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, 1999 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of March 1, 2000, was approximately $7 Million.
Number of shares of Common Stock outstanding as of March 1, 2000: 2,122,289.
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]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 4, 2000, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business 3
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters 11
ITEM 6. Selected Financial Data 12
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III
ITEM 10. Directors and Executive Officers of the Registrant 39
ITEM 11. Executive Compensation 39
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 39
ITEM 13. Certain Relationships and Related Transactions 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 40
Signatures 41
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 results to
differ materially from those anticipated in the forward looking statements
contained in this statement, 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 of Business
VSE Corporation ("VSE" or the "company") was established and
incorporated in Delaware January 1959. The company's business operations consist
of the operations of the parent company, operations of the company's wholly
owned subsidiaries and operations of the company's divisions. Wholly owned
subsidiaries include Energetics Incorporated ("Energetics"), Human Resource
Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly
VSE Services Corporation) and VSE Services International Inc. ("VSI"). The
company sold its CMstat Corporation subsidiary in May 1999. Unincorporated
divisions include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet
Maintenance"), Ordnance Division ("Ordnance"), VSE IT Services Division ("IT
Services"), and Value Systems Services Division ("VSS"). 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, technical, and management services, performed on a contract basis.
A large majority 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. Customers are
3
generally billed for a specified level-of-effort incurred in performing a
project or providing a service or, less frequently, for installed products,
systems and maintenance charges.
(b) Financial Information About Industry Segments
Financial information about industry segments for the three years ended
December 31, 1999, appears in Note 10 (Segment Information) of "Notes to
Consolidated Financial Statements" contained in this Form 10-K.
(c) Narrative Description of Business
During the three years ended December 31, 1999, the company operated
in two business segments. The engineering, logistics, management and technical
services segment ("ELMTS") includes the operations of the parent company and
all of the subsidiaries and divisions except CMstat. The software products
and services segment ("SPS") was comprised of the operations of CMstat prior
to the sale of CMstat in May 1999. The company has not had any operations in
SPS since May 1999.
Services and Products
Engineering, Logistics, Management and Technical Services Segment
VSE engineering, technical, management and information technology
services include a broad array of capabilities and resources used in program
planning; design and engineering, including prototype development; ship
reactivation and transfer support; logistics management; ship maintenance,
repair, overhaul planning and follow-on technical support; ship dismantlement
and recycling services; office automation systems and support; training;
technology research, development and demonstration programs involving energy
conservation and efficiency, advanced technology transfers, and feasibility,
assessment and development programs.
Typical engineering and technical services projects include sustaining
engineering support for military vehicles, combat trailers, bridging systems
and amphibious transport; ocean engineering and mooring systems; depot repair
operations; logistics management support for military aircraft; machinery
condition analysis; specification preparation for ship alterations and
repairs; ship force crew training; ship dismantlement and ship sales; energy
conservation and advanced technology demonstration projects; and technical
data package preparation.
VSE information technology services and products include cross-platform
technical data, product data and configuration management (CM/PDM) support,
bar coding and inventory application, and database management and control.
Contracts
Depending on solicitation requirements and other factors, VSE offers
its professional and technical services and products through various
4
competitive contract arrangements and business units which are responsive to
customer requirements and which may also provide an opportunity for
diversification. Such arrangements include prime contracts, subcontracts,
cooperative arrangements, joint ventures, dedicated ventures, dedicated cost
centers (divisions) and subsidiaries.
Substantially all of the company's revenues are derived from contract
services performed for the government. The U.S. Navy is VSE's largest single
customer, and most of the company's operating divisions and subsidiaries
derive a majority or all of their work from the Navy. Other significant
customers include: the U.S. Army, served by VSE (parent company); the U.S.
Postal Service, served by VSE (parent company) and by HRSI; and the
Department of Energy, which comprises the majority of Energetics' work. The
company's customers also include various other government agencies, non-
government organizations, and commercial entities.
VSE Revenues by Customer
(Dollars in Thousands)
1999 1998 1997
Customer Revenues % Revenues % Revenues %
- -------- -------- - -------- - -------- -
U.S. Navy $109,993 69.9 $128,773 72.7 $105,103 68.9
U.S. Army 19,468 12.4 19,577 11.1 19,423 12.7
All other government 27,558 17.5 27,991 15.8 25,804 16.9
Commercial 380 0.2 754 0.4 2,220 1.5
-------- ----- -------- ----- -------- -----
Total $157,399 100.0 $177,095 100.0 $152,550 100.0
======== ===== ======== ===== ======== =====
The government's procurement practices in recent years have tended
toward the bundling of various work efforts under large comprehensive
("omnibus") management contracts. As a result, the growth opportunities
available to the company will probably continue to occur in large
unpredictable increments. The company has elected to pursue these larger
efforts by assembling teams of subcontractors and forming joint venture
partnerships to offer the range of technical competencies required by these
omnibus contracts. The company has also elected to pursue more of its
contract work through its operating divisions and subsidiaries to focus on
particular lines of work or specific customer bases.
As a result of the bundling trend described above, the company has
several divisions for which revenues are derived predominantly from one major
contract effort. During 1999, the company's six largest contracts accounted
for approximately 80% of total revenues. The company's largest contract,
performed by BAV, is with the U.S. Navy and accounted for more than 50% of
consolidated revenues in 1999 and 1998. This contract is a ten year contract
awarded in 1995, and it has the potential to generate total revenues of over
one billion dollars from 1995 through 2005. Other major contracts include
U.S. Navy contracts performed by VSE (parent company), VSS, and Ordnance
divisions, and a U.S. Postal Service contract and a U.S. Army contract
performed by VSE (parent company). The VSS contract and the U.S. Postal
Service contract are expected to be re-bid in 2000, and the company is
actively pursuing the continuance of this work.
The company's contracts with the government are typically performed
under cost plus fee, time and materials, or fixed price contracts. Under cost
5
plus fee contracts, the customer reimburses the company for its allowable
costs and pays a fee as determined by the contract terms. Under time and
materials contracts, the customer pays the company contract specific hourly
rates for labor services and reimburses the company for the cost of
materials. Under fixed price contracts, the customer pays a contract specific
price for services or products. 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. During 1999, the company provided
services to the government and other customers under approximately 210
contracts and approximately 795 delivery orders or task orders.
Backlog
During 1999 and 1998, VSE was awarded contracts having potential
ceiling values of approximately $115 million and $124 million, respectively.
VSE's funded backlog of contract work as of December 31, 1999, 1998 and
1997 was approximately $108 million, $122 million and $110 million,
respectively. Funded backlog is defined as orders for services that have not
been fully rendered and for which funding has been provided either at the
time of award or thereafter. Substantially all the funded backlog is expected
to be completed within one year.
The excess of unfulfilled contract estimates over the incremental
funding authorized represents an unfunded backlog. Based on the total
estimated value of contracts actually awarded, the company's potential
revenues for work remaining to be performed under existing contracts (both
funded and unfunded backlog) was approximately $946 million, $1 billion and
$1.2 billion, as of December 31, 1999, 1998 and 1997, respectively. The
company has no reasonable basis on which to determine when or if such
unfunded backlog will be funded. Because of uncertainties associated with
changing program requirements and the ultimate availability of funds, VSE
believes that measurements of unfunded backlog are of limited use in
evaluating future workload.
As of December 31, 1999, VSE had proposals pending for engineering
services contracts covering approximately $618 million in services for the
Department of Defense or other government agencies or prime contractors. If
these contracts are awarded to VSE, resulting ordering periods could extend
through 2005. There is no assurance that VSE will be the successful bidder
for any of these contracts. Additionally, there can be no assurance that
contracts awarded will result in revenues to VSE because (a) contract awards
may be rescinded as a result of the government's bid protest procedures, (b)
contracts may not be funded at the nominal amounts cited in competitive bid
announcements and (c) contracts when funded may be terminated at the
convenience of the government.
Marketing
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators and other
personnel. Information concerning new programs and requirements becomes
6
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, scientific,
medical and technical personnel having high levels of education, experience,
training and skills. As of February 2000, VSE employed approximately 900
employees, including approximately 150 part-time personnel.
