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, 2000 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 27, 2000: 2,122,289.
<PAGE>
<TABLE>
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
------------------------------------------------------------------------------
(in thousands, except share amounts)
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 583 $ 62
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 17,974 19,361
Deferred tax assets . . . . . . . . . . . . . . . 979 927
Other current assets . . . . . . . . . . . . . . . 1,126 974
-------- --------
Total current assets . . . . . . . . . . . . . . 20,662 21,324
Property and equipment, net . . . . . . . . . . . . 3,470 4,377
Deferred tax assets . . . . . . . . . . . . . . . . 803 728
Intangible assets, net . . . . . . . . . . . . . . . 1,203 1,267
Note receivable from business transferred . . . . . 590 665
Other assets . . . . . . . . . . . . . . . . . . . . 2,902 2,889
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 29,630 $ 31,250
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 5,664 $ 8,193
Accrued expenses . . . . . . . . . . . . . . . . 5,767 5,977
Dividends payable . . . . . . . . . . . . . . . . 85 76
-------- --------
Total current liabilities . . . . . . . . . . . 11,516 14,246
Long-term debt . . . . . . . . . . . . . . . . . . . - -
Deferred compensation . . . . . . . . . . . . . . . 1,896 1,859
-------- --------
Total liabilities . . . . . . . . . . . . . . . 13,412 16,105
======== ========
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,194,289 shares in 2000
and 1999 . . . . . . . . . . . . . . . . . . . . 110 110
Paid-in surplus . . . . . . . . . . . . . . . . . 3,894 3,894
Retained earnings . . . . . . . . . . . . . . . . 13,006 11,933
Treasury stock, at cost (72,000 shares in 2000
and 1999) . . . . . . . . . . . . . . . . . . . (792) (792)
-------- --------
Total stockholders' investment . . . . . . . . . 16,218 15,145
-------- --------
Total liabilities and stockholders' investment . $ 29,630 $ 31,250
======== ========
</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>
2000 1999
------------------ ------------------
Three Nine Three Nine
Months Months Months Months
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues, principally from
contracts . . . . . . . . . . . $ 30,484 $ 93,010 $ 36,587 $ 122,819
Costs and expenses of contracts . 30,037 90,648 35,385 119,364
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 447 2,362 1,202 3,455
Selling, general and administrative
expenses . . . . . 27 209 36 528
Loss on CMstat operations . . . . - - - 401
Loss on disposition of CMstat . . - - - 1,098
Interest (income) expense . . . . (85) (32) 42 62
--------- --------- --------- ---------
Income before income taxes . . . 505 2,185 1,124 1,366
Provision for income taxes . . . 197 857 449 462
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 308 $ 1,328 $ 675 $ 904
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .15 $ 0.63 $ .32 $ 0.43
========= ========= ========= =========
Basic weighted average shares
outstanding 2,122,289 2,122,289 2,115,061 2,114,967
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .15 $ 0.63 $ .32 $ 0.43
========= ========= ========= =========
Diluted weighted average shares
outstanding 2,122,289 2,122,289 2,115,061 2,114,967
========= ========= ========= =========
</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
Shares Amount Surplus Earnings Stock
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 . . . . 2,187 $ 109 $ 3,832 $ 10,703 $ (792)
Net income
for the year . . . . . . -- -- -- 1,534 --
Issuance of stock . . . . . 7 1 62 -- --
Dividends declared
($.144) . . . . . . . . . -- -- -- (304) --
----- ------ ------- -------- -------
Balance at
December 31, 1999 . . . . 2,194 110 3,894 11,933 (792)
Net income
for the period . . . . . -- -- -- 1,328 --
Dividends declared
($.12) . . . . . . . . . -- -- -- (255) --
----- ------ ------- -------- -------
Balance at
September 30, 2000 . . . 2,194 $ 110 $ 3,894 $ 13,006 $ (792)
===== ====== ======= ======== =======
</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>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 1,328 $ 904
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 1,205 1,277
Loss on sale of property and equipment . . . . . . . 7 -
Deferred compensation plan expense . . . . . . . . . 53 34
Net payments of deferred compensation . . . . . . . . (54) (183)
Change in Deferred taxes . . . . . . . . . . . . . . (127) (980)
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 1,387 11,154
Other current assets and noncurrent assets . . . . . (186) 1,223
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . (2,491) (5,453)
Accrued expenses . . . . . . . . . . . . . . . . . . (210) 575
Net liabilities of business transferred under
contractual arrangements . . . . . . . . . . . . . - (6,744)
------- -------
Net cash provided by operating activities 912 1,807
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (220) (977)
Proceeds from note receivable from business transferred 75 -
------- -------
Net cash used in investing activities (145) (977)
------- -------
Cash flows from financing activities:
Net payments of bank loan . . . . . . . . . . . . . . . - (365)
Issuance of common stock . . . . . . . . . . . . . . . . - 3
Cash dividends paid . . . . . . . . . . . . . . . . . . (246) (229)
------- -------
Net cash used in financing activities (246) (591)
------- -------
Net increase in cash and cash equivalents . . . . . . . . 521 239
Cash and cash equivalents at beginning of period . . . . 62 49
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 583 $ 288
======= =======
</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 three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the company
currently holds no derivative instruments and does not engage in hedging
activities, the company expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition In Financial Statements" ("SAB
No. 101"). SAB No. 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria; persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's price
to the buyer is fixed or determinable, and collectibility is reasonably assured.
The company does not believe that the adoption of SAB No. 101 will have a
material effect on its financial position or result of operations.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Divestiture
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.
The sale is a divestiture for legal and tax purposes. For accounting purposes,
the sale is not afforded 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 is primarily dependent on the buyer's ability
to repay the promissory note.
In accordance with SAB No. 30, the company continues to assess the
recoverability of the promissory note balance based upon CMstat's operating
results. The current promissory note balance as of September 30, 2000 is
approximately $688 thousand.
As prescribed by SAB No. 30, the revenues, costs and expenses and cash flows
for the SPS segment for the three and nine month periods ended September 30,
1999, have been excluded from the respective captions in the Consolidated
Statements of Operations, Balance Sheets, Cash Flows and related footnotes.
As such, the results of operations for the SPS segment are reflected as a single
line item "Loss on CMstat operations" in the Consolidated Statements of
Operations for each year presented. Additionally, a $1,098 thousand loss from
the disposal of CMstat was recognized for the year ended December 31, 1999.
Debt
VSE has a revolving bank loan agreement that contains certain financial
covenants. Under the agreement, VSE can borrow up to $30 million, subject to a
borrowing formula based on billed receivables. Interest is charged at a prime-
based rate or an optional LIBOR-based rate. Commitment fees are charged on the
unused portion of the revolving loan commitment. The termination date of the
revolving loan is May 31, 2002. The loan agreement contains collateral
requirements by which company assets secure amounts outstanding, restrictive
covenants that include minimum tangible net worth and cash flow coverage ratio
requirements, a limit on annual dividends, and limits on investments and loans
to certain affiliates.
Due to losses incurred by VSE's CMstat subsidiary, the company was not in
compliance with certain original loan covenants during 1999. The company's banks
amended the loan agreement to restate certain terms and conditions of the loan,
including the covenants with which the company was not compliant. The company
was in compliance during 2000 and 1999 with all covenants of the loan agreement
as amended.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 (see "Divestiture" above).
<TABLE>
The following table presents revenues and other financial information by
business segment for the three and nine month periods ended September 30, 2000
and September 30, 1999, in thousands:
<CAPTION>
Nine Months
Ended Effect of
September 30, 2000 ELMTS SPS Subtotal Disposition Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 93,010 $ - $ 93,010 $ - $ 93,010
Interest income (32) - (32) - (32)
Depreciation and
amortization 1,205 - 1,205 - 1,205
Loss on disposition
of CMstat - - - - -
Operating income 2,185 - 2,185 - 2,185
Expenditures for
capital assets 377 - 377 - 377
Assets 29,630 - 29,630 - 29,630
Nine Months
Ended Effect of
September 30, 1999 ELMTS SPS Subtotal Disposition Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $122,819 $ 902 $123,721 $(902) $122,819
Interest expense 62 128 190 (128) 62
Depreciation and
amortization 1,277 105 1,382 (105) 1,277
Loss on disposition
of CMstat - 1,098 1,098 - 1,098
Operating income
(loss) 2,844 (1,478) 1,366 - 1,366
Expenditures for
capital assets 1,158 25 1,183 (25) 1,158
Assets 35,787 - 35,787 - 35,787
Three Months
Ended Effect of
September 30, 2000 ELMTS SPS Subtotal Disposition Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 30,484 $ - $ 30,484 $ - $ 30,484
Interest expense (85) - (85) - (85)
Depreciation and
amortization 403 - 403 - 403
Loss on disposition
of CMstat - - - - -
Operating income 505 - 505 - 505
Expenditures for
capital assets 83 - 83 - 83
Assets 29,630 - 29,630 - 29,630
Three Months
Ended Effect of
September 30, 1999 ELMTS SPS Subtotal Disposition Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 36,587 $ - $ 36,587 $ - $ 36,587
Interest expense 42 - 42 - 42
Depreciation and
amortization 433 - 433 - 433
Loss on disposition
of CMstat - - - - -
Operating income
(loss) 1,124 - 1,124 - 1,124
Expenditures for
capital assets 339 - 339 - 339
Assets 35,787 - 35,787 - 35,787
</TABLE>
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
During 2000, VSE and its subsidiaries and divisions operate in one reportable
segment, the engineering, logistics, management and technical services segment
("ELMTS"). The company had two reportable segments, ELMTS and the software
products and services segment ("SPS") for the year 1999. The term "VSE" or
"company" means VSE and its subsidiaries and divisions unless the context
indicates operations of the parent company only.
Software products and services in 1999 included 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" above).
<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, 2000 and 1999 (in thousands):
<CAPTION>
2000
Compared
to
Three Months Nine Months 1999
Ended September 30, Ended September 30, Three Nine
2000 1999 2000 1999 Months Months
------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Engineering, Logistics,
Management and
Technical Services
Segment:
Revenues . . . . . . . $30,484 $36,587 $93,010 $122,819 $(6,103) $(29,809)
======= ======= ======= ======== ======= ========
Pretax income . . . . $ 505 $ 1,124 $ 2,185 $ 2,844 $ (619) $ (659)
Provision for income
taxes . . . . . . . 197 449 857 1,132 (252) (275)
------- ------- ------- -------- ------- --------
Net income . . . . . $ 308 $ 675 $ 1,328 $ 1,712 $ (367) $ (384)
======= ======= ======= ======== ======= ========
Software Products and
Services Segment:
Revenues . . . . . . . $ - $ - $ - $ 902 $ - $ (902)
======= ======= ======= ======== ======= ========
Pretax loss . . . . . $ - $ - $ - $(1,478) $ - $ 1,478
Benefit for income
taxes . . . . . . . - - - (670) - 670
------- ------- ------- -------- ------- --------
Net loss . . . . . . . $ - $ - $ - $ (808) $ - $ 808
======= ======= ======= ======== ======= ========
</TABLE>
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
RESULTS OF OPERATIONS
The discussion and analysis which follow are 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, logistics, management and technical services to the U.S. Government
(the "government") and other government prime contractors. 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 approximately 17% and 24%, respectively,
for the three month and nine month periods ended September 30, 2000, as compared
to the same periods of 1999. The decreases in revenues were primarily due to a
decrease in the level of services ordered under a contract performed by the BAV
Division (see "BAV Contract" below). Other factors contributing to the decrease
are the expiration of a contract performed by the VSS Division (see "VSS
Contract" below), reduced sales by the company's Energetics subsidiary, and a
reduction in revenue associated with the company's sale of its HRSI Health Care
Division contracts (see "HRSI Contracts" under "Divestitures" below).
Pretax income for this segment decreased by approximately 55% and 23%,
respectively, for the three and nine month periods ended September 30, 2000, as
compared to the same periods of 1999. This decrease was primarily due to the
decreased revenues of BAV, VSS, and Energetics. Pretax income for the three
month period were further decreased due to start-up costs associated with VSE's
new Telecommunications Technologies Division (see "New Business" below). This
decrease in pretax income was partially offset by an improved profit margin on
remaining VSE (parent) contracts due to cost reductions implemented in 1999.
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 any future reductions in Defense
spending will not have a material adverse impact on the company's results of
operations or financial condition.
The company's revenues depend on the ability of the company to win new contracts
and on the amount of work ordered by the government under the company's existing
contracts. The company's ability to win new contracts is affected by government
acquisition policies and procedures, including government procurement practices
that in recent years have tended toward bundling work efforts under large
comprehensive ("omnibus") management contracts. This emphasis on large contracts
presents challenges to winning new contract work, including making it more
difficult for the company to qualify as a bidder, increases in the level of
competition due to the award of fewer
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
contracts, and forcing the company into competition with larger organizations
that have greater financial resources and larger technical staffs. Other
government procurement practices that can affect the company's revenues are
the use of past performance criteria that may preclude entrance into new
government markets and government social programs that limit contract work to
small, woman, or minority owned businesses. Additional risk factors that could
potentially affect the company's revenues 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.
Several of the company's operating divisions were formed in recent years to bid
on and perform contract work that had been traditionally performed by VSE
(parent company). This organization has enabled the company to use an operating
structure that is better suited to perform certain types of contract work. The
company anticipates that it will continue using its operating divisions to bid
and perform new contract work to better serve the needs of customers. As the use
of operating divisions for new contracts increases, the company expects that the
revenue of VSE (the parent company) will be reduced in the future as parent
company contracts are replaced by operating division contracts. 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.
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. The contract accounted
for approximately 40% and 51% of consolidated revenues from operations during
the nine month periods ended September 30, 2000 and 1999, respectively. The
level of revenues 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.
VSS Contract. 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 began work on this
contract in 1994 and the last option year was scheduled to end in 1999. The
government extended the contract through April 28, 2000. VSS was not awarded
the successor contract and work on this contract effort terminated as of
April 28, 2000. The contract accounted for a majority of the work in the VSS
Division during the period from 1995 through 1999, but represented less than
10% of the company's revenues during this time. VSS continues to perform work on
other contracts.
New Business. VSE has begun several new business initiatives during 2000 and
1999. The company expects each of these new business initiatives to contribute
to future revenue growth.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
In January 1999, VSE formed the GSA Services Division to bid on and perform work
issued through the government's Federal Supply Schedule Program. The GSA
Services Division has been awarded three purchase agreements since inception and
is actively pursuing additional work.
In June 1999, VSE formed VSE's Ship Remediation and Recycling, Inc. ("SRR") to
pursue business opportunities associated with dismantling ships that are no
longer usable. SRR is a partner in a joint venture that was awarded a contract
associated with a new government program to dismantle and recycle inactive U.S.
Navy ships. The contract requires the joint venture to dismantle U.S. Navy ships
and recover costs by selling salvageable materials and parts. Work on this
contract began in February 2000.
In August 1999, VSE formed VSE Services International, Inc. ("VSI") 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.
In August 2000, VSE formed Telecommunications Technologies Division ("TTD") to
continue a strategy to support customers with effective knowledge management and
information technology solutions. TTD markets the company's growing capability
to provide customers with the latest products, services, and support in network,
multimedia, and audio-visual technology. TTD specializes in maintaining and
staffing products and services to create state of the art, network and multi-
media technology systems. This includes "turnkey" design, installation,
management and support for a wide variety of voice, data, multimedia and related
projects.
Divestitures
See "Divestiture" section of "Notes to Consolidated Financial Statements."
HRSI Contracts. On July 2, 2000, HRSI sold its Health Care Division and two
associated contracts. The purchase price for the Health Care Division and the
revenues and losses generated by these contracts were not material to VSE.
Liquidity and Capital Resources
Cash and cash equivalents increased by approximately $500 thousand during the
nine month period ended September 30, 2000. Cash provided by operating
activities contributed approximately $900 thousand. Cash used in financing
activities was approximately $200 thousand and cash used in investing activities
was approximately $200 thousand. Financing activities consisted of cash
dividends paid. Investing activities consisted primarily of purchases of
property and equipment, net of dispositions.
Cash and cash equivalents increased by approximately $200 thousand during
the nine month period ended September 30, 1999. Cash provided by operating
activities contributed approximately $1.8 million. Cash used in investing
activities was approximately $1 million and cash used in financing activities
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
was approximately $600 thousand. Investing activities consisted of purchases of
property and equipment, net of dispositions. Significant financing activities
included decreased borrowing on the company's bank loan of approximately $400
thousand and cash dividends paid of approximately $200 thousand.
The difference between cash provided by operating activities of approximately
$900 thousand in 2000 as compared to cash provided by operating activities of
approximately $1.8 million in 1999 is primarily due to changes in the levels of
accounts receivable and accounts payable associated with fluctuations in BAV
contract activity and to changes in certain asset and liability accounts
resulting from the sale of CMstat in 1999.
The company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
accounts receivable from period to period and from profitability. Significant
increases or decreases in revenue and accounts receivable can cause significant
increases or decreases in internal liquidity. The decrease in revenues and
associated accounts receivable in the current year has resulted in an increase
in internally generated cash flows. 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. The company has made use of recent electronic billing and payment
initiatives implemented by the government to decrease the time to collect billed
accounts receivable, thereby improving internal liquidity. Accounts receivable
levels can also be affected by contract retainages, start-up and termination
costs associated with new or completed contracts, and differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company. Internal liquidity is also affected by the
acquisition of capital assets for office and computer support and by the payment
of cash dividends. Purchases of
capital assets for office and computer support have not varied significantly in
recent years.
Quarterly cash dividends at the rate of $.04 per share were declared during the
nine month period ended September 30, 2000. Pursuant to its bank loan agree-
ment, the payment of cash dividends by VSE is subject to a maximum annual rate.
VSE has paid cash dividends each year since 1973.
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
"Debt" section 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 $30 million
dollars as of the quarter ended September 30, 2000.
Performance of work under the BAV contract has the potential to cause
substantial requirements for cash; however, management believes that the cash
flows from future operations and the bank loan commitment are adequate to meet
current operating cash requirements.
<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 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. For example, an economic slowdown in countries served under
the BAV contract could potentially affect BAV sales. Severe adverse global
economic conditions could potentially have a material adverse impact on the
company's results of operations.
Year 2000
The company is not currently aware of any Year 2000 issues that have affected
its business. Costs incurred to date for Year 2000 readiness efforts have been
minimal and are included as part of the company's ongoing administrative costs
and have not been separately identified. There are no unbudgeted expenditures
expected to occur in the future.
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,
2000.
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 discussions contained in VSE's "Letter to Stockholders",
"Narrative Description of Business", and "Notes to Consolidated Financial
Statements" contained in VSE's Annual Report and Form 10-K for the fiscal year
ended December 31, 1999 (Form 10-K) filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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 subsequent Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K filed by the company.
<PAGE>
VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule
Exhibit 3.2 By-Laws of VSE Corporation as amended through May 16,
2000
(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 27, 2000 _______________________________________
C. S. Weber, Executive Vice President
and Chief Financial Officer
/s/ T. R. Loftus
Date: October 27, 2000 _______________________________________
T. R. Loftus, Senior 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>
