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, 2001 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 July 31, 2001: 2,145,863.
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
June 30, December 31,
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 585 $ 647
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 18,303 19,215
Deferred tax assets . . . . . . . . . . . . . . . 935 853
Other current assets . . . . . . . . . . . . . . . 2,112 1,533
-------- --------
Total current assets . . . . . . . . . . . . . . 21,935 22,248
Property and equipment, net . . . . . . . . . . . . 3,512 3,336
Deferred tax assets . . . . . . . . . . . . . . . . 841 847
Intangible assets, net . . . . . . . . . . . . . . . 1,978 2,134
Other assets . . . . . . . . . . . . . . . . . . . . 2,916 2,958
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 31,182 $ 31,523
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 6,448 $ 8,678
Accrued expenses . . . . . . . . . . . . . . . . 5,161 5,121
Dividends payable . . . . . . . . . . . . . . . . 85 85
-------- --------
Total current liabilities . . . . . . . . . . . 11,694 13,884
Long-term debt . . . . . . . . . . . . . . . . . . . 1,338 -
Deferred compensation . . . . . . . . . . . . . . . 1,798 1,846
-------- --------
Total liabilities . . . . . . . . . . . . . . . 14,830 15,730
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,145,863 shares in 2001
and 2,197,863 shares in 2000 . . . . . . . . . . 107 110
Paid-in surplus . . . . . . . . . . . . . . . . . 3,264 3,914
Retained earnings . . . . . . . . . . . . . . . . 12,981 12,561
Treasury stock, at cost (72,000 shares in 2000). . - (792)
-------- --------
Total stockholders' investment . . . . . . . . . 16,352 15,793
-------- --------
Total liabilities and stockholders' investment . $ 31,182 $ 31,523
======== ========
The accompanying notes are an integral part of these financial statements.
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)
Three Months Six Months
2001 2000 2001 2000
---- ---- ---- ----
Revenues, principally from
contracts . . . . . . . . . . . $ 24,633 $ 31,435 $ 55,075 $ 62,511
Costs and expenses of contracts . 24,010 30,765 53,958 60,600
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 623 670 1,117 1,911
Selling, general and administrative
expenses . . . . . 64 24 113 192
Interest expense (income) . . . . 14 (13) 29 39
--------- --------- --------- ---------
Income before income taxes . . . 545 659 975 1,680
Provision for income taxes . . . 211 257 385 660
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 334 $ 402 $ 590 $ 1,020
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .16 $ .19 $ .28 $ .48
========= ========= ========= =========
Basic weighted average shares
outstanding 2,130,863 2,122,289 2,128,720 2,122,289
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .16 $ .19 $ .28 $ .48
========= ========= ========= =========
Diluted weighted average shares
outstanding 2,130,863 2,122,289 2,128,720 2,122,289
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- -------------------------------------------------------------------------------
(in thousands)
Common Stock Paid-In Retained Treasury
Shares Amount Surplus Earnings Stock
------ ------ ------- -------- -----
Balance at
December 31, 1999 . . . . 2,194 $ 110 $ 3,894 $ 11,933 $ (792)
Net income
for the year . . . . . . -- -- -- 968 --
Issuance of stock . . . . . 4 -- 20 -- --
Dividends declared
($.16) . . . . . . . . . -- -- -- (340) --
----- ------ ------- -------- -------
Balance at
December 31, 2000 . . . . 2,198 110 3,914 12,561 (792)
Net income
for the period . . . . . -- -- -- 590 --
Issuance of
Treasury stock . . . . . -- -- (81) -- 220
Retirement of
Treasury stock . . . . . (52) (3) (569) -- 572
Dividends declared
($.08) . . . . . . . . . -- -- -- (170) --
----- ------ ------- -------- -------
Balance at
June 30, 2001 . . . . . . 2,146 $ 107 $ 3,264 $ 12,981 $ --
===== ====== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the six months ended June 30,
- -------------------------------------------------------------------------------
(in thousands)
2001 2000
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 590 $ 1,020
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 754 802
Loss (gain) on sale of property and equipment . . . 26 (114)
Deferred compensation plan expense . . . . . . . . . 25 35
Net payments of deferred compensation . . . . . . . . (73) (89)
Change in Deferred taxes . . . . . . . . . . . . . . (76) 133
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 912 591
Other current assets and noncurrent assets . . . . . (537) (2,308)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . (2,230) (1,713)
Accrued expenses . . . . . . . . . . . . . . . . . . 40 (239)
------- -------
Net cash (used in) operating activities (569) (1,882)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (800) (45)
Proceeds from note receivable from business transferred - 50
------- -------
Net cash (used in) provided by investing activities (800) 5
------- -------
Cash flows from financing activities:
Net proceeds from bank loan . . . . . . . . . . . . . . 1,338 2,695
Cash dividends paid . . . . . . . . . . . . . . . . . . (170) (161)
Issuance of common stock . . . . . . . . . . . . . . . . 139 -
------- -------
Net cash provided by financing activities 1,307 2,534
------- -------
Net (decrease) increase in cash and cash equivalents . . . (62) 657
Cash and cash equivalents at beginning of period . . . . 647 62
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 585 $ 719
======= =======
The accompanying notes are an integral part of these financial statements.
