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, 2001 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of March 6, 2002, was approximately $8 Million.
Number of shares of Common Stock outstanding as of March 6, 2002: 2,150,540.
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 2, 2002, are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 3
ITEM 2. Properties 7
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote of Security Holders 8
Executive Officers of the Registrant 9
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters 10
ITEM 6. Selected Financial Data 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
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 40
ITEM 13. Certain Relationships and Related Transactions 40
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 Corporation
("VSE" or the "company") results to differ materially from those anticipated in
the forward looking statements contained in this filing, see VSE's "Narrative
Description of Business", "Management's Discussion and Analysis" and "Notes to
Consolidated Financial Statements". Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
analysis only as of the date hereof. The company undertakes no obligation to
publicly revise these forward looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the company files from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the company subsequent to this
Annual Report on Form 10-K and any Current Reports on Form 8-K filed by the
company.
Part I
ITEM 1. Business
(a) General Development of Business
VSE was established and incorporated in Delaware in January 1959. The
parent company conducts a limited amount of business operations while primarily
serving as a centralized management and consolidating entity for the business
operations conducted by the company's wholly owned subsidiaries and divisions.
Wholly owned subsidiaries include Energetics Incorporated ("Energetics"), Human
Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR")
and VSE Services International, Inc. ("VSI"). Unincorporated divisions include
BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), GSA
Services Division ("GSA Services"), Ordnance Division ("Ordnance"), Value
Systems Services Division ("VSS"), Telecommunications Technologies Division
("TTD") beginning in September 2000, Land Systems Division ("Land Systems")
beginning in February 2001, and Management Sciences Division ("MSD") beginning
in December 2001. 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.
Substantially all of the company's contracts are with agencies of the United
States Government (the "government") and other government prime contractors. The
company's customers also include non-government organizations and commercial
entities.
VSE seeks to provide its customers with competitive, cost effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products, and an in-depth understanding of
the basic requirements for effective systems and equipment. 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
VSE operations are conducted within a single reporting segment and
financial information is presented on a company-wide basis. Financial informa-
tion for the three years ended December 31, 2001 appears in the "Consolidated
Statements of Operations" contained in this Form 10-K.
(c) Narrative Description of Business
Services and Products
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; the design and
installation of intelligent conference rooms; 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 and combat trailers; logistics
management support; machinery condition analysis; specification preparation for
ship alterations and repairs; ship force crew training; energy conservation and
advanced technology demonstration projects; technical data package preparation;
multimedia, computer LAN, and telecommunications systems; cross-platform
technical data, product data and technical manual support.
Contracts
Depending on solicitation requirements and other factors, VSE offers
its professional and technical services and products through various
competitive contract arrangements and business units which are responsive to
customer requirements and which may also provide an opportunity for
diversification. Such arrangements include prime contracts, subcontracts,
cooperative arrangements, joint ventures, dedicated ventures, GSA schedules,
dedicated cost centers (divisions) and subsidiaries.
Substantially all of the company's revenues are derived from contract
services performed for the government. The U.S. Navy is VSE's largest single
customer. Other significant customers include the U.S. Army and the Department
of Energy. The company's customers also include various other government
agencies, non-government organizations, and commercial entities.
4
VSE Revenues by Customer
(Dollars in Thousands)
2001 2000 1999
Customer Revenues % Revenues % Revenues %
- -------- -------- - -------- - -------- -
U.S. Navy $ 80,101 71.8 $ 87,828 71.8 $109,993 69.9
Department of Energy 11,887 10.7 10,009 8.2 11,403 7.2
U.S. Army 8,722 7.8 9,497 7.8 19,468 12.4
All other government 3,303 2.9 13,448 11.0 16,155 10.3
Commercial 7,559 6.8 1,487 1.2 335 0.2
-------- ----- -------- ----- -------- -----
Total $111,572 100.0 $122,269 100.0 $157,354 100.0
======== ===== ======== ===== ======== =====
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 pursued these larger efforts by assembling teams of
subcontractors 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
divisions for which revenues are derived predominantly from one major contract
effort. During 2001, the company's three largest contracts accounted for
approximately 65% of total revenues. The company's largest contract, performed
by BAV, is with the U.S. Navy and accounted for approximately 38%, 41%, and 50%
of consolidated revenues in 2001, 2000, and 1999, respectively. 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) and
Ordnance.
The company's contracts with the government are typically performed
under cost plus fee, time and materials, or fixed-price contracts. Under cost
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.
Backlog
Total backlog represents a measure of the company's potential future
revenues and is defined as the total estimated value of contracts actually
awarded less the amount of revenues that have already been recognized on such
contracts. VSE's total backlog was approximately $799 million, $804 million,
and $946 million, as of December 31, 2001, 2000, and 1999, respectively. Funded
backlog for government contracts is the portion of total backlog that
5
has been appropriated and funded by the procuring agency. VSE's funded backlog
as of December 31, 2001, 2000, and 1999 was approximately $65 million,
$81 million, $108 million, respectively. Because of uncertainties associated
with changing program requirements and the ultimate availability of funds, the
company has no reasonable basis on which to determine when or if the portion of
total backlog that is not funded will become funded. Substantially all the
company's funded backlog is expected to be completed within one year.
Marketing
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators and other
personnel, with these activities centrally coordinated through the company's
Business Development staff. Information concerning new programs and require-
ments becomes available in the course of contract performance, through formal
and informal briefings, from participation in professional organizations, and
from literature published by the government, trade associations, professional
organizations and commercial entities.
Personnel
VSE services are provided by a staff of professional, and technical
personnel having high levels of education, experience, training and skills.
As of February 2002, VSE employed approximately 550 employees, including
approximately 70 part-time personnel.
Principal categories of VSE personnel include (a) engineers, and
technicians in mechanical, electrical, electronic, chemical, industrial, energy
and environmental services, (b) information technology professionals in computer
systems, applications and products, configuration, change and data management
disciplines, (c) technical editors and writers, (d) multimedia and computer
design engineers, and (e) graphic designers and technicians. 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 organiza-
tions including large manufacturing corporations.
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
6
provides a schedule of services at fixed prices which may be ordered outside of
the solicitation process. The company has been awarded five separate GSA
schedule contracts for various classes of services, but there is no assurance
regarding the level of work under these contract arrangements. Government
budgets, and in particular the budgets of certain government agencies, can also
impact competition in VSE's business. A reallocation of government spending
priorities or a general decline in government budgets can result in lower
levels of potential business for VSE and its competitors, thereby intensifying
competition for the remaining business.
It is not possible to predict the extent and range of competition that
VSE will encounter as a result of changing economic or competitive conditions,
customer requirements, or technological developments. VSE believes the principal
competitive factors for the professional and technical services business in
which it is engaged are technical and financial qualifications, quality and
innovation of services and products, past performance and low price.
Risks. In recent years, 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. 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.
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,
7
2003. This building contains approximately 110,000 square feet of engineering,
shop, and administrative space. VSE also provides services and products from
approximately 11 other U.S. offices located at or near customer sites to
facilitate communications and enhance project performance. These offices are
generally occupied under short-term leases and currently include an aggregate
of approximately 109,000 square feet of office and warehouse space. VSE
employees often provide services at customer facilities, limiting VSE's require-
ment for additional space. BAV provides services from several locations outside
of the United States, generally at foreign shipyards.
VSE owns and operates an engineering test center in Ladysmith,
Virginia, consisting of approximately 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
In June 2001 a personal injury lawsuit was filed against VSE, Astoria
Metals Corporation ("AMC"), Ship Dismantlement and Recycling Joint Venture,
Earth Tech, Inc., and Tyco International Ltd. in the Superior Court of the
State of California for the County of Alameda (Case No. 835601-7). While the
plaintiffs' complaint does not specify the amount of alleged damages suffered,
the plaintiffs have provided the defendants with a notice of damages aggregating
approximately $20 million. VSE provided notice of the suit to its insurance
carrier, Travelers Insurance, which is defending the company in this matter.
