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, 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 October 31, 2001: 2,145,863.
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
-------------------------------------------------------------------------------
(in thousands, except share amounts)
September 30, December 31,
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 488 $ 647
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 21,050 19,215
Deferred tax assets . . . . . . . . . . . . . . . 860 853
Other current assets . . . . . . . . . . . . . . . 2,178 1,533
-------- --------
Total current assets . . . . . . . . . . . . . . 24,576 22,248
Property and equipment, net . . . . . . . . . . . . 3,937 3,336
Deferred tax assets . . . . . . . . . . . . . . . . 755 847
Intangible assets, net . . . . . . . . . . . . . . . 1,900 2,134
Other assets . . . . . . . . . . . . . . . . . . . . 2,563 2,958
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 33,731 $ 31,523
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 8,630 $ 8,678
Accrued expenses . . . . . . . . . . . . . . . . 5,425 5,121
Dividends payable . . . . . . . . . . . . . . . . 86 85
-------- --------
Total current liabilities . . . . . . . . . . . 14,141 13,884
Long-term debt . . . . . . . . . . . . . . . . . . . 1,672 -
Deferred compensation . . . . . . . . . . . . . . . 1,442 1,846
-------- --------
Total liabilities . . . . . . . . . . . . . . . 17,255 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 . . . . . . . . . . . . . . . . 13,105 12,561
Treasury stock, at cost (72,000 shares in 2000). . - (792)
Total stockholders' investment . . . . . . . . . 16,476 15,793
-------- --------
Total liabilities and stockholders' investment . $ 33,731 $ 31,523
======== ========
The accompanying notes are an integral part of these financial statements.
-2-
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)
Three Months Nine Months
2001 2000 2001 2000
---- ---- ---- ----
Revenues, principally from
contracts . . . . . . . . . . . $ 28,986 $ 30,499 $ 84,061 $ 93,010
Costs and expenses of contracts . 28,612 30,048 82,570 90,648
--------- --------- --------- ---------
Gross profit . . . . . . . . . . 374 451 1,491 2,362
Selling, general and administrative
expenses . . . . . 29 17 142 209
Interest expense (income) . . . . 2 (71) 31 (32)
--------- --------- --------- ---------
Income before income taxes . . . 343 505 1,318 2,185
Provision for income taxes . . . 132 197 517 857
--------- --------- --------- ---------
Net income . . . . . . . . . . . $ 211 $ 308 $ 801 $ 1,328
========= ========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . $ .10 $ .15 $ .38 $ .63
========= ========= ========= =========
Basic weighted average shares
outstanding 2,145,863 2,122,289 2,133,863 2,122,289
========= ========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . $ .10 $ .15 $ .38 $ .63
========= ========= ========= =========
Diluted weighted average shares
outstanding 2,145,863 2,122,289 2,133,863 2,122,289
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-3-
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
($.16) . . . . . . . . . -- -- -- (340) --
----- ------ ------- -------- -------
Balance at
December 31, 2000 . . . . 2,198 110 3,914 12,561 (792)
Net income
for the period . . . . . -- -- -- 801 --
Issuance of
Treasury stock . . . . . -- -- (81) -- 220
Retirement of
Treasury stock . . . . . (52) (3) (569) -- 572
Dividends declared
($.12) . . . . . . . . . -- -- -- (257) --
----- ------ ------- -------- -------
Balance at
September 30, 2001 . . . 2,146 $ 107 $ 3,264 $ 13,105 $ --
===== ====== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the nine months ended September 30,
-------------------------------------------------------------------------------
(in thousands)
2001 2000
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 801 $ 1,328
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 1,054 1,205
Loss on sale of property and equipment . . . . . . . 28 7
Change in Deferred compensation . . . . . . . . . . (404) (1)
Change in Deferred taxes . . . . . . . . . . . . . 85 (127)
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . (1,835) 1,387
Other current assets and noncurrent assets . . . . . (219) (186)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . (48) (2,491)
Accrued expenses . . . . . . . . . . . . . . . . . . 304 (210)
------- -------
Net cash (used in) provided by
operating activities (234) 912
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (1,480) (220)
Proceeds from note receivable from business transferred - 75
------- -------
Net cash (used in) investing activities (1,480) (145)
------- -------
Cash flows from financing activities:
Net proceeds form bank loan . . . . . . . . . . . . . . 1,672 -
Cash dividends paid . . . . . . . . . . . . . . . . . . (256) (246)
Issuance of common stock . . . . . . . . . . . . . . . 139 -
------- -------
Net cash provided by (used in)
financing activities 1,555 (246)
------- -------
Net (decrease) increase in cash and cash equivalents . . (159) 521
Cash and cash equivalents at beginning of period . . . 647 62
------- -------
Cash and cash equivalents at end of period . . . . . . $ 488 $ 583
======= =======
The accompanying notes are an integral part of these financial statements.
-5-
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, 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 in-
definite 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.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
company is in the process of evaluating the financial statement impact of
adoption of SFAS No. 143.
