SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003 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 [ ]
The aggregate market value of outstanding voting stock held by nonaffiliates of
the Registrant as of June 27, 2003, was approximately $16.0 million based on the
last reported sales price of the Registrant's common stock on the Nasdaq
National Market as of that date.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
Number of shares of Common Stock outstanding as of March 11, 2004: 2,218,886.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 3, 2004, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 3
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
Executive Officers of the Registrant 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
ITEM 6. Selected Financial Data 13
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 8. Financial Statements and Supplementary Data 27
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
ITEM 10. Directors and Executive Officers of the Registrant 47
ITEM 11. Executive Compensation 47
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 48
ITEM 13. Certain Relationships and Related Transactions 48
ITEM 14. Principal Accountant Fees and Services 48
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 48
Signatures 49
2
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 Corporation
("VSE" or the "Company" or the "Registrant") results to differ materially from
those anticipated in the forward looking statements contained in this filing,
see VSE's "Narrative Description of Business," "Management's Discussion and
Analysis," and "Notes to Consolidated Financial Statements." Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's analysis only as of the date hereof. The Company under-
takes 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 the Quarterly Reports on Form 10-Q to be filed by the Company
subsequent to this Annual Report on Form 10-K and any Current Reports on Form
8-K filed by the Company.
Part I
ITEM 1. Business
(a) General Development of Business
VSE was incorporated in Delaware in January 1959. The parent company
conducts a limited amount of business operations while primarily serving as a
centralized management and consolidating entity for the business operations
conducted 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"), Communications and Engineering Division ("CED") beginning in
February 2003, Coast Guard Division ("VCG") beginning in February 2002, Fleet
Maintenance Division ("FMD"), GSA Services Division ("GSA Services"), Management
Sciences Division ("MSD") beginning in December 2001, Ordnance Division
("Ordnance"), Systems Engineering Division ("SED," formerly Land Systems
Division) beginning in February 2001, Telecommunications Technologies Division
("TTD"), and Value Systems Services Division ("VSS"). As of December 31, 2003,
HRSI, SRR, VSI, GSA Services, and Ordnance are not conducting any current
business operations. Work contracted under GSA schedules is performed directly
by each of the operating divisions or subsidiaries. In February 2003, VSE began
phasing out the operations of TTD and expects TTD to become inactive in 2004.
The term "VSE" or "Company" means VSE and its subsidiaries and divisions unless
the context indicates operations of the parent company only.
The Company's business operations consist primarily of diversified
engineering, logistics, management, and technical services performed on a
contract basis. Substantially all of the Company's contracts are with agencies
of the United States Government (the "government") and other government prime
3
contractors. The Company's customers also include non-government organizations
and commercial entities.
VSE seeks to provide its customers with competitive, cost-effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products, and an in-depth understanding of
the basic requirements for effective systems and equipment. Customers are
generally billed for a specified level of effort incurred in performing a
project or providing a service.
(b) Financial Information
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis. Financial informa-
tion for the three years ended December 31, 2003 appears in the "Consolidated
Statements of Operations" contained in this Form 10-K.
(c) Narrative Description of Business
Services and Products
VSE engineering, logistics, management, and technical services include a
broad array of capabilities and resources used in program planning; systems
integration support; configuration management; computer-aided drafting and
design; design and engineering, including prototype development; ship
reactivation and transfer support; logistics management; design and installation
of intelligent conference rooms; office automation systems and support;
training, consulting and implementation support; technology insertion; environ-
mental management and support; technology research, development and demonstra-
tion programs involving energy conservation and efficiency, advanced technology
transfers; and feasibility, assessment and development programs.
Typical projects include sustaining engineering support for military
vehicles and combat trailers; ship maintenance, repair, overhaul planning and
follow-on technical support; logistics management support; machinery condition
analysis; specification preparation for ship alterations and repairs; ship force
crew training; life cycle support for ships; energy conservation and advanced
technology demonstration projects; technical data package preparation;
multimedia, computer LAN, and telecommunications systems; cross-platform
technical data, product data and technical manual support.
Contracts
Depending on solicitation requirements and other factors, VSE offers its
professional and technical services and products through various competitive
contract arrangements and business units which are responsive to customer
requirements and which may also provide an opportunity for diversification. Such
arrangements include prime contracts, subcontracts, cooperative arrangements,
joint ventures, dedicated ventures, GSA schedules, dedicated cost centers
(divisions) and subsidiaries.
Substantially all of the Company's revenues are derived from contract
services performed for the government. The U.S. Navy is VSE's largest single
4
customer. Other significant customers include the U.S. Army and the Department
of Energy. The Company's customers also include various other government
agencies, non-government organizations, and commercial entities.
VSE Revenues by Customer
(Dollars in Thousands)
2003 2002 2001
Customer Revenues % Revenues % Revenues %
- -------- -------- - -------- - -------- -
U.S. Navy $ 94,040 69.9 $102,856 76.5 $ 80,101 71.8
U.S. Army 16,979 12.6 6,570 4.9 8,722 7.8
Department of Energy 11,405 8.5 11,660 8.7 11,887 10.7
U.S. Coast Guard 4,946 3.7 1,895 1.4 0 0.0
All other government 4,173 3.1 4,597 3.4 3,303 2.9
Commercial and other 2,916 2.2 6,801 5.1 7,559 6.8
-------- ----- -------- ----- -------- -----
Total $134,459 100.0 $134,379 100.0 $111,572 100.0
======== ===== ======== ===== ======== =====
The government's procurement practices in recent years have tended toward
the bundling of various work efforts under large comprehensive ("omnibus")
management contracts. As a result, the growth opportunities available to the
Company have occurred in large, unpredictable increments. The Company has
pursued these larger efforts by assembling teams of subcontractors to offer the
range of technical competencies required by these omnibus contracts. Typically
the use of subcontractors and large material purchases on government contracts
does not allow for profit margins that are as high as on work performed by
company personnel. Accordingly, the use of such teaming arrangements has lowered
the Company's overall profit margins in recent years. Although the government's
practice of using omnibus contracts is expected to continue, there are
indications that the Company will have opportunities to compete for smaller
contracts requiring specific areas of expertise in the future. VSE is positioned
to pursue these opportunities while continuing to use subcontractor teams to
compete for the omnibus contracts. Due to competitive pressures, the Company has
also elected to pursue more of its contract work through its operating divisions
and subsidiaries to focus on particular lines of work or specific customer
requirements.
As a result of the bundling trend described above, the Company has some
divisions for which revenues are derived predominantly from one major contract
effort. The Company's largest contract, performed by BAV, is with the U.S. Navy
and accounted for approximately 48%, 54%, and 38% of consolidated revenues in
2003, 2002, and 2001, respectively. This contract is a ten-year contract awarded
in 1995, and it has a total contract ceiling of over one billion dollars.
The Company's contracts with the government are typically cost plus fee,
time and materials, or fixed-price contracts. Revenues result from work
performed on these contracts by the Company's employees and from pass-through
of costs for material and work performed by subcontractors. Revenues on cost-
type contracts are recorded as contract allowable costs are incurred and fees
earned. Profits on cost-type contracts are equal to the fees that are earned.
The Company has a contract in its BAV Division for which contract terms specify
award fee payments that are determined by performance and level of contract
activity. Award fees under the BAV contract are made three times during the
year, and a contract modification authorizing the award fee payment is issued
subsequent to the period in which the work is performed. The Company does not
recognize award fee income until the contract modification
5
authorizing the award fee is certain. Due to such timing, and to fluctuations in
the level of revenues, profits as a percentage of revenues on this contract will
fluctuate from period to period. Revenues for time and materials contracts are
recorded on the basis of contract allowable labor hours worked times the
contract defined billing rates, plus the cost of materials used in performance
on the contract. Profits on time and material contracts result from the
difference between the cost of services performed and the contract defined
billing rates for these services. Revenues on fixed-price service contracts are
recorded as services are provided. Revenues on other fixed-price contracts are
recorded as costs are incurred, using the percentage-of-completion method of
accounting. Profits on fixed-price contracts result from the difference between
the incurred costs and the revenue earned. Some of the contracts permit the
contracting agency to issue delivery orders or task orders in an expeditious
manner to satisfy relatively short-term requirements for engineering and
technical services. The services ordered pursuant to such arrangements are
normally performed and completed within one year.
Backlog
Total backlog represents a measure of the Company's potential future
revenues and is defined as the total estimated value of contracts actually
awarded less the amount of revenues that have already been recognized on such
contracts. VSE's total backlog was approximately $3.7 billion, $921 million, and
$799 million, as of December 31, 2003, 2002, and 2001, respectively. The large
increase in total backlog for 2003 is primarily due to the award of a multi-year
Rapid Response support contract by the U.S. Army Communications-Electronics
Command (CECOM). If all options are exercised, this contract has a potential
total ceiling of $2.9 billion over an eight-year period. The contract is a
multiple award, indefinite delivery, indefinite quantity contract, and revenues
from this contract are expected to be considerably less than the contract
ceiling amount. Funded backlog for government contracts is the portion of total
backlog that has been appropriated and funded by the procuring agency. VSE's
funded backlog as of December 31, 2003, 2002, and 2001 was approximately $83
million, $44 million, $65 million, respectively. Because of uncertainties
associated with changing program requirements and the ultimate availability of
funds, the Company has no reasonable basis on which to determine when or how
much of the unfunded backlog will become funded. Substantially all the Company's
funded backlog is expected to be completed within one year.
Marketing
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators and other
personnel, with these activities centrally coordinated through the Company's
Business Development staff. Information concerning new programs and requirements
becomes available in the course of contract performance, through formal and
informal briefings, from participation in professional organizations, and from
literature published by the government, trade associations, professional
organizations and commercial entities.
Personnel
VSE services are provided by a staff of professional and technical
personnel having high levels of education, experience, training and skills. As
of February 2004, VSE employed approximately 500 employees.
6
Principal categories of VSE technical personnel include (a) engineers, and
technicians in mechanical, electronic, chemical, industrial, energy and
environmental services, (b) information technology professionals in computer
systems, applications and products, configuration, change and data management
disciplines, (c) technical editors and writers, (d) multimedia and computer
design engineers, (e) graphic designers and technicians, and (f) logisticians.
The expertise required by VSE customers also frequently includes knowledge of
government administrative procedures. Many VSE employees have had experience as
government employees or have served in the U.S. armed forces. The Company
considers its relationships with employees to be excellent.
Competition and Risks
The professional and technical services industry in which VSE is engaged is
very competitive. There are a substantial number of other organizations,
including large, diversified firms with greater financial resources and larger
technical staffs, which are capable of providing essentially the same services
as those offered by VSE. Such companies may be publicly owned or privately held
or may be divisions of much larger organizations, including large manufacturing
corporations.