While there is no assurance, VSE believes that the resolution of the lawsuit
will not have a material adverse effect on VSE's consolidated financial position
or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the three month period ended
December 31, 2001.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Registrant as of March 7, 2002. Each person named has served
as an executive officer of VSE, or has served in a similar executive capacity in
VSE, for more than the past five years.
The executive officers are chosen annually to serve until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their successors are elected and have qualified, or
until death, resignation or removal, whichever is sooner.
Name Age Position with Registrant
- ---- --- ------------------------
Donald M. Ervine 65 Chairman and Chief Executive Officer,
President and Chief Operating Officer
Michael E. Hamerly 56 Senior Vice President and General
Manager,
Fleet Maintenance Division
James M. Knowlton 59 Executive Vice President and Director,
International Group
Thomas R. Loftus 46 Senior Vice President and Comptroller
Jayne M. Tuohig 55 Senior Vice President and General Manager,
VSS Division
John J. Werbowski 52 Senior Vice President, Business
Development
Craig S. Weber 57 Executive Vice President, Chief Financial
Officer and Secretary
9
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Market Information
The company's common stock ($.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
------------- ---- --- ---------
2001:
March 31 $7.875 $5.31 $.04
June 30 7.65 5.75 .04
September 30 7.75 5.50 .04
December 31 7.75 5.75 .04
For the Year $7.875 $5.31 $.16
2000:
March 31 $9.00 $6.25 $.04
June 30 8.125 5.50 .04
September 30 7.188 5.75 .04
December 31 8.00 5.125 .04
For the Year $9.00 $5.125 $.16
(b) Holders
There are about 1,400 stockholders of VSE common stock as of
February 1, 2002, consisting of approximately 300 stockholders of record plus
the number of beneficial owner proxy sets provided in connection with VSE's
2002 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 $.16 per share during 2001
and 2000. 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.
10
ITEM 6. Selected Financial Data
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues, principally from contracts . . . . . $111,572 $122,269 $157,354 $177,074 $152,522
======== ======== ======== ======== ========
Income from continuing operations . . . . . . $ 855 $ 1,385 $ 2,364 $ 3,015 $ 2,566
Loss from discontinued operations . . . . . - - (256) (1,420) (4,013)
Loss on disposal of discontinued
operations . . . . . . . . . . . . . . . . - (417) (574) - -
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . $ 855 $ 968 $ 1,534 $ 1,595 $ (1,447)
======== ======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations . . . . . $ .40 $ .65 $ 1.12 $ 1.42 $ 1.21
Loss from discontinued operations . . . . . - (.19) (.39) (.67) (1.89)
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . $ .40 $ .46 $ .73 $ .75 $ (.68)
======== ======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations . . . . . $ .40 $ .65 $ 1.12 $ 1.42 $ 1.21
Loss from discontinued operations . . . . . - (.19) (.39) (.67) (1.89)
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . .40 $ .46 $ .73 $ .75 $ (.68)
======== ======== ======== ======== ========
Working Capital . . . . . . . . . . . . . . . $ 8,807 $ 8,364 $ 7,078 $ 5,801 $ 6,258
======== ======== ======== ======== ========
Total assets . . . . . . . . . . . . . . . . . $ 33,209 $ 31,523 $ 31,250 $ 47,248 $ 43,413
======== ======== ======== ======== ========
Long-term debt . . . . . . . . . . . . . . . . $ 351 $ - $ - $ 1,503 $ 3,444
======== ======== ======== ======== ========
Stockholders' investment . . . . . . . . . . . $ 16,475 $ 15,793 $ 15,145 $ 13,852 $ 12,481
======== ======== ======== ======== ========
Cash dividends per common share . . . . . . . $ .16 $ .16 $ .144 $ .144 $ .144
======== ======== ======== ======== ========
Per share amounts have been adjusted to reflect stock splits effected in 1997.
This consolidated summary of selected financial data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Form 10-K.
11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Company Organization and Overview
Company Organization
The term "VSE" or "company" refers to VSE and its subsidiaries and
divisions unless the context indicates operations of the parent company only.
VSE's business operations consist primarily of services performed by the
company's wholly owned subsidiaries and divisions. Wholly owned subsidiaries
include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc.
("HRSI"), Ship Remediation and Recycling, Inc. ("SRR") and VSE Services
International, Inc. ("VSI"). Unincorporated divisions include BAV Division
("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), GSA Services Division
("GSA Services"), Ordnance Division ("Ordnance"), Value Systems Services
Division ("VSS"), Telecommunications Technologies Division ("TTD") beginning
in September 2000, Land Systems Division ("Land Systems") beginning in
February 2001, and Management Sciences Division ("MSD") beginning in
December 2001.
Several of the company's operating divisions were formed in recent
years to bid on and perform contract work that had been previously performed by
VSE (parent company). The formation of these divisions has enabled the company
to use an operating structure that is better suited to perform certain types of
contract work. The company anticipates that it will continue using its operating
divisions to bid and perform new contract work to better serve the needs of
customers. Management believes that the use of operating divisions to perform
future work and the associated improvements in servicing customers will better
position the consolidated entity for future revenue growth.
Overview of Services
The company is engaged principally in providing engineering, design,
logistics, management and technical services to the U.S. Government (the
"government"), other government prime contractors, and commercial entities. The
largest customer for the services rendered by the company is the U.S. Department
of Defense ("Defense"), including agencies of the U.S. Army, Navy, and
Air Force. BAV is a major player in providing logistics, training, and technical
assistance in support of the Navy's ship transfer program. Fleet Maintenance,
Ordnance, and VSS also support the Navy by providing a variety of services
including ship installation efforts, combat systems inspections, ship repair
and overhaul availability planning, harpoon weapons management, ordnance
alteration, air combat logistics, and outsourcing decision assistance. SRR
provides environmentally sound solutions for the dismantling and disposal of
inactive ships. Land Systems provides the Army with engineering and technical
support for ground weapons, logistics and training services, material procure-
ment support, and prototype development support for combat vehicles. MSD
provides the Army and other government agencies and commercial organizations
with quality training services for product, process, and management
optimization.
VSE also provides services to other government agencies and industry.
The company has provided support services to the U.S. Postal Service for over
twenty years and is continuing to support this customer through its HRSI
12
subsidiary. Energetics is focused on providing the Department of Energy and
other government and industry customers with expert consulting services in
environmental management and energy supply, resource management, and conserva-
tion. TTD markets the company's growing capability to provide government and
industry customers with the latest products, services, and support in network,
multimedia, and audio-visual technology. This includes design, installation,
management and support for a wide variety of voice, data, multimedia and related
projects. These projects include facility security solutions and intelligent
conference rooms which provide an ideal balance between technology and human
interaction.
Substantially all of the company's services are performed for its
customers on a contract basis. The three primary types of contracts used are
cost-type contracts, time and materials contracts, and fixed-price contracts.
Revenues result from work performed on these contracts by the company's
employees and from pass-through of costs for material and work performed by
subcontractors. Revenues on cost-type contracts are recorded as contract
allowable costs are incurred and fees earned. Profits on cost-type contracts
are equal to the fees that are earned. Revenues for time and materials contracts
are recorded on the basis of contract allowable labor hours worked times the
contract defined billing rates, plus the cost of materials used in performance
on the contract. Profits on time and material contracts result from the
difference between the cost of services performed and the contract defined
billing rates for these services. Revenues on fixed-price 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. Profits on fixed-price contracts result
from the difference between the costs of services performed and the revenue
earned using the percentage-of-completion.