In September 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. This standard is required to be adopted by the company beginning on
January 1, 2002. The company is in the process of evaluating the financial
statement impact of adoption of SFAS No. 144.
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.
Due to the write off of the CMstat note receivable (see "Discontinued
Operations" section of "Management Discussion and Analysis"), the company was
not in compliance with the original profitability covenant during 2001. The
company's bank amended the loan agreement to restate this covenant. The company
was in compliance during 2001 with all covenants of the loan agreements as
amended.
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
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
-8-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Company Organization and Overview
Company Organization
The term "VSE" or "company" refers to VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only. VSE's
business operations consist primarily of services performed by the company's
wholly owned subsidiaries and divisions. Wholly owned subsidiaries include
Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"),
Ship Remediation and Recycling, Inc. ("SRR") and VSE Services International,
Inc. ("VSI"). 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, and Land Systems Division ("Land
Systems") beginning in February 2001.
Several of the company's operating divisions were formed in recent years to bid
on and perform contract work that had been previously performed by VSE (parent
company). The formation of these divisions has enabled the company to use an
operating structure that is better suited to perform certain types of contract
work. The company anticipates that it will continue using its operating
divisions to bid and perform new contract work to better serve the needs of
customers.
Management believes that the use of operating divisions to perform future work
and the associated improvements in servicing customers will better position the
consolidated entity for future revenue growth.
Overview of Services
The company is engaged principally in providing engineering, design, logistics,
management and technical services to the U.S. Government (the "government"),
other government prime contractors, and commercial entities. The largest
customer for the services rendered by the company is the U.S. Department of
Defense ("Defense"), including agencies of the U.S. Army, Navy, and Air Force.
BAV is a major player in providing logistics, training, and technical assistance
in support of the Navy's ship transfer program. Fleet Maintenance, Ordnance,
and VSS also support the Navy by providing a variety of services including ship
installation efforts, combat systems inspections, ship repair and overhaul
availability planning, harpoon weapons management, ordnance alteration, air
combat logistics, and outsourcing decision assistance. SRR provides
environmentally sound solutions for the dismantling and disposal of inactive
ships. Land Systems provides the Army with engineering and technical support
for ground weapons, logistics and training services, material procurment
support, and prototype development support for combat vehicles.
VSE also provides services to other government agencies and industry. The
company has provided support services to the U.S. Postal Service for over twenty
years and is continuing to support this customer through its HRSI subsidiary.
Energetics is focused on providing the Department of Energy and other government
and industry customers with expert consulting services in environmental
management and energy supply, resource management, and conservation. TTD
markets the company's growing capability to provide
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
government and industry customers with the latest products, services, and
support in network, multimedia, and audio-visual technology. This includes
"turnkey" design, installation, management and support for a wide variety of
voice, data, multimedia and related projects. These projects include facility
security solutions and intelligent conference rooms which provide an ideal
balance between technology and human interaction.
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
nine month periods ended September 30, 2001 and 2000 (in thousands). All
significant intercompany transactions have been eliminated in consolidation.
Certain prior year balances have been reclassified for comparative purposes.
2001
Compared
to
2000
Three Months Nine Months --------------
Ended September 30, Ended September 30, Three Nine
2001 2000 2001 2000 Months Months
---- ---- ---- ---- ------ ------
Revenues . . . . . . $28,986 $30,499 $84,061 $93,010 $(1,513) $(8,949)
======= ======= ======= ======= ======= =======
Pretax income . . . $ 343 $ 505 $ 1,318 $ 2,185 $ (162) $ (867)
Provision for income
taxes . . . . . . 132 197 517 857 (65) (340)
------- ------- ------- ------- ------- -------
Net income . . . . $ 211 $ 308 $ 801 $ 1,328 $ (97) $ (527)
======= ======= ======= ======= ======= =======
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.
Results of Operations
Revenues declined by approximately 5% and 10%, respectively, for the three month
and nine month periods ended September 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 of the company's
other divisions and subsidiaries, including increased revenues in TTD, Fleet
Maintenance, SRR, and Energetics.
Pretax income decreased by approximately 32% and 40%, respectively, for the
three month and nine month periods ended September 30, 2001, as compared to the
same periods of 2000. The decrease for the nine month period was primarily due
to the loss of profits associated with the expiration of the VSS and USPS
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
contracts, to a reduction of income associated with the decrease in the
company's revenues and a decrease in work ordered under the BAV contract, and
to losses caused by increased costs incurred by SRR. The decrease for the
three month period was primarily due to the loss of profits associated with
the expiration of USPS contract and to a reduction of income associated with the
decrease in the company's revenues and a decrease in work ordered under the BAV
contract. The decreases in pretax income for the three month and nine month
periods ended September 30, 2001 were partially offset by increased
profitability of Energetics and the elimination of start-up losses by TTD 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.
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 40% of
consolidated revenues from operations during the nine month periods ended
September 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 nine
month periods ended September 30, 2001, which was based on reduced revenue
levels experienced during the fourth quarter of 2000 and first two quarters 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.