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 six
month periods ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. 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, 2000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"). SFAS No. 141 requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method. The company does not
anticipate that adoption of SFAS No. 141 will have a material impact, either
positive or negative, on future results of operations or financial condition.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing
goodwill and intangible assets. Under SFAS 142, goodwill will no longer be
subject to amortization over its estimated useful life and intangible assets
with indefinite lives will no longer be amortized over an arbitrary number of
years. The effective date for VSE's implementation of SFAS No. 142 is
January 1, 2002. The company does not anticipate that adoption of SFAS
No. 142 will have a material impact, either positive or negative, on future
results of operations or financial condition.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt
VSE has a revolving loan agreement with a bank on which the company can borrow
up to $15 million, subject to a borrowing formula based on billed receivables.
Under terms of the agreement, the company pays a fixed amount annual
commitment fee and interest on any borrowings at a prime-based rate or an
optional LIBOR-based rate. The expiration date of the revolving loan is
May 31, 2003. The loan agreement contains collateral requirements by which
company assets secure amounts outstanding, restrictive covenants that include
minimum tangible net worth and profitability requirements, a limit on annual
dividends, and other affirmative and negative covenants. This loan agreement
replaced the previous loan agreement that had a maximum commitment of $30
million dollars. The company determined that the new loan agreement was
adequate to cover current and future liquidity requirements.
Litigation
In June 2001 a personal injury lawsuit was filed against VSE, Astoria Metals
Corporation ("AMC"), Ship Dismantlement and Recycling Joint Venture,
Earth Tech, Inc., and Tyco International Ltd. in the Superior Court of the
State of California for the County of Alameda (Case No. 835601-7). While the
plaintiffs' complaint does not specify the amount of alleged damages suffered,
the plaintiffs have provided the defendants with a notice of damages
aggregating approximately $20 million. VSE believes that it has meritorious
defenses to the plaintiffs' claims and intends to contest the lawsuit
vigorously. While there is no assurance, VSE believes that the resolution of
the lawsuit will not have a material adverse effect on VSE's consolidated
financial position or results of operations.
The company and its subsidiaries have, in the normal course of business,
certain other claims against them and against other parties. In the opinion
of management, the resolution of these claims will not have a material adverse
effect on the company's results of operations or financial position.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
The term "VSE" or "company" means VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only. VSE's
business operations consist of the operations of the parent company,
operations of the company's wholly owned subsidiaries and operations of the
company's divisions. Wholly owned subsidiaries include Energetics Incorporated
("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and
Recycling, Inc. ("SRR") and VSE Services International, Inc. ("VSI").
Operations of unincorporated divisions include BAV Division ("BAV"), Ordnance
Division ("Ordnance"), Value Systems Services Division ("VSS"), Fleet
Maintenance Division ("Fleet Maintenance"), Telecommunications Technologies
Division ("TTD") beginning in September 2000, GSA Services Division ("GSA
Services"), and Land Systems Division ("Land Systems") beginning in February
2001.
