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, 2005 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
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 [ ]
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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [x] No [ ]
The aggregate market value of outstanding voting stock held by nonaffiliates of
the Registrant as of June 30, 2005, was approximately $45.9 million based on the
last reported sales price of the Registrant's common stock on the Nasdaq
National Market as of that date.
Number of shares of Common Stock outstanding as of March 8, 2006: 2,359,611.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 2, 2006, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . 10
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 10
ITEM 4. Submission of Matters to a Vote of Security Holders . . 10
Executive Officers of the Registrant . . . . . . . . . . 11
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 12
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 15
ITEM 8. Financial Statements and Supplementary Data . . . . . . 29
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . 49
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . 49
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . 49
PART III
ITEM 10. Directors and Executive Officers of the Registrant . . . 49
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . 49
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 49
ITEM 13. Certain Relationships and Related Transactions . . . . . 49
ITEM 14. Principal Accountant Fees and Services . . . . . . . . . 50
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 50
Signatures . . . . . . . . . . . . . . . . . . . . . . . 51
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 undertakes
no obligation to publicly revise these forward looking statements to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including 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
VSE was incorporated in Delaware in 1959. The parent company serves as a
centralized management and consolidating entity for the business operations
conducted by the Company's divisions and wholly owned subsidiary, Energetics
Incorporated ("Energetics"). Unincorporated divisions include BAV Division
("BAV"), Communications and Engineering Division ("CED"), Coast Guard Division
("VCG"), Engineering and Logistics Division ("ELD") beginning in 2006, Fleet
Maintenance Division ("FMD"), Management Sciences Division ("MSD"), and Systems
Engineering Division ("SED").
VSE previously conducted business operations in other subsidiaries and
divisions during the past three year period that have been dissolved or became
inactive prior to December 31, 2005. These include Human Resource Systems, Inc.
("HRSI"), dissolved in 2004; Telecommunications Technologies Division ("TTD"),
discontinued operations in 2004 and Information Assurance Division ("IAD",
formerly Value Systems Services Division or "VSS"), inactive as of May 2005.
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
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.
3
(b) Financial Information
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis. In 2004, all
business operations associated with the Company's TTD division ceased and
financial results of TTD are presented as discontinued operations. Financial
information for the three years ended December 31, 2005, appears in the
"Consolidated Statements of Operations" contained in this Form 10-K.
(c) 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; engineering and technical support for ground weapons;
material procurement support; configuration management; computer-aided drafting
and design; design and engineering, including prototype development; ship
reactivation, transfer support and follow-on technical support; logistics
management; design and installation of intelligent conference rooms; training,
consulting and implementation support; quality training services for product,
process, and management optimization; technology insertion; service life
extension; environmental management and support; technology research,
development and demonstration programs involving energy conservation and
efficiency; advanced technology transfers; technology roadmaps; and feasibility,
assessment and development programs.
Typical projects include sustaining engineering support for military
vehicles and combat trailers; military equipment refurbishment and modification;
military vehicle ballistic protection systems; 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; ship
communication systems; 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 development and 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 may include prime contracts, subcontracts, cooperative
arrangements, joint ventures, dedicated ventures, GSA schedules, dedicated cost
centers (divisions) and subsidiaries. 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.
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
customer. Other significant customers include the U.S. Army and Army Reserve and
the Department of Energy. The Company's customers also include various other
government agencies, non-government organizations, and commercial entities.
4
VSE Revenues by Customer
(Dollars in Thousands)
2005 2004 2003
Customer Revenues % Revenues % Revenues %
- ------- -------- - -------- - -------- -
U.S. Navy . . . . . . $196,363 70.1 $157,433 72.9 $ 93,957 70.6
U.S. Army/Army Reserve 56,019 20.0 27,384 12.7 16,374 12.3
Department of Energy . 9,734 3.5 10,578 4.9 11,405 8.6
U.S. Air Force . . . . 5,431 1.9 3,628 1.7 2,287 1.7
U.S. Coast Guard . . . 5,008 1.8 8,498 3.9 4,946 3.7
All other government . 5,795 2.1 6,535 3.0 2,408 1.8
Commercial and other . 1,789 0.6 1,955 0.9 1,682 1.3
-------- ----- -------- ----- -------- -----
Total $280,139 100.0 $216,011 100.0 $133,059 100.0
======== ===== ======== ===== ======== =====
The government's procurement practices in recent years have tended toward
the bundling of various work efforts under large comprehensive management
contracts ("omnibus"). 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 may lower
the Company's overall profit margins in some 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 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. Substantially all of BAV's work is performed on a program for the
U.S. Navy that accounted for approximately 43%, 52%, and 48% of consolidated
revenues in 2005, 2004, and 2003, respectively. This program is currently
performed under two contracts. The original ten-year contract was awarded in
1995 with a total contract ceiling of over $1 billion and has been extended to
continue work on a major delivery order effort through most of 2006. A follow-on
five-year contract with a total ceiling of approximately $544 million was
awarded in 2005.
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 are
earned. Profits on cost-type contracts are equal to the fees that are earned.
The BAV Division contracts have terms that specify award fee payments
that are determined by performance and level of contract activity. Award fees
under the BAV contracts 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 fees are fixed and determinable, generally upon contract
notification confirming the award fee. 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 multiplied by the contract defined billing
rates, plus the cost of materials used in performance on the contract.
5
Profits or losses on time and material contracts result from the difference
between the cost of services performed and the contract defined billing rates
for these services.
Revenue recognition methods on fixed-price contracts will vary depending
on the nature of the work and the contract terms. On some fixed-price contracts
revenues are recorded as costs are incurred, using the percentage-of-completion
method of accounting. Revenues on fixed-price service contracts are recorded as
work is performed. Revenues on fixed-price contracts that require delivery of
specific items may be recorded based on a price per unit as units are delivered.
Profits on fixed-price contracts result from the difference between the incurred
costs and the revenue earned.
Backlog
Funded backlog for government contracts represents a measure of the
Company's potential future revenues and is defined as the total estimated value
of contracts that has been appropriated and funded by the procuring agencies,
less the amount of revenues that have already been recognized on such contracts.
VSE's funded backlog as of December 31, 2005, increased to approximately $276
million, the highest backlog in the Company's history. Funded backlog as of
December 31, 2004 and 2003 was approximately $168 million and $83 million,
respectively. The increases in funded backlog during these years are due to
increases in funding on the Company's existing programs and the funding received
on new programs in 2005. Changes in funded backlog on contracts are sometimes
unpredictable due to uncertainties associated with changing program requirements
and the ultimate availability of funds. The majority of the Company's funded
backlog is expected to be completed within one year.
In addition to the increases in funding on current contracts, there were
significant increases in total contract ceiling amounts available for use by the
Company resulting from large multiple award, indefinite delivery, indefinite
quantity contracts awarded by the U.S. Army and U.S. Navy to the Company in 2004
and 2003. While the award of these contracts has increased the opportunities
available to VSE to pursue future work, the amount of future work is not
determinable until delivery orders are placed on the contracts. Additionally,
these delivery orders must be funded by the procuring agencies before the
Company can perform work and begin earning revenues from them.
In December 2005, VSE was awarded a task order on the U.S. Army contract
with a base year valued at approximately $139 million, with an additional one-
year option period valued at approximately $212 million. The task order is
incrementally funded. The initial funding was approximately $31 million,
included in the December 31, 2005 funded backlog amount above, with additional
funding expected to follow.
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 2006, VSE employed 716 employees. 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
6
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
The professional and technical services industry in which VSE is engaged
is very competitive. There are numerous 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 emphasized awarding contracts of the types
performed by VSE on a competitive basis as opposed to a sole source or other
non-competitive basis. Most of the significant contracts currently 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 four GSA schedule contracts for different
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.
Available Information
Copies of VSE's 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 and Exchange Commission.
ITEM 1A. Risk Factors
VSE's future results may differ materially from past results and from
those projected in the forward-looking statements contained in this Form 10-K
due to various uncertainties and risks, including but not limited to those set
forth below, one-time events and other important factors disclosed previously
and from time to time in other filings with the SEC.
7
Federal procurement directives could result in a loss of work on current
programs to set-asides and omnibus contracts.
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 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 VSE's revenue
growth and profit margins.
Funding uncertainties for federal programs could adversely affect the Company's
ability to continue work on its government contracts.
Government contract business is subject to funding delays, terminations,
reductions, extensions, and moratoriums caused by political and administrative
disagreements within the government. 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.
Global economic conditions and political factors could adversely affect revenues
on current programs.
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 Ship Transfer Program could potentially affect
sales. Failure by the government of a potential foreign customer to approve and
fund acquisition of U.S. Navy ships serviced under this program could affect
sales. BAV sales to Egypt and Taiwan have historically comprised a large
percentage of the Company's total sales in any one year. The concentration of
a large percentage of work under one or two client countries presents additional
risk to the Company.
The current international situation posed by potential terrorist activity
and the continuing conflict in the Middle East could potentially increase the
political risks for revenues from the BAV Ship Transfer, TBPS, and CED Army
Equipment Support Programs. 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.
VSE is exposed to contractual and financial liabilities in the event that its
subcontractors do not perform satisfactorily.
A large percentage of VSE's contract work is performed by subcontractors,
which raises certain performance and financial risks to VSE. While subcontractor
terms generally specify the terms and performance for which the subcontractor is
liable to VSE, in the event of any unsatisfactory performance on the part of
subcontractors, the Company still must bear the cost to ensure satisfactory
performance on its prime contracts.
As a U.S. Government contractor, VSE is subject to a number of procurement rules
and regulations that could expose the Company to potential liabilities or loss
of work.
VSE must comply with and is affected by laws and regulations relating to
the award, administration and performance of U.S. Government contracts.
Government contract laws and regulations affect how the Company does business
with its customers and, in some instances, impose added costs on the business.
A violation of specific laws and regulations could result in the imposition of
fines and penalties or the termination of contracts or debarment from bidding on
contracts.
8
In some instances, these laws and regulations impose terms or rights that
are more favorable to the government than those typically available to
commercial parties in negotiated transactions. For example, the U.S. Government
may terminate any government contracts and, in general, subcontracts, at their
convenience, as well as for default based on performance. Upon termination for
convenience of a fixed-price type contract, the Company would normally be
entitled to receive the purchase price for delivered items, reimbursement for
allowable costs for work-in-process and an allowance for profit on the contract
or adjustment for loss if completion of performance would have resulted in a
loss. Upon termination for convenience of a cost-type contract, the Company
would normally be entitled to reimbursement of allowable costs plus a portion of
the fee. Such allowable costs would include the cost to terminate agreements
with suppliers and subcontractors. The amount of the fee recovered, if any, is
related to the portion of the work accomplished prior to termination and is
determined by negotiation.
A termination for default could expose the Company to liability and have
a material adverse effect on its ability to compete for future contracts and
orders. In addition, the U.S. Government could terminate a prime contract under
which the Company is a subcontractor, irrespective of the quality of services
provided by VSE as a subcontractor.