Government agencies have placed emphasis on awarding contracts of the types
performed by VSE on a competitive basis as opposed to a sole source or other
non-competitive basis. All significant contracts currently being performed by
VSE were either initially awarded on a competitive basis or have been renewed at
least once on a competitive basis. Government agencies also order work through
contracts awarded by the General Services Administration ("GSA"). GSA provides
a schedule of services at fixed prices which may be ordered outside of the
solicitation process. The Company has six separate GSA schedule contracts for
various classes of services, but there is no assurance regarding the level of
work which may be obtained by VSE under these contract arrangements. Government
budgets, and in particular the budgets of certain government agencies, can also
affect competition in VSE's business. A reallocation of government spending
priorities or a general decline in government budgets can result in lower levels
of potential business for VSE and its competitors, thereby intensifying
competition for the remaining business.
It is not possible to predict the extent and range of competition that VSE
will encounter as a result of changing economic or competitive conditions,
customer requirements, or technological developments. VSE believes the principal
competitive factors for the professional and technical services business in
which it is engaged are technical and financial qualifications, quality and
innovation of services and products, past performance, and low price.
The government acquisition policies and procedures often emphasize factors
that can present challenges to VSE's efforts to win new business, and may make
it difficult for VSE to qualify as a potential bidder. For example, past
performance may be used to exclude entrance into new government markets, and
multiple-award schedules may result in unequal contract awards between
successful contractors.
In addition, VSE's business with the government is subject to the risk that
one or more of the Company's potential contracts or contract extensions may be
awarded by the contracting agency to a small or disadvantaged
7
or minority-owned business pursuant to set-aside programs administered by the
Small Business Administration, or may be bundled into omnibus contracts for very
large businesses. These risks can potentially have an adverse effect on revenue
growth and profit margins.
Government contract business is subject to funding delays, extensions, and
moratoriums caused by political and administrative disagreements. To date, the
effect of such negotiations and disagreements on the Company has not been
material, but no assurances can be given about such risks with respect to future
years.
Government contracts are subject to termination at the government's
convenience, which means that the government may terminate the contract at any
time, without cause. If a government contract is terminated for convenience, the
contractor is generally reimbursed for its allowable costs to the date of
termination and is paid a proportionate amount of the stipulated profit or fee
for the work actually performed. VSE has not suffered any material losses or
disruptions of its business due to government terminations for convenience.
VSE's business is subject to the risks arising from global economic and
political conditions associated with potential foreign customers served through
the Company's contracts with the U.S. Government. For example, economic
slowdowns or political unrest in certain countries served under the BAV contract
could potentially affect sales.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports are filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and are available free of charge through VSE's website www.vsecorp.com as
soon as reasonably practicable after the reports are electronically filed with
the Securities Exchange Commission.
ITEM 2. Properties
VSE's principal executive and administrative offices are located in a
five-story building in Alexandria, Virginia, leased by VSE through April 30,
2008. This building contains approximately 127,000 square feet of engineering,
shop, and administrative space. VSE also provides services and products from
approximately 15 other U.S. offices located at or near customer sites to
facilitate communications and enhance project performance. These offices are
generally occupied under short-term leases and currently include an aggregate
of approximately 129,000 square feet of office and warehouse space. VSE
employees often provide services at customer facilities, limiting VSE's
requirement for additional space. BAV provides services from several locations
outside of the United States, generally at foreign shipyards.
VSE owns and operates an engineering test center in Ladysmith, Virginia,
consisting of approximately 45 acres of land and an improved storage and vehicle
maintenance facility. This facility has been used by VSE to test military and
commercial equipment for which VSE provides system technical support or other
engineering services and to supplement Alexandria, Virginia, office and shop
facilities. The Company is investing about $450 thousand in
8
2004 to expand its facility at this location in support of expected growth in
its System Engineering Division.
ITEM 3. Legal Proceedings
VSE and its subsidiaries have, in the normal course of business, certain
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the three-month period ended
December 31, 2003.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Registrant as of March 3, 2004. Each person named has served
as an executive officer of VSE, or has served in a similar executive capacity in
VSE, for more than the past five years, except for Mr. Dacus who joined VSE in
2001 and previously served as an officer of VSE from 1984 to 1991. From 1991 to
2001, Mr. Dacus served as an officer in four high technology service companies.
Mr. Dacus's career includes over 30 years experience in managing high technology
engineering programs and projects.
The executive officers are chosen annually to serve until the first meeting
of the Board of Directors following the next annual meeting of stockholders and
until their successors are elected and have qualified, or until death,
resignation or removal, whichever is sooner.
Name Age Position with Registrant
- ---- --- ------------------------
Thomas G. Dacus 58 Senior Vice President and Director,
Federal Group
Donald M. Ervine 67 Chairman and Chief Executive Officer,
President and Chief Operating Officer
Robert J. Kelly 66 VSE Director; Chairman and President,
Energetics Incorporated and Director,
Energy and Environment Group
James M. Knowlton 61 Executive Vice President and Director,
International Group
Thomas R. Loftus 48 Senior Vice President and Chief Financial
Officer
Craig S. Weber 59 Executive Vice President, Chief
Administrative Officer, and Secretary
10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
The Company's common stock (par value $.05 per share) is traded in the
Nasdaq National Market System, trading symbol, "VSEC," Newspaper listing, "VSE."
The following table sets forth the range of high and low sales price
information on VSE common stock for each quarter and annually during the last
two years based on information reported by the Nasdaq National Market System.
Quarter Ended High Low Dividends
------------- ---- --- ---------
2002:
March 31 $ 8.97 $ 6.50 $.04
June 30 8.96 7.03 .04
September 30 8.24 5.01 .04
December 31 11.52 10.02 .04
For the Year $11.52 $ 5.01 $.16
2003:
March 31 $13.98 $ 8.15 $.04
June 30 12.79 7.81 .04
September 30 13.85 10.26 .04
December 31 13.50 10.52 .04
For the Year $13.98 $ 7.81 $.16
(b) Holders
There were approximately 1,300 stockholders of VSE common stock as of
February 1, 2004, consisting of approximately 300 stockholders of record plus
the number of beneficial owner proxy sets provided in connection with VSE's 2003
Annual Meeting of Stockholders held on May 2, 2003, to (a) brokers, banks, and
nominees and (b) participants in the VSE Corporation Employee ESOP/401(k) Plan.
(c) Dividends
Cash dividends were declared at the rate of $.16 per share during 2003 and
2002. Pursuant to VSE's bank loan agreement (see Note 7 of "Notes to
Consolidated Financial Statements"), the payment of cash dividends by VSE is
subject to annual rate restrictions. VSE has paid cash dividends each year since
1973.
11
(d) Equity Compensation Plan Information
Number of Shares
Remaining
Available for
Number of Weighted Future Issuance
Shares to be Average Under Equity
Issued upon Exercise Compensation Plans
Exercise of Price of (excluding shares
Outstanding Outstanding reflected in
Options Options column (a))
Plan Category (a) (b) (c) (1)
- ------------- ------------ ----------- ------------------
Equity compensation
plans approved by
shareholders 211,500 $8.04 73,000
Equity compensation
plan not approved
by shareholders 750 6.50 -
------- ----- ------
Total 212,250 $8.04 73,000
======= ===== ======
(1) Excludes 317,223 issued and outstanding shares of VSE Common Stock (par
value $.05 per share) held by the VSE Corporation Employee ESOP/401(k) Plan,
which shares may be transferred to Plan participants on retirement or
termination of VSE employment or pursuant to ESOP diversification.
12
ITEM 6. Selected Financial Data
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues, principally from contracts . . . . . $134,459 $134,379 $111,572 $122,269 $157,354
======== ======== ======== ======== ========
Income from continuing operations . . . . . . $ 2,011 $ 652 $ 855 $ 1,385 $ 2,364
Loss from discontinued operations . . . . . - - - - (256)
Loss on disposal of discontinued
operations . . . . . . . . . . . . . . . . - - - (417) (574)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ 2,011 $ 652 $ 855 $ 968 $ 1,534
======== ======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations . . . . . $ .92 $ .30 $ .40 $ .65 $ 1.12
Loss from discontinued operations . . . . . - - - (.19) (.39)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ .92 $ .30 $ .40 $ .46 $ .73
======== ======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations . . . . . $ .90 $ .30 $ .40 $ .65 $ 1.12
Loss from discontinued operations . . . . . - - - (.19) (.39)
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . .90 $ .30 $ .40 $ .46 $ . 73
======== ======== ======== ======== ========
Working Capital . . . . . . . . . . . . . . . $ 13,394 $ 10,762 $ 8,807 $ 8,364 $ 7,078
======== ======== ======== ======== ========
Total assets . . . . . . . . . . . . . . . . . $ 40,776 $ 32,075 $ 33,209 $ 31,523 $ 31,250
======== ======== ======== ======== ========
Long-term debt . . . . . . . . . . . . . . . . $ - $ - $ 351 $ - $ -
======== ======== ======== ======== ========
Stockholders' investment . . . . . . . . . . . $ 19,058 $ 17,043 $ 16,475 $ 15,793 $ 15,145
======== ======== ======== ======== ========
Cash dividends per common share . . . . . . . $ .16 $ .16 $ .16 $ .16 $ .144
======== ======== ======== ======== ========
This consolidated summary of selected financial data should be read in
conjunction with Management's Discussion and Analysis of the Financial Condition
and Results of Operations included in Item 7 of this Form 10-K and with the
Consolidated Financial Statements and related Notes included in Item 8 in this
Form 10-K. The historical results set forth in this Item 6 are not necessarily
indicative of the results of operations to be expected in the future.
13
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
VSE 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 unincorporated divisions. Active
subsidiaries in 2003 include Energetics Incorporated ("Energetics") and Human
Resource Systems, Inc. ("HRSI"). Active divisions include BAV Division ("BAV"),
Coast Guard Division ("VCG") beginning in February 2002, Communications and
Engineering Division ("CED") beginning in February 2003, Fleet Maintenance
Division ("FMD"), Management Sciences Division ("MSD"), Systems Engineering
Division ("SED," formerly Land Systems Division), Telecommunications
Technologies Division ("TTD"), and Value Systems Services Division ("VSS"). In
February 2003, VSE began phasing out the operations of TTD and expects all TTD
contractual obligations will be satisfied and operations will cease in 2004.
Some of TTD's technical capabilities have been transferred to other VSE
divisions. The sole HRSI contract expired on May 31, 2003, and this work was
continued on a new contract in another VSE division. VSE also has several other
subsidiaries and divisions that were inactive in 2003, but had contract activity
in years prior to 2003.
The Company uses multiple operating divisions to bid on and perform
contract work. The use of these divisions enables the Company to use an
operating structure that is flexible and well-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 serve the needs of
customers. Management believes that this strategy best positions the
consolidated entity for future revenue growth.