Principal categories of VSE personnel include (a) engineers, scientists
and technicians in mechanical, electrical, electronic, chemical, industrial,
energy and environmental services, marine and ocean engineering disciplines,
(b) information technology professionals in computer systems, applications
and products, configuration, change and data management disciplines,
(c) technical editors and writers, (d) graphic designers and technicians and
(e) health care service personnel. The expertise required by VSE customers also
frequently includes knowledge of government administrative procedures. Many
VSE employees have had experience as government employees or have served in
the U.S. armed forces. The company considers its relationships with
employees to be excellent.
Competition and Risks
Competition. The professional and technical services industry in which
VSE is engaged is very competitive. There are a substantial number of other
organizations, including large, diversified firms with greater financial
resources and larger technical staffs, which are capable of providing
essentially the same services as those offered by VSE. Such companies may be
publicly owned or privately held and may be divisions of much larger
organizations including large manufacturing corporations. Competition in the
government contract business has intensified in recent years due to declining
government budgets.
Government agencies have placed an increased emphasis on awarding
contracts of the types performed by VSE on a competitive basis as opposed to
a non-competitive basis. All significant contracts currently being performed
by VSE were either initially awarded on a competitive basis or have been
renewed at least once on a competitive basis. Government agencies also order
work through contracts awarded by the General Services Administration
("GSA") which provide a schedule of services at fixed prices which may be
ordered outside of the solicitation process. The company has been awarded
three separate GSA schedule contracts for various classes of services, but
there is no assurance regarding the level of work under these contract
arrangements.
It is not possible to predict the extent and range of competition which
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
7
qualifications, quality and innovation of services and products, past
performance and low price.
Risks. Since 1993, the government has initiated a series of changes
designed to improve and streamline its acquisition policies and procedures.
Such changes include an emphasis on very large contracts, which may make it
more difficult for VSE to qualify as a potential bidder; past performance,
which may be used to exclude entrance into new government markets; and
multiple-award schedules, which may result in unequal contract awards between
successful contractors.
VSE's business with the government is subject to the risk that one or
more of its potential contracts or contract extensions may be awarded by the
contracting agency to a "small and 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. In addition, government contract business is subject to funding
delays, extensions, and moratoriums caused by political and administrative
disagreements such as occurred during the 1996 U.S. Government budget
negotiations. To date, the effect of such negotiations and disagreements on
the company has not been material; however, no assurances can be given about
such risks with respect to future years.
Government contracts are subject to termination at the government's
convenience, which means that the government may terminate the contract at
any time, without cause. If a government contract is terminated for
convenience, the contractor is generally reimbursed for its allowable costs
to the date of termination and is paid a proportionate amount of the
stipulated profit or fee for the work actually performed. VSE has not
suffered any material losses or disruptions of its business due to government
terminations for convenience.
VSE's business is subject to the risks arising from global economic
conditions associated with potential foreign customers served through the
company's contracts with the U.S. Government. For example, economic slowdowns
in certain countries served under the BAV contract could potentially affect
BAV sales. In addition, the company's subsidiary VSE Services International,
Inc. is also expected to serve foreign customers on a direct sales basis and
may be subject to such economic slowdowns.
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,
2003. This building contains approximately 108,000 square feet of
engineering, shop, and administrative space. VSE also provides services
and products from approximately 11 U.S. branch offices located at or near
customer sites to facilitate communications and enhance project performance.
Branch offices are generally occupied under short term leases and currently
include an aggregate of approximately 195,000 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); these services are often of short duration based on
"tiger team" or "as-ordered" requirements.
8
VSE owns and operates an engineering test center in Ladysmith,
Virginia, consisting of approximately 44 acres of land and an improved
storage and vehicle maintenance facility. This facility has been used by VSE
to test military and commercial equipment for which VSE provides system
technical support or other engineering services and to supplement Alexandria,
Virginia, office and shop facilities.
ITEM 3. Legal Proceedings
Litigation
None.
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, 1999.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Registrant as of March 15, 2000.
The executive officers are chosen annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and have qualified, or
until death, resignation or removal, whichever is sooner.
Name Age Position with Registrant
- ---- --- ------------------------
William R. Albertolli 57 Senior Vice President and
President, VSS Division
Byron S. Bartholomew 72 Executive Vice President,
Business Development
Donald M. Ervine 63 Chairman and Chief Executive
Officer
James M. Knowlton 57 President and Chief Operating
Officer, President and
General Manager, BAV Division
Jayne M. Tuohig 53 Senior Vice President and
General Manager, Postal
Service Program Center
Paul A. Vander Myde 63 Senior Vice President,
Corporate Affairs
Craig S. Weber 55 Senior Vice President,
Chief Financial Officer and
Corporate Secretary
10
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder
Matters
(a) Market Information
The company's common stock ($.05 par value) 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
------------- ---- --- ---------
1998:
March 31 $ 9.70 $8.125 $.036
June 30 10.50 8.00 .036
September 30 9.50 7.75 .036
December 31 13.00 5.75 .036
For the Year $13.00 $5.75 $.144
1999:
March 31 $11.75 $8.25 $.036
June 30 11.00 6.75 .036
September 30 10.50 8.125 .036
December 31 9.875 7.125 .036
For the Year $11.75 $6.75 $.144
(b) Holders
There were approximately 1,200 stockholders of VSE common stock as of
March 1, 2000, consisting of about 300 stockholders of record plus the number
of beneficial owner proxy sets provided in connection with VSE's 1999 Annual
Meeting of Stockholders 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 $.144 per share during 1999
and 1998. Pursuant to its bank loan agreement (see Note 4 of "Notes to
Consolidated Financial Statements"), the payment of cash dividends by VSE is
subject to annual rate restrictions. VSE has paid cash dividends each year
since 1973.
11
ITEM 6. Selected Financial Data
- -----------------------------------------------------------------------------
(In thousands, except per share data)
1999 1998 1997 1996 1995(A)
-------- -------- -------- -------- -------
Revenues, principally from contracts . . . . . $157,399 $177,095 $152,550 $115,616 $72,378
======== ======== ======== ======== =======
Income (loss) from continuing operations . . . $ 1,534 $ 1,595 $ (1,447) $ 1,946 $ 1,738
(Loss) from discontinued operations . . . . . - - - (25) (92)
Loss on disposal of discontinued
operations . . . . . . . . . . . . . . . . . - - - (179) -
-------- -------- -------- -------- -------
Net income (loss) . . . . . . . . . . . . $ 1,534 $ 1,595 $ (1,447) $ 1,742 $ 1,646
======== ======== ======== ======== =======
Basic earnings per common share:
Income (loss) from continuing operations . . $ .73 $ .75 $ (.68) $ .89 $ .80
(Loss) from discontinued operations . . . . - - - (.09) (.04)
-------- -------- -------- -------- -------
Net income (loss) . . . . . . . . . . . . $ .73 $ .75 $ (.68) $ .80 $ .76
======== ======== ======== ======== =======
Diluted earnings per common share:
Income (loss) from continuing operations . . $ .73 $ .75 $ (.68) $ .88 $ .80
(Loss) from discontinued operations . . . . - - - (.09) (.04)
-------- -------- -------- -------- -------
Net income (loss) . . . . . . . . . . . . .73 $ .75 $ (.68) $ .79 $ .76
======== ======== ======== ======== =======
Working Capital . . . . . . . . . . . . . . . $ 7,078 $ 5,801 $ 6,258 $ 9,839 $ 9,535
======== ======== ======== ======== =======
Total assets . . . . . . . . . . . . . . . . . $ 31,250 $ 47,248 $ 43,413 $ 49,353 $29,108
======== ======== ======== ======== =======
Long-term debt . . . . . . . . . . . . . . . . $ - $ 1,503 $ 3,444 $ 5,384 $ 4,514
======== ======== ======== ======== =======
Stockholders' investment . . . . . . . . . . . $ 15,145 $ 13,852 $ 12,481 $ 14,595 $13,553
======== ======== ======== ======== =======
Cash dividends per common share . . . . . . . $ .144 $ .144 $ .144 $ .138 $ .13
======== ======== ======== ======== =======
Per share amounts have been adjusted to reflect stock splits effected in 1996
and 1997.
(A) The increase in revenues in 1996 as compared to 1995 are attributed to
the award of the BAV contract and the acquisitions of Energetics Incorporated
and CMstat Incorporated.