VSE's business could be adversely affected by a negative audit by the U.S.
Government.
U.S. Government agencies, including the Defense Contract Audit Agency and
the Department of Labor, routinely audit and investigate government contractors.
These agencies review a contractor's performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. The
U.S. Government also may review the adequacy of, and a contractor's compliance
with, its internal control systems and policies, including the contractor's
purchasing, property, estimating, compensation and management information
systems. Any costs found to be improperly allocated to a specific contract will
not be reimbursed, while such costs already reimbursed must be refunded. If an
audit uncovers improper or illegal activities, the Company may be subject to
civil and criminal penalties and administrative sanctions, including termination
of contracts, forfeiture of profits, suspension of payments, fines and
suspension or prohibition from doing business with the U.S. Government. In
addition, the Company could suffer serious reputational harm if allegations of
impropriety were made.
VSE's earnings and margins may vary based on the mix of contracts and programs.
At December 31, 2005, funded backlog included both cost-type and fixed-
price contracts. Cost-type contracts generally have lower profit margins than
fixed-price 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 level of work
performed on cost-type versus fixed-price contracts and the level of work
performed by subcontractors may cause fluctuations in the Company's overall
profit margins from year to year or from period to period.
VSE uses estimates in accounting for its programs. Changes in estimates could
affect future financial results.
The Company uses 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. Significant estimates affecting the financial statements
include the allowance for doubtful accounts and accruals for loss contracts,
contract disallowance and self insured health claims, and estimated cost to
complete on certain fixed-price contracts.
9
New accounting standards could result in changes to VSE's methods of quantifying
and recording accounting transactions, and could affect financial results and
financial position.
Changes to Generally Accepted Accounting Principles in the United States
(GAAP) arise from new and revised standards, interpretations and other guidance
issued by the Financial Accounting Standards Board, the SEC, and others. The
effects of such changes may include prescribing an accounting method where none
had been previously specified, prescribing a single acceptable method of
accounting from among several acceptable methods that currently exist, or
revoking the acceptability of a current method and replacing it with an entirely
different method, among others. Such changes could result in unanticipated
effects on results of operations, financial position and other financial
measures.
ITEM 1B. Unresolved Staff Comments
None
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 16 other U.S. leased facilities located near customer sites to
facilitate communications and enhance project performance. These facilities are
generally occupied under short-term leases and currently include an aggregate of
approximately 173,000 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 multiple storage and vehicle
maintenance buildings totaling approximately 17,000 square feet of space. This
property is used by VSE to test military equipment for which VSE provides system
technical support or other engineering services; to provide maintenance and
refurbishment services for military equipment; and to supplement Alexandria,
Virginia, office and shop facilities.
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. However, the results of
any legal proceedings cannot be predicted with certainty.
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, 2005.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Registrant as of March 8, 2006. 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 and Mr. Reed.
Mr. Dacus 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, and his career includes over 30 years
experience in managing high technology engineering programs and projects.
Mr. Reed joined VSE in 2005 as Chief Operating Officer of VSE's wholly
owned subsidiary Energetics Incorporated, and effective April 1, 2005, he was
appointed Energetics' President. Mr. Reed was a founder of Energetics in 1979
and served as an officer of Energetics from 1979 to 2001. He provided senior-
level consulting services to government and private clients as a sole proprietor
during the period 2001 through 2004. He is a Registered Professional Engineer in
Maryland.
The executive officers are appointed 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 . . . . . . . . 60 Senior Vice President and Director,
Federal Group
Donald M. Ervine . . . . . . . 69 Chairman and Chief Executive Officer,
President and Chief Operating Officer
James E. Reed . . . . . . . . . 57 President, Energetics Incorporated, and
Director, Energy and Environment Group
James M. Knowlton . . . . . . . 63 Executive Vice President and
Director, International Group
Thomas R. Loftus . . . . . . . 50 Senior Vice President and Chief
Financial Officer
Craig S. Weber . . . . . . . . 61 Executive Vice President, Chief
Administrative Officer, and Secretary
11
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
------------- ---- --- ---------
2004:
March 31 . . . . . . . $19.10 $12.35 $.04
June 30 . . . . . . . 27.00 14.62 .05
September 30 . . . . . 33.91 14.00 .05
December 31 . . . . . 33.91 22.56 .05
For the Year $33.91 $12.35 $.19
2005:
March 31 . . . . . . . $27.49 $21.09 $.05
June 30 . . . . . . . 38.85 23.82 .06
September 30 . . . . . 40.50 30.00 .00 (see (c) below)
December 31 . . . . . 42.25 31.56 .12
For the Year $42.25 $21.09 $.23
(b) Holders
There were approximately 1,740 stockholders of VSE common stock as of
February 1, 2006, consisting of approximately 250 stockholders of record plus
the number of beneficial owner proxy sets provided in connection with VSE's
Annual Meeting of Stockholders held on May 3, 2005, 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 $.05 per share on March 8,
2005, and $.06 per share on May 3, 2005, October 3, 2005 and December 6, 2005.
Pursuant to VSE's bank loan agreement (see Note 8 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.
12
(d) Equity Compensation Plan Information
The following table provides information about the Company's equity
compensation plans as of December 31, 2005:
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 (1) Options column (a))
Plan Category (a) (b) (c)
- ------------- ------------ ----------- ------------------
Equity compensation
plans approved by
stockholders . . . . . 197,563 $15.83 280,000
Equity compensation
plan not approved
by stockholders . . . . - - -
------- ------ -------
Total 197,563 $15.83 280,000
======= ====== =======
(1) Excludes 262,913 shares of issued and outstanding shares of VSE Common
Stock (par value $.05 per share) held by the VSE Corporation Employee
ESOP/401(k) Plan; these shares may be transferred to Plan participants on
retirement, termination of VSE employment, or pursuant to ESOP diversification.
13
ITEM 6. Selected Financial Data
(In thousands, except per share data)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Revenues, principally from contracts . . . . . $280,139 $216,011 $133,059 $128,417 $103,490
======== ======== ======== ======== ========
Income from continuing operations . . . . . . $ 6,169 $ 3,445 $ 2,090 $ 1,585 $ 547
(Loss) income from discontinued operations . . - (1) (79) (933) 308
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ 6,169 $ 3,444 $ 2,011 $ 652 $ 855
======== ======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations . . . . . $ 2.66 $ 1.54 $ .96 $ .73 $ .26
Loss (income) from discontinued operations . - - (.04) (.43) .14
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . $ 2.66 $ 1.54 $ .92 $ .30 $ .40
======== ======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations . . . . . $ 2.58 $ 1.49 $ .94 $ .72 $ .26
Loss (income) from discontinued operations . - - (.04) (.42) .14
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . 2.58 $ 1.49 $ .90 $ .30 $ . 40
======== ======== ======== ======== ========
Working Capital . . . . . . . . . . . . . . . $ 22,028 $ 15,748 $ 13,394 $ 10,762 $ 8,807
======== ======== ======== ======== ========
Total assets . . . . . . . . . . . . . . . . . $ 73,866 $ 60,352 $ 30,776 $ 32,075 $ 33,209
======== ======== ======== ======== ========
Long-term debt . . . . . . . . . . . . . . . . $ - $ - $ - $ - $ 351
======== ======== ======== ======== ========
Stockholders' investment . . . . . . . . . . . $ 30,151 $ 23,043 $ 19,058 $ 17,043 $ 16,475
======== ======== ======== ======== ========
Cash dividends per common share . . . . . . . $ .23 $ .19 $ .16 $ .16 $ .16
======== ======== ======== ======== ========
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.
14
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
- ------------------
VSE Organization
VSE's business operations consist primarily of services performed by the
Company's unincorporated divisions and wholly owned subsidiary. The Company uses
multiple operating entities to bid on and perform contract work. The use of an
operating structure with multiple entities gives the Company certain competitive
advantages and the flexibility to pursue a diverse business base. The term "VSE"
or "Company" refers to VSE and its divisions and subsidiaries unless the context
indicates operations of the parent company only.
Unincorporated divisions include BAV Division ("BAV"), Communications and
Engineering Division ("CED"), Coast Guard Division ("VCG"), Engineering and
Logistics Division ("ELD") beginning in 2006, Fleet Maintenance Division
("FMD"), Management Sciences Division ("MSD"), and Systems Engineering Division
("SED"). Energetics Incorporated ("Energetics") is currently VSE's only active
subsidiary.
VSE previously conducted business operations in other subsidiaries and
divisions during the past three year period that have been dissolved or became
inactive prior to December 31, 2005. These include Human Resource Systems, Inc.
("HRSI"), dissolved in 2004; Telecommunications Technologies Division ("TTD"),
discontinued operations in 2004 and Information Assurance Division ("IAD",
formerly Value Systems Services Division or "VSS"), inactive as of May 2005.
VSE Customers and 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 Company's services is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Navy, Army, and Air Force.
Navy - The majority of VSE's work is performed for the U.S. Navy. BAV is
a major provider of logistics, training, and technical assistance in support of
the Navy's Foreign Military Sales ("FMS") ship transfer program. FMD supports
the Navy by providing a variety of services including ship systems installation
efforts, combat systems inspections, ship repair and overhaul availability
planning, weapons management, ordnance alterations, and air combat logistics.
VCG provides services to the U.S. Coast Guard that are similar to the work
performed by BAV for the U.S. Navy and its FMS customers.
Army/Army Reserve - VSE also performs a significant amount of its work
for the U.S. Army and U.S. Army Reserve. VSE, through SED and ELD, provides
these customers equipment refurbishment services, military vehicle protection
systems, 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, as well as other government
agencies and commercial organizations, with training services in quality systems
and product, process, and management optimization. CED provides management
oversight and coordinates support efforts for a variety of government work
orders on a large Army contract.
Other - Energetics provides the Department of Energy and other government
and industry customers with expert consulting services that typically include
program planning and analysis, R&D management services, technology assessment
and performance metrics, communications and outreach, and conference planning.
VSE provides base support and other services to the U.S. Air Force through
contract work performed by FMD and SED. The Company has also provided support
services to the U.S. Postal Service and U.S. Department of Treasury.