VSE 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 provider of logistics, training, and technical
assistance in support of the Navy's ship transfer program. VCG provides similar
services to the U.S. Coast Guard. FMD supports 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, and air combat logistics. VSS provides the Navy with
outsourcing decision assistance. SED provides the Army with engineering and
technical support for ground weapons, logistics and training services, material
procurement support, and prototype development support for combat vehicles. MSD
provides the Army, other government agencies, and commercial organizations with
quality training services for product, process, and management optimization. CED
provides management oversight and coordinates support efforts for a variety of
Department of Defense agency work orders.
14
The Company has also provided support services to the U.S. Postal Service
for over twenty years and is continuing to support this customer through its VSS
Division. 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 has offered products, services, and support in network,
multimedia, and audio-visual technology. This includes design, installation,
management and support for voice, data, multimedia and related projects. VSE
has transferred some of the technical capabilities of TTD to SED and other
divisions.
Management Outlook
VSE believes that its short term future outlook, based on expected revenue
growth under existing contracts, is more positive than in recent years. The
Taiwan ship transfer work on the BAV contract (see "BAV Contract" below) will
contribute significantly to near term revenue growth. VSE's company wide funded
backlog at December 31, 2003, was approximately $83 million, the highest amount
since 1999. Revenues are also growing in several of VSE's other divisions.
Profit margins in most of VSE's divisions were up in 2003 and can be expected
to show further improvement as the Company's revenue base grows. The Company
has a positive cash flow and cash of approximately $9.8 million as of
December 31, 2003. This positive short-term trend is tempered by two areas of
concern to management. CED incurred pretax losses of approximately $963 thousand
in 2003, its first year of operation. While management has addressed this issue
by adopting a less aggressive pricing strategy, CED may continue to incur losses
in 2004. VSE has accrued liabilities of approximately $145 thousand against any
future losses associated with CED operations as of December 31, 2003. The second
concern involves the utilization of the Company's primary office facility. VSE
does not always occupy all of the space in its primary leased office facility
and has from time to time subleased parts of this facility to other tenants.
During 2003, some of the larger tenants did not renew their subleases with VSE,
leaving the facility underutilized as of December 31, 2003. The Company is
attempting to find new tenants to sub-lease space, but the potential exists for
continued underutilization of the facility that could negatively impact earnings
in 2004. We believe that we will be able to sublease the majority of the
available space by the end of 2004.
The longer term future outlook for VSE centers on the uncertainty
associated with the renewal of the BAV contract. BAV expects the U.S. Navy to
solicit bids for a new contract and intends to aggressively pursue the award of
the new contract. BAV is confident in its ability to capture this award and
continue work on the ship transfer program; however, the size of this effort
will entice other companies to offer strong competition. Accordingly, there can
be no assurance that BAV will win the new contract. If BAV fails to win the new
contract, VSE will suffer a significant loss of future revenue and profits. To
mitigate this risk, VSE has been exploring potential acquisition opportunities.
The company intends to continue these efforts in 2004.
Revenue Recognition
Substantially all of the Company's services are performed for its customers
on a contract basis. The three primary types of contracts used are cost-type
contracts, time and materials contracts, and fixed-price contracts. Revenues
result from work performed on these contracts by the Company's employees and
from pass-through of costs for material and work performed by
15
subcontractors. Revenues on cost-type contracts are recorded as contract
allowable costs are incurred and fees earned. Profits on cost-type contracts
are equal to the fees that are earned. The BAV contract terms specify award fee
payments that are determined by performance and level of contract activity.
Award fees are made three times during the year and a contract modification
authorizing the award fee payment is issued subsequent to the period in which
the work is performed. The Company does not recognize award fee income until the
contract modification authorizing the award fee is certain. Due to such timing,
and to fluctuations in the level of revenues, profits as a percentage of
revenues on this contract will fluctuate from period to period. Revenues for
time and materials contracts are recorded on the basis of contract allowable
labor hours worked times the contract defined billing rates, plus the cost of
materials used in performance on the contract. Profits on time and material
contracts result from the difference between the cost of services performed and
the contract defined billing rates for these services. Revenues on fixed-price
service contracts are recorded as services are provided. Revenues on other
fixed-price contracts are recorded as costs are incurred, using the percentage-
of-completion method of accounting. Profits on fixed-price contracts result from
the difference between the incurred costs and the revenue earned. The Company
will occasionally perform work at risk, which is work that is performed prior
to the government formalizing funding for such work. Revenue related to work
performed at risk is not recognized until it can be reliably estimated and its
realization is probable. VSE recognizes this "risk funding" as revenue when the
associated costs are incurred or the work is performed. As of December 31, 2003,
VSE has recognized approximately $478 thousand in risk funding. VSE believes
that it will receive funding for all of this risk funding revenue. VSE is at
risk of loss for any risk funding not received. The Company provides for
anticipated losses on contracts by a charge to income during the period in
which losses are first identified.
Revenues by contract type for the three years ended December 31, 2003 were
as follows (in thousands):
2003 2002 2001
Contract Type Revenues % Revenues % Revenues %
- ------------- -------- - -------- - -------- -
Cost-type $ 93,627 69.6 $106,346 79.1 $ 82,606 74.0
Time and materials 24,448 18.2 15,176 11.3 14,528 13.0
Fixed-price 16,384 12.2 12,857 9.6 14,438 13.0
-------- ----- -------- ----- -------- -----
$134,459 100.0 $134,379 100.0 $111,572 100.0
======== ===== ======== ===== ======== =====
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from 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.
16
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 some 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. Competing for these contracts
requires the Company to use teams of subcontractors to be able to offer the
range of technical competencies needed to do the work. While the use of
subcontractors on a large scale basis allows the Company to compete for this
work, profit margins on subcontract work are lower than on work performed by
company personnel, thereby reducing the Company's overall profit margins. The
use of subcontractors on government contracts also raises certain performance
and financial risks to VSE in that government prime contractors are usually
obligated to ensure compliance with U.S. Government regulations relative to the
performance by subcontractors.
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.
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. This cost-plus contract
is a ten-year contract awarded in 1995 and has a total ceiling value of over one
billion dollars over the life of the contract. As of December 31, 2003, BAV has
recognized cumulative revenues on this contract of approximately $525 million
and funded backlog was approximately $48 million. Revenues generated by this
contract have typically accounted for approximately 40% to 50% of consolidated
VSE revenues, and during 2003 and 2002 the contract accounted for approximately
48% and 54% of consolidated revenues, respectively. Contract terms specify award
fee payments to BAV that are determined by performance and level of contract
activity. Award fees are made three times during the year and a contract
modification authorizing the award fee payment is issued subsequent to the
period in which the work is performed. The Company does not recognize award fee
income until the contract modification authorizing the award fee is certain. Due
to such timing, and to fluctuations in the level of revenues, profits as a
percentage of revenues will fluctuate from period to period. As of December 31,
2003, award fee has been recognized for work performed through the award fee
period ended August 31, 2003.
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
17
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. The U.S. Navy has approved the transfer of four
U.S. Navy ships to Taiwan, with work related to this transfer to be performed
under the BAV contract. This transfer is expected to result in a significant
increase in the revenues of BAV during the time this work is performed beginning
in 2004. BAV has received a contract delivery order related to this work in
early 2004 of approximately $100 million.
The original BAV contract ending date was in 2005. The U.S. Navy recently
modified the contract for the purpose of ensuring continuity of work with
respect to the transfer of ships to Taiwan. The modification provided
contractual coverage for this work effort into 2007. Indications are that the
U.S. Navy intends to issue a new contract for the overall ship transfer program
through a competitive bidding process. There can be no assurance that BAV will
win the award for this new contract. If BAV fails to win this new contract
award, it could have a material adverse impact on the Company's future results
of operation and financial condition.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic
conditions and political factors associated with current and potential customers
served through VSE's contracts with the U.S. Government. An economic slowdown in
countries served under the BAV contract could potentially affect sales. The
current international situation posed by potential terrorist activity and the
continuing conflict in the Middle East could potentially increase the political
risks associated with BAV contract revenues. 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 affect sales. In any one year, a
significant amount of the Company's revenues may result from sales on the BAV
contract to a single foreign government. During 2003 and 2002, revenues
associated with BAV contract sales to Egypt accounted for approximately 33% and
28% of the Company's revenues, respectively. Future years' revenues are expected
to include large amounts of BAV contract sales to both Egypt and Taiwan. In
addition to the effect on BAV contract work, international tensions can also
affect work by FMD on U.S. Navy ships when they are deployed outside of
U.S. Navy facilities and are unavailable for maintenance work during this time
period. Adverse results arising from these global economic and political risks
could potentially have a material adverse impact on the Company's results of
operations.
Concentration of Revenues
2003 2002 2001
Source of Revenue Revenues % Revenues % Revenues %
- ----------------- -------- - -------- - -------- -
BAV Egypt $ 44,190 32.9 $ 38,170 28.4 $ 27,248 24.4
BAV Other 19,627 14.6 33,902 25.2 14,612 13.1
-------- ----- -------- ----- -------- -----
Total BAV 63,817 47.5 72,072 53.6 41,860 37.5
VSE Other 70,642 52.5 62,307 46.4 69,712 62.5
-------- ----- -------- ----- -------- -----
Total Revenues $134,459 100.0 $134,379 100.0 $111,572 100.0
======== ===== ======== ===== ======== =====
18
Critical Accounting Policies
VSE's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require VSE
to make estimates and assumptions. In addition to the VSE revenue recognition
policy, discussed under "Executive Overview" above, the Company believes the
following critical accounting polices affect our more significant judgments,
estimates and assumptions used in the preparation of its consolidated financial
statements.
Long-Lived Assets
In assessing the recoverability of long-lived assets, including goodwill
and other intangibles, VSE must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
If these estimates or their related assumptions change in the future, VSE may be
required to record impairment charges for these assets not previously recorded.
Contingencies
From time to time VSE is subject to proceedings, lawsuits and other claims
related to environmental, labor and other matters. VSE is required to assess the
likelihood of any adverse judgments or outcomes to these contingencies as well
as potential ranges of probable losses and establish reserves accordingly. The
amount of reserves required may change in future periods due to new developments
in each matter or changes in approach to a matter such as a change in settlement
strategy.
Income Taxes
The carrying value of VSE net deferred tax assets is based on assumptions
regarding VSE's ability to generate sufficient future taxable income to utilize
these deferred tax assets. If the estimates and related assumptions regarding
VSE's future taxable income change in the future, VSE may be required to record
valuation allowances against its deferred tax assets, resulting in additional
income tax expense.