Revenues by contract type for the three years ended December 31, 2001,
were as follows (in thousands):
2001 2000 1999
Contract Type Revenues % Revenues % Revenues %
- ------------- -------- - -------- - -------- -
Cost-type $ 82,606 74.0 $ 92,556 75.7 $116,314 73.9
Time and materials 14,528 13.0 25,511 20.9 31,913 20.3
Fixed-price 14,438 13.0 4,202 3.4 9,127 5.8
-------- ----- -------- ----- -------- -----
$111,572 100.0 $122,269 100.0 $157,354 100.0
======== ===== ======== ===== ======== =====
The company will occasionally perform work at risk, which is work that
is performed prior to formalizing contract terms for such work. Potential
revenue related to work performed at risk is not recognized 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.
13
Results of Operations
Revenues
The following table shows the revenues from operations of VSE, its
subsidiaries and divisions, and such revenues as a percent of total revenues:
Revenues from Operations
(dollars in thousands)
2001 2000 1999
Company or Business Unit Revenues % Revenues % Revenues %
- ------------------------ -------- - -------- - -------- -
VSE (parent company). . . . . $ 22,681 20.3 $ 39,165 32.0 $ 44,337 28.1
BAV . . . . . . . . . . . . . 41,860 37.5 49,801 40.7 78,791 50.1
Ordnance . . . . . . . . . . 12,945 11.6 11,170 9.2 6,116 3.9
Energetics . . . . . . . . . 12,272 11.0 10,546 8.6 11,683 7.4
TTD . . . . . . . . . . . . . 8,082 7.2 813 0.7 - 0.0
SRR . . . . . . . . . . . . . 4,165 3.8 1,104 0.9 - 0.0
Land Systems . . . . . . . . 3,113 2.8 - 0.0 - 0.0
Fleet Maintenance . . . . . . 3,075 2.8 1,224 1.0 273 0.2
VSS . . . . . . . . . . . . . 1,683 1.5 4,233 3.5 10,271 6.5
HRSI . . . . . . . . . . . . 1,344 1.2 3,947 3.2 5,770 3.7
GSA Services . . . . . . . . 352 0.3 265 0.2 107 0.1
Management Sciences . . . . . - 0.0 - 0.0 - 0.0
VSI . . . . . . . . . . . . . - 0.0 1 0.0 6 0.0
-------- ----- -------- ----- -------- -----
$111,572 100.0 $122,269 100.0 $157,354 100.0
======== ===== ======== ===== ======== =====
Revenues declined by approximately 9% and 22%, respectively, for the
years ended December 31, 2001, and December 31, 2000. The decrease in revenues
during 2001 was primarily due to a decrease in the level of services ordered
under the BAV contract (see "BAV Contract" below), the expiration of a contract
performed by VSE for the U.S. Postal Service (see "Contract Expirations" below),
and a reduction in revenue associated with the company's sale of its HRSI Health
Care Division contracts in July of 2000. The reduction in revenue from these
contracts in 2001 was partially offset by increases in revenues in some of the
company's other divisions and subsidiaries, including increased revenues in TTD,
SRR, and Energetics. The decrease in revenues during 2000 was primarily due to
a decrease in the level of services ordered under the BAV contract and the
expiration of a contract performed by VSS for the U.S. Navy (see "Contract
Expirations" below).
BAV Contract. VSE's BAV Division has a contract with the U.S. Navy to
provide engineering, technical and logistical support services associated with
the sale, lease, or transfer of Navy ships to foreign governments. This
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. BAV
has recognized revenues on this contract of approximately $391 million through
December 31, 2001, resulting in a backlog of potential future revenues of
approximately $669 million, of which approximately $40 million is funded. The
contract accounted for approximately 38% and 41% of consolidated revenues from
operations during 2001 and 2000, respectively. Contract terms specify award fee
payments to BAV that are determined by performance and level of
14
contract activity. The level of revenues and associated profits resulting from
fee income generated by this contract varies depending on a number of factors
including the timing of ship transfers and associated support services ordered
by foreign governments and economic conditions of potential customers worldwide.
The decline in services ordered through this contract between 1999 and 2001 has
contributed significantly to the decline in the company's revenues during 2001
and 2000 as compared to prior years. The company has experienced significant
quarterly and annual revenue fluctuations and anticipates that future quarterly
and annual revenues will be subject to significant variations primarily due to
changes in the level of activity on this contract. See "Global Economic
Conditions and Political Factors" below for further discussion of potential
impacts on future revenues associated with this contract.
Contract Expirations. VSE's VSS Division had a U.S. Navy contract to
provide data management and documentation, logistics support services and
configuration management services to the Naval Air Systems Command. VSS was not
awarded the successor contract and work on this contract effort terminated as of
April 28, 2000. VSE (parent company) had a contract to provide engineering
support services to the U.S. Postal Service. VSE (parent company) was not
awarded the successor contract, and work on this contract effort terminated
as of January 31, 2001. These two contracts accounted for less than 1% and
approximately 10% and 13% of total company revenues in 2001, 2000, and 1999,
respectively. The loss of revenues associated with the expiration of these two
contracts contributed to the decline in company revenues and pretax income in
2001 as compared to 2000 and in 2000 as compared to 1999. VSE's Ordnance
Division had a contract with the U. S. Navy to provide program management and
logistics services that expired in December 2001. VSE re-bid and was awarded
the successor contract in its Fleet Maintenance Division. Future work for this
program will be conducted by Fleet Maintenance. This contract is a five year
contract awarded in October, 2001, and it has the potential to generate total
revenues of approximately $72.5 million from 2001 through 2006.
Business Termination and New Business Start-up. During the three months
ended December 31, 2001, VSE management made the strategic decision to
discontinue SRR's ship remediation and recycling efforts at the Hunters Point
Shipyard in San Francisco, California. This decision was made due to the limited
business opportunities associated with ship dismantlement work, due in part to
an absence of any significant amount of government funding for these efforts,
and essentially terminates SRR's role as a VSE business operating entity.
Profitability from SRR work has been marginal for VSE. Concurrent with the
decision to cease SRR operations, VSE formed MSD to offer government and
commercial organizations quality training and product, process, and management
optimization services. VSE management expects MSD revenues to approximately
equal revenues formerly generated by SRR, with MSD profit margins higher than
the marginal profitability provided by SRR. The net effect of these two
strategic decisions is expected to be neutral to future company revenue while
increasing profitability.
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from domestic economic
conditions and political factors that may impact the budgets and program funding
of customers served through VSE's contracts. VSE's revenues have historically
been subject to annual fluctuations resulting from changes in the
15
level of Defense spending. Future budgetary and funding decisions by government
lawmakers or Defense restructuring efforts could affect the types and level of
services provided by VSE to its government customers and could potentially have
a material adverse impact on the company's results of operations or financial
condition.
The company's revenues depend on the ability of the company to win new
contracts and on the amount of work ordered by the government under the
company's existing contracts. The company's ability to win new contracts is
affected by government acquisition policies and procedures, including government
procurement practices that in recent years have tended toward bundling work
efforts under large comprehensive ("omnibus") management contracts. This
emphasis on large contracts presents challenges to winning new contract work,
including making it more difficult for the company to qualify as a bidder,
increases in the level of competition due to the award of fewer contracts, and
forcing the company into competition with larger organizations that have greater
financial resources and larger technical staffs. Other government procurement
practices that can affect the company's revenues are the use of past performance
criteria that may preclude entrance into new government markets and government
social programs that limit contract work to small, woman, or minority owned
businesses. Additional risk factors that could potentially affect the company's
results of operations are the government's right to terminate contracts for
convenience, the government's right to not exercise all of the option periods
on a contract, and funding delays caused by government political or
administrative actions.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic
conditions and political factors associated with current and potential foreign
customers served through VSE's contracts with the U.S. Government and in
particular, the BAV contract. An economic slowdown in countries served under the
BAV contract could potentially affect sales. The current international conflict
initiated by the terrorist attacks in New York and Washington, D. C. on
September 11, 2001 could potentially increase the political risks associated
with BAV contract revenues. Failure by the government of a potential foreign
customer to approve and fund acquisition of U.S. Navy ships serviced under the
BAV contract could affect sales. In any one year, a significant amount of the
company's revenues may result from sales on the BAV contract to a single foreign
government. Severe adverse results arising from these global economic and
political risks could potentially have a material adverse impact on the
company's results of operations.