15
VSE Revenues by Customer
(Dollars in Thousands)
2005 2004 2003
Source of Revenue Revenues % Revenues % Revenues %
- ----------------- -------- - -------- - -------- -
Navy $196,363 70.1 $157,433 72.9 $ 93,957 70.6
Army/Army Reserve 56,019 20.0 27,384 12.7 16,374 12.3
Other 27,757 9.9 31,194 14.4 22,728 17.1
-------- ----- -------- ----- -------- -----
Total Revenues $280,139 100.0 $216,011 100.0 $133,059 100.0
======== ===== ======== ===== ======== =====
BAV Ship Transfer Program
VSE's BAV Division provides the U.S. Navy with engineering, technical and
logistical support services associated with the sale, lease, or transfer of
Navy ships to foreign governments. During its life, this program has been the
Company's single largest revenue producer. Revenues generated by this program
have typically accounted for approximately 40% to 50% of consolidated VSE
revenues, and revenues generated by this program accounted for approximately 43%
and 52% of consolidated revenues in 2005 and 2004, respectively. The level of
revenues and associated profits resulting from fee income generated by this
program varies depending on a number of factors, including the timing of ship
transfers and associated support services ordered by foreign governments and
economic conditions of potential customers worldwide. The Company has
experienced significant quarterly and annual revenue fluctuations and
anticipates that future quarterly and annual revenues will be subject to
variation due to changes in the level of activity associated with the Navy's
ship transfer program. The transfer of four U.S. Navy ships to Taiwan currently
conducted under this program is a major contributor to the Company's revenues in
2005 and 2004.
The original contract associated with this program was a ten-year cost-
plus award fee contract awarded in 1995 with a total ceiling value of more than
$1 billion. BAV was awarded a second contract in April 2005 to continue work on
this program. The new contract is a five-year cost-plus award fee contract with
a total ceiling value of approximately $544 million. The Navy began issuing
orders on the new contract in the second quarter of 2005 and ceased issuing
orders for new work on the original contract at that time. BAV will continue
work associated with the transfer of four ships to Taiwan under delivery orders
previously issued on the original contract until the work is completed and all
four ships are delivered to Taiwan.
Contract terms under both the original and new contracts specify base fee
payments and award fee payments to BAV. Base fee payments are determined by
level of contract activity and base fee income is recognized each month. Award
fee payments are determined by performance and level of contract activity. 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 fees are fixed and determinable, generally upon contract
notification confirming the award fee. Award fees are made three times during
the year. Accordingly, the Company typically has three quarterly reporting
periods per year that include the recognition of BAV award fee income and one
quarterly reporting period that does not include BAV award fee income. Due to
such timing, and to fluctuations in the level of revenues, profits as a
percentage of revenues will fluctuate from period to period. In 2005 and 2004,
each of the three month periods ended December 31, June 30, and March 31,
includes BAV award fee income. The three month periods ended September 30, 2005
and 2004 do not include BAV award fee income.
TBPS Program
In November 2004, VSE's SED Division began work on a program to provide a
protection system, the Tanker Ballistic Protection System ("TBPS"), for vehicles
deployed by the U.S. Army in Iraq. Under this program, SED applies a Fuel Tank
Self-Sealing System and necessary Add-on Armor Panels for Army Fuel
16
Dispensing Tankers as protection from damage resulting from hostile fire.
Testing and preparatory work was conducted in November and December 2004 and
delivery of completed vehicle protection systems began in January 2005.
SED has multiple firm fixed price per unit contracts under which it is
performing the TBPS Program. Subsequent to award, VSE has received modifications
to the contracts to adjust the number of tankers based on Army tanker
availability and needs, and the possibility remains that there may be future
modifications to these contracts as the Army's needs change. The current funded
contract ceiling for the TBPS Program contracts is approximately $78 million as
of December 31, 2005. Contractual coverage for work on the TBPS program runs
through January 2007 and the Company expects to most likely complete work in
early 2007.
The TBPS Program has contributed significantly to VSE revenue growth in
2005. The work performed on this program also significantly increases the amount
of fixed price contract work performed by the Company. In general, fixed price
contract work carries a higher level of risk and has higher profit margins than
work on other contract types. Accordingly, the TBPS program has presented, and
is expected to continue to present, VSE's business with the potential for both
increased profit margins and increased risks of incurring a loss.
CED Army Equipment Support Program
In December 2005, VSE's CED Division was awarded a task order on its
Rapid Response support contract to provide maintenance and logistics services in
support of U.S. Army equipment in Iraq and Afghanistan. Services provided under
this program include deployed sustainment management, deployed logistics and
repairs management, unique system training and curriculum support, resource
management, and acquisition and administrative support. Work on this program
began in 2006.
The task order for this program is time and materials, with substantially
all of the services provided by CED's subcontractor. CED will provide certain
program management services. The contract task order has a base year valued at
approximately $139 million and an additional one-year option period valued at
approximately $212 million. This program is expected to contribute significantly
to VSE's revenues in 2006 and 2007, however, profit margins on subcontract work
are lower than on work performed by Company personnel.
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.
The revenues of the Company depend on its ability 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 management contracts ("omnibus"). 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, increasing the level of
competition due to the award of fewer contracts, and forcing the Company into
competition with larger businesses 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
17
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
responsible for performing to the requirements of the contract and ensuring
compliance with U.S. Government regulations relative to the performance by
subcontractors.
Other government procurement practices that can affect the Company's
revenues are 1) the length of contracts issued, which may vary depending on
changes in contracting regulations and other factors; 2) the use of past
performance criteria that may preclude entrance into new government markets; and
3) government socioeconomic programs that limit contract work to small, woman,
or minority owned businesses. Additional risk factors that could potentially
affect the Company's results of operations are the government's right to
terminate contracts for convenience, the government's right to not exercise all
of the option periods on a contract, and funding delays caused by government
political or administrative actions.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic
conditions and political factors associated with current and potential customers
served through VSE's contracts with the U.S. Government. An economic slowdown in
countries served under the BAV Ship Transfer Program could potentially affect
sales. Failure by the government of a potential foreign customer to approve and
fund acquisition of U.S. Navy ships serviced under this program could affect
sales. In any one year, a significant amount of the Company's revenues may
result from sales on the BAV Ship Transfer Program to a single foreign
government. BAV sales to Egypt have historically comprised a large percentage
of the Company's total sales in any one year. Work associated with the transfer
of four ships to Taiwan under the BAV Ship Transfer Program during 2004 and 2005
also comprised a large percentage of total sales.
The current international situation posed by potential terrorist activity
and the continuing conflict in the Middle East could potentially increase the
political risks for revenues from the BAV Ship Transfer, TBPS, and CED Army
Equipment Support Programs. 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 From Continuing Operations
(in thousands)
2005 2004 2003
Source of Revenue Revenues % Revenues % Revenues %
- ----------------- -------- - -------- - -------- -
BAV Egypt . . . . $ 52,926 18.9 $ 50,250 23.3 $ 44,190 33.2
BAV Taiwan . . . 63,058 22.5 56,038 25.9 12,368 9.3
BAV Other . . . . 5,024 1.8 6,675 3.1 7,259 5.5
-------- ----- -------- ----- -------- -----
Total BAV 121,008 43.2 112,963 52.3 63,817 48.0
TBPS Program 29,533 10.5 134 0.1 - -
VSE Other . . . . 129,598 46.3 102,914 47.6 69,242 52.0
-------- ----- -------- ----- -------- -----
Total Revenues $280,139 100.0 $216,011 100.0 $133,059 100.0
======== ===== ======== ===== ======== =====
18
Management Outlook
- ------------------
Another Record Year
VSE again reached historical highs for revenues and profits in 2005.
SED's work on the TPBS Program and FMD's continuing work on Navy programs
contributed significantly to increased revenues. The Taiwan ship transfer work
by BAV also increased revenues and continued to be the Company's single largest
work effort. Several of VSE's other divisions also contributed to revenue growth
in 2005. Work on the TPBS Program began contributing to VSE's profits, and each
of VSE's active business units showed improved profits in 2005. See "Results of
Operations" below for a more detailed discussion of 2005 results.
More Growth Ahead
Subject to the risk elements discussed above, VSE expects to continue to
increase revenues and profits in 2006. Reasons for this expectation include:
CED Army Equipment Support Program
CED began work on this program in 2006. The program is new work and is
expected to increase Company revenues significantly in 2006 and 2007. The
contract task order for this program is incrementally funded, with funded
backlog of approximately $31 million as of December 31, 2005.
TBPS Program
SED began delivery of completed vehicle protection systems on this
program in 2005. The program is expected to continue in 2006 with increased
levels of production. Funded backlog on the TBPS program was approximately $49
million as of December 31, 2005, as compared to approximately $14 million as of
December 31, 2004.
Taiwan Ship Transfer
The Taiwan ship transfer effort is expected to continue through mid to
late 2006, allowing BAV to maintain revenue levels in 2006 similar to 2005.
Funded backlog on the BAV Ship Transfer Program was approximately $115 million
as of December 31, 2005, as compared to approximately $71 million as of
December 31, 2004.
Other Significant Contracts
VSE has three multiyear, multiple award, indefinite delivery, indefinite
quantity contracts that have large nominal ceiling amounts with no funding
committed at the time of award. VSE is one of several awardees on each contract.
While future VSE revenue from these contracts cannot be predicted with
certainty, the award of these contracts provides the Company with the
opportunity to compete for work that could contribute to future revenue growth,
including new work in 2006. These three contracts are described below.
VSE's CED Division has a multi-year Rapid Response support contract
issued by the U.S. Army Communications-Electronics Command (CECOM) that was
awarded in January 2003. The contract enhances the Company's revenue producing
capabilities by allowing it to provide services through any of VSE's operating
entities or through third party subcontractors for various end user government
customers. If all options are exercised, this contract has a potential total
ceiling of approximately $2.9 billion over an eight-year period. While it is not
likely that the full ceiling amount will be realized, this contract has
generated revenues for VSE of approximately $37 million and $27 million during
2005 and 2004, respectively. The CED Army Equipment Support Program is expected
to add significantly to this contract's and the Company's revenues in 2006. VSE
continues to pursue new orders on this contract that present potential revenue
opportunities for the future.
VSE's FMD Division has a contract with the U.S. Navy, SeaPort Enhanced,
awarded in April 2004, which includes a five-year base period and two five-year
19
option periods. This contract is a procurement vehicle for the Navy to use for
ordering services from a wide range of contractors to support all phases of
naval ship and shipboard weapons systems acquisition and life-cycle support.
While this award does not guarantee any revenues for VSE, the Company is one of
several contractors eligible to bid for services during the life of the
contract. To date, FMD has generated only minor amounts of revenue from this
contract.
FMD also has a contract, awarded in September 2004, with the U.S. Navy to
provide engineering and technical services to support Naval Sea Systems Command
maintenance, overhaul, repair, and alteration of systems aboard ships. This
contract has a total contract ceiling amount of $1.022 billion over a five-year
period if all option periods are exercised. VSE is one of several awardees
eligible to share in the potential total contract ceiling amount. Since the date
of the contract award, FMD has been awarded delivery orders with ceilings valued
at approximately $44 million on this contract, of which approximately $35
million has been funded. Although it is not likely that the full $1.022 billion
ceiling amount will be realized, this contract presents potential future revenue
opportunities.
Increases in Bookings and Funded Backlog
Revenue increases in government contracting businesses such as that
experienced by VSE in 2005 and 2004 are typically preceded by increases in
contract funding ("Bookings") and a build-up of funded contract backlog. VSE's
Bookings and funded backlog continued to increase in 2005, giving the Company a
firm basis for a continuation in revenue growth in 2006.
