SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 August 1, 1999: 2,114,905.
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 58 $ 49
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 25,857 34,105
Deferred tax assets . . . . . . . . . . . . . . . 995 403
Other current assets . . . . . . . . . . . . . . . 1,610 1,266
-------- --------
Total current assets . . . . . . . . . . . . . . 28,520 35,823
Property and equipment, net . . . . . . . . . . . . 4,773 4,480
Deferred tax assets . . . . . . . . . . . . . . . . 322 208
Intangible assets, net . . . . . . . . . . . . . . . 1,269 2,836
Other assets . . . . . . . . . . . . . . . . . . . . 2,714 2,777
Assets of business transferred under contractual
arrangements . . . . . . . . . . . . . . . . . . . 800 1,124
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 38,398 $ 47,248
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 1,333 $ 1,333
Accounts payable and other current liabilities . . 8,645 12,063
Accrued expenses . . . . . . . . . . . . . . . . 6,620 5,935
Dividends payable . . . . . . . . . . . . . . . . 76 77
Net liabilities of business transferred
under contractual arrangements . . . . . . . . . 0 6,747
-------- --------
Total current liabilities . . . . . . . . . . . 16,674 26,155
Long-term debt . . . . . . . . . . . . . . . . . . . 6,006 5,370
Deferred compensation . . . . . . . . . . . . . . . 1,788 1,871
-------- --------
Total liabilities . . . . . . . . . . . . . . . 24,468 33,396
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,186,905 shares in 1999
and 1998 . . . . . . . . . . . . . . . . . . . . 109 109
Paid-in surplus . . . . . . . . . . . . . . . . . 3,832 3,832
Retained earnings . . . . . . . . . . . . . . . . 10,781 10,703
Treasury stock, at cost (72,000 shares in 1999
and 1998) . . . . . . . . . . . . . . . . . . . (792) (792)
-------- --------
Total stockholders' investment . . . . . . . . . 13,930 13,852
-------- --------
Total liabilities and stockholders' investment . $ 38,398 $ 47,248
======== ========
</TABLE>
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three and six months ended June 30,
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
1999 1998
-------------------- --------------------
Three Six Three Six
Months Months Months Months
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, principally from
contracts . . . . . . . . . . . $ 46,050 $ 86,239 $ 38,385 $ 79,216
Costs and expenses of contracts . 44,586 83,979 37,111 76,705
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 1,464 2,260 1,274 2,511
Selling, general and administrative
expenses . . . . . . . . . . . 333 492 161 296
Loss on CMstat operations . . . . 1,183 1,499 720 1,508
Interest expense . . . . . . . . 67 27 33 15
--------- --------- --------- ---------
Pretax income (loss). . . . . . . (119) 242 360 692
Provision (benefit) for income
taxes . . . . . . . . . . . . . (142) 13 171 325
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 23 $ 229 $ 189 $ 367
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .01 $ 0.11 $ 0.09 $ 0.17
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .01 $ 0.11 $ 0.09 $ 0.17
========= ========= ========= =========
Weighted average shares
outstanding: 2,114,905 2,114,905 2,132,061 2,130,353
========= ========= ========= =========
</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
($.144) . . . . . . . -- -- -- (314) -- --
------ ------ ------- -------- ------- --------
Balance at
December 31, 1998 . . 2,187 109 3,832 10,703 (792) 0
Net income
for the period . . . -- -- -- 229 -- --
Dividends declared
($.072) . . . . . . . -- -- -- (151) -- --
------ ------ ------- -------- ------- --------
Balance at
June 30, 1999 . . . . 2,187 $ 109 $ 3,832 $ 10,781 $ (792) $ 0
====== ====== ======= ======== ======= ========
</TABLE>
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the six months ended June 30,
- -----------------------------------------------------------------------------
(in thousands)
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 229 $ 367
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 844 759
Deferred compensation plan expense . . . . . . . . . . 23 72
Change in assets and liabilities
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 8,248 (1,689)
Other current assets and noncurrent assets . . . . . 1,157 (919)
Deferred taxes, net . . . . . . . . . . . . . . . . (706) 381
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . (3,437) (3,443)
Accrued expenses. . . . . . . . . . . . . . . . . . . 685 286
Net liabilities of business transferred under
contractual arrangements . . . . . . . . . . . . . (6,765) 958
------- -------
Net cash provided by (used in)
operating activities 278 (3,228)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . . (666) (220)
Net (payments of) proceeds from deferred compensation . . (87) 119
------- -------
Net cash used in investing activities (753) (101)
------- -------
Cash flows from financing activities:
Net proceeds from bank loan . . . . . . . . . . . . . . . 636 3,710
Stock grants . . . . . . . . . . . . . . . . . . . . . . 0 202
Advance to ESOP . . . . . . . . . . . . . . . . . . . . 0 (112)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (152) (158)
------- -------
Net cash provided by financing activities 484 3,642
------- -------
Net increase in cash and cash equivalents . . . . . . . . 9 313
Cash and cash equivalents at beginning of period . . . . 49 15
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 58 $ 328
======= =======
</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 six month period ended June 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.
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.
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
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Income. 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.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments are
strategic business units that offer different products and services. They
are managed separately because each business requires different technology and
marketing strategies. The software products and services segment was acquired
as a unit, and the management has been maintained separately since the
acquisition.