19
Results of Operations
Revenues
The following table shows the revenues from operations of VSE, its
subsidiaries and divisions, and such revenues as a percent of total revenues:
Revenues from Operations
(dollars in thousands)
2003 2002 2001
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- - -------- - -------- -
VSE (parent company). . . . . $ 1,720 1.3 $ 14,796 11.0 $ 22,681 20.3
BAV . . . . . . . . . . . . . 63,817 47.5 72,072 53.6 41,860 37.5
FMD . . . . . . . . . . . . . 24,406 18.1 9,602 7.2 3,075 2.8
Energetics . . . . . . . . . 11,982 8.9 12,171 9.1 12,272 11.0
CED . . . . . . . . . . . . . 11,743 8.7 - 0.0 - 0.0
SED . . . . . . . . . . . . . 9,750 7.3 7,287 5.4 3,113 2.8
VCG . . . . . . . . . . . . . 4,946 3.7 1,895 1.4 - 0.0
VSS . . . . . . . . . . . . . 2,292 1.7 8,156 6.1 1,683 1.5
MSD . . . . . . . . . . . . . 2,261 1.7 1,440 1.1 - 0.0
TTD . . . . . . . . . . . . . 1,400 1.0 5,962 4.4 8,082 7.2
HRSI . . . . . . . . . . . . 142 0.1 703 0.5 1,344 1.2
Ordnance . . . . . . . . . . - 0.0 244 0.2 12,945 11.6
SRR . . . . . . . . . . . . . - 0.0 46 0.0 4,165 3.8
VSI . . . . . . . . . . . . . - 0.0 5 0.0 - 0.0
GSA Services . . . . . . . . - 0.0 - 0.0 352 0.3
-------- ----- -------- ----- -------- -----
$134,459 100.0 $134,379 100.0 $111,572 100.0
======== ===== ======== ===== ======== =====
Revenues were substantially the same for the year ended December 31, 2003,
and increased by approximately 20% for the year ended December 31, 2002, as
compared to each of the respective prior years. During 2003, the Company had
decreased revenues in some of its divisions and subsidiaries which were offset
by increases in the revenues of others. The most notable areas of declines in
revenue were in BAV, which was due to work ordered by certain client countries
in 2002 that was not repeated in 2003, and TTD due to the decision to phase out
operations. Revenues also declined for HRSI and VSS. The declines in revenues of
these divisions were offset by the revenues generated by the start up of CED and
an increase in the revenues of the Company's other active divisions compared to
the prior year. While the increased revenues in SED, MSD, and VCG were not
significant in proportion to total Company revenues, the increases were
significant in proportion to the prior years' revenues of each of these
divisions.
The increase in revenues during 2002 was primarily due to an increase in
the level of services ordered under the BAV contract, and the start-up of new
businesses (see "Business Termination and New Business Start-up" below). These
increases were partially offset by decreased revenues associated with closing
SRR (see "Business Termination and New Business Start-up" below) and the
expiration of the Ordnance contract (see "Contract Expirations" below). During
the period from 2001 to 2003, a significant amount of contract work previously
performed by VSE (parent company) was transitioned to the FMD and SED divisions.
Certain program efforts supporting the U.S. Navy have been transferred from
Ordnance into VSS in 2002 and then into FMD in 2003.
20
Contract Expirations. VSE's Ordnance Division had a contract with the U.S.
Navy to provide program management and logistics services that expired in
December 2001. VSE re-bid and was awarded the successor contract in its Fleet
Maintenance Division. This contract is a five year contract awarded in October
2001, and it has the potential to generate total revenues of approximately $72.5
million from 2001 through 2006. One program performed by SED under the
predecessor contract was not renewed under the new contract, and this work was
not performed by the Company during the first three months of 2002. The lapse in
contract coverage for this program resulted in a loss of revenue and profit
associated with the program for the Company during this period. A subsequent
contract was obtained in April of 2002 and work on the program resumed.
Business Terminations and New Business Start-ups. In February 2003, VSE
decided to terminate operations of TTD due to declining revenues and to
significant losses sustained by this division. In 2002, TTD experienced a
revenue decline of approximately 26% and a pretax loss of approximately $2.1
million, including a loss associated with the impairment of intangible assets
of $576 thousand. TTD continued work on uncompleted contracts during 2003 to
satisfy its contractual obligations and will finish work in 2004 before ceasing
operations. Revenues from TTD represented approximately 1% of total Company
revenues and the pretax loss on TTD operations was reduced to approximately $200
thousand in 2003. VSE believes that its current reserves are adequate to cover
any potential losses from the closing of TTD operations. Some of TTD's technical
capabilities were transferred to other VSE divisions. The loss of future revenue
associated with the termination of TTD operations is not expected to be
significant compared to total future VSE revenue, while the elimination of TTD
losses is expected to improve future VSE profits.
In January 2003, VSE formed its Communications and Engineering Division
(CED) upon the award of a multi-year Rapid Response support contract by the
U.S. Army Communications-Electronics Command (CECOM). If all options are
exercised, this contract has a potential total ceiling of $2.9 billion over an
eight-year period. The contract is a multiple award, indefinite delivery,
indefinite quantity contract, and VSE revenues from it are expected to be
considerably less than the contract ceiling amount. While actual revenue
estimates for the contract cannot be predicted, it is expected that this
contract will contribute to future VSE revenue growth.
In 2001, VSE decided to discontinue SRR's ship remediation and recycling
efforts at the Hunters Point Shipyard in San Francisco, California, due to the
limited business opportunities associated with ship dismantlement work, due in
part to an absence of any significant amount of government funding for these
efforts. Profitability from the SRR work was marginal for VSE relative to the
risk. Also in 2001, VSE formed MSD to offer government and commercial
organizations quality training and product, process, and management optimization
services. In February 2002, VCG began work for the U.S. Coast Guard under a
contract that has potential to generate total revenues of approximately $25.4
million over five years. VSE expects revenues from MSD and VCG to more than
offset the loss of revenues formerly generated by SRR, with profit margins
higher than that provided by SRR. During 2002, revenues from MSD and VCG were
approximately equal to the revenues generated by SRR in 2001. The combined
revenues of MSD and VCG doubled in 2003 and are expected to continue to grow in
2004.
21
Income from Operations Before Income Taxes
The following table shows consolidated revenues and income from operations
before income taxes, other items of income and expense, and such amounts as a
percent of revenues.
Income from Operations Before Income Taxes
(dollars in thousands)
Description 2003 % 2002 % 2001 %
- ----------- ---- - ---- - ---- -
Revenues . . . . . . . . . $134,459 100.0 $134,379 100.0 $111,572 100.0
Costs and expenses . . . . 130,898 97.4 132,306 98.5 109,990 98.6
-------- ----- -------- ----- -------- -----
Gross profit . . . . . . . 3,561 2.6 2,073 1.5 1,582 1.4
Selling, general and
administrative expenses. 352 0.3 328 0.2 237 0.2
Interest(income)expense . (69) (0.1) 24 0.0 49 0.0
Loss on Impairment of
Intangible Assets . . . - 0.0 576 0.4 - 0.0
-------- ----- -------- ----- -------- -----
Income from operations
Before income taxes . . $ 3,278 2.4 $ 1,145 0.9 $ 1,296 1.2
======== ===== ======== ===== ======== =====
VSE's gross profit margins improved in 2003 as compared to prior years.
This improvement is primarily due to the phase out of TTD and the reduction of
losses associated with this division. The Company's gross profit margins also
improved due to increases in the gross profit margins of most of its operating
divisions and also due to the increased revenues in higher margin divisions,
including MSD, SED, and VCG. The company-wide gross margin increases were
partially offset by operational losses associated with CED, and to a lesser
extent by start up costs associated with CED. During 2002, TTD experienced
significant losses as revenues for this division decreased approximately 26%.
Costs and expenses of operating TTD did not decrease in proportion to the
revenue decline, which resulted in losses. Gross profit margins on revenues in
other VSE divisions and subsidiaries, in the aggregate, increased during this
period due to the increase in total VSE revenues while a portion of the costs
and expenses of operating the Company remained fixed. The combination of these
two factors resulted in VSE gross profit margins remaining substantially
unchanged in 2002 as compared to 2001. Other factors that affect the percentage
of costs and expenses to revenues include the amount of work performed on the
BAV contract as a percentage of total revenues, the timing of contract award
fees, effective project and cost management, and competitive factors.
Selling, general and administrative expenses consist primarily of costs and
expenses that are not chargeable or reimbursable on the Company's operating unit
contracts. As a percentage of revenues, these expenses remained substantially
unchanged in 2003 and 2002 as compared to the respective prior years.
VSE has not had significant borrowing requirements or interest expense in
2003, 2002, and 2001. The Company had interest income in 2003 as compared to
interest expense in 2002, and interest expense declined in 2002 as compared to
2001, as profits from operations were used to pay down borrowings and cash
surpluses were invested.
22
In 2002, the Company took a loss associated with the impairment of
intangible assets of $576 thousand held by TTD. These assets consisted of
acquired contracts, proposals, and opportunities; files and documentation;
rights to hire certain individuals; customer lists; trademarks; and, website
rights. The purpose of these acquired assets was to assist in the business
development efforts of TTD. The decision by VSE to terminate the operations of
TTD rendered these business development assets worthless.
Financial Condition
VSE's financial condition did not change materially during 2003. The
Company's largest asset is its accounts receivable and its largest liabilities
are its accounts payable and accrued expenses. Accounts receivable increased
approximately $3.9 million, and accounts payable and accrued expenses increased
approximately $6.6 million in 2003 as compared to 2002 due to a significant
level of work in December 2003, the timing of subcontractor activity, and the
associated payments required to perform this work. Cash and cash equivalents
increased approximately $5.6 million in 2003 as a result of net income and the
timing of subcontractor activity and associated payments. The increase in total
stockholder's investment in 2003 resulted primarily from earnings and dividend
activity and from the exercise of stock options.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents increased by approximately $5.6
million during 2003. Approximately $6.4 million in net cash was provided by
operating activities, investing activities used approximately $720 thousand, and
financing activities used approximately $34 thousand. Investing activities
consisted of the purchase of property and equipment. Financing activities
consisted of $349 thousand used to pay dividends and $315 thousand provided by
the issuance of common stock associated with the exercise of stock options. Cash
flows provided by operating activities increased in 2003 as compared to 2002 due
primarily to increases in net income and accounts payable and accrued expenses,
which was partially offset by an increase in accounts receivable.
The Company's cash and cash equivalents increased by approximately $4
million during 2002. Approximately $5.0 million in net cash was provided by
operating activities, investing activities used approximately $521 thousand, and
financing activities used approximately $456 thousand. Investing activities
consisted of the purchase of property and equipment. Financing activities
consisted of the repayment of $351 thousand of bank loan borrowings, $349
thousand used to pay dividends, and $244 thousand provided by the issuance of
common stock associated with the exercise of stock options. Cash flows provided
by operating activities increased in 2002 as compared to 2001 due primarily to
a decrease in accounts receivable, which was partially offset by a decrease in
accounts payable.
Cash and cash equivalents declined by $438 thousand during 2001 as a result
of approximately $2 million used in investing activities, approximately $1.4
million provided by operating activities, and approximately $179 thousand
provided by financing activities. Investing activities consisted of $2 million
used to purchase property and equipment, including investments in VSE's
23
information technology infrastructure and facilities improvements. Financing
activities consisted of $351 thousand provided by bank loan borrowing, $169
thousand provided by the issuance of common stock associated with the exercise
of stock options and $341 thousand used to pay cash dividends.