(in $ millions)
2005 2004 2003
---- ---- ----
Bookings . . . . . . . . . . . . . . . . 390 303 181
Funded Backlog . . . . . . . . . . . . . 276 168 83
Revenues . . . . . . . . . . . . . . . . 280 216 133
Longer Term Concerns and Risks
Certain work efforts that have supported VSE's growth in 2004 and 2005
and that are expected to support continued growth in 2006 are due to expire in
the future. VSE has received significant contributions to its revenue growth in
2004 from the Taiwan Ship Transfer work and in 2005 from both the Taiwan Ship
Transfer work and the TBPS Program work. These two programs and the CED Army
Equipment Support Program are expected to be the largest contributors to VSE
revenue in 2006. The Taiwan Ship Transfer work is expected to be substantially
completed in late 2006. The TBPS program contractual coverage runs through
January 2007, and the Company expects to continue work on the program through
2006 and into early 2007. The Company has no indication that there will be any
further work ordered on the TBPS program beyond early 2007. The CED Army
Equipment Support Program will be performed under a two-year contract task order
in 2006 and 2007. The Company does not know of any additional contractual
coverage that may be issued to continue VSE's work on this program.
The expected expiration of these programs will present challenges for VSE
to sustain the revenue growth that it experienced during 2004 and 2005, and that
it expects to experience 2006, in years beyond 2006. VSE is tracking multiple
bidding opportunities for new contract work and is also exploring potential
acquisition opportunities to mitigate the future loss of revenues associated
with the expiration of the Taiwan Ship Transfer, TBPS, and CED Army Equipment
Support work.
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the Financial Accounting Standards Board issued
SFAS 123(R), "Share-Based Payment," which is a revision to SFAS 123. SFAS 123(R)
supersedes APB Opinion No. 25 and amends SFAS 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
20
SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. The Company adopted SFAS 123(R), using the modified prospective
method, on January 1, 2006.
If VSE had adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share. The impact of
adopting SFAS 123(R) is expected to be an increase in expenses, net of related
tax effects, of approximately $155 thousand in 2006. SFAS 123(R) also requires
the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. The amount of operating cash flows recognized
for each of the last three years for such excess tax deductions were
approximately $761 thousand, $433 thousand, and $14 thousand for 2005, 2004 and
2003, respectively.
On December 30, 2005, VSE's board of directors (the "Board") directed VSE
to discontinue awarding options, both discretionary and nondiscretionary, to
purchase VSE common stock ("VSE Stock") under VSE's 2004 Stock Option Plan
approved by VSE' stockholders on May 3, 2005 (the "2004 Plan"). The options
outstanding under the 2004 Plan as of December 30, 2005, and the options to
purchase shares of VSE Stock under VSE's 1998 Stock Option Plan (the "1998
Plan") are not affected by this Board action. The primary reason for the Board's
suspension of option awards under the 2004 Plan was the potential impact on
VSE's results of operations from the application of SFAS 123 (R) to share-based
payments to employees, including stock option awards.
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. 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.
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
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 fees are fixed and
determinable, generally upon contract notification confirming the award fee. 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 multiplied by the contract defined billing
rates, plus the direct costs and indirect cost burdens associated with materials
and subcontract work 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.
21
Revenue recognition methods on fixed-price contracts will vary depending
on the nature of the work and the contract terms. On certain fixed-price
contracts revenues are recorded as costs are incurred, using the percentage-of-
completion method of accounting, since these contracts require design,
engineering, and manufacturing performed to the customer's specifications.
Revenues on fixed-price service contracts are recorded as work is performed.
Revenues on fixed-price contracts that require delivery of specific items may be
recorded based on a price per unit as units are delivered. Profits on fixed-
price contracts result from the difference between the incurred costs and the
revenue earned.
Certain direct and incremental contract costs have been deferred and
reported as a current asset prior to the recognition of revenue. Such costs are
realizable over the life of the contract.
Revenues by contract type for the three years ended December 31, 2005
were as follows (in thousands):
2005 2004 2003
Contract Type Revenues % Revenues % Revenues %
- ------------- -------- - -------- - -------- -
Cost-type . . . . . $177,567 63.4 $148,043 68.5 $ 93,552 70.3
Time and materials. 60,618 21.6 31,928 14.8 24,362 18.3
Fixed-price . . . . 41,954 15.0 36,040 16.7 15,145 11.4
-------- ----- -------- ----- -------- -----
$280,139 100.0 $216,011 100.0 $133,059 100.0
======== ===== ======== ===== ======== =====
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. VSE is
at risk of loss for any risk funding not received. Revenues recognized in 2005
include approximately $473 thousand for which the Company had not received
formalized funding as of December 31, 2005. The Company received funding
modifications for approximately $452 thousand of this amount as of February
2006, leaving approximately $21 thousand of 2005 revenues classified as risk
funding. VSE believes that it will receive funding for this remaining risk
funding revenue.
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.
Goodwill
Goodwill and intangible assets with indefinite lives are subject to a
review for impairment at least annually. The Company performs its annual
impairment test on September 30. As of December 31, 2005, the Company had
approximately $1.1 million of unamortized goodwill associated with its
acquisition of Energetics in 1995. The Company has not recognized any reduction
to the goodwill due to the impairment rules. 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.
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
22
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.
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)
2005 2004 2003
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- - -------- - -------- -
VSE (parent company). . . . . $ 34 0.0 $ 12 0.0 $ 1,720 1.3
BAV . . . . . . . . . . . . . 121,008 43.2 112,963 52.3 63,817 48.0
FMD . . . . . . . . . . . . . 59,800 21.3 41,711 19.3 24,406 18.4
SED . . . . . . . . . . . . . 49,001 17.5 12,762 5.9 9,750 7.3
CED . . . . . . . . . . . . . 28,564 10.2 24,615 11.4 11,743 8.8
Energetics . . . . . . . . . 12,694 4.5 11,693 5.4 11,982 9.0
VCG . . . . . . . . . . . . . 4,975 1.8 7,314 3.4 4,946 3.7
MSD . . . . . . . . . . . . . 4,063 1.5 3,300 1.5 2,261 1.7
Business Units Inactive
as of December 31, 2005 . - - 1,641 0.8 2,434 1.8
-------- ----- -------- ----- -------- -----
$280,139 100.0 $216,011 100.0 $133,059 100.0
======== ===== ======== ===== ======== =====
Revenues increased by approximately 30% and 62% for the years ended
December 31, 2005 and December 31, 2004, as compared to the respective prior
years. The primary reasons for the increases in revenues in 2005 were 1) work
attributable to the TBPS program; 2) increased levels of work performed by FMD
on its U.S. Navy contracts; 3) an increase in work performed under the BAV Ship
Transfer Program, including revenues associated with the Taiwan ship transfer;
4) an increase in work performed on the CED Rapid Response contract; and 5)
increased levels of military equipment refurbishment services performed by SED
for the U.S. Army Reserve.
The primary reasons for the increase in revenues in 2004 were 1) an
increase in work performed under the BAV contract, including increased
revenues associated with the Taiwan ship transfer; 2) the CED Rapid Response
contract received work orders that generated revenues throughout the full year
in 2004, as compared to the prior year when the contract was awarded in February
of 2003 and did not begin to receive any significant amount of work until
September; and 3) increased levels of work performed by FMD due in part to the
Navy's elevated readiness requirements. Work requirements and revenues also
increased in SED, MSD and VCG.
23
Income from Continuing 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 Continuing Operations Before Income Taxes
(dollars in thousands)
Description 2005 % 2004 % 2003 %
- ----------- ---- - ---- - ---- -
Revenues . . . . . . . . . $280,139 100.0 $216,011 100.0 $133,059 100.0
Costs and expenses . . . . 269,780 96.3 209,841 97.1 129,372 97.2
-------- ----- -------- ----- -------- -----
Gross profit . . . . . . . 10,359 3.7 6,170 2.9 3,687 2.8
Selling, general and
administrative expenses. 580 0.2 636 0.3 351 0.3
Interest(income)expense . (210) (0.1) (102) 0.0 (69) (0.1)
-------- ----- -------- ----- -------- -----
Income from continuing
operations before
income taxes . . . . . . $ 9,989 3.6 $ 5,636 2.6 $ 3,405 2.6
======== ===== ======== ===== ======== =====
VSE's gross profit margin on continuing operations increased in 2005
as compared to 2004 and remained substantially unchanged during 2004 as compared
to 2003. Company-wide revenue increases tend to increase the gross margins
realized on the Company's fixed price and time and materials contracts due to
the ability to spread corporate costs over a larger revenue base. The increase
in gross margins in 2005 was primarily attributable to spreading corporate fixed
costs over a larger revenue base and an increase in the percentage of work
performed on fixed price and time and materials contracts, which have more
favorable profit margins than work performed on cost type contracts. The TBPS
Program and increased military equipment refurbishment services performed by SED
for the U.S. Army Reserve increased both the Company's overall revenue and
percentage of fixed price and time and materials contract work, and made the
most significant contributions to increased gross margins. Another reason for
the improved gross margins is the reduction of operational losses associated
with CED in 2005 as compared to 2004 and 2003. Other factors that affect the
Company's gross margins include 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 varied little in
2005 and 2004 as compared to the respective prior years.
VSE did not have significant borrowing requirements or interest expense
in 2005, 2004, and 2003. The Company's interest income increased in 2005 as
compared to 2004 and increased in 2004 as compared to 2003 as profits from
operations and resulting cash surpluses were invested.
Discontinued Operations
In July 2004, all business operations associated with the Company's TTD
division ceased. Accordingly, prior period consolidated financial statements
have been restated to reflect the financial results of TTD as discontinued
operations. The revenues, costs and expenses of TTD have been excluded from the
respective captions in the Consolidated Statement of Operations. The loss from
discontinued operations associated with TTD, net of tax, in the years ended
December 31, 2005, 2005, and 2003 was approximately $0, $1 thousand and, $79
thousand, respectively.
Financial Condition
- -------------------
VSE's financial condition remained strong during 2005. The Company's
largest assets are its accounts receivable and cash and cash equivalents. The
24
largest liabilities are its accounts payable and accrued expenses. Accounts
receivable increased approximately $3.7 million, accounts payable increased
approximately $3.6 million, and accrued expenses increased approximately $4.3
million during 2005 due primarily to the increase in the level of business
activity and the associated billings to customers and payments to subcontractors
required to perform this work. Cash and cash equivalents increased approximately
$12.6 million due to the timing of customer billings and collections, the timing
of subcontractor and vendor billings and payments, and to profits. Inventories
declined approximately $4.2 million during 2005 as initial quantities of
materials and supplies purchased for the TBPS Program were used to complete
protection systems for vehicles. The change in total stockholders' investment in
this period resulted 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 $12.6
million during 2005. Approximately $15.6 million in net cash was provided by
operating activities, approximately $1.6 million was used in investing
activities, and approximately $1.4 million was used in financing activities. The
difference between cash provided by operating activities of approximately $15.6
million in 2005 as compared to cash used in operating activities of
approximately $8.8 million in 2004 is primarily due to differences in the levels
of accounts receivable, contract inventories, and accounts payable associated
with contract requirements and the associated billing and collections cycle, and
to the Company's increase in profits. Investing activities consisted of the
purchase of property and equipment. Financing activities consisted of $1.6
million used to repay bank loans, $715 thousand provided by the issuance of
common stock to directors and officers associated with the exercise of stock
options and directors' fees, and $510 thousand used to pay dividends.