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the changes in these items for the three and
six month periods ended June 30, 2001 and 2000 (in thousands):
2001
Compared
to
Three Months Six Months 2000
Ended June 30, Ended June 30 ----------------
-------------- ------------- Three Six
2001 2000 2001 2000 Months Months
---- ---- ---- ---- ------ ------
Revenues . . . . . . . $24,633 $31,435 $55,075 $62,511 $(6,802) $(7,436)
======= ======= ======= ======= ======= =======
Pretax income . . . . $ 545 $ 659 $ 975 $ 1,680 $ (114) $ (705)
Provision for income
taxes . . . . . . . 211 257 385 660 (46) (275)
------- ------- ------- ------- ------- -------
Net income . . . . . $ 334 $ 402 $ 590 $ 1,020 $ (68) $ (430)
======= ======= ======= ======= ======= =======
The discussion and analysis that follow are intended to assist in
understanding and evaluating the results of operations, financial condition,
and certain other matters of the company. 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.
Results of Operations
Revenues declined by approximately 21% and 12%, respectively, for the three
month and six month periods ended June 30, 2001, as compared to the same
periods of 2000. The decrease in revenues was primarily due to a decrease in
the level of services ordered under the BAV contract (see "BAV Contract"
below), the expiration of contracts performed by VSS for the U.S. Navy and by
VSE for the U.S. Postal Service (see "VSS Contract" and "USPS Contract"
below), and a reduction in revenue associated with the company's sale of its
HRSI Health Care Division contracts in July of 2000. The reduction in revenue
from these contracts was partially offset by increases in revenues in some
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
of the company's other divisions and subsidiaries, most notably by increased
revenues in TTD, SRR, and Energetics.
Pretax income decreased by approximately 17% and 42%, respectively, for the
three month and six month periods ended June 30, 2001, as compared to the same
periods of 2000. The decrease for the six month period was primarily due to
losses experienced by TTD during the first quarter of 2001, to the loss of
profits associated with the expiration of the VSS and USPS contracts, and to a
reduction in fee income associated with the decrease in the level of services
ordered under the BAV contract. The decrease for the three month period was
primarily due to the loss of profits associated with the expiration of USPS
contract, to a reduction in fee income associated with the decrease in the
level of services ordered under the BAV contract, and to losses caused by
increased costs incurred by SRR. The decreases in pretax income for the three
month and six month periods ended June 30, 2001 were partially offset by
increased profitability of Energetics in these periods and a non-recurring VSE
sublease transaction that resulted in an addition to pre-tax income of
$250,000 during the second quarter of 2001.
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). The formation of these divisions has enabled the company to
use an operating structure that is better suited to perform certain types of
contract work. The company anticipates that it will continue using its
operating divisions to bid and perform new contract work to better serve the
needs of customers. 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. Contract terms
specify award fee payments to BAV that are determined by performance and level
of contract activity. The contract accounted for approximately 36% and 38% of
consolidated revenues from operations during the six month periods ended
June 30, 2001 and 2000, respectively. The level of revenues and associated
profits resulting from fee income generated by this contract varies depending
on a number of factors including the timing of ship transfers and associated
support services ordered by foreign governments and economic conditions of
potential customers worldwide. Fee income received during the three and six
month periods ended June 30, 2001, which was based on reduced revenue levels
experienced during the fourth quarter of 2000 and first quarter of 2001, was
lower than fee income received during comparable periods during 2000. This
contributed to the decline in pretax income during 2001 as compared to 2000.
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.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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. The loss of revenues
associated with the expiration of this contract contributed to the decline in
revenues and pretax income during the first six months of 2001 as compared to
2000.
USPS Contract. VSE had a contract to provide engineering support services to
the U.S. Postal Service. VSE was not awarded the successor contract, and work
on this contract effort terminated as of January 31, 2001. Revenues on this
contract represented approximately 8% of the company's revenues during 2000.
The loss of revenues from this contract expiration contributed to the decline
in revenues and pretax profit during the first six months of 2001 as compared
to 2000.