Cash dividends were declared at the rate of $.16 per share during 2003,
2002 and 2001. Pursuant to its bank loan agreement (see Note 7 of "Notes to
Consolidated Financial Statements"), the payment of cash dividends by VSE is
subject to annual rate restrictions. VSE has paid cash dividends each year since
1973.
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 and accounts payable from period to period, and from
profitability. An increase in net income contributed to an increase in
internally generated cash flows during 2003. Significant increases or decreases
in revenue and accounts receivable and accounts payable 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 payments received on
accounts receivable represent the principal source of cash for the Company.
Accounts receivable levels can be affected by contract retainages, 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 Company's contracts.
Accounts payable arise primarily from purchases of subcontractor services and
materials used by the Company in the performance of its contract work. Payments
made on accounts payable, along with payments made to satisfy employee payroll
and payroll associated expenses, make up the principal cash requirements of the
Company. Accounts payable levels can be affected by changes in the level of
contract work performed by the Company and by the timing of large materials
purchases and subcontractor efforts used in performance on the Company's
contracts. Other cash requirements include the acquisition of capital assets for
office and computer support, facilities maintenance, and the payment of cash
dividends. The Company plans additional spending of approximately $750 thousand
in 2004 for facilities improvements at two locations. This cash requirement is
for the expansion of its facility in Ladysmith, Virginia in support of the
expected growth in its System Engineering Division and improvements at its
primary office facility in Alexandria, Virginia.
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 Note 7 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
$15 million as of December 31, 2003. The Company has determined that the
$15 million commitment is adequate to cover current and future liquidity
requirements. The Company did not borrow against this loan in 2003.
Performance of work under the BAV contract has the potential to cause
substantial requirements for working capital; however, management believes
24
that current cash surpluses, cash flows from future operations, and the bank
loan commitment are adequate to meet current operating cash requirements.
Contractual Obligations
The following table shows the consolidated contractual obligations as of
December 31, 2003 (in thousands):
Payments Due by Period
----------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
- ----------------------- ----- ------ ----- ----- -----
Operating leases, net of
non-cancelable sublease
income $ 9,769 $ 2,810 $4,181 $2,778 $ -
Purchase obligations 37,114 36,983 131 - -
------- ------- ------ ------ ------
Total $46,883 $39,793 $4,312 $2,778 $ -
======= ======= ====== ====== ======
Purchase obligations includes two general categories of obligations. The
first category consists of obligations incurred in the normal course of business
to satisfy performance requirements for VSE customers. Such obligations include
those arising from the acquisition of materials necessary to complete required
tasks and the use of subcontractors to perform tasks for which the company may
not have its own expertise. Subcontractor and material obligations accounted for
approximately $36 million of the total Purchase Obligations as of December 31,
2003.
The second category of purchase obligations consists primarily of
contractual commitments associated with construction, improvements or
maintenance of VSE facilities.
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 considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to
be insignificant.
Forward-Looking Disclosures
Goodwill
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 with indefinite lives. Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life and intangible
assets with indefinite lives are no longer amortized over an
25
arbitrary number of years. Goodwill and intangible assets with indefinite lives
are instead subject to a review for impairment at least annually. The effective
date for VSE's implementation of SFAS No. 142 was January 1, 2002.
As of December 31, 2003, the Company had approximately $1.1 million of
unamortized goodwill associated with its acquisition of Energetics in 1995. The
goodwill was being amortized prior to the adoption of SFAS No. 142. In 2002, the
Company stopped amortizing the goodwill. As of December 31, 2003, the Company
has not recognized any reduction to the goodwill due to the impairment rules
associated with SFAS No. 142. If at some time in the future it is determined
that impairment has occurred, such impairment could potentially have a material
adverse impact on the Company's 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 such a material
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 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 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.
26
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
----
Report of Independent Auditors 28
Consolidated Balance Sheets as of December 31, 2003 and 2002 30
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001 31
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 2003, 2002, and 2001 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001 33
Notes to Consolidated Financial Statements 34
27
Report of Independent Auditors
Board of Directors of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' investment
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of the Company for the year ended December 31, 2001 were audited by
other auditors who have ceased operations and whose report dated February 22,
2002 expressed an unqualified opinion on these statements before the restatement
disclosures described in Note 6.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 2003 and 2002 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of VSE Corporation and subsidiaries at December 31, 2003 and 2002 and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 6 to the consolidated financial statements, in
2002 the Company changed its accounting for goodwill and intangibles assets.
As discussed above, the financial statements of the Company for the year
ended December 31, 2001, were audited by other auditors who have ceased
operations. As described in Note 6, these financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the Company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 6 with respect to 2001 included (a) agreeing the
previously reported net income to the previously issued financial statements
and the adjustments to reported net income representing amortization expense
recognized in that period related to goodwill that is no longer being amortized
to the Company's underlying records obtained from management, and (b) testing
the mathematical accuracy of the reconciliation of adjusted net income to
reported net income, and the related earnings-per-share amounts. In our opinion,
the disclosures for 2001 in Note 6 are appropriate. However, we were not engaged
to audit, review, or apply any procedures to the 2001 financial statements of
the Company other than with respect to such disclosures and, accordingly, we do
not express an opinion or any form of assurance on the 2001 financial statements
taken as a whole.
/s/ Ernst & Young LLP
McLean, Virginia
February 20, 2004
28
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
investment and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VSE
Corporation as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the three years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 22, 2002
This page shows a copy of the audit report previously issued by Arthur Andersen
LLP in connection with the VSE Corporation filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K. (See Exhibit 23.2 for
further discussion).
29
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
As of December 31,
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 9,843 $ 4,210
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 21,835 17,922
Deferred tax assets . . . . . . . . . . . . . . . . . . 819 1,313
Other current assets . . . . . . . . . . . . . . . . . . 1,379 1,370
------- -------
Total current assets . . . . . . . . . . . . . . . . 33,876 24,815
Property and equipment, net . . . . . . . . . . . . . . . 3,038 3,483
Deferred tax assets . . . . . . . . . . . . . . . . . . . 297 449
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,054 1,054
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,511 2,274
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $40,776 $32,075
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $14,634 $ 8,785
Accrued expenses . . . . . . . . . . . . . . . . . . . . 5,760 5,052
Dividends payable . . . . . . . . . . . . . . . . . . . 88 87
------- -------
Total current liabilities . . . . . . . . . . . . . 20,482 13,924
Deferred compensation . . . . . . . . . . . . . . . . . . 1,236 1,108
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 21,718 15,032
------- -------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,214,136 in 2003 and
2,185,760 in 2002 . . . . . . . . . . . . . . . . . . 110 109
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 3,928 3,558
Deferred stock-based compensation . . . . . . . . . . . (17) -
Retained earnings . . . . . . . . . . . . . . . . . . . 15,037 13,376
------- -------
Total stockholders' investment . . . . . . . . . . . 19,058 17,043
------- -------
Total liabilities and stockholders' investment . . . $40,776 $32,075
======= =======
The accompanying notes are an integral part of these statements.
30
VSE Corporation and Subsidiaries
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
For the years ended December 31,
2003 2002 2001
---- ---- ----
Revenues, principally from contracts . . . . $ 134,459 $ 134,379 $ 111,572
Costs and expenses of contracts . . . . . . 130,898 132,306 109,990
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . 3,561 2,073 1,582
Selling, general and administrative expenses 352 328 237
Interest (income) expense, net . . . . . . . (69) 24 49
Loss on impairment of intangible assets . . - 576 -
--------- --------- ---------
Income before income taxes . . . . . . . . . 3,278 1,145 1,296
Provision for income taxes . . . . . . . . . 1,267 493 441
--------- --------- ---------
Net income $ 2,011 $ 652 $ 855
========= ========= =========
Basic earnings per share:
Net income . . . . . . . . . . . . . . . . . $ 0.92 $ 0.30 $ 0.40
========= ========= =========
Basic weighted average shares outstanding 2,189,197 2,172,384 2,136,992
========= ========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . . $ 0.90 $ 0.30 $ 0.40
========= ========= =========
Diluted weighted average shares
outstanding . . . . . . . . . . . . . . . . 2,230,226 2,196,390 2,136,992
========= ========= =========
The accompanying notes are an integral part of these statements.
31
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Investment
- -----------------------------------------------------------------------------------------------------
(in thousands except per share data)
Deferred Total
Common Stock Paid-In Stock-based Retained Treasury Stockholders'
Shares Amount Surplus Compensation Earnings Stock Investment
------ ------ ------- ------------ -------- ----- ----------
Balance at
December 31, 2000 2,198 $ 110 $ 3,914 $ - $12,561 $ (792) $15,793
Net income for the year - - - - 855 - 855
Issuance of Treasury stock - - (81) - - 220 139
Retirement of Treasury
Stock (52) (3) (569) - - 572 -
Issuance of stock 4 - 30 - - - 30
Dividends declared ($.16) - - - - (342) - (342)
----- ----- ------- ----- ------- ------- -------
Balance at
December 31, 2001 2,150 107 3,294 - 13,074 - 16,475
Net income for the year - - - - 652 - 652
Exercised stock options 33 2 213 - - - 215
Tax benefit of options
exercised - - 22 - - - 22
Issuance of stock 3 - 29 - - - 29
Dividends declared ($.16) - - - - (350) - (350)
----- ----- ------- ----- ------- ------- -------
Balance at
December 31, 2002 2,186 $ 109 $ 3,558 - $ 13,376 $ - $17,043
Net income for the year - - - - 2,011 - 2,011
Exercised stock options 25 1 270 - - - 271
Tax benefit of options
exercised - - 14 - - - 14
Deferred stock-based
compensation - - 42 (42) - - -
Amortization of deferred
stock-based compensation - - - 25 - - 25
Issuance of stock 3 - 44 - - - 44
Dividends declared ($.16) - - - - (350) - (350)
----- ----- ------- ----- ------- ------- -------
Balance at
December 31, 2003 2,214 $ 110 $ 3,928 $ (17) $ 15,037 $ - $19,058
===== ===== ======= ===== ======== ======= =======
The accompanying notes are an integral part of these statements.
32
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------
(in thousands)
For the years ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,011 $ 652 $ 855
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,158 1,414 1,372
Loss on impairment of intangible assets . . . . . . . . . . - 576 -
Loss on sale of property and equipment . . . . . . . . . . 7 27 91
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . 646 (274) 212
Tax benefit of options exercised . . . . . . . . . . . . . 14 22 -
Amortization of deferred stock-based compensation . . . . . 25 - -
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . . (3,913) 2,927 (1,634)
Other current assets and noncurrent assets . . . . . . . . (246) 769 (532)
Increase (decrease) in:
Accounts payable and deferred compensation. . . . . . . . . 5,977 (1,952) 1,931
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 708 817 (886)
------- ------- -------
Net cash provided by operating activities 6,387 4,978 1,409
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . . . (720) (521) (2,026)
------- ------- -------
Net cash used in investing activities (720) (521) (2,026)
------- ------- -------
Cash flows from financing activities:
Net proceeds from (payments on) long-term bank loans . . . . . - (351) 351
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (349) (349) (341)
Proceeds from issuance of common stock . . . . . . . . . . . 315 244 169
------- ------- -------
Net cash (used in) provided by financing activities (34) (456) 179
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . 5,633 4,001 (438)
Cash and cash equivalents at beginning of year . . . . . . . . 4,210 209 647
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 9,843 $ 4,210 $ 209
======= ======= =======
Supplemental cash flow disclosures (in thousands):
2003 2002 2001
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 61 $ 56
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 616 $ 205 $ 336
The accompanying notes are an integral part of these statements.