The Company's cash and cash equivalents decreased by approximately $9.7
million during 2004. Approximately $8.8 million in net cash was used in
operating activities, investing activities used approximately $2.6 million, and
financing activities provided approximately $1.7 million. The difference between
cash used in operating activities of approximately $8.8 million in 2004 as
compared to cash provided by operating activities of approximately $6.4 million
in 2003 is primarily due to increases in accounts receivable and contract
inventories associated with contract requirements for significant material and
subcontractor usage for which the billing and collections cycle had not been
completed. The accounts receivable and contract inventories increases were
partially offset by increases in net income and accounts payable and accrued
expenses. Investing activities consisted of the purchase of property and
equipment. Financing activities consisted of $1.6 million provided by bank loan
proceeds, $518 thousand provided by the issuance of common stock to directors
and officers associated with the exercise of stock options and directors' fees,
and $401 thousand used to pay dividends.
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 to directors and officers associated with the
exercise of stock options and directors' fees.
Quarterly cash dividends were paid at the rate of $.05 per share during
the three month periods ended March 31 and June 30, 2005, and at the rate of
$.06 per share during the three month periods ended September 30 and
December 31, 2005. Pursuant to its bank loan agreement (see Note 8 of "Notes
to Consolidated Financial Statements"), the payment of cash dividends by VSE is
25
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. 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 significantly by the
timing of large materials purchases and subcontractor efforts used in
performance on the Company's contracts. Accounts receivable levels are also
affected by contract retainages, differences between the provisional billing
rates authorized by the government compared to the costs actually incurred by
the Company, and government delays in processing administrative paperwork for
contract funding.
Work on the TBPS program requires the Company to acquire inventories
consisting of materials, supplies, and other expenditures for which end units
have not yet been completed and accepted. Although these costs are classified as
inventories for accounting purposes, they are similar in nature to materials and
direct supplies purchased for use in performance on the Company's other
contracts in that they are solely and directly attributable to the contract and
will be billed to the customer within a relatively short time. All of the
inventories are expected to be liquidated, billed, and collected as vehicle
protection systems are completed and accepted by the government customer. These
materials and direct supplies will not be restocked to maintain any permanent
inventory levels.
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 income tax payments, the acquisition of
capital assets for shop, office and computer support, and the payment of cash
dividends. From time to time, the Company also invests in the expansion,
improvement, and maintenance of its operational and administrative facilities.
The Company expects to make approximately $643 thousand in such facilities
investments and additional acquisitions of shop equipment in 2006 to support
expected increases in the level of military equipment refurbishment efforts.
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 8 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, 2005. The amount of this commitment is negotiable
between the Company and the bank. The Company has determined that the current
$15 million commitment amount is adequate to cover known current and future
liquidity requirements.
Performance of work under the Company's larger contracts that require
significant amounts of subcontractor or material purchases have the potential
to cause substantial requirements for working capital; however, management
26
believes that cash flows from operations and the bank loan commitment are
adequate to meet current operating cash requirements.
Contractual Obligations
The following table shows the consolidated contractual obligations for
VSE as of December 31, 2005 (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 . . . . . . . . 6,792 2,487 4,042 263 -
Purchase obligations . . 451 451 - - -
------ ------ ------ ------ ------
Total $7,243 $2,938 $4,042 $ 263 $ -
====== ====== ====== ====== ======
Operating lease commitments are primarily for VSE's principal executive
and administrative offices and leased facilities for office, shop, and warehouse
space located near customer sites. The Company also has some equipment and
software leases that are included in these amounts. In January 2006, the Company
signed an additional five year facility lease for shop, office and warehouse
space to begin in April 2006 for an aggregate amount of $668 thousand.
Purchase obligations consist primarily of contractual commitments
associated with construction, improvements and maintenance on VSE facilities,
and for the acquisition of office, shop, and computer equipment. The table
excludes contractual commitments for materials or subcontractor work purchased
to perform U.S. Government contracts. Such commitments for materials and
subcontractors are reimbursable when used on the contracts, and generally are
also reimbursable in the event a contract is "terminated for convenience" by the
U.S. Government pursuant to federal contracting regulations.
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 not expected to
be significant.
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, or enter into other loan arrangements, future interest rate changes
could potentially have 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
27
divisions or subsidiaries are virtually non-existent. Accordingly, the Company
does not believe that it is exposed to any material foreign currency.
28
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm . . . . 30
Consolidated Balance Sheets as of December 31, 2005 and 2004 . . 31
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004, and 2003 . . . . . . . . . . . . 32
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 2005, 2004, and 2003 . . 33
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003 . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . . . . 35
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE Corporation
and subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders' investment and cash flows for each of
the three years in the period ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VSE Corporation
and subsidiaries at December 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
McLean, Virginia
February 23, 2006
30
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
As of December 31,
2005 2004
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $12,717 $ 130
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 43,926 40,274
Contract inventories . . . . . . . . . . . . . . . . . . 4,273 8,504
Deferred tax assets . . . . . . . . . . . . . . . . . . 1,033 1,077
Other current assets . . . . . . . . . . . . . . . . . . 2,205 1,760
------- -------
Total current assets . . . . . . . . . . . . . . . . 64,154 51,745
Property and equipment, net . . . . . . . . . . . . . . . 4,583 4,310
Deferred tax assets . . . . . . . . . . . . . . . . . . . 682 312
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 1,054 1,054
Other assets . . . . . . . . . . . . . . . . . . . . . . . 3,393 2,931
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $73,866 $60,352
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Bank notes payable . . . . . . . . . . . . . . . . . . . $ - $ 1,578
Accounts payable . . . . . . . . . . . . . . . . . . . . 29,752 26,383
Accrued expenses . . . . . . . . . . . . . . . . . . . . 12,233 7,922
Dividends payable . . . . . . . . . . . . . . . . . . . 141 114
------- -------
Total current liabilities . . . . . . . . . . . . . 42,126 35,997
Deferred compensation . . . . . . . . . . . . . . . . . . 1,589 1,312
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 43,715 37,309
------- -------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued and outstanding 2,359,611
in 2005 and 2,276,688 in 2004 . . . . . . . . . . . . 118 114
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 6,348 4,879
Deferred stock-based compensation . . . . . . . . . . . (1) (4)
Retained earnings . . . . . . . . . . . . . . . . . . . 23,686 18,054
------- -------
Total stockholders' investment . . . . . . . . . . . 30,151 23,043
------- -------
Total liabilities and stockholders' investment . . . $73,866 $60,352
======= =======
The accompanying notes are an integral part of these balance sheets.
31
VSE Corporation and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
For the years ended December 31,
2005 2004 2003
---- ---- ----
Revenues, principally from contracts . . . . $ 280,139 $ 216,011 $ 133,059
Costs and expenses of contracts . . . . . . 269,780 209,841 129,372
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . 10,359 6,170 3,687
Selling, general and administrative expenses 580 636 351
Interest (income) expense, net . . . . . . . (210) (102) (69)
--------- --------- ---------
Income before income taxes . . . . . . . . . 9,989 5,636 3,405
Provision for income taxes . . . . . . . . . 3,820 2,191 1,315
--------- --------- ---------
Income from continuing operations . . . . . 6,169 3,445 2,090
Discontinued operations:
Loss from operations before income taxes . - (2) (127)
Benefit for income taxes . . . . . . . . . - (1) (48)
--------- --------- ---------
Loss from discontinued operations . . . . - (1) (79)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 6,169 $ 3,444 $ 2,011
========= ========= =========
Basic earnings per share:
Income from continuing operations $ 2.66 $ 1.54 $ 0.96
Loss from discontinued operations 0.00 0.00 (.04)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 2.66 $ 1.54 $ 0.92
========= ========= =========
Basic weighted average shares outstanding 2,322,736 2,231,848 2,189,197
========= ========= =========
Diluted earnings per share:
Income from continuing operations $ 2.58 $ 1.49 $ 0.94
Loss from discontinued operations 0.00 0.00 (0.04)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 2.58 $ 1.49 $ 0.90
========= ========= =========
Diluted weighted average shares
outstanding . . . . . . . . . . . . . . . . 2,392,027 2,309,932 2,230,226
========= ========= =========
The accompanying notes are an integral part of these statements.
32
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Investment
- -----------------------------------------------------------------------------------------------
(in thousands except per share data)
Deferred Total
Common Stock Paid-In Stock-based Retained Stockholders'
Shares Amount Surplus Compensation Earnings Investment
------ ------ ------- ------------ -------- ----------
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
Net income for the year . . - - - - 3,444 3,444
Exercised stock options . . 62 4 505 - - 509
Tax benefit of options
exercised . . . . . . . - - 433 - - 433
Deferred stock-based
compensation . . . . . . - - 4 (4) - -
Amortization of deferred
stock-based compensation. - - - 17 - 17
Issuance of stock . . . . . 1 - 9 - - 9
Dividends declared ($.19) . - - - - (427) (427)
----- ----- ------- ----- -------- -------
Balance at
December 31, 2004 2,277 $ 114 $ 4,879 $ (4) $ 18,054 $23,043
Net income for the year . . - - - - 6,169 6,169
Exercised stock options . . 79 4 587 - - 591
Tax benefit of options
exercised . . . . . . . - - 761 - - 761
Deferred stock-based
compensation . . . . . . - - (3) - - (3)
Amortization of deferred
stock-based compensation. - - - 3 - 3
Issuance of stock . . . . . 4 - 124 - - 124
Dividends declared ($.23) . - - - - (537) (537)
----- ----- ------- ----- -------- -------
Balance at
December 31, 2005 2,360 $ 118 $ 6,348 $ (1) $ 23,686 $30,151
===== ===== ======= ===== ======== =======
The accompanying notes are an integral part of these statements.