Discontinued Operations. On May 21, 1999, the company sold its CMstat
subsidiary for an $800 thousand promissory note. The sale was a divestiture
for legal and tax purposes, but was primarily dependent on the buyer's ability
to repay the promissory note. Accordingly, the sale was not originally
provided discontinued operations treatment under Staff Accounting Bulletin
No. 30 "Accounting for Divestiture of a Subsidiary or Other Business
Operation"("SAB No. 30") since it did not transfer the risks of ownership. In
December 2000, the company determined that the promissory note acquired from
the sale of its CMstat subsidiary was not collectible and the remaining
balance was written off. Accordingly, the company's consolidated financial
statements were restated to reflect the disposition of its CMstat subsidiary
as discontinued operations.
Financial Condition
VSE's financial condition did not change materially during the six month
period ended June 30, 2001. The company's largest asset is its accounts
receivable and its largest liabilities are its accounts payable and accrued
expenses. A decrease in accounts receivable of approximately $900 thousand at
June 30, 2001, as compared to December 31, 2000, and a corresponding decrease
of approximately $900 thousand in accounts payable and long-term bank debt
combined, resulted primarily from the decrease in revenues. Other assets and
liabilities remained substantially unchanged. The increase in total
stockholders' investment during this period resulted from earnings and
dividend activity and from the sale of a portion of the company's Treasury
Stock to a director. The remaining Treasury Stock was retired.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $62 thousand during the
six month period ended June 30, 2001. Cash provided by financing activities
was approximately $1.3 million. Cash used in investing activities was
approximately $800 thousand and cash used in operating activities was
approximately $600 thousand. Significant financing activities included an
increase of approximately $1.3 million in bank loan borrowings. Investing
activities consisted of purchases of property and equipment, net of
dispositions.
Cash and cash equivalents increased by approximately $700 thousand during the
six month period ended June 30, 2000. Cash from financing activities provided
approximately $2.5 million and cash used in operating activities was
approximately $1.9 million. Significant financing activities included
increased borrowing on the company's bank loan of approximately $2.7 million.
Significant investing activities included purchases of property and equipment,
net of dispositions, of approximately $45 thousand.
The difference between cash used in operating activities of approximately $600
thousand in 2001 as compared to approximately $1.9 million in 2000 is
primarily due to changes in the levels of other current assets associated with
a significant deposit made by the BAV Division in June 2000.
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. Accounts receivable
arise primarily from billings made by the company to the government or other
government prime contractors for services rendered and generally do not
present collection problems. Accounts receivable levels can also be affected
by contract retainages, 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. A decrease in accounts payable during the six month period ended
June 30, 2001 due to the timing of certain large dollar vendor payments by the
BAV division in late 2000 and early 2001 contributed to a decrease in
internally generated cash flows. Internal liquidity is also affected by the
acquisition of capital assets for office and computer support and by the
payment of cash dividends.
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" note in "Notes to Consolidated Financial Statements".) The bank
financing complements the internal sources of liquidity by providing
increasing levels of borrowing capacity as accounts receivable levels
increase. The bank loan agreement provided loan financing up to a maximum
commitment of $15 million as of the quarter ended June 30, 2001. This loan
agreement replaced a previous loan agreement that had a maximum commitment of
$30 million in the prior year. The company determined that the new loan amount
was adequate to cover current and future liquidity requirements.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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.
Quarterly cash dividends at the rate of $.04 per share were declared during
the six month period ended June 30, 2001. 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.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future labor
costs to be escalated for any option periods provided by the contracts, while
the non-labor costs included in such contracts are normally reimbursable at
cost. VSE property and equipment consists principally of computer systems
equipment and furniture and fixtures. The overall impact of inflation on
replacement costs of such property and equipment is expected to be
insignificant.
Forward-Looking Disclosures
New Business
VSE has begun several new business initiatives in recent years. The company
expects these new business initiatives to contribute to future revenue growth.