33
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements consist of the operations of the
parent company, operations of the Company's wholly owned subsidiaries, and
operations of the Company's divisions. Active subsidiaries in 2003 include
Energetics Incorporated ("Energetics") and Human Resource Systems, Inc.
("HRSI"). Active divisions include BAV Division ("BAV"), Coast Guard Division
("VCG") beginning in February 2002, Communications and Engineering Division
("CED") beginning in February 2003, Fleet Maintenance Division ("FMD"),
Management Sciences Division ("MSD"), Systems Engineering Division ("SED,"
formerly Land Systems Division), Telecommunications Technologies Division
("TTD"), and Value Systems Services Division ("VSS"). In February 2003, VSE
began phasing out the operations of TTD and expects all TTD contractual obliga-
tions will be satisfied and operations will cease in 2004. Some of TTD's
technical capabilities have been transferred to other VSE divisions. The sole
HRSI contract expired on May 31, 2003, and this work was continued on a new
contract in another VSE division. VSE also has several other subsidiaries and
divisions that were inactive in 2003 but had contract activity in years prior
to 2003.
The term "VSE" or "Company" means VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only. Intercompany
sales are principally at cost. All intercompany transactions have been
eliminated in consolidation. Certain prior year balances have been reclassified
for comparative purposes.
The Company's business operations consist primarily of diversified
engineering, logistics, management, and technical services performed on a
contract basis. Substantially all of the Company's contracts are with agencies
of the United States Government (the "government") and other government prime
contractors. The Company's customers also include non-government organizations
and commercial entities.
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis. The Company's
segment includes all of the operations of the Company's subsidiaries and
divisions as they have similar operations servicing a similar customer base.
Therefore, the Company manages these services as a single segment that is
divided into profit centers that are focused on contracts.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
34
Significant estimates affecting the financial statements include the allowance
for doubtful accounts and accruals for loss contracts, contract disallowance and
self insured health claims.
Accounting for Stock-based Compensation
The company accounts for stock-based employee compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and related
interpretations. Had compensation costs for the Company's stock options been
determined based on SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been as follows (in
thousands, except per share amounts):
Year Ended December 31
----------------------------
2003 2002 2001
---- ---- ----
Net income, as reported $2,011 $ 652 $ 855
Add: Total stock-based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) for all awards, net
of related tax effects 15 -- --
Deduct: Total stock-based
compensation expense
determined under fair value based
method (SFAS No. 123) for all
awards, net of related tax effects (83) (111) (94)
------ ----- -----
Pro forma net income $1,943 $ 541 $ 761
====== ===== =====
Earnings per share:
Basic - as reported $ 0.92 $0.30 $0.40
Diluted - as reported $ 0.90 $0.30 $0.40
Basic - pro forma $ 0.89 $0.25 $0.36
Diluted - pro forma $ 0.87 $0.25 $0.36
The fair value of the options is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used in the
pricing calculations for 2003, 2002, and 2001:
2003 2002 2001
---- ---- ----
Risk free interest rate 2.18% 3.50% 5.04%
Dividend yield 1.48% 2.16% 2.77%
Expected life 3 years 3 years 3 years
Expected volatility 37.30% 32.90% 58.27%
35
Earnings Per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Shares issued during the period and shares reacquired during the period
are weighted for the portion of the period that they were outstanding. Diluted
earnings per share have been computed in a manner consistent with that of basic
earnings per share while giving effect to all potentially dilutive common shares
that were outstanding during each period. Potentially dilutive common shares
include incremental common shares issuable upon exercise of stock options.
Years Ended December 31,
2003 2002 2001
---- ---- ----
Basic weighted average
common shares outstanding 2,189,197 2,172,384 2,136,992
Diluted effect of options 41,029 24,006 -
--------- --------- ---------
Diluted weighted average
common shares outstanding 2,230,226 2,196,390 2,136,992
========= ========= =========
Cash and Cash Equivalents
Cash and cash equivalents reported by the Company consist of cash balances
in the Company's bank accounts and short term temporary invested balances
connected to the bank accounts with sweep arrangements, netted by checks issued
on the Company's bank accounts that have not yet been presented to the bank for
collection. The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation of computer systems
equipment is provided principally by the double-declining method over periods of
two to four years. Depreciation of furniture and fixtures is provided
principally by the straight-line method over approximately nine years.
Depreciation of other equipment is provided principally by the double-declining
method over periods of three to ten years. Depreciation of buildings and land
improvements is provided principally by the straight-line method over
approximately thirty years. Amortization of leasehold improvements is provided
by the straight-line method over the lesser of their useful life or the
remaining term of the lease.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The Company believes that concentrations of credit risk with
respect to trade accounts receivable are limited as they are primarily
government receivables. The Company believes that the fair market value of all
financial instruments approximates book value.
36
Contracts with the U.S. Government, primarily with the U.S. Department of
Defense, accounted for approximately 98%, 95% and 93% of revenues for 2003,
2002, and 2001, respectively.
Contract Revenues
Substantially all of the Company's revenues result from contract services
performed for the government or for contractors engaged in work for the
government under a variety of contracts. Revenue is recognized when earned as
services are provided. Revenue is considered earned when persuasive evidence of
an arrangement exists, services have been rendered, the price is fixed and
determinable and collectibility is reasonably assured. Revenues on cost-type
contracts are recorded on the basis of recoverable costs incurred and fees
earned. The Company has a contract in its BAV division for which contract terms
specify award fee payments to BAV that are determined by performance and level
of contract activity. Award fees are made three times during the year and a
contract modification authorizing the award fee payment is issued subsequent to
the period in which the work is performed. The Company does not recognize award
fee income until the contract modification authorizing the award fee is certain.
Due to such timing, and to fluctuations in the level of revenues, profits as a
percentage of revenues on this contract will fluctuate from period to period.
Approximately $93.6 million, $106.3 million and $82.6 million of the Company's
revenues were under cost reimbursable contracts for the years ended December 31,
2003, 2002, and 2001, respectively.
Revenues on time and material contracts are recorded on the basis of
billable rates times allowable hours worked plus material and other reimbursable
costs incurred. Revenues on fixed-price service contracts are recorded as
services are provided. Revenues on other fixed-price contracts are recorded as
costs are incurred, using the percentage-of-completion method of accounting.
Profits on fixed-price contracts result from the difference between the incurred
costs and the revenue earned.
Revenue related to work performed on contracts at risk, which is work
performed prior to the government formalizing funding, is not recognized as
income until it can be reliably estimated and its realization is probable. The
Company provides for anticipated losses on contracts by a charge to income
during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is subject
to audit by the Defense Contract Audit Agency. The Company's indirect cost rates
have been audited and approved for 2001 and prior years and these completed
audits have not resulted in material adjustments to the Company's results of
operations or financial position. While the Company maintains reserves to cover
the risk of potential future audit adjustments based primarily on the results of
prior audits, there can be no assurances that the audits of the indirect cost
rates for 2003 and 2002 will not result in material adjustments to the Company's
results of operations or financial position.
The Company establishes allowances for collection of doubtful accounts.
The Company assesses the adequacy of these reserves by considering general
factors, such as the length of time individual receivables are past due and
historical collection experience. The Company believes that the established
valuation allowances are adequate.
37
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 2003,
2002, and 2001 was $0, $7 thousand, and $21 thousand, respectively.
Included in other assets are assets of the deferred compensation plans
which include equity securities recorded at fair value. The fair value of the
deferred compensation plan assets was approximately $1.2 million as of December
31, 2003, and 2002. Because plan participants are at risk for market value
changes in these assets, the liability to plan participants fluctuates with the
asset values.
Impairment of Long-Lived Assets
Long-lived assets includes property and equipment to be held and used.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount should be addressed pursuant to
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"). The criteria for determining impairment for such long-lived
assets to be held and used is determined by comparing the carrying value of
these long-lived assets to management's best estimate of future undiscounted
cash flows expected to result from the use of the assets. The Company believes
that no impairment existed under SFAS No. 144 as of December 31, 2003.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Goodwill
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets,"
effective January 1, 2002. SFAS No. 142 no longer permits amortization of
goodwill and establishes a new method of testing goodwill for impairment by
using a fair-value based approach. See Note 6 of the Company's consolidated
financial statements for further description related to this accounting change.
38
(2) Accounts Receivable
The components of accounts receivable as of December 31, 2003 and 2002,
were as follows (in thousands):
2003 2002
---- ----
Billed . . . . . . . . . . . . . . . . . . . . $ 5,397 $ 7,559
Unbilled:
Retainages . . . . . . . . . . . . . . . . . 8 80
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . 16,507 10,382
Less-Allowance for doubtful accounts . . . . . (77) (99)
------- -------
Total accounts receivable $21,835 $17,922
======= =======
The "Unbilled: Other" includes certain costs for work performed at risk
but which the Company believes will be funded by the government. Amounts not
presently funded included in "Unbilled: Other" were $478 thousand and $206
thousand as of December 31, 2003, and 2002, respectively.
The Company generally expects to collect all accounts receivable other than
retainages within one year.
The following table summarizes activity in the allowance for doubtful
accounts (in thousands):
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Deductions(1) Expenses Period
--------- ------------- -------- ------
For the year ended December 31, 2003
- ------------------------------------
Allowance for doubtful
accounts $ 99 $ 87 $ 65 $ 77
For the year ended December 31, 2002
- ------------------------------------
Allowance for doubtful
accounts 300 270 69 99
For the year ended December 31, 2001
- ------------------------------------
Allowance for doubtful
accounts 77 64 287 300
(1) Write-offs and settlements
(3) Other Current Assets
Other current assets consisted of the following (in thousands):
2003 2002
---- ----
Travel advances . . . . . . . . . . . . . . . . . . $ 443 $ 492
Prepaid rent expense . . . . . . . . . . . . . . . . 243 114
Federal and state tax receivable . . . . . . . . . . 129 92
Deferred compensation trust . . . . . . . . . . . . 12 129
Other prepaid expenses . . . . . . . . . . . . . . . 552 543
------- -------
$ 1,379 $ 1,370
======= =======
39
(4) Other Assets
Other assets consisted of the following (in thousands):
2003 2002
---- ----
Cash surrender value of life insurance . . . . . . . $ 1,269 $ 1,160
Deferred compensation trust . . . . . . . . . . . . 1,236 1,108
Other assets . . . . . . . . . . . . . . . . . . . . 6 6
------- -------
$ 2,511 $ 2,274
======= =======
(5) Property and Equipment
Property and equipment (recorded at cost) consisted of the following (in
thousands):
2003 2002
---- ----
Computer systems equipment . . . . . . . . . . . . . $ 3,644 $ 4,016
Furniture, fixtures, equipment and other . . . . . . 2,533 2,832
Leasehold improvements . . . . . . . . . . . . . . . 1,968 2,412
Buildings . . . . . . . . . . . . . . . . . . . . . 302 302
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
8,832 9,947
Less accumulated depreciation and amortization . . . (5,794) (6,464)
------- -------
$ 3,038 $ 3,483
======= =======
Depreciation and amortization expense for property and equipment was
approximately $1.2 million for 2003 and 2002 and $1.1 million for 2001.