33
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------
(in thousands)
For the years ended December 31,
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,169 $ 3,444 $ 2,011
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,417 1,304 1,158
Loss on sale of property and equipment . . . . . . . . . . 1 - 7
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . (326) (273) 646
Tax benefit of options exercised . . . . . . . . . . . . . 761 433 14
Amortization of deferred stock-based compensation . . . . . - 17 25
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net . . . . . . . . . . . . . . . . . (3,652) (18,439) (3,913)
Contract inventories . . . . . . . . . . . . . . . . . . . 4,231 (8,504) -
Other current assets and noncurrent assets . . . . . . . . (932) (801) (246)
Increase (decrease) in:
Accounts payable and deferred compensation. . . . . . . . . 3,646 12,655 5,669
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 4,311 1,332 1,016
------- ------- -------
Net cash provided by (used in) operating activities 15,626 (8,832) 6,387
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . . . (1,666) (2,576) (720)
------- ------- -------
Net cash used in investing activities (1,666) (2,576) (720)
------- ------- -------
Cash flows from financing activities:
Net proceeds from (repayment of) bank loans . . . . . . . . . (1,578) 1,578 -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (510) (401) (349)
Proceeds from the exercise of options of common stock . . . . 591 508 271
Proceeds from issuance of common stock . . . . . . . . . . . 124 10 44
------- ------- -------
Net cash used in) provided by financing activities (1,373) 1,695 (34)
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . 12,587 (9,713) 5,633
Cash and cash equivalents at beginning of year . . . . . . . . 130 9,843 4,210
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $12,717 $ 130 $ 9,843
======= ======= =======
Supplemental cash flow disclosures (in thousands):
2005 2004 2003
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ - $ -
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,153 $ 2,292 $ 616
The accompanying notes are an integral part of these statements.
34
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements consist of the operations of the
parent company, operations of the Company's unincorporated divisions and wholly
owned subsidiary. Energetics Incorporated ("Energetics") is currently VSE's only
active subsidiary. Active divisions include BAV Division ("BAV"), Coast Guard
Division ("VCG"), Communications and Engineering Division ("CED"), Fleet
Maintenance Division ("FMD"), Management Sciences Division ("MSD"), and Systems
Engineering Division ("SED").
VSE previously conducted business operations in other subsidiaries and
divisions during the past three year period that have been dissolved or became
inactive prior to December 31, 2005. These include Human Resource Systems, Inc.
("HRSI"), dissolved in 2004, Telecommunications Technologies Division ("TTD"),
discontinued operations in 2004 and Information Assurance Division ("IAD",
formerly Value Systems Services Division or "VSS"), inactive as of May 2005.
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 federal 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 serving a similar customer base. The
Company manages these services as a single segment that is divided into profit
centers that are focused on contracts.
(b) 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.
Significant estimates affecting the financial statements include the allowance
for doubtful accounts and accruals for loss contracts, contract disallowance and
self insured health claims, and estimated cost to complete on certain fixed-
price contracts.
(c) Accounting for Stock-based Compensation
In 2005 and prior years, the Company used the disclosure-only provisions
of SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure."
Accordingly, the Company accounts for stock-based compensation under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, using the intrinsic value method. The
following table illustrates the effect on net income and earnings per share if
35
the Company had applied the fair value recognition provisions of SFAS 123 to all
stock-based employee compensation (in thousands, except per share amounts):
Year Ended December 31
---------------------------
2005 2004 2003
---- ---- ----
Net income, as reported . . . . . . . . $6,169 $3,444 $2,011
Add: Total stock-based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) for all awards, net
of related tax effects . . . . . . . . -- 9 15
Deduct: Total stock-based
compensation expense
determined under fair value based
method (SFAS No. 123) for all
awards, net of related tax effects . . (294) (126) (68)
------ ------ ------
Pro forma net income . . . . . . . . . $5,875 $3,327 $1,958
====== ====== ======
Earnings per share:
Basic - as reported . . . . . . . . . $2.66 $1.54 $0.92
Diluted - as reported . . . . . . . . $2.58 $1.49 $0.90
Basic - pro forma . . . . . . . . . . $2.53 $1.49 $0.89
Diluted - pro forma . . . . . . . . . $2.46 $1.44 $0.88
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 2005, 2004, and 2003:
2005 2004 2003
---- ---- ----
Risk free interest rate . . . . . . . . 3.28% 2.47% 2.18%
Dividend yield . . . . . . . . . . . . 0.79% 1.30% 1.48%
Expected life . . . . . . . . . . . . . 3 years 3 years 3 years
Expected volatility . . . . . . . . . . 60.50% 48.30% 37.30%
In December 2004, the Financial Accounting Standards Board issued
SFAS 123(R), "Share-Based Payment," which is a revision to SFAS 123. SFAS 123(R)
supersedes APB Opinion No. 25 and amends SFAS 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. The Company will adopt SFAS 123(R), using the modified prospective
method, on January 1, 2006.
On December 30, 2005, the board of directors of VSE Corporation (the
"Board") directed VSE to discontinue, until and unless the Board determined
otherwise, awarding options, both discretionary and nondiscretionary, to
purchase VSE common stock ("VSE Stock") under VSE's 2004 Stock Option Plan
approved by VSE' stockholders on May 3, 2005 (the "2004 Plan"). The options
outstanding under the 2004 Plan, as of December 30, 2005, are not affected by
this Board action. In addition, the options to purchase shares of VSE Stock
under VSE's 1998 Stock Option Plan (the "1998 Plan") are not affected by this
Board action.
The primary reason for the Board's suspension of option awards under the
2004 Plan was the potential impact on VSE's results of operations from the
application of SFAS 123 (R) to share-based payments to employees, including
stock option awards.
36
Had VSE adopted SFAS 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net income and earnings per share above. The impact of adopting
SFAS 123(R) is expected to be an increase in expenses, net of related tax
effects, of approximately $155 thousand in 2006. SFAS 123(R) also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption.
While the Company cannot estimate what those amounts will be in the future
because they depend on, among other things, when employees exercise stock
options, the amount of operating cash flows recognized for each of the last
three years of the period ending December 31, 2005 for such excess tax
deductions were approximately $761 thousand, $433 thousand, and $14 thousand for
2005, 2004 and 2003, respectively.
(d) 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,
2005 2004 2003
---- ---- ----
Basic weighted average
common shares outstanding . . 2,322,736 2,231,848 2,189,197
Dilutive effect of options . . 69,291 78,084 41,029
--------- --------- ---------
Diluted weighted average
common shares outstanding . . 2,392,027 2,309,932 2,230,226
========= ========= =========
(e) 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 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.
(f) Contract Inventories
Contract inventories consist of materials purchased, advances to
suppliers, and other expenditures arising from and solely and directly
attributable to contract requirements. The cost of such contract inventories is
expected to be billed to the customer within a relatively short time. These
materials and direct supplies are purchased to satisfy contract requirements and
are not restocked to maintain any permanent contract inventory levels.
Raw material contract inventories consist of advances to suppliers for
materials for use in contract requirements for which work has not yet begun and
are stated at cost. Work in process contract inventories consist of amounts for
materials, supplies and other expenditures for which work has been performed but
for which the end unit has not yet been completed and accepted. Work in process
contract inventory is stated at cost plus applicable indirect cost burdens,
including general and administrative costs. Pursuant to contract provisions,
agencies of the U.S. Government and certain other customers have title to or a
security interest in inventories related to such contracts as a result of
37
advances, performance based payments and progress payments. Such advances and
payments are reflected as an offset against the related inventory balances.
(g) 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 periods of
approximately twenty to 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.
(h) 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, including assets of the deferred compensation plan and
debt, approximate book value.
Contracts with the U.S. Government either as a prime or subcontractor,
primarily with the U.S. Department of Defense, accounted for approximately 99%
of revenues for each of the years ending December 31, 2005, 2004, and 2003. The
BAV contract accounted for approximately 43%, 52% and 48% of consolidated
revenues during 2005, 2004 and 2003, respectively.
(i) Contract Revenues
Substantially all of the Company's revenues result from contract services
performed for the U.S. Government or for contractors engaged in work for the
government under a variety of contracts. 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 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 fees are fixed and
determinable, generally upon contract notification confirming the award fee. 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 multiplied by the contract defined billing
rates, plus the direct costs and indirect cost burdens associated with materials
and subcontract work 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.
Revenue recognition methods on fixed-price contracts will vary depending
on the nature of the work and the contract terms. On certain fixed-price
contracts revenues are recorded as costs are incurred, using the percentage-of-
completion method of accounting, since these contracts require design,
engineering, and manufacturing performed to the customer's specifications.
Revenues on fixed-price service contracts are recorded as work is performed.
38
Revenues on fixed-price contracts that require delivery of specific items may be
recorded based on a price per unit as units are delivered. 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 at the customer's request 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, based on total contract revenue compared to total contract costs, by
a charge to income during the period in which losses are first identified.
Contract costs include direct and indirect costs, including general and
administrative costs, which are considered costs and expenses of contracts.
Certain direct and incremental contract costs have been deferred and
reported as a current asset prior to the recognition of revenue. Such costs are
amortized over the life of the contract.
A substantial portion of 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 2002 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 2005, 2004 and 2003 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.
(j) Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 2005,
2004, and 2003 was $421 thousand, $240, and $0 thousand, respectively.
Included in other assets are assets of the deferred compensation plans
which include debt and equity securities recorded at fair value. The fair value
of the deferred compensation plan assets was approximately $1.6 million and
$1.3 million as of December 31, 2005, and 2004, respectively. Because plan
participants are at risk for market value changes in these assets, the liability
to plan participants fluctuates with the asset values.
(k) 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, 2005.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method in
accordance with FASB Statement No. 109, "Accounting for Income Taxes." 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
39
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.
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. Management believes that the deferred tax assets will be
realized through future taxable income and, therefore, no valuation allowance is
required.
(m) Discontinued Operations
In July 2004, all business operations associated with the Company's TTD
division ceased. Accordingly, prior period consolidated financial statements
have been restated to reflect the financial results of TTD as discontinued
operations. The revenues, costs and expenses of TTD have been excluded from the
respective captions in the Consolidated Statement of Operations. The revenues
from discontinued operations associated with TTD in the years ended December 31,
2004 and 2003 were approximately $9 thousand and $1.4 million, respectively.
The loss from discontinued operations associated with TTD, net of tax, in the
years ended December 31, 2004 and 2003 was approximately $1 thousand and $79
thousand, respectively. Approximately $6 thousand net current liabilities
comprised primarily of payables and approximately $5 thousand net current assets
comprised primarily of receivables, related to TTD, were included in the
December 31, 2005 and December 31, 2004 balance sheets, respectively.
(n) Goodwill
SFAS No. 142 does not permit amortization of goodwill, but requires a
review for impairment at least annually, or more frequently if an asset might be
impaired, using a fair-value based approach. See Note 7 of the Company's
consolidated financial statements for further discussion.
(2) Accounts Receivable
The components of accounts receivable as of December 31, 2005 and 2004,
were as follows (in thousands):
2005 2004
---- ----
Billed . . . . . . . . . . . . . . . . . . . . $14,218 $15,777
Unbilled:
Government retainage . . . . . . . . . . . . 65 35
Subcontract retainage . . . . . . . . . . . . 4,160 4,700
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . 25,539 19,814
Less-Allowance for doubtful accounts . . . . . (56) (52)
------- -------
Total accounts receivable, net $43,926 $40,274
======= =======
Unbilled subcontract retainage includes amounts withheld from payments to
subcontractors.
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 $21 thousand and $56
thousand as of December 31, 2005, and 2004, respectively.