This consolidated summary of selected financial data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report.
12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
VSE and its subsidiaries and divisions have two reportable segments:
the engineering, logistics, management and technical services segment
("ELMTS") and the software products and services segment ("SPS"). The
term "VSE" or "company" means VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only.
The ELMTS business operations consist of the operations of the parent
company, operations of the company's wholly owned subsidiaries and operations
of the company's divisions. Wholly owned subsidiaries in this segment
include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc.
("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services
Corporation) and VSE Services International Inc ("VSI") incorporated in
August 1999. Unincorporated divisions in this segment include BAV Division
("BAV"), Fleet Maintenance Division ("Fleet Maintenance") formed in June
1999, Ordnance Division ("Ordnance"), VSE IT Services Division ("IT
Services"), formed in January 1999, and Value Systems Services Division
("VSS").
The SPS business operations include sales of developed software
products and the services related to the installation and use of the
software. This is the primary business of VSE's former subsidiary CMstat
Corporation ("CMstat"), sold in May 1999. (See "Divestiture" below).
The company is engaged principally in providing engineering, software
development, testing and management services to the U.S. Government (the
"government"). Intercompany sales are principally at cost and have been
eliminated from the consolidated financial statements.
13
Results of Operations
Revenues
The following table shows the revenues from operations of VSE and
subsidiaries and such revenues as a percent of total revenues:
Revenues from Operations
(dollars in thousands)
1999 1998 1997
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- - -------- - -------- -
ELMTS Segment:
VSE (parent company). . . . . $ 44,301 28.0 $ 51,993 28.9 $ 50,040 32.2
BAV . . . . . . . . . . . . . 78,791 49.8 93,564 52.0 75,296 48.3
Energetics . . . . . . . . . 11,604 7.3 11,984 6.6 11,598 7.4
VSS . . . . . . . . . . . . . 10,271 6.5 10,182 5.6 9,179 5.9
Ordnance . . . . . . . . . . 6,115 3.9 1,531 0.8 0 0.0
HRSI . . . . . . . . . . . . 5,770 3.6 7,841 4.4 6,437 4.1
Fleet Maintenance . . . . . . 273 0.2 - 0.0 - 0.0
IT Services . . . . . . . . . 268 0.1 - 0.0 - 0.0
VSI . . . . . . . . . . . . . 6 0.0 - 0.0 - 0.0
-------- ----- -------- ----- -------- -----
$157,399 99.4 $177,095 98.3 $152,550 97.9
======== ===== ======== ===== ======== =====
SPS Segment:
CMstat . . . . . . . . . . . $ 902 0.6 $ 3,138 1.7 $ 3,313 2.1
======== ===== ======== ===== ======== =====
The consolidated statements of operations have been restated and
include the revenues and income from the SPS segment on the "Loss on CMstat
operations" line.
Engineering, Logistics, Management and Technical Services Segment
The largest customer for the ELMTS segment is the U.S. Department of
Defense ("Defense"), including agencies of the U.S. Army, Navy and Air Force.
VSE's ELMTS segment revenues have historically been subject to annual
fluctuations resulting from changes in the level of Defense spending.
Accordingly, there can be no assurance that future reductions in Defense
spending will not have a material adverse impact on the company's results of
operations or financial position.
Substantially all of the company's revenues from this segment depend on
the award of new contracts, on current contracts not being terminated for the
convenience of the government, and on the exercise of option periods and the
satisfaction of incremental funding requirements on current contracts. In
1999, 1998 and 1997, the company did not experience any terminations of
contracts for the convenience of the government nor any non-exercise of
option periods on current contracts which were material to the company's
results of operations or financial position.
14
During 1998 and 1999, the Ordnance and Fleet Maintenance divisions bid
on contract work that had been traditionally performed by VSE. This enabled
the company to use an operating structure that was better suited to perform
certain types of contract work. In prior years, the company has utilized this
strategy to win contracts and generate new revenue in the BAV and VSS
divisions. The company anticipates that it will continue this strategy to
better service the needs of its customers. As the use of operating divisions
to bid and win new contracts increases, the company expects that the revenue
of VSE (the parent company) will be further reduced in the future as parent
company contracts are replaced by operating division contracts. Management
believes that the use of operating divisions to perform future work and the
associated improvements in servicing customers will better position the
consolidated entity for future revenue growth.
BAV Contract. Since August 1995, VSE's BAV Division has had a contract
with the U.S. Navy to provide engineering, technical and logistical support
services associated with the sale, lease or transfer of Navy ships to foreign
governments. This contract has the potential, if all options are exercised,
to generate revenues in excess of one billion dollars over a ten year period
from 1995 through 2005. The contract accounted for approximately 50% and 52%
of consolidated revenues from operations during 1999 and 1998, respectively.
The level of revenues generated by this contract will vary 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 experienced significant
quarterly and annual revenue fluctuations from 1997 through 1999 and
anticipates that future revenues will be subject to significant variations
primarily due to this contract.
New Business. The company has been successful in bidding and winning
new types of work in the ELMTS segment. IT Services was formed in January
1999 to bid and perform on work issued through the government's GSA schedule.
This division was awarded a second purchase agreement in October 1999 to
support the U.S. Navy's Engineering Investigations (EI) safety program
related to naval aircraft and aircraft systems and subsystems.
VSI was formed in August 1999 to expand VSE's international presence
and perform services for foreign government and commercial customers similar
to the services VSE has traditionally provided in the United States. VSI
received its first work order in September 1999.
SRR is a participant in a joint venture that was awarded a contract
associated with a new program to dismantle and recycle retired U.S. Navy
ships. Work on this contract began in January 2000.
Each of these three new business units is engaged in bidding on and
performing work that could potentially increase the future revenues of the
company.
Software Products and Services Segment
The company sold its CMstat subsidiary in May 1999. (See "Divestiture"
below). The revenues and pretax losses of this segment for 1999 include the
activity of CMstat through May 21, 1999, and the pretax loss includes a loss
on the sale of CMstat. Accordingly, year to year comparisons of revenue and
15
income for this segment are not meaningful. As a result of the sale of
CMstat, the company will no longer have any active business operations in the
software products and services segment. The company's 1999 operating results
for the SPS segment are therefore not a good indicator of future quarterly
results.
Income from Operations Before Income Taxes
The following table shows consolidated revenues and income from
operations before income taxes of VSE segments, other items of income and
expense, and such amounts as a percent of segment revenues.
Income (Loss) from Operations Before Income Taxes
(dollars in thousands)
Description 1999 % 1998 % 1997 %
- ----------- ---- - ---- - ---- -
ELMTS Segment:
Revenues . . . . . . . $157,399 100.0 $177,095 100.0 $152,550 100.0
Costs and expenses . . 152,705 97.0 171,629 96.9 148,412 97.3
-------- ------ -------- ----- -------- ------
Gross profit . . . . . 4,694 3.0 5,466 3.1 4,138 2.7
Selling, general and
administrative expenses 684 0.4 592 0.3 159 0.1
Interest expense . . . 132 0.1 45 0.1 130 0.1
-------- ------ -------- ----- -------- ------
Income from operations
before income
taxes . . . . . . . $ 3,878 2.5 $ 4,829 2.7 $ 3,849 2.5
======== ====== ======== ===== ======== ======
SPS Segment:
Revenues . . . . . . . $ 902 100.0 $ 3,138 100.0 $ 3,313 100.0
Costs and expenses . . 1,072 118.9 4,607 146.8 8,178 246.9
-------- ------ -------- ----- -------- ------
Gross loss . . . . . . (170) (18.9) (1,469) (46.8) (4,865) (146.9)
Selling, general and
administrative expenses 82 9.1 178 5.7 691 20.9
Loss on disposition
of CMstat 1,098 121.7 - 0.0 - 0.0
Interest expense . . . 128 14.2 496 15.8 376 11.3
-------- ------ -------- ----- -------- ------
Loss from operations
before income
taxes . . . . . . . $ (1,478) (163.9) $ (2,143) (68.3) $ (5,932) (179.1)
======== ====== ======== ===== ======== ======
Engineering, Logistics, Management and Technical Services Segment
Costs and expenses of operations, as a percentage of ELMTS segment
revenues, were fairly stable during 1999, 1998 and 1997. The small
percentage differences between 1999, 1998 and 1997 are due to a combination
of factors, some of which are offsetting, including (a) differences between
16
costs incurred and costs billable (whether they may be billed based on
contract provisions), (b) the effects of increases or decreases in facility
and equipment lease renewals, fringe benefit programs and similar period
expenses, (c) costs associated with contract start-up and termination phases,
(d) narrower profit margins on new work due to increased competition, (e)
increased labor costs reflecting a more competitive marketplace for
attracting and retaining our employees, (f) the establishment and reversal of
reserves for potential contract disallowances due to the timing of government
audits on costs incurred, g) the amount of work performed on certain
contracts as a percentage of total revenues, (h) the timing of contract award
fees and (i) effective project and cost management.