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 was not awarded the
successor contract and work on this contract effort terminated as of April 28,
2000. The loss of revenues associated with the expiration of this contract
contributed to the decline in revenues and pretax income during the first nine
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 nine 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
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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.
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from domestic economic conditions
and political factors that may impact the budgets and program funding of
customers served through VSE's contracts. VSE's revenues have historically been
subject to annual fluctuations resulting from changes in the level of Defense
spending. Future budgetary and funding decisions by government lawmakers or
Defense restructuring efforts could affect the types and level of services
provided by VSE to its government customers and could potentially have a
material adverse impact on the company's results of operations or financial
condition.
The company's revenues depend on the ability of the company to win new contracts
and on the amount of work ordered by the government under the company's existing
contracts. The company's ability to win new contracts is affected by government
acquisition policies and procedures, including government procurement practices
that in 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 results of
operations are the government's right to terminate contracts for convenience,
the government's right to not exercise all of the option periods on a contract,
and funding delays caused by government political or administrative actions.
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
-12-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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.
Financial Condition
VSE's financial condition did not change materially during the nine month period
ended September 30, 2001. The company's largest asset is its accounts receivable
and its largest liabilities are its accounts payable and accrued expenses. An
increase in accounts receivable of approximately $1.8 million at September 30,
2001, as compared to December 31, 2000, was financed by a corresponding increase
of approximately $1.7 million in long-term bank debt. 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.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $159 thousand during the
nine month period ended September 30, 2001. The decrease in cash and cash
equivalents during this period resulted from cash provided by financing
activities of approximately $1.6 million, cash used in investing activities of
approximately $1.5 million and cash used in operating activities of
approximately $234 thousand. Significant financing activities included an
increase of approximately $1.7 million in bank loan borrowings. Investing
activities consisted of purchases of property and equipment, net of
dispositions.
Cash and cash equivalents increased by approximately $521 thousand during the
nine month period ended September 30, 2000. The increase in cash and cash
equivalents during this period resulted from cash provided by operating
activities of approximately $912 thousand, cash used in financing activities of
approximately $246 thousand, and cash used in investing activities of
approximately $145 thousand. Financing activities consisted of cash dividends
paid of approximately $246 thousand. Significant investing activities included
purchases of property and equipment, net of dispositions, of approximately $220
thousand.
The difference between cash used in operating activities of approximately $234
thousand in 2001 as compared to cash provided by operating activities of
approximately $912 thousand in 2000 is primarily due to the decrease in net
income in 2001 as compared to 2000 and to changes in the levels of accounts
receivable and accounts payable resulting from fluctuations in BAV contract
activity and from the timing of payments received on contract accounts
receivable.
-13-
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Quarterly cash dividends at the rate of $.04 per share were declared during the
nine month period ended September 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.
Sources of Liquidity
The company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
accounts receivable 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, differences between the provisional billing rates authorized by the
government compared to the costs actually incurred by the company, government
delays in processing administrative paperwork for contract funding, and the
timing of large materials purchases and subcontractor efforts used in
performance on the company's contracts. An increase in accounts receivable
during the nine month period ended September 30, 2001 due to the timing of
certain large dollar accounts receivable collections contributed to a decrease
in internally generated cash flows during this period. 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 September 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.
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.
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
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
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
In August 2000, VSE formed TTD to continue a strategy to support customers with
effective multimedia and information technology solutions. TTD specializes in
maintaining and staffing products and services to create state of the art,
network and multimedia technology systems. In December 2000, VSE invested $960
thousand in the acquisition of certain contract and marketing rights to enhance
TTD's growth opportunities. The company expects TTD to play a significant part
in the future growth of VSE.
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.
Disclosures About Market Risk
Interest Rates
VSE's bank loan financing provides available borrowing to the company at
variable interest rates. The company has not borrowed significant amounts on
the loan in recent years. Accordingly, the company does not believe that any
movement in interest rates would have a material impact on future earnings or
cash flows. If VSE were to significantly increase borrowings on the current loan
arrangement, future interest rate changes could potentially have an impact.
Foreign Currency
While a significant amount of the company's business results from the services
provided by BAV related to the transfer of ships to foreign governments, the
BAV contract payments are made to BAV by the U.S. Government in U.S. dollars.
Additionally, most funding requirements to support work performed or services
purchased in foreign countries are made in U.S. dollars, and the infrequent
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VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
disbursements that are made in foreign currencies are reimbursable to BAV in
post conversion dollars. Foreign currency transactions of other VSE divisions
or subsidiaries are virtually non-existent. Accordingly, the company does not
believe that it is exposed to any material foreign currency risk.
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VSE CORPORATION AND SUBSIDIARIES
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other Information"
because such other items are not applicable or are not required if the answer is
negative or because the information required to be reported therein has been
previously reported.
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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 31, 2001 -------------------------------------
C. S. Weber, Executive Vice President
and Chief Financial Officer
/s/ T. R. Loftus
Date: October 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.
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