40
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
Allowance for Doubtful Accounts of Period Deductions(1) Expenses Period
- ------------------------------- ---------- ------------- ---------- ----------
For the year ended
December 31, 2005 . . . . . . . . . $52 $22 $26 $56
For the year ended
December 31, 2004 . . . . . . . . . 77 35 10 52
For the year ended
December 31, 2003 . . . . . . . . . 99 87 65 77
(1) Write-offs and settlements
(3) Other Current Assets
Other current assets consisted of the following as of December 31, 2005
and 2004 (in thousands):
2005 2004
---- ----
Prepaid materials . . . . . . . . . . . . . . . . . $ 392 $ 88
Prepaid rent expense . . . . . . . . . . . . . . . . 345 208
Travel advances . . . . . . . . . . . . . . . . . . 299 271
Federal and state tax receivable . . . . . . . . . . 171 401
Prepaid software license . . . . . . . . . . . . . . 164 95
Deferred contract costs . . . . . . . . . . . . . . 106 -
Other . . . . . . . . . . . . . . . . . . . . . . . 728 697
------ ------
Total other current assets $2,205 $1,760
====== ======
(4) Contract Inventories
The components of contract inventories as of December 31, 2005 and 2004
were as follows (in thousands):
2005 2004
---- ----
Raw material . . . . . . . . . . . . . . . . . . . . $ - $4,783
Work in process . . . . . . . . . . . . . . . . . . 9,965 3,721
------ ------
9,965 8,504
Less: Progress payments and customer
advances received (5,692) -
------ ------
Total contract inventories $4,273 $8,504
====== ======
Inventories at December 31, 2005 and 2004 consisted of materials
purchased, advances to suppliers, and other expenditures for use in a contract
to modify and apply a protective system, the Tanker Ballistic Protection System
("TBPS"), to military vehicles for the U.S. Army. This contract was awarded to
VSE in November 2004.
Although these costs are classified as inventories for accounting
purposes, they are similar in nature to materials and direct supplies purchased
for use in performance on the Company's other contracts in that they are solely
and directly attributable to the contract and will be billed to the customer
within a relatively short time. These materials and direct supplies will not be
restocked to maintain any permanent inventory levels. Contract inventories are
relieved when units are delivered and revenue is recognized.
41
Raw materials inventories consist of advances to suppliers for materials
for use on this contract but on which work has not yet begun. Work in process
inventories consist of amounts for materials, supplies and other expenditures
for which work has been performed but for which the end unit has not yet been
completed and accepted. Work in process inventories at December 31, 2005 and
2004 included applicable indirect cost burdens, including general and
administrative costs totaling approximately $1.3 million and $442 thousand,
respectively. Indirect cost burdens, including general and administrative costs
charged to cost of sales from inventories for the years ended December 31, 2005
and 2004 totaled $3.4 million and $0, respectively.
(5) Other Assets
Other assets consisted of the following as of December 31, 2005 and 2004
(in thousands):
2005 2004
---- ----
Cash surrender value of life insurance . . . . . . . $ 1,432 $ 1,347
Deferred compensation. . . . . . . . . . . . . . . . 1,589 1,312
Other assets . . . . . . . . . . . . . . . . . . . . 372 272
------- -------
Total other assets $ 3,393 $ 2,931
======= =======
(6) Property and Equipment
Property and equipment (recorded at cost) consisted of the following as
of December 31, 2005 and 2004(in thousands):
2005 2004
---- ----
Computer systems equipment . . . . . . . . . . . . . $ 4,591 $ 4,360
Furniture, fixtures, equipment and other . . . . . . 3,168 2,877
Leasehold improvements . . . . . . . . . . . . . . . 2,799 2,607
Buildings . . . . . . . . . . . . . . . . . . . . . 1,259 1,050
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
12,202 11,279
Less accumulated depreciation and amortization . . . (7,619) (6,969)
------- -------
Total property and equipment $ 4,583 $ 4,310
======= =======
Depreciation and amortization expense for property and equipment was
approximately $1.4 million for 2005, $1.3 million for 2004 and approximately
$1.2 million for 2003.
(7) 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 this
asset might be impaired, to determine if impairment has occurred. Approximately
$1.1 million of unamortized goodwill remains on the books as of December 31,
2005.
(8) Debt
VSE has a loan agreement with a bank under which credit is made available
to the Company in the form of revolving loan amounts or letters of credit. The
amount of credit available to the Company is $15 million, subject to certain
conditions, including a borrowing formula based on billed receivables. The
expiration date of the loan agreement is May 31, 2007. From time to time the
bank and the Company may negotiate an amendment to the loan to increase or
42
decrease the amount of available credit or to change the expiration date to a
later date.
The loan agreement contains terms whereby the Company may borrow against
the revolving loan and has the option at any time and from time to time to
prepay such borrowings in whole or in part without premium or penalty. There are
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. As of December 31, 2005 the Company has not been notified by the
bank, nor is the Company aware of any non-compliance with any of the bank loan
covenants.
The Company pays a fixed annual commitment fee of $20 thousand, interest
on any revolving loan borrowings at a prime-based rate or an optional LIBOR-
based rate, and fees on any letters of credit that are issued. As of
December 31, 2005, there were no revolving loan amounts outstanding and one
letter of credit for approximately $192 thousand. Amounts outstanding under this
loan agreement as of December 31, 2004 were approximately $1.6 million in
revolving loan borrowings and no letters of credit. Interest expense incurred
for revolving loan amounts borrowed was approximately $1 thousand for each year
in 2005 and 2004. There was no borrowing and no interest expense for 2003.
(9) Accrued Expenses
The components of accrued expenses as of December 31, 2005 and 2004, were
as follows (in thousands):
2005 2004
---- ----
Accrued bonus . . . . . . . . . . . . . . . . . . $ 4,040 $1,856
Accrued vacation . . . . . . . . . . . . . . . . 1,951 1,661
Accrued salaries . . . . . . . . . . . . . . . . 1,745 1,432
Billed amounts in excess of revenue recognition . 1,618 470
Estimated contract disallowances . . . . . . . . 499 467
Accrued pension and 401(k) contributions . . . . 446 468
Accrued deferred compensation . . . . . . . . . . 419 156
Estimated future losses on contracts . . . . . . 320 480
Accrued workers compensation . . . . . . . . . . 214 -
Other accrued expenses . . . . . . . . . . . . . 981 932
------- ------
Total accrued expenses $12,233 $7,922
======= ======
(10) ESOP/401(k) Plan and Profit Sharing Plan
VSE has an ESOP/401(k) plan that allows employees meeting certain age and
service requirements to contribute a portion of their salary to certain
investment trusts. Under the terms of the plan, employer 401(k) contributions
are made on behalf of the eligible employee participants based on the employees'
401(k) payroll deferrals. 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 2005, 2004, and 2003 was $578 thousand,
$415 thousand, and $262 thousand, respectively.
Prior to April 1, 1999, the Company made contributions under this plan
into an ESOP 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. Subsequent to April 1, 1999, the ESOP contributions were discontinued and
replaced by employer 401(k) contributions. The ESOP/401(k) plan held 262,913
shares and 281,933 shares of VSE stock as of December 31, 2005 and 2004,
respectively. Such shares receive dividend payments and are included in the
weighted average shares for earnings per share calculations.
43
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 2005, 2004, and 2003 was $420 thousand, $443 thousand, and $429
thousand, respectively.
(11) Stock Option Plans
On December 30, 2005, the board of directors of VSE Corporation (the
"Board") directed VSE to discontinue, until and unless the Board determined
otherwise, awarding options, both discretionary and nondiscretionary, to
purchase VSE common stock ("VSE Stock") under VSE's 2004 Stock Option Plan
approved by VSE' stockholders on May 3, 2005 (the "2004 Plan"). The options
outstanding under the 2004 Plan, as of December 30, 2005, are not affected by
this Board action. In addition, the options to purchase shares of VSE Stock
under VSE's 1998 Stock Option Plan (the "1998 Plan") are not affected by this
Board action.
The primary reason for the Board's suspension of option awards under the
2004 Plan was the potential impact on VSE's results of operations from the
application of SFAS 123 (R) to share-based payments to employees, including
stock option awards.
(a) 2004 Stock Option Plan
As of December 31, 2005, options issued under the 2004 Plan for up to
68,250 shares of VSE Common Stock, par value $.05 per share ("shares" or "VSE
Stock") remain outstanding. Each option granted under the 2004 Plan was issued
at the fair market value of VSE shares on the date of grant. Each option vests
25% on date of award and 25% on each anniversary date thereafter, becoming 100%
vested as of the third anniversary date of award. The 2004 Plan will terminate
on the earliest of May 1, 2014, or the date on which all options issued under
the 2004 Plan have been exercised, expire, or have been terminated.
(b) 1998 Stock Option Plan
As of December 31, 2005, options issued under the 1998 Plan for up to
129,313 shares remain outstanding. The 1998 Plan will terminate on the earliest
of May 6, 2008, or the date on which all options issued under the 1998 Plan have
been exercised, expire, or have been terminated.
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2005 Price 2004 Price 2003 Price
---- ----- ---- ----- ---- -----
Number of shares under
stock options:
Outstanding at beginning
of year . . . . . . . . 211,625 $ 9.51 212,250 $ 8.07 185,000 $ 7.66
Granted . . . . . . . . 70,000 25.17 65,500 12.82 68,750 10.85
Exercised . . . . . . . (79,312) 7.45 (62,125) 8.19 (24,875) 10.89
Forfeited . . . . . . . (4,750) - - - (4,625) 10.18
Terminations . . . . . . - - (4,000) 8.03 (12,000) 10.93
------- ------ ------- ------ ------- ------
Outstanding at end
of year 197,563 $15.83 211,625 $ 9.51 212,250 $ 8.07
======= ====== ======= ====== ======= ======
Exercisable at end
of year . . . . . . . . 146,438 $13.93 161,938 $ 8.70 127,250 $ 7.45
======= ====== ======= ====== ======= ======
Weighted average remaining
contractual life . . . 3 years 2 years 1 year
Weighted average fair
value of options granted $4.70 $2.76 $2.80
===== ===== =====
44
The following table summarizes the range of exercise prices for options
outstanding at December 31, 2005:
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
- ------------------------ ------ ---------- ----- ------ -----
$6.62 . . . . . . . . . 24,750 1 $ 6.62 24,750 $ 6.62
$10.73 . . . . . . . . . 45,438 2 10.73 45,438 10.73
$12.82 . . . . . . . . . 59,125 3 12.82 43,000 12.82
$25.17 . . . . . . . . . 68,250 4 25.17 33,250 25.17
------- - ------ ------- ------
Total 197,563 3 $15.83 146,438 $13.93
======= = ====== ======= ======
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, 2005 and 2004, was approximately $0 thousand and $9
thousand, respectively.
