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. VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - ------------------------------------------------------------------------------ (in thousands, except share amounts)
September 30, December 31, 2000 1999 ---- ---- 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 ======== ========
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)
2000 1999 ------------------ ------------------ Three Nine Three Nine Months Months Months Months ------ ------ ------ ------ 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 ========= ========= ========= =========
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, 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) ===== ====== ======= ======== =======
VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Cash Flows For the nine months ended September 30, - ------------------------------------------------------------------------------- (in thousands)
2000 1999 ---- ---- 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 ======= =======
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. 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. 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). 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:
Nine Months Ended Effect of September 30, 2000 ELMTS SPS Subtotal Disposition Consolidated - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ 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
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). 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):
2000 Compared to Three Months Nine Months 1999 Ended September 30, Ended September 30, Three Nine 2000 1999 2000 1999 Months Months ------- ------- -------- -------- ------- ------- 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 ======= ======= ======= ======== ======= ========
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 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. 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 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. 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 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. 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. 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.