16
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from
continuing operations before income taxes, other items of income and expense,
and such amounts as a percent of revenues.
Income from Continuing Operations Before Income Taxes
(dollars in thousands)
Description 2001 % 2000 % 1999 %
- ----------- ---- - ---- - ---- -
Revenues . . . . . . . . $111,572 100.0 $122,269 100.0 $157,354 100.0
Costs and expenses . . . 109,990 98.6 119,937 98.1 152,684 97.0
-------- ----- -------- ----- -------- -----
Gross profit . . . . . . 1,582 1.4 2,332 1.9 4,670 3.0
Selling, general and
administrative expenses 237 0.2 239 0.2 684 0.4
Interest(income)expense 49 0.0 (98) (0.1) 87 0.1
-------- ----- -------- ----- -------- -----
Income from continuing
operations before
income taxes . . . . . $ 1,296 1.2 $ 2,191 1.8 $ 3,899 2.5
======== ===== ======== ===== ======== =====
Costs and expenses of operations, as a percentage of revenues,
increased slightly in 2001 as compared to 2000, and in 2000 as compared to 1999.
The increases on a percentage basis were primarily attributable to the decrease
in revenues while a portion of the costs and expenses of operating the company
remain fixed. Other factors that affect the percentage of costs and expenses to
revenues include the amount of work performed on the BAV contract as a
percentage of total revenues, the timing of contract award fees, effective
project and cost management and competitive factors.
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on the company's operating
unit contracts. As a percentage of revenues, these expenses remained
substantially unchanged in 2001 and decreased slightly in 2000 as compared to
the respective prior years due to various types of nonreimbursable costs.
The company's business financing requirements changed slightly in 2001
as compared to prior years due to the nature of TTD's business. TTD performs a
higher percentage of work for commercial entities and on fixed-price contracts
where the type of work and customer base requires billing and collection cycles
that are not as favorable to the company as the cost reimbursable terms
associated with the company's government contract work. The resulting increase
in bank borrowings in 2001 caused the company to incur interest expense in 2001
as compared to realizing interest income during 2000. Reduced receivables
financing requirements due to the reduction in revenues and improved cash
collection cycles on government contracts resulted in interest income in 2000 as
compared to interest expense in 1999.
Discontinued Operations
On May 21, 1999, the company sold its CMstat subsidiary for an $800
thousand promissory note. The sale was a divestiture for legal and tax purposes,
but was primarily dependent on the buyer's ability to repay the
17
promissory note. Accordingly, the sale was not originally provided discontinued
operations treatment under Staff Accounting Bulletin No. 30 "Accounting for
Divestiture of a Subsidiary or Other Business Operation" ("SAB No. 30") since
it did not transfer the risks of ownership. In December 2000, the company
determined that the remaining balance under the promissory note acquired from
the sale of its CMstat subsidiary was not collectible and approximately $688
thousand was written off. Accordingly, the company's consolidated financial
statements were restated to reflect the disposition as discontinued operations.
Financial Condition
VSE's financial condition did not change materially during 2001. The
company's largest asset is its accounts receivable and its largest liabilities
are its accounts payable and accrued expenses. Accounts receivable increased
slightly due to the increase in TTD's business while liabilities remained
substantially unchanged at December 31, 2001 as compared to December 31, 2000.
The increase in total stockholder's investment in 2001 resulted from earnings
and dividend activity and from the sale of a portion of the company's Treasury
Stock to a director. The remaining Treasury Stock was retired.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents declined by $438 thousand during 2001 as a
result of approximately $2 million used in investing activities, approximately
$1.4 million provided by continuing operations, and approximately $179 thousand
provided by financing activities. Investing activities consisted of $2 million
used to purchase property and equipment, including investments in VSE's
information technology infrastructure and facilities improvements. Financing
activities consisted of $351 thousand provided by bank loan borrowing, $169
thousand provided by the issuance of common stock and $342 used to pay cash
dividends. Cash flows provided by continuing operations decreased in 2001 as
compared to 2000 due primarily to the decrease in income and an increase in
TTD's accounts receivable, which was partially offset by an increase in accounts
payable.
A net increase in cash and cash equivalents of $585 thousand during
2000 resulted from approximately $1.8 million provided by continuing operations,
approximately $1.1 million used in investing activities, $311 thousand used in
financing activities, and $248 thousand provided by discontinued operations.
Significant investing activities included $700 thousand associated with the
acquisition of certain contract and marketing rights and $424 thousand used to
purchase property and equipment. Financing activities consisted primarily of
$331 thousand used to pay cash dividends. Cash flows provided by continuing
operations decreased in 2000 as compared to 1999 due primarily to the changes
in the levels of accounts receivable and accounts payable on the BAV contract
in 2000 as compared to 1999, as well as a decrease in the company's net income.
The company's level of net cash and cash equivalents did not change
significantly during 1999. Approximately $12.2 million in net cash was provided
by continuing operations. Discontinued operations used approximately
18
$8 million, financing activities used approximately $3.1 million, and investing
activities used approximately $1.1 million. Significant financing activities
included decreases in long-term bank loans and the current portion of long-term
bank debt of approximately $1.5 million and $1.3 million, respectively.
Significant investing activities included approximately $1.1 million associated
with the purchase of property and equipment, primarily computer equipment.
Cash dividends were declared at the rate of $.16 per share during 2001
and 2000 and $.144 per share during 1999. 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.
Sources of Liquidity
The company's internal sources of liquidity result primarily from
operating activities, specifically from changes in the level of revenues and
associated accounts receivable from period to period and from profitability.
Significant increases or decreases in revenue and accounts receivable can cause
significant increases or decreases in internal liquidity. Accounts receivable
arise primarily from billings made by the company to the government or other
government prime contractors for services rendered and generally do not present
collection problems. Accounts receivable levels can also be affected by contract
retainages, differences between the provisional billing rates authorized by the
government compared to the costs actually incurred by the company, government
delays in processing administrative paperwork for contract funding, and the
timing of large materials purchases and subcontractor efforts used in
performance on the company's contracts. An increase in accounts receivable
associated with increased levels of work in TTD contributed to a decrease in
internally generated cash flows during this period. Internal liquidity is also
affected by the acquisition of capital assets for office and computer support,
facilities improvements, and by the payment of cash dividends. Purchases of
capital assets for office and computer support and facilities improvements
increased in 2001 due to investments made to upgrade VSE's information
technology infrastructure and to facilities improvements made by VSE and
Energetics.
VSE's external sources of liquidity consist of a revolving bank loan
agreement that provides loan financing based on the company's accounts
receivable. (See Note 4 of "Notes to Consolidated Financial Statements".) The
bank financing complements the internal sources of liquidity by providing
increasing levels of borrowing capacity as accounts receivable levels increase.
The bank loan agreement provided loan financing up to a maximum commitment of
$15 million as of December 31, 2001. This loan agreement replaced a previous
loan agreement that had a maximum commitment of $30 million. The company
determined that the new loan agreement was adequate to cover current and future
liquidity requirements.
Performance of work under the BAV contract has the potential to cause
substantial requirements for working capital; however, management believes that
the cash flows from future operations and the bank loan commitment are adequate
to meet current operating cash requirements.
19
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future
labor costs to be escalated for any option periods provided by the contracts,
while the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to be
insignificant.
Forward-Looking Disclosures
New Business
In December 2001, VSE formed MSD to provide government and commercial
organizations with quality training and product, process, and management
optimization services. While VSE management expects MSD to provide only a
minimal amount of revenue growth, profit margins on the type of work performed
by MSD are expected to be higher than profit margins in other VSE operations,
and therefore, should play a part in improving the future profitability of VSE
operations.
Business Combinations
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"). SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method. The company does not
anticipate that adoption of SFAS No. 141 will have a material impact, either
positive or negative, on future results of operations or financial condition.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing
goodwill and intangible assets. Under SFAS No. 142, goodwill will no longer be
subject to amortization over its estimated useful life and intangible assets
with indefinite lives will no longer be amortized over an arbitrary number of
years. The effective date for VSE's implementation of SFAS No. 142 is
January 1, 2002. The company does not anticipate that adoption of SFAS No. 142
will have a material impact, either positive or negative, on future results of
operations or financial condition.
Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
20
SFAS No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The company is in the process of evaluating
the financial statement impact of adoption of SFAS No. 143.
Impairment or Disposal of Long-Lived Assets
In September 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment and disposal of
long-lived assets. This standard is required to be adopted by the company
beginning on January 1, 2002. The company does not anticipate that adoption of
SFAS No. 144 will have a material impact, either positive or negative, on future
results of operations or financial condition.
Disclosures About Market Risk
Interest Rates
VSE's bank loan financing provides available borrowing to the company
at variable interest rates. The company has not borrowed significant amounts on
the loan in recent years. Accordingly, the company does not believe that any
movement in interest rates would have a material impact on future earnings or
cash flows. If VSE were to significantly increase borrowings on the current
loan arrangement, future interest rate changes could potentially have such a
material impact.
Foreign Currency
While a significant amount of the company's business results from the
services provided by BAV related to the transfer of ships to foreign
governments, the BAV contract payments are made to BAV by the U.S. Government
in U.S. dollars. Additionally, most funding requirements to support work
performed or services purchased in foreign countries are made in U.S. dollars,
and the infrequent disbursements that are made in foreign currencies are
reimbursable to BAV in post conversion dollars. Foreign currency transactions
of other VSE divisions or subsidiaries are virtually non-existent. Accordingly,
the company does not believe that it is exposed to any material foreign currency
risk.
21
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
----
Report of Independent Public Accountants 23
Consolidated Balance Sheets as of December 31, 2001 and 2000 24
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 25
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 2001, 2000 and 1999 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 27
Notes to Consolidated Financial Statements 28
22
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
investment and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VSE
Corporation as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the three years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 22, 2002
23
VSE Corporation and Subsidiaries
Consolidated Balance Sheets As of December 31,
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 209 $ 647
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . . . . 20,849 19,215
Deferred tax assets . . . . . . . . . . . . . . . . . . 695 853
Other current assets . . . . . . . . . . . . . . . . . . 1,984 1,533
------- -------
Total current assets . . . . . . . . . . . . . . . . 23,737 22,248
Property and equipment, net . . . . . . . . . . . . . . . 4,211 3,336
Deferred tax assets . . . . . . . . . . . . . . . . . . . 793 847
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,822 2,134
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,646 2,958
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . $33,209 $31,523
======= =======
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $10,609 $ 8,678
Accrued expenses . . . . . . . . . . . . . . . . . . . . 4,235 5,121
Dividends payable . . . . . . . . . . . . . . . . . . . 86 85
------- -------
Total current liabilities . . . . . . . . . . . . . 14,930 13,884
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 351 -
Deferred compensation . . . . . . . . . . . . . . . . . . 1,453 1,846
------- -------
Total liabilities . . . . . . . . . . . . . . . . . 16,734 15,730
------- -------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,150,540 in 2001 and
2,197,863 in 2000 . . . . . . . . . . . . . . . . . . . 107 110
Paid-in surplus . . . . . . . . . . . . . . . . . . . . . 3,294 3,914
Retained earnings . . . . . . . . . . . . . . . . . . . . 13,074 12,561
Treasury stock, at cost (72,000 shares in 2000). . . . . . - (792)
------- -------
Total stockholders' investment . . . . . . . . . . . 16,475 15,793
------- -------
Total liabilities and stockholders' investment . . . $33,209 $31,523
======= =======
The accompanying notes are an integral part of these statements.
24
VSE Corporation and Subsidiaries
Consolidated Statements of Operations For the years ended December 31,
- -----------------------------------------------------------------------------
(in thousands, except share amounts)
2001 2000 1999
---- ---- ----
Revenues, principally from contracts . . . . $ 111,572 $ 122,269 $ 157,354
Costs and expenses of contracts . . . . . . 109,990 119,937 152,684
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . 1,582 2,332 4,670
Selling, general and administrative expenses 237 239 684
Interest (income) expense . . . . . . . . . 49 (98) 87
--------- --------- ---------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . 1,296 2,191 3,899
Provision for income taxes . . . . . . . . . 441 806 1,535
--------- --------- ---------
Income from continuing operations. . . . . . 855 1,385 2,364
Discontinued operations, net of tax:
Loss from operations (net of tax benefit
of $145 in 1999) . . . . . . . . . . . . - - (256)
Loss on disposal (net of tax benefit
of $271 in 2000 and $524 in 1999) . . . - (417) (574)
--------- --------- ---------
Net income $ 855 $ 968 $ 1,534
========= ========= =========
Basic earnings per share:
Income from continuing operations . . . . $ 0.40 $ 0.65 $ 1.12
Loss from discontinued operations . . . . - (0.19) (0.39)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 0.40 $ 0.46 $ 0.73
========= ========= =========
Basic weighted average shares outstanding 2,136,992 2,122,564 2,115,569
========= ========= =========
Diluted earnings per share:
Income from continuing operations . . . . $ 0.40 $ 0.65 $ 1.12
Loss from discontinued operations . . . . - (0.19) (0.39)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . $ 0.40 $ 0.46 $ 0.73
========= ========= =========
Diluted weighted average shares outstanding 2,136,992 2,122,564 2,115,569
========= ========= =========
The accompanying notes are an integral part of these statements.
25
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Investment
- ----------------------------------------------------------------------------
(in thousands)
Common Stock Paid-In Retained Treasury
Shares Amount Surplus Earnings Stock
------ ------ ------- -------- -----
Balance at
December 31, 1998 2,187 $109 $3,832 $10,703 $(792)
Net income for
the year - - - 1,534 -
Issuance of stock 7 1 62 - -
Dividends
declared ($.144) - - - (304) -
----- ---- ------ ------- -----
Balance at
December 31, 1999 2,194 110 3,894 11,933 (792)
Net income for
the year - - - 968 -
Issuance of stock 4 - 20 - -
Dividends
declared ($.16) - - - (340) -
----- ---- ------ ------- -----
Balance at
December 31, 2000 2,198 110 3,914 12,561 (792)
Net income for
the year - - - 855 -
Issuance of
Treasury stock - - (81) - 220
Retirement of
Treasury Stock (52) (3) (569) - 572
Issuance of stock 4 - 30 - -
Dividends
declared ($.16) - - - (342) -
----- ---- ------ ------- -----
Balance at
December 31, 2001 2,150 $107 $3,294 $13,074 $ -
===== ==== ====== ======= =====
The accompanying notes are an integral part of these statements.
26
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows For the years ended December 31,
- ----------------------------------------------------------------------------------------------
(in thousands)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 855 $ 968 $ 1,534
Loss from discontinued operations . . . . . . . . . . . . . . . - - 256
Loss on disposal of discontinued operations . . . . . . . . . . - 417 574
------- ------- -------
Income from continuing operations . . . . . . . . . . . . . . . 855 1,385 2,364
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,372 1,563 1,829
Loss (gain) on sale of property and equipment . . . . . . . 91 17 (124)
Change in deferred compensation . . . . . . . . . . . . . . (393) (51) (16)
Change in deferred taxes . . . . . . . . . . . . . . . . . 212 (45) (549)
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,634) 146 14,835
Other current assets and noncurrent assets . . . . . . . . (139) (650) 1,569
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . 1,931 523 (7,733)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . (886) (1,116) 42
------- ------- -------
Net cash provided by operating activities of
continuing operations 1,409 1,772 12,217
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of proceeds from dispositions) . . . . . . . . . . . . . (2,026) (424) (1,081)
Purchase of intangible assets . . . . . . . . . . . . . . . . . - (700) -
------- ------- -------
Net cash used in investing activities of
continuing operations (2,026) (1,124) (1,081)
------- ------- -------
Cash flows from financing activities:
Net proceeds from (payments on) long-term bank loans . . . . . 351 - (1,503)
Payment of current portion of long-term bank debt . . . . . . - - (1,333)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . (341) (331) (304)
Issuance of common stock . . . . . . . . . . . . . . . . . . 169 20 63
------- ------- -------
Net cash provided by (used in) financing activities of
continuing operations 179 (311) (3,077)
------- ------- -------
Net cash provided by (used in) discontinued
operations - 248 (8,046)
------- ------- -------
Net (decrease) increase in cash and cash equivalents . . . . . . (438) 585 13
Cash and cash equivalents at beginning of year . . . . . . . . 647 62 49
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 209 $ 647 $ 62
======= ======= =======
Supplemental cash flow disclosures (in thousands):
2001 2000 1999
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56 $ 127 $ 321
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 336 $ 1,026 $ 1,261
Noncash investing and financing activities:
Note receivable from discontinued operations . . . . . . . . . $ - $ - $ 800
Write off of note receivable from discontinued operations . . $ - $ 688 $ -
Payable related to purchase of intangible assets . . . . . . . $ - $ 260 $ -
The accompanying notes are an integral part of these statements.
27
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements consist of the operations of the
parent company, operations of the company's wholly owned subsidiaries, and
operations of the company's divisions. Wholly owned subsidiaries include
Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"),
Ship Remediation and Recycling, Inc. ("SRR"), and VSE Services International,
Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Fleet
Maintenance Division ("Fleet Maintenance"), GSA Services Division ("GSA
Services"), Land Systems Division ("Land Systems"), Management Sciences Division
("MSD"), Ordnance Division ("Ordnance"), Telecommunications Technologies
Division ("TTD"), and Value Systems Services Division ("VSS"). The company is
engaged principally in providing engineering, testing, management and informa-
tion technology services to the U.S. Government (the "government") and other
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.
Segment Information
The company operates within one reportable segment. 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.
The SPS segment was sold on May 21, 1999, and is reflected as a discontinued
operation (see note 10).
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.
28
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"). SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method. The company does not
anticipate that adoption of SFAS No. 141 will have a material impact, either
positive or negative, on future results of operations or financial condition.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing
goodwill and intangible assets. Under SFAS No. 142, goodwill will no longer be
subject to amortization over its estimated useful life and intangible assets
with indefinite lives will no longer be amortized over an arbitrary number of
years. The effective date for VSE's implementation of SFAS No. 142 is
January 1, 2002. See note 2 for the discussion of the company's goodwill and
intangible assets.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
SFAS No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The company is in the process of evaluating the
financial statement impact of adoption of SFAS No. 143.
In September 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment and disposal of
long-lived assets. This standard is required to be adopted by the company
beginning on January 1, 2002. The company does not anticipate that adoption of
SFAS No. 144 will have a material impact, either positive or negative, on future
results of operations or financial condition.
Earnings Per Share
Basic earnings per share has been computed by dividing net income
available to common stockholders by the weighted average number of shares of
common stock outstanding during each period. Shares issued during the period
and shares reacquired during the period are weighted for the portion of the
period that they were outstanding. Diluted earnings per share have been
computed in a manner consistent with that of basic earnings per share while
giving effect to all potentially dilutive common shares that were outstanding
during each period. There was no dilutive impact on reported earnings per share
for 2001, 2000, and 1999.
29
Cash and Cash Equivalents
Cash and cash equivalents reported by the company consist of cash
balances in the company's bank accounts and short term temporary invested
balances connected to the bank accounts with sweep arrangements, netted by
checks issued on the company's bank accounts that have not yet been presented
to the bank for collection. The company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
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, 2001 and
December 31, 2000 consisted of overnight money market accounts of $0 and $853
thousand, respectively, securedby 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.
Approximately $82.6 million, $92.6 million and $116.3 million of the company's
revenues were under cost reimbursable contracts for the years ended December 31,
2001, 2000 and 1999, respectively.
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 billable rates times hours delivered plus material and other
reimbursable costs incurred.
Potential revenue related to work performed at risk is not recognized
as income until it can be reliably estimated and its realization is probable.
The company provides for anticipated losses on contracts by a charge to income
during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is
subject to audit by the Defense Contract Audit Agency. The company's indirect
cost rates have been audited and approved for 1999 and prior years. In the
30
opinion of management, the audits of the indirect cost rates for 2001 and 2000
will not result in material adjustments, if any, to the company's results of
operations or financial position.
Other Current Assets
Other current assets consisted of the following (in thousands):
2001 2000
---- ----
Federal and State Tax Receivable . . . . . . . . . . $ 583 $ 500
Travel advances . . . . . . . . . . . . . . . . . . 448 435
Prepaid rent expense . . . . . . . . . . . . . . . . 266 155
Other prepaid expenses . . . . . . . . . . . . . . . 687 443
------- -------
$ 1,984 $ 1,533
======= =======
Other Assets
Other assets consisted of the following (in thousands):
2001 2000
---- ----
Deferred Compensation Trust . . . . . . . . . . . . $ 1,453 $ 1,848
Cash Surrender Value of Life Insurance . . . . . . . 1,120 1,034
Other assets . . . . . . . . . . . . . . . . . . . . 73 76
------- -------
$ 2,646 $ 2,958
======= =======
Property and Equipment
Property and equipment (valued at cost) consisted of the following (in
thousands):
2001 2000
---- ----
Computer systems equipment . . . . . . . . . . . . . $ 4,798 $ 6,083
Furniture, fixtures, equipment and other . . . . . . 3,132 3,791
Leasehold improvements . . . . . . . . . . . . . . . 2,419 1,585
Buildings . . . . . . . . . . . . . . . . . . . . . 302 302
Land and land improvements . . . . . . . . . . . . . 385 385
------- -------
11,036 12,146
Less accumulated depreciation . . . . . . . . . . . (6,825) (8,810)
------- -------
$ 4,211 $ 3,336
======= =======
Depreciation and amortization expense for property and equipment was
approximately $1.1 million for 2001, $1.4 million for 2000 and $1.6 million for
1999. Depreciation of computer systems equipment is provided principally by the
double-declining method over periods of two to four years. Depreciation of
furniture and fixtures is provided principally by the straight-line method over
approximately nine years. Depreciation of 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.
31
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31,
2001, 2000, and 1999 was $21 thousand, $117 thousand and $29 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 $1.5 million and $1.8 million as of December
31, 2001 and 2000, respectively. Because plan participants are at risk for
market value changes in these assets, the liability to plan participants
fluctuates with the asset values.
Impairment Review
The company performs a periodic review of certain long-lived assets to
determine if impairment has occurred. If impaired, the company writes down the
asset to its fair market value.
(2) Goodwill and Intangible Assets
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 was
amortized by the straight-line method over fifteen years, and approximately $1.1
million of unamortized goodwill remains on the books as of December 31, 2001. In
accordance with SFAS No. 142, beginning in January 2002, goodwill will no longer
be amortized, but will be reviewed annually to determine if an impairment has
occurred.
On December 28, 2000, VSE invested $960 thousand in the acquisition of
certain contract and marketing rights. In accordance with SFAS No. 142, the
intangible asset is being amortized by the straight-line method over five years,
and approximately $768 thousand of unamortized intangible asset remains on the
books as of December 31, 2001.
Amortization expense for goodwill and intangible assets was approximately
$311 thousand, $115 thousand and $180 thousand for 2001, 2000, and 1999,
respectively.
32
(3) Accounts Receivable
The components of accounts receivable as of December 31, 2001 and 2000,
were as follows (in thousands):
2001 2000
---- ----
Billed . . . . . . . . . . . . . . . . . . . . $ 8,349 $ 7,192
Unbilled:
Retainages . . . . . . . . . . . . . . . . . 116 71
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . 12,684 12,012
Less-Allowance for doubtful accounts . . . . . (300) (60)
------- -------
Total accounts receivable $20,849 $19,215
======= =======
The "Unbilled: Other" included in accounts receivable are reported net
of an allowance for contract disallowances of $244 thousand as of December 31,
2001 and $201 thousand as of December 31, 2000. "Unbilled: Other" also
includes certain costs for work performed at risk 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 $702 thousand
and $307 thousand as of December 31, 2001, and 2000, respectively.
Contracts with the government, primarily with the U.S. Department of
Defense, accounted for approximately 93% of revenues for 2001 and 99% of
revenues for 2000 and 1999. These contracts were primarily for engineering
services. A contract awarded in 1995 with the U.S. Navy accounted for
approximately 38%, 41% and 50% of such revenues in 2001, 2000, and 1999,
respectively.
The company generally expects to collect all accounts receivable other
than retainages within one year.
(4) Debt
VSE has a revolving loan agreement with a bank on which the company can
borrow up to $15 million, subject to a borrowing formula based on billed
receivables. Under terms of the agreement, the company pays a fixed amount
annual commitment fee and interest on any borrowings at a prime-based rate or
an optional LIBOR-based rate. The expiration date of the revolving loan is
May 31, 2003. The loan agreement contains collateral requirements by which
company assets secure amounts outstanding, restrictive covenants that include
minimum tangible net worth and profitability requirements, a limit on annual
dividends, and other affirmative and negative covenants. This loan agreement
replaced the previous loan agreement that had a maximum commitment of $30
million dollars. The company determined that the new loan agreement was
adequate to cover current and future liquidity requirements. The amount borrowed
under this loan agreement was approximately $351 thousand and $0 as of
December 2001 and 2000, respectively. Interest expense incurred was
approximately $60 thousand, $74 thousand and $170 thousand for 2001, 2000, and
1999, respectively.
Due to the write off of the CMstat note receivable (see "Discontinued
Operations" section of "Management Discussion and Analysis") and to certain
operating losses, including losses associated with start-up costs of TTD and
33
MSD, the company did not achieve the original minimum amount established in the
profitability covenant at year end 2000 and for each of the four quarters during
2001, and is projecting to not achieve the original minimum required amount for
the first and second quarters of 2002. The company and the bank have made
amendments to the loan agreement during 2001 and 2002 to restate this covenant
for 2000, 2001 and 2002. The company was in compliance during 2000 and 2001, and
is expecting to be in compliance during 2002, with all covenants of the loan
agreement as amended.
(5) Accrued Expenses
The components of accrued expenses as of December 31, 2001 and 2000, were
as follows (in thousands):
2001 2000
---- ----
Accrued salaries . . . . . . . . . . . . . . . . $1,174 $1,490
Accrued vacation . . . . . . . . . . . . . . . . 1,291 1,518
Estimated future losses on fixed-price and
time and material contracts . . . . . . . . . . 463 293
Other accrued expenses . . . . . . . . . . . . . 1,307 1,820
------ ------
Total accrued expenses $4,235 $5,121
====== ======
(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.
Contributions at the rate of up to 2% of eligible employee compensation were
permitted at the discretion of the VSE board of directors and were allocated,
subject to a vesting schedule, on a pro rata basis on eligible employee
compensation. The 401(k) segment of the plan allows employees meeting certain
age and service requirements to contribute a portion of their salary to certain
investment trusts. As of April 1, 1999, the ESOP contributions were discontinued
and replaced by employer 401(k) contributions made on behalf of the eligible
employee participants based on the employees' 401(k) payroll deferrals. For 2001
and prior years, the employer contribution was equal to 50% of the employee
deferral on the first 5% of the employee pay deferred. For 2002 and future
years, the employer contribution will be equal to 50% of the employee deferral
on the first 6% of the employee pay deferred. The company expense associated
with this plan for 2001, 2000, and 1999 was $249 thousand, $245 thousand, and
$333 thousand, respectively.
The ESOP/401(k) plan held 429,526 shares and 521,014 shares of VSE
stock as of December 31, 2001 and 2000, respectively. Such shares receive
dividend payments and are included in the weighted average shares for earnings
per share calculations.
Energetics maintains a profit sharing plan for employees. All
employees who have completed two years of service are members of the profit
sharing plan. At its discretion, Energetics may make contributions to the plan.
The plan expense for 2001, 2000, and 1999 was $450 thousand, $400 thousand, and
$312 thousand, respectively.
34
(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):
2001 2000 1999
---- ---- ----
Net income: As reported $ 855 $ 968 $1,534
====== ====== ======
Pro forma $ 761 $ 874 $1,463
====== ====== ======
Earnings per share: As reported $ 0.40 $ 0.46 $ 0.73
====== ====== ======
Pro forma $ 0.36 $ 0.41 $ 0.69
====== ====== ======
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, 2001 the company has granted options for 211,455 shares of
common stock priced at 100% of the fair value of the stock at the time of the
grant of the option. The maximum term of the options granted is five years.
The vesting period is three years and allows for 25% vesting immediately upon
date of the grant and an additional 25% on each successive anniversary date
thereafter. Vesting may be accelerated for shares granted to certain
individuals as determined by the Board of Directors. The 1996 Plan will
terminate on the earliest of February 5, 2006, or the date on which all options
under the 1996 plan have been exercised or terminated. As of December 31,
2001, 44,625 shares are exercisable under this plan.
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, 2001 the company has granted options for 172,750 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.
35
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2001 Price 2000 Price 1999 Price
---- ----- ---- ----- ---- -----
Number of shares under
stock options:
Outstanding at beginning
of year 343,455 $10.28 279,085 $11.01 234,273 $10.95
Granted 69,750 5.77 79,000 7.89 69,750 10.93
Exercised - - - - (313) 9.42
Forfeited (19,000) 9.01 (14,630) 11.29 (24,625) 10.32
Terminations (176,830) 11.30 - - - -
------- ------ ------- ------ ------- ------
Outstanding at end
of year 217,375 $ 8.12 343,455 $10.28 279,085 $11.01
======= ====== ======= ====== ======= ======
Exercisable at end
of year 112,687 $ 8.83 247,486 $10.80 213,585 $11.02
======= ====== ======= ====== ======= ======
Weighted average remaining
contractual life 6 years 6 years 6 years
Weighted average fair
value of options granted $2.24 $3.32 $2.36
===== ===== =====
The fair value of the options is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used in the
pricing calculation for 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Risk free interest rate 5.04% 6.42% 4.57%
Dividend yield 2.77% 2.00% 2.00%
Expected life 3 years 3 years 3 years
Expected volatility 58.27% 61.95% 29.00%
36
(8) Income Taxes
The company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision for income taxes for the years
ended December 31, 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999
---- ---- ----
Current
Federal . . . . . . . . . . . . . . . . . . $ 218 $ 682 $1,691
State . . . . . . . . . . . . . . . . . . . 11 169 393
------ ------ ------
229 851 2,084
Deferred
Federal . . . . . . . . . . . . . . . . . . 182 (36) (432)
State . . . . . . . . . . . . . . . . . . 30 (9) (117)
------ ------ ------
212 (45) (549)
------ ------ ------
Provision for income taxes $ 441 $ 806 $1,535
====== ====== ======
The differences between the amount of tax computed at the federal statutory
rate of 34% and the provision for income taxes for 2001, 2000, and 1999 are as
follows (in thousands):
2001 2000 1999
---- ---- ----
Tax at statutory federal income
tax rate at 34% . . . . . . . . . . . . . . $ 441 $ 744 $1,326
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 74 112 180
Permanent differences, net . . . . . . . . (2) - 9
Other, net . . . . . . . . . . . . . . . . (72) (50) 20
------ ------- ------
Provision for income taxes $ 441 $ 806 $1,535
====== ====== ======
The provision for income taxes has been reduced for the period ending
December 31, 2001 due to a change in the company's effective state tax rate.
The reduction in the effective state tax rate is the result of lower apportion-
ment factors in states with higher tax rates. The provision for income taxes
includes a one time state tax adjustment of approximately $72,000.
The company's deferred tax assets (liabilities) as of December 31, 2001 and
2000, 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):
2001 2000
---- ----
Current deferred tax assets . . . . . . . . . . $1,007 $1,035
Current deferred tax liabilities . . . . . . . . (312) (182)
------ ------
Net current deferred tax assets . . . . . . . . 695 853
------ ------
Noncurrent deferred tax assets . . . . . . . . . 1,038 1,101
Noncurrent deferred tax liabilities . . . . . . . (245) (254)
------ ------
Net noncurrent deferred tax assets . . . . . . 793 847
------ ------
Net deferred tax assets . . . . . . . . . . . . . $1,488 $1,700
====== ======
37
The tax effect of temporary differences representing deferred tax assets
and liabilities as of December 31, 2001 and 2000, are as follows (in thousands):
2001 2000
---- ----
Deferred compensation . . . . . . . . . . . . . . $1,082 $1,317
Accelerated depreciation . . . . . . . . . . . . 134 84
Bad debt expense . . . . . . . . . . . . . . . . 115 25
Accrued expenses . . . . . . . . . . . . . . . . 88 205
Intangible assets . . . . . . . . . . . . . . . . 82 37
Allowance for contract and other disallowances . 78 68
Retainages not taxed until billed. . . . . . . . (46) (61)
Deferred revenues . . . . . . . . . . . . . . . . (225) (90)
Other . . . . . . . . . . . . . . . . . . . . . . 180 115
------ ------
Net deferred tax assets $1,488 $1,700
====== ======
(9) Commitments and Contingencies
Leases and other commitments
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 equipment generally under
noncancelable operating leases for periods of one to five years. In addition,
the company entered into a Microsoft license agreement requiring contract
payments over three years, beginning in June, 2001. Total rent, lease and other
commitments for 2001, 2000, and 1999 was approximately $1.8 million,
$1.9 million, and $1.9 million, respectively, which was net of sublease income
of $689 thousand, $694 thousand and $686 thousand, respectively. The future
minimum annual commitments having remaining noncancelable commitment terms in
excess of one year, net of noncancelable sublease income, will approximate
$2.4 million in 2002, $2.0 million in 2003, $1.5 million in 2004 and 2005,
$900 thousand in 2006, and $1.7 million thereafter.
Litigation
In June 2001 a personal injury lawsuit was filed against VSE, Astoria
Metals Corporation ("AMC"), Ship Dismantlement and Recycling Joint Venture,
Earth Tech, Inc., and Tyco International Ltd. in the Superior Court of the State
of California for the County of Alameda (Case No. 835601-7). While the
plaintiffs' complaint does not specify the amount of alleged damages suffered,
the plaintiffs have provided the defendants with a notice of damages aggregating
approximately $20 million. VSE provided notice of the suit to its insurance
carrier, Travelers Insurance, which is defending the company in this matter.
While there is no assurance, VSE believes that the resolution of the lawsuit
will not have a material adverse effect on VSE's consolidated financial position
or results of operations.
The company and its subsidiaries have, in the normal course of
business, certain claims against them and against other parties. The company
is not
38
aware of any present claims which would have a material adverse effect on the
company's financial condition or results of operations.
(10) Discontinued Operations
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. While the sale was a divestiture for legal and tax purposes,
for accounting purposes, the sale was not originally provided discontinued
operations treatment under Staff Accounting Bulletin No. 30 "Accounting for
Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the
sale did not transfer the risks of ownership because the sales price was
primarily dependent on the buyer's ability to repay the promissory note.
In December 2000, the company determined that the remaining balance
under the promissory note acquired from the sale of its CMstat subsidiary was
not collectible and approximately $688 thousand was written off. Accordingly,
the consolidated financial statements have been restated to reflect the
disposition of its CMstat subsidiary as discontinued operations. The
revenues, costs and expenses, assets and liabilities and cash flows from the
CMstat subsidiary have been excluded from the respective captions in the
Consolidated Statement of Operations, Balance Sheets, Cash Flows and related
footnotes.
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.
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,
2001, 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.
39
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.
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 6, 2002 By: /s/ C. S. Weber
-----------------------------
C. S. Weber, Executive 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 5, 2002, 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,
President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus
----------------------------- -----------------------------
C. S. Weber, Executive Vice T. R. Loftus, Senior Vice
President and Chief Financial President and Comptroller
Officer
(d) 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.M. Kendall /s/ B. K. Wachtel
----------------------------- -----------------------------
C. M. Kendall B. K. Wachtel
/s/ C. S. Koonce
-----------------------------
C. S. Koonce
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
May 16, 2000 (Exhibit 3.2 to Form 10-Q dated
October 27, 2000) *
4 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2) *
9 Voting trust agreement Not Applicable
10 Material contracts
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Jayne M. Tuohig (Exhibit VII to form 10-K dated
March 7, 2001)
Employment Agreement entered into as of December 10,
1997, by and between VSE Corporation and
Craig S. Weber (Exhibit VIII to form 10-K dated
March 7, 2001)
Employment Agreement entered into as of October 21,
1998, by and between VSE Corporation and
Donald M. Ervine (Exhibit VI to Form 10-K dated
March 18, 1999) *
Employment Agreement entered into as of January 15,
1999, by and between VSE Corporation and
Energetics, Incorporated and Robert J. Kelly
(Exhibit VII to Form 10-K dated March 18, 1999) *
Employment Agreement entered into as of June 3,
1999, by and between VSE Corporation and
James M. Knowlton (Exhibit V to Form 10-K dated
March 15, 2000) *
Employment Agreement dated as of November 1,
2000, by and between VSE Corporation and
James M. Todd (Exhibit V to form 10-K dated
March 7, 2001)
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
42
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -------------- ---------------------- ---------
Separation Agreement and General Release dated
February 15, 2002, by and between
VSE Corporation and James M. Todd Exhibit IV
Consulting Agreement dated February 15, 2002,
by and between VSE Corporation and
James M. Todd Exhibit V
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996)
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 6, 1998)
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on May 6, 1998)
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or selected quarterly data Exhibit 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 independent public accountants and
counsel Exhibit III
24 Power of attorney Not Applicable
99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
43