(12) Income Taxes
The Company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision for income taxes from continuing
operations for the years ended December 31, 2005, 2004, and 2003 are as follows
(in thousands):
2005 2004 2003
---- ---- ----
Current
Federal . . . . . . . . . . . . . . . . . . $3,475 $1,989 $ 796
State . . . . . . . . . . . . . . . . . . . 671 475 244
------ ------ ------
4,146 2,464 1,040
Deferred
Federal . . . . . . . . . . . . . . . . . . (288) (202) 275
State . . . . . . . . . . . . . . . . . . (38) (71) -
------ ------ ------
(326) (273) 275
------ ------ ------
Provision for income taxes . . . . . . . . . . $3,820 $2,191 $1,315
====== ====== ======
The benefit for income taxes from discontinued operations for the
years ended December 31, 2005, 2004 and 2003 are as follows (in thousands):
2005 2004 2003
---- ---- ----
Current . . . . . . . . . . . . . . . . . . . $ - $ (1) $(419)
Deferred . . . . . . . . . . . . . . . . . . . - - 371
----- ----- -----
Total income tax benefit $ - $ (1) $ (48)
===== ===== =====
The differences between the amount of tax computed at the federal
statutory rate of 34% and the provision for income taxes for 2005, 2004, and
2003 are as follows (in thousands):
2005 2004 2003
---- ---- ----
Tax at statutory federal income
tax rate at 34% . . . . . . . . . . . . . . $3,396 $1,916 $1,158
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 417 266 160
Permanent differences, net . . . . . . . . 6 9 (6)
Other, net . . . . . . . . . . . . . . . . 1 - 3
------ ------ ------
Provision for income taxes . . . . . . . . . . $3,820 $2,191 $1,315
====== ====== ======
45
The Company's deferred tax assets (liabilities) as of December 31, 2005
and 2004 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):
2005 2004
---- ----
Current deferred tax assets . . . . . . . . . . $1,247 $1,173
Current deferred tax liabilities . . . . . . . . (214) (96)
------ ------
Net current deferred tax assets . . . . . . . . 1,033 1,077
------ ------
Noncurrent deferred tax assets . . . . . . . . . 1,480 1,109
Noncurrent deferred tax liabilities . . . . . . . (798) (797)
------ ------
Net noncurrent deferred tax assets . . . . . . 682 312
------ ------
Net deferred tax assets . . . . . . . . . . . . . $1,715 $1,389
====== ======
The tax effect of temporary differences representing deferred tax assets
and liabilities as of December 31, 2005 and 2004, are as follows (in thousands):
2005 2004
---- ----
Deferred compensation and accrued paid leave . . $1,558 $1,221
Reserve for contract and other disallowances . . 198 165
Reserve for future losses . . . . . . . . . . . . 126 186
Accrued expenses . . . . . . . . . . . . . . . . 101 75
Accelerated depreciation . . . . . . . . . . . . 65 (133)
Reserve for doubtful accounts . . . . . . . . . . 16 32
Retainages not taxed until billed . . . . . . . (7) (9)
Deferred revenues . . . . . . . . . . . . . . . . (180) (50)
Intangible assets . . . . . . . . . . . . . . . . (185) (139)
Other . . . . . . . . . . . . . . . . . . . . . . 23 41
------ ------
Net deferred tax assets $1,715 $1,389
====== ======
(13) Commitments and Contingencies
(a) Leases and other commitments
The Company and its subsidiaries have various non-cancelable operating
leases for facilities, equipment, and software with terms between two and ten
years. Rent expense is recognized on a straight-line basis for rent agreements
having escalating rent. Payments on these leases for 2005, 2004, and 2003 were:
(in thousands)
------------------------------------------
Payments Sublease Net
on Leases Income Expense
--------- ------ -------
2005 . . . . . . . . . . . $3,733 $ 922 $2,811
2004 . . . . . . . . . . . 3,692 566 3,126
2003 . . . . . . . . . . . 3,289 637 2,652
Future minimum annual non-cancelable commitments as of December 31, 2005 are as follows:
(in thousands)
------------------------------------------
Payments Sublease Net
on Leases Income Expense
--------- ------ -------
2006 . . . . . . . . . . . $ 3,396 $ 909 $2,487
2007 . . . . . . . . . . . 2,919 910 2,009
2008 . . . . . . . . . . . 1,876 390 1,486
2009 . . . . . . . . . . . 642 95 547
2010 . . . . . . . . . . . 263 - 263
Thereafter . . . . . . . . - - -
------- ------ ------
Total $ 9,096 $2,304 $6,792
======= ====== ======
46
(b) Contingencies
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. However, the results of
any legal proceedings cannot be predicted with certainty.
47
(14) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2005 and 2004, in
thousands, except earnings per share:
2005 Quarters
-------------
1st 2nd 3rd 4th
--- --- --- ---
Revenues . . . . . . . . . . . . . . . . $65,919 $72,682 $76,600 $64,938
======= ======= ======= =======
Gross profit . . . . . . . . . . . . . . $ 2,164 $ 2,966 $ 2,717 $ 2,512
======= ======= ======= =======
Income from continuing operations . . . $ 1,304 $ 1,765 $ 1,587 $ 1,513
Loss from discontinued operations . . . - - - -
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . $ 1,304 $ 1,765 $ 1,587 $ 1,513
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations . . . $ .57 $ .76 $ .68 $ .64
Loss from discontinued operations . . . - - - -
------- ------- ------- -------
Net income per share . . . . . . . . . . $ .57 $ .76 $ .68 $ .64
======= ======= ======= =======
Weighted average shares outstanding . . 2,279 2,311 2,348 2,351
======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations . . . $ .55 $ .74 $ .66 $ .63
Loss from discontinued operations . . . - - - -
------- ------- ------- -------
Net income per share . . . . . . . . . . $ .55 $ .74 $ .66 $ .63
======= ======= ======= =======
Weighted average shares outstanding . . 2,354 2,377 2,417 2,419
======= ======= ======= =======
2004 Quarters
-------------
1st 2nd 3rd 4th
--- --- --- ---
Revenues . . . . . . . . . . . . . . . . $42,609 $54,037 $62,223 $57,142
======= ======= ======= =======
Gross profit . . . . . . . . . . . . . . $ 1,147 $ 1,613 $ 1,604 $ 1,806
======= ======= ======= =======
Income from continuing operations . . . $ 708 $ 855 $ 885 $ 997
Loss from discontinued operations . . . - (1) - -
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . $ 708 $ 854 $ 885 $ 997
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations . . . $ .32 $ .38 $ .40 $ .44
Loss from discontinued operations . . . - - - -
------- ------- ------- -------
Net income per share . . . . . . . . . . $ .32 $ .38 $ .40 $ .44
======= ======= ======= =======
Weighted average shares outstanding . . 2,216 2,222 2,225 2,264
======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations . . . $ .31 $ .37 $ .38 $ .43
Loss from discontinued operations . . . - - - -
------- ------- ------- -------
Net income per share . . . . . . . . . . $ .31 $ .37 $ .38 $ .43
======= ======= ======= =======
Weighted average shares outstanding . . 2,287 2,306 2,301 2,346
======= ======= ======= =======
48
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. Controls and Procedures
As of the end of the period covered by this report, based on our
management's evaluation, with the participation of VSE's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d - 15(e) under the Securities
Exchange Act of 1934, as amended) our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed by us in reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There was no change in our internal control over financial reporting
during our fourth quarter of fiscal 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. Other Information
None.
PART III
Except as otherwise indicated below, 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 definitive proxy statement relating to its Annual Meeting of
Stockholders scheduled for May 2, 2006 (the "Proxy Statement") to be filed with
the SEC, except as otherwise indicated below:
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the
Proxy Statement.
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Proxy Statement except for the text thereof under the captions "Compensation
Committee Report" and "Performance Graph."
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
Except for the "Equity Compensation Plan Information" disclosed in Item
5(d) above, the information required by this Item is incorporated by reference
to the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Proxy Statement.
49
ITEM 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to the
Proxy Statement.
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,
notes to the consolidated financial statements, or supplementary financial
information.
3. Exhibits
See "Exhibit Index" hereinafter contained and incorporated by
reference.
4. Reports on Form 8-K
On January 6, 2006, the Registrant filed a Current Report on
Form 8-K to report that on December 30, 2005, the Registrant's board of
directors (the "Board") directed VSE Corporation to discontinue, until and
unless the Board determined otherwise, awarding options, both discretionary and
nondiscretionary, to purchase VSE common stock under VSE's 2004 Stock Option
Plan approved by VSE's stockholders on May 3, 2004.
On November 3, 2005, the Registrant filed a Current Report on
Form 8-K to report Amended and Restated By-Laws of VSE Corporation, as of
November 1, 2005.
On October 31, 2005, the Registrant filed a Current Report on
Form 8-K to announce the financial results of the third quarter 2005.
50
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 7, 2006 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 7, 2006
- ---------------------------- Chief Executive Officer,
Donald M. Ervine Chief Operating Officer
/s/ Craig S. Weber Executive Vice President, March 7, 2006
- ---------------------------- Chief Administrative
Craig S. Weber Officer, Secretary
/s/ Thomas R. Loftus Senior Vice President and March 7, 2006
- ---------------------------- Chief Financial Officer
Thomas R. Loftus Principal Financial and
Accounting Officer)
/s/ Clifford M. Kendall Director March 7, 2006
- ----------------------------
Clifford M. Kendall
/s/ Calvin S. Koonce Director March 7, 2006
- ----------------------------
Calvin S. Koonce
/s/ James F. Lafond Director March 7, 2006
- ----------------------------
James F. Lafond
/s/ David M. Osnos Director March 7, 2006
- ----------------------------
David M. Osnos
/s/ Jimmy D. Ross Director March 7, 2006
- ----------------------------
Jimmy D. Ross
/s/ Bonnie K. Wachtel Director March 7, 2006
- ----------------------------
Bonnie K. Wachtel
51
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
November 1, 2005 *
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
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 March 10, 2004,
By and between VSE Corporation and Thomas G. Dacus
(Exhibit 10.1 to form 10-Q dated April 28, 2004) *
Employment Agreement dated as of July 1, 2004,
By and between VSE Corporation and Thomas R. Loftus
(Exhibit 10.1 to form 10-Q dated July 30, 2004) *
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 as amended by the
Board through March 9, 2004 (Exhibit 10.2 to
Form 10-Q dated April 28, 2004) *
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) *
52
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
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) *
VSE Corporation 2004 Stock Option Plan (Appendix B to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 3, 2004) *
VSE Corporation 2004 Non-employee Directors Stock Plan
(Appendix C to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on
May 3, 2004) *
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 registered public accounting
firm Exhibit 23.1
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
99 Audit Committee Charter (as adopted by the Board
Of Directors of VSE Corporation on March 9, 2004
(Appendix A to Registrant's definitive proxy
Statement for the Annual Meeting of Stockholders
held on May 3, 2004 *
*Document has been filed as indicated and is incorporated by reference herein.
53