<TABLE>
The following table presents revenues and other financial information by
business segment for the three and six month periods ended June 30, 1999 and
June 30, 1998, in thousands:
<CAPTION>
Three months ended June 30, 1999 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 46,050 $ 174 $46,224
Interest expense 27 40 67
Depreciation and amortization 423 39 462
Operating income (loss) 1,103 (1,222) (119)
Expenditures for capital assets 461 12 473
Six months ended June 30, 1999 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 86,239 $ 902 $87,141
Interest expense 27 128 155
Depreciation and amortization 844 105 949
Operating income (loss) 1,720 (1,478) 242
Expenditures for capital assets 819 25 844
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended June 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 38,385 $ 645 $39,030
Interest expense 15 136 151
Depreciation and amortization 379 61 440
Operating income (loss) 1,080 (720) 360
Expenditures for capital assets 107 27 134
Six months ended June 30, 1998 ELMTS SPS Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers $ 79,216 $1,478 $80,694
Interest expense 15 237 252
Depreciation and amortization 759 121 880
Operating income (loss) 2,119 (1,427) 692
Expenditures for capital assets 222 33 255
</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 including Energetics Incorporated ("Energetics"), Human Resource
Systems, Inc. ("HRSI"), BAV Division ("BAV"), Fleet Maintenance Division
("Fleet Maintenance") formed in June 1999, GSA IT Services Division formed in
January 1999, Indian Head Division ("Ordnance"), and Value Systems Services
Division ("VSS"), unincorporated divisions of VSE. One other VSE subsidiary,
Ship Remediation and Recycling, Inc. ("SRR") (formerly VSE Services Corporation
("VSES")) is not currently active.
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 six month periods ended June 30, 1999 and 1998 (in thousands). The
revenues, pretax losses and net losses of the SPS segment for the three and six
month periods ended June 30, 1999 include the activity of CMstat through May 21,
1999.
<CAPTION>
1999
Compared
to
Three Months Six Months 1998
Ended June 30, Ended June 30, Three Six
1999 1998 1999 1998 Months Months
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Engineering, Logistics,
Management and
Technical Services
Segment:
Revenues . . . . . . . $46,050 $38,385 $86,239 $79,216 $ 7,665 $7,023
======= ======= ======= ======= ======= ======
Pretax income . . . . $ 1,103 $ 1,080 $ 1,720 $ 2,119 $ 23 $ (399)
Provision for income
taxes . . . . . . . 413 433 683 874 (20) (191)
------- ------- ------- ------- ------- ------
Net income . . . . . $ 690 $ 647 $ 1,037 $ 1,245 $ 43 $ (208)
======= ======= ======= ======= ======= ======
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Software Products and
Services Segment:
Revenues . . . . . . . $ 174 $ 645 $ 902 $ 1,478 $ (471) $ (576)
======= ======= ======= ======= ======= ======
Pretax loss . . . . . $(1,222) $ (720) $(1,478) $(1,427) $ (502) $ (51)
Benefit for income
taxes . . . . . . . (555) (262) (670) (549) (293) (121)
------- ------- ------- ------- ------- ------
Net loss . . . . . . . $ (667) $ (458) $ (808) $ (878) $ (209) $ 70
======= ======= ======= ======= ======= ======
</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 for the three and six month periods ending June 30,
1999 increased by approximately 20% and 9%, respectively, as compared to the
same periods of 1998. The increase in revenues is primarily due to the timing
of BAV revenue from quarter to quarter. (See "BAV Contract" below). The
increase in revenue was partially offset by a decrease in the revenue of VSE.
Pretax income for this segment increased by approximately 2% for the three month
period and decreased by approximately 19% for the six month period ended
June 30, 1999 as compared to the same periods of 1998. The decrease for the
six 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 increase for the three month period
was due to the increased profitability of BAV and some of the other VSE
divisions, which offset the reduced profitability of VSE.
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.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 56% and 50% of consolidated revenues
from operations during the six month periods ended June 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.
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 three and six month
periods ended June 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. The company's
1999 quarterly operating results for the SPS segment, are therefore not a good
indicator of future quarterly results.
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 approximately 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.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Liquidity and Capital Resources
Cash and cash equivalents increased by approximately $10 thousand during the six
month period ended June 30, 1999. Cash used in investing activities of
approximately $750 thousand was financed by cash provided by financing
activities of approximately $480 thousand and cash provided by operating
activities of approximately $280 thousand. Significant investing activities
included purchases of property and equipment of approximately $670 thousand.
Significant financing activities included increased borrowing on the company's
bank loan, including commitments for checks outstanding, of approximately $640
thousand.
A net increase in cash and cash equivalents of approximately $310 thousand
during the six month period ended June 30, 1998 resulted from approximately
$3.6 million provided by financing activities, approximately $3.2 million used
in operating activities and approximately $100 thousand used in investing
activities.
Significant financing activities included increased borrowing on the company's
bank loan, including commitments for checks outstanding, of approximately $3.7
million. Significant investing activities included purchases of property and
equipment of approximately $220 thousand.
The difference between the cash provided by operating activities of
approximately $280 thousand in 1999 as compared to the cash used in operating
activities of approximately $3.2 million in 1998 is primarily due to the
reduction in assets associated with the sale of CMstat and to 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 term loan
and revolving 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.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Quarterly cash dividends at the rate of $.036 per share were declared during the
three month period ended June 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.
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
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 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.
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 10% completed and is expected to be completed prior to November
of 1999.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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
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.
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 will be developed prior to December of 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 June 30,
1999.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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.
On May 26, 1999, the Registrant filed a Current Report on Form 8-K
reporting the sale of its software products and services business segment, which
consists of the operations of CMstat Corporation ("CMstat"), to a company wholly
owned by CMstat's CEO, John S. Daley.
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: August 13, 1999 -------------------------------------
C. S. Weber, Senior Vice President,
and Secretary
/s/ T. J. CORRIDON
Date: August 13, 1999 -------------------------------------
T. J. Corridon, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ T. R. Loftus
Date: August 13, 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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