what efforts the company is undertaking to address it. This includes:
distribution of reference materials and lists of vendor certified Year 2000
compliant hardware, equipment, and software; selection of contact points for
each location and organization for Year 2000 compliance issues; and assignment
of responsibility for ensuring that operations are not disrupted or are only
minimally affected. At this time, all of the company's initially
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
identified efforts associated with the awareness phase have been completed.
Additional awareness efforts, if any, will be made as they become known.
Inventory and Assessment. Identification has been made of all "Mission Critical"
actions or functions and of all hardware, equipment, software, and embedded
systems used to conduct the "Mission Critical" actions or functions. "Mission
Critical" is defined as an action or function that must happen in order to
serve a customer or line of business comprising more than 10% of the revenue
base or pre-tax profit of an organization within the company. This phase
includes: 1) Developing inventory listings of all hardware, equipment,
software, embedded systems, operating systems, custom user applications, and
contract obligations having a Year 2000 impact; 2) Analyzing and developing
corrective actions for each of the items on the inventory listings; 3) Procuring
programs and tools to provide compliance for the items on the inventory
listings; and 4) Surveying manufacturers and vendors to obtain certification of
their products as Year 2000 compliant. The inventory and assessment phase is
approximately 100% complete. Analysis of the items on the inventory listing
has been done primarily using internally administered programs supplied by
independent outside sources. Approximately 99% of the hardware, equipment, and
embedded systems and approximately 90% of the software, operating systems,
custom user applications and contract obligations on the inventory listing have
been found to be Year 2000 compliant or have been removed from service.
Correction and Renovation. The items identified in the inventory and assessment
phase have been redesigned, repaired, converted, or replaced, as necessary, to
ensure Year 2000 compliance. Corrections and renovations are documented and this
documentation is distributed to the affected managers and staff. Testing plans
are developed and validation and testing occurs. Risk analysis is conducted
and contingency planning issues are identified. The correction and renovation
phase is approximately 88% completed and is expected to be completed prior to
the end of November of 1999.
Costs. Costs incurred to date for Year 2000 compliance efforts have been
minimal and are included as part of the company's ongoing administrative costs
and have not been separately identified. The company continues to upgrade and
improve its information technology systems as part of its normal effort to
maintain a competitive edge. As these upgrades and improvements are made, the
company is ensuring that all are Year 2000 compliant. Therefore, the majority
of costs incurred for computer systems that ensure Year 2000 compliance are
expenditures that are made in the normal course of business. Total property
and equipment expenditures for 1998, including expenditures for computers and
computer systems, were approximately $1.6 million. Expenditures for 1999 are
expected to remain at about the same level. Accordingly, management believes
that the incremental costs of ensuring that the company's information technology
systems are Year 2000 compliant will not materially affect the company's
consolidated financial position, liquidity, or results of operations through
December 31, 1999.
Risks. The full range of potential risks associated with the Year 2000 issue is
under review. Potential risks include obligations related to contract
performance on current and past contracts, the reliance on infrastructure
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
services to conduct the company's business operations, and the possibility of
liquidity issues caused by payment problems with VSE's banks or government
customers. Although management believes that the risks associated with internal
issues regarding the Year 2000 problem will be minimal, the risks associated
with external issues are difficult to predict. If these external issues cause
massive failures to systems upon which the company is reliant, the results could
materially affect the company's consolidated financial position, liquidity, or
results of operations.
The government agency that pays the majority of the company's billings, the
Defense Finance and Accounting Service ("DFAS"), has issued published assurances
that it is diligently pursuing a Year 2000 compliance strategy and is confident
that its payments to contractors will continue uninterrupted in January 2000.
The company's primary bank has also issued published statements that it is
year 2000 compliant and that banking transaction activity will not be
interrupted.
Contingency Plans. The Y2K Plan calls for the development of contingency plans.
VSE currently has extra borrowing capacity under its bank loan agreement and
intends to maintain this extra borrowing capacity beyond the year 2000 to
provide funding in the event of government customer payment problems.
Contingency plans related to contract performance obligations and to business
operation infrastructure services have been developed in a preliminary form and
are scheduled to be finalized and in place by the first of December 1999. The
company will perform some testing on certain aspects of the contingency plans
during December 1999.
Market Risk
The company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at September 30,
1999.
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 results to differ
materially from those anticipated in the forward looking statements contained
in this statement, see VSE's Securities and Exchange Commission filings
including, but not limited to, VSE's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (Form 10-K), including discussions contained in
VSE's "Letter to Stockholders"; "VSE Operations"; "Description of Business";
"Management Discussion and Analysis"; and "Notes to Consolidated Financial
Statements" in the VSE Corporation 1998 Annual Report incorporated by reference
and attached to VSE's Form 10-K filing.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other
Information" because such other items are not applicable or are not required if
the answer is negative or because the information required to be reported
therein has been previously reported.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
/s/ C. S. WEBER
Date: October 29, 1999 _____________________________________
C. S. Weber, Senior Vice President,
and Secretary
/s/ T. J. CORRIDON
Date: October 29, 1999 _____________________________________
T. J. Corridon, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ T. R. Loftus
Date: October 29, 1999 _____________________________________
T. R. Loftus, Vice President and
Comptroller
(Principal Accounting Officer)
The financial information included in this report reflects all known adjustments
normally determined or settled at year-end which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods. The accompanying notes to consolidated financial statements are an
integral part of this report.
<PAGE>
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