Selling, general and administrative expenses as a percentage of
segment revenues increased slightly in 1999 as compared to 1998 and in 1998
as compared to 1997. Selling, general and administrative expenses will vary
from year to year due to various types of nonreimbursable costs, including
costs associated with the start up of new divisions or subsidiaries, costs of
discontinued operations and unrecoverable contract costs.
Interest expense as a percentage of segment revenues increased slightly
in 1999 as compared to 1998 due primarily to an increase in average levels of
bank debt resulting from the sale of CMstat. Interest expense as a percentage
of segment revenues decreased approximately 0.1% in 1998 as compared to 1997
due primarily to the application of earnings to reduce the bank debt of this
segment and to the improved cash collection cycles on government contracts.
Divestiture
On May 22, 1999, VSE sold its wholly owned subsidiary CMstat. Under
the terms of the transaction, VSE sold all of the outstanding capital stock
of CMstat to an officer of CMstat in exchange for a promissory note for which
principal is payable in installments from September 1, 1999 through May 20,
2006. The transaction resulted in a pretax loss of approximately $1.1
million. An additional pretax loss from CMstat operations prior to the sale
date of approximately $400 thousand was incurred in 1999.
The sale of CMstat is a divestiture for legal and tax purposes.
For accounting purposes, the sale is not afforded discontinued operations
treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture
of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale
did not transfer the risks of ownership because the sales price is primarily
dependent on the buyer's ability to repay the promissory note.
The company sustained significant losses on CMstat operations during
1999, 1998 and 1997. Management believes that the divestiture of CMstat will
allow the company to focus on its core business lines and improve
profitability in the future.
Liquidity and Capital Resources
Cash Flows
The company's level of net cash and cash equivalents did not change
significantly during 1999. Approximately $4.2 million in net cash provided by
17
operations was used for financing activities of approximately $3.1 million
and for investing activities of approximately $1.1 million. Significant
financing activities included decreases in bank loan borrowings and the
current portion of long-term debt of approximately $1.5 million and $1.3
million, respectively. Significant investing activities included approximate-
ly $1.2 million associated with the purchase of property and equipment,
primarily computer equipment. Cash flows provided by operating activities
increased in 1999 as compared to 1998 due primarily to changes in the levels
of accounts receivable and accounts payable in 1999 resulting from a decrease
in revenues on the BAV contract as compared with the previous year.
A net increase in cash and cash equivalents of approximately $34
thousand during 1998 resulted from approximately $2.9 million provided by
operations, approximately $1.4 million used in financing activities, and
approximately $1.5 million used in investing activities. Significant
financing activities included a decrease in bank loan borrowings of
approximately $1.9 million. Significant investing activities included
approximately $1.5 million associated primarily with the purchase of computer
equipment. Cash flows provided by operating activities decreased in 1998 as
compared to 1997 due primarily to an increase in the level of accounts
receivable in 1998 resulting from the increased revenues in 1998 as compared
with a significant decrease in accounts receivable in 1997 due to collections
of accounts receivable on the BAV contract. The decrease in cash flows
provided by operating activities due to changes in the level of accounts
receivable was offset slightly by cash provided by the increase in net income
and the increase in accounts payable.
A net decrease in cash and cash equivalents of approximately $399
thousand during 1997 resulted from approximately $3.5 million provided by
operations, approximately $2 million used in financing activities, and
approximately $1.8 million used in investing activities. Significant
financing activities included a decrease in bank loan borrowings of $1.9
million. Significant investing activities included approximately $1.8
million associated with the purchase of property and equipment.
The company's principal requirements for cash are to finance the costs
of operations pending the collection of accounts receivable, to acquire
capital assets including leaseholds for office and computer support and to
pay cash dividends. Performance of work under the BAV contract has the
potential to cause substantial requirements for cash; however, management
believes that the cash flows from future operations and the bank revolving
loan commitment are adequate to meet current operating cash requirements.
Working Capital
VSE's requirements for working capital are affected significantly by
its revenues and accounts receivable, which are primarily derived from
billings made by the company to the government or other government prime
contractors for services rendered. Such accounts receivable generally do not
present liquidity or collection problems. Working capital is also affected by
(a) contract retainages, (b) start-up and termination costs associated with
new or completed contracts, (c) capital equipment requirements,
(d) differences between the provisional billing rates authorized by the
government compared to the costs actually incurred by the company and (e)
profitability.
18
Government contracts generally require VSE to pay for material and
subcontract costs included in VSE's contract billings prior to receiving
payment for such costs from the government. However, such contracts
generally provide for progress payments on a monthly or semimonthly basis,
thereby reducing requirements for working capital.
Dividends
Cash dividends were declared at the rate of $.144 per share during
1999, 1998, and 1997. Pursuant to its bank loan agreement (see Note 4 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.
ESOP Advances
Prior to December 1998 the company made advances to the ESOP trust
totaling $792 thousand in connection with distributions made to terminated
participants. In December 1998, the company and the ESOP entered into an
agreement in which the ESOP repaid the advances. Under the terms of the
agreement, the company purchased 72,000 shares of VSE stock from the ESOP at
market price and the ESOP simultaneously returned the proceeds of $792,000
from the stock sale to the company as repayment of the advances.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future
labor costs to be escalated for any option periods provided by the contracts,
while the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to
be insignificant.
Global Economic Conditions
VSE's business is subject to the risks arising from global economic
conditions associated with potential foreign customers served through VSE's
contracts with the U.S. Government. For example, an economic slowdown in
countries served under the BAV contract could potentially affect BAV sales.
Management is unable to predict what, if any, impact such conditions may have
on the company's financial position or results of operations.
Year 2000
Overview. The company is not currently aware of any Year 2000 issues
that have affected its business. During 1999, the company completed a
detailed assessment of all its information technology and non-information
technology hardware and software with regard to the Year 2000 issue, with
special emphasis on mission critical systems. Prior to December 31, 1999,
information and non-information technology hardware and software were
19
inventoried and those not Year 2000 ready were identified, remediated (i.e.,
corrected or replaced) and tested to ensure that they would, in fact, operate
as desired according to Year 2000 requirements. It is possible that the
company's computerized systems could be affected in the future by the Year
2000 issue. The company will continue to monitor its mission critical
computer applications throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Costs. Costs incurred to date for Year 2000 readiness efforts have
been minimal and are included as part of the company's ongoing administrative
costs and have not been separately identified. The company continues to
upgrade and improve its information technology systems as part of its normal
effort to maintain a competitive edge. As these upgrades and improvements are
made, the company is ensuring that all are Year 2000 ready. Therefore, the
majority of costs incurred for computer systems that ensure Year 2000
readiness are expenditures that are made in the normal course of business.
Total property and equipment expenditures for 1999 and 1998, including
expenditures for computers and computer systems, were approximately $1.2
million and $1.5 million, respectively. Accordingly, management believes
that the incremental costs of addressing the Year 2000 readiness issue have
not materially affected the company's consolidated financial position,
liquidity, or results of operations through December 31, 1999 and will not
materially affect them through 2000.
Impact on Operations. The company did not materially alter its spending
patterns for information technology as a result of the Year 2000 issue. The
company has not experienced any material revenue fluctuations due to
increases or decreases in customer purchasing activity related to the Year
2000 issue during late 1999 or early 2000 and does not expect to experience
such fluctuations. The company has not experienced and does not expect to
experience any significant returns of products or services purchased in 1999
by customers in preparation for Year 2000. Accordingly, the company does not
anticipate that the Year 2000 issue will materially impact its results of
operations in 2000 as compared to 1999.