(6) Goodwill and Intangible Assets
As part of the August 29, 1995, acquisition of Energetics, the Company
recorded approximately $1.7 million of goodwill. Between 1995 and 2001, VSE
amortized the goodwill by the straight-line method using a fifteen year life. In
accordance with SFAS No. 142, VSE stopped amortizing the goodwill in January
2002, but continues to review it at least annually, or more frequently if an
asset might be impaired, to determine if an impairment has occurred.
Approximately $1.1 million of unamortized goodwill remains on the books as of
December 31, 2003.
40
Had the Company been accounting for its goodwill under SFAS No. 142 for the
fiscal year ended December 31, 2001, the Company's net income and earnings per
share would have been as follows (in thousands, except per share data):
Year ended December 31,
2001
----
Reported net income . . . . . . . . . . . . . . . . . . $ 855
Add back goodwill amortization, net of tax . . . . . . 74
------
Adjusted net income . . . . . . . . . . . . . . . . . . $ 929
======
Basic earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . $ .40
Goodwill amortization, net of tax . . . . . . . . . . .03
------
Adjusted basic earnings per share . . . . . . . . . . $ .43
======
Diluted earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . $ .40
Goodwill amortization, net of tax . . . . . . . . . . .03
------
Adjusted diluted earnings per share . . . . . . . . . $ .43
======
On December 28, 2000, TTD invested $960 thousand in the acquisition of
certain contract and marketing rights. Between January 2001 and December 2002,
these intangible assets were amortized by the straight-line method using a life
of five years. During the fourth quarter of 2002, VSE determined that an
impairment of the intangible assets had occurred due to recurring losses and
reduced backlog. As a result, an impairment loss for the remaining unamortized
amount of $576 thousand was included in VSE's results of operations for 2002.
Total Company amortization expense for goodwill and intangible assets was
approximately $0, $192 thousand and $311 thousand for 2003, 2002, and 2001,
respectively.
(7) Debt
VSE has a revolving loan agreement with a bank in 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 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,
2005. 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. There were no amounts borrowed
under this loan agreement as of December 31, 2003 or 2002. There was no interest
expense incurred on this loan in 2003. Interest expense incurred on the loan for
2002 and 2001 was approximately $55 thousand and $60 thousand, respectively.
41
(8) Accrued Expenses
The components of accrued expenses as of December 31, 2003 and 2002, were
as follows (in thousands):
2003 2002
---- ----
Accrued salaries . . . . . . . . . . . . . . . . $1,267 $1,068
Accrued vacation . . . . . . . . . . . . . . . . 1,332 1,270
Estimated future losses on contracts . . . . . . 516 754
Contract disallowances . . . . . . . . . . . . . 442 398
Accrued bonus . . . . . . . . . . . . . . . . . . 1,157 488
Other accrued expenses . . . . . . . . . . . . . 1,046 1,074
------ ------
Total accrued expenses $5,760 $5,052
====== ======
(9) ESOP/401(k) Plan and Profit Sharing Plan
VSE established an ESOP/401(k) plan in 1984. Under the provisions of the
ESOP, VSE and certain of its operating entities made contributions into a trust
which purchased VSE stock on behalf of employees who met certain age and service
requirements and were employed at the end of the plan year. Contributions at the
rate of up to 2% of eligible employee compensation were permitted at the
discretion of the VSE Board of Directors and were allocated, subject to a
vesting schedule, on a pro rata basis on eligible employee compensation. The
401(k) segment of the plan allows employees meeting certain age and service
requirements to contribute a portion of their salary to certain investment
trusts. As of April 1, 1999, the ESOP contributions were discontinued and
replaced by employer 401(k) contributions made on behalf of the eligible
employee participants based on the employees' 401(k) payroll deferrals. For 2001
and prior years, the employer contribution was equal to 50% of the employee
deferral on the first 5% of the employee pay deferred. From 2002 the employer
contribution is equal to 50% of the employee deferral on the first 6% of the
employee pay deferred. The Company expense associated with this plan for 2003,
2002, and 2001 was $262 thousand, $342 thousand, and $249 thousand,
respectively.
The ESOP/401(k) plan held 317,223 shares and 349,485 shares of VSE stock
as of December 31, 2003 and 2002, respectively. Such shares receive dividend
payments and are included in the weighted average shares for earnings per share
calculations.
Energetics maintains a profit sharing plan for employees. All employees
who have completed two years of service are members of the profit sharing plan.
At its discretion, Energetics may make contributions to the plan. The plan
expense for 2003, 2002, and 2001 was $429 thousand, $458 thousand, and $450
thousand, respectively.
42
(10) Stock Option Plans
1996 and 1998 Stock Option Plans
Under the 1996 Plan, the Company may grant options for and sell up to an
aggregate of 273,698 shares of the common stock of the Company. Through December
31, 2003, the Company has granted options for 211,455 shares of common stock
priced at 100% of the fair value of the stock at the time of the grant of the
option. The maximum term of the options granted is five years. The vesting
period is three years and allows for 25% vesting immediately upon date of the
grant and an additional 25% on each successive anniversary date thereafter.
Vesting may be accelerated for shares granted to certain individuals as
determined by the Board of Directors. The 1996 Plan will terminate on the
earliest of February 5, 2006, or the date on which all options under the 1996
plan have been exercised or terminated. As of December 31, 2003, zero shares are
exercisable under this plan.
Under the 1998 Plan, the Company may grant options for and sell up to an
aggregate of 419,250 shares of common stock. Of the shares available for grant,
23,250 shares may be granted to non-employee directors of VSE, and 396,000
shares may be granted to executive officers and key employees. Through
December 31, 2003 the Company has granted options for 346,250 shares of common
stock priced at 100% of the fair value of the stock at the time of the grant of
the option. The vesting period is three years and allows for 25% vesting
immediately upon date of the grant and an additional 25% on each successive
anniversary date thereafter. The 1998 Plan will terminate on the earliest of
May 6, 2008, or the date on which all options under the 1998 Plan have been
exercised or terminated.
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2003 Price 2002 Price 2001 Price
---- ----- ---- ----- ---- -----
Number of shares under
stock options:
Outstanding at beginning
of year 185,000 $ 7.66 217,375 $ 8.12 343,455 $10.28
Granted 68,750 10.85 69,750 6.62 69,750 5.77
Exercised (24,875) 10.89 (32,500) 6.59 - -
Forfeited (4,625) 10.18 (39,000) 7.86 (19,000) 9.01
Terminations (12,000) 10.93 (30,625) 9.42 (176,830) 11.30
------- ------ ------- ------ ------- ------
Outstanding at end
of year 212,250 $ 8.07 185,000 $ 7.66 217,375 $ 8.12
======= ====== ======= ====== ======= ======
Exercisable at end
of year 127,250 $ 7.45 111,063 $ 8.29 112,687 $ 8.83
======= ====== ======= ====== ======= ======
Weighted average remaining
contractual life 3 years 3 years 2 years
Weighted average fair
value of options granted $2.80 $1.97 $2.24
===== ===== =====
43
The following table summarizes the range of exercise prices for options
outstanding at December 31, 2003:
Outstanding Options
------------------- Exercisable Options
Weighted --------------------
Average Weighted Weighted
Contractual Average Average
Number of Life Exercise Number of Exercise
Range of Exercise Prices Shares (in years) Price Shares Price
- ------------------------ ------ ---------- ----- ------ -----
$5.77 to $6.62 96,000 2 $ 6.14 61,813 $ 6.06
$8.03 48,500 1 8.03 48,500 8.03
$10.73 to $12.32 67,750 4 10.85 16,938 10.85
------- - ------ ------- ------
Total 212,250 3 $ 8.07 127,250 $ 7.45
======= = ====== ======= ======
The company accounts for stock-based employee compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and related
interpretations. The total stock-based employee compensation expense, net of tax
effects, as of December 31, 2003 was approximately $15 thousand.
(11) Income Taxes
The Company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision for income taxes for the years
ended December 31, 2003, 2002, and 2001 are as follows (in thousands):
2003 2002 2001
---- ---- ----
Current
Federal . . . . . . . . . . . . . . . . . . $ 443 $ 619 $ 218
State . . . . . . . . . . . . . . . . . . . 178 148 11
------ ------ ------
621 767 229
Deferred
Federal . . . . . . . . . . . . . . . . . . 587 (238) 182
State . . . . . . . . . . . . . . . . . . 59 (36) 30
------ ------ ------
646 (274) 212
------ ------ ------
Provision for income taxes . . . . . . . . . . $1,267 $ 493 $ 441
====== ====== ======
The differences between the amount of tax computed at the federal statutory
rate of 34% and the provision for income taxes for 2003, 2002, and 2001 are as
follows (in thousands):
2003 2002 2001
---- ---- ----
Tax at statutory federal income
tax rate at 34% . . . . . . . . . . . . . . $1,115 $ 389 $ 441
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 155 67 74
Permanent differences, net . . . . . . . . (6) 14 (2)
Other, net . . . . . . . . . . . . . . . . 3 23 (72)
------ ------ ------
Provision for income taxes . . . . . . . . $1,267 $ 493 $ 441
====== ====== ======
The provision for income taxes was reduced for the period ended December
31, 2001, due to a change in the Company's effective state tax rate. The
reduction in the effective state tax rate was the result of lower
44
apportionment factors in states with higher tax rates. The provision for income
taxes included a one time state tax adjustment of approximately $72,000.