In August 2000, VSE formed TTD to continue a strategy to support customers
with effective multimedia and information technology solutions. In December
2000, VSE invested $960 thousand in the acquisition of certain contract and
marketing rights to enhance TTD's growth opportunities. 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 multimedia technology systems. This includes "turnkey"
design, installation, management and support for a wide variety of voice,
data, multimedia and related projects.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing
goodwill and intangible assets. Under SFAS 142, goodwill will no longer be
subject to amortization over its estimated useful life and intangible assets
with indefinite lives will no longer be amortized over an arbitrary number of
years. The effective date for VSE's implementation of SFAS No. 142 is
January 1, 2002. The company does not anticipate that adoption of SFAS
No. 142 will have a material impact, either positive or negative, on future
results of operations or financial condition.
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Disclosures About Market Risk
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from domestic economic
conditions and political factors that may impact the budgets and program
funding of customers served through VSE's contracts. The largest customer for
the services rendered by the company is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Army, Navy, and Air Force. VSE's
revenues have historically been subject to annual fluctuations resulting from
changes in the level of Defense spending. Future budgetary and funding
decisions by government lawmakers or Defense restructuring efforts could
affect the types and level of services provided by VSE to its government
customers and could potentially have a material adverse impact on the
company's results of operations or financial condition.
The company's revenues depend on the ability of the company to win new
contracts and on the amount of work ordered by the government under the
company's existing contracts. The company's ability to win new contracts is
affected by government acquisition policies and procedures, including
government procurement practices that in recent years have tended toward
bundling work efforts under large comprehensive ("omnibus") management
contracts. This emphasis on large contracts presents challenges to winning new
contract work, including making it more difficult for the company to qualify
as a bidder, increases in the level of competition due to the award of fewer
contracts, and forcing the company into competition with larger organizations
that have greater financial resources and larger technical staffs. Other
government procurement practices that can affect the company's revenues are
the use of past performance criteria that may preclude entrance into new
government markets and government social programs that limit contract work to
small, woman, or minority owned businesses. Additional risk factors that could
potentially affect the company's 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.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic conditions
and political factors 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. Likewise, failure by the government of a potential foreign
customer to approve and fund acquisition of U.S. Navy ships serviced under
the BAV contract could also affect sales. Severe adverse results arising
from these global economic and political risks could potentially have a material
adverse impact on the company's results of operations.
VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings.
In June 2001 Marcos and Silveira Garcia filed a lawsuit, as amended, against
VSE, Astoria Metals Corporation ("AMC"), Ship Dismantlement and Recycling
Joint Venture ("SDR"), Earth Tech, Inc., and Tyco International Ltd. in the
Superior Court of the State of California for the County of Alameda (Case
No. 835601-7). The lawsuit alleges that the plaintiffs are entitled to
damages for personal injuries to Marcos Garcia arising out of an accident
which occurred on June 10, 2000, at a dry-dock facility at the former Hunters
Point Naval Shipyard in San Francisco, California. The dry-dock facility was
operated by AMC, a subcontractor to SDR, which is a joint venture 50% owned by
VSE's wholly owned subsidiary Ship Remediation and Recycling, Inc. and 50%
owned by Earth Tech, Inc., a subsidiary of Tyco International Ltd. Mr. Garcia
was an employee of a subcontractor to AMC. The plaintiffs allege, among other
things, that the defendants failed to exercise due care and diligence in the
operation of the dry-dock facility, resulting in personal injuries to
Mr. Garcia. While the plaintiffs' amended complaint in the lawsuit does not
specify the amount of alleged damages suffered by the plaintiffs, the
plaintiffs have provided the defendants with a notice of damages claiming
damages aggregating approximately $20 million. The operations of VSE and SDR
in 2000 were subject to liability insurance policies, and SDR was named as an
additional insured on liability policies obtained by AMC. VSE believes that
it and SDR have meritorious defenses to the plaintiffs' claims and intends to
contest the lawsuit vigorously. While there is no assurance, VSE believes
that the resolution of the lawsuit will not have a material adverse effect on
VSE's consolidated financial position or results of operations.
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.
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: July 31, 2001 -------------------------------------
C. S. Weber, Executive Vice President
and Chief Financial Officer
/s/ T. R. Loftus
Date: July 31, 2001 ------------------------------------
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.