Risks. The full range of potential risks associated with the Year 2000
issue will continue to be monitored. Potential risks include obligations
related to contract performance on current and past contracts, the reliance
on infrastructure services to conduct the company's business operations, and
the possibility of liquidity issues caused by payment problems with VSE's
banks or government customers. Although management believes that the risks
associated with internal issues regarding the Year 2000 problem will be
minimal, the risks associated with external issues are difficult to predict.
If these external issues cause massive failures to systems upon which the
company is reliant, the results could materially affect the company's
consolidated financial position, liquidity, or results of operations.
Market Risk
The Company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at December
31, 1999.
20
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
----
Report of Independent Public Accountants 22
Consolidated Balance Sheets as of December 31, 1999 and 1998 23
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 24
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 1999, 1998 and 1997 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 26
Notes to Consolidated Financial Statements 27
21
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations,
stockholders' investment and cash flows for the three years ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VSE
Corporation as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the three years ended December 31, 1999, in
conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 3, 2000
22
Consolidated Balance Sheets As of December 31,
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
1999 1998
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 62 $ 49
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 19,361 34,105
Deferred tax assets . . . . . . . . . . . . . . . . . . 927 403
Other current assets . . . . . . . . . . . . . . . . . . 974 1,266
------- -------
Total current assets . . . . . . . . . . . . . . . . 21,324 35,823
Property and equipment, net . . . . . . . . . . . . . . . 4,377 4,480
Deferred tax assets . . . . . . . . . . . . . . . . . . . 728 703
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,267 2,836
Note receivable from business transferred . . . . . . . . 665 -
Net assets of business transferred under contractual
arrangement . . . . . . . . . . . . . . . . . . . . . . - 629
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,889 2,777
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $31,250 $47,248
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . $ - $ 1,333
Accounts payable . . . . . . . . . . . . . . . . . . . . 8,193 15,930
Accrued expenses . . . . . . . . . . . . . . . . . . . . 5,977 5,935
Dividends payable . . . . . . . . . . . . . . . . . . . 76 77
Net liabilities of business transferred under
contractual arrangement . . . . . . . . . . . . . . . - 6,747
------- -------
Total current liabilities . . . . . . . . . . . . . 14,246 30,022
Long-term debt . . . . . . . . . . . . . . . . . . . . . . - 1,503
Deferred compensation . . . . . . . . . . . . . . . . . . 1,859 1,871
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 16,105 33,396
------- -------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,194,289 in 1999 and
2,186,905 in 1998 . . . . . . . . . . . . . . . . . . 110 109
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 3,894 3,832
Retained earnings . . . . . . . . . . . . . . . . . . . 11,933 10,703
Treasury stock, at cost (72,000 shares) . . . . . . . . (792) (792)
------- -------
Total stockholders' investment . . . . . . . . . . . 15,145 13,852
------- -------
Total liabilities and stockholders' investment . . . $31,250 $47,248
======= =======
See accompanying notes
23
Consolidated Statements of Operations For the years ended December 31,
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
1999 1998 1997
---- ---- ----
Revenues, principally from contracts . . . . $ 157,399 $ 177,095 $ 152,550
Costs and expenses of contracts . . . . . . 152,684 171,510 148,020
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . 4,715 5,585 4,530
Selling, general and administrative expenses 684 592 159
Loss on CMstat operations . . . . . . . . . 401 2,262 6,324
Loss on disposition of CMstat . . . . . . . 1,098 - -
Interest expense . . . . . . . . . . . . . . 132 45 130
--------- --------- ---------
Income (loss) before income taxes . . . . . 2,400 2,686 (2,083)
Provision (benefit) for income taxes . . . . 866 1,091 (636)
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 1,534 $ 1,595 $ (1,447)
========= ========= =========
Basic earnings per share:
Net income (loss) . . . . . . . . . . . . . $ 0.73 $ 0.75 $ (0.68)
========= ========= =========
Basic weighted average shares outstanding 2,115,569 2,126,151 2,123,544
========= ========= =========
Diluted earnings per share:
Net income (loss) . . . . . . . . . . . . . $ 0.73 $ 0.75 $ (0.68)
========= ========= =========
Diluted weighted average shares outstanding 2,115,569 2,126,151 2,123,544
========= ========= =========
See accompanying notes
24
Consolidated Statements of Stockholders' Investment
- -------------------------------------------------------------------------------------------------
(in thousands)
Unrealized
Loss on
Common Stock Paid-In Retained Treasury ESOP Available-for-
Shares Amount Surplus Earnings Stock Obligation Sale Securities
------ ------ ------- -------- ----- ---------- ---------------
Balance at
December 31, 1996 3,908 $ 195 $ 8,241 $ 22,840 $ (16,285) $ (350) $ (46)
Net loss for
the year -- -- -- (1,447) -- -- --
Purchase of Treasury
Stock -- -- -- -- (70) -- --
ESOP Obligation -- -- -- -- -- (330) --
Realized loss on
marketable
securities -- -- -- -- -- -- 46
Retirement of
Treasury Stock (2,176) (109) (4,588) (11,658) 16,355 -- --
Stock split
effected in the
form of a 5-for-4
stock dividend 433 22 (22) -- -- -- --
Dividends
declared ($.144) -- -- -- (313) -- -- --
------ ----- ------- -------- --------- ------ -----
Balance at
December 31, 1997 2,165 108 3,631 9,422 -- (680) --
Net income for
the year -- -- -- 1,595 -- -- --
ESOP Obligation -- -- -- -- -- (112) --
Purchase of Treasury
Stock -- -- -- -- (792) 792 --
Issuance of stock 22 1 201 -- -- -- --
Dividends
declared ($.144) -- -- -- (314) -- -- --
------ ----- ------- -------- --------- ------ -----
Balance at
December 31, 1998 2,187 109 3,832 10,703 (792) -- --
Net income for
the year -- -- -- 1,534 -- -- --
Issuance of stock 7 1 62 -- -- -- --
Dividends
declared ($.144) -- -- -- (304) -- -- --
------ ----- ------- -------- --------- ------ -----
Balance at
December 31, 1999 2,194 $ 110 $ 3,894 $ 11,933 $ (792) $ -- $ --
====== ===== ======= ======== ========= ====== =====
See accompanying notes
25
Consolidated Statements of Cash Flows For the years ended December 31,
- ----------------------------------------------------------------------------------------------
(in thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 1,534 $ 1,595 $(1,447)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,947 1,603 1,622
Loss on disposition of CMstat . . . . . . . . . . . . . . . 1,098 - -
(Gain) loss on sale of property and equipment . . . . . . . (124) 5 47
Deferred compensation plan expense . . . . . . . . . . . . 29 140 6
Net (payments of) proceeds from deferred compensation . . . (45) 188 242
Change in Deferred taxes . . . . . . . . . . . . . . . . . (549) 317 (733)
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . . 14,652 (3,817) 4,983
Other current assets and noncurrent assets . . . . . . . . 1,569 (509) 80
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . (7,733) 1,999 (5,819)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 42 9 522
Net Liabilities of business transferred under
contractual arrangements . . . . . . . . . . . . . . . . (8,205) 1,421 3,968
------- ------- -------
Net cash provided by operating activities 4,215 2,951 3,471
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of proceeds from dispositions) . . . . . . . . . . . . . (1,199) (1,530) (1,818)
Proceeds from note receivable from business transferred . . . . 74 - -
------- ------- -------
Net cash used in investing activities (1,125) (1,530) (1,818)
------- ------- -------
Cash flows from financing activities:
Net payments of bank loan . . . . . . . . . . . . . . . . . . (1,503) (1,941) (1,940)
Current portion of long-term debt . . . . . . . . . . . . . . (1,333) 778 555
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . (304) (314) (313)
Repayment from (advance to)ESOP . . . . . . . . . . . . . . . - 680 (330)
Purchase of Treasury stock . . . . . . . . . . . . . . . . . - (792) (70)
Realized loss on marketable securities . . . . . . . . . . . . - - 46
Issuance of common stock . . . . . . . . . . . . . . . . . . 63 202 -
------- ------- -------
Net cash used in financing activities (3,077) (1,387) (2,052)
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . 13 34 (399)
Cash and cash equivalents at beginning of year . . . . . . . . 49 15 414
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 62 $ 49 $ 15
======= ======= =======
Supplemental disclosures of cash flow information for the three years ended December 31, are
presented below (in thousands):
1999 1998 1997
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 $ 537 $ 568
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,261 $ 903 $ 319
Noncash investing and financing activities:
Note receivable from business transferred . . . . . . . . . . $ 800 $ - $ -
See accompanying notes
26
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include two segments: the engineering,
logistics, management, and technical services ("ELMTS") segment and the
software products and services ("SPS") segment. ELMTS business operations
consist of the operations of the parent company, operations of the company's
wholly owned subsidiaries, and operations of the company's divisions. Wholly
owned subsidiaries in this segment include Energetics Incorporated
("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and
Recycling, Inc. ("SRR", formerly VSE Services Corporation), and VSE Services
International, Inc. ("VSI"). Unincorporated divisions in this segment
include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet
Maintenance"), Ordnance Division ("Ordnance"), VSE IT Services Division
("IT Services"), and Value Systems Services Division ("VSS"). This
segment is engaged principally in providing engineering, testing, management
and information technology services to the U.S. Government (the
"government") and other government prime contractors. The SPS segment business
operations consist of the operations of wholly owned subsidiary CMstat, sold in
May 1999 (see note 10), which was engaged principally in software development
and sales of software products and services primarily to government prime
contractors.
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 significant intercompany
transactions have been eliminated in consolidation. Certain prior year
balances have been reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stockholders' Investment and Earnings Per Share
At December 31, 1999, options to purchase 149,023 shares, 38,063 shares,
36,563 shares and 55,438 shares of common stock at $10.91, $13.04, $9.42 and
$10.93 per share, respectively, were outstanding. There was no dilutive
impact on reported earnings per share for 1999, 1998 and 1997.
27
Cash and Cash Equivalents
The company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for-
sale. Available-for-sale securities are carried at fair value with
unrealized gains and losses, net of tax, reported as a component of
stockholders' investment. Realized gains and losses are included in other
income. Available-for-sale debt securities as of December 31, 1999 and
December 31, 1998 consisted of overnight money market accounts of $1.7
million and $3.3 million, respectively, secured by Government agency
securities. The estimated fair value of these securities approximated cost,
and the amount of gross unrealized gains and losses was not significant.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to concentration
of credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The company believes that concentrations of credit risk with
respect to trade accounts receivable are limited as they are primarily
Government receivables. The company believes that the fair market value of
all financial instruments approximates book value.
Contract Revenues
Substantially all of the company's revenues result from contract services
performed for the Government or for contractors engaged in work for the
Government under a variety of contracts. Revenues on cost-type contracts are
recorded on the basis of recoverable costs incurred and fees earned.
Revenues on fixed price contracts are recorded as services are performed,
using the percentage-of-completion method of accounting, primarily based on
contract costs incurred to date compared with total estimated costs at
completion. Revenues on time and material contracts are recorded on the
basis of hours delivered plus other allowable direct costs as incurred.
Potential revenue related to work performed at risk is not recognized either
as income or as an offset against a potential loss until it can be reliably
estimated and its realization is probable. The company provides for
anticipated losses on contracts by a charge to income during the period in
which losses are first identified.
A substantial portion of the contract and administrative costs is subject to
audit by the Defense Contract Audit Agency. The company's indirect cost
rates have been audited and approved for 1997 and prior years, with the
exception of VSS which has been audited and approved through 1996. In the
opinion of management, the audits of the indirect cost rates for 1999, 1998
and the VSS 1997 audit will not result in material adjustments, if any, to
the company's results of operations or financial position.
28
Property and Equipment
Property and equipment (valued at cost) consisted of the following (in
thousands):
1999 1998
---- ----
Computer systems equipment . . . . . . . . . . . . . $ 7,916 $ 7,215
Furniture, fixtures, equipment and other . . . . . . 4,736 4,688
Leasehold improvements . . . . . . . . . . . . . . . 1,608 1,395
Buildings . . . . . . . . . . . . . . . . . . . . . 302 381
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
14,947 14,064
Less accumulated depreciation . . . . . . . . . . . (10,570) (9,584)
------- ------
$ 4,377 $ 4,480
======= =======
Depreciation and amortization expense for property and equipment was
approximately $1.8 million for 1999, $1.3 million for 1998 and $1.2 million
for 1997. Depreciation of computer systems equipment is provided principally
by the double-declining method over periods of four to six years.
Depreciation of furniture and fixtures is provided principally by the
straight-line method over approximately nine years. Depreciation of all
other property and equipment is provided principally by the double-declining
method over periods of three to twenty years. Depreciation of buildings and
land improvements is provided principally by the straight-line method over
approximately thirty years.
Note Receivable
As discussed in footnote 10, as part of the sale of CMstat, VSE received a
seven year, $800,000 promissory note with an effective interest rate of 8%.
As of December 31, 1999 this note had a balance of $756,630. Approximately
$92 thousand of this balance has been appropriately classified as short term
and included as a component of accounts receivable.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1999,
1998 and 1997 was approximately $29 thousand, $140 thousand and $6 thousand,
respectively.
Included in other assets are assets of the deferred compensation plans which
include equity securities recorded at fair value. The fair value of
these securities was approximately $1.8 million as of December 31, 1999 and
1998. Because plan participants are at risk for market value changes in
these assets, the liability to plan participants fluctuates with the asset
values.
29
Impairment Review
The company performs a periodic review of certain assets to determine if
impairment has occurred. If impaired, the company writes down the asset
to its fair market value.
(2) Goodwill
As part of the August 29, 1995 acquisition of Energetics, the company
recorded approximately $1.7 million of goodwill in connection with this
acquisition, including approximately $200 thousand of additional goodwill
due to contingency requirements established in the purchase agreement.
Goodwill is being amortized by the straight-line method over fifteen years,
and approximately $1.3 million of unamortized goodwill remains on the books
as of December 31, 1999.
(3) Accounts Receivable
The components of accounts receivable as of December 31, 1999 and 1998, were
as follows (in thousands):
1999 1998
---- ----
Billed . . . . . . . . . . . . . . . . . . . . $ 7,967 $10,402
Unbilled:
Retainages . . . . . . . . . . . . . . . . . 71 100
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . . 11,400 16,407
Receivable from CMstat . . . . . . . . . . . . - 7,281
Less-Allowance for doubtful accounts . . . . . (77) (85)
------- -------
Total accounts receivable $19,361 $34,105
======= =======
The "Unbilled: Other" included in accounts receivable are reported net of an
allowance for contract disallowances of approximately $422 thousand as of
December 31, 1999 and approximately $333 thousand as of December 31, 1998.
"Unbilled: Other" also includes certain costs which are not reimbursable
under current contracts, but which the company believes will be reimbursable
on execution of contract documentation or amendments increasing funding.
Amounts not presently reimbursable included in "Unbilled: Other" were
approximately $287 thousand and $485 thousand as of December 31, 1999, and
1998, respectively.
Contracts with the Government, primarily with the U.S. Department of Defense,
accounted for more than 95% of revenues in all years presented. These
contracts were primarily for engineering services. A contract awarded in
1995 with the U.S. Navy accounted for approximately 50% and 52% of such
revenues in 1999 and 1998, respectively.
The company generally expects to collect all accounts receivable other than
retainages within one year.
30
(4) Debt
Long-term debt as of December 31, 1998 was as follows (in thousands):
1998
----
Bank loan borrowings and commitments . . . . . . . $ 2,836
Less portion due within one year . . . . . . . . . (1,333)
-------
$ 1,503
=======
VSE has a loan agreement with a syndicate of banks that includes a revolving
loan and a term loan and contains certain financial covenants. Under the
revolving loan portion of the agreement, VSE can borrow up to $30 million,
subject to a borrowing formula based on billed receivables. Interest is
charged at a prime-based rate or an optional LIBOR-based rate. Commitment
fees are charged on the unused portion of the revolving loan commitment. The
termination date of the revolving loan is May 31, 2001. The original
principal amount of the term loan was $4 million and the term of the
loan was four years. During September 1999, VSE repaid the principal amount
in full, and the term loan portion of the loan agreement no longer exists.
Repayment of the term loan did not cause any changes in the terms related to
the revolving loan portion of the agreement. The loan agreement contains
collateral requirements by which company assets secure amounts outstanding,
restrictive covenants that include minimum tangible net worth and cash flow
coverage ratio requirements, a limit on annual dividends, and limits on
investments and loans to certain affiliates.
Due to losses incurred by VSE's CMstat subsidiary, the company was not in
compliance with certain original loan covenants during 1999 and 1998. The
company's banks amended the loan agreement in these years to restate certain
terms and conditions of the loan, including the covenants with which the
company was not compliant. The company was in compliance during 1999 and 1998
with all covenants of the loan agreement as amended.
(5) Accrued Expenses
The components of accrued expenses as of December 31, 1999 and 1998, were as
follows (in thousands):
1999 1998
---- ----
Accrued salaries . . . . . . . . . . . . . . . . $1,766 $1,791
Accrued vacation . . . . . . . . . . . . . . . . 1,619 1,659
Estimated future losses on fixed-price and
time and material contracts . . . . . . . . . . 583 350
Other accrued expenses . . . . . . . . . . . . . 2,009 2,135
------ ------
Total accrued expenses $5,977 $5,935
====== ======
(6) ESOP/401(k) Plan and Profit Sharing Plan
VSE established an ESOP/401(k) plan in 1984. Under the provisions of the
ESOP, VSE and certain of its operating entities made contributions into a
trust which purchased VSE stock on behalf of employees who met certain age
and service requirements and were employed at the end of the plan year.
31
Contributions at the rate of up to 2% of eligible employee compensation were
permitted at the discretion of the VSE board of directors and were allocated,
subject to a vesting schedule, on a pro rata basis on eligible employee
compensation. The 401(k) segment of the plan allows employees meeting certain
age and service requirements to contribute a portion of their salary to
certain investment trusts. As of April 1, 1999, the ESOP portion was
discontinued and replaced by a plan provision whereby 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 5% of the employee pay
deferred. The company expense associated with this plan for 1999, 1998, and
1997 was approximately $333 thousand, $359 thousand, and $236 thousand,
respectively.
The ESOP/401(k) plan held 582,761 shares and 688,522 shares of VSE stock as
of December 31, 1999 and 1998, respectively, which receive dividend payments
and are included in the weighted average shares for earnings per share
calculations.
During 1998 and 1997, the company advanced the ESOP trust $112 thousand and
$330 thousand, respectively, in connection with distributions made to
terminated participants. The advances were payable to the company when the
funds became available. The unallocated shares of the company's common stock
related to these transactions are not included in the weighted average shares
for earnings per share calculations. On December 31, 1998 the ESOP trust
sold shares to the company and repaid the advances. These shares were
accounted for as treasury stock.
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 1999, 1998, and 1997 was approximately $312 thousand, $443
thousand, and $420 thousand, respectively.
(7) Stock Option Plans
1996 and 1998 Stock Option Plans
The company accounts for the VSE Corporation 1996 Stock Option Plan (the
"1996 Plan") and the 1998 Stock Option Plan (the "1998 Plan") pursuant to
APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which
no compensation cost has been recognized because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant. Had compensation costs for the 1996 Plan and 1998 Plan been
determined based on SFAS No. 123, "Accounting for Stock-Based Compensation,"
the company's net income and earnings per share would have been as follows
(in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net income (loss): As reported $ 1,534 $1,595 $(1,447)
======= ====== =======
Pro forma $ 1,463 $1,542 $(1,569)
======= ====== =======
Earnings per share: As reported $ 0.73 $ 0.75 $ (0.68)
======= ====== =======
Pro forma $ 0.69 $ 0.73 $ (0.74)
======= ====== =======
32
Under the 1996 Plan, the company may grant options for and sell up to an
aggregate of 273,698 shares of the common stock of the company. Through
December 31, 1999 the company has granted options for 267,725 shares of
common stock priced at 100% of the fair value of the stock at the time of the
grant of the option. The maximum term of the options granted is five years.
The vesting period is three years and allows for 25% vesting immediately upon
date of the grant and an additional 25% on each successive anniversary
date thereafter. Vesting may be accelerated for shares granted to certain
individuals as determined by the Board of Directors. The 1996 Plan will
terminate on the earliest of February 5, 2006, or the date on which all
options under the 1996 plan have been exercised or terminated.
Under the 1998 Plan, the company may grant options for and sell up to an
aggregate of 343,750 shares of common stock. Of the shares available for
grant, 15,625 shares may be granted to non-employee directors of VSE, and
328,125 shares may be granted to executive officers and key employees.
Through December 31, 1999 the company has granted options for 69,750 shares
of common stock priced at 100% of the fair value of the stock at the time of
the grant of the option. The vesting period is three years and allows for
25% vesting immediately upon date of the grant and an additional 25% on each
successive anniversary date thereafter. The 1998 Plan will terminate on
the earliest of May 6, 2008, or the date on which all options under the 1998
Plan have been exercised or terminated.
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
---- -------- ---- -------- ---- --------
Number of shares under
stock options:
Outstanding at beginning
of year 234,273 $10.95 205,283 $11.38 160,707 $10.91
Granted 69,750 10.93 47,000 9.42 56,500 13.04
Exercised (313) 9.42 0 0.00 0 0.00
Forfeited (24,625) 10.32 (18,010) 11.80 (11,924) 12.83
------- ------ ------- ------ ------- ------
Outstanding at end
of year 279,085 $11.01 234,273 $10.95 205,283 $11.38
======= ====== ======= ====== ======= ======
Exercisable at end
of year 213,585 $11.02 142,642 $11.07 91,203 $11.18
======= ====== ======= ====== ======= ======
Weighted average remaining
contractual life 6 years 7 years 8 years
Weighted average fair
value of options granted $2.36 $2.14 $3.05
===== ===== =====
33
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 calculation for 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk free interest rate 4.57% 5.47% 6.03%
Dividend yield 2.00% 2.00% 2.00%
Expected life 3 years 3 years 3 years
Expected volatility 29.00% 29.00% 29.00%
(8) Income Taxes
The company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision (benefit) for income taxes for
the years ended December 31, 1999, 1998 and 1997 are as follows (in
thousands):
1999 1998 1997
---- ---- ----
Current
Federal . . . . . . . . . . . . . . . . . . $1,145 $ 574 $ 460
State . . . . . . . . . . . . . . . . . . . 270 197 231
------ ------- ------
1,415 771 691
Deferred
Federal . . . . . . . . . . . . . . . . . . (432) 249 (1,103)
State . . . . . . . . . . . . . . . . . . (117) 71 (224)
------ ------- ------
(549) 320 (1,327)
------ ------- ------
Provision (benefit) for income taxes $ 866 $ 1,091 $ (636)
====== ======= ======
The differences between the amount of tax computed at the federal statutory
rate of 34% and the provision for income taxes for 1999, 1998 and 1997 are as
follows (in thousands):
1999 1998 1997
---- ---- ----
Tax at statutory federal income
tax rate at 34% . . . . . . . . . . . . . . $ 816 $ 913 $ (708)
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 98 179 39
Permanent differences for tax . . . . . . . (68) 38 33
Other, net . . . . . . . . . . . . . . . . 20 (39) -
------ ------- ------
Provision (benefit) for income taxes $ 866 $ 1,091 $ (636)
====== ======= ======
34
The company's deferred tax assets (liabilities) as of December 31, 1999 and
1998, 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):
1999 1998
---- ----
Current deferred tax assets . . . . . . . . . . $ 1,334 $ 1,234
Current deferred tax liabilities . . . . . . . . (407) (831)
------- -------
Net current deferred tax assets . . . . . . . . 927 403
------- -------
Noncurrent deferred tax assets . . . . . . . . . 1,031 1,010
Noncurrent deferred tax liabilities . . . . . . . (253) (257)
Valuation allowance . . . . . . . . . . . . . . . (50) (50)
------- -------
Net noncurrent deferred tax assets . . . . . . 728 703
------- -------
Net deferred tax assets . . . . . . . . . . . . . $ 1,655 $ 1,106
======= =======
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The company has
established such a valuation allowance for the deferred tax asset associated
with certain real property because of the uncertainty that the deferred tax
asset will be fully realized.
The tax effect of temporary differences representing deferred tax assets and
liabilities as of December 31, 1999 and 1998, are as follows (in thousands):
1999 1998
---- ----
Deferred compensation . . . . . . . . . . . . . . $ 1,377 $ 1,400
Accrued expenses . . . . . . . . . . . . . . . . 263 267
Accelerated depreciation . . . . . . . . . . . . 6 (28)
Other . . . . . . . . . . . . . . . . . . . . . . 229 182
Allowance for contract and other disallowances . 163 129
Bad debt expense . . . . . . . . . . . . . . . . 32 35
Retainages not taxed until billed. . . . . . . . (68) (389)
Deferred revenues . . . . . . . . . . . . . . . . (338) (440)
Intangible assets . . . . . . . . . . . . . . . . 41 -
------- -------
1,705 1,156
Valuation allowance . . . . . . . . . . . . . . . (50) (50)
------- -------
Net deferred tax assets $ 1,655 $ 1,106
======= =======
(9) Commitments and Contingencies
Leases
The principal facilities of the company and its subsidiaries are generally
rented under noncancelable operating leases for periods of one to ten years.
The company and its subsidiaries also lease furniture and equipment generally
under noncancelable operating leases for periods of one to five years. Rent
expense for 1999, 1998 and 1997 was approximately $1.9 million, $2.1 million,
and $2.7 million, respectively, which was net of sublease income of
approximately $686 thousand, $464 thousand and $318 thousand, respectively.
The future minimum annual rental required under leases having
remaining noncancelable lease terms in excess of one year, net of
noncancelable sublease income, will approximate $1.1 million in 2000, 2001
and 2002, and $716 thousand in 2003 and $519 thousand in 2004 and $1.8
million thereafter.
35
Litigation
The company and its subsidiaries have, in the normal course of business,
certain claims against them and against other parties. The company is not
aware of any present claims which would have a material adverse effect on
the company's results of operations or financial position.
(10) Segment Information
Prior to May 21, 1999, VSE had two reportable segments: the engineering,
logistics, management, and technical services segment ("ELMTS"), which
provides diversified engineering, technical and management services
principally to agencies of the United States Government and to other
government prime contractors; and the software products and services segment
("SPS"), which provided application software and services related to the
installation of the software to primarily commercial customers. As discussed
below, the SPS segment was sold on May 21, 1999.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments
are strategic business units that offer different products and services. They
are managed separately because each business requires different technology
and marketing strategies. The software products and services segment was
acquired as a unit, and the management had been maintained separately since
the acquisition.
The following table presents revenues and other financial information by
business segment for the years 1999, 1998, and 1997, in thousands:
Effect of
1999 ELMTS SPS Subtotal Disposition(A) Consolidated
- -----------------------------------------------------------------------------
Revenues $157,399 $ 902 $158,301 $(902) $157,399
Interest expense 132 128 260 (128) 132
Depreciation and
amortization 1,947 105 2,052 (105) 1,947
Loss on disposition
of CMstat - (1,098) (1,098) - (1,098)
Operating income
(loss) 3,878 (1,478) 2,400 - 2,400
Expenditures for
capital assets 1,847 25 1,872 25 1,897
Assets 31,250 - 31,250 - 31,250
36
Effect of
1998 ELMTS SPS Subtotal Disposition(A) Consolidated
- -----------------------------------------------------------------------------
Revenues $177,095 $3,138 $180,233 $(3,138) $177,095
Interest expense 45 496 541 (496) 45
Depreciation and
amortization 1,603 251 1,854 (251) 1,603
Operating income
(loss) 4,829 (2,143) 2,686 - 2,686
Expenditures for
capital assets 1,538 55 1,593 (55) 1,538
Assets 38,515 2,223 40,738 6,510 47,248
Effect of
1997 ELMTS SPS Subtotal Disposition(A) Consolidated
- -----------------------------------------------------------------------------
Revenues $152,550 $3,313 $155,863 $(3,313) $152,550
Interest expense 130 376 506 (376) 130
Depreciation
and amortization 1,622 2,465 4,087 (2,465) 1,622
Operating income
(loss) 3,849 (5,932) (2,083) - (2,083)
Expenditures for
capital assets 1,826 974 2,800 (974) 1,826
Assets 35,551 2,498 38,049 5,364 43,413
(A) See below regarding the divestiture of the SPS segment.
Divestiture
On May 21, 1999, the company sold all of its interests in the SPS segment.
This entailed selling its CMstat subsidiary for an $800 thousand promissory
note. The sale is a divestiture for legal and tax purposes. For accounting
purposes, the sale is not afforded discontinued operations treatment under
Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary
or Other Business Operation"("SAB No. 30") since the sale did not transfer
the risks of ownership because the sales price is primarily dependent on the
buyer's ability to repay the promissory note.
As prescribed by SAB No. 30, the revenues, costs and expenses, assets and
liabilities and cash flows for the SPS segment have been excluded from the
respective captions in the Consolidated Statements of Operations, Balance
Sheets, Cash Flows and related footnotes.
As such, the results of operations for the SPS segment are reflected as a
single line item "Loss on CMstat operations" in the Consolidated Statements
of Operations for each year presented. Additionally, a $1,098 thousand loss
from the disposal of CMstat was recognized for the year ended December 31,
1999. The assets and liabilities are presented in the Consolidated Balance
Sheets as "Net assets of business transferred under contractual arrangement"
and "Net liabilities of business transferred under contractual arrangement",
respectively.
37
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in the company's independent public
accountants or disagreements with such accountants on accounting principles
or practices or financial statement disclosures.
38
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the company is incorporated by
reference from the registrant's definitive proxy statement for its annual
meeting of stockholders to be filed not later than 120 days after December
31, 1999, with the Securities and Exchange Commission pursuant to Regulation
14A (the "Proxy Statement"). Certain information relating to Executive
Officers of the company appears on page 10 of this Form 10-K Annual Report.
ITEM 11. Executive Compensation
Information with respect to this item is incorporated by reference from
the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to this item is incorporated by reference from
the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to this item is incorporated by reference from
the Proxy Statement.
39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) Exhibits
See "Exhibit Index" hereinafter contained and
incorporated by reference.
(b) Supplemental Financial Statement Schedule
Schedules not included herein have been omitted
because of the absence of conditions under which they
are required or because the required information,
where material, is shown in the consolidated
financial statements, financial notes, or
supplementary financial information.
(c) Reports on Form 8-K
None.
40
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 15, 2000 By: /s/ C. S. Weber
------------------------
C. S. Weber, Senior Vice
President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 14, 2000, by the following persons on
behalf of the Registrant and in the capacities indicated.
(a) Principal Executive Officers:
/s/ D. M. Ervine
---------------------------------------------------------------
D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Knowlton
---------------------------------------------------------------
J. M. Knowlton, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus
----------------------------- ----------------------------
C. S. Weber, Senior Vice T. R. Loftus, Vice President
President and Chief Financial and Comptroller
Officer
(b) Directors:
/s/ D. M. Ervine /s/ D. M. Osnos
----------------------------- ----------------------------
D. M. Ervine D. M. Osnos
/s/ R. J. Kelly /s/ J. D. Ross
----------------------------- ----------------------------
R. J. Kelly J. D. Ross
/s/ C. S. Koonce /s/ B. K. Wachtel
----------------------------- ----------------------------
C. S. Koonce B. K. Wachtel
/s/ J. M. Knowlton
-----------------------------
J. M. Knowlton
41
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
July 14, 1998 (Exhibit V to Form 10-K dated
March 18, 1999) *
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 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
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996)
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 6, 1998)
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on May 6, 1998)
42
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or quarterly report to security holders Exhibit II
16 Letter re change in certifying accountant Not Applicable
18 Letter re change in accounting principles Not Applicable
21 Subsidiaries of the registrant Exhibit I
22 Published report regarding matters submitted
to vote of security holders Not Applicable
23 Consents of experts and counsel Exhibit IV
24 Power of attorney Not Applicable
27 Financial Data Schedule Exhibit III
99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
43