The Company's deferred tax assets (liabilities) as of December 31, 2003 and
2002, which represent the tax effects of temporary differences between tax and
financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates, are as follows (in thousands):
2003 2002
---- ----
Current deferred tax assets . . . . . . . . . . $1,023 $1,437
Current deferred tax liabilities . . . . . . . . (204) (124)
------ ------
Net current deferred tax assets . . . . . . . . 819 1,313
------ ------
Noncurrent deferred tax assets . . . . . . . . . 887 788
Noncurrent deferred tax liabilities . . . . . . . (590) (339)
------ ------
Net noncurrent deferred tax assets . . . . . . 297 449
------ ------
Net deferred tax assets . . . . . . . . . . . . . $1,116 $1,762
====== ======
The tax effect of temporary differences representing deferred tax assets
and liabilities as of December 31, 2003 and 2002, are as follows (in thousands):
2003 2002
---- ----
Deferred compensation and accrued paid leave . . $1,016 $ 988
Allowance for contract and other disallowances . 159 138
Accrued expenses . . . . . . . . . . . . . . . . 70 79
Allowance for doubtful accounts . . . . . . . . . 36 38
Retainages not taxed until billed . . . . . . . (5) (32)
Intangible assets . . . . . . . . . . . . . . . . (92) 270
Accelerated depreciation . . . . . . . . . . . . (138) 23
Deferred revenues . . . . . . . . . . . . . . . . (165) (74)
Other . . . . . . . . . . . . . . . . . . . . . . 235 332
------ ------
Net deferred tax assets $1,116 $1,762
====== ======
(12) Commitments and Contingencies
Leases and other commitments
The principal facilities of the Company and its subsidiaries are generally
rented under non-cancelable operating leases for periods of two to 10 years. The
Company and its subsidiaries also lease equipment generally under non-cancelable
operating leases for periods of two to five years. In addition, the Company
entered into a Microsoft license agreement requiring contract payments over
three years, beginning in June, 2001. Total rent and lease expense for 2003,
2002, and 2001 was approximately $2.7 million, $1.8 million, and $1.8 million,
respectively, which was net of sublease income of $637 thousand, $869 thousand
and $689 thousand, respectively. The future minimum annual commitments having
remaining non-cancelable commitment terms in excess of one year, net of non-
cancelable sublease income, will approximate $2.8 million in 2004, $2.3 million
in 2005, $1.8 million in 2006, $1.8 million in 2007, $1 million in 2008, and
$0 thereafter.
45
The Company has commitments to construct a new building at its Ladysmith
facility and for improvements at our primary office facility, totaling
approximately $1.2 million.
Litigation
The Company and its subsidiaries have, in the normal course of business,
certain claims against them and against other parties. The Company is not aware
of any present claims which would have a material adverse effect on the
Company's financial condition or results of operations.
(13) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2003 and 2002, in
thousands, except earnings per share:
2003 Quarters
-------------
1st 2nd 3rd 4th
--- --- --- ---
Revenues . . . . . . . . . . . . . . . . $26,462 $29,368 $36,391 $42,238
======= ======= ======= =======
Gross profit . . . . . . . . . . . . . . $ 697 $ 760 $ 909 $ 1,195
======= ======= ======= =======
Net income . . . . . . . . . . . . . . . $ 432 $ 436 $ 523 $ 620
======= ======= ======= =======
Basic earnings per share:
Net income per share . . . . . . . . . . $ .20 $ .20 $ .24 $ .28
======= ======= ======= =======
Weighted average shares outstanding . . 2,187 2,189 2,189 2,192
======= ======= ======= =======
Diluted earnings per share:
Net income per share . . . . . . . . . . $ .19 $ .20 $ .23 $ .28
======= ======= ======= =======
Weighted average shares outstanding . . 2,225 2,220 2,236 2,239
======= ======= ======= =======
2002 Quarters
-------------
1st 2nd 3rd 4th
Revenues . . . . . . . . . . . . . . . . $29,080 $36,353 $37,836 $31,110
======= ======= ======= =======
Gross profit . . . . . . . . . . . . . . $ 264 $ 518 $ 484 $ 807
======= ======= ======= =======
Net income . . . . . . . . . . . . . . . $ 119 $ 274 $ 257 $ 2
======= ======= ======= =======
Basic earnings per share:
Net income per share . . . . . . . . . . $ .06 $ .12 $ .12 $ .00
======= ======= ======= =======
Weighted average shares outstanding . . 2,151 2,174 2,182 2,183
======= ======= ======= =======
Diluted earnings per share:
Net income per share . . . . . . . . . . $ .06 $ .12 $ .12 $ .00
======= ======= ======= =======
Weighted average shares outstanding . . 2,151 2,200 2,205 2,205
======= ======= ======= =======
46
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
VSE Corporation engaged the services of Ernst & Young LLP as its new
independent auditors to replace Arthur Andersen LLP, effective May 15, 2002. For
additional information, see VSE Corporation's current report on Form 8-K dated
May 17, 2002 (as amended by the Form 8-K/A filed May 21, 2002).
ITEM 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
VSE's chief executive officer and chief financial officer, after evaluating
the effectiveness of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a 14(c) and 15d 14(c)) as of a date
(the "Evaluation Date") within 90 days before the filing of this annual report,
have concluded that, as of the Evaluation Date, VSE's disclosure controls and
procedures were adequate to ensure that the information required to be disclosed
in the reports filed or submitted by the Company under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the
requisite time periods.
PART III
The information required by Items 10, 11, 12, 13 and 14 of Part III of Form
10-K has been omitted in reliance of General Instruction G(3) and is
incorporated herein by reference to the Company's proxy statement to be filed
with the SEC pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, except for the specific disclosures below:
ITEM 10. Directors and Executive Officers of the Registrant
Audit Committee and Financial Expert
The Board of Directors has determined that the Company has at least one
audit committee financial expert serving on its Audit Committee, Director James
A. Lafond. Mr. Lafond is "independent" as that term is used in Schedule 14A,
Item 7(d)(3)(iv) under the Securities Exchange Act of 1934, as amended.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Ethics and Conduct that applies
to all of its directors, officers, including principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, and employees. The Code is posted on the
Company's Internet website www.vsecorp.com.
ITEM 11. Executive Compensation
The information required by this Item 11 is included in the text and tables
under the caption "Executive Officer Compensation," in the 2003 Proxy Statement,
which is required to be filed by April 30, 2004, and that information is
incorporated by reference in this Form 10-K.
47
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item 12 is included under the caption
"Security Ownership of Certain Beneficial Owners and Management," in the 2003
Proxy Statement, which is required to be filed by April 30, 2004, and that
information is incorporated by reference in this Form 10-K.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-K concerning certain
relationships and related transactions is included under the caption
"Transactions with Management and Others; Other Information" in our 2003 Proxy
Statement, which is required to be filed by April 30, 2004, and that information
is incorporated by reference in this Form 10-K.
ITEM 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A concerning principal
accounting fees and services is included under the caption "Appointment of
Independent Certified Public Accountants" in our 2003 Proxy Statement, which is
required to be filed by April 30, 2004, and that information is incorporated by
reference in this Form 10-K.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
1. Financial Statements
The consolidated financial statements are listed under Item 8 of this
report.
2. Supplemental Financial Statement Schedule
Schedules not included herein have been omitted because of the
absence of conditions under which they are required or because the required
information, where material, is shown in the consolidated financial statements,
financial notes, or supplementary financial information.
3. Exhibits
See "Exhibit Index" hereinafter contained and incorporated by
reference.
4. Reports on Form 8-K
On October 30, 2003, the Registrant filed a Current Report on Form
8-K to announce the financial results of the third quarter 2003.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 11, 2004 By: /s/ D. M. Ervine
-----------------------------------
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- -----------------------------------------------------------------------------
/s/ Donald M. Ervine
_____________________________ Chairman, President, March 9, 2004
Donald M. Ervine Chief Executive Officer,
Chief Operating Officer
/s/ Craig S. Weber
_____________________________ Executive Vice President, March 9, 2004
Craig S. Weber Chief Administrative
Officer, Secretary
/s/ Thomas R. Loftus
_____________________________ Senior Vice President and March 9, 2004
Thomas R. Loftus Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Robert J. Kelly
_____________________________ Director March 9, 2004
Robert J. Kelly
/s/ Clifford M. Kendall
_____________________________ Director March 9, 2004
Clifford M. Kendall
/s/ Calvin S. Koonce
_____________________________ Director March 9, 2004
Calvin S. Koonce
/s/ James F. Lafond
_____________________________ Director March 9, 2004
James F. Lafond
/s/ David M. Osnos
_____________________________ Director March 9, 2004
David M. Osnos
/s/ Jimmy D. Ross
_____________________________ Director March 9, 2004
Jimmy D. Ross
/s/ Bonnie K. Wachtel
_____________________________ Director March 9, 2004
Bonnie K. Wachtel
49
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Exchange Agreement dated as of March 25, 1992,
amended as of September 1, 1992, by and between VSE
Corporation and JBT Holding Corp., et al. (Exhibit A
to Exhibit 1, Proxy Statement, filed on
Form 8-K on November 2, 1992) *
3 Articles of incorporation and by-laws
Restated Certificate of Incorporation of VSE
Corporation dated as of February 6, 1996 *
By-Laws of VSE Corporation as amended through
May 16, 2000 (Exhibit 3.2 to Form 10-Q dated
October 27, 2000) Exhibit 3.2
4 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2) *
9 Voting trust agreement Not Applicable
10 Material contracts
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Jayne M. Tuohig (Exhibit VII to form 10-K dated
March 7, 2001) *
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Craig S. Weber (Exhibit VIII to form 10-K dated
March 7, 2001) *
Employment Agreement entered into as of October 21,
1998, by and between VSE Corporation and
Donald M. Ervine (Exhibit VI to Form 10-K dated
March 18, 1999) *
Employment Agreement entered into as of January 15,
1999, by and between VSE Corporation and
Energetics Incorporated and Robert J. Kelly
(Exhibit VII to Form 10-K dated March 18, 1999) *
Employment Agreement entered into as of June 3,
1999, by and between VSE Corporation and
James M. Knowlton (Exhibit V to Form 10-K dated
March 15, 2000) *
Employment Agreement dated as of November 1,
2000, by and between VSE Corporation and
James M. Todd (Exhibit V to form 10-K dated
March 7, 2001) *
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
50
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
Separation Agreement and General Release dated
February 15, 2002, by and between
VSE Corporation and James M. Todd (Exhibit IV
to Form 10-K dated March 6, 2002) *
Consulting Agreement dated February 15, 2002,
by and between VSE Corporation and
James M. Todd (Exhibit V to Form 10-K dated March
March 6, 2002) *
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996) *
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 6, 1998) *
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on May 6, 1998)*
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or selected quarterly data Exhibit 13
16 Letter re change in certifying accountant Not Applicable
18 Letter re change in accounting principles Not Applicable
21 Subsidiaries of the Registrant Exhibit 21
22 Published report regarding matters submitted
to vote of security holders Not Applicable
23.1 Consent of independent auditors Exhibit 23.1
23.2 Information regarding consent of Arthur Andersen Exhibit 23.2
24 Power of attorney Not Applicable
31.1 Section 302 CEO Certification Exhibit 31.1
31.2 Section 302 CFO and PAO Certification Exhibit 31.2
32.1 Section 906 CEO Certification Exhibit 32.1
32.2 Section 906 CFO and PAO Certification Exhibit 32.2
*Document has been filed as indicated and is incorporated by